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4-Traders Homepage  >  Equities  >  Nasdaq  >  PCSB Financial Corp    PCSB

PCSB FINANCIAL CORP (PCSB)
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PCSB FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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02/09/2018 | 10:24pm CET

General

Management's discussion and analysis of financial condition at December 31, 2017
and June 30, 2017, and results of operations for the three and six months ended
December 31, 2017 and 2016 is intended to assist in understanding the financial
condition and results of operations of the Company. The information contained in
this section should be read in conjunction with the unaudited financial
statements and the notes thereto appearing in Part I, Item 1, of this quarterly
report on Form 10-Q and with the audited financial statements included in the
annual report on Form 10-K for the fiscal year ended June 30, 2017.

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:

     •    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 tax laws, regulatory fees,
          and capital requirements, including as a result of Basel III;


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


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


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


  • changes in consumer spending, borrowing and savings habits;


                                       31

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• changes in accounting policies and practices, as may be adopted by the

bank regulatory agencies, the Financial Accounting Standards Board, the

Securities and Exchange Commission or the Public Company Accounting

          Oversight Board;


  • our ability to retain key employees;

• our compensation expense associated with equity allocated or awarded to

          our employees; and


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

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

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

Critical Accounting Policies

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

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

Income Taxes. We recognize income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of our
assets and liabilities at enacted tax rates expected to be in effect when the
amounts related to such temporary differences are realized or settled.

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

Comparison of Financial Condition at December 31, 2017 and June 30, 2017



Total Assets. Total assets increased $16.8 million, or 1.2%, to $1.44 billion at
December 31, 2017 from $1.43 billion at June 30, 2017. The increase is primarily
the result of increases of $28.5 million in net loans and $16.6 million in cash
and cash equivalents, partially offset by decreases of $25.1 million in total
investment securities, $1.9 million in deferred tax assets, and $977,000 in
foreclosed real estate.



Cash and Cash Equivalents. Cash and cash equivalents increased $16.6 million, or
27.5%, to $77.1 million at December 31, 2017 from $60.5 million at June 30,
2017. The increase was primarily attributable to a $25.1 million decrease in
total investment securities and a $14.2 million increase in liabilities,
partially offset by a $28.5 million increase in net loans and a $3.4 million
decrease in all other assets.



Securities Held-to-Maturity. Total securities held to maturity decreased $15.9
million, or 4.1%, to $367.7 million at December 31, 2017 from $383.6 million at
June 30, 2017. This decrease was primarily caused by $19.5 million of net
maturities of U.S. government and agency obligations, partially offset by net
purchases of $3.0 million of corporate and other debt securities and $593,000 of
mortgage-backed securities.



Securities Available for Sale. Total securities available for sale decreased $9.2 million, or 8.2%, to $102.7 million at December 31, 2017 from $111.9 million at June 30, 2017. This decline was primarily due to $8.1 million of net

                                       32

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maturities of U.S. government and agency obligations, $6.0 million in sales of
mortgage backed securities, and a $1.1 million increase in net unrealized losses
driven primarily by an increase in market interest rates, partially offset by
$6.0 million of net purchases of mortgage backed securities.



Net Loans Receivable. Net loans receivable increased $28.5 million, or 3.5%, to
$838.1 million at December 31, 2017 from $809.6 million at June 30, 2017. The
increase is primarily due to an increase of $43.5 million in commercial mortgage
loans, partially offset by decreases of $6.0 million in construction loans, $4.1
million in residential mortgage loans, $2.0 million in commercial loans and $1.8
million in home equity credit lines. The Company purchased $46.7 million of
commercial mortgage loans during the six months ended December 31, 2017.



Deposits. Total deposits increased $25.9 million, or 2.4%, to $1.11 billion at
December 31, 2017 from $1.09 billion at June 30, 2017. This increase primarily
reflects a $16.8 million increase in time deposits and a $17.4 million increase
in demand deposits and NOW accounts, partially offset by an $8.3 million
decrease in savings and money market accounts.



Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $11.9
million, or 27.9%, to $30.7 million at December 31, 2017 from $42.6 million at
June 30, 2017, primarily due to $11.8 million in maturities of short-term
advances.



Total Shareholder's Equity. Total shareholders' equity increased $2.6 million,
or 0.9%, to $282.4 million at December 31, 2017 from $279.8 million at June 30,
2017. This increase was primarily due to net income of $1.8 million and a $1.3
million reduction in unearned ESOP shares for plan shares earned during the
period. At December 31, 2017, the Company's book value per share was $15.55,
compared to $15.41 at June 30, 2017. At December 31, 2017, the Bank was
considered "well capitalized" under applicable regulatory guidelines.





Comparison of Operating Results for the Three Months Ended December 31, 2017 and 2016



General. Net income decreased $1.7 million, or 99.9%, to $2,000 for the three
months ended December 31, 2017 compared to $1.7 million for the three months
ended December 31, 2016. The decrease was primarily due to a $1.8 million
increase in income tax expense, a $1.6 million decrease in non-interest income,
and a $331,000 increase in non-interest expenses, partially offset by $1.7
million increase in net interest income and a $362,000 decrease in the provision
for loan losses.



Net Interest Income. Net interest income increased $1.7 million, or 19.5%, to
$10.2 million for the three months ended December 31, 2017 compared to a $8.5
million for the three months ended December 31, 2016. The increase primarily
reflects a $170.4 million increase in average net interest-earning assets and an
11-basis point increase in the net interest margin to 3.00% for the three months
ended December 31, 2017 compared to 2.89% for the three months ended December
31, 2016. The increase in average net interest-earning assets primarily reflects
the investment of the net proceeds received in the Company's initial public
offering completed in April 2017.



Interest and Dividend Income. Interest and dividend income increased $1.8
million, or 18.3%, to $11.7 million for the three months ended December 31, 2017
compared to a $9.9 million for the three months ended December 31, 2016. The
increase primarily reflects a $174.1 million increase in total average
interest-earning assets and an 11-basis point increase in the yield on total
interest-earning assets.



Interest income on loans receivable increased $933,000, or 11.3%, primarily due
to a $65.1 million increase in the average balance of loans receivable to $827.6
million for the three months ended December 31, 2017 from $762.5 million for the
same period last year, and an 11-basis point increase in the average yield on
loans to 4.43% for the three months ended December 31, 2017 from 4.32% for the
same period last year.



Interest income on securities increased $739,000, or 48.3%, primarily due to a
$110.7 million increase in the average balance of securities and a 23-basis
point increase in the average yield on securities to 1.92% for the current-year
period from 1.69% for the same period last year. The increase in the yield on
securities was due primarily to an increase in market interest rates as well as
an increase in the percentage of the portfolio being invested in generally
higher-yielding mortgage-backed securities.



Interest income on other interest-earning assets increased $135,000, or 164.6%, primarily due to a 100-basis point increase in the average yield on other interest-earning assets to 1.58% for the three months ended December 31,

                                       33

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2017 from 0.58% for the same period last year, partially offset by a $1.7
million decrease in the average balance to $54.3 million for the three months
ended December 31, 2017 compared to a $56.0 million for the same period last
year. The increase in the yield on other interest-earning assets was due
primarily to an increase in market interest rates.



Interest Expense. Interest expense increased $148,000, or 11.2%, to $1.5 million
for the three months ended December 31, 2017 compared to $1.3 million for the
three months ended December 31, 2016. The increase primarily reflects a $3.7
million increase in the average balance on interest bearing liabilities and a
6-basis point increase in the average cost to 0.59% for the three months ended
December 31, 2017 from 0.53% for the same period last year.



