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PBFS Pioneer Bancorp

Filed: 14 May 20, 4:16pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

PIONEER BANCORP, INC.

(Exact Name of Company as Specified in its Charter)

 

Maryland

001-38991

83-4274253

(State of Other Jurisdiction of Incorporation)

(Commission File No.)

(I.R.S. Employer Identification No.)

 

652 Albany Shaker Road, Albany, New York 12211

(Address of Principal Executive Office) (Zip Code)

(518) 730‑3999

(Issuer’s Telephone Number including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

 

Trading
Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

PBFS

 

The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒         NO   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒        NO   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).  YES ☐      NO   ☒

As of May 13, 2020, there were 25,977,679 shares outstanding of the registrant’s common stock.

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

PIONEER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

June 30, 

 

 

2020

 

2019

Assets

 

 

  

 

 

  

Cash and due from banks

 

$

22,890

 

$

48,385

Federal funds sold

 

 

4,006

 

 

2,083

Interest-earning deposits with banks

 

 

163,305

 

 

179,641

Cash and cash equivalents

 

 

190,201

 

 

230,109

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

73,631

 

 

91,735

Securities held to maturity (fair value of $4,182 at March 31, 2020; and $3,887 at June 30, 2019)

 

 

4,139

 

 

3,873

Equity securities, at fair value

 

 

2,884

 

 

3,618

Federal Home Loan Bank of New York stock

 

 

1,824

 

 

924

Net loans receivable

 

 

1,101,997

 

 

1,053,938

Accrued interest receivable

 

 

4,026

 

 

4,374

Premises and equipment, net

 

 

41,332

 

 

41,710

Bank-owned life insurance

 

 

17,229

 

 

17,834

Goodwill

 

 

7,292

 

 

7,292

Other intangible assets, net

 

 

2,250

 

 

2,523

Other assets

 

 

52,909

 

 

22,062

Total assets

 

$

1,499,714

 

$

1,479,992

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Non-interest bearing deposits

 

$

369,085

 

$

357,523

Interest bearing deposits

 

 

868,590

 

 

973,795

Total deposits

 

 

1,237,675

 

 

1,331,318

Mortgagors’ escrow deposits

 

 

3,705

 

 

6,044

Borrowings from Federal Home Loan Bank of New York

 

 

20,000

 

 

 —

Other liabilities

 

 

9,802

 

 

7,665

Total liabilities

 

 

1,271,182

 

 

1,345,027

 

 

 

 

 

 

 

Shareholders' Equity

 

 

  

 

 

  

  Preferred stock ($0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding as of March 31, 2020)

 

 

 —

 

 

 —

  Common stock ($0.01 par value, 75,000,000 shares authorized, 25,977,679 shares issued and outstanding as of March 31, 2020)

 

 

260

 

 

 —

  Additional paid in capital

 

 

114,015

 

 

 —

Retained earnings

 

 

138,973

 

 

146,068

Unallocated common stock of Employee Stock Ownership Plan ("ESOP")

 

 

(12,791)

 

 

 —

Accumulated other comprehensive loss

 

 

(11,925)

 

 

(11,103)

Total shareholders' equity

 

 

228,532

 

 

134,965

Total liabilities and shareholders' equity

 

$

1,499,714

 

$

1,479,992

 

3

PIONEER BANCORP, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2020

    

2019

    

2020

    

2019

Interest and dividend income:

 

 

  

 

 

  

 

 

  

 

 

  

Loans

 

$

12,282

 

$

12,438

 

$

38,122

 

$

36,899

Securities

 

 

518

 

 

649

 

 

1,715

 

 

1,918

Interest-earning deposits with banks and other

 

 

488

 

 

512

 

 

1,866

 

 

1,115

Total interest and dividend income

 

 

13,288

 

 

13,599

 

 

41,703

 

 

39,932

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

1,213

 

 

1,082

 

 

3,761

 

 

2,986

Borrowings and other

 

 

22

 

 

57

 

 

77

 

 

207

Total interest expense

 

 

1,235

 

 

1,139

 

 

3,838

 

 

3,193

Net interest income

 

 

12,053

 

 

12,460

 

 

37,865

 

 

36,739

Provision for loan losses

 

 

2,550

 

 

570

 

 

20,440

 

 

1,780

Net interest income after provision for loan losses

 

 

9,503

 

 

11,890

 

 

17,425

 

 

34,959

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

  

 

 

  

 

 

  

 

 

  

Bank fees and service charges

 

 

1,718

 

 

2,232

 

 

6,730

 

 

5,969

Insurance and wealth management services

 

 

1,809

 

 

1,568

 

 

5,233

 

 

4,850

Net loss on equity securities

 

 

(1,017)

 

 

 —

 

 

(735)

 

 

 —

Net gain on available for sale securities transactions

 

 

83

 

 

 —

 

 

134

 

 

 —

Net loss on disposal of assets

 

 

(7)

 

 

(27)

 

 

(28)

 

 

(575)

Bank-owned life insurance

 

 

10

 

 

30

 

 

537

 

 

95

Other

 

 

69

 

 

169

 

 

200

 

 

203

Total noninterest income

 

 

2,665

 

 

3,972

 

 

12,071

 

 

10,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

  

 

 

  

 

 

  

 

 

  

Salaries and employee benefits

 

 

6,213

 

 

5,741

 

 

18,764

 

 

16,731

Net occupancy and equipment

 

 

1,559

 

 

1,522

 

 

4,597

 

 

4,456

Data processing

 

 

829

 

 

734

 

 

2,374

 

 

2,182

Advertising and marketing

 

 

162

 

 

282

 

 

551

 

 

720

FDIC insurance premiums

 

 

119

 

 

196

 

 

(8)

 

 

551

Contribution to Pioneer Bank Charitable Foundation

 

 

 —

 

 

 —

 

 

5,446

 

 

 —

Fraudulent activity

 

 

 —

 

 

 —

 

 

2,500

 

 

 —

Professional fees

 

 

966

 

 

81

 

 

2,864

 

 

268

Other

 

 

1,260

 

 

1,090

 

 

3,888

 

 

3,245

Total noninterest expense

 

 

11,108

 

 

9,646

 

 

40,976

 

 

28,153

Income (loss) before income taxes

 

 

1,060

 

 

6,216

 

 

(11,480)

 

 

17,348

Income tax (benefit) expense

 

 

211

 

 

1,437

 

 

(3,495)

 

 

3,326

Net income (loss)

 

$

849

 

$

4,779

 

$

(7,985)

 

$

14,022

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

           Basic

 

$

0.03

 

 

 —

 

$

(0.32)

 

 

 —

           Diluted

 

$

0.03

 

 

 —

 

$

(0.32)

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

           Weighted average shares outstanding - basic and diluted

 

 

25,016,634

 

 

 —

 

 

25,006,027

 

 

 —

 

 

4

PIONEER BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2020

    

2019

    

2020

    

2019

Net income (loss)

 

$

849

 

$

4,779

 

$

(7,985)

 

$

14,022

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized gains/losses on securities:

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized holding (losses) gains arising during the period

 

 

(558)

 

 

799

 

 

(169)

 

 

(436)

Reclassification adjustment for gains included in net income

 

 

(83)

 

 

 —

 

 

(134)

 

 

 —

 

 

 

(641)

 

 

799

 

 

(303)

 

 

(436)

Tax (benefit) expense

 

 

(168)

 

 

209

 

 

(80)

 

 

(114)

 

 

 

(473)

 

 

590

 

 

(223)

 

 

(322)

Defined benefit plan:

 

 

  

 

 

  

 

 

  

 

 

  

Change in funded status of defined benefit plans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Reclassification adjustment for amortization of net actuarial loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Tax effect

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total other comprehensive (loss) income

 

 

(473)

 

 

590

 

 

(223)

 

 

(322)

Comprehensive income (loss)

 

$

376

 

$

5,369

 

$

(8,208)

 

$

13,700

 

 

5

PIONEER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET WORTH (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

 

 

Undivided

 

Comprehensive

 

Net

 

    

 

Surplus

    

Profits

    

Loss

    

Worth

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2018

 

$

10,658

 

$

116,394

 

$

(8,989)

 

$

118,063

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

4,443

 

 

 —

 

 

4,443

Other comprehensive loss

 

 

 —

 

 

 —

 

 

(82)

 

 

(82)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2018

 

$

10,658

 

$

120,837

 

$

(9,071)

 

$

122,424

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

4,800

 

 

 —

 

 

4,800

Other comprehensive loss

 

 

 —

 

 

 —

 

 

(830)

 

 

(830)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

10,658

 

$

125,637

 

$

(9,901)

 

$

126,394

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

4,779

 

 

 —

 

 

4,779

Other comprehensive income

 

 

 —

 

 

 —

 

 

590

 

 

590

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2019

 

$

10,658

 

$

130,416

 

$

(9,311)

 

$

131,763

6

PIONEER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Unallocated

 

Accumulated Other

 

Total

 

 

Common Stock

 

Paid-in

 

Retained

 

Common

 

Comprehensive

 

Shareholders'

 

 

Shares

 

Amount

    

Capital

    

Earnings

    

Stock of ESOP

    

Loss

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2019

 

 

 —

 

$

 —

 

$

 —

 

$

146,068

 

$

 —

 

$

(11,103)

 

$

134,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle - revenue recognition (1)

 

 

 —

 

 

 —

 

 

 —

 

 

291

 

 

 —

 

 

 —

 

 

291

Cumulative effect of change in accounting principle - equity securities (2)

 

 

 —

 

 

 —

 

 

 —

 

 

599

 

 

 —

 

 

(599)

 

 

 —

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

(12,684)

 

 

 —

 

 

 —

 

 

(12,684)

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

241

 

 

241

Issuance of common stock to the mutual holding company

 

 

14,287,723

 

 

143

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

143

Issuance of common stock for the initial public offering, net of offering costs

 

 

11,170,402

 

 

112

 

 

108,800

 

 

 —

 

 

 —

 

 

 —

 

 

108,912

Issuance of common stock to the Pioneer Bank Charitable Foundation

 

 

519,554

 

 

 5

 

 

5,191

 

 

 —

 

 

 —

 

 

 —

 

 

5,196

Purchase of common stock by the ESOP (1,018,325 shares)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,644)

 

 

 —

 

 

(13,644)

ESOP shares committed to be released (25,458 shares)

 

 

 —

 

 

 —

 

 

16

 

 

 —

 

 

341

 

 

 —

 

 

357

Balance as of September 30, 2019

 

 

25,977,679

 

$

260

 

$

114,007

 

$

134,274

 

$

(13,303)

 

$

(11,461)

 

$

223,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

3,850

 

 

 —

 

 

 —

 

 

3,850

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 9

 

 

 9

ESOP shares committed to be released (25,458 shares)

 

 

 —

 

 

 —

 

 

 5

 

 

 —

 

 

341

 

 

 —

 

 

346

Balance as of December 31, 2019

 

 

25,977,679

 

$

260

 

$

114,012

 

$

138,124

 

$

(12,962)

 

$

(11,452)

 

$

227,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

849

 

 

 —

 

 

 —

 

 

849

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(473)

 

 

(473)

ESOP shares committed to be released (12,729 shares)

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

171

 

 

 —

 

 

174

Balance as of March 31, 2020

 

 

25,977,679

 

$

260

 

$

114,015

 

$

138,973

 

$

(12,791)

 

$

(11,925)

 

$

228,532


(1)

Adoption of Accounting Standard Update 2014-09.

(2)

Adoption of Accounting Standard Update 2016-01.

7

PIONEER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

March 31, 

 

    

2020

    

2019

Cash flows from operating activities:

 

 

  

 

 

  

Net (loss) income

 

$

(7,985)

 

$

14,022

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

2,172

 

 

2,101

Provision for loan losses

 

 

20,440

 

 

1,780

Net accretion on securities

 

 

(305)

 

 

(400)

ESOP compensation

 

 

877

 

 

 —

Earnings on bank-owned life insurance

 

 

(537)

 

 

(95)

Proceeds from sale of loans

 

 

 —

 

 

227

Net loss on the sale, disposal or write-down of premises and equipment, and other real estate owned

 

 

28

 

 

575

Net loss on equity securities

 

 

735

 

 

 —

Net gain on available for sale securities transactions

 

 

(134)

 

 

 —

Deferred tax (benefit) expense

 

 

(1,526)

 

 

173

Decrease (increase) in accrued interest receivable

 

 

348

 

 

(421)

     Stock contribution to Pioneer Bank Charitable Foundation

 

 

5,196

 

 

 —

Increase in other assets

 

 

(28,850)

 

 

(6,072)

Increase (decrease) in other liabilities

 

 

2,138

 

 

(3,963)

Net cash (used in) provided by operating activities

 

 

(7,403)

 

 

7,927

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

  

 

 

  

Proceeds from maturities, paydowns and calls of securities available for sale

 

 

56,088

 

 

43,589

Proceeds from sales of securities available for sale

 

 

5,030

 

 

 —

Purchases of securities available for sale

 

 

(42,878)

 

 

(49,725)

Proceeds from maturities and paydowns of securities held to maturity

 

 

3,296

 

 

4,553

Purchases of securities held to maturity

 

 

(3,562)

 

 

(3,378)

Net purchases of FHLBNY stock

 

 

(900)

 

 

 —

Net increase in loans receivable

 

 

(68,760)

 

 

(56,925)

Purchases of premises and equipment

 

 

(1,528)

 

 

(1,791)

Proceeds from sale of premises and equipment, and other real estate owned

 

 

138

 

 

578

Proceeds from bank-owned life insurance death benefit

 

 

1,142

 

 

 —

Net cash used in investing activities

 

 

(51,934)

 

 

(63,099)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

  

 

 

  

Net (decrease) increase in deposits

 

 

(93,643)

 

 

93,579

Net decrease in mortgagors’ escrow deposits

 

 

(2,339)

 

 

(1,901)

Net increase in borrowings from FHLBNY

 

 

20,000

 

 

 —

Issuance of common stock

 

 

109,055

 

 

 —

Purchase of shares by the ESOP

 

 

(13,644)

 

 

 —

Net cash provided by financing activities

 

 

19,429

 

 

91,678

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(39,908)

 

 

36,506

Cash and cash equivalents at beginning of period

 

 

230,109

 

 

120,280

Cash and cash equivalents at end of period

 

$

190,201

 

$

156,786

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

Cash paid during the period for:

 

 

  

 

 

  

Interest

 

$

3,818

 

$

3,189

Income taxes

 

$

1,800

 

$

3,500

Non-cash investing and financing activity:

 

 

  

 

 

  

Loans transferred to other real estate owned

 

$

260

 

$

226

 

8

PIONEER BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principals of Consolidation

Pioneer Bancorp, Inc. (the “Company”) is a mid-tier stock holding company whose wholly owned subsidiary is Pioneer Bank (the “Bank”). The Bank is a New York State chartered savings bank whose wholly owned subsidiaries are Pioneer Commercial Bank, Pioneer Financial Services, Inc., and Anchor Agency, Inc.

The Company provides diversified financial services through the Bank and its subsidiaries, with 22 offices in the Capital Region of New York State. The Company, through its subsidiaries, offers a broad array of deposit, lending, and other financial services to individuals, businesses, and municipalities.   There are no significant concentrations of loans to any one customer or industry. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the Bank’s market area.

The consolidated financial statements include the accounts of the Company, the Bank, and the Bank’s wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation. Financial information for the periods before the Company’s mutual holding company reorganization and stock offering on July 17, 2019 are those of the Bank and its subsidiaries.

The interim financial data as of March 31, 2020 and for the three and nine months ended March 31, 2020 and 2019, respectively, is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented in conformance with accounting principles generally accepted in the United States of America (“GAAP”).  The results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the results to be achieved for the remainder of fiscal 2020 or any other period.

These unaudited interim consolidated financial statements should be read in conjunction with the Company’s 2019 Annual Report on Form 10-K for the year ended June 30, 2019.

Mutual Holding Company Reorganization and Minority Stock Issuance

On July 17, 2019, Pioneer Bancorp, Inc. became the holding company of the Bank when it closed its stock offering in connection with the completion of the reorganization of the Bank into the two-tier mutual holding company form of organization. The Company sold 11,170,402 shares of common stock at a price of $10.00 per share, for net proceeds of $109.1 million, issued 14,287,723 shares to Pioneer Bancorp, MHC and contributed 519,554 shares of common stock and $250,000 in cash to the Pioneer Bank Charitable Foundation. The Company established an ESOP which owns 1,018,325 shares of common stock of the Company. The remaining amount of subscription proceeds received and recorded as a liability on June 30, 2019, was refunded to subscribers. Pioneer Bancorp, MHC now owns 55% of the common stock of the Company.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ substantially from those estimates. The allowance for loan losses, valuation of securities and other financial instruments, the funded status and expense of employee benefit plans, and the realizability of deferred tax assets are particularly subject to change.

9

Reclassifications

Amounts in the prior period’s consolidated financial statements are reclassified whenever necessary to conform to the current period’s presentation.

Adoption of Recent Accounting Pronouncements

On July 1, 2019, the Company adopted Accounting Standard Update (“ASU”) 2014-09 amending guidance on “Revenue from Contracts with Customers (Topic 606)” and all subsequent ASU’s that modified Topic 606.  The objective of the ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services.  This ASU replaces most existing revenue recognition guidance under GAAP.  A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance.  With respect to noninterest income, the Company has identified revenue streams within the scope of the guidance, which include insurance revenues, wealth management services, service charges on deposits, interchange income, and gains (losses) from the transfer of other real estate owned.  The Company recorded a net increase to beginning retained earnings of $291,000 as of July 1, 2019 due to the cumulative impact of adopting Topic 606, primarily driven by the recognition of insurance commission income. The adoption of Topic 606 did not have a significant impact on the Company’s consolidated financial statements as of and for the three and nine-month periods ended March 31, 2020. Refer to Note 10 for additional disclosures required by Topic 606.

On July 1, 2019, the Company adopted ASU 2016-01 amending guidance on “Financial Instruments (Subtopic 825-10)”.  This amendment addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  These amendments require equity securities to be measured at fair value with changes in the fair value to be recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. The Company evaluated its preferred stock holdings and concluded that the preferred stocks are not considered equity securities subject to ASU 2016-01. As of June 30, 2019, the Company had equity investments with a cost of $2.8 million and an estimated fair value of $3.6 million.  On July 1, 2019, the Company recorded a cumulative-effect adjustment to increase retained earnings in the amount of $599,000 representing the unrealized gain, net of tax, on these equity securities.  Changes in fair value during the three and nine-months ended March 31, 2020 have been recognized in net income (loss).  

