Pioneer Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2019 (not calendar Q1). The filing compares operating results with the three months ended September 30, 2018 and balance-sheet amounts with June 30, 2019. Pioneer Bancorp became the Bank’s holding company and completed its minority stock offering on July 17, 2019; pre-reorganization comparative financial information is for the Bank and subsidiaries.
Key financial results
| Metric | Quarter ended September 30, 2019 | Comparison |
|---|---|---|
| Interest and dividend income | $14.6 million | $13.0 million in 2018 |
| Net interest income | $13.3 million | $12.0 million in 2018 |
| Net interest margin | 4.15% | 4.05% in 2018 |
| Provision for loan losses | $16.4 million | $0.6 million in 2018 |
| Noninterest income | $4.0 million | $3.5 million in 2018 |
| Noninterest expense | $18.2 million | $9.3 million in 2018 |
| Net result | $12.7 million loss; $0.51 loss per share | $4.4 million income in 2018 |
| Operating cash flow | $0.9 million used | $7.2 million provided in 2018 |
Interest income growth reflected higher average earning-asset balances and yields. Deposit interest expense also rose, as the average cost of interest-bearing liabilities increased to 0.64% from 0.48%. The 2019 effective tax rate was 27.0%; the company recorded a $4.7 million income tax benefit.
Financial condition, liquidity and capital
- At September 30, total assets were $1.450 billion, down $30.0 million from June 30. Net loans were $1.054 billion, essentially unchanged; deposits were $1.215 billion, down $116.6 million; and shareholders’ equity was $223.8 million, up $88.8 million.
- Cash and cash equivalents were $188.8 million, down $41.3 million during the quarter. Investing activities used $16.0 million and financing activities used $24.4 million; overall cash and cash equivalents decreased $41.3 million.
- The company reported no borrowing balance on its statement of condition. It reported $481.8 million of potential FHLB borrowing capacity, with $257.0 million utilized as collateral for municipal-deposit letters of credit, and a $20.0 million unsecured bank line with no balance outstanding. Management stated liquidity was sufficient for expected needs, while cautioning that the effect of the fraud-related events on liquidity and capital beyond the quarter could not be predicted.
- The Bank was categorized as well capitalized. At September 30, its Tier 1 leverage ratio was 12.15%, common equity Tier 1 ratio 14.81%, Tier 1 risk-based ratio 14.81%, and total risk-based capital ratio 16.12%.
- Net charge-offs were $15.9 million, principally from the Mann Entities’ commercial loans. The allowance for loan losses was $15.0 million, or 1.45% of loans; nonperforming assets were $14.1 million, or 0.97% of assets.
Material changes and unusual items
- Potentially fraudulent customer activity: The Bank reported approximate potential exposure of $19.0 million related to deposits and $16.0 million for its participation in commercial loans. It set off customer deposit accounts, recorded a $2.5 million noninterest expense charge, and charged off $15.8 million of loan principal through the provision for loan losses. The investigation continued, and the filing says additional exposure remained possible.
- Litigation: Southwestern Payroll Services sued the company, the Bank and others on October 31, 2019, alleging wrongful conversion, collection and retention of approximately $9.8 million and gross negligence. Pioneer said it believed it had substantial defenses, but could not predict the outcome; legal costs and additional claims could be significant.
- Offering and foundation contribution: The July reorganization offering generated $109.1 million in net proceeds. The company also contributed shares and cash to the Pioneer Bank Charitable Foundation, recording $5.4 million of expense. An ESOP purchased 1,018,325 shares, financed by a company loan; the ESOP loan balance was $13.6 million.
- Acquisition plan: The company had agreed to acquire Jaeger & Flynn Associates for an aggregate stated price of $12.75 million, subject to adjustments and performance-based installments. Closing was anticipated in early calendar 2020, subject to customary conditions.
Outlook, risks and other disclosures
The filing provides no quantitative earnings or revenue guidance. Management’s forward-looking discussion identifies risks including credit losses and real-estate conditions, deposit competition and funding costs, interest-rate changes, fraud prevention and recovery, litigation expenses, regulatory requirements, and execution of the planned acquisition. Management reported effective disclosure controls as of quarter-end and no material change in internal control over financial reporting. It also stated that risk factors were unchanged from the June 30, 2019 Form 10-K.
Important facts for investors to verify
- Updates to the Mann Entities investigation, recoveries, remaining deposit or loan exposure, and any additional claims or litigation outcomes.
- Whether the $15.8 million charge-off and $2.5 million deposit-related charge fully capture the known losses, and how subsequent credit performance affects the allowance.
- Deposit stability and liquidity after the $116.6 million quarterly deposit decline, including upcoming certificate maturities and reliance on municipal deposits.
- Final terms, closing date, performance adjustments and funding of the Jaeger & Flynn acquisition.
- Subsequent-quarter earnings, credit quality and capital results; the filing notes that this quarter’s results are not necessarily indicative of the remainder of fiscal 2020.