Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
For the transition period from ______ to ______
Commission File No. 001-41384
HANOVER BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York
81-3324480
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
80 East Jericho Turnpike, Mineola, NY 11501
(Address of Principal Executive Offices) (Zip Code)
(516) 548-8500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock
HNVR
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value
7,184,120 Shares
(Title of Class)
(Outstanding as of July 31, 2023)
Form 10-Q
For the Quarterly Period Ended June 30, 2023
Page
PART I
Item 1.
Financial Statements
3
Consolidated Statements of Financial Condition as of June 30, 2023 (unaudited) and September 30, 2022
Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended June 30, 2023 and 2022
4
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended June 30, 2023 and 2022
5
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Nine Months Ended June 30, 2023 and 2022
6
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended June 30, 2023 and 2022
8
Notes to Unaudited Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
45
PART II
Legal Proceedings
46
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
47
Signatures
48
2
ITEM 1. – FINANCIAL STATEMENTS
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
June 30, 2023
September 30, 2022
ASSETS
(unaudited)
Cash and non-interest-bearing deposits due from banks
$
5,410
9,934
Interest-bearing deposits due from banks
205,656
139,559
Federal funds sold
467
454
Total cash and cash equivalents
211,533
149,947
Securities:
Held to maturity (fair value of $3,883 and $4,095, respectively)
4,180
4,414
Available for sale, at fair value
11,094
12,285
Total securities
15,274
16,699
Loans held for investment
1,823,503
1,623,531
Allowance for loan losses
(15,369)
(12,844)
Loans held for investment, net
1,808,134
1,610,687
Premises and equipment, net
16,256
14,462
Operating lease assets
10,602
—
Accrued interest receivable
10,189
8,546
Prepaid pension
3,565
3,444
Stock in Federal Home Loan Bank ("FHLB"), at cost
15,772
6,280
Goodwill
19,168
Other intangible assets
344
399
Loan servicing rights
4,375
4,353
Deferred income taxes
1,934
2,508
Other assets
4,637
TOTAL ASSETS
2,121,783
1,840,058
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing demand
180,303
219,225
Savings, NOW and money market
956,831
969,808
Time
456,505
339,073
Total deposits
1,593,639
1,528,106
Borrowings
293,849
101,752
Subordinated debentures
24,608
24,568
Operating lease liabilities
11,309
Accrued interest payable
1,242
915
Other liabilities
14,330
12,133
TOTAL LIABILITIES
1,938,977
1,667,474
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock, Series A (par value $0.01; 15,000,000 shares authorized; issued and outstanding 150,000 and none, respectively)
2,963
Common stock (par value $0.01; 17,000,000 shares authorized; issued and outstanding 7,184,120 and 7,285,648, respectively)
72
73
Surplus
125,276
126,656
Retained earnings
55,904
46,475
Accumulated other comprehensive loss, net of tax
(1,409)
(620)
TOTAL STOCKHOLDERS' EQUITY
182,806
172,584
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended
Nine Months Ended
June 30,
2023
2022
INTEREST INCOME
Loans
25,581
15,842
71,501
47,972
Taxable securities
198
98
608
358
Other interest income
2,680
319
3,982
486
Total interest income
28,459
16,259
76,091
48,816
INTEREST EXPENSE
Savings, NOW and money market deposits
9,905
579
22,461
1,290
Time deposits
3,214
427
7,144
1,319
1,835
433
3,793
1,374
Total interest expense
14,954
1,439
33,398
3,983
Net interest income
13,505
14,820
42,693
44,833
Provision for loan losses
500
1,000
2,932
2,400
Net interest income after provision for loan losses
13,005
13,820
39,761
42,433
NON-INTEREST INCOME
Loan servicing and fee income
811
779
2,028
2,203
Service charges on deposit accounts
70
60
200
169
Gain on sale of loans held-for-sale
1,052
849
2,625
3,916
Gain on sale of securities available-for-sale
105
Other income
41
140
288
483
Total non-interest income
1,974
1,828
5,141
6,876
NON-INTEREST EXPENSE
Salaries and employee benefits
5,405
4,843
15,301
15,400
Occupancy and equipment
1,587
1,394
4,601
4,177
Data processing
576
374
1,435
1,133
Advertising and promotion
112
533
298
Acquisition costs
250
Professional fees
781
2,345
1,718
Federal deposit insurance premiums
357
90
873
260
Other expenses
1,660
1,088
4,316
3,116
Total non-interest expense
10,566
8,730
29,404
26,352
Income before income tax expense
4,413
6,918
15,498
22,957
Income tax expense
1,585
3,857
5,227
NET INCOME
3,094
5,333
11,641
17,730
Earnings per share:
BASIC
0.42
0.81
1.59
2.97
DILUTED
0.80
1.57
2.92
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized losses on investment securities available for sale:
Change in unrealized loss on securities available for sale arising during the period, net of tax of ($163), ($65), ($251) and ($224), respectively
(579)
(241)
(900)
(451)
Reclassification adjustment for gains realized in net income, net of tax of $0, $0, $0 and ($24), respectively
(81)
Net change in unrealized gains (losses) on securities available for sale
(532)
Unrealized gains on cash flow hedges:
Change in unrealized gain on cash flow hedges arising during the period, net of tax of $31, $0, $31 and $0, respectively
111
Total other comprehensive loss, net of tax
(468)
(789)
Total comprehensive income, net of tax
2,626
5,092
10,852
17,198
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except share and per share data)
For the Three and Nine Months Ended June 30, 2023
Common
Accumulated Other
Total
Stock
Preferred
Retained
Comprehensive
Stockholders’
(Shares)
Earnings
Loss, Net
Equity
Beginning balance as of October 1, 2022
7,285,648
5,338
Other comprehensive loss, net of tax
(95)
Cash dividends declared ($0.10 per share)
(739)
Stock-based compensation
439
Stock awards granted
3,000
Shares received related to tax withholding
(262)
(5)
Preferred stock issued in exchange for common stock
(150,000)
(2)
(2,961)
Exercise of stock options
10,614
106
Ending balance as of December 31, 2022
7,149,000
71
124,235
51,074
(715)
177,628
3,209
(226)
(738)
794
Stock awards granted, net of forfeitures
39,513
1
(1)
(7,421)
(145)
Ending balance as of March 31, 2023
7,181,092
124,883
53,545
(941)
180,522
(735)
401
3,500
(472)
(8)
Ending balance as of June 30, 2023
7,184,120
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) (Continued)
For the Three and Nine Months Ended June 30, 2022
(Loss) Income, Net
Beginning balance as of October 1, 2021
5,563,426
56
97,246
24,971
256
122,529
6,537
Other comprehensive income, net of tax
54
Issuance of common stock in lieu of directors' fees
2,384
42
Stock-based compensation, net
(3,011)
217
Ending balance as of December 31, 2021
5,562,799
97,505
31,508
310
129,379
5,860
(345)
(588)
462
266,770
Ending balance as of March 31, 2022
5,829,569
58
97,965
36,780
(35)
134,768
(734)
564
1,482
(677)
(28)
Common stock issued in Initial Public Offering ("IPO")
1,466,250
15
27,714
27,729
Ending balance as of June 30, 2022
7,296,624
126,215
41,379
(276)
167,391
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,297
1,243
Change in operating lease assets
1,199
Net gain on sale of securities available-for-sale
(105)
1,634
Net gain on sale of loans held-for-sale
(2,625)
(3,916)
Net accretion of premiums, discounts and loan fees and costs
(772)
(2,933)
Amortization of intangible assets
55
62
Amortization of debt issuance costs
40
Loan servicing rights valuation adjustments
606
354
Deferred tax expense
830
1,251
(Increase) decrease in accrued interest receivable
(1,643)
1,720
(Increase) decrease in other assets
(1,715)
113
Increase (decrease) in accrued interest payable
327
(679)
Increase (decrease) in other liabilities
2,796
(1,274)
Change in operating lease liabilities
(1,107)
Net cash provided by operating activities
15,495
17,250
Cash flows from investing activities:
Purchases of securities available-for-sale
(2,000)
Purchases of restricted securities
(90,495)
(1,548)
Proceeds from sales of securities available-for-sale
2,105
Principal repayments of securities held to maturity
231
4,097
Principal repayments of securities available-for-sale
38
321
Redemptions of restricted securities
81,003
1,404
Proceeds from sales of loans
36,038
64,851
Net increase in loans
(233,477)
(227,707)
Purchases of premises and equipment
(3,091)
(931)
Net cash used in investing activities
(209,753)
(159,408)
Cash flows from financing activities:
Net increase in deposits
65,935
185,753
Proceeds from term FHLB advances
100,725
20,000
Repayments of term FHLB advances
(8,800)
(24,000)
Repayments of Federal Reserve Bank borrowings
(4,768)
(98,794)
Net increase in other short-term borrowings
105,000
Payments related to tax withholding for equity awards
(158)
Cash dividends paid
(2,196)
(1,322)
Net proceeds from issuance of common stock
Net cash provided by financing activities
255,844
109,588
Increase (decrease) in cash and cash equivalents
61,586
(32,570)
Cash and cash equivalents, beginning of period
166,544
Cash and cash equivalents, end of period
133,974
Supplemental cash flow information:
Interest paid
33,071
4,662
Income taxes paid
3,873
5,316
Supplemental non-cash disclosure:
Transfers from portfolio loans to loans held-for-sale
33,413
60,935
Lease liabilities arising from obtaining right-of-use assets
1,791
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, RISKS AND UNCERTAINTIES, ACCOUNTING POLICIES AND RECENT ACCOUNTING DEVELOPMENTS
Hanover Bancorp, Inc. (the “Company”), is a New York corporation which is the holding company for Hanover Community Bank (the “Bank”). The Bank, headquartered in Mineola, New York, is a New York State chartered bank. The Bank commenced operations on November 4, 2008 and is a full-service bank providing personal and business lending and deposit services. As a New York State chartered, non-Federal Reserve member bank, the Bank is subject to regulation by the New York State Department of Financial Services (“DFS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “FRB”).
