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Section 1: 424B3 (424B3)

 

Filed Pursuant to Rule 424(b)(3)

Registration No: 333-230208

 

PROSPECTUS

 

 

(Proposed Holding Company for Pioneer Bank)

Up to 9,713,393 Shares of Common Stock

(Subject to increase to up to 11,170,402 Shares)

 

Pioneer Bancorp, Inc., a Maryland corporation, is offering up to 9,713,393 shares of its common stock for sale at $10.00 per share on a best efforts basis as part of the reorganization of Pioneer Savings Bank (“Pioneer Bank”), a New York-chartered savings bank, from a mutual savings bank (meaning no stockholders) into the “two-tier” mutual holding company structure. In connection with the sale of our common stock, we intend to contribute 2% of the outstanding shares of common stock of Pioneer Bancorp, Inc. and $250,000 in cash to our charitable foundation. Pioneer Bancorp, Inc. has never offered common stock for sale to the public and, as a result, currently there is no trading market for our common stock. We expect to list our common stock on the Nasdaq Capital Market under the symbol “PBFS.” We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

 

The shares of common stock being offered, including shares issued to the charitable foundation, represent 45% of our shares of common stock that will be outstanding upon completion of the stock offering. After the stock offering, 55% of our outstanding shares of common stock will be owned by our new mutual holding company parent, Pioneer Bancorp, MHC, a New York-chartered mutual holding company. These percentages will not be affected by the number of shares we sell in the stock offering. We must sell a minimum of 7,179,465 shares to complete the stock offering, and we will terminate the stock offering if we do not sell the minimum number of shares. We may sell up to 11,170,402 shares because of changes in market conditions without resoliciting subscribers.

 

The shares of common stock are first being offered in a subscription offering to eligible depositors of Pioneer Bank and to Pioneer Bank’s tax-qualified employee benefit plans. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given to residents of the communities served by Pioneer Bank. Any shares of common stock not purchased in the subscription or community offerings may be offered for sale to the public in a syndicated offering through a syndicate of broker-dealers. The syndicated offering may begin before the subscription and community offerings (including any extensions) have ended. However, shares purchased in the subscription offering or the community offering will not be issued until the completion of any syndicated community offering. The subscription, community, and syndicated community offerings are collectively referred to as the “offering.”

 

The minimum order is 25 shares of common stock. Generally, no individual may purchase more than 15,000 shares of common stock, and no individual or other person, along with their associates and those with whom they are acting in concert, may purchase more than 30,000 shares of common stock. The subscription and community offerings are expected to expire at 5:00 p.m., Eastern Time, on June 18, 2019. We may extend this expiration time and date, without notice to you, until August 2, 2019. Once submitted, stock orders are irrevocable unless the subscription and community offerings are terminated or extended, with regulatory approval, beyond August 2, 2019, or the number of shares of common stock offered for sale is increased to more than 11,170,402 shares or decreased to less than 7,179,465 shares. If the subscription and community offerings are extended beyond August 2, 2019, we will notify all subscribers and give them an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offering is increased to more than 11,170,402 shares or decreased to less than 7,179,465 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at Pioneer Bank and will earn interest at 0.05% per annum until completion or termination of the offering.

 

Sandler O’Neill & Partners, L.P. is assisting us in selling the shares on a best efforts basis in the subscription and community offerings, and will serve as sole manager for any syndicated community offering. Sandler O’Neill & Partners, L.P. is not required to purchase any shares of common stock that are sold in the subscription offering, community offering or syndicated community offering.

 

OFFERING SUMMARY

Price: $10.00 per Share

 

   Minimum   Midpoint   Maximum   Adjusted
Maximum
 
Number of shares   7,179,465    8,446,429    9,713,393    11,170,402 
Gross offering proceeds  $71,794,650   $84,464,290   $97,133,930   $111,704,020 
Estimated offering expenses, excluding selling agent fees and expenses  $1,469,500   $1,469,500   $1,469,500   $1,469,500 
Selling agent fees and expenses (1)  $638,497   $753,643   $868,789   $1,001,208 
Estimated net proceeds  $69,686,654   $82,241,147   $94,795,641   $109,233,312 
Estimated net proceeds per share  $9.71   $9.74   $9.76   $9.78 

 

 

(1)Assumes all shares are sold in the subscription and community offerings and includes reimbursement of selling agent’s expenses. See Pro Forma Data” and The Reorganization and Offering—Plan of Distribution; Selling Agent and Underwriting Compensation” for information regarding compensation to be received by Sandler O’Neill & Partners, L.P. in the subscription and community offerings and the compensation to be received by Sandler O’Neill & Partners, L.P. and other participating broker-dealers in the syndicated offering. If all shares are sold in the syndicated offering, excluding those purchased by our insiders and by our employee stock ownership plan and contributed to our charitable foundation, for which no selling agent fee will be paid, the selling agent fees and expenses would be approximately $3.2 million, $3.7 million, $4.3 million and $5.0 million at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively.

 

This investment involves a degree of risk, including the possible loss of principal.

See “Risk Factors” beginning on page 18.

 

Shares of our common stock are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other government agency. Neither the Securities and Exchange Commission, the New York State Department of Financial Services, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

Sandler O’Neill + Partners, L.P.

For assistance, please contact the Stock Information Center at (518) 730-3025.

 

The date of this prospectus is May 14, 2019.

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
SUMMARY 1
RISK FACTORS 18
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 33
RECENT DEVELOPMENTS 35
FORWARD-LOOKING STATEMENTS 42
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 43
OUR DIVIDEND POLICY 44
MARKET FOR THE COMMON STOCK 45
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 46
CAPITALIZATION 47
PRO FORMA DATA 48
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION 56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 58
BUSINESS OF PIONEER BANCORP, MHC 75
BUSINESS OF PIONEER BANCORP, INC. 75
BUSINESS OF PIONEER BANK 75
SUPERVISION AND REGULATION 98
TAXATION 107
MANAGEMENT 108
SUBSCRIPTIONS BY TRUSTEES AND EXECUTIVE OFFICERS 120
THE REORGANIZATION AND OFFERING 121
PIONEER BANK CHARITABLE FOUNDATION 142
RESTRICTIONS ON ACQUISITION OF PIONEER BANCORP, INC. 145
DESCRIPTION OF CAPITAL STOCK OF PIONEER BANCORP, INC. 150
TRANSFER AGENT 152
EXPERTS 152
LEGAL MATTERS 152
WHERE YOU CAN FIND ADDITIONAL INFORMATION 152
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PIONEER SAVINGS BANK F-1

 

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SUMMARY

 

The following summary provides material information about the contents of this prospectus, but it may not contain all of the information that is important to you. Before making an investment decision, you should read carefully this entire document, including the consolidated financial statements and the notes thereto that appear starting on page F-1 of this prospectus and the section entitled “Risk Factors.” The terms “we,” “our,” and “us” refer to Pioneer Bancorp, MHC, Pioneer Bancorp, Inc. and Pioneer Bank, unless the context indicates another meaning.

 

Pioneer Bancorp, MHC

 

Pioneer Bancorp, MHC will be formed as a New York-chartered mutual holding company in connection with the reorganization of Pioneer Bank into the “two-tier” mutual holding company form of organization. As a mutual holding company, Pioneer Bancorp, MHC will be a non-stock company. Pioneer Bancorp, MHC’s principal assets will be the common stock of Pioneer Bancorp, Inc. it receives in the reorganization and offering and $100,000 in cash for its initial capitalization. It is expected that the only business activity of Pioneer Bancorp, MHC will be to own a majority of Pioneer Bancorp, Inc.’s common stock. Pioneer Bancorp, MHC will be 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 will be regulated 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, Inc.

 

Pioneer Bancorp, Inc., a Maryland corporation, was incorporated in March 2019. The offering of common stock by means of this prospectus is being made by Pioneer Bancorp, Inc. in connection with the reorganization of Pioneer Bank into the “two-tier” mutual holding company form of organization. Upon completion of the reorganization, Pioneer Bancorp, Inc. will become the bank holding company for Pioneer Bank by owning all the outstanding shares of capital stock of Pioneer Bank and will be regulated by the Federal Reserve Board and the NYSDFS. To date, Pioneer Bancorp, Inc. has engaged in organizational activities only. Following the reorganization and offering, Pioneer Bancorp, Inc.’s primary business activity will be to own all the outstanding shares of capital stock of Pioneer Bank.

 

Pioneer Bank

 

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. Pioneer 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.

 

In January 2016, we entered into a strategic partnership with Homestead Funding Corp. to outsource our residential mortgage loan originations, underwriting and closing processes. 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 Pioneer Bank to purchase the loan upon funding. 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

 

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we have approved. However, Pioneer 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 Pioneer 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 Homestead Funding Corp. directly or was due to our customer referral. The purchased loans are acquired without recourse or any right against Homestead Funding Corp. to require the loans to be repurchased from us. At December 31, 2018, one- to four-family residential real estate loans acquired from Homestead Funding Corp. totaled $134.1 million, or 13.0%, of our total loans receivable.

 

At December 31, 2018, we had consolidated total assets of $1.3 billion, total deposits of $1.1 billion and net worth of $126.4 million. We are subject to regulation and examination by the NYSDFS and by the Federal Deposit Insurance Corporation. Our executive offices are located at 652 Albany Shaker Road, Albany, NY 12211. Our website address is www.pioneerbanking.com. Information on our website is not and should not be considered a part of this prospectus.

 

Our Reorganization into a Mutual Holding Company and the Stock Offering

 

We do not have stockholders in our current mutual form of ownership. Our depositors have the right to vote on certain specific matters pertaining to Pioneer Bank, such as the proposed reorganization of Pioneer Bank into the mutual holding company form of ownership or the funding of a charitable foundation. The mutual holding company reorganization is a series of transactions by which we will reorganize from a mutual savings bank to the mutual holding company form of ownership by establishing Pioneer Bancorp, MHC and Pioneer Bancorp, Inc. and converting our mutual savings bank organization certificate to a stock savings bank organization certificate. The reorganization will be conducted pursuant to a plan of reorganization and minority stock issuance, which we refer to as the “plan of reorganization.” Following the reorganization, Pioneer Bank will become a wholly-owned subsidiary of Pioneer Bancorp, Inc., and Pioneer Bancorp, Inc. will be a majority-owned subsidiary of Pioneer Bancorp, MHC. After the reorganization, our depositors will continue to have the same limited voting rights in Pioneer Bancorp, MHC as they had in Pioneer Bank before the reorganization.

 

In connection with the reorganization, we are offering for sale shares of common stock of Pioneer Bancorp, Inc. at a price of $10.00 per share. All investors will pay the same price per share in the offering. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual holding company reorganizations and stock offerings. See “—Terms of the Offering.”

 

The primary reason for our decision to reorganize into the mutual holding company form of organization and offer our shares of common stock for sale in the offering is to establish an organizational structure that will enable us to:

 

·preserve Pioneer Bank’s mutual form of ownership and our ability to remain an independent community savings bank;

 

·increase our capital to support future growth and profitability although we currently have capital well in excess of all applicable regulatory requirements;

 

·grow our banking franchise through acquisitions of insurance, wealth management and other financial service businesses, branch offices and financial institutions or organically through de novo branching;

 

·compete more effectively in the financial services marketplace; and

 

·offer our depositors, employees, management and trustees an equity ownership interest in Pioneer Bank, and thereby an economic interest in our future success.

 

The reorganization and the capital raised in the offering are expected to provide us with additional capital to support new loans and higher lending limits, support the growth of our banking franchise, provide an additional cushion against unforeseen risks and allows us to expand our asset and deposit base. The reorganization and

 

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offering also will allow us to establish stock-based benefit plans for management and other employees that we believe will permit us to attract and retain qualified personnel.

 

Unlike a standard mutual-to-stock conversion transaction in which all the common stock of the holding company of the converting savings bank is sold to the public, only a minority interest in the stock of a mutual holding company subsidiary is sold to the public in a mutual holding company minority stock offering. Federal and New York laws and regulations require that a majority of the outstanding common stock of Pioneer Bancorp, Inc. be held by our mutual holding company. Consequently, the shares that we are permitted to sell in the offering represent a minority of the shares of Pioneer Bancorp, Inc. that will be outstanding when the offering is completed. As a result, a mutual holding company offering raises less than half the capital that would be raised in a standard conversion offering. Based on these restrictions and an evaluation of our capital needs, our board of trustees has decided that 43% of our outstanding shares of common stock will be offered for sale in the offering, 2% of our outstanding shares will be issued to the charitable foundation, and 55% of our shares will be retained by Pioneer Bancorp, MHC. Our board of trustees has determined that offering 43% of our outstanding shares of common stock for sale in the offering will enable management to effectively invest the capital raised in the offering. See “—Possible Conversion of Pioneer Bancorp, MHC to Stock Form.”

 

The following diagram illustrates our current pre-reorganization organizational structure:

 

 

The following diagram illustrates our proposed post-reorganization organizational structure:

 

 

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Business Strategy

 

Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our 130-year history in the community, our knowledge of the local marketplace and our long-standing reputation for providing superior, relationship-based customer service. We believe we can distinguish ourselves by maintaining the culture of a local community bank, but offering the products of a comprehensive financial services provider by promoting and continuing to expand our insurance, consulting and wealth management businesses. The following are the key elements of our business strategy:

 

Continue our emphasis on commercial lending. Over the last five and a half years, we have increased our commercial loan portfolio, which consists of commercial real estate, commercial and industrial and commercial construction loans, consistent with safe and sound underwriting practices. This has had the benefits of increasing the yield on our loan portfolio while reducing the average term to repricing of our loans. However, we have sought to maintain an appropriate balance in the overall loan portfolio between our commercial and non-commercial loans in order to diversify our credit risk. At December 31, 2018, our commercial loan portfolio totaled $658.5 million, or 63.3% of total loans, compared with $389.1 million, or 61.0% of total loans, at June 30, 2014. We view the growth of commercial lending as a means of increasing our interest income and establishing relationships with local businesses, which offer a recurring and potentially broader source of fee income through commercial deposits, commercial insurance, and our employee benefits products and consulting. We also generally require that commercial and industrial loan borrowers establish a commercial deposit account with us, which assists our efforts to grow core deposits and cross-sell our other products and services. The additional capital raised in the offering will enable us to increase our originations of commercial real estate, commercial and industrial and commercial construction loans in our primary market area, and originate loans with larger balances that we intend to retain in our portfolio.

 

Diversify our products and services in order to increase non-interest income. We continue to seek ways of increasing our non-interest income by growing our financial services businesses. We initially entered into the wealth management services business by establishing Pioneer Financial Services, Inc. as a wholly-owned subsidiary of Pioneer Bank (which operates under the name Pioneer Wealth Management). We substantially grew this business with the acquisition of substantially all of the operating assets of Ward Financial Management, LTD in 2018. At December 31, 2018, Pioneer Financial Services, Inc. had $481.5 million of assets under management. We also sell commercial and personal insurance products and provide employee benefits products and services through our wholly-owned subsidiary, Anchor Agency, Inc., which we acquired in 2016. We expanded our employee benefits products and services business through our acquisition in 2017 of substantially all of the operating assets of Capital Region Strategic Employee Benefits Services, LLC, an employee benefits and consulting firm. The growth of our financial services businesses has contributed to the increase in non-interest income to $3.3 million for the six months ended December 31, 2018 compared to $2.4 million for the six months ended December 31, 2017 and to $5.1 million for fiscal 2018 compared to $3.7 million for fiscal 2017. We believe that there will be opportunities to cross-sell these products to our deposit and borrower customers which may further increase our non-interest income, and also to cross-sell our banking services and products to customers and clients of Pioneer Financial Services, Inc. and Anchor Agency, Inc. We intend to consider future acquisition opportunities to expand our wealth management activities, including the amount of the assets that we have under management, insurance or other complementary financial services businesses. On April 24, 2019, Pioneer Bank entered into a stock purchase agreement with Jaeger & Flynn Associates, Inc., a New York insurance agency. For information regarding this proposed acquisition, please see “Recent Developments.”

 

Increase our Share of Lower-Cost Core Deposits. We continue to emphasize offering core deposits (demand deposit accounts, savings accounts and money market accounts) to businesses, municipalities and individuals located in our market area. Core deposits represent our best opportunity to develop customer relationships that enable us to cross-sell the products and services of our complementary subsidiaries. We attract and retain transaction accounts by offering competitive products and rates and providing quality customer service. Our core deposits increased $403.7 million to $990.9 million at December 31, 2018 from $587.1 million at June 30, 2014. At December 31, 2018, core deposits comprised 88.9% of our total deposits. Core deposits are our least costly source of funds which improves our interest rate spread and also contributes non-interest income from account-related services.

 

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Strategically Grow our Balance Sheet. We believe there is a large customer base in our market that prefers doing business with local institutions and may be dissatisfied with the service they receive from the larger regional banks. By offering personalized customer service, along with our extensive knowledge of our local markets and employees who have strong relationships with our customers which leads to referrals and repeat business, we believe we can leverage these strengths to attract and retain customers. We have recently undergone a significant rebranding effort and updated our branch layout, website and other technology infrastructure that prioritizes the customer experience and moves away from the traditional single branch channel. We also believe we can capitalize on commercial deposit and personal banking relationships derived from an increase in commercial real estate and commercial business lending. Based on the foregoing, our attractive market area and strategic investment in technology to enhance the customer experience, we believe we are well-positioned to increase our balance sheet, particularly loans and deposits.

 

Continue to Emphasize Operating Efficiencies and Cost Controls. Despite significant growth of our loan portfolio, product offerings and financial services businesses in recent years, we have remained focused on expense control while increasing our net income. We remain disciplined in our approach to non-interest expenses by identifying cost savings opportunities such as renegotiating key third-party contracts and reducing other operating expenses. Our efficiency ratio was 60.0% (annualized) during the six months ended December 31, 2018, compared to 79.4% during the year ended June 30, 2014. While we expect that our non-interest expenses will increase when we become a public company, we intend to continue to diligently monitor and control expenses as we focus our efforts on continued growth. In order to support our growth in a cost-effective way, we plan to continue to invest prudently in technology to help improve our operational infrastructure.

 

Maintain Disciplined Underwriting. We emphasize a disciplined credit culture based on intimate knowledge of the market, close ties to our customers, sound underwriting standards and experienced loan officers. We are committed to actively monitoring and managing all segments of our loan portfolio in an effort to proactively identify and mitigate credit risks within the portfolio. At December 31, 2018, non-performing assets totaled $11.8 million, which represented 0.92% of total assets. At December 31, 2018, there were $5.5 million of non-performing commercial real estate loans and $137,000 of non-performing commercial and industrial loans.

 

Terms of the Offering

 

We are offering between 7,179,465 and 9,713,393 shares of common stock in a subscription offering to eligible depositors of Pioneer Bank and to our tax-qualified employee benefit plans, and, to the extent shares remain available, to the general public in a community offering. If necessary, we will also offer shares to the general public in a syndicated community offering. The number of shares of common stock to be sold may be increased up to 11,170,402 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 11,170,402 shares or decreased to fewer than 7,179,465 shares, or the subscription and community offerings are extended beyond August 2, 2019, subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended past August 2, 2019, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, your order will be canceled and we will promptly return your funds with interest at 0.05% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 11,170,402 shares or decreased to less than 7,179,465 shares, all subscribers’ stock orders will be canceled, all withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at the same rate. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated community offering.

 

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering, or the syndicated community offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Sandler O’Neill & Partners, L.P., our marketing agent in the subscription and community offerings, will use its best efforts to assist us in selling shares of our common stock in the subscription and community offerings but is not obligated to purchase any shares of common stock in the subscription and community offerings or the syndicated community offering.

 

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How We Determined the Offering Range and the $10.00 per Share Offering Price

 

The amount of common stock we are offering for sale is based on an independent appraisal of the estimated market value of Pioneer Bancorp, Inc., assuming the offering has been completed and shares of common stock and cash have been contributed to the charitable foundation. RP Financial, LC. (“RP Financial”), our independent appraiser, has estimated that, as of February 8, 2019, assuming we were undertaking the offering, this market value, including the shares to be issued to the charitable foundation and Pioneer Bancorp, MHC, was $196.4 million. Based on applicable regulations, this market value forms the midpoint of a valuation range with a minimum of $167.0 million and a maximum of $225.9 million.