On July 1, 2019, the Company adopted ASU 2016‑15 which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice. The amendment covers the following cash flows: Cash payments for debt prepayment or extinguishment costs will be classified in financing activities. Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity. Cash paid by an acquirer that is not soon after a business combination for the settlement of a contingent consideration liability will be separated between financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess will be classified in operating activities. Cash paid soon after the business combination will be classified in investing activities. Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature of each loss included in the settlement. Cash proceeds received from the settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies will be classified as cash inflows from investing activities. Cash payments for premiums on COLI and BOLI may be classified as cash outflows for investing, operating, or a combination of both. A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a noncash activity, and cash received from beneficial interests will be classified in investing activities. Distributions received from equity method investees will be classified using either a cumulative earnings approach or a look- through approach as an accounting policy election. The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an

10

entity should classify the aggregate amount into one class of cash flows on the basis of predominance. The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.

On July 1, 2019, the Company adopted ASU 2016‑18 related to guidance on “Statement of Cash Flows (Topic 230) Restricted Cash” which addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows. The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.

On July 1, 2019, the Company adopted ASU 2017‑07 related to guidance on “Compensation - Retirement Benefits (Topic 715)” which improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASU 2017‑07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The adoption of this guidance did not have a material impact on our consolidated results of operations or financial position.

Impact of Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016‑02 to its guidance on “Leases (Topic 842)”. The new leases standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606. Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendments in ASU 2016‑02 are effective for the Company for the fiscal year beginning July 1, 2021. Early adoption is permitted. The adoption of this ASU will result in a gross up of the Consolidated Statements of Condition for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee. In July 2018, the FASB issued ASU No. 2018‑10, Codification Improvements to Topic 842 - Leases to address certain narrow aspects of the guidance issued in ASU No. 2016‑02. In July 2018, the FASB issued ASU No. 2018‑11, Leases (Topic 842): Targeted Improvements, which amends FASB Accounting Standards Codification (ASC), Leases (Topic 842), to (1) add an optional transition method that would permit entities to apply the new requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption, and (2) provide a practical expedient for lessors regarding the separation of the lease and non-lease components of a contract. In December 2018, the FASB issued ASU No. 2018‑20, Narrow-Scope Improvements for Lessors, which addresses issues related to (1) sales tax and similar taxes collected from lessees, (2) certain lessor costs, and (3) recognition of variable payments for contracts with lease and non-lease components. The Company is evaluating the significance and other effects of adoption on the consolidated financial statements and related disclosures. The Company is performing its accounting analysis of its branch building and other leases underlying contracts. The Company is currently evaluating the potential impact on adoption of this ASU on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016‑13 to its guidance on “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016‑13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model

11

(referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above. Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities.  For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis. The amendments in this ASU are effective for the Company for the fiscal year beginning July 1, 2023. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). In November 2018, the FASB issued ASU 2018‑19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which aligns the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarifies the scope of the guidance in the amendments in ASU 2016‑13. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.  ASU 2019-04 clarifies or addresses stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 related to measuring the allowance for loan losses under the new guidance. The effective dates and transition requirements for the amendments related to this Update are the same as the effective dates and transition requirements in Update 2016-13. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments Credit Losses clarifying certain amendments to various provisions of ASU No. 2016-13 relating to (1) purchased financial assets with credit deterioration, (2) financial assets secured by collateral maintenance agreements, (3) transition relief for troubled debt restructurings, and (4) disclosure relief when the practical expedient for accrued interest receivables is applied. The initial adjustment will not be reported in earnings and therefore will not have any material impact on our consolidated results of operations, but it is expected that it will have an impact on our consolidated financial position at the date of adoption of this ASU. At this time, we have not calculated the estimated impact that this ASU will have on our allowance for loan losses, however, we anticipate it will have a significant impact on the methodology process we utilize to calculate the allowance. Alternative methodologies are currently being considered. Data requirements and integrity are being reviewed and enhancements incorporated into standard processes. The Company is currently evaluating the potential impact on adoption of this ASU on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017‑08 to its guidance on “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310‑20) related to premium amortization on purchased callable debt securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for the Company for the fiscal year beginning July 1, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosure about a change in accounting principle. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In August 2018, the FASB issued ASU 2018‑13 to its guidance on “Fair Value Measurement (Topic 820)”. This update modifies the disclosure requirements on fair value measurements. The following disclosure requirements were removed from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value measurements; and (4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The following disclosure requirements were modified in Topic 820: (1) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic

12

entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; (2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and (3) the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. In addition, the amendments eliminate at a minimum from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in ASU No. 2018‑13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018‑13 and delay adoption of the additional disclosures until their effective date. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In August 2018, the FASB has issued ASU  2018‑14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715‑20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”, that applies to all employers that sponsor defined benefit pension or other postretirement plans. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The following disclosure requirements were removed from Subtopic 715‑20: (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; (2) the amount and timing of plan assets expected to be returned to the employer; (3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; (4) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets; and (5) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. The following disclosure requirements were added to Subtopic 715‑20: (1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715‑20‑50‑3, which state that the following information for defined benefit pension plans should be disclosed: (1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets; and (2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. ASU No. 2018‑14 is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In April 2019, the FASB issued an Update (ASU 2019-04), Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.

The amendments to Topic 326 and other Topics in this Update include items related to the amendments in Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses TRG meetings. The amendments clarify or address

13

stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 on a number of different topics, including the following: 

·

Accrued Interest

·

Transfers between Classifications or Categories for Loans and Debt Securities

·

Recoveries

·

Consideration of Prepayments in Determining the Effective Interest Rate

·

Consideration of Estimated Costs to Sell When Foreclosure Is Probable

·

Vintage Disclosures— Line-of-Credit Arrangements Converted to Term Loans

·

Contractual Extensions and Renewals

The ASU also covered a number of issues that related to hedge accounting including:

·

Partial-Term Fair Value Hedges of Interest Rate Risk

·

Amortization of Fair Value Hedge Basis Adjustments

·

Disclosure of Fair Value Hedge Basis Adjustments

·

Consideration of the Hedged Contractually Specified Interest Rate under the Hypothetical Derivative Method

·

Scoping for Not-for-Profit Entities

·

Hedge Accounting Provisions Applicable to Certain Private Companies and Not-for- Profit Entities

·

Application of a First- Payments-Received Cash Flow Hedging Technique to Overall Cash Flows on a Group of Variable Interest Payments

·

Transition Guidance

For Codification Improvements specific to ASU 2016-01, the following topics were covered within ASU 2019-04:

·

Scope Clarifications

·

Held-to-Maturity Debt Securities Fair Value Disclosures

·

Applicability of Topic 820 to the Measurement Alternative

·

Remeasurement of Equity Securities at Historical Exchange Rates

ASU 2019-04 has various implementation dates dependent on a number of factors as it pertains to the above items.

In December 2019, the FASB issued ASU 2019-12, Income Taxes Topic 740.  This update simplifies and improves accounting for income taxes by eliminating certain exceptions to the general rules and clarifying or amending other current guidance. The scope of FASB ASC Subtopic 740-10, Income Taxes -Overall, has been amended to require that, if a franchise (or similar tax) is partially based on income, (1) deferred tax assets and liabilities should be recognized and accounted for pursuant to FASB ASC 740, as should the amount of current tax expense that is based on income, and (2) any incremental amount incurred should be recorded as a non-income-based tax. Note that under the amended guidance, the effect of potentially paying a non-income-based tax in future years need not be considered in evaluating the realizability of deferred tax assets. The amendments in this ASU are effective for the Company for the fiscal year beginning July 1, 2022. Early adoption is permitted, including adoption in an interim period. If early adoption is elected, all of the amended guidance must be adopted in the same period. If early adoption is initially applied in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period.  The Company is currently evaluating the potential impact on adoption of this ASU on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).  The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance

14

related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.  The amendments for contract modifications can be elected to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. The amendments for existing hedging relationships can be elected to be applied as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is currently evaluating the potential impact on adoption of this guidance on our consolidated financial statements.

 

2.COVID-19 PANDEMIC

In early January 2020, the World Health Organization issued an alert that a novel coronavirus outbreak was emanating from the Wuhan Province in China. Later in January, the first death related to the novel coronavirus, identified as Coronavirus Disease 2019 (“COVID-19”), occurred in the United States. Over the course of the next several weeks, the outbreak continued to spread to various regions of the World prompting the World Health Organization to declare COVID-19 a global pandemic on March 11, 2020.  In the United States, the rapid spread of the COVID-19 virus invoked various Federal and State, including New York State, authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international and domestic travel, restrictions on business operations, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public.   These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses and have resulted in a significant number of layoffs and furloughs of employees in the Company’s market area. The direct and indirect effects of the COVID-19 pandemic have resulted in dramatic reductions in the level of economic activity in the Company’s market area and have severely hampered the ability for businesses and consumers to meet their current repayment obligations.  The Company’s third fiscal quarter of 2020 (the quarter ended March 31, 2020) results were adversely impacted by the effects of the pandemic, which contributed to an increase in the provision for loan losses, and the net loss on equity securities.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), in addition to providing financial assistance to both businesses and consumers, creates a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The Federal and New York State banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board, and provisions of the CARES Act allow modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments prior to any relief, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. The Company has begun working with its customers affected by COVID-19 and expects a significant amount of modifications across its loan portfolios in the near term. To the extent that such modifications meet the criteria previously described, such modifications are not expected to be classified as troubled debt restructurings.

As a result of the spread of COVID-19, economic uncertainties have arisen which are likely to negatively impact the Company’s operational and financial performance. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain and not currently estimable, however the impact could be material.

15

3.INVESTMENT SECURITIES

The amortized cost and estimated fair value of securities are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

61,915

 

$

431

 

$

 —

 

$

62,346

Mortgage-backed securities - residential

 

 

85

 

 

 —

 

 

 —

 

 

85

Asset-backed securities

 

 

67

 

 

42

 

 

(4)

 

 

105

Collateralized mortgage obligations - residential

 

 

450

 

 

261

 

 

(56)

 

 

655

Municipal obligations

 

 

5,762

 

��

10

 

 

 —

 

 

5,772

Total debt securities

 

 

68,279

 

 

744

 

 

(60)

 

 

68,963

Preferred stocks

 

 

6,007

 

 

21

 

 

(1,360)

 

 

4,668

Total available for sale securities

 

$

74,286

 

$

765

 

$

(1,420)

 

$

73,631

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal obligations

 

$

4,139

 

$

43

 

$

 —

 

$

4,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

70,706

 

$

164

 

$

(3)

 

$

70,867

Mortgage-backed securities - residential

 

 

109

 

 

 3

 

 

 —

 

 

112

Asset-backed securities

 

 

75

 

 

55

 

 

(2)

 

 

128

Collateralized mortgage obligations - residential

 

 

525

 

 

401

 

 

(37)

 

 

889

Municipal obligations

 

 

14,666

 

 

33

 

 

 —

 

 

14,699

Total debt securities

 

 

86,081

 

 

656

 

 

(42)

 

 

86,695

Preferred stocks

 

 

6,007

 

 

52

 

 

(1,019)

 

 

5,040

Total available for sale securities

 

$

92,088

 

$

708

 

$

(1,061)

 

$

91,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal obligations

 

$

3,873

 

$

14

 

$

 —

 

$

3,887

 

16

The estimated fair value and gross unrealized losses aggregated by security category and length of time such securities have been in a continuous unrealized loss position, is summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage-backed securities - residential (1)

 

$

14

 

$

 —

 

$

 1

 

$

 —

 

$

15

 

$

 —

Asset-backed securities

 

 

 5

 

 

(1)

 

 

 4

 

 

(3)

 

 

 9

 

 

(4)

Collateralized mortgage obligations - residential

 

 

30

 

 

(2)

 

 

141

 

 

(54)

 

 

171

 

 

(56)

Preferred stocks

 

 

 —

 

 

 —

 

 

4,645

 

 

(1,360)

 

 

4,645

 

 

(1,360)

 

 

$

49

 

$

(3)

 

$

4,791

 

$

(1,417)

 

$

4,840

 

$

(1,420)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

 

Losses

Securities available for sale:

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

4,969

 

$

(1)

 

$

7,988

 

$

(2)

 

$

12,957

 

$

(3)

Mortgage-backed securities - residential (1)

 

 

 1

 

 

 —

 

 

 2

 

 

 —

 

 

 3

 

 

 —

Asset-backed securities

 

 

 —

 

 

 —

 

 

 5

 

 

(2)

 

 

 5

 

 

(2)

Collateralized mortgage obligations - residential

 

 

15

 

 

(9)

 

 

160

 

 

(28)

 

 

175

 

 

(37)

Preferred stocks

 

 

 —

 

 

 —

 

 

4,986

 

 

(1,019)

 

 

4,986

 

 

(1,019)

 

 

$

4,985

 

$

(10)

 

$

13,141

 

$

(1,051)

 

$

18,126

 

$

(1,061)


(1)

Unrealized losses on these securities are less than $500.

 

At March 31, 2020, there were 48 securities with unrealized losses. Unrealized losses on debt securities are primarily related to increases in credit spreads since the securities were purchased. Unrealized losses on agency-backed and certain private-label mortgage-backed securities, asset-backed securities and collateralized mortgage obligation securities are not considered other-than-temporary based upon analysis completed by management considering credit rating of the instrument, length of time each security has spent in an unrealized loss position and the strength of the underlying collateral. Unrealized losses on two auction rate securities, consisting of U.S. Bancorp and Bank of America preferred stock, are not considered to be other-than-temporary based upon management’s evaluation of the underlying operating results and financial strength of the issuers. The U.S. Bancorp security is investment grade, whereas the Bank of America security, remains non-investment grade as of March 31, 2020. The Bank of America security had a cost basis of $2.2 million and an estimated fair value of $1.9 million, as of March 31, 2020. Management does not have the intent to sell, nor do they believe that they will be required to sell the above mentioned securities in an unrealized loss position before recovery of the amortized cost basis. In management’s opinion, the market conditions are temporary in nature and provide the basis for the Company’s belief that the declines are not other-than-temporary.

At March 31, 2020, management reviewed all private-label mortgage-backed securities, asset-backed securities and collateralized mortgage obligations which were rated less than investment grade for impairment, resulting in no additional impairment charges during the nine months ended March 31, 2020. At March 31, 2020, 57 securities with an amortized cost of $0.4 million and remaining par value of $1.8 million were evaluated.

The table below presents a rollforward of the credit losses recognized in earnings (dollars in thousands):

 

 

 

 

Balance, July 1, 2019

    

$

1,477

 

 

 

 

Reductions for amounts realized for securities transactions

 

 

(117)

 

 

 

 

Balance, March 31, 2020

 

$

1,360

 

17

The fair value of debt securities and carrying amount, if different, by contractual maturity were as follows (dollars in thousands). Securities not due at a single maturity date are shown separately.

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Amortized

 

Estimated

 

    

Cost

    

Fair Value

Securities available for sale:

 

 

  

 

 

  

Due in one year or less

 

$

67,677

 

$

68,118

Due after one to five years

 

 

 —

 

 

 —

  Mortgage-backed securities - residential

 

 

85

 

 

85

  Asset-backed securities

 

 

67

 

 

105

  Collateralized mortgage obligations - residential

 

 

450

 

 

655

  Preferred stocks

 

 

6,007

 

 

4,668

 

 

$

74,286

 

$

73,631

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

Due in one year or less

 

$

3,803

 

$

3,846

Due after one to five years

 

 

226

 

 

226

Due after five to ten years

 

 

110

 

 

110

 

 

$

4,139

 

$

4,182

 

During the three and nine months ended March 31, 2020, the Company received $5.0 million in proceeds from the sale of securities available for sale, realizing gross gains of $83,000. During the nine months ended March 31, 2020, the Company realized gross gains of $51,000 from other securities transactions. There were no sales of securities available for sale for the three and nine months ended March 31, 2019.

There were no sales of securities held to maturity for the three and nine months ended March 31, 2020 and 2019.

At March 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of our equity. As of March 31, 2020, and June 30, 2019, the carrying value of available for sale securities pledged to secure FHLBNY advances and municipal deposits was $67.0 million and $84.9 million, respectively.