Interest expense on interest-bearing deposits increased $15,000, or 1.2%,
primarily due to a 2-basis point increase in the average cost of deposits to
0.54% for the three months ended December 31, 2017 from 0.52% for the same
period last year, partially offset by a $25.3 million decrease in the average
balance to $957.8 million for the three months ended December 31, 2017 from
$983.1 million for the three months ended December 31, 2016. The increase in the
average rate paid on interest-bearing deposits was caused primarily by an
8-basis point increase in the average rate paid on time deposits as the Bank
offered special rates and terms to attract customers.



Interest expense on Federal Home Loan Bank advances increased $133,000, or
429.0%, primarily due to a $28.9 million increase in the average balance to
$35.3 million for the three months ended December 31, 2017 from $6.4 million for
the same period last year, partially offset by an 11-basis point decrease in the
average cost to 1.85% for the three months ended December 31, 2017 from 1.96%
for the same period last year. The decrease in the average cost is primarily due
to a shorter average term on advances in the current year compared to the same
period last year.



Provision for Loan Losses. The provision for loan losses decreased by $362,000
to $200,000 for the three months ended December 31, 2017, compared to $562,000
for the three months ended December 31, 2016 primarily due to increases in
specific reserves on impaired loans in the prior year period. Charge-offs, net
of recoveries, were $997,000 for the three months ended December 31, 2017
compared to net recoveries of $1,000 for the three months ended December 31,
2016. In the current period, the Company recorded a $997,000 charge-off of a
specific reserve recorded in a prior period on a construction loan.



Non-Interest Income. Non-interest income decreased $1.6 million, or 69.4% to
$692,000 for the three months ended December 31, 2017 compared to a $2.3 million
for the three months ended December 31, 2016. The decrease was caused primarily
by a one-time settlement on an acquired loan of $1.6 million in the prior year.



Non-Interest Expense. Non-interest expense increased $331,000, or 4.2%, to $8.1
million for the three months ended December 31, 2017 compared to $7.8 million
for the three months ended December 31, 2016. The increase was caused primarily
by increases of $379,000 in salaries and benefits, $343,000 in other operating
expenses, $103,000 in professional fees, and $89,000 in advertising expense,
partially offset by a $548,000 decrease in occupancy and equipment expense and a
$42,000 decrease in FDIC assessment. The increase in salaries and benefits was
due primarily to a $301,000 increase in retirement expenses, resulting primarily
from ESOP compensation expense not incurred in the prior period, and a $159,000
increase due to increased staffing, partially offset by a $97,000 decrease in
benefits expense due primarily to lower health care costs. The increase in other
operating expenses was caused primarily by increases in Director and Officer
insurance and data processing fees. The increase in professional fees was due
primarily to expenses related to being a public company. The decrease in
occupancy and equipment expense was due primarily to a $521,000 lease obligation
write-off recorded in the prior year.



Income Tax Expense. Income tax expense increased $1.8 million, or 236.5%, to
$2.6 million for the three months ended December 31, 2017 from $758,000 for the
three months ended December 31, 2016. The increase was caused primarily by the
$1.8 million estimated re-measurement charge recorded in the current quarter
required in connection with tax law changes contained in the Tax Cuts and Jobs
Act, however the Company expects to benefit in the future from the decrease in
the federal corporate tax rate from 34% to 21%. The effective income tax rate
was 99.9% for the three months ended December 31, 2017 compared to 31.2% for the
three months ended December 31, 2016.











                                       34
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Comparison of Operating Results for the Six Months Ended December 31, 2017 and 2016



General. Net income decreased $1.4 million, or 43.8%, to $1.8 million for the
six months ended December 31, 2017 compared to $3.1 million for the six months
ended December 31, 2016. The decrease was primarily due to a $2.0 million
increase in income tax expense, a $1.4 million decrease in non-interest income,
and a $1.0 million increase in non-interest expenses, partially offset by a $2.8
million increase in net interest income and a $253,000 decrease in the provision
for loan losses.



