Pioneer Bancorp, Inc./MD (PBFS) FY 2024 MD&A

ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reflects our audited 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 audited consolidated financial statements that appear beginning on page 74 of this Annual Report on Form 10-K. Please read the information in this section in conjunction with the business and financial information regarding the Company, the Bank and the audited consolidated financial statements that appear starting on page 74 of this Annual Report on Form 10-K.

Overview

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

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

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

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

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

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

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

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

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

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

Professional fees include legal and other consulting expenses.

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Litigation-related expense includes expenses related to legal proceedings, exclusive of legal fees and expenses.

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

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

Select Financial Data

The following tables set forth selected historical financial and other data for the Company on a consolidated basis at and for the years ended June 30, 2024 and 2023.

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Recent Developments

Pioneer Commercial Bank Merger

Pioneer Commercial Bank is a New York-chartered limited-purpose commercial bank wholly owned by the Bank. Prior to our conversion to a national bank, the limited-purpose commercial bank subsidiary enabled us to establish banking relationships with municipalities and other public entities for deposits throughout our market area which was otherwise prohibited by law for a New York chartered savings bank. On September 16, 2024, the OCC approved the Commercial Bank Merger. The Commercial Bank Merger is expected to close on October 1, 2024. Following the completion of the Commercial Bank Merger, the Bank will directly offer full municipal deposit banking services.

Stock Repurchase Program

On May 21, 2024, the Company announced that it had adopted a stock repurchase program.  Under the repurchase program, the Company may repurchase up to 1,298,883 shares of its common stock.

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Shares may be repurchased in open market or private transactions, through block trades, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the SEC. The repurchase program has no expiration date.

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Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance.  Open market purchases will be subject to the limitations set forth in Rule 10b-18 of the SEC and other applicable legal requirements.

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The timing and amount of share repurchases under the repurchase program may be suspended, terminated or modified by the Company at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The Company is not obligated to repurchase any particular number of shares or any shares in any specific time period. For additional details regarding the stock repurchase program see “Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.

Charter Conversion

On April 1, 2024, the Bank completed its conversion to a national bank following approval of the conversion by the OCC, the regulator of national banks. The Bank now operates under the name “Pioneer Bank, National Association” and is subject to the supervision, regulation and examination by the OCC. The Bank continues to operate in the same mutual holding company structure as it did prior to the conversion, with the Company and Pioneer Bancorp, MHC as the Bank’s parent bank holding companies.

Balance Sheet Repositioning

On December 28, 2023, the Company completed a balance sheet repositioning, by selling $74.5 million of lower-yielding available for sale securities with an average book yield of approximately 0.83% and weighted average remaining life of 2.2 years, recognizing a pre-tax loss on the sale of $5.6 million. Proceeds from the sale were initially redeployed into interest-earning deposits with banks with an average book yield of 5.40% and ultimately the Company reinvested the proceeds into loans and securities available for sale yielding current market rates during the quarter ended March 31, 2024. The transaction had a neutral impact on shareholders’ equity and book value per share as of the date of the sale, as unrealized losses on securities available for sale were already accounted for as a deduction to shareholders’ equity. Beginning in the quarter ended March 31, 2024, this transaction began to have a favorable impact on the Company’s net income, net interest margin, return on average assets, and return on average equity.

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Settlement Agreement

As previously disclosed, on December 1, 2020, the Bank filed a complaint in the Supreme Court of the State of New York (the “Action”) against Teal, Becker & Chiaramonte, CPAs, P.C. (“TBC”), Mr. Pasquale M. Scisci and Mr. Vincent Commisso (collectively, with TBC, the “TBC Parties”), alleging professional malpractice by the TBC Parties in auditing the annual consolidated financial statements of Valuewise Corporation and its subsidiaries (“Valuewise Entities”) for the fiscal years 2010 to 2018.

