Pioneer Bancorp, Inc.: Form 10-Q for the period ended Sep 30, 2024

Statement Regarding Forward-Looking Statements

Certain statements contained herein are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may.” The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. No assurance can be given that the future results covered by forward-looking statements will be achieved. Certain forward-looking statements are included in this Form 10-Q, principally in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition to the factors described in Item 1A – Risk Factors, factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

• inflation and changes in market interest rates that reduce our margins and yields, reduce the fair value of financial instruments or reduce our volume of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make, whether held in our portfolio or sold in the secondary market;
• risks related to the variety of litigation, investigations, and other proceedings described in the “Legal Proceedings” section of this report;
• general economic conditions, either nationally or in our market area, that are worse than expected;
• certain events in the recent past involving the failure of financial institutions which have adversely affected market sentiment toward regional banks, which may result in decreased deposits and increased regulatory costs that could adversely affect our liquidity, our business, and the market price of our common stock;
• competition within our market area that is stronger than expected;
• changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of our allowance for credit losses;
• our ability to access cost-effective funding;
• fluctuations in real estate values and both residential and commercial real estate market conditions;
• demand for loans and deposits in our market area;
• changes in our partnership with a third-party mortgage banking company;
• our ability to continue to implement our business strategies;
• competition among depository and other financial institutions, as well as other non-traditional competitors;
• adverse changes in the securities markets;
• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
• our ability to manage market risk, credit risk and operational risk;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• the imposition of tariffs or other domestic or international governmental polices impacting the value of the products of our borrowers;
• our ability to successfully integrate into our operations any assets, liabilities or systems we may acquire, as well as new management personnel or customers, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
• changes in consumer spending, borrowing and savings habits;
• our ability to maintain our reputation;
• our ability to prevent or mitigate fraudulent activity;
• changes in our costs of legal expenses, including defending against significant litigation;
• any future FDIC insurance premium increases, or special assessments, which may adversely affect our earnings;
• fluctuations in the stock market, which may have a significant adverse effect on transaction fees, client activity and client investment portfolio gains and losses related to our wealth management business;
• a breach in security of our information systems, including the occurrence of a cyber incident or a deficiency in cyber security;
• political instability or civil unrest;
• acts of war or terrorism or pandemics such as the recent COVID-19 pandemic;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”) or the Public Company Accounting Oversight Board;
• our ability to attract and retain key employees;
• our ability to evaluate the amount and timing of recognition of future tax assets and liabilities;
• our compensation expense associated with equity benefits allocated or awarded to our employees; and
• changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Additional factors that may affect our results are discussed in the annual report on Form 10-K for the fiscal year ended June 30, 2024, under the heading “Risk Factors” and this Form 10-Q, under the heading “Risk Factors.” The Company disclaims any obligation to revise or update any forward-looking statements contained in this quarterly report on Form 10-Q to reflect future events or developments, except as required by applicable law.

Overview

Net Interest Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income we earn on our loans and investments, and interest expense, which is the interest we pay on our deposits and borrowings.

Provision for Credit Losses. We charge (credit) provisions for credit losses to operations in order to maintain our allowance for credit losses on loans, securities held to maturity and unfunded commitments at a level that is considered reasonable and necessary to absorb expected credit losses inherent in the loan portfolio and securities held to maturity portfolio, as well as expected losses on commitments to grant loans that are expected to be advanced at the statements of condition date. Loans are charged against the allowance when management believes that the collectability of the principal loan amount is not probable. Recoveries on loans previously charged-off, if any, are credited to the allowance for credit losses when realized.

Non-interest Income. Our primary sources of non-interest income are banking fees and service charges, and insurance and wealth management services income. Our non-interest income also includes net gain or losses on equity securities, net gain or losses on sales and calls of available for sale securities, and miscellaneous income.

Non-Interest Expense. Our non-interest expenses consist of salaries and employee benefits, net occupancy and equipment, data processing, advertising and marketing, insurance premiums, federal deposit insurance premiums, professional fees, and other general and administrative expenses.

Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for worker’s compensation and disability insurance, health insurance, retirement plans and other employee benefits, as well as commissions and other incentives.

Net occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter.

Data processing expenses are fees we pay to third parties for use of their software and for processing customer information, deposits and loans.

