PIONEER BANCORP: MD Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-K)

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This discussion and analysis reflects our consolidated financial statements and
other relevant statistical data, and is intended to enhance your understanding
of our financial condition and results of operations. The information in this
section has been derived in part from the consolidated financial statements that
appear beginning on page 77 of this Annual Report on Form 10-K and other
consolidated financial statements that are not included herein. Please read the
information in this section in conjunction with the business and financial
information regarding Pioneer Bancorp, Inc., Pioneer Bank and the consolidated
financial statements that appear starting on page 77 of this Annual Report on
Form 10-K.



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Overview

Net Interest Income. Our primary source of income is net interest income. Net
interest income is the difference between interest income, which is the income
we earn on our loans and investments, and interest expense, which is the
interest we pay on our deposits and borrowings.

Provision for Loan Losses. The allowance for loan losses is a valuation
allowance for probable incurred credit losses. The allowance for loan losses is
increased through charges to the provision for loan losses. Loans are charged
against the allowance when management believes that the collectability of the
principal loan amount is not probable. Recoveries on loans previously
charged-off, if any, are credited to the allowance for loan losses when
realized. It is likely we will incur elevated provision for loan losses and
charge-offs due to the adverse impact of the COVID-19 pandemic on the economy of
our market area and our customers.

Non-interest Income. Our primary sources of non-interest income are banking fees
and service charges, insurance and wealth management services income. Our
non-interest income also includes net gain or losses on equity securities, net
gain or losses on sales and calls of available for sale securities, net gains or
losses in cash surrender value of bank owned life insurance, net gain or loss on
disposal of assets, other gains and losses, and miscellaneous income.

Non-interest charges. Our non-interest expenses include salaries and benefits, net occupancy and equipment, data processing, advertising and marketing, federal deposit insurance premiums, professional fees, related expenses litigation and other general and administrative costs.

Salaries and benefits mainly include salaries and wages paid to our employees, payroll taxes and expenses for workers’ compensation and disability insurance, health insurance, pension plans and other employee benefits, as well as as commissions and other incentives.

Net occupancy and equipment expenses, which are the fixed and variable costs of
buildings and equipment, consist primarily of depreciation charges, rental
expenses, furniture and equipment expenses, maintenance, real estate taxes and
costs of utilities. Depreciation of premises and equipment is computed using a
straight-line method based on the estimated useful lives of the related assets
or the expected lease terms, if shorter.

Data processing fees are fees that we pay to third parties for the use of their software and for processing customer information, deposits and loans.

Advertising and marketing includes most marketing expenses including multi-media
advertising (public and in-store), promotional events and materials, civic and
sales focused memberships, and community support.

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

Professional fees include legal and other consulting fees.

Litigation expenses include expenses related to legal proceedings, excluding legal fees and expenses.

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

Income Tax Expense. Our income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between the carrying amounts and the tax
basis of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amounts expected to be
realized.



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  Table of Contents

Recent Developments

COVID-19 Pandemic

Although there is a high degree of uncertainty around the magnitude and duration
of the economic impact of the COVID-19 pandemic, the Company's management
believes that it was well positioned with adequate levels of capital as of June
30, 2021. At June 30, 2021, all of the Bank's regulatory capital ratios exceeded
all well-capitalized standards. More specifically, the Bank's Tier 1 Leverage
Ratio, a common measure to evaluate a financial institution's capital strength,
was 10.00% at June 30, 2021.

In addition, management believes the Company was well positioned with adequate
levels of liquidity as of June 30, 2021. The Bank maintains a funding base
largely comprised of core noninterest bearing demand deposit accounts and low
cost interest-bearing savings and money market deposit accounts with customers
that operate, reside or work within its branch footprint. At June 30, 2021, the
Company's cash and cash equivalents balance was $325.0 million. The Company also
maintains an available-for-sale investment securities portfolio, comprised
primarily of highly liquid U.S. Treasury securities and highly-rated municipal
securities. This portfolio not only generates interest income, but also serves
as a ready source of liquidity. At June 30, 2021, the Company's
available-for-sale investment securities portfolio totaled $264.6 million.  The
Bank's unused borrowing capacity at the Federal Home Loan Bank of New York at
June 30, 2021 was $208.9 million.

The Bank participated in the PPP, a specialized low-interest (1%) forgivable
loan program funded by the U.S. Treasury Department and administered by the SBA.
The SBA will guarantee 100% of the PPP loans made to eligible borrowers. As of
June 30, 2021, the Bank's commercial loan portfolio included 381 PPP loans
totaling $51.5 million. The Bank assisted a substantial number of its PPP
borrowers with forgiveness requests during the fourth fiscal quarter of 2021 and
expects to continue assisting PPP borrowers with forgiveness requests during the
first fiscal quarter of 2022. As of June 30, 2021, the Bank has received
forgiveness or loan payoffs related to 586 borrowers' PPP loans for a total of
$63.9 million.

From a credit risk and lending perspective, the Company has taken actions to
identify and assess its COVID-19 related credit exposures based on asset class
and borrower type. Through June 30, 2021, no specific COVID-19 related credit
impairment was identified within the Company's investment securities portfolio,
including the Company's municipal securities portfolio. With respect to the
Company's lending activities, the Company implemented customer payment deferral
programs to assist both consumer and commercial borrowers that may be
experiencing financial hardship due to COVID-19 related challenges, whereby
short-term deferrals of payments (generally three to six months) have been
provided. In relation to its consumer borrowers, as of June 30, 2021, the
Company had COVID-19 related financial hardship payment deferrals totaling nine
loans representing $1.4 million of the Company's residential mortgage, home
equity loans and lines of credit, and consumer loan balances, which is down from
110 loans representing $27.4 million of the Company's residential mortgage, home
equity loans and lines of credit, and consumer loan balances as of June 30,
2020. In relation to its commercial borrowers, as of June 30, 2021, the Company
had COVID-19 related financial hardship payment deferrals totaling four loans
representing $16.3 million of the Company's commercial loan balances, which is
down from 144 loans representing $170.3 million of the Company's commercial loan
balances as of June 30, 2020. Loans in deferment status will continue to accrue
interest during the deferment period unless otherwise classified as
nonperforming. Consistent with the CARES Act and industry regulatory guidance,
borrowers that were otherwise current on loan payments that were granted
COVID-19 related financial hardship payment deferrals will continue to be
reported as current loans throughout the agreed upon deferral period and not
classified as troubled-debt restructured loans. Borrowers that were delinquent
in their payments to the Bank prior to requesting a COVID-19 related financial
hardship payment deferral, were reviewed on a case by case basis for troubled
debt restructure classification and non-performing loan status. In the instances
where the Bank granted a payment deferral to a delinquent borrower, the
borrower's delinquency status was frozen as of March 20, 2020, and their loans
will continue to be reported as delinquent during the deferment period based on
their delinquency status as of March 20, 2020. Although the amount of loans in
deferral status at June 30, 2021 has declined from June 30, 2020, there are
borrowers continuing to experience COVID-19 related financial hardships. The
Company believes that delinquent and nonperforming loans may increase in future
periods as borrowers that continue to experience COVID-19 related financial
hardships may be unable to continue loan payments

