UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from _____ to _____

Commission File Number: 001-38065

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

Maryland	81-4710738
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2651 Strang Blvd, Suite 100 Yorktown Heights, NY	10598
(Address of principal executive offices)	(Zip Code)

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

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	PCSB	The NASDAQ Stock Market, LLC

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Small reporting company	☒
		Emerging growth company	☐

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

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

15,334,323 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of November 4, 2022.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signatures		39

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

(Dollars in thousands, except per share data)

	September 30,			June 30,
	2022			2022
ASSETS
Cash and due from banks	$	48,747		$	116,522
Federal funds sold		2,006			1,935
Total cash and cash equivalents		50,753			118,457
Held to maturity debt securities, at amortized cost (fair value of $339,143 and $361,608 as of September 30, 2022 and June 30, 2022, respectively)		406,250			412,449
Available for sale debt securities, at fair value		32,431			34,621
Total investment securities		438,681			447,070
Loans receivable, net of allowance for loan losses of $9,048 and $8,927 as of September 30, 2022 and June 30, 2022, respectively		1,350,197			1,329,372
Accrued interest receivable		7,074			6,396
FHLB stock		2,865			3,766
Premises and equipment, net		19,084			19,358
Deferred tax asset, net		4,403			4,132
Bank-owned life insurance		36,513			36,322
Goodwill		6,106			6,106
Other intangible assets		77			89
Other assets		24,816			18,064
Total assets	$	1,940,569		$	1,989,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits	$	1,365,631		$	1,380,953
Non-interest bearing deposits		227,635			245,297
Total deposits		1,593,266			1,626,250
Mortgage escrow funds		7,302			11,173
Advances from FHLB		28,288			48,323
Other liabilities		30,576			26,224
Total liabilities		1,659,432			1,711,970
Commitments and contingencies		-			-
Shareholders' equity:
Preferred stock ($0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding as of September 30, 2022 and June 30, 2022)		-			-
Common stock ($0.01 par value, 200,000,000 shares authorized, 18,703,577 shares issued as of both September 30, 2022 and June 30, 2022, and 15,334,323 and 15,334,857 shares outstanding as of September 30, 2022 and June 30, 2022, respectively)		187			187
Additional paid in capital		194,935			193,893
Retained earnings		166,033			162,262
Unearned compensation - ESOP		(8,963	)		(9,208	)
Accumulated other comprehensive loss, net of income taxes		(9,702	)		(8,629	)
Treasury stock, at cost (3,369,254 and 3,368,720 shares as of September 30, 2022 and June 30, 2022, respectively)		(61,353	)		(61,343	)
Total shareholders' equity		281,137			277,162
Total liabilities and shareholders' equity	$	1,940,569		$	1,989,132

See accompanying notes to the consolidated financial statements (unaudited)

3

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	September 30,
	2022		2021
Interest and dividend income
Loans receivable	$	13,849	$	12,107
Investment securities		2,420		2,011
Federal funds and other		487		109
Total interest and dividend income		16,756		14,227
Interest expense
Deposits and escrow interest		1,664		1,354
FHLB advances		235		338
Total interest expense		1,899		1,692
Net interest income		14,857		12,535
Provision for loan losses		82		13
Net interest income after provision for loan losses		14,775		12,522
Noninterest income
Fees and service charges		453		401
Bank-owned life insurance		191		192
Swap income		141		-
Other		8		20
Total noninterest income		793		613
Noninterest expense
Salaries and employee benefits		5,985		5,773
Occupancy and equipment		1,403		1,353
Communication and data processing		610		527
Professional fees		335		393
Merger-related expenses		311		-
Postage, printing, stationery and supplies		174		143
Advertising		128		100
FDIC assessment		125		125
Amortization of intangible assets		12		16
Other operating expenses		474		194
Total noninterest expense		9,557		8,624
Net income before income tax expense		6,011		4,511
Income tax expense		1,235		897
Net income	$	4,776	$	3,614
Earnings per common share:
Basic	$	0.34	$	0.25
Diluted		0.33		0.25
Weighted average common shares outstanding:
Basic		14,214,313		14,337,543
Diluted		14,301,600		14,405,816

See accompanying notes to the consolidated financial statements (unaudited)

4

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(Dollars in thousands)

	Three Months Ended
	September 30,
	2022			2021
Net income	$	4,776		$	3,614
Other comprehensive income:
Unrealized (losses) gains on available for sale debt securities:
Net change in unrealized gains/losses before reclassification adjustment		(1,519	)		(187	)
Reclassification adjustment for gains realized in net income		-			-
Net change in unrealized gains/losses		(1,519	)		(187	)
Tax effect		319			40
Net of tax		(1,200	)		(147	)
Defined benefit pension plan:
Net gain arising during the period		-			-
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost		141			38
Net change in unrealized gains/losses		141			38
Tax effect		(30	)		(9	)
Net of tax		111			29
Supplemental retirement plans:
Net gain arising during the period		-			-
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost		20			16
Net change in unrealized gains/losses		20			16
Tax effect		(4	)		(3	)
Net of tax		16			13
Total other comprehensive loss		(1,073	)		(105	)
Comprehensive income	$	3,703		$	3,509

See accompanying notes to the consolidated financial statements (unaudited)

5

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

(Dollars in thousands, except per share data)

														Accumulated
	Number of					Additional					Unallocated			Other			Treasury			Total
	Common			Common		Paid-In		Retained			Common Stock			Comprehensive			Stock,			Shareholders'
	Shares			Stock		Capital		Earnings			of ESOP			Loss			at cost			Equity
Balance at July 1, 2022		15,334,857		$	187	$	193,893	$	162,262		$	(9,208	)	$	(8,629	)	$	(61,343	)	$	277,162
Net income		-			-		-		4,776			-			-			-			4,776
Other comprehensive loss		-			-		-		-			-			(1,073	)		-			(1,073	)
Common stock dividends declared ($0.07 per share)		-			-		-		(1,005	)		-			-			-			(1,005	)
Shares withheld related to income tax withholding		(534	)		-		-		-			-			-			(10	)		(10	)
Stock-based compensation		-			-		820		-			-			-			-			820
ESOP shares committed to be released (24,419 shares)		-			-		222		-			245			-			-			467
Balance at September 30, 2022		15,334,323		$	187	$	194,935	$	166,033		$	(8,963	)	$	(9,702	)	$	(61,353	)	$	281,137

															Accumulated
	Number of					Additional						Unallocated			Other			Treasury			Total
	Common			Common		Paid-In			Retained			Common Stock			Comprehensive			Stock,			Shareholders'
	Shares			Stock		Capital			Earnings			of ESOP			Loss			at cost			Equity
Balance at July 1, 2021		15,770,645		$	187	$	189,926		$	150,987		$	(10,176	)	$	(3,099	)	$	(53,265	)	$	274,560
Net income		-			-		-			3,614			-			-			-			3,614
Other comprehensive income		-			-		-			-			-			(105	)		-			(105	)
Common stock dividends declared ($0.06 per share)		-			-		-			(876	)		-			-			-			(876	)
Repurchase of common stock		(204,261	)		-		-			-			-			-			(3,720	)		(3,720	)
Restricted stock awards granted		8,000			-		(145	)		-			-			-			145			-
Shares withheld related to income tax withholding		(74	)																(1	)		(1	)
Stock-based compensation		-			-		810			-			-			-			-			810
ESOP shares committed to be released (24,419 shares)		-			-		202			-			244			-			-			446
Balance at September 30, 2021		15,574,310		$	187	$	190,793		$	153,725		$	(9,932	)	$	(3,204	)	$	(56,841	)	$	274,728

See accompanying notes to the consolidated financial statements (unaudited)

