UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(
(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 |
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.
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).
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 ☐ |
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 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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 | ||
(Title of Class) | (Outstanding as of May 9, 2022) | |
HANOVER BANCORP, INC.
Form 10-Q
For the Quarterly Period Ended March 31, 2022
Table of Contents
2
PART I
ITEM 1. – FINANCIAL STATEMENTS
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
| March 31, 2022 |
| September 30, 2021 | |||
(unaudited) | ||||||
ASSETS | ||||||
Cash and non-interest-bearing deposits due from banks | $ | | $ | | ||
Interest-bearing deposits due from banks |
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Federal funds sold |
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Total cash and cash equivalents |
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Securities: | ||||||
Held to maturity (fair value of $ |
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Available for sale, at fair value |
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Total securities | | | ||||
Loans held for investment |
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Allowance for loan losses |
| ( |
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Loans held for investment, net |
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Premises and equipment, net |
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Accrued interest receivable |
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Prepaid pension |
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Stock in Federal Home Loan Bank (FHLB), at cost |
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Goodwill |
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Other intangible assets |
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Loan servicing rights |
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Deferred income taxes |
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Other assets |
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TOTAL ASSETS | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Deposits: |
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Non-interest-bearing demand | $ | | $ | | ||
Savings, NOW and money market |
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Time |
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Total deposits |
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Borrowings |
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Subordinated debentures |
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Accrued interest payable |
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Other liabilities |
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TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENT LIABILITIES | ||||||
STOCKHOLDERS' EQUITY |
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Preferred stock (par value $ | | | ||||
Common stock (par value $ |
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Surplus |
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Retained earnings |
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Accumulated other comprehensive (loss) income, net of tax |
| ( |
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TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | | $ | | ||
See accompanying notes to unaudited consolidated financial statements.
3
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
| 2022 | 2021 |
| 2022 |
| 2021 | ||||||
INTEREST INCOME |
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Loans | $ | | $ | | $ | | $ | | ||||
Taxable securities |
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Other interest income |
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Total interest income |
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INTEREST EXPENSE |
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Savings, NOW and money market deposits |
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Time deposits |
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Borrowings |
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Total interest expense |
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Net interest income |
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Provision for loan losses |
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Net interest income after provision for loan losses |
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NON-INTEREST INCOME |
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Loan servicing and fee income |
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Service charges on deposit accounts |
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Gain on sale of loans held-for-sale |
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Gain on sale of securities available for sale |
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Other income |
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Total non-interest income |
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NON-INTEREST EXPENSE |
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Salaries and employee benefits |
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Occupancy and equipment |
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Data processing |
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Advertising and promotion |
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Acquisition costs |
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Professional fees |
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Other expenses |
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Total non-interest expense |
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Income before income tax expense |
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Income tax expense |
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NET INCOME | $ | | $ | | $ | | $ | | ||||
EARNINGS PER COMMON SHARE - BASIC | $ | | $ | | $ | | $ | | ||||
EARNINGS PER COMMON SHARE - DILUTED | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited consolidated financial statements.
4
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
Three Months Ended | Six Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Net income |
| $ | |
| $ | | $ | |
| $ | | |
Other comprehensive (loss) income, net of tax: |
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|
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| ||||||||
Change in unrealized (loss) gain on securities available for sale arising during the period, net of tax of ($ | ( | | ( | | ||||||||
Reclassification adjustment for gains realized in net income, net of tax of ($ |
| ( |
| ( |
| ( |
| ( | ||||
Total other comprehensive (loss) income, net of tax |
| ( |
| ( |
| ( |
| | ||||
Total comprehensive income, net of tax | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited consolidated financial statements.