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in accordance with their contractual obligations and the Company may be required to make additional provisions for loan losses.

The COVID-19 crisis is expected to continue to adversely impact the Company's
financial results, as well as demand for its services and products in fiscal
year 2022 and potentially beyond. The short and long-term implications of the
COVID-19 crisis, and related monetary and fiscal stimulus measures, on the
Company's future operations, revenues, earnings results, allowance for loan
losses, capital reserves, and liquidity are unknown at this time. At this point,
the extent to which COVID-19 may impact our future financial condition or
results of operations is uncertain and not currently estimable, however the
impact could be adverse and material.

Fraudulent activity related to Mann entities

During the first fiscal quarter of 2020 (the quarter ending September 30, 2019),
the Company became aware of potentially fraudulent activity associated with
transactions by an established business customer of the Bank. The customer and
various affiliated entities (collectively, the "Mann Entities") had numerous
accounts with the Bank. The transactions in question related both to deposit and
lending activity with the Mann Entities.

For the fraudulent activity related to the Mann Entities, the Bank's potential
exposure with respect to its deposit activity was approximately $18.5 million.
In the first fiscal quarter of 2020, the Bank exercised its rights pursuant to
state and federal law and the relevant Mann Entity general deposit account
agreements to take actions to set off/recover approximately $16.0 million from
general deposit corporate operating accounts held by the Mann Entities at the
Bank to partially cover overdrafts/negative account balances in Mann Entity
general deposit corporate operating accounts that primarily resulted from
another bank returning/calling back $15.6 million in checks on August 30, 2019,
that the Mann Entities had deposited into and then withdrawn from their accounts
at the Bank the day before.  In the first fiscal quarter of 2020, the Bank
recognized a charge to non-interest expense in the amount of $2.5 million based
on the net negative deposit balance of the various Mann Entities' accounts after
the setoffs/overdraft recoveries. Through the end of the fourth fiscal quarter
of 2021, no additional charges to non-interest expense were recognized related
to the deposit transactions with the Mann Entities.

With respect to the Bank's lending activity with the Mann Entities, its
potential monetary exposure was approximately $15.8 million (which represents
the Bank's participation interest in the approximately $35.8 million commercial
loan relationships for which the Bank is the originating lender). For additional
details regarding legal, other proceedings and related matters, see, "Part I,
Item 3 - Legal Proceedings". In the fourth fiscal quarter of 2019, the Bank
recognized a provision for loan losses in the amount of $15.8 million, related
to the charge-off of the entire principal balance owed to the Bank related to
the Mann Entities' commercial loan relationships. During the third fiscal
quarter of 2020 and the first fiscal quarter of 2021, the Bank recognized
partial recoveries in the amount of $1.7 million and $34,000, respectively,
related to the charge-off of the Mann Entities' commercial loan relationships,
which were credited to the allowance for loan losses. Through the end of the
fourth fiscal quarter of 2021, no additional charges to the provision for loan
losses were recognized related to the loan transactions with the Mann Entities.

Several other parties and regulatory agencies are asserting claims against the
Company and the Bank related to the series of transactions between the Company
or the Bank, on the one hand, and the Mann Entities, on the other. The Company
and the Bank continue to investigate these matters and it is possible that the
Company and the Bank will be subject to additional liabilities which may have a
material adverse effect on our financial condition, results of operations or
cash flows. The Company is pursuing all available sources of recovery and other
means of mitigating the potential loss, and the Company and the Bank are
vigorously defending all claims asserted against them arising out of or
otherwise related to the fraudulent activity of the Mann Entities. During the
fiscal year ended June 30, 2021, the Bank recognized insurance recoveries in the
amount of $1.3 million, related to the partial reimbursement of defense costs
incurred as a result of these matters, which were credited to noninterest
expense - professional fees on the consolidated statement of operations. For
additional details regarding legal, other proceedings and related matters,
including litigation-related expense, see, "Part I, Item 3 - Legal Proceedings".



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Business strategy

Our business strategy is to operate as a well-capitalized and profitable
community bank dedicated to providing personal service to our individual,
business and municipal customers. We believe that we have a competitive
advantage in the markets we serve because of our 130-year history in the
community, our knowledge of the local marketplace and our long-standing
reputation for providing superior, relationship-based customer service. We
believe we can distinguish ourselves by maintaining the culture of a local
community bank, but offering the products of a comprehensive financial services
provider by promoting and continuing to expand our insurance, consulting and
wealth management businesses. The following are the key elements of our business
strategy:

Continue our emphasis on commercial lending. Over the last five years, we have
increased our commercial loan portfolio, which consists of commercial real
estate, commercial and industrial and commercial construction loans, consistent
with safe and sound underwriting practices. This has had the benefits of
increasing the yield on our loan portfolio while reducing the average term to
repricing of our loans. However, we have sought to maintain an appropriate
balance in the overall loan portfolio between our commercial and non-commercial
loans in order to diversify our credit risk. At June 30, 2021, our commercial
loan portfolio totaled $722.9 million, or 65.6% of total loans, compared with
$646.9 million, or 68.5% of total loans, at June 30, 2017. We view the growth of
commercial lending as a means of increasing our interest income and establishing
relationships with local businesses, which offer a recurring and potentially
broader source of fee income through commercial deposits, commercial insurance,
and employee benefits products and consulting. We also generally require that
commercial and industrial loan borrowers establish a commercial deposit account
with us, which assists our efforts to grow core deposits and cross-sell our
other products and services. The additional capital raised in our initial public
offering has enabled us to increase our originations of commercial real estate,
commercial and industrial and commercial construction loans in our primary
market area, and originate loans with larger balances that we intend to retain
in our portfolio.