Advertising and marketing includes most marketing expenses including multi-media advertising (public and in-store), promotional events and materials, civic and sales focused memberships, and community support.

Insurance premiums include expense related to various insurance policies, excluding federal deposit insurance premiums.

Federal deposit insurance premiums are payments we make to the FDIC for insurance of our deposit accounts.

Professional fees include legal and other consulting expenses.

Other general and administrative expenses include expenses for office supplies, postage, telephone, insurance and other miscellaneous operating expenses.

Income Tax Expense. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.

Recent Developments

Change in Fiscal Year End

On October 15, 2024, the board of directors of the Company approved an amendment to Article VI, Section 5 of its Bylaws to change its fiscal year from June 30 to December 31. As a result of this change the three months ended September 30, 2024 is the first three months of the Company’s six month transition period ending December 31, 2024. The Company will file a transition report for the six months ending December 31, 2024 on Form 10-K.

Completion of Pioneer Commercial Bank Merger

On September 16, 2024, the Office of the Comptroller of the Currency (the “OCC”) approved the merger of Pioneer Commercial Bank with and into Pioneer Bank with Pioneer Bank as the resulting entity (the “Commercial Bank Merger”). The Commercial Bank Merger closed on October 1, 2024. Following the completion of the Commercial Bank Merger, Pioneer Bank now directly offers full municipal deposit banking services which were previously provided through Pioneer Commercial Bank.

Mann Entities Related Fraudulent Activity

During the first fiscal quarter of 2020 (the quarter ended September 30, 2019), the Company became aware of potentially fraudulent activity associated with transactions by an established business customer of the Bank. The customer and various affiliated entities (collectively, the “Mann Entities”) had numerous accounts with the Bank. The transactions in question related both to deposit and lending activity with the Mann Entities.

For additional details regarding legal, other proceedings and related matters see “Item 1 – Consolidated Financial Statements – Note 9 – Commitments and Contingent Liabilities – Legal Proceedings and Other Contingent Liabilities.”

Critical Accounting Policies and Estimates

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies and estimates discussed below to be critical accounting policies and estimates. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to continue to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies and estimates:

Allowance for Credit Losses. The allowance for credit losses consists of the allowance for credit losses on loans, securities held to maturity and unfunded commitments. The measurement of Current Expected Credit Losses (“CECL”) on financial instruments requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, macroeconomic variables (e.g., civilian unemployment and U.S. gross domestic product (“GDP”)), and reasonable and supportable forecasts from the Federal Open Market Committee (“FOMC”) that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the estimated fair value of the collateral, as applicable. The allowance for credit losses on loans and securities held to maturity, as reported in our consolidated statements of condition, are adjusted by a provision for credit losses, which is recognized in earnings, and reduced by the charge-offs, net of recoveries. The allowance for credit losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws and is included in other liabilities on the Company’s consolidated statements of condition.

As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolios. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain, including making significant estimates of current credit risks and trends using existing quantitative and qualitative information, and reasonable and supportable forecasts of future economic conditions, which may undergo frequent and material changes. Subsequent evaluations of the then-existing loan portfolios, in light of changes in economic conditions, new information regarding existing loans and other factors, may result in significant changes in the allowance for credit losses in those future periods. For example, changes to the FOMC’s forecasted civilian unemployment rate and year-over-year U.S. GDP growth could have a material impact on the model’s estimation of the allowance for credit losses on loans. An immediate increase of 100 basis points in the FOMC’s projected rate of civilian unemployment and a decrease of 100 basis points in the FOMC’s projected rate of U.S. GDP growth would increase the model’s total calculated allowance for credit losses on loans by $1.2 million, or 5.6%, assuming qualitative adjustments are kept at current levels. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. Additionally, changes in those factors and inputs may not occur at the same rate and inputs may be directionally inconsistent, such that improvements in one factor may offset deterioration in in others. Going forward, the impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolios, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility to our reported earnings.

Actual loan losses may be significantly more than the allowance we have established which could have a material negative effect on our financial results.