6

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

	Three Months Ended
	September 30,
	2022			2021
OPERATING ACTIVITIES
Net income	$	4,776		$	3,614
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		82			13
Depreciation and amortization		749			738
Amortization of net premiums on securities and net deferred loan origination costs		237			20
Net increase in accrued interest receivable		(678	)		(152	)
Stock-based compensation		820			810
ESOP compensation		467			446
Earnings from cash surrender value of BOLI		(191	)		(192	)
Net accretion of purchase accounting adjustments		(19	)		(35	)
Other adjustments, principally net changes in other assets and liabilities		(2,224	)		(1,080	)
Net cash provided by operating activities		4,019			4,182
INVESTING ACTIVITIES
Purchases of investment securities held to maturity		(1,500	)		(75,504	)
Maturities, calls and amortization of investment securities:
Held to maturity		7,579			24,415
Available for sale		641			12,134
Loan (originations) repayments, net		(20,975	)		19,021
Net redemption of FHLB stock		901			1
Net purchase of bank premises and equipment		(464	)		(159	)
Net cash used in investing activities		(13,818	)		(20,092	)
FINANCING ACTIVITIES
Net (decrease) increase in deposits		(32,984	)		12,955
Repayment of long-term FHLB advances		(20,035	)		(33	)
Net decrease in mortgage escrow funds		(3,871	)		(3,708	)
Common stock dividends paid		(1,005	)		(876	)
Repurchase of shares from employees for income tax withholding purpose		(10	)		(1	)
Repurchase of common stock		-			(3,720	)
Net cash (used in) provided by financing activities		(57,905	)		4,617
Net decrease in cash and cash equivalents		(67,704	)		(11,293	)
Cash and cash equivalents at beginning of period		118,457			159,305
Cash and cash equivalents at end of period	$	50,753		$	148,012
Supplemental information:
Cash paid for:
Interest	$	1,940		$	1,694
Income taxes		1,160			917

See accompanying notes to the consolidated financial statements (unaudited)

7

PCSB Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

Nature of Operations: PCSB Financial Corporation (the “Holding Company” and together with its direct and indirect subsidiaries, the “Company”) is a Maryland corporation organized by PCSB Bank (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in the Bank's conversion to stock ownership on April 20, 2017. At September 30, 2022, the significant assets of the Holding Company were the capital stock of the Bank, cash deposited in the Bank, and a loan to the PCSB Bank Employee Stock Ownership Plan (“ESOP”). The liabilities of the Holding Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended, and regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New York State Department of Financial Services (the “NYSDFS”).

PCSB Bank is a community-oriented financial institution that provides financial services to individuals and businesses within its market area of Putnam, Southern Dutchess, Rockland and Westchester Counties in New York. The Bank is a state-chartered commercial bank, and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s primary regulators are the FDIC and the NYSDFS.

Basis of Presentation: The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and include the accounts of the Holding Company, the Bank and the Bank's two subsidiaries – PCSB Funding Corp. and UpCounty Realty Corp. (formerly PCSB Realty Ltd.). PCSB Funding Corp. is a real estate investment trust that holds certain mortgage assets. UpCounty Realty Corp. is a corporation that holds certain properties foreclosed upon by the Bank. All intercompany transactions and balances have been eliminated in consolidation.

The unaudited consolidated financial statements contained herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments reflected in the consolidated financial statements contained herein. The results of operations for the current period presented are not necessarily indicative of the results of operations that may be expected for the entire current fiscal year. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2022, included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

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

Risks and Uncertainties:

In preparing these consolidated financial statements, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates based upon changing conditions, including economic conditions and future events, such as continued interest rate volatility, prolonged periods of inflation, continued trade and supply chain disruptions, economic recession and increased unemployment. Such conditions could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include, but are not limited to, the valuation impairments of the Company’s intangible assets, investments, loans receivable, or deferred tax assets. Additionally, it is reasonably possible that the Company’s allowance for loan loss estimate as of September 30, 2022 could change in the near term and could result in a material change to the Company’s provision for loan losses, earnings and capital.

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

8

Note 2. Recent Accounting Pronouncements

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

There were no accounting standards adopted in the current period.

Future Application of Accounting Pronouncements Previously Issued

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 which affects entities holding financial assets that are not accounted for at fair value through net income, including loans, debt securities, and other financial assets. The ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by recording an allowance for current expected credit losses. In October 2019, the FASB unanimously voted to delay the implementation of the standard for three years for certain companies, including small reporting companies (as defined by the SEC), non-SEC public companies and private companies. The Company currently qualifies as a small reporting company and is subject to the delayed implementation. Therefore, the amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2023, including interim periods within that fiscal year. The Company is actively working through the provisions of the Update. Management has established a steering committee which is identifying the methodologies and the additional data requirements necessary to implement the Update and has engaged a third-party software service provider to assist in the Company's implementation. On March 31, 2022 the FASB issued ASU 2022-02 "Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." The ASU eliminates the current accounting guidance on troubled debt restructurings ("TDRs") for creditors, enhances disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty and amends the guidance on vintage disclosures with respect to current period gross charge-offs. For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2022-02 are effective upon the adoption of ASU 2016-13. Management is currently evaluating the impact that ASU 2016-13 and ASU 2022-02 will have on the Company’s consolidated financial position, results of operations and disclosures.

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

9

Note 3. Investment Securities

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity debt securities at September 30, 2022 and June 30, 2022 were as follows (in thousands):

	September 30, 2022
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
Available for sale debt securities
U.S. Government and agency obligations	$	10,945	$	-	$	(1,502	)	$	9,443
Corporate		5,000		-		(235	)		4,765
State and municipal		7,040		-		(2,706	)		4,334
Mortgage-backed securities – residential		13,695		2		(2,074	)		11,623
Mortgage-backed securities – commercial		2,398		-		(132	)		2,266
Total available for sale debt securities	$	39,078	$	2	$	(6,649	)	$	32,431
Held to maturity debt securities
U.S. Government and agency obligations	$	59,995	$	-	$	(5,088	)	$	54,907
Corporate		52,068		-		(3,558	)		48,510
State and municipal		88,490		64		(27,580	)		60,974
Mortgage-backed securities – residential		97,886		-		(13,727	)		84,159
Mortgage-backed securities – collateralized mortgage obligations		22,916		-		(3,047	)		19,869
Mortgage-backed securities – commercial		84,895		-		(14,171	)		70,724
Total held to maturity debt securities	$	406,250	$	64	$	(67,171	)	$	339,143

	June 30, 2022
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
Available for sale debt securities
U.S. Government and agency obligations	$	10,942	$	-	$	(1,014	)	$	9,928
Corporate		5,000		4		(150	)		4,854
State and municipal		7,040		-		(2,244	)		4,796
Mortgage-backed securities – residential		14,351		5		(1,644	)		12,712
Mortgage-backed securities – commercial		2,416		-		(85	)		2,331
Total available for sale debt securities	$	39,749	$	9	$	(5,137	)	$	34,621
Held to maturity debt securities
U.S. Government and agency obligations	$	59,995	$	6	$	(3,046	)	$	56,955
Corporate		52,076		111		(2,796	)		49,391
State and municipal		87,111		-		(22,307	)		64,804
Mortgage-backed securities – residential		101,525		4		(9,746	)		91,783
Mortgage-backed securities – collateralized  mortgage obligations		24,198		-		(2,124	)		22,074
Mortgage-backed securities – commercial		87,544		-		(10,943	)		76,601
Total held to maturity debt securities	$	412,449	$	121	$	(50,962	)	$	361,608

No securities were sold during the three months ended September 30, 2022 or 2021.

The following table presents the fair value and carrying amount of debt securities at September 30, 2022, by contractual maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

10

	Held to maturity				Available for sale
	Carrying		Fair		Amortized		Fair
	Amount		Value		Cost		Value
1 year or less	$	5,280	$	5,265	$	-	$	-
1 to 5 years		66,230		60,805		12,944		11,440
5 to 10 years		45,100		41,303		3,001		2,768
over 10 years		80,102		53,753		7,040		4,334
Mortgage-backed securities and other		209,538		178,017		16,093		13,889
Total	$	406,250	$	339,143	$	39,078	$	32,431

Securities pledged had carrying amounts of $211.4 million and $202.9 million at September 30, 2022 and June 30, 2022, respectively, and were pledged principally to secure FHLB advances and public deposits.