Diversify our products and services in order to increase non-interest income. We
continue to seek ways of increasing our non-interest income by growing our
financial services businesses. We sell commercial and personal insurance
products and provide employee benefits products and services through our
wholly-owned subsidiary, Anchor Agency, Inc., which we acquired in 2016. We
expanded our employee benefits products and services business through our
acquisition in 2017 of substantially all of the operating assets of Capital
Region Strategic Employee Benefits Services, LLC, an employee benefits and
consulting firm. We initially entered into the wealth management services
business by establishing Pioneer Financial Services, Inc. in 1997 as a
wholly-owned subsidiary of Pioneer Bank (which operates under the name Pioneer
Wealth Management). We substantially grew this business with the acquisition of
substantially all of the operating assets of Ward Financial Management, LTD in
2018. At June 30, 2021, Pioneer Financial Services, Inc. had $671.0 million of
assets under management. We believe that there will be opportunities to
cross-sell these products to our deposit and borrower customers which may
further increase our non-interest income, and also to cross-sell our banking
services and products to customers and clients of Anchor Agency, Inc. and
Pioneer Financial Services, Inc. We intend to consider future acquisition
opportunities to expand our insurance, wealth management activities (including
the amount of the assets that we have under management) or other complementary
financial services businesses.

Increase our Share of Lower-Cost Core Deposits. We continue to emphasize
offering core deposits (demand deposit accounts, savings accounts and money
market accounts) to businesses, municipalities and individuals located in our
market area. Core deposits represent our best opportunity to develop customer
relationships that enable us to cross-sell the products and services of our
complementary subsidiaries. We attract and retain transaction accounts by
offering competitive products and rates and providing quality customer service.
Our core deposits increased $553.7 million to $1.4 billion at June 30, 2021 from
$882.4 million at June 30, 2017. At June 30, 2021, core deposits comprised 93.8%
of our total deposits. Core deposits are our least costly source of funds which
improves our interest rate spread and also contributes non-interest income from
account- related services.

Strategically Grow our Balance Sheet. We believe there is a large customer base
in our market that prefers doing business with local institutions and may be
dissatisfied with the service they receive from the larger regional banks. By
offering personalized customer service, along with our extensive knowledge of
our local markets and employees who have strong relationships with our customers
which leads to referrals and repeat business, we believe we can leverage these
strengths to attract and retain customers. We have recently undergone a
significant rebranding effort and updated our

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branch layout, website and other technology infrastructure that prioritizes the
customer experience and moves away from the traditional single branch channel.
We also believe we can capitalize on commercial deposit and personal banking
relationships derived from an increase in commercial real estate and commercial
business lending. Based on the foregoing, our attractive market area and
strategic investment in technology to enhance the customer experience, we
believe we are well-positioned to increase our balance sheet, particularly loans
and deposits.

Summary of critical accounting policies

The discussion and analysis of the financial condition and results of operations
are based on our financial statements, which are prepared in conformity with
U.S. GAAP. The preparation of these financial statements requires management to
make estimates and assumptions affecting the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of income and expenses. We consider the accounting policies discussed
below to be critical accounting policies. The estimates and assumptions that we
use are based on historical experience and various other factors and are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions, resulting in a
change that could have a material impact on the carrying value of our assets and
liabilities and our results of operations.

The JOBS Act contains provisions that, among other things, reduce certain
reporting requirements for qualifying public companies. As an "emerging growth
company" we may delay adoption of new or revised accounting pronouncements
applicable to public companies until such pronouncements are made applicable to
private companies. We intend to take advantage of the benefits of this extended
transition period. Accordingly, our financial statements may not be comparable
to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated
by management as necessary to absorb credit losses incurred in the loan
portfolio that are both probable and reasonably estimable at the relevant
balance sheet date. The amount of the allowance is based on significant
estimates, and the ultimate losses may vary from such estimates as more
information becomes available or conditions change. The methodology for
determining the allowance for loan losses is considered a critical accounting
policy by management due to the high degree of judgment involved, the
subjectivity of the assumptions used and the potential for changes in the
economic environment that could result in changes to the amount of the recorded
allowance for loan losses.

As a substantial percentage of our loan portfolio is collateralized by real
estate, appraisals of the underlying value of property securing loans are
critical in determining the amount of the allowance required for specific loans.
Assumptions are instrumental in determining the value of properties. Overly
optimistic assumptions or negative changes to assumptions could significantly
affect the valuation of a property securing a loan and the related allowance
determined. Management carefully reviews the assumptions supporting such
appraisals to determine that the resulting values reasonably reflect amounts
realizable on the related loans.

Management performs an evaluation of the adequacy of the allowance for loan
losses at least quarterly. We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, credit concentrations, the adequacy of the underlying collateral,
the financial strength of the borrower, results of internal loan reviews and
other relevant factors. This evaluation is inherently subjective as it requires
material estimates by management that may be susceptible to significant change
based on changes in economic and real estate market conditions.

The evaluation has specific and general components. The specific component
relates to loans that are deemed to be impaired and classified as special
mention, substandard, doubtful, or loss. For such loans that are also classified
as impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using the
loan's existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. The general component covers non-classified loans
and is based on historical loss experience adjusted for qualitative factors.

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Actual loan losses can be significantly greater than the allowance we have established, which could have a material adverse effect on our financial results.