 

Based on this valuation range and assuming 43% of the shares of Pioneer Bancorp, Inc. common stock is being offered for sale in the offering at $10.00 per share, 2% of our outstanding shares is issued to the charitable foundation, and 55% of the shares is retained by Pioneer Bancorp, MHC, Pioneer Bancorp, Inc. is offering for sale 7,179,465 shares at the minimum of the offering range, 8,446,429 shares at the midpoint of the offering range, and 9,713,393 shares at the maximum of the offering range. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual holding company and standard stock conversion offerings by savings banks. If demand for shares or market conditions warrant, the appraisal can be increased by up to 15%, which would result in an appraised value of $259.8 million, and we may sell up to 11,170,402 shares of common stock in the offering.

 

RP Financial advised the board of trustees that the appraisal was prepared in conformance with the regulatory appraisal methodology, which requires a valuation based on an analysis of the trading prices of comparable public companies whose stock has traded for at least one year prior to the valuation date. RP Financial selected a group of ten comparable public companies for this analysis.

 

RP Financial considered adjustments to the pro forma market value based on a comparison of Pioneer Bancorp, Inc. with the peer group set forth below. RP Financial advised the board of trustees that the valuation analysis took into consideration that relative to the peer group slight upward adjustments were applied for: (1) profitability, growth and viability of earnings; and (2) asset growth. RP Financial applied a slight downward adjustment for (1) dividends and made no adjustments for: (1) financial condition; (2) marketing of the issue; (3) management; (4) effect of government regulations and regulatory reform; and (5) liquidity of the shares of common stock.

 

The appraisal is based in part on Pioneer Bank’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of ten publicly-traded bank holding companies and savings and loan holding companies that RP Financial considers comparable to Pioneer Bancorp, Inc. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market.

 

Company Name  Ticker
Symbol
  Headquarters  Total Assets at
September 30, 2018
 
         (In millions) 
           
ESSA Bancorp, Inc.  ESSA  Stroudsburg, PA  $1,834 
Hingham Institution for Savings  HIFS  Hingham, MA  $2,370 
HMN Financial, Inc.  HMNF  Rochester, MN  $737 
PCSB Financial Corporation  PCSB  Yorktown Heights, NY  $1,474 
Prudential Bancorp, Inc.  PBIP  Philadelphia, PA  $1,081 
Severn Bancorp, Inc.  SVBI  Annapolis, MD  $889 
Standard AVB Financial Corp.  STND  Monroeville, PA  $983 
Waterstone Financial, Inc.  WSBF  Wauwatosa, WI  $1,919 
Wellesley Bancorp, Inc.  WEBK  Wellesley, MA  $837 
Western New England Bancorp, Inc.  WNEB  Westfield, MA  $2,151 

 

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The characteristics of publicly-traded shares of a mutual holding company differ from those of publicly-traded shares of fully converted stock holding companies (those in which all shares are held by public stockholders) in several ways, including that: (1) publicly-traded shares of a mutual holding company subsidiary tend to have less liquidity because they represent less than 50% of the outstanding shares of the company; (2) the holders of publicly-traded shares of a mutual holding company subsidiary cannot exercise voting control; (3) publicly-traded shares of a mutual holding company subsidiary are affected by the possibility of a “second-step” conversion transaction; and (4) the publicly-traded shares of a mutual holding company subsidiary are adversely affected by regulatory restrictions on the ability of the mutual holding company to waive the receipt of dividends declared by its subsidiary, thereby precluding or limiting the subsidiary’s ability to pay dividends to public stockholders. To account for the unique characteristics of publicly-traded shares of a mutual holding company, RP Financial included in its appraisal the pricing ratios of Pioneer Bancorp, Inc. on both a non-fully converted basis and a fully converted basis and compared each to the pricing ratios of the peer group. The decision to also provide Pioneer Bancorp, Inc.’s pricing ratios on a fully converted basis is meant to: (1) facilitate the comparison of the peer group, which consists of fully converted companies, to Pioneer Bancorp, Inc.; and (2) establish the pro forma market value range of 100% of the shares of Pioneer Bancorp, Inc., which forms the basis for determining the offering range. Tables presenting select pricing ratios of Pioneer Bancorp, Inc. on both a non-fully converted basis and a fully converted basis and comparing such ratios to similar ratios for the peer group follow.

 

The following table presents a summary of selected pricing ratios for the peer group companies on a fully converted basis and for Pioneer Bancorp, Inc. on a non-fully converted basis (i.e., the table assumes that 43% of our outstanding shares of common stock is sold in the offering, as opposed to 100% of our outstanding shares of common stock). These figures are from the RP Financial appraisal report. Compared to the average pricing ratios of the peer group, and based upon the information in the following table, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 20.2% on a non-fully converted price-to-earnings basis, a discount of 19.4% on a non-fully converted price-to-book value basis, and a discount of 19.1% on a non-fully converted price-to-tangible book value basis.

 

   Non-Fully Converted
Pro Forma Price-to-
Earnings Multiple
   Non-Fully Converted Pro
Forma Price-to-Book
Value Ratio
   Non-Fully Converted Pro
Forma Price-to-Tangible
Book Value Ratio
 
Pioneer Bancorp, Inc.               
Adjusted Maximum   15.54x   117.37%   123.00%
Maximum   13.51    108.23    113.64 
Midpoint   11.74    99.30    104.60 
Minimum   9.98    89.37    94.43 
                

 

   Fully Converted
Pro Forma Price-to-
Earnings Multiple (1)
   Fully Converted Pro
Forma Price-to-Book
Value Ratio (1)
   Fully Converted Pro
Forma Price-to-Tangible
Book Value Ratio (1)
 
             
Valuation of peer group companies               
as of February 8, 2019               
Averages   14.72x   123.16%   129.23%
Medians   14.63    117.29    125.03 

 

 

(1)Information for the peer group companies is based upon actual earnings for the twelve months ended September 30, 2018 (or for the latest available date as of February 8, 2019) and information for Pioneer Bancorp, Inc. is based upon actual earnings for the twelve months ended December 31, 2018. These ratios are different from the ratios in “Pro Forma Data.”

 

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The following table presents a summary of selected pricing ratios for the peer group companies, and the resulting pricing ratios for Pioneer Bancorp, Inc. on a fully converted equivalent basis. Compared to the average fully converted pricing ratios of the peer group, Pioneer Bancorp, Inc.’s pro forma fully converted pricing ratios at the midpoint of the offering range indicated a discount of 21.67% on a fully converted price-to-earnings basis, a discount of 45.54% on a fully converted price-to-book value basis and a discount of 46.27% on a fully converted price-to-tangible book value basis.

 

   Fully Converted Pro
Forma Price-to-Earnings
Multiple (1)
   Fully Converted Pro
Forma Price-to-Book
Value Ratio (1)
   Fully Converted Pro
Forma Price-to-
Tangible Book Value
Ratio (1)
 
Pioneer Bancorp, Inc.               
Adjusted Maximum   15.20x   75.36%   77.64%
Maximum   13.23    71.07    73.42 
Midpoint   11.53    67.07    69.44 
Minimum   9.83    62.62    65.06 
                
Valuation of peer group companies               
as of February 8, 2019               
Averages   14.72x   123.16%   129.23%
Medians   14.63    117.29    125.03 

 

 

(1)Information for the peer group companies is based upon actual earnings for the twelve months ended September 30, 2018 (or for the latest available date as of February 8, 2019) and information for Pioneer Bancorp, Inc. is based upon actual earnings for the twelve months ended December 31, 2018. These ratios are different from the ratios in “Pro Forma Data.”

 

The fully converted pro forma calculations for Pioneer Bancorp, Inc. are based on the following assumptions:

 

·A number of shares equal to 8% of the shares sold in a full conversion and contributed to the charitable foundation are purchased by the employee stock ownership plan, with the expense to be amortized over 20 years;

 

·A number of restricted stock awards equal to 4% of the shares sold in a full conversion and contributed to the charitable foundation are purchased by a stock-based benefit plan, with the expense to be amortized over five years; and

 

·A number of options equal to 10% of the shares sold in a full conversion and contributed to the charitable foundation are granted under a stock-based benefit plan, with option expense of $2.92 per option amortized over five years.

 

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the offering the shares of our common stock will trade at or above the $10.00 per share price. Furthermore, RP Financial used the pricing ratios presented in the appraisal to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Reorganization and Offering—Stock Pricing and Number of Shares to be Issued.”

 

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How We Intend to Use the Proceeds from the Offering

 

We intend to invest at least 50% of the net proceeds from the offering in Pioneer Bank, fund the loan to our employee stock ownership plan to finance its purchase of shares of common stock in the offering, contribute $250,000 to the charitable foundation and retain the remainder of the net proceeds at Pioneer Bancorp, Inc.

 

Assuming we sell 8,446,429 shares of common stock in the offering at the midpoint of the offering range, resulting in estimated net proceeds of $82.3 million, we intend to invest $41.1 million in Pioneer Bank, lend $7.7 million to our employee stock ownership plan to fund its purchase of shares of common stock, use $250,000 of the net proceeds to fund the cash contribution to the charitable foundation, and retain the remaining $33.2 million of the net proceeds at Pioneer Bancorp, Inc. Assuming we sell 11,170,402 shares of common stock in the offering at the adjusted maximum of the offering range, resulting in estimated net proceeds of $109.2 million, we intend to invest $54.6 million in Pioneer Bank, lend $10.2 million to our employee stock ownership plan to fund its purchase of shares of common stock, use $250,000 of the net proceeds to fund the cash contribution to the charitable foundation and retain the remaining $44.2 million of the net proceeds at Pioneer Bancorp, Inc.

 

Pioneer Bancorp, Inc. may use the funds it retains for investment, to invest in securities, to repurchase shares of common stock when permitted under applicable laws and regulations, to acquire other financial institutions or financial services companies, or for other general corporate purposes. Pioneer Bank may use the proceeds it receives to support increased lending and investment, to expand its retail banking franchise by establishing or acquiring new branches or to acquire other financial institutions or financial services companies or for other corporate purposes.

 

See “How We Intend to Use the Proceeds from the Offering” for more information on the proposed use of the proceeds from the offering.

 

Persons Who May Order Shares of Common Stock in the Offering

 

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

1.To depositors with deposit account(s) at Pioneer Bank with aggregate balances of at least $100.00 at the close of business on December 31, 2017.

 

2.To our tax-qualified employee benefit plans (including Pioneer Bank’s employee stock ownership plan and its 401(k) Plan), which may subscribe for, in the aggregate, up to 4.90% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering, including shares issued to Pioneer Bancorp, MHC and contributed to the charitable foundation. We expect our employee stock ownership plan to purchase 3.92% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering, including shares issued to Pioneer Bancorp, MHC and contributed to the charitable foundation.

 

3.To depositors (other than officers, trustees and directors of Pioneer Bancorp, MHC, Pioneer Bancorp, Inc. and Pioneer Bank) with deposit account(s) at Pioneer Bank with aggregate balances of at least $100.00 at the close of business on March 31, 2019, who are not eligible in the first priority.

 

4.To other depositors with deposit account(s) at Pioneer Bank with aggregate balances of at least $100.00 at the close of business on May 10, 2019, who are not eligible in the first and third priorities.

 

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons residing in Albany, Greene, Rensselaer, Saratoga, Schenectady and Warren Counties in New York. The community offering may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common

 

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stock not purchased in the subscription offering and the community offering through a syndicated community offering. Sandler O’Neill & Partners, L.P. will act as sole manager for the syndicated community offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering, and our interpretation of the terms and conditions of the plan of reorganization will be final. Any determination to accept or reject stock orders in the community offering or syndicated community offering will be based on the facts and circumstances then available to us.

 

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. See “The Reorganization and Offering” for a detailed description of the subscription offering, the community offering and the syndicated community offering, as well as a discussion regarding allocation procedures.

 

Limits on How Much Common Stock You May Purchase

 

The minimum number of shares of common stock that may be purchased is 25 shares.

 

Generally, no individual may purchase more than 15,000 shares ($150,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 30,000 shares ($300,000) of common stock:

 

·most companies, trusts or other entities in which you are a senior officer, partner, trustee or have a substantial beneficial interest;

 

·your spouse or any relative of you or your spouse living in your house or who is a director, trustee, or officer of Pioneer Bancorp, Inc., Pioneer Bancorp, MHC or Pioneer Bank; or

 

·other persons who may be your associates or persons acting in concert with you.

 

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying deposit accounts registered to the same address will be subject to the overall purchase limitation of 30,000 shares ($300,000).

 

Subject to regulatory approval, we may increase or decrease the purchase limitations at any time. See “The Reorganization and Offering—Additional Limitations on Common Stock Purchases.”

 

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

 

In the subscription offering and community offering, you may pay for your shares only by:

 

1.personal check, bank check or money order made payable to Pioneer Bancorp, Inc.; or

 

2.authorizing us to withdraw available funds from your deposit account(s) at Pioneer Bank.

 

Pioneer Bank is prohibited from lending funds to anyone to purchase shares of common stock in the offering. Additionally, you may not use a line of credit check from Pioneer Bank or any type of third-party check (such as a check payable to you and endorsed over to Pioneer Bancorp, Inc.) to pay for shares of common stock. Do not submit cash. No wire transfer will be accepted without our prior approval. You may not authorize direct withdrawal from an individual retirement account (“IRA”) at Pioneer Bank. See “—Using IRA Funds to Purchase Shares of Common Stock.”

 

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Pioneer Bancorp, Inc. or authorization to withdraw funds from one or more of your deposit accounts at Pioneer Bank, provided that we receive your stock order form before 5:00 p.m., Eastern Time, on June 18, 2019, which is the end of the subscription offering period. You may submit your stock order form and payment by mail using the stock order reply envelope provided or by overnight delivery to our Stock Information Center, which is located at 652 Albany Shaker Road,

 

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Albany, NY 12211. You may also hand-deliver stock order forms to the Stock Information Center. We will accept hand-delivered stock order forms only at this location. We will not accept stock order forms at our banking offices. Do not mail stock order forms to any of Pioneer Bank’s banking offices.

 

See “The Reorganization and Offering—Procedure for Purchasing Shares in Subscription and Community Offerings—Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

 

Using IRA Funds to Purchase Shares of Common Stock

 

You may be able to subscribe for shares of common stock using funds in your IRA. If you wish to use some or all of the funds in an IRA at Pioneer Bank, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. A one-time and/or annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the June 18, 2019 offering deadline, for assistance with purchases using your IRA or other retirement account you may have at Pioneer Bank or elsewhere. Whether you may use such funds to purchase shares in the offering may depend on timing constraints and, possibly, limitations imposed by the institution holding the funds.

 

See “The Reorganization and Offering—Procedure for Purchasing Shares in Subscription and Community Offerings—Payment for Shares” and “—Using Individual Retirement Account Funds.”

 

Market for Common Stock

 

We expect that our common stock will be traded on the Nasdaq Capital Market under the symbol “PBFS.” Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in our common stock following the completion of the offering, but is not obligated to do so.

 

Our Dividend Policy

 

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. However, we currently intend to retain all future earnings, if any, for use in our business and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any future determination to pay cash dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, regulatory restrictions, including the Federal Reserve Board’s current policy of prohibiting mutual holding companies from waiving the receipt of dividends, our business strategy and other factors that our board of directors deems relevant. See “Our Dividend Policy” for additional information regarding our dividend policy.

 

Stock Purchases by Trustees and Executive Officers

 

We expect our trustees and executive officers, together with their associates, to subscribe for 240,000 shares of common stock in the offering, representing 3.3% of the shares sold in the offering and 1.4% of to be “outstanding shares” at the minimum of the offering range. “Outstanding shares” of common stock are all shares issued by Pioneer Bancorp, Inc. as of the completion of the offering, including shares sold in the offering, shares purchased by tax-qualified employee benefit plans, shares issued to Pioneer Bancorp, MHC and shares contributed to the charitable foundation. Trustees and executive officers will pay the same $10.00 per share price that will be paid by all other persons who purchase shares of common stock in the offering. See “Subscriptions by Trustees and Executive Officers.”

 

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Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

 

The deadline for ordering shares of common stock in the subscription and community offerings is 5:00 p.m., Eastern Time, on June 18, 2019, unless we extend this deadline. If you wish to order shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

 

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 5:00 p.m., Eastern Time, on June 18, 2019, whether or not we have been able to locate each person entitled to subscription rights.

 

See “The Reorganization and Offering— Procedure for Purchasing Shares in Subscription and Community Offerings—Expiration Date” for a complete description of the deadline for ordering shares in the offering.

 

You May Not Sell or Transfer Your Subscription Rights

 

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you must sign a written certification that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. On the order form, you cannot add the names of other individuals for joint stock registration unless they are also named on the qualifying deposit account. Doing so may jeopardize your subscription rights. In addition, the stock order form requires that you list all deposit accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription.

 

Delivery of Shares of Common Stock

 

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the offering. We expect trading in the stock to begin on the first business day following completion of the offering. The offering is expected to be completed as soon as practicable following satisfaction of the conditions described below in “—Conditions to Completion of the Reorganization.” Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

Conditions to Completion of the Reorganization

 

We cannot complete the reorganization and offering unless:

 

·The plan of reorganization is approved by the required vote of the depositors of Pioneer Bank at a special meeting of depositors to be held on July 8, 2019;

 

·We receive orders for at least the minimum number of shares of common stock offered in the offering; and

 

·We receive final regulatory approval or non-objection, as applicable, from the NYSDFS, the Federal Deposit Insurance Corporation and the Federal Reserve Board to complete the reorganization and offering.

 

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Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

 

If we do not receive orders for at least 7,179,465 shares of common stock, we may take several steps to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

·increase the purchase and ownership limitations; and/or

 

·seek regulatory approval to extend the offering beyond August 2, 2019, so long as we resolicit subscribers who previously submitted subscriptions in the offering.

 

If we extend the offering past August 2, 2019, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will cancel your stock order and promptly return your funds with interest at 0.05% per annum for funds received in the subscription and community offerings or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their subscriptions up to the then-applicable limit.

 

Possible Change in the Offering Range

 

RP Financial will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 11,170,402 shares in the offering without further notice to you. If, however, the updated appraisal indicates our pro forma market value is either below $167.0 million or above $259.8 million, then, after consulting with the NYSDFS, the Federal Deposit Insurance Corporation and the Federal Reserve Board, we may:

 

·terminate the offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings);

 

·set a new offering range; or

 

·take such other actions as may be permitted by the NYSDFS, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Securities and Exchange Commission.

 

If we set a new offering range, we will promptly return funds, with interest at 0.05% per annum for funds received for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place new stock orders for a period of time.

 

Possible Termination of the Offering

 

We may terminate the offering at any time with regulatory approval. If we terminate the offering, we will promptly return your funds with interest at 0.05% per annum, and we will cancel deposit account withdrawal authorizations.

 

Our Contribution of Shares of Common Stock to the Charitable Foundation

 

To further our commitment to our local community, we intend to contribute to our charitable foundation as part of the reorganization and offering. Assuming we receive regulatory and depositor approvals, we intend to contribute to the charitable foundation a number of shares of our common stock equal to 2.0% of our outstanding shares of common stock as of the completion of the offering (including shares issued to Pioneer Bancorp, MHC), and $250,000 in cash. At the minimum, midpoint, maximum and adjusted maximum of the offering range, we would contribute to the charitable foundation 333,928, 392,857, 451,786 and 519,554 shares of common stock, respectively. As a result of the contribution, we expect to record an after-tax expense of approximately $3.1 million during the quarter in which the reorganization and offering is completed, assuming the offering closes at the midpoint of the offering range.

 

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The charitable foundation will be dedicated exclusively to supporting charitable causes and community development activities in the communities in which we operate. The contribution of common stock and cash to the charitable foundation will:

 

·with respect to the contribution of shares of common stock, dilute the voting interests of purchasers of shares of our common stock in the offering; and

 

·result in an expense, and a reduction in capital, during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit.

