PIONEER BANCORP, INC. This discussion and analysis reflects our audited 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 audited consolidated financial statements that appear beginning on page 70 of this Annual Report on Form 10-K. Please read the information in this section in conjunction with the business and financial information regarding the Company, the Bank and the audited consolidated financial statements that appear starting on page 70 of this Annual Report on Form 10-K.
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 (decreased) through charges (credits) 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.
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Non-interest Income. Our primary sources of non-interest income are banking fees and service charges and, 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 Expense. 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, litigation-related expense, and other general and administrative expenses, as well as employee retention credits.
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.
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 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.
Litigation-related expense include expenses related to legal proceedings, exclusive of legal fees and expenses.
Employee retention credit is the benefit recorded related to a refundable credit against certain employment taxes as described in "Recent Developments - Employee Retention Credit."
Other expenses include expenses for office supplies, postage, telephone, insurance and other miscellaneous operating expenses.
Income Tax Expense. Our income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between the carrying amounts and the tax
basis of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amounts expected to be
realized.
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Select Financial Data
The following tables set forth selected consolidated historical financial and
other data for the Company on a consolidated basis at and for the years ended
June 30, 2022 and 2021.
At June 30,
2022 2021
(In thousands)
Selected Financial Condition Data:
Total assets $ 1,964,229 $ 1,796,252
Cash and cash equivalents 376,060 324,963
Securities available for sale 481,790 264,602
Securities held to maturity 23,952 10,878
Equity securities 2,039 2,879
Federal Home Loan Bank stock 1,091 1,215
Loans, net of allowance for loan losses 982,566 1,081,799
Bank-owned life insurance 17,165 17,212
Premises and equipment, net 37,312 38,918
Deposits 1,680,283 1,530,896
Shareholders' equity 242,627 237,822
For the Years Ended June 30,
2022 2021
(In thousands except for per share amounts)
Selected Operating Data:
Interest and dividend income $
43,842 $ 43,927
Interest expense 1,464 2,110
Net interest income 42,378 41,817
Provision for loan losses (550) 4,050
Net interest income after provision for loan losses 42,928 37,767
Noninterest income 14,074 15,750
Noninterest expense 43,664 50,857
Income before income taxes 13,338 2,660
Income tax expense 3,059 1,583
Net income 10,279 1,077
Earnings per share $ 0.41 $ 0.04
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At or For the Years Ended June 30,
2022 2021
Performance Ratios:
Return on average assets 0.54 % 0.07 %
Return on average equity 4.30 % 0.48 %
Interest rate spread (1) 2.35 % 2.69 %
Net interest margin (2) 2.41 % 2.79 %Non-interest expenses to average assets 2.31 % 3.09 % Efficiency ratio (3) 77.35 % 88.34 % Average interest-earning assets to average interest-bearing liabilities 165.40 %
166.18 %
Capital Ratios (4): Average equity to average assets 12.63 % 13.77 % Total capital to risk weighted assets 19.25 % 18.08 % Tier 1 capital to risk weighted assets 17.98 % 16.82 % Common equity tier 1 capital to risk weighted assets 17.98 % 16.82 % Tier 1 capital to average assets 9.48 % 10.00 %
Asset Quality Ratios: Allowance for loan losses as a percentage of total loans
2.04 % 2.11 %
Allowance for loan losses as a percentage of
non-performing loans 320.85 % 106.08 % Net charge-offs to average outstanding loans during the year
0.02 % 0.32 %
Non-performing loans as a percentage of total loans 0.70 % 1.99 %
Non-performing loans as a percentage of total assets 0.36 % 1.22 %
Total non-performing assets as a percentage of total
assets 0.36 % 1.24 %
Other:
Number of offices 22 22Number of full-time equivalent employees 256 245
Represents the difference between the weighted average yield on average (1) interest-earning assets and the weighted average cost of interest-bearing
liabilities for the years.
(2) Represents net interest income as a percentage of average interest-earning
assets.
(3) Represents non-interest expenses divided by the sum of net interest income
and non-interest income.
(4) Capital Ratios are for the Bank.
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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 . 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.