The following table provides information regarding investment securities with unrealized/unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at September 30, 2022 and June 30, 2022 (in thousands):

	September 30, 2022
	Less than 12 months					12 months or greater					Total
			Unrealized/					Unrealized/					Unrealized/
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
	Value		Loss			Value		Loss			Value		Loss
Available for sale
U.S. Government and agency obligations	$	-	$	-		$	9,443	$	(1,502	)	$	9,443	$	(1,502	)
Corporate		4,765		(235	)		-		-			4,765		(235	)
State and municipal		2,563		(1,460	)		1,771		(1,246	)		4,334		(2,706	)
Mortgage-backed securities – residential		3,624		(104	)		7,822		(1,970	)		11,446		(2,074	)
Mortgage-backed securities – commercial		2,266		(132	)		-		-			2,266		(132	)
Total available for sale	$	13,218	$	(1,931	)	$	19,036	$	(4,718	)	$	32,254	$	(6,649	)
Held to maturity
U.S. Government and agency obligations	$	31,488	$	(2,012	)	$	23,419	$	(3,076	)	$	54,907	$	(5,088	)
Corporate		48,510		(3,558	)		-		-			48,510		(3,558	)
State and municipal		26,953		(9,722	)		32,457		(17,858	)		59,410		(27,580	)
Mortgage-backed securities – residential		62,389		(8,570	)		21,770		(5,157	)		84,159		(13,727	)
Mortgage-backed securities – collateralized mortgage obligations		10,344		(717	)		9,525		(2,330	)		19,869		(3,047	)
Mortgage-backed securities – commercial		27,763		(3,546	)		42,961		(10,625	)		70,724		(14,171	)
Total held to maturity	$	207,447	$	(28,125	)	$	130,132	$	(39,046	)	$	337,579	$	(67,171	)

11

	June 30, 2022
	Less than 12 months					12 months or greater					Total
			Unrealized/					Unrealized/					Unrealized/
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
	Value		Loss			Value		Loss			Value		Loss
Available for sale
U.S. Government and agency obligations	$	2,774	$	(226	)	$	7,154	$	(788	)	$	9,928	$	(1,014	)
Corporate		2,850		(150	)		-		-			2,850		(150	)
State and municipal		2,860		(1,162	)		1,936		(1,082	)		4,796		(2,244	)
Mortgage-backed securities – residential		3,616		(81	)		8,394		(1,563	)		12,010		(1,644	)
Mortgage-backed securities – commercial		2,331		(85	)		-		-			2,331		(85	)
Total available for sale	$	14,431	$	(1,704	)	$	17,484	$	(3,433	)	$	31,915	$	(5,137	)
Held to maturity
U.S. Government and agency obligations	$	39,883	$	(2,616	)	$	5,066	$	(430	)	$	44,949	$	(3,046	)
Corporate		39,758		(2,796	)		-		-			39,758		(2,796	)
State and municipal		61,847		(20,696	)		2,957		(1,611	)		64,804		(22,307	)
Mortgage-backed securities – residential		87,364		(9,063	)		3,994		(683	)		91,358		(9,746	)
Mortgage-backed securities – collateralized mortgage obligations		13,611		(642	)		8,390		(1,482	)		22,001		(2,124	)
Mortgage-backed securities – commercial		50,434		(5,515	)		26,166		(5,428	)		76,600		(10,943	)
Total held to maturity	$	292,897	$	(41,328	)	$	46,573	$	(9,634	)	$	339,470	$	(50,962	)

As of September 30, 2022, the Company’s securities portfolio consisted of $438.7 million in securities, of which 314 securities with a fair value of $369.8 million were in an unrealized/unrecognized loss position. Non-U.S. government and agency obligations are internally pass rated and are subject to quarterly credit monitoring.

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

Note 4. Loans Receivable

Loans receivable are summarized as follows (in thousands):

	September 30,			June 30,
	2022			2022
Mortgage loans:
Residential	$	214,586		$	214,167
Commercial		953,539			942,130
Construction		25,307			20,896
Net deferred loan origination fees		(145	)		(100	)
Total mortgage loans		1,193,287			1,177,093
Commercial and consumer loans:
Commercial loans		141,902			136,304
Home equity lines of credit		22,955			23,688
Consumer and overdrafts		508			594
Net deferred loan origination costs		593			620
Total commercial and consumer loans		165,958			161,206
Total loans receivable		1,359,245			1,338,299
Allowance for loan losses		(9,048	)		(8,927	)
Loans receivable, net	$	1,350,197		$	1,329,372

The following tables present the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2022 and 2021 (in thousands):

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	Three Months Ended September 30, 2022
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	323	$	(3	)	$	-		$	2	$	322
Commercial mortgages		7,351		5			-			-		7,356
Construction		209		25			-			-		234
Commercial loans		982		32			(15	)		74		1,073
Home equity lines of credit		51		(9	)		-			1		43
Consumer and overdrafts		11		32			(24	)		1		20
Total	$	8,927	$	82		$	(39	)	$	78	$	9,048
	Three Months Ended September 30, 2021
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	337	$	(13	)	$	-		$	2	$	326
Commercial mortgages		6,435		134			-			-		6,569
Construction		102		25			-			-		127
Commercial loans		948		(143	)		(100	)		367		1,072
Home equity lines of credit		54		(3	)		-			2		53
Consumer and overdrafts		5		13			(7	)		1		12
Total	$	7,881	$	13		$	(107	)	$	372	$	8,159

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The following tables present the balance in the allowance for loan losses and the recorded investment in loans, excluding net deferred fees and accrued interest, by portfolio segment, and based on impairment method as of September 30, 2022 and June 30, 2022 (in thousands):

	September 30, 2022
	Loans								Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total
Residential mortgages	$	1,664	$	212,704	$	218	$	214,586	$	109	$	213	$	-	$	322
Commercial mortgages		3,504		949,185		850		953,539		-		7,356		-		7,356
Construction		2,792		22,515		-		25,307		-		234		-		234
Commercial loans		781		141,121		-		141,902		-		1,073		-		1,073
Home equity lines of credit		400		22,469		86		22,955		2		41		-		43
Consumer and overdrafts		-		508		-		508		-		20		-		20
Total	$	9,141	$	1,348,502	$	1,154	$	1,358,797	$	111	$	8,937	$	-	$	9,048
	June 30, 2022
	Loans								Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total
Residential mortgages	$	1,613	$	212,333	$	221	$	214,167	$	110	$	213	$	-	$	323
Commercial mortgages		4,778		936,493		859		942,130		-		7,351		-		7,351
Construction		2,792		18,104		-		20,896		-		209		-		209
Commercial loans		783		135,521		-		136,304		-		982		-		982
Home equity lines of credit		452		23,147		89		23,688		9		42		-		51
Consumer and overdrafts		-		594		-		594		-		11		-		11
Total	$	10,418	$	1,326,192	$	1,169	$	1,337,779	$	119	$	8,808	$	-	$	8,927

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The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by portfolio segment as of September 30, 2022 and June 30, 2022 (in thousands):

	September 30, 2022						June 30, 2022
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance recorded:
Residential mortgages	$	1,382	$	1,313	$	-	$	1,262	$	1,197	$	-
Commercial mortgages		3,582		3,504		-		4,789		4,778		-
Construction		2,792		2,792		-		2,792		2,792		-
Commercial loans		793		781		-		795		783		-
Home equity lines of credit		383		376		-		379		399		-
With an allowance recorded:
Residential mortgages		351		351		109		353		416		110
Home equity lines of credit		31		24		2		60		53		9
Total	$	9,314	$	9,141	$	111	$	10,430	$	10,418	$	119

The tables below present the average recorded investment and interest income recognized on loans individually evaluated for impairment, by portfolio segment, for the three months ended September 30, 2022 and 2021 (in thousands):

	September 30, 2022				September 30, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgages	$	1,318	$	9	$	1,936	$	7
Commercial mortgages		3,543		-		3,582		-
Construction		2,792		-		-		-
Commercial loans		782		4		980		191
Home equity lines of credit		378		-		350		2
With an allowance recorded:
Residential mortgages		352		3		424		3
Home equity lines of credit		27		-		33		-
Total	$	9,192	$	16	$	7,305	$	203

The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days and still on accrual status, by portfolio segment, as of September 30, 2022 and June 30, 2022 (in thousands):

					Loans Past Due Over 90 Days
	Nonaccrual				and Still Accruing
	September 30,		June 30,		September 30,		June 30,
	2022		2022		2022		2022
Residential mortgages	$	791	$	671	$	-	$	-
Commercial mortgages		3,504		4,778		-		-
Construction		2,792		2,792		-		-
Commercial loans		534		539		-		-
Home equity lines of credit		368		416		-		-
Consumer and overdrafts		-		-		-		39
Total	$	7,989	$	9,196	$	-	$	39

Nonperforming loans include both smaller-balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The table above excludes acquired loans that are accounted for as purchased credit impaired loans totaling $133,000 and $137,000 as of September 30, 2022 and June 30, 2022, respectively. Such loans are excluded because the loans are in pools that are considered performing. The discounts arising from recording these loans at fair value upon acquisition were due in part to credit quality and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows.