 

The amount of common stock that we would offer for sale in the offering would be greater if the offering were completed without funding the charitable foundation. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see “Risk Factors—Risks Related to the Charitable Foundation—The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in fiscal year 2020,” “Risk Factors—Risks Related to the Charitable Foundation—Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits,” “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation” and “Pioneer Bank Charitable Foundation.”

 

Our Officers, Directors and Employees Will Receive Additional Benefits and Compensation after the Offering

 

In connection with the offering, we are establishing an employee stock ownership plan, and, subject to receipt of stockholder and NYSDFS approval, we intend to implement one or more stock-based benefit plans that will provide for grants of stock options and restricted stock.

 

Employee Stock Ownership Plan. Pioneer Bank intends to adopt an employee stock ownership plan, which will grant shares of Pioneer Bancorp, Inc. common stock to eligible employees primarily based on their compensation. The board of directors of Pioneer Bancorp, Inc. will, at the completion of the offering, ratify the loan to the employee stock ownership plan and the sale of common stock to the employee stock ownership plan. It is expected that our employee stock ownership plan will purchase in the offering 3.92% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the conclusion of the offering.

 

Stock-Based Benefit Plans. Following the completion of the offering, we intend to implement one or more stock-based benefit plans that will provide for grants of stock options and awards of shares of restricted common stock. In accordance with applicable regulations, we anticipate the plans will authorize a number of stock options and a number of shares of restricted common stock, not to exceed 4.90% and 1.96%, respectively, of the outstanding shares of common stock of Pioneer Bancorp, Inc. as of the conclusion of the offering. These limitations will not apply if the plan is implemented more than one year after the completion of the offering, provided that all common stock awarded in excess of the above limits must be acquired in the secondary market.

 

The stock-based benefit plans will not be established sooner than six months after the offering and, if implemented within one year after the stock offering, the plans must be approved by a majority of the votes eligible to be cast by our stockholders, as well as a majority of the votes eligible to be cast by our stockholders other than Pioneer Bancorp, MHC. If stock-based benefit plans are established more than one year after the offering is completed, they must be approved by a majority of votes cast by our stockholders, as well as a majority of votes cast by our stockholders other than Pioneer Bancorp, MHC.

 

Certain additional restrictions would apply to our stock-based benefit plans if implemented within one year after completion of the offering, including:

 

·non-employee directors in the aggregate may not receive more than 30% of the options and shares of restricted common stock authorized under the plans;

 

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·no non-employee director may receive more than 5% of the options and restricted stock awards authorized under the plans;

 

·no individual may receive more than 25% of the options and restricted stock awards authorized under the plans;

 

·the options and shares of restricted common stock may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans; and

 

·accelerated vesting of options and restricted stock is not permitted except for death, disability or upon a change in control of Pioneer Bancorp, Inc. or Pioneer Bank.

 

We have not yet determined whether we will present stock-based benefit plans for stockholder approval within one year or more than one year following the completion of the offering. If applicable regulations or policies regarding stock-based benefit plans change, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.

 

We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or by repurchasing our common stock.

 

Equity Plan Expenses. The implementation of an employee stock ownership plan and one or more stock-based benefit plans will increase our future compensation costs, thereby reducing our earnings. For example, under our employee stock ownership plan we will be required to expense each year the fair market value of the shares committed to be released for that year to the participating employees. Similarly, if we issue restricted stock awards under a stock-based benefit plan, we would be required to expense as the shares vest, the fair market value of such shares as of the grant date. Finally, if we issue stock options, we would be required to expense as the options vest, the estimated fair value of such options as of the grant date. See “Risk Factors—Risks Related to the Offering—Our stock-based benefit plans, if implemented, will increase our expenses and reduce our income” and “Management—Benefits to be Considered Following Completion of the Stock Offering.”

 

Benefits to Management. The following table summarizes the stock benefits that our officers, directors and employees may receive following the reorganization and offering, at the adjusted maximum of the offering range and assuming our employee stock ownership plan purchases 3.92% of our outstanding shares as of the completion of the offering, and we implement one or more stock-based benefit plans that would authorize (1) granting options to purchase up to 4.90% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering and (2) awarding shares of restricted common stock equal to 1.96% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering.

 

Plan  Individuals Eligible to Receive Awards  Percent of
Outstanding Shares
   Value of Benefits Based on
Adjusted Maximum of
Offering Range (In
Thousands)
 
Employee stock ownership plan  All employees   3.92%  $10,183 
Stock awards  Directors, officers and employees   1.96    5,092 
Stock options  Directors, officers and employees   4.90    3,717(1)
Total      10.78%  $18,992 

 

 

(1)The fair value of stock options has been estimated at $2.92 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; no dividend yield; expected option life of 10 years; risk free interest rate of 2.69%; and a volatility rate of 13.20% based on an index of publicly traded thrift institutions.

 

The actual value of the shares of restricted common stock awarded under stock-based benefit plans will be based on the price of Pioneer Bancorp, Inc.’s common stock at the time the shares are awarded. The following table presents the total value of all shares of restricted common stock to be available for award and issuance under the stock-based benefit plans, assuming receipt of stockholder and NYSDFS approval and the shares are awarded when market prices range from $8.00 per share to $14.00 per share.

 

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Share Price   327,250 Shares
Awarded at Minimum
of Offering Range
   385,000 Shares
Awarded at Midpoint of
Offering Range
   442,750 Shares
Awarded at Maximum
of Offering Range
   509,163 Shares
Awarded at Adjusted
Maximum of Offering
Range
 
      
$8.00   $2,618,000   $3,080,000   $3,542,000   $4,073,304 
$10.00   $3,272,500   $3,850,000   $4,427,500   $5,091,630 
$12.00   $3,927,000   $4,620,000   $5,313,000   $6,109,956 
$14.00   $4,581,500   $5,390,000   $6,198,500   $7,128,282 

 

The grant-date fair value of the options granted under the stock-based benefit plans would be based in part on the trading price of Pioneer Bancorp, Inc. common stock at the time the options are granted. The value will also depend on the various assumptions used in the option pricing model ultimately adopted. The following table presents the total estimated value of the options to be available for grant under the stock-based benefit plans, assuming receipt of stockholder and NYSDFS approval, using a Black-Scholes option pricing model, and assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $8.00 per share to $14.00 per share. The Black-Scholes option pricing model provides an estimate only of the fair value of the options, and the actual value of the options may differ significantly from the value set forth in this table.

 

Market/Exercise
Price
   Grant Date Fair
Value Per Option
   818,125 Options at
Minimum of
Offering Range
   962,500 Options at
Midpoint of
Offering Range
   1,106,875 Options
at Maximum of
Offering Range
   1,272,906 Options
at Adjusted
Maximum of
Offering Range
 
      
$8.00   $2.34   $1,914,413   $2,252,250   $2,590,088   $2,978,601 
$10.00   $2.92   $2,388,925   $2,810,500   $3,232,075   $3,716,886 
$12.00   $3.50   $2,863,438   $3,368,750   $3,874,063   $4,455,172 
$14.00   $4.09   $3,346,131   $3,936,625   $4,527,119   $5,206,187 

 

Restrictions on the Acquisition of Pioneer Bancorp, Inc. and Pioneer Bank

 

Federal and state regulations, as well as provisions contained in the governing documents of Pioneer Bank and Pioneer Bancorp, Inc., restrict the ability of any person, firm or entity to acquire Pioneer Bancorp, Inc., Pioneer Bank, or their respective capital stock. These restrictions include the requirement that a potential acquirer of common stock obtain prior regulatory approval before acquiring in excess of 10% of the voting stock of Pioneer Bancorp, Inc. or Pioneer Bank, as well as a provision in Pioneer Bancorp, Inc.’s articles of incorporation that generally provides that, no person, other than Pioneer Bancorp, MHC, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of Pioneer Bancorp, Inc. and that any shares acquired in excess of this limit would not be entitled to be voted and would not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.

 

Because a majority of the shares of outstanding common stock of Pioneer Bancorp, Inc. must be owned by Pioneer Bancorp, MHC, any acquisition of Pioneer Bancorp, Inc. must be approved by Pioneer Bancorp, MHC. Furthermore, Pioneer Bancorp, MHC would not be required to pursue or approve a sale of Pioneer Bancorp, Inc. even if such sale were favored by a majority of Pioneer Bancorp, Inc.’s public stockholders. Finally, although a mutual holding company with a subsidiary stock holding company with public stockholders may be acquired by a mutual institution or another mutual holding company in what is known as a “remutualization” transaction, current regulatory policy may make such transactions unlikely because of the heightened regulatory scrutiny given to the structure and pricing of such transactions. Specifically, current regulatory policy views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity, and raising issues concerning the effect on the mutual members of the acquiring entity. As a result, a remutualization transaction for Pioneer Bancorp, Inc. would be unlikely unless the applicant can clearly demonstrate that the regulatory concerns are not warranted in the particular case.

 

Possible Conversion of Pioneer Bancorp, MHC to Stock Form

 

In the future, Pioneer Bancorp, MHC may convert from the mutual to capital stock form of ownership, in a transaction commonly referred to as a “second-step conversion.” In a second-step conversion, depositors of Pioneer

 

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Bank would have subscription rights to purchase common stock of the fully-converted Pioneer Bancorp, Inc. and the public stockholders of Pioneer Bancorp, Inc. would be entitled to exchange their shares of common stock for an equal percentage of shares of the fully-converted Pioneer Bancorp, Inc., subject to adjustment if required by the Federal Reserve Board, to reflect any dividends waived by Pioneer Bancorp, MHC or assets owned by Pioneer Bancorp, MHC.

 

Our board of trustees has no current plans to undertake a second-step conversion transaction. Any second-step conversion transaction would require the approval of holders of a majority of the outstanding shares of Pioneer Bancorp, Inc. common stock (excluding shares held by Pioneer Bancorp, MHC) and the approval of depositors of Pioneer Bank. Stockholders who purchase our common stock in the offering will not be able to force a second-step conversion without the consent of Pioneer Bancorp, MHC since a second-step conversion also requires the approval of a majority of all of the outstanding common stock of Pioneer Bancorp, Inc., which can only be achieved if Pioneer Bancorp, MHC votes to approve the second-step conversion.

 

Tax Consequences

 

Pioneer Bancorp, Inc. and Pioneer Bank have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences, and have received the opinion of Bonadio & Co., LLP regarding the material New York State income tax consequences, of the reorganization and offering. As a general matter, the reorganization and offering will not be a taxable transaction for purposes of federal or state income taxes to Pioneer Bancorp, Inc., Pioneer Bank or persons eligible to subscribe for shares of stock in the subscription offering.

 

Emerging Growth Company Status

 

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we so qualify we are exempt from various reporting requirements applicable to other public companies but not to emerging growth companies. See “Risk Factors—Risks Related to the Offering—We are an emerging growth company, and if we elect to comply only with the reduced reporting and disclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors” and “Supervision and Regulation—Federal Securities Laws—Emerging Growth Company Status.”

 

An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. We have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

How You Can Obtain Additional Information—Stock Information Center

 

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the reorganization and offering, call our Stock Information Center at (518) 730-3025. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on weekends and bank holidays.

 

Delivery of Prospectus

 

To ensure that each purchaser in the offering receives a prospectus at least 48 hours prior to the expiration of the offering, in accordance with federal laws and regulations, we may not mail a prospectus later than five days prior to the expiration date or hand deliver a prospectus any later than two days prior to that date.

 

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RISK FACTORS

 

You should consider carefully the following risk factors in evaluating an investment in the shares of our common stock.

 

Risks Related to Our Business

 

Our loan portfolio consists of a high percentage of loans secured by commercial real estate. These loans carry a greater credit risk than loans secured by one- to four-family properties.

 

Our loan portfolio includes commercial real estate loans, primarily loans secured by office buildings, industrial facilities, retail facilities, multi-family properties and other commercial properties. At December 31, 2018, our commercial real estate loans totaled $379.5 million, or 36.5%, of our total loan portfolio. Our commercial real estate loans expose us to greater risk of nonpayment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation and income stream of the borrowers. If we foreclose on these loans, our holding period for the collateral typically is longer than for a one- to four-family residential property because there are fewer potential purchasers of the collateral. In addition, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential loans. Accordingly, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. An unexpected adverse development on one or more of these types of loans can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. In addition, the physical condition of non-owner occupied properties may be below that of owner-occupied properties due to lax property maintenance standards, which have a negative impact on the value of the collateral properties. As our commercial real estate loans increase, the corresponding risks and potential for losses from these loans may also increase.

 

A large portion of our loan portfolio is comprised of commercial and industrial loans secured by accounts receivable, inventory, equipment or other business assets, the deterioration in value of which could increase the potential for future losses.

 

At December 31, 2018, $183.3 million, or 17.6% of our total loan portfolio, was comprised of commercial and industrial loans and variable lines of credit to a variety of small and medium-sized businesses in our market area collateralized by general business assets including, among other things, accounts receivable and inventory, and we may augment this collateral with additional liens on real property. These commercial and industrial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a per loan basis. Additionally, the repayment of commercial and industrial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes moveable property such as inventory, which may decline in value more rapidly than we anticipate, or may be difficult to market and sell, exposing us to increased credit risk. Significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets, resulting in inadequate collateral coverage that may expose us to credit losses and could adversely affect our business, financial condition and results of operations.

 

We make and hold in our portfolio commercial construction loans, which are considered to have greater credit risk than residential loans made by financial institutions.

 

We originate and purchase commercial construction loans primarily to 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 finance infrastructure improvements. We also provide commercial construction loans to local developers for the construction of one- to four-family residential developments, and originate rehabilitation loans, enabling the borrower to partially or totally refurbish an existing structure. At December 31, 2018, commercial construction loans were $95.8 million, or 9.2% of our total loan portfolio. We also had undrawn amounts on the commercial construction loans totaling $84.0 million at December 31, 2018. Commercial construction loans are considered more risky than residential mortgage loans. The primary credit risks associated with construction lending are underwriting risks, project risks and market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard

 

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risks. Market risks are risks associated with the sale of the completed project. They include affordability risk, which means the risk of affordability of financing by borrowers, product design risk, and risks posed by competing projects.

 

We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.

 

At December 31, 2018, approximately $834.7 million, or 80.2%, of our total loan portfolio was secured by real estate, most of which is located in our primary lending market. Future declines in the real estate values in the Capital Region of New York and surrounding markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for loan losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, construction, commercial and industrial and consumer lending, including, the ability of borrowers to repay these loans and the value of the collateral securing these loans.

 

While economic conditions in our primary market remain strong, deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

·demand for our products and services may decrease;

 

·loan delinquencies, problem assets and foreclosures may increase;

 

·collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

 

·the value of our securities portfolio may decrease; and

 

·the net worth and liquidity of loan guarantors may decrease, thereby impairing their ability to honor commitments made to us.

 

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect our financial performance. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

Our allowance for loan losses may not be sufficient to cover actual loan losses.

 

We maintain an allowance for loan losses, which is established through a provision for loan losses that represents management’s best estimate of probable incurred losses within the existing portfolio of loans. We make various assumptions and judgments about the collectability of loans in our portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the adequacy of the allowance for loan losses, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, and adjustments may be necessary to address different economic conditions or adverse developments in the loan portfolio. Consequently, a problem with one or more loans could require us to significantly increase our provision for loan losses. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or

 

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recognize additional loan charge-offs. Material additions to the allowance would materially decrease our net income.

 

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for Pioneer Bancorp, Inc. and Pioneer Bank for our first fiscal year beginning after December 15, 2021. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of establishing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and increase the data we would need to collect and review to determine the appropriate level of our allowance for loan losses.

 

Changes in interest rates may reduce our profits.

 

Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements. Factors such as inflation, recession and instability in financial markets, among other factors beyond our control, may affect interest rates.

 

If interest rates rise, and the interest rates on our deposits increase faster than the interest rates we receive on our loans and investments, our interest rate spread would decrease, which would have a negative effect on our net interest income and profitability. Furthermore, increases in interest rates may adversely affect the ability of borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to reinvest such loan or securities prepayments into lower-yielding assets, which may also negatively impact our income.

 

If interest rates rise, we expect that our net portfolio value of equity would decrease. Net portfolio value of equity represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities, adjusted for the value of off-balance sheet contracts. At December 31, 2018, and assuming a 200 basis points increase in market interest rates, we estimate that our net portfolio value would decrease by $12.8 million, or 6.8%. Conversely, at December 31, 2018 and assuming a 200 basis points decrease in market interest rates, we estimate that our net portfolio value would increase by $9.6 million, or 5.0%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk—Economic Value of Equity Analysis.”

 

Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a material adverse effect on our financial condition and results of operations. Changes in interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate risk modeling techniques and assumptions cannot fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

 

Municipal deposits are price sensitive and could result in an increase in interest expense or funding fluctuations.

 

Municipal deposits are a significant source of funds for our lending and investment activities. At December 31, 2018, $216.5 million, or 19.4% of our total deposits, consisted of municipal deposits from local government entities such as towns, cities, school districts and other municipalities, which are collateralized by letters of credit from the Federal Home Loan Bank of New York and investment securities. Given our dependence on high-average balance municipal funds deposits as a source of funds, our inability to retain such funds could significantly and

 

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adversely affect our liquidity. Further, our municipal deposits are primarily demand deposit accounts and are therefore more sensitive to interest rate risk. If we are forced to pay higher rates on our municipal accounts to retain those funds, or if we are unable to retain such funds and we are forced to resort to other sources of funds for our lending and investment activities, such as borrowings from the Federal Home Loan Bank of New York, the interest expense associated with these other funding sources may be higher than the rates we are currently paying on our municipal deposits, which would adversely affect our net income.

 

The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.

 

The Federal Deposit Insurance Corporation and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-owner occupied, non-farm, non-residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these factors, we have a concentration in loans of the type described in (ii) above of 276.1% of our total capital at December 31, 2018. The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Our bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in a curtailment of our commercial real estate and multi-family lending and/or the requirement that we maintain higher levels of regulatory capital, either of which would adversely affect our loan originations and profitability.

 

We use a third party to originate one- to four-family residential mortgage loans.

 

We have used a third-party mortgage banking company, Homestead Funding Corp., to underwrite, process and close our residential mortgage loans since January 2016. We use this company in order to offer our customers this loan product without the expense of maintaining and operating an in-house residential mortgage loan department. At December 31, 2018, one- to four-family residential real estate loans acquired from Homestead Funding Corp. totaled $134.1 million, or 13.0%, of our total loans receivable. Should we discontinue this relationship or otherwise be unable to use this company in the future, our ability to purchase residential mortgage loans may be disrupted unless we are able to find a suitable replacement or have or re-develop the capability to originate residential mortgage loans through our lending staff. Should we add more staff in such an event, our compensation expense would increase. Our income may be negatively affected if our residential mortgage lending program is disrupted.

 

Our business strategy involves moderate growth, and our financial condition and results of operations may be adversely affected if we fail to grow or fail to manage our growth effectively.

 

Our assets increased $462.3 million, or 56.1%, from $824.6 million at June 30, 2014 to $1.3 billion at December 31, 2018, primarily due to increases in loans receivable.  Over the next several years, we expect to experience moderate growth in our total assets and deposits, and the scale of our operations.  Achieving our growth targets requires us to attract customers that currently bank at other financial institutions in our market.  Our ability to grow successfully will depend on a variety of factors, including our ability to attract and retain experienced bankers, the availability of attractive business opportunities, competition from other financial institutions in our market area and our ability to manage our growth.  While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.  If we do not manage our growth effectively, we may not be able to achieve our business plan, which would have an adverse effect on our financial condition and results of operations.

 

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Changes in the valuation of our securities portfolio may reduce our profits and our capital levels.

 

Our securities portfolio may be affected by fluctuations in market value, potentially reducing accumulated other comprehensive income or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, we may take a charge to earnings to reflect such impairment. Changes in interest rates may also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are affected by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. Declines in market value may result in other-than-temporary impairments of these assets, which may lead to accounting charges that could have a material adverse effect on our net income and stockholders’ equity.

 

A portion of our loan portfolio consists of loan participations secured by properties outside our market area. Loan participations may have a higher risk of loss than loans we originate because we are not the lead lender and we have limited control over credit monitoring.

