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EX-21 - EX-21 - Pioneer Bancorp, Inc./MDpbfs-20200630ex21e2fc2d1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Year Ended June 30, 2020

OR

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

For the transition period from _____________ to _______________

Commission File Number: 001-38991

Pioneer Bancorp, Inc.

(Exact Name of Registrant as Specified in its Charter)

Maryland

   

83-4274253

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification Number)

or organization)

 

652 Albany Shaker Road, Albany New York

12211

(Address of principal executive offices)

(Zip code)

(518) 730-3025

(Registrant’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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes    No

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 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 (§232.405 of this chapter) during the preceding 12 months (or 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 the 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  

  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

The aggregate value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock of $15.31 as of December 31, 2019 was $160.3 million.

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

DOCUMENTS INCORPORATED BY REFERENCE

The registrant incorporates by reference its definitive Proxy Statement with respect to its 2020 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into (Part III) of this Annual Report on Form 10-K.


TABLE OF CONTENTS

ITEM 1.

Business

3

ITEM 1A.

Risk Factors

35

ITEM 1B.

Unresolved Staff Comments

51

ITEM 2.

Properties

51

ITEM 3.

Legal Proceedings

52

ITEM 4

Mine Safety Disclosures

54

ITEM 5 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

54

ITEM 6.

Selected Financial Data

55

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

56

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

70

ITEM 8.

Financial Statements and Supplementary Data

70

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

126

ITEM 9A.

Controls and Procedures

126

ITEM 9B.

Other Information

127

ITEM 10.

Directors, Executive Officers and Corporate Governance

127

ITEM 11.

Executive Compensation

127

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

127

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

128

ITEM 14.

Principal Accountant Fees and Services

128

ITEM 15.

Exhibits and Financial Statement Schedules

128

ITEM 16.

Form 10-K Summary

129

2


PART I

ITEM 1.Business

Forward Looking Statements

This Annual Report on Form 10-K contains 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, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” or words of similar meaning, or future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may.” A forward-looking statement is neither a prediction nor a guarantee of future events. Certain forward-looking statements are included in this Form 10-K, principally in the sections captioned “Business,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

In addition, the factors described under Critical Accounting Policies and Estimates in Part II, Item 7, and Risk Factors in Part I, Item 1A, as well as other possible factors not listed, could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following:

risks and uncertainties related to the Coronavirus Disease 2019 (“COVID-19”) pandemic and resulting governmental and societal response;
risks related to the variety of litigation and other proceedings described in the “Legal Proceedings” section;
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 a long-term economic recession and continuing a 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;

3


changes in our partnership with a third-party mortgage banking company;
our ability to continue to implement our business strategies;
competition among depository and other financial institutions;
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 products of our borrowers;
our ability to successfully integrate into our operations any assets, liabilities or systems we may acquire, as well as new management personnel or customers, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
our ability to maintain our reputation;
our ability to prevent or mitigate fraudulent activity;
changes in cost of legal expenses, including defending against significant litigation;
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;
our ability to retain key employees;
our ability to evaluate the amount and timing of recognition of future tax assets and liabilities;
our compensation expense associated with equity benefits allocated or awarded to our employees in the future; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We disclaim any obligation to revise or update any forward-looking statements contained in this Annual Report on Form 10-K to reflect future events or developments.

4


Pioneer Bancorp, Inc.

Pioneer Bancorp, Inc. (the “Company”) is a Maryland corporation that was organized in March 2019 and owns all of the issued and outstanding capital stock of Pioneer Bank (the “Bank”). On July 17, 2019, Pioneer Bancorp, Inc., became the holding company for 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 to depositors of the Bank for net proceeds of $109.1 million, issued 14,287,723 shares of common stock to Pioneer Bancorp, MHC and contributed 519,554 shares of common stock to the Pioneer Bank Charitable Foundation. The Company’s common stock is traded on the Nasdaq Capital Market under the symbol “PBFS.”

As a result of the completed minority stock offering, the Company files interim, quarterly and annual reports with the Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers such as the Company that file electronically with the SEC. All filed SEC reports and interim filings can also be obtained from the Bank’s website (www.pioneerny.com), on the “Investor Relations” page, without charge from the Company.

The executive offices of the Company are located at 652 Albany Shaker Road, Albany, New York 12211, and its telephone number is (518) 730-3025. The Company is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New York State Department of Financial Services (the “NYSDFS”).

Pioneer Bancorp, MHC

Pioneer Bancorp, MHC was formed as a New York mutual holding company and will, for as long as it is in existence, own a majority of the outstanding shares of the Company’s common stock.

Pioneer Bancorp, MHC’s principal assets are the common stock of the Company it received in the reorganization and offering and $100,000 in cash in initial capitalization. Presently, it is expected that the only business activity of Pioneer Bancorp, MHC will be to own a majority of the Company’s common stock. Pioneer Bancorp, MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding companies under New York law, including investing in loans and securities. Pioneer Bancorp, MHC is subject to comprehensive regulation and examination by the Federal Reserve Board and NYSDFS.

