HANOVER BANCORP, INC. The following is a discussion of our financial condition and results of our operations for the fiscal years endedSeptember 30, 2022 and 2021, respectively. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. Unless the context otherwise specifies or requires, references herein to "we" or "us" includeHanover Bancorp, Inc. andHanover Bank on a consolidated basis.
Business Overview
We are aNew York corporation which became the holding company for the Bank in 2016. The Bank, a community commercial bank focusing on highly personalized and efficient services and products responsive to local needs, commenced operations in 2009 and was incorporated under the laws of theState of New York . As aNew York State chartered bank, the Bank is subject to regulation by theNew York State DFS and theFDIC . As a bank holding company, we are subject to regulation and examination by the FRB. The Bank offers a full range of financial services and employs a complete suite of consumer and commercial banking products and services, including multi-family and commercial mortgages, government guaranteed loans, residential loans, business loans and lines of credit. The Bank also offers its customers, among other things, access to 24-hour ATM service with no fees, free checking with interest, telephone banking, advanced technologies in mobile and internet banking for its consumer and business customers and safe deposit boxes. Our corporate administrative office is located inMineola, New York where the Bank also operates a full-service branch office. Additional branches are located inGarden City Park ,Forest Hills ,Flushing ,Sunset Park ,Manhattan andChinatown ,New York andFreehold, New Jersey . In addition, we have received regulatory approval to open a new office inHauppauge, New York In Suffolk County, which we expect to open in early 2023. AtSeptember 30, 2022 , on a consolidated basis we had$1.84 billion in total assets,$172.6 million in total stockholders' equity,$1.62 billion in total loans,$1.53 billion in total deposits and 162 full-time equivalent employees.
Significant Factors Affecting Our Business
The COVID-19 pandemic has caused widespread economic disruption in our
metropolitan
42
Table of Contents
A key program under the CARES Act is the Paycheck Protection Program ("PPP"),
administered by the Small Business Administration ("SBA") which provided funding
to qualifying businesses and organizations. These loans are 100% guaranteed by
the SBA and have no allowance for loan losses allocated to them based on the
nature of the guarantee. These loans carry a fixed rate of 1.00% and a term of
two years (loans made before June 5, 2020 , subject to extension to five years
with the consent of the lender) or five years (loans made on or after June 5,
2020 ), if not forgiven, in whole or in part. Under this program, we have
originated approximately $366.1 million in principal amount of PPP loans to
local borrowers. As of September 30, 2022 , borrowers had received forgiveness or
have made payments on $355.9 million in PPP loans.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. We believe the more critical accounting and reporting policies that currently affect our financial condition and results of operations include the accounting for the allowance for loan losses. Accordingly, our significant accounting policies and effects of new accounting pronouncements are discussed in detail in Note 1, "Summary of Significant Accounting Policies" to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Allowance for Loan Losses
We establish an allowance for loan losses that represents management's best estimate of probable credit losses inherent in the portfolio at the balance sheet date. Estimates for loan losses are determined by management's ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the allowance for loan losses, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded to criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. See Note 1, "Summary of Significant Accounting Policies" and Note 4, "Loans" to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Results of Operations for the year ended
To facilitate review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the consolidated statements of income.
For the year ended
43
Table of Contents
Set forth below are our selected consolidated financial and other data. Our
business is primarily the business of our Bank. This financial data is derived
in part from, and should be read in conjunction with, our consolidated financial
statements.
