PIONEER BANCORP, INC. Statement Regarding Forward-Looking Statements
Certain statements contained herein are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions, or future or conditional verbs, such as "will," "would," "should," "could," or "may." The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. No assurance can be given that the future results covered by forward-looking statements will be achieved. Certain forward-looking statements are included in this Form 10-Q, principally in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition to the factors described in Item 1A - Risk Factors, factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:
our business, financial condition, liquidity, capital and results of operations
? have been, and will likely continue to be, adversely affected by the COVID-19
pandemic;
? risks and uncertainties related to the COVID-19 pandemic and resulting
governmental and societal response;
? impact on our interest earning asset yield volatility as PPP loans are forgiven
by the SBA;
? risks related to the variety of litigation and other proceedings described in
the "Legal Proceedings" section;
? general economic conditions, either nationally or in our market area, that are
worse than expected;
? competition within our market area that is stronger than expected;
? changes in the level and direction of loan delinquencies and charge-offs and
changes in estimates of the adequacy of the allowance for loan losses;
? our ability to access cost-effective funding;
? fluctuations in real estate values and both residential and commercial real
estate market conditions;
? demand for loans and deposits in our market area;
? changes in our partnership with a third-party mortgage banking company;
? our ability to maintain sufficient sources of liquidity to satisfy our short
and long-term liquidity needs;
? our ability to continue to implement our business strategies;
? competition among depository and other financial institutions;
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inflation and changes in market interest rates that reduce our margins and
yields, reduce the fair value of financial instruments or reduce our volume of
? loan originations, or increase the level of defaults, losses and prepayments on
loans we have made and make, whether held in portfolio or sold in the secondary
market;
? adverse changes in the securities markets;
? changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees and capital requirements;
? non-compliance with certain laws and regulations could subject us to fines or
other regulatory sanctions;
? our ability to manage market risk, credit risk and operational risk;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
? the imposition of tariffs or other domestic or international governmental
polices impacting the value of the products of our borrowers;
our ability to successfully integrate into our operations any assets,
? liabilities or systems we may acquire, as well as new management personnel or
customers, and our ability to realize related revenue synergies and cost
savings within expected time frames and any goodwill charges related thereto;
? changes in consumer spending, borrowing and savings habits;
? our ability to maintain our reputation;
? our ability to prevent or mitigate fraudulent activity;
? changes in cost of legal expenses, including defending against significant
litigation;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the
and
? our ability to retain key employees;
? our ability to evaluate the amount and timing of recognition of future tax
assets and liabilities;
? our compensation expense associated with equity benefits allocated or awarded
to our employees in the future; and
? changes in the financial condition, results of operations or future prospects
of issuers of securities that we own.
Additional factors that may affect our results are discussed in the annual report on Form 10-K for the fiscal year endedJune 30, 2021 , under the heading "Risk Factors" and this Form 10-Q, under the heading "Risk Factors." The Company disclaims any obligation to revise or update any forward-looking statements contained in this quarterly report on Form 10-Q to reflect future events or developments.
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. We may incur elevated provision for loan losses and charge-offs due to the adverse impact of the 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 gains or losses on equity securities, net realized gains or losses on available for sale securities and other income.
Non-Interest Expenses. Our non-interest expenses consist of salaries and employee benefits, net occupancy and equipment, data processing, advertising and marketing, federal deposit insurance premiums, professional fees, and other general and administrative expenses, as well as employee retention credits.
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Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for worker's compensation and disability insurance, health insurance, retirement plans and other employee benefits, as well as commissions and other incentives.
Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter.
Data processing expenses are fees we pay to third parties for 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 we make to the
Professional fees includes legal and other consulting expenses.
Employee retention credit is the benefit recorded related to a refundable credit against certain employment taxes as described in "Recent Developments - COVID-19 Pandemic".
Other expenses include expenses for professional services, 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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Recent Developments
Acquisitions
On December 10, 2021 and December 22, 2021 , respectively, the Company, through
its subsidiary, Pioneer Financial Services, Inc. , completed the acquisition of
certain assets of two practices engaged in the wealth management services
business in the Capital Region of New York . The Company paid an aggregate of
$1.5 million in cash and recorded $728,000 in contingent consideration payable
to acquire the assets and recorded an $890,000 customer list intangible asset
and goodwill in the amount of $1.3 million in conjunction with the acquisitions.
The effects of the acquired assets have been included in the consolidated
financial statements since the respective acquisition dates. The above
referenced acquisitions were made to expand the Company's wealth management
services activities.