18

4.NET LOANS RECEIVABLE

A summary of net loans receivable is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

    

March 31, 2020

    

June 30, 2019

Commercial:

 

 

  

 

 

  

Real estate

 

$

458,633

 

$

414,375

Commercial and industrial

 

 

175,490

 

 

183,262

Construction

 

 

88,132

 

 

85,274

Total commercial

 

 

722,255

 

 

682,911

Residential mortgages

 

 

285,834

 

 

281,388

Home equity loans and lines

 

 

81,405

 

 

80,258

Consumer

 

 

30,563

 

 

21,482

 

 

 

1,120,057

 

 

1,066,039

Net deferred loan costs

 

 

2,640

 

 

2,398

Allowance for loan losses

 

 

(20,700)

 

 

(14,499)

Net loans receivable

 

$

1,101,997

 

$

1,053,938

 

The following tables present the activity in the allowance for loan losses by portfolio segment (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2020

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Mortgages

    

 

Home Equity

    

Consumer

    

Total

Allowance for loan losses at beginning of period

 

$

12,760

 

$

2,452

 

$

868

 

$

413

 

$

16,493

Provisions charged to operations

 

 

1,411

 

 

813

 

 

205

 

 

121

 

 

2,550

Loans charged off

 

 

 —

 

 

 —

 

 

 —

 

 

(64)

 

 

(64)

Recoveries on loans charged off (1)

 

 

1,707

 

 

 —

 

 

 —

 

 

14

 

 

1,721

Allowance for loan losses at end of period

 

$

15,878

 

$

3,265

 

$

1,073

 

$

484

 

$

20,700


(1)

The three months ended March 31, 2020 included a partial recovery in the amount of $1.7 million related to the charge-off of the entire principal balance owed to the Bank related to a business customer and various affiliated entities (collectively, the “Mann Entities”) commercial loan relationships in the first fiscal quarter of 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2019

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Mortgages

    

Home Equity

    

Consumer

    

Total

Allowance for loan losses at beginning of period

 

$

10,062

 

$

2,459

 

$

800

 

$

279

 

$

13,600

Provisions charged to operations

 

 

486

 

 

38

 

 

 —

 

 

46

 

 

570

Loans charged off

 

 

 —

 

 

(56)

 

 

 —

 

 

(62)

 

 

(118)

Recoveries on loans charged off

 

 

 —

 

 

 —

 

 

 —

 

 

17

 

 

17

Allowance for loan losses at end of period

 

$

10,548

 

$

2,441

 

$

800

 

$

280

 

$

14,069

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended March 31, 2020

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Mortgages

    

Home Equity

    

Consumer

    

Total

Allowance for loan losses at beginning of period

 

$

11,057

 

$

2,360

 

$

813

 

$

269

 

$

14,499

Provisions charged to operations (1)

 

 

18,919

 

 

924

 

 

259

 

 

338

 

 

20,440

Loans charged off (1)

 

 

(15,805)

 

 

(19)

 

 

 —

 

 

(153)

 

 

(15,977)

Recoveries on loans charged off (1)

 

 

1,707

 

 

 —

 

 

 1

 

 

30

 

 

1,738

Allowance for loan losses at end of period

 

$

15,878

 

$

3,265

 

$

1,073

 

$

484

 

$

20,700


(1)

The nine months ended March 31, 2020 included a provision for loan losses in the amount of $15.8 million related to the charge-off of the entire principal balance owed to the Bank related to the Mann Entities commercial loan relationships which were recognized in the first fiscal quarter of 2020.  The nine months ended March 31, 2020 also included a partial recovery in the amount of $1.7 million related to the charge-off of the Mann Entities commercial loan relationships which was recognized in the third fiscal quarter of 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended March 31, 2019

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Mortgages

    

Home Equity

    

Consumer

    

Total

Allowance for loan losses at beginning of period

 

$

10,414

 

$

2,166

 

$

770

 

$

160

 

$

13,510

Provisions charged to operations

 

 

1,180

 

 

331

 

 

30

 

 

239

 

 

1,780

Loans charged off

 

 

(1,046)

 

 

(56)

 

 

 —

 

 

(151)

 

 

(1,253)

Recoveries on loans charged off

 

 

 —

 

 

 —

 

 

 —

 

 

32

 

 

32

Allowance for loan losses at end of period

 

$

10,548

 

$

2,441

 

$

800

 

$

280

 

$

14,069

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Mortgages

    

Home Equity

    

Consumer

    

Total

Allowance for loan losses:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Related to loans individually evaluated for impairment

 

$

533

 

$

 —

 

$

 —

 

$

 —

 

$

533

Related to loans collectively evaluated for impairment

 

 

15,345

 

 

3,265

 

 

1,073

 

 

484

 

 

20,167

Ending balance

 

$

15,878

 

$

3,265

 

$

1,073

 

$

484

 

$

20,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Individually evaluated for impairment

 

$

6,622

 

$

 —

 

$

 —

 

$

 —

 

$

6,622

Loans collectively evaluated for impairment

 

 

715,633

 

 

285,834

 

 

81,405

 

 

30,563

 

 

1,113,435

Ending balance

 

$

722,255

 

$

285,834

 

$

81,405

 

$

30,563

 

$

1,120,057

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

Mortgages

    

 

Home Equity

    

Consumer

    

Total

Allowance for loan losses:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Related to loans individually evaluated for impairment

 

$

426

 

$

 —

 

$

 —

 

$

 —

 

$

426

Related to loans collectively evaluated for impairment

 

 

10,631

 

 

2,360

 

 

813

 

 

269

 

 

14,073

Ending balance

 

$

11,057

 

$

2,360

 

$

813

 

$

269

 

$

14,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Individually evaluated for impairment

 

$

8,067

 

$

 —

 

$

 —

 

$

 —

 

$

8,067

Loans collectively evaluated for impairment

 

 

674,844

 

 

281,388

 

 

80,258

 

 

21,482

 

 

1,057,972

Ending balance

 

$

682,911

 

$

281,388

 

$

80,258

 

$

21,482

 

$

1,066,039

 

The following tables present information related to impaired loans by class as of (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

March 31, 2020

 

March 31, 2020

 

 

Unpaid

 

 

 

 

Allowance for

 

Average

 

Interest

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

    

Balance

    

Investment

    

Allocated

    

Investment

    

Recognized

With no related allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

2,390

 

$

2,390

 

$

 —

 

$

2,360

 

$

231

Commercial and industrial

 

 

46

 

 

42

 

 

 —

 

 

46

 

 

 —

Construction

 

 

1,298

 

 

1,298

 

 

 —

 

 

1,324

 

 

 —

Subtotal

 

 

3,734

 

 

3,730

 

 

 —

 

 

3,730

 

 

231

With an allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

 

1,523

 

 

1,463

 

 

30

 

 

1,584

 

 

 —

Commercial and industrial

 

 

1,437

 

 

1,429

 

 

503

 

 

1,463

 

 

69

Subtotal

 

 

2,960

 

 

2,892

 

 

533

 

 

3,047

 

 

69

Total

 

$

6,694

 

$

6,622

 

$

533

 

$

6,777

 

$

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 

June 30, 2019

 

June 30, 2019

 

 

Unpaid

 

 

 

 

Allowance for

 

Average

 

Interest

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

    

Balance

    

Investment

    

Allocated

    

Investment

    

Recognized

With no related allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

5,593

 

$

5,376

 

$

 —

 

$

5,608

 

$

 —

Commercial and industrial

 

 

59

 

 

48

 

 

 —

 

 

59

 

 

 —

Construction

 

 

1,377

 

 

1,377

 

 

 —

 

 

1,106

 

 

 —

Subtotal

 

 

7,029

 

 

6,801

 

 

 —

 

 

6,773

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

1,266

 

 

1,266

 

 

426

 

 

1,293

 

 

95

Subtotal

 

 

1,266

 

 

1,266

 

 

426

 

 

1,293

 

 

95

Total

 

$

8,295

 

$

8,067

 

$

426

 

$

8,066

 

$

95

 

21

Interest income on nonaccrual loans is recognized using the cost recovery method. Interest income on impaired loans that were on nonaccrual status and cash-basis interest income for the three and nine months ended March 31, 2020, and the year ended June 30, 2019 was nominal.

The recorded investment in loans excludes accrued interest receivable and deferred loan fees, net due to immateriality.

At various times, certain loan modifications are executed which are considered to be troubled debt restructurings. Substantially all of these modifications include one or a combination of the following:  extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; change in scheduled payment amount including interest only; or extensions of additional credit for payment of delinquent real estate taxes or other costs.

During the quarter ended March 31, 2020, the Company implemented customer payment deferral programs to assist both consumer and commercial borrowers that may be experiencing financial hardship due to COVID-19 related challenges, whereby short-term deferrals of payments (generally three to six months) will be provided.  Commercial, residential mortgage, home equity loans and lines, and consumer loans in deferment status will continue to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual.  Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral period and therefore, not classified as troubled-debt restructured loans. Borrowers that are delinquent in their payments prior to requesting a COVID-19 related financial hardship payment deferral will be reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status.

There were no loans modified as troubled debt restructurings during the three and  nine months ended March 31, 2020, and 2019, respectively. There were no loans that had been modified as a troubled debt restructuring during the twelve months prior to March 31, 2020 and 2019 which have subsequently defaulted during the three and nine months ended March 31, 2020 and 2019, respectively.

Loans subject to a troubled debt restructuring are evaluated as impaired loans for the purpose of determining the specific component of allowance for loan losses.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

June 30, 

 

 

2020

 

2019

 

    

 

 

    

Past Due

    

 

 

    

Past Due

 

 

 

 

 

90 Days

 

 

 

 

90 Days 

 

 

 

 

 

Still on 

 

 

 

 

Still on 

 

 

Nonaccrual

 

Accrual

 

Nonaccrual

 

Accrual

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

3,369

 

$

56

 

$

5,618

 

$

58

Commercial and industrial

 

 

42

 

 

 5

 

 

42

 

 

 —

Construction

 

 

1,298

 

 

 —

 

 

1,377

 

 

 —

Residential mortgages

 

 

4,191

 

 

 —

 

 

4,028

 

 

 —

Home equity loans and lines

 

 

1,511

 

 

54

 

 

1,497

 

 

41

Consumer

 

 

210

 

 

10

 

 

 —

 

 

19

 

 

$

10,621

 

$

125

 

$

12,562

 

$

118

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans.

22

The following tables present the aging of the recorded investment in loans by class of loans as of (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

30 - 59

 

60 - 89

 

90 or more

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

Days

 

Total

 

Loans Not

 

 

 

 

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Total

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

5,798

 

$

 —

 

$

2,189

 

$

7,987

 

$

450,646

 

$

458,633

Commercial and industrial

 

 

4,223

 

 

 —

 

 

47

 

 

4,270

 

 

171,220

 

 

175,490

Construction

 

 

6,609

 

 

 —

 

 

1,298

 

 

7,907

 

 

80,225

 

 

88,132

Residential mortgages

 

 

685

 

 

672

 

 

2,583

 

 

3,940

 

 

281,894

 

 

285,834

Home equity loans and lines

 

 

270

 

 

192

 

 

1,201

 

 

1,663

 

 

79,742

 

 

81,405

Consumer

 

 

 3

 

 

 —

 

 

10

 

 

13

 

 

30,550

 

 

30,563

Total

 

$

17,588

 

$

864

 

$

7,328

 

$

25,780

 

$

1,094,277

 

$

1,120,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

30 - 59

 

60 - 89

 

90 or more

 

 

 

 

 

 

 

 

 

 

 

Days

 

Days

 

Days

 

Total

 

Loans Not

 

 

 

 

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Total

Commercial:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

 3

 

$

 —

 

$

5,490

 

$

5,493

 

$

408,882

 

$

414,375

Commercial and industrial

 

 

 —

 

 

 —

 

 

42

 

 

42

 

 

183,220

 

 

183,262

Construction

 

 

 —

 

 

 —

 

 

1,377

 

 

1,377

 

 

83,897

 

 

85,274

Residential mortgages

 

 

156

 

 

217

 

 

2,699

 

 

3,072

 

 

278,316

 

 

281,388

Home equity loans and lines

 

 

476

 

 

318

 

 

988

 

 

1,782

 

 

78,476

 

 

80,258

Consumer

 

 

 5

 

 

 —

 

 

19

 

 

24

 

 

21,458

 

 

21,482

Total

 

$

640

 

$

535

 

$

10,615

 

$

11,790

 

$

1,054,249

 

$

1,066,039

 

The Company categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. The Company uses the following definitions for risk ratings:

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Commercial loans not meeting the criteria above are considered to be pass rated loans.

23

The following tables present commercial loans summarized by class of loans and the risk category (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard

    

Doubtful

 

Total

Commercial

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

447,313

 

$

484

 

$

10,836

 

$

 —

 

$

458,633

Commercial and industrial

 

 

161,059

 

 

6,583

 

 

7,848

 

 

 —

 

 

175,490

Construction

 

 

86,216

 

 

 —

 

 

1,916

 

 

 —

 

 

88,132

 

 

$

694,588

 

$

7,067

 

$

20,600

 

$

 —

 

$

722,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard

    

Doubtful

 

Total

Commercial

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Real estate

 

$

406,317

 

$

2,440

 

$

5,618

 

$

 —

 

$

414,375

Commercial and industrial

 

 

179,099

 

 

226

 

 

3,937

 

 

 —

 

 

183,262

Construction

 

 

83,897

 

 

 —

 

 

1,377

 

 

 —

 

 

85,274

 

 

$

669,313

 

$

2,666

 

$

10,932

 

$

 —

 

$

682,911

 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

As of March 31, 2020 and June 30, 2019, the Company had pledged $474.6 million and $485.6 million respectively, of residential mortgage, home equity and commercial loans as collateral for FHLBNY borrowings and stand-by letters of credit.

24

5.DERIVATIVES

In the normal course of servicing our commercial customers, the Company acts as an interest rate swap counterparty for certain commercial borrowers. The Company manages its exposure to such interest rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that match the terms of the interest rate swap with the commercial borrowers. These positions directly offset each other and the Company’s exposure is the fair value of the derivatives due to potential changes in credit risk of our commercial borrowers and third parties.

The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. At March 31, 2020, the Company held derivatives not designated as hedging instruments, comprised of back-to-back interest rate swaps, with a total notional amount of $697.8 million, consisting of $348.9 million of interest rate swaps with commercial borrowers and $348.9 million of offsetting interest rate swaps with third-party counterparties on substantially the same terms. At June 30, 2019, the Company held derivatives not designated as hedging instruments, comprised of back-to-back interest rate swaps, with a total notional amount of $515.4 million, consisting of $257.7 million of interest rate swaps with commercial borrowers and $257.7 million of offsetting interest rate swaps with third-party counterparties on substantially the same terms.

The fair value of derivatives are classified as other assets and other liabilities on the consolidated statement of condition. The estimated fair value of derivatives not designated as hedging instruments are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Derivative 

    

Derivative 

 

 

Assets

 

Liabilities

Gross interest rate swaps

 

$

40,096

 

$

40,096

Less: master netting arrangements

 

 

 —

 

 

 —

Less: cash collateral applied

 

 

 —

 

 

(40,062)

Net amount

 

$

40,096

 

$

34

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

Derivative 

    

Derivative 

 

 

Assets

 

Liabilities

Gross interest rate swaps

 

$

13,550

 

$

13,550

Less: master netting arrangements

 

 

(88)

 

 

(88)

Less: cash collateral applied

 

 

 —

 

 

(13,318)

Net amount

 

$

13,462

 

$

144

 

Under terms of the agreements with the third-party counterparties, the Company provides cash collateral to the counterparty for the initial trade. Subsequent to the trade, the margin is exchanged in either direction, based upon the estimated fair value of the underlying contracts. At March 31, 2020, the Company had deposited $40.1 million as collateral for swap agreements with third-party counterparties. At June 30, 2019, the Company had deposited $13.3 million as collateral for swap agreements with third-party counterparties.

25

6.OTHER COMPREHENSIVE INCOME (LOSS)

Reclassifications out of accumulated other comprehensive loss were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Details About Accumulated Other

 

Amount Reclassified from Accumulated

 

Affected Line Item in the Statement

Comprehensive Loss Components

 

Other Comprehensive Loss

 

Where Net Income is Presented

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

    

March 31, 

    

March 31, 

    

  

 

    

2020

    

2019

 

2020

 

2019

    

 

Unrealized gains/losses on securities (before tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains included in net income

 

$

83

 

$

 —

 

$

134

 

$

 —

 

Net gain on available for sale securities transactions

Tax expense

 

 

(22)

 

 

 —

 

 

(35)

 

 

 —

 

Income tax expense

Net of tax

 

 

61

 

 

 —

 

 

99

 

 

 —

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit plan items (before tax):

 

 

  

 

 

  

 

 

  

 

 

  

 

  

Net actuarial loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Salaries and employee benefits

Tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Income tax expense

Net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

  

Total reclassification for the period, net of tax

 

$

61

 

$

 —

 

$

99

 

$

 —

 

  

 

The balances and changes in the components of accumulated other comprehensive income (loss), net of tax are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

    

 

 

    

 

 

    

Accumulated

 

 

Unrealized

 

 

 

 

Other

 

 

Gains/Losses

 

Defined

 

Comprehensive

 

 

on Securities

 

Benefit Plans

 

Loss

2020:

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) as of January 1, 2020

 

$

(11)

 

 

(11,441)

 

$

(11,452)

Other comprehensive income (loss) before reclassifications

 

 

(412)

 

 

 —

 

 

(412)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(61)

 

 

 —

 

 

(61)

Accumulated other comprehensive income (loss) as of March 31, 2020

 

$

(484)

 

 

(11,441)

 

$

(11,925)

 

 

 

 

 

 

 

 

 

 

2019:

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) as of January 1, 2019

 

$

(502)

 

 

(9,399)

 

$

(9,901)

Other comprehensive income (loss) before reclassifications

 

 

590

 

 

 —

 

 

590

Accumulated other comprehensive income (loss) as of March 31, 2019

 

$

88

 

 

(9,399)

 

$

(9,311)

26

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended March 31, 

 

    

 

 

    

 

 

    

Accumulated

 

 

Unrealized

 

 

 

 

Other

 

 

Gains/Losses

 

Defined

 

Comprehensive

 

 

on Securities

 

Benefit Plans

 

Loss

2020:

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) as of July l, 2019

 

$

338

 

 

(11,441)

 

$

(11,103)

Other comprehensive income (loss) before reclassifications

 

 

(124)

 

 

 —

 

 

(124)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(99)

 

 

 —

 

 

(99)

Reclassification for change in accounting principle (1)

 

 

(599)

 

 

 —

 

 

(599)

Accumulated other comprehensive income (loss) as of March 31, 2020

 

 

(484)

 

 

(11,441)

 

 

(11,925)

 

 

 

 

 

 

 

 

 

 

2019:

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) as of July l, 2018

 

 

410

 

 

(9,399)

 

 

(8,989)

Other comprehensive income (loss) before reclassifications

 

 

(322)

 

 

 —

 

 

(322)

Accumulated other comprehensive income (loss) as of March 31, 2019

 

$

88

 

 

(9,399)

 

$

(9,311)


(1)

Adoption of ASU 2016-01 – cumulative effect of change in measurement of equity securities.

The amounts of income tax expense (benefit) allocated to each component of other comprehensive income (loss) were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31, 

 

    

2020

    

2019

Unrealized gains/losses on securities:

 

 

  

 

 

  

Unrealized holdings (losses) gains arising during the period

 

$

(146)

 

$

209

Reclassification adjustment for gains included in net income

 

 

(22)

 

 

 —

 

 

 

(168)

 

 

209

Defined benefit plans:

 

 

  

 

 

  

Change in funded status

 

 

 —

 

 

 —

Reclassification adjustment for accretion of net prior service cost

 

 

 —

 

 

 —

Reclassification adjustment for amortization of net actuarial loss

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

$

(168)

 

$

209

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

March 31, 

 

    

2020

    

2019

Unrealized gains/losses on securities:

 

 

 

 

 

 

Unrealized holdings (losses) gains arising during the period

 

$

(45)

 

$

(114)

Reclassification adjustment for gains included in net income

 

 

(35)

 

 

 —

 

 

 

(80)

 

 

(114)

Defined benefit plans:

 

 

 

 

 

 

Change in funded status

 

 

 —

 

 

 —

Reclassification adjustment for amortization of net actuarial loss

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

$

(80)

 

$

(114)

 

27

7.EMPLOYEE BENEFIT PLANS

The Company maintains a noncontributory defined benefit pension plan and a defined benefit post-retirement plan. Plan assets and obligations that determine the funded status are measured as of the end of the fiscal year.

Pension Plan

The Company maintains a noncontributory defined benefit pension plan covering substantially all of its full-time employees twenty-one years of age or older, with at least one year of service. Through December 31, 2009, pensions were paid as an annuity using a pension formula of 2.0% of the average of the five highest consecutive years of total compensation over the last ten years multiplied by credited service up to thirty years. Effective January 1, 2010, the plan was amended and service rendered thereafter is paid using a pension formula of 1.5%. Amounts contributed to the plan are determined annually on the basis of (a) the maximum amount allowable under Internal Revenue Service regulations and (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974 (“ERISA”) The defined benefit pension plan was amended, effective August 31, 2019, to close the plan to new employees hired on or after September 1, 2019, therefore, no new employees hired on or after September 1, 2019 would be eligible to participate in the defined benefit pension plan.