5
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except share and per share data)
| Three Months Ended March 31, 2022 | ||||||||||||||||
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| Accumulated Other |
| Total | ||||||||||
Common Stock | Common | Retained | Comprehensive | Stockholders’ | |||||||||||||
(Shares) | Stock | Surplus | Earnings | (Loss) Income, Net | Equity | ||||||||||||
Beginning balance as of January 1, 2022 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
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Other comprehensive loss, net of tax |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Cash dividends declared ($ |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Stock-based compensation expense |
| — |
| — |
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| — |
| — |
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Stock awards granted, net of forfeitures |
| |
| |
| ( |
| — |
| — |
| — | |||||
Ending balance as of March 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
| Three Months Ended March 31, 2021 | ||||||||||||||||
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| Accumulated Other |
| Total | ||||||||||
Common Stock | Common | Retained | Comprehensive | Stockholders’ | |||||||||||||
(Shares) | Stock | Surplus | Earnings | (Loss) Income, Net | Equity | ||||||||||||
Beginning balance as of January 1, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — | |
| — |
| | ||||||
Other comprehensive income, net of tax |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Stock-based compensation |
| |
| — |
| |
| — |
| — |
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Issuance of common stock |
| |
| — |
| |
| — |
| — |
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Ending balance as of March 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
| Six Months Ended March 31, 2022 | ||||||||||||||||
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| Accumulated Other |
| Total | ||||||||||
Common stock | Common | Retained | Comprehensive | Stockholders’ | |||||||||||||
(Shares) | Stock | Surplus | Earnings | (Loss) Income, Net | Equity | ||||||||||||
Beginning balance as of October 1, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
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Other comprehensive loss, net of tax |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Cash dividends declared ($ |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Stock-based compensation expense |
| — |
| — |
| |
| — |
| — |
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Stock awards granted, net of forfeitures | |
| |
| ( |
| — |
| — |
| — | ||||||
Issuance of common stock in lieu of directors’ fees | |
| — |
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| — |
| — |
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6
| Six Months Ended March 31, 2021 | ||||||||||||||||
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| Accumulated Other |
| Total | ||||||||||
Common stock | Common | Retained | Comprehensive | Stockholders’ | |||||||||||||
(Shares) | Stock | Surplus | Earnings | (Loss) Income, Net | Equity | ||||||||||||
Beginning balance as of October 1, 2020 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
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Other comprehensive income, net of tax |
| — |
| — |
| — |
| — |
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Stock-based compensation |
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| — |
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| — |
| — |
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Issuance of common stock |
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| — |
| |
| — |
| — |
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Ending balance as of March 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
See accompanying notes to unaudited consolidated financial statements.
8
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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Depreciation and amortization |
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Net gain on sale of securities available for sale |
| ( |
| ( | ||
Stock-based compensation |
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Net gain on sale of loans held-for-sale |
| ( |
| ( | ||
Net accretion of premiums, discounts and loan fees and costs |
| ( |
| ( | ||
Amortization of intangible assets |
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Amortization of debt issuance costs |
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Loan servicing rights valuation adjustments |
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Deferred tax expense (benefit) |
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| ( | ||
Decrease in accrued interest receivable |
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Increase in other assets |
| ( |
| ( | ||
(Decrease) increase in accrued interest payable |
| ( |
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(Decrease) increase in other liabilities |
| ( |
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Net cash provided by operating activities |
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Cash flows from investing activities: | ||||||
Purchases of securities available for sale |
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Purchases of restricted securities |
| ( |
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Proceeds from sales of securities available for sale |
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Principal repayments of securities held to maturity |
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Principal repayments of securities available for sale |
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Redemptions of restricted securities |
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Proceeds from sales of loans |
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Net increase in loans |
| ( |
| ( | ||
Purchases of premises and equipment |
| ( |
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Net cash used in investing activities |
| ( |
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Cash flows from financing activities: | ||||||
Net increase in deposits | | | ||||
Advances of term FHLB borrowings |
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Repayments of FHLB advances |
| ( |
| ( | ||
Repayments of Federal Reserve Bank borrowings |
| ( |
| ( | ||
Proceeds from issuance of subordinated debentures, net of issuance costs |
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Repayment of note payable |
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Cash dividends paid |
| ( |
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Net proceeds from issuance of common stock |
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Net cash (used in) provided by financing activities |
| ( |
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Net decrease in cash and cash equivalents |
| ( |
| ( | ||
Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental cash flow information: |
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Interest paid | $ | | $ | | ||
Income taxes paid |
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Supplemental non-cash disclosure: | ||||||
Transfers from portfolio loans to loans held-for-sale | $ | | $ | |
See accompanying notes to unaudited consolidated financial statements.