Pioneer Bank

General

Founded in 1889, Pioneer Bank is a New York-chartered savings bank that operates 22 retail banking offices in Albany, Greene, Rensselaer, Saratoga, Schenectady and Warren Counties in New York. We consider these six counties, Schoharie County and the surrounding areas, as our primary market area for our business operations. We attract deposits from the general public and municipalities and use those funds along with advances from the Federal Home Loan Bank of New York and funds generated from operations to originate commercial real estate loans, commercial and industrial loans, commercial construction loans and home equity loans and lines of credit and, to a lesser extent, consumer loans. Since January 2016, all of our one- to four-family residential real estate loans have been purchases through our relationship with Homestead Funding Corp., an unaffiliated mortgage banking company. We also invest in securities, which have historically consisted primarily of U.S. Government and agency obligations, municipal obligations and Federal Home Loan Bank of New York stock. We offer a variety of deposit accounts, including demand accounts, savings accounts, money market accounts and certificate of deposit accounts. Municipal deposit banking services are provided through a limited purpose commercial bank subsidiary, Pioneer Commercial Bank. The Bank also sells commercial and consumer insurance products and employee benefit products and services through Anchor Agency, Inc., its insurance agency subsidiary, and provides wealth management services through its subsidiary, Pioneer Financial Services, Inc.

5


At June 30, 2020, we had consolidated total assets of $1.5 billion, total deposits of $1.3 billion and shareholders’ equity of $224.0 million. The Bank is subject to comprehensive regulation and examination by the NYSDFS and the Federal Deposit Insurance Corporation (the “FDIC”). Our website address is www.pioneerny.com. Information on this website is not and should not be considered a part of this Annual Report on Form 10-K.

Market Area

Our primary market area encompasses Albany, Greene, Rensselaer, Saratoga, Schenectady, Schoharie and Warren Counties, which are located in the Capital Region of New York and include the cities of Albany, the capital of New York, Schenectady and Troy. Our offices are located in these counties and surrounding areas, with the exception of Schoharie County. The Capital Region has a diversified economy and representative industries include educational services, technology and health care, along with a strong state government workforce. Large employers in the Capital Region include General Electric, Regeneron Pharmaceuticals, Inc., GlobalFoundries, the Golub Corporation, St. Peter’s Health Partners, Albany Medical Center, the Rensselaer Polytechnic Institute and the State of New York.

The total population in our primary market area in 2020 is approximately 1.0 million, as estimated by Claritas, which provides demographic data based on U.S. Census and other data sources. Of the seven counties in our market area, Saratoga County has the highest level of median household income, estimated at $91,676 in 2020 and projected to grow nearly 10.9% through 2026, and Schoharie County has the lowest median household income, estimated at $58,683 in 2020 and projected to grow 5.5% through 2026, compared to the 2020 estimated median household income of $74,462 and $67,761 for New York and the United States as a whole, respectively.

As of June 30, 2020, unemployment rates, according to the New York State Department of Labor, were 10.4% for Albany County, 11.4% for Greene County, 9.9% for Rensselaer County, 10.2% for Saratoga County, 11.7% for Schenectady County, 9.2% for Schoharie County and 11.5% for Warren County. As of June 30, 2020, the unemployment for the United States, New York State and the Capital Region of New York was 11.2%, 15.6% and 10.4%, respectively.

We believe that we have developed products and services that will meet the financial needs of our current and future customer base; however, we plan, and believe it is necessary, to expand the range of products and services that we offer to be more competitive in our market area. Our marketing strategies focus on the strength of our knowledge of local consumer and small business markets, as well as expanding relationships with current customers and reaching out to develop new, profitable business relationships.

Competition

We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from the numerous financial institutions operating in our market area (including other community banks and credit unions), many of which are significantly larger than we are and have greater resources. We also face competition for investors’ funds from other sources such as brokerage firms, money market funds and mutual funds, as well as securities, such as Treasury bills, offered by the Federal Government. Based on FDIC data, at June 30, 2020 (the latest date for which information is available), we had 2.71% of the FDIC insured deposit market share in Albany County among the 21 institutions with offices in the county, 16.59% of the FDIC insured deposit market share in Rensselaer County among the 11 institutions with offices in the county, 3.30% of the FDIC insured deposit market share in Saratoga County among the 17 institutions with offices in the county, 1.65% of the FDIC insured deposit market share in Greene County among the seven institutions with offices in the county, 4.47% of the FDIC insured deposit market share in Schenectady County among the 12 institutions with offices in the county and 0.64% of the FDIC insured deposit market share in Warren County among the 10 institutions with offices in the county. In all six counties, either New York City money center banks (e.g. JP Morgan Chase and Bank of America) or large regional banks (e.g., Key Bank, Citizens Bank, M&T Bank and TD Bank) have a large presence.

Our competition for loans comes primarily from the competitors referenced above and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies participating in the mortgage market, such as insurance companies, securities companies, financial technology companies, specialty finance firms and technology companies.

6


We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the internet and made it possible for non-depository institutions, including financial technology companies, to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

General. Our principal lending activity has been originating commercial real estate loans (including multi-family real estate loans), commercial and industrial loans, commercial construction loans and home equity loans and lines of credit. Beginning in January 2016, we entered into a strategic partnership with Homestead Funding Corp., a mortgage banking company, to outsource our residential mortgage loan originations, underwriting and closing processes. Through this partnership, we refer our customers to the mortgage banking company and then we decide whether we want to purchase the one- to four-family residential real estate loans originated by the mortgage banking company for our portfolio.