On March 16, 2022 , the Company, through its subsidiary, Pioneer Financial
Services, Inc. , completed the acquisition of certain assets of a practice
engaged in the wealth management services business in the Capital Region of New
York . The Company paid $165,000 in cash and recorded $130,000 in contingent
consideration payable to acquire the assets and recorded a $118,000 customer
list intangible asset and goodwill in the amount of $177,000 in conjunction with
the acquisition. The effects of the acquired assets have been included in the
consolidated financial statements since the acquisition date.
The above referenced acquisitions were made to expand the Company's wealth management services activities.
COVID-19 Pandemic
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 2023 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 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 ofJune 30, 2022 , the Bank's commercial loan portfolio included 15 PPP loans totaling$1.8 million . The Bank assisted a substantial number of its PPP borrowers with forgiveness requests during the fiscal year of 2022 and expects to assist the majority of its remaining PPP borrowers with forgiveness requests during the first fiscal quarter of 2023. As ofJune 30, 2022 , the Bank has received forgiveness or loan payoffs related to 952 borrowers' PPP loans for a total of$113.6 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. ThroughJune 30, 2022 , 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 commercial and consumer borrowers, as ofJune 30, 2022 , the Company had no COVID-19 related financial hardship payment deferrals.
Employee Retention Credit
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
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is
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 has amended certain payroll tax filings to
apply for a refund for each of the first three quarters of calendar 2021. The
Internal Revenue Service has a significant backlog of ERC refunds to process.
Taxpayers have reported waiting anywhere from ten to twelve months and in some
cases longer for their ERC refunds. The Company currently estimates that it will
receive the refunds in the third fiscal quarter of 2023.
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 year ended June 30, 2022 , 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 at June 30, 2022 .
Mann Entities Related Fraudulent Activity
During the first fiscal quarter of 2020 (the quarter endedSeptember 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 deposit balance of the various Mann Entities' accounts after the setoffs/overdraft recoveries. ThroughJune 30, 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. ThroughJune 30, 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 57
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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 years endedJune 30, 2022 and 2021, the Bank recognized insurance recoveries in the amount of$3.8 million and$1.3 million , respectively, 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".
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable diversified financial institution focused on our relationship-based model of customer engagement which we believe will result in growth through new customer acquisition, deepened existing customer relationships, and further market penetration. We are focused on growing our broad range of financial products and services for individual, business and municipal customers by continuing to expand our banking, insurance, consulting, and wealth management businesses. We distinguish ourselves by maintaining the culture of a local community bank, emphasizing an engaged workforce, creating positive community impact all while offering a full range of comprehensive financial products and services, in a consultative approach. We believe that we have a competitive advantage in the markets we serve because of our over 130-year history in the community, our knowledge of the local marketplace and our long-standing reputation for providing superior, relationship-based customer service. The following are the key elements of our business strategy: 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 seeking more relationship-based service than they receive from the larger regional banks and other financial services providers. By offering personalized relationship-based customer service, along with our extensive knowledge of our local markets and a wide range of product offerings, we believe it has allowed us to establish strong relationships with our customers. We believe we can leverage these strengths to attract and retain customers. We have embarked on a sales enablement strategy that is focused on engaging in a multidisciplinary approach to customer interaction. We have also undergone a significant rebranding effort and updated our branch layout, website and other technology infrastructure that prioritizes the customer experience. 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 strategically grow our balance sheet. Continue our emphasis on commercial customer acquisition, with a targeted focus on commercial lending. We view the growth of commercial lending, consistent with safe and sound underwriting practices, as a means of increasing our interest income and establishing relationships with local businesses. These relationships will offer a recurring and potentially broader source of fee income through commercial deposits, commercial insurance and employee benefits products and consulting. We 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. Our focus on commercial lending also has 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 to diversify our credit risk. Diversify our products and services to increase non-interest income. We continue to seek ways of increasing our customer base and 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, and grew with our acquisition in 2017 of substantially all of the operating assets ofCapital Region Strategic Employee