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:
changes in market interest rates due to economic conditions or other factors
and/or the fiscal and monetary policy measures undertaken by
? government in response to such economic conditions, which may adversely impact
interest rates, the interest rate yield curve, interest margins, loan demand
and interest rate sensitivity;
? risks related to the variety of litigation and other proceedings described in
the "Legal Proceedings" section;
general economic conditions, either locally, regionally, or nationally,
? including flat economic growth or recession, volatility and/or lack of
liquidity in capital markets, added volatility to the global stock markets, and
increased loan delinquencies and defaults;
? the effects of inflationary pressures and the impact of rising interest rates
on borrowers' liquidity and ability to repay;
risks and uncertainties related to the Coronavirus Disease 2019 ("COVID-19")
? pandemic and resulting governmental and societal response, added volatility to
the global stock markets, and increased loan delinquencies and defaults; competition within our market area from both financial institutions or
non-financial institutions, including product and pricing pressures, which can
? in turn impact the Company's credit spreads, changes to third-party
relationships and revenues, changes in the manner of providing services,
customer acquisition and retention pressures, and the Company's ability to
attract, develop and retain qualified professionals;
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? 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 continue to implement our business strategies;
? 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;
? 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;
? risks and uncertainties related to the restatement of certain of our historical
consolidated financial statements;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the
Oversight Board;
? our ability to attract and 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;
? the potential deterioration of the
other shocks; 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, 2022 , 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 (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.
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, loans or other assets
and other income.
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Non-Interest Expense. Our non-interest expenses consist of salaries and employee
benefits, net occupancy and equipment, data processing, advertising and
marketing, insurance premiums, federal deposit insurance premiums, professional
fees 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.
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.
Insurance premiums include expense related to various insurance policies, excluding federal deposit insurance premiums.
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 - Employee Retention Credit."
Other expenses include expenses for professional services, office supplies, postage, telephone 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. Recent Developments Acquisitions OnDecember 10, 2021 andDecember 22, 2021 , 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 theCapital Region ofNew 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. During the six months endedDecember 31, 2022 , contingent consideration of$124,000 was paid. The effects of the acquired assets have been included in the consolidated financial statements since the respective acquisition dates. OnMarch 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 theCapital Region ofNew 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
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the acquisition. During the six months ended
The above referenced acquisitions were made to expand the Company's wealth management services activities.
Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security Act (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 has amended certain payroll tax filings to
apply for a refund for each of the first three quarters of calendar 2021.
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 ended December 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 at
December 31, 2022 . 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.
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. Through the end of the second fiscal quarter of 2023, no additional charges to non-interest expense were recognized related to the deposit transactions with the Mann Entities. 43
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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 2023, 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 similar legal, regulatory, governmental or other proceedings and additional liabilities. The ultimate timing and outcome of any such proceedings, involving the Company, or the Bank, cannot be predicted with any certainty. It also remains possible that other private parties or governmental bodies will pursue existing or additional claims against the Bank as a result of the Bank's dealings with certain of the Mann Entities or as a result of the actions taken by the Company or the Bank. The Company's and the Bank's legal fees and expenses related to these actions are significant and are expected to continue being significant. In addition, costs associated with potentially prosecuting, litigating or settling any litigation, satisfying any adverse judgments, if any, or other proceedings, could be significant. These legal, regulatory, governmental and other proceedings, claims or investigations, costs, settlements, judgments, sanctions or other expenses could have a material adverse effect on the Company's business prospects, financial condition, results of operations or cash flows or cause significant reputational harm and subject the Company to face civil litigation, significant fines, damage awards or other material regulatory consequences. 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, 2022 and 2021, the Bank recognized insurance recoveries in the amount of$1.5 million and$2.2 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, see, "Part II, Item 1 - Legal Proceedings".
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 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 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
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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 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 will
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.