Our commercial lending efforts focus on the small-to-medium sized business market, targeting borrowers with outstanding loan balances that typically range between $2.5 million to $10.0 million. We focus primarily on commercial real estate loans, commercial and industrial loans and commercial construction loans in our market area. As part of the commercial lending strategy, we will continue to use our commercial relationships to increase our commercial transactional deposit accounts.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

At June 30,

 

2020

2019

2018

2017

2016

 

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

 

(Dollars in thousands)

 

Commercial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

450,452

 

38.5

$

414,375

 

38.9

$

375,852

 

37.7

$

399,074

 

42.2

$

293,445

 

36.7

%

Commercial and industrial

 

237,223

 

20.3

 

183,262

 

17.2

 

194,183

 

19.5

 

179,908

 

19.1

 

123,470

 

15.5

%

Commercial construction(1)

 

91,805

 

7.8

 

85,274

 

8.0

 

84,569

 

8.5

 

67,928

 

7.2

 

96,223

 

12.1

%

One-to four-family residential real estate

 

279,960

 

23.9

 

281,388

 

26.4

 

249,635

 

25.0

 

202,733

 

21.5

 

197,670

 

24.8

%

Home equity loans and lines of credit

 

80,345

 

6.9

 

80,258

 

7.5

 

78,286

 

7.8

 

76,132

 

8.1

 

69,423

 

8.7

%

Consumer

 

30,860

 

2.6

 

21,482

 

2.0

 

14,977

 

1.5

 

18,042

 

1.9

 

17,878

 

2.2

%

Total loans receivable

 

1,170,645

 

100.0

 

1,066,039

 

100.0

 

997,502

 

100.0

 

943,817

 

100.0

 

798,109

 

100.0

%

Less:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net deferred loan costs

 

605

 

  

 

2,398

 

  

 

1,910

 

  

 

765

 

  

 

695

 

  

Allowance for losses

 

(22,851)

 

  

 

(14,499)

 

  

 

(13,510)

 

  

 

(11,820)

 

  

 

(9,794)

 

  

Total loans receivable, net

$

1,148,399

 

  

$

1,053,938

 

  

$

985,902

 

  

$

932,762

 

  

$

789,010

 

  


(1)Represents amounts disbursed at June 30, 2020, 2019, 2018, 2017 and 2016. The undrawn amounts of the commercial construction loans totaled $35.8 million, $83.7 million, $68.3 million, $76.8 million and $49.1 million at June 30, 2020, 2019, 2018, 2017 and 2016, respectively.

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Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at June 30, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.

One- to Four-

Commercial Real

Commercial and

Commercial

Family

June 30, 2020

    

Estate

    

Industrial

    

Construction (1)

    

Residential 

(In thousands)

Amounts due in:

 

  

 

  

 

  

 

  

One year or less

$

27,739

$

98,114

$

12,743

$

122

More than one to five years

 

127,287

 

126,541

 

32,120

 

2,667

More than five years

 

295,426

 

12,568

 

46,942

 

277,171

Total

$

450,452

$

237,223

$

91,805

$

279,960


(1)Includes commercial construction loans that convert to commercial real estate loans upon completion of the construction phase.

    

Home Equity

    

    

Loans and Lines

June 30, 2020

of Credit

Consumer

Total

(In thousands)

Amounts due in:

 

  

 

  

 

  

One year or less

$

88

$

19,799

$

158,605

More than one to five years

 

2,357

 

9,350

 

300,322

More than five years

 

77,900

 

1,711

 

711,718

Total

$

80,345

$

30,860

$

1,170,645

The following table sets forth our fixed and adjustable-rate loans at June 30, 2020 that are contractually due after June 30, 2021.

Due After June 30, 2021

    

Fixed

    

Adjustable

    

Total

(In thousands)

Commercial:

 

  

 

  

 

  

Commercial real estate

$

43,997

$

378,716

$

422,713

Commercial and industrial

 

113,554

 

25,555

 

139,109

Commercial construction

 

10,226

 

68,836

 

79,062

One- to four-family residential real estate

 

236,850

 

42,988

 

279,838

Home equity loans and lines of credit

 

47,932

 

32,325

 

80,257

Consumer

 

6,329

 

4,732

 

11,061

Total loans

$

458,888

$

553,152

$

1,012,040

Commercial Real Estate Loans. At June 30, 2020, we had $450.5 million in commercial real estate loans, representing 38.5% of our total loan portfolio. Our commercial real estate loans are secured primarily by office buildings, industrial facilities, retail facilities, multi-family properties and other commercial properties, substantially all of which are located in our primary market area. At June 30, 2020, multi-family residential real estate loans, which are described below, totaled $82.5 million. Excluding multi-family loans, $106.3 million of our commercial real estate portfolio was owner-occupied real estate and $261.7 million was secured by income producing, or non-owner-occupied real estate.

We generally originate commercial real estate loans with maximum terms of 10 years based on a 20-year amortization schedule, and loan-to-value ratios of up to 80% (or 75% for non-owner occupied) of the appraised value of the property. Our typical commercial real estate loan has an adjustable rate which generally adjusts every five years that is indexed to the five-year Federal Home Loan Bank of New York amortizing advance indications, plus a margin, subject to an interest rate floor. All of our commercial real estate loans are subject to our underwriting procedures and guidelines,

8


including requiring borrowers to generally have cash infusions of at least 10% of the loan amount or project cost and that properties with a loan in excess of $500,000 are subject to biennial inspections to verify if appropriate maintenance is being performed.

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the mortgaged property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that it is at least 120% of the monthly debt service and the ratio of the loan amount to the appraised value of the mortgaged property. Our commercial real estate loans are generally appraised by outside independent appraisers approved by the board of directors. Personal guarantees are often obtained from commercial real estate borrowers. The borrower’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.

Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to a single borrower or a group of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. As a result, the nature of these loans makes them more difficult for management to monitor and evaluate.

At June 30, 2020, multi-family real estate loans, which we consider a sub-category of commercial real estate loans, totaled $82.5 million, or 18.3% of our commercial real estate loan portfolio. Our multi-family real estate loans are generally secured by properties consisting of five to 100 rental units within our market area. We originate a variety of adjustable-rate multi-family residential real estate loans with terms and amortization periods generally of up to 25 years (or 30 years if the age of the collateral is less than 10 years old), which may include balloon payments. Interest rates and payments on our adjustable-rate loans adjust generally every five years and generally are indexed to the comparable Federal Home Loan Bank of New York amortizing advance indications, plus a margin.