September 30,
(in thousands) 2022 2021 2020
Selected Balance Sheet Data:Securities available-for-sale, at fair value$ 12,285 $ 7,747 $
6,035
Securities held-to-maturity 4,414 8,611 10,727
Loans held for investment 1,623,531 1,247,125 725,019
Total assets 1,840,058 1,484,641 851,606
Total deposits 1,528,106 1,164,662 664,760
Total stockholders' equity 172,584 122,529 78,043
Year Ended September 30,
(dollars in thousands) 2022 2021 2020
Selected Operating Data:
Total interest income $ 68,429 $ 48,675 $ 40,133
Total interest expense 7,175 6,967 13,011
Net interest income 61,254 41,708 27,122
Provision for loan losses 4,450 1,000 1,250
Total non-interest income 8,872 3,349 1,364
Total non-interest expense 35,181 30,005 21,022
Income before income taxes 30,495 14,052 6,214
Income tax expense 6,939 3,201 1,240
Net income 23,556 10,851 4,974
Selected Financial Data and Other Data:
Return on average equity 16.14 % 11.53 % 6.63 %
Return on average assets 1.55 % 0.99 % 0.58 %
Yield on average interest earning assets 4.66 % 4.63 % 4.87 %
Cost of average interest bearing liabilities 0.62 % 0.81 % 1.87 % Net interest rate spread 4.04 % 3.82 % 3.00 % Net interest rate margin 4.18 % 3.97 % 3.29 %
Average equity to average assets 9.59 % 8.61 %
8.80 %
Analysis of Results of Operations
Net Interest Income
Net interest income is the primary source of the Company's revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, and loan prepayment behavior. Net interest income for the year endedSeptember 30, 2022 was$61.3 million , an increase of 46.9% from$41.7 million for the year endedSeptember 30, 2021 . The increase was primarily driven by a$416.8 million increase in average interest-earning assets, primarily due to the acquisition of Savoy, as well as continued organic loan growth in our markets, particularly in loans secured
by
multifamily properties.
44
Table of Contents
Net interest margin was 4.18% for the year ended
Average interest-bearing liabilities were$1.16 billion for the year endedSeptember 30, 2022 , an increase of$297.6 million compared to$859.8 million for the year endedSeptember 30, 2021 . The increase was primarily attributable to growth in interest-bearing deposits, which increased by$336.0 million during fiscal year 2022 from both the acquisition of Savoy and organic growth in our markets. The Company's average cost of interest-bearing liabilities was 0.62% for the year endedSeptember 30, 2022 , a decrease of 19 basis points compared to 0.81% for the year endedSeptember 30, 2021 . This decrease is due to the Company's strategic decision to replace higher rate consumer deposits with lower rate municipal deposits. Wholesale deposits atSeptember 30, 2022 totaled$416.9 million , an increase of 18.9% compared toSeptember 30, 2021 . The following table presents daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis for the periods presented: Year Ended September 30, 2022 2021 2020 Average Average Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Interest-earning assets: Loans(1)(2)$ 1,344,369 $ 67,005 4.98 % $
934,066
12,788 484 3.78 % 16,845 685 4.07 % 13,907 523 3.76 % Interest-earning balances and other
109,922 940 0.86 % 99,348 305 0.31 % 92,506 969 1.05 %
Total interest-earning assets 1,467,079 68,429 4.66 % 1,050,259 48,675 4.63 % 824,247 40,133 4.87 %
Other assets 55,295 42,675 27,807
Total assets $ 1,522,374 $ 1,092,934 $ 852,054
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Savings, NOW and money market
deposits $ 737,057 $ 3,166 0.43 % $
333,996
313,435 2,209 0.70 % 380,473 3,822 1.00 % 418,384 9,180 2.19 % Total interest-bearing deposits
1,050,492 5,375 0.51 % 714,469 4,725 0.66 % 597,490 10,625 1.78 % Borrowings
82,362 469 0.57 % 121,246 955 0.79 % 99,550 2,386 2.40 % Subordinated debentures
24,533 1,331 5.43 % 24,088 1,287 5.34 % - - 0.00 %
Total interest-bearing
liabilities 1,157,387 7,175 0.62 % 859,803 6,967 0.81 % 697,040 13,011 1.87 % Non-interest-bearing deposits 206,484
128,540 72,007 Other liabilities 12,526 10,519 8,031 Total liabilities 1,376,397 998,862 777,078 Stockholders' equity 145,977 94,072 74,976 Total liabilities and stockholders' equity$ 1,522,374 $ 1,092,934 $ 852,054 Net interest rate spread 4.04 % 3.82 % 3.00 % Net interest income/margin$ 61,254 4.18 %$ 41,708 3.97 %$ 27,122 3.29 %
(1) There is no income tax exempt interest recorded for loans or investment
securities for the periods presented.