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The following tables present the aging of the recorded investment in past due loans by portfolio segment as of September 30, 2022 and June 30, 2022 (in thousands):

	September 30, 2022
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current		Total
Residential mortgages	$	-	$	104	$	427	$	531	$	214,055	$	214,586
Commercial mortgages		-		-		-		-		953,539		953,539
Construction		-		-		2,792		2,792		22,515		25,307
Commercial loans		-		51		533		584		141,318		141,902
Home equity lines of credit		-		-		296		296		22,659		22,955
Consumer and overdrafts		-		-		-		-		508		508
Total	$	-	$	155	$	4,048	$	4,203	$	1,354,594	$	1,358,797

	June 30, 2022
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current		Total
Residential mortgages	$	-	$	-	$	367	$	367	$	213,800	$	214,167
Commercial mortgages		-		-		1,197		1,197		940,933		942,130
Construction		-		-		1,113		1,113		19,783		20,896
Commercial loans		-		16		400		416		135,888		136,304
Home equity lines of credit		-		-		399		399		23,289		23,688
Consumer and overdrafts		-		-		39		39		555		594
Total	$	-	$	16	$	3,515	$	3,531	$	1,334,248	$	1,337,779

Troubled Debt Restructurings

The terms of certain loans have been modified as troubled debt restructurings (“TDRs”). The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. All TDRs are considered impaired loans.

As of both September 30, 2022 and June 30, 2022, the Company had 9 loans, classified as TDRs totaling $1.4 million, including $1.2 million of loans still accruing interest. The Company has allocated $111,000 and $119,000, respectively, of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2022 and June 30, 2022. As of September 30, 2022, the Company has no commitments to lend additional funds to customers with outstanding loans that are classified as TDRs.

The Company did not modify any loans during the three months ended September 30, 2022 or 2021 that were classified as TDRs.

There were no defaults of TDRs occurring in the three months ended September 30, 2022 or 2021 that were modified in the twelve months prior to default.

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. On December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19. This extension expired as of January 1, 2022. Additionally, on April 7, 2020, the banking agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (“Interagency Statement”), to encourage banks to work prudently with borrowers

16

and to describe the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain COVID-19-related modifications.

During the three months ended September 30, 2022, no loan payment deferrals were granted or extended by the Company. During the three months ended September 30, 2021, the Company granted or extended loan payment deferrals for 5 residential mortgage, construction and commercial loans totaling $3.7 million. In accordance with either the CARES Act (as amended) or Interagency Statement, these modifications are not considered TDRs. The Company had no loans on loan payment deferral as of September 30, 2022 nor June 30, 2022.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company utilizes the same grading process for acquired loans as it does for originated loans. The Company uses the following definitions for risk ratings:

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

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

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

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

	September 30, 2022
	Pass		Special Mention		Substandard		Total
Residential mortgages	$	213,581	$	383	$	622	$	214,586
Commercial mortgages		944,482		1,538		7,519		953,539
Construction		22,515		1,679		1,113		25,307
Commercial loans		141,295		145		462		141,902
Home equity lines of credit		22,587		-		368		22,955
Consumer and overdrafts		508		-		-		508
Total	$	1,344,968	$	3,745	$	10,084	$	1,358,797

	June 30, 2022
	Pass		Special Mention		Substandard		Total
Residential mortgages	$	212,810	$	154	$	1,203	$	214,167
Commercial mortgages		931,178		1,548		9,404		942,130
Construction		18,104		1,679		1,113		20,896
Commercial loans		135,725		156		423		136,304
Home equity lines of credit		23,220		43		425		23,688
Consumer and overdrafts		594		-		-		594
Total	$	1,321,631	$	3,580	$	12,568	$	1,337,779

17

Purchased Credit Impaired Loans

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of September 30, 2022 and June 30, 2022 is as follows (in thousands):

	September 30,		June 30,
	2022		2022
Residential mortgages	$	218	$	221
Commercial mortgages		850		859
Home equity lines of credit		86		89
Carrying amount, net of allowance of $0	$	1,154	$	1,169

There was no provision for loan losses on purchased credit impaired loans during the three months ended September 30, 2022 or 2021.

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

	Three Months Ended September 30,
	2022			2021
Beginning balance	$	89		$	130
Accretion income		(3	)		(10	)
Ending balance	$	86		$	120

Note 5. Accumulated Other Comprehensive (Loss) Income

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax (in thousands):

	Net unrealized gain (loss) on available for sale securities (1)			Unrealized loss on pension benefits (2)			Unrealized loss on SERP benefits (2)			Total
Balance at July 1, 2022	$	(4,052	)	$	(4,452	)	$	(125	)	$	(8,629	)
Other comprehensive loss before reclassifications		-			-			-			-
Amounts reclassified from accumulated other    comprehensive income		(1,519	)		141			20			(1,358	)
Tax effect		319			(30	)		(4	)		285
Net other comprehensive (loss) income		(1,200	)		111			16			(1,073	)
Balance at September 30, 2022	$	(5,252	)	$	(4,341	)	$	(109	)	$	(9,702	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2021	$	137		$	(3,055	)	$	(181	)	$	(3,099	)
Other comprehensive loss before reclassifications		(187	)		-			-			(187	)
Amounts reclassified from accumulated other    comprehensive income		-			38			16			54
Tax effect		40			(9	)		(3	)		28
Net other comprehensive (loss) income		(147	)		29			13			(105	)
Balance at September 30, 2021	$	(10	)	$	(3,026	)	$	(168	)	$	(3,204	)

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Note 6. Post-Retirement Benefits

Employee Pension Plan

The Company maintains a non-contributory defined benefit pension plan that covers employees meeting specific requirements as to age and length of service. The Company’s contributions to this qualified plan are determined on the basis of (i) the maximum amount that can be deducted for federal income tax purposes, and (ii) the amount determined by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974 (“ERISA”). Contributions are intended to provide for benefits attributed to service to date but also those expected to be earned in the future. On February 15, 2017, the Board of Directors approved the freezing of the defined benefit pension plan effective May 1, 2017.

Supplemental Executive Retirement Plans

The Company also maintains unfunded and non-qualified supplemental executive retirement plans ("SERP") to provide pension benefits in addition to those provided under the qualified pension plan.

Net periodic benefit cost and other amounts recognized in other comprehensive income for the three months ended September 30, 2022 and 2021 (in thousands):

	Three Months Ended					Three Months Ended
	September 30, 2022					September 30, 2021
	Defined Benefit Plan			Supplemental Retirement Plans		Defined Benefit Plan			Supplemental Retirement Plans
Service cost	$	-		$	82	$	-		$	131
Interest cost		196			26		149			17
Expected return on plan assets		(410	)		-		(510	)		-
Amortization of prior net loss		141			20		38			16
Settlement charges		-			-		-			-
Net periodic (benefit) cost	$	(73	)	$	128	$	(323	)	$	164

The Company made no contributions to the defined benefit plan during the three months ended September 30, 2022.

Employee Stock Ownership Plan

On January 1, 2017, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Company employees. On April 20, 2017, the Holding Company granted a loan to the ESOP in the amount of $14.5 million for the purchase of 1,453,209 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Holding Company to purchase the common stock is payable annually over 15 years at a rate per annum equal to the Prime Rate, reset annually on January 1st (3.25% for 2022). Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. The balance of the ESOP loan at September 30, 2022 was $9.7 million. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released annually is 96,881 through 2032. Dividends on allocated shares increase participant accounts and are used to purchase additional shares of stock. Participants receive the shares at the end of employment.

Shares held by the ESOP include the following (Dollars in thousands):

	September 30, 2022		June 30, 2022
Allocated to participants		541,097		518,371
Unearned		896,348		920,767
Total ESOP shares		1,437,445		1,439,138
Fair value of unearned shares	$	16,072	$	17,577

Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2022 and 2021 was $467,000 and $446,000, respectively.

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Note 7. Fair Value of Financial Instruments

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

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

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

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

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

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

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

Foreclosed Real Estate: Assets acquired through or instead of loan foreclosure are initially recorded at fair value, less estimated costs to sell, when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Foreclosed properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Credit Department, as well as a third-party specialist, where deemed appropriate, reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Once appraisals are considered appropriate, management discounts the appraised value for estimated selling costs, such as legal, broker, and property maintenance and insurance costs. The most recent analysis performed indicated discount rates ranging between 10% and 20% should be applied to properties with appraisals performed.