 

We occasionally purchase commercial real estate, commercial and industrial and commercial construction loan participations secured by properties outside our market area in which we are not the lead lender. We have purchased loan participations secured by various types of collateral such as real estate, equipment and other business assets located in New York, Connecticut and Vermont. Loan participations may have a higher risk of loss than loans we originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our decisions regarding the classification of a loan participation and loan loss provisions associated with a loan participation are made in part based upon information provided by the lead lender. A lead lender also may not monitor a participation loan in the same manner as we would for loans that we originate. At December 31, 2018, our loan participations where we are not the lead lender totaled $64.7 million, or 6.2% of our loan portfolio. At December 31, 2018, commercial and industrial loan participations outside our market area totaled $18.0 million, or 9.8% of the commercial and industrial loan portfolio, commercial construction loan participations outside our market area totaled $8.6 million, or 8.9% of the commercial construction loan portfolio and commercial real estate loan participations outside our market area totaled $2.0 million, or 0.5% of the commercial real estate loan portfolio. At December 31, 2018, no loan participations were delinquent 60 days or more. If our underwriting of these participation loans is not sufficient, our non-performing loans may increase and our earnings may decrease.

 

We may, in the future, participate in structured financing transactions involving businesses inside and outside our market area that require alternative financing arrangements. While these types of arrangements may generate more income than our traditional commercial loans that we originate and hold in portfolio, they generally have greater credit risk because they involve lending to borrowers with higher risk profiles, the issuance of more complex financial instruments and the valuation of more complex underlying collateral.

 

We may be adversely affected by recent changes in U.S. tax laws.

 

The Tax Cuts and Jobs Act, which was enacted in December 2017, is likely to have both positive and negative effects on our financial performance. Although the legislation’s reduction in our federal corporate tax rate has had a favorable impact on our earnings and capital generation abilities, the legislation also enacted limitations on certain deductions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. These limitations include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage and home equity loans, (ii) a limitation on the deductibility of business interest expense and (iii) a limitation on the deductibility of property taxes and state and local income taxes.

 

The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in

 

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states with high residential home prices and high state and local taxes, like New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

 

Conditions in insurance markets could adversely affect our earnings.

 

As we have diversified our sources of income, we have become increasingly reliant on non-interest income, particularly insurance fees and commissions. Revenue from these sources could be negatively affected by fluctuating premiums in the insurance markets or other factors beyond our control. Other factors that affect our insurance revenue are the profitability and growth of our clients, continued development of new products and services, as well as our access to new markets. Our insurance revenues and profitability may also be adversely affected by regulatory developments impacting healthcare and insurance markets, possibly including recent legislative proposals and discussions relating to national health insurance and the elimination of the private health insurance market.

 

Involvement in wealth management creates risks associated with the industry.

 

Our wealth management operations with Pioneer Financial Services, Inc. present special risks not borne by institutions that focus exclusively on other traditional retail and commercial banking products. For example, the investment advisory industry is subject to fluctuations in the stock market that may have a significant adverse effect on transaction fees, client activity and client investment portfolio gains and losses. Also, additional or modified regulations may adversely affect our wealth management operations. In addition, our wealth management operations, are dependent on a small number of established financial advisors, whose departure could result in the loss of a significant number of client accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect our income and potentially require the contribution of additional capital to support our operations.

 

Changes in market conditions, changes in discount rates, changes in mortality assumptions or lower returns on assets may increase required contributions to, and costs associated with, our tax-qualified defined benefit plan in future periods.

 

The funded status and benefit obligations of our tax-qualified defined benefit plan (“pension plan”) is dependent upon many factors, including returns on invested assets, certain market interest rates, the discount rates and mortality assumptions used to determine pension obligations. The pension plan liability is calculated based on various actuarial assumptions, including mortality expectations, discount rates and expected long-term rates of return on plan assets. Unfavorable returns on plan assets could materially change the amount of required plan funding, which would reduce the cash available for our operations. In addition, a decrease in the discount rate and/or changes in the mortality assumptions used to determine pension obligations could increase the estimated value of our pension obligations, which would require us to increase the amounts of future contributions to the plan, thereby reducing our equity and our costs associated with the plan may substantially increase in future periods.

 

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

 

We are subject to extensive regulation, supervision and examination by our banking regulators. Such regulation and supervision govern the activities in which a financial institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of Pioneer Bank rather than for the protection of our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the ability to impose restrictions on our operations, classify our assets and determine the level of our allowance for loan losses. These regulations, along with the currently existing tax, accounting, securities, deposit insurance and monetary laws, rules, standards, policies, and interpretations, control the ways financial institutions conduct business, implement strategic initiatives, and prepare financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes

 

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in accounting standards can be both difficult to predict and may involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially retroactively, how we report our financial condition and results of operations.

 

Strong competition within our market area may reduce our profits and slow growth.

 

We face strong competition in making loans and attracting deposits. Price competition for loans and deposits sometimes requires us to charge lower interest rates on our loans and pay higher interest rates on our deposits, and may reduce our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. Our competitors often aggressively price loan and deposit products when they enter into new lines of business or new market areas. If we are unable to effectively compete in our market area, our profitability would be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets. For more information about our market area and the competition we face, see “Business of Pioneer Bank—Market Area” and “—Competition.”

 

We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or restrict us from paying dividends or repurchasing shares.

 

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2015, and define what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 to risk-based assets capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The regulations also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt-out is exercised. We elected to exercise our one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities holdings for calculating our regulatory capital requirements. The regulations also establish a “capital conservation buffer” of 2.5%, resulting in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 to risk-based assets capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. The capital conservation buffer requirement began being phased in January 2016 at 0.625% of risk-weighted assets and increased each year until it was fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

 

The recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) simplifies capital calculations by requiring the federal regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that eligible institutions may choose to elect to replace the risk-based capital requirements under the Basel III capital rules for such institutions. Institutions that meet the community bank leverage ratio will automatically be deemed to be well-capitalized under the federal regulator’s prompt corrective action framework, although the regulators retain the flexibility to determine that an institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile. The federal regulators jointly issued a proposed rule on November 21, 2018, whereby a qualifying community bank organization may elect to use the community bank leverage ratio capital framework, in which case it will be considered well-capitalized so long as its community bank leverage ratio is greater than 9%.

 

Until the federal regulators issue their final rule, the Basel III risk-based and leverage ratios apply. The effective date of the final rule and the specific community bank leverage ratio have not been determined at this time.

 

The application of more stringent Basel III capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating Basel III regulatory capital and/or additional Basel III capital

 

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conservation buffers could result in management modifying its business strategy, and could limit our ability to pay dividends or repurchase our shares.

 

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers that open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. Several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

 

Our success depends on retaining certain key personnel.

 

Our performance largely depends on the talents and efforts of highly skilled individuals who comprise our senior management team. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation, wealth management and insurance businesses. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our income. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which would reduce our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

 

Systems failures or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

 

Our operations depend upon our ability to protect our computer systems and network infrastructure against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

 

It is possible that we could incur significant costs associated with a breach of our computer systems. While we have cyber liability insurance, there are limitations on coverage. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer losses.

 

Changes in accounting standards could affect reported earnings.

 

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and bank regulators, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

 

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Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

 

In preparing this prospectus as well as periodic reports we will be required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of specified dates. These estimates and assumptions are based on management’s best estimates and experience at such times and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan losses, the determination of our deferred income taxes, our fair value measurements, our determination of other-than-temporary impairment of investment securities, and our evaluation of our defined benefit pension plan obligations.

 

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

 

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”) requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

 

Our risk management framework is designed to minimize risk and loss to us. We try to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use broad and diversified risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses if we fail to properly anticipate and manage these risks.

 

We are subject to environmental liability risk associated with lending activities.

 

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure on nonresidential real property, these reviews may not be sufficient to detect all

 

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potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

 

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

 

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

 

Risks Related to the Offering

 

The future price of our shares of common stock may be less than the $10.00 offering price per share.

 

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 offering price. In many cases, shares of common stock issued by newly converted savings institutions have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including our performance, prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of Pioneer Bancorp, Inc. and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

 

Pioneer Bancorp, MHC’s majority control of our common stock will enable it to exercise voting control over most matters put to a vote of stockholders and will prevent stockholders from forcing a sale or a second-step conversion transaction you may find advantageous.

 

Pioneer Bancorp, MHC will own a majority of Pioneer Bancorp, Inc.’s common stock after the offering and, through its board of trustees, will be able to exercise voting control over most matters put to a vote of stockholders. Most of the directors and officers who will manage Pioneer Bancorp, Inc. and Pioneer Bank will also manage Pioneer Bancorp, MHC. As a New York-chartered mutual holding company, the board of trustees of Pioneer Bancorp, MHC must ensure that the interests of depositors of Pioneer Bank are represented and considered in matters put to a vote of stockholders of Pioneer Bancorp, Inc. Therefore, the votes cast by Pioneer Bancorp, MHC may not be in your personal best interests as a stockholder. For example, Pioneer Bancorp, MHC may exercise its voting control to defeat a stockholder nominee for election to the board of directors of Pioneer Bancorp, Inc. and will be able to elect all of the directors of Pioneer Bancorp, Inc. Some stockholders may desire a sale or merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since, on a fully converted basis most fully stock institutions tend to trade at higher multiples of book value than mutual holding companies. However, stockholders will not be able to force a merger or a second-step conversion transaction without the consent of Pioneer Bancorp, MHC since such transactions also require, under New York and federal law, the approval of a majority of all of the outstanding voting stock, which can only be achieved if Pioneer Bancorp, MHC votes to approve such transactions.

 

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Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

 

We intend to invest between $34.8 million and $47.4 million of the net proceeds of the offering (or $54.6 million at the adjusted maximum of the offering range) in Pioneer Bank. We may use the remaining net proceeds to invest in securities and for general corporate purposes, including, subject to regulatory limitations, repurchasing shares of common stock. We also expect to use a portion of the net proceeds we retain to fund a loan to Pioneer Bank’s employee stock ownership plan to purchase shares of common stock in the offering and to fund the charitable foundation. Pioneer Bank may use the net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, except for funding the loan to the employee stock ownership plan and funding the charitable foundation, we have not allocated specific amounts of the net proceeds for any of these purposes. Therefore, we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require prior regulatory approval. We have not established a timetable for reinvesting the net proceeds, and we cannot predict how long it will take to reinvest the net proceeds. Our failure to utilize these funds effectively and timely would reduce our profitability and may adversely affect the value of our common stock.

 

Our return on equity may be low following the offering and this could negatively affect the trading price of our shares of common stock.

 

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on equity may be low until we are able to leverage the additional capital we receive from the offering. Our return on equity will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to implement. Until we can increase our net interest income and non-interest income and deploy the capital raised in the offering, we expect our return on equity to be lower, which may reduce the market price of our shares of common stock. At the midpoint of the offering range, Pioneer Bancorp, Inc.’s pro forma consolidated return on equity for the six months ended December 31, 2018 would have equaled 9.31% (annualized), compared to Pioneer Bank’s return on equity for the six months ended December 31, 2018 of 15.48% (annualized).

 

We are an emerging growth company, and if we elect to comply only with the reduced reporting and disclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

 

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive if we choose to rely on these exemptions.

 

As an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which would require that our independent auditors review and attest to the effectiveness of our internal control over financial reporting. We could be an emerging growth company for up to five years following the completion of this offering. We will cease to be an emerging growth company upon the earliest of: (1) the end of the fiscal year following the fifth anniversary of this offering; (2) the first fiscal year after our annual gross revenues are $1.07 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million at the end of the second quarter of that fiscal year.

 

Our stock-based benefit plans, if implemented, will increase our expenses and reduce our income.

 

We intend to implement one or more stock-based benefit plans after the offering, subject to stockholder and NYSDFS approval, which would increase our annual compensation and benefit expenses related to stock options and stock awards granted to participants under the stock-based benefit plans. The amount of these stock-related

 

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compensation and benefit expenses would depend on the number of options and stock awards granted, the fair value of the options and our stock on the date of grant, the vesting period, and other factors that we cannot predict at this time. If we implement stock-based benefit plans within 12 months following the offering, the total shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 1.96% and 4.90%, respectively, of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering. If we award restricted shares of common stock or grant options in excess of these amounts under stock-based benefit plans implemented more than 12 months after the completion of the offering, our costs would increase further.

 

We anticipate that our employee stock ownership plan will purchase 3.92% of our outstanding shares. The cost of acquiring the shares of common stock for the employee stock ownership plan is estimated to be between $6.5 million at the minimum of the offering range and $10.2 million at the adjusted maximum of the offering range (assuming we are able to purchase all of such shares in the offering). We will record annual employee stock ownership plan expenses in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

 

The estimated expense in the first year following the offering for shares purchased in the offering (or in the after-market if the offering is oversubscribed by the eligible account holders) by our employee stock ownership plan and for stock-based benefit plans implemented within one year after the offering, subject to receipt of stockholder and NYSDFS approval, is approximately $2.3 million ($1.8 million after tax) at the adjusted maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share offering price as fair market value. Actual expense may be higher if the price of our common stock at the time the shares are allocated or awarded is greater than $10.00 per share. For further discussion of our proposed stock-based plans, see “Management—Benefits to be Considered Following Completion of the Stock Offering.”

 

Implementing stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

 

We intend to adopt one or more new stock-based benefit plans following the offering, subject to stockholder and NYSDFS approval. These plans may be funded either through open market purchases or by issuing additional authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on common stock repurchases, the availability of stock in the market, the trading price of our stock, our capital levels, alternative uses for our capital and our financial performance. While we intend to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 6.4% dilution in ownership interest if newly issued shares of our common stock are used to fund stock options and shares of restricted common stock in amounts equal to 4.90% and 1.96%, respectively, of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of offering.

 

Although our stockholders must approve the implementation of any stock-based benefit plans follow the offering, the overwhelming majority of stock-based benefit plans implemented by converting institutions and their holding companies have been approved by stockholders.

 

Federal Reserve Board regulations and policy effectively prohibit Pioneer Bancorp, MHC from waiving the receipt of dividends, which will likely preclude us from paying any dividends on our common stock.

 

Pioneer Bancorp, Inc.’s board of directors will have the authority to declare dividends on our common stock subject to statutory and regulatory requirements. We currently intend to retain all our future earnings, if any, for use in our business and do not expect to pay any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be made by our board of directors and will depend upon our financial condition, results of operations, capital requirements, restrictions under Federal Reserve Board regulations and policy, our business strategy and other factors that our board of directors deems relevant.

 

Under current Federal Reserve Board regulations and policy, if Pioneer Bancorp, Inc. pays dividends to its public stockholders, it also would be required to pay dividends to Pioneer Bancorp, MHC, unless Pioneer Bancorp,

 

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MHC waives the receipt of such dividends. Federal Reserve Board policy has been to prohibit mutual holding companies that are regulated as bank holding companies, such as Pioneer Bancorp, MHC, from waiving the receipt of dividends and the Federal Reserve Board’s regulations implemented after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) effectively prohibit federally-chartered mutual holding companies from waiving dividends declared by their subsidiaries. See “Supervision and Regulation—Holding Company Regulation—Waivers of Dividends by Pioneer Bancorp, MHC” for a further discussion of the applicable requirements related to the potential waiver of dividends by a mutual holding company. Moreover, since Pioneer Bancorp, Inc. will sell only a minority of its shares to the public and will contribute the remaining shares to Pioneer Bancorp, MHC, Pioneer Bancorp, Inc. will raise significantly less capital than would have been the case if it sold all its shares to the public. As a result, paying dividends to Pioneer Bancorp, MHC, an entity that will not be paying for the shares of Pioneer Bancorp, Inc. common stock it receives in connection with the offering, may be inequitable to public stockholders and not in their best financial interests. Therefore, unless Federal Reserve Board regulations or policy change to allow Pioneer Bancorp, MHC to waive the receipt of dividends declared by Pioneer Bancorp, Inc. without diluting minority stockholders, it is unlikely that Pioneer Bancorp, Inc. will pay any dividends.

 

Various factors may make takeover attempts more difficult to achieve.

 

Stock banks and savings banks or holding companies, as well as individuals, may not acquire control of a mutual holding company, such as Pioneer Bancorp, Inc. As result, the only persons that may acquire control of a mutual holding company are other mutual savings institutions or mutual holding companies. Accordingly, it is very unlikely, that Pioneer Bancorp, Inc. would be subject to any takeover attempt by activist stockholders or other financial institutions. In addition, certain provisions of our articles of incorporation and bylaws and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Pioneer Bancorp, Inc. without our board of directors’ prior approval.

 

Under Federal Reserve Board regulations, for a period of three years following completion of the offering, no person may directly or indirectly acquire or offer to acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve Board and the NYSDFS before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including Pioneer Bank.

 

There also are provisions in our articles of incorporation that may be used to delay or block a takeover attempt, including a provision that generally prohibits any person, other than Pioneer Bancorp, MHC, from voting more than 10% of the shares of common stock outstanding. Taken as a whole, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.

 

For additional information, see “Restrictions on Acquisition of Pioneer Bancorp, Inc.”

 

Our stock value may be negatively affected by applicable regulations that restrict stock repurchases.

 

Applicable regulations restrict us from repurchasing any of our shares of common stock during the first year following the offering and limit us from repurchasing our shares of common stock during each of the second and third years following the offering to 5% of our outstanding shares, unless we obtain prior approval from the NYSDFS. Stock repurchases are a capital management tool that can enhance the value of a company’s stock, and our inability to repurchase any of our shares of common stock during the first year following the offering and limitations on our ability to repurchase our shares of common stock during the second and third years following the offering may negatively affect our stock price.

 

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We have never issued common stock to the public, and there is no guarantee that a liquid market will develop.

 

We have never issued common stock to the public and there is no established market for our common stock. We expect that our common stock will be listed for trading on the Nasdaq Capital Market under the symbol “PBFS,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in shares of our common stock following the offering, but it is not obligated to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, we may not be able to obtain such commitments. This would result in our common stock not being listed for trading on the Nasdaq Capital Market, which could reduce the liquidity of our common stock. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by Pioneer Bancorp, MHC and our directors and executive officers, is likely to be limited. As a result, an active trading market for the common stock may not develop or, if it does develop, it may not continue. Additionally, if you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the completion of the offering and may have an adverse impact on the price at which the common stock can be sold.

 

You may not revoke your order to purchase common stock in the subscription or community offerings after you send us your order form.

 

Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the offering, including any extension of the expiration date and consummation of a syndicated community offering. Because completion of the offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, among other factors, there may be one or more delays in completing the offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond August 2, 2019, or the number of shares to be sold in the offering is increased to more than 11,170,402 shares or decreased to fewer than 7,179,465 shares.

 

You may not be able to sell your shares of common stock until you have received a statement reflecting ownership of shares, which will affect your ability to take advantage of changes in the stock price immediately following the offering.

 

A statement reflecting ownership of shares of common stock purchased in the offering may not be delivered for several days after the completion of the offering and the commencement of trading in the common stock. Your ability to sell the shares of common stock before receiving your ownership statement will depend on arrangements you may make with a brokerage firm, and you may not be able to sell your shares of common stock until you have received your ownership statement. As a result, you may not be able to take advantage of fluctuations in the price of the common stock immediately following the offering.

 

The distribution of subscription rights could have adverse income tax consequences.

 

If the subscription rights granted to eligible current or former depositors of Pioneer Bank are deemed to have an ascertainable value, receipt of the rights may be taxable in an amount equal to the ascertained value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that subscription rights have no ascertainable value; however, the opinion is not binding on the Internal Revenue Service.

 

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Risks Related to the Charitable Foundation

 

The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in fiscal 2020.

 

We intend to fund our charitable foundation in connection with the offering. We intend to contribute shares of our common stock equal to 2.0% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering and $250,000 in cash. At the minimum, midpoint, maximum and adjusted maximum of the offering range, we will contribute to the charitable foundation 333,928, 392,857, 451,786 and 519,554 shares of common stock, respectively. The contribution will have an adverse effect on our net income for the quarter and year in which we complete the offering and make the contribution to the charitable foundation. The after-tax expense of the contribution is expected to reduce net income for the year ended June 30, 2020 by approximately $3.1 million, assuming the offering closes at the midpoint of the offering range. Our net income for the six months ended December 31, 2018 and for the year ended June 30, 2018 was $9.2 million and $11.5 million, respectively. In addition, persons purchasing shares in the offering will have their ownership and voting interests in Pioneer Bancorp, Inc. diluted by up to 2.0% due to the contribution of shares of common stock to the charitable foundation.