In underwriting multi-family residential real estate loans, we consider several factors, which include a debt service coverage ratio of at least 120%, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Multi-family residential real estate loans have loan-to-value ratios of up to 80% of the appraised value of the property securing the loans. The borrower’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.

If we foreclose on a multi-family real estate loan, the marketing and liquidation period to convert the real estate to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability.

Commercial and Industrial Loans. We originate commercial loans and lines of credit to a variety of small and medium sized businesses in our market area. These loans are generally secured by accounts receivable, inventory or other business assets, and we may support this collateral with liens on real property. At June 30, 2020, commercial and industrial loans totaled $237.2 million, or 20.3% of our total loan portfolio. Customers for these loans include professional businesses, family-owned businesses and not for profit businesses. As part of our relationship-driven focus, we generally require our commercial borrowers to maintain a deposit account with us, which improves our interest rate spread, margin and overall profitability.

Commercial lending products include revolving lines of credit and term loans. Our commercial lines of credit are typically made with adjustable interest rates, indexed to either the London Interbank Offered Rate (“LIBOR”) or The Wall Street Journal Prime Rate, plus a margin, and we can demand repayment of the borrowed amount due at any time. Term loans are generally made with fixed interest rates, indexed to the comparable Federal Home Loan Bank of New York

9


amortizing advance indications, plus a margin, and are for terms up to 10 years. We focus our efforts on experienced, growing small- to medium-sized, privately-held companies with solid operating history and projected cash flow that operate in our market area.

When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, accounts receivable, inventory and equipment. Depending on the collateral used to secure the loans, commercial and industrial loans are made in amounts generally of up to 75% of the value of the collateral securing the loan. We generally do not make unsecured commercial and industrial loans. Personal guarantees are often obtained from commercial and industrial borrowers.

Commercial and industrial loans also include loans originated under 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”). In 2020, 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 have an interest rate of 1.0%, a two-year or five-year loan term to maturity, and principal and interest payments deferred until the lender receives the applicable forgiven amount or ten months after the period the business has used such funds.  The SBA guarantees 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 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. Through June 30, 2020, the Bank has originated 624 PPP loans totaling $74.0 million.

Commercial and industrial loans generally have greater credit risk than residential real estate loans. Unlike residential real estate loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through our underwriting standards.

Commercial Construction Loans. We originate loans primarily to established local developers to finance the construction of commercial and multi-family properties or to acquire land for development of commercial and multi-family properties and to fund infrastructure improvements. We also provide construction loans primarily to local developers for the construction of one- to four-family residential developments. We also originate rehabilitation loans, enabling a borrower to partially or totally refurbish an existing structure, which are structured as construction loans and monitored in the same manner. At June 30, 2020, commercial construction loans totaled $91.8 million, or 7.8% of our total loan portfolio. Most of these loans are secured by properties located in our primary market area. We also had undrawn amounts on the commercial construction loans totaling $35.8 million at June 30, 2020.

Our commercial construction loans are generally interest-only loans that provide for the payment of interest during the construction phase, which is usually 12 to 24 months. The interest rate is generally a variable rate based on an index rate, typically The Wall Street Journal Prime Rate or LIBOR, plus a margin. At the end of the construction phase, the loan generally converts to a permanent commercial real estate mortgage loan, but in some cases it may be payable in full. However, our construction loans for the construction of one- to four-family residential developments do not convert to permanent residential real estate loans. Loans can be made with a maximum loan-to-value ratio of 75% of the appraised market value upon completion of the project.

Before making a commitment to fund a commercial construction loan, we require an appraisal of the property by an independent licensed appraiser. The construction phase is carefully monitored to minimize our risk. All construction projects must be completed in accordance with approved plans and approved by the municipality in which they are located. Loan proceeds are disbursed periodically in increments as construction progresses and as inspections by our approved inspectors warrant.

10


One- to Four-Family Residential Real Estate Lending. At June 30, 2020, $280.0 million, or 23.9%, of our total loan portfolio consisted of one- to four-family residential real estate loans (residential mortgages). In January 2016, we entered into a strategic partnership with Homestead Funding Corp., an unaffiliated mortgage banking company, to outsource our residential mortgage loan originations, underwriting and closing processes. As a result, we no longer process this type of loan in-house; and instead residential mortgage loans are processed through Homestead Funding Corp. Pioneer Bank has no ownership interest in this company or any common employees or directors. Homestead Funding Corp.’s staff receives the loan referral from us and then handles the underwriting, processing and closing of the loan. One- to four-family residential real estate loans are funded by Homestead Funding Corp. with an option for the Bank to purchase the loan upon funding. Through our relationship with Homestead Funding Corp., we can assist applicants in obtaining financing from the mortgage banking company, but we are not required to commit to purchase or portfolio any loan originated by Homestead Funding Corp. The decision whether to acquire each loan is made at the time the borrower’s application is submitted to Homestead Funding Corp. and must generally comply with underwriting guidelines that we have approved. However the Bank normally purchases such loans so long as they meet our underwriting standards. We may also purchase one- to four-family residential real estate loans from Homestead Funding Corp. to customers who were not referred to the mortgage banking company by the Bank.