(2) Includes non-accrual loans and loans held for sale.
45
Table of Contents
The following table details the variances in net interest income caused by
changes in average interest rates and average volume for the periods presented:
2022 vs. 2021 2021 vs. 2020
Increase (decrease) due to change in:
(in thousands) Average volume Average rate Total Average volume Average rate Total
Interest income
Loans $ 20,475 $ (1,155) $ 19,320 $ 11,127 $ (2,083) $ 9,044
Investment securities (156) (45) (201) 117 45 162Interest-earning balances and other 35 600 635 67 (731) (664) Total interest income 20,354 (600) 19,754 11,311 (2,769) 8,542 Interest expense Savings, NOW and money market deposits 1,521 742
2,263 780 (1,322) (542)
Time deposits (599) (1,015) (1,614) (775) (4,583) (5,358)
Borrowings (261) (225) (486) 434 (1,865) (1,431)
Subordinated debentures 24 20 44 1,287 - 1,287
Total interest expense 685 (478) 207 1,726 (7,770) (6,044)
Net increase (decrease) in net
interest income $ 19,669 $ (122) $ 19,547 $ 9,585 $ 5,001 $ 14,586
Provision for Loan Losses
The provision for loan losses was$4.5 million for the year endedSeptember 30, 2022 , an increase of$3.5 million compared to$1.0 million for the year endedSeptember 30, 2021 . The increase was primarily due to loan growth recorded in fiscal year 2022. Total net charge-offs were$0.2 million and$0.3 million for the years endedSeptember 30, 2022 , and 2021, respectively. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include recent growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. See additional discussion under "Asset Quality - Analysis of Allowance for Loan Losses" section. Non-Interest Income Year Ended September 30, (in thousands) 2022 2021 2020 Loan servicing and fee income$ 2,885 $ 1,207 $ 385
Service charges on deposit accounts 232 127
62
Net gain on sale of loans held for sale 5,143 1,307
917
Net gain on sale of investments available-for-sale 105 240
-
Other income 507 468 -
Total non-interest income $ 8,872 $ 3,349 $ 1,364 Non-interest income was$8.9 million for the year endedSeptember 30, 2022 , an increase of$5.5 million from$3.3 million for the year endedSeptember 30, 2021 . This increase was primarily driven by gains on the sale of loans held for sale representing full year of SBA loan sales. The increase in loan servicing and fee income was due to the increase in loan balances and growth in the volume of loans serviced by the Company. 46 Table of Contents Non-Interest Expense Year Ended September 30, (in thousands) 2022 2021 2020 Salaries and employee benefits$ 19,665 $ 14,761 $ 10,945 Occupancy and equipment 5,633 4,978 4,462 Data processing 1,629 1,280 911 Advertising and promotion 348 118 296 Acquisition costs 250 4,430 450 Professional fees 2,568 1,706 2,070 Other expenses 5,088 2,732 1,888 Total non-interest expense$ 35,181 $ 30,005 $ 21,022 Non-interest expense was$35.2 million for the year endedSeptember 30, 2022 , an increase of$5.2 million from$30.0 million for the year endedSeptember 30, 2021 . The overall increase in non-interest expenses was primarily from growth in compensation and benefits related to increased headcount. The increase in headcount has resulted from several factors including organic growth, the opportunistic addition of experienced executives to implement new product initiatives such as expanded commercial real estate and commercial and industrial lending, and an increase in personnel from theMay 2021 acquisition of Savoy. Income Taxes
Income tax expense was$6.9 million for the year endedSeptember 30, 2022 , an increase from$3.2 million for the year endedSeptember 30, 2021 . The effective income tax rate for the years endedSeptember 30, 2022 and 2021 was 22.8%.
