PIONEER BANCORP: MD Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-K)
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 Bankand the consolidated financial statements that appear starting on page 77 of this Annual Report on Form 10-K. 61
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
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. 62
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. Treasurysecurities 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 Yorkat June 30, 2021was $208.9 million. The Bank participated in the PPP, a specialized low-interest (1%) forgivable loan program funded by the U.S. Treasury Departmentand 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 millionof 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 millionof 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 millionof the Company's commercial loan balances, which is down from 144 loans representing $170.3 millionof 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, 2021has 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 63
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 millionfrom 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 millionin 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 millionbased 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 millioncommercial 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 millionand $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". 64
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, LTDin 2018. At June 30, 2021, Pioneer Financial Services, Inc.had $671.0 millionof 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 millionto $1.4 billionat June 30, 2021from $882.4 millionat 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 65
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. 66
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, 2021and 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. 67
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. Goodwilland 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. Goodwillis 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. 68
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 $ 42,3943.76 % $ 1,092,425 $ 49,5104.53 % $ 1,031,592 $ 49,8184.83 % 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 $ 1,330,332Interest-bearing liabilities: Demand deposits $ 151,211181 0.12 % $ 110,444215 0.19 % $ 114,699341 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 $ 1,330,332Net interest income $ 41,817 $ 48,788 $ 49,679Net interest rate spread (1) 2.69 % 3.51 % 3.93 % Net interest-earning assets (2) $ 597,855 $ 474,503 $ 376,315Net 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. 69
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
Total Assets. Total assets increased
$269.8 million, or 17.7%, to $1.80 billionat June 30, 2021from $1.53 billionat 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 milliondecrease in other assets from $58.0 millionat June 30, 2020to $40.6 millionat June 30, 2021was 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 millionat June 30, 2021from $156.9 millionat June 30, 2020. This increase resulted from net increases in deposits of $260.7 millionfrom $1.3 billionat June 30, 2020to $1.5 billionat June 30, 2021primarily 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. 70
Securities Available for Sale. Total securities available for sale increased
$188.8 million, or 249.2%, to $264.6 millionat June 30, 2021from $75.8 millionat June 30, 2020. The increase was primarily due to purchases of U.S Governmentand agency obligations and municipal obligations during the year ended June 30, 2021to 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 millionat June 30, 2021from $6.8 millionat June 30, 2020due primarily to the purchase of a $5.0 millioncorporate debt security to deploy excess liquidity, partially offset by maturities and pay downs. Net Loans. Net loans of $1.08 billionat June 30, 2021decreased $66.6 million, or 5.8%, from $1.15 billionat June 30, 2020. By loan category, commercial and industrial loans decreased by $69.3 million, or 29.2%, to $167.9 millionat June 30, 2021from $237.2 millionat June 30, 2020; commercial construction loans decreased $26.9 million, or 29.3%, to $64.9 millionat June 30, 2021from $91.8 millionat June 30, 2020; consumer loans decreased by $5.3 million, or 17.1%, to $25.6 millionat June 30, 2021from $30.9 millionat June 30, 2020; and home equity loans and lines of credit decreased by $4.9 million, or 6.1%, to $75.5 millionat June 30, 2021from $80.3 millionat 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 millionat June 30, 2021from $450.5 millionat 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 millionas of June 30, 2021, representing a decrease of $22.5 millionfrom $74.0 millionas 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 billionat June 30, 2021from $1.27 billionat June 30, 2020. The increase in deposits reflected an increase in money market accounts of $110.7 million, or 32.2%, to $454.5 millionat June 30, 2021from $343.7 millionat June 30, 2020; an increase in non-interest-bearing demand accounts of $67.4 million, or 15.4%, to $504.9 millionat June 30, 2021from $437.5 millionat June 30, 2020; an increase in interest-bearing demand accounts of $65.1 million, or 58.8%, to $175.8 millionat June 30, 2021from $110.7 millionat June 30, 2020; and an increase in savings accounts of $42.3 million, or 16.3%, to $300.8 millionat June 30, 2021from $258.6 millionat 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 millionat June 30, 2021from $119.6 millionat 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 millionat June 30, 2021from $224.0 millionat June 30, 2020. The increase was principally due to a decrease in accumulated other comprehensive loss of $12.2 millionprimarily from our defined benefit plan, as well as, an increase in retained earnings of $1.1 millionfrom net income during the year ended June 30, 2021.