Basis of Presentation
In the opinion of the Company’s management, the preceding unaudited interim consolidated financial statements contain all adjustments, consisting of normal accruals, necessary for a fair presentation of the Company’s consolidated statement of financial condition as of June 30, 2023, its consolidated statements of income for the three and nine months ended June 30, 2023 and 2022, its consolidated statements of comprehensive income for the three and nine months ended June 30, 2023 and 2022, its consolidated statements of changes in stockholders’ equity for the three and nine months ended June 30, 2023 and 2022 and its consolidated statements of cash flows for the nine months ended June 30, 2023 and 2022. Certain prior period amounts have been reclassified to conform to the current period presentation.
In addition, the preceding unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. They do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The results of operations for the three and nine months ended June 30, 2023 are not necessarily indicative of the results of operations to be expected for the remainder of the fiscal year. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
All material intercompany accounts and transactions have been eliminated in consolidation. Unless the context otherwise requires, references herein to the Company include the Company and the Bank on a consolidated basis.
Risks and Uncertainties
The United States economy is currently experiencing a level of price inflation not experienced since the late 1970's and early 1980's. It is therefore difficult to predict the response of consumers and businesses to this level of inflation, and its impact on the economy. In addition, in order to attempt to control and reduce the level of inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions. It is unclear whether the Federal Reserve’s efforts will be successful, and what impact they may have on the United States’ economy. It is possible that that the combined effects of inflation and increases in market interest rates could cause the economy of the United States to enter a recession, which could negatively impact the businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our results of operations.
Accounting Policies
Allowance for Loan Losses – The Company considers the determination of the allowance for loan losses its most critical accounting policy, practice, and use of estimates. The Company uses available information to recognize probable and reasonably estimable losses on loans. Future additions to the allowance may be necessary based upon changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. The allowance for loan losses is increased by a provision for loan losses charged against income and is decreased by charge-offs, net of recoveries. Loan losses are recognized in the period the loans, or portion thereof, are deemed uncollectible. The adequacy of the allowance to cover any inherent loan losses in the portfolio is evaluated on a quarterly basis.
Loans and Loan Interest Income Recognition - Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs and an allowance for loan losses. The loan portfolio is segmented into residential real estate, multi-family, commercial real estate, commercial and industrial, construction and land development, and consumer loans.
Interest income on loans is accrued and credited to income as earned. Net loan origination fees and costs are deferred and accreted/amortized to interest income over the contractual life of loans using the level-yield method, adjusted for actual prepayments.
Loans that are acquired are initially recorded at fair value with no carryover of the related allowance for loan losses. After acquisition, losses are recognized through the allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of expected principal and interest cash flows to be collected on the loans and discounting those cash flows at a market interest rate. At June 30, 2023 and September 30, 2022, the Company had loans totaling $0.1 million and $1.2 million, respectively, which at the time of acquisition, showed evidence of credit deterioration since origination.
Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. Periodically, the Company originates various residential mortgage loans for sale to investors generally on a servicing released basis. The sale of such loans is generally arranged through a master commitment on a best-efforts basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Premiums, discounts, origination fees and costs on loans held for sale are deferred and recognized as a component of the gain or loss on sale. Gains and losses on sales of loans held for sale are included in other income, recognized on settlement date and are determined to be the difference between the sale proceeds and the carrying value of the loans. These transactions are accounted for as sales based on satisfaction of the criteria for such accounting which provides that, as transferor, the Company has surrendered control of the loans.
For liquidity purposes generally, there are instances when loans originated with the intent to hold in the portfolio are subsequently transferred to loans held for sale. At transfer, they are carried at the lower of cost or fair value.
Series A Preferred Stock - Holders of the Company’s Series A preferred stock will be entitled to receive dividends when, as and if declared by the Company’s board of directors, in the same per share amount as the common stockholders. No dividends will be payable on the common stock unless a dividend identical to that paid on the common stock is paid at the same time on the Series A preferred stock. Therefore Series A preferred stock is treated as common stock for EPS calculations. Series A preferred stock has no voting rights. In the event of a dissolution of the Company, Series A preferred stock is entitled to the payment of any declared and unpaid dividend, and then will share in dissolution proceeds, if any, with the shares of common stock.
10
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016 02, Leases (Topic 842). The FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The new guidance also requires enhanced disclosure about an entity’s leasing arrangements. The Company adopted Topic 842 using the transition approach of applying the new leases standard at the beginning of the period of adoption on October 1, 2022. The new guidance includes a number of optional transition-related practical expedients that must be elected as a package and applied by a reporting entity to all of its leases consistently. The Company has elected to apply the package of practical expedients to all its existing leases, which among other things, allowed the Company to carry forward the historical lease classification as operating leases in accordance with previous GAAP. The effect of adopting this standard in the Company’s Consolidated Statements of Financial Condition was a $10 million increase in operating lease assets and operating lease liabilities as of October 1, 2022.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on current expected credit losses (“CECL”), rather than incurred losses, to estimate credit losses on certain types of financial instruments (i.e. loans and held to maturity securities), including certain off-balance sheet financial instruments (i.e. commitments to extend credit and standby letters of credit that are not unconditionally cancellable). The CECL standard should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating credit losses. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset (i.e. increase) to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as provision for loan losses for these assets. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. As the Company is a smaller-reporting company under SEC regulations, the Company will adopt CECL on October 1, 2023. The Company is currently evaluating the impact the CECL model will have on our accounting and allowance for loans losses. The Company has engaged a third-party to assist in the development of a CECL model for the calculation of the allowance for loan and lease losses in preparation for the change to the current expected credit loss model. The Company has also engaged a third-party to perform a model validation of our CECL model. The Company is also in the process of updating its policies, procedures and internal controls accordingly. The Company may recognize a one-time cumulative-effect adjustment to retained earnings upon adoption of CECL on October 1, 2023, consistent with regulatory expectations set forth in interagency guidance. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our consolidated financial condition or results of operations.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Company will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 for entities that have adopted ASU 2016-13, otherwise effective date is the same as ASU 2016-13. The Company will adopt ASU 2016-13 effective October 1, 2023 and will simultaneously implement ASU 2022-02.
11
2. EARNINGS PER SHARE
The two-class method is used in the calculation of basic and diluted earnings per share (“EPS”). Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings. The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities.
The Company’s basic and diluted EPS calculations for the three and nine months ended June 30, 2023 and 2022 follows. There were no stock options that were antidilutive for the three and nine months ended June 30, 2023 and 2022.
Three Months Ended June 30,
(in thousands, except share and per share data)
Net income available to common stockholders
Less: Dividends paid and earnings allocated to participating securities
(103)
(259)
(448)
(668)
Income attributable to common stock
2,991
5,074
11,193
17,062
Weighted average common shares outstanding, including participating securities
7,332,090
6,596,505
7,316,241
5,970,288
Less: Weighted average participating securities
(262,200)
(324,403)
(286,455)
(219,311)
Weighted average common shares outstanding
7,069,890
6,272,102
7,029,786
5,750,977
Basic EPS
Weighted average common equivalent shares outstanding
75,523
99,062
77,735
99,206
Weighted average common and equivalent shares outstanding
7,145,413
6,371,164
7,107,521
5,850,183
Diluted EPS
12
3. SECURITIES
At the time of purchase of a security, the Company designates the security as either available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent.