9
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 became the holding company for Hanover Community Bank (the “Bank”) in 2016. 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. 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 March 31, 2022, its consolidated statements of income for the three and six months ended March 31, 2022 and 2021, its consolidated statements of comprehensive income for the three and six months ended March 31, 2022 and 2021, its consolidated statements of changes in stockholders’ equity for the three and six months ended March 31, 2022 and 2021 and its consolidated statements of cash flows for the six months ended March 31, 2022 and 2021. 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 six months ended March 31, 2022 are not necessarily indicative of the results of operations to be expected for the remainder of the 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 year ended September 30, 2021.
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
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The COVID-19 pandemic has adversely affected local, national and global economic activity. Various actions taken to help mitigate the spread of COVID-19 included restrictions on travel, quarantines and government-mandated closures of various businesses. The outbreak caused significant disruptions to the economy and disrupted banking and other financial activity in the areas in which the Company operates.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020 to, among other things, provide emergency assistance to individuals, families and businesses affected by the COVID-19 pandemic. The ongoing effects of the COVID-19 pandemic may materially and adversely affect the Company’s financial condition and results of operations in future periods, and it is unknown what the complete financial impact will be to the Company. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the coronavirus, the new “waves” of COVID-19 infections, the spread of new variants of the virus, and the distribution of vaccines and vaccination rates, among others. It is possible that estimates made in the financial statements could be materially and adversely impacted due to these conditions.
10
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 loan’s contractual life 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 March 31, 2022 and September 30, 2021, the Company had loans totaling $
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.
Recent Accounting Developments
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
11
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. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As the Company is a smaller-reporting company under SEC regulations, the Company will adopt CECL on October 1, 2023 and the future adoption of this ASU may have a material effect on the Company’s consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases. The amendments in this update primarily replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for operating leases and sales type and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a right-of-use asset and lease liability equal to the present value of the lease payments. The right-of-use asset and lease liability should be derecognized in a manner that effectively yields a straight-line lease expense over the lease term. In addition to the changes to the lessee operating lease accounting requirements, the amendments also change the types of costs that can be capitalized related to a lease agreement for both lessees and lessors. The amendments also require additional disclosures for all lease types for both lessees and lessors. The FASB has subsequently issued additional ASUs intended to clarify guidance, provide implementation support, and provide an additional transition election. The amendments are effective on October 1, 2022, with early adoption permitted. The amendments must be applied on a modified retrospective basis, and we anticipate selecting the transition option that will allow us to record a cumulative adjustment as of the adoption date. We are assessing our current population of lease contracts and upon adoption, our balance sheet will include a right-of-use asset and lease liability for our operating leases where we are the lessee, which primarily include our facilities leases. We do not anticipate the adoption of these amendments will have a material impact to our consolidated financial statements. We plan to adopt these amendments on October 1, 2022 and expect to use the modified retrospective approach as currently required.
2. BUSINESS COMBINATIONS
On May 26, 2021, the Company completed its previously announced acquisition of Savoy Bank (“Savoy”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 27, 2020, as amended, between the Company, the Bank and Savoy. Pursuant to the Merger Agreement, Savoy was merged with and into the Bank, with the Bank surviving, in a two-step transaction (collectively, the “Merger”).
