PIONEER BANCORP, INC. Statement Regarding Forward-Looking Statements
Certain statements contained herein are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions, or future or conditional verbs, such as "will," "would," "should," "could," or "may." The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. No assurance can be given that the future results covered by forward-looking statements will be achieved. Certain forward-looking statements are included in this Form 10-Q, principally in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition to the factors described in Item 1A - Risk Factors, factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:
our business, financial condition, liquidity, capital and results of operations
? have been, and will likely continue to be, adversely affected by the COVID-19
pandemic;
? risks and uncertainties related to the COVID-19 pandemic and resulting
governmental and societal response;
? impact on our interest earning asset yield volatility as PPP loans are forgiven
by the SBA;
? risks and uncertainties related to the Restatement of certain of our historical
consolidated financial statements;
? risks related to the variety of litigation and other proceedings described in
the "Legal Proceedings" section;
? general economic conditions, either nationally or in our market area, that are
worse than expected;
? competition within our market area that is stronger than expected;
? changes in the level and direction of loan delinquencies and charge-offs and
changes in estimates of the adequacy of the allowance for loan losses;
? our ability to access cost-effective funding;
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? fluctuations in real estate values and both residential and commercial real
estate market conditions;
? demand for loans and deposits in our market area;
? changes in our partnership with a third-party mortgage banking company;
? our ability to maintain sufficient sources of liquidity to satisfy our short
and long-term liquidity needs;
? our ability to continue to implement our business strategies;
? competition among depository and other financial institutions;
inflation and changes in market interest rates that reduce our margins and
yields, reduce the fair value of financial instruments or reduce our volume of
? loan originations, or increase the level of defaults, losses and prepayments on
loans we have made and make, whether held in portfolio or sold in the secondary
market;
? adverse changes in the securities markets;
changes in laws or government regulations or policies affecting financial
? institutions, including changes in regulatory fees and capital requirements and
changes resulting from a change in administration;
? non-compliance with certain laws and regulations could subject us to fines or
other regulatory sanctions;
? our ability to manage market risk, credit risk and operational risk;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
? the imposition of tariffs or other domestic or international governmental
polices impacting the value of the products of our borrowers;
our ability to successfully integrate into our operations any assets,
? liabilities or systems we may acquire, as well as new management personnel or
customers, and our ability to realize related revenue synergies and cost
savings within expected time frames and any goodwill charges related thereto;
? changes in consumer spending, borrowing and savings habits;
? our ability to maintain our reputation;
? our ability to prevent or mitigate fraudulent activity;
? changes in cost of legal expenses, including defending against significant
litigation;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the
and
? our ability to retain key employees;
? our ability to evaluate the amount and timing of recognition of future tax
assets and liabilities;
? our compensation expense associated with equity benefits allocated or awarded
to our employees in the future; and
? changes in the financial condition, results of operations or future prospects
of issuers of securities that we own.
Additional factors that may affect our results are discussed in the annual report on Form 10-K, as amended, for the fiscal year endedJune 30, 2020 , under the heading "Risk Factors" and this Form 10-Q, under the heading "Risk Factors." The Company disclaims any obligation to revise or update any forward-looking statements contained in this quarterly report on Form 10-Q to reflect future events or developments. Overview Net Interest Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income we earn on our loans and investments, and interest expense, which is the interest we pay on our deposits and borrowings. Provision for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased through charges to the provision for loan losses. Loans are charged against the allowance when management believes that the collectability of the principal loan amount is not probable. Recoveries on loans previously charged-off, if any, are credited to the allowance for loan losses when realized. We may incur elevated provision for loan losses and charge-offs due to the adverse impact of the pandemic on the economy of our market area and our customers.
Non-interest Income. Our primary sources of non-interest income are banking fees and service charges, insurance and wealth management services income. Our non-interest income also includes net gains or losses on equity securities,
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net realized gains or losses on available for sale securities, net gains or losses in cash surrender value of bank owned life insurance, net gain on the sale of loans, net gain or loss on disposal of assets and other income.
Non-Interest Expenses. Our non-interest expenses consist of salaries and employee benefits, net occupancy and equipment, data processing, advertising and marketing, federal deposit insurance premiums, professional fees, and other general and administrative expenses.
Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for worker's compensation and disability insurance, health insurance, retirement plans and other employee benefits, as well as commissions and other incentives.
Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter.
Data processing expenses are fees we pay to third parties for use of their software and for processing customer information, deposits and loans.
Advertising and marketing includes most marketing expenses including multi-media advertising (public and in-store), promotional events and materials, civic and sales focused memberships, and community support.
Federal deposit insurance premiums are payments we make to the
Professional fees includes legal and other consulting expenses.
Other expenses include expenses for professional services, office supplies, postage, telephone, insurance and other miscellaneous operating expenses.
Income Tax Expense. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized. Recent Developments COVID-19 Pandemic In earlyJanuary 2020 , theWorld Health Organization issued an alert that a novel coronavirus outbreak was emanating from theWuhan Province inChina . Later in January, the first death related to the novel coronavirus, identified as Coronavirus Disease 2019 ("COVID-19"), occurred inthe United States . Over the course of the next several weeks, the outbreak continued to spread to various regions of the World prompting theWorld Health Organization to declare COVID-19 a global pandemic inMarch 2020 . Inthe United States , the rapid spread of the COVID-19 virus invoked various Federal and State, includingNew York State , authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international and domestic travel, restrictions on business operations, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. As ofMarch 31, 2021 , some of these restrictions have been removed and many non-essential businesses have been allowed to re-open in a limited capacity, adhering to social distancing and disinfection guidelines. Further, vaccines are proving effective and rapidly scaling, bending the pandemic curve in many geographies. However, these restrictions and other consequences of the pandemic have resulted in significant adverse effects for the Company and its customers. The direct and indirect effects of the COVID-19 pandemic have resulted in dramatic reductions in the level of economic activity in the Company's market area, as well as in the national and global economies and financial markets, and have severely hampered the ability for certain businesses and consumers to meet their current repayment obligations. 42
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Concerns about the pandemic and its negative impact on economic activity, has severely disrupted both domestic and international financial markets and has prompted Central Banks around the World to inject significant amounts of monetary stimulus into their economies. Inthe United States , theFederal Reserve System's Federal Open Market Committee , swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate onMarch 3, 2020 and an additional 100 basis point reduction onMarch 15, 2020 . In addition, theFederal Reserve rolled out various market support programs to ease the stress on financial markets. In addition theUnited States Congress , onMarch 27, 2020 , passed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which was intended to provide approximately$2.5 trillion of direct support toU.S. citizens and businesses affected by the COVID-19 outbreak, and onApril 24, 2020 , passed the Paycheck Protection and Health Care Enhancement Act ("Enhancement Act"), which was intended to provide$484 billion in additional funding to replenish and supplement key programs under the CARES Act. OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021 (the "2021 Appropriations Act") became law and further extended certain provisions of the CARES Act while also providing an additional$284 billion for the PPP loan program (as defined and described below), and extending the deadline of the program throughMarch 31, 2021 . Subsequent legislation extended the deadline of the PPP loan program untilMay 31, 2021 . However, theSmall Business Administration announced onMay 4, 2021 that the PPP loan program no longer had funds available for most banks, including the Bank. As the COVID-19 events unfolded throughout calendar year 2020 and 2021, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of the Company's operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. Beginning late in the first quarter of the calendar 2020 year, in order to protect its employees and assure workforce and operational continuity, the Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that were unable to work remotely. The Company also implemented drive-thru only and by appointment operating protocols for its bank branch network. Late in the second quarter of the calendar 2020 year, the Company implemented a return-to-work plan and phased a majority of its employees back to working in a traditional office environment and a majority of its branch network lobbies were open to the public. During the fourth quarter of the calendar 2020 year, to limit the risk of virus spread in anticipation of the winter virus surge, the Company reinstituted drive-through only and by appointment operating protocols for its bank branch network, and an emphasis on work from home protocols. Late in the first quarter of the calendar 2021 year, the Company implemented a return-to-work plan and a majority of its branch network lobbies were open to the public. Throughout the pandemic, the Company has maintained regular communications with its primary regulatory agencies and critical vendors to assure all mission-critical activities and functions are being performed in line with regulatory expectations and the Company's service standards. Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, the Company's management believes that it was well positioned with adequate levels of capital as ofMarch 31, 2021 . AtMarch 31, 2021 , all of the Bank's regulatory capital ratios exceeded all well-capitalized standards. More specifically, the Bank's Tier 1 Leverage Ratio, a common measure to evaluate a financial institution's capital strength, was 10.70% atMarch 31, 2021 . In addition, management believes the Company was well positioned with adequate levels of liquidity as ofMarch 31, 2021 . The Bank maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing savings and money market deposit accounts with customers that operate, reside or work within its branch footprint. AtMarch 31, 2021 , the Company's cash and cash equivalents balance was$328.6 million . The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquidU.S. Treasury securities and highly-rated municipal securities. This portfolio not only generates interest income, but also serves as a ready source of liquidity. AtMarch 31, 2021 , the Company's available-for-sale investment securities portfolio totaled$200.2 million . The Bank's unused borrowing capacity at theFederal Home Loan Bank of New York atMarch 31, 2021 was$182.6 million . The Bank participated in the Paycheck Protection Program ("PPP"), a specialized low-interest (1%) forgivable loan program funded by theU.S. Treasury Department and administered by theU.S. Small Business Administration ("SBA"). The SBA will guarantee 100% of the PPP loans made to eligible borrowers. As ofMarch 31, 2021 , the Bank's commercial loan portfolio included 576 PPP loans totaling$68.7 million . The Bank assisted a substantial number of its PPP borrowers with forgiveness requests during the third fiscal quarter of 2021 and expects to continue assisting PPP 43
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borrowers with forgiveness requests during the fourth fiscal quarter of 2021. As ofMarch 31, 2021 , the Bank has received forgiveness payments related to 308 borrowers' PPP loans for a total of$40.5 million . TheFederal Reserve has instituted a program, the Paycheck Protection Program Liquidity Facility ("PPPLF"), authorized under section 13(3) of the Federal Reserve Act, which is intended to facilitate lending by banks to small businesses under the PPP while maintaining strong liquidity to meet cash flow needs. Under the PPPFL, the Federal Reserve Banks lends to banks on a non-recourse basis, taking PPP loans as collateral. Principal repayment of PPPLF borrowings, if any, are made upon receipt of payment on the underlying PPP loans pledged as collateral and interest is charged at a rate of 0.35%. AtMarch 31, 2021 , the Bank's unused borrowing capacity at theFederal Reserve Bank of New York through the PPPLF was$68.7 million . The Bank continues to evaluate its liquidity needs and has access to borrow funds through the PPPLF if deemed necessary. 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. ThroughMarch 31, 2021 , no specific COVID-19 related credit impairment was identified within the Company's investment securities portfolio, including the Company's municipal securities portfolio. With respect to the Company's lending activities, the Company implemented customer payment deferral programs to assist both consumer and commercial borrowers that may be experiencing financial hardship due to COVID-19 related challenges, whereby short-term deferrals of payments (generally three to six months) have been provided. In relation to its consumer borrowers, as ofMarch 31, 2021 , the Company had COVID-19 related financial hardship payment deferrals related to eight loans representing$1.7 million of the Company's residential mortgage, home equity loans and lines of credit, and consumer loan balances, which is down from 110 loans representing$27.4 million as ofJune 30, 2020 . In relation to its commercial borrowers, as ofMarch 31, 2021 , the Company had COVID-19 related financial hardship payment deferrals related to 22 loans representing$38.2 million of the Company's commercial loan balances, which is down from 144 loans representing$170.3 million as ofJune 30, 2020 . Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming. Consistent with the CARES Act and industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral period and not classified as troubled-debt restructured loans. Borrowers that were delinquent in their payments to the Bank prior to requesting a COVID-19 related financial hardship payment deferral, were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status. In the instances where the Bank granted a payment deferral to a delinquent borrower, the borrower's delinquency status was frozen as ofMarch 20, 2020 , and their loans will continue to be reported as delinquent during the deferment period based on their delinquency status as ofMarch 20, 2020 . Although the amount of loans in deferral status atMarch 31, 2021 has declined fromJune 30, 2020 , there are borrowers continuing to experience COVID-19 related financial hardships. The Company anticipates that delinquent and nonperforming loans may increase in future periods as borrowers that continue to experience COVID-19 related financial hardships will be unable to continue loan payments consistent with their contractual obligations and the Company may be required to make additional provisions for loan losses. The COVID-19 crisis is expected to continue to adversely impact the Company's financial results, as well as demand for its services and products during the remainder of the fiscal year 2021 and 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.
Mann Entities Related Fraudulent Activity
During the first fiscal quarter of 2020 (the quarter endingSeptember 30, 2019 ), the Company became aware of potentially fraudulent activity associated with transactions by an established business customer of the Bank. The customer and various affiliated entities (collectively, the "Mann Entities") had numerous accounts with the Bank. The transactions in question related both to deposit and lending activity with the Mann Entities. For the fraudulent activity related to the Mann Entities, the Bank's potential exposure with respect to its deposit activity was approximately$18.5 million . In the first fiscal quarter of 2020, the Bank exercised its rights pursuant to state and federal law and the relevant Mann Entity general deposit account agreements to take actions to set off/recover approximately$16.0 million from general deposit corporate operating accounts held by the Mann Entities at the Bank to partially cover overdrafts/negative account balances in Mann Entity general deposit corporate operating accounts that 44
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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 third fiscal quarter of 2021, no additional charges to non-interest expense were recognized related to the deposit transactions with the Mann Entities. With respect to the Bank's lending activity with the Mann Entities, its potential 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 third fiscal quarter of 2021, no additional charges to the provision for loan losses were recognized related to the loan transactions with the Mann Entities. Several other parties are asserting claims against the Company and the Bank related to the series of transactions between the Company or the Bank, on the one hand, and the Mann Entities, on the other. The Company and the Bank continue to investigate these matters and it is possible that the Company and the Bank will be subject to additional liabilities which may have a material adverse effect on our financial condition, results of operations or cash flows. The Company is pursuing all available sources of recovery and other means of mitigating the potential loss, and the Company and the Bank are vigorously defending all claims asserted against them arising out of or otherwise related to the fraudulent activity of the Mann Entities. During the third fiscal quarter of 2021, the Bank recognized insurance recoveries in the amount of$547,000 , 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 - Other Information, Item 1 - Legal Proceedings" below.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated
by management as necessary to absorb credit losses incurred in the loan
portfolio that are both probable and reasonably estimable at the relevant
balance sheet date. The amount of the allowance is based on significant
estimates, and the ultimate losses may vary from such estimates as more
information becomes available or conditions change. The methodology for
determining the allowance for loan losses is considered a critical accounting
policy by management due to the high degree of judgment involved, the
subjectivity of the assumptions used and the potential for changes in the
economic environment that could result in changes to the amount of the recorded
allowance for loan losses. See Item 2 - "Recent Developments - COVID-19
Pandemic."