Legal Proceedings and Other Contingent Liabilities.  In the ordinary course of
business, we are involved in a number of legal, regulatory, governmental and
other proceedings, claims or investigations that could result in losses,
including damages, fines and/or civil penalties, which could be significant
concerning matters arising from the conduct of our business. In view of the
inherent difficulty of predicting the outcome of such matters, particularly
where the claimants seek large or indeterminate damages, we generally cannot
predict the eventual outcome of the pending matters, timing of the ultimate
resolution of these matters, or eventual loss, fines or penalties related to
each pending matter. In accordance with applicable accounting guidance, we
establish an accrued liability when those matters present loss contingencies
that are both probable and estimable. Our estimate of potential losses will
change over time and the actual losses may vary significantly, and there may be
an exposure to loss in excess of any amounts accrued. As a matter develops,
management, in conjunction with any outside counsel handling the matter,
evaluate on an ongoing basis whether such matter presents a loss contingency
that is probable and estimable; or where a loss is reasonably possible, whether
in excess of a related accrued liability or where there is no accrued liability,
whether it is possible to estimate a range of possible loss. Once the loss
contingency is deemed to be both probable and estimable, we establish an accrued
liability and record a corresponding amount of litigation-related expense. We
continue to monitor the matters for further developments that could affect the
amount of the accrued liability that has been previously established. These
estimates are based upon currently available information and are subject to
significant judgment, a variety of assumptions and known and unknown
uncertainties.  The matters underlying the accrued liability and estimated range
of possible losses are unpredictable and may change from time to time, and
actual losses may vary significantly from the current estimate and accrual which
could have a material negative effect on our financial results.  The estimated
range of possible loss does not represent our maximum loss exposure.

Income Taxes. Income tax expense (benefit) is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
amounts for temporary differences between carrying amounts and the tax basis of
assets and liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized. We
recognize interest and/or penalties related to income tax matters in other
expense. A tax position is recognized as a benefit only if it is "more likely
than not" that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount recognized is the largest
amount of tax benefit that is more than 50% likely of being realized on
examination. For tax positions not meeting the "more likely than not" test, no
tax benefit is recorded. Management determines the need for a deferred tax
valuation allowance based upon the realizability of tax benefits from the
reversal of temporary differences creating the deferred tax assets, as well as
the amounts of available open tax carrybacks, if any. At June 30, 2021 and 2020,
no valuation allowance was required.

We exercise significant judgment in evaluating the amount and timing of
recognition of the resulting tax assets and liabilities. These judgments require
us to make projections of future taxable income. The judgments and estimates we
make in determining our deferred tax assets are inherently subjective and are
reviewed on a regular basis as regulatory or business factors change. Any
reduction in estimated future taxable income may require us to record a
valuation allowance against our deferred tax assets. A valuation allowance that
results in additional income tax expense in the period in which it is recognized
would negatively affect earnings.

Fair Value Measurements. The fair value of a financial instrument 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
particular asset or liability in an orderly transaction between market
participants on the measurement date. We estimate the fair value of a financial
instrument and any related asset impairment using a variety of valuation
methods. Where financial instruments are actively traded and have quoted market
prices, quoted market prices as of the measurement date are used for fair value.
When the financial instruments are not actively traded, other observable market
inputs, such as quoted prices of securities with similar characteristics, quoted
prices in markets that are not active or other inputs that are observable or can
be corroborated by observable market data, may be used, if available, to
determine fair value. When observable market prices do not exist, we estimate
fair value. These estimates are subjective in nature and imprecision in
estimating these factors can impact the amount of revenue or loss recorded.

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Investment Securities. Available-for-sale and held-to-maturity securities are
reviewed by management on a quarterly basis, and more frequently when economic
or market conditions warrant, for possible other-than-temporary impairment. In
determining other-than-temporary impairment, management considers many factors,
including the length of time and the extent to which the fair value has been
less than cost, the financial condition and near-term prospects of the issuer,
whether the market decline was affected by macroeconomic conditions and whether
the Company has the intent to sell the debt security or more likely than not
will be required to sell the debt security before its anticipated recovery. A
decline in value that is considered to be other-than-temporary is recorded as a
loss within non-interest income in the statement of operations. The assessment
of whether other-than-temporary impairment exists involves a high degree of
subjectivity and judgment and is based on the information available to
management at a point in time. In order to determine other-than-temporary
impairment for mortgage-backed securities, asset-backed securities and
collateralized mortgage obligations, we compare the present value of the
remaining cash flows as estimated at the preceding evaluation date to the
current expected remaining cash flows. Other-than-temporary impairment is deemed
to have occurred if there has been an adverse change in the remaining expected
future cash flows.

Pension Obligations.  We maintain a non-contributory defined benefit pension
plan covering substantially all of our full-time employees hired before
September 1, 2019. The benefits are developed from actuarial valuations and are
based on the employee's years of service and compensation. Actuarial assumptions
such as interest rates, expected return on plan assets, turnover, mortality and
rates of future compensation increases have a significant impact on the costs,
assets and liabilities of the plan. Pension expense is the net of service cost,
interest cost, return on plan assets and amortization of gains and losses not
immediately recognized.

Goodwill and Intangible Assets.   The excess of the cost of acquired entities
over the fair value of identifiable tangible and intangible assets acquired,
less liabilities assumed, is recorded as goodwill. Goodwill is carried at its
acquired value and is reviewed annually for impairment, or when events or
changes in circumstances indicate that carrying amounts may be impaired.

Acquired identifiable intangible assets that have finite lives are amortized
over their useful economic life. Customer relationship intangibles are generally
amortized over fifteen years based upon the projected discounted cash flows of
the accounts acquired. Core deposit premium related to the Bank's assumption of
certain deposit liabilities is being amortized over fifteen years. Acquired
identifiable intangible assets that are amortized are reviewed for impairment
when events or changes in circumstances indicate that the carrying amounts may
be impaired.



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Average balances and returns

The following table sets forth average balances, average yields and costs, and
certain other information for the years indicated.  No tax-equivalent yield
adjustments have been made, as the effects would be immaterial.  All average
balances are daily average balances.  Non-accrual loans were included in the
computation of average balances.  The yields set forth below include the effect
of deferred fees, discounts, and premiums that are amortized or accreted to
interest income or interest expense, as applicable.