The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at June 30, 2023 and September 30, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:
Gross
Amortized
Unrealized
(in thousands)
Cost
Gains
Losses
Fair Value
Available for sale:
U.S. GSE residential mortgage-backed securities
335
(124)
211
Corporate bonds
12,700
(1,817)
10,883
Total available for sale securities
13,035
(1,941)
Held to maturity:
1,588
(136)
1,452
U.S. GSE commercial mortgage-backed securities
2,592
(161)
2,431
Total held to maturity securities
(297)
3,883
Total investment securities
17,215
(2,238)
14,977
375
(133)
242
(657)
12,043
13,075
(790)
1,778
(160)
1,618
2,636
(159)
2,477
(319)
4,095
17,489
(1,109)
16,380
13
The amortized cost and fair value of investment securities at June 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single date are shown separately.
Fair
Value
Securities available for sale:
Five to ten years
Total securities available for sale
Securities held to maturity:
Total securities held to maturity
At June 30, 2023 and September 30, 2022, investment securities with a carrying amount of $1.9 million and $1.8 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
There were no sales of securities for the three and nine months ended June 30, 2023 and the three months ended June 30, 2022. There were $2.1 million of proceeds on sales of securities available for sale with gross gains of $105 thousand for the nine months ended June 30, 2022.
The following tables summarize gross unrealized losses and fair values of investment securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2023 and September 30, 2022.
Less than Twelve Months
Twelve Months or Longer
Number of
(in thousands, except number of securities)
Securities
Available-for-sale:
5,022
(978)
4,661
(839)
9,683
Total available-for-sale
4,872
(963)
9,894
Held-to-maturity:
Total held-to-maturity
14
152
(126)
(7)
10,843
10,995
(783)
11,085
There was no other than temporary impairment loss recognized on any securities at June 30, 2023 or September 30, 2022.
4. LOANS
The following table sets forth the classification of the Company’s loans by loan portfolio segment for the periods presented.
Residential real estate
623,362
515,316
Multi-family
583,224
574,413
Commercial real estate
532,648
472,511
Commercial and industrial
66,642
45,758
Construction and land development
12,682
12,871
Consumer
22
Gross loans
1,818,846
1,620,891
Net deferred loan fees and costs
4,657
2,640
Total loans
Total loans, net
The Company’s Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans outstanding, included in commercial and industrial loans in the table above, totaled $4.9 million and $10.2 million at June 30, 2023 and September 30, 2022, respectively.
At June 30, 2023 and September 30, 2022, the Company was servicing approximately $247.8 million and $246.0 million, respectively, of loans for others. The Company had no loans held for sale at June 30, 2023 and September 30, 2022.
Purchased Credit Impaired Loans
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount for those loans is as follows:
602
136
629
Total recorded investment
1,231
During the nine months ended June 30, 2023, two purchased credit impaired loans acquired in the Savoy Bank acquisition totaling $457 thousand were charged off to the allowance for loan losses.
For the three months ended June 30, 2023 and 2022, the Company sold loans totaling approximately $12.6 million and $9.5 million, respectively, recognizing net gains of $1.1 million and $0.8 million, respectively. For the nine months ended June 30, 2023 and 2022, the Company sold loans totaling approximately $33.4 million and $60.9 million, respectively, recognizing net gains of $2.6 million and $3.9 million, respectively.
The following summarizes the activity in the allowance for loan losses by portfolio segment for the periods indicated:
Three Months Ended June 30, 2023
Commercial
Construction
Residential
Multi-
and
and Land
Real Estate
Family
Industrial
Development
Allowance for loan losses:
Beginning balance
4,664
5,315
3,244
1,525
18
14,879
Charge-offs
(10)
Recoveries
Provision (credit) for loan losses
132
(27)
137
253
Ending Balance
4,796
5,288
3,381
1,768
108
28
15,369
Three Months Ended June 30, 2022
3,400
2,627
3,327
532
9,886
Recovories
(168)
503
479
103
82
Ending balance
3,232
3,130
3,806
635
10,886
16
Nine Months Ended June 30, 2023
Beginning Balance
3,951
4,308
3,707
761
115
12,844
(467)
845
980
(326)
1,414
26
Nine Months Ended June 30, 2022
4,155
2,433
1,884
79
8,552
(66)
(923)
763
1,922
556
The following table represents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment evaluation method. The recorded investment in loans excludes accrued interest receivable due to immateriality.
Individually evaluated for impairment
724
Collectively evaluated for impairment
4,564
14,645
Purchased-credit impaired
Total allowance for loan losses
Loans:
3,731
3,499
365
12,391
621,533
580,338
528,664
67,417
12,660
364
1,810,976
Total loans held for investment
625,264
583,837
533,460
67,918
17
711
12,794
50
5,392
2,348
5,875
907
14,522
510,866
572,713
466,507
44,749
12,907
36
1,607,778
516,258
575,061
472,984
46,285
The following presents information related to the Company’s impaired loans by portfolio segment for the periods shown.
Unpaid
Principal
Recorded
Allowance
Balance
Investment
Allocated
With no related allowance recorded:
3,733
5,394
1,935
5,950
390
908
10,854
10,827
14,600
With an allowance recorded:
1,564
Average
Interest
Income
Recognized
Recognized(1)
3,642
5,034
3,701
52
4,400
2,150
1,058
2,274
641
5,269
5,851
5,633
2,883
398
207
418
23
11,459
12,150
12,026
78
8,124
521
174
At June 30, 2023 and September 30, 2022, past due and non-accrual loans disaggregated by portfolio segment were as follows:
Past Due and Non-Accrual
30 - 59
60 - 89
Greater than
Total past
Purchased
Days
89 Days
due and
Credit
Past Due
Non-accrual
Impaired(1)
Current
5,591
2,834
1,989
10,414
614,850
569
4,068
579,769
4,728
2,443
11,967
521,493
445
392
1,202
66,580
11,333
5,669
10,649
27,651
1,795,716
961
351
3,151
4,463
511,795
936
6,811
465,571
539
161
1,607
44,049
2,436
512
12,281
15,229
1,607,071
Troubled debt restructurings (“TDRs”) are loan modifications where the Company has granted a concession to a borrower in financial difficulty. To assess whether a borrower is experiencing financial difficulty, an evaluation is performed to determine if that borrower is currently in payment default under any of its obligations or whether there is a probability that the borrower will be in payment default in the foreseeable future without the modification. At June 30, 2023 and September 30, 2022, the Company had a recorded investment in TDRs totaling $1.7 million and $2.3 million, consisting solely of residential real estate loans with no specific reserves allocated to such loans and no commitment to lend additional funds under those loans, at either June 30, 2023 or September 30, 2022.
For the three and nine months ended June 30, 2023 and 2022, there were no TDRs for which there was a payment default within twelve months of restructuring. A loan is considered to be in payment default once it is 90 days contractually past due under its modified terms. For the three and nine months ended June 30, 2023 and 2022, the Company had no new TDRs.
The Company continuously monitors the credit quality of its loan receivables. Credit quality is monitored by reviewing certain credit quality indicators. Management has determined that internally assigned credit risk ratings by loan segment are the key credit quality indicators that best assist management in monitoring the credit quality of the Company’s loan receivables.
The Company has adopted a credit risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign a credit risk rating to each loan in their portfolio at origination. When the lender learns of important financial developments, the risk rating is reviewed and adjusted if necessary. In addition, the Company engages a third-party independent loan reviewer that performs quarterly reviews of a sample of loans, validating the credit risk ratings assigned to such loans. The credit risk ratings play an important role in the establishment of the loan loss provision and to confirm the adequacy of the allowance for loan losses.
19
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. The Company uses the following definitions for risk ratings:
Special Mention: The loan has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the Company’s credit position at some future date.
Substandard: The loan is inadequately protected by current sound worth and paying capacity of the obligor or collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: The loan has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions, and values, highly questionable and improbable.
Loans not having a credit risk rating of Special Mention, Substandard or Doubtful are considered pass loans.