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 ofDecember 31, 2021 . AtDecember 31, 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 9.80% atDecember 31, 2021 . In addition, management believes the Company was well positioned with adequate levels of liquidity as ofDecember 31, 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. AtDecember 31, 2021 , the Company's cash and cash equivalents balance was$349.1 million . The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquidU.S. Treasury securities and highly-rated municipal securities. This portfolio not only generates interest income, but also serves as a ready source of liquidity. AtDecember 31, 2021 , the Company's available-for-sale investment securities portfolio totaled$365.6 million . The Bank's unused borrowing capacity at theFederal Home Loan Bank of New York atDecember 31, 2021 was$306.8 million . The Bank participated in the PPP, a specialized low-interest (1%) forgivable loan program funded by theU.S. Treasury Department and administered by the SBA. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. As ofDecember 31, 2021 , the Bank's commercial loan portfolio included 105 PPP loans totaling$14.1 million . The Bank assisted a substantial number of its PPP borrowers with forgiveness requests during the second fiscal quarter of 2022 and expects to assist the majority of its remaining PPP borrowers with forgiveness requests during the third fiscal quarter of 2022. As ofDecember 31, 2021 , the Bank has received forgiveness or loan payoffs related to 862 borrowers' PPP loans for a total of$101.3 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. ThroughDecember 31, 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 ofDecember 31, 2021 , the Company had COVID-19 related financial hardship payment deferrals totaling four loans representing$1.1 million of the Company's residential mortgage, home equity loans and lines of credit, and consumer loan balances. In relation to its commercial borrowers, as ofDecember 31, 2021 , the Company had no COVID-19 related financial hardship payment deferrals. 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 ofMarch 20 , 42
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2020, and their loans will continue to be reported as delinquent during the deferment period based on their delinquency status as ofMarch 20, 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 consistent 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. The CARES Act provided numerous tax provisions and other stimulus measures, including an employee retention credit ("ERC"), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. As expanded, the ERC is equal to 70% of qualified wages paid to employees (including employer qualified health plan expenses) and is capped at$10,000 of qualified wages for each employee, such that the maximum ERC that can be claimed is$7,000 per employee per applicable calendar quarter in 2021. As a result of the Company averaging fewer than 500 full-time employees, all wages paid to employees were eligible for the ERC. The Company evaluated its eligibility for the ERC in the second fiscal quarter of 2022. The Company determined it qualified for the ERC for the first quarter of calendar 2021, using the alternative quarter election, because the Company's gross receipts decreased more than 20% for the fourth quarter of 2020 from the respective quarter in 2019, and for the second and third quarters of calendar 2021 because the Company's gross receipts decreased more than 20% for each quarter in 2021 from each of the respective quarters of 2019, the relevant criteria for the ERC. The Company is in the process of amending certain payroll tax filings to apply for a refund for each of the first three quarters of calendar 2021. The Company cannot reasonably estimate when it will receive the refunds once the filings have been made. Since there is not any GAAP guidance for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, the Company accounted for the employee retention credit by analogy to FASB ASC Subtopic 958-605, Not-for-Profit Entities: Revenue Recognition ("ASC 958-605"). Under ASC 958-605, government grants are recognized when the conditions or conditions on which they depend are substantially met. The conditions for recognition of the ERC include meeting the rules as an eligible employer (meeting the rules for a decline in gross receipts) and incurring qualifying expenses (payroll costs). During the three and six months endedDecember 31, 2021 , the Company recorded an ERC benefit of$5.0 million in noninterest expenses in the consolidated statements of operations. The Company has recorded an ERC grant receivable of$5.0 million in other assets in the consolidated statements of condition sheet atDecember 31, 2021 .
Mann Entities Related Fraudulent Activity
During the first fiscal quarter of 2020 (the quarter endingSeptember 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 onAugust 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 43 Table of Contents deposit balance of the various Mann Entities' accounts after the setoffs/overdraft recoveries. Through the end of the second fiscal quarter of 2022, 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). 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 second fiscal quarter of 2022, 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 six months endedDecember 31, 2021 , the Bank recognized insurance recoveries in the amount of$2.2 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. No insurance recoveries were recorded for the six months endedDecember 31, 2020 related to reimbursement of defense costs incurred as a results of these matters. For additional details regarding legal, other proceedings and related matters, including litigation-related expense, see, "Part II, Item 1 - Legal Proceedings". 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 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 Jumpstart Our Business Startups Act of 2012 (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.
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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.
Actual loan losses may be significantly more than the allowance we have established which could have a material negative effect on our financial results.
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.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 prospectus 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 income. 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. 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. 45
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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. AtDecember 31, 2021 , 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. 46 Table of Contents Average Balances and Yields
The following tables set forth average balances, average yields and costs, and
certain other information for the periods 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
Three Months Ended
2021 2020
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield/Cost
Balance Interest (4) Balance Interest (4)
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,017,128 $ 10,094 4.00 % $ 1,129,503 $ 10,896 3.88 %
Securities 365,147 605 0.66 % 130,533 279 0.85 % Interest-earning deposits and other
358,345 152 0.17 % 165,174 63 0.15 %
Total interest-earning assets 1,740,620 10,851 2.50 % 1,425,210 11,238 3.17 % Non-interest-earning assets 133,932 148,909 Total assets$ 1,874,552 $ 1,574,119 Interest-bearing liabilities: Demand deposits$ 187,082 $ 59 0.13 %$ 123,088 $ 33 0.11 % Savings deposits 307,444 26 0.03 % 265,337 35 0.05 % Money market deposits 469,545 96 0.08 % 357,719 135 0.15 % Certificates of deposit 88,575 162
0.73 % 104,575 338 1.29 % Total interest-bearing deposits
1,052,646 343 0.13 % 850,719 541 0.25 %
Borrowings and other 3,424 17 1.98 % 3,214 18 2.24 %
Total interest-bearing liabilities 1,056,070 360 0.14 % 853,933 559 0.26 % Non-interest-bearing deposits
559,541 471,516
Other non-interest-bearing liabilities 19,978
23,260
Total liabilities 1,635,589 1,348,709
Total shareholders' equity 238,963 225,410
Total liabilities and shareholders'
equity $ 1,874,552 $ 1,574,119
Net interest income $ 10,491 $ 10,679
Net interest rate spread (1) 2.36 % 2.91 %Net interest-earning assets (2)$ 684,550 $ 571,277 Net interest margin (3) 2.41 % 3.01 % Average interest-earning assets to interest-bearing liabilities 164.82 % 166.90 %
Net interest rate spread represents the difference between the weighted (1) average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
(4) Annualized.
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For the Six Months Ended December 31,
2021 2020
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield/Cost
Balance Interest (4) Balance Interest (4)
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,040,783 $ 20,128 3.87 % $ 1,134,740 $ 21,560 3.80 %
Securities 325,590 1,036 0.63 % 111,496 610 1.09 % Interest-earning deposits and other
350,891 304 0.17 % 157,362 134 0.17 % Total interest-earning assets
1,717,264 21,468 2.50 % 1,403,598 22,304 3.18 %
Non-interest-earning assets 137,244 150,669
Total assets $ 1,854,508 $ 1,554,267
Interest-bearing liabilities:
Demand deposits $ 183,545 $ 118 0.13 % $ 122,400 $ 73 0.12 %
Savings deposits 305,170 51 0.03 % 263,093 70 0.05 %
Money market deposits 463,136 191 0.08 % 350,105 331 0.19 %
Certificates of deposit 90,472 341 0.75 % 108,142 753 1.39 % Total interest-bearing deposits
1,042,323 701 0.13 % 843,740 1,227 0.29 %
Borrowings and other 4,242 40 1.88 % 4,384 47 2.14 %
Total interest-bearing liabilities 1,046,565 741 0.14 % 848,124 1,274 0.30 % Non-interest-bearing deposits
550,136 458,842
Other non-interest-bearing
liabilities 19,190 22,749
Total liabilities 1,615,891 1,329,715
Total shareholders' equity 238,617 224,552
Total liabilities and shareholders'
equity $ 1,854,508 $ 1,554,267
Net interest income $ 20,727 $ 21,030
Net interest rate spread (1) 2.35 % 2.88 %
Net interest-earning assets (2) $ 670,699 $ 555,474
Net interest margin (3) 2.41 % 2.99 %
Average interest-earning assets to
interest-bearing liabilities 164.09 % 165.49 %
Net interest rate spread represents the difference between the weighted (1) average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
(4) Annualized.