Analysis of Results of Financial Condition
Our investment securities portfolio, which is structured with minimum credit
exposure, is intended to provide us with adequate liquidity, flexibility in
asset/liability management, and a source of stable income. Investment securities
classified as available-for-sale are carried at fair value in the consolidated
statements of financial condition, while investment securities classified as
held-to-maturity are shown at amortized cost in the consolidated statements of
financial condition.
The following table summarizes the amortized cost and fair value of investment
securities:
Balance at September 30,
2022 2021 2020
(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Investment securities
available-for-sale:
U.S. GSE residential mortgage-backed
securities $ 375 $ 242 $ 722 $ 833 $ 838 $ 962
Corporate bonds 12,700 12,043 6,700 6,914 5,000 5,073
Total investment securities
available-for- sale 13,075 12,285 7,422 7,747 5,838 6,035
Investment securities
held-to-maturity:
U.S. GSE residential mortgage-backed
securities 1,778 1,618 2,417 2,491 4,478 4,596
U.S. GSE commercial mortgage-backed
securities 2,636 2,477 2,694 2,869 2,749 3,002
Corporate bonds - - 3,500 3,505 3,500 3,533
Total investment securities
held-to-maturity 4,414 4,095 8,611 8,865 10,727 11,131
Total investment securities $ 17,489 $ 16,380 $ 16,033 $ 16,612 $ 16,565 $ 17,166 47 Table of Contents
We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories. Our investment securities portfolio included no gross unrealized gains and gross unrealized losses of$1.1 million atSeptember 30, 2022 , compared to gross unrealized gains of$0.6 million and gross unrealized losses of$5 thousand atSeptember 30, 2021 . Management believes that all of its unrealized losses on individual investment securities atSeptember 30, 2022 and 2021 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. We do not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.
The tables below illustrates the maturity distribution and weighted average
yield for amortized cost of our investment securities as of
Investment Securities Portfolio by Expected Maturities(1)
Balance at September 30, 2022
Available-for-Sale Held-to-Maturity
Amortized Weighted Amortized Weighted
(dollars in thousands) Cost Average Yield Cost Average Yield
U.S. GSE residential mortgage-backed securities
Due after five years through ten years $ - - %$ 1,256 2.30 % Due after ten years 375 3.02 % 522 2.66 % 375 3.02 % 1,778 2.41 %U.S. GSE commercial mortgage-backed securities Due after one year through five years - - 2,636 2.68 % - - 2,636 2.68 % Corporate bonds Due after five years through ten years 12,700
5.19 % - - %
12,700 5.19 % - - %
Total investment securities $ 13,075 5.13 % $ 4,414 2.57 %
Balance at September 30, 2021
Available-for-Sale Held-to-Maturity
Amortized Weighted Amortized Weighted
(dollars in thousands) Cost Average Yield Cost Average Yield
U.S. GSE residential mortgage-backed securities
Due within one year $ 25 -0.99 % $ - -
Due after one year through five years 1 -3.75 % - -
Due after ten years 696 2.44 % 2,417 2.29 %
722 2.01 % 2,417 2.29 %
U.S. GSE commercial mortgage-backed securities
Due after one through five years - - 2,694 2.68 %
- - 2,694 2.68 %
Corporate bonds
Due after one year through five years - - 1,500 5.00 %
Due after five years through ten years 6,700
4.61 % 2,000 5.25 %
6,700 4.61 % 3,500 5.14 %
Total investment securities $ 7,422 4.36 % $ 8,611 3.57 %
(1) There is no income tax exempt interest recorded for investment securities for
the periods presented.