Comparison of operating results for the years ended
General. Net income decreased by
The decrease was primarily due to a
$7.0 milliondecrease in net interest income and a $786,000increase in income tax expense, partially offset by a $2.7 milliondecrease in the provision for loan losses and a $828,000decrease in non-interest expense. Interest and Dividend Income. Interest and dividend income decreased $9.6 million, or 17.9%, to $43.9 millionfor the year ended June 30, 2021, from $53.5 millionfor the year ended June 30, 2020due 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 millionincrease in the average balance of interest-earning assets. 71
Interest income on loans decreased
$7.1 million, or 14.4%, to $42.4 millionfor the year ended June 30, 2021from $49.5 millionfor 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, 2021from 4.53% for the year ended June 30, 2020, partially offset by a $34.9 millionincrease in the average balance of loans to $1.13 billionfor the year ended June 30, 2021from $1.09 billionfor 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 Reserveto 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 millionfor the year ended June 30, 2021from $2.1 millionfor 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, 2021from 2.27% for the year ended June 30, 2020, offset by a $62.9 millionincrease in the average balance of securities to $155.9 millionfor the year ended June 30, 2021from $93.0 millionfor 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, 2021as compared to the year ended June 30, 2020. Interest income on interest-earning deposits decreased $1.6 million, or 83.4%, to $315,000for the year ended June 30, 2021from $1.9 millionfor 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, 2021from 1.47% for the year ended June 30, 2020as market interest rates decreased. The decrease in the average yield on interest-earning deposits was offset by an $88.9 millionincrease in the average balance of interest-earning deposits to $218.0 millionfor the year ended June 30, 2021from $129.1 millionfor 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 millionfor the year ended June 30, 2021from $4.7 millionfor the year ended June 30, 2020as 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, 2021from 0.56% for the year ended June 30, 2020, offset by a $63.3 millionincrease in the average balance of interest-bearing liabilities. Interest expense on interest-bearing deposits decreased $2.6 million, or 56.0%, to $2.0 millionfor the year ended June 30, 2021from $4.6 millionfor 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, 2021from 0.55% for the prior year, offset by a $68.0 millionincrease in the average balance of deposits to $899.4 millionfor the year ended June 30, 2021from $831.4 millionfor 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 Yorkborrowings and other interest-bearing liabilities decreased $40,000to $84,000for the year ended June 30, 2021compared to $124,000for the year ended June 30, 2020. The decrease was due primarily to a $4.7 milliondecrease in the average balance of Federal Home Loan Bank of New Yorkadvances and other interest-bearing liabilities to $3.9 millionfor the year ended June 30, 2021from $8.6 millionfor the year ended June 30, 2020, offset by a 72 basis points increase in the average cost of Federal Home Loan Bank of New Yorkadvances and other interest-bearing liabilities to 2.16% for the year ended June 30, 2021from 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 millionfor the year ended June 30, 2021compared to $48.8 millionfor 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, 2021from 3.51% for the year ended June 30, 72
2020, partially offset by, a
$123.4 millionincrease in the average balance of net interest-earning assets to $597.9 millionfor the year ended June 30, 2021from $474.5 millionfor the year ended June 30, 2020. The net interest margin decreased 92 basis points to 2.79% for the year ended June 30, 2021from 3.71% for the year ended June 30, 2020. Provision for Loan Losses. We recorded a provision for loan losses of $4.1 millionfor the year ended June 30, 2021compared to $6.8 millionfor 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 millionfor the year ended June 30, 2021, compared to a net recovery of $1.6 millionfor the year ended June 30, 2020. Net charge-offs for the year ended June 30, 2021included 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, 2021and $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 millionfor the year ended June 30, 2021from $15.7 millionfor the year ended June 30, 2020. The increase was primarily due to a $1.8 millionincrease in the net gain on equity securities and an increase of $338,000in insurance and wealth management services, offset by a decrease of $1.9 millionin bank fees and service charges and a $576,000decrease in bank-owned life insurance. The increase in the net gain on equity securities for the year ended June 30, 2021was 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 millionat June 30, 2021from $552.6 millionat 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 millionfor the year ended June 30, 2021from $51.7 millionfor the year ended June 30, 2020. The decrease was primarily the result of the $5.4 millioncontribution of stock and cash to the Pioneer Bank Charitable Foundationin conjunction with our minority stock issuance, and a $2.5 millioncharge 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 millionlitigation-related expense (see Item 3 - "Legal Proceedings," for details), and an increase in FDICinsurance premiums related to Small Bank Assessment Credits for the year ended June 30, 2020which 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 $786,000to $1.6 millionfor the year ended June 30, 2021from $797,000for the year ended June 30, 2020and resulted in an effective tax rate of 59.5% for the year ended June 30, 2021compared 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 Statealternative tax on apportioned capital to 0.1875%. 73
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 millionwas utilized as collateral for letters of credit issued to secure municipal deposits. At June 30, 2021, we had a $20.0 millionunsecured 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 millionwas 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 $0to $52.5 millionin 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 millionat 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, 2021totaled $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 Yorkadvances. 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
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 millionof commitments to originate loans, comprised of $126.0 millionof commitments under commercial loans and lines of credit (including $16.1 millionof unadvanced portions of commercial construction loans), $54.5 millionof commitments under home equity loans and lines of credit, $20.4 millionof commitments to purchase one- to four-family residential real estate loans and $8.1 millionof unfunded commitments under consumer lines of credit. In addition, at June 30, 2021, we had $25.0 millionin 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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