Derivatives: The Company’s derivative assets and liabilities consist of transactions undertaken as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest

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rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

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

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
September 30, 2022
Measured on a recurring basis:
Available for sale debt securities:
U.S. Government and agency obligations	$	-	$	9,443	$	-	$	9,443
Corporate		-		1,997		2,768		4,765
State and municipal		-		4,334		-		4,334
Mortgage-backed securities – residential		-		11,623		-		11,623
Mortgage-backed securities – commercial		-		2,266		-		2,266
Derivatives – interest rate contracts		-		14,774		-		14,774
Total assets at fair value	$	-	$	44,437	$	2,768	$	47,205
Derivatives – interest rate contracts	$	-	$	14,774	$	-	$	14,774
Total liabilities at fair value	$	-	$	14,774	$	-	$	14,774
Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	242	$	242
Home equity lines of credit		-		-		22		22
Total assets at fair value	$	-	$	-	$	264	$	264

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
June 30, 2022
Measured on a recurring basis:
Available for sale debt securities:
U.S. Government and agency obligations	$	-	$	9,928	$	-	$	9,928
Corporate		-		2,004		2,850		4,854
State and municipal		-		4,796		-		4,796
Mortgage-backed securities – residential		-		12,712		-		12,712
Mortgage-backed securities – commercial		-		2,331		-		2,331
Derivatives – interest rate contracts		-		8,223		-		8,223
Total assets at fair value	$	-	$	39,994	$	2,850	$	42,844
Derivatives – interest rate contracts	$	-	$	8,223	$	-	$	8,223
Total liabilities at fair value	$	-	$	8,223	$	-	$	8,223
Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	306	$	306
Home equity lines of credit		-		-		44		44
Total assets at fair value	$	-	$	-	$	350	$	350

There were no transfers between levels within the fair value hierarchy during the three months ended September 30, 2022 or 2021.

Impaired loans in the preceding table had a carrying amount of $375,000 and a remaining valuation allowance of $111,000, at September 30, 2022, as compared to $469,000 and $119,000, respectively, as of June 30, 2022. Impaired loans measured at fair value incurred no net charge-offs and resulted in a benefit for loan losses of $2,000 during the three months ended September 30, 2022. Impaired loans measured at fair value as of September 30, 2021 incurred no net charge-offs and resulted in a credit for loan losses of $2,000 during the three months ended September 30, 2021.

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The following tables present quantitative information about Level 3 fair value measurements for selected financial instruments measured at fair value on a non-recurring basis at September 30, 2022 and June 30, 2022 (Dollars in thousands):

			Valuation	Unobservable	Range or
	Fair Value		Technique(s)	Input(s)	Rate Used
September 30, 2022
Impaired loans - residential mortgages	$	242	Discounted cash flow	Discount rate	5.4% to 6.3%
Impaired loans - home equity lines of credit		22	Discounted cash flow	Discount rate	4.8% to 6.3%
June 30, 2022
Impaired loans - residential mortgages	$	306	Discounted cash flow	Discount rate	5.4% to 6.3%
Impaired loans - home equity lines of credit		44	Discounted cash flow	Discount rate	4.8% to 6.3%

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

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
September 30, 2022
Financial assets:
Cash and cash equivalents	$	50,753	$	50,753	$	-	$	-	$	50,753
Held to maturity debt securities		406,250		-		307,553		31,590		339,143
Available for sale debt securities		32,431		-		29,663		2,768		32,431
Loans receivable, net		1,350,197		-		-		1,280,789		1,280,789
Accrued interest receivable		7,074		-		1,845		5,229		7,074
FHLB stock		2,865	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		14,774		-		14,774		-		14,774
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,269,942		1,269,942		-		-		1,269,942
Time deposits		323,324		-		324,778		-		324,778
Mortgage escrow funds		7,302		7,302		-		-		7,302
Advances from FHLB		28,288		-		27,347		-		27,347
Accrued interest payable		53		-		53		-		53
Derivative liabilities - interest rate contracts		14,774		-		14,774		-		14,774

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2022
Financial assets:
Cash and cash equivalents	$	118,457	$	118,457	$	-	$	-	$	118,457
Held to maturity debt securities		412,449		-		331,262		30,346		361,608
Available for sale debt securities		34,621		-		31,771		2,850		34,621
Loans receivable, net		1,329,372		-		-		1,261,035		1,261,035
Accrued interest receivable		6,396		-		1,751		4,645		6,396
FHLB stock		3,766	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		8,223		-		8,223		-		8,223
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,298,661		1,298,661		-		-		1,298,661
Time deposits		327,589		-		329,885		-		329,885
Mortgage escrow funds		11,173		11,173		-		-		11,173
Advances from FHLB		48,323		-		48,094		-		48,094
Accrued interest payable		94		1		93		-		94
Derivative liabilities - interest rate contracts		8,223		-		8,223		-		8,223

The methods of determining the fair value of assets and liabilities presented in the table above are consistent with our methodologies disclosed in the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

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Note 8. Regulatory Matters

The following is a summary of the Bank’s actual capital amounts and ratios as of September 30, 2022 and June 30, 2022, compared to the required ratios for minimum capital adequacy and for classification as well capitalized (Dollars in thousands).

											To Be Well Capitalized
						For Capital					Under Prompt
						Adequacy					Corrective Action
	Bank Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022
Leverage (Tier 1)	$	256,469		13.0	%	$	78,658		4.0	%	$	98,323		5.0	%
Risk-based:
Common Tier 1		256,469		17.3			66,842		4.5			96,549		6.5
Tier 1		256,469		17.3			89,122		6.0			118,829		8.0
Total		265,517		17.9			118,829		8.0			148,537		10.0
June 30, 2022
Leverage (Tier 1)	$	251,144		12.8	%	$	78,490		4.0	%	$	98,112		5.0	%
Risk-based:
Common Tier 1		251,144		17.2			65,630		4.5			94,799		6.5
Tier 1		251,144		17.2			87,507		6.0			116,676		8.0
Total		260,071		17.8			116,676		8.0			145,845		10.0

In addition to the ratios above, the Basel III Capital Rules have established that community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers.

Management believes that as of September 30, 2022 and June 30, 2022, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification.

Note 9. Earnings Per Share (“EPS”)

Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted EPS is calculated in a similar matter, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. Dilutive financial instruments include stock options and unvested restricted stock. The following table provides factors used in the earnings per share computation for the three months ended September 30, 2022 and 2021:

	2022			2021
	(Dollars in thousands, except per share data)
Net income applicable to common stock	$	4,776		$	3,614
Average number of common shares outstanding		15,122,732			15,342,975
Less: Average unallocated ESOP shares		(908,419	)		(1,005,432	)
Average number of common shares outstanding used to calculate basic earnings per common share		14,214,313			14,337,543
Effect of equity-based awards		87,287			68,273
Average number of common shares outstanding used to calculate diluted earnings per common share		14,301,600			14,405,816
Earnings per common share:
Basic	$	0.34		$	0.25
Diluted	$	0.33		$	0.25

Stock options for 1,314,963 and 1,325,935 shares of common stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2022 and 2021, respectively, because they were antidilutive.

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Note 10. Derivatives and Hedging

Derivatives not designated as hedges may be used to manage the Company’s exposure to interest rate movements or to provide service to customers. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. The Company presents interest rate swap assets and liabilities in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. These interest rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.

The following table presents summary information about the interest rate swaps as of September 30, 2022 and June 30, 2022 (Dollars in thousands).

	September 30, 2022			June 30, 2022
Notional amounts	$	287,485		$	264,462
Weighted average pay rates		4.31	%		3.57	%
Weighted average receive rates		4.31	%		3.57	%
Weighted average maturity	8.14 years			8.22 years
Fair value of combined interest rate swaps	$	-		$	-

Note 11. Revenue From Contracts With Customers

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company applies the following five steps to properly recognize revenue:

1.Identify the contract with a customer.

2.Identify the performance obligations in the contract.

3.Determine the transaction price.

4.Allocate the transaction price to performance obligations in the contract.

5.Recognize revenue when (or as) the Company satisfies a performance obligation.

The following table presents summary information about sources of revenue from contracts with customers for the periods indicated (in thousands).

	Three months ended September 30,
	2022		2021
Noninterest income:
Service charges on deposits	$	234	$	183
Interchange fees		153		156
Other fees and service charges (1)		66		62
Fees and service charges		453		401
Swap income (1)		141		-
Bank-owned life insurance (1)		191		192
Other noninterest income (1)		8		20
Total noninterest income	$	793	$	613

(1)Not within the scope of ASC 606.