At June 30, 2023 and September 30, 2022, the Company’s loan portfolio by credit risk rating disaggregated by portfolio segment were as follows:
Special
Pass
Mention
Substandard
Doubtful
Real Estate:
618,809
3,809
2,646
519,268
7,177
7,015
66,157
1,078
683
1,797,596
12,064
13,843
512,595
571,128
3,933
453,321
8,085
11,578
43,314
540
10,499
2,408
1,590,893
11,545
21,093
20
5. EQUITY COMPENSATION PLANS
The Company’s 2021 and 2018 Equity Compensation Plans (the “2021 Plan” and the “2018 Plan,” respectively), provide for the grant of stock-based compensation awards to members of management, including employees and management officials, and members of the Board. Under the 2021 Plan, a total of 427,500 shares of the Company’s common stock or equivalents were approved for issuance, of which 265,307 shares remain available for issuance at June 30, 2023. Of the total 346,000 shares of common stock approved for issuance under the 2018 Plan, 16,159 shares remain available for issuance at June 30, 2023.
Stock Options
Stock options are granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant, and generally with vesting periods of three years and contractual terms of ten years. All stock options fully vest upon a change in control.
The fair value of stock options is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of the common stock of the Company’s peers. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Expected terms are based on historical data and represent the periods in which the options are expected to be outstanding. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
There were no stock options exercised during the three months ended June 30, 2023 and 10,614 stock options exercised during the nine months ended June 30, 2023. No stock options were exercised during the three and nine months ended June 30, 2022.
A summary of stock option activity follows (aggregate intrinsic value in thousands):
Weighted
Aggregate
Remaining
Exercise
Intrinsic
Contractual
Options
Price
Term
Outstanding, October 1, 2022
227,406
9.50
2,298
2.45 years
Granted
Exercised
(10,614)
10.00
Forfeited
(18,459)
16.25
Outstanding, June 30, 2023 (1)
198,333
8.85
1,793
1.55 years
The following table presents information related to the stock option plan for the periods presented:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit from option exercises
There was no compensation expense attributable to stock options for the three and nine months ended June 30, 2023 and 2022.
21
Restricted Stock Awards
During the nine months ended June 30, 2023, restricted stock awards of 50,580 shares were granted with a five-year vesting period. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.
A summary of restricted stock awards activity follows:
Weighted-Average
Grant Date Fair
Shares
Unvested, October 1, 2022
284,263
19.78
50,580
19.73
Vested
(67,128)
20.08
(4,567)
20.03
Unvested, June 30, 2023
263,148
19.69
Compensation expense attributable to restricted stock awards was $340 thousand and $482 thousand for the three months ended June 30, 2023 and 2022, respectively. Compensation expense attributable to restricted stock awards was $1.4 million and $1.1 million for the nine months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, there was $4.2 million of total unrealized compensation cost related to unvested restricted stock, expected to be recognized over a weighted-average term of 3.62 years. The total fair value of shares vested during the nine months ended June 30, 2023 and 2022 was $1.3 million and $824 thousand, respectively.
Restricted Stock Units
Long Term Incentive Plan
Restricted stock units (“RSU”s) represent an obligation to deliver shares to a grantee at a future date if certain vesting conditions are met. RSUs are subject to a time-based vesting schedule and the satisfaction of performance conditions and are settled in shares of the Company's common stock. RSUs do not provide voting rights and RSUs may accrue dividends from the date of grant.
The following table summarizes the unvested performance-based RSU activity for the nine months ended June 30, 2023:
47,676
(6,072)
41,604
No RSUs were granted during the nine months ended June 30, 2023. Performance-based RSUs granted in 2022 cliff vest after three years and are subject to the achievement of the Company's pre-defined performance goals for the three-year period ending December 31, 2024.
Compensation expense attributable to RSUs was $61 thousand and $210 thousand, respectively, for the three and nine months ended June 30, 2023. Compensation expense attributable to RSUs was $82 thousand and $139 thousand, respectively, for the three and nine months ended June 30, 2022. As of June 30, 2023, there was $404 thousand of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 1.65 years.
6. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes that as of June 30, 2023, the Bank meets all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized or worse, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2023 and September 30, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
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.
The following table sets forth the Bank’s actual and required capital amounts (in thousands) and ratios under current regulations:
Minimum Capital
Minimum to Be Well
Adequacy Requirement
Capitalized Under
with Capital
Prompt Corrective
Actual Capital
Conservation Buffer
Action Provisions
Amount
Ratio
Total capital to risk-weighted assets
204,109
14.24
%
114,674
8.00
150,501
10.50
143,342
Tier 1 capital to risk-weighted assets
188,568
13.16
86,005
6.00
121,841
8.50
Common equity tier 1 capital to risk-weighted assets
64,504
4.50
100,339
7.00
93,172
6.50
Tier 1 capital to average total assets
9.16
82,341
4.00
N/A
102,926
5.00
191,355
16.32
93,796
123,107
117,245
178,340
15.21
70,347
99,658
52,760
82,071
76,209
10.90
65,429
81,786
Dividend restrictions - The Company’s principal source of funds for dividend and debt service payments is dividends received from the Bank. During the nine months ended June 30, 2023 the Bank paid $3.7 million in cash dividends to the Holding Company. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of June 30, 2023, the Bank had $49.1 million of retained net income available for dividends to the Company, without obtaining regulatory approval.
7. FAIR VALUE
FASB ASC No. 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
FASB ASC 820-10 also establishes a fair value hierarchy and describes three levels of inputs that may be used to measure fair values: The three levels within the fair value hierarchy are as follows:
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
24
Assets Measured at Fair Value on a Recurring Basis
The following presents fair value measurements on a recurring basis at June 30, 2023 and September 30, 2022:
Fair Value Measurements Using:
Quoted Prices In
Significant
Active Markets
Significant Other
Unobservable
Carrying
for Identical Assets
Observable Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Available-for-sale securities:
1,200
Derivatives
142
15,611
10,036
5,575
for Identical
Assets
(In thousands)
16,638
The fair value for the securities available-for-sale were obtained from an independent broker based upon matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The Company has determined these are classified as Level 2 inputs within the fair value hierarchy.
Derivatives represent interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.
The fair value of mortgage servicing rights are based on a valuation model that calculates the present value of estimated future servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income. The fair value of loan servicing rights related to residential mortgage loans at June 30, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 12.38% to 14.88%, a prepayment speed of 26.25% and a weighted average life ranging from 1.32 to 2.89 years. Fair value at September 30, 2022 for loan servicing rights was determined based on discounted expected future cash flows using discount rates ranging from 12.0% to 14.5%, prepayment speed of 26.25% and a weighted average life ranging from 1.2 to 3.0 years.
The fair value of loan servicing rights for SBA loans at June 30, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 9.33% to 37.36%, prepayment speeds ranging from 8.18% to 27.61% and a weighted average life ranging from 1.26 to 5.83 years. The fair value of loan servicing rights for SBA loans at September 30, 2022 was determined based on discounted expected future cash flows using discount rates ranging from 5.78% to 26.72%, prepayment speeds ranging from 8.42% to 24.00% and a weighted average life ranging from 1.47 to 5.79 years.
25
The Company has determined these are mostly unobservable inputs and considers them Level 3 inputs within the fair value hierarchy.
The following table presents the changes in mortgage servicing rights for the periods presented:
Balance at beginning of period
4,429
4,028
3,690
Additions
280
628
784
Adjustment to fair value
(334)
(119)
(606)
(354)
Balance at end of period
4,120
Assets Measured at Fair Value on a Non-recurring Basis
Assets measured at fair value on a non-recurring basis as of June 30, 2023 are summarized below:
Impaired loans
840
The fair value amounts shown in the table above are impaired loans net of reserves allocated to said loans. The total reserves allocated to these impaired loans are $724 thousand for June 30, 2023. There were no material collateral dependent impaired loans as of September 30, 2022.
The table below presents additional quantitative information about level 3 fair value measured at fair value on non-nonrecurring basis at June 30, 2023:
Range
Valuation Technique
Unobservable Input
(Average)
(Dollar in thousands)
Impaired loans - Multi-family
Income Approach
Capitalization Rate
4.40%-5.50%
(5.11)%
Financial Instruments Not Measured at Fair Value
The following presents the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value at June 30, 2023 and September 30, 2022:
Total Fair
Cash and cash equivalents
Securities held-to-maturity
Loans, net
1,767,928
420
9,769
Financial liabilities:
449,594
Demand and other deposits
1,137,134
292,040
26,868
1,564,991
219
8,327
328,964
1,189,033
99,597
24,199
914
27
8. BORROWINGS
Federal Home Loan Bank (“FHLB”) Advances
At June 30, 2023 and September 30, 2022, FHLB term borrowings outstanding were $129.7 million and $37.8 million, respectively, all of which were fixed rate.
