Pioneer Bancorp, Inc. (NASDAQ:PBFS) is a mid-tier stock holding company with a diverse array of financial services offerings. The company's wholly owned subsidiary, Pioneer Bank, operates 23 offices in the Capital Region of New York State, providing a broad range of deposit, lending, and other financial services to individuals, businesses, and municipalities.

Business Overview

Pioneer Bancorp, Inc. was formed in 2019 when the Bank reorganized into a two-tier mutual holding company structure. The company's primary subsidiary, Pioneer Bank, recently completed its conversion to a national bank, now operating under the name "Pioneer Bank, National Association" and subject to supervision by the Office of the Comptroller of the Currency (OCC).

The Bank offers a comprehensive suite of banking products and services, including commercial and industrial loans, commercial real estate loans, residential mortgages, home equity loans and lines of credit, and consumer loans. Additionally, the company provides insurance and wealth management services through its subsidiaries, Anchor Agency, Inc. and Pioneer Financial Services, Inc.

Financials

For the fiscal year ended June 30, 2023, Pioneer Bancorp reported annual net income of $21.9 million on total revenue of $79.7 million. The company's annual operating cash flow and free cash flow for the same period were both $0.

In the most recent quarter, for the three months ended March 31, 2024, the company reported net income of $4.7 million, a decrease of 21.7% compared to the prior-year quarter. Total revenue for the quarter was $23.1 million, an increase of 23.1% year-over-year. The decrease in net income was primarily due to a $2.3 million, or 17.8%, increase in non-interest expense, driven by higher professional fees and salaries and employee benefits.

Net Interest Income and Margin

Net interest income for the three months ended March 31, 2024 was $17.3 million, a slight decrease of 1.1% compared to the prior-year quarter. The company's net interest margin decreased 18 basis points to 3.96% during the same period, primarily due to a 75 basis point decline in the net interest rate spread to 3.19%.

The decrease in net interest margin was largely attributable to a 160 basis point increase in the average cost of interest-bearing liabilities to 2.11%, as well as a shift in the mix of interest-bearing liabilities towards higher-cost deposit accounts. This was partially offset by an 85 basis point increase in the average yield on interest-earning assets to 5.30%.

Provision for Credit Losses

The provision for credit losses was $80,000 for the three months ended March 31, 2024, compared to no provision in the prior-year quarter. The increase in the provision was primarily due to growth in the loan portfolio, offset in part by improvements in asset quality.

Non-Performing Assets

Non-performing assets, which include non-accrual loans and loans past due 90 days or more still on accrual, decreased to $8.7 million, or 0.44% of total assets, as of March 31, 2024, compared to $17.7 million, or 0.96% of total assets, as of June 30, 2023. The decrease was primarily due to paydowns and payoffs of several commercial real estate and commercial and industrial loan relationships.

The allowance for credit losses on loans was $21.6 million, or 1.62% of total loans, as of March 31, 2024, compared to $22.2 million, or 2.00% of total loans, as of March 31, 2023. Net charge-offs were $20,000, or an annualized 0.01% of average loans, for the three months ended March 31, 2024, compared to net recoveries of $22,000, or an annualized (0.01%) of average loans, for the three months ended March 31, 2023.

Non-Interest Income

Non-interest income increased $984,000, or 30.3%, to $4.2 million for the three months ended March 31, 2024, compared to $3.3 million for the prior-year quarter. The increase was primarily due to a $583,000 increase in insurance and wealth management services income, as well as a $445,000 increase in net gain on equity securities.

The increase in insurance and wealth management services income was largely attributable to the acquisition of Hudson Financial LLC in July 2023, which expanded the company's wealth management business into the Hudson Valley Region of New York. The net gain on equity securities was primarily related to the sale of the company's entire equity securities portfolio in March 2024, which was done in conjunction with the Bank's conversion to a national bank.

Non-Interest Expense

Non-interest expense increased $2.3 million, or 17.8%, to $15.4 million for the three months ended March 31, 2024, compared to $13.1 million for the prior-year quarter. The increase was primarily due to a $1.9 million increase in professional fees, as well as a $319,000 increase in salaries and employee benefits expense.

The increase in professional fees was largely attributable to higher legal fees and expenses, while the increase in salaries and employee benefits was due to compensation expense from annual merit increases.

Liquidity

As of March 31, 2024, Pioneer Bank, the company's primary subsidiary, exceeded all applicable regulatory capital requirements and was considered "well capitalized" under regulatory guidelines. The Bank's Tier 1 (leverage) capital ratio was 11.39%, its Common Tier 1 risk-based capital ratio was 18.56%, and its Total risk-based capital ratio was 19.82%.

The company's liquidity position remained strong, with cash and cash equivalents totaling $246.5 million as of March 31, 2024. Additionally, the Bank had the ability to borrow up to $497.5 million from the Federal Home Loan Bank of New York, of which none was utilized for borrowings and $270.0 million was utilized as collateral for letters of credit issued to secure municipal deposits.

Recent Developments

Acquisition and Balance Sheet Repositioning

In July 2023, the company, through its subsidiary Pioneer Financial Services, Inc., completed the acquisition of certain assets of Hudson Financial LLC, a wealth management services company in the Hudson Valley Region of New York. The company paid $2.0 million in cash and recorded $1.5 million in contingent consideration payable to acquire the assets, which included a $1.4 million customer list intangible asset and $2.1 million in goodwill.

Additionally, in December 2023, the company completed a balance sheet repositioning transaction, selling $74.5 million of lower-yielding available-for-sale securities with an average book yield of approximately 0.83% and a weighted average remaining life of 2.2 years, recognizing a pre-tax loss of $5.6 million. The proceeds from the sale were initially redeployed into higher-yielding interest-earning deposits and subsequently reinvested into loans and securities available for sale during the quarter ended March 31, 2024.

Litigation Settlement

In November 2023, the company's subsidiary, Pioneer Bank, entered into a settlement agreement with Teal, Becker & Chiaramonte, CPAs, P.C. (TBC) to resolve a lawsuit filed by the Bank in December 2020 alleging professional malpractice by TBC in auditing the annual consolidated financial statements of Valuewise Corporation and its subsidiaries. Pursuant to the settlement agreement, TBC made a payment of $5.95 million to the Bank, and the Bank caused the lawsuit to be dismissed with prejudice.

Outlook

The company has not provided any specific financial guidance for the upcoming fiscal year. However, management has indicated that it remains focused on growing its loan portfolio, particularly in the residential mortgage and commercial construction segments, while also seeking to expand its wealth management and insurance services offerings through strategic acquisitions and organic growth initiatives.

Risks and Challenges

While Pioneer Bancorp has demonstrated solid financial performance, the company faces several risks and challenges that investors should consider. These include the potential for continued pressure on net interest margin due to rising funding costs, the ongoing legal and regulatory proceedings related to the Mann Entities fraud, and the integration and execution risks associated with any future acquisitions.

Additionally, the company's geographic concentration in the Capital Region of New York exposes it to economic conditions and real estate market trends in that specific market, which could impact the performance of its loan portfolio and asset quality.

Conclusion

Overall, Pioneer Bancorp, Inc. appears to be a well-capitalized and diversified regional bank with a strong presence in its core markets. The company's recent balance sheet repositioning, acquisition activity, and focus on growing its higher-yielding loan portfolio and fee-based businesses suggest a proactive approach to navigating the current interest rate environment and enhancing shareholder value. However, investors should closely monitor the company's progress in managing its legal and regulatory challenges, as well as its ability to successfully integrate any future acquisitions and maintain its strong asset quality and capital position.