Fees and Service Charges on Deposit Accounts. The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfied the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

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Interchange Income. The Company earns interchange fees from debit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Gain on Sales of Foreclosed Real Estate. The Company records a gain or loss from the sale of foreclosed real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of foreclosed real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed real estate asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

Note 12. Stock-Based Compensation

On October 24, 2018, the Company’s shareholders approved the PCSB Financial Corporation 2018 Equity Incentive Plan (the “Plan”), which permits the grant of stock options and restricted stock and/or restricted stock units. The total number of shares that may be granted under the Plan is 2,543,115, of which 1,816,511 shares may be granted as stock options and 726,604 shares may be granted as restricted stock and restricted stock units. Total compensation cost that has been charged against income for the Plan was $820,000 and $810,000 for the three months ended September 30, 2022 and 2021, respectively.

Restricted Stock Awards (“RSAs”)

RSAs awarded under the Plan provide for the issuance of shares to both employees and non-employee directors. These awards generally vest over a 5-year period, with 20% vesting each year on the anniversary of the award. All awards were made at the fair value of common stock on the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at grant date. The fair value of the stock was determined to be the closing price of the stock on the NASDAQ exchange. Total shares available for grant under the Plan are 726,000, of which 549,467 shares were granted as of September 30, 2022.

The following table presents a summary of RSA activity during the period ended September 30, 2022.

	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested granted shares outstanding at July 1, 2022		223,450		$	18.89
Shares granted		-			-
Shares vested		(2,200	)		16.21
Shares forfeited		-			-
Unvested granted shares at September 30, 2022		221,250		$	18.92

As of September 30, 2022, there was $2.4 million of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.4 years.

Stock Option Awards

Stock options awarded to employees under the Plan are considered incentive stock options (ISOs), up to applicable limits. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. Those issued to non-employee directors, as well as those exceeding ISO limitations, are considered non-qualified stock options (NQSOs). Options generally vest over a 5-year period, with 20% vesting each year on the anniversary of the award, however, may not vest more rapidly than over a three-year period, and have a contractual term of 10 years. The Company has a policy of using shares held as a treasury stock to satisfy share option exercises. Currently, the Company has a sufficient number of treasury shares to satisfy the current level of exercisable share options.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatilities of a peer group of publicly traded financial institutions. The expected term of options granted is based on the simplified

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“mid-point” approach which utilizes the weighted average vesting period and contractual term. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

Total options available for grant under the Plan are 1,816,511, of which 1,320,963 options were granted as of September 30, 2022. The following table presents a summary of activity related to stock options granted under the Plan, and changes during the period then ended:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Years		Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Options outstanding at July 1, 2022		1,320,963	$	18.98		6.4	$	411
Options granted		-		-
Options expired		-		-
Options forfeited		-		-
Options exercised		-		-
Options outstanding at September 30, 2022		1,320,963	$	18.98		6.1	$	37
Exercisable at September 30, 2022		786,578	$	19.00		6.1	$	14

As of September 30, 2022, there was $1.4 million of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.4 years.

Note 13. Leases

As of September 30, 2022, the Company leases real estate for eleven branch offices and one administrative office, including its corporate headquarters, under various operating lease agreements. The Company’s leases have maturities which range from 2023 to 2041, some of which include lessee options to extend the lease term. The weighted average remaining life of the lease terms for these leases was 9.4 years as of September 30, 2022.

The operating lease asset and lease liability are determined at the commencement date of the lease based on the present value of the lease payments. As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term, at the lease commencement date. The Company utilized a weighted average discount rate of 2.49% in determining the lease liability as of September 30, 2022.

The Company made a policy election to exclude the recognition requirements of ASC 842 to short-term leases, those leases with original terms of 12 months or less. Short-term lease payments are recognized in the income statement on a straight-line basis over the lease term. The Company had no short-term lease cost for the three months ended September 30, 2022 or 2021. Certain leases may include one or more options to renew. The exercise of lease renewal options is typically at the Company’s discretion and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated. The Company does not sublease any of its leased properties. There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three months ended September 30, 2022 or 2021.

Total operating lease cost was $505,000 for the three months ended September 30, 2022 and 2021, respectively. The right-of-use asset, included in premises and equipment, net, was $8.1 million and the corresponding lease liability, included in other liabilities was $8.4 million as of September 30, 2022.

Future minimum lease payments for the fiscal years ending June 30th and a reconciliation of undiscounted lease cash flows and the lease liability recognized in the consolidated balance sheet as of September 30, 2022 is shown below (in thousands):

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2023	$	1,550
2024		1,719
2025		1,426
2026		907
2027		547
Thereafter		3,442
Total future minimum lease payments (undiscounted)		9,591
Discounting effect on cash flows		(1,228	)
Lease liability (discounted)	$	8,363

Note 14. Pending Merger With and Into Brookline Bancorp, Inc.

On May 23, 2022, the Company and Brookline Bancorp, Inc (“Brookline”), the holding company of Brookline Bank and Bank Rhode Island, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, the Company will merge with and into Brookline, with Brookline as the surviving corporation (the “Merger”). Following the Merger, PCSB Bank will operate as a separate bank subsidiary of Brookline. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each stockholder of PCSB will receive, at the holder’s election, either $22.00 in cash consideration or 1.3284 shares of Brookline common stock for each share of PCSB common stock, subject to allocation procedures to ensure that 60% of the outstanding shares of PCSB common stock will be converted to Brookline common stock. On September 21, 2022, the Company's shareholders approved the Merger Agreement. The consummation of the Merger remains subject to customary closing conditions, including the receipt of regulatory approvals. The Merger is currently expected to be completed in the fourth calendar quarter of 2022.

For the three months ended September 30, 2022, the Company recognized $311,000 of merger-related expenses. No merger-related expenses were recognized for the three months ended September 30, 2021.

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

General

Management’s discussion and analysis of financial condition at September 30, 2022 and June 30, 2022, and results of operations for the three months ended September 30, 2022 and 2021 is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q and with the audited consolidated financial statements included in the annual report on Form 10-K for the fiscal year ended June 30, 2022.

Cautionary Note Regarding Forward-Looking Statements

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

•statements of our goals, intentions and expectations;

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

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

•estimates of our risks and future costs and benefits.

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

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

•extent, duration and severity of the COVID-19 pandemic and government action in response to the pandemic, including their impact on our business and operations, including the impact on lost fee revenue and operating expenses, as well as their effects on our customers and issuers of securities, including their ability to make timely payments on obligations, service providers, and on economies and markets more generally;

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

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

•our ability to access cost-effective funding;

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

•demand for loans and deposits in our market area;

•our ability to continue to implement our business strategies;

•competition among depository and other financial institutions;

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

•adverse changes in the securities or credit markets;

•changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

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

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

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

•changes in consumer spending, borrowing and savings habits;

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

•our ability to retain key employees;

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

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

Additional factors that may affect our results are discussed in the annual report on Form 10-K for the fiscal year ended June 30, 2022, under the heading “Risk Factors” and in this quarterly report on Form 10-Q under Part II, Item 1A.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

Critical Accounting Policies and Critical Accounting Estimates

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments, estimates and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. For additional information regarding critical accounting policies, refer to the section captioned “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the June 30, 2022 Form 10-K. There have been no significant changes in our application of critical accounting policies for the three months ended September 30, 2022.

Overview

PCSB Financial Corporation (the “Holding Company” and together with its direct and indirect subsidiaries, the “Company”) is a Maryland corporation organized by PCSB Bank (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in the Bank's conversion to stock ownership on April 20, 2017. At September 30, 2022, the significant assets of the Holding Company were the capital stock of the Bank, cash deposited in the Bank, and a loan to the PCSB Bank Employee Stock Ownership Plan (“ESOP”). The liabilities of the Holding Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended, and regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New York State Department of Financial Services (the “NYSDFS”).

PCSB Bank is a community-oriented financial institution that provides financial services to individuals and businesses within its market area of Putnam, Southern Dutchess, Rockland and Westchester Counties in New York. The Bank is a state-chartered commercial bank, and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s primary regulators are the FDIC and the NYSDFS.

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

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Selected Financial Ratios

The summary information presented below as of and for the three months ended September 30, 2022 and 2021 is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Part I (Dollars in thousands, except per share data).