At June 30, 2023, the Company had $160.0 million in FHLB overnight borrowings outstanding at a rate of 5.31%. At September 30, 2022, the Company had $55.0 million in FHLB overnight borrowings outstanding at a rate of 3.29%.
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by residential and commercial mortgage loans under a blanket lien arrangement at June 30, 2023 and September 30, 2022. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to an additional total of $101.8 million at June 30, 2023.
The following table sets forth the contractual maturities in the next five years of the balance sheet date and weighted average interest rates of the Company’s fixed rate FHLB advances (in thousands):
Balance at June 30,
Contractual Maturity
Average Rate
Overnight
160,000
5.31
2024, rates from 0.37% to 2.53%
8,000
1.72
2025, rates from 0.39% to 0.49%
13,860
0.43
2026, rates from 0.56% to 4.98%
47,555
3.92
2027, rates from 4.13% to 4.74%
40,250
4.32
2028, rates from 3.99% to 4.58%
4.18
Total term advances
129,665
3.57
Total FHLB advances
289,665
4.53
Balance at September 30,
55,000
3.29
2023, rates from 0.37% to 2.96%
11,860
2.23
2024, rates from 0.39% to 2.53%
18,860
0.98
2025, rates from 0.56% to 0.59%
7,080
0.58
37,800
1.30
92,800
2.48
Federal Reserve Borrowings
At June 30, 2023 and September 30, 2022, the Company’s borrowings from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) were $4.1 million and $9.0 million, respectively. The borrowings have a rate of 0.35% and the maturity date will equal the maturity date of the underlying PPP loan pledged to secure the extension of credit. The maturity date of a PPP loan is either two or five years from origination date. The Company utilized the PPPLF to fund PPP loan production. The borrowings are secured by pledged PPP loans as of June 30, 2023 and September 30, 2022.
Correspondent Bank Borrowings
At June 30, 2023, approximately $92 million in unsecured lines of credit extended by correspondent banks were available to be utilized for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at June 30, 2023 and September 30, 2022.
9. SUBORDINATED DEBENTURES
In October 2020, the Company completed the private placement of $25.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to certain qualified institutional buyers and accredited investors. The Notes bear interest, payable semi-annually, at the rate of 5.00% per annum, until October 15, 2025. From and including October 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 (“SOFR”) plus 487.4 basis points. The Company may, at its option, beginning with the interest payment date of October 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 portion of the proceeds of these subordinated notes contributed to the Bank are included as a component of the Bank’s Tier 1 capital for regulatory reporting.
At June 30, 2023 and September 30, 2022, the unamortized issuance costs of the Notes were $0.4 million. For the three and nine months ended June 30, 2023, $13 thousand and $40 thousand, respectively, in issuance costs were recorded in interest expense. For the three and nine months ended June 30, 2022, $13 thousand and $41 thousand, respectively, in issuance costs were recorded in interest expense. The Notes are presented net of unamortized issuance costs in the Company’s Consolidated Statements of Financial Condition.
10. DERIVATIVES
Cash Flow Hedges of Interest Rate Risk
As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The Company executed its first interest rate swap agreement in June 2023.
Interest rate swaps with notional amounts totaling $25.0 million as of June 30, 2023 were designated as cash flow hedges of certain Brokered Certificates of Deposit. The swaps were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other assets/(other liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.
29
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the next twelve months, the Company estimates that $0.3 million will be reclassified as a decrease in interest expense.
The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the consolidated statements of income relating to the cash flow derivative instruments for the periods indicated:
Gain recognized in other comprehensive income
The following table reflects the cash flow hedges included in the consolidated statements of financial condition as of the dates indicated:
Notional
Asset
Liability
Included in other assets/(liabilities):
Interest rate swaps related to Brokered Certificates of Deposit
25,000
Credit-Risk-Related Contingent Features
The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net liability position, the Company is required to post collateral against its obligations under the agreements. However, if the termination value of derivatives is a net asset position, the counterparty is required to post collateral to the Company. At June 30, 2023, the Company received no collateral from its counterparties under the agreements in a net asset position. As of June 30, 2023, there were no derivatives in a net liability position, and therefore the termination value was zero.
30
11. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents changes in accumulated other comprehensive (loss) income by component, net of tax, for the nine months ended June 30, 2023 and 2022:
Unrealized Gains and
Gains and
Losses on Available-
Losses on
for-Sale Debt
Cash Flow
Hedges
Balance at October 1, 2022
Other comprehensive (loss) income, before reclassification
Amount reclassified from accumulated other comprehensive loss
Net current period other comprehensive (loss) income
Balance at June 30, 2023
(1,520)
Balance at October 1, 2021
Other comprehensive loss, before reclassification
Amount reclassified from accumulated other comprehensive income
Net current period other comprehensive loss
Balance at June 30, 2022
The following represents the reclassification out of accumulated other comprehensive (loss) income for the three and nine months ended June 30, 2023 and 2022.
Affected Line Item in Consolidated
Statements of Income
Unrealized gains and losses on available-for-sale securities
Realized gains on securities available-for-sale
Gain on sale of investment securities available-for-sale, net
Tax effect
Net of tax
81
Gains and losses on cash flow hedges
Interest rate contracts
Interest income (expense)
Income tax (expense) or benefit
Total reclassifications for the period, net of tax
31
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements - This document contains a number of forward-looking statements, including statements about the financial condition, results of operations, earnings outlook and prospects of the Company. Forward-looking statements are typically identified by words such as “should,” “likely,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “target,” “project,” “goal” and other similar words and expressions. The forward-looking statements involve certain risks and uncertainties. The ability of the Company to predict results or the actual effects of its plans and strategies is subject to inherent uncertainty.
Factors that may cause actual results or earnings to differ materially from such forward-looking statements include those set forth in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as updated by the Company’s subsequent filings with the SEC and, among others, the following:
Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this document. All subsequent written and oral forward-looking statements concerning matters addressed in this document and attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
Non-GAAP Disclosure - This discussion includes discussions of the Company’s tangible common equity (“TCE”) ratio, tangible common equity and tangible assets, non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or modifies amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with U.S. GAAP. The Company believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and the Company’s marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other financial institutions.
With respect to the calculations and reconciliations of tangible common equity, tangible assets and the TCE ratio, please see Liquidity and Capital Resources contained herein for a reconciliation to the most directly comparable GAAP measure.
Executive Summary – The Company is a one-bank holding company incorporated in 2016. The Company operates as the parent for its wholly owned subsidiary, the Bank, which commenced operations in 2008. The income of the Company is primarily derived through the operations of the Bank. Unless the context otherwise requires, references herein to the Company include the Company and the Bank on a consolidated basis.
The Bank operates as a locally headquartered, community-oriented bank, serving customers throughout the New York metro area from offices in Nassau, Suffolk, Queens, Kings (Brooklyn) and New York (Manhattan) Counties, New York and Freehold in Monmouth County, New Jersey. We opened the Bank’s Hauppauge Business Banking Center in Hauppauge, Suffolk County, New York in May 2023. This location is the nexus of our expanded commercial lending and deposit activities, that are integral to the ongoing diversification of our balance sheet as we fill the void left by the diminishing number of commercial banks in the NYC Metro area. We offer personal and business loans on a secured and unsecured basis, SBA and USDA guaranteed loans, revolving lines of credit, commercial mortgage loans, and one- to four-family non-qualified mortgages secured by primary and secondary residences that may be owner occupied or investment properties, home equity loans, bridge loans and other personal purpose loans.
The Bank works to provide more direct, personal attention to customers than management believes is offered by competing financial institutions, the majority of which are branch offices of banks headquartered outside of the Bank’s primary trade area. By striving to employ professional, responsive and knowledgeable staff, the Bank believes it offers a superior level of service to its customers. As a result of senior management’s availability for consultation on a daily basis, the Bank believes it offers customers a quicker response on loan applications and other banking transactions, as well as greater and earlier certainty as to whether these transactions will actually close, than competitors, whose decisions may take longer and be made in distant headquarters.
Historically, the Bank has generated additional income by strategically originating and selling residential and government guaranteed loans to other financial institutions at premiums, while also retaining servicing rights in some sales. However, due to the pace of interest rate increases over the last year, the residential loan sale market remains less active, and the Bank continues originating residential loans for its own portfolio. The Bank is an approved SBA Preferred Lender, enabling the Bank to process SBA applications under delegated authority from the SBA and enhancing the Bank’s ability to compete more effectively for SBA lending opportunities.