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As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs an evaluation of the adequacy of the allowance for loan losses at least quarterly. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic 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, an allowance is generally established when the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans, as well as classified loans that are not deemed to be impaired, and is based on historical loss experience adjusted for qualitative factors.
Actual loan losses may be significantly more than the allowance we have established which could have a material negative effect on our financial results.
Fair Value Measurements. The fair value of a financial instrument is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the particular asset or liability in an orderly transaction between market participants on the measurement date. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices as of the measurement date are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded.Investment Securities . Available-for-sale and held-to-maturity securities are reviewed by management on a quarterly basis, and more frequently when economic or market conditions warrant, for possible other-than-temporary impairment. In determining other-than-temporary impairment, management considers many factors, including the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospectus of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statement of income. The assessment of whether other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. In order to determine other-than-temporary impairment for mortgage-backed securities, asset-backed securities and collateralized mortgage obligations, we compare the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. Other-than-temporary impairment is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. Pension Obligations. We maintain a non-contributory defined benefit pension plan covering substantially all of our full-time employees. The benefits are developed from actuarial valuations and are based on the employee's years of service and compensation. Actuarial assumptions such as interest rates, expected return on plan assets, turnover, mortality and rates of future compensation increases have a significant impact on the costs, assets and liabilities of the plan. Pension expense is the net of service cost, interest cost, return on plan assets and amortization of gains and losses not immediately recognized. 46
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Legal Proceedings and Other Contingent Liabilities. In the ordinary course of business, we are involved in a number of legal, regulatory, governmental and other proceedings or investigations 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. These estimates are based upon currently available information and are subject to significant judgment, a variety of assumptions and known and unknown uncertainties. Our estimates 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 expense. We continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Income Taxes. Income tax expense (benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for temporary differences between carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. We recognize interest and/or penalties related to income tax matters in other expense. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Management determines the need for a deferred tax valuation allowance based upon the realizability of tax benefits from the reversal of temporary differences creating the deferred tax assets, as well as the amounts of available open tax carrybacks, if any. AtMarch 31, 2021 , no valuation allowance was required. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings. 47
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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
2021 2020
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield/Cost
Balance Interest (4) Balance Interest (4)
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,125,766 $ 10,608 3.88 %
164,904 249 0.61 % 94,593 518 2.21 % Interest-earning deposits and other
256,870 83 0.13 % 123,928 488 1.59 % Total interest-earning assets
1,547,540 10,940 2.90 % 1,312,229 13,288 4.12 %
Non-interest-earning assets 149,193 132,221
Total assets $ 1,696,733 $ 1,444,450
Interest-bearing liabilities:
Demand deposits $ 171,360 $ 50 0.12 % $ 119,755 $ 83 0.28 %
Savings deposits 277,957 31 0.05 % 236,241 31 0.05 %
Money market deposits 378,930 99 0.11 % 350,066 521 0.60 %
Certificates of deposit 98,105 243 1.01 % 127,837 578 1.83 % Total interest-bearing deposits
926,352 423 0.19 % 833,899 1,213 0.58 % Borrowings and other
2,431 15 2.53 % 6,708 22 1.32 %
Total interest-bearing liabilities 928,783 438 0.19 % 840,607 1,235 0.59 % Non-interest-bearing deposits
512,529 366,545
Other non-interest-bearing liabilities 27,701 8,828
Total liabilities 1,469,013 1,215,980
Total shareholders' equity 227,720 228,470
Total liabilities and shareholders'
equity $ 1,696,733 $ 1,444,450
Net interest income $ 10,502 $ 12,053
Net interest rate spread (1) 2.71 % 3.53 %
Net interest-earning assets (2) $ 618,757 $ 471,622
Net interest margin (3) 2.75 % 3.78 %
Average interest-earning assets to
interest-bearing liabilities 166.62 % 156.10 %
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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 Nine Months Ended March 31,
2021 2020
(As Restated)
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield/Cost
Balance Interest (4) Balance Interest (4)
(Dollars in thousands)
Interest-earning assets:
Loans $ 1,131,792 $ 32,168 3.80 % $ 1,073,085 $ 38,122 4.74 %
Securities 129,039 859 0.89 % 97,297 1,715 2.35 % Interest-earning deposits and other
190,047 217 0.15 % 121,140 1,866 2.05 % Total interest-earning assets
1,450,878 33,244 3.06 % 1,291,522 41,703 4.31 %
Non-interest-earning assets 149,475 134,760
Total assets $ 1,600,353 $ 1,426,282
Interest-bearing liabilities:
Demand deposits $ 138,482 $ 123 0.12 % $ 113,359 $ 256 0.30 %
Savings deposits 267,975 101 0.05 % 238,581 94 0.05 %
Money market deposits 359,432 430 0.16 % 350,894 1,656 0.63 %
Certificates of deposit 104,845 996 1.27 % 129,617 1,755 1.80 % Total interest-bearing deposits
870,734 1,650 0.25 % 832,451 3,761 0.60 % Borrowings and other
3,742 62 2.18 % 5,352 77 1.91 %
Total interest-bearing liabilities 874,476 1,712 0.26 % 837,803 3,838 0.61 % Non-interest-bearing deposits
476,476 351,333
Other non-interest-bearing
liabilities 23,808 17,535
Total liabilities 1,374,760 1,206,671
Total shareholders' equity 225,593 219,611
Total liabilities and shareholders'
equity $ 1,600,353 $ 1,426,282
Net interest income $ 31,532 $ 37,865
Net interest rate spread (1) 2.80 % 3.70 %
Net interest-earning assets (2) $ 576,402 $ 453,719
Net interest margin (3) 2.89 % 3.92 %
Average interest-earning assets to
interest-bearing liabilities 165.91 % 154.16 %
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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 March 31, Nine Months Ended March 31,
2021 vs. 2020 2021 vs. 2020
(As Restated)
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 $ 349 $ (2,023)
247 (516) (269) 438 (1,294) (856)
Interest-earning deposits and other 269 (674) (405) 685 (2,334) (1,649)
Total interest-earning assets 865 (3,213) (2,348) 3,105 (11,564) (8,459)
Interest-bearing liabilities:
Demand deposits 27 (60) (33) 47 (180) (133)
Savings deposits 5 (5) - 11 (4) 7
Money market deposits 40 (462) (422) 39 (1,265) (1,226)
Certificates of deposit (115) (220) (335) (298) (461) (759)
Total interest-bearing deposits (43) (747) (790) (201) (1,910) (2,111)
Borrowings and other (20) 13 (7) (25) 10 (15)
Total interest-bearing liabilities (63) (734) (797) (226) (1,900) (2,126)
Change in net interest income $ 928 $ (2,479) $ (1,551) $ 3,331 $ (9,664) $ (6,333)
Exclusive of the impact of PPP loans, the Company expects its fourth fiscal
quarter of 2021 net interest margin to remain depressed due to the precipitous
drop in the Federal Funds, Prime and LIBOR interest rates in the second half of
fiscal 2020. Expected decreases in average interest earning asset yields are
unlikely to be fully offset by expected decreases in the average cost of funds.