For each purchased loan, we generally pay a fixed aggregate fee to Homestead Funding Corp. of 1.75% of the loan balance. This fixed aggregate fee is paid by us regardless of whether the loan was originated by the mortgage banking company directly or was due to our customer referral. We receive no fee for referring a customer to Homestead Funding Corp. For the year ended June 30, 2020, we purchased for our portfolio $46.8 million of loans originated through Homestead Funding Corp. As part of purchasing the loans, we typically acquire the servicing rights to the loans in order to best assist the customer relationship. The purchased loans are acquired from Homestead Funding Corp. without recourse or any right against the mortgage banking company to require the loans to be repurchased from us. The fixed aggregate fee we pay to acquire the loan and servicing rights are deferred as part of the loan balance and amortized over the contractual life of the loan under the interest method.

We purchase for our portfolio both fixed-rate single-family mortgage loans, as well as adjustable-rate single-family loans, with maturities up to 30 years. At June 30, 2020, our one- to four-family residential real estate loans consisted of $237.0 million of fixed-rate loans and $43.0 million of adjustable-rate loans. Most of these one- to four-family residential properties are located in our primary market area and many are underwritten according to Fannie Mae guidelines. We refer to loans that conform to the Fannie Mae guidelines as “conforming loans.”  We also purchase for our portfolio loans above the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which at June 30, 2020 was $510,400 for single-family homes in our market area. Loans that exceed that limit are considered “jumbo loans.” At June 30, 2020, we had $52.9 million in jumbo loans.

Our purchased loans generally adhere to the following guidelines: (1) the loan is an owner-occupied one- to four-family residential real estate loan; (2) the loan does not provide for negative amortization of principal, such as “Option Arm” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan; (3) the loan is not an “interest only” mortgage loan; (4) the maximum loan term is 30 years; (5) the loan has a loan-to-value ratio up to a maximum of 90%, provided, however, that the loan-to-value ratio may exceed 90% as long as the borrower obtains private mortgage insurance; and (6) the borrower has a maximum debt-to-income ratio of 45%. We may, at our discretion, decide not to purchase a loan based on the income level of the borrower, the appraisal or any other information that is obtained in originating the loan. We do not purchase any “subprime loans” (loans that are made with low down-payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

Our purchased adjustable-rate residential real estate loans have interest rates that are fixed for an initial period ranging from one to 10 years. After the initial fixed period, the interest rate on adjustable-rate residential real estate loans is generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities or LIBOR, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board, subject to periodic and lifetime limitations on interest rate changes. All of our adjustable-rate residential real estate loans with initial

11


fixed-rate periods of one, five, seven or 10 years have initial and periodic caps of 2% on interest rate changes, with a current cap of 5% over the life of the loan.

Home Equity Loans and Lines of Credit. We offer home equity loans and home equity lines of credit, both of which are secured by either first mortgages or second mortgages on owner occupied, one- to four-family residences. At June 30, 2020, outstanding home equity loans and equity lines of credit totaled $80.3 million, or 6.9% of total loans outstanding. At June 30, 2020, the unadvanced portion of home equity lines of credit totaled $46.5 million.

The underwriting standards used for home equity loans and home equity lines of credit include a title review, the recordation of a lien, a determination of the applicant’s ability to satisfy existing debt obligations and payments on the proposed loan, and the value of the collateral securing the loan. The loan-to-value ratio for our home equity loans and our lines of credit is generally limited to 90% when combined with the first security lien, if applicable. Home equity loans are offered with fixed rates of interest and with terms of up to 20 years. Our home equity lines of credit generally have 25-year terms and adjustable rates of interest, subject to a contractual floor, which are indexed to The Wall Street Journal Prime Rate.

Home equity loans and lines of credit secured by junior mortgages have greater risk than one- to four-family residential mortgage loans secured by first mortgages. At June 30, 2020, $30.1 million of our home equity loans and lines of credit were in a junior lien position, nearly all of which were second mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers.

Consumer Loans. We offer a limited range of consumer loans, principally to customers residing in our primary market area with other relationships with us and with acceptable credit ratings. Our consumer loans primarily consist of personal loans to the owners of certain commercial businesses who have commercial loans with us, and to a lesser extent, loans on automobiles and overdraft accounts. At June 30, 2020, consumer loans were $30.9 million, or 2.6% of our total loan portfolio.

Consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Originations, Purchases, Participations and Sales of Loans

Lending activities are conducted by our loan personnel operating at our main and branch office locations. We also obtain referrals from existing or past customers and from accountants, real estate brokers, builders and attorneys. All loans that we originate or purchase are underwritten pursuant to our policies and procedures, which incorporate Fannie Mae underwriting guidelines to the extent applicable for residential loans. We originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed or adjustable-rate loans depends upon the relative customer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. Our loan origination and purchase activity may be adversely affected by a rising interest rate environment, which typically results in decreased loan demand.

We generally do not purchase whole loans from third parties other than the one- to four-family residential real estate loans described above. However, we sell participations in loans to other financial institutions in which we generally act as the lead lender. Through our loan participations, we and the other participating lenders generally share ratably in cash flows and any gains or losses that may result from a borrower’s noncompliance with the contractual terms of the loan.

12


We primarily participate in commercial real estate loans (including multi-family real estate loans), commercial and industrial loans and commercial construction loans. From time to time, we may purchase participation interests in loans where we are not the lead lender. We underwrite our participation interest in the loans that we purchase according to our own underwriting criteria and procedures. At June 30, 2020, the outstanding balances of our loan participations where we are not the lead lender totaled $49.4 million, of which $20.1 million were commercial or multi-family real estate loans, $19.6 million were commercial and industrial loans and $9.7 million were commercial construction loans.