Net Interest Income. Net interest income increased $2.8 million, or 16.0%, to
$20.1 million for the six months ended December 31, 2017 compared to a $17.3
million for the six months ended December 31, 2016. The increase primarily
reflects a $167.0 million increase in average net interest-earning assets and a
6-basis point increase in the net interest margin to 2.95% for the six months
ended December 31, 2017 compared to 2.89% for the six months ended December 31,
2016. The increase in average net interest-earning assets primarily reflects the
investment of the net proceeds received in the Company's initial public offering
completed in April 2017.


Interest and Dividend Income. Interest and dividend income increased $3.0 million, or 15.0%, to $23.0 million for the six months ended December 31, 2017 compared to $20.0 million for the six months ended December 31, 2016. The increase primarily reflects a $164.1 million increase in total average interest-earning assets and a 4-basis point increase in the yield on total interest-earning assets.



Interest income on loans receivable increased $1.2 million, or 7.3%, primarily
due to a $51.1 million increase in the average balance of loans receivable to
$820.4 million for the six months ended December 31, 2017 from $769.3 million
for the same period last year, and a 3-basis point increase in the average yield
on loans to 4.38% for the six months ended December 31, 2017 from 4.35% for the
same period last year.



Interest income on securities increased $1.5 million, or 50.0%, primarily due to
a $111.0 million increase in the average balance of securities and a 25-basis
point increase in the average yield on securities to 1.88% for the current-year
period from 1.63% for the same period last year. The increase in the yield on
securities was due primarily to an increase in market interest rates as well as
an increase in the percentage of the portfolio being invested in generally
higher-yielding mortgage-backed securities.



Interest income on other interest-earning assets increased $265,000, or 142.5%,
primarily due to a $2.0 million increase in the average balance and an 83-basis
point increase in the average yield on other interest-earning assets to 1.45%
for the six months ended December 31, 2017 from 0.62% for the same period last
year. The increase in the yield on other interest-earning assets was due
primarily to an increase in market interest rates.



Interest Expense. Interest expense increased $235,000, or 8.8%, to $2.9 million
for the six months ended December 31, 2017 compared to $2.7 million for the six
months ended December 31, 2016. The increase primarily reflects a 5-basis point
increase in the average cost of interest-bearing liabilities to 0.58% for the
three months ended December 31, 2017 from 0.53% for the same period last year,
partially offset by a $2.9 million decrease in the average balance on
interest-bearing liabilities.



Interest expense on interest-bearing deposits decreased $2,000, or 0.1%,
primarily due to a $30.3 million decrease in the average balance to $959.5
million for the six months ended December 31, 2017 from a $989.8 million for the
six months ended December 31, 2016, partially offset by a 1-basis point increase
in the average cost of deposits to 0.53% for the six months ended December 31,
2017 from 0.52% for the same period last year. The decrease in the average
balance of interest-bearing deposits primarily reflects lower average savings
and time deposit balances. The increase in the average rate paid on
interest-bearing deposits was caused primarily by an 8-basis point increase in
the average rate paid on time deposits as the Bank offered special rates and
terms to attract customers.



Interest expense on Federal Home Loan Bank advances increased $237,000, or
292.6%, primarily due to a $27.4 million increase in the average balance to
$38.3 million for the six months ended December 31, 2016 from $10.9 million for
the same period last year, and a 17-basis point increase in the average cost to
1.65% for the six months ended December 31, 2017 from 1.48% for the same period
last year. The increase in the average cost is primarily due to a longer average
term on advances in the current year compared to the same period last year.



Provision for Loan Losses. The provision for loan losses decreased by $253,000
to $335,000 for the six months ended December 31, 2017, compared to $588,000 for
the six months ended December 31, 2016 primarily due to

                                       35

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increases in specific reserves on impaired loans in the prior year period. Charge-offs, net of recoveries, were $1.0 million and $70,000 for the six months ended December 31, 2017 and 2016, respectively.



Non-Interest Income. Non-interest income decreased $1.4 million, or 50.0% to
$1.4 million for the six months ended December 31, 2017 compared to $2.8 million
for the six months ended December 31, 2016. The decrease was caused primarily by
a one-time settlement on an acquired loan of $1.6 million in the prior year
partially offset by a $173,000 gain on the sale of securities recognized in the
current year.