Benefits Services, LLC , an employee benefits and consulting firm. We initially entered into the wealth management services business by establishingPioneer Financial Services, Inc. in 1997 as a wholly-owned subsidiary of the Bank (which operates under the name Pioneer Wealth Management). We substantially grew this business with the acquisition of substantially all of the operating assets ofWard Financial Management, LTD in 2018, and further expanded this business with the acquisition of substantially all of the operating assets of three wealth management practices in fiscal 2022 (see "Recent Developments - Acquisitions"). AtJune 30, 2022 ,Pioneer Financial Services, Inc. 58 Table of Contents had$690.8 million of assets under management. We believe that there will be opportunities to cross-sell these products to our deposit and borrower customers which may further increase our non-interest income, and also to cross-sell our banking services and products to customers and clients ofAnchor Agency, Inc. andPioneer Financial Services, Inc. We intend to consider future acquisition opportunities to expand our insurance, wealth 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 individuals, businesses and municipalities 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$578.5 million to$1.6 billion atJune 30, 2022 from$1.0 billion atJune 30, 2018 . AtJune 30, 2022 , core deposits comprised 95.2% 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. Continue to focus on our commitment to an engaged workforce. We continue to focus on ways to further enhance the employee engagement of our team. We seek to retain our position as an employer of choice for top talent in the Capital Region through a focus on career and leadership development opportunities, and attention to providing a robust and competitive benefits package for our employees. We do this through the lens of an inclusive and diverse workforce. We provide opportunities for our employees to engage in meaningful ways in the community and will enhance this engagement through the philanthropic efforts of thePioneer Bank Charitable Foundation .
Critical Accounting Policies and Estimates
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 and estimates discussed below to be critical accounting policies and estimates. 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 continue 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 and estimates:
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
estimate 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
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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.
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, including our interactions with various regulatory agencies with supervisory authority over us, 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 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. AtJune 30, 2022 and 2021, no valuation allowance was required. 60 Table of Contents 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.Investment Securities . Available-for-sale and held-to-maturity debt 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 beforeSeptember 1, 2019 . The benefits are developed from actuarial valuations and are based on the employee's years of service and compensation. Actuarial assumptions such as interest rates, expected return on plan assets, turnover, mortality and rates of future compensation increases have a significant impact on the costs, assets and liabilities of the plan. Pension expense is the net of service cost, interest cost, return on plan assets and amortization of gains and losses not immediately recognized.Goodwill and Intangible Assets. The excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, is recorded as goodwill.Goodwill is carried at its acquired value and is reviewed annually for impairment, or when events or changes in circumstances indicate that carrying amounts may be impaired. Acquired identifiable intangible assets that have finite lives are amortized over their useful economic life. Customer relationship intangibles are generally amortized over fifteen years based upon the projected discounted cash flows of the accounts acquired. Core deposit premium related to the Bank's assumption of certain deposit liabilities is being amortized over fifteen years. Acquired identifiable intangible assets that are amortized are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts
may
be impaired.
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Average Balances and Yields
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,
2022 2021
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,012,125 $ 39,557 3.91 % $ 1,127,282 $ 42,394 3.76 %
Securities 381,685 2,954 0.77 % 155,946 1,218 0.78 %
Interest-earning deposits 367,509 1,331 0.36 % 217,957 315 0.14 %
Total interest-earning assets 1,761,319 43,842 2.49 % 1,501,185 43,927 2.93 %
Non-interest-earning assets 131,794 143,397
Total assets $ 1,893,113 $ 1,644,582
Interest-bearing liabilities:
Demand deposits $ 196,450 252 0.13 % $ 151,211 181 0.12 %
Savings deposits 312,177 103 0.03 % 275,095 125 0.05 %
Money market deposits 465,603 385 0.08 % 370,506 519 0.14 %
Certificates of deposit 86,770 627 0.72 % 102,628 1,201 1.17 %Total interest-bearing deposits 1,061,000 1,367 0.13
% 899,440 2,026 0.23 % Borrowings and other 3,867 97 2.51 % 3,890 84 2.16 % Total interest-bearing liabilities 1,064,867 1,464 0.14 % 903,330 2,110 0.23 %
Non-interest-bearing deposits 567,286
492,035
Other non interest-bearing
liabilities 21,870 22,801
Total liabilities 1,654,023 1,418,166
Total shareholders' equity 239,090 226,416
Total liabilities and
shareholders' equity $ 1,893,113 $ 1,644,582
Net interest income $ 42,378 $ 41,817
Net interest rate spread (1) 2.35 % 2.69 %
Net interest-earning assets (2) $ 696,452 $ 597,855
Net interest margin (3) 2.41 % 2.79 %
Average interest-earning assets
to interest-bearing liabilities 165.40 % 166.18 %
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.