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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 periods 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.
Three Months Ended December 31, Six Months Ended December 31,
2021 vs. 2020 2021 vs. 2020
Total Total
Increase (Decrease) Due to Increase Increase (Decrease) Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in thousands)
Interest-earning assets:
Loans $ (1,115) $ 313 $ (802) $ (1,815) $ 383 $ (1,432)
Securities 401 (75) 326 767 (341) 426
Interest-earning deposits and other 81 8 89 168 2 170
Total interest-earning assets (633) 246 (387) (880) 44 (836)
Interest-bearing liabilities:
Demand deposits 19 7 26 39 6 45
Savings deposits 5 (14) (9) 10 (29) (19)
Money market deposits 34 (73) (39) 84 (224) (140)
Certificates of deposit (46) (130) (176) (108) (304) (412)Total interest-bearing deposits 12 (210) (198) 25 (551) (526) Borrowings and other 1 (2) (1) (1) (6) (7) Total interest-bearing liabilities 13 (212) (199) 24 (557) (533) Change in net interest income $ (646)$ 458
$ (188) $ (904)$ 601 $ (303)
Exclusive of the impact of PPP loans, the Company expects its third 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 Condition at
Total Assets. Total assets increased$46.9 million , or 2.6%, to$1.84 billion atDecember 31, 2021 from$1.80 billion atJune 30, 2021 . The increase was due primarily to an increase of$101.0 million , or 38.2%, in securities available for sale as well as an increase of$24.2 million , or 7.4%, in cash and cash equivalents partially offset by a decrease of$88.1 million , or 8.1%, in net loans receivable. Cash and Cash Equivalents. Total cash and cash equivalents increased$24.2 million , or 7.4%, to$349.1 million atDecember 31, 2021 from$325.0 million atJune 30, 2021 . This increase was primarily a result of net increases in deposits of$48.0 million and net decreases in loans of$88.1 million offset by an increase in securities available for sale of$101.0 million during the six months endedDecember 31, 2021 . Securities Available for Sale. Total securities available for sale increased$101.0 million , or 38.2%, to$365.6 million atDecember 31, 2021 from$264.6 million atJune 30, 2021 . The increase was primarily due to purchases ofU.S Government and agency obligations and municipal obligations during the six months endedDecember 31, 2021 . Securities Held to Maturity. Total securities held to maturity increased$10.9 million , or 100.5%, to$21.8 million atDecember 31, 2021 from$10.9 million atJune 30, 2021 primarily due to the purchases of corporate debt securities, as well as, purchases of other municipal obligations offset by scheduled maturities of municipal obligations during the six months endedDecember 31, 2021 . 49
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Equity Securities . Total equity securities decreased$686,000 , or 23.8%, to$2.2 million atDecember 31, 2021 from$2.9 million atJune 30, 2021 primarily due to the sale of various securities for proceeds of$803,000 offset in part by investment gains during the six months endedDecember 31, 2021 . Net Loans. Net loans of$993.7 million atDecember 31, 2021 decreased$88.1 million , or 8.1%, from$1.08 billion atJune 30, 2021 . By loan category, commercial and industrial loans decreased by$62.8 million , or 37.4%, to$105.1 million atDecember 31, 2021 from$167.9 million atJune 30, 2021 , commercial construction loans decreased by$18.9 million , or 29.2%, to$46.0 million atDecember 31, 2021 from$64.9 million atJune 30, 2021 , one-to four-family residential real estate loans decreased by$4.9 million , or 1.8%, to$274.6 million atDecember 31, 2021 from$279.5 million atJune 30, 2021 , commercial real estate loans decreased by$4.4 million , or 0.9%, to$485.7 million atDecember 31, 2021 from$490.1 million atJune 30, 2021 and consumer loans decreased$741,000 , or 2.9%, to$24.8 million atDecember 31, 2021 from$25.6 million atJune 30, 2021 . These decreases were marginally offset by an increase in home equity loans and lines of credit of$2.0 million , or 2.7%, to$77.5 million atDecember 31, 2021 from$75.5 million atJune 30, 2021 . The decrease in commercial and industrial loans was related to forgiveness of PPP loans which declined$37.4 million from$51.5 million atJune 30, 2021 to$14.1 million atDecember 31, 2021 , as well as, paydowns and reduced line of credit utilization during the six months endedDecember 31, 2021 . The decrease in commercial construction loans was related to the conversion of loans to permanent financing. The decrease in commercial real estate loans and one-to four family residential real estate loans were both related to loan payoffs outpacing loan funding. The decrease in consumer loans was related to reduced line of credit utilization. The increase in home equity loans and lines of credit was related to loan originations outpacing amortization and prepayments. Deposits. Total deposits increased$48.0 million , or 3.1%, to$1.58 billion atDecember 31, 2021 from$1.53 billion atJune 30, 2021 . The increase in deposits was primarily related to an increase in non-interest bearing demand accounts of$49.3 million , or 9.8%, to$554.2 million atDecember 31, 2021 from$504.9 million atJune 30, 2021 , an increase in savings accounts of$10.5 million , or 3.5%, to$311.3 million atDecember 31, 2021 from$300.8 million atJune 30, 2021 and an increase in interest-bearing demand accounts of$2.9 million , or 1.7%, to$178.7 million atDecember 31, 2021 from$175.8 million atJune 30, 2021 . These increases were partially offset by a decrease in certificates of deposit of$8.3 million , or 8.8%, to$86.6 million atDecember 31, 2021 from$94.9 million atJune 30, 2021 and a decrease in money market accounts of$6.4 million , or 1.4%, to$448.1 million atDecember 31, 2021 from$454.5 million atJune 30, 2021 . The increase in non-interest-bearing demand accounts and interest-bearing demand accounts was primarily related to growth in commercial deposit relationships. The increase in savings accounts was principally related to growth in existing consumer depositor accounts. The decrease in certificates of deposit was primarily due to the maturity of various accounts. The decrease in money market accounts was primarily due to routine fluctuations in municipal deposit accounts. Total Shareholders' Equity. Total shareholders' equity increased$6.2 million , or 2.6%, to$244.0 million atDecember 31, 2021 from$237.8 million atJune 30, 2021 primarily as a result from net income of$7.6 million for the six month period endedDecember 31, 2021 , offset in part by an increase in unrealized holding losses on securities available for sale of$1.7 million .