In the first half of 2023 we largely completed expansions of our SBA & USDA and C&I Banking teams and anticipate the pace and volume of SBA and USDA guaranteed loan originations and C&I loan originations and deposit production will grow during the second half of 2023.
33
The Bank finances most of its activities through a combination of deposits, including non-interest-bearing demand, savings, NOW and money market deposits as well as time deposits, and both short- and long-term borrowings. The Company’s chief competition includes local banks within its market area, New York City money center banks and regional banks, as well as non-bank lenders, including fintech lenders.
Financial Performance Summary
As of or for the three and nine months ended June 30, 2023 and 2022
(dollars in thousands, except per share data)
Three months ended
Nine months ended
Revenue (1)
15,479
16,648
47,834
51,709
Non-interest expense
Acquisition costs included in non-interest expense
Net income per share - diluted
Return on average assets
0.60
1.41
1.61
Return on average stockholders' equity (2)
6.82
14.05
8.68
17.27
Tier 1 leverage ratio
11.64
Common equity tier 1 risk-based capital ratio
16.27
Tier 1 risk-based capital ratio
Total risk-based capital ratio
17.32
Tangible common equity ratio (non-GAAP) (2)
7.77
9.29
Total stockholders' equity/total assets (3)
8.62
10.40
At June 30, 2023 the Company, on a consolidated basis, had total assets of $2.1 billion, total deposits of $1.6 billion and total stockholders’ equity of $182.8 million. The Company recorded net income of $3.1 million, or $0.42 per diluted share (including Series A preferred shares), for the three months ended June 30, 2023 compared to net income of $5.3 million, or $0.80 per diluted share, for the same period in 2022 and $11.6 million, or $1.57 per diluted share, for the nine months ended June 30, 2023 compared to net income of $17.7 million, or $2.92 per diluted share, for the same period in 2022.
The $2.2 million decrease in earnings for the three months ended June 30, 2023, versus the comparable 2022 period was primarily due to a $1.3 million decrease in net interest income and a $1.8 million increase in non-interest expense. The $6.1 million decrease in earnings for the nine months ended June 30, 2023, versus the comparable 2022 period resulted primarily from a $2.1 million decrease in net interest income; $1.7 million decrease in non-interest income; a $3.1 million increase in non-interest expense; a $0.5 million increase in the provision for loan losses expense and a decrease in purchase accounting accretion.
The Company’s return on average assets and return on average stockholders’ equity were 0.60% and 6.82%, respectively, for the three months ended June 30, 2023, versus 1.41% and 14.05%, respectively, for the comparable 2022 period, and 0.81% and 8.68% for the nine months ended June 30, 2023, versus 1.61% and 17.27%, respectively, for the prior year period.
Total non-accrual loans at June 30, 2023 were $10.6 million, or 0.58% of total loans, compared to $12.3 million, or 0.76% of total loans at September 30, 2022 and $12.5 million, or 0.88% of total loans, at June 30, 2022. The allowance for loan
34
losses as a percentage of total non-accrual loans amounted to 144%, 105% and 87% at June 30, 2023, September 30, 2022 and June 30, 2022, respectively.
The Company’s operating efficiency ratio was 68.3% for the three months ended June 30, 2023, versus 52.4% a year ago. The increase in the operating efficiency ratio was due to decreases in non-interest income and net interest income resulting from the rapid rise in interest rates and an increase in non-interest expense.
Critical Accounting Policies, Judgments and Estimates - To prepare financial statements in conformity with U.S. GAAP, the Company’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Critical accounting estimates are accounting estimates where (a) the nature of the estimate is material due to levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and (b) the impact of the estimate on financial condition or operating performance is material.
The Company considers the determination of the allowance for loan losses its most critical accounting policy, practice and use of estimates. The Company uses available information to recognize probable and reasonably estimable losses on loans. Future additions to the allowance may be necessary based upon changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. The allowance for loan losses is increased by a provision for loan losses charged against income and is decreased by charge-offs, net of recoveries. Loan losses are recognized in the period the loans, or portion thereof, are deemed uncollectible. The adequacy of the allowance to cover any inherent loan losses in the portfolio is evaluated on a quarterly basis.
Financial Condition – Total assets of the Company were $2.1 billion at June 30, 2023, versus $1.8 billion at September 30, 2022. Total loans at June 30, 2023 were $1.8 billion, compared to total loans of $1.6 billion at September 30, 2022. Total deposits were $1.6 billion at June 30, 2023, versus $1.5 billion at September 30, 2022. Total borrowings and subordinated debt at June 30, 2023 were $318.5 million, including $289.7 million of outstanding FHLB advances, compared to $126.3 million at September 30, 2022.
For the nine months ended June 30, 2023, the Company’s loan portfolio, net of sales, grew by $200.0 million to $1.8 billion. At June 30, 2023, the residential loan portfolio amounted to $625.3 million, or 34.3% of total loans. Commercial real estate loans, including multi-family loans and construction and land development loans, continue to make up a greater proportion of our loan portfolio and totaled $1.1 billion or 62.0% of total loans at June 30, 2023. Commercial loans, including PPP loans, totaled $67.9 million or 3.7% of total loans.
Total deposits were $1.6 billion at June 30, 2023, versus $1.5 billion at September 30, 2022. Core deposit balances, which consist of demand, NOW, savings and money market deposits, represented 71.4% and 77.8% of total deposits at June 30, 2023 and September 30, 2022, respectively. At those dates, demand deposit balances represented 11.3% and 14.3% of total deposits. The Company’s municipal deposit program is built on long-standing relationships developed in the local marketplace. We believe this core deposit business will continue to provide a stable source of funding for the Company’s lending products at costs lower than both consumer deposits and market-based borrowings. The Company continues to broaden its municipal customer deposit base as evidenced by the increase in the number of relationships year over year. At June 30, 2023, total municipal deposits were $346.4 million, representing 21.7% of total deposits, compared to $416.9 million at September 30, 2022, representing 27.3% of total deposits. The weighted average rate on the municipal deposit portfolio was 3.79% at June 30, 2023.
Borrowings at June 30, 2023 were $293.8 million, including $4.1 million in PPPLF funding, versus $101.8 million, including $9.0 million in PPPLF funding at September 30, 2022. PPPLF borrowings declined as borrowers received forgiveness or have made payments on PPP loans. At June 30, 2023, the Company had $289.7 million of outstanding FHLB advances as compared to $92.8 million at September 30, 2022. The Company added $100.7 million of extended duration FHLB term advances in March 2023 to provide additional liquidity and enhance the interest rate sensitivity profile. The Company utilizes a number of strategies to manage interest rate risk including interest rate swap agreements. During the second quarter of 2023, the Company executed its first pay fixed, receive floating interest rate swap with a notional amount totaling $25.0 million for a four-year term at a fixed rate of 3.89%.
35
Liquidity and Capital Resources – Liquidity management is defined as ability of the Company and the Bank to meet their 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 the Federal Reserve, FHLB and correspondent banks, which totaled $211.5 million and $150.0 million at June 30, 2023 and September 30, 2022, 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 and the ability to sell or pledge marketable assets and access to lines of credit. At June 30, 2023, liquidity sources, which includes cash and unencumbered securities and secured and unsecured funding capacity, totaled $485.8 million, representing approximately 165% of uninsured deposit balances.
Liquidity is continuously monitored, 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 the Company’s ability to meet liquidity needs, including variations in the markets served, loan demand, its asset/liability mix, its reputation and credit standing in its markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities and loan 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 Company’s primary sources of funds are cash provided by deposits, which may include brokered and listing service deposits, borrowings, proceeds from maturities and sales of securities and cash provided by operating activities. At June 30, 2023, total deposits were $1.6 billion, of which $389.4 million were time deposits scheduled to mature within the next 12 months. Based on historical experience, the Company expects to be able to replace a substantial portion of those maturing deposits with comparable deposit products. At June 30, 2023 and September 30, 2022, the Company had $293.8 million and $101.8 million, respectively, in borrowings outstanding.
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 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. At June 30, 2023, the Bank had access to approximately $953.1 million in FHLB lines of credit for overnight or term borrowings, of which $401.9 million securing municipal letters of credit, $129.7 million in term borrowings, and $160.0 million in overnight borrowings were outstanding. At June 30, 2023, the Bank’s borrowings from the Federal Reserve’s PPPLF were $4.1 million. At June 30, 2023, the Bank had access to approximately $92 million in unsecured lines of credit extended by correspondent banks, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at June 30, 2023.