48
Table of Contents
Loans
AtSeptember 30, 2022 , our loan portfolio was$1.62 billion , an increase of$376.4 million from$1.25 billion atSeptember 30, 2021 . The Company has experienced continued growth in multifamily, commercial real estate and residential mortgage loans. These increases are slightly offset by the continued forgiveness or payoff of PPP loans that were granted in fiscal year 2020 as a result of the COVID-19 pandemic. For the year endedSeptember 30, 2022 , the Bank realized an increase in loans secured by multi-family properties of$308.1 million , representing growth of approximately 116%. This increase was the result of the Bank's desire to leverage capital and expertise in favor of dependable asset growth with an attractive risk profile. The weighted average LTV of our multi-family loans in the year endingSeptember 30, 2022 was 64%, and the weighted average debt service coverage ratio was 1.38x. Our success in achieving this volume of originations is based on the expertise of our commercial real estate lending team, which has deep and long-standing relationships with mortgage brokers inNew York andNew Jersey . The Bank's underwriting prioritizes the lower of rents allowable under applicable rent regulations or market rents. Loans secured by one or more properties with more than 10 units are originated without recourse to ownership, but the Bank considers the credit scores, financial strength and global debt service capacity of principals in its evaluation of loans. The Bank generally strives to collect a minimum origination fee of 25 basis points and charges a minimum interest rate of 150 basis points over the 5-year United States Treasury Rate. Loans typically have a 10-year term with an interest rate reset commencing in the sixth year of the term. Prepayment penalties vary but generally consist of a sliding percentage of the principal amount, ranging from 5% to 0%, based on the length of time loans remain on the Bank's balance sheet. The following table provides the composition of the Company's loans held for investment: Balance at September 30, (in thousands) 2022 2021 2020 2019 2018 Real estate: Residential$ 515,316 $ 444,011 $ 454,073 $ 465,422 $ 372,673 Multi-family 574,413 266,294 136,539 139,504 132,301 Commercial 472,511 348,641 113,615 108,197 48,669 Total real estate 1,562,240 1,058,946 704,227 713,123 553,643 Commercial and industrial 45,758 172,274 21,100 7,353 6,736 Construction 12,871 15,374 - - - Consumer 22 11 24 501 24 Gross loans 1,620,891 1,246,605 725,351 720,977 560,403 Net deferred loan costs (fees) 2,640 520
(332) (535) (1,023)
Total loans held for investment
The following table provides information for the contractual maturity and interest-rate profile of the Company's commercial and industrial and real estate construction loans held for investment:
Balance at September 30, 2022
Due After One
Year But
Due within Within Five Due After
(in thousands) One Year Years Five Years Total
By Loan Type:
Commercial and industrial $ 8,884 $ 19,538 $ 17,336 $ 45,758
Real estate construction 5,340 4,550 2,981 12,871
Total $ 14,224 $ 24,088 $ 20,317 $ 58,629
By Interest Rate Type:
Fixed rate $ 975 $ 11,736 $ 107 $ 12,818
Variable rate 13,249 12,352 20,210 45,811
Total $ 14,224 $ 24,088 $ 20,317 $ 58,629
49
Table of Contents
Balance at September 30, 2021
Due After One
Year But
Due within Within Five Due After
(in thousands) One Year Years Five Years Total
By Loan Type:
Commercial and industrial $ 29,689 $ 129,503 $ 13,082 $ 172,274
Real estate construction 8,761 2,789 3,824 15,374
Total $ 38,450 $ 132,292 $ 16,906 $ 187,648
By Interest Rate Type:
Fixed rate $ 21,986 $ 123,823 $ 183 $ 145,992
Variable rate 16,464 8,469 16,723 41,656
Total $ 38,450 $ 132,292 $ 16,906 $ 187,648 Credit Policies and Procedures
Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers, reviewed byCredit Administration , and a sample of these loans are tested by the Company's third-party independent loan reviewer. The testing program includes an evaluation of a sample of both new and existing loans, including large loans, loans that are identified as having potential credit weaknesses, and loans past due 90 days or more and still accruing. We strive to maintain the loan portfolio in accordance with our loan underwriting policies that result in loans specifically tailored to the needs of our market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. Generally, we do not engage in significant volumes of lease financing, highly leveraged transactions or loans to customers domiciled outsidethe United States . Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process we maintain an internally-classified, adversely-risk-rated loan list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the allowance is allocated based on management's judgment and historical experience. Acquired loans are recorded at fair value as of the loan's acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date, recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in additional allowance for loan losses. A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. If applicable, the Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the loan's effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan's collateral, less estimated costs to sell. 50 Table of Contents Asset Quality We consider asset quality to be of primary importance and employ a formal internal loan review process to ensure adherence to our lending policy as approved by our Board of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. The Company's internal credit risk review function, through focused review and sampling, validates the accuracy of commercial loan risk grades. Each loan risk grade corresponds to an estimated default probability. In addition, as a given loan's credit quality improves or deteriorates, the Company will update the borrower's risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in our market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management's estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.