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
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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. 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. 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. 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.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 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
2022 2021
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield/Cost
Balance Interest (4) Balance Interest (4)
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,035,604 $ 13,506 5.28 % $ 1,017,128 $ 10,094 4.00 %
Securities 543,438 2,523 1.85 % 365,147 605 0.66 % Interest-earning deposits and other
213,257 1,950 3.68 % 358,345 152 0.17 % Total interest-earning assets
1,792,299 17,979 4.04 % 1,740,620 10,851 2.50 %
Non-interest-earning assets 155,259 133,932
Total assets $ 1,947,558 $ 1,874,552
Interest-bearing liabilities:
Demand deposits $ 180,138 $ 169 0.37 % $ 187,082 $ 59 0.13 %
Savings deposits 319,966 26 0.03 % 307,444 26 0.03 %
Money market deposits 444,181 353 0.32 % 469,545 96 0.08 %
Certificates of deposit 66,693 84 0.50 % 88,575 162 0.73 % Total interest-bearing deposits
1,010,978 632 0.25 % 1,052,646 343 0.13 %
Borrowings and other 25,980 212 3.28 % 3,424 17 1.98 %
Total interest-bearing liabilities 1,036,958 844 0.32 % 1,056,070 360 0.14 % Non-interest-bearing deposits
621,060 559,541
Other non-interest-bearing liabilities 44,179
19,978
Total liabilities 1,702,197 1,635,589
Total shareholders' equity 245,361 238,963
Total liabilities and shareholders'
equity $ 1,947,558 $ 1,874,552
Net interest income $ 17,135 $ 10,491
Net interest rate spread (1) 3.72 % 2.36 %Net interest-earning assets (2)$ 755,341 $ 684,550 Net interest margin (3) 3.85 % 2.41 % Average interest-earning assets to interest-bearing liabilities 172.84 % 164.82 %
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,
2022 2021
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield/Cost
Balance Interest (4) Balance Interest (4)
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,019,730 $ 25,018 4.93 % $ 1,040,783 $ 20,128 3.87 %
Securities 530,564 4,457 1.67 % 325,590 1,036 0.63 % Interest-earning deposits and other
259,168 3,695 2.85 % 350,891 304 0.17 % Total interest-earning assets
1,809,462 33,170 3.67 % 1,717,264 21,468 2.50 %
Non-interest-earning assets 148,969 137,244
Total assets $ 1,958,431 $ 1,854,508
Interest-bearing liabilities:
Demand deposits $ 188,757 $ 311 0.33 % $ 183,545 $ 118 0.13 %
Savings deposits 322,296 53 0.03 % 305,170 51 0.03 %
Money market deposits 455,945 501 0.22 % 463,136 191 0.08 %
Certificates of deposit 69,617 173 0.49 % 90,472 341 0.75 % Total interest-bearing deposits
1,036,615 1,038 0.20 % 1,042,323 701 0.13 %
Borrowings and other 22,245 324 2.91 % 4,242 40 1.88 %
Total interest-bearing liabilities 1,058,860 1,362 0.26 % 1,046,565 741 0.14 % Non-interest-bearing deposits 614,423 550,136 Other non-interest-bearing liabilities 40,194 19,190 Total liabilities 1,713,477 1,615,891 Total shareholders' equity 244,954 238,617 Total liabilities and shareholders' equity$ 1,958,431 $ 1,854,508 Net interest income$ 31,808 $ 20,727 Net interest rate spread (1) 3.41 % 2.35 % Net interest-earning assets (2)$ 750,602 $ 670,699 Net interest margin (3) 3.52 % 2.41 % Average interest-earning assets to interest-bearing liabilities 170.89 % 164.09 %
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,
2022 vs. 2021 2022 vs. 2021
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 $ 183 $ 3,229
407 1,511 1,918 946 2,475 3,421
Interest-earning deposits and other (86) 1,884 1,798 (99) 3,490 3,391
Total interest-earning assets 504 6,624 7,128 427 11,275 11,702
Interest-bearing liabilities:
Demand deposits (2) 112 110 3 190 193
Savings deposits 1 (1) - 3 (1) 2
Money market deposits (5) 262 257 (3) 313 310
Certificates of deposit (34) (44) (78) (68) (100) (168)Total interest-bearing deposits (40) 329 289 (65) 402 337 Borrowings and other 177 18 195 251 33 284 Total interest-bearing liabilities 137 347 484 186 435 621 Change in net interest income$ 367 $ 6,277
Comparison of Financial Condition at
Total Assets. Total assets decreased$129.7 million , or 6.6%, to$1.83 billion atDecember 31, 2022 from$1.96 billion atJune 30, 2022 . The decrease was due primarily to a decrease of$228.7 million , or 60.8%, in cash and cash equivalents, offset in part by an increase of$65.5 million , or 6.7%, in net loans receivable and an increase of$25.8 million , or 5.4% in securities available for sale. Cash and Cash Equivalents. Total cash and cash equivalents decreased$228.7 million , or 60.8%, to$147.3 million atDecember 31, 2022 from$376.1 million atJune 30, 2022 . This decrease was primarily a result of a net decrease in deposits of$141.9 million coupled with an increase in net loans receivable of$65.5 million and an increase in securities available for sale of$25.8 million during the six months endedDecember 31, 2022 . Securities Available for Sale. Total securities available for sale increased$25.8 million , or 5.4%, to$507.6 million atDecember 31, 2022 from$481.8 million atJune 30, 2022 . The increase was primarily due to purchases ofU.S Government and agency obligations during the six months endedDecember 31, 2022 . Net Loans. Net loans of$1.05 billion atDecember 31, 2022 increased$65.5 million , or 6.7%, from$982.6 million atJune 30, 2022 . By