The purchase price in the transaction was based upon the tangible book values of each of the Company and Savoy as of April 30, 2021 and calculated in accordance with the terms of the Merger Agreement. At the effective time of the Merger, each share of Savoy common stock, $
12
A preliminary summary of the fair value of assets received and liabilities assumed are as follows:
| As Recorded |
| Fair Value |
| As Recorded | ||||
(in thousands) | by Savoy | Adjustments | by Hanover | ||||||
Assets |
|
|
|
| |||||
Cash and due from banks | $ | | $ | — |
| $ | | ||
Investment securities available-for-sale |
| |
| — |
|
| | ||
Loans held for sale |
| |
| — |
|
| | ||
Loans held for investment |
| |
| | (a) |
| | ||
Premises and equipment, net |
| |
| ( | (b) |
| | ||
Core deposit intangible |
| — |
| | (c) |
| | ||
Accrued interest receivable |
| |
| ( | (d) |
| | ||
Other assets |
| |
| ( | (e) |
| | ||
Total assets acquired | $ | | $ | |
| | |||
Liabilities |
|
|
|
|
|
|
| ||
Deposits | $ | | $ | | (f) | | |||
Borrowings |
| |
| | (g) |
| | ||
Accrued interest payable |
| |
| — |
|
| | ||
Other liabilities and accrued expenses |
| |
| ( | (h) |
| | ||
Total liabilities assumed | $ | | $ | |
|
| | ||
Net assets acquired |
|
|
|
|
|
| | ||
Total consideration |
|
|
|
|
|
| | ||
Goodwill |
|
|
|
|
| $ | | ||
| (a) | Represents the fair value adjustments on net book value of loans, which includes an interest rate mark and credit mark adjustment, the write-off of deferred fees/costs and premiums and the elimination of Savoy’s allowance for loan losses. |
| (b) | Represents the fair value adjustments to reflect the fair value of premises and equipment. |
| (c) | Represents the fair value of core deposit intangible recorded, which will be amortized on an accelerated basis over the estimated average life of the deposit base. |
| (d) | Represents an adjustment to accrued interest receivable acquired. |
| (e) | Represents an adjustment to other assets acquired. The largest adjustment was the net deferred tax assets resulting from the fair value adjustment related to the acquired assets, liabilities assumed, and identifiable intangible assets recorded. |
| (f) | Represents the fair value adjustments on time deposits, which will be treated as a reduction of interest expense over the remaining term of the time deposits. |
| (g) | Represents the fair value adjustments on an FHLB borrowing, which will be treated as a reduction to interest expense over the life of the borrowing. |
| (h) | Represents an adjustment to other liabilities assumed. |
A summary of total consideration paid is as follows:
(in thousands, except share data) |
|
| |
Common stock issued ( | $ | | |
Cash payments to common shareholders |
| | |
Total consideration paid | $ | |
With the Savoy acquisition, the Company significantly expanded its commercial banking and Small Business Administration (“SBA”) lending capabilities.
13
The estimated fair values are subject to refinement for up to
The Company has determined the above noted acquisition constitutes a business combination as defined by ASC Topic 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805.
The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Savoy acquisition as of the merger date:
(in thousands) |
| ||
Contractually required principal and interest at acquisition | $ | | |
Contractual cash flows not expected to be collected (non-accretable discount) |
| ( | |
Expected cash flows at acquisition |
| | |
Interest component of expected cash flows (accretable discount) |
| ( | |
Fair value of acquired purchased credit impaired loans | $ | |
3. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed based on the weighted-average number of shares outstanding. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. For periods in which a loss is reported, the impact of stock options is not considered as the result would be antidilutive.
The computation of earnings per common share for the three and six months ended March 31, 2022 and 2021 follows. There were
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||
(in thousands, except share and per share data) | 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Basic earnings per common share | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding | | | | | ||||||||
Basic earnings per common share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per common share | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding for basic earnings per common share |
| |
| |
| |
| | ||||
Add: dilutive effects of assumed exercises of stock options |
| |
| |
| |
| | ||||
Average shares and dilutive potential common shares |
| |
| |
| |
| | ||||
Diluted earnings per common share | $ | | $ | | $ | | $ | | ||||
4. 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.
14
The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at March 31, 2022 and September 30, 2021 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:
March 31, 2022 | ||||||||||||
| Amortized |
| Gross Unrealized |
| Gross Unrealized |
| ||||||
(in thousands) | Cost | Gains | Losses | Fair Value | ||||||||
Available for sale: | ||||||||||||
U.S. GSE residential mortgage-backed securities | $ | | $ | — | $ | ( | $ | | ||||
Corporate bonds | | — | ( | | ||||||||
Total available for sale securities | $ | | $ | — | $ | ( | $ | | ||||
Held to maturity: | ||||||||||||
U.S. GSE residential mortgage-backed securities | $ | | $ | — | $ | ( | $ | | ||||
U.S. GSE commercial mortgage-backed securities |
| |
| |
| |
| | ||||
Total held to maturity securities |
| |
| |
| ( |
| | ||||
Total investment securities | $ | | $ | | $ | ( | $ | | ||||
September 30, 2021 | ||||||||||||
|
| Gross |
| Gross |
| |||||||
Amortized | Unrealized | Unrealized | ||||||||||
(in thousands) | Cost | Gains | Losses | Fair Value | ||||||||
Available for sale: | ||||||||||||
U.S. GSE residential mortgage-backed securities | $ | | $ | | $ | ( | $ | | ||||
Corporate bonds |
| |
| |
| |
| | ||||
Total available for sale securities | $ | | $ | | $ | ( | $ | | ||||
Held to maturity: | ||||||||||||
U.S. GSE residential mortgage-backed securities | $ | | $ | | $ | | $ | | ||||
U.S. GSE commercial mortgage-backed securities |
| |
| |
| |
| | ||||
Corporate bonds |
| |
| |
| ( |
| | ||||
Total held to maturity securities |
| |
| |
| ( |
| | ||||
Total investment securities | $ | | $ | | $ | ( | $ | | ||||
All of the Company’s securities with gross unrealized losses at March 31, 2022 and September 30, 2021 had been in a continuous loss position for less than twelve months and such unrealized losses totaling $
15
The amortized cost and fair value of the Company’s securities portfolio at March 31, 2022 are presented by contractual maturity in the table below. The expected life of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties.