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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our
net interest income for the years indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior two columns. For purposes of this table, changes attributable to both rate
and volume, which cannot be segregated, have been allocated proportionately
based on the changes due to rate and the changes due to volume.
Year Ended June 30,
2022 vs. 2021
Total
Increase (Decrease) Due to Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ (4,454) $ 1,617 $ (2,837)
Securities 1,747 (11) 1,736
Interest-earning deposits 318 698 1,016
Total interest-earning assets (2,389) 2,304 (85)
Interest-bearing liabilities:
Demand deposits 57 14 71
Savings deposits 15 (37) (22)
Money market deposits 112 (246) (134)
Certificates of deposit (165) (409) (574)Total interest-bearing deposits 19 (678)
(659)
Borrowings and other - 13
13
Total interest-bearing liabilities 19 (665)
(646)
Change in net interest income $ (2,408) $ 2,969 $ 561 Comparison of Financial Condition at
Total Assets. Total assets increased$168.0 million , or 9.4%, to$1.96 billion atJune 30, 2022 from$1.80 billion atJune 30, 2021 . The increase was due primarily to an increase of$217.2 million , or 82.1%, in securities available for sale as well as a$51.1 million , or 15.7%, increase in cash and cash equivalents partially offset by a decrease of$99.2 million , or 9.2%, in net loans receivable and a decrease of$14.3 million , or 35.1%, in other assets. The$14.3 million decrease in other assets from$40.6 million atJune 30, 2021 to$26.3 million atJune 30, 2022 was primarily due to a decrease in the estimated fair value of derivative assets related to interest rate swaps. Cash and Cash Equivalents. Total cash and cash equivalents increased$51.1 million , or 15.7%, to$376.1 million atJune 30, 2022 from$325.0 million atJune 30, 2021 . This increase primarily resulted from net increases in deposits of$149.4 million from$1.5 billion atJune 30, 2021 to$1.7 billion atJune 30, 2022 primarily due to deposit customers continuing to increase cash balances during the COVID-19 pandemic, as well as, federal stimulus funds being received by municipal deposit customers. Securities Available for Sale. Total securities available for sale increased$217.2 million , or 82.1%, to$481.8 million atJune 30, 2022 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 year endedJune 30, 2022 to deploy excess liquidity and to collateralize an increase in municipal deposits. Securities Held to Maturity. Total securities held to maturity increased$13.1 million , or 120.2%, to$24.0 million atJune 30, 2022 from$10.9 million atJune 30, 2021 primarily due to the purchase of$13.0 million of corporate debt securities to deploy excess liquidity. 63
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Net Loans. Net loans of$982.6 million atJune 30, 2022 decreased$99.2 million , or 9.2%, from$1.08 billion atJune 30, 2021 . By loan category, commercial and industrial loans decreased by$64.7 million , or 38.5%, to$103.2 million atJune 30, 2022 from$167.9 million atJune 30, 2021 ; commercial real estate loans decreased$36.6 million , or 7.5%, to$453.5 million atJune 30, 2022 from$490.1 million atJune 30, 2021 ; one- to four-family residential real estate loans decreased$9.2 million , or 3.3%, to$270.3 million atJune 30, 2022 from$279.5 million atJune 30, 2021 and consumer loans decreased$3.3 million , or 12.8%, to$22.3 million atJune 30, 2022 from$25.6 million atJune 30, 2021 . These decreases were partially offset by an increase in commercial construction loans of$6.2 million , or 9.5%, to$71.1 million atJune 30, 2022 from$64.9 million atJune 30, 2021 and an increase in home equity loans and lines of credit of$5.7 million , or 7.6%, to$81.2 million atJune 30, 2022 from$75.5 million atJune 30, 2021 . The decrease in commercial and industrial loans was primarily due to the forgiveness and repayment of PPP loans during the year endedJune 30, 2022 , as well as, various pay downs and payoffs. Commercial and industrial loans included PPP loans of$1.8 million as ofJune 30, 2022 , representing a decrease of$49.7 million from$51.5 million as ofJune 30, 2021 . The decrease in commercial real estate loans and one- to four-family residential real estate loans were both related to loan payoffs outpacing loan originations. The decrease in consumer loans was related to reduced line of credit utilization. The increase in commercial construction loans was due to funding of increased construction commitments. The increase in home equity loans and