loan category, residential mortgage loans increased by$82.4 million , or 30.5%, to$352.7 million atDecember 31, 2022 from$270.3 million atJune 30, 2022 , commercial construction loans increased by$12.9 million , or 18.1%, to$84.0 million atDecember 31, 2022 from$71.1 million atJune 30, 2022 , and home equity loans and lines of credit increased by$5.6 million , or 6.8%, to$86.8 million atDecember 31, 2022 from$81.2 million atJune 30, 2022 . These increases were partially offset by a decrease in commercial real estate loans of$30.9 million , or 6.8%, to$422.6 million atDecember 31, 2022 from$453.5 million atJune 30, 2022 , a decrease in consumer loans of$3.6 million , or 16.2%, to$18.7 million atDecember 31, 2022 from$22.3 million atJune 30, 2022 , and a decrease in commercial and industrial loans of$2.6 million , or 2.5%, to$100.6 million atDecember 31, 2022 from$103.2 million atJune 30, 2022 . The increase in residential mortgage loans and home equity loans and lines of credit were both related to loan funding outpacing loan payoffs. The increase in commercial construction loans was related to the funding of loan commitments which outpaced payoffs and conversion of loans to permanent financing. The decrease in commercial real estate loans was 49
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due to elevated loan prepayments. The decrease in consumer loans was primarily related to reduced line of credit utilization during the six months endedDecember 31, 2022 . The decrease in commercial and industrial loans was primarily related to forgiveness of PPP loans which declined$1.6 million from$1.8 million atJune 30, 2022 to$180,000 atDecember 31, 2022 . Deposits. Total deposits decreased$141.9 million , or 8.4%, to$1.54 billion atDecember 31, 2022 from$1.68 billion atJune 30, 2022 . The decrease in deposits was primarily related to a decrease in money market accounts of$79.8 million , or 16.0%, to$417.4 million atDecember 31, 2022 from$497.2 million atJune 30, 2022 , a decrease in demand accounts of$24.1 million , or 13.2%, to$158.7 million atDecember 31, 2022 from$182.8 million atJune 30, 2022 , a decrease in certificates of deposit of$16.6 million , or 20.6%, to$64.0 million atDecember 31, 2022 from$80.6 million atJune 30, 2022 , a decrease in non-interest bearing demand accounts of$13.8 million , or 2.3%, to$579.7 million atDecember 31, 2022 from$593.5 million atJune 30, 2022 , and a decrease in savings accounts of$7.7 million , or 2.4%, to$318.6 million atDecember 31, 2022 from$326.3 million atJune 30, 2022 . The decrease in deposits was primarily concentrated in certain larger and more rate-sensitive accounts. The effects of theFederal Reserve Board's rapidly tightening monetary policy, inflation, and higher rate alternatives continued to have an impact on deposit balances. Total Shareholders' Equity. Total shareholders' equity increased$7.1 million , or 2.9%, to$249.7 million atDecember 31, 2022 from$242.6 million atJune 30, 2022 primarily as a result of net income of$11.4 million for the six month period endedDecember 31, 2022 , partially offset by an increase in unrealized holding losses on securities available for sale of$4.6 million due to the increase in market interest rates.
Comparison of Operating Results for the Three Months Ended
General. Net income decreased by$74,000 , or 1.2%, to$6.2 million for the three months endedDecember 31, 2022 as compared to$6.3 million for the three months endedDecember 31, 2021 . The decrease was primarily due to a$7.1 million increase in non-interest expense, largely offset by a$6.6 million increase in net interest income and a$400,000 decrease in the provision for loan losses. Interest and Dividend Income. Interest and dividend income increased$7.1 million , or 65.7%, to$18.0 million for the three months endedDecember 31, 2022 , from$10.9 million for the three months endedDecember 31, 2021 due to increases in interest income on loans, securities, and interest-earning deposits and other. The increase was the result of a 154 basis points increase in the average yield on interest-earning assets to 4.04% for the three months endedDecember 31, 2022 , from 2.50% for the three months endedDecember 31, 2021 . The increase in the average yield on interest-earning assets was driven by a significant increase in variable rate loan yields and yields on interest-earning deposits with banks due to rising market interest rates, as well as due to market related increases in interest rates on new loans and securities. Average interest-earning assets also increased by$51.7 million from$1.74 billion for the three months endedDecember 31, 2021 to$1.79 billion for the three months endedDecember 31, 2022 . Interest income on loans increased$3.4 million , or 33.8%, to$13.5 million for the three months endedDecember 31, 2022 from$10.1 million for the three months endedDecember 31, 2021 . Interest income on loans increased due to a 128 basis points increase in the average yield on loans to 5.28% for the three months endedDecember 31, 2022 from 4.00% for the three months endedDecember 31, 2022 and a$18.5 million increase in the average balance of loans to$1.04 billion for the three months endedDecember 31, 2022 from$1.02 billion for the three months endedDecember 31, 2021 . The increase in average yield on loans was primarily due to loans tied to variable short-term rates which increased significantly during the three months endedDecember 31, 