Loan Approval Procedures and Authority

Pursuant to New York law, the aggregate amount of loans that Pioneer Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Pioneer Bank’s capital, surplus fund and undivided profits (25% if the amount in excess of 15% is secured by “readily marketable collateral”). At June 30, 2020, based on the 15% limitation, Pioneer Bank’s loans-to-one-borrower limit was approximately $27.8 million. On the same date, Pioneer Bank had no borrowers with outstanding balances in excess of this amount.

Our lending is subject to written underwriting standards and origination procedures. Decisions on residential loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.

Purchases of residential real estate loans up to $750,000 from Homestead Funding Corp. must be approved by one of the following officers: the President and Chief Executive Officer, Chief Credit Officer, Chief Financial Officer, Chief Administrative Officer, Retail Lending Officer or the Retail Loan Servicing Officer. Purchases of residential real estate loans greater than $750,000 must be approved by our board loan committee, which is comprised of all of the members of the board of directors.

For commercial loans, loans in excess of the commercial officers’ lending limits require approval from our staff loan committee, which is comprised of the President and Chief Executive Officer, Chief Financial Officer, Chief Credit Officer, Chief Banking Officer, Chief Risk Officer, Commercial Senior Vice Presidents, Commercial Vice Presidents and Commercial Loan Officers. The staff loan committee can approve individual loans of up to prescribed limits, depending on the type of the loan. Loans in excess of the Staff Loan Committee’s loan approval authority require the approval of our board of directors. Specifically, commercial real estate loans in excess of $6.0 million, commercial lines of credit in excess of $2.0 million and commercial loans with a new customer relationship in excess of $1.0 million must be approved by our board of directors.

Certain loans that involve policy exceptions must be approved by our board of directors.

We require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.

Delinquencies and Asset Quality

Delinquency Procedures. System-generated late notices are mailed to a borrower after the late payment “grace period,” which is 15 days in the case of all loans secured by residential or commercial real estate and 15 days in the case of commercial and industrial and most consumer loans. A second notice will be mailed to a borrower if the loan remains past due after 30 days, and we attempt to contact the borrower and develop a plan of repayment. By the 90th day of delinquency, we will issue a pre-foreclosure notice that will require the borrower to bring the loan current within 30 days in order to avoid the beginning of foreclosure proceedings for loans secured by residential real estate. Commercial real estate, commercial and industrial, commercial construction and consumer loans are managed on a loan by loan basis. Decisions to send a demand notice are based on conversations with the borrower to address the delinquency issues. A report of all loans 30 days or more past due is provided to the board of directors monthly.

13


Loans Past Due and Non-Performing Assets. 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 in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair market value, less estimated costs to sell. Any excess of the recorded value of the loan over the fair market value of the property is charged against the allowance for 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. Refer to the Loan Deferrals Related to COVID-19 Pandemic section on page 17.

Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

At June 30,

2020

2019

2018

3059

6089

90 Days

3059

6089

90 Days

3059

6089

90 Days

Days

Days

or More

Days

Days

or More

Days

Days

or More

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

(In thousands)

Commercial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

23

$

211

$

2,270

$

3

$

$

5,490

$

634

$

21

$

2,083

Commercial and industrial

 

 

26

 

1,551

 

 

 

42

 

1,346

 

45

 

659

Commercial construction

 

 

 

1,319

 

 

 

1,377

 

205

 

 

One- to four-family residential real estate

 

2,666

 

1,272

 

3,505

 

156

 

217

 

2,699

 

716

 

781

 

4,696

Home equity loans and lines of credit

 

1,217

 

1,259

 

1,383

 

476

 

318

 

988

 

205

 

385

 

1,183

Consumer

 

39

 

4

 

12

 

5

 

 

19

 

7

 

1

 

24

Total

$

3,945

$

2,772

$

10,040

$

640

$

535

$

10,615

$

3,113

$

1,233

$

8,645

14


At June 30,

2017

2016

3059

6089

90 Days

3059

6089

90 Days

Days

Days

or More

Days

Days

or More

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

(In thousands)

Commercial:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

476

$

2,135

$

2,599

$

256

$

535

$

1,480

Commercial and industrial

 

61

 

 

7

 

 

5

 

59

Commercial construction

 

 

 

 

 

 

One- to four-family residential real estate

 

1,080

 

399

 

3,908

 

1,188

 

7

 

3,270

Home equity loans and lines of credit

 

462

 

58

 

1,028

 

205

 

212

 

1,192

Consumer

 

101

 

100

 

354

 

314

 

144

 

300

Total

$

2,180

$

2,692

$

7,896

$

1,963

$

903

$

6,301

Loans that were 30-59 days past due totaled $3.9 million at June 30, 2020, representing an increase from $640,000 at June 30, 2019 and loans that were 60-89 days past due totaled $2.8 million at June 30, 2020, an increase from $535,000 at June 30, 2019. Increases in the 30-59 and 60-89 day past due categories were primarily one-to four family residential real estate and home equity loans and lines of credit and were related to borrowers affected by COVID-19 who did not request loan deferment as of June 30, 2020

Non-Performing Assets. 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 zero, $185,000, $235,000, $2.1 million and, $768,000 as of June 30, 2020, 2019, 2018, 2017 and 2016, respectively.