The Bank asserted that the TBC Parties were aware that the primary, if not the exclusive, reason the Valuewise Entities engaged TBC to audit their financial statements was to provide the Bank with accurate financial information that the Bank would rely on in evaluating whether to provide loans to the Valuewise Entities. The Bank contended that, among other matters, Mr. Michael Mann used the Valuewise Entities to defraud the Bank. This was because the Bank relied on the unqualified “clean” opinions on the financial statements of the Valuewise Entities for fiscal years 2010 to 2018 issued by the TBC Parties in continuing to loan money to the Valuewise Entities. The TBC Parties filed their answer to the Bank’s complaint on February 12, 2021. On February 28, 2022, the TBC Parties filed a motion to dismiss the complaint. On October 4, 2022, the Court entered a decision and order denying the motion in its entirety.

On November 15, 2023, the Bank, on the one hand, and the TBC Parties, on the other hand, entered into a settlement agreement (the “Settlement Agreement”), pursuant to which the parties agreed to resolve and settle all disputes and potential claims which exist or may exist among them, including without limitation those claims asserted in the Action, as more specifically set forth in, and subject to the terms and conditions of, the Settlement Agreement. Pursuant to the Settlement Agreement, the TBC Parties made a payment of $5.95 million to the Bank, in exchange for which the Bank caused the Action to be dismissed with prejudice.

Acquisition

On July 13, 2023, the Company, through its subsidiary, Pioneer Financial Services, Inc., completed the acquisition of certain assets of Hudson Financial LLC, a company engaged in the wealth management services business in the Hudson Valley Region of New York. The Company paid an aggregate of $2.0 million in cash and recorded $1.5 million in contingent consideration payable to acquire the assets and recorded a $1.4 million customer list intangible asset and goodwill in the amount of $2.1 million in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since the acquisition date. This acquisition was made to expand the Company’s wealth management services activities.

Mann Entities Related Fraudulent Activity

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

While the Bank has been reimbursed in the past by its insurer for certain legal fees and expenses associated with this matter, the Bank does not expect to recognize any such insurance recoveries in the future, as the applicable policy limits and deductibles have been exceeded. For additional details regarding legal, other proceedings and related matters see “Item 8 – Financial Statements and Supplementary Data – Note 14 – Commitments and Contingent Liabilities – Legal Proceedings and Other Contingent Liabilities.”

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Business Strategy

Our business strategy is to operate as a well-capitalized and profitable diversified financial institution focused on our relationship-based model of customer engagement which we believe will result in growth through new customer acquisition, deepened existing customer relationships, and further market penetration.  At Pioneer, we are “More Than a Bank” which means that we are focused on growing our broad range of financial products and services for individual, business and municipal customers by continuing to expand our banking, insurance, consulting, and wealth management businesses.  We are fully grounded in the belief the future of financial services relies heavily on providing an unparalleled level of personal service and a comprehensive approach to our customer’s finances. Our sales enablement strategy reflects that approach and through this client-centric endeavor, we bring our products, services, and expertise to our customers in a seamless and efficient manner. We distinguish ourselves by maintaining the culture of a local community financial institution, emphasizing an engaged workforce, creating positive community impact all while offering a full range of comprehensive financial products and services, in a consultative approach. We believe that we have a competitive advantage in the markets we serve because of our over 130-year history in the community, our knowledge of the local marketplace and our long-standing reputation for providing superior, relationship-based customer service.  The following are the key elements of our business strategy:

Strategically grow through deepening customer relationships. Integral to our strategy is our belief that there is a large customer base in our market that prefers doing business with local institutions that are grounded in the success of their customers and communities. These customers are seeking more relationship-based service than they receive from the larger regional banks and other financial services providers. By offering personalized relationship-based customer service, along with our extensive knowledge of our local markets and a wide range of product offerings, we believe it has allowed us to establish strong relationships with our customers. We believe we can continue to leverage these strengths to attract and retain customers. We have embarked on a sales enablement strategy that is focused on engaging in a multidisciplinary approach to customer interaction.  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 strategically grow our balance sheet.