Nonperforming Assets
The following table presents information regarding nonperforming assets for the
periods presented. The Company did not own any repossessed property for the
periods presented.
Balance at September 30,
(dollars in thousands) 2022 2021 2020 2019 2018
Nonaccrual loans $ 12,281 $ 7,028 $ 953 $ 1,613 $ -
Loans greater than 90 days past due 1,231 2,519 296 629 -
Total nonperforming assets $ 13,512 $ 9,547 $ 1,249 $ 2,242 $ -
Performing TDRs $ 2,370 $ 455 $ 454 $ 454 $ 354
Nonaccrual loans as a percentage of loans
held-for- investment 0.76 % 0.56 % 0.13 % 0.22 % 0.00 %
Non-performing assets as a percentage of
total assets 0.73 % 0.64 % 0.15 % 0.26 % 0.00 %
Total nonaccrual loans were$12.3 million atSeptember 30, 2022 , an increase from total nonaccrual loans of$7.0 million atSeptember 30, 2021 . The increase in nonaccrual loans in 2022 was driven by loans acquired from Savoy that were not classified as purchased-credit impaired as of the acquisition, which totaled$5.3 million atSeptember 30, 2022 , but experienced credit deterioration subsequent to the acquisition.
Analysis of Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Management increases the allowance for loan
losses by provisions charged to operations and by recoveries of amounts
previously charged off. The allowance is reduced by loans charged off.
Management evaluates the adequacy of the allowance at least monthly. In
addition, on a monthly basis our Board of Directors reviews the loan portfolio,
conducts an evaluation of credit quality and reviews the computation of the loan
loss allowance. In evaluating the adequacy of the allowance, management
considers the growth, composition and industry diversification of the portfolio,
historical loan loss experience, current delinquency levels, adverse situations
that may affect a borrower's ability to repay, estimated value of any underlying
collateral, prevailing economic conditions and other relevant factors deriving
from our history of operations. In addition to our history, management also
considers the loss experience and allowance levels of other similar banks and
the historical experience encountered by our management and senior lending
officers prior to joining us. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the allowance for loan
51
Table of Contents
losses and may require us to make additions for estimated losses based upon judgments different from those of management.
Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. Generally, we do not engage in significant lease financing, highly leveraged transactions or loans to customers domiciled outsidethe United States . Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the allowance is allocated based on management's judgment and historical experience. Acquired loans are recorded at fair value as of the loan's acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date, recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in additional allowance for loan losses. A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. The Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the loan's effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan's collateral, less estimated costs to sell.
The allowance for loan losses was
The Company experienced$0.2 million in net charge-offs during the year endedSeptember 30, 2022 , a decrease compared to net charge-offs of$0.3 million during the year endedSeptember 30, 2021 . The Company has recorded an immaterial amount of recoveries during the years endedSeptember 30, 2022 and 2021, respectively.