Net periodic pension cost included in the Company’s consolidated statements of operations included the following components (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2020

    

2019

    

2020

    

2019

Service cost

 

$

563

 

$

431

 

$

1,689

 

$

1,050

Interest cost

 

 

492

 

 

314

 

 

1,476

 

 

1,281

Expected return on plan assets

 

 

(926)

 

 

(573)

 

 

(2,777)

 

 

(2,349)

Amortization of net actuarial loss

 

 

270

 

 

73

 

 

810

 

 

508

Net periodic pension cost

 

$

399

 

$

245

 

$

1,198

 

$

490

 

Contributions

For the three and nine months ended March 31, 2020 and March 31, 2019, the Company made no cash contributions to the plan.

Post-Retirement Healthcare Plan

The Company offers a defined benefit post-retirement plan which provides medical and life insurance benefits to employees meeting certain requirements. Effective October 1, 2006, the plan was amended so that there have been no new plan participants for medical benefits. The cost of post-retirement plan benefits is recognized on an accrual basis as employees perform services. Active employees are eligible for retiree medical coverage upon reaching age sixty with twenty-five or more years of service. Employees with a minimum of thirty years of service are eligible for individual and spousal coverage. Retirees are eligible to participate in any bank-sponsored health insurance programs. The Company’s contributions for retiree medical are limited to a monthly premium of $210 for individual coverage and $420 for employee and spousal coverage. The Company’s funding policy is to pay insurance premiums as they come due.

28

Net periodic post-retirement benefit cost included in the Company’s consolidated statements of operations included the following components (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2020

    

2019

    

2020

    

2019

Service cost

 

$

 9

 

$

 7

 

$

27

 

$

21

Interest cost

 

 

16

 

 

17

 

 

48

 

 

50

Amortization of net actuarial loss

 

 

 1

 

 

 —

 

 

 2

 

 

 —

Net periodic post-retirement benefit cost

 

$

26

 

$

24

 

$

77

 

$

71

 

Employee Stock Ownership Plan

On July 17, 2019, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Company employees. The Company granted loans to the ESOP for the purchase of 1,018,325 shares of the Company’s common stock at an average price of $13.40 per share. The loan obtained by the ESOP from the Company to purchase the common stock is payable annually over 20 years at a rate per annum equal to the Prime Rate. Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. The balance of the ESOP loan at March 31, 2020 was $12.9 million. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released annually is 50,916 through the year 2038. Participants receive the shares at the end of employment.

Shares held by the ESOP include the following (dollars in thousands):

 

 

 

 

    

March 31, 2020

Allocated

 

50,916

Committed to be allocated

 

12,729

Unallocated

 

954,680

 Total Shares

 

1,018,325

Total compensation expense recognized in connection with the ESOP for the three and nine months ended March 31, 2020 was $174,000 and $877,000, respectively.

 

 

8.COMMITMENTS AND CONTINGENT LIABILITIES

Off-Balance-Sheet Financing and Concentrations of Credit

The Company is a party to certain financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include the Company’s commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated statement of condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual notional amounts of those instruments which are presented in the tables below (dollars in thousands). The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

29

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Fixed Rate

    

Variable Rate

    

Total

Financial instruments whose contract amounts represent credit risk (including unused lines of credit and unadvanced loan funds):

 

 

  

 

 

  

 

 

  

Commitments to extend credit

 

$

32,859

 

$

205,008

 

$

237,867

Standby letters of credit

 

 

 —

 

 

30,483

 

 

30,483

 

 

$

32,859

 

$

235,491

 

$

268,350

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

Fixed Rate

    

Variable Rate

    

Total

Financial instruments whose contract amounts represent credit risk (including unused lines of credit and unadvanced loan funds):

 

 

  

 

 

  

 

 

  

Commitments to extend credit

 

$

23,892

 

$

357,223

 

$

381,115

Standby letters of credit

 

 

 —

 

 

33,385

 

 

33,385

 

 

$

23,892

 

$

390,608

 

$

414,500

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and require payment of a fee. Since certain commitments are expected to expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, if any, required by the Company for the extension of credit is based on management’s credit evaluation of the customer.

Commitments to extend credit may be written on a fixed rate basis thus exposing the Company to interest rate risk, given the possibility that market rates may change between commitment and actual extension of credit.

Standby letters of credit are conditional commitments issued by the Company to guarantee payment on behalf of a customer or to guarantee the performance of a customer to a third party. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Since a portion of these instruments will expire unused, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance-sheet instruments. Bank policies governing loan collateral apply to standby letters of credit at the time of credit extension.

Certain residential mortgage loans are written on an adjustable basis and include interest rate caps which limit annual and lifetime increases in interest rates. Generally, adjustable rate mortgages have an annual rate increase cap of 2% and lifetime rate increase cap of 5% to 6% above the initial loan rate. These caps expose the Company to interest rate risk should market rates increase above these limits. At March 31, 2020, approximately $46.4 million of adjustable rate residential mortgage loans had interest rate caps. In addition, certain adjustable rate residential mortgage loans have a conversion option whereby the borrower may elect to convert the loan to a fixed rate during a designated time period. At March 31, 2020, approximately $3.6 million of the adjustable rate mortgage loans had conversion options.

The Company periodically sells residential mortgage loans to FNMA and to the State of New York Mortgage Agency. At March 31, 2020 and June 30, 2019, the Bank had no loans held for sale. In addition, the Bank has no loan commitments with borrowers at March 31, 2020 and June 30, 2019 with rate lock agreements which are intended to be held for sale, if closed. The Company generally determines whether or not a loan is held for sale at the time that loan commitments are entered into or at the time a convertible adjustable rate mortgage loan converts to a fixed interest rate. In order to reduce the interest rate risk associated with the portfolio of loans held for sale, as well as loan commitments with locked interest rates which are intended to be held for sale if closed, the Company enters into agreements to sell loans in the secondary market. At March 31, 2020 and June 30, 2019, the Company had no commitments to sell loans to unrelated investors.

30

Concentrations of Credit

The Company primarily grants loans to customers located in the New York State counties of Albany, Greene, Rensselaer, Schenectady, Saratoga, and Warren. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the real estate and construction-related sectors of the economy.

Legal Proceeding and Other Contingent Liabilities

The Company is involved in various pending and threatened claims and other legal proceedings in the ordinary course of business.  The Company evaluates the possible impact of these matters, taking into consideration the most recent information available.  A loss reserve is established for those matters for which the Company believes a loss is both probable and reasonably estimable.  Once established, the reserve is adjusted as appropriate to reflect any new developments.  Actual losses with respect to any such matter could be significantly more or less than the amount estimated by the Company.  For matters where a loss is not probable, or the amount of loss cannot be reasonably estimated by the Company, no loss reserve is established.  

As of March 31, 2020, the Company believes that any liabilities individually or in the aggregate, which may result from the final outcomes of legal proceedings, is unlikely to have a material adverse effect on the Company’s consolidated financial statements.  However, legal proceedings are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the Company’s results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the Company’s business, results of operations and financial condition. In addition, regardless of the ultimate outcome of any such legal or bankruptcy proceeding, inquiry or investigation, any such matter could cause the Company to incur additional expenses, which could be significant, and possibly material, to the Company’s results of operations in any future period.

Potentially Fraudulent Activity

As previously disclosed, during the first fiscal quarter of 2020 (the quarter ending September 30, 2019), the Company became aware of potentially fraudulent activity associated with transactions conducted in the Company’s first fiscal quarter of 2020 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 relate both to deposit and lending activity with the Mann Entities.  Several other parties are asserting claims against the Company and the Bank related to the series of transactions between the Company or the Bank, on the one hand, and the Mann Entities, on the other. The Company and the Bank continue to investigate these matters and it is possible that the Company and the Bank will be subject to additional liabilities which may have a material adverse effect on our financial condition, results of operations or cash flows.  The Company is pursuing all available sources of recovery and other means of mitigating the potential loss and the Company and the Bank are vigorously defending all claims asserted against them arising out of or otherwise related to the fraudulent activity of the Mann Entities.  See “Legal Proceedings,” below.

For the fraudulent activity related to the Mann Entities, the Bank’s potential exposure with respect to its deposit activity is expected to be approximately $19.0 million and with respect to its lending activity with the Mann Entities, the Bank’s potential exposure is expected to be approximately $16.0 million (which represents the Bank’s participation interest in the approximately $36.0 million commercial loan relationships for which the Bank is the originating lender).  In the first fiscal quarter of 2020, the Bank exercised its legal right of setoffs on the deposit accounts held by the Mann Entities at the Bank. The Bank recognized a charge to non-interest expense in the amount of $2.5 million, in the first fiscal quarter of 2020, based on the net negative deposit balance of the various Mann Entities’ accounts after the setoffs. In the first fiscal quarter of 2020, the Bank concluded that due to the impact of the potential fraudulent activity, it is more likely than not that the Bank will not be able to recover the loan balances. The Bank recorded a provision for loan losses in the amount of $15.8 million, in the first fiscal quarter of 2020, related to the charge-off of the entire principal balance owed to the Bank related to the customer’s commercial loan relationships. During the third fiscal quarter of 2020 (the quarter ended March 31, 2020), the Bank recognized a partial recovery in the amount of $1.7 million related to the charge-off of the

31

Mann Entities commercial loan relationships.  No additional charges to non-interest expense or the provision for loan losses were recognized in the third fiscal quarter of 2020 related to the transactions with the Mann Entities.

For the other parties asserting claims against the Company and the Bank, in the second fiscal quarter of 2020, Southwestern Payroll Services, Inc. (“Southwestern”), a payroll company, and National Payment Corp. (“NatPay”), a third-party automated clearing house service provider, filed lawsuits against the Bank seeking recovery of allegedly wrongful seizure and retention of funds related to the Mann Entities.  In February 2020, Berkshire Bank and Chemung Canal Trust Company, the participating lenders with the Bank in the Mann Entities commercial loan relationships, filed lawsuits against the Bank seeking recovery of their respective aggregate participation interest and additional damages. See “Legal Proceedings” below for additional information regarding these lawsuits.

Legal Proceedings

On October 31, 2019, Southwestern filed a complaint against the Company and the Bank (“Pioneer Parties”), Michael T. Mann, Valuewise Corporation, MyPayrollHR, LLC and Cloud Payroll, LLC (collectively, the “Mann Parties”) in the United States District Court for the Northern District of New York. The complaint alleges that the Pioneer Parties (i) wrongfully converted certain funds belonging to Southwestern, (ii) engaged in fraudulent and wrongful collection and retention of funds belonging to Southwestern, and (iii) committed gross negligence and that Southwestern is entitled to a constructive trust limiting how the Pioneer Parties distribute the funds in question, which are about $9.8 million. On November 26, 2019, the Pioneer Parties moved to dismiss Southwestern’s fraud claim, which also postponed the Pioneer Parties’ deadline to file an answer until 14 days after the court decides the motion to dismiss. On December 10, 2019, Southwestern filed both a response to the Pioneer Parties’ motion to dismiss and an amended complaint, which rendered the Pioneer Parties’ motion to dismiss moot. The amended complaint names several corporate entities affiliated with the Mann Parties as co-defendants and asserts claims against the Pioneer Parties for declaratory judgment, conversion, actual and constructive fraud, gross negligence, unjust enrichment and constructive trust, and an accounting. The amended complaint seeks a monetary judgment of at least $9.8 million. Each party has filed numerous motions in the proceedings. On January 10, 2020, the Pioneer Parties moved again to dismiss Southwestern’s fraud claim, which also postponed the Pioneer Parties’ deadline to file an answer until 14 days after the court decided the motion to dismiss. On April 16, 2020, the court granted the Pioneer Parties’ motion to dismiss Southwestern’s fraud claim. On April 30, 2020, Southwestern filed a motion to reconsider the court’s motion to dismiss, along with a second amended complaint. On May 1, 2020, the Pioneer Parties filed their answer. The Pioneer Parties asserted numerous affirmative defenses, and the Bank asserted counterclaims against Southwestern and cross-claims against certain of the Mann Parties based on common law fraud under New York law and violations of the federal Racketeer Influenced and Corrupt Organization Act (“RICO”). The Bank’s fraud counterclaim/cross-claim seeks damages of at least $15.6 million, plus pre-judgment interest, jointly and severally against Southwestern and the named Mann Parties.  The Bank’s RICO counterclaim/cross-claim seeks treble damages of at least $46.5 million, plus pre-judgment interest and attorneys’ fees, jointly and severally against Southwestern and the named Mann Parties.

On December 10, 2019, NatPay filed a motion to intervene as a plaintiff in Southwestern’s lawsuit against the Pioneer Parties and the Mann Parties as described above. Attached to NatPay’s motion to intervene is a proposed complaint, which includes, among other matters, a prayer for relief seeking “compensatory damages in an amount of no less than $4 million” (the complaint also seeks punitive damages and interest in unspecified amounts). On January 10, 2020, the Pioneer Parties filed their response opposing NatPay’s motion to intervene.  NatPay’s motion to intervene remains pending.

On February 4, 2020, Berkshire Hills Bancorp Inc.’s wholly owned subsidiary Berkshire Bank (“Berkshire Bank”), filed a complaint against the Bank in the Supreme Court of the State of New York, in the County of Albany, New York resulting from its participation interest in the commercial loan relationship to the Mann Entities. The complaint alleges that the Bank (1) breached the amended and restated loan participation agreement between the Bank and Berkshire Bank dated as of June 27, 2018, (2) breached the amended and restated loan participation agreement between the Bank and Berkshire Bank dated as of August 12, 2019, (3) engaged in constructive fraud, (4) engaged in fraudulent inducement, (5) engaged in fraudulent concealment, and (6) negligently misrepresented certain material information. The complaint seeks to recover $15.6 million and additional damages. The timeframe within which the Bank’s response is due has been extended.

32

On February 4, 2020, Chemung Financial Corporation’s wholly owned subsidiary, Chemung Canal Trust Company (“Chemung”), filed a complaint against the Bank in the Supreme Court of the State of New York, in the County of Albany, New York resulting from its participation interest in the commercial loan relationship to the Mann Entities. The complaint alleges that the Bank (1) breached the participation agreement between the Bank and Chemung dated as of August 12, 2019, (2) engaged in fraudulent activities, (3) engaged in constructive fraud, and (4) negligently misrepresented and omitted certain material information. The complaint seeks to recover $4.2 million and additional damages. The timeframe within which the Bank’s response is due has been extended.

During the quarter ended March 31, 2020, Cachet Financial Services (“Cachet”), a third-party automated clearing house service provider, filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in the Central District of California, Los Angeles Division. Cachet is currently involved in legal proceedings against certain Mann Parties and other related parties. The Bank is not listed as a creditor in the bankruptcy proceedings. However, in the filings with the bankruptcy court, Cachet asserts that the Bank is holding $7.0 million of its funds. The Company and the Bank dispute this assertion and, if necessary, intend to defend themselves vigorously.

On April 30, 2020, the U.S. Department of Justice, with the authorization of a delegate of the Secretary of the Treasury, filed a civil complaint against the Company and the Bank (and Cloud Payroll, LLC) in the United States District Court, Northern District of New York (the “DOJ Complaint”). The complaint alleges, among other things, that the Company and the Bank wrongfully seized approximately $7.3 million from an account held by Cloud Payroll to apply towards debts allegedly owed to the Bank by Cloud Payroll and other affiliates of Michael Mann.  The complaint alleges that the funds in question were comprised of payroll taxes withheld by Southwestern and thus subject to a statutory trust under 26 U.S.C. § 7501 that prohibited the Bank from seizing those funds to apply towards debts owed to the Bank.  The complaint seeks return of any payroll taxes, plus interest.  The Bank and the Company have not yet answered or otherwise responded to the government’s complaint. The DOJ Complaint relates to the same set of facts described above in– “Potentially Fraudulent Activity,” and the alleged payroll taxes, plus interest, sought in this proceeding may be part of the recovery sought in the Southwestern complaint described above.

The Company and the Bank are defending each of these lawsuits vigorously, and management believes that the Company and the Bank have substantial defenses, including affirmative defenses, counterclaims and cross-claims to the various allegations that have been asserted. The Company and the Bank continue to investigate these matters and it is possible that the Company and the Bank will be subject to additional liabilities. The ultimate outcome of these lawsuits, or any other litigation or other similar proceedings, involving the Company, the Bank or the Pioneer Parties, cannot be predicted with certainty. It also remains possible that other parties will pursue additional claims against the Bank as a result of the Bank’s dealings with certain of the Mann Entities or as a result of the actions taken by the Pioneer Parties. The Company’s and the Bank’s legal fees and expenses related to these actions are expected to be significant. In addition, costs associated with potentially prosecuting, litigating or settling any litigation, satisfying any adverse judgments, if any, or other proceedings, could be significant. These costs, settlements, judgments or other expenses could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

9.FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

33

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2). The fair value of derivatives are classified as a component of other assets and other liabilities on the consolidated statements of condition.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.

Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

March 31, 2020 Using

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets:

 

 

 

 

 

  

 

 

  

 

 

  

Available for sale securities:

 

 

 

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

62,346

 

$

62,346

 

$

 —

 

$

 —

Mortgage-backed securities - residential

 

 

85

 

 

 —

 

 

85

 

 

 —

Asset-backed securities

 

 

105

 

 

 —

 

 

105

 

 

 —

Collateralized mortgage obligations – residential

 

 

655

 

 

 —

 

 

655

 

 

 —

Municipal obligations

 

 

5,772

 

 

 —

 

 

5,772

 

 

 —

Total debt securities

 

 

68,963

 

 

62,346

 

 

6,617

 

 

 —

Preferred stocks

 

 

4,668

 

 

1,872

 

 

2,796

 

 

 —

Total available for sale securities

 

 

73,631

 

 

64,218

 

 

9,413

 

 

 —

Equity securities

 

 

2,884

 

 

2,884

 

 

 —

 

 

 —

Derivative assets

 

 

40,096

 

 

 —

 

 

40,096

 

 

 —

Total

 

$

116,611

 

$

67,102

 

$

49,509

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Derivative liabilities

 

$

34

 

$

 —

 

$

34

 

$

 —

Total

 

$

34

 

$

 —

 

$

34

 

$

 —

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

June 30, 2019 Using

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets:

 

 

 

 

 

  

 

 

  

 

 

  

Available for sale securities:

 

 

 

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

70,867

 

$

70,867

 

$

 —

 

$

 —

Mortgage-backed securities - residential

 

 

112

 

 

 —

 

 

112

 

 

 —

Asset-backed securities

 

 

128

 

 

 —

 

 

128

 

 

 —

Collateralized mortgage obligations – residential

 

 

889

 

 

 —

 

 

889

 

 

 —

Municipal obligations

 

 

14,699

 

 

 —

 

 

14,699

 

 

 —

Total debt securities

 

 

86,695

 

 

70,867

 

 

15,828

 

 

 —

Preferred stocks

 

 

5,040

 

 

1,970

 

 

3,070

 

 

 —

Total available for sale securities

 

 

91,735

 

 

72,837

 

 

18,898

 

 

 —

Equity securities

 

 

3,618

 

 

3,618

 

 

 —

 

 

 —

Derivative assets

 

 

13,462

 

 

 —

 

 

13,462

 

 

 —

Total

 

$

108,815

 

$

76,455

 

$

32,360

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Derivative liabilities

 

$

144

 

$

 —

 

$

144

 

$

 —

Total

 

$

144

 

$

 —

 

$

144

 

$

 —

 

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

March 31, 2020

 

 

 

 

 

  

 

 

  

 

 

  

Impaired loans:

 

 

 

 

 

  

 

 

  

 

 

  

Commercial loans

 

$

2,359

 

$

 —

 

$

 —

 

$

2,359

OREO

 

 

260

 

 

 —

 

 

 —

 

 

260

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

$

840

 

$

 —

 

$

 —

 

$

840

OREO

 

 

158

 

 

 —

 

 

 —

 

 

158

 

Impaired loans, which are assets measured at fair value on a non-recurring basis, using the fair value of collateral for collateral dependent loans, had a carrying amount of $2.9 million with a valuation allowance of $533,000 resulting in an estimated fair value of $2.4 million as of March 31, 2020. Impaired loans, which are assets measured at fair value on a non-recurring basis, using the fair value of collateral for collateral dependent loans, had a carrying amount of $1.3 million with a valuation allowance of $426,000 resulting in an estimated fair value of $840,000  as of June 30, 2019.