March 31, 2022 | ||||||
| Amortized |
| Fair | |||
(in thousands) | Cost | Value | ||||
Securities available for sale: |
|
| ||||
Five to ten years | $ | | $ | | ||
U.S. GSE residential mortgage-backed securities |
| |
| | ||
Total securities available for sale | | | ||||
Securities held to maturity: |
|
|
|
| ||
One to five years | | | ||||
Five to ten years |
| |
| | ||
U.S. GSE residential mortgage-backed securities |
| |
| | ||
U.S. GSE commercial mortgage-backed securities |
| |
| | ||
Total securities held to maturity | | | ||||
Total investment securities | $ | | $ | | ||
There were $
5. LOANS
The following table sets forth the classification of the Company’s loans by loan portfolio segment for the periods presented.
| March 31, 2022 |
| September 30, 2021 | |||
(in thousands) | ||||||
Residential real estate | $ | | $ | | ||
Multi-family |
| |
| | ||
Commercial real estate |
| |
| | ||
Commercial and industrial |
| |
| | ||
Construction and land development |
| |
| | ||
Consumer |
| |
| | ||
Gross loans |
| |
| | ||
Net deferred costs (fees) |
| |
| | ||
Total loans |
| |
| | ||
Allowance for loan losses |
| ( |
| ( | ||
Total loans, net | $ | | $ | | ||
The Company was a participant in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration under the CARES Act, to provide guaranteed loans to qualifying businesses and organizations. These loans carry a fixed rate of
At March 31, 2022 and September 30, 2021, the Company was servicing approximately $
16
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:
March 31, | September 30, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Commercial real estate | $ | | $ | | ||
Commercial and industrial |
| |
| | ||
Total recorded investment | $ | | $ | | ||
The Company has not recorded an allowance for loan losses related to these loans at March 31, 2022 and September 30, 2021.
The following table presents a summary of changes in accretable difference on purchased loans accounted for under ASC 310-30:
Three Months Ended | Six Months Ended | |||||
(in thousands) | March 31, 2022 | March 31, 2022 | ||||
Balance at beginning of period |
| $ | |
| $ | |
Accretable differences acquired | — | | ||||
Accretion | ( | ( | ||||
Adjustments to accretable difference due to changes in expected cash flows | ( | ( | ||||
Other changes, net | | | ||||
Ending balance |
| $ | |
| $ | |
For the three months ended March 31, 2022 and 2021, the Company sold loans totaling approximately $
The following summarizes the activity in the allowance for loan losses by portfolio segment for the periods indicated:
Three Months Ended March 31, 2022 | |||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||
Residential | Multi- | Commercial | and | and Land | |||||||||||||||||
| Real Estate |
| Family |
| Real Estate |
| Industrial |
| Development |
| Consumer |
| |||||||||
Loans | Loans | Loans | Loans | Loans | Loans | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| — | — |
| — | ||||||||
Recoveries |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Provision (credit) for loan losses |
| ( |
| |
| |
| |
| — |
| ( |
| | |||||||
Ending Balance | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
17
Three Months Ended March 31, 2021 | |||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||
Residential | Multi- | Commercial | and | and Land | |||||||||||||||||
Real Estate | Family | Real Estate | Industrial | Development | Consumer | ||||||||||||||||
| Loans |
| Loans |
| Loans |
| Loans |
| Loans |
| Loans |
| Total | ||||||||
(in thousands) | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Recovories |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Provision (credit) for loan losses |
| ( |
| |
| |
| |
| — |
| — |
| | |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||
Six Months Ended March 31, 2022 | |||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||
Residential | Multi- | Commercial | and | and Land | |||||||||||||||||
| Real Estate |
| Family |
| Real Estate |
| Industrial |
| Development |
| Consumer |
| |||||||||
Loans | Loans | Loans | Loans | Loans | Loans | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning Balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| |