The Company strives to maintain an efficient level of capital, commensurate with its risk profile, on which a competitive rate of return to stockholders will be realized over the short and long terms. Capital is managed to enhance stockholder value while providing flexibility for management to act opportunistically in a changing marketplace. Management continually evaluates the Company’s capital position in light of current and future growth objectives and regulatory guidelines. Total stockholders’ equity increased to $182.8 million at June 30, 2023 from $172.6 million at September 30, 2022, primarily due to net income recorded during the nine months ended June 30, 2023.
The Bank is subject to regulatory capital requirements. The Bank’s tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 9.16%, 13.16%, 13.16% and 14.24%, respectively, at June 30, 2023, exceeding all regulatory guidelines for a well-capitalized institution, the highest regulatory capital category. Moreover, capital rules also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above minimum capital requirements. At June 30, 2023, the Bank’s capital buffer was in excess of requirements.
The Company did not repurchase any shares of its common stock during the nine months ended June 30, 2023.
The Company’s total stockholders’ equity to total assets ratio and tangible common equity to tangible assets ratio (“TCE ratio”) were 8.62% and 7.77%, respectively, at June 30, 2023, versus 9.38% and 8.41%, respectively, at September 30, 2022 and 10.40% and 9.29%, respectively, at June 30, 2022. The ratio of total stockholders’ equity to total assets is the most comparable U.S. GAAP measure to the non-GAAP TCE ratio presented herein. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing total stockholders’ equity by total assets, after reducing both amounts by intangible assets. The TCE ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of our capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. Set forth below are the reconciliations of tangible common equity to U.S. GAAP total stockholders’ equity and tangible assets to U.S. GAAP total assets at June 30, 2023 (in thousands). (See also Non-GAAP Disclosure contained herein.)
Ratios
Total stockholders' equity (3)
Total assets
8.62%
(1)
Less: goodwill
(19,168)
Less: core deposit intangible
(344)
Tangible common equity (3)
163,294
Tangible assets
2,102,271
7.77%
(2)
All dividends must conform to applicable statutory and regulatory requirements. The Company’s ability to pay dividends to stockholders depends on the Bank’s ability to pay dividends to the Company. Additionally, the ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Under New York law, a bank may pay a dividend on its common stock only out of net profits, and must obtain the approval of the Superintendent of the DFS if the total of all dividends declared by a bank or trust company in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock.
The Company’s Board of Directors approved the payment of a $0.10 per share cash dividend on both common and Series A preferred shares payable on August 16, 2023 to stockholders of record on August 9, 2023.
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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 customers provided there are no violations of any conditions established under the loan agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many commitments are expected to expire without being drawn upon, 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, income-producing commercial properties and other real estate. At June 30, 2023 and September 30, 2022, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $88 million and $73 million, respectively.
Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of 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 financings 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. At June 30, 2023 and September 30, 2022, letters of credit outstanding were approximately $488 thousand and $817 thousand, respectively.
Results of Operations – Comparison of the Three Months Ended June 30, 2023 and 2022 – The Company recorded net income of $3.1 million during the three months ended June 30, 2023, versus net income of $5.3 million in the comparable three month period a year ago. The decline in earnings for the three months ended June 30, 2023, versus the comparable 2022 quarter resulted primarily from a $1.3 million decrease in net interest income and a $1.8 million increase in non-interest expense.
Net Interest Income and Margin
The $1.3 million decline in net interest income for the three months ended June 30, 2023, versus the comparable 2022 quarter was largely due to the compression of the Company’s net interest margin to 2.68% in the 2023 quarter from 4.05% in the comparable 2022 quarter. The yield on interest earning assets increased to 5.65% in the 2023 quarter from 4.45% in the comparable 2022 quarter, an increase of 120 basis points. This increase was offset by a 302 basis point increase in the cost of interest-bearing liabilities to 3.52% in 2023 from 0.50% in the third fiscal quarter of 2022. The rapid and significant rise in interest rates driven by the Federal Reserve and, to a lesser extent, the Company’s decision to increase liquidity as a result of recent industry events resulted in the higher cost of funds. Included in net interest income was accretion and amortization of purchase accounting adjustments arising from the acquisition of Savoy Bank of $0.6 million during the three months ended June 30, 2023 and $0.4 million in the three months ended June 30, 2022.
NET INTEREST INCOME ANALYSIS
For the Three Months Ended June 30, 2023 and 2022
(dollars in thousands)
Rate
Assets:
Interest-earning assets
1,798,651
5.70
1,323,482
4.80
Investment securities
15,885
10,752
3.66
Interest-earning cash
195,883
2,494
5.11
128,669
272
0.85
FHLB stock and other investments
9,974
186
7.48
4,228
4.46
Total interest-earning assets
2,020,393
5.65
1,467,131
4.45
Non interest-earning assets:
Cash and due from banks
8,240
10,035
53,511
44,858
2,082,144
1,522,024
Liabilities and stockholders' equity:
Interest-bearing liabilities
1,080,328
3.68
778,751
0.30
437,202
2.95
281,196
0.61
Total interest-bearing deposits
1,517,530
13,119
3.47
1,059,947
1,006
0.38
160,079
1,501
3.76
65,213
100
0.62
24,599
334
5.45
24,545
333
5.44
Total interest-bearing liabilities
1,702,208
3.52
1,149,705
0.50
Demand deposits
174,515
209,176
23,490
10,863
Total liabilities
1,900,213
1,369,744
Stockholders' equity
181,931
152,280
Total liabilities and stockholders' equity
Net interest rate spread
2.13
3.95
Net interest income/margin
2.68
4.05
Provision and Allowance for Loan Losses
The Company recorded a $0.5 million provision for loan losses expense for the three months ended June 30, 2023, versus $1.0 million recorded for the comparable period in 2022. The adequacy of the provision and the resulting allowance for loan losses, which was $15.4 million at June 30, 2023, is determined by management’s ongoing review of the loan portfolio including, among other things, impaired loans, past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect borrower’s ability to repay and estimated fair value of any underlying collateral securing loans. Moreover, management evaluates changes, if any, in underwriting standards; collection, charge-off and recovery practices; the nature or volume of the portfolio, lending staff and concentration of loans; as well as current economic conditions and other relevant factors. Management believes the allowance for loan losses is adequate to provide for probable and reasonably estimable losses at June 30, 2023. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)
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Non-interest Income
Non-interest income increased by $0.1 million for the three months ended June 30, 2023 versus the comparable 2022 period. This increase was driven by a $0.2 million increase in net gain on sale of loans reflective of the strengthening of secondary market premiums in connection with sales of SBA loans offset by a $0.1 million decrease in other income. For the three months ended June 30, 2023 and 2022, the Company sold the government guaranteed portion of SBA loans totaling approximately $12.6 million and $9.5 million, respectively, recognizing net gains of $1.1 million and $0.8 million, respectively.
Non-Interest Income
For the three and nine months ended June 30, 2023 and 2022
Net gain on sale of loans held for sale
Net gain on sale of investments available-for-sale
Non-interest Expense
Total non-interest expense increased by $1.8 million for the three months ended June 30, 2023 versus the comparable 2022 quarter. The increase in non-interest expense was primarily due to increases in salaries and employee benefits, data processing, professional fees and federal deposit insurance premiums.
Non-Interest Expense
The Company recorded income tax expense of $1.3 million for an effective tax rate of 29.9% for the three months ended June 30, 2023, versus income tax expense of $1.6 million for an effective tax rate of 22.9% in the comparable 2022 period. This increase is primarily related to a $0.3 million tax related upward adjustment due to increased business in other states, coupled with lower projected pre-tax income. We anticipate the effective tax rate for the remainder of the year to range from 24.5% to 25.5%.
Results of Operations – Comparison of the Nine Months Ended June 30, 2023 and 2022 – The Company recorded net income of $11.6 million during the nine months ended June 30, 2023, versus net income of $17.7 million in the comparable nine months a year ago. The decline in earnings for the nine months ended June 30, 2023, versus the comparable 2022 period resulted primarily from a $2.1 million decrease in net interest income; a $1.7 million decrese in non-interest income; a $3.1 million increase in non-interest expense; a $0.5 million increase in the provision for loan losses expense due to growth in the loan portfolio; and a decrease in purchase accounting accretion.