Comparison of Operating Results for the Three Months Ended
General. Net income increased by$4.4 million , or 230.1%, to$6.3 million for the three months endedDecember 31, 2021 as compared to$1.9 million for the three months endedDecember 31, 2020 . The increase was primarily due to a$4.9 million decrease in non-interest expense and a$1.6 million decrease in the provision for loan losses, partially offset by a$691,000 decrease in non-interest income, a$188,000 decrease in net interest income and a$1.3 million increase in income tax expense. Interest and Dividend Income. Interest and dividend income decreased$387,000 , or 3.4%, to$10.9 million for the three months endedDecember 31, 2021 , from$11.2 million for the three months endedDecember 31, 2020 primarily due to a decrease in interest income on loans, offset in part by increases in interest income on securities and interest-earning deposits and other. The decrease was the result of a 67 basis points decrease in the average yield on interest-earning assets to 2.50% for the three months endedDecember 31, 2021 , from 3.17% for the three months endedDecember 31, 2020 . Average interest-earning assets increased by$315.4 million from$1.42 billion for the three months endedDecember 31, 2020 to$1.74 billion for the three months
endedDecember 31, 2021 . 50 Table of Contents
Interest income on loans decreased$802,000 , or 7.4%, to$10.1 million for the three months endedDecember 31, 2021 from$10.9 million for the three months endedDecember 31, 2020 . Interest income on loans decreased primarily due to a$112.4 million decrease in the average balance of loans to$1.02 billion for the three months endedDecember 31, 2021 from$1.13 billion for the three months endedDecember 31, 2020 , partially offset by a 12 basis points increase in the average yield on loans to 4.00% for the three months endedDecember 31, 2021 from 3.88% for the three months endedDecember 31, 2020 . The decrease in the average balance of loans was due to commercial loan payoffs and forgiveness of customer PPP loans. The increase in the average yield on loans was primarily due to the recognition of deferred loan fee income associated with the forgiveness of customer PPP loans as well as the recognition of interest income related to certain non-accrual loans that paid off. Interest income on securities increased$326,000 , or 116.8%, to$605,000 for the three months endedDecember 31, 2021 from$279,000 for the three months endedDecember 31, 2020 . Interest income on securities increased due to a$234.6 million increase in the average balance of securities to$365.1 million for the three months endedDecember 31, 2021 from$130.5 million for the three months endedDecember 31, 2020 , offset by a 19 basis points decrease in the average yield on securities to 0.66% for the three months endedDecember 31, 2021 from 0.85% for the three months endedDecember 31, 2020 . The increase in the average balance of securities was due to purchases ofU.S. government and agency and municipal obligation securities outpacing maturities and sales throughout fiscal year 2021 and during the three months endedDecember 31, 2021 . The decrease in average yield on securities was due to scheduled maturities of higher yieldingU.S. government and agency and municipal obligation securities, as well as, decreased market rates of interest for new securities that were purchased during the quarter endedDecember 31, 2021 . Interest income on interest-earning deposits and other increased$89,000 , or 141.3%, to$152,000 for the three months endedDecember 31, 2021 from$63,000 for the three months endedDecember 31, 2020 . Interest income on interest-earning deposits increased due to an increase of$193.1 million in average balances on interest-earning deposits to$358.3 million for the three months endedDecember 31, 2021 from$165.2 million for the three months endedDecember 31, 2020 . Interest income on interest-earning deposits also increased due to a two basis points increase in the average yield on interest-earning deposits to 0.17% for the three months endedDecember 31, 2021 from 0.15% for the three months endedDecember 31, 2020 . Interest Expense. Interest expense decreased$199,000 , or 35.6%, to$360,000 for the three months endedDecember 31, 2021 from$559,000 for the three months endedDecember 31, 2020 as a result of a decrease in interest expense on deposits. The decrease primarily reflected a 12 basis points decrease in the average cost of interest-bearing liabilities to 0.14% for the three months endedDecember 31, 2021 from 0.26% for the three months endedDecember 31, 2020 , offset in part by a$202.1 million increase in the average balance of interest-bearing liabilities. Interest expense on interest-bearing deposits decreased$198,000 , or 36.6%, to$343,000 for the three months endedDecember 31, 2021 from$541,000 for the three months endedDecember 31, 2020 . Interest expense on interest-bearing deposits decreased primarily due to a 12 basis points decrease in the average cost of interest-bearing deposits to 0.13% for the three months endedDecember 31, 2021 from 0.25% for the three months endedDecember 31, 2020 , offset, in part, by a$201.9 million increase in the average balance of interest-bearing deposits to$1.05 billion for the three months endedDecember 31, 2021 from$850.7 million for the three months endedDecember 31, 2020 . The decrease in the average cost of deposits was a result of lower market deposit rates, as well, as repricing of certificates of deposit that have matured over the last twelve months. The increase in average interest-bearing deposits was primarily due to increases in various deposit categories throughout the calendar year, centered primarily in municipal and consumer interest-bearing deposit accounts. Net Interest Income. Net interest income decreased$188,000 , or 1.8%, to$10.5 million for the three months endedDecember 31, 2021 compared to$10.7 million for the three months endedDecember 31, 2020 . The decrease was a result of a 55 basis points decrease in the net interest rate spread to 2.36% for the three months endedDecember 31, 2021 from 2.91% for the three months endedDecember 31, 2020 . The net interest margin decreased 60 basis points to 2.41% for the three months endedDecember 31, 2021 from 3.01% for the three months endedDecember 31, 2020 , partially offset by a$113.3 million increase in the average balance of net interest-earning assets to$684.6 million for the three months endedDecember 31, 2021 from$571.3 million for the three months endedDecember 31, 2020 . 