Although the stated interest rate on PPP loans is fixed at 1.0%, timing of the
Company's recognition of the interest income on origination fees, net of
deferred origination costs, on PPP loans is uncertain as to the period of
recognition at this time and will likely cause interest earning asset yield
volatility as loans are forgiven by the SBA.
Comparison of Financial Condition at
Total Assets. Total assets increased$262.0 million , or 17.2%, to$1.8 billion atMarch 31, 2021 from$1.5 billion atJune 30, 2020 . The increase was due primarily to an increase of$124.4 million , or 164.2%, in securities available for sale as well as an increase of$171.7 million , or 109.4%, in cash and cash equivalents partially offset by a decrease of$22.5 million , or 38.8%, in other assets. Cash and Cash Equivalents. Total cash and cash equivalents increased$171.7 million , or 109.4%, to$328.6 million atMarch 31, 2021 from$156.9 million atJune 30, 2020 . This increase resulted from net increases in deposits of$264.4 million during the nine months endedMarch 31, 2021 primarily due to deposit customers continuing to increase cash balances during the COVID-19 pandemic and seasonal deposit growth related to tax collection by municipal deposit customers. Securities Available for Sale. Total securities available for sale increased$124.4 million , or 164.2%, to$200.2 million atMarch 31, 2021 from$75.8 million atJune 30, 2020 . The increase was primarily due to purchases ofU.S Government and agency obligations and municipal obligations during the nine months endedMarch 31, 2021 .
Securities Held to Maturity. Total securities held to maturity increased
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security, as well as, purchases of other municipal obligations offset by
scheduled maturities of municipal obligations during the nine months ended
Equity Securities . Total equity securities decreased$5.8 million , or 68.5%, to$2.7 million atMarch 31, 2021 from$8.5 million atJune 30, 2020 primarily due to the sale of various securities for proceeds of$7.5 million , partially offset by investment gains during the nine months endedMarch 31, 2021 . Net Loans. Net loans of$1.14 billion atMarch 31, 2021 decreased$9.6 million , or 0.8%, from$1.15 billion atJune 30, 2020 . By loan category, commercial and industrial loans decreased by$22.7 million , or 9.6%, to$214.5 million atMarch 31, 2021 from$237.2 million atJune 30, 2020 , commercial construction loans decreased by$5.2 million , or 5.7%, to$86.6 million atMarch 31, 2021 from$91.8 million atJune 30, 2020 , and home equity loans and lines of credit decreased by$4.5 million , or 5.6%, to$75.9 million atMarch 31, 2021 from$80.3 million atJune 30, 2020 . These decreases were somewhat offset by an increase in commercial real estate loans of$18.1 million , or 4.0%, to$468.6 million atMarch 31, 2021 from$450.5 million atJune 30, 2020 and an increase in one-to four-family residential real estate loans of$6.6 million , or 2.4%, to$286.6 million atMarch 31, 2021 from$278.0 million atJune 30, 2020 . The decrease in commercial and industrial loans was related to forgiveness of PPP loans, as well as, paydowns and reduced line of credit utilization during the nine months endedMarch 31, 2021 . The increase in one- to four-family residential real estate loans was related to the purchasing of loans from our partnership with a third party mortgage banking company. The increase in commercial real estate loans was mainly related to the conversion of commercial construction loans to permanent financing. Deposits. Total deposits increased$264.4 million , or 20.8%, to$1.53 billion atMarch 31, 2021 from$1.27 billion atJune 30, 2020 . The increase in deposits was primarily related to an increase in non-interest bearing demand accounts of$117.2 million , or 26.8%, to$554.7 million atMarch 31, 2021 from$437.5 million atJune 30, 2020 , an increase in interest-bearing demand accounts of$92.6 million , or 83.6%, to$203.3 million atMarch 31, 2021 from$110.7 million atJune 30, 2020 , an increase in money market accounts of$45.2 million , or 13.1%, to$388.9 million atMarch 31, 2021 from$343.8 million atJune 30, 2020 and an increase in savings accounts of$31.9 million , or 12.4%, to$290.5 million atMarch 31, 2021 from$258.6 million atJune 30, 2020 . These increases were partially offset by a decrease in certificates of deposit of$22.5 million , or 18.8%, to$97.1 million atMarch 31, 2021 from$119.6 million atJune 30, 2020 . The increases in non-interest bearing demand accounts, interest-bearing demand accounts, savings accounts and money market accounts were primarily related to growth in consumer and commercial deposit relationships. The increase in demand and savings accounts was also due to deposit customers increasing cash balances during the COVID-19 pandemic partly due to government stimulus. The decrease in certificates of deposit was primarily due to the maturity of certain large dollar accounts. Total Shareholders' Equity. Total shareholders' equity increased$4.7 million , or 2.1%, to$228.7 million atMarch 31, 2021 from$224.0 million atJune 30, 2020 primarily as a result from net income of$4.6 million for the nine month period endedMarch 31, 2021 .