lines of credit was related to loan originations outpacing amortization and prepayments. Deposits. Total deposits increased$149.4 million , or 9.8%, to$1.68 billion atJune 30, 2022 from$1.53 billion atJune 30, 2021 . The increase in deposits reflected an increase in non-interest-bearing demand accounts of$88.6 million , or 17.5%, to$593.5 million atJune 30, 2022 from$504.9 million atJune 30, 2021 ; money market accounts of$42.7 million , or 9.4%, to$497.2 million atJune 30, 2022 from$454.5 million atJune 30, 2021 ; an increase in savings accounts of$25.5 million , or 8.5%, to$326.3 million atJune 30, 2022 from$300.8 million atJune 30, 2021 and an increase in interest-bearing demand accounts of$7.0 million , or 4.0%, to$182.8 million atJune 30, 2022 from$175.8 million atJune 30, 2021 . These increases were partially offset by a decrease in certificates of deposit of$14.3 million , or 15.1%, to$80.6 million atJune 30, 2022 from$94.9 million atJune 30, 2021 . The increase in non-interest-bearing demand accounts, interest-bearing demand accounts and money market accounts was primarily related to growth in municipal deposits and 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. Total Shareholders' Equity. Total shareholders' equity increased$4.8 million , or 2.0%, to$242.6 million atJune 30, 2022 from$237.8 million atJune 30, 2021 . The increase was principally due to an increase in retained earnings of$10.3 million and increases in the unallocated common stock of the ESOP of$683,000 partially offset by an increase in accumulated other comprehensive loss of$6.1 million primarily due to an increase in unrealized holding losses on our available for sale securities portfolio as a result of the increase in market rates partially offset by changes in our defined benefit plan.
Comparison of Operating Results for the Years Ended
General. Net income increased by$9.2 million , or 854.4%, to$10.3 million for the year endedJune 30, 2022 from$1.1 million for the year endedJune 30, 2021 . The increase was primarily due to a$7.2 million decrease in non-interest expense, a$4.6 million decrease in the provision for loan losses and a$561,000 increase in net interest income, partially offset by a$1.7 million decrease in non-interest income and a$1.5 million increase in income tax expense. Interest and Dividend Income. Interest and dividend income decreased$85,000 , or 0.2%, to$43.8 million for the year endedJune 30, 2022 , from$43.9 million for the year endedJune 30, 2021 due to a decrease in interest income on loans, partially offset by increases in interest income on securities and interest-earning deposits. The decrease was primarily due to a change in the interest earning asset mix as the average balance of securities and interest-earning deposits increased which resulted in a decrease in the average yield on interest-earning assets to 2.49% for the year endedJune 30, 2022 , from 2.93% for the year endedJune 30, 2021 , despite an increase in the average balance of interest-earning assets of$260.1 million during the year endedJune 30, 2022 as compared to the prior year. Interest income on loans decreased$2.8 million , or 6.7%, to$39.6 million for the year endedJune 30, 2022 from$42.4 million for the year endedJune 30, 2021 . Interest income on loans decreased primarily due to a$115.2 million decrease in the average balance of loans to$1.01 billion for the year endedJune 30, 2022 from$1.13 billion for the year 64
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endedJune 30, 2021 , partially offset by a 15 basis points increase in the average yield on loans to 3.91% for the year endedJune 30, 2022 from 3.76% for the year endedJune 30, 2021 . The decrease in average balance of loans was primarily due to PPP loan forgiveness and prepayments of commercial real estate loans. The increase in the average yield on loans was primarily due to the upward adjustment of interest rates on our existing adjustable-rate loans following the actions taken by theFederal Reserve Board to increase short-term interest rates, as well as the accelerated recognition of PPP loan fees. Interest income on securities increased$1.7 million , or 142.5%, to$2.9 million for the year endedJune 30, 2022 from$1.2 million for the year endedJune 30, 2021 . Interest income on securities increased primarily due to an increase in the average balance of securities of$225.8 million to$381.7 million for the year endedJune 30, 2022 from$155.9 million for the year endedJune 30, 2021 , marginally offset by a one basis point decrease in the average yield on securities to 0.77% for the