51 Table of Contents Provision for Loan Losses. No provision for loan losses was recorded for the three months endedDecember 31, 2021 compared to$1.6 million for the three months endedDecember 31, 2020 . Net charge-offs decreased to$433,000 for the three months endedDecember 31, 2021 , compared to$1.8 million for the three months endedDecember 31, 2020 . Non-performing assets increased as a dollar value yet decreased as a percentage of assets to$15.1 million , or 0.82% of total assets, atDecember 31, 2021 , compared to$14.2 million , or 0.90% of total assets, atDecember 31, 2020 . The allowance for loan losses was$22.6 million , or 2.23% of total loans outstanding, atDecember 31, 2021 and$23.4 million , or 2.06% of total net loans outstanding, atDecember 31, 2020 . Non-Interest Income. Non-interest income decreased$774,000 , or 16.4%, to$3.9 million for the three months endedDecember 31, 2021 from$4.7 million for the three months endedDecember 31, 2020 . The decrease was primarily due to a decline in net gain on equity securities to$160,000 for the three months endedDecember 31, 2021 as compared to a net gain on equity securities of$831,000 for the three months endedDecember 31, 2020 , as well as a decrease of$73,000 in bank fees and service charges offset, in part, by an increase of$123,000 in insurance and wealth management services. The lower net gain on equity securities during the three months endedDecember 31, 2021 as compared to the three months endedDecember 31, 2020 was due to general equity market performance. The decrease in bank fees and service charges was primarily due to lower loan-related fee income. The increase in income attributable to our insurance and wealth management services was primarily due to favorable market conditions related to the Company's wealth management business unit. Non-Interest Expense. Non-interest expense decreased$5.0 million , or 44.1%, to$6.4 million for the three months endedDecember 31, 2021 as compared to$11.4 million for the three months endedDecember 31, 2020 . The decrease in non-interest expense was primarily due to the recognition of employee retention credits totaling$5.0 million as well as a$229,000 decrease in professional fees and$184,000 decrease in salaries and employee benefits expense, offset in part by a$145,000 increase in data processing costs and a$162,000 increase in net occupancy and equipment. Professional fees decreased primarily due to the recognition of insurance recoveries related to the partial reimbursement of defense costs incurred as a result of the Mann Entities matter. Salaries and employee benefits expense primarily decreased due to lower net periodic pension expense. Data processing costs increased due to an increase in online and mobile banking transaction volumes, as well as, add-on services from our core processing service provider. Net occupancy and equipment costs increased due to contractual cost increases in service contracts. Income Tax Expense. Income tax expense increased$1.3 million to$1.8 million for the three months endedDecember 31, 2021 from$554,000 for the three months endedDecember 31, 2020 , due to an increase in income before income taxes. Our effective tax rate was 22.4% for the three months endedDecember 31, 2021 compared to 22.6% for the three months endedDecember 31, 2020 .
Comparison of Operating Results for the Six Months Ended
General. Net income increased by$4.3 million , or 131.5%, to$7.6 million for the six months endedDecember 31, 2021 as compared to$3.3 million for the six months endedDecember 31, 2020 . The increase was primarily due to a$5.0 million decrease in non-interest expense and a$2.1 million decrease in the provision for loan losses, partially offset by a$1.1 million decrease in non-interest income, a$303,000 decrease in net interest income and a$1.4 million increase in income tax expense. Interest and Dividend Income. Interest and dividend income decreased$836,000 , or 3.7%, to$21.5 million for the six months endedDecember 31, 2021 , from$22.3 million for the six months endedDecember 31, 2020 primarily due to a decrease in interest income on loans, offset in part by increases in interest income on securities and interest-earning deposits and other. The decrease was the result of a 68 basis points decrease in the average yield on interest-earning assets to 2.50% for the six months endedDecember 31, 2021 , from 3.18% for the six months endedDecember 31, 2020 . Average interest-earning assets increased by$313.7 million from$1.40 billion for the six months endedDecember 31, 2020 to$1.72 billion for the six months endedDecember 31, 2021 . Interest income on loans decreased$1.5 million , or 6.6%, to$20.1 million for the six months endedDecember 31, 2021 from$21.6 million for the six months endedDecember 31, 2020 . Interest income on loans decreased primarily due to a$94.0 million decrease in the average balance of loans to$1.04 billion for the six months endedDecember 31, 2021 from$1.13 billion for the six months endedDecember 31, 2020 , partially offset by a seven basis points increase in 52
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the average yield on loans to 3.87% for the six months endedDecember 31, 2021 from 3.80% for the six months endedDecember 31, 2020 . The decrease in the average balance of loans was due to commercial loan payoffs and forgiveness of customer PPP loans. The increase in the average yield on loans was primarily due to the recognition of deferred loan fee income associated with the forgiveness of customer PPP loans as well as the recognition of interest income related to certain non-accrual loans that paid off. Interest income on securities increased$426,000 , or 69.8%, to$1.0 million for the six months endedDecember 31, 2021 from$610,000 for the six months endedDecember 31, 2020 . Interest income on securities increased due to a$214.1 million increase in the average balance of securities to$325.6 million for the six months endedDecember 31, 2021 from$111.5 million for the six months endedDecember 31, 2020 , offset by a 46 basis points decrease in the average yield on securities to 0.63% for the six months endedDecember 31, 2021 from 1.09% for the six months endedDecember 31, 2020 . The increase in the average balance of securities was due to purchases ofU.S. government and agency and municipal obligation securities outpacing maturities and sales throughout fiscal year 2021 and during the six months endedDecember 31, 2021 . The decrease in average yield on securities was due to scheduled maturities of higher yieldingU.S. government and agency and municipal obligation securities, as well as, decreased market rates of interest for new securities that were purchased during the six months endedDecember 31, 2021 . Interest income on interest-earning deposits and other increased$170,000 , or 126.9%, to$304,000 for the six months endedDecember 31, 2021 from$134,000 for the six months endedDecember 31, 2020 . Interest income on interest-earning deposits increased due to an increase of$193.5 million in average balances on interest-earning deposits to$350.9 million for the six months endedDecember 31, 2021 from$157.4 million for the six months endedDecember 31, 2020 . Interest Expense. Interest expense decreased$533,000 , or 41.8%, to$741,000 for the six months endedDecember 31, 2021 from$1.3 million