| ( |
| |
| |
| | |
| ( | ||||||||
Recoveries |
| |
| |
| |
| |
| |
| |
| | |||||||
Provision (credit) for loan losses |
| ( |
| |
| |
| |
| |
| ( |
| | |||||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Six Months Ended March 31, 2021 | |||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||
Residential | Multi- | Commercial | and | and Land | |||||||||||||||||
Real Estate | Family | Real Estate | Industrial | Development | Consumer | ||||||||||||||||
| Loans |
| Loans |
| Loans |
| Loans |
| Loans |
| Loans |
| Total | ||||||||
(in thousands) | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning Balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| |
| |
| |
| |
| |
| |
| | |||||||
Recoveries |
| |
| |
| |
| |
| |
| |
| | |||||||
Provision (credit) for loan losses |
| ( |
| |
| |
| |
| |
| |
| | |||||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
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.
| March 31, 2022 | ||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||
Residential | Multi- | Commercial | and | and Land | |||||||||||||||||
(in thousands) |
| Real Estate |
| Family |
| Real Estate |
| Industrial |
| Development |
| Consumer |
| Total | |||||||
Allowance for loan losses: | |||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| — |
| — |
| | |||||||
Purchased-credit impaired |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total allowance for loan losses | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| |
| |
| | |||||||
Purchased-credit impaired |
| — |
| — |
| |
| |
| — |
| — |
| | |||||||
Total loans held for investment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
18
September 30, 2021 | |||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||
Residential | Multi- | Commercial | and | and Land | |||||||||||||||||
(in thousands) |
| Real Estate |
| Family |
| Real Estate |
| Industrial |
| Development |
| Consumer |
| Total | |||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| |
| |
| | |||||||
Purchased-credit impaired |
| |
| |
| |
| |
| |
| |
| | |||||||
Total allowance for loan losses | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| |
| |
| | |||||||
Purchased-credit impaired |
| |
| |
| |
| |
| |
| |
| | |||||||
Total loans held for investment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
No allowance was recorded on purchased-credit impaired loans.
The following presents information related to the Company’s impaired loans by portfolio segment for the periods shown.
| March 31, 2022 | September 30, 2021 | ||||||||||||||||
| Unpaid |
|
| Unpaid |
|
| ||||||||||||
Principal | Recorded | Allowance | Principal | Recorded | Allowance | |||||||||||||
(in thousands) | Balance | Investment | Allocated | Balance | Investment | Allocated | ||||||||||||
With no related allowance recorded: | ||||||||||||||||||
Residential real estate |
| $ | |
| $ | |
| $ | — | $ | |
| $ | |
| $ | — | |
Multi-family |
| |
| |
| — |
| |
| |
| — | ||||||
Commercial real estate |
| |
| |
| — |
| |
| |
| — | ||||||
Commercial and industrial |
| |
| |
| — |
| |
| |
| — | ||||||
Total | $ | | $ | | $ | — | $ | | $ | | $ | — | ||||||
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||
| Average | Interest | Average | Interest |
| Average |
| Interest |
| Average |
| Interest | ||||||||||
Recorded | Income | Recorded | Income | Recorded | Income | Recorded | Income | |||||||||||||||
(in thousands) | Investment | Recognized | Investment | Recognized | Investment | Recognized(1) | Investment | Recognized(1) | ||||||||||||||
Residential real estate |
| $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Multi-family |
| |
| — |
| |
| |
| |
| — |
| |
| | ||||||
Commercial real estate |
| |
| — |
| |
| |
| |
| — |
| |
| | ||||||
Commercial and industrial |
| |
| — |
| — |
| — |
| |
| — |
| — |
| — | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
| (1) |
19
At March 31, 2022 and September 30, 2021, past due and non-accrual loans disaggregated by portfolio segment were as follows:
(in thousands) | Past Due and Non-Accrual | |||||||||||||||||||||||
|
|