Continue our emphasis on commercial customer acquisition, with a targeted focus on commercial lending while maintaining an appropriate balance in the overall loan portfolio. We view the long term growth of our commercial loan portfolio, consistent with safe and sound underwriting practices, as a means of increasing our interest income and establishing relationships with local businesses. These relationships will offer a recurring and we believe broader source of fee income through commercial deposits, commercial insurance and employee benefits products and consulting. We generally require that commercial borrowers establish a commercial deposit account with us, which assists our efforts to grow core deposits and cross-sell our other products and services. Our focus on commercial lending also has the benefits of increasing the yield on our loan portfolio while reducing the average term to repricing of our loans. However, we will continue to maintain an appropriate balance in the overall loan portfolio between our commercial and non-commercial loans to diversify our credit risk. Through our strategic partnership with the Mortgage Banking Company we are able to decide whether we want to purchase residential mortgage loans originated by the Mortgage Banking Company for our portfolio. During the year ended June 30, 2024 we strategically increased our portfolio of non-commercial loans, in part to take advantage of the substantial recent increase in market rates, through the purchases of residential mortgage loans, increasing that portfolio by $170.6 million or 36.8% as compared to the prior year.

Diversify our products and services to increase non-interest income. Our strategy includes further expansion of our customer base, deepening relationships and a focus on non-interest income by growing our financial services businesses. We sell commercial and personal insurance products and provide employee benefits products and services through our wholly-owned subsidiary, Pioneer Insurance Agency, Inc., which we acquired in 2016, and grew with our acquisition of Capital Region Strategic Employee Benefits Services, LLC employee benefits and consulting business in 2017. We entered into the wealth management services business by establishing Pioneer Financial Services, Inc. in 1997 as a wholly-owned subsidiary of the Bank (which operates under the name Pioneer Wealth Management). We substantially grew our wealth management services business with the acquisition of Ward Financial Management, LTD’s business in 2018, three wealth management practices’ businesses in fiscal year 2022 and with the acquisition of certain assets of Hudson Financial, LLC in fiscal year 2024. At June 30, 2024, Pioneer Financial Services, Inc. had $1.13 billion of assets under management. 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

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customers and clients of Pioneer Insurance Agency, Inc. and Pioneer Financial Services, Inc. We intend to consider future acquisition opportunities to expand our insurance, wealth management or other complementary financial services businesses.

Increase our Share of Lower-Cost Core Deposits. 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 continue to emphasize offering core deposits (demand deposit accounts, savings accounts and money market accounts) to individuals, businesses and municipalities located in our market area. We attract and retain transaction accounts by offering competitive products and rates and providing quality customer service. At June 30, 2024, core deposits comprised 89.2% 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.

Ongoing focus on our commitment to an engaged workforce.  We maintain our focus on ways to further enhance the employee engagement of our team.  We seek to retain our position as an employer of choice for top talent in the Capital Region through a focus on career and leadership development opportunities, and attention to providing a robust and competitive benefits package for our employees.  We provide opportunities for our employees to engage in meaningful ways in the community and expect to enhance this engagement through the philanthropic efforts of the Pioneer Bank Charitable Foundation.

Critical Accounting Policies and Estimates

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

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

The following represent our critical accounting policies and estimates:

Allowance for Credit Losses. The allowance for credit losses consists of the allowance for credit losses on loans, securities held to maturity and unfunded commitments. Effective July 1, 2023, the measurement of Current Expected Credit Losses (“CECL”) on financial instruments requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, macroeconomic variables (e.g., civilian unemployment and U.S. gross domestic product (“GDP”)), and reasonable and supportable forecasts from the Federal Open Market Committee (“FOMC”) that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the estimated fair value of the collateral, as applicable. The allowance for credit losses on loans and securities held to maturity, as reported in our consolidated statements of condition, are adjusted by a provision for credit losses, which is recognized in earnings, and reduced by the

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charge-offs, net of recoveries. The allowance for credit losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws and is included in other liabilities on the Company’s consolidated statements of condition. All loan information presented as of June 30, 2023 or a prior date is presented in accordance with previously applicable GAAP (the incurred loss method).