	Three Months Ended
	September 30, 2022			September 30, 2021
Performance Ratios (1):
Return on average assets		0.98	%		0.78	%
Return on average equity		6.90	%		5.29	%
Interest rate spread		3.06	%		2.71	%
Net interest margin		3.19	%		2.82	%
Efficiency ratio		61.07	%		65.59	%
Noninterest income to average assets		0.16	%		0.13	%
Noninterest expense to average assets		1.96	%		1.85	%
Average interest-earning assets to average interest-bearing liabilities		131.62	%		131.14	%
Average equity to average assets		14.17	%		14.66	%
Dividend payout ratio (2)		21.04	%		24.24	%

	As of or for the three months ended
	September 30, 2022			September 30, 2021
Loans to deposits		84.74	%		80.46	%
Share Data:
Shares outstanding		15,334,323			15,574,310
Book value per common share	$	18.33		$	17.64
Tangible book value per common share (3)	$	17.93		$	17.24
Asset Quality Ratios:
Non-performing loans receivable	$	7,989		$	5,732
Non-performing assets	$	7,989		$	5,732
Allowance for loan losses as a percent of total loans receivable (4)		0.67	%		0.68	%
Allowance for loan losses as a percent of non-performing loans receivable		113.26	%		142.34	%
Non-performing loans as a percent of total loans receivable, net (4)		0.59	%		0.48	%
Non-performing assets as a percent of total assets		0.41	%		0.31	%
Net recoveries	$	(39	)	$	(265	)
Net recoveries to average outstanding loans during the period (1)		(0.01	%)		(0.09	%)
Capital Ratios (5):
Tier 1 capital (to adjusted total assets)		13.02	%		12.72	%
Common equity Tier 1 capital (to risk-weighted assets)		17.27	%		17.84	%
Tier 1 capital (to risk-weighted assets)		17.27	%		17.84	%
Total capital (to risk-weighted assets)		17.88	%		18.46	%

(1)Performance ratios are annualized.

(2)Dividends declared per share divided by net income per share.

(3)Tangible book value per share is a non-GAAP measure and equals total shareholders' equity, less goodwill and other intangible assets, divided by shares outstanding. We believe this disclosure may be meaningful to those investors who seek to evaluate our equity without giving effect to goodwill and other intangible assets. Reconciliations of GAAP to non-GAAP measures appear below this table.

(4)Total loans receivable excludes PPP loans.

(5)Represents Bank ratios.

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Non-GAAP Financial Measures

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

	As of
	September 30, 2022			June 30, 2022
Computation of Tangible Book Value per Common Share
Total shareholders' equity (GAAP)	$	281,137		$	277,162
Adjustments:
Goodwill		(6,106	)		(6,106	)
Other intangible assets		(77	)		(89	)
Tangible common shareholders' equity (Non-GAAP)	$	274,954		$	270,967
Common shares outstanding		15,334,323			15,334,857
Book value per share (GAAP)	$	18.33		$	18.07
Adjustments:
Effects of intangible assets		(0.40	)		(0.40	)
Tangible book value per common share (Non-GAAP)	$	17.93		$	17.67

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents decreased $67.7 million, or 57.2%, to $50.8 million at September 30, 2022 from $118.5 million at June 30, 2022. The decrease is primarily due to a $33.0 million decrease in deposits, a $20.8 million increase in net loans receivable, and a $20.0 million decrease in FHLB advances, partially offset by an $8.4 million decrease in total investment securities.

Investment Securities Portfolio. The following table is a summary of the Company's investment securities portfolio, at carrying value, as of September 30, 2022 and June 30, 2022 (Dollars in thousands):

	September 30,		June 30,		Increase / (Decrease)
	2022		2022		$			%
Available for sale debt securities
U.S. Government and agency obligations	$	9,443	$	9,928	$	(485	)		-4.9	%
Corporate		4,765		4,854		(89	)		-1.8
State and municipal		4,334		4,796		(462	)		-9.6
Mortgage-backed securities – residential		11,623		12,712		(1,089	)		-8.6
Mortgage-backed securities – commercial		2,266		2,331		(65	)		-2.8
Total available for sale debt securities	$	32,431	$	34,621	$	(2,190	)		-6.3	%
Held to maturity debt securities
U.S. Government and agency obligations	$	59,995	$	59,995	$	-			0.0	%
Corporate		52,068		52,076		(8	)		0.0
State and municipal		88,490		87,111		1,379			1.6
Mortgage-backed securities – residential		97,886		101,525		(3,639	)		-3.6
Mortgage-backed securities – collateralized mortgage obligations		22,916		24,198		(1,282	)		-5.3
Mortgage-backed securities – commercial		84,895		87,544		(2,649	)		-3.0
Total held to maturity debt securities	$	406,250	$	412,449	$	(6,199	)		-1.5	%

The decrease in investment securities was primarily the result of principal payments in mortgage-backed securities.

Loans Receivable Portfolio. The following table is a summary of the Company's loan portfolio, as of September 30, 2022 and June 30, 2022 (Dollars in thousands):

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	September 30,			June 30,			Increase / (Decrease)
	2022			2022			$			%
Mortgage loans
Residential	$	214,586		$	214,167		$	419			0.2	%
Commercial		953,539			942,130			11,409			1.2
Construction		25,307			20,896			4,411			21.1
Net deferred loan origination (fees) costs		(145	)		(100	)		(45	)		45.0
Total mortgage loans		1,193,287			1,177,093			16,194			1.4
Commercial and consumer loans:
Commercial loans		141,902			136,304			5,598			4.1
Home equity lines of credit		22,955			23,688			(733	)		-3.1
Consumer and overdrafts		508			594			(86	)		-14.5
Net deferred loan origination costs (fees)		593			620			(27	)		-4.4
Total commercial and consumer loans		165,958			161,206			4,752			2.9
Total loans receivable		1,359,245			1,338,299			20,946			1.6
Allowance for loan losses		(9,048	)		(8,927	)		(121	)		1.4
Loans receivable, net	$	1,350,197		$	1,329,372		$	20,825			1.6	%

Allowance for Loan Losses. The allowance for loan losses is maintained at a level 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 $121,000, or 1.4%, to $9.0 million at September 30, 2022 from $8.9 million at June 30, 2022. The increase is primarily due to loan portfolio growth. Non-performing loans as a percent of total loans receivable were 0.59% as of September 30, 2022, a decrease from 0.69% as of June 30, 2022.

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

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

	September 30,		June 30,		Increase / (Decrease)
	2022		2022		$			%
Demand	$	227,635	$	245,297	$	(17,662	)		-7.2	%
NOW accounts		253,857		243,006		10,851			4.5
Money market accounts		385,470		399,026		(13,556	)		-3.4
Savings		402,980		411,332		(8,352	)		-2.0
Time deposits		323,324		327,589		(4,265	)		-1.3
Total deposits	$	1,593,266	$	1,626,250	$	(32,984	)		-2.0	%

Federal Home Loan Bank Advances. FHLB advances decreased $20.0 million, or 41.5%, to $28.3 million at September 30, 2022 as compared to $48.3 million at June 30, 2022. This decrease is due to maturities and principal paydowns.

Total Shareholders’ Equity. Total shareholders’ equity increased $3.9 million, or 1.4%, to $281.1 million at September 30, 2022 from $277.2 million at June 30, 2022. This increase was primarily due to net income of $4.8 million and $1.3 million of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period, partially offset by $1.1 million of other comprehensive losses related primarily to unrealized losses on available for sale investment securities driven by higher market interest rates and $1.0 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. At September 30, 2022, the Bank was considered “well capitalized” under applicable regulatory guidelines.

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Results of Operations for the Three Months Ended September 30, 2022 and September 30, 2021

Net Income. Net income increased $1.2 million, or 32.2%, to $4.8 million for the three months ended September 30, 2022 compared to $3.6 million for the three months ended September 30, 2021. The increase was primarily due to increases of $2.3 million in net interest income and $180,000 in noninterest income, partially offset by increases of $933,000 in noninterest expense, $338,000 in income tax expense and $69,000 in provision for loan losses.