Legal Proceedings and Other Contingent Liabilities. In the ordinary course of business, we are involved in a number of legal, regulatory, governmental and other proceedings, claims or investigations that could result in losses, including damages, fines and/or civil penalties, which could be significant concerning matters arising from the conduct of our business. In view of the inherent difficulty of predicting the outcome of such matters, particularly where the claimants seek large or indeterminate damages, we generally cannot predict the eventual outcome of the pending matters, timing of the ultimate resolution of these matters, or eventual loss, fines or penalties related to each pending matter. In accordance with applicable accounting guidance, we establish an accrued liability when those matters present loss contingencies that are both probable and estimable. Our estimate of potential losses will change over time and the actual losses may exceed these estimates, and there may be an exposure to loss in excess of any amounts accrued. As a matter develops, management, in conjunction with any outside counsel handling the matter, evaluate on an ongoing basis whether such matter presents a loss contingency that is probable and estimable; or where a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, whether it is possible to estimate a range of possible loss. Once the loss contingency is deemed to be both probable and estimable, we establish an accrued liability and record a corresponding amount of litigation-related expense. We continue to monitor the matters for further developments, including our interactions with various regulatory agencies with supervisory authority over us, that could affect the amount of the accrued liability that has been previously established. These estimates are based upon currently available information and are subject to significant judgment, a variety of assumptions and known and unknown uncertainties. The matters underlying the accrued liability and estimated range of possible losses are unpredictable and may change from time to time, and actual losses may vary significantly from the current estimate and accrual which could have a material negative effect on our financial results. The estimated range of possible loss does not represent our maximum loss exposure.

Average Balances and Yields

The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense, as applicable.

(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average total interest-earning assets.

(4) Annualized.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior two columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

(Dollars in thousands)

Comparison of Financial Condition at September 30, 2024 and June 30, 2024

Total Assets. Total assets of $2.01 billion at September 30, 2024 increased $119.2 million, or 6.3%, from $1.90 billion at June 30, 2024. The increase was due primarily to an increase of $55.7 million, or 4.1%, in net loans receivable, an increase of $59.8 million, or 36.2% in cash and cash equivalents, and an increase of $5.1 million, or 2.0% in securities available for sale.

Cash and Cash Equivalents. Total cash and cash equivalents of $225.0 million at September 30, 2024, increased $59.8 million, or 36.2%, from $165.2 million at June 30, 2024.

Securities Available for Sale. Total securities available for sale of $262.5 million at September 30, 2024 increased $5.1 million, or 2.0%, from $257.4 million at June 30, 2024. The increase was primarily due to purchases of $37.2 million, offset in part by maturities, paydowns, calls and sales of $35.1 million during the three months ended September 30, 2024.

Net Loans Receivable. Net loans receivable of $1.40 billion at September 30, 2024 increased $55.7 million, or 4.1%, from $1.34 billion at June 30, 2024. By loan category, residential mortgage loans increased by $31.2 million, or 4.9%, to $665.0 million at September 30, 2024 from $633.8 million at June 30, 2024, commercial real estate loans increased by $15.2 million, or 3.7%, to $421.4 million at September 30, 2024 from $406.2 million at June 30, 2024, commercial and industrial loans increased by $8.2 million, or 8.1%, to $109.4 million at September 30, 2024 from $101.2 million at June 30, 2024, consumer loans increased by $4.6 million, or 33.7%, to $18.1 million at September 30, 2024 from $13.5 million at June 30, 2024, and home equity loans and lines of credit increased by $1.0 million, or 1.2%, to $93.8 million at September 30, 2024 from $92.8 million at June 30, 2024. These increases were partially offset by a decrease in commercial construction loans of $5.1 million, or 4.3%, to $113.3 million at September 30, 2024 from $118.4 million at June 30, 2024.

The increase in residential mortgage loans was primarily related to the Bank’s relationship with a third-party mortgage banking company which facilitated an increase in residential mortgage loan volume, despite the higher interest rate environment. The increase in commercial real estate loans and commercial and industrial loans was due to loan funding outpacing loan payoffs. The increase in consumer loans was due to the purchase of $5.0 million in unsecured consumer loans during the quarter. The decrease in commercial construction loans was related to the conversion of loans to permanent financing.

The following table presents our commercial real estate loan portfolio by industry sector at September 30, 2024.

(Dollars in thousands)

Our commercial real estate loans are secured primarily by multi-family properties, office buildings, industrial facilities, retail facilities and other commercial properties, substantially all of which are located in our primary market area.