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

Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolios. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain, including making significant estimates of current credit risks and trends using existing quantitative and qualitative information, and reasonable and supportable forecasts of future economic conditions, which may undergo frequent and material changes. Subsequent evaluations of the then-existing loan portfolios, in light of changes in economic conditions, new information regarding existing loans and other factors, may result in significant changes in the allowance for credit losses in those future periods. For example, changes to the FOMC’s forecasted civilian unemployment rate and year-over-year U.S. GDP growth could have a material impact on the model’s estimation of the allowance for credit losses on loans. An immediate increase of 100 basis points in the FOMC’s projected rate of civilian unemployment and a decrease of 100 basis points in the FOMC’s projected rate of U.S. GDP growth would increase the model’s total calculated allowance for credit losses on loans by $1.1 million, or 5.2%, assuming qualitative adjustments are kept at current levels. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. Additionally, changes in those factors and inputs may not occur at the same rate and inputs may be directionally inconsistent, such that improvements in one factor may offset deterioration in in others. Going forward, the impact of utilizing the CECL approach to calculate the allowance for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolios, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the allowance for credit losses, and therefore, greater volatility to our reported earnings.

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

Legal Proceedings and Other Contingent Liabilities.  In the ordinary course of business, we are involved in a number of legal, regulatory, governmental and other proceedings, claims or investigations that could result in losses, including damages, fines and/or civil penalties, which could be significant concerning matters arising from the conduct of our business. In view of the inherent difficulty of predicting the outcome of such matters, particularly where the claimants seek large or indeterminate damages, we generally cannot predict the eventual outcome of the pending matters, timing of the ultimate resolution of these matters, or eventual loss, fines or penalties related to each pending matter. In accordance with applicable accounting guidance, we establish an accrued liability when those matters present loss contingencies that are both probable and estimable. Our estimate of potential losses will change over time and the actual losses may exceed these estimates, and there may be an exposure to loss in excess of any amounts accrued. As a matter develops, management, in conjunction with any outside counsel handling the matter, evaluate on an ongoing basis whether such matter presents a loss contingency that is probable and estimable; or where a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, whether it is possible to estimate a range of possible loss. Once the loss contingency is deemed to be both probable and estimable, we establish an accrued liability and record a corresponding amount of litigation-related expense. We continue to monitor the matters for further developments, including our

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interactions with various regulatory agencies with supervisory authority over us, that could affect the amount of the accrued liability that has been previously established. These estimates are based upon currently available information and are subject to significant judgment, a variety of assumptions and known and unknown uncertainties.  The matters underlying the accrued liability and estimated range of possible losses are unpredictable and may change from time to time, and actual losses may vary significantly from the current estimate and accrual which could have a material negative effect on our financial results.  The estimated range of possible loss does not represent our maximum loss exposure.

Average Balances and Yields

The following table sets forth average balances, average yields and costs, and certain other information for the years 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 costs and fees, discounts, and premiums that are amortized or accreted to interest income or interest expense, as applicable.

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Rate/Volume Analysis

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

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Comparison of Financial Condition at June 30, 2024 and June 30, 2023

Total Assets. Total assets of $1.90 billion at June 30, 2024 increased $39.2 million, or 2.1%, from $1.86 billion at June 30, 2023. The increase was due primarily to an increase of $199.9 million, or 17.5%, in net loans receivable, an increase of $14.7 million, or 9.8%, in cash and cash equivalents and an increase of $1.1 million, or 4.8%, in securities held to maturity, offset in part by a decrease of $174.3 million, or 40.4%, in securities available for sale. Since June 30, 2023, we continued to shift the composition of interest-earning assets from securities available for sale to net loans receivable.

Cash and Cash Equivalents. Total cash and cash equivalents of $165.2 million at June 30 2024, increased $14.7 million, or 9.8%, from $150.5 million at June 30, 2023.

Securities Available for Sale. Total securities available for sale of $257.4 million at June 30, 2024 decreased $174.3 million, or 40.4%, from $431.7 million at June 30, 2023. The decrease was primarily due to maturities of $143.5 million and sales of $74.5 million, offset in part by purchases of U.S. Government and agency obligations and municipal obligations of $32.7 million and a decrease in net unrealized losses of $14.9 million (including a $5.6 million decrease related to losses realized from the sale of securities available for sale described in “Recent Developments”) during the year ended June 30, 2024.

