Business context and reporting period
Pioneer Bancorp, Inc. is a Maryland bank holding company operating primarily through Pioneer Bank, a New York-chartered savings bank with 22 offices in the Capital Region. Its businesses include community banking, insurance and wealth management. Although the request metadata identifies “2022 Q4,” this filing is a Form 10-K for the fiscal year ended June 30, 2023, with June 30, 2022 as the principal comparison; it is not a quarterly filing.
Financial performance and position
| Metric | FY2023 / June 30, 2023 | Comparison |
|---|---|---|
| Total assets | $1.86 billion | Down 5.5% from $1.96 billion |
| Net income | $21.9 million; diluted EPS $0.87 | Up from $10.3 million; EPS $0.41 |
| Net interest income | $65.5 million | Up 54.7% from $42.4 million |
| Net interest margin | 3.72% | Up from 2.41% |
| Return on average assets / equity | 1.15% / 8.73% | Up from 0.54% / 4.30% |
| Noninterest income / expense | $14.1 million / $51.8 million | Income broadly unchanged; expense up 18.7% |
| Operating cash flow | $26.3 million | Down from $50.0 million |
| Loans, net | $1.14 billion | Up 16.4% from $982.6 million |
| Deposits | $1.54 billion | Down 8.2% from $1.68 billion |
| Shareholders’ equity | $266.7 million | Up 9.9% from $242.6 million |
Earnings improvement primarily reflected higher asset yields as market rates rose: average yield on interest-earning assets increased to 4.03% from 2.49%. Interest expense also rose, to $5.5 million from $1.5 million, as deposit and borrowing costs increased. Management said funding costs could continue rising and pressure margins over coming quarters.
Cash and cash equivalents fell to $150.5 million from $376.1 million, as cash was deployed into loans and deposits declined. Available-for-sale securities totaled $431.7 million at fair value, with $18.9 million of gross unrealized losses; held-to-maturity securities had $2.2 million of gross unrealized losses and a $21.7 million fair value against $23.9 million amortized cost. Net cash decreased $225.6 million during the year, primarily reflecting deposit outflows and loan growth.
The Bank reported no FHLB borrowings at year-end. It had $305.6 million of available FHLB borrowing capacity after $90.0 million was used for municipal-deposit letters of credit, plus an unused $20.0 million correspondent-bank line. The Bank was classified as well capitalized: total risk-based capital was 20.11%, Tier 1 leverage was 11.47%, and common equity Tier 1 was 18.85%. The Company does not anticipate paying dividends in the foreseeable future.
Material changes versus the prior year
- Net income more than doubled, mainly because net interest income increased $23.1 million.
- Loan growth was led by residential mortgages, up $174.6 million, or 64.6%, to $444.9 million; management attributed the increase to purchases through its third-party mortgage banking relationship and a shift from cash and securities toward higher-yielding assets.
- Deposits declined $138.4 million. Non-maturity deposits fell as some larger, rate-sensitive accounts moved out or migrated to certificates of deposit; certificates rose, with growth concentrated in brokered deposits. Municipal deposits were $432.1 million, or 28.0% of deposits.
- Credit indicators weakened: nonperforming assets rose to $17.8 million, or 0.96% of assets, from $7.0 million, or 0.36%. The allowance for loan losses was nearly unchanged at $22.5 million, but coverage of nonperforming loans fell to 126.41% from 320.85%.
- Noninterest expense increased in part because FY2022 included a $5.0 million employee-retention-credit benefit and $1.2 million of litigation-related expense. FY2023 included no such benefit or litigation-related expense, while professional fees and compensation costs increased.
- Available-for-sale securities declined $50.1 million to $431.7 million; cash fell by $225.6 million. Shareholders’ equity increased, supported by net income and a smaller accumulated other comprehensive loss.
Outlook, risks and unusual items
- Funding and interest-rate risk: Management expects deposit rates and other funding costs to rise, potentially pressuring net interest margin. Deposits decreased amid higher-rate alternatives and uncertainty following regional bank failures; municipal deposits and uninsured deposits are material funding exposures. Uninsured deposits were approximately $688.1 million at June 30, 2023.
- Credit and concentration risk: About 90.2% of loans were secured by real estate, and commercial real estate represented 36.6% of loans. Nonaccrual loans increased to $14.2 million. A $7.7 million commercial real estate relationship was placed on nonaccrual; a $3.2 million matured construction loan was extended after year-end. Three commercial real estate loans totaling $4.8 million that were 30–59 days past due at year-end were subsequently brought current.
- Legal and fraud matters: The Company and Bank face multiple proceedings associated with alleged fraud involving the Mann Entities, including claims by payment processors, loan participants, the U.S. Department of Justice and others. Management is defending the claims and pursuing recoveries. For matters where loss was reasonably possible and estimable, the filing disclosed a range of $0 to $54.4 million in excess of any accrued liability; this is not the maximum possible exposure. Insurance coverage is disputed or still under review for some claims, and the Company said legal costs could exceed applicable insurance limits.
- Other unusual items: The Company received a $5.0 million employee-retention-credit refund plus $171,000 of interest in FY2023; the associated $5.0 million benefit had been recorded in FY2022. On July 13, 2023, after year-end, the wealth-management subsidiary acquired certain Hudson Financial assets for $2.0 million cash plus $1.5 million contingent consideration, recording a $2.1 million goodwill asset and a $1.4 million customer-list intangible.
- Accounting and controls: CECL was scheduled to take effect for the Company’s fiscal year beginning July 1, 2023; management was finalizing implementation and did not provide a clear quantified adoption impact. Management assessed internal control over financial reporting as effective at June 30, 2023. The filing also notes that an earlier restatement of fiscal 2019 and 2020 statements had involved a material weakness that was subsequently remediated.
- Additional risks: Interest-rate sensitivity, unrealized securities losses, commercial real estate conditions, cybersecurity and fraud, regulatory scrutiny, and reliance on a third-party residential mortgage originator could affect results. A 200-basis-point rate increase was estimated to reduce net portfolio value by $38.0 million, or 9.0%, at June 30, 2023.
Important facts for investors to verify
- Review subsequent deposit trends, deposit pricing, brokered-deposit usage and liquidity after the reported $138.4 million annual deposit decline.
- Track nonperforming and classified loans, particularly the commercial real estate relationship and construction loan discussed in the filing, and assess allowance adequacy as CECL is adopted.
- Follow the Mann Entities-related litigation, regulatory inquiries, insurance coverage and costs; compare developments with the disclosed possible-loss range and existing accruals.
- Assess the impact of further rate changes on net interest margin, securities values, capital and the cost of deposits.
- Confirm CECL’s actual opening allowance and capital impact, and monitor the performance and integration of the post-year-end Hudson Financial acquisition.