2022 as compared to the same period in the prior year, offset in part by a$613,000 decrease in PPP loan related interest income to$1,000 for the three months endedDecember 31, 2022 from$614,000 for the three months endedDecember 31, 2021 . The increase in the average balance of loans was principally due to purchases of residential mortgage loans. Interest income on securities increased$1.9 million , or 317.0%, to$2.5 million for the three months endedDecember 31, 2022 from$605,000 for the three months endedDecember 31, 2021 . Interest income on securities increased due to a 119 basis points increase in the average yield on securities to 1.85% for the three months endedDecember 31, 2022 from 0.66% for the three months endedDecember 31, 2021 , as well as, a$178.3 million increase in the average balance of securities to$543.4 million for the three months endedDecember 31, 2022 from$365.1 million for the three months endedDecember 31, 2021 . The increase in the average balance of securities was due to purchases ofU.S. 50
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government and agency and municipal obligation securities outpacing maturities and sales throughout the later part of fiscal year 2022 and continuing during the six months endedDecember 31, 2022 . The increase in average yield on securities was due to higher market rates of interest for new securities that were purchased during the six months endedDecember 31, 2022 replacing scheduled maturities of lower yieldingU.S. government and agency and municipal obligation securities. Interest income on interest-earning deposits with banks and other increased$1.8 million to$2.0 million for the three months endedDecember 31, 2022 from$152,000 for the three months endedDecember 31, 2021 . Interest income on interest-earning deposits with banks and other increased due to a 351 basis points increase in the average yield on interest-earning deposits with banks and other to 3.68% for the three months endedDecember 31, 2022 from 0.17% for the three months endedDecember 31, 2021 primarily as a result of the increase in the Federal Funds target rate during calendar year 2022, marginally offset by a decrease of$145.1 million in average balances on interest-earning deposits with banks and other to$213.2 million for the three months endedDecember 31, 2022 from$358.3 million for the three months endedDecember 31, 2021 . Interest Expense. Interest expense increased$484,000 , or 134.4%, to$844,000 for the three months endedDecember 31, 2022 from$360,000 for the three months endedDecember 31, 2021 as a result of an increase in interest expense on deposits, as well as, on borrowings and other. The increase was primarily due to an 18 basis points increase in the average cost of interest-bearing liabilities to 0.32% for the three months endedDecember 31, 2022 from 0.14% for the three months endedDecember 31, 2021 , as well as, a marginal shift in interest-bearing liabilities mix to higher interest rate liability accounts. Interest expense on interest-bearing deposits increased$289,000 , or 84.3%, to$632,000 for the three months endedDecember 31, 2022 from$343,000 for the three months endedDecember 31, 2021 . Interest expense on interest-bearing deposits increased primarily due to a 12 basis points increase in the average cost of interest-bearing deposits to 0.25% for the three months endedDecember 31, 2022 from 0.13% for the three months endedDecember 31, 2021 , offset in part by a decrease in average interest-bearing deposits of$41.7 million to$1.01 billion for the three months endedDecember 31, 2022 from$1.05 for the three months endedDecember 31, 2021 . Interest expense on borrowings and other liabilities increased$195,000 to$212,000 for the three months endedDecember 31, 2022 from$17,000 for the three months endedDecember 31, 2021 . The average cost of interest-bearing liabilities increased for the three months endedDecember 31, 2022 , as theFederal Reserve Board raised the Federal Funds target rate throughout calendar year 2022. We continue to monitor the effects the increases in market rates are having on deposit rates and we anticipate the impact will lead to an increase in rates on interest-bearing liabilities. Net Interest Income. Net interest income increased$6.6 million , or 63.3%, to$17.1 million for the three months endedDecember 31, 2022 compared to$10.5 million for the three months endedDecember 31, 2021 . The increase was a result of a 136 basis points increase in the net interest rate spread to 3.72% for the three months endedDecember 31, 2022 from 2.36% for the three months endedDecember 31, 2021 . Net interest margin increased 144 basis points to 3.85% for the three months endedDecember 31, 2022 from 2.41% for the three months endedDecember 31, 2021 . Net interest-earning assets increased by$70.7 million to$755.3 million for the three months endedDecember 31, 2022 from$684.6 million for the three months endedDecember 31, 2021 . Provision for Loan Losses. A credit to the provision for loan losses of$400,000 was recorded for the three months endedDecember 31, 2022 compared to no provision recorded for the three months endedDecember 31, 2021 . The credit to the provision was primarily due to improved credit quality and lower net charge-offs. We recorded net recoveries of$22,000 for the three months endedDecember 31, 2022 , compared to net charge-offs of$433,000 for the three months endedDecember 31, 2021 . Non-performing assets increased to$18.5 million , or 1.01% of total assets, atDecember 31, 2022 , compared to$15.1 million , or 0.82% of total assets, atDecember 31, 2021 . The allowance for loan losses was$22.2 million , or 2.07% of total loans outstanding, atDecember 31, 2022 and$22.6 million , or 2.23% of total net loans outstanding, atDecember 31, 2021 . Non-Interest Income. Non-interest income was consistent at$3.9 million for the three months endedDecember 31, 2022 and for the three months endedDecember 31, 2021 . An increase in insurance and wealth management services income of$186,000 and an increase in net gain on equity securities of$108,000 were offset by a decrease in bank fees and service charges of$186,000 . The increase in insurance and wealth management services income was due to the recent 51