Securities Held to Maturity. Total securities held to maturity of $25.1 million at June 30, 2024 increased $1.1 million, or 4.8%, from $23.9 million at June 30, 2023. The increase was primarily due to purchases of $4.1 million offset in part by maturities of $2.7 million and a provision for credit losses of $262,000 during the year ended June 30, 2024.

Net Loans Receivable. Net loans receivable of $1.34 billion at June 30, 2024 increased $199.9 million, or 17.5%, from $1.14 million at June 30, 2023. By loan category, residential mortgage loans increased by $170.6 million, or 36.8%, to $633.8 million at June 30, 2024 from $463.2 million at June 30, 2023, commercial construction loans increased by $25.7 million, or 27.7%, to $118.4 million at June 30, 2024 from $92.7 million at June 30, 2023, commercial and industrial

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loans increased by $3.9 million, or 4.0%, to $101.2 million at June 30, 2024 from $97.3 million at June 30, 2023, and home equity loans and lines of credit increased by $7.3 million, or 8.5%, to $92.8 million at June 30, 2024 from $85.5 million at June 30, 2023. These increases were partially offset by a decrease in commercial real estate loans of $5.0 million, or 1.2%, to $406.2 million at June 30, 2024 from $411.2 million at June 30, 2023, and a decrease in consumer loans of $3.3 million, or 19.3%, to $13.5 million at June 30, 2024 from $16.8 million at June 30, 2023.

The increase in residential mortgage loans was related to the Bank’s asset allocation shift, using investment securities cash flow and cash to fund higher yielding assets. The Bank’s relationship with the Mortgage Banking Company facilitated a significant increase in residential mortgage loan volume, despite the higher interest rate environment. The increase in commercial construction loans was due to funding of increased construction commitments. The increase in home equity loans and lines of credit was due to increased utilization rates of home equity lines of credit. The decrease in commercial real estate loans was related to loan payoffs outpacing loan originations.

Deposits. Total deposits of $1.55 billion at June 30, 2024 increased $8.4 million, or 0.5%, from $1.54 billion at June 30, 2023. By deposit category, demand accounts increased by $19.2 million, or 13.8%, to $158.0 million at June 30, 2024 from $138.8 million at June 30, 2023, money market accounts increased by $50.7 million, or 11.0%, to $513.6 million at June 30, 2024 from $462.9 million at June 30, 2023, and certificate of deposits increased by $50.0 million, or 42.8%, to $167.0 million at June 30, 2024 from $117.0 million at June 30, 2023, offset in part by a decrease in non-interest-bearing demand accounts of $80.8 million, or 15.4%, to $445.3 million at June 30, 2024 from $526.1 million at June 30, 2023, and a decrease in savings accounts of $30.7 million, or 10.3%, to $266.3 million at June 30, 2024 from $297.0 at June 30, 2023. The increase in certificates of deposit was primarily related to a migration of funds from non-interest-bearing demand, savings, and other lower rate interest-bearing accounts. The increase in demand accounts and money market accounts was primarily related to growth in municipal and commercial deposits and a migration of funds from non-interest bearing demand, savings and other lower rate interest-bearing accounts. The decrease in non-interest-bearing demand and savings accounts was primarily related to migration of funds to higher interest-bearing accounts.

Total Shareholders’ Equity. Total shareholders’ equity of $296.5 million at June 30, 2024 increased $29.8 million, or 11.2%, from $266.7 million at June 30, 2023 primarily as a result of net income of $15.3 million, a decrease in accumulated other comprehensive loss of $14.5 million, and the net increase of $507,000 related to the day-one CECL adjustment, partially offset by the repurchase of common stock of $1.1 million.

Comparison of Operating Results for the Years Ended June 30, 2024 and June 30, 2023

General.  Net income decreased by $6.6 million, or 30.5%, to $15.3 million for the year ended June 30, 2024 from $21.9 million for the year ended June 30, 2023. The decrease was primarily due to a $8.9 million increase in non-interest expense and a $2.7 million increase in the provision for credit losses, partially offset by a $2.2 million increase in non-interest income, a $1.0 million increase in net interest income and a $1.8 million decrease in income tax expense.