Other real estate owned measured at fair value less costs to sell, had a carrying amount of $260,000 at March 31, 2020. There were write-downs of $8,000 for the nine months ended March 31, 2020. Other real estate owned measured at fair value less costs to sell, had a carrying amount of $158,000 at June 30, 2019. There were write-downs of $17,000 for the year ended June 30, 2019.

35

The carrying and estimated fair values of financial assets and liabilities were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

    

Carrying

    

Estimated

    

Assets

 

Inputs

 

Inputs

 

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial assets

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

190,201

 

$

190,201

 

$

190,201

 

$

 —

 

$

 —

Securities available for sale

 

 

73,631

 

 

73,631

 

 

64,218

 

 

9,413

 

 

 —

Securities held to maturity

 

 

4,139

 

 

4,182

 

 

 —

 

 

4,182

 

 

 —

Equity securities

 

 

2,884

 

 

2,884

 

 

2,884

 

 

 —

 

 

 —

FHLBNY stock

 

 

1,824

 

 

1,824

 

 

 —

 

 

1,824

 

 

 —

Net loans receivable

 

 

1,101,997

 

 

1,127,223

 

 

 —

 

 

 —

 

 

1,127,223

Accrued interest receivable

 

 

4,026

 

 

4,026

 

 

 —

 

 

4,026

 

 

 —

Derivatives

 

 

40,096

 

 

40,096

 

 

 —

 

 

40,096

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Deposits

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Savings, money market, and demand accounts

 

$

1,114,187

 

$

1,114,187

 

$

 —

 

$

1,114,187

 

$

 —

Time deposits

 

 

123,488

 

 

124,826

 

 

 —

 

 

124,826

 

 

 —

Mortgagors’ escrow deposits

 

 

3,705

 

 

3,705

 

 

 —

 

 

3,705

 

 

 —

FHLB advances

 

 

20,000

 

 

20,000

 

 

 —

 

 

20,000

 

 

 —

Accrued interest payable

 

 

191

 

 

191

 

 

 —

 

 

191

 

 

 —

Derivatives

 

 

34

 

 

34

 

 

 —

 

 

34

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

Carrying

 

Estimated

 

Assets

 

Inputs

 

Inputs

 

    

Amount

    

Fair Value

    

(Level 1)

 

(Level 2)

 

(Level 3)

Financial assets

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

230,109

 

$

230,109

 

$

230,109

 

$

 —

 

$

 —

Securities available for sale

 

 

91,735

 

 

91,735

 

 

72,837

 

 

18,898

 

 

 —

Securities held to maturity

 

 

3,873

 

 

3,887

 

 

 —

 

 

3,887

 

 

 —

Equity securities

 

 

3,618

 

 

3,618

 

 

3,618

 

 

 —

 

 

 —

FHLBNY stock

 

 

924

 

 

924

 

 

 —

 

 

924

 

 

 —

Net loans receivable

 

 

1,053,938

 

 

1,065,328

 

 

 —

 

 

 —

 

 

1,065,328

Accrued interest receivable

 

 

4,374

 

 

4,374

 

 

 —

 

 

4,374

 

 

 —

Derivatives

 

 

13,462

 

 

13,462

 

 

 —

 

 

13,462

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Deposits

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Savings, money market, and demand accounts

 

$

1,200,753

 

$

1,200,753

 

$

 —

 

$

1,200,753

 

$

 —

Time deposits

 

 

130,565

 

 

130,680

 

 

 —

 

 

130,680

 

 

 —

Mortgagors’ escrow deposits

 

 

6,044

 

 

6,044

 

 

 —

 

 

6,044

 

 

 —

Accrued interest payable

 

 

17

 

 

17

 

 

 —

 

 

17

 

 

 —

Derivatives

 

 

144

 

 

144

 

 

 —

 

 

144

 

 

 —

 

36

Short-Term Financial Instruments

The fair value of certain financial instruments are estimated to approximate their carrying amounts because the remaining term to maturity or period to repricing of the financial instrument is less than ninety days. Such financial instruments include cash and cash equivalents, accrued interest receivable and payable, and mortgagor’s escrow deposits.

Securities

Fair values of securities available for sale, securities held to maturity and equity securities are determined as outlined earlier in this footnote.

FHLBNY Stock

The fair value of FHLB stock approximates its carrying value due to transferability restrictions.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including residential real estate, commercial real estate, and consumer loans and whether the interest rates are fixed and/or variable.

The estimated fair values of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the respective loan portfolio.

Estimated fair values for nonperforming loans are based on estimated cash flows discounted using a rate commensurate with the credit risk involved. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

Derivatives

Fair values of derivative assets and liabilities are determined as outlined earlier in this footnote.

Deposits

The estimated fair value of deposits with no stated maturity, such as savings, money market and demand deposits, is regarded to be the amount payable on demand. The estimated fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using market rates for time deposits with similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposits as compared to the cost of borrowing funds in the market.

Borrowings

The estimated fair value of FHLB advances, if any, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for borrowings with similar remaining maturities.

The fair values of commitments to extend credit, unused lines of credit, and standby letters of credit are not considered material.

10.REVENUE RECOGNITION

On July 1, 2019, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 1 – “Adoption of Recent Accounting Pronouncements,” results for reporting periods beginning after July 1, 2019 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The Company recorded a net increase to beginning retained earnings of $291,000 as of July 1, 2019 due to the cumulative impact of adopting Topic 606,  primarily driven by the recognition of insurance commission income.

37

Under Topic 606, the Company made any necessary revisions to its policies related to the new revenue recognition guidance. In general, for revenue not associated with financial instruments, guarantees and lease contracts, we apply the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when performance obligation is satisfied. Our contracts with customers are generally short term in nature, typically due within one year or less or cancellable by us or our customer upon a short notice period. Performance obligations for our customer contracts are generally satisfied at a single point in time, typically when the transaction is complete. In some cases, we act in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such transactions, we recognized revenue and the related costs to provide our services on a net basis in our financial statements. These transactions primarily relate to insurance and brokerage commissions, and fees derived from our customers' use of various interchange and ATM/debit card networks.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, and insurance and wealth management services commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606.

Insurance Services Income: Prior to the adoption of Topic 606, commission revenue on insurance policies billed in installments were recognized on the latter of the policy effective date or the date that the premium was billed to the client. As a result of the adoption of Topic 606, revenue associated with the issuance of policies will be recognized upon the effective date of the associated policy regardless of the billing method, meaning that commission revenues billed on an installment basis will be now recognized earlier than they had been previously. Revenue will be accrued based upon the completion of the performance obligation creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months. The Company does not expect the overall impact of these changes to be significant, but it will result in slight variances from quarter to quarter. Contingent commissions represent a form of variable consideration associated with the same performance obligation, which is the placement of coverage, for which we earn core commissions. The Company records a monthly accrual for contingent commissions.

Wealth Management Services Income: The Company earns fees from investment brokerage services provided to its customers by a third-party service provider. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the respective month. The Company acts as an agent in arranging the relationship between the customer and the third-party service provider. Investment brokerage fees are presented net of related costs.

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, and stop payment charges, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Card Services Fee Income: The Company earns interchange fees from debit cardholder transactions conducted through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to cardholder.

Other service charges include revenue from processing wire transfers, check orders, and safe deposit box rental. Wire transfer fees are charged on per item basis, and are charged at the time of transfer and charged directly to the customer account. Check order charges are charged to the customer at the time the order is placed directly to the customer account.  Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

38

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended March 31, 2020.

 

 

 

 

 

 

 

 

    

For the Three Months Ended

    

For the Nine Months Ended

 

 

March 31, 2020

 

March 31, 2020

 

 

(dollars in thousands)

 

(dollars in thousands)

Non-interest Income

 

 

 

 

 

 

In scope of "ASC" Topic 606:

 

 

 

 

 

 

   Insurance services

 

$

1,060

 

$

3,092

   Wealth management services

 

 

748

 

 

2,141

   Service charges on deposit accounts

 

 

784

 

 

2,559

   Card services income

 

 

649

 

 

2,088

   Other

 

 

69

 

 

200

Non-interest income in scope of "ASC" Topic 606

 

 

3,310

 

 

10,080

 

 

 

 

 

 

 

Non-interest income out of scope of "ASC" Topic 606

 

 

(645)

 

 

1,991

 

 

 

 

 

 

 

Total non-interest income

 

$

2,665

 

$

12,071

 

 

11.EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share represent income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no potentially diluted common stock equivalents as of March 31, 2020. Earnings per share data is not applicable for the three and nine month periods ended March 31, 2019 as the Company had no shares outstanding.

 

 

 

 

 

 

 

 

    

For the Three Months Ended

    

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

 

 

2020

 

 

2020

 

 

(Dollars in thousands, expect share and per share amounts)

Net income (loss) applicable to common stock

 

$

849

 

$

(7,985)

 

 

 

 

 

 

 

Average number of common shares outstanding

 

 

25,977,679

 

 

25,977,679

Less: Average unallocated ESOP shares

 

 

961,045

 

 

971,652

Average number of common shares outstanding used to calculate basic and diluted earnings per common share

 

 

25,016,634

 

 

25,006,027

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

Basic

 

$

0.03

 

$

(0.32)

Diluted

 

$

0.03

 

$

(0.32)

 

 

 

 

12.SUBSEQUENT EVENTS

Potentially Fraudulent Activity

As previously disclosed, during the first fiscal quarter of 2020, the Company became aware of potentially fraudulent activity associated with transactions conducted in the Company’s first fiscal quarter of 2020 by an established business customer of the Bank. The Mann Entities had numerous accounts with the Bank. The transactions in question relate to both deposit and lending activity with the Mann Entities. Several other parties are asserting claims against the Company and the Bank related to the series of transactions between the Company or the Bank, on the one hand, and the Mann Entities, on the other. The Company and the Bank continue to investigate these matters and it is possible that the Company and the Bank will be subject to additional liabilities which may have a material adverse effect on our financial

39

condition, results of operations or cash flows. The Company is pursuing all available sources of recovery and other means of mitigating the potential loss, and the Company and the Bank are vigorously defending all claims asserted against them arising out of or otherwise related to the fraudulent activity of the Mann Entities.

For the other parties asserting claims against the Company and the Bank, in the second fiscal quarter of 2020, Southwestern, a payroll company, and NatPay, a third-party automated clearing house service provider, filed lawsuits against the Bank seeking recovery of allegedly wrongful seizure and retention of funds related to the Mann Entities.  In February 2020, Berkshire Bank and Chemung, the participating lenders with the Bank in the Mann Entities commercial loan relationships, filed lawsuits against the Bank seeking recovery of their respective aggregate participation interest and additional damages.  In April 2020, the U.S. Department of Justice, with the authorizations of a delegate of the Secretary of the Treasury, filed a civil complaint alleging that the Company and the Bank wrongfully seized funds comprised of withheld payroll taxes to apply towards debts allegedly owed to the Bank by Cloud Payroll and other affiliates of Michael Mann.  See “Note 8 – Commitments and Contingent Liabilities” for additional information regarding these legal proceedings.

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.  Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

·

risks and uncertainties related to the COVID-19 pandemic and resulting governmental and societal response;

·

general economic conditions, either nationally or in our market area, that are worse than expected;

·

risks that COVID-19 may adversely impact our customers and lead to an economic recession or other severe disruption in the U.S. economy, and could potentially create business continuity issues for us;

·

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 the allowance for loan 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-part mortgage banking company;

·

our ability to continue to implement our business strategies;

·

competition among depository and other financial institutions;

·

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 portfolio or sold in the secondary market;

·

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 agricultural or other 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;

40

·

changes in consumer spending, borrowing and savings habits;

·

our ability to maintain our reputation;

·

our ability to prevent or mitigate fraudulent activity;

·

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

·

changes in cost of legal expenses, including defending against significant litigation;

·

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.

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.

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 Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased through charges to the provision for loan losses. 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 loan losses when realized. It is likely we will incur elevated provision for loan losses and charge-offs due to the adverse impact of the pandemic on the economy of our market area and our customers.

Non-interest Income. Our primary sources of non-interest income are banking fees and service charges, insurance and wealth management services income. Our non-interest income also includes net gains or losses on equity securities, net realized gains or losses on available for sale securities, net gains in cash surrender value of bank owned life insurance, net gain or loss on disposal of assets, other gains and losses, and miscellaneous income.

Non-Interest Expenses. Our non-interest expenses consist of salaries and employee benefits, net occupancy and equipment, data processing, advertising, 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.

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

Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

41

Professional fees includes legal and other consulting expenses.

Other expenses include expenses for professional services, office supplies, postage, telephone, insurance and other miscellaneous operating expenses.

Income Tax Expense (Benefit).  Our income tax expense (benefit) 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

COVID-19 Pandemic

In early January 2020, the World Health Organization issued an alert that a novel coronavirus outbreak was emanating from the Wuhan Province in China. Later in January, the first death related to the novel coronavirus, identified as Coronavirus Disease 2019 (“COVID-19”), occurred in the United States. Over the course of the next several weeks, the outbreak continued to spread to various regions of the World prompting the World Health Organization to declare COVID-19 a global pandemic on March 11, 2020. In the United States, the rapid spread of the COVID-19 virus invoked various Federal and State, including New York State, authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international and domestic travel, restrictions on business operations, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses and have resulted in a significant number of layoffs and furloughs of employees in our market area. The direct and indirect effects of the COVID-19 pandemic have resulted in dramatic reductions in the level of economic activity in our market area and have severely hampered the ability for businesses and consumers to meet their current repayment obligations.

Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting Central Banks around the World to inject significant amounts of monetary stimulus into their economies. In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve rolled out various market support programs to ease the stress on financial markets. The estimated value of the pandemic-related monetary stimulus package provided through the Federal Reserve’s activities is estimated at $4 trillion. In addition the United States Congress, on March 27, 2020, passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which is intended to provide approximately $2.5 trillion of direct support to U.S. citizens and businesses affected by the COVID-19 outbreak, and on April 24, 2020, passed the Paycheck Protection and Health Care Enhancement Act (“Enhancement Act”), which is intended to provide $484 billion in additional funding to replenish and supplement key programs under the CARES Act.

As the COVID-19 events unfolded throughout the third fiscal quarter of 2020, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. In order to protect its employees and assure workforce and operational continuity, the Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely. To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its bank branch network. The Company also maintained regular communications with its primary regulatory agencies and critical vendors to assure all mission-critical activities and functions are being performed in line with regulatory expectations and the Company’s service standards.

42

Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, the Company’s management believes that it was well positioned with adequate levels of capital as of March 31, 2020. At March 31, 2020, all of the Bank’s regulatory capital ratios exceeded all well-capitalized standards. More specifically, the Bank’s Tier 1 Leverage Ratio, a common measure to evaluate a financial institutions capital strength, was 12.18% at March 31, 2020.

In addition, management believes the Company was well positioned with adequate levels of liquidity as of March 31, 2020. The Bank maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing savings, interest checking and money market deposit accounts with customers that operate, reside or work within its branch footprint. At March 31, 2020, the Company’s cash and cash equivalents balances were $190.2 million. The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury securities and highly-rated municipal securities. This portfolio not only generates interest income, but also serves as a ready source of liquidity and capital. At March 31, 2020, the Company’s available-for-sale investment securities portfolio totaled $73.6 million.  The Bank’s unused borrowing capacity at the Federal Home Loan Bank of New York at March 31, 2020 was $92.6 million. The Company did not experience significant draws on available working capital lines of credit and home equity lines of credit during the third fiscal quarter of 2020 due to the COVID-19 crisis.

The Bank also has and continues to participate in the Paycheck Protection Program (“PPP”), a $650 billion specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration (“SBA”). The Bank became a qualified SBA lender and was authorized to originate PPP loans.  An eligible business can generally apply for a PPP loan up to the greater of: 2.5 times its average monthly payroll costs, or $10.0 million.  PPP loans will have an interest rate of 1.0%, a two-year loan term to maturity, and principal and interest payments deferred for six months from the date of disbursement.  The SBA will guarantee 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. Through May 8, 2020, the Bank has approved 610 PPP loans totaling $75.1 million.  The Federal Reserve has instituted a program, the Paycheck Protection Program Liquidity Facility (“PPPLF”), authorized under section 13(3) of the Federal Reserve Act, which is intended to facilitate lending by banks to small businesses under the PPP while maintaining strong liquidity to meet cash flow needs. Under the PPPFL, the Federal Reserve Banks will lend to banks on a non-recourse basis, taking PPP loans as collateral.  Principal repayment of PPPLF borrowings, if any, will be made upon receipt of payment on the underlying PPP loans being pledged as collateral and interest will be charged at a rate of 0.35%. At May 8, 2020, the Bank’s unused borrowing capacity at the Federal Reserve Bank of New York through the PPPLF was $75.1 million.  The Bank anticipates high levels of customer utilization of the PPP loan program, but also believes its liquidity resources are sufficient to meet the funding requirements of its borrowers.  The Bank continues to evaluate its liquidity needs and has access to borrow funds through the PPPLF if deemed necessary.