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wealth management acquisitions. The increase in net gain on equity securities was due to general improvement in equity market performance. The decrease in bank fees and service charges was due to lower deposit service charges. Non-Interest Expense. Non-interest expense increased$7.1 million , or 111.7%, to$13.5 million for the three months endedDecember 31, 2022 as compared to$6.4 million for the three months endedDecember 31, 2021 . The increase in non-interest expense was primarily due to the recognition of a non-recurring ERC benefit of$5.0 million for the three months endedDecember 31, 2021 . The ERC, which is a refundable tax credit against certain employment taxes, is one of the numerous tax provisions and other stimulus measures included in the CARES Act, as amended, providing financial assistance to businesses in response to the COVID-19 pandemic. The increase was also due to an increase in salaries and employee benefits expense of$982,000 , an increase in professional fees of$399,000 , and an increase in other expenses of$483,000 . Salaries and employee benefits expense increased due to compensation expense from annual merit increases, hiring talent to fill open positions, as well as an enhanced annual award. Professional fees increased due to legal fees and expenses. Other expenses increased due to a tax-deductible contribution to thePioneer Bank Charitable Foundation . Income Tax Expense. Income tax expense was consistent at$1.8 million for the three months endedDecember 31, 2022 and for the three months endedDecember 31, 2021 . Our effective tax rate was 22.5% for the three months endedDecember 31, 2022 compared to 22.4% for the three months endedDecember 31, 2021 .
Comparison of Operating Results for the Six Months Ended
General. Net income increased by$3.8 million , or 50.0%, to$11.4 million for the six months endedDecember 31, 2022 as compared to$7.6 million for the six months endedDecember 31, 2021 . The increase was primarily due to a$11.1 million increase in net interest income, a$603,000 increase in non-interest income and a$530,000 decrease in the provision for loan losses, offset in part by a$7.6 million increase in non-interest expense and an$830,000 increase in income tax expense. Interest and Dividend Income. Interest and dividend income increased$11.7 million , or 54.5%, to$33.2 million for the six months endedDecember 31, 2022 , from$21.5 million for the six months endedDecember 31, 2021 due to increases in interest income on loans, securities, and interest-earning deposits and other. The increase was the result of an 117 basis points increase in the average yield on interest-earning assets to 3.67% for the six months endedDecember 31, 2022 , from 2.50% for the six months endedDecember 31, 2021 . The increase in the average yield on interest-earning assets was driven by a significant increase in variable rate loan yields and yields on interest-earning deposits with banks due to rising market interest rates, as well as due to market related increases in interest rates on new loans and securities. Average interest-earning assets also increased by$92.2 million from$1.71 billion for the six months endedDecember 31, 2021 to$1.81 billion for the six months endedDecember 31, 2022 . Interest income on loans increased$4.9 million , or 24.3%, to$25.0 million for the six months endedDecember 31, 2022 from$20.1 million for the six months endedDecember 31, 2021 . Interest income on loans increased due to a 106 basis points increase in the average yield on loans to 4.93% for the six months endedDecember 31, 2022 from 3.87% for the six months endedDecember 31, 2022 , offset in part by a$21.1 million decrease in the average balance of loans to$1.02 billion for the six months endedDecember 31, 2022 from$1.04 billion for the six months endedDecember 31, 2021 . The increase in average yield on loans was primarily due to loans tied to variable short-term rates which increased significantly during the six months endedDecember 31, 2022 as compared to the same period in the prior year, offset in part by a$1.2 million decrease in PPP loan related interest income to$45,000 for the six months endedDecember 31, 2022 from$1.2 million for the six months endedDecember 31, 2021 . The decrease in the average balance of loans was principally due to forgiveness of customer PPP loans. Interest income on securities increased$3.5 million , or 330.2%, to$4.5 million for the six months endedDecember 31, 2022 from$1.0 million for the six months endedDecember 31, 2021 . Interest income on securities increased due to a 104 basis points increase in the average yield on securities to 1.67% for the six months endedDecember 31, 2022 from 0.63% for the six months endedDecember 31, 2021 , as well as, a$205.0 million increase in the average balance of securities to$530.6 million for the six months endedDecember 31, 2022 from$325.6 million for the six months endedDecember 31, 2021 . 