At June 30,

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

(Dollars in thousands)

 

Non-accrual loans:

 

  

    

  

    

  

    

  

    

  

Commercial real estate

$

3,364

$

5,618

$

2,236

$

2,375

$

1,386

Commercial and industrial

 

95

 

42

 

705

 

3

 

59

Commercial construction

 

1,319

 

1,377

 

 

 

One- to four-family residential real estate

 

4,807

 

4,028

 

3,834

 

3,325

 

2,874

Home equity loans and lines of credit

 

1,865

 

1,497

 

970

 

899

 

955

Consumer

 

210

 

 

 

 

Total non-accrual loans

 

11,660

 

12,562

 

7,745

 

6,602

 

5,274

Accruing loans past due 90 days or more:

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

143

 

58

 

180

 

225

 

95

Commercial and industrial

 

1,455

 

 

 

4

 

Commercial construction

 

 

 

 

 

One- to four-family residential real estate

 

 

 

1,232

 

583

 

395

Home equity loans and lines of credit

 

 

41

 

330

 

129

 

237

Consumer

 

12

 

19

 

24

 

354

 

300

Total accruing loans past due 90 days or more

 

1,610

 

118

 

1,766

 

1,295

 

1,027

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

 

 

 

72

 

 

Consumer

 

 

 

 

 

Total real estate owned

 

260

 

158

 

72

 

 

Total non-performing assets

$

13,530

$

12,838

$

9,583

$

7,897

$

6,301

Total accruing troubled debt restructured loans

$

2,200

$

$

$

$

1,418

Total non-performing loans to total loans

 

1.13

%  

 

1.19

%  

 

0.95

%  

 

0.84

%  

 

0.79

%

Total non-performing assets to total assets

 

0.89

%  

 

0.87

%  

 

0.75

%  

 

0.70

%  

 

0.63

%

15


For the year ended June 30, 2020, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $639,000. Interest income recognized on such loans for the year ended June 30, 2020 was $228,000.

During the year ended June 30, 2020, non-accrual loans decreased primarily with respect to one commercial real estate loan totaling $3.2 million paying off, partially offset by an increase in other commercial real estate loans of $1.2 million, an increase in one-to four-family residential real estate loans totaling $779,000 and an increase in home equity loans and lines of credit totaling $368,000. At June 30, 2020, accruing commercial and industrial loans past due 90 days or more increased to $1.5 million from none at June 30, 2019 and was related to one loan that paid off in full subsequent to June 30, 2020.

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

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 accounting principles generally accepted in the United States of America (“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 worked with its customers affected by COVID-19 and accommodated a significant amount of loan modifications across its loan portfolios. The Company anticipates that the number and amount of these modifications will decrease in the first fiscal quarter of 2021. To the extent that additional modifications meet the criteria previously described, such modifications are not expected to be classified as troubled debt restructurings.

16


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 June 30, 2020 and deferrals are as of June 30, 2020 and September 22, 2020.

    

    

    

Loans by Industry Sector

Deferrals as of June 30, 2020

Deferrals as of September 22, 2020

Percentage of

Percentage of

Percentage of

June 30, 2020

Commercial

Commercial

Commercial

Balance

Loans

Balance

Loans

Balance

Loans

(Dollars in thousands)

Commercial Loans:

 

  

 

 

 

Real estate

Residential real estate, including lessors of residential buildings

$

135,298

17.4

%

$

58,560

7.4

%

$

1,255

0.2

%

Non-residential real estate

Office

61,409

7.9

%

9,106

1.2

%

0.0

%

Retail

76,889

9.9

%

17,631

2.3

%

0.0

%

Industrial

25,927

3.3

%

1,109

0.1

%

0.0

%

Self-storage

6,913

0.9

%

402

0.1

%

0.0

%

Mixed use

26,427

3.4

%

10,045

1.3

%

0.0

%

Other real estate

31,103

4.0

%

5,609

0.7

%

513

0.1

%

Total real estate

363,966

46.8

%

102,462

13.1

%

1,768

0.3

%

Construction

 

123,466

15.7

%

9,580

1.2

%

0.0

%

Accommodation and food service

 

65,876

8.5

%

33,599

4.3

%

21,841

2.8

%

Retail trade

 

38,395

4.9

%

744

0.1

%

0.0

%

Wholesale trade

 

27,884

3.6

%

520

0.1

%

0.0

%

Finance and insurance

 

21,919

2.8

%

236

0.0

%

0.0

%

Healthcare and social assistance

 

26,083

3.3

%

6,434

0.9

%

0.0

%

Manufacturing

 

25,895

3.3

%

3,202

0.4

%

1,061

0.1

%

Arts, entertainment and recreation

 

13,739

1.8

%

5,700

0.7

%

346

0.0

%

Other

 

72,257

9.3

%

7,794

1.0

%

0.0

%

Total commercial loans

$

779,480

100.0

%

$

170,271

21.8

%

$

25,016

3.2

%

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 June 30, 2020 and deferrals are as of June 30, 2020 and September 22, 2020:

Loans by Portfolio

Deferrals as of June 30, 2020

Deferrals as of September 22, 2020

June 30, 2020

Percentage of

Percentage of

Balance

Balance

Loan Category

Balance

Loan Category

(Dollars in thousands)

Residential mortgages

$

279,960

$

23,243

8.3

%

$

5,492

2.0

%

Home equity loans and lines

 

80,345

1,390

1.7

%

95

0.1

%

Consumer

30,860

2,737

8.9

%

1,228

4.0

%

On June 17, 2020, the New York legislature passed, and Governor Cuomo signed, new legislation which allows certain borrowers to seek forbearance on residential mortgage loans (including home equity loans) if financial hardship is

17


demonstrated as a result of COVID-19 for up to 180 days with an option for an additional 180 days. The Company anticipates that this new law could increase the amount of residential forbearances in future periods.

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

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

The following table sets forth our amounts of all classified loans and loans designated as special mention as of June 30, 2020, 2019 and 2018. The classified loans total at June 30, 2020 includes $11.7 million of non-performing loans.