Interest and Dividend Income.  Interest and dividend income increased $17.3 million, or 24.3%, to $88.3 million for the year ended June 30, 2024, from $71.0 million for the year ended June 30, 2023 due to increases in interest income on loans and interest-earning deposits and other. The increase was the result of a 99 basis points increase in the average yield on interest-earning assets to 5.02% for the year ended June 30, 2024, from 4.03% for the year ended June 30, 2023, partially offset by a decrease in the average balance of interest-earning assets of $1.9 million. The increase in the average yield on interest-earning assets was driven by an increase in variable rate loan yields and yields on interest-earning deposits with banks due to the current higher interest rate environment, as well as due to market related increases in interest rates on new loans and an asset allocation shift, using investment securities’ cash flow to fund higher yielding assets. Average interest-earning assets of $1.76 billion for the year ended June 30, 2024 decreased by $1.9 milllion from the year ended June 30, 2023.

Interest income on loans increased $17.2 million, or 31.0%, to $72.4 million for the year ended June 30, 2024 from $55.2 million for the year ended June 30, 2023. Interest income on loans increased due to a 51 basis points increase in the average yield on loans to 5.72% for the year ended June 30, 2024 from 5.21% for the year ended June 30, 2023, coupled with a $206.2 million increase in the average balance of loans to $1.27 billion for the year ended June 30, 2024 from $1.06 billion for the year ended June 30, 2023. The increase in average yield on loans was primarily due to loans tied

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to variable short-term rates which increased during the year ended June 30, 2024 as well as due to market related increases in interest rates on new loans. The increase in the average balance of loans was principally due to purchases of residential mortgage loans.

Interest income on securities decreased $125,000, or 1.3%, to $9.8 million for the year ended June 30, 2024 from $9.9 million for the year ended June 30, 2023. Interest income on securities decreased due to a $144.2 million decrease in the average balance of securities to $382.3 million for the year ended June 30, 2024 from $526.5 million for the year ended June 30, 2023, partially offset by a 67 basis points increase in the average yield on securities to 2.55% for the year ended June 30, 2024 from 1.88% for the year ended June 30, 2023. The decrease in the average balance of securities was due to the sales of U.S. government and agency securities, and maturities of U.S. government and agency and municipal obligation securities, outpacing purchases during the year ended June 30, 2024, in conjunction with an asset allocation shift, using investment securities’ cash flow to fund higher yielding assets. The increase in average yield on securities was due to higher market rates of interest for new securities that were purchased during the year ended June 30, 2024 partially replacing the sale and scheduled maturities of lower yielding U.S. government and agency and municipal obligation securities.

Interest income on interest-earning deposits with banks and other increased $261,000, or 4.4%, to $6.2 million for the year ended June 30, 2024 from $5.9 million for the year ended June 30, 2023. Interest income on interest-earning deposits with banks and other increased due to a 212 basis points increase in the average yield on interest-earning deposits with banks and other to 5.47% for the year ended June 30, 2024 from 3.35% for the year ended June 30, 2023 primarily due to an increase in yields on interest-earning deposits with banks due to higher market interest rates, partially offset by a decrease of $63.9 million in average balances on interest-earning deposits with banks and other to $113.1 million for the year ended June 30, 2024 from $177.0 million for the year ended June 30, 2023 related to the shift in composition of interest-earning assets from cash and cash equivalents to loans.

Interest Expense.  Interest expense increased $16.3 million, or 297.0%, to $21.8 million for the year ended June 30, 2024 from $5.5 million for the year ended June 30, 2023 as a result of an increase in interest expense on deposits, as well as, on borrowings and other. The increase was primarily due to a 148 basis points increase in the average cost of interest-bearing liabilities to 2.01% for the year ended June 30, 2024 from 0.53% for the year ended June 30, 2023, as well as, a shift in the mix of interest-bearing liabilities to higher interest rate liability accounts.

