Pioneer Bancorp, Inc. — Form 10-K Summary
Reporting-period note: The request identifies “2018 Q4,” but the supplied filing is the annual report for the year ended June 30, 2019, with comparison to fiscal 2018. The company was formed in March 2019; at June 30, 2019 it had no assets or liabilities and had conducted only organizational activities. The financial statements and operating results summarized here are for Pioneer Savings Bank and subsidiaries. The holding-company reorganization and minority stock offering closed July 17, 2019.
Business context and financial results
Pioneer Bank is a New York community bank with 22 offices in the Capital Region. Its core activities are commercial and real-estate lending, deposit gathering, and insurance, employee-benefit and wealth-management services.
| Metric | FY ended June 30, 2019 | FY ended June 30, 2018 |
|---|---|---|
| Total assets, at year-end | $1.480 billion | $1.284 billion |
| Net loans, at year-end | $1.054 billion | $985.9 million |
| Deposits, at year-end | $1.331 billion | $1.150 billion |
| Net worth, at year-end | $135.0 million | $118.1 million |
| Net interest income | $49.7 million | $43.3 million |
| Provision for loan losses | $2.35 million | $1.97 million |
| Non-interest income | $14.4 million | $12.8 million |
| Non-interest expense | $37.9 million | $36.3 million |
| Income before taxes | $23.8 million | $17.8 million |
| Income tax expense | $4.83 million | $6.31 million |
| Net income | $19.0 million | $11.5 million |
| Net interest margin | 4.10% | 3.78% |
| Return on average assets / equity | 1.43% / 14.93% | 0.92% / 10.51% |
| Operating cash flow | $6.1 million | $23.0 million |
Material changes and financial position
- Net income rose 65.4%, principally from a $6.4 million increase in net interest income, $1.6 million more non-interest income, and $1.5 million lower income tax expense. The federal tax-rate reduction materially lowered the effective tax rate: 20.3% in FY2019 versus 35.4% in FY2018. FY2019 also included a $580,000 tax benefit related to remeasurement of deferred taxes; FY2018 included a $1.2 million charge.
- Net interest income increased 14.7%; the reported net interest spread rose to 3.93% from 3.67%. Interest-earning asset yields increased as loans and securities grew and market rates rose, while deposit costs also increased.
- Deposits increased 15.7%; non-interest-bearing deposits were $357.5 million, and core deposits were 90.2% of total deposits. Municipal deposits totaled $275.7 million, or 20.7% of deposits, and are a meaningful funding source.
- The loan portfolio grew 6.9% net of allowance. Commercial real estate loans were $414.4 million (38.9% of total loans); commercial and industrial loans were $183.3 million (17.2%); commercial construction loans were $85.3 million (8.0%). Approximately 80.8% of loans were secured by real estate.
- Credit indicators weakened: non-performing assets increased to $12.8 million, or 0.87% of assets, from $9.6 million, or 0.75%. Non-accrual loans increased to $12.6 million from $7.7 million. The allowance was $14.5 million, 1.36% of loans, compared with $13.5 million, 1.35%. Net charge-offs rose to $1.36 million from $280,000, largely due to commercial and industrial loan charge-offs.
- Cash and cash equivalents increased to $230.1 million from $120.3 million. No borrowings were outstanding at year-end. FHLB capacity was reported at $405 million, including $207 million used to support letters of credit securing municipal deposits; the Bank also had an unused $20 million unsecured line of credit. Management stated liquidity was sufficient at June 30, 2019.
- Operating cash flow fell to $6.1 million from $23.0 million, including a $14.2 million increase in other assets. Financing cash flow was $181.7 million, primarily reflecting deposit growth; investing activities used $78.0 million, including $70.9 million of net loan growth.
- The Bank exceeded regulatory capital requirements and was categorized as well capitalized. Its June 30, 2019 total risk-based capital ratio was 13.85%, Tier 1 leverage ratio 9.99%, and common equity Tier 1 ratio 12.58%.
Outlook, risks and unusual items
- Management’s strategy is moderate balance-sheet growth, continued commercial lending, growth in lower-cost core deposits, and expansion of fee income through insurance and wealth management. The filing does not provide numerical earnings or revenue guidance.
- A major post-year-end event is potentially fraudulent activity involving the Mann Entities, identified in fiscal Q1 2020. The Bank reported approximately $16 million of lending exposure (its participation in roughly $36 million of commercial loan relationships) and approximately $19 million of deposit-related potential exposure. After exercising setoff rights, it expected a $2.5 million non-interest expense charge and a $15.8 million loan-loss provision in Q1 FY2020. The investigation and recovery efforts were ongoing, and further exposure could not be ruled out.
- Southwestern Payroll Services sued the company and Bank on October 31, 2019, alleging wrongful conversion, improper collection and gross negligence concerning approximately $9.8 million, and seeking a constructive trust. Management said it was defending the matter and believed it had substantial defenses; outcome and potential costs remain uncertain.
- The company received Nasdaq delinquency notices for late periodic filings, including the 10-K and the September 2019 10-Q, and disclosed risk of delisting if it failed to regain compliance by the stated deadline. The filing also says not all call reports were timely filed and that regulatory fines were possible.
- Management described commercial real estate concentration, borrower and collateral risks, sensitivity to interest rates and municipal-deposit retention, competition, fraud, litigation, cybersecurity, and reliance on a third-party mortgage originator as significant risks. A 200-basis-point rate increase was estimated to reduce net portfolio value by $16.5 million, or 7.5%; a 200-basis-point decrease was estimated to reduce it by $4.3 million, or 2.0%.
- The Bank signed an agreement to acquire Jaeger & Flynn Associates for a stated $12.75 million, subject to adjustments, installment and performance conditions, and customary closing conditions. Completion was anticipated in early calendar 2020; the transaction was not completed as of the filing.
- The July 2019 offering sold 11.17 million shares at $10 per share and generated approximately $109.1 million in net proceeds. Pioneer Bancorp, MHC held 55% of the company after the offering. Management did not anticipate dividends in the foreseeable future, citing regulatory constraints and the MHC dividend-waiver issue.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls as of June 30, 2019. Management concluded disclosure controls were effective. The filing notes that management’s internal-control assessment was not included because of the transition period for a newly public company.
Important facts for investors to verify
- Subsequent disclosures and later filings on the Mann Entities matter: actual loan charge-offs, deposit loss, recoveries, insurance coverage, investigation results and any further claims.
- Current status, exposure and resolution of Southwestern Payroll Services litigation, including legal costs and any related proceedings.
- Whether the company cured Nasdaq filing delinquencies and any reported consequences, including the status of the September 2019 10-Q and call-report compliance.
- Recent trends in non-accrual loans, classified assets, charge-offs and allowance adequacy, especially in commercial real estate, commercial and industrial, and construction lending.
- Deposit stability and pricing, particularly municipal deposits, and actual available borrowing capacity after letters of credit and collateral requirements.
- Completion and final economics of the Jaeger & Flynn acquisition, including contingent installment or earn-out payments.
- Post-offering capital deployment, resulting returns on equity, and whether any dividend policy or regulatory constraints have changed.