At June 30,

    

2020

    

2019

    

2018

(In thousands)

Classification of Loans:

Substandard

$

31,234

$

16,517

$

10,016

Doubtful

 

53

 

 

659

Loss

 

 

 

Total Classified Loans

$

31,287

$

16,517

$

10,675

Special Mention

$

6,499

$

2,666

$

3,330

Total classified loans increased $14.8 million from $16.5 million at June 30, 2019 to $31.3 million at June 30, 2020 primarily with respect to an increase in substandard loans consisting of a loan relationship mainly consisting of commercial real estate loans totaling $8.6 million, a loan relationship mainly consisting of commercial real estate loans totaling $5.3 million, a loan relationship including two commercial and industrial loans of $1.3 million, a loan relationship including two commercial real estate loans totaling $1.2 million and a loan relationship including one commercial and industrial loan totaling $1.0 million.

Total special mention loans increased $3.8 million from $2.7 million at June 30, 2019 to $6.5 million at June 30, 2020 primarily with respect to two commercial and industrial loan relationships totaling $3.8 million and $2.5 million, respectively, partially offset by one loan relationship including two commercial real estate loans totaling $1.2 million migrated to substandard.

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

18


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 collateral values, future cash flows on impaired loans, and national and regional economic conditions 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.

In addition, the NYSDFS and the FDIC 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 years indicated.

At or for the Years Ended June 30,

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

(Dollars in thousands)

 

Allowance at beginning of year

$

14,499

$

13,510

$

11,820

$

9,794

$

9,011

Provision for loan losses

 

22,590

 

2,350

 

1,970

 

2,395

 

1,180

Charge offs:

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

 

 

121

 

 

Commercial and industrial

 

15,805

 

1,086

 

53

 

38

 

169

Commercial construction

 

 

 

 

 

One- to four-family residential real estate

 

19

 

85

 

 

148

 

118

Home equity loans and lines of credit

 

 

47

 

17

 

104

 

57

Consumer

162

179

152

 

165

 

160

Total charge-offs

15,986

1,397

343

 

455

 

504

Recoveries:

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

 

 

 

 

10

Commercial and industrial

 

1,707

 

 

 

5

 

5

Commercial construction

 

 

 

 

 

One- to four-family residential real estate

 

 

 

 

 

Home equity loans and lines of credit

 

1

 

 

3

 

15

 

14

Consumer

 

40

 

36

 

60

 

66

 

78

Total recoveries

 

1,748

 

36

 

63

 

86

 

107

Net charge-offs

 

14,238

 

1,361

 

280

 

369

 

397

Allowance at end of year

$

22,851

$

14,499

$

13,510

$

11,820

$

9,794

Allowance to non-performing loans

 

172.20

%  

 

114.35

%  

 

142.05

%  

 

149.68

%  

 

155.44

%

Allowance to total loans outstanding at the end of the year

 

1.95

%  

 

1.36

%  

 

1.35

%  

 

1.25

%  

 

1.23

%

Net charge-offs to average loans outstanding during the year

 

1.30

%  

 

0.13

%  

 

0.03

%  

 

0.04

%  

 

0.05

%

During the year ended June 30, 2020, our total charge-offs of $16.0 million included a $15.8 million charge-off related to 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 year ended June 30, 2020 also included a partial recovery in the

19


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. We increased the provision for loan losses by $15.8 million to reflect the net charge-off of the Mann Entities’ commercial loan relationships during fiscal 2020. In addition, the year ended June 30, 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 beginning late in the third fiscal quarter of 2020 and continuing into the fourth 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 first fiscal quarter of 2021 and potentially beyond.

At June 30, 2020, the allowance for loan losses included specific reserves totaling $929,000, including $904,000 for two commercial and industrial loan relationships classified as impaired and $25,000 for one commercial real estate loan classified as impaired.

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

At June 30,

 

2020

2019

2018

 

    

    

Percent of

    

    

    

Percent of

    

    

    

Percent of

    

 

Allowance

Percent of

Allowance

Percent of

Allowance

Percent of

 

in Category

Loans in

in Category

Loans in

in Category

Loans in

 

Allowance

to Total

Each

Allowance

to Total

Each

Allowance

to Total

Each

 

for Loan

Allocated

Category to

for Loan

Allocated

Category to

for Loan

Allocated

Category to

 

    

Losses

    

Allowance

    

Total Loans

    

Losses

    

Allowance

    

Total Loans

    

Losses

    

Allowance

    

Total Loans

 

(Dollars in thousands)

 

Commercial:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

10,549

 

46.2

%  

38.5

%  

$

6,440

 

44.4

%  

38.4

%  

$

5,254

 

38.8

%  

37.7

%

Commercial and industrial

 

4,885

 

21.4

%  

20.3

%  

 

3,293

 

22.7

%  

17.6

%  

 

3,977

 

29.5

%  

19.5

%

Commercial construction

 

2,136

 

9.3

%  

7.8

%  

 

1,324

 

9.1

%  

7.7

%  

 

1,183

 

8.8

%  

8.5

%

One- to four-family residential real estate

 

3,484

 

15.2

%  

23.9

%  

 

2,360

 

16.3

%  

26.7

%  

 

2,166

 

16.0

%  

25.0

%

Home equity loans and lines of credit

 

1,303

 

5.7

%  

6.9

%  

 

813

 

5.6

%  

7.5

%  

 

770

 

5.7

%  

7.8

%

Consumer

 

494

 

2.2

%  

2.6

%  

 

269

 

1.9

%  

2.1

%  

 

160

 

1.2

%