year endedJune 30, 2022 from 0.78% for the year endedJune 30, 2021 . The increase in the average balance of securities was due to increased purchases ofU.S. government and agency and municipal obligation securities during the year endedJune 30, 2022 as compared to the year endedJune 30, 2021 . Interest income on interest-earning deposits increased$1.0 million , or 322.5%, to$1.3 million for the year endedJune 30, 2022 from$315,000 for the year endedJune 30, 2021 . Interest income on interest-earning deposits increased due to a 22 basis points increase in the average yield on interest-earning deposits to 0.36% for the year endedJune 30, 2022 from 0.14% for the year endedJune 30, 2021 as market interest rates increased, as well as an increase in the average balance of interest-earning deposits to$367.5 million for the year endedJune 30, 2022 from$218.0 million for the year endedJune 30, 2021 , as management favored maintaining increased levels of cash and cash equivalents during the COVID-19 pandemic. Interest Expense. Interest expense decreased$646,000 , or 30.6%, to$1.5 million for the year endedJune 30, 2022 from$2.1 million for the year endedJune 30, 2021 as a result of a decrease in interest expense on deposits. The decrease primarily reflected a nine basis points decrease in the average cost of interest-bearing liabilities to 0.14% for the year endedJune 30, 2022 from 0.23% for the year endedJune 30, 2021 , offset in part by a$161.6 million increase in the average balance of interest-bearing liabilities. Interest expense on interest-bearing deposits decreased$659,000 , or 32.5%, to$1.4 million for the year endedJune 30, 2022 from$2.0 million for the year endedJune 30, 2021 . Interest expense on interest-bearing deposits decreased primarily due to a 10 basis points decrease in the average cost of interest-bearing deposits to 0.13% for the year endedJune 30, 2022 from 0.23% for the prior year, offset in part by a$161.6 million increase in the average balance of deposits to$1.06 billion for the year endedJune 30, 2022 from$899.4 million for the year endedJune 30, 2021 . 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 during the year endedJune 30, 2022 as compared to the prior year, centered primarily in municipal and commercial interest-bearing deposit accounts. Net Interest Income. Net interest income increased$561,000 , or 1.3%, to$42.4 million for the year endedJune 30, 2022 compared to$41.8 million for the year endedJune 30, 2021 . The increase was a result of a$98.6 million increase in the average balance of net interest-earning assets to$696.5 million for the year endedJune 30, 2022 from$597.9 million for the year endedJune 30, 2021 , offset by a 34 basis points decrease in the net interest rate spread to 2.35% for the year endedJune 30, 2022 from 2.69% for the year endedJune 30, 2021 . The net interest margin decreased 38 basis points to 2.41% for the year endedJune 30, 2022 from 2.79% for the year endedJune 30, 2021 . Provision for Loan Losses. We recorded a credit to the provision of$550,000 for the year endedJune 30, 2022 , a decrease of$4.6 million as compared to the year endedJune 30, 2021 . The credit to the provision was mainly attributable to a decrease in net charge-offs and improving credit trends for the year endedJune 30, 2022 as compared to the year endedJune 30, 2021 . Net charge-offs decreased to$185,000 for the year endedJune 30, 2022 , compared to$3.6 million for the year endedJune 30, 2021 . Net charge-offs for the year endedJune 30, 2022 included charge-offs in the various loan categories totaling$1.1 million which were largely offset by recoveries of$930,000 , including a partial recovery in the amount of$825,000 related to a commercial and industrial loan that was charged-off during the year endedJune 30, 2021 . Non-performing assets decreased to$7.0 million , or 0.36% of total assets, atJune 30, 2022 , compared to$22.3 65 Table of Contents
million, or 1.24% of total assets, at