for the six months endedDecember 31, 2020 as a result of a decrease in interest expense on deposits. The decrease primarily reflected a 16 basis points decrease in the average cost of interest-bearing liabilities to 0.14% for the six months endedDecember 31, 2021 from 0.30% for the six months endedDecember 31, 2020 , offset in part by a$198.4 million increase in the average balance of interest-bearing liabilities. Interest expense on interest-bearing deposits decreased$526,000 , or 42.9%, to$701,000 for the six months endedDecember 31, 2021 from$1.2 million for the six months endedDecember 31, 2020 . Interest expense on interest-bearing deposits decreased primarily due to a 16 basis points decrease in the average cost of interest-bearing deposits to 0.13% for the six months endedDecember 31, 2021 from 0.29% for the six months endedDecember 31, 2020 , offset, in part, by a$198.6 million increase in the average balance of interest-bearing deposits to$1.04 billion for the six months endedDecember 31, 2021 from$843.7 million for the six months endedDecember 31, 2020 . The decrease in the average cost of deposits was a result of lower market deposit rates, as well, as repricing of certificates of deposit that have matured over the last twelve months. The increase in average interest-bearing deposits was primarily due to increases in various deposit categories throughout the calendar year, centered primarily in municipal and consumer interest-bearing deposit accounts. Net Interest Income. Net interest income decreased$303,000 , or 1.4%, to$20.7 million for the six months endedDecember 31, 2021 compared to$21.0 million for the six months endedDecember 31, 2020 . The decrease was a result of a 53 basis points decrease in the net interest rate spread to 2.35% for the six months endedDecember 31, 2021 from 2.88% for the six months endedDecember 31, 2020 . The net interest margin decreased 58 basis points to 2.41% for the six months endedDecember 31, 2021 from 2.99% for the six months endedDecember 31, 2020 , partially offset by a$115.2 million increase in the average balance of net interest-earning assets to$670.7 million for the six months endedDecember 31, 2021 from$555.5 million for the six months endedDecember 31, 2020 . Provision for Loan Losses. We recorded provisions for loan losses of$250,000 for the six months endedDecember 31, 2021 compared to$2.3 million for the six months endedDecember 31, 2020 . Net charge-offs decreased to$871,000 for the six months endedDecember 31, 2021 , compared to$1.8 million for the six months endedDecember 31, 2020 . Non-performing assets increased as a dollar value yet decreased as a percentage of assets to$15.1 million , or 0.82% of total assets, atDecember 31, 2021 , compared to$14.2 million , or 0.90% of total assets, atDecember 31, 2020 . The allowance for loan losses was$22.6 million , or 2.23% of total loans outstanding, atDecember 31, 2021 and$23.4 million , or 2.06% of total net loans outstanding, atDecember 31, 2020 . 53
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Non-Interest Income. Non-interest income decreased$1.1 million , or 13.3%, to$7.1 million for the six months endedDecember 31, 2021 from$8.3 million for the six months endedDecember 31, 2020 . The decrease was primarily due to a decline in net gain on equity securities to$118,000 for the six months endedDecember 31, 2021 as compared to a net gain on equity securities of$1.4 million for the six months endedDecember 31, 2020 , offset, in part, by an increase of$330,000 in insurance and wealth management services. The lower net gain on equity securities during the six months endedDecember 31, 2021 as compared to the six months endedDecember 31, 2020 was due to general equity market performance. The increase in income attributable to our insurance and wealth management services was primarily due to favorable market conditions related to the Company's wealth management business unit. Non-Interest Expense. Non-interest expense decreased$5.0 million , or 22.1%, to$17.8 million for the six months endedDecember 31, 2021 as compared to$22.8 million for the six months endedDecember 31, 2020 . The decrease in non-interest expense was primarily due to the recognition of employee retention credits totaling$5.0 million as well as a$398,000 decrease in professional fees and a$419,000 decrease in salaries and employee benefits expense, offset in part by a$310,000 increase in data processing costs, a$268,000 increase in net occupancy and equipment and a$380,000 increase in other expenses. Professional fees decreased primarily due to the recognition of insurance recoveries related to the partial reimbursement of defense costs incurred as a result of the Mann Entities matter. Salaries and employee benefits expense decreased primarily due to lower net periodic pension expense. Data processing costs increased due to an increase in online and mobile banking transaction volumes, as well as, add-on services from our core processing service provider. Net occupancy and equipment costs increased due to contractual cost increases in service contracts. The increase in other expenses was principally due to increased insurance premiums. Income Tax Expense. Income tax expense increased$1.4 million to$2.2 million for the six months endedDecember 31, 2021 from$857,000 for the six months endedDecember 31, 2020 , primarily due to an increase in income before income taxes. Our effective tax rate was 22.6% for the six months endedDecember 31, 2021 compared to 20.7% for the six months endedDecember 31, 2020 .
Asset Quality and Allowance for Loan Losses
Asset Quality. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable that at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on the present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and is in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair market value, less estimated costs to sell. Any excess of the recorded value of the loan over the fair market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense in the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower's financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.
Pursuant to the CARES Act and as further modified by the 2021 Appropriations Act, financial institutions have the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings for a limited
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period of time to account for the effects of COVID-19. This provision allows a
financial institution the option to not apply the guidance on accounting for
troubled debt restructurings to loan modifications, such as extensions or
deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i)
January 1, 2022 or (ii) 60 days after the end of the COVID-19 national
emergency. The relief can only be applied to modifications for borrowers that
were not more than 30 days past due as of December 31, 2019 . The Bank elected to
adopt these provisions of the CARES Act.