From a credit risk and lending perspective, the Company has taken actions to identify and assess its COVID-19 related credit exposures based on asset class and borrower type. No specific COVID-19 related credit impairment was identified within the Company’s investment securities portfolio, including the Company’s municipal securities portfolio, during third fiscal quarter of 2020. With respect to the Company’s lending activities, the Company implemented customer payment deferral programs to assist both consumer and commercial borrowers that may be experiencing financial hardship due to COVID-19 related challenges, whereby short-term deferrals of payments (generally three to six months) will be provided. Through May 8, 2020, the Company granted payment deferral requests for consumer borrowers related to 109 loans representing $28.0 million of the Company’s residential mortgage, home equity loans and lines, and consumer loan balances, and for commercial borrowers related to 153 loans representing $190.1 million of the Company’s commercial loan balances. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming. Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral period and not classified as troubled-debt restructured loans during the third fiscal quarter of 2020. Borrowers that were delinquent in their payments to the Bank prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status. In the instances where the Bank granted a payment deferral to a delinquent borrower, the borrower’s delinquency status was frozen as of March 20, 2020, and their loans will continue to be reported

43

as delinquent during the deferment period based on their delinquency status as of March 20, 2020. The Company anticipates that the number and amount of COVID-19 financial hardship payment deferral requests will increase during the fourth fiscal quarter of 2020 (quarter ending June 30, 2020).

The Company’s third fiscal quarter of 2020 fiscal results were adversely impacted by the effects of the pandemic, which contributed to an increase in the provision for loan losses, and the net loss on equity securities. The COVID-19 crisis is expected to continue to adversely impact the Company’s financial results, as well as demand for its services and products during the fourth fiscal quarter of 2020 and beyond. The short and long-term implications of the COVID-19 crisis, and related monetary and fiscal stimulus measures, on the Company’s future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are unknown at this time. At this point, the extent to which COVID-19 may impact our future financial condition or results of operations is uncertain and not currently estimable, however the impact could be material.

Potentially Fraudulent Activity

As previously disclosed, during the first fiscal quarter of 2020 (the quarter ending September 30, 2019), the Company became aware of potentially fraudulent activity associated with transactions conducted in the Company’s first fiscal quarter of 2020 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 relate both to deposit and lending activity with the Mann Entities.  Several other parties are asserting claims against the Company and the Bank related to the series of transactions between the Company or the Bank, on the one hand, and the Mann Entities, on the other. The Company and the Bank continue to investigate these matters and it is possible that the Company and the Bank will be subject to additional liabilities which may have a material adverse effect on our financial condition, results of operations or cash flows.  The Company is pursuing all available sources of recovery and other means of mitigating the potential loss, and the Company and the Bank are vigorously defending all claims asserted against them arising out of or otherwise related to the fraudulent activity of the Mann Entities.  See, Part II, Item 1 – Legal Proceedings.

For the fraudulent activity related to the Mann Entities, the Bank’s potential exposure with respect to its deposit activity is expected to be approximately $19.0 million and with respect to its lending activity with the Mann Entities, the Bank’s potential exposure is expected to be approximately $16.0 million (which represents the Bank’s participation interest in the approximately $36.0 million commercial loan relationships for which the Bank is the originating lender).  In the first fiscal quarter of 2020, the Bank exercised its legal right of setoffs on the deposit accounts held by the Mann Entities at the Bank. The Bank recognized a charge to non-interest expense in the amount of $2.5 million, in the first fiscal quarter of 2020, based on the net negative deposit balance of the various Mann Entities’ accounts after the setoffs. In the first fiscal quarter of 2020, the Bank concluded that due to the impact of the potential fraudulent activity, it is more likely than not that the Bank will not be able to recover the loan balances. The Bank recorded a provision for loan losses in the amount of $15.8 million, in the first fiscal quarter of 2020, related to the charge-off of the entire principal balance owed to the Bank related to the customer’s commercial loan relationships. During the third fiscal quarter of 2020 (the quarter ended March 31, 2020) the Bank recognized a partial recovery in the amount of $1.7 million related to the charge-off of the Mann Entities commercial loan relationships.  No additional charges to non-interest expense or the provision for loan losses were recognized in the third fiscal quarter of 2020 related to the transactions with the Mann Entities.

For the other parties asserting claims against the Company and the Bank, in the second fiscal quarter of 2020, Southwestern Payroll Services, Inc. (“Southwestern”), a payroll company, and National Payment Corp. (“NatPay”), a third-party automated clearing house service provider, filed lawsuits against the Bank seeking recovery of allegedly wrongful seizure and retention of funds related to the Mann Entities.  In February 2020, Berkshire Bank and Chemung Canal Trust Company, the participating lenders with the Bank in the Mann Entities commercial loan relationships, filed lawsuits against the Bank seeking recovery of their respective aggregate participation interest and additional damages.  In April 2020, the U.S. Department of Justice, with the authorization of a delegate of the Secretary of the Treasury, filed a civil complaint alleging that the Company and the Bank wrongfully seized funds comprised of withheld payroll taxes to apply towards debts allegedly owed to the Bank by Cloud Payroll and other affiliates of Michael Mann.  See, Part II, Item 1 – Legal Proceedings.

44

The Company and the Bank are defending each of these lawsuits vigorously, and management believes that the Company and the Bank have substantial defenses, including affirmative defenses, counterclaims and cross-claims to the various allegations that have been asserted. The Company and the Bank continue to investigate these matters and it is possible that the Company and the Bank will be subject to additional liabilities. The ultimate outcome of these lawsuits, or any other litigation or other similar proceedings, involving the Company, the Bank or the Pioneer Parties, cannot be predicted with certainty. It also remains possible that other parties will pursue additional claims against the Bank as a result of the Bank’s dealings with certain of the Mann Entities or as a result of the actions taken by the Pioneer Parties. The Company’s and the Bank’s legal fees and expenses related to these actions are expected to be significant. In addition, costs associated with potentially prosecuting, litigating or settling any litigation, satisfying any adverse judgments, if any, or other proceedings, could be significant. These costs, settlements, judgments or other expenses could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Mutual Holding Company Reorganization and Minority Stock Issuance

On July 17, 2019, Pioneer Bancorp, Inc. became the holding company of Pioneer Bank when it closed its stock offering in connection with the completion of the reorganization of the Bank into the two-tier mutual holding company form of organization. The Company sold 11,170,402 shares of common stock at a price of $10.00 per share, for net proceeds of $109.1 million, issued 14,287,723 shares to Pioneer Bancorp, MHC and contributed 519,554 shares of common stock and $250,000 in cash to the Pioneer Bank Charitable Foundation.  The Company recognized a charge to non-interest expense in the amount of $5.4 million, in the first quarter of 2020, related to the contribution to the Pioneer Bank Charitable Foundation.  The Company established an ESOP which owns 1,018,325 shares of the Company. The remaining amount of subscription proceeds received and recorded as a liability on June 30, 2019, was refunded to subscribers. Pioneer Bancorp, MHC now owns 55% of the common stock of the Company.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. 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 discussed below to be critical accounting policies. 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 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:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the relevant balance sheet date. The amount of the allowance is based on significant estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses. See Item 2 – “Recent Developments – COVID-19 Pandemic”.

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

45

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 performs an evaluation of the adequacy of the allowance for loan losses at least quarterly. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

The evaluation has specific and general components. The specific component relates to loans that are deemed to be impaired and classified as special mention, substandard, doubtful, or loss. For such loans that are also classified as impaired, an allowance is generally established when the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

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

Income Taxes. Income tax expense (benefit) 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 temporary differences between 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 amount expected to be realized. We recognize interest and/or penalties related to income tax matters in other expense. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Management determines the need for a deferred tax valuation allowance based upon the realizability of tax benefits from the reversal of temporary differences creating the deferred tax assets, as well as the amounts of available open tax carrybacks, if any. At March 31, 2020, no valuation allowance was required.

We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings.

Fair Value Measurements. The fair value of a financial instrument is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the particular asset or liability in an orderly transaction between market participants on the measurement date. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices as of the measurement date are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded.

Investment Securities. Available-for-sale and held-to-maturity securities are reviewed by management on a quarterly basis, and more frequently when economic or market conditions warrant, for possible other-than-temporary impairment. In determining other-than-temporary impairment, management considers many factors, including the length

46

of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospectus of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statement of operations. The assessment of whether other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. In order to determine other-than-temporary impairment for mortgage-backed securities, asset-backed securities and collateralized mortgage obligations, we compare the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. Other-than-temporary impairment is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Pension Obligations.  We maintain a non-contributory defined benefit pension plan covering substantially all of our full-time employees. The benefits are developed from actuarial valuations and are based on the employee’s years of service and compensation. Actuarial assumptions such as interest rates, expected return on plan assets, turnover, mortality and rates of future compensation increases have a significant impact on the costs, assets and liabilities of the plan. Pension expense is the net of service cost, interest cost, return on plan assets and amortization of gains and losses not immediately recognized.

47

Average Balances and Yields

The following tables set 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

 

2020

 

2019

 

 

    

Average 

    

 

    

Average

    

Average

    

 

    

Average

 

 

 

Outstanding 

 

 

 

Yield/Cost

 

Outstanding

 

 

 

Yield/Cost

 

 

 

Balance

 

Interest

 

(4)

 

Balance

 

Interest

 

(4)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,093,708

 

$

12,282

 

4.59

%  

$

1,035,755

 

$

12,438

 

4.96

%

Securities

 

 

94,593

 

 

518

 

2.22

%  

 

106,885

 

 

649

 

2.49

%

Interest-earning deposits and other

 

 

123,928

 

 

488

 

1.59

%  

 

70,425

 

 

512

 

2.98

%

Total interest-earning assets

 

 

1,312,229

 

 

13,288

 

4.14

%  

 

1,213,065

 

 

13,599

 

4.62

%

Non-interest-earning assets

 

 

132,221

 

 

  

 

  

 

 

121,458

 

 

  

 

  

 

Total assets

 

$

1,444,450

 

 

  

 

  

 

$

1,334,523

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Demand deposits

 

$

119,755

 

$

83

 

0.28

%  

$

114,753

 

$

82

 

0.29

%

Savings deposits

 

 

236,241

 

 

31

 

0.05

%  

 

244,755

 

 

31

 

0.05

%

Money market deposits

 

 

350,066

 

 

521

 

0.60

%  

 

331,140

 

 

461

 

0.57

%

Certificates of deposit

 

 

127,837

 

 

578

 

1.83

%  

 

128,205

 

 

508

 

1.62

%

Total interest-bearing deposits

 

 

833,899

 

 

1,213

 

0.59

%  

 

818,853

 

 

1,082

 

0.54

%

Borrowings and other

 

 

6,707

 

 

22

 

1.33

%  

 

8,079

 

 

57

 

2.89

%

Total interest-bearing liabilities

 

 

840,606

 

 

1,235

 

0.59

%  

 

826,932

 

 

1,139

 

0.56

%

Non-interest-bearing liabilities

 

 

375,373

 

 

  

 

  

 

 

378,430

 

 

  

 

  

 

Total liabilities

 

 

1,215,979

 

 

  

 

  

 

 

1,205,362

 

 

  

 

  

 

Total shareholders' equity

 

 

228,471

 

 

  

 

  

 

 

129,161

 

 

  

 

  

 

Total liabilities and shareholders' equity

 

$

1,444,450

 

 

  

 

  

 

$

1,334,523

 

 

  

 

  

 

Net interest income

 

 

  

 

$

12,053

 

  

 

 

  

 

$

12,460

 

  

 

Net interest rate spread (1)

 

 

  

 

 

  

 

3.54

%  

 

  

 

 

  

 

4.07

%

Net interest-earning assets (2)

 

$

471,623

 

 

  

 

  

 

$

386,133

 

 

  

 

  

 

Net interest margin (3)

 

 

  

 

 

  

 

3.75

%  

 

  

 

 

  

 

4.23

%

Average interest-earning assets to interest-bearing liabilities

 

 

156.11

%  

 

  

 

  

 

 

146.69

%  

 

  

 

  

 


(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.

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended March 31, 

 

 

 

2020

 

2019

 

 

    

Average 

    

 

 

    

Average

    

Average

    

 

 

    

Average

 

 

 

Outstanding 

 

 

 

 

Yield/Cost

 

Outstanding

 

 

 

 

Yield/Cost

 

 

 

Balance

 

Interest

 

(4)

 

Balance

 

Interest

 

(4)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,078,328

 

$

38,122

 

4.73

%  

$

1,026,735

 

$

36,899

 

4.82

%

Securities

 

 

97,297

 

 

1,715

 

2.35

%  

 

110,437

 

 

1,918

 

2.32

%

Interest-earning deposits and other

 

 

121,140

 

 

1,866

 

2.06

%  

 

62,901

 

 

1,115

 

2.37

%

Total interest-earning assets

 

 

1,296,765

 

 

41,703

 

4.30

%  

 

1,200,073

 

 

39,932

 

4.46

%

Non-interest-earning assets

 

 

133,402

 

 

 

 

  

 

 

114,443

 

 

  

 

  

 

Total assets

 

$

1,430,167

 

 

 

 

  

 

$

1,314,516

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Demand deposits

 

$

105,210

 

$

256

 

0.32

%  

$

108,053

 

$

247

 

0.30

%

Savings deposits

 

 

238,581

 

 

94

 

0.05

%  

 

244,453

 

 

94

 

0.05

%

Money market deposits

 

 

350,894

 

 

1,656

 

0.63

%  

 

330,986

 

 

1,241

 

0.50

%

Certificates of deposit

 

 

129,617

 

 

1,755

 

1.81

%  

 

127,397

 

 

1,404

 

1.47

%

Total interest-bearing deposits

 

 

824,302

 

 

3,761

 

0.61

%  

 

810,889

 

 

2,986

 

0.49

%

Borrowings and other

 

 

5,352

 

 

77

 

1.92

%  

 

8,957

��

 

207

 

3.09

%

Total interest-bearing liabilities

 

 

829,654

 

 

3,838

 

0.62

%  

 

819,846

 

 

3,193

 

0.52

%

Non-interest-bearing liabilities

 

 

377,018

 

 

 

 

  

 

 

369,746

 

 

  

 

  

 

Total liabilities

 

 

1,206,672

 

 

 

 

  

 

 

1,189,592

 

 

  

 

  

 

Total shareholders' equity

 

 

223,495

 

 

 

 

  

 

 

124,924

 

 

  

 

  

 

Total liabilities and shareholders' equity

 

$

1,430,167

 

 

 

 

  

 

$

1,314,516

 

 

  

 

  

 

Net interest income

 

 

 

 

$

37,865

 

  

 

 

  

 

$

36,739

 

  

 

Net interest rate spread (1)

 

 

 

 

 

 

 

3.69

%  

 

  

 

 

  

 

3.94

%  

Net interest-earning assets (2)

 

$

467,111

 

 

 

 

  

 

$

380,227

 

 

  

 

  

 

Net interest margin (3)

 

 

 

 

 

 

 

3.90

%  

 

  

 

 

  

 

4.10

%  

Average interest-earning assets to interest-bearing liabilities

 

 

156.30

%  

 

 

 

  

 

 

146.38

%  

 

  

 

  

 


(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.

49

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Nine Months Ended March 31, 

 

 

2020 vs. 2019

 

2020 vs. 2019

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Total

 

 

Increase (Decrease) Due to

 

Increase

 

Increase (Decrease) Due to

 

Increase

 

    

Volume

    

Rate

    

(Decrease)

    

Volume

    

Rate

    

(Decrease)

 

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,569

 

$

(1,725)

 

$

(156)

 

$

1,546

 

$

(322)

 

$

1,224

Securities

 

 

(68)

 

 

(63)

 

 

(131)

 

 

(214)

 

 

11

 

 

(203)

Interest-earning deposits and other

 

 

591

 

 

(615)

 

 

(24)

 

 

829

 

 

(79)

 

 

750

Total interest-earning assets

 

 

2,092

 

 

(2,403)

 

 

(311)

 

 

2,161

 

 

(390)

 

 

1,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Demand deposits

 

 

 7

 

 

(6)

 

 

 1

 

 

(4)

 

 

13

 

 

 9

Savings deposits

 

 

(2)

 

 

 2

 

 

 —

 

 

(2)

 

 

 2

 

 

 —

Money market deposits

 

 

29

 

 

31

 

 

60

 

 

79

 

 

336

 

 

415

Certificates of deposit

 

 

(4)

 

 

74

 

 

70

 

 

25

 

 

326

 

 

351

Total interest-bearing deposits

 

 

30

 

 

101

 

 

131

 

 

98

 

 

677

 

 

775

Borrowings and other

 

 

(8)

 

 

(27)

 

 

(35)

 

 

(67)

 

 

(63)

 

 

(130)

Total interest-bearing liabilities

 

 

22

 

 

74

 

 

96

 

 

31

 

 

614

 

 

645

Change in net interest income

 

$

2,070

 

$

(2,477)

 

$

(407)

 

$

2,130

 

$

(1,004)

 

$

1,126

 

Exclusive of the impact of PPP loans, the Company expects its fourth fiscal quarter of 2020 net interest margin to decrease due to the precipitous drop in the Federal Funds, Prime and LIBOR interest rates in the latter half of the third fiscal quarter of 2020, and the continued drop in the LIBOR interest rates in the fourth fiscal quarter of 2020. Expected decreases in average interest earning asset yields are unlikely to be fully offset by expected decreases in the average cost of funds. Although the stated interest rate on PPP loans is fixed at 1.0%, the Company’s recognition of the interest income on origination fees, net of deferred origination costs, on PPP loans is uncertain at this time and will likely cause interest earning asset yield volatility as loans are forgiven by the SBA.

Comparison of Financial Condition at March 31, 2020 and June 30, 2019

Total Assets. Total assets increased $19.7 million, or 1.3%, to $1.5 billion at March 31, 2020 from $1.48 billion at June 30, 2019. The increase was due primarily to an increase of $48.1 million, or 4.6% in net loans receivable as well as a $30.8 million, or 139.8% increase in other assets partially offset by a decrease of $39.9 million, or 17.3%, in cash and cash equivalents and a decrease of $18.1 million, or 19.7%, in securities available for sale. The $30.8 million increase in other assets from $22.1 million at June 30, 2019 to $52.9 million at March 31, 2020 was primarily due to an increase in the estimated fair value of derivative assets related to interest rate swaps.

Cash and Cash Equivalents. Total cash and cash equivalents decreased $39.9 million, or 17.3%, to $190.2 million at March 31, 2020 from $230.1 million at June 30, 2019. This decrease resulted from net decreases in deposits of $93.6 million which included $38.8 million of deposits returned as a result of unfilled stock subscriptions related to the completion of our mutual holding company reorganization and minority stock issuance in July 2019, as well as, from an increase in net loans receivable of $48.1 million or 4.6% for the nine months ended March 31, 2020.  These uses of cash were partially offset by the minority stock issuance which resulted in $109.1 million of net proceeds to the Company, as well as, an increase of $20.0 million in borrowings from the Federal Home Loan Bank of New York.