Non-Interest Expense. Non-interest expense increased $1.0 million, or 6.9%, to
$16.0 million for the six months ended December 31, 2017 compared to $15.0
million for the six months ended December 31, 2016. The increase was primarily
caused by increases of $942,000 in salaries and benefits, $497,000 in other
operating expenses, $207,000 in professional fees and $115,000 in advertising
expense, partially offset by a $557,000 decrease in occupancy and equipment
expense and a $179,000 decrease in FDIC assessment. The increase in salaries and
benefits was due primarily to a $591,000 net increase in retirement expenses and
a $385,000 increase due to increased staffing. The increase in other operating
expenses was caused primarily by increases in Director and Officer insurance and
data processing fees. The increase in professional fees was due primarily to
expenses related to being a public company. The decrease in occupancy and
equipment expense was caused primarily by a $521,000 lease obligation write-off
recorded in the prior year.



Income Tax Expense. Income tax expense increased $2.0 million, or 138.9%, to
$3.4 million for the six months ended December 31, 2017 from $1.4 million for
the six months ended December 31, 2016. The increase was caused primarily by the
$1.8 million estimated re-measurement charge recorded in the current quarter
required in connection with tax law changes contained in the Tax Cuts and Jobs
Act, however the Company expects to benefit in the future from the decrease in
the federal corporate tax rate from 34% to 21%. The effective income tax rate
was 65.6% for the six months ended December 31, 2017 as compared to 31.0% for
the six months ended December 31, 2016.



















                                       36
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Net Interest Income

Average Balance Sheet and Interest Rates. The following tables present
information regarding average balances of assets and liabilities, the total
dollar amounts of interest income and dividends from average interest-earning
assets, the total dollar amounts of interest expense on average interest-bearing
liabilities, and the resulting annualized average yields and costs. The yields
and costs for the periods indicated are derived by dividing income or expense by
the average balances of assets or liabilities, respectively, for the periods
presented. Average balances have been calculated using daily balances.
Nonaccrual loans are included in average balances only. Amortization of loan
fees is included in interest income on loans.



                                                           Three months ended December 31,
                                                 2017                                           2016
                                Average        Interest/       Average         Average        Interest/       Average
                                Balance        Dividends         Rate          Balance        Dividends         Rate
                                                               (dollars in thousands)
Assets:
Loans receivable              $   827,614$     9,171           4.43 %   $   762,538$     8,238           4.32 %
Securities                        473,641           2,269           1.92         362,954           1,530           1.69
Other interest-earning
assets                             54,388             217           1.58          56,045              82           0.58
Total interest-earning
assets                          1,355,643          11,657           3.44       1,181,537           9,850           3.33
Non-interest-earning assets        58,665                                         58,604
Total assets                  $ 1,414,308$ 1,240,141

Liabilities and equity:
NOW accounts                  $   112,147              48           0.17     $   105,647              44           0.16
Money market accounts              29,014              22           0.30          31,874              21           0.26
Savings accounts and escrow       509,888             309           0.24         527,779             327           0.25
Time deposits                     306,756             928           1.20         317,757             900           1.12
Total interest-bearing
deposits                          957,805           1,307           0.54         983,057           1,292           0.52
Federal Home Loan Bank
advances                           35,293             164           1.85           6,354              31           1.96
Total interest-bearing
liabilities                       993,098           1,471           0.59         989,411           1,323           0.53
Non-interest-bearing
deposits                          130,614                                        123,135
Other non-interest-bearing
liabilities                         7,765                                         15,101
Total liabilities               1,131,477                                      1,127,647
Total equity                      282,831                                        112,494
Total liabilities and
equity                        $ 1,414,308$ 1,240,141

Net interest income                           $    10,186$     8,527
Interest rate spread (1)                                            2.85                                           2.80
Net interest margin (2)                                             3.00                                           2.89
Average interest-earning
assets to interest-bearing
liabilities                        136.51 %                                       119.42 %



(1) Net interest rate spread represents the difference between the average yield

     on average interest-earning assets and the average cost of average
     interest-bearing liabilities.