The following table presents the allocation of the allowance for loan losses by loan category for the periods presented:
At September 30,
2022 2021 2020 2019 2018
% of % of % of % of % of
Gross Gross Gross Gross Gross
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Residential real estate $ 3,951 0.77 % $ 4,155 0.94 % $ 5,103 1.12 % $ 4,647 1.00 % $ 4,363 1.17 %
Multi-family 4,308 0.75 % 2,433 0.91 % 1,506 1.10 % 1,215 0.87 % 1,478 1.12 %
Commercial real estate 3,707 0.78 % 1,884 0.54 % 1,221 1.07 % 1,193 1.10 % 500 1.03 %
Commercial and industrial 761 1.66 % 79 0.05 % 38 0.18 % 75 1.02 % 152 2.26 %
Construction 115 0.89 % - - - - - - - -
Consumer 2 9.09 % 1 9.09 %
1 4.17 % 13 2.59 % - -
Total allowance for loan losses
52
Table of Contents
The following table presents information related activity in the allowance for loan losses for the periods presented:
Year Ended September 30,
(dollars in thousands) 2022 2021 2020 2019 2018
Beginning balance $ 8,552 $ 7,869 $ 7,143 $ 6,493 $ 4,795
Provision for loan losses 4,450 1,000 1,250 650 1,698
Charge-Offs:
Residential real estate - (267) - - -
Multi-family (66) (32) - - -
Commercial real estate - (30) (224) - -
Commercial and industrial (92) - (300) - -
Construction - - - - -
Consumer - - - - -
Total loan charge-offs (158) (329) (524) - -
Recoveries:
Commercial and industrial - 12 - - -
Total recoveries - 12 - - -
Total net charge-offs (158) (317) (524) - -
Ending balance $ 12,844 $ 8,552 $ 7,869 $ 7,143 $ 6,493
Allowance for loan losses to total loans
held-for- investment(1)(2) 0.79 % 0.69 % 1.09 % 0.99 % 1.16 %
Net charge-offs to average loans
held-for-investment 0.01 % 0.03 % 0.07 % 0.00 % 0.00 %
(1) Calculation includes
(2) Includes loans acquired from Savoy that do not carry an allowance for loans
losses as of
Sources of Funds and Liquidity
Liquidity management is defined as both our and the Bank's ability to meet our financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments, such as fed funds sold, the marketability of securities available-for-sale and interest-bearing deposits due from theFederal Reserve Bank of New York ,Federal Home Loan Bank (the "FHLB") and correspondent banks, which totaled$149.9 million and$166.0 million atSeptember 30, 2022 and 2021, respectively. These liquid assets may include assets that have been pledged primarily against municipal deposits or borrowings. Liquidity is also provided by the maintenance of a base of core deposits, cash and non-interest-bearing deposits due from banks, the ability to sell or pledge marketable assets and access to lines of credit. Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect our ability to meet liquidity needs, including variations in the markets served, loan demand, asset/liability mix, reputation and credit standing in our markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. Among these are changes in the local and national economies, competition from other financial institutions and changes in market interest rates. The Liquidity and Wholesale Funding Policy of the Bank establishes specific policies and operating procedures governing liquidity levels to assist management in developing plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders' equity. 53 Table of Contents Deposits We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source.
Total deposits at
The following is our average deposits and weighted-average interest rates paid thereon for the past three fiscal years:
Year Ended September 30,
2022 2021 2020
Average Average Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate Balance Rate
Non-interest bearing demand $ 206,484 0.00 % $ 128,540 0.00 % $ 72,007 0.00 %
Savings 77,756 0.41 % 48,995 0.20 % 41,223 0.45 %
NOW 483,400 0.44 % 153,595 0.26 % 37,774 0.63 %
Money market 175,901 0.42 % 131,406 0.30 % 100,109 1.02 %
Time deposits 313,435 0.70 % 380,473 1.00 % 418,384 2.19 %
Total average deposits $ 1,256,976 0.43 % $ 843,009 0.56 % $ 669,497 1.59 %
As discussed previously, during fiscal year 2022 the Company made the strategic
decision to allow higher cost consumer deposits to run-off and replace these
funding sources with municipal deposits, which have a significantly lower
average interest rate. The Company had total wholesale deposits of
$416.9 million at September 30, 2022 , which comprised 27.3% of total deposits,
an increase of $66.4 million or 18.9% from $350.5 million , at September 30,
2021 . These lower rates were partially offset by deposits acquired from Savoy,
which have a higher average rate.