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 the later part of fiscal year 2022 and 52 Table of Contents continuing during the six months endedDecember 31, 2022 . The increase in average yield on securities was due to higher market rates of interest for new securities that were purchased during the six months endedDecember 31, 2022 replacing scheduled maturities of lower yieldingU.S. government and agency and municipal obligation securities. Interest income on interest-earning deposits with banks and other increased$3.4 million to$3.7 million for the six months endedDecember 31, 2022 from$304,000 for the six months endedDecember 31, 2021 . Interest income on interest-earning deposits with banks and other increased due to a 268 basis points increase in the average yield on interest-earning deposits with banks and other to 2.85% for the six months endedDecember 31, 2022 from 0.17% for the six months endedDecember 31, 2021 primarily as a result of the increase in the Federal Funds target rate during calendar year 2022, marginally offset by a decrease of$91.7 million in average balances on interest-earning deposits with banks and other to$259.2 million for the six months endedDecember 31, 2022 from$350.9 million for the six months endedDecember 31, 2021 . Interest Expense. Interest expense increased$621,000 , or 83.8%, to$1.4 million for the six months endedDecember 31, 2022 from$741,000 for the six months endedDecember 31, 2021 as a result of an increase in interest expense on deposits, as well as, on borrowings and other. The increase was primarily due to a 12 basis points increase in the average cost of interest-bearing liabilities to 0.26% for the six months endedDecember 31, 2022 from 0.14% for the six months endedDecember 31, 2021 , as well as, a marginal shift in interest-bearing liabilities mix to higher interest rate liability accounts. Interest expense on interest-bearing deposits increased$337,000 , or 48.1%, to$1.0 million for the six months endedDecember 31, 2022 from$701,000 for the six months endedDecember 31, 2021 . Interest expense on interest-bearing deposits increased primarily due to a seven basis points increase in the average cost of interest-bearing deposits to 0.20% for the six months endedDecember 31, 2022 from 0.13% for the six months endedDecember 31, 2021 . Average interest-bearing liabilities were relatively unchanged for the six months endedDecember 31, 2022 from the six months endedDecember 31, 2021 . Interest expense on borrowings and other liabilities increased$284,000 to$324,000 for the six months endedDecember 31, 2022 from$40,000 for the six months endedDecember 31, 2021 . The average cost of interest-bearing liabilities increased for the six months endedDecember 31, 2022 , as theFederal Reserve Board raised the Federal Funds target rate throughout calendar year 2022. We continue to monitor the effects the increases in market rates are having on deposit rates and we anticipate the impact will lead to an increase in rates on interest-bearing liabilities. Net Interest Income. Net interest income increased$11.1 million , or 53.5%, to$31.8 million for the six months endedDecember 31, 2022 compared to$20.7 million for the six months endedDecember 31, 2021 . The increase was a result of a 106 basis points increase in the net interest rate spread to 3.41% for the six months endedDecember 31, 2022 from 2.35% for the six months endedDecember 31, 2021 . Net interest margin increased 111 basis points to 3.52% for the six months endedDecember 31, 2022 from 2.41% for the six months endedDecember 31, 2021 . Net interest-earning assets increased by$79.9 million to$750.6 million for the six months endedDecember 31, 2022 from$670.7 million for the six months endedDecember 31, 2021 . Provision for Loan Losses. A credit to the provision for loan losses of$280,000 was recorded for the six months endedDecember 31, 2022 compared to a provision charge of$250,000 for the six months endedDecember 31, 2021 . The credit to the provision was primarily due to improved credit quality and lower net charge-offs. We recorded net charge-offs of$52,000 for the six months endedDecember 31, 2022 , compared to net charge-offs of$871,000 for the six months endedDecember 31, 2021 . Non-performing assets increased to$18.5 million , or 1.01% of total assets, atDecember 31, 2022 , compared to$15.1 million , or 0.82% of total assets, atDecember 31, 2021 . The allowance for loan losses was$22.2 million , or 2.07% of total loans outstanding, atDecember 31, 2022 and$22.6 million , or 2.23% of total net loans outstanding, atDecember 31, 2021 . Non-Interest Income. Non-interest income increased$603,000 , or 8.4%, to$7.8 million for the six months endedDecember 31, 2022 as compared to$7.1 million for the six months endedDecember 31, 2021 . The increase was primarily due to an increase in other income of$420,000 and an increase in insurance and wealth management services income of$359,000 , offset in part by a decrease in bank fees and service charges of$221,000 . The increase in other income was primarily due to bank-owned life insurance income as a result of a death benefit. The increase in insurance and wealth management services income was due to the recent wealth management acquisitions. The decrease in bank fees and service charges was due to lower deposit service charges. 53