(2)  Net interest margin represents annualized net interest income divided by
     average interest-earning assets.














                                       37
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                                                                      Six months ended December 31,
                                                           2017                                          2016
                                           Average        Interest/       Average        Average        Interest/       Average
                                           Balance        Dividends        Rate          Balance        Dividends        Rate
                                                                         (dollars in thousands)
Assets:
Loans receivable                         $   820,429$    17,989          4.38 %   $   769,340$    16,763          4.35 %
Securities                                   479,833           4,514          1.88         368,855           3,010          1.63
Other interest-earning assets                 61,822             451          1.45          59,800             186          0.62
Total interest-earning assets              1,362,084          22,954          3.37       1,197,995          19,959          3.33
Non-interest-earning assets                   58,453                                        56,929
Total assets                             $ 1,420,537$ 1,254,924

Liabilities and equity:
NOW accounts                             $   113,458              97          0.17     $   107,803              88          0.16
Money market accounts                         29,557              43          0.29          31,642              42          0.26
Savings accounts and escrow                  514,102             633          0.25         528,580             654          0.25
Time deposits                                302,382           1,801          1.18         321,775           1,792          1.10
Total interest-bearing deposits              959,499           2,574          0.53         989,800           2,576          0.52
Federal Home Loan Bank advances               38,346             318          1.65          10,914              81          1.48
Total interest-bearing liabilities           997,845           2,892          0.58       1,000,714           2,657          0.53
Non-interest-bearing deposits                132,491                                       126,951
Other non-interest-bearing liabilities         8,026                                        15,394
Total liabilities                          1,138,362                                     1,143,059
Total equity                                 282,175                                       111,865
Total liabilities and equity             $ 1,420,537$ 1,254,924

Net interest income                                      $    20,062$    17,302
Interest rate spread (1)                                                      2.79                                          2.80
Net interest margin (2)                                                       2.95                                          2.89
Average interest-earning assets to
interest-bearing liabilities                  136.50 %                                      119.71 %


(1) Net interest rate spread represents the difference between the average yield

     on average interest-earning assets and the average cost of average
     interest-bearing liabilities.


(2)  Net interest margin represents annualized net interest income divided by
     average interest-earning assets.




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

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                                                Three months ended December 31,
                                                        2017 versus 2016
                                              Rate           Volume            Net
                                                         (in thousands)
      Interest income:
      Loans receivable                      $    169$       764$   933
      Securities                                 127               612           739
      Other interest-earning assets              136                (1 )         135
      Total interest-earning assets              432             1,375         1,807

      Interest expense:
      NOW accounts                                 2                 2             4
      Money market accounts                        2                (1 )           1
      Savings and escrow accounts                 (9 )              (9 )         (18 )
      Time deposits                               62               (34 )          28
      Federal Home Loan Bank advances             (2 )             135           133
      Total interest-bearing liabilities          55                93           148

      Net increase in net interest income   $    377$     1,282
 $ 1,659





                                                 Six months ended December 31,
                                                        2017 versus 2016
                                               Rate           Volume          Net
                                                         (in thousands)
       Interest income:
       Loans receivable                      $     50$     1,176$ 1,226
       Securities                                 277             1,227       1,504
       Other interest-earning assets              252                13     

265

       Total interest-earning assets              579             2,416       2,995

       Interest expense:
       NOW accounts                                 4                 5           9
       Money market accounts                        4                (3 )         1
       Savings and escrow accounts                 (9 )             (12 )       (21 )
       Time deposits                              120              (111 )         9
       Federal Home Loan Bank advances             10               227         237
       Total interest-bearing liabilities         129               106         235

Net increase in net interest income $ 450$ 2,310$ 2,760



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 and investment securities, have longer
maturities than our liabilities, consisting primarily of deposits and FHLB
advances. 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 that has been established by 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

                                       39

--------------------------------------------------------------------------------

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. The net
proceeds from the offering have increased our capital and provided management
with greater flexibility to manage our interest rate risk, including the
following strategies: originating loans with adjustable interest rates;
promoting core deposit products; and adjusting the interest rates and maturities
of funding sources, as necessary. By following these strategies, we believe that
we are better positioned to react to changes in market interest rates.