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

	Three Months Ended September 30,
	2022								2021
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
Assets:
Loans receivable (1)	$	1,346,194		$	13,849		4.12	%	$	1,223,532		$	12,107		3.96	%
Investment securities (1)		445,231			2,420		2.26			404,565			2,011		2.07
Other interest-earning assets		85,377			487		2.26			160,659			109		0.27
Total interest-earning assets		1,876,802			16,756		3.59			1,788,756			14,227		3.20
Non-interest-earning assets		78,342								76,375
Total assets	$	1,955,144							$	1,865,131
Liabilities and equity:
NOW accounts	$	243,354			250		0.41		$	182,531			70		0.15
Money market accounts		390,619			376		0.38			350,575			186		0.21
Savings accounts and escrow		422,178			186		0.18			397,292			113		0.11
Time deposits		323,219			852		1.05			367,641			985		1.06
Total interest-bearing deposits		1,379,370			1,664		0.48			1,298,039			1,354		0.41
FHLB advances		46,522			235		2.00			65,935			338		2.03
Total interest-bearing liabilities		1,425,892			1,899		0.53			1,363,974			1,692		0.49
Non-interest-bearing deposits		230,076								207,806
Other non-interest-bearing liabilities		22,180								19,943
Total liabilities		1,678,148								1,591,723
Total shareholders' equity		276,996								273,408
Total liabilities and shareholders' equity	$	1,955,144							$	1,865,131
Net interest income				$	14,857							$	12,535
Interest rate spread - tax equivalent (2)							3.06								2.71
Net interest margin - tax equivalent (3)							3.19								2.82
Average interest-earning assets to interest-bearing liabilities		131.62	%							131.14	%

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

(2)Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

(3)Net interest margin represents annualized net interest income divided by average interest-earning assets. See reconciliation of GAAP to non-GAAP measures in the table below.

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

	Three Months Ended
	September 30,
	2022		2022
Total interest income	$	16,756	$	14,227
Total interest expense		1,899		1,692
Net interest income (GAAP)		14,857		12,535
Tax equivalent adjustment		116		89
Net interest income - tax equivalent (non-GAAP)	$	14,973	$	12,624

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

	Three Months Ended September 30,
	2022 versus 2022
	Rate			Volume			Net
Interest income:
Loans receivable	$	440		$	1,302		$	1,742
Investment securities		224			185			409
Other interest-earning assets		452			(74	)		378
Total interest-earning assets		1,116			1,413			2,529
Interest expense:
NOW accounts		150			30			180
Money market accounts		166			24			190
Savings and escrow accounts		66			7			73
Time deposits		(16	)		(117	)		(133	)
FHLB advances		(5	)		(98	)		(103	)
Total interest-bearing liabilities		361			(154	)		207
Net increase in net interest income	$	755		$	1,567		$	2,322

Provision for Loan Losses. The provision for loan losses increased for the three months ended September 30, 2022, compared to the same period last year. The increase is primarily due to higher loan portfolio growth in the current period. Recoveries net of charge-offs were $39,000 for the three months ended September 30, 2022, compared to recoveries, net of charge-offs of $265,000 for the same period last year.

Noninterest Income. The following table displays noninterest income for the three months ended September 30, 2022 and 2021 (Dollars in thousands).

	Three Months Ended
	September 30,				Net Change
	2022		2021		$			%
Fees and service charges	$	453	$	401	$	52			13.0	%
Bank-owned life insurance		191		192		(1	)		-0.5	%
Swap income		141		-		141			100.0	%
Other		8		20		(12	)		-60.0	%
Total noninterest income	$	793	$	613	$	180			29.4	%

The increase in fees and service charges for the three months ended September 30, 2022 compared to the same period last year was primarily the result of increases in deposit and loan processing fees.

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Noninterest Expense. The following table displays noninterest expense for the three months ended September 30, 2022 and 2021 (Dollars in thousands).

	Three Months Ended
	September 30,				Net Change
	2022		2021		$			%
Salaries and employee benefits	$	5,985	$	5,773	$	212			3.7	%
Occupancy and equipment		1,403		1,353		50			3.7	%
Communication and data processing		610		527		83			15.7	%
Professional fees		335		393		(58	)		-14.8	%
Merger-related expenses		311		-		311			100.0	%
Postage, printing, stationery and supplies		174		143		31			21.7	%
Advertising		128		100		28			28.0	%
FDIC assessment		125		125		-			0.0	%
Amortization of intangible assets		12		16		(4	)		-25.0	%
Other operating expenses		474		194		280			144.3	%
Total noninterest expense	$	9,557	$	8,624	$	933			10.8	%

The increase in salaries and employee benefits for the three months ended September 30, 2022 compared to the same period last year is primarily driven by higher salary and benefit costs. Merger-related expenses associated with the pending Brookline Bancorp merger largely include professional services fees. The increase in other operating expenses for the three months ended September 30, 2022 compared to the same period last year is primarily due to higher pension costs in the current period.

Income Tax Expense. The effective income tax rate was 20.5% for the three months ended September 30, 2022 as compared to 19.9% for the same period last year.

Management of Market Risk

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

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

Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of equity ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100 and 200 basis points from current market rates and that interest rates decrease 50 and 100 basis points from current market rates.

35

The following table presents the estimated changes in our NPV that would result from changes in market interest rates at September 30, 2022 and June 30, 2022 (Dollars in thousands). All estimated changes presented in the table are within the policy limits approved by our Board of Directors.

	NPV								NPV as Percent of Portfolio Value of Assets
Basis Point Change in Interest Rates	Dollar Amount		Dollar Change			Percent Change			NPV Ratio			Change (in bps)
September 30, 2022:
200	$	256,664	$	(47,850	)		(15.7	%)		15.06	%		(188	)
100		281,394		(23,120	)		(7.6	)		16.07			(87	)
-		304,514		-			-			16.94			-
(100)		335,857		31,343			10.3			18.09			115
(200)		366,247		61,733			20.3			19.10			216
June 30, 2022:
200	$	267,563	$	(50,616	)		(19.9	%)		14.94	%		(187	)
100		294,042		(24,137	)		(7.6	)		15.96			(85	)
-		318,179	-				-			16.81			-
(100)		349,957		31,778			10.0			17.90			109
(200)		382,642		64,463			20.3			18.96			215

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 September 30, 2022, cash and cash equivalents totaled $50.8 million, a decrease from $118.5 million as of June 30, 2022. Unpledged securities classified as available for sale, which provide an additional source of liquidity, totaled $9.5 million at September 30, 2022, a decrease from $18.5 million as of June 30, 2022.

We had the ability to borrow up to $223.0 million from the FHLB of New York, at September 30, 2022 of which $28.3 million was outstanding as of September 30, 2022. Additionally, as of September 30, 2022, we had an available line of credit with the FRB of New York’s discount window program of $102.8 million, and $25.0 million of fed funds lines of credit, neither of which had outstanding balances as of September 30, 2022.

We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. If loan demand was to increase faster than expected, or any unforeseen demand or commitment was to occur, we could access our borrowing sources detailed above.

We had $14.4 million of loan commitments outstanding as of September 30, 2022 and $171.2 million of approved, but unadvanced, funds to borrowers. We also had $2.9 million in outstanding letters of credit at September 30, 2022.

36

Time deposits due within one year of September 30, 2022 totaled $203.0 million. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits at September 30, 2022. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Holding Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders, to repurchase shares of its common stock and for other corporate purposes. The Holding Company’s primary source of liquidity is dividend payments it may receive from the Bank. The Bank’s ability to pay dividends to the Holding Company is governed by applicable law and regulations. At September 30, 2022, the Holding Company (on an unconsolidated, stand-alone basis) had liquid assets of $18.0 million.

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the NYSDFS and the FDIC. At September 30, 2022, the Bank exceeded all applicable regulatory capital requirements, and the Bank was considered “well capitalized” under applicable regulatory guidelines. See Note 8 to the accompanying unaudited consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is included in Part I, Item 2 of this report under "Management of Market Risk."

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2022. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2022, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

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Item 1A. Risk Factors

For information regarding the Company’s risk factors, see Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the Securities and Exchange Commission. As of September 30, 2022, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

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

(a)Not applicable

(b)Not applicable

(c)On February 3, 2021, a repurchase program was authorized by the Board of Directors to repurchase up to 801,856 shares, or 5.0% of the Company’s then outstanding common stock. As of September 30, 2022, the Company repurchased 682,561 shares at an average cost of $18.23 per share.

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number	Description
3.1	Articles of Incorporation of PCSB Financial Corporation (1)
3.2	Amended and Restated Bylaws of PCSB Financial Corporation (2)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials for the quarter ended September 30, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
104	Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101.

(1)Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215052).

(2)Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on June 24, 2021.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PCSB FINANCIAL CORPORATION
Date: November 4, 2022	/s/ Joseph D. Roberto
	Joseph D. Roberto
	Chairman, President and Chief Executive Officer
Date: November 4, 2022	/s/ Jeffrey M. Helf
	Jeffrey M. Helf
	Senior Vice President and Chief Financial Officer

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