Deposits. Total deposits of $1.68 billion at September 30, 2024 increased $125.0 million, or 8.1%, from $1.55 billion at June 30, 2024. By deposit category, non-interest-bearing demand deposits increased by $92.6 million, or 20.8%, to $537.9 million at September 30, 2024 from $445.3 million at June 30, 2024, money market accounts increased by $37.6 million, or 7.3%, to $551.3 million at September 30, 2024 from $513.7 million at June 30, 2024, and demand accounts increased by $12.0 million, or 7.6%, to $170.0 million at September 30, 2024 from $158.0 million at June 30, 2024. These increases were partially offset by a decrease in certificates of deposit by $10.6 million, or 6.4%, to $156.4 million at September 30, 2024 from $167.0 million at June 30, 2024 (included in certificates of deposit were brokered deposits which decreased by $19.5 million to $19.8 million at September 30, 2024 from $39.3 million at June 30, 2024) and a decrease in savings accounts by $6.6 million, or 2.5%, to $259.7 million at September 30, 2024 from $266.3 million at June 30, 2024.

The increase in non-interest-bearing demand accounts and demand accounts was primarily related to growth in municipal deposits due to seasonality. The increase in money market accounts was primarily due to growth in municipal and commercial deposits and migration of funds from non-interest-bearing demand, savings and other lower rate interest-bearing accounts. The decrease in certificates of deposit was primarily due to a decrease in brokered deposits, partially offset by a migration of funds from non-interest-bearing demand, savings and other lower rate interest-bearing accounts. The decrease in savings accounts was primarily related to migration of funds to higher interest-bearing accounts.

The following table sets forth the distribution of total deposits by depositor type as of the dates indicated.

(Dollars in thousands)

Uninsured deposits represents the portion of deposit accounts that exceed FDIC insurance limits. The Company calculates its uninsured deposit balances based on the same methodologies and assumptions used for regulatory reporting requirements, which includes collateralized deposits.

The following table estimates uninsured deposits after certain exclusions:

Uninsured deposits after exclusions represents 14.9% and 14.7% of total deposits as of September 30, 2024 and June 30, 2024, respectively. The Company believes that this presentation of uninsured deposits provides a more accurate view of deposits at risk as affiliate deposits are not customer facing and therefore are eliminated upon consolidation, and collateralized deposits are fully secured by investments and municipal letters of credits.

Total Shareholders’ Equity. Total shareholders’ equity of $303.8 million at September 30, 2024 increased $7.3 million, or 2.5%, from $296.5 million at June 30, 2024 primarily as a result of net income of $6.3 million and an increase in accumulated other comprehensive income of $1.7 million, partially offset by the repurchase of common stock of $1.2 million.

Comparison of Operating Results for the Three Months Ended September 30, 2024 and September 30, 2023

General. Net income increased by $2.9 million to $6.3 million for the three months ended September 30, 2024 as compared to $3.4 million for the three months ended September 30, 2023. The increase was primarily due to an increase in net interest income of $2.0 million, a decrease in the provision for credit losses of $1.6 million, and an increase in non-interest income of $544,000, offset in part by an increase in income tax expense of $998,000 and an increase in non-interest expense of $284,000.

Interest and Dividend Income. Interest and dividend income increased $4.2 million, or 21.0%, to $24.4 million for the three months ended September 30, 2024, from $20.2 million for the three months ended September 30, 2023 due to increases in interest income on loans and interest-earning deposits with banks and other, offset in part by a decrease in interest income on securities. The increase was the result of an 85 basis points increase in the average yield on interest-earning assets to 5.64% for the three months ended September 30, 2024, from 4.79% for the three months ended September 30, 2023. The increase in the average yield on interest-earning assets was driven by an increase in variable rate loan yields, as well as due to market related increases in interest rates on new loans and an asset allocation shift, using investment securities’ cash flow to fund higher yielding assets. Average interest-earning assets increased by $52.6 million from $1.70 billion for the three months ended September 30, 2023 to $1.75 billion for the three months ended September 30, 2024 primarily due to the increase in the average balance of loans.

Interest income on loans increased $4.4 million, or 26.6%, to $20.9 million for the three months ended September 30, 2024 from $16.5 million for the three months ended September 30, 2023. Interest income on loans increased due to a $203.8 million increase in the average balance of loans to $1.38 billion for the three months ended September 30, 2024 from $1.18 billion for the three months ended September 30, 2023, coupled with a 46 basis points increase in the average yield on loans to 6.16% for the three months ended September 30, 2024 from 5.70% for the three months ended September 30, 2023. The increase in the average balance of loans was principally due to purchases of residential mortgage loans. The increase in average yield on loans was primarily due to loans tied to variable short-term rates and market related increases in interest rates on new loans as compared to the same period in the prior year.