| Greater than |
|
|
|
|
| ||||||||||||||||
30 - 59 days | 60 - 89 days | 89 days past | Total past | Purchased- | ||||||||||||||||||||
past due and | past due and | due and | due and non- | credit | ||||||||||||||||||||
March 31, 2022 | accruing | accruing | accruing | Non-accrual | accrual | impaired | Current | Total | ||||||||||||||||
Residential real estate | $ | | $ | | $ | | $ | | (1) | $ | | $ | | $ | | $ | | |||||||
Multi-family |
| |
| |
| |
| | (2) |
| |
| |
| |
| | |||||||
Commercial real estate |
| |
| |
| |
| | (3) |
| |
| |
| |
| | |||||||
Commercial and industrial |
| |
| |
| |
| | (4) |
| |
| |
| |
| | |||||||
Construction and land development |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Consumer |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Total | $ | | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
| (1) |
| (2) |
| (3) |
| (4) |
(in thousands) | Past Due and Non-Accrual | |||||||||||||||||||||||
|
|
| Greater than |
|
|
|
|
| ||||||||||||||||
30 - 59 days | 60 - 89 days | 89 days past | Total past | Purchased- | ||||||||||||||||||||
past due and | past due and | due and | due and non- | credit | ||||||||||||||||||||
September 30, 2021 | accruing | accruing | accruing | Non-accrual | accrual | Impaired | Current | Total | ||||||||||||||||
Residential real estate | $ | | $ | | $ | | $ | | (1) | $ | | $ | | $ | | $ | | |||||||
Multi-family |
| |
| |
| |
| | (2) |
| |
| |
| |
| | |||||||
Commercial real estate |
| |
| |
| |
| | (3) |
| |
| |
| |
| | |||||||
Commercial and industrial |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Construction and land development |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Consumer | | | | | | | | | ||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
| (1) |
| (2) |
| (3) |
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 March 31, 2022 and September 30, 2021, the Company had a recorded investment in TDRs totaling $
For the three and six months ended March 31, 2022 and 2021, there were
In June 2020, New York’s then-Governor Andrew Cuomo signed SB 8243C and SB 8428 into law, which created Section 9-x of the New York Banking Law. Section 9-x requires New York regulated banking institutions and New York regulated mortgage servicers to make available applications for forbearance of any payment due on certain residential
20
mortgages to qualified borrowers for their primary residence located in New York. In general, qualified borrowers will be granted forbearance of all monthly payments for a period of up to
The Company has been prudently working with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing an appropriate allowance for loan losses. The Company modified
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.
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 jeopardizes 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.
21
At March 31, 2022 and September 30, 2021, the Company’s loan portfolio by credit risk rating disaggregated by portfolio segment were as follows:
March 31, 2022 | |||||||||||||||
|
| Special |
|
|
| ||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Total | ||||||||||
Real Estate: |
|
|
|
|
|
|
|
|
|
| |||||
Residential | $ | | $ | | $ | | $ | | $ | | |||||
Multi-family |
| |
| |
| |
| |
| | |||||
Commercial |
| |
| |
| |
| |
| | |||||
Commercial and industrial |
| |
| |
| |
| |
| | |||||
Construction and land development |
| |
| |
| |
| |
| | |||||
Consumer |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
| September 30, 2021 | ||||||||||||||
|
| Special |
|
|
| ||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Total | ||||||||||
Real Estate: |
|
|
|
|
|
|
|
|
|
| |||||
Residential | $ | | $ | | $ | | $ | | $ | | |||||
Multi-family |
| |
| |
| |
| |
| | |||||
Commercial |
| |
| |
| |
| |
| | |||||
Commercial and industrial |
| |
| |
| |
| |
| | |||||
Construction and land development |
| |
| |
| |
| |
| | |||||
Consumer |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
6. 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
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
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.