The table below sets forth the amounts and categories of our non-performing
assets at the dates indicated. There were no non-accruing troubled debt
restructurings as of
At At
December 31, June 30,
2021 2021
(Dollars in thousands)
Non-accrual loans:
Commercial real estate $ 6,099 $ 10,527
Commercial and industrial 24 465
Commercial construction - 550One- to four-family residential real estate 4,714
4,993
Home equity loans and lines of credit 1,792
2,043 Consumer - 187 Total non-accrual loans 12,629 18,765 Accruing loans past due 90 days or more: Commercial real estate 1,451 1,476 Commercial and industrial 278 1,525 Commercial construction - 145
One- to four-family residential real estate -
-
Home equity loans and lines of credit -
-
Consumer 27
15
Total accruing loans past due 90 days or more 1,756
3,161 Real estate owned: Commercial real estate - - Commercial and industrial - - Commercial construction 550 -
One- to four-family residential real estate 161
365
Home equity loans and lines of credit -
-
Consumer - -
Total real estate owned 711 365
Total non-performing assets$ 15,096 $
22,291
Total accruing troubled debt restructured loans $ 2,200
Total non-performing loans to total loans 1.42 % 1.99 % Total non-performing assets to total assets 0.82 %
1.24 % Non-accrual loans decreased$6.2 million to$12.6 million atDecember 31, 2021 from$18.8 million atJune 30, 2021 primarily due to two commercial real estate loans with a combined balance of$4.1 million as ofJune 30, 2021 that were paid in full during the second quarter of fiscal 2022, a commercial construction loan that was transferred to real estate owned and a commercial and industrial loan charge-off of$380,000 . Accruing loans past due 90 days or more decreased$1.4 million to$1.8 million atDecember 31, 2021 from$3.2 million atJune 30, 2021 primarily due to commercial and industrial loans that were brought current as ofDecember 31, 2021 . Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets 55
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without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as "special mention."
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
The following table sets forth our amounts of all classified loans and loans
designated as special mention as of
At At
December 31, June 30,
2021 2021
(In thousands)
Classification of Loans:
Substandard $ 60,330 $ 38,411
Doubtful 339 3,043
Loss - -
Total Classified Loans $ 60,669 $ 41,454
Special Mention $ 8,943 $ 34,860
Total substandard loans increased $21.9 million to $60.3 million at December 31,
2021 from $38.4 million at June 30, 2021 primarily due to the addition of two
commercial real estate loan relationships in the accommodation and food service
industry totaling $17.1 million and $8.0 million , offset in part by loan
payoffs.
Total doubtful loans decreased $2.7 million to $339,000 at December 31, 2021
from $3.0 million at June 30, 2021 primarily due to the payoff of a $2.1 million
commercial real estate loan and the charge-offs of three loans totaling
$509,000 .
Total special mention commercial loans decreased $26.0 million to $8.9 million
at December 31, 2021 from $34.9 million at June 30, 2021 due to $8.1 million of
loan migrations into the pass category and $8.0 million of loan migrations into
the substandard category, as well as $11.3 million of loan payoffs, partially
offset by certain loan migrations into special mention.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb probable credit
losses inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectability of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
loans that are individually classified as impaired are generally determined
based on collateral values or the present value of estimated cash flows. Because
of uncertainties associated with national and regional economic conditions,
collateral values, and future cash flows on impaired loans, including as a
result of the COVID-19 pandemic, it is reasonably possible that management's
estimate of probable credit losses inherent in the loan portfolio and the
related allowance may change materially in the near-term. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by full and partial charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision
for loan losses. Management's periodic evaluation of the adequacy of the
allowance is based on various factors, including, but not limited to, historical
loss experience, current economic conditions, delinquency statistics, geographic
and industry concentrations, the adequacy of the underlying collateral, the
financial strength of the
56
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borrower, results of internal loan reviews and other qualitative and quantitative factors which could affect potential credit losses.
In addition, theNew York State Department of Financial Services (the "NYSDFS") and theFederal Deposit Insurance Corporation periodically review our allowance for loan losses and as a result of such reviews, we may have to materially adjust our allowance for loan losses or recognize further loan charge-offs. The following table sets forth activity in our allowance for loan losses for the periods indicated. At or for the Six Months EndedDecember 31, 2021 2020 (Dollars in thousands)
Allowance at beginning of period$ 23,259
$ 22,851 Provision for loan losses 250 2,300 Charge offs: Commercial real estate 112 - Commercial and industrial 407 1,558 Commercial construction - -
One- to four-family residential real estate 305 108 Home equity loans and lines of credit 40
51
Consumer 54 110
Total charge-offs 918 1,827
Recoveries:
Commercial real estate - -
Commercial and industrial 25 59
Commercial construction 18 -One- to four-family residential real estate - - Home equity loans and lines of credit -
-
Consumer 4 10
Total recoveries 47 69
Net charge-offs 871 1,758
Allowance at end of period $ 22,638 $ 23,393 Allowance to non-performing loans 157.37 %
166.31 % Allowance to total loans outstanding at the end of the period
2.23 % 2.06 %
Net charge-offs to average loans outstanding during
the period 0.08 %(1) 0.31 %(1)
(1) Annualized.
Net charge-offs for the six months ended
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Loan Deferrals Related to COVID-19 Pandemic. The direct and indirect effects of
the COVID-19 pandemic have resulted in dramatic reductions in the level of
economic activity in the Company's market area, as well as in the national and
global economies and financial markets, and have severely hampered the ability
for certain businesses and consumers to meet their current repayment
obligations.