                                                                                  For the Years Ended June 30,
                                                  2021                                        2020                                        2019
                                   Average                                     Average                                     Average
                                 Outstanding                   Average       Outstanding                    Average      Outstanding                   Average
                                   Balance       Interest     Yield/Cost       Balance        Interest     Yield/Cost      Balance       Interest     Yield/Cost

                                                                                     (Dollars in thousands)
Interest-earning assets:
Loans                            $  1,127,282    $  42,394          3.76 %  $    1,092,425    $  49,510          4.53 %  $  1,031,592    $  49,818          4.83 %
Securities                            155,946        1,218          0.78 %          92,981        2,108          2.27 %       107,572        2,541          2.36 %
Interest-earning deposits             217,957          315          0.14 %         129,097        1,901          1.47 %        72,686        1,800          2.48 %
Total interest-earning assets       1,501,185       43,927          2.93 %       1,314,503       53,519          4.07 %     1,211,850       54,159          4.47 %
Non-interest-earning assets           143,397                                      137,952                                    118,482
Total assets                     $  1,644,582                               $    1,452,455                               $  1,330,332

Interest-bearing liabilities:
Demand deposits                  $    151,211          181          0.12 %  $      110,444          215          0.19 %  $    114,699          341          0.30 %
Savings deposits                      275,095          125          0.05 %         241,471          127          0.05 %       246,055          126          0.05 %
Money market deposits                 370,506          519          0.14 %         351,790        1,997          0.57 %       338,883        1,818          0.54 %
Certificates of deposit               102,628        1,201          1.17 %         127,671        2,268          1.78 %       128,041        1,960          1.53 %
Total interest-bearing
deposits                              899,440        2,026          0.23 %         831,376        4,607          0.55 %       827,678        4,245          0.51 %
Borrowings and other                    3,890           84          2.16 %           8,624          124          1.44 %         7,857          235          2.99 %
Total interest-bearing
liabilities                           903,330        2,110          0.23 %         840,000        4,731          0.56 %       835,535        4,480          0.54 %
Non-interest-bearing
liabilities                           514,836                                      390,366                                    367,468
Total liabilities                   1,418,166                                    1,230,366                                  1,203,003
Total shareholders' equity            226,416                                      222,089                                    127,329
Total liabilities and
shareholders' equity             $  1,644,582                               $    1,452,455                               $  1,330,332
Net interest income                              $  41,817                                    $  48,788                                  $  49,679
Net interest rate spread (1)                                        2.69 %                                       3.51 %                                     3.93 %
Net interest-earning assets
(2)                              $    597,855                               $      474,503                               $    376,315
Net interest margin (3)                                             2.79 %                                       3.71 %                                     4.10 %
Average interest-earning
assets to interest-bearing
liabilities                            166.18 %                                     156.49 %                                   145.04 %

————————————————– ——————————

The net interest rate differential represents the difference between the weighted average return (1) on interest-bearing assets and the weighted average cost of

interest bearing liabilities.

(2) Net interest-bearing assets represent the total of interest-bearing assets less

total interest-bearing liabilities.


(3) Net interest margin represents net interest income divided by average total
    interest-earning assets.




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Rate / Volume Analysis

The following table presents the effects of changing rates and volumes on our
net interest income for the years indicated. 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 total column represents the sum of the
prior two columns. For purposes of this table, changes attributable to both rate
and volume, which cannot be segregated, have been allocated proportionately
based on the changes due to rate and the changes due to volume.


                                                          Year Ended June 30,                                 Year Ended June 30,
                                                             2021 vs. 2020                                       2020 vs. 2019
                                                                                   Total                                                Total
                                              Increase (Decrease) Due to          Increase         Increase (Decrease) Due to         Increase
                                             Volume               Rate           (Decrease)        Volume              Rate          (Decrease)

                                                                                      (In thousands)
Interest-earning assets:
Loans                                      $     1,537      $        (8,653)    $    (7,116)    $      2,849      $       (3,157)    $     (308)
Securities                                         952               (1,842)           (890)           (334)                 (99)          (433)
Interest-earning deposits                          798               (2,384)         (1,586)           1,025                (924)            101
Total interest-earning assets                    3,287              (12,879)         (9,592)           3,540              (4,180)          (640)

Interest-bearing liabilities:
Demand deposits                                     64                  (98)            (34)            (12)                (114)          (126)
Savings deposits                                    16                  (18)             (2)             (2)                    3              1
Money market deposits                              101               (1,579)         (1,478)              71                  108            179
Certificates of deposit                          (389)                 (678)         (1,067)             (6)                  314            308
Total interest-bearing deposits                  (208)               (2,373)         (2,581)              51                  311            362
Borrowings and other                              (86)                    46            (40)              21                (132)          (111)
Total interest-bearing liabilities               (294)               (2,327)         (2,621)              72                  179            251

Change in net interest income              $     3,581      $       (10,552)    $    (6,971)    $      3,468      $       (4,359)    $     (891)




Exclusive of the impact of PPP loans, the Company expects its first fiscal
quarter of 2022 net interest margin to remain depressed due to the precipitous
drop in the Federal Funds, Prime and LIBOR interest rates in the second half of
fiscal 2020. Expected decreases in average interest earning asset yields are not
expected to be fully offset by expected decreases in the average cost of funds.
Although the stated interest rate on PPP loans is fixed at 1.0%, the timing of
the Company's recognition of the interest income on origination fees, net of
deferred origination costs, on PPP loans is uncertain as to the period of
recognition at this time and will likely cause continued interest earning asset
yield volatility as loans are forgiven by the SBA.

Comparison of financial position to June 30, 2021 and June 30, 2020

Total Assets. Total assets increased $269.8 million, or 17.7%, to $1.80 billion
at June 30, 2021 from $1.53 billion at June 30, 2020. The increase was due
primarily to an increase of $188.8 million, or 249.2%, in securities available
for sale as well as a $168.1 million, or 107.1%, increase in cash and cash
equivalents partially offset by a decrease of $66.6 million, or 5.8%, in net
loans receivable and a decrease of $17.4 million, or 29.9%, in other assets. The
$17.4 million decrease in other assets from $58.0 million at June 30, 2020 to
$40.6 million at June 30, 2021 was primarily due to a decrease in the estimated
fair value of derivative assets related to interest rate swaps.