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Non-Interest Expense. Non-interest expense increased$7.6 million , or 42.6%, to$25.4 million for the six months endedDecember 31, 2022 as compared to$17.8 million for the six months endedDecember 31, 2021 . The increase in non-interest expense was primarily due to the recognition of a non-recurring ERC benefit of$5.0 million for the six months endedDecember 31, 2021 . The ERC, which is a refundable tax credit against certain employment taxes, is one of the numerous tax provisions and other stimulus measures included in the CARES Act, as amended, providing financial assistance to businesses in response to the COVID-19 pandemic. The increase was also due to an increase in salaries and employee benefits expense of$1.3 million , an increase in professional fees of$325,000 , and an increase in other expenses of$568,000 . Salaries and employee benefits expense increased due to compensation expense from annual merit increases, hiring talent to fill open positions, as well as an enhanced annual award. Professional fees increased due to legal fees and expenses. Other expenses increased due to a tax-deductible contribution to thePioneer Bank Charitable Foundation . Income Tax Expense. Income tax expense increased$830,000 to$3.0 million for the six months endedDecember 31, 2022 from$2.2 million for the six months endedDecember 31, 2021 , due to an increase in income before income taxes. Our effective tax rate was 21.1% for the six months endedDecember 31, 2022 compared to 22.6% for the six months endedDecember 31, 2021 . The decrease in our effective tax rate was primarily due to the increase in tax-exempt income for the six months endedDecember 31, 2022 as compared to the prior year period.
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.
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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,
2022 2022
(Dollars in thousands)
Non-accrual loans:
Commercial real estate $ 470 $ 756
Commercial and industrial - 38
Commercial construction - -
Residential mortgages 4,118 3,975Home equity loans and lines of credit 1,515
1,672 Consumer - - Total non-accrual loans 6,103 6,441 Accruing loans past due 90 days or more: Commercial real estate 357 200 Commercial and industrial 1,350 378 Commercial construction 5,364 - Residential mortgages - -
Home equity loans and lines of credit -
-
Consumer 5,337
1
Total accruing loans past due 90 days or more 12,408
579 Real estate owned: Commercial real estate - -
Commercial and industrial -
-
Commercial construction - -
Residential mortgages - -Home equity loans and lines of credit -
-
Consumer - -
Total real estate owned - -
Total non-performing assets$ 18,511 $
7,020
Total accruing troubled debt restructured loans $ 2,173
Total non-performing loans to total loans 1.73 % 0.70 % Total non-performing assets to total assets 1.01 %
0.36 %
Non-accrual loans were relatively unchanged atDecember 31, 2022 fromJune 30, 2022 . Accruing loans past due 90 days or more increased$11.8 million to$12.4 million atDecember 31, 2022 from$579,000 atJune 30, 2022 primarily due to loans that were matured atDecember 31, 2022 and in the credit renewal process, which included one commercial and industrial loan, two commercial construction loans and two consumer loans. 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 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 55 Table of Contents
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,
2022 2022
(In thousands)
Classification of Loans:
Substandard $ 55,236 $ 53,119
Doubtful - 38
Loss - -
Total Classified Loans $ 55,236 $ 53,157
Special Mention $ 11,881 $ 9,307
Total substandard loans at December 31, 2022 and June 30, 2022 , include three
commercial real estate loan relationships in the accommodation and food service
industry totaling $29.5 million and $30.3 million , respectively. Total
substandard loans increased $2.1 million to $55.2 million at December 31, 2022
from $53.1 million at June 30, 2022 primarily due to two consumer loans that
became 90 days or more past due at December 31, 2022 , offset in part by one
commercial real estate relationship being upgraded to the pass category, as well
as, loan payments. Total special mention commercial loans increased $2.6 million
to $11.9 million at December 31, 2022 from $9.3 million at June 30, 2022 due to
two commercial real estate loan relationships being downgraded to the special
mention category, offset in part by loan payments.
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, 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 (decreased) by a provision for loan losses, which is
charged (credited) 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 borrower, results of
internal loan reviews and other qualitative and quantitative factors which could
affect potential credit losses.
In addition, the New York State Department of Financial Services (the "NYSDFS")
and the FDIC 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.
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The following table sets forth activity in our allowance for loan losses for the
periods indicated.