Interest expense on interest-bearing deposits increased $16.1 million, or 347.4%, to $20.7 million for the year ended June 30, 2024 from $4.6 million for the year ended June 30, 2023. Interest expense on interest-bearing deposits increased primarily due to a 149 basis points increase in the average cost of interest-bearing deposits to 1.95% for the year ended June 30, 2024 from 0.46% for the year ended June 30, 2023 and an increase in average interest-bearing deposits of $50.0 million to $1.06 billion for the year ended June 30, 2024 from $1.01 billion for the year ended June 30, 2023. The increase in the average cost of interest-bearing deposits was primarily due to the repricing of certain interest-bearing deposit accounts in response to changes in market interest rates and the higher interest rate environment, as well as a shift in the mix of deposits towards higher cost interest-bearing accounts.

Interest expense on borrowings and other liabilities increased $259,000 to $1.1 milion for the year ended June 30, 2024 from $872,000 for the year ended June 30, 2023 due primarily to increases in average borrowings and other liabilities of $2.1 million to $26.4 million for the year ended June 30, 2024 from $24.3 million for the year ended June 30, 2023, as well as the average cost of borrowings and other liabilities of 69 basis points as a result of the higher interest rate environment.

Net Interest Income.  Net interest income increased $972,000, or 1.5%, to $66.5 million for the year ended June 30, 2024 compared to $65.5 million for the year ended June 30, 2023. The increase was primarily due to an increase in the average yield on interest-earning assets of 99 basis points, partially offset by a decrease in the average balance of interest-earning assets of $1.9 million, an increase in the average cost of interest-bearing liabilities of 148 basis points and an increase in the average balance of interest-bearing liabilities of $52.1 million. The net interest rate spread decreased 49 basis points to 3.01% for the year ended June 30, 2024 from 3.50% for the year ended June 30, 2023. Net interest margin increased 6 basis points to 3.78% for the year ended June 30, 2024 from 3.72% for the year ended June 30, 2023. Net interest-earning assets decreased by $53.9 million to $673.8 million for the year ended June 30, 2024 from $727.7 million

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for the year ended June 30, 2023. The effect on net interest income of the decrease in the average balance of net interest-earning assets for the fiscal year ended June 30, 2024 was offset by the asset allocation shift to higher yielding assets.

Provision for Credit Losses.  The provision for credit losses was $2.7 million for the year ended June 30, 2024, as compared to no provision for credit losses for the year ended June 30, 2023. The provision for credit losses for the year ended June 30, 2024 was primarily due to growth in the loan portfolio offset in part by improvements in asset quality. Net charge-offs increased to $520,000 for the year ended June 30, 2024, compared to $55,000 for the year ended June 30, 2023. Non-performing assets decreased to $9.2 million, or 0.49% of total assets, at June 30, 2024, compared to $17.8 million, or 0.96% of total assets, at June 30, 2023. During the year ended June 30, 2024, non-performing loans decreased primarily with respect to one commercial real estate loan relationship that included seven loans totaling $7.7 million as of June 30, 2023, which as a result of payments received from the borrower decreased to four loans totaling $3.2 million as of June 30, 2024 and one commercial construction loan relationship totaling $3.2 million that was matured as of June 30, 2023 and was extended during the year ended June 30, 2024. The allowance for credit losses on loans was $21.8 million at June 30, 2024 compared to $22.5 million at June 30, 2023, representing 1.60% and 1.94% of total loans outstanding, respectively. The decrease in the allowance for credit losses as a percentage of total loans outstanding was primarily due to the cumulative effect adjustment for the adoption of ASU 2016-13 as of July 1, 2023 as described in “Part 2, Item 8 –  Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies” and by improvements in asset quality.

Non-Interest Income.  Non-interest income increased $2.2 million, or 15.4%, to $16.3 million for the year ended June 30, 2024 as compared to $14.1 million for the year ended June 30, 2023. Noninterest income increased primarily as a result of $6.0 million of income from the previously disclosed settlement of litigation as described in “Recent Developments” and also from a $2.3 million increase in insurance and wealth management services income, offset in part by a $5.6 million loss on the sale of securities available for sale from the balance sheet repositioning transaction as described in “Recent Developments,” as well as a $614,000 decrease in bank-owned life insurance income during the year ended June 30, 2024 due to recognition of a death benefit in the year ended June 30, 2023. The increase in insurance and wealth management services income was primarily due to the acquisition of Hudson Financial LLC which expanded our wealth management business into the Hudson Valley Region of New York.

