Pioneer Bancorp, Inc. — Form 10-Q Summary
Reporting period: The quarter and six months ended December 31, 2019, corresponding to Pioneer’s fiscal second quarter and first half of fiscal 2020. The filing was signed February 14, 2020. Pioneer is a New York community banking company operating 22 offices in the Capital Region; the Bank provides deposit, lending, insurance, wealth management and related services.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 |
|---|---|---|
| Interest and dividend income | $13.8 million | $28.4 million |
| Net interest income | $12.6 million | $25.8 million |
| Net interest margin | 3.94% (4.14% prior year) | 4.02% (4.07% prior year) |
| Provision for loan losses | $1.5 million | $17.9 million |
| Noninterest income | $5.5 million | $9.4 million |
| Noninterest expense | $11.7 million | $29.8 million |
| Net income (loss) | $3.9 million | $(8.8) million |
| Basic and diluted earnings (loss) per share | $0.15 | $(0.35) |
- Balance sheet at December 31: Assets were $1.392 billion, down 6.0% from June 30, 2019. Net loans were $1.079 billion, up 2.4%; deposits were $1.140 billion, down 14.4%; and shareholders’ equity was $228.0 million, up from $135.0 million.
- Liquidity and funding: Cash and cash equivalents were approximately $114.9 million, versus $230.1 million at June 30. The Bank had $10.0 million of FHLB advances outstanding. It reported $398.9 million of FHLB borrowing capacity, of which $201.5 million supported letters of credit, and an unused $20.0 million correspondent-bank line.
- Cash flows, first half: Operating activities provided $11.0 million; investing activities used $39.3 million; financing activities used $86.9 million; cash declined $115.2 million. Financing included $109.1 million of net stock-offering proceeds, substantial deposit outflows, and ESOP share purchases.
- Credit quality: Nonperforming assets were $11.2 million, or 0.80% of assets, versus $12.8 million, or 0.87%, at June 30. The allowance for loan losses was $16.5 million, or 1.51% of loans. The six-month provision included a $15.8 million specific provision and charge-off tied to the Mann Entities.
- Regulatory capital: Management said the Bank and Pioneer Commercial Bank exceeded requirements and were well capitalized. Pioneer Bank’s reported ratios included a 12.36% Tier 1 leverage ratio and 16.84% total risk-based capital ratio at December 31.
Changes versus comparable periods
- Quarterly net income fell from $4.8 million to $3.9 million. Higher loan-loss provision and operating expenses more than offset higher net interest and noninterest income.
- First-half results shifted from $9.2 million net income to an $8.8 million net loss. The main drivers were the $15.8 million Mann Entities loan provision/charge-off, a $5.4 million charitable foundation contribution related to the stock offering, and a $2.5 million charge for negative Mann Entities deposit balances after setoffs.
- First-half net interest income rose 6.3%, but the margin narrowed five basis points. Deposit costs rose amid competition; loan growth and higher interest income on bank deposits supported revenue.
- The July 2019 mutual holding company reorganization and stock offering generated $109.1 million of net proceeds. Pioneer Bancorp, MHC retained 55% ownership; 25,977,679 shares were outstanding at December 31.
Outlook, risks and unusual items
- Mann Entities matter: The Bank cited potential exposure of approximately $19 million related to deposit activity and $16 million related to its participation in commercial loans. It recorded the $2.5 million deposit-related expense and $15.8 million loan provision in the first fiscal quarter; no further Mann-related charges were recorded in the second quarter. Recovery efforts and investigations continued.
- Litigation: Southwestern sought at least $9.8 million; NatPay’s proposed complaint sought at least $4 million plus unspecified punitive damages and interest. In February 2020, after quarter-end, participating lenders Berkshire Bank and Chemung Canal Trust Company filed claims seeking $15.6 million and $4.2 million, respectively, plus additional damages. Pioneer said it was vigorously defending the claims and believed it had substantial defenses, but warned legal costs, judgments or settlements could materially affect results, financial condition or cash flows. These claimed amounts are not established liabilities.
- Acquisition: Pioneer had agreed to acquire insurance agency Jaeger & Flynn Associates for an aggregate stated purchase price of $12.75 million, subject to adjustments and performance-based installments. The transaction remained subject to customary conditions and regulatory approval; the company anticipated completion after approval.
- Other risks and outlook: No earnings or financial guidance was provided. Management said it believed liquidity was sufficient at December 31, while noting uncertainty about the fraud-related events’ future effect on liquidity and capital resources. Risks include credit losses, real estate and economic conditions, deposit competition and retention, interest rates, fraud, litigation, regulation and execution of growth or acquisition plans.
- The company adopted revenue-recognition guidance in July 2019, increasing opening retained earnings by $291,000; management said adoption did not significantly affect the period’s statements. The company was evaluating the future CECL credit-loss standard and had not estimated its allowance impact, though it expected a significant effect on its methodology.
Investor verification checklist
- Track the resolution, recovery prospects and any additional provisions or expenses arising from the Mann Entities activity.
- Check the status and potential financial exposure of all related lawsuits, including the post-quarter Berkshire and Chemung claims, and whether insurance or other recoveries offset costs.
- Reconcile the deposit decline and cash reduction, including stock-subscription refunds and seasonal municipal deposit movements; monitor subsequent liquidity and funding levels.
- Review loan growth and concentrations, commercial loan risk ratings, delinquencies, charge-offs, nonperforming assets and allowance adequacy after the unusual $15.8 million charge-off.
- Confirm the Jaeger & Flynn acquisition’s regulatory approval, closing, final consideration and performance-based payments.
- Verify subsequent regulatory capital ratios and the company’s CECL implementation estimates; the filing’s regulatory capital figures are for the bank subsidiaries, not the consolidated parent.