Pioneer Bancorp, Inc. — Form 10-Q Summary
Business and reporting period. Pioneer Bancorp is a bank holding company serving New York’s Capital Region through 22 offices. This filing covers the quarter and six months ended December 31, 2021, the second quarter and first half of fiscal 2022. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and position
- Quarterly earnings: Net income was $6.3 million, or $0.25 per diluted share, versus $1.9 million, or $0.08 per share, in the prior-year quarter. Income before taxes was $8.1 million versus $2.4 million.
- First-half earnings: Net income was $7.6 million, or $0.30 per diluted share, compared with $3.3 million, or $0.13 per share, a year earlier.
- Net interest income and margin: Quarterly net interest income decreased 1.8% to $10.5 million; net interest margin fell to 2.41% from 3.01%. For the six months, net interest income decreased 1.4% to $20.7 million and margin declined to 2.41% from 2.99%.
- Revenue mix: Quarterly interest and dividend income was $10.9 million, down 3.4%; noninterest income was $3.9 million, down 16.4%. First-half amounts were $21.5 million and $7.1 million, respectively, down 3.7% and 13.3%. Lower gains on equity securities contributed to the noninterest-income declines.
- Expenses and credit costs: Noninterest expense was $6.4 million for the quarter and $17.8 million for the half-year, down 44.1% and 22.1%. The reductions included a $5.0 million employee retention credit (ERC) benefit. The quarter had no loan-loss provision, versus $1.6 million a year earlier; the six-month provision was $250,000 versus $2.3 million.
- Assets and loans: Total assets were $1.84 billion at December 31, up 2.6% from June 30, 2021. Net loans were $993.7 million, down 8.1%, largely reflecting PPP forgiveness, commercial loan paydowns and lower construction balances. Available-for-sale securities increased 38.2% to $365.6 million.
- Deposits, liquidity and capital: Deposits increased 3.1% to $1.58 billion, including noninterest-bearing deposits of $554.2 million. Cash and cash equivalents were $349.1 million. Management reported $306.8 million of unused FHLB borrowing capacity; the Bank had no FHLB advances outstanding and an unused $20 million correspondent-bank line. The Bank’s Tier 1 leverage ratio was 9.80%, and management reported that the Bank and Pioneer Commercial Bank exceeded applicable capital requirements and were well capitalized.
- Cash flow, first half: Operating activities provided $5.8 million; investing activities used $28.6 million; financing activities provided $47.0 million. Cash and cash equivalents increased $24.2 million to $349.1 million.
- Credit quality: Nonperforming assets were $15.1 million, or 0.82% of assets, at December 31, down from $22.3 million, or 1.24%, at June 30. The allowance for loan losses was $22.6 million, or 2.23% of loans. Classified loans rose to $60.7 million from $41.5 million at June 30, including an increase in substandard loans.
Material changes and notable items
- Reported earnings improved substantially, but the $5.0 million ERC benefit materially reduced reported noninterest expense. The company recorded a corresponding $5.0 million receivable and was seeking refunds by amending payroll-tax filings; timing of collection was uncertain.
- Net interest margin continued to contract despite lower deposit costs, as yields on interest-earning assets declined. Average interest-earning assets grew, but this did not offset lower asset yields.
- The commercial and industrial portfolio declined, including PPP loans falling to $14.1 million from $51.5 million at June 30. The Bank reported that 862 PPP borrowers had received forgiveness or paid off loans totaling $101.3 million.
- The company acquired assets of two local wealth-management practices in December for $1.5 million cash, plus $728,000 contingent consideration; it recorded $890,000 of customer-list intangibles and $1.3 million of goodwill.
- Available-for-sale securities had $2.5 million of gross unrealized losses at December 31, primarily attributed to higher credit spreads. The resulting after-tax securities loss reduced other comprehensive income and contributed to accumulated other comprehensive loss of $6.9 million.
Outlook, risks and contingencies
- Management expected third-quarter fiscal 2022 net interest margin to remain depressed, excluding PPP effects, because lower asset yields were not expected to be fully offset by lower funding costs. PPP fee recognition and forgiveness timing could add yield volatility. No quantified earnings or full-year guidance was provided.
- Management said COVID-19’s future effects on the company could be adverse and material but were not currently estimable. It cited possible higher delinquencies, nonperforming loans and provisions. At December 31, four consumer loans totaling $1.1 million remained in COVID-related deferral; no commercial deferrals remained.
- Significant Mann Entities litigation and regulatory risk: Multiple lawsuits and investigations relate to alleged fraudulent activity involving a former customer. The company disclosed a reasonably possible estimated loss range of $0 to $52.5 million in excess of any accrued liability, while cautioning that this is not the maximum exposure and outcomes cannot be predicted. Claims include substantial damages sought by private parties and government entities; some matters are in discovery, and certain proposed amended complaints were pending. The company and Bank dispute the claims and say they are defending them vigorously.
- The New York State Department of Financial Services had indicated that a negotiated resolution might be possible or it could proceed to an administrative hearing. Potential monetary penalties could be up to $30 million, with $15 million of that amount related to, and not incremental to, damages sought in specified proceedings. The filing warns that litigation, investigations, legal costs, penalties or settlements could materially affect results, cash flows, reputation or financial condition.
- Other risks include regional real-estate and economic conditions, deposit retention and funding costs, interest-rate changes, loan quality, securities valuations, fraud prevention and the company’s ability to integrate acquisitions. The filing reported no material changes to the prior Form 10-K risk factors.
Important facts for investors to verify
- Whether and when the $5.0 million ERC receivable is collected, and how much of reported earnings growth reflects this benefit rather than recurring operations.
- Updates to Mann Entities-related litigation, the NYSDFS matter, accrued liabilities, insurance recoveries and any new proceedings; reconcile overlapping claims and potential damages carefully.
- Whether margin pressure continues and how PPP forgiveness and fee recognition affect loan yields and net interest income.
- Trends in substandard loans, nonperforming assets, charge-offs and allowance adequacy, especially given the rise in classified loans.
- Deposit growth and mix, liquidity capacity, capital ratios, and the effect of securities unrealized losses or changing interest rates.
- Performance and integration costs of the wealth-management acquisitions, including contingent consideration and recorded goodwill/intangibles.