Comparison of Operating Results for the Three Months Ended
General. Net income increased by$492,000 to$1.3 million for the three months endedMarch 31, 2021 from$849,000 for the three months endedMarch 31, 2020 . The increase was primarily due to a$1.4 million increase in non-interest income and a$1.3 million decrease in the provision for loan losses, offset by a$1.6 million decrease in net interest income and a$590,000 increase in non-interest expense. Interest and Dividend Income. Interest and dividend income decreased$2.4 million , or 17.7%, to$10.9 million for the three months endedMarch 31, 2021 , from$13.3 million for the three months endedMarch 31, 2020 due to decreases in interest income on loans, securities and interest-earning deposits. The decrease reflected a 122 basis points decrease in the average yield on interest-earning assets to 2.90% for the three months endedMarch 31, 2021 , from 4.12% for the three months endedMarch 31, 2020 offset in part by a$235.3 million increase in the average balance of interest-earning assets. Interest income on loans decreased$1.7 million , or 13.6%, to$10.6 million for the three months endedMarch 31, 2021 from$12.3 million for the three months endedMarch 31, 2020 . Interest income on loans decreased primarily due to a 70 basis points decrease in the average yield on loans to 3.88% for the three months endedMarch 31, 2021 from 51
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4.58% for the three months endedMarch 31, 2020 , partially offset by a$32.1 million increase in the average balance of loans to$1.1 billion for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . The decrease in the average yield on loans was primarily due to the downward adjustment of interest rates on our existing adjustable-rate loans following the actions taken by theFederal Reserve to reduce short-term interest rates. The increase in the average balance of loans was due to the Company's PPP loan originations, as well as, our continued effort to increase our commercial loan portfolio. Interest income on securities decreased$269,000 , or 51.9%, to$249,000 for the three months endedMarch 31, 2021 from$518,000 for the three months endedMarch 31, 2020 . Interest income on securities decreased due to a 160 basis points decrease in the average yield on securities to 0.61% for the three months endedMarch 31, 2021 from 2.21% for the three months endedMarch 31, 2020 , partially offset by a$70.3 million increase in the average balance of securities to$164.9 million for the three months endedMarch 31, 2021 from$94.6 million for the three months endedMarch 31, 2020 . The decrease in average yield of securities was due to scheduled maturities of higher yieldingU.S. government and agency and municipal obligation securities, as well as, decreased market rates of interest for new securities that were purchased during the quarter endedMarch 31, 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 three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Interest income on interest-earning deposits decreased$405,000 , or 83.0%, to$83,000 for the three months endedMarch 31, 2021 from$488,000 for the three months endedMarch 31, 2020 . The decrease was due to a 146 basis points decrease in the average yield on interest-earning deposits to 0.13% for the three months endedMarch 31, 2021 from 1.59% for the three months endedMarch 31, 2020 as a result of the decrease in short-term interest rates. The decrease in average yield was partially offset by an increase in the average balances on interest-earning deposits of$133.0 million to$256.9 million for the three months endedMarch 31, 2021 from$123.9 million for the three months endedMarch 31, 2020 due to increased balance sheet liquidity. Interest Expense. Interest expense decreased$797,000 , or 64.5%, to$438,000 for the three months endedMarch 31, 2021 from$1.2 million for the three months endedMarch 31, 2020 as a result of a decrease in interest expense on deposits. The decrease primarily reflected a 40 basis points decrease in the average cost of interest-bearing liabilities to 0.19% for the three months endedMarch 31, 2021 from 0.59% for the three months endedMarch 31, 2020 , partially offset by an$88.2 million increase in the average balance of interest-bearing liabilities. Interest expense on interest-bearing deposits decreased$790,000 , or 65.1%, to$423,000 for the three months endedMarch 31, 2021 from$1.2 million for the three months endedMarch 31, 2020 . Interest expense on interest-bearing deposits decreased primarily due to a 39 basis points decrease in the average cost on interest-bearing deposits to 0.19% for the three months endedMarch 31, 2021 from 0.58% for the prior three months, partially offset by a$92.5 million increase in the average balance of deposits to$926.4 million for the three months endedMarch 31, 2021 from$833.9 million for the three months endedMarch 31, 2020 . The decrease in the average cost of deposits reflected a decline in the interest rate environment as the Company reduced rates on money market deposit accounts and demand deposit accounts, as well as, downward rate adjustments on maturing certificates of deposit. The increase in average balances of interest-bearing deposits was due to deposit customers increasing cash balances during the COVID-19 pandemic partly due to government stimulus. Net Interest Income. Net interest income decreased$1.6 million , or 12.9%, to$10.5 million for the three months endedMarch 31, 2021 compared to$12.1 million for the three months endedMarch 31, 2020 . The decrease reflected an 82 basis points decrease in the net interest rate spread to 2.71% for the three months endedMarch 31, 2021 from 3.53% for the three months endedMarch 31, 2020 , partially offset by a$147.2 million increase in the average balance of net interest-earning assets to$618.8 million for the three months endedMarch 31, 2021 from$471.6 million for the three months endedMarch 31, 2020 . The net interest margin decreased 103 basis points to 2.75% for the three months endedMarch 31, 2021 from 3.78% for the three months endedMarch 31, 2020 . Provision for Loan Losses. We recorded a provision for loan losses of$1.3 million for the three months endedMarch 31, 2021 compared to$2.6 million for the three months endedMarch 31, 2020 . The decrease in the provision was primarily due to improving economic conditions related to COVID-19 for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Net charge-offs increased to$1.6 million for the three months ended 52
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March 31, 2021 , compared to$1.7 million in net recoveries for the three months endedMarch 31, 2020 . Net charge-offs for the three months endedMarch 31, 2021 included the partial charge-offs of two commercial loan relationships totaling$1.6 million that were specifically reserved for as of the quarter endedDecember 31, 2020 . Non-performing assets increased to$22.1 million , or 1.23% of total assets, atMarch 31, 2021 , compared to$11.0 million , or 0.73% of total assets, atMarch 31, 2020 . The allowance for loan losses was$23.1 million , or 1.99% of net loans outstanding, atMarch 31, 2021 as compared to$20.7 million , or 1.85% of net loans outstanding, atMarch 31, 2020 . Non-Interest Income. Non-interest income increased$1.4 million , or 53.2%, to$4.1 million for the three months endedMarch 31, 2021 from$2.7 million for the three months endedMarch 31, 2020 . The increase was primarily due to a$1.2 million increase in the net gain on equity securities and a$278,000 increase in income attributable to our insurance and wealth management services. The increase in net gain on equity securities during the three months endedMarch 31, 2021 was due to the increase in market value of our equity securities as compared to the same prior year period. The increase in income attributable to our insurance and wealth management services during the three months endedMarch 31, 2021 was due primarily to the timing of insurance policy renewals as compared to the same prior year period. Non-Interest Expense. Non-interest expense increased$590,000 , or 5.3%, to$11.7 million for the three months endedMarch 31, 2021 from$11.1 million for the three months endedMarch 31, 2020 . The increase was primarily due to a$528,000 increase in salaries and benefits expense and an increase of$124,000 inFDIC insurance premiums, partially offset by a$109,000 decrease in professional fees. Salaries and benefits expense increased due to an increase in pension benefit expense.FDIC insurance premiums increased due to our growth in deposits. Professional fees decreased primarily due to the recognition of insurance recoveries related to the partial reimbursement of defense costs incurred as a result of the Mann Entities matter. Income Tax Expense. Income tax expense increased$85,000 to$296,000 for the three months endedMarch 31, 2021 from$211,000 for the three months endedMarch 31, 2020 due to the increase in income before income taxes. Our effective tax rate was 18.1% for the three months endedMarch 31, 2021 compared to 19.9% for the three months endedMarch 31, 2020 .