 

Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.

 

We may not have sufficient profits to be able to fully use the tax deduction from our contribution to the charitable foundation. Under the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (generally income before federal income taxes and charitable contributions expense) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal income tax purposes over each of the five years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period and expires thereafter.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables set forth selected consolidated historical financial and other data for Pioneer Bank, on a consolidated basis, at the dates and for the periods indicated. It is only a summary and it should be read in conjunction with the business and financial information contained elsewhere in this prospectus, including the consolidated financial statements that appear starting on page F-1 of this prospectus. The information at December 31, 2018 and for the six months ended December 31, 2018 and 2017 is not audited but, in the opinion of management, includes all adjustments necessary for a fair presentation. All adjustments are normal and recurring. The results of operations for the six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the year ending June 30, 2019 or any other period. The information at June 30, 2018 and 2017 and for the years ended June 30, 2018 and 2017 is derived in part from the audited consolidated financial statements appearing in this prospectus. The information at June 30, 2016, 2015 and 2014 and for the years ended June 30, 2016, 2015 and 2014 is derived in part from audited consolidated financial statements not appearing in this prospectus.

 

   At December   At June 30, 
   31, 2018   2018   2017   2016   2015   2014 
   (In thousands) 
Selected Financial Condition Data:                              
Total assets  $1,286,967   $1,284,128   $1,134,139   $995,918   $881,285   $824,620 
Cash and cash equivalents   56,456    120,280    40,261    34,518    35,141    58,809 
Securities available for sale   107,144    88,063    81,975    100,951    108,750    82,253 
Securities held to maturity   4,275    5,297    2,213    3,811    3,389    7,539 
Loans, net of allowance for loan losses   1,028,920    985,902    932,762    789,010    678,796    629,134 
Bank-owned life insurance   17,779    17,715    17,601    17,527    17,423    17,279 
Premises and equipment, net   42,010    42,902    37,384    30,703    20,629    14,605 
Federal Home Loan Bank stock   2,233    883    1,149    1,584    986    958 
Deposits   1,114,959    1,150,262    1,010,026    864,188    769,124    716,486 
Borrowings   30,000        5,000    17,000    6,758    1,750 
Net worth   126,394    118,063    104,012    93,610    93,620    93,158 

 

   For the Six Months Ended
December 31,
   For the Years Ended June 30, 
   2018   2017   2018   2017   2016   2015   2014 
   (In thousands) 
Selected Operating Data:                                   
Interest and dividend income  $26,332   $22,282   $46,486   $37,621   $32,161   $28,805   $28,237 
Interest expense   2,053    1,481    3,186    2,411    1,648    1,314    1,478 
Net interest income   24,279    20,801    43,300    35,210    30,513    27,491    26,759 
Provision for loan losses   1,210    950    1,970    2,395    1,180    962    890 
Net interest income after provision for loan losses   23,069    19,851    41,330    32,815    29,333    26,529    25,869 
Non-interest income   6,569    5,983    12,804    10,897    8,226    7,398    7,253 
Non-interest expense   18,507    17,926    36,325    35,366    30,272    27,327    27,017 
Income before income taxes   11,131    7,908    17,809    8,346    7,287    6,600    6,105 
Income tax expense   1,888    3,963    6,310    2,715    2,289    2,220    1,745 
Net income  $9,243   $3,945   $11,499   $5,631   $4,998   $4,380   $4,360 

 

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   At or For the Six
Months Ended
December 31, (1)
   At or For the Years Ended June 30, 
   2018   2017   2018   2017   2016   2015   2014 
                             
Performance Ratios:                                   
Return on average assets   1.41%   0.64%   0.92%   0.52%   0.53%   0.52%   0.54%
Return on average equity   15.48%   7.45%   10.51%   5.83%   5.18%   4.59%   4.87%
Interest rate spread (2)   3.93%   3.64%   3.67%   3.47%   3.43%   3.40%   3.52%
Net interest margin (3)   4.07%   3.74%   3.78%   3.57%   3.51%   3.46%   3.59%
Non-interest expenses to average assets   2.81%   2.92%   2.91%   3.27%   3.19%   3.23%   3.32%
Efficiency ratio (4)   60.00%   66.33%   64.75%   76.70%   78.14%   78.33%   79.43%
Average interest-earning assets to average interest-bearing liabilities   145.54%   140.35%   141.31%   139.29%   139.05%   136.82%   133.33%
                                    
Capital Ratios:                                   
Average equity to average assets   9.41%   8.79%   8.77%   8.93%   10.17%   11.26%   11.01%
Total capital to risk weighted assets   13.29%   12.60%   12.86%   12.41%   14.10%   15.65%   16.11%
Tier 1 capital to risk weighted assets   12.04%   11.33%   11.59%   11.18%   12.91%   14.38%   14.72%
Common equity tier 1 capital to risk weighted assets   12.04%   11.33%   11.59%   11.18%   12.91%   14.38%   14.72%
Tier 1 capital to average assets   9.70%   9.13%   9.17%   9.60%   10.87%   11.79%   12.04%
                                    
Asset Quality Ratios:                                   
Allowance for loan losses as a percentage of total loans   1.31%   1.28%   1.35%   1.25%   1.23%   1.31%   1.43%
Allowance for loan losses as a percentage of non-performing loans   115.83%   160.05%   142.05%   149.68%   155.44%   143.85%   152.68%
Net charge-offs to average outstanding loans during the period   0.22%   0.05%   0.03%   0.04%   0.05%   0.16%   0.06%
Non-performing loans as a percentage of total loans   1.13%   0.80%   0.95%   0.84%   0.79%   0.91%   0.94%
Non-performing loans as a percentage of total assets   0.91%   0.63%   0.74%   0.70%   0.63%   0.71%   0.72%
Total non-performing assets as a percentage of total assets   0.92%   0.63%   0.75%   0.70%   0.63%   0.78%   0.77%
                                    
Other:                                   
Number of offices   22    22    22    22    18    17    17 
Number of full-time equivalent employees   256    255    259    251    215    230    228 

 

 

(1)Annualized for the six month periods ended December 31, 2018 and 2017.
(2)Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities for the periods.
(3)Represents net interest income as a percentage of average interest-earning assets.
(4)Represents non-interest expenses divided by the sum of net interest income and non-interest income.

 

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RECENT DEVELOPMENTS

 

The following tables set forth selected consolidated historical financial and other data for Pioneer Bank and its subsidiaries for the periods and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial information regarding Pioneer Bank contained elsewhere in this prospectus, including the consolidated financial statements beginning on page F-1 of this prospectus. The information at June 30, 2018 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at March 31, 2019 and for the three and nine months ended March 31, 2019 and 2018, is unaudited and reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine months ended March 31, 2019, are not necessarily indicative of the results for all fiscal 2019 or any other period.

 

   At March 31,   At June 30, 
   2019   2018 
   (In thousands) 
Selected Financial Condition Data:          
Total assets  $1,385,542   $1,284,128 
Cash and cash equivalents   156,786    120,280 
Securities available for sale   94,163    88,063 
Securities held to maturity   4,123    5,297 
Loans, net of allowance for loan losses   1,040,647    985,902 
Bank-owned life insurance   17,810    17,715 
Premises and equipment, net   41,835    42,902 
Federal Home Loan Bank stock   883    883 
Deposits   1,243,841    1,150,262 
Borrowings        
Net worth   131,763    118,063 

 

   For the Three Months
Ended March 31,
   For the Nine Months
Ended March 31,
 
   2019   2018   2019   2018 
   (In thousands) 
Selected Operating Data:                    
Interest and dividend income  $13,599   $11,843   $39,932   $34,126 
Interest expense   1,139    794    3,193    2,275 
Net interest income   12,460    11,049    36,739    31,851 
Provision for loan losses   570    450    1,780    1,400 
Net interest income after provision for loan losses   11,890    10,599    34,959    30,451 
Non-interest income   3,972    3,090    10,542    9,073 
Non-interest expense   9,646    9,223    28,153    27,150 
Income before income taxes   6,216    4,466    17,348    12,374 
Income tax expense   1,437    1,050    3,326    5,013 
Net income  $4,779   $3,416   $14,022   $7,361 

 

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   At or For the Three Months
Ended March 31, (1)
   At or For the Nine Months
Ended March 31, (1)
 
   2019   2018   2019   2018 
                 
Performance Ratios:                    
Return on average assets   1.46%   1.09%   1.42%   0.79%
Return on average equity   15.88%   13.20%   15.22%   9.18%
Interest rate spread (2)   4.07%   3.76%   3.94%   3.65%
Net interest margin (3)   4.23%   3.87%   4.10%   3.76%
Non-interest expenses to average assets   2.93%   2.92%   2.85%   2.93%
Efficiency ratio (4)   58.70%   65.23%   59.54%   66.34%
Average interest-earning assets to average interest-bearing liabilities   146.44%   142.83%   145.86%   141.18%
                     
Capital Ratios:                    
Average equity to average assets   9.68%   8.60%   9.50%   8.73%
Total capital to risk-weighted assets   13.79%   12.84%   13.78%   12.84%
Tier 1 capital to risk-weighted assets   12.51%   11.57%   12.50%   11.57%
Common equity tier 1 capital to risk- weighted assets   12.51%   11.57%   12.50%   11.57%
Tier 1 capital to average assets   9.94%   9.10%   10.10%   9.43%
                     
Asset Quality Ratios:                    
Allowance for loan losses as a percentage of total loans   1.34%   1.30%   1.34%   1.30%
Allowance for loan losses as a percentage of non-performing loans   108.41%   144.46%   108.41%   144.46%
Net charge-offs to average outstanding loans during the period   0.04%   0.02%   0.16%   0.04%
Non-performing loans as a percentage of total loans   1.23%   0.90%   1.23%   0.90%
Non-performing loans as a percentage of total assets   0.94%   0.68%   0.94%   0.68%
Total non-performing assets as a percentage of total assets   0.94%   0.69%   0.94%   0.69%
                     
Other:                    
Number of offices   22    22    22    22 
Number of full-time equivalent employees   257    255    257    255 

 

 

(1)Annualized for the three and nine month periods ended March 31, 2019 and 2018.
(2)Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities for the periods.
(3)Represents net interest income as a percentage of average interest-earning assets for the period.
(4)Represents non-interest expense divided by the sum of net interest income and non-interest income.

 

Comparison of Financial Condition at March 31, 2019 and June 30, 2018

 

Total Assets. Total assets increased $101.4 million, or 7.9%, to $1.39 billion at March 31, 2019 from $1.28 billion at June 30, 2018. The increase was due primarily to increases of $54.7 million, or 5.6%, in net loans, $36.5 million, or 30.4%, in cash and cash equivalents, and $6.1 million, or 6.9%, in available for sale securities.

 

Cash and Cash Equivalents. Total cash and cash equivalents increased $36.5 million, or 30.4%, to $156.8 million at March 31, 2019 from $120.3 million at June 30, 2018. This increase resulted primarily from growth of our deposits.

 

Securities Available for Sale. Total securities available for sale increased $6.1 million, or 6.9%, to $94.2 million at March 31, 2019 from $88.1 million at June 30, 2018. The increase was primarily due to an $11.1 million increase in U.S. government and agency obligations, partially offset by a decrease of $4.4 million in municipal obligations.

 

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Securities Held to Maturity. Total securities held to maturity decreased $1.2 million, or 22.2%, to $4.1 million at March 31, 2019 from $5.3 million at June 30, 2018. The decrease was primarily due to maturities and paydowns of municipal obligations.

 

Net Loans. Net loans increased $54.7 million, or 5.6%, to $1.04 billion at March 31, 2019 from $985.9 million at June 30, 2018. The increase was primarily due to an increase in one- to four-family residential mortgage loans of $31.5 million, or 12.6%, to $281.1 million at March 31, 2019 from $249.6 million at June 30, 2018, and an increase in commercial real estate loans of $27.8 million, or 7.4%, to $403.7 million at March 31, 2019 from $375.9 million at June 30, 2018. In addition, consumer loans increased $7.2 million, or 48.1%, to $22.2 million at March 31, 2019 from $15.0 million at June 30, 2018. These increases were partially offset by a decrease in commercial and industrial loans of $8.5 million, or 4.4%, to $185.7 million at March 31, 2019 from $194.2 million at June 30, 2018, and a decrease in commercial construction loans of $3.8 million, or 4.4%, to $80.8 million at March 31, 2019 from $84.6 million at June 30, 2018. The increase in one- to four-family residential mortgage loans resulted primarily from purchases from Homestead Funding Corp., an unaffiliated mortgage banking company, and reflected management’s desire to maintain an appropriate balance in the overall loan portfolio between commercial and non-commercial lending. The increase in commercial real estate loans resulted from new relationships as well as certain commercial construction loans that converted to permanent financing upon completion of construction, which also accounted for the decrease in commercial construction loans. 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 reflected principal reductions in the portfolio based on the time of the year.

 

Deposits. Total deposits increased $93.6 million, or 8.1%, to $1.24 billion at March 31, 2019 from $1.15 billion at June 30, 2018. The increase in deposits reflected an increase in non-interest-bearing demand accounts of $35.2 million, or 10.2%, to $380.2 million at March 31, 2019 from $345.0 million at June 30, 2018, an increase in interest-bearing demand accounts of $25.1 million, or 25.8%, to $122.3 million at March 31, 2019 from $97.2 million at June 30, 2018, an increase in money market accounts of $20.6 million, or 6.2%, to $355.5 million at March 31, 2019 from $334.9 million at June 30, 2018 and an increase in savings accounts of $12.7 million, or 5.2%, to $256.8 million at March 31, 2019 from $244.1 million at June 30, 2018. The increase in deposits was primarily due to seasonality and growth in municipal deposits with March being one of the seasonal high points during each year for the deposit balances of many municipal customers.

 

Borrowings. There were no borrowings outstanding at either March 31, 2019 or June 30, 2018.

 

Total Net Worth. Total net worth increased $13.7 million, or 11.6%, to $131.8 million at March 31, 2019 from $118.1 million at June 30, 2018. The increase was due to net income of $14.0 million for the nine months ended March 31, 2019, offset in part by an increase of $322,000 in accumulated other comprehensive loss on our available for sale securities.

 

Comparison of Operating Results for the Three Months Ended March 31, 2019 and 2018

 

General. Net income increased by $1.4 million, or 39.9%, to $4.8 million for the three months ended March 31, 2019 from $3.4 million for the three months ended March 31, 2018. The increase was primarily due to a $1.4 million increase in net interest income combined with an $882,000 increase in non-interest income, partially offset by a $423,000 increase in non-interest expense, a $387,000 increase in income tax expense and a $120,000 increase in the provision for loan losses.

 

Interest and Dividend Income. Interest and dividend income increased $1.8 million, or 14.8%, to $13.6 million for the three months ended March 31, 2019, from $11.8 million for the three months ended March 31, 2018 due to increases in interest income on loans and securities. The increase primarily reflected a 47 basis points increase in the average yield on interest-earning assets to 4.62% for the three months ended March 31, 2019, from 4.15% for the three months ended March 31, 2018, and to a lesser degree a $38.7 million increase in the average balance of interest-earning assets for the three months ended March 31, 2019 as compared to the prior year period.

 

Interest income on loans increased $1.4 million, or 12.6%, to $12.4 million for the three months ended March 31, 2019 from $11.0 million for the three months ended March 31, 2018. The increase in interest income on loans was due primarily to a 31 basis points increase in the average yield on loans to 4.96% for the three months

 

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ended March 31, 2019 from 4.65% for the three months ended March 31, 2018, combined with a $56.0 million increase in the average balance of loans to $1.04 billion for the three months ended March 31, 2019 from $979.8 million for the three months ended March 31, 2018. The increase in the average yield was due to our originating and purchasing new loans at higher market rates of interest and the upward adjustment of the interest rates on our existing adjustable-rate loans as a result of the rising interest rate environment, while the increase in the average balance of loans was due to our continued efforts to increase our loan portfolio.

 

Interest income on securities increased $297,000 to $649,000 for the three months ended March 31, 2019 from $352,000 for the three months ended March 31, 2018. The increase in interest income on securities was due to a 74 basis points increase in the average yield to 2.49% for the three months ended March 31, 2019 from 1.75% for the three months ended March 31, 2018, and a $24.9 million increase in the average balance of securities to $106.9 million for the three months ended March 31, 2019 from $82.0 million for the three months ended March 31, 2018. The increase in both the average yield and average balance of securities was primarily due to both increased market rates of interest and investing excess cash in interest-earning assets having higher yields.

 

Interest Expense. Interest expense increased $345,000, or 43.5%, to $1.1 million for the three months ended March 31, 2019 from $794,000 for the three months ended March 31, 2018 due to increases in interest expense on deposits and borrowings. The increase primarily reflected a 17 basis points increase in the average cost of interest-bearing liabilities to 0.56% for the three months ended March 31, 2019 from 0.39% for the three months ended March 31, 2018, and a $6.1 million increase in the average balance of interest-bearing liabilities.

 

Interest expense on interest-bearing deposits increased $302,000, or 38.1%, to $1.1 million for the three months ended March 31, 2019 from $793,000 for the three months ended March 31, 2018. The increase in interest expense on interest-bearing deposits was due primarily to a 15 basis points increase in the average cost of interest-bearing deposits to 0.54% for the three months ended March 31, 2019 from 0.39% for the same period in the prior year, partially offset by a $328,000 decrease in the average balance of deposits to $818.9 million for the three months ended March 31, 2019 from $819.2 million for the three months ended March 31, 2018. The increase in the average cost of deposits reflected a rising interest rate environment as well as competition from other financial service providers operating in our market.

 

Interest expense on Federal Home Loan Bank borrowings increased $37,000 to $38,000 for the three months ended March 31, 2019 compared to the prior year period. The increase was due primarily to a $5.6 million increase in the average balance of Federal Home Loan Bank of New York advances to $5.8 million for the three months ended March 31, 2019 from $222,000 for the three months ended March 31, 2018, and an 85 basis points increase in the average cost of Federal Home Loan Bank of New York advances to 2.69% for the three months ended March 31, 2019 from 1.84% for the three months ended March 31, 2018. Early in the three-month period ended March 31, 2019, we increased the amount of our Federal Home Loan Bank of New York borrowings in order to increase our short-term liquidity due to a loss of seasonal municipal deposits.

 

Net Interest Income. Net interest income increased $1.4 million, or 12.8%, to $12.5 million for the three months ended March 31, 2019 compared to $11.1 million for the three months ended March 31, 2018. The increase reflected a 31 basis points increase in the net interest rate spread to 4.07% for the three months ended March 31, 2019 from 3.76% for the three months ended March 31, 2018, combined with a $32.6 million increase in the average balance of net interest-earning assets to $384.7 million for the three months ended March 31, 2019 from $352.1 million for the three months ended March 31, 2018. The net interest margin increased 36 basis points to 4.23% for the three months ended March 31, 2019 from 3.87% for the three months ended March 31, 2018, reflecting the growth of our net interest-earning assets.

 

Provision for Loan Losses. We recorded a provision for loan losses of $570,000 for the three months ended March 31, 2019 compared to $450,000 for the three months ended March 31, 2018. The increase in the provision reflected management’s assessment of the loss inherent in our loan portfolio, the growth of the commercial real estate, one- to four-family residential mortgage, and consumer loan portfolios, and increased levels of charge-offs and non-performing assets. Non-performing assets increased to $13.1 million, or 0.94% of total assets, at March 31, 2019, compared to $9.0 million, or 0.69% of total assets, at March 31, 2018. Net charge-offs increased to $100,000 for the three months ended March 31, 2019, compared to $39,000 for the three months ended

 

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March 31, 2018. The allowance for loan losses was $14.1 million, or 1.34% of loans outstanding, at March 31, 2019 and $12.9 million, or 1.30% of loans outstanding, at March 31, 2018.