The $2.1 million decline in net interest income for the nine months ended June 30, 2023, versus the comparable 2022 period was largely due to the compression of the Company’s net interest margin to 3.05% in the 2023 nine month period from 4.23% in the comparable 2022 period. The margin compression reflects the effects of the rapid and significant rise in interest rates and the competitive deposit environment. The yield on interest earning assets increased to 5.44% in the 2023 nine month period from 4.60% in the comparable 2022 period, an increase of 84 basis points, offset by a 243 basis point increase in the cost of interest-bearing liabilities to 2.90% in 2023 from 0.47% in the 2022 nine month period. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.1 million during the nine months ended June 30, 2023 and $3.3 million in the nine months ended June 30, 2022 arising from the acquisition of Savoy Bank.
For the Nine Months Ended June 30, 2023 and 2022
Yield/Cost
Interest-earning assets:
1,748,618
5.47
1,283,856
16,268
12,659
3.78
97,681
3,558
4.87
116,709
356
0.41
7,617
424
7.44
4,518
130
3.85
1,870,184
1,417,742
4.60
9,557
8,901
53,334
47,044
1,933,075
1,473,687
Interest-bearing liabilities:
1,000,926
3.00
694,429
0.25
401,095
2.38
311,483
0.57
1,402,021
29,605
2.82
1,005,912
2,609
0.35
115,635
2,792
3.23
93,213
376
0.54
24,586
1,001
24,524
998
1,542,242
2.90
1,123,649
0.47
187,071
200,295
24,522
12,456
1,753,835
1,336,400
179,240
137,287
2.54
4.13
3.05
4.23
Provision for Loan Losses
The Company recorded a $2.9 million provision for loan losses expense for the nine months ended June 30, 2023, versus $2.4 million recorded for the comparable period in 2022. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)
Non-interest income decreased by $1.7 million for the nine months ended June 30, 2023, versus the comparable 2022 period. This decline was largely driven by the $1.3 million decrease in net gain on sale of loans due to a lower volume of SBA loan sales and depressed secondary market premiums early in the year. For the nine months ended June 30, 2023 and 2022, the Company sold loans totaling approximately $33.4 million and $60.9 million, respectively, recognizing net gains of $2.6 million and $3.9 million, respectively.
Total non-interest expense increased by $3.1 million for the nine months ended June 30, 2023, versus the comparable 2022 period. The increase in non-interest expense was primarily due to increases in occupancy and equipment, data processing, professional fees and federal deposit insurance premiums.
The Company recorded income tax expense of $3.9 million for an effective tax rate of 24.9% for the nine months ended June 30, 2023, versus income tax expense of $5.2 million for an effective tax rate of 22.8% in the comparable 2022 period.
Asset Quality - Total non-accrual loans at June 30, 2023 were $10.6 million, or 0.58% of total loans, compared to $12.3 million, or 0.76% of total loans at September 30, 2022 and $12.5 million, or 0.88% of total loans, at June 30, 2022. The allowance for loan losses as a percentage of total non-accrual loans amounted to 144%, 105% and 87% at June 30, 2023, September 30, 2022 and June 30, 2022, respectively.
Total accruing loans delinquent 30 days or more, excluding purchased credit-impaired loans, amounted to $17.0 million, $2.9 million and $4.5 million at June 30, 2023, September 30, 2022 and June 30, 2022, respectively.
Total loans having credit risk ratings of Special Mention or Substandard were $25.9 million at June 30, 2023, versus $32.6 million at September 30, 2022. These were mainly from the acquired loan portfolio of Savoy Bank. The acquired portfolio has a large component of SBA loans, which were supported through the COVID-pandemic with assistance from the SBA. The Company’s Special Mention and Substandard loans were comprised of residential real estate, multi-family, commercial real estate loans, commercial and industrial loans (including SBA facilities) and construction loans at June 30, 2023. The Company had no loans with a credit risk rating of Doubtful for the periods presented. All loans not having credit risk ratings of Special Mention, Substandard or Doubtful are considered pass loans.
At June 30, 2023, the Company had $1.7 million in troubled debt restructurings (“TDRs”), consisting of residential real estate loans. The Company had TDRs amounting to $2.3 million and $1.3 million at September 30, 2022 and June 30, 2022, respectively.
At June 30, 2023, the Company’s allowance for loan losses amounted to $15.4 million or 0.84% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 0.79% at September 30, 2022 and 0.77% at June 30, 2022. The Company recorded loan charge-offs during the three months ended June 30, 2023 and September 30, 2022 of $10 thousand and $92 thousand, respectively. The Company recorded no loan charge-offs during the three months ended June 30, 2022.
The Company recorded a $0.5 million provision for loan losses expense for the three months ended June 30, 2023, versus $1.0 million recorded for the comparable period in 2022. Adjustments to the Company’s loss experience is based on management’s evaluation of several environmental factors, including: changes in local, regional, national, and international economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments; changes in the nature and volume of the Company’s portfolio and in the terms of the Company’s loans; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans; changes in the quality of the Company’s loan review system; changes in lending policies, procedures and strategies; changes in the value of underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio.
Management has determined that the current level of the allowance for loan losses is adequate in relation to the probable and reasonably estimable losses present in the portfolio. While management uses available information to recognize probable and reasonably estimable losses on loans, future additions to the allowance may be necessary and management may need to record loan charge-offs in future periods. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. (See also Critical Accounting Policies, Judgments and Estimates contained herein).
43
ASSET QUALITY
June 30, 2023 versus September 30, 2022 and June 30, 2022
As of or for the three months ended
6/30/2023
9/30/2022
6/30/2022
Non-accrual loans
12,491
Non-accrual loans held for sale
Loans greater than 90 days past due
1,237
Other real estate owned
Total non-performing assets (1)
10,785
13,512
13,728
Performing TDRs
1,744
2,370
1,390
Loans held for sale
1,415,777
Provision
2,050
(92)
Allowance for loan losses as a % of total loans (2)
0.84
0.79
0.77
Allowance for loan losses as a % of non-accrual loans (2)
144
87
Non-accrual loans as a % of total loans (2)
0.76
0.88
Non-performing assets as a % of total loans, loans held for sale and other real estate owned
0.59
0.83
0.97
Non-performing assets as a % of total assets
0.51
0.73
Non-performing assets and performing TDRs, to total loans held for sale and investment
0.69
1.07
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. The Company’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, matured or repriced in any given period of time. The Company’s earnings or the net value of its portfolio will change under different interest rate scenarios. The principal objective of the Company’s asset/liability management program is to maximize net interest income within an acceptable range of overall risk, including both the effect of changes in interest rates and liquidity risk.
The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics, (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, and (iii) entering into interest rate swap agreements.
The following presents the Company’s economic value of equity (“EVE”) and net interest income (“NII”) sensitivities at June 30,2023 (dollars in thousands). The results are within the Company’s policy limits.
At June 30, 2023
Interest Rates
Estimated
Estimated Change in EVE
Estimated Change in NII(1)
(basis points)
EVE
NII(1)
+400
113,978
(92,769)
(44.9)
32,717
(13,820)
(29.7)
+300
135,252
(71,495)
(34.6)
36,152
(10,385)
(22.3)
+200
157,676
(49,071)
(23.7)
39,645
(6,892)
(14.8)
+100
182,740
(24,007)
(11.6)
43,168
(3,369)
(7.2)
0
206,747
46,537
-100
227,095
20,348
9.8
49,853
3,316
7.1
Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to differ from actual results.
ITEM 4. – CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rule l3a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic reports filed with the Securities and Exchange Commission. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
There were no changes to the Company’s internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. - LEGAL PROCEEDINGS
The Company is not subject to any legal proceedings, which could have a materially adverse impact on its results of operations and financial condition.
ITEM 1A. – RISK FACTORS
There have been no material changes to the risks disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the Securities and Exchange Commission other than as described below.
Risks Related to Recent Events Impacting the Financial Services Industry
Recent events impacting the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, have resulted in decreased confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock.
These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. Inability to access short-term funding, loss of client deposits or changes in our credit ratings could increase the cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization. We may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial and cascading disruption within the financial markets and increased expenses. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES
ITEM 4. – MINE SAFETY DISCLOSURES
ITEM 5. – OTHER INFORMATION
ITEM 6. – EXHIBITS
10.1
Second Amended and Restated Employment Agreement by and between Mr. Wilcox and Hanover Community Bank (1)
31.1
Certification of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 27, 2023
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 11, 2023
/s/ Michael P. Puorro
Michael P. Puorro
Chairman & Chief Executive Officer
(principal executive officer)
/s/ Lance P. Burke
Lance P. Burke
Executive Vice President & Chief Financial Officer
(principal financial and accounting officer)