Non-Interest Income. Non-interest income decreased$1.7 million , or 10.6%, to$14.1 million for the year endedJune 30, 2022 from$15.8 million for the year endedJune 30, 2021 . The decrease was primarily due to a$1.9 million decrease in the net gain / (loss) on equity securities, offset in part by a$263,000 increase in net gains on disposal of assets. The losses on equity securities during the year endedJune 30, 2022 as compared to gains during the year endedJune 30, 2021 were due to declining equity market performance. The net gain on the disposal of assets was related to the sale of other real estate owned. Non-Interest Expense. Non-interest expense decreased$7.2 million , or 14.1%, to$43.7 million for the year endedJune 30, 2022 from$50.9 million for the year endedJune 30, 2021 . The decrease in non-interest expense was primarily due to the recognition of employee retention credits totaling$5.0 million as well as a$3.3 million decrease in litigation-related expense (see Item 3 - "Legal Proceedings," section) offset in part by a$790,000 increase in net occupancy and equipment and a$394,000 increase in insurance premiums. Net occupancy and equipment costs primarily increased due to contractual cost increases in service contracts. The increase in insurance premiums was principally due to increases in annual insurance renewals. Income Tax Expense. Income tax expense increased$1.5 million to$3.1 million for the year endedJune 30, 2022 from$1.6 million for the year endedJune 30, 2021 and resulted in an effective tax rate of 22.9% for the year endedJune 30, 2022 compared to 59.5% for the year endedJune 30, 2021 . The decrease in our effective tax rate for 2022 was primarily due to the inclusion of non-deductible expenses in net income for the year endedJune 30, 2021 . Income tax expense increased as a result of an increase in income before income taxes.
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 . AtJune 30, 2022 , we had the ability to borrow up to$313.6 million , of which none was utilized for borrowings and$32.0 million was utilized as collateral for letters of credit issued to secure municipal deposits. AtJune 30, 2022 , we had a$20.0 million unsecured line of credit with a correspondent bank with no outstanding balance. We cannot accurately predict what the impact of the events described in "Recent Developments - COVID-19 Pandemic and Mann Entities Related Fraudulent Activity" above and in the "Legal Proceedings" section may have on our liquidity and capital resources. For example, costs associated with potentially prosecuting, litigating or settling any litigation, satisfying any adverse judgments, if any, or other regulatory proceedings, could be significant. We continue to monitor these matters for further developments that could affect the amount of the accrued liability that has been established. Excluding legal fees and expenses, litigation-related expense of$1.2 million and$4.5 million was recognized for the year endedJune 30, 2022 and 2021, respectively. See Item 3 - "Legal Proceedings" section. For those matters for which a loss is reasonably possible and estimable, whether in excess of an accrued liability or where there is no accrued liability, the Company's estimated range of possible loss is$0 to$51.3 million in excess of the accrued liability, if any, as ofJune 30, 2022 . 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. 66
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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 ofJune 30, 2022 . 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. AtJune 30, 2022 , cash and cash equivalents totaled$376.1 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$481.8 million atJune 30, 2022 . 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 ofJune 30, 2022 totaled$56.8 million , or 3.4%, 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. The Bank is subject to various regulatory capital
requirements administered by NYSDFS and the
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 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. AtJune 30, 2022 , we had$279.9 million of commitments to originate loans, comprised of$158.8 million of commitments under commercial loans and lines of credit (including$57.2 million of unadvanced portions of commercial construction loans),$61.6 million of commitments under home equity loans and lines of credit,$51.9 million of commitments to purchase one- to four-family residential real estate loans and$7.6 million of unfunded commitments under consumer lines of credit. In addition, atJune 30, 2022 , we had$30.2 million in standby letters of credit outstanding. See Note 15 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 Pronouncements
Please refer to Note 2 in the Notes to the consolidated financial statements that appear starting on page 75 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 Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires the measurement of financial position and
operating results in terms of historical dollars without considering
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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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