Securities Available for Sale. Total securities available for sale decreased $18.1 million, or 19.7%, to $73.6 million at March 31, 2020 from $91.7 million at June 30, 2019. The decrease was primarily due to maturities of municipal

50

obligations and U.S. Government obligations, as well as, the sale of U.S. Government obligations during the nine months ended March 31, 2020.  Due to the meaningful decline in fixed income yields during the period, along with uncertainties related to COVID-19, management favored maintaining increased levels of cash and cash equivalents to fund loans and/or provide for deposit outflows as opposed to reinvesting proceeds from maturing securities.

Securities Held to Maturity. Total securities held to maturity increased $266,000, or 6.9%, to $4.1 million at March 31, 2020 from $3.9 million at June 30, 2019 as purchases during the nine months ended March 31, 2020 exceeded maturities and principal reductions.

Net Loans. Net loans of $1.1 billion at March 31, 2020 increased $48.1 million, or 4.6%, from $1.05 billion at June 30, 2019. By loan category, commercial real estate loans increased by $44.2 million, or 10.7%, to $458.6 million at March 31, 2020 from $414.4 million at June 30, 2019 and consumer loans increased by $9.1 million, or 42.3%, to $30.6 million at March 31, 2020 from $21.5 million at June 30, 2019. In addition, one-to four-family residential real estate loans increased $4.4 million, or 1.6%, to $285.8 million at March 31, 2020 from $281.4 million at June 30, 2019; commercial construction loans increased $2.8 million, or 3.4%, to $88.1 million at March 31, 2020 from $85.3 million at June 30, 2019 and home equity loans increased $1.1 million, or 1.4%, to $81.4 million at March 31, 2020 from $80.3 million at June 30, 2019. These increases were somewhat offset by a decrease in commercial and industrial loans of $7.8 million, or 4.2%, to $175.5 million at March 31, 2020 from $183.3 million at June 30, 2019. The increase in commercial real estate loans was related to the funding of multiple relatively large loan commitments during the nine month period which are secured by seasoned properties inside of our market area, as well as, the conversion of several commercial construction loans to permanent financing during the period. The increase in consumer loans reflected an increase in personal loans to the owners of certain commercial businesses. The decrease in commercial and industrial loans was primarily due to loan charge-offs related to the Mann Entities’ commercial loan relationships of $15.8 million during the nine month period, partially offset by advances on other commercial and industrial loan commitments during the same period.

Deposits. Total deposits decreased $93.6 million, or 7.0%, to $1.24 billion at March 31, 2020 from $1.33 billion at June 30, 2019. The decrease in deposits reflected a decrease in interest-bearing demand accounts of $75.9 million, or 34.4%, to $144.6 million at March 31, 2020 from $220.5 million at June 30, 2019, a decrease in savings accounts of $12.7 million, or 5.0%, to $238.2 million at March 31, 2020 from $250.9 million at June 30, 2019, a decrease in certificates of deposit of $7.1, million or 5.4%, to $123.5 million at March 31, 2020 from $130.6 million at June 30, 2019, and a decrease in money market accounts of $9.5 million, or 2.6%, to $362.3 million at March 31, 2020 from $371.8 million at June 30, 2019, partially offset by an increase in non-interest bearing demand accounts of $11.6 million, or 3.2%, to $369.1 million at March 31, 2020 from $357.5 million at June 30, 2019. The decrease in interest-bearing demand accounts, savings accounts and money market accounts was primarily due to stock subscription orders from our minority stock offering being fulfilled or returned to subscribers. The decrease in certificates of deposit was primarily due to the maturity of certain large dollar accounts.

Borrowings. Borrowings from the Federal Home Loan Bank of New York increased to $20.0 million at March 31, 2020 from none at June 30, 2019. The increase was due to new short-term borrowings taken to bolster the Company’s on-balance sheet liquidity position during the early stages of the COVID-19 pandemic.

Total Shareholders’ Equity. Total shareholders’ equity increased $93.5 million, or 69.3%, to $228.5 million at March 31, 2020 from $135.0 million at June 30, 2019. The increase was primarily due to the completion of our minority stock issuance which resulted in $109.1 million in net proceeds to the Company. The increase was partially offset by the net loss of $8.0 million during the nine months ended March 31, 2020 and the unallocated common stock held by the ESOP of $12.8 million.

Comparison of Operating Results for the Three Months Ended March 31, 2020 and March 31, 2019

General.  Net income decreased by $4.0 million to $849,000 for the three months ended March 31, 2020 from $4.8 million for the three months ended March 31, 2019. The decrease was primarily due to a $2.0 million increase in the provision for loan losses, a $1.3 million decrease in non-interest income, a $1.5 million increase in non-interest expense, and a $407,000 decrease in net interest income, partially offset by a $1.2 million decrease in income tax expense. 

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Interest and Dividend Income.  Interest and dividend income decreased $311,000, or 2.3%, to $13.3 million for the three months ended March 31, 2020, from $13.6 million for the three months ended March 31, 2019 due to decreases in interest income on loans, securities and interest-earning deposits. The decrease was a result of a 48 basis points decrease in the average yield on interest-earning assets to 4.14% for the three months ended March 31, 2020, from 4.62% for the three months ended March 31, 2019, largely offset by an increase in the average balance of interest-earning assets by $99.1 million to $1.3 billion during the quarter ended March 31, 2020 from $1.2 million during the quarter ended March 31, 2019.

Interest income on loans decreased $156,000, or 1.3%, to $12.3 million for the three months ended March 31, 2020 from $12.4 million for the three months ended March 31, 2019. Interest income on loans decreased primarily due to a 37 basis points decrease in the average yield on loans to 4.59% for the three months ended March 31, 2020 from 4.96% for the three months ended March 31, 2019 partially offset by a $58.0 million increase in the average balance of loans to $1.1 billion for the three months ended March 31, 2020 from $1.0 billion for the three months ended March 31, 2019.  The increase in the average balance of loans was due to our continued effort to increase our commercial loan portfolio, while the decrease in the average yield on loans was due to the downward adjustment of interest rates on our existing adjustable-rate loans following the actions taken by the Federal Reserve during the second and third fiscal quarters of 2020 to reduce short-term interest rates.

Interest income on securities decreased $131,000, or 20.2%, to $518,000 for the three months ended March 31, 2020 from $649,000 for the three months ended March 31, 2019. Interest income on securities decreased due to a 27 basis points decrease in the average yield on securities to 2.22% for the three months ended March 31, 2020 from 2.49% for the three months ended March 31, 2019 as well as a $12.3 million decrease in the average balance of securities to $94.6 million for the three months ended March 31, 2020 from $106.9 million for the three months ended March 31, 2019. The decrease in average yield on securities was due to decreased market rates of interest for certain securities and the decrease in average balance was due to scheduled U.S. government and agency obligations and municipal obligation maturities, as well as, with the sale of U.S. government and agency obligations.

Interest income on interest-earning deposits decreased $24,000, or 4.7%, to $488,000 for the three months ended March 31, 2020 from $512,000 for the three months ended March 31, 2019. Interest income on interest-earning deposits decreased due to a 139 basis points decrease in the average yield on interest-earning deposits to 1.59% for the three months ended March 31, 2020 from 2.98% for the three months ended March 31, 2019 largely offset by an increase in the average balances of interest-earning deposits by $53.5 million to $123.9 million for the three months ended March 31, 2020 from $70.4 million for the three months ended March 31, 2019.

Interest Expense.  Interest expense increased $96,000, or 8.4%, to $1.2 million for the three months ended March 31, 2020 from $1.1 million for the three months ended March 31, 2019 as a result of an increase in interest expense on deposits. The increase primarily reflected a three basis points increase in the average cost of interest-bearing liabilities to 0.59% for the three months ended March 31, 2020 from 0.56% for the three months ended March 31, 2019, as well as a $13.7 million increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased $131,000, or 12.1%, to $1.2 million for the three months ended March 31, 2020 from $1.1 million for the three months ended March 31, 2019. Interest expense on interest-bearing deposits increased primarily due to a five basis points increase in the average cost on interest-bearing deposits to 0.59% for the three months ended March 31, 2020 from 0.54% for the prior three months, as well as a $15.0 million increase in the average balance of deposits to $833.9 million for the three months ended March 31, 2020 from $818.9 million for the three months ended March 31, 2019. The increase in the average cost of deposits reflected competition from other financial service providers operating in our market, primarily with regard to certificate of deposit pricing.

Interest expense on Federal Home Loan Bank borrowings and other interest-bearing liabilities decreased $35,000 to $22,000 for the three months ended March 31, 2020 compared to the prior year period. The decrease was due to a 156 basis points decrease in the average cost of Federal Home Loan Bank of New York advances and other interest-bearing liabilities to 1.33% for the three months ended March 31, 2020 from 2.89% for the three months ended March 31, 2019 as well as a $1.4 million decrease in the average balance of Federal Home Loan Bank of New York advances and other

52

interest-bearing liabilities to $6.7 million for the three months ended March 31, 2020 from $8.1 million for the three months ended March 31, 2019.  

Net Interest Income.  Net interest income decreased $407,000, or 3.3%, to $12.1 million for the three months ended March 31, 2020 compared to $12.5 million for the three months ended March 31, 2019.  The decrease reflected a 53 basis points decrease in the net interest rate spread to 3.54% for the three months ended March 31, 2020 from 4.07% for the three months ended March 31, 2019, partially offset by a $85.5 million increase in the average balance of net interest-earning assets to $471.6 million for the three months ended March 31, 2020 from $386.1 million for the three months ended March 31, 2019.  The net interest margin decreased 48 basis points to 3.75% for the three months ended March 31, 2020 from 4.23% for the three months ended March 31, 2019. Due to the sharp decrease in interest rates in response to the economic downturn caused by the COVID-19 pandemic, we expect further compression in our net interest margin in future periods.

Provision for Loan Losses.  We recorded a provision for loan losses of $2.6 million for the three months ended March 31, 2020 compared to $570,000 for the three months ended March 31, 2019. The increase in the provision was primarily due to an increase in our qualitative loss reserve factors relating to local, national, and global economic conditions which have experienced significant deterioration as a result of the COVID-19 pandemic.  Due to the adverse economic impacts of the COVID-19 pandemic on our market area and our customers, the Company expects that its provision for loan losses will be elevated in the fourth fiscal quarter of 2020 and potentially beyond. The Company realized net recoveries of $1.6 million for the three months ended March 31, 2020, compared to net charge-offs of $100,000 for the three months ended March 31, 2019. Net recoveries for the three months ended March 31, 2020 included  a partial recovery in the amount of $1.7 million related to the charge-off of the entire principal balance owed to the Bank related to the Mann Entities’ commercial loan relationship in the first fiscal quarter of 2020. Non-performing assets decreased to $11.0 million, or 0.73% of total assets, at March 31, 2020, compared to $12.8 million, or 0.87% of total assets, at June 30, 2019. The allowance for loan losses was $20.7 million, or 1.85% of net loans outstanding at March 31, 2020 and $14.1 million, or 1.34% of net loans outstanding at March 31, 2019. We expect economic uncertainty to continue for additional periods which may result in the allowance for loan losses as a percentage of total loans increasing in the future.

Non-Interest Income.  Non-interest income decreased $1.3 million, or 32.9%, to $2.7 million for the three months ended March 31, 2020 from $4.0 million for the three months ended March 31, 2019.  The decrease was primarily due to a $1.0 million net loss on equity securities, and a $514,000 decrease in bank fees and service charges, partially offset by a $241,000 increase in income attributable to our insurance and wealth management services. The net loss on equity securities during the three months ended March 31, 2020 was due to the mark to market of our equity securities during a period of severe market volatility related to the COVID-19 pandemic. Bank fees and service charges decreased primarily due to a reduction in commercial loan fees. Our insurance services income for the three months ended March 31, 2020 continues to reflect the impact of the adoption of the new revenue recognition accounting standards (refer to the Unaudited Consolidated Financial Statements - Note 10 for additional information).

Non-Interest Expense.  Non-interest expense increased $1.5 million, or 15.2%, to $11.1 million for the three months ended March 31, 2020 from $9.6 million for the three months ended March 31, 2019.  The $1.5 million increase was primarily due to an increase in salaries and benefits expense of $472,000, and an increase in professional fees of $885,000.  Salaries and benefits expense increased due to annual increases and ESOP expenses.  Professional fees increased mainly due to expenses related to the Mann Entities’ potentially fraudulent activity and related litigation.  

Income Tax Expense. Income tax expense decreased $1.2 million to $211,000 for the three months ended March 31, 2020 from $1.4 million for the three months ended March 31, 2019 due to the decrease in income before income taxes. Our effective tax rate was 19.9% for the three months ended March 31, 2020 compared to 23.1% for the three months ended March 31, 2019. 

Comparison of Operating Results for the Nine Months Ended March 31, 2020 and March 31, 2019

General.  Net income decreased by $22.0 million to an $8.0 million net loss for the nine months ended March 31, 2020 from $14.0 million in net income for the nine months ended March 31, 2019.  The decrease was primarily due to an $18.7 million increase in the provision for loan losses and a $12.8 million increase in non-interest expense, partially

53

offset by a $1.1 million increase in net interest income, a $1.5 million increase in non-interest income, and a $6.8 million decrease in income tax expense. 

Interest and Dividend Income.  Interest and dividend income increased $1.8 million, or 4.4%, to $41.7 million for the nine months ended March 31, 2020, from $39.9 million for the nine months ended March 31, 2019 primarily due to increases in interest income on loans and interest-earning deposits, offset by a decrease in interest income on securities. The increase reflected a $96.7 million increase in the average balance of interest-earning assets partially offset by a 16 basis point decrease in the average yield on interest-earning assets to 4.30% for the nine months ended March 31, 2020, from 4.46% for the nine months ended March 31, 2019.

Interest income on loans increased $1.2 million, or 3.3%, to $38.1 million for the nine months ended March 31, 2020 from $36.9 million for the nine months ended March 31, 2019. Interest income on loans increased primarily due to a $51.6 million increase in the average balance of loans to $1.1 billion for the nine months ended March 31, 2020 from $1.0 billion for the nine months ended March 31, 2019, offset by a nine basis points decrease in the average yield on loans to 4.73% for the nine months ended March 31, 2020 from 4.82% for the nine months ended March 31, 2019.  The increase in the average balance of loans was due to our continued effort to increase our commercial loan portfolio, while the decrease in the average yield on loans was primarily due to the downward adjustment of interest rates on our existing adjustable-rate loans following the actions taken by the Federal Reserve during the second and third fiscal quarters of 2020 to reduce short-term interest rates.

Interest income on securities decreased $203,000, or 10.6%, to $1.7 million for the nine months ended March 31, 2020 from $1.9 million for the nine months ended March 31, 2019. Interest income on securities decreased due to a $13.1 million decrease in the average balance of securities to $97.3 million for the nine months ended March 31, 2020 from $110.4 million for the nine months ended March 31, 2019. The decrease in the average balance of securities was partially offset by a three basis points increase in the average yield on securities to 2.35% for the nine months ended March 31, 2020 from 2.32% for the nine months ended March 31, 2019. The decrease in the average balance of securities was due to scheduled U.S. government and agency and municipal obligation maturities, as well as, with the sale of U.S. government and agency obligations.

Interest income on interest-earning deposits increased $751,000, or 67.4%, to $1.9 million for the nine months ended March 31, 2020 from $1.1 million for the nine months ended March 31, 2019. Interest income on interest-earning deposits increased as average balances on interest-earning deposits increased by $58.2 million to $121.1 million for the nine months ended March 31, 2020 from $62.9 million for the nine months ended March 31, 2019. The increase was offset by a 31 basis points decrease in the average yield on interest-earning deposits to 2.06% for the nine months ended March 31, 2020 from 2.37% for the nine months ended March 31, 2019 as market interest rates decreased.

Interest Expense.  Interest expense increased $645,000, or 20.2%, to $3.8 million for the nine months ended March 31, 2020 from $3.2 million for the nine months ended March 31, 2019 as a result of an increase in interest expense on deposits. The increase primarily reflected a 10 basis points increase in the average cost of interest-bearing liabilities to 0.62% for the nine months ended March 31, 2020 from 0.52% for the nine months ended March 31, 2019, as well as a $9.8 million increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased $775,000, or 26.0%, to $3.8 million for the nine months ended March 31, 2020 from $3.0 million for the nine months ended March 31, 2019. Interest expense on interest-bearing deposits increased primarily due to a 12 basis points increase in the average cost on interest-bearing deposits to 0.61% for the nine months ended March 31, 2020 from 0.49% for the prior nine months as well as a $13.4 million increase in the average balance of deposits to $824.3 million for the nine months ended March 31, 2020 from $810.9 million for the nine months ended March 31, 2019. The increase in the average cost of deposits reflected competition from other financial service providers operating in our market.

Interest expense on Federal Home Loan Bank of New York borrowings and other interest-bearing liabilities decreased $130,000 to $77,000 for the nine months ended March 31, 2020 compared to the prior year period. The decrease was due primarily to a $3.6 million decrease in the average balance of Federal Home Loan Bank of New York advances and other interest-bearing liabilities to $5.4 million for the nine months ended March 31, 2020 from $9.0 million for the

54

nine months ended March 31, 2019, as well as a 117 basis points decrease in the average cost of Federal Home Loan Bank of New York advances and other interest-bearing liabilities to 1.92% for the nine months ended March 31, 2020 from 3.09% for the nine months ended March 31, 2019.

Net Interest Income.  Net interest income increased $1.2 million, or 3.1%, to $37.9 million for the nine months ended March 31, 2020 compared to $36.7 million for the nine months ended March 31, 2019.  The increase reflected an $86.9 million increase in the average balance of net interest-earning assets to $467.1 million for the nine months ended March 31, 2020 from $380.2 million for the nine months ended March 31, 2019, offset by a 25 basis points decrease in the net interest rate spread to 3.69% for the nine months ended March 31, 2020 from 3.94% for the nine months ended March 31, 2019.  The net interest margin decreased 20 basis points to 3.90% for the nine months ended March 31, 2020 from 4.10% for the nine months ended March 31, 2019. Due to the sharp decrease in interest rates in response to the economic downturn caused by the COVID-19 pandemic, we expect further compression in our net interest margin in future periods.