Non-Interest Expense.  Non-interest expense increased $8.9 million, or 17.2%, to $60.7 million for the year ended June 30, 2024 compared to $51.8 million for the year ended June 30, 2023. The increase in noninterest expense for the year ended June 30, 2024 was primarily due to an increase in professional fees of $6.3 million, as well as an increase in salaries and employee benefits expense of $1.8 million. Professional fees increased due to legal fees and expenses. Salaries and employee benefits expense increased due to compensation expense from annual merit increases, hiring talent to fill open positions, as well as the acquisition of Hudson Financial LLC.

Income Tax Expense. Income tax expense decreased $1.8 million to $4.1 million for the year ended June 30, 2024 from $5.9 million for the year ended June 30, 2023, due to a decrease in income before income taxes. Our effective tax rate was 21.4% for the year ended June 30, 2024 compared to 21.2% for the year ended June 30, 2023. The increase in our effective tax rate was primarily due to the decrease in tax-exempt income for the year ended June 30, 2024 as compared to the prior year.

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Liquidity and Capital Resources

Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities. We also have the ability to borrow from the FHLBNY. At June 30, 2024, we had the ability to borrow up to $497.2 million, of which none was utilized for borrowings and $200.0 million was utilized as collateral for letters of credit issued to secure municipal deposits. At June 30, 2024, we had a $20.0 million unsecured line of credit with a correspondent bank with no outstanding balance, as well as the ability to borrow from the Federal Reserve Bank of New York through the discount window lending program, and access to the reciprocal and brokered deposit markets.

We cannot accurately predict what the impact of the events described in “Mann Entities Related Fraudulent Activity” above and in the “Legal Proceedings” section may have on our liquidity and capital resources. For example, costs associated with potentially prosecuting, litigating or settling any litigation, satisfying any adverse judgments, if any, or other regulatory proceedings, could be significant. We continue to monitor these matters for further developments that could affect the amount of the accrued liability that has been established. See Item 3 – “Legal Proceedings” and “Part II, Item 8–Financial Statements and Supplementary Data- Note 14 – Commitments and Contingent Liabilities – Legal Proceedings and Other Contingent Liabilities” elsewhere in this report for more information. For those matters for which a loss is reasonably possible and estimable, whether in excess of an accrued liability or where there is no accrued liability, the Company’s estimated range of possible loss is $0 to $54.4 million in excess of the accrued liability, if any, as of June 30, 2024. These estimates are based upon currently available information and are subject to significant judgment, a variety of assumptions and known and unknown uncertainties. The matters underlying the accrued liability and estimated range of possible losses are unpredictable and may change from time to time, and actual losses may vary significantly from the current estimate and accrual. The estimated range of possible loss does not represent the Company’s maximum loss exposure. These legal, regulatory, governmental and other proceedings, claims or investigations, costs, settlements, judgments, sanctions or other expenses could have a material adverse effect on our business, prospects, financial condition, results of operations or cash flows or cause significant reputational harm and subject us to civil litigation, significant fines, damage awards or other material regulatory consequences.

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

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any period. At June 30, 2024, cash and cash equivalents totaled $165.2 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $257.4 million at June 30, 2024.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of June 30, 2024 totaled $156.7 million, or 10.1%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the OCC. At June 30, 2024, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. See Note 16 in the Notes to the consolidated financial statements for further information.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

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

At June 30, 2024, we had $303.9 million of commitments to originate loans, comprised of $183.5 million of commitments under commercial loans and lines of credit (including $52.7 million of unadvanced portions of commercial construction loans), $70.6 million of commitments under home equity loans and lines of credit, $42.8 million of commitments to purchase residential mortgage loans, and $7.0 million of unfunded commitments under consumer lines of credit. In addition, at June 30, 2024, we had $21.9 million in standby letters of credit outstanding. See Note 14 in the Notes to the consolidated financial statements for further information.

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

Recent Accounting Pronouncements

Please refer to Note 2 in the Notes to the consolidated financial statements that appear starting on page 81 of this Annual Report on Form 10-K for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.