As of
In the table below, the residential mortgage, home equity loans and lines, and consumer loan portfolios are presented with loan deferrals as the result of the COVID-19 pandemic. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings. The loan portfolio balances and deferrals are as ofDecember 31, 2021 : Loans by Portfolio Deferrals as of December 31, 2021 December 31, 2021 Percentage of Balance Balance Loan Category (Dollars in thousands) Residential mortgages $ 274,564 $ 1,033 0.4 % Home equity loans and lines 77,531 49 0.1 % Consumer 24,827 - 0.0 % As ofDecember 31, 2021 , the Company had COVID-19 related financial hardship payment deferrals to its consumer borrowers totaling four loans representing$1.1 million of the Company's residential mortgage, home equity loans and lines of credit, and consumer loan balances. 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 consistent with their contractual obligations and the Company may be required to make additional provisions for loan losses.
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 theFederal Home Loan Bank of New York . AtDecember 31, 2021 , we had the ability to borrow up to$349.8 million , of which none was utilized for borrowings and$43.0 million was utilized as collateral for letters of credit issued to secure municipal deposits. AtDecember 31, 2021 , we also had a$20.0 million unsecured line of credit with a correspondent bank with no outstanding balance. We cannot predict what the impact of the events described in "Recent Developments - COVID-19 Pandemic and Mann Entities Related Fraudulent Activity" above may have on our Liquidity and Capital Resources beyond the second quarter of fiscal 2022. 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 ofDecember 31, 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. AtDecember 31, 2021 , cash and cash equivalents totaled$349.1 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$365.6 million atDecember 31, 2021 . 58
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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 ofDecember 31, 2021 totaled$62.4 million , or 3.95%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits andFederal 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. We are subject to various regulatory capital requirements administered by NYSDFS and theFederal Deposit Insurance Corporation . AtDecember 31, 2021 , we exceeded all applicable regulatory capital requirements, and were considered "well capitalized" under regulatory guidelines. The Bank andPioneer Commercial Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank andPioneer Commercial Bank to maintain minimum capital amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to average assets (as defined), and common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined). UnderBasel III rules, banks must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios in order to avoid limitations on distributions and certain discretionary bonus payments to executive officers. The required capital conservation buffer is 2.50%. As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a "Community Bank Leverage Ratio" (the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than$10 billion . A "qualifying community bank" that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered "well capitalized" under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. Pursuant to the CARES Act, the federal banking agencies issued rules to set the Community Bank Leverage Ratio at 8% beginning in the second calendar quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. Community banks will have untilJanuary 1, 2022 , before theCommunity Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. The Bank andPioneer Commercial Bank did not elect to become subject to the Community Bank Leverage Ratio. As ofDecember 31, 2021 , the Bank andPioneer Commercial Bank met all capital adequacy requirements to which they were subject. Further, the most recentFDIC notification categorized the Bank andPioneer Commercial Bank as well capitalized institutions under the prompt corrective action regulations. There have been no conditions or events since the notification that management believes have changed the Bank's orPioneer Commercial Bank's capital classification. 59 Table of Contents
The actual capital amounts and ratios for the Bank and
To be Well
For Capital Capitalized Under
For Capital Adequacy Purposes Prompt
Actual Adequacy Purposes with Capital Buffer Corrective Action
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Pioneer Bank :
As of December 31, 2021
Tier 1 (leverage) capital $ 183,080 9.80 % $ 74,734 4.00 % N/A N/A $ 93,417 5.00 %
Risk-based capital
Common Tier 1 $ 183,080 17.76 % $ 46,392 4.50 % $ 72,166 7.00 % $ 67,011 6.50 %
Tier 1 $ 183,080 17.76 % $ 61,857 6.00 % $ 87,630 8.50 % $ 82,475 8.00 %
Total $ 196,087 19.02 % $ 82,475 8.00 % $ 108,049 10.50 % $ 103,094 10.00 %
As of June 30, 2021
Tier 1 (leverage) capital $ 177,269 10.00 % $ 70,894 4.00 % N/A N/A $ 88,617 5.00 %
Risk-based capital
Common Tier 1 $ 177,269 16.82 % $ 47,422 4.50 % $ 73,768 7.00 % $ 68,499 6.50 %
Tier 1 $ 177,269 16.82 % $ 63,230 6.00 % $ 89,576 8.50 % $ 84,307 8.00 %
Total $ 190,566 18.08 % $ 84,307 8.00 % $ 110,652 10.50 % $ 105,383 10.00 %
To be Well
For Capital Capitalized Under
For Capital Adequacy Purposes Prompt
Actual Adequacy Purposes with Capital Buffer Corrective Action
Amount Ratio Amount
Ratio Amount Ratio Amount
Tier 1 (leverage) capital$ 33,473 7.19 %$ 18,632 4.00 % N/A N/A$ 23,290 5.00 % Risk-based capital Common Tier 1$ 33,473 41.40 %$ 3,638 4.50 %$ 5,660 7.00 %$ 5,256 6.50 % Tier 1$ 33,473 41.40 %$ 4,851 6.00 %$ 6,873 8.50 %$ 6,468 8.00 % Total$ 33,473 41.40 %$ 6,468 8.00 %$ 8,490 10.50 %$ 8,086 10.00 % As of June 30, 2021 Tier 1 (leverage) capital$ 30,966 7.53 %$ 16,442 4.00 % N/A N/A$ 20,553 5.00 % Risk-based capital Common Tier 1$ 30,966 37.65 %$ 3,702 4.50 %$ 5,758 7.00 %$ 5,347 6.50 % Tier 1$ 30,966 37.65 %$ 4,935 6.00 %$ 6,992 8.50 %$ 6,580 8.00 % Total$ 30,966 37.65 %$ 6,580 8.00 %$ 8,637 10.50 %$ 8,226 10.00 % 60 Table of Contents
Off-Balance Sheet Arrangements and Aggregate 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 statements of condition. 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. AtDecember 31, 2021 , we had$271.4 million of commitments to originate or purchase loans, comprised of$190.9 million of commitments under commercial loans and lines of credit (including$68.8 million of unadvanced portions of commercial construction loans),$58.1 million of commitments under home equity loans and lines of credit,$14.8 million of commitments to purchase one- to four-family residential real estate loans and$7.7 million of unfunded commitments under consumer lines of credit. In addition, atDecember 31, 2021 , the Company had$27.7 million in standby letters of credit outstanding. 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.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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