At or for the
Six Months Ended December 31,
2022 2021
(Dollars in thousands)Allowance at beginning of period$ 22,524
$ 23,259 Provision for loan losses (280) 250 Charge offs: Commercial real estate 31 112 Commercial and industrial 11 407 Commercial construction - - Residential mortgages 24 305
Home equity loans and lines of credit -
40
Consumer 101 54
Total charge-offs 167 918
Recoveries:
Commercial real estate - -
Commercial and industrial 53 25
Commercial construction - 18
Residential mortgages 42 -Home equity loans and lines of credit 14
-
Consumer 6 4
Total recoveries 115 47
Net charge-offs 52 871
Allowance at end of period $ 22,192 $ 22,638 Allowance to non-performing loans 119.88 %
157.37 % Allowance to total loans outstanding at the end of the period
2.07 % 2.23 %
Net charge-offs to average loans outstanding during
the period (1) 0.01 % 0.08 %
(1) Annualized.
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, 2022 , we had the ability to borrow up to$335.1 million , of which none was utilized for borrowings and none was utilized as collateral for letters of credit issued to secure municipal deposits. AtDecember 31, 2022 , 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 - Mann Entities Related Fraudulent Activity" above may have on our Liquidity and Capital Resources beyond the second quarter of fiscal 2023. The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of December
31,
2022.
57
Table of Contents
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. Our
most liquid assets are cash and cash equivalents. The levels of these assets are
dependent on our operating, financing, lending and investing activities during
any period. At December 31, 2022 , cash and cash equivalents totaled $147.3
million . Securities classified as available-for-sale, which provide additional
sources of liquidity, totaled $507.6 million at December 31, 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 of December 31, 2022 totaled $45.6 million , or 2.96%, of total
deposits. If these deposits do not remain with us, we will be required to seek
other sources of funds, including other deposits and Federal Home Loan Bank of
New York advances. Depending on market conditions, we may be required to pay
higher rates on such deposits or borrowings than we currently pay. We believe,
however, based on past experience that a significant portion of such deposits
will remain with us. We have the ability to attract and retain deposits by
adjusting the interest rates offered.
Capital Resources. We are subject to various regulatory capital requirements
administered by NYSDFS and the
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%. 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, 2022 . As ofDecember 31, 2022 , 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. 58 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, 2022
Tier 1 (leverage) capital $ 197,772 10.29 % $ 76,903 4.00 % N/A N/A $ 96,128 5.00 %
Risk-based capital
Common Tier 1 $ 197,772 18.37 % $ 48,446 4.50 % $ 75,361 7.00 % $ 69,978 6.50 %
Tier 1 $ 197,772 18.37 % $ 64,595 6.00 % $ 91,510 8.50 % $ 86,127 8.00 %
Total $ 211,337 19.63 % $ 86,127 8.00 % $ 113,042 10.50 % $ 107,659 10.00 %
As of June 30, 2022
Tier 1 (leverage) capital $ 185,892 9.48 % $ 78,405 4.00 % N/A N/A $ 98,006 5.00 %
Risk-based capital
Common Tier 1 $ 185,892 17.98 % $ 46,515 4.50 % $ 72,357 7.00 % $ 67,189 6.50 %
Tier 1 $ 185,892 17.98 % $ 62,021 6.00 % $ 87,862 8.50 % $ 82,694 8.00 %
Total $ 198,932 19.25 % $ 82,694 8.00 % $ 108,536 10.50 % $ 103,368 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$ 42,538 8.26 %$ 20,600 4.00 % N/A N/A$ 25,751 5.00 % Risk-based capital Common Tier 1$ 42,538 49.51 %$ 3,866 4.50 %$ 6,014 7.00 %$ 5,585 6.50 % Tier 1$ 42,538 49.51 %$ 5,155 6.00 %$ 7,303 8.50 %$ 6,873 8.00 % Total$ 42,538 49.51 %$ 6,873 8.00 %$ 9,021 10.50 %$ 8,592 10.00 % As of June 30, 2022 Tier 1 (leverage) capital$ 39,264 7.65 %$ 20,532 4.00 % N/A N/A$ 25,665 5.00 % Risk-based capital Common Tier 1$ 39,264 40.43 %$ 4,370 4.50 %$ 6,797 7.00 %$ 6,312 6.50 % Tier 1$ 39,264 40.43 %$ 5,826 6.00 %$ 8,254 8.50 %$ 7,768 8.00 % Total$ 39,264 40.43 %$ 7,768 8.00 %$ 10,196 10.50 %$ 9,711 10.00 % 59 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, 2022 , we had$271.6 million of commitments to originate or purchase loans, comprised of$153.5 million of commitments under commercial loans and lines of credit (including$42.4 million of unadvanced portions of commercial construction loans),$58.1 million of commitments under home equity loans and lines of credit,$52.5 million of commitments to purchase residential mortgage loans and$7.4 million of unfunded commitments under consumer lines of credit. In addition, atDecember 31, 2022 , we had$29.7 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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