Provision for Loan Losses.  We recorded  a provision for loan losses of $20.4 million for the nine months ended March 31, 2020 compared to $1.8 million for the nine months ended March 31, 2019. The increase in the provision was primarily due to a specific provision in the amount of $15.8 million for the nine months ended March 31, 2020 related to the charge-off of the entire principal balance owed to the Bank related to the Mann Entities’ commercial loan relationships. In addition, the increase in the provision was due to an increase in our qualitative loss reserve factors relating to local, national, and global economic conditions which have experienced significant deterioration as a result of the COVID-19 pandemic.  Due to the adverse economic impacts of the COVID-19 pandemic on our market area and our customers, the Company expects that its provision for loan losses will be elevated in the fourth fiscal quarter of 2020 and potentially beyond. Net charge-offs increased to $14.2 million for the nine months ended March 31, 2020, compared to $1.2 million for the nine months ended March 31, 2019.  Non-performing assets decreased to $11.0 million, or 0.73% of total assets, at March 31, 2020, compared to $12.8 million, or 0.87% of total assets, at June 30, 2019. The allowance for loan losses was $20.7 million, or 1.85% of net loans outstanding, at March 31, 2020 and $14.1 million, or 1.34% of net loans outstanding, at March 31, 2019. We expect economic uncertainty to continue for additional periods which may result in the allowance for loan losses as a percentage of total loans increasing in the future.

Non-Interest Income.  Non-interest income increased $1.6 million, or 14.5%, to $12.1 million for the nine months ended March 31, 2020 from $10.5 million for the nine months ended March 31, 2019.  The increase was primarily due to an increase of $761,000 in bank fees and service charges, a $383,000 increase in income attributable to our insurance and wealth management services, a $548,000 decrease in the loss on disposal of assets, and a $442,000 increase in Bank-owned life insurance, offset by a $735,000 net loss on equity securities. Bank fees and service charges increased primarily due to commercial loan fees. Our insurance services income for the nine months ended March 31, 2020 continues to reflect the impact of the adoption of the new revenue recognition accounting standards (refer to the Unaudited Consolidated Financial Statements - Note 10 for additional information). The decrease in loss on disposal of assets for the nine month period ended March 31, 2020 was primarily the result of the sale of a branch location during the nine month period ended March 31, 2019. The increase in bank-owned life insurance income was primarily due to proceeds from a death benefit during the nine months ended March 31, 2020. Net loss on equity securities during the nine months ended March 31, 2020 was due to the mark to market of our equity securities during a period of severe market volatility related to COVID-19 pandemic.

Non-Interest Expense.  Non-interest expense increased $12.8 million, or 45.5%, to $41.0 million for the nine months ended March 31, 2020 from $28.2 million for the nine months ended March 31, 2019.  The $12.8 million increase was primarily the result of the $5.4 million contribution of stock and cash to the Pioneer Bank Charitable Foundation in conjunction with our minority stock issuance, and a $2.5 million charge based on the net negative deposit balance of the various Mann Entities’ accounts after setoffs. Salaries and benefits expense increased $2.0 million due to annual increases and ESOP expenses. Additionally, professional fees increased $2.6 million to $2.9 million for the nine months ended March 31, 2020 from $268,000 for the nine months ended March 31, 2019, mainly due to expenses related to the Mann Entities’ potentially fraudulent activity and related litigation. The increase in non-interest expense was partially offset by a decrease in FDIC insurance premiums related to Small Bank Assessment Credits.

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Income Tax Expense (Benefit). Income tax expense decreased $6.8 million to a $3.5 million benefit for the nine months ended March 31, 2020 from a $3.3 million expense for the nine months ended March 31, 2019. The income tax benefit was due to our $11.5 million loss before income taxes, which included the tax benefit related to our $5.4 million contribution to the Pioneer Bank Charitable Foundation. Income tax expense for the nine months ended March 31, 2019 reflected a $580,000 tax benefit related to the final evaluation of our net deferred tax asset in connection with the rate reduction resulting from the Tax Cuts and Jobs Act. Our effective tax rate was 30.4% for the nine months ended March 31, 2020 compared to 19.2% for the nine months ended March 31, 2019.

Asset Quality and Allowance for Loan Losses

Asset Quality. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable that at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on the present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 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 is 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. See Item 2 – “Recent Developments – COVID-19 Pandemic”.

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 loan 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.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

Pursuant to the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the CARE Act.

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The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Non-accrual loans include non-accruing troubled debt restructurings of $185,000 at June 30, 2019. There were no non-accruing troubled debt restructurings as of March 31, 2020.

 

 

 

 

 

 

 

 

 

 

At

 

At 

 

 

 

March 31, 

 

June 30, 

 

 

    

2020

    

2019

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

  

 

 

  

 

Commercial real estate

 

$

3,369

 

$

5,618

 

Commercial and industrial

 

 

42

 

 

42

 

Commercial construction

 

 

1,298

 

 

1,377

 

One- to four-family residential real estate

 

 

4,191

 

 

4,028

 

Home equity loans and lines of credit

 

 

1,511

 

 

1,497

 

Consumer

 

 

210

 

 

 —

 

Total non-accrual loans

 

 

10,621

 

 

12,562

 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more:

 

 

  

 

 

  

 

Commercial real estate

 

 

56

 

 

58

 

Commercial and industrial

 

 

 5

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

One- to four-family residential real estate

 

 

 —

 

 

 —

 

Home equity loans and lines of credit

 

 

54

 

 

41

 

Consumer

 

 

10

 

 

19

 

Total accruing loans past due 90 days or more

 

 

125

 

 

118

 

 

 

 

 

 

 

 

 

Real estate owned:

 

 

  

 

 

  

 

Commercial real estate

 

 

99

 

 

 —

 

Commercial and industrial

 

 

 —

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

One- to four-family residential real estate

 

 

161

 

 

158

 

Home equity loans and lines of credit

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

Total real estate owned

 

 

260

 

 

158

 

 

 

 

 

 

 

 

 

Total non-performing assets

 

$

11,006

 

$

12,838

 

 

 

 

 

 

 

 

 

Total accruing troubled debt restructured loans

 

$

484

 

$

 —

 

 

 

 

 

 

 

 

 

Total non-performing loans to total loans

 

 

0.96

%  

 

1.19

%

Total non-performing assets to total assets

 

 

0.73

%  

 

0.87

%

 

During the nine months ended March 31, 2020,  non-accruing loans decreased primarily with respect to one non-accruing commercial real estate loan totaling $3.2 million which paid off,  partially offset by the addition of one non-accrual commercial real estate loan relationship totaling $1.4 million at March 31, 2020.  

Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for loans that are individually classified as impaired are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with national and regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, historical loss experience, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other qualitative and quantitative factors which could affect potential credit losses.

57

In addition, the New York State Department of Financial Services (the “NYSDFS”) and the Federal Deposit Insurance Corporation periodically review our allowance for loan losses and as a result of such reviews, we may have to materially adjust our allowance for loan losses or recognize further loan charge-offs.

The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

 

 

 

 

 

 

 

 

 

At or for the 

 

 

 

Nine Months Ended March 31, 

 

 

    

2020

    

2019

 

 

 

(Dollars in thousands)

 

Allowance at beginning of period

 

$

14,499

 

$

13,510

 

Provision for loan losses

 

 

20,440

 

 

1,780

 

 

 

 

 

 

 

 

 

Charge offs:

 

 

  

 

 

  

 

Commercial real estate

 

 

 1

 

 

 —

 

Commercial and industrial

 

 

15,804

 

 

1,046

 

Commercial construction

 

 

 —

 

 

 —

 

One- to four-family residential real estate

 

 

19

 

 

56

 

Home equity loans and lines of credit

 

 

 —

 

 

 —

 

Consumer

 

 

153

 

 

151

 

Total charge-offs

 

 

15,977

 

 

1,253

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

  

 

 

  

 

Commercial real estate

 

 

 —

 

 

 —

 

Commercial and industrial

 

 

1,707

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

One- to four-family residential real estate

 

 

 —

 

 

 —

 

Home equity loans and lines of credit

 

 

 1

 

 

 —

 

Consumer

 

 

30

 

 

32

 

Total recoveries

 

 

1,738

 

 

32

 

 

 

 

 

 

 

 

 

Net charge-offs

 

 

14,239

 

 

1,221

 

 

 

 

 

 

 

 

 

Allowance at end of period

 

$

20,700

 

$

14,069

 

 

 

 

 

 

 

 

 

Allowance to non-performing loans

 

 

192.61

%  

 

108.40

%

Allowance to total loans outstanding at the end of the period

 

 

1.85

%  

 

1.34

%

Net charge-offs to average loans outstanding during the period

 

 

1.76

%(1)

 

0.16

%(1)


(1)

Annualized.

The nine months ended March 31, 2020 included a provision for loan losses in the amount of $15.8 million related to the charge-off of the entire principal balance owed to the Bank related to the Mann Entities’ commercial loan relationships which were recognized in the first fiscal quarter of 2020. The nine months ended March 31, 2020 also included a partial recovery in the amount of $1.7 million related to the charge-off of the Mann Entities’ commercial loan relationships which was recognized in the third fiscal quarter of 2020. In addition, the nine months ended March 31, 2020 included increased provision for loan losses due to an increase in our qualitative loss reserve factors relating to local, national, and global economic conditions which have experienced significant deterioration late in the third fiscal quarter of 2020 as a result of the COVID-19 pandemic.  Due to the adverse economic impacts of the COVID-19 pandemic on our market area and our customers, the Company expects that its provision for loan losses will be elevated in the fourth fiscal quarter of 2020 and potentially beyond.

58

Loan Deferrals Related to COVID-19 Pandemic.  The COVID-19 pandemic has created economic uncertainty resulting in increased temporary unemployment as well as the mandated closure of nonessential businesses.

In the table below, the commercial loan portfolio is presented by industry sector with loan deferrals as the result of the COVID-19 pandemic. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings.  The commercial loan industry sector balances are as of March 31, 2020, and the deferrals are as of May 8, 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans by Industry Sector

 

Deferrals as of May 8, 2020

 

 

 

 

Percentage of

 

 

 

Percentage of

 

Percentage of

 

 

March 31, 2020

 

Commercial

 

 

 

Industry

 

Commercial

 

 

Balance

 

Loans

 

Balance

 

Sector

 

Loans

 

 

(Dollars in thousands)

Commercial Loans:

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Residential real estate, including lessors of residential buildings

 

$

143,185

 

19.7

%

 

$

57,207

 

40.0

%

 

7.9

%

 Non-residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Office

 

 

68,482

 

9.5

%

 

 

9,033

 

13.2

%

 

1.3

%

   Retail

 

 

64,464

 

8.9

%

 

 

22,068

 

34.2

%

 

3.1

%

   Industrial

 

 

26,600

 

3.7

%

 

 

1,364

 

5.1

%

 

0.2

%

   Self-storage

 

 

6,953

 

1.0

%

 

 

397

 

5.7

%

 

0.1

%

   Mixed use

 

 

26,396

 

3.7

%

 

 

4,479

 

17.0

%

 

0.6

%

 Other real estate

 

 

30,081

 

4.2

%

 

 

14,404

 

47.9

%

 

2.0

%

   Total real estate

 

 

366,161

 

50.7

%

 

 

108,952

 

29.8

%

 

15.1

%

Construction

 

 

107,539

 

14.9

%

 

 

10,048

 

9.3

%

 

1.4

%

Accommodation and food service

 

 

59,266

 

8.2

%

 

 

33,495

 

56.5

%

 

4.6

%

Retail trade

 

 

31,709

 

4.4

%

 

 

7,453

 

23.5

%

 

1.0

%

Wholesale trade

 

 

23,495

 

3.3

%

 

 

519

 

2.2

%

 

0.1

%

Finance and insurance

 

 

23,351

 

3.2

%

 

 

237

 

1.0

%

 

0.0

%

Healthcare and social assistance

 

 

23,301

 

3.2

%

 

 

6,468

 

27.8

%

 

0.9

%

Manufacturing

 

 

19,150

 

2.7

%

 

 

3,117

 

16.3

%

 

0.4

%

Arts, entertainment and recreation

 

 

12,739

 

1.8

%

 

 

2,874

 

22.6

%

 

0.4

%

Other

 

 

55,544

 

7.6

%

 

 

16,894

 

30.4

%

 

2.3

%

   Total commercial loans

 

$

722,255

 

100.0

%

 

$

190,057

 

26.3

%

 

26.3

%

 

In the table below, the residential mortgage, home equity loans and lines, and consumer loan portfolios are presented with loan deferrals as the result of the COVID-19 pandemic. In accordance with the CARES Act, the deferrals listed below are not considered troubled debt restructurings.  The loan portfolio balances are as of March 31, 2020 and the deferrals are as of May 8, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Loans by Portfolio

 

Deferrals as of May 8, 2020

 

 

March 31, 2020

 

 

 

Percentage of

 

 

Balance

 

Balance

 

Loan Category

 

 

(Dollars in thousands)

Residential mortgages

 

$

285,834

 

$

23,785

 

8.3

%

Home equity loans and lines

 

 

81,405

 

 

1,270

 

1.6

%

Consumer

 

 

30,563

 

 

2,946

 

9.6

%

 

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

59

the Federal Home Loan Bank of New York. At March 31, 2020, we had the ability to borrow up to $397.1 million, of which $284.5 million was utilized as collateral for letters of credit issued to secure municipal deposits and $20.0 million was advanced. At March 31, 2020, we also had a $20.0 million unsecured line of credit with a correspondent bank with no outstanding balance. We cannot predict what the impact of the events described in “Recent Developments – COVID-19 Pandemic and Potentially Fraudulent Activity” above may have on our Liquidity and Capital Resources beyond the third quarter of fiscal 2020.

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 March 31, 2020.

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 March 31, 2020, cash and cash equivalents totaled $190.2 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $73.6 million at March 31, 2020.

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 March 31, 2020 totaled $85.0 million, or 6.87%, 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 NYSDFS and the Federal Deposit Insurance Corporation. At March 31, 2020, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines.

The Bank and Pioneer Commercial Bank are 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). Basel III transitional rules became effective for the Bank and Pioneer Commercial Bank on January 1, 2015 with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. 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%.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a "Community Bank Leverage Ratio" (the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A "qualifying community bank" that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes

60

of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. Pursuant to the CARES Act, the federal banking agencies in April 2020 issued interim final rules to set the Community Bank Leverage Ratio at 8% beginning in the second calendar quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. The new rule took effect on January 1, 2020. The Bank and Pioneer Commercial Bank did not elect to become subject to the Community Bank Leverage Ratio.

As of March  31, 2020, the Bank and Pioneer Commercial Bank met all capital adequacy requirements to which they were subject. Further, the most recent FDIC notification 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 or Pioneer Commercial Bank’s capital classification.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To be Well 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital 

 

Capitalized Under 

 

 

 

 

 

 

 

 

For Capital 

 

Adequacy Purposes 

 

Prompt

 

 

 

Actual

 

Adequacy Purposes

 

with Capital Buffer

 

Corrective Action

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Pioneer Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (leverage) capital

 

$

174,488

 

12.18

%  

$

57,703

 

4.00

%  

 

N/A

 

N/A

 

$

72,128

 

5.00

%

Risk-based capital

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Common Tier 1

 

$

174,488

 

15.12

%  

$

51,943

 

4.50

%  

$

80,800

 

7.00

%  

$

75,028

 

6.50

%

Tier 1

 

$

174,488

 

15.12

%  

$

69,257

 

6.00

%  

$

98,114

 

8.50

%  

$

92,343

 

8.00

%

Total

 

$

188,994

 

16.37

%  

$

92,343

 

8.00

%  

$

121,200

 

10.50

%  

$

115,428

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (leverage) capital

 

$

136,879

 

9.99

%  

$

54,808

 

4.00

%  

 

N/A

 

N/A

 

$

68,510

 

5.00

%

Risk-based capital

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Common Tier 1

 

$

136,879

 

12.58

%  

$

48,974

 

4.50

%  

$

76,182

 

7.00

%  

$

70,741

 

6.50

%

Tier 1

 

$

136,879

 

12.58

%  

$

65,299

 

6.00

%  

$

92,507

 

8.50

%  

$

87,066

 

8.00

%

Total

 

$

150,776

 

13.85

%  

$

87,066

 

8.00

%  

$

114,274

 

10.50

%  

$

108,832

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To be Well 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital 

 

Capitalized Under 

 

 

 

 

 

 

 

 

For Capital 

 

Adequacy Purposes 

 

Prompt

 

 

 

Actual

 

Adequacy Purposes

 

with Capital Buffer

 

Corrective Action

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Pioneer Commercial Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (leverage) capital

 

$

26,751

 

7.63

%  

$

14,025

 

4.00

%  

 

N/A

 

N/A

 

$

17,532

 

5.00

%

Risk-based capital

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Common Tier 1

 

$

26,751

 

39.33

%  

$

3,060

 

4.50

%  

$

4,761

 

7.00

%  

$

4,421

 

6.50

%

Tier 1

 

$

26,751

 

39.33

%  

$

4,081

 

6.00

%  

$

5,781

 

8.50

%  

$

5,441

 

8.00

%

Total

 

$

26,751

 

39.33

%  

$

5,441

 

8.00

%  

$

7,141

 

10.50

%  

$

6,801

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (leverage) capital

 

$

24,502

 

7.64

%  

$

12,826

 

4.00

%  

 

N/A

 

N/A

 

$

16,032

 

5.00

%

Risk-based capital

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Common Tier 1

 

$

24,502

 

42.25

%  

$

2,610

 

4.50

%  

$

4,059

 

7.00

%  

$

3,769

 

6.50

%

Tier 1

 

$

24,502

 

42.25

%  

$

3,480

 

6.00

%  

$

4,929

 

8.50

%  

$

4,639

 

8.00

%

Total

 

$

24,502

 

42.25

%  

$

4,639

 

8.00

%  

$

6,089

 

10.50

%  

$

5,799

 

10.00

%

 

61

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 March 31, 2020, we had $268.4 million of commitments to originate or purchase loans, comprised of $158.0 million of commitments under commercial loans and lines of credit (including $40.5 million of unadvanced portions of commercial construction loans), $47.4 million of commitments under home equity loans and lines of credit, $24.3 million of commitments to purchase one- to four-family residential real estate loans and $8.1 million of unfunded commitments under consumer lines of credit. In addition, at March 31, 2020,  the Company had $30.5 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.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information relating to this item.

Item 4 – Controls and Procedures

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 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 Securities and Exchange Act of 1934, as amended (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 Securities and Exchange Commission.  As of March 31, 2020, 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 Securities and Exchange Commission’s  rules and forms.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter

62

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 has been no change in the Company’s internal control over financial reporting during the third quarter of the fiscal year ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.

On October 31, 2019, Southwestern Payroll Services, Inc. (“Southwestern”) filed a complaint against the Company and the Bank (“Pioneer Parties”), Michael T. Mann, Valuewise Corporation, MyPayrollHR, LLC and Cloud Payroll, LLC (collectively, the “Mann Parties”) in the United States District Court for the Northern District of New York. The complaint alleges that the Pioneer Parties (i) wrongfully con