Interest income on securities decreased $403,000, or 15.7%, to $2.2 million for the three months ended September 30, 2024 from $2.6 million for the three months ended September 30, 2023. Interest income on securities decreased due to a $165.4 million decrease in the average balance of securities to $280.8 million for the three months ended September 30, 2024 from $446.2 million for the three months ended September 30, 2023, offset in part by a 79 basis points increase in the average yield on securities to 3.09% for the three months ended September 30, 2024 from 2.30% for the three months ended September 30, 2023. The decrease in the average balance of securities was primarily due to the sales of U.S. government and agency securities during the three months ended December 31, 2023 as part of a balance sheet repositioning in which the Company sold $74.5 million of lower-yielding available for sale securities with an average book yield of approximately 0.83%, and maturities of U.S. government and agency and municipal obligation securities, in conjunction with an asset allocation shift, using investment securities’ cash flow to fund higher yielding assets. The increase in average yield on securities was due to higher market rates of interest for new securities that were purchased replacing lower yielding available for sale securities.

Interest income on interest-earning deposits with banks and other increased $229,000 to $1.3 million for the three months ended September 30, 2024 from $1.1 million for the three months ended September 30, 2023. Interest income on interest-earning deposits with banks and other increased due to a $14.1 million increase in the average balances on interest-earning deposits with banks and other to $90.7 million for the three months ended September 30, 2024 from $76.6 million for the three months ended September 30, 2023 primarily due to a net increase in deposits, as well as a 16 basis points increase in the average yield on interest-earning deposits with banks and other to 5.74% for the three months ended September 30, 2024 from 5.58% for the three months ended September 30, 2023 primarily due to the purchase of Federal Reserve Bank of New York stock during the three months ended June 30, 2024.

Interest Expense. Interest expense increased $2.2 million to $6.5 million for the three months ended September 30, 2024 from $4.3 million for the three months ended September 30, 2023 as a result of increases in interest expense on deposits. The increase was primarily due to a 69 basis points increase in the average cost of interest-bearing liabilities to 2.35% for the three months ended September 30, 2024 from 1.66% for the three months ended September 30, 2023, as well as a shift in the mix of interest-bearing liabilities to higher interest rate liability accounts.

Interest expense on interest-bearing deposits increased $2.3 million to $6.3 million for the three months ended September 30, 2024 from $4.0 million for the three months ended September 30, 2023. Interest expense on interest-bearing deposits increased primarily due to a 74 basis points increase in the average cost of interest-bearing deposits to 2.32% for the three months ended September 30, 2024 from 1.58% for the three months ended September 30, 2023, as well as a shift in the mix of interest-bearing deposits to higher interest rate deposit accounts and an increase in average interest-bearing deposits of $83.2 million to $1.08 billion for the three months ended September 30, 2024 from $1.00 billion for the three months ended September 30, 2023. The increase in the average cost of interest-bearing deposits was primarily due to the repricing of certain interest-bearing deposit accounts in response to changes in market interest rates and the higher interest rate environment, as well as a shift in the mix of deposits towards higher cost interest-bearing accounts. The increase in the average balance of interest-bearing deposits was due to higher average money market and certificates of deposit balances.

Interest expense on borrowings and other liabilities decreased $100,000 to $212,000 for the three months ended September 30, 2024 from $312,000 for the three months ended September 30, 2023 due primarily to the decrease in the average borrowings and other liabilities of $4.5 million to $23.4 million for the three months ended September 30, 2024 from $27.9 million for the three months ended September 30, 2023, and by a decrease in the average cost of borrowings and other liabilities of 87 basis points to 3.64% for the three months ended September 30, 2024 from 4.51% for the three months ended September 30, 2023.