 

Non-Interest Income. Non-interest income increased $882,000, or 28.5%, to $4.0 million for the three months ended March 31, 2019 from $3.1 million for the three months ended March 31, 2018. The increase was due primarily to a $716,000 increase in bank fees and service charges and a $94,000 increase in income attributable to our insurance and wealth management services. Bank fees and service charges increased primarily due to commercial loan fees. The increase in income attributable to our insurance and wealth management services during the three months ended March 31, 2019 reflected the acquisition in May 2018 of the assets of Ward Financial Management, LTD. Our assets under management increased to $522.7 million at March 31, 2019 from $221.2 million at March 31, 2018.

 

Non-Interest Expense. Non-interest expense increased $423,000, or 4.6%, to $9.6 million for the three months ended March 31, 2019 from $9.2 million for the three months ended March 31, 2018. The $423,000 increase was caused primarily by an $182,000 increase in salaries and employee benefits expense, a $153,000 increase in occupancy and equipment costs, and an $82,000 increase in data processing costs. Salaries and employee benefits expense and occupancy and equipment costs increased during the three months ended March 31, 2019 as compared to the same prior year period due to annual salary increases, additional personnel acquired in the Ward Financial Management, LTD acquisition, and regular maintenance expenses for our branches. Data processing costs increased during the three months ended March 31, 2019 compared to the same prior year period due to an increase in transaction volumes.

 

Income Tax Expense. Income tax expense increased $387,000, or 36.9%, to $1.4 million for the three months ended March 31, 2019 from $1.1 million for the three months ended March 31, 2018. The increase was due primarily to an increase in our pre-tax income to $6.2 million for the three months ended March 31, 2019 compared to $4.5 million for the three months ended March 31, 2018. Our effective tax rate was 23.1% for the three months ended March 31, 2019 compared to 23.5% for the three months ended March 31, 2018.

 

Comparison of Operating Results for the Nine Months Ended March 31, 2019 and 2018

 

General. Net income increased by $6.7 million, or 90.5%, to $14.0 million for the nine months ended March 31, 2019 from $7.4 million for the nine months ended March 31, 2018. The increase was primarily due to a $4.9 million increase in net interest income, a $1.5 million increase in non-interest income, and a $1.7 million decrease in income tax expense, partially offset by a $1.0 million increase in non-interest expense, and a $380,000 increase in the provision for loan losses.

 

Interest and Dividend Income. Interest and dividend income increased $5.8 million, or 17.0%, to $39.9 million for the nine months ended March 31, 2019, from $34.1 million for the nine months ended March 31, 2018 due to increases in interest income on loans and securities. The increase primarily reflected a 43 basis points increase in the average yield on interest-earning assets to 4.46% for the nine months ended March 31, 2019, from 4.03% for the nine months ended March 31, 2018 combined with a $66.6 million increase in the average balance of interest-earning assets for the nine months ended March 31, 2019 compared to the prior year period.

 

Interest income on loans increased $4.7 million, or 14.6%, to $36.9 million for the nine months ended March 31, 2019 from $32.2 million for the nine months ended March 31, 2018. The increase in interest income on loans was primarily due to a 35 basis points increase in the average yield on loans to 4.82% for the nine months ended March 31, 2019 from 4.47% for the nine months ended March 31, 2018, combined with a $62.7 million increase in the average balance of loans to $1.03 billion for the nine months ended March 31, 2019 from $964.1 million for the nine months ended March 31, 2018. The increase in the average yield was due to our originating and purchasing new loans at higher market rates of interest and the upward adjustment of the interest rates on our existing adjustable-rate loans as a result of the rising interest rate environment, while the increase in the average balance of loans was due to our continued efforts to increase our loan portfolio.

 

Interest income on securities increased $992,000 to $1.9 million for the nine months ended March 31, 2019 from $926,000 for the nine months ended March 31, 2018. The increase in interest income on securities was due to a 76 basis points increase in the average yield to 2.32% for the nine months ended March 31, 2019 from 1.56% for the

 

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nine months ended March 31, 2018, and a $31.1 million increase in the average balance of securities to $110.4 million for the nine months ended March 31, 2019 from $79.3 million for the nine months ended March 31, 2018. The increase in both the average yield and average balance of securities was primarily due to both increased market rates of interest and investing excess cash in interest-earning assets with higher yields.

 

Interest Expense. Interest expense increased $918,000, or 40.4%, to $3.2 million for the nine months ended March 31, 2019 from $2.3 million for the nine months ended March 31, 2018 due to increases in interest expense on deposits and borrowings. The increase primarily reflected a 14 basis points increase in the average cost of interest-bearing liabilities to 0.52% for the nine months ended March 31, 2019 from 0.38% for the nine months ended March 31, 2018, and a $19.9 million increase in the average balance of interest-bearing liabilities.

 

Interest expense on interest-bearing deposits increased $769,000, or 33.8%, to $3.0 million for the nine months ended March 31, 2019 from $2.3 million for the nine months ended March 31, 2018. The increase in interest expense on interest-bearing deposits was primarily due to a 12 basis points increase in the average cost of interest-bearing deposits to 0.49% for the nine months ended March 31, 2019 from 0.37% for the same period in the prior year, along with a $11.7 million increase in the average balance of deposits to $810.9 million for the nine months ended March 31, 2019 from $799.2 million for the nine months ended March 31, 2018. The increase in the average balance of deposits was due to our focus on increasing core deposits obtained from our business and municipal customers. The increase in the average cost of deposits reflected a rising interest rate environment as well as competition from other financial service providers operating in our market.

 

Interest expense on Federal Home Loan Bank borrowings increased $105,000, to $107,000 for the nine months ended March 31, 2019 compared to the prior year period. The increase was due primarily to a $5.2 million increase in the average balance of Federal Home Loan Bank of New York advances to $5.4 million for the nine months ended March 31, 2019 from $201,000 for the nine months ended March 31, 2018, and a 134 basis points increase in the average cost of Federal Home Loan Bank of New York advances to 2.67% for the nine months ended March 31, 2019 from 1.33% for the nine months ended March 31, 2018. From November 2018 through January 2019, we increased the amount of Federal Home Loan Bank of New York borrowings in order to increase our short-term liquidity due to a loss of seasonal municipal deposits.

 

Net Interest Income. Net interest income increased $4.8 million, or 15.3%, to $36.7 million for the nine months ended March 31, 2019 compared to $31.9 million for the nine months ended March 31, 2018. The increase reflected a 29 basis points increase in the net interest rate spread to 3.94% for the nine months ended March 31, 2019 from 3.65% for nine months ended March 31, 2018, combined with a $46.7 million increase in the average balance of net interest-earning assets to $377.3 million for the nine months ended March 31, 2019 from $330.6 million for the nine months ended March 31, 2018. The net interest margin increased 34 basis points to 4.10% for the nine months ended March 31, 2019 from 3.76% for the nine months ended March 31, 2018, reflecting the growth of our net interest-earning assets.

 

Provision for Loan Losses. We recorded a provision for loan losses of $1.8 million for the nine months ended March 31, 2019 compared to $1.4 million for the nine months ended March 31, 2018. The increase in the provision reflected management’s assessment of the loss inherent in our loan portfolio, the growth of the commercial real estate, one- to four-family residential mortgage, and consumer loan portfolios, and increased levels of charge-offs and non-performing assets. Net charge-offs increased to $1.2 million for the nine months ended March 31, 2019, compared to $272,000 for the nine months ended March 31, 2018. Net charge-offs for the nine months ended March 31, 2019, included partial charge-offs totaling $1.0 million related to two borrower relationships consisting of commercial and industrial loans. Non-performing assets increased to $13.1 million, or 0.94% of total assets at March 31, 2019, compared to $9.0 million, or 0.69% of total assets at March 31, 2018. The allowance for loan losses was $14.1 million, or 1.34% of loans outstanding at March 31, 2019, and $12.9 million, or 1.30% of loans outstanding at March 31, 2018.

 

Non-Interest Income. Non-interest income increased $1.4 million, or 16.2%, to $10.5 million for the nine months ended March 31, 2019 from $9.1 million for the nine months ended March 31, 2018. The increase was primarily due to a $1.1 million increase in bank fees and service charges and a $990,000 increase in income attributable to our insurance and wealth management services, partially offset by a $457,000 increase in the loss on the disposal of assets and a decrease of $135,000 in net gain on securities transactions. Bank fees and service

 

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charges increased primarily due to commercial loan fees. The increase in income attributable to our insurance and wealth management services reflected the acquisition in May 2018 of the assets of Ward Financial Management, LTD during the nine months ended March 31, 2019. Our assets under management increased to $522.7 million at March 31, 2019 from $221.2 million at March 31, 2018. The increase in the loss on the disposal of assets was primarily the result of the sale of a branch location during the nine months ended March 31, 2019. Net gain on securities sales decreased during the nine months ended March 31, 2019 as we had no sales during such period.

 

Non-Interest Expense. Non-interest expense increased $1.0 million, or 3.7%, to $28.2 million for the nine months ended March 31, 2019 from $27.2 million for the nine months ended March 31, 2018. The $1.0 million increase was caused primarily by a $634,000 increase in salaries and employee benefits expense, a $302,000 increase in occupancy and equipment costs, and a $196,000 increase in advertising and marketing expenses. Salaries and employee benefits expense and occupancy and equipment costs increased during the nine months ended March 31, 2019 compared to the same prior year period due to annual salary increases, additional personnel acquired in the Ward Financial Management, LTD acquisition, and regular maintenance expenses for our branches. Advertising and marketing expenses increased due to sponsorships with community organizations during the nine months ended March 31, 2019.

 

Income Tax Expense. Income tax expense decreased $1.7 million, or 33.7%, to $3.3 million for the nine months ended March 31, 2019 from $5.0 million for the nine months ended March 31, 2018. The decrease resulted from the lower effective federal corporate tax rate under the Tax Cuts and Jobs Act, which became effective on January 1, 2018. The Tax Cuts and Jobs Act reduced the federal corporate income tax rate from 35% to 21%. Our effective tax rate was 19.2% for the nine months ended March 31, 2019 compared to 40.5% for the nine months ended March 31, 2018. Income tax expense for the nine months ended March 31, 2019 also reflected a $580,000 tax benefit related to the final evaluation of our net deferred tax assets in connection with the federal income tax rate reduction resulting from the Tax Cuts and Jobs Act. The income tax expense decrease was partially offset by an increase in our pre-tax income to $17.3 million for the nine months ended March 31, 2019 from $12.4 million for the nine months ended March 31, 2018. In addition, income tax expense for the nine months ended March 31, 2018 included a $1.2 million charge related to the revaluation of our net deferred tax assets following the enactment of the Tax Cuts and Jobs Act.

 

Stock Purchase Agreement with Jaeger & Flynn Associates, Inc.

 

On April 24, 2019, Pioneer Bank entered into a stock purchase agreement with Jaeger & Flynn Associates, Inc., a New York insurance agency (“JFA”), which provides employee benefits products and services, commercial and personal insurance products, and human resources consulting services. Pursuant to the stock purchase agreement, Pioneer Bank will acquire 100% of the outstanding shares of capital stock of JFA. JFA will become a wholly owned subsidiary of Pioneer Bank.

 

Pursuant to the terms of the stock purchase agreement, Pioneer Bank will pay an aggregate purchase price of $12.75 million. The purchase price may be adjusted upward or downward as described below and will be payable in four installments with $3.75 million being paid at closing (the “closing payment”) and $3.0 million paid following the first, second and third anniversaries of the closing (each an “installment payment”).

 

The $3.75 million closing payment will be adjusted downward if there is (i) any indebtedness outstanding at the closing date or (ii) a shortfall from the target working capital of JFA, determined as of closing. Full payment of each installment payment is contingent upon JFA achieving its target Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as adjusted to reflect the difference, if any, between Anchor Agency, Inc.’s EBITDA and pro-forma EBITDA, for each of the three 12-month periods immediately following the closing date (each the “performance period”). Each installment payment will be adjusted downward if either: (i) there is a negative difference between JFA’s EBITDA and target EBITDA during the performance period or (ii) JFA experiences a decline in organic revenue by 5% or more for the performance period compared to the prior 12-month period. Each installment payment, however, is subject to an earn-out adjustment (with no maximum amount) equal to 50% of the positive difference between JFA’s EBITDA and target EBITDA for each performance period so long as JFA has at least 10% organic revenue growth for the applicable performance period.

 

The transaction is subject to closing conditions, including receipt of final board of directors approval and that the two principals of JFA enter into three-year employment agreements with Pioneer Bank containing

 

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customary non-solicitation, non-piracy and non-acceptance covenants that will continue while the principals are employed with Pioneer Bank and for 48 months thereafter. Pioneer Bank currently anticipates that the transaction will be completed sometime late in the third calendar quarter of 2019.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. 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.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

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

 

·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;

 

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·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;

 

·changes in consumer spending, borrowing and savings habits;

 

·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 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.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. See “Risk Factors” beginning on page 18.

 

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net offering proceeds will be until the offering is completed, we estimate that the net proceeds will be between $69.7 million and $94.8 million, or $109.2 million if the offering range is increased by 15%.

 

We intend to distribute the net proceeds as follows:

 

   Based Upon the Sale at $10.00 Per Share of 
   7,179,465 Shares   8,446,429 Shares   9,713,393 Shares   11,170,402 Shares (1) 
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
   Amount   Percent of
Net
Proceeds
 
   (Dollars in thousands) 
                                 
Gross offering proceeds  $71,795        $84,464        $97,134        $111,704      
Less: offering expenses   (2,108)        (2,223)        (2,338)        (2,471)     
Net offering proceeds   69,687    100.0%   82,241    100.0%   94,796    100.0%   109,233    100.0%
                                         
Distribution of net proceeds:                                        
Proceeds contributed to Pioneer Bank   34,844    50.0%   41,121    50.0%   47,398    50.0%   54,617    50.0%
Cash contribution to the charitable foundation   250    0.4%   250    0.3%   250    0.3%   250    0.2%
Loan to employee stock ownership plan   6,545    9.4%   7,700    9.4%   8,855    9.3%   10,183    9.3%
Proceeds retained by Pioneer Bancorp, Inc.  $28,048    40.2%  $33,172    40.4%  $38,293    40.4%  $44,183    40.5%

 

 

(1)As adjusted to give effect to an increase in the number of shares, which increase could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

 

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Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will reduce Pioneer Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if fewer shares were sold in the subscription and community offerings and more in the syndicated offering than we have assumed.

 

Pioneer Bancorp, Inc. may use the proceeds it retains from the offering:

 

·to invest in securities;

 

·to finance the potential acquisition of financial institutions or insurance, wealth management and other financial services companies;

 

·to repurchase shares of our common stock, including repurchases to fund stock-based benefit plans; and

 

·for other general corporate purposes.

 

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the offering. Under NYSDFS regulations, we may not repurchase shares of our common stock during the first year following the completion of the offering and, in the second and third years, we may not repurchase more than 5% of our then-outstanding shares of common stock in each of those years without the prior approval of the NYSDFS.

 

Pioneer Bank may use the net proceeds it receives from the offering:

 

·to fund new loans;

 

·to invest in securities;

 

·to expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any agreements to acquire a financial institution; and

 

·for other general corporate purposes.

 

Initially, a substantial portion of the net proceeds retained by Pioneer Bancorp, Inc. will be invested in an interest-bearing deposit account in Pioneer Bank and in short-term investment securities of the type currently held by Pioneer Bank. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of proceeds outlined above may change based on many factors, including changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions.

 

We expect our return on equity to be low until we are able to effectively deploy the additional capital raised in the offering. See “Risk Factors—Risks Related to the Offering—Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.”

 

OUR DIVIDEND POLICY

 

Following completion of the offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, we currently do not intend to pay cash dividends. The decision to pay a dividend in the future would depend upon a number of factors, including: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; statutory and regulatory limitations, including the Federal Reserve Board’s dividend waiver regulations and policy, which currently effectively prohibit us from paying any dividends to our public stockholders without also paying the same dividends per share to Pioneer Bancorp,

 

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MHC; and general economic conditions. We cannot assure you that any dividends will be paid on our common stock as long as we operate in the mutual holding company form, unless there is a change in Federal Reserve Board regulations or policy that would allow mutual holding companies to waive the receipt of dividends. Moreover, even if we pay dividends on our common stock in the future, we cannot assure you that dividends will not be reduced or eliminated. Special cash dividends, stock dividends or returns of capital, to the extent permitted by applicable law, regulations and policy, may be paid in addition to, or in lieu of, regular cash dividends. See “Risk Factors—Risks Related to the Offering—Federal Reserve Board regulations effectively prohibit Pioneer Bancorp, MHC from waiving the receipt of dividends which will likely preclude us from paying any dividends on our common stock.”

 

We will file a consolidated federal tax return with Pioneer Bank. Accordingly, it is anticipated that any cash distributions that we make to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to applicable regulations, during the three-year period following the offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of Pioneer Bancorp, Inc.—Common Stock.” Dividends we can declare and pay also will depend, in part, upon receipt of dividends from Pioneer Bank, because initially we will have no source of income other than dividend income from Pioneer Bank and earnings from the investment of the net proceeds from the sale of shares of common stock retained by us and interest payments received in connection with the loan to the employee stock ownership plan. New York banking law imposes limitations on capital distributions (including dividends) by Pioneer Bank. See “Supervision and Regulation—New York Banking Law and Supervision—Dividends.”

 

Any payment of dividends by Pioneer Bank to us that would be deemed to be drawn out of Pioneer Bank’s tax bad debt reserves, if any, would require a payment of taxes at the then-current tax rate by Pioneer Bank on the amount of earnings deemed to be removed from the reserves for such distribution. Pioneer Bank does not intend to make any distribution to Pioneer Bancorp, Inc. that would create such a federal tax liability.

 

MARKET FOR THE COMMON STOCK

 

We have never issued capital stock and there is no established market for our shares of common stock. We expect that our shares of common stock will be listed for trading on the Nasdaq Capital Market under the symbol “PBFS,” subject to completion of the offering and compliance with certain listing conditions, including the presence of at least three registered and active market makers. Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in shares of our common stock following the offering, but it is not obligated to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.

 

The development and maintenance of a public market, having the desirable characteristics of depth, liquidity and orderliness, depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of shares of our common stock at any particular time may be limited, which may have an adverse effect on the price at which shares of our common stock can be sold. There can be no assurance that persons purchasing the shares of common stock will be able to sell their shares at or above the $10.00 offering purchase price per share.

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At December 31, 2018, Pioneer Bank exceeded all applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth, at December 31, 2018, the historical equity capital and regulatory capital and the pro forma equity capital and regulatory capital of Pioneer Bank after giving effect to the sale of shares of common stock at $10.00 per share. The tabular data assumes the receipt by Pioneer Bank of 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

   Pioneer Bank
Historical at
   Pro Forma at December 31, 2018 Based Upon the Sale in the Offering of: 
   December 31, 2018   7,179,465 Shares   8,446,429 Shares   9,713,393 Shares   11,170,402 Shares (1) 
   Amount   Percent of
Assets (2)
   Amount   Percent of
Assets (2)
   Amount   Percent of
Assets (2)
   Amount   Percent of
Assets (2)
   Amount   Percent of
Assets (2)
 
   (unaudited)   (Dollars in thousands)     
                                         
Equity capital  $126,394    9.82%  $151,420    11.46%  $155,965    11.74%  $160,509    12.03%  $165,737    12.35%
                                                   
Tier 1 leverage capital  $126,257    9.70%  $151,283    11.31%  $155,828    11.60%  $160,372    11.88%  $165,600    12.20%
Tier 1 leverage requirement   65,155    5.00%   66,857    5.00%   67,171    5.00%   67,484    5.00%   67,845    5.00%
Excess  $61,143    4.69%  $84,426    6.31%  $88,657    6.60%  $92,888    6.88%  $97,755    7.20%
                                                   
Tier 1 risk-based capital (3)  $126,257    12.04%  $151,283    14.33%  $155,828    14.74%  $160,372    15.15%  $165,600    15.63%
Tier 1 risk-based requirement   83,908    8.00%   84,466    8.00%   84,566    8.00%   84,667    8.00%   84,782    8.00%
Excess  $42,349    4.04%  $66,817    6.33%  $71,262    6.74%  $75,705    7.15%  $80,818    7.63%
                                                   
Total risk-based capital (3)  $139,353    13.29%  $164,379    15.57%  $168,924    15.98%  $173,468    16.39%  $178,696    16.86%
Total risk-based requirement   104,885    10.00%   105,582    10.00%   105,708    10.00%   105,833    10.00%   105,978    10.00%
Excess  $34,468    3.29%  $58,797    5.57%  $63,216    5.98%  $67,635    6.39%  $72,718    6.86%
                                                   
Common equity tier 1 capital  $126,257    12.04%  $151,283    14.33%  $155,828    14.74%  $160,372    15.15%  $165,600    15.63%
Common equity tier 1 requirement   68,176    6.50%   68,628    6.50%   68,710    6.50%   68,792    6.50%   68,886    6.50%
Excess  $58,081    5.54%  $82,655    7.83%  $87,118    8.24%  $91,580    8.65%  $96,714    9.13%
                                                   
Reconciliation:                                                  
Net proceeds infused into Pioneer Bank            $34,844        $41,121        $47,398        $54,617      
Less:  Common stock acquired by employee stock ownership plan             (6,545)        (7,700)        (8,855)        (10,183)     
Less:  Common stock acquired by stock-based benefit plan             (3,273)        (3,850)        (4,428)        (5,092)     
Pro forma increase in tier 1 and risk-based capital            $25,026        $29,571        $34,115        $39,342      

 

 

(1)As adjusted to give effect to an increase in the number of shares, which increase could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Equity and Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(3)Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

 

The following table presents, at December 31, 2018, the historical consolidated capitalization of Pioneer Bank and the pro forma consolidated capitalization of Pioneer Bancorp, Inc. after giving effect to the offering based upon the assumptions set forth under “Pro Forma Data.”