Cash and Cash Equivalents. Total cash and cash equivalents increased $168.1
million, or 107.1%, to $325.0 million at June 30, 2021 from $156.9 million at
June 30, 2020. This increase resulted from net increases in deposits of $260.7
million from $1.3 billion at June 30, 2020 to $1.5 billion at June 30, 2021
primarily due to deposit customers continuing to increase cash balances during
the COVID-19 pandemic, as well as, federal stimulus funds being received by
consumer, commercial and municipal deposit customers.

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Securities Available for Sale. Total securities available for sale increased
$188.8 million, or 249.2%, to $264.6 million at June 30, 2021 from $75.8 million
at June 30, 2020. The increase was primarily due to purchases of U.S Government
and agency obligations and municipal obligations during the year ended June 30,
2021 to deploy excess liquidity and to collateralize an increase in municipal
deposits.

Securities Held to Maturity. Total securities held to maturity increased $4.1
million, or 59.5%, to $10.9 million at June 30, 2021 from $6.8 million at
June 30, 2020 due primarily to the purchase of a $5.0 million corporate debt
security to deploy excess liquidity, partially offset by maturities and pay
downs.

Net Loans. Net loans of $1.08 billion at June 30, 2021 decreased $66.6 million,
or 5.8%, from $1.15 billion at June 30, 2020. By loan category, commercial and
industrial loans decreased by $69.3 million, or 29.2%, to $167.9 million at June
30, 2021 from $237.2 million at June 30, 2020; commercial construction loans
decreased $26.9 million, or 29.3%, to $64.9 million at June 30, 2021 from $91.8
million at June 30, 2020; consumer loans decreased by $5.3 million, or 17.1%, to
$25.6 million at June 30, 2021 from $30.9 million at June 30, 2020; and home
equity loans and lines of credit decreased by $4.9 million, or 6.1%, to $75.5
million at June 30, 2021 from $80.3 million at June 30, 2020. These decreases
were partially offset by an increase in commercial real estate loans of $39.7
million, or 8.8%, to $490.1 million at June 30, 2021 from $450.5 million at
June 30, 2020. The decrease in commercial and industrial loans was primarily due
to the forgiveness and repayment of PPP loans during the year ended June 30,
2021, as well as, various pay downs and payoffs. Commercial and industrial loans
included PPP loans of $51.5 million as of June 30, 2021, representing a decrease
of $22.5 million from $74.0 million as of June 30, 2020. The decrease in
commercial construction loans was primarily due to the conversion of several
commercial construction loans to permanent financing. The increase in commercial
real estate loans was related to the conversion of several commercial
construction loans to permanent financing.

Deposits. Total deposits increased $260.7 million, or 20.5%, to $1.53 billion at
June 30, 2021 from $1.27 billion at June 30, 2020. The increase in deposits
reflected an increase in money market accounts of $110.7 million, or 32.2%, to
$454.5 million at June 30, 2021 from $343.7 million at June 30, 2020; an
increase in non-interest-bearing demand accounts of $67.4 million, or 15.4%, to
$504.9 million at June 30, 2021 from $437.5 million at June 30, 2020; an
increase in interest-bearing demand accounts of $65.1 million, or 58.8%, to
$175.8 million at June 30, 2021 from $110.7 million at June 30, 2020; and an
increase in savings accounts of $42.3 million, or 16.3%, to $300.8 million at
June 30, 2021 from $258.6 million at June 30, 2020. These increases were
partially offset by a decrease in certificates of deposit of $24.7 million, or
20.6%, to $94.9 million at June 30, 2021 from $119.6 million at June 30, 2020.
The increase in non-interest bearing demand accounts and the increase in savings
accounts were primarily due to deposit customers increasing cash balances during
the COVID-19 pandemic. The increase in money market accounts was primarily due
to federal stimulus funds being received by municipal deposit customers. The
increase in interest-bearing demand accounts was primarily due to increases at
certain large dollar accounts. The decrease in certificates of deposit was
primarily due to the maturity of certain large dollar accounts.

Total Shareholders' Equity. Total shareholders' equity increased $13.9 million,
or 6.2%, to $237.8 million at June 30, 2021 from $224.0 million at June 30,
2020. The increase was principally due to a decrease in accumulated other
comprehensive loss of $12.2 million primarily from our defined benefit plan, as
well as, an increase in retained earnings of $1.1 million from net income during
the year ended June 30, 2021.

Comparison of operating results for the years ended June 30, 2021 and June 30, 2020

General. Net income decreased by $ 4.1 million, or 79.3%, to $ 1.1 million for the year ended June 30, 2021 of $ 5.2 million for the year ended June 30, 2020.

 The decrease was primarily due to a $7.0 million decrease in net interest
income and a $786,000 increase in income tax expense, partially offset by a $2.7
million decrease in the provision for loan losses and a $828,000 decrease in
non-interest expense.

Interest and Dividend Income.  Interest and dividend income decreased $9.6
million, or 17.9%, to $43.9 million for the year ended June 30, 2021, from $53.5
million for the year ended June 30, 2020 due to decreases in interest income on
loans, securities, and interest-earning deposits. The decrease reflected a 114
basis points decrease in the average yield on interest-earning assets to 2.93%
for the year ended June 30, 2021, from 4.07% for the year ended June 30, 2020,
offset by a $186.7 million increase in the average balance of interest-earning
assets.

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Interest income on loans decreased $7.1 million, or 14.4%, to $42.4 million for
the year ended June 30, 2021 from $49.5 million for the year ended June 30,
2020. Interest income on loans decreased primarily due to a 77 basis points
decrease in the average yield on loans to 3.76% for the year ended June 30, 2021
from 4.53% for the year ended June 30, 2020, partially offset by a $34.9 million
increase in the average balance of loans to $1.13 billion for the year ended
June 30, 2021 from $1.09 billion for the year ended June 30, 2020. The decrease
in the average yield on loans was primarily due to the downward adjustment of
interest rates on our existing adjustable-rate loans following the actions taken
by the Federal Reserve to reduce short-term interest rates. The increase in the
average balance of loans was due to the Company's PPP loan originations, as well
as, our continued effort to increase our commercial loan portfolio.