Comparison of Operating Results for the Nine Months Ended
General. Net income increased by$908,000 to$4.6 million for the nine months endedMarch 31, 2021 from$3.7 million for the nine months endedMarch 31, 2020 . The increase was due to a$6.4 million decrease in non-interest expense and a$1.1 million decrease in the provision for loan losses, offset by a$6.3 million decrease in net interest income, and a$555,000 increase in income tax expense. Interest and Dividend Income. Interest and dividend income decreased$8.5 million , or 20.3%, to$33.2 million for the nine months endedMarch 31, 2021 , from$41.7 million for the nine months endedMarch 31, 2020 due to decreases in interest income on loans, securities and interest-earning deposits. The decrease reflected a 125 basis points decrease in the average yield on interest-earning assets to 3.06% for the nine months endedMarch 31, 2021 , from 4.31% for the nine months endedMarch 31, 2020 , partially offset by a$159.4 million increase in the average balance of interest-earning assets. Interest income on loans decreased$5.9 million , or 15.6%, to$32.2 million for the nine months endedMarch 31, 2021 from$38.1 million for the nine months endedMarch 31, 2020 . Interest income on loans decreased primarily due to a 94 basis points decrease in the average yield on loans to 3.80% for the nine months endedMarch 31, 2021 from 4.74% for the nine months endedMarch 31, 2020 , partially offset by a$58.7 million increase in the average balance of loans to$1.1 billion for the nine months endedMarch 31, 2021 as compared to the nine months endedMarch 31, 2020 . The decrease in the average yield on loans was primarily due to the downward adjustment of interest rates on our existing adjustable-rate loans following the actions taken by theFederal Reserve to reduce short-term interest rates. The increase in the average balance of loans was due to the Company's PPP loan originations, as well as, our continued effort to increase our commercial loan portfolio. Interest income on securities decreased$856,000 , or 49.9%, to$859,000 for the nine months endedMarch 31, 2021 from$1.7 million for the nine months endedMarch 31, 2020 . Interest income on securities decreased due to a 146 basis points decrease in the average yield on securities to 0.89% for the nine months endedMarch 31, 2021 from 2.35% 53
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for the nine months endedMarch 31, 2020 . The decrease in average yield of securities was partially offset by a$31.7 million increase in the average balance of securities to$129.0 million for the nine months endedMarch 31, 2021 from$97.3 million for the nine months endedMarch 31, 2020 . The decrease in average yield of securities was due to scheduled maturities of higher yieldingU.S. government and agency and municipal obligation securities, as well as, decreased market rates of interest for new securities that were purchased during the nine months endedMarch 31, 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 nine months endedMarch 31, 2021 as compared to the nine months endedMarch 31, 2020 . Interest income on interest-earning deposits decreased$1.7 million , or 88.4%, to$217,000 for the nine months endedMarch 31, 2021 from$1.9 million for the nine months endedMarch 31, 2020 . Interest income on interest-earning deposits decreased due to a 190 basis points decrease in the average yield on interest-earning deposits to 0.15% for the nine months endedMarch 31, 2021 from 2.05% for the nine months endedMarch 31, 2020 as a results of the decrease in short-term interest rates. The decrease in average yield was partially offset by an increase in the average balance on interest-earning deposits of$68.9 million to$190.0 million for the nine months endedMarch 31, 2021 from$121.1 million for the nine months endedMarch 31, 2020 due to increased balance sheet liquidity. Interest Expense. Interest expense decreased$2.1 million , or 55.4%, to$1.7 million for the nine months endedMarch 31, 2021 from$3.8 million for the nine months endedMarch 31, 2020 as a result of a decrease in interest expense on deposits. The decrease primarily reflected a 35 basis points decrease in the average cost of interest-bearing liabilities to 0.26% for the nine months endedMarch 31, 2021 from 0.61% for the nine months endedMarch 31, 2020 , partially offset by a$36.7 million increase in the average balance of interest-bearing liabilities. Interest expense on interest-bearing deposits decreased$2.1 million , or 56.1%, to$1.7 million for the nine months endedMarch 31, 2021 from$3.8 million for the nine months endedMarch 31, 2020 . Interest expense on interest-bearing deposits decreased due to a 35 basis points decrease in the average cost on interest-bearing deposits to 0.25% for the nine months endedMarch 31, 2021 from 0.60% for the prior nine months, partially offset by a$38.2 million increase in the average balance of deposits to$870.7 million for the nine months endedMarch 31, 2021 from$832.5 million for the nine months endedMarch 31, 2020 . The decrease in the average cost of deposits reflected a decline in the interest rate environment as the Company reduced rates on money market deposit accounts and demand deposit accounts, as well as, downward rate adjustments on maturing certificates of deposit. The increase in average balances of interest-bearing deposits was due to deposit customers increasing cash balances during the COVID-19 pandemic partly due to government stimulus. Net Interest Income. Net interest income decreased$6.4 million , or 16.7%, to$31.5 million for the nine months endedMarch 31, 2021 compared to$37.9 million for the nine months endedMarch 31, 2020 . The decrease reflected a 90 basis points decrease in the net interest rate spread to 2.80% for the nine months endedMarch 31, 2021 from 3.70% for the nine months endedMarch 31, 2020 , partially offset by a$122.7 million increase in the average balance of net interest-earning assets to$576.4 million for the nine months endedMarch 31, 2021 from$453.7 million for the nine months endedMarch 31, 2020 . The net interest margin decreased 103 basis points to 2.89% for the nine months endedMarch 31, 2021 from 3.92% for the nine months endedMarch 31, 2020 . Provision for Loan Losses. We recorded a provision for loan losses of$3.6 million for the nine months endedMarch 31, 2021 compared to$4.6 million for the nine months endedMarch 31, 2020 . The decrease in the provision was primarily due to the nine month period endedMarch 31, 2020 including increased provisions related to the onset of COVID-19 in the third fiscal quarter of 2020. Net charge-offs increased to$3.3 million for the nine months endedMarch 31, 2021 , compared to$1.6 million in net recoveries for the nine months endedMarch 31, 2020 . Net charge-offs for the nine months endedMarch 31, 2021 included the charge-off of three commercial loan borrower relationships totaling$3.1 million . Loans past due 30-89 days increased$8.9 million to$15.6 million atMarch 31, 2021 from$6.7 million atJune 30, 2020 mainly due to increases in delinquent commercial real estate loans. Non-performing assets increased to$22.1 million , or 1.23% of total assets, atMarch 31, 2021 , compared to$11.0 million , or 0.73% of total assets, atMarch 31, 2020 . The allowance for loan losses was$23.1 million , or 1.99% of net loans outstanding, atMarch 31, 2021 as compared to$20.7 million , or 1.85% of net loans outstanding, atMarch 31, 2020 . Non-Interest Income. Non-interest income increased$262,000 , or 2.2%, to$12.3 million for the nine months endedMarch 31, 2021 from$12.1 million for the nine months endedMarch 31, 2020 . The increase was primarily due to 54
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a$2.4 million increase in the net gain on equity securities, offset by a decrease of$1.8 million in bank fees and service charges and a$554,000 decrease in bank-owned life insurance. The increase in the net gain on equity securities during the nine months endedMarch 31, 2021 was due to the increase in market value of our equity securities as compared to the same prior year period. Bank fees and service charges decreased primarily due to less commercial loan fees and a decrease in deposit service charges due to a drop in transaction activity related to the impact of the COVID-19 pandemic. The decrease in bank-owned life insurance was primarily due to proceeds from a death benefit during the nine months endedMarch 31, 2020 . Non-Interest Expense. Non-interest expense decreased$6.5 million , or 15.7%, to$34.5 million for the nine months endedMarch 31, 2021 from$41.0 million for the nine months endedMarch 31, 2020 . The$6.5 million decrease was primarily the result of the$5.4 million contribution of stock and cash to thePioneer Bank Charitable Foundation in conjunction with our minority stock issuance, and a$2.5 million charge based on the net negative deposit balance of the various Mann Entities' accounts after the setoffs/overdraft recoveries for the nine months endedMarch 31, 2020 . The decrease in non-interest expense was partially offset by an increase inFDIC insurance premiums related toSmall Bank Assessment Credits for the nine months endedMarch 31, 2020 which offset the premium expense for that period. Income Tax Expense. Income tax expense increased$555,000 to$1.2 million for the nine months endedMarch 31, 2021 from$598,000 for the nine months endedMarch 31, 2020 due to an increase in income before income taxes. Our effective tax rate was 19.9% for the nine months endedMarch 31, 2021 compared to 13.8% for the nine months endedMarch 31, 2020 .