 

   Pioneer Bank
Historical at
   Pioneer Bancorp, Inc. Pro Forma at December 31, 2018 Based upon the Sale
in the Offering at $10.00 per Share of:
 
   December 31,
2018
   7,179,465
Shares
   8,446,429
Shares
   9,713,393
Shares
  

11,170,402

Shares (1)

 
   (unaudited)   (Dollars in thousands) 
                     
Deposits (2)  $1,114,959   $1,114,959   $1,114,959   $1,114,959   $1,114,959 
Borrowings   30,000    30,000    30,000    30,000    30,000 
Total deposits and borrowed funds  $1,144,959   $1,144,959   $1,144,959   $1,144,959   $1,144,959 
                          
Stockholders’ equity:                         
Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued                    
Common stock, $0.01 par value, 75,000,000 shares authorized; shares to be issued as reflected (3)       167    196    226    260 
Additional paid-in capital   10,658    83,517    96,633    109,746    124,827 
Tax benefit of contribution to the charitable foundation       933    1,086    1,240    1,416 
Retained earnings (4)   125,637    125,637    125,637    125,637    125,637 
Accumulated other comprehensive loss   (9,901)   (9,901)   (9,901)   (9,901)   (9,901)
Less:                         
Expense of stock contribution to the
charitable foundation
       (3,339)   (3,929)   (4,518)   (5,196)
Expense of cash contribution to the
charitable foundation
       (250)   (250)   (250)   (250)
Capital retained by Pioneer Bancorp, MHC       (100)   (100)   (100)   (100)
Common stock to be acquired by
employee stock ownership plan (5)
       (6,545)   (7,700)   (8,855)   (10,183)
Common stock to be acquired by stock-based benefit plans (6)       (3,273)   (3,850)   (4,428)   (5,092)
Total stockholders’ equity  $126,394   $186,846   $197,822   $208,797   $221,418 
                          
Pro Forma Shares Outstanding                         
Total shares issued       16,696,428    19,642,857    22,589,286    25,977,679 
Shares contributed to charitable foundation       333,928    392,857    451,786    519,554 
Shares issued to Pioneer Bancorp, MHC       9,183,035    10,803,571    12,424,107    14,287,723 
Shares sold in the offering       7,179,465    8,446,429    9,713,393    11,170,402 
                          
Total stockholders’ equity as a percentage of total assets   9.82%   13.87%   14.56%   15.25%   16.02%

 

 

(1)As adjusted to give effect to an increase in the number of shares, which increase could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Does not reflect withdrawals from deposit accounts at Pioneer Bank for the purchase of shares of common stock. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3)No effect has been given to the issuance of additional shares of common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 4.90% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering will be reserved for issuance upon the exercise of options under the plans. See “Management.”
(4)The retained earnings of Pioneer Bank will be substantially restricted after the offering. See “Supervision and Regulation—New York Banking Law and Supervision—Dividends.”
(5)Assumes that 3.92% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering will be acquired by the employee stock ownership plan financed by a loan from Pioneer Bancorp, Inc. The loan will be repaid principally from Pioneer Bank’s contributions to the employee stock ownership plan. Since Pioneer Bancorp, Inc. will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on Pioneer Bancorp, Inc.’s consolidated balance sheet. Accordingly, the number of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(6)Assumes a number of shares of common stock equal to 1.96% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering will be purchased for grant by one or more stock-based benefit plans. The funds to be used by such plans to purchase shares will be provided by Pioneer Bancorp, Inc. The dollar amount of common stock to be purchased is based on the $10.00 per share offering price and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the offering price. Pioneer Bancorp, Inc. will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder and NYSDFS approval.

 

 

 47 

 

 

PRO FORMA DATA

 

The following tables summarize historical and pro forma data of Pioneer Bancorp, Inc. at and for the six months ended December 31, 2018 and at and for the year ended June 30, 2018. This information is based on assumptions set forth below and, in the tables, and should not be used as a basis for projections of market value of the shares of common stock following the offering.

 

The net proceeds in the table are based upon the following assumptions:

 

1.all shares of common stock will be sold in the subscription and community offerings;

 

2.our trustees, executive officers, and their associates will purchase 240,000 shares of common stock;

 

3.our employee stock ownership plan will purchase 3.92% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering with the proceeds of a loan from Pioneer Bancorp, Inc. The loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, calculated at the date of the loan origination) over a 20-year period. Interest income that we earn on the loan will offset the interest paid by Pioneer Bank;

 

4.Pioneer Bancorp, Inc. will contribute $250,000 in cash to the charitable foundation;

 

5.we will pay Sandler O’Neill & Partners, L.P. a fee equal to 1.0% of the aggregate amount of common stock sold in the subscription and community offerings;

 

6.no fee will be paid to Sandler O’Neill & Partners, L.P. with respect to shares of common stock purchased by our tax-qualified and non-qualified employee stock benefit plans or contributed to our charitable foundation, or stock purchased by our officers, trustees, directors and employees, and their immediate families; and

 

7.total expenses of the offering, other than the fees and commissions to be paid to Sandler O’Neill & Partners, L.P. and other broker-dealers, will be $1.5 million.

 

We calculated pro forma consolidated net income for the six months ended December 31, 2018 and the year ended June 30, 2018 as if the estimated net proceeds had been invested at the beginning of the period at an assumed interest rate of 2.51% (1.86% after-tax). This rate represents the yield on the five-year U.S. Treasury Note at December 31, 2018, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by applicable regulations.

 

We further believe that the reinvestment rate is factually supportable because:

 

·the yield on the U.S Treasury Note can be determined or estimated from third-party sources; and

 

·we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For purposes of pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

The pro forma tables give effect to the implementation of one or more stock-based benefit plans. Subject to the receipt of stockholder and NYSDFS approval, we have assumed that stock-based benefit plans will acquire to

 

 48 

 

 

fund restricted stock awards a number of shares of common stock equal to 1.96% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering at the same price for which they were sold in the offering. We assume that awards of common stock granted under such plans vest over a five-year period.

 

We have also assumed that options will be granted under stock-based benefit plans to acquire a number of shares of common stock equal to 4.90% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering. In preparing the tables below, we assumed that stockholder and NYSDFS approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.92 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 13.20% for the shares of common stock, no dividend yield, an expected option term of 10 years and a risk-free rate of return of 2.69%.

 

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 4.90% and 1.96%, respectively, of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering (provided all common stock awarded in excess of the above limits is acquired in the secondary market) and that vest sooner than over a five-year period if the stock-based benefit plans are implemented more than one year following the completion of the offering.

 

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute 50% of the net offering proceeds to Pioneer Bank, and we will retain the remainder of the net offering proceeds. We will use a portion of the proceeds we retain to fund a loan to the employee stock ownership plan and retain the rest for future use.

 

The pro forma tables do not give effect to:

 

·withdrawals from deposit accounts at Pioneer Bank to purchase shares of common stock in the offering;

 

·our results of operations after the offering;

 

·increased fees that we would pay Sandler O’Neill & Partners, L.P. and other broker-dealers if we would have to conduct a syndicated community offering; or

 

·changes in the market price of the shares of common stock after the offering.

 

The following pro forma information may not be representative of the financial effects of the offering at the dates on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation account to be established by Pioneer Bank or, in the unlikely event of a liquidation of Pioneer Bank, to the tax effect of the recapture of the bad debt reserve.

  

 49 

 

  

  

At or For the Six Months Ended December 31, 2018

Based Upon the Sale at $10.00 Per Share of:

 
  

7,179,465

Shares

  

8,446,429

Shares

  

9,713,393

Shares

  

11,170,402

Shares (1)

 
   (Dollars in thousands, except per share amounts) 
                 
Gross proceeds of stock offering  $71,795   $84,464   $97,134   $111,704 
Plus: market value of shares issued to Pioneer Bancorp, MHC                
Plus: market value of shares contributed to charitable foundation   3,339    3,929    4,518    5,196 
Pro forma market capitalization  $75,134   $88,393   $101,652   $116,900 
                     
Gross proceeds of stock offering  $71,795   $84,464   $97,134   $111,704 
Less: expenses   2,108    2,223    2,338    2,471 
Estimated net proceeds   69,687    82,241    94,796    109,233 
Less: cash contribution to charitable foundation   (250)   (250)   (250)   (250)
Less: common stock purchased by employee stock ownership plan   (6,545)   (7,700)   (8,855)   (10,183)
Less: common stock purchased by stock-based benefit plans   (3,273)   (3,850)   (4,428)   (5,092)
Estimated net proceeds, as adjusted  $59,619   $70,441   $81,263   $93,708 
                     
For the Six Months Ended December 31, 2018                    
Consolidated net earnings:                    
Historical  $9,243   $9,243   $9,243   $9,243 
Pro forma income on net proceeds   554    654    755    871 
Pro forma capitalization of Pioneer Bancorp, MHC   (1)   (1)   (1)   (1)
Pro forma employee stock ownership plan adjustment (2)   (121)   (143)   (164)   (189)
Pro forma stock award adjustment (3)   (242)   (285)   (328)   (377)
Pro forma stock option plan adjustment (4)   (224)   (263)   (302)   (348)
Pro forma net income (5)(6)  $9,209   $9,205   $9,203   $9,199 
                     
Per share net income:                    
Historical  $0.58   $0.49   $0.43   $0.37 
Pro forma income on net proceeds   0.03    0.03    0.03    0.03 
Pro forma capitalization of Pioneer Bancorp, MHC                
Pro forma employee stock ownership plan adjustment (2)   (0.01)   (0.01)   (0.01)   (0.01)
Pro forma stock award adjustment (3)   (0.02)   (0.02)   (0.02)   (0.02)
Pro forma stock option plan adjustment (4)   (0.01)   (0.01)   (0.01)   (0.01)
Pro forma earnings per share (5)(6)  $0.57   $0.48   $0.42   $0.36 
                     
Stock price as a multiple of pro forma earnings per share   8.77x   10.42x   11.90x   13.89x
Shares used for calculating pro forma earnings per share   16,058,290    18,892,107    21,725,923    24,984,812 
                     
At December 31, 2018                    
Stockholders’ equity:                    
Historical  $126,394   $126,394   $126,394   $126,394 
Estimated net proceeds   69,687    82,241    94,796    109,233 
Less:  capitalization of MHC   (100)   (100)   (100)   (100)
Plus: market value of shares contributed to charitable foundation   3,339    3,929    4,518    5,196 
Less: expense of contribution to charitable foundation   (3,339)   (3,929)   (4,518)   (5,196)
Plus: tax benefit of contribution to charitable foundation   933    1,086    1,240    1,416 
Less: cash contribution to charitable foundation   (250)   (250)   (250)   (250)
Less: common stock acquired by employee stock ownership plan (2)   (6,545)   (7,700)   (8,855)   (10,183)
Less: common stock acquired by stock-based benefit plans (3)   (3,273)   (3,850)   (4,428)   (5,092)
Pro forma stockholders’ equity (7)  $186,846   $197,822   $208,797   $221,418 
                     
Intangible assets   (10,005)   (10,005)   (10,005)   (10,005)
Pro forma tangible stockholders’ equity   176,841    187,817    198,792    211,413 
                     
Stockholders’ equity per share:                    
Historical  $7.57   $6.43   $5.59   $4.87 
Estimated net proceeds   4.17    4.19    4.20    4.20 
                     
Less: capitalization of MHC   (0.01)   (0.01)        
Plus: market value of shares contributed to charitable foundation   0.20    0.20    0.20    0.20 
Less: market value of shares contributed to charitable foundation   (0.20)   (0.20)   (0.20)   (0.20)
Less: cash contribution to charitable foundation   (0.01)   (0.01)   (0.01)   (0.01)
Plus: tax benefit of contribution to charitable foundation   0.06    0.06    0.05    0.05 
Less: common stock acquired by employee stock ownership plan (2)   (0.39)   (0.39)   (0.39)   (0.39)
Less: common stock acquired by stock-based benefit plans (3)   (0.20)   (0.20)   (0.20)   (0.20)
Pro forma stockholders’ equity per share (7)  $11.19   $10.07   $9.24   $8.52 

 

 50 

 

 

  

At or For the Six Months Ended December 31, 2018

Based Upon the Sale at $10.00 Per Share of:

 
  

7,179,465

Shares

  

8,446,429

Shares

  

9,713,393

Shares

  

11,170,402

Shares (1)

 
   (Dollars in thousands, except per share amounts) 
Intangible assets per share   (0.60)   (0.51)   (0.44)   (0.39)
Pro forma tangible stockholders’ equity per share  $10.59   $9.56   $8.80   $8.13 
                     
Offering price as percentage of pro forma equity per share   89.37%   99.30%   108.23%   117.37%
Offering price as percentage of pro forma tangible stockholders’
equity per share
   94.43%   104.60%   113.64%   123.00%
Number of shares outstanding for pro forma book value per share calculations   16,696,428    19,642,857    22,589,286    25,977,679 

 

(footnotes begin on following page)

 

 51 

 

 

(1)As adjusted to give effect to an increase in the number of shares, which increase could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that 3.92% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Pioneer Bancorp, Inc. Pioneer Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Pioneer Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation—Stock Compensation—Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Pioneer Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 26.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 16,363, 19,250, 22,138 and 25,458 shares were committed to be released during the period at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and according to ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations.
(3)Assumes that one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 1.96% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the offering. The shares may be acquired directly from Pioneer Bancorp, Inc. or through open market purchases. Shares in the stock-based benefit plans are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by Pioneer Bancorp, Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 10.0% of the amount contributed to the plans is amortized as an expense during the six months ended December 31, 2018, and (iii) the plans’ expense reflects an effective combined federal and state tax rate of 26.0%. The issuance of authorized but unissued shares of common stock to fund these awards would dilute stockholders’ ownership and voting interests by approximately 1.9%.
(4)Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 4.90% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering. Stockholder approval of the plans may not occur earlier than six months after the completion of the offering. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.92 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an effective combined federal and state tax rate of 26.0%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the implementation of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 4.7%.
(5)Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and contributed to the charitable foundation and, according to ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the period. See footnote 1 above. The number of shares of common stock actually sold and the corresponding number of outstanding shares may be more or less than the assumed amounts.
(6)The following table shows the estimated after-tax expense associated with the contribution to the charitable foundation, as well as pro forma net income and pro forma net income per share assuming the contribution to the charitable foundation had been expensed during the six months ended December 31, 2018.

 

  

For the Six Months Ended December 31, 2018

Based upon the Sale at $10.00 Per Share of:

 
  

7,179,465

Shares

  

8,446,429

Shares

  

9,713,393

Shares

  

11,170,402

Shares

 
   (In thousands, except per share amounts) 
After-tax expense of stock and cash contribution to charitable foundation  $(2,656)  $(3,092)  $(3,528)  $(4,030)
Pro forma net income, adjusted for foundation contribution   6,553    6,113    5,675    5,169 
Pro forma net income per share   0.41    0.32    0.26    0.21 

 

The pro forma data assume that we will realize 100% of the income tax benefit as a result of the contribution to the charitable foundation based on a 26.0% combined federal and state tax rate. The realization of the tax benefit is generally limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

(7)The retained earnings of Pioneer Bank will be substantially restricted after the offering. See “Our Dividend Policy,” and “Supervision and Regulation—New York Banking Law and Supervision—Dividends.”

 

 52 

 

 

  

At or For the Year Ended June 30, 2018

Based upon the Sale at $10.00 Per Share of:

 
  

7,179,465

Shares

  

8,446,429

Shares

  

9,713,393

Shares

  

11,170,402

Shares (1)

 
   (Dollars in thousands, except per share amounts) 
                 
Gross proceeds of stock offering  $71,795   $84,464   $97,134   $111,704 
Plus: market value of shares issued to Pioneer Bancorp, MHC                
Plus: market value of shares contributed to charitable foundation   3,339    3,929    4,518    5,196 
Pro forma market capitalization  $75,134   $88,393   $101,652   $116,900 
                     
Gross proceeds of stock offering  $71,795   $84,464   $97,134   $111,704 
Less: expenses   2,108    2,223    2,338    2,471 
Estimated net proceeds   69,687    82,241    94,796    109,233 
Less: cash contribution to charitable foundation   (250)   (250)   (250)   (250)
Less: common stock purchased by employee stock ownership plan   (6,545)   (7,700)   (8,855)   (10,183)
Less: common stock purchased by stock-based benefit plans   (3,273)   (3,850)   (4,428)   (5,092)
Estimated net proceeds, as adjusted   59,619    70,441    81,263    93,708 
                     
For the Year Ended June 30, 2018                    
Consolidated net earnings:                    
Historical  $11,499   $11,499   $11,499   $11,499 
Pro forma income on net proceeds   1,107    1,308    1,509    1,741 
Pro forma capitalization of Pioneer Bancorp, MHC   (2)   (2)   (2)   (2)
Pro forma employee stock ownership plan adjustment (2)   (242)   (285)   (328)   (377)
Pro forma stock award adjustment (3)   (484)   (570)   (655)   (754)
Pro forma stock option plan adjustment (4)   (447)   (526)   (604)   (695)
Pro forma net income (5)(6)  $11,431   $11,424   $11,419   $11,412 
                     
Per share net income:                    
Historical  $0.72   $0.61   $0.53   $0.46 
Pro forma income on net proceeds   0.07    0.07    0.07    0.07 
Pro forma capitalization of Pioneer Bancorp, MHC                
Pro forma employee stock ownership plan adjustment (2)   (0.02)   (0.02)   (0.02)   (0.02)
Pro forma stock award adjustment (3)   (0.03)   (0.03)   (0.03)   (0.03)
Pro forma stock option plan adjustment (4)   (0.03)   (0.03)   (0.03)   (0.03)
Pro forma net income per share (5)(6)  $0.71   $0.60   $0.52   $0.45 
                     
Stock price as a multiple of pro forma earnings per share   14.08x   16.67x   19.23x   22.22x
Shares used for calculating pro forma earnings per share   16,074,653    18,911,357    21,748,061    25,010,270 
                     
At June 30, 2018                    
Stockholders’ equity:                    
Historical  $118,063   $118,063   $118,063   $118,063 
Estimated net proceeds   69,687    82,241    94,796    109,233 
Less: capitalization of Pioneer Bancorp, MHC   (100)   (100)   (100)   (100)
Plus: market value of shares contributed to charitable foundation   3,339    3,929    4,518    5,196 
Less: expense of contribution to charitable foundation   (3,339)   (3,929)   (4,518)   (5,196)
Less: cash contribution to charitable foundation   (250)   (250)   (250)   (250)
Plus: tax benefit of contribution to charitable foundation   933    1,087    1,240    1,416 
Less: common stock acquired by employee stock ownership plan (2)   (6,545)   (7,700)   (8,855)   (10,183)
Less: common stock acquired by stock-based benefit plans (3)   (3,273)   (3,850)   (4,428)   (5,092)
Pro forma stockholders’ equity (7)  $178,515   $189,491   $200,466   $213,087 
                     