Net Interest Income. Net interest income of $17.9 million for the three months ended September 30, 2024 increased $2.0 million, or 12.6%, compared to $15.9 million for the three months ended September 30, 2023 as net interest margin increased 36 basis points to 4.12% for the three months ended September 30, 2024 from 3.76% for the three months ended September 30, 2023. The increase in the net interest margin was partially offset by a decrease in net interest-earning assets by $26.1 million to $645.3 million for the three months ended September 30, 2024 from $671.4 million for the three months ended September 30, 2023 as a result of a shift in deposit mix which increased interest-bearing deposits. The effect on net interest income of the decrease in the average balance of net interest-earning assets for the three months ended September 30, 2024 was offset by the asset allocation shift to higher yielding assets. Net interest rate spread increased 16 basis points to 3.29% for the three months ended September 30, 2024 from 3.13% for the three months ended September 30, 2023.

Provision for Credit Losses. A credit to the provision for credit losses of $870,000 was recorded for the three months ended September 30, 2024, as compared to a provision for credit losses of $750,000 for the three months ended September 30, 2023. The credit to the provision for credit losses for the three months ended September 30, 2024 was primarily due to improvements in asset quality, economic conditions, and net recoveries, offset in part by growth in the loan portfolio. Non-performing assets were $5.4 million, or 0.27% of total assets, at September 30, 2024, compared to $9.2 million, or 0.49% of total assets, at June 30, 2024 and $14.4 million, or 0.73% of total assets, at September 30, 2023. The allowance for credit losses on loans was $21.2 million at September 30, 2024 and $21.1 million at September 30, 2023, representing 1.49% and 1.72% of total loans outstanding, respectively. Net recoveries were $134,000 or an annualized (0.04)% of average loans, for the three months ended September 30, 2024 compared to net charge-offs of $5,000, or an annualized 0.00% of average loans, for the three months ended September 30, 2023.

Non-Interest Income. Non-interest income increased $544,000, or 15.2%, to $4.1 million for the three months ended September 30, 2024 as compared to $3.6 million for the three months ended September 30, 2023. Noninterest income increased primarily due to a $190,000 increase in insurance and wealth management services income, and a $165,000 net gain on the sale of securities available for sale. The increase in insurance and wealth management services income was primarily as a result of organic growth and positive market performance related to our wealth management services.

Non-Interest Expense. Non-interest expense increased $284,000, or 2.0%, to $14.7 million for the three months ended September 30, 2024 as compared to $14.4 million for the three months ended September 30, 2023. The increase was primarily due to an increase in salaries and employee benefits of $743,000, offset in part by a decrease in professional fees of $634,000. Salaries and employee benefits increased due to compensation expense from annual merit increases, hiring talent to fill open positions, as well as due to share-based compensation costs recognized during the three months ended September 30, 2024 for the stock awards granted during the three months ended June 30, 2024. Professional fees decreased due to lower legal fees and expenses as compared to the prior-year period.

Income Tax Expense. Income tax expense increased $998,000 to $1.9 million for the three months ended September 30, 2024 as compared to $890,000 for the three months ended September 30, 2023 primarily due to an increase in income before income taxes. Our effective tax rate was 23.0% for the three months ended September 30, 2024 compared to 20.7% for the three months ended September 30, 2023. The increase in our effective tax rate was primarily due to the decrease in tax-exempt income for the three months ended September 30, 2024 as compared to the prior-year period.

Asset Quality and Allowance for Credit Losses

Asset Quality. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair market value, less estimated costs to sell. Any excess of the recorded value of the loan over the fair market value of the property is charged against the allowance for credit losses, or, if the existing allowance is inadequate, charged to expense in the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

(Dollars in thousands)

Non-accrual loans decreased $3.6 million to $5.4 million at September 30, 2024 from $9.0 million at June 30, 2024 primarily due to one commercial real estate loan relationship secured by various multi-family properties totaling $3.2 million at June 30, 2024, that as a result of various payments received from the borrower returned to accrual status during the three months ended September 30, 2024.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention.”

The following table sets forth our amounts of all classified loans and loans designated as special mention as of September 30, 2024 and June 30, 2024.

(In thousands)

Total substandard loans increased $3.9 million to $26.5 million at September 30, 2024 from $22.6 million at June 30, 2024 primarily due to the migration from the special mention category to the substandard category of a $4.7 million commercial real estate loan relationship consisting of four loans secured by multiple office, warehouse and industrial properties. The increase was partially offset by the upgrade to the pass category of a commercial real estate relationship and paydowns on a commercial real estate loan relationship secured by various multi-family properties.