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

The following table presents the estimated changes in our NPV that would result
from changes in market interest rates at December 31, 2017 and June 30, 2017.
All estimated changes presented in the table are within the policy limits
approved by our Board of Directors.



                                                                            NPV as Percent of Portfolio
                                            NPV                                   Value of Assets
                                  (dollars in thousands)
Basis Point Change in      Dollar         Dollar         Percent             EVE                  Change
Interest Rates             Amount         Change         Change             Ratio                (in bps)
December 31, 2017:
200                      $  289,504$  (38,771 )         (11.8 ) %           21.83 %                (148 )
100                         311,392        (16,883 )          (5.1 )             22.77                   (54 )
-                           328,275              -               -               23.31                     -
(100)                       336,479          8,204             2.5               23.28                    (3 )

June 30, 2017:
200                      $  290,781$  (35,848 )         (11.0 ) %           21.62 %                (130 )
100                         311,728        (14,901 )          (4.6 )             22.49                   (42 )
-                           326,629              -               -               22.92                     -
(100)                       331,139          4,510             1.4               22.69                   (22 )




Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurements. Modeling changes requires 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.

                                       40

--------------------------------------------------------------------------------


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
depend on our operating, financing, lending and investing activities during any
given period. At December 31, 2017, cash and cash equivalents totaled $77.1
million, an increase from $60.5 million as of June 30, 2017. Securities
classified as available for sale, which provide an additional source of
liquidity, totaled $102.7 million at December 31, 2017, a decrease from $111.9
million as of June 30, 2017.

We had the ability to borrow up to $332.2 million and $350.7 million from the
Federal Home Loan Bank of New York, at December 31, 2017 and June 30, 2017,
$30.7 million and $42.6 million of which was outstanding as of December 31, 2017
and June 30, 2017, respectively. We also had an available line of credit with
the Federal Reserve Bank of New York's discount window program of $87.0 million
and $85.9 million as of December 31, 2017 and June 30, 2017, respectively, none
of which was outstanding at either date.

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

We had $91.4 million and $77.6 million of loan commitments outstanding as of
December 31, 2017 and June 30, 2017, respectively, and $36.6 million and $45.4
million as of December 31, 2017 and June 30, 2017, respectively, of approved,
but unadvanced, funds to borrowers. We also had $750,000 and $705,000 in
outstanding letters of credit at December 31, 2017 and June 30, 2017,
respectively.

Time deposits due within one year of December 31, 2017 totaled $116.8 million,
an increase of $9.7 million from $107.1 million as of June 30, 2017. If these
deposits do not remain with us, we will be required to seek other sources of
funds, including other time deposits and Federal Home Loan Bank of New York
advances. Depending on market conditions, we may be required to pay higher rates
on such deposits or other borrowings than we currently pay on the time deposits
at December 31, 2017. 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 Company is a separate legal entity from the Bank and must provide for its
own liquidity to pay any dividends to its stockholders and for other corporate
purposes. The Company's primary source of liquidity is dividend payments it may
receive from the Bank. The Bank's ability to pay dividends to the Company is
governed by applicable laws and regulations. At December 31, 2017, the Company
(on an unconsolidated, stand-alone basis) had liquid assets of $72.8 million.

Capital Resources. The Company and Bank are subject to various regulatory
capital requirements administered by the New York State Department of Financial
Services and the Federal Deposit Insurance Corporation. At December 31, 2017,
the Bank exceeded all applicable regulatory capital requirements, and was
considered "well capitalized" under regulatory guidelines. See Note 9 to the
accompanying unaudited financial statements

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