Interest income on securities decreased $890,000, or 42.2%, to $1.2 million for
the year ended June 30, 2021 from $2.1 million for the year ended June 30, 2020.
Interest income on securities decreased primarily due to a 149 basis points
decrease in the average yield on securities to 0.78% for the year ended June 30,
2021 from 2.27% for the year ended June 30, 2020, offset by a $62.9 million
increase in the average balance of securities to $155.9 million for the year
ended June 30, 2021 from $93.0 million for the year ended June 30, 2020.  The
decrease in average yield of securities was due to scheduled maturities of
higher yielding U.S. government and agency and municipal obligation securities,
as well as, decreased market rates of interest for new securities that were
purchased during the year ended June 30, 2021. The increase in the average
balance of securities was due to increased purchases of U.S. government and
agency and municipal obligation securities during the year ended June 30, 2021
as compared to the year ended June 30, 2020.

Interest income on interest-earning deposits decreased $1.6 million, or 83.4%,
to $315,000 for the year ended June 30, 2021 from $1.9 million for the year
ended June 30, 2020. Interest income on interest-earning deposits decreased due
to a 133 basis points decrease in the average yield on interest-earning deposits
to 0.14% for the year ended June 30, 2021 from 1.47% for the year ended June 30,
2020 as market interest rates decreased.  The decrease in the average yield on
interest-earning deposits was offset by an $88.9 million increase in the average
balance of interest-earning deposits to $218.0 million for the year ended June
30, 2021 from $129.1 million for the year ended June 30, 2020, as management
favored maintaining increased levels of cash and cash equivalents during the
COVID-19 pandemic.

Interest Expense.  Interest expense decreased $2.6 million, or 55.4%, to $2.1
million for the year ended June 30, 2021 from $4.7 million for the year ended
June 30, 2020 as a result of a decrease in interest expense on deposits. The
decrease primarily reflected a 33 basis points decrease in the average cost of
interest-bearing liabilities to 0.23% for the year ended June 30, 2021 from
0.56% for the year ended June 30, 2020, offset by a $63.3 million increase in
the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits decreased $2.6 million, or 56.0%,
to $2.0 million for the year ended June 30, 2021 from $4.6 million for the year
ended June 30, 2020. Interest expense on interest-bearing deposits decreased
primarily due to a 32 basis points decrease in the average cost of
interest-bearing deposits to 0.23% for the year ended June 30, 2021 from 0.55%
for the prior year, offset by a $68.0 million increase in the average balance of
deposits to $899.4 million for the year ended June 30, 2021 from $831.4 million
for the year ended June 30, 2020. The decrease in the average cost of deposits
reflected competition from other financial service providers operating in our
market, specifically with regard to certificates of deposit and the decrease in
market interest rates. The increase in average interest-bearing deposits was
primarily due to federal stimulus funds being received by municipal deposit
customers, as well as, increases in certain large dollar deposit relationships.

Interest expense on Federal Home Loan Bank of New York borrowings and other
interest-bearing liabilities decreased $40,000 to $84,000 for the year ended
June 30, 2021 compared to $124,000 for the year ended June 30, 2020. The
decrease was due primarily to a $4.7 million decrease in the average balance of
Federal Home Loan Bank of New York advances and other interest-bearing
liabilities to $3.9 million for the year ended June 30, 2021 from $8.6 million
for the year ended June 30, 2020, offset by a 72 basis points increase in the
average cost of Federal Home Loan Bank of New York advances and other
interest-bearing liabilities to 2.16% for the year ended June 30, 2021 from
1.44% for the year ended June 30, 2020.

Net Interest Income.  Net interest income decreased $7.0 million, or 14.3%, to
$41.8 million for the year ended June 30, 2021 compared to $48.8 million for the
year ended June 30, 2020. The decrease reflected an 82 basis points decrease in
the net interest rate spread to 2.69% for the year ended June 30, 2021 from
3.51% for the year ended June 30,

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2020, partially offset by, a $123.4 million increase in the average balance of
net interest-earning assets to $597.9 million for the year ended June 30, 2021
from $474.5 million for the year ended June 30, 2020. The net interest margin
decreased 92 basis points to 2.79% for the year ended June 30, 2021 from 3.71%
for the year ended June 30, 2020.

Provision for Loan Losses.  We recorded a provision for loan losses of $4.1
million for the year ended June 30, 2021 compared to $6.8 million for the year
ended June 30, 2020. The decrease in the provision was primarily due to
increased provisions related to the onset of the COVID-19 pandemic during the
year ended June 30, 2020. Net charge-offs increased to $3.6 million for the year
ended June 30, 2021, compared to a net recovery of $1.6 million for the year
ended June 30, 2020. Net charge-offs for the year ended June 30, 2021 included
the charge-off of three commercial loan relationships totaling $3.1 million.
Non-performing assets increased to $22.3 million, or 1.24% of total assets, at
June 30, 2021, compared to $13.5 million, or 0.89% of total assets, at June 30,
2020. The allowance for loan losses was $23.3 million, or 2.11% of net loans
outstanding, at June 30, 2021 and $22.9 million, or 1.95% of net loans
outstanding, at June 30, 2020.

Non-Interest Income.  Non-interest income increased $68,000, or 0.4%, to $15.8
million for the year ended June 30, 2021 from $15.7 million for the year ended
June 30, 2020.  The increase was primarily due to a $1.8 million increase in the
net gain on equity securities and an increase of $338,000 in insurance and
wealth management services, offset by a decrease of $1.9 million in bank fees
and service charges and a $576,000 decrease in bank-owned life insurance. The
increase in the net gain on equity securities for the year ended June 30, 2021
was due to the increase in market value of our equity securities as compared to
the prior year. The increase in income attributable to our insurance and wealth
management services reflected an increase in our assets under management to
$671.0 million at June 30, 2021 from $552.6 million at June 30, 2020. Bank fees
and service charges decreased primarily due to less commercial loan fees and a
decrease in deposit service charges due to a drop in transaction activity
related to the impact of the COVID-19 pandemic. The decrease in bank-owned life
insurance was primarily due to proceeds from a death benefit during the year
ended June 30, 2020.