Total special mention loans decreased by $6.2 million to $8.5 million at September 30, 2024 from $14.7 million at June 30, 2024 primarily due to the migration to the substandard category from the special mention category of a $4.7 million commercial real estate loan relationship consisting of four loans secured by multiple office, warehouse and industrial properties, and the payoff of a $1.3 million loan relationship.

Allowance for Credit Losses on Loans. The measurement of Current Expected Credit Losses (“CECL”) on loans requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the estimated fair value of the collateral, as applicable. The allowance for credit losses on loans, as reported in our consolidated statements of condition, is adjusted by a provision for credit losses, which is recognized in earnings, and reduced by the charge-off of loans, net of recoveries.

Determining the appropriateness of the allowance is complex and requires judgments by our management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolios, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. The impact of utilizing the CECL approach to calculate the allowance for credit losses is significantly influenced by the composition, characteristics and quality of our loan portfolios, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility to our reported earnings.

In addition, bank regulators periodically review our allowance for credit losses on loans and as a result of such reviews, we may have to materially adjust our allowance for credit losses on loans or recognize further loan charge-offs.

The following table sets forth activity in our allowance for credit losses on loans for the periods indicated.

(Dollars in thousands)

(1) Annualized.

Liquidity and Capital Resources

Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities. We also have the ability to borrow from the Federal Home Loan Bank of New York. At September 30, 2024, we had the ability to borrow up to $514.5 million from the Federal Home Loan Bank of New York, of which none was utilized for borrowings and $280.0 million was utilized as collateral for letters of credit issued to secure municipal deposits. At September 30, 2024, we also had a $20.0 million unsecured line of credit with a correspondent bank with no outstanding balance, as well as the ability to borrow from the Federal Reserve Bank of New York through the discount window lending program, and access to the reciprocal and brokered deposit markets. We cannot predict what the impact of the events described in “Recent Developments – Mann Entities Related Fraudulent Activity” above may have on our Liquidity and Capital Resources beyond the quarter ended September 30, 2024.

The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we had enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2024.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any period. At September 30, 2024, cash and cash equivalents totaled $225.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $262.5 million at September 30, 2024.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2024 totaled $146.1 million, or 8.72%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Resources. We are subject to various regulatory capital requirements administered by the OCC. At September 30, 2024, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines.

The Bank is and Pioneer Commercial Bank was subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and Pioneer Commercial Bank to maintain minimum capital amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to average assets (as defined), and common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined). Under Basel III rules, banks must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios in order to avoid limitations on distributions and certain discretionary bonus payments to executive officers. The required capital conservation buffer is 2.50%.

The federal banking agencies, including the OCC, issued a rule pursuant to The Economic Growth Regulatory Relief and Consumer Protection Act of 2018 (the “Regulatory Relief Act”) to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) of 9% that qualifying institutions may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. If an election to use the community bank leverage ratio capital framework is made, a qualifying bank with less than $10 billion in assets with capital exceeding the specified community bank leverage ratio is considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized.” As of September 30, 2024 the Bank had not elected to be subject to the alternative community bank leverage ratio framework.

As of September 30, 2024, the Bank and Pioneer Commercial Bank met all capital adequacy requirements to which they were subject. Further, the most recent OCC and FDIC notifications categorized the Bank and Pioneer Commercial Bank as well capitalized institutions under the prompt corrective action regulations. There have been no conditions or events since the notification that management believes have changed the Bank’s capital classification including the completion of the Commerical Bank Merger.

The actual capital amounts and ratios for the Bank and Pioneer Commercial Bank are presented in the following tables (dollars in thousands):

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

At September 30, 2024, we had $285.8 million of commitments to originate or purchase loans, comprised of $177.2 million of commitments under commercial loans and lines of credit (including $59.4 million of unadvanced portions of commercial construction loans), $70.3 million of commitments under home equity loans and lines of credit, $31.2 million of commitments to purchase residential mortgage loans and $7.1 million of unfunded commitments under consumer lines of credit. In addition, at September 30, 2024, we had $21.4 million in standby letters of credit outstanding.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. As of September 30, 2024, the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15 and 15d-15(e) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the risk factors set forth under Item 1.A. Risk Factors as set forth in the Company’s Annual Report on Form 10-K for the year ended June 30, 2024 (“Form 10-K”). Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth in the Form 10-K also are a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.