Pioneer Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Pioneer Bancorp is a Maryland holding company for Pioneer Bank, serving individuals, businesses and municipalities through 22 offices in New York’s Capital Region. This filing covers the three months ended September 30, 2021, the first quarter of fiscal 2022; comparative income and cash-flow figures are for the three months ended September 30, 2020. Balance-sheet comparisons are to June 30, 2021. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2022 / September 30, 2021 | Comparable period / June 30, 2021 |
|---|---|---|
| Total assets | $1,967.7 | $1,796.3 at June 30, 2021 |
| Net income | $1.36; diluted EPS $0.05 | $1.39; diluted EPS $0.06 in Q1 FY2021 |
| Net interest income | $10.24 | $10.35 in Q1 FY2021 |
| Net interest margin | 2.42% | 3.00% in Q1 FY2021 |
| Provision for loan losses | $0.25 | $0.75 in Q1 FY2021 |
| Noninterest income / expense | $3.20 / $11.41 | $3.53 / $11.43 in Q1 FY2021 |
| Cash and cash equivalents | $478.6 | $325.0 at June 30, 2021 |
| Net loans / allowance for loan losses | $1,049.3 / $23.1 | $1,081.8 / $23.3 at June 30, 2021 |
| Total deposits | $1,704.4 | $1,530.9 at June 30, 2021 |
| Total shareholders’ equity | $239.1 | $237.8 at June 30, 2021 |
- Interest income fell 4.1% year over year to $10.6 million, while interest expense declined 46.7% to $0.38 million. Net interest margin contracted 58 basis points, reflecting lower asset yields; lower deposit costs only partly offset the effect.
- Net income declined 2.7%. Lower provision expense and slightly lower noninterest expense were more than offset by reduced net interest and noninterest income and higher income tax expense.
- Quarterly operating cash flow was $5.9 million, versus cash used of $2.0 million a year earlier. Investing activities used $22.3 million, financing activities provided $170.0 million, and cash and cash equivalents increased $153.6 million.
- No borrowings were outstanding at September 30. The Bank reported $353.1 million of FHLBNY borrowing capacity, of which $210.0 million supported letters of credit, leaving $143.1 million unused; a $20.0 million correspondent-bank line was also undrawn.
- The Bank’s Tier 1 leverage ratio was 9.78%; its risk-based capital ratios were above regulatory well-capitalized thresholds. Pioneer Commercial Bank’s Tier 1 leverage ratio was 7.08%.
Material changes versus comparable periods
- Total assets increased $171.4 million, or 9.5%, from June 30, driven primarily by deposit growth and higher cash and securities balances.
- Deposits rose $173.5 million, including a $133.0 million increase in noninterest-bearing deposits. Management attributed much of the growth to seasonal municipal tax collections and commercial deposit relationships; it may not be recurring.
- Net loans declined $32.5 million, or 3.0%, from June 30. Commercial and industrial balances fell partly because of PPP forgiveness, paydowns and lower line utilization; construction loans declined as loans converted to permanent financing. Commercial real estate loans increased.
- Compared with Q1 FY2021, loan interest income decreased $0.63 million and noninterest income decreased $0.33 million. The latter included a $0.04 million equity-securities loss versus a $0.58 million gain in the prior-year quarter. Insurance and wealth-management income increased, alongside higher assets under management.
- Provision expense was lower year over year, but net charge-offs were $0.44 million versus $0.01 million of net recoveries in Q1 FY2021. At September 30, nonperforming assets were $20.6 million, or 1.05% of assets, compared with $22.3 million, or 1.24%, at June 30.
Outlook, risks and unusual items
- Management expected the second-quarter FY2022 net interest margin to remain depressed, excluding PPP effects, because asset yields were not expected to fall as much as funding costs. PPP forgiveness and associated fee recognition may add volatility to asset yields. No quantitative earnings guidance was provided.
- The Bank had 237 PPP loans totaling $32.1 million outstanding at September 30. It had received forgiveness or payoff on 730 borrowers’ loans totaling $83.3 million and expected to assist most remaining borrowers in the second and third fiscal quarters.
- COVID-19-related deferrals remained on six commercial loans totaling $25.8 million and two consumer-related loans totaling $0.85 million. Management warned that borrower stress, delinquencies and future loan-loss provisions could rise; the eventual pandemic impact was uncertain and could be material.
- The Mann Entities’ alleged fraudulent activity continues to generate significant litigation and regulatory exposure. The filing estimates a reasonably possible loss range of $0 to $52.5 million in excess of any accrued liability; this range is not the maximum possible exposure. Multiple lawsuits seek substantial damages, including claims involving payroll-related funds and loan participations. The NYSDFS indicated that unresolved findings could proceed to an administrative hearing, with potential penalties up to $30 million; $15 million of that amount relates to, and is not incremental to, specified plaintiffs’ claims. Outcomes and timing are uncertain.
- The Bank recognized $1.4 million of insurance recoveries for Mann-related defense costs in the quarter, credited against professional fees. The filing reports no litigation-related expense for the quarter, excluding legal fees and expenses.
- Management said the Bank had adequate liquidity and capital at quarter-end. It also cautioned that COVID-19, interest-rate changes, PPP forgiveness, credit quality, funding conditions and litigation could materially affect future results. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Subsequent developments, accruals, insurance recoveries and regulatory actions in the Mann Entities litigation; assess potential exposure beyond the disclosed estimated range.
- Whether the large municipal and commercial deposit inflows persist, and how they affect liquidity and funding costs.
- Trends in net interest margin as PPP loans are forgiven and market rates change.
- Credit quality, including COVID-19 deferrals, classified and special-mention loans, nonperforming assets, charge-offs and allowance adequacy.
- Capital and liquidity capacity under potential legal, credit and deposit stresses, including the availability and terms of contingent borrowing sources.
- Timing and effects of adopting lease accounting in fiscal 2023 and CECL in fiscal 2024; management had not yet quantified CECL’s expected financial impact.