Non-Interest Expense.  Non-interest expense decreased $828,000, or 1.6%, to
$50.9 million for the year ended June 30, 2021 from $51.7 million for the year
ended June 30, 2020. The decrease was primarily the result of the $5.4 million
contribution of stock and cash to the Pioneer Bank Charitable Foundation in
conjunction with our minority stock issuance, and a $2.5 million charge based on
the net negative deposit balance of the various Mann Entities' accounts after
the setoffs/overdraft recoveries for the year ended June 30, 2020. The decrease
in non-interest expense was largely offset by the $4.5 million
litigation-related expense (see Item 3 - "Legal Proceedings," for details), and
an increase in FDIC insurance premiums related to Small Bank Assessment Credits
for the year ended June 30, 2020 which offset the premium expense for that year,
and an increase in salaries and benefits expense related to higher net periodic
pension expense.

Income Tax Expense. Income tax expense increased $786,000 to $1.6 million for
the year ended June 30, 2021 from $797,000 for the year ended June 30, 2020 and
resulted in an effective tax rate of 59.5% for the year ended June 30, 2021
compared to 13.3% for the year ended June 30, 2020. The increase in our
effective tax rate for 2021 was primarily due to non-deductible expenses, as
well as, the increase in the New York State alternative tax on apportioned
capital to 0.1875%.



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Liquidity and capital resources

Liquidity. Liquidity describes our ability to meet the financial obligations
that arise in the ordinary course of business. Liquidity is primarily needed to
meet the borrowing and deposit withdrawal requirements of our customers and to
fund current and planned expenditures. Our primary sources of funds are
deposits, principal and interest payments on loans and securities, and proceeds
from calls, maturities and sales of securities. We also have the ability to
borrow from the Federal Home Loan Bank of New York. At June 30, 2021, we had the
ability to borrow up to $360.9 million, of which none was utilized for
borrowings and $152.0 million was utilized as collateral for letters of credit
issued to secure municipal deposits. At June 30, 2021, we had a $20.0 million
unsecured line of credit with a correspondent bank with no outstanding balance.

We cannot accurately predict what the impact of the events described in "Recent
Developments - COVID-19 Pandemic and Mann Entities Related Fraudulent Activity"
above and in the "Legal Proceedings" section may have on our liquidity and
capital resources. For example, costs associated with potentially prosecuting,
litigating or settling any litigation, satisfying any adverse judgments, if any,
or other regulatory proceedings, could be significant. We continue to monitor
these matters for further developments that could affect the amount of the
accrued liability that has been established. Excluding legal fees and expenses,
litigation-related expense of $4.5 million was recognized for the year ended
June 30, 2021 (none in 2020). See Item 3 - "Legal Proceedings" section. For
those matters for which a loss is reasonably possible and estimable, whether in
excess of an accrued liability or where there is no accrued liability, the
Company's estimated range of possible loss is $0 to $52.5 million in excess of
the accrued liability, if any, as of June 30, 2021. These estimates are based
upon currently available information and are subject to significant judgment, a
variety of assumptions and known and unknown uncertainties. The matters
underlying the accrued liability and estimated range of possible losses are
unpredictable and may change from time to time, and actual losses may vary
significantly from the current estimate and accrual. The estimated range of
possible loss does not represent the Company's maximum loss exposure. These
legal, regulatory, governmental and other proceedings, claims or investigations,
costs, settlements, judgments, sanctions or other expenses could have a material
adverse effect on our business, prospects, financial condition, results of
operations or cash flows or cause significant reputational harm and subject us
to face civil litigation, significant fines, damage awards or other material
regulatory consequences.

The board of directors is responsible for establishing and monitoring our
liquidity targets and strategies in order to ensure that sufficient liquidity
exists for meeting the borrowing needs and deposit withdrawals of our customers
as well as unanticipated contingencies. We believe that we had enough sources of
liquidity to satisfy our short and long-term liquidity needs as of June 30,
2021.

While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. 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 period. At June 30, 2021, cash and cash equivalents totaled $325.0 million.
Securities classified as available-for-sale, which provide additional sources of
liquidity, totaled $264.6 million at June 30, 2021.

We are committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient
funds to meet our current funding commitments. Certificates of deposit due
within one year of June 30, 2021 totaled $62.2 million, or 4.1%, of total
deposits. If these deposits do not remain with us, we will be required to seek
other sources of funds, including other 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 borrowings than we currently pay. We believe,
however, based on past experience that a significant portion of such deposits
will remain with us. We have the ability to attract and retain deposits by
adjusting the interest rates offered.

Capital resources. The Bank is subject to various regulatory capital requirements administered by NYSDFS and the FDIC. TO June 30, 2021, we exceeded all applicable regulatory capital requirements and were considered “well capitalized” under regulatory guidelines. See note 16 of the appendix to the consolidated financial statements.

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Off-balance sheet arrangements and global contractual obligations

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

At June 30, 2021, we had $209.1 million of commitments to originate loans,
comprised of $126.0 million of commitments under commercial loans and lines of
credit (including $16.1 million of unadvanced portions of commercial
construction loans), $54.5 million of commitments under home equity loans and
lines of credit, $20.4 million of commitments to purchase one- to four-family
residential real estate loans and $8.1 million of unfunded commitments under
consumer lines of credit. In addition, at June 30, 2021, we had $25.0 million in
standby letters of credit outstanding. See Note 14 in the Notes to the
consolidated financial statements for further information.

Contractual Obligations. In the ordinary course of our operations, we enter into
certain contractual obligations. Such obligations include data processing
services, operating leases for premises and equipment, agreements with respect
to borrowed funds and deposit liabilities.

Recent accounting positions

Please refer to Note 2 in the Notes to the consolidated financial statements
that appear starting on page 82 of this Annual Report on Form 10-K for a
description of recent accounting pronouncements that may affect our financial
condition and results of operations.

Impact of inflation and price changes

The financial statements and related data presented herein have been prepared in
accordance with U.S. GAAP, which requires the measurement of financial position
and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on our operations is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.

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