As of
September 30,
(in thousands) 2022
Three months or less $ 10,192
Over three months through six months 8,471
Over six months through 12 months 17,817
Over 12 months 51,424
Total $ 87,904
Borrowings
The total carrying value of our borrowings was$126.3 million atSeptember 30, 2022 , a decrease of$57.8 million from$184.2 million atSeptember 30, 2021 . AtSeptember 30, 2022 ,$66.9 million of these borrowings were classified as short-term, while the remaining was classified as long- term. Short-term borrowings are comprised of short-term FHLB advances, securities sold under agreements to repurchase and Federal funds purchased. Many short-term funding sources, particularly Federal funds purchased and securities sold under agreements to repurchase, are expected to be reissued and, therefore, do not represent an immediate need for cash. Long-term funding is comprised of long-term FHLB advances and subordinated debentures. The Company will prepay FHLB advances from time to time as funding needs change. See Note 7, "Borrowings" and Note 8, "Subordinated Debentures" to the accompanying Consolidated Financial Statements contained in Item 8 for additional details. 54 Table of Contents InOctober 2020 , the Company completed the private placement of$25.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due in 2030. The Notes will initially bear interest, payable semi-annually, at the rate of 5.00% per annum, untilOctober 15, 2025 . From and includingOctober 15, 2025 through maturity, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate plus 487.4 basis points. The Company may, at its option, beginning with the interest payment date ofOctober 15, 2025 but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, subject to the receipt of any required regulatory approval. The Notes are not subject to redemption at the option of the holder. The Company used a portion of the net proceeds to pay off an existing holding company note inOctober 2020 and used the remainder of the net proceeds for acquisition financing and general corporate purposes, including contributing equity capital to the Bank. AtSeptember 30, 2022 , the Company had access to approximately$276.4 million in FHLB lines of credit for overnight or term borrowings, of which$55.0 million in overnight borrowings and$37.8 million in term borrowings were outstanding. AtSeptember 30, 2022 , approximately$65.0 million in unsecured lines of credit extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks atSeptember 30, 2022 .
Off-Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. AtSeptember 30, 2022 and 2021, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately$73.1 million and$105.7 million , respectively. Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management's evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. AtSeptember 30, 2022 and 2021, letters of credit outstanding were approximately$0.8 million .
Capital Resources
Total stockholders' equity was$172.6 million atSeptember 30, 2022 , an increase of$50.1 million from stockholders' equity of$122.5 million atSeptember 30, 2021 . The increase was primarily due to a$27.7 million increase in common stock and surplus from net proceeds from the public offering of our common stock inMay 2022 and net income earned for the year endedSeptember 30, 2022 . We are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators 55 Table of Contents
about components, risk weightings, and other factors. We use our capital primarily for our lending activities as well as acquisitions and expansions of our business and other operating requirements.
The Bank capital level is characterized as "well-capitalized" under theBasel III Capital Rules. A summary of the Bank's regulatory capital amounts and ratios are presented below: September 30, (dollars in thousands) 2022 2021 2020 Total capital$ 191,355 $ 132,554 $ 95,079 Tier 1 capital 178,340 123,666 89,275 Common equity tier 1 capital 178,340 123,666 89,275 Total capital ratio 16.32 % 15.59 % 20.57 % Tier 1 capital ratio 15.21 % 14.54 % 19.32 %
Common equity tier 1 capital ratio 15.21 % 14.54 % 19.32 % Tier 1 leverage ratio
10.90 % 9.45 % 11.22 %
Under a policy of the Federal Reserve applicable to bank holding companies with
less than $3.0 billion in consolidated assets, the Company is not subject to
consolidated regulatory capital requirements.
© Edgar Online, source