Asset Quality and Allowance for Loan Losses
Asset Quality. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable that at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on the present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and is in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method. See Item 2 - "Recent Developments - COVID-19 Pandemic." When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair market value, less estimated costs to sell. Any excess of the recorded value of the loan over the fair market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense in the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower's financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months. Pursuant to the CARES Act and as further modified by the 2021 Appropriations Act, financial institutions have the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made betweenMarch 1, 2020 and the earlier of (i)January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as ofDecember 31, 2019 . The Bank elected to adopt these provisions of the CARES Act. 55
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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
March 31, June 30,
2021 2020
(Dollars in thousands)
Non-accrual loans:
Commercial real estate $ 8,339 $ 3,364
Commercial and industrial 484 95
Commercial construction 550 1,319
One- to four-family residential real estate 5,061 4,807
Home equity loans and lines of credit 2,200 1,865 Consumer 195 210 Total non-accrual loans 16,829 11,660
Accruing loans past due 90 days or more:
Commercial real estate 3,056
143
Commercial and industrial 1,355
1,455
Commercial construction 617 - One- to four-family residential real estate - - Home equity loans and lines of credit - - Consumer 40 12 Total accruing loans past due 90 days or more 5,068 1,610 Real estate owned: Commercial real estate - 99 Commercial and industrial - - Commercial construction - - One- to four-family residential real estate 161 161 Home equity loans and lines of credit - - Consumer - - Total real estate owned 161 260 Total non-performing assets$ 22,058 $
13,530
Total accruing troubled debt restructured loans
Total non-performing loans to total loans 1.89 %
1.13 %
Total non-performing assets to total assets 1.23 % 0.89 % Non-accrual loans increased$5.2 million to$16.8 million atMarch 31, 2021 fromJune 30, 2020 primarily due to one commercial loan relationship in the accommodation and food service industry totaling$5.2 million that was placed on non-accrual status during the quarter endedMarch 31, 2021 and was previously granted a COVID-19 payment deferral. Accruing loans past due 90 days or more increased$3.4 million to$5.1 million atMarch 31, 2021 from$1.6 million atJune 30, 2020 primarily due to one commercial loan relationship totaling$2.8 million which included a commercial real estate loan of$2.2 million and a commercial construction loan of$617,000 . 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 56
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loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
The following table sets forth our amounts of all classified loans and loans
designated as special mention as of
At At
March 31, June 30,
2021 2020
(In thousands)
Classification of Loans:
Substandard $ 38,662 $ 31,234
Doubtful 412 53
Loss - -
Total Classified Loans $ 39,074 $ 31,287
Special Mention $ 38,490 $ 6,499
In total, classified loans increased by $7.8 million to $39.1 million at March
31, 2021 from $31.3 million at June 30, 2020 , primarily due to three commercial
real estate loan relationships secured by office properties totaling $2.9
million , $2.3 million and $1.2 million , respectively, as well as, one commercial
and industrial loan relationship totaling $3.6 million that were continuing to
experience COVID-19 related financial hardships.
Total special mention commercial loans increased $32.0 million to $38.5 million
at March 31, 2021 from $6.5 million at June 30, 2020 primarily due to three
commercial real estate loan relationships in the accommodation and food service
industry totaling $8.0 million , $6.6 million and $6.3 million , respectively, as
well as, one commercial real estate loan relationship in the arts and recreation
industry totaling $6.7 million that were continuing to experience COVID-19
related financial hardships.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb probable credit
losses inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectability of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
loans that are individually classified as impaired are generally determined
based on collateral values or the present value of estimated cash flows. Because
of uncertainties associated with national and regional economic conditions,
collateral values, and future cash flows on impaired loans, including as a
result of the COVID-19 pandemic, it is reasonably possible that management's
estimate of probable credit losses inherent in the loan portfolio and the
related allowance may change materially in the near-term. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by full and partial charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision
for loan losses. Management's periodic evaluation of the adequacy of the
allowance is based on various factors, including, but not limited to, historical
loss experience, current economic conditions, delinquency statistics, geographic
and industry concentrations, the adequacy of the underlying collateral, the
financial strength of the 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 Federal Deposit Insurance Corporation periodically review our allowance
for loan losses and as a result of such reviews, we may have to materially
adjust our allowance for loan losses or recognize further loan charge-offs.
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The following table sets forth activity in our allowance for loan losses for the
periods indicated.
At or for the
Nine Months Ended March 31,
2021 2020
(As Restated)
(Dollars in thousands)
Allowance at beginning of period $ 22,851 $ 14,499
Provision for loan losses 3,550 4,640
Charge offs:
Commercial real estate - 1
Commercial and industrial 2,386 4
Commercial construction 769 -
One- to four-family residential real estate 108 19
Home equity loans and lines of credit 51 -
Consumer 160 153
Total charge-offs 3,474 177
Recoveries:
Commercial real estate - -
Commercial and industrial 130 1,707
Commercial construction - -
One- to four-family residential real estate - -
Home equity loans and lines of credit - 1
Consumer 30 30
Total recoveries 160 1,738
Net charge-offs (recoveries) 3,314 (1,561)
Allowance at end of period $ 23,087 $ 20,700
Allowance to non-performing loans 1.05 % 192.61 % Allowance to total loans outstanding at the end of the period
1.99 % 1.85 %
Net charge-offs (recoveries) to average loans
outstanding during the period 0.39 %(1) (0.20) %(1)
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(1) Annualized.