Intangible assets   (10,167)   (10,167)   (10,167)   (10,167)
Pro forma tangible stockholders’ equity   168,348    179,324    190,299    202,920 
                     
Stockholders’ equity per share:                    
Historical  $7.07   $6.01   $5.23   $4.55 
Estimated net proceeds   4.17    4.19    4.20    4.20 
Less: capitalization of Pioneer Bancorp, MHC   (0.01)   (0.01)        
Plus: market value of shares contributed to charitable foundation   0.20    0.20    0.20    0.20 
Less: expense of contribution to charitable foundation   (0.20)   (0.20)   (0.20)   (0.20)
Less: cash contribution to charitable foundation   (0.01)   (0.01)   (0.01)   (0.01)
Plus: tax benefit of contribution to charitable foundation   0.06    0.06    0.05    0.05 
Less: common stock acquired by employee stock ownership plan (2)   (0.39)   (0.39)   (0.39)   (0.39)
Less: common stock acquired by stock-based benefit plans (3)   (0.20)   (0.20)   (0.20)   (0.20)
Pro forma stockholders’ equity per share (7)  $10.69   $9.65   $8.88   $8.20 

 

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At or For the Year Ended June 30, 2018

Based upon the Sale at $10.00 Per Share of:

 
  

7,179,465

Shares

  

8,446,429

Shares

  

9,713,393

Shares

  

11,170,402

Shares (1)

 
   (Dollars in thousands, except per share amounts) 
                 
Intangible assets   (0.61)   (0.52)   (0.45)   (0.39)
Pro forma tangible stockholders’ equity per share  $10.08   $9.13   $8.43   $7.81 
                     
Offering price as percentage of pro forma stockholders’ equity per share   93.55%   103.63%   112.61%   121.95%
Offering price as percentage of pro forma tangible stockholders’ equity per share   99.21%   109.53%   118.62%   128.04%
Number of shares outstanding for pro forma book value per share calculations   16,696,428    19,642,857    22,589,286    25,977,679 

 

(footnotes begin on following page)

 

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(1)As adjusted to give effect to an increase in the number of shares, which increase could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that 3.92% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Pioneer Bancorp, Inc. Pioneer Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Pioneer Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. ASC 718-40 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Pioneer Bank, the fair value of the common stock remains equal to the offering price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 26.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 32,275, 38,500, 44,275 and 50,916 shares were committed to be released during the year at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and according to ASC 718-40, only the employee stock ownership plan shares committed to be released during the year were considered outstanding for purposes of net income per share calculations.
(3)Assumes that one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 1.96% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the offering. The shares may be acquired directly from Pioneer Bancorp, Inc. or through open market purchases. Shares in the stock-based benefit plans are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by Pioneer Bancorp, Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended June 30, 2018, and (iii) the plans’ expense reflects an effective combined federal and state tax rate of 26.0%. The issuance of authorized but unissued shares of common stock to fund these awards would dilute stockholders’ ownership and voting interests by approximately 1.9%.
(4)Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 4.90% of the outstanding shares of common stock of Pioneer Bancorp, Inc. at the completion of the offering. Stockholder approval of the plans may not occur earlier than six months after the completion of the offering. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.92 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed combined federal and state tax rate of 26.0%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the implementation of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 4.7%.
(5)Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and contributed to the charitable foundation and, according to ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the year. See footnote 1 above. The number of shares of common stock actually sold and the corresponding number of outstanding shares may be more or less than the assumed amounts.
(6)The following table shows the estimated after-tax expense associated with the contribution to the charitable foundation, as well as pro forma net income and pro forma net income per share assuming the contribution to the charitable foundation had been expensed during the year ended June 30, 2018.

 

  

For the Year Ended June 30, 2018

Based upon the Sale at $10.00 Per Share of:

 
  

7,179,465

Shares

  

8,446,429

Shares

  

9,713,393

Shares

  

11,170,402

Shares

 
   (In thousands, except per share amounts) 
After-tax expense of stock and cash contribution to charitable foundation  $(2,656)  $(3,092)  $(3,528)  $(4,030)
Pro forma net income, adjusted for foundation contribution   8,775    8,332    7,891    7,382 
Pro forma net income per share   0.54    0.44    0.36    0.30 

 

The pro forma data assume that we will realize 100% of the income tax benefit as a result of the contribution to the charitable foundation based on a combined federal and state tax rate of 26.0%. The realization of the tax benefit is generally limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

(7)The retained earnings of Pioneer Bank will be substantially restricted after the offering. See “Our Dividend Policy,” and “Supervision and Regulation—New York Banking Law and Supervision—Dividends.”

 

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COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE CHARITABLE FOUNDATION

 

As reflected in the table below, if the charitable foundation is not funded in connection with the reorganization and offering, RP Financial estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be issued in the offering. At the minimum, midpoint, maximum, and adjusted maximum of the valuation range, our pro forma valuation is $167.0 million, $196.4 million, $225.9 million and $259.8 million, respectively, with the charitable foundation, as compared to $172.1 million, $202.5 million, $232.9 million and $267.8 million, respectively, without the charitable foundation. There is no assurance that if the charitable foundation were not funded, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

 

For comparative purposes only, set forth below are certain pricing ratios, financial data and ratios at and for the six months ended December 31, 2018 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, assuming the offering was completed at the beginning of the period, with and without the charitable foundation.

 

   Minimum of Offering Range   Midpoint of Offering Range   Maximum of Offering Range   Adjusted Maximum of
Offering Range
 
   With
Foundation
   Without
Foundation
   With
Foundation
   Without
Foundation
   With
Foundation
   Without
Foundation
   With
Foundation
   Without
Foundation
 
   (Dollars in thousands, except per share amounts) 
     
Estimated offering amount  $71,795   $77,456   $84,464   $91,125   $97,134   $104,794   $111,704   $120,513 
Pro forma market capitalization   75,134    77,456    88,393    91,125    101,652    104,794    116,900    120,513 
Estimated full value   166,964    172,125    196,429    202,500    225,893    232,875    259,777    267,806 
Total assets   1,347,419    1,352,039    1,358,395    1,363,798    1,369,370    1,375,556    1,381,991    1,389,077 
Total liabilities   1,160,573    1,160,573    1,160,573    1,160,573    1,160,573    1,160,573    1,160,573    1,160,573 
Pro forma stockholders’ equity   186,846    191,466    197,822    203,225    208,797    214,983    221,418    228,504 
Pro forma net income (1)   9,209    9,243    9,206    9,245    9,203    9,247    9,200    9,250 
Pro forma stockholders’ equity per share   11.19    11.11    10.07    10.04    9.24    9.23    8.52    8.53 
Pro forma net income per share   0.57    0.56    0.48    0.47    0.42    0.41    0.36    0.36 
                                         
Pro forma pricing ratios:                                        
Offering price as a percentage of pro forma stockholders’ equity per share   89.37%   90.01%   99.30%   99.60%   108.23%   108.34%   117.37%   117.23%
Offering price to pro forma net income per
share
   8.77x   8.93x   10.42x   10.64x   11.90x   12.20x   13.89x   13.89x
                                         
Pro forma financial ratios:                                        
Return on assets (annualized)   1.37%   1.37%   1.36%   1.36%   1.34%   1.34%   1.33%   1.33%
Return on equity (annualized)   9.86%   9.66%   9.31%   9.10%   8.82%   8.60%   8.31%   8.10%
Equity to assets   13.87%   14.16%   14.56%   14.90%   15.25%   15.63%   16.02%   16.45%
                                         
Total shares issued   16,696,428    17,212,500    19,642,857    20,250,000    22,589,286    23,287,500    25,977,679    26,780,625 

 

(footnotes on following page)

 

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(1)The following table shows the estimated after-tax expense associated with the contribution to the charitable foundation, as well as pro forma net income, pro forma net income per share, pro forma return on assets and pro forma return on stockholders’ equity assuming the contribution to the charitable foundation was expensed during the six months ended December 31, 2018.

 

   Minimum of
Offering Range
   Midpoint of
Offering Range
   Maximum of
Offering Range
   Adjusted
Maximum of
Offering Range
 
   (Dollars in thousands, except per share amounts) 
                 
Before-tax expense of stock and cash contribution to foundation  $(3,589)  $(4,179)  $(4,768)  $(5,446)
After-tax expense of stock and cash contribution to foundation  $(2,656)  $(3,092)  $(3,528)  $(4,030)
Pro forma net income  $6,553   $6,113   $5,675   $5,169 
Pro forma net income per share  $0.41   $0.32   $0.26   $0.21 
Pro forma tax benefit  $933   $1,087   $1,240   $1,416 
Offering price to pro forma net income per share   6.10    7.81    9.62    11.90 
Pro forma return on assets (annualized)   0.97%   0.90%   0.83%   0.75%
Pro forma return on equity (annualized)   7.02%   6.18%   5.44%   4.67%

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived in part from the consolidated financial statements that appear beginning on page F-1 of this prospectus and other consolidated financial statements that are not included herein. Please read the information in this section in conjunction with the business and financial information regarding Pioneer Bank and the consolidated financial statements that appear starting on page F-1 of this prospectus.

 

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.

 

Non-interest Income. Our primary sources of non-interest income are banking fees and service charges, insurance, employee benefits and wealth management services income. Our non-interest income also includes net gain or losses on sales and calls of 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 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.

 

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

 

Income Tax Expense. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities,

 

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computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.

 

Business Strategy

 

Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our 130-year history in the community, our knowledge of the local marketplace and our long-standing reputation for providing superior, relationship-based customer service. We believe we can distinguish ourselves by maintaining the culture of a local community bank, but offering the products of a comprehensive financial services provider by promoting and continuing to expand our insurance, consulting and wealth management businesses. The following are the key elements of our business strategy:

 

Continue our emphasis on commercial lending. Over the last five and a half years, we have increased our commercial loan portfolio, which consists of commercial real estate, commercial and industrial and commercial construction loans, consistent with safe and sound underwriting practices. This has had the benefits of increasing the yield on our loan portfolio while reducing the average term to repricing of our loans. However, we have sought to maintain an appropriate balance in the overall loan portfolio between our commercial and non-commercial loans in order to diversify our credit risk. At December 31, 2018, our commercial loan portfolio totaled $658.5 million, or 63.3% of total loans, compared with $389.1 million, or 61.0% of total loans, at June 30, 2014. We view the growth of commercial lending as a means of increasing our interest income and establishing relationships with local businesses, which offer a recurring and potentially broader source of fee income through commercial deposits, commercial insurance, and our employee benefits products and consulting. We also generally require that commercial and industrial loan borrowers establish a commercial deposit account with us, which assists our efforts to grow core deposits and cross-sell our other products and services. The additional capital raised in the offering will enable us to increase our originations of commercial real estate, commercial and industrial and commercial construction loans in our primary market area, and originate loans with larger balances that we intend to retain in our portfolio.

 

Diversify our products and services in order to increase non-interest income. We continue to seek ways of increasing our non-interest income by growing our financial services businesses. We initially entered into the wealth management services business by establishing Pioneer Financial Services, Inc. as a wholly-owned subsidiary of Pioneer Bank (which operates under the name Pioneer Wealth Management). We substantially grew this business with the acquisition of substantially all of the operating assets of Ward Financial Management, LTD in 2018. At December 31, 2018, Pioneer Financial Services, Inc. had $481.5 million of assets under management. We also sell commercial and personal insurance products and provide employee benefits products and services through our wholly-owned subsidiary, Anchor Agency, Inc., which we acquired in 2016. We expanded our employee benefits products and services business through our acquisition in 2017 of substantially all of the operating assets of Capital Region Strategic Employee Benefits Services, LLC, an employee benefits and consulting firm. The growth of our financial services businesses has contributed to the increase in non-interest income to $3.3 million for the six months ended December 31, 2018 compared to $2.4 million for the six months ended December 31, 2017 and to $5.1 million for fiscal 2018 compared to $3.7 million for fiscal 2017. We believe that there will be opportunities to cross-sell these products to our deposit and borrower customers which may further increase our non-interest income, and also to cross-sell our banking services and products to customers and clients of Pioneer Financial Services, Inc. and Anchor Agency, Inc. We intend to consider future acquisition opportunities to expand our wealth management activities, including the amount of the assets that we have under management, insurance or other complementary financial services businesses. On April 24, 2019, Pioneer Bank entered into a stock purchase agreement with Jaeger & Flynn Associates, Inc., a New York insurance agency. For information regarding this proposed acquisition, please see “Recent Developments.”

 

Increase our Share of Lower-Cost Core Deposits. We continue to emphasize offering core deposits (demand deposit accounts, savings accounts and money market accounts) to businesses, municipalities and individuals located in our market area. Core deposits represent our best opportunity to develop customer relationships that enable us to cross-sell the products and services of our complementary subsidiaries. We attract and retain transaction accounts by offering competitive products and rates and providing quality customer service. Our core deposits increased $403.7 million to $990.9 million at December 31, 2018 from $587.1 million at June 30,

 

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2014. At December 31, 2018, core deposits comprised 88.9% of our total deposits. Core deposits are our least costly source of funds which improves our interest rate spread and also contributes non-interest income from account- related services.

 

Strategically Grow our Balance Sheet. We believe there is a large customer base in our market that prefers doing business with local institutions and may be dissatisfied with the service they receive from the larger regional banks. By offering personalized customer service, along with our extensive knowledge of our local markets and employees who have strong relationships with our customers which leads to referrals and repeat business, we believe we can leverage these strengths to attract and retain customers. We have recently undergone a significant rebranding effort and updated our branch layout, website and other technology infrastructure that prioritizes the customer experience and moves away from the traditional single branch channel. We also believe we can capitalize on commercial deposit and personal banking relationships derived from an increase in commercial real estate and commercial business lending. Based on the foregoing, our attractive market area and strategic investment in technology to enhance the customer experience, we believe we are well-positioned to increase our balance sheet, particularly loans and deposits.

 

Continue to Emphasize Operating Efficiencies and Cost Controls. Despite significant growth of our loan portfolio, product offerings and financial services businesses in recent years, we have remained focused on expense control while increasing our net income. We remain disciplined in our approach to non-interest expenses by identifying cost savings opportunities such as renegotiating key third-party contracts and reducing other operating expenses. Our efficiency ratio was 60.0% (annualized) during the six months ended December 31, 2018, compared to 79.4% during the year ended June 30, 2014. While we expect that our non-interest expenses will increase when we become a public company, we intend to continue to diligently monitor and control expenses as we focus our efforts on continued growth. In order to support our growth in a cost-effective way, we plan to continue to invest prudently in technology to help improve our operational infrastructure.

 

Maintain Disciplined Underwriting. We emphasize a disciplined credit culture based on intimate knowledge of the market, close ties to our customers, sound underwriting standards and experienced loan officers. We are committed to actively monitoring and managing all segments of our loan portfolio in an effort to proactively identify and mitigate credit risks within the portfolio. At December 31, 2018, non-performing assets totaled $11.8 million, which represented 0.92% of total assets. At December 31, 2018, there were $5.5 million of non-performing commercial real estate loans and $137,000 of non-performing commercial and industrial loans.

 

Anticipated Increase in Non-interest Expense

 

Following the completion of the reorganization and stock offering, our non-interest expense is expected to increase because of the increased costs associated with operating as a public company, and the increased compensation expenses associated with the purchase of shares of common stock by our employee stock ownership plan and the possible implementation of one or more stock-based benefit plans, if approved by our stockholders, no earlier than six months after the completion of the reorganization and stock offering. For further information, see “Summary—Our Officers, Directors and Employees Will Receive Additional Benefits and Compensation after the Offering;” “Risk Factors—Risks Related to the Offering—Our stock-based benefit plans, if implemented, will increase our expenses and reduce our income;” and “Management—Benefits to be Considered Following Completion of the Stock Offering.”

 

Summary of 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, which are presented in the Notes to the consolidated financial statements. 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.

 

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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.

 

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

 

Management 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. See Note 1 to the Notes to the consolidated financial statements for a complete discussion of the allowance for loan losses.

 

Income Taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for 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 December 31, 2018, no valuation allowance was required.

 

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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. See Note 12 to the Notes to our consolidated financial statements for a complete discussion of income taxes.

 

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. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology we utilize can be found in Note 14 to the Notes to the consolidated financial statements.

 

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 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 bank 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 income. 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 plan provides for defined benefits based on years of service and final average salary. For further detail on our pension obligations, including the significant assumptions used by management, see Note 11 to the Notes to the consolidated financial statements.

 

 

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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 Six Months Ended December 31, 
   2018   2017 
   Average
Outstanding
Balance
   Interest   Average
Yield/Cost
(4)
   Average
Outstanding
Balance
   Interest   Average
Yield/Cost
(4)
 
   (Dollars in thousands) 
     
Interest-earning assets:                              
Loans  $1,022,324   $24,461    4.80%  $956,389   $21,150    4.43%
Securities   112,174    1,269    2.26%   78,028    574    1.46%
Interest-earning deposits   58,104    572    1.96%   78,298    522    1.33%
Other   1,116    30    5.40%   804    36    9.08%
Total interest-earning assets   1,193,718    26,332    4.42%   1,113,519    22,282    4.01%
Non-interest-earning assets   112,071              102,815           
Total assets  $1,305,789             $1,216,334           
                               
Interest-bearing liabilities:                              
Demand deposits  $104,775   $165    0.31%  $96,524   $98    0.20%
Savings deposits   244,304    63    0.05%   240,869    62    0.05%
Money market deposits   331,041    780    0.47%   322,645    568    0.35%
Certificates of deposit   127,002    895    1.40%   129,460    714    1.10%
Total interest-bearing deposits   807,122    1,903    0.47%   789,498    1,442    0.36%
Borrowings   5,163    69    2.67%   190    1    1.05%
Other   7,904    81    2.04%   3,837    38    1.97%
Total interest-bearing
liabilities
   820,189    2,053    0.49%   793,525    1,481    0.37%
Non-interest-bearing liabilities   362,746              315,885           
Total liabilities   1,182,935              1,109,410           
Total net worth   122,852              106,924           
Total liabilities and net worth  $1,305,787             $1,216,334           
Net interest income       $24,279             $20,801      
Net interest rate spread (1)             3.93%             3.64%
Net interest-earning assets (2)  $373,529             $319,994           
Net interest margin (3)             4.07%             3.74%
Average interest-earning assets
to interest-bearing liabilities
   145.54%             140.33%          

 

 

(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.

 

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   For the Years Ended June 30, 
   2018   2017   2016 
   Average
Outstanding
Balance
   Interest   Average
Yield/Cost
   Average
Outstanding
Balance
   Interest   Average
Yield/Cost
   Average
Outstanding
Balance
   Interest   Average
Yield/Cost
 
   (Dollars in thousands) 
Interest-earning assets:                                             
Loans  $969,624   $43,649    4.50%  $869,816   $36,174    4.16%  $740,794   $30,782    4.16%
Securities   82,514    1,367    1.66%   100,455    1,225    1.22%   110,667    1,234    1.11%
Interest-earning deposits   91,941    1,408    1.53%   14,230    117    0.82%   16,913    69    0.41%
Other   816    62    7.60%   1,953    105    5.38%   1,944    76    3.91%
Total interest-earning assets   1,144,895    46,486    4.06%   986,454    37,621    3.81%   870,328    32,161    3.69%
Non-interest-earning assets   102,942              95,973              78,089           
Total assets  $1,247,837             $1,082,427             $948,417           
                                              
Interest-bearing liabilities:                                             
Demand deposits  $106,309    249    0.23%  $56,208    79    0.14%  $43,626    31    0.07%
Savings deposits   241,357    124    0.05%   233,843    120    0.05%   219,157    112    0.05%
Money market deposits   328,242    1,231    0.38%   262,754    800    0.30%   214,301    470    0.22%
Certificates of deposit   129,495    1,491    1.15%   126,988    1,156    0.91%&nb