Net charge-offs for the nine months endedMarch 31, 2021 included the charge-off of three commercial loan borrower relationships totaling$3.1 million . The nine months endedMarch 31, 2020 included a partial recovery in the amount of$1.7 million related to the charge-off of the entire principal balance owed to the Bank related to a business customer and various affiliated entities (collectively, the "Mann Entities") commercial loan relationships in the fourth fiscal quarter of 2019. 58
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Loan Deferrals Related to COVID-19 Pandemic. The direct and indirect effects of the COVID-19 pandemic have resulted in dramatic reductions in the level of economic activity in the Company's market area, as well as in the national and global economies and financial markets, and have severely hampered the ability for certain businesses and consumers to meet their current repayment obligations. In the table below, the commercial loan portfolio is presented by industry sector with loan deferrals as the result of the COVID-19 pandemic. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings. The commercial loan industry sector balances and deferrals are as ofMarch 31, 2021 . Loans by Industry Sector Deferrals as of March 31, 2021 Percentage of Percentage of Percentage of March 31, 2021 Commercial Industry Commercial Balance Loans Balance Sector Loans (Dollars in thousands) Commercial Loans: Real estate Residential real estate, including lessors of residential buildings$ 139,418 18.1 %$ 6,743 4.8 % 0.9 % Non-residential real estate Office 62,823 8.2 % 2,120 3.4 % 0.3 % Retail 75,708 9.8 % 1,108 1.5 % 0.1 % Industrial 22,859 3.0 % - 0.0 % 0.0 % Self-storage 6,761 0.9 % - 0.0 % 0.0 % Mixed use 23,458 3.0 % 864 3.7 % 0.1 % Other real estate 32,758 4.3 % - 0.0 % 0.0 % Total real estate 363,785 47.3 % 10,835 3.0 % 1.4 % Construction 125,151 16.3 % - 0.0 % 0.0 % Accommodation and food service 74,233 9.6 % 26,702 36.0 % 3.5 % Retail trade 30,879 4 % - 0.0 % 0.0 % Wholesale trade 25,258 3.3 % - 0.0 % 0.0 % Finance and insurance 16,698 2.2 % - 0.0 % 0.0 % Healthcare and social assistance 21,743 2.8 % - 0.0 % 0.0 % Manufacturing 23,360 3 % 709 3.0 % 0.1 % Arts, entertainment and recreation 11,681 1.5 % - 0.0 % 0.0 % Other 76,903 10 % - 0.0 % 0.0 % Total commercial loans$ 769,691 100.0 %$ 38,246 5.0 % 5.0 % As ofMarch 31, 2021 , the Company had in relation to its commercial borrowers COVID-19 related financial hardship payment deferrals related to 22 loans representing$38.2 million of the Company's commercial loan balances, which is down from 144 loans representing$170.3 million as ofJune 30, 2020 . In the table below, the residential mortgage, home equity loans and lines, and consumer loan portfolios are presented with loan deferrals as the result of the COVID-19 pandemic. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings. The loan portfolio balances and deferrals are as ofMarch 31, 2021 : Loans by Portfolio Deferrals as of March 31, 2021 March 31, 2021 Percentage of Balance Balance Loan Category (Dollars in thousands) Residential mortgages $ 286,559 $ 1,656 0.6 % Home equity loans and lines 75,882 - 0.0 % Consumer 28,322 - 0.0 %
As of
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equity loans and lines of credit, and consumer loan balances, which is down from
110 loans representing
Although the amount of commercial and consumer loans in deferral status atMarch 31, 2021 has declined fromJune 30, 2020 , there are borrowers continuing to experience COVID-19 related financial hardships. The Company anticipates that delinquent and nonperforming loans will increase in future periods as borrowers that continue to experience COVID-19 related financial hardships may be unable to continue loan payments consistent with their contractual obligations and the Company may be required to make additional provisions for loan losses.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities. We also have the ability to borrow from theFederal Home Loan Bank of New York . AtMarch 31, 2021 , we had the ability to borrow up to$362.1 million , of which none was utilized for borrowings and$179.5 million was utilized as collateral for letters of credit issued to secure municipal deposits. AtMarch 31, 2021 , we also had a$20.0 million unsecured line of credit with a correspondent bank with no outstanding balance. We cannot predict what the impact of the events described in "Recent Developments - COVID-19 Pandemic and Mann Entities Related Fraudulent Activity" above may have on our Liquidity and Capital Resources beyond the third quarter of fiscal 2021. 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 ofMarch 31, 2021 . While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any period. AtMarch 31, 2021 , cash and cash equivalents totaled$328.6 million . Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$200.2 million atMarch 31, 2021 . We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year ofMarch 31, 2021 totaled$60.8 million , or 3.96%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits andFederal Home Loan Bank of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Capital Resources. We are subject to various regulatory capital requirements administered by NYSDFS and theFederal Deposit Insurance Corporation . AtMarch 31, 2021 , we exceeded all applicable regulatory capital requirements, and were considered "well capitalized" under regulatory guidelines. The Bank andPioneer Commercial Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. 60
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Quantitative measures established by regulation to ensure capital adequacy require the Bank andPioneer Commercial Bank to maintain minimum capital amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to average assets (as defined), and common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined). UnderBasel III rules, banks must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios in order to avoid limitations on distributions and certain discretionary bonus payments to executive officers. The required capital conservation buffer is 2.50%. As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a "Community Bank Leverage Ratio" (the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than$10 billion . A "qualifying community bank" that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered "well capitalized" under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. Pursuant to the CARES Act, the federal banking agencies issued rules to set the Community Bank Leverage Ratio at 8% beginning in the second calendar quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. Community banks will have untilJanuary 1, 2022 , before theCommunity Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. The Bank andPioneer Commercial Bank did not elect to become subject to the Community Bank Leverage Ratio. As ofMarch 31, 2021 , the Bank andPioneer Commercial Bank met all capital adequacy requirements to which they were subject. Further, the most recentFDIC notification categorized the Bank andPioneer Commercial Bank as well capitalized institutions under the prompt corrective action regulations. There have been no conditions or events since the notification that management believes have changed the Bank's orPioneer Commercial Bank's capital classification. 61
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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 March 31, 2021
Tier 1 (leverage) capital $ 180,576 10.70 % $ 67,521 4.00 % N/A N/A $ 84,401 5.00 %
Risk-based capital
Common Tier 1 $ 180,576 16.39 % $ 49,573 4.50 % $ 77,113 7.00 % $ 71,605 6.50 %
Tier 1 $ 180,576 16.39 % $ 66,097 6.00 % $ 93,637 8.50 % $ 88,129 8.00 %
Total $ 194,461 17.65 % $ 88,129 8.00 % $ 115,669 10.50 % $ 110,161 10.00 %
As of June 30, 2020
Tier 1 (leverage) capital $ 175,424 11.53 % $ 60,868 4.00 % N/A N/A $ 76,085 5.00 %
Risk-based capital
Common Tier 1 $ 175,424 15.33 % $ 51,503 4.50 % $ 80,115 7.00 % $ 74,393 6.50 %
Tier 1 $ 175,424 15.33 % $ 68,670 6.00 % $ 97,283 8.50 % $ 91,561 8.00 %
Total $ 189,835 16.59 % $ 91,561 8.00 % $ 120,173 10.50 % $ 114,451 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$ 28,408 7.53 %$ 15,100 4.00 % N/A N/A$ 18,875 5.00 % Risk-based capital Common Tier 1$ 28,408 37.49 %$ 3,410 4.50 %$ 5,304 7.00 %$ 4,925 6.50 % Tier 1$ 28,408 37.49 %$ 4,556 6.00 %$ 6,441 8.50 %$ 6,062 8.00 % Total$ 28,408 37.49 %$ 6,062 8.00 %$ 7,956 10.50 %$ 7,577 10.00 % As of June 30, 2020 Tier 1 (leverage) capital$ 27,144 8.11 %$ 13,388 4.00 % N/A N/A$ 16,736 5.00 % Risk-based capital Common Tier 1$ 27,144 45.91 %$ 2,661 4.50 %$ 4,139 7.00 %$ 3,843 6.50 % Tier 1$ 27,144 45.91 %$ 3,548 6.00 %$ 5,026 8.50 %$ 4,730 8.00 % Total$ 27,144 45.91 %$ 4,730 8.00 %$ 6,209 10.50 %$ 5,913 10.00 % 62
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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. AtMarch 31, 2021 , we had$247.7 million of commitments to originate or purchase loans, comprised of$157.1 million of commitments under commercial loans and lines of credit (including$20.8 million of unadvanced portions of commercial construction loans),$54.5 million of commitments under home equity loans and lines of credit,$28.0 million of commitments to purchase one- to four-family residential real estate loans and$8.1 million of unfunded commitments under consumer lines of credit. In addition, atMarch 31, 2021 , the Company had$24.5 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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