22
A summary of stock option activity follows (aggregate intrinsic value in thousands):
Weighted | ||||||||||
Weighted | Average | |||||||||
Average | Aggregate | Remaining | ||||||||
Number of | Exercise | Intrinsic | Contractual | |||||||
| Options |
| Price |
| Value |
| Term | |||
Outstanding, October 1, 2021 |
| | $ | | $ | |
| |||
Granted |
| |
| |
|
| ||||
Exercised |
| |
| |
|
| ||||
Forfeited |
| |
| |
|
| ||||
Outstanding, March 31, 2022 (1) |
| | $ | | $ | |
| |||
| (1) | All outstanding options are fully vested and exercisable. |
There was
Restricted Stock Awards
During the six months ended March 31, 2022, restricted stock awards of
A summary of restricted stock awards activity follows:
|
| Weighted-Average | |||
Number of | Grant Date Fair | ||||
| Shares |
| Value | ||
Unvested, October 1, 2021 | | $ | | ||
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| ( |
| | |
Unvested, March 31, 2022 |
| | $ | | |
Compensation expense attributable to restricted stock awards was $
Restricted Stock Units
Long Term Incentive Plan
Restricted stock units (RSUs) 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/or 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.
23
The following table summarizes the unvested performance-based RSU activity for the six months ended March 31, 2022:
|
| Weighted-Average | |||
Number of | Grant Date Fair | ||||
| Shares |
| Value | ||
Unvested, October 1, 2021 | | $ | | ||
Granted |
| |
| | |
Vested |
| |
| | |
Forfeited |
| |
| | |
Unvested, March 31, 2022 |
| | $ | | |
During the six months ended March 31, 2022, the Company granted
Compensation expense attributable to RSUs was $
7. 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 as of March 31, 2022, 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 March 31, 2022 and September 30, 2021, 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.
24
The following table sets forth the Bank’s capital amounts (in thousands) and ratios under current regulations:
Minimum Capital | Minimum to Be Well |
| |||||||||||||||||||
Adequacy Requirement | Capitalized Under |
| |||||||||||||||||||
Minimum Capital | with Capital | Prompt Corrective |
| ||||||||||||||||||
Actual Capital | Adequacy Requirement | Conservation Buffer | Action Provisions |
| |||||||||||||||||
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||||
March 31, 2022 | |||||||||||||||||||||
Total capital to risk-weighted assets | $ | |
| | % | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Tier 1 capital to risk-weighted assets |
| |
| | % |
| |
| | % |
| |
| | % |
| |
| | % | |
Common equity tier 1 capital to risk-weighted assets |
| |
| | % |
| |
| | % |
| |
| | % |
| |
| | % | |
Tier 1 capital to adjusted average assets (leverage) |
| |
| | % |
| |
| | % |
| N/A |
| N/A |
| |
| | % | ||
September 30, 2021 | |||||||||||||||||||||
Total capital to risk-weighted assets | $ | |
| | % | $ | | | % | $ |
| | % | $ | |
| | % | |||
Tier 1 capital to risk-weighted assets |
| |
| | % | | | % | |
| | % | |
| | % | |||||
Common equity tier 1 capital to risk-weighted assets |
| |
| | % | | | % | |
| | % | |
| | % | |||||
Tier 1 capital to adjusted average assets (leverage) |
| |
| | % | | | % | N/A |
| N/A | |
| | % | ||||||
Dividend restrictions - The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of March 31, 2022, the Bank had $
8. 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:
| ● | Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| ● | Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, rate volatility, prepayment speeds, credit ratings,) or inputs that are derived principally or corroborated by market data, by correlation, or other means. |
| ● | Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation. |
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
25
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.
Assets Measured at Fair Value on a Recurring Basis
The following presents fair value measurements on a recurring basis at March 31, 2022 and September 30, 2021:
March 31, 2022 | ||||||||||||
Fair Value Measurements Using: | ||||||||||||
Quoted Prices In | Significant | |||||||||||
|
| Active Markets |
| Significant Other |
| Unobservable | ||||||
Carrying | for Identical Assets | Observable Inputs | Inputs | |||||||||
(In thousands) | Amount | (Level 1) | (Level 2) | (Level 3) | ||||||||
Financial assets: | ||||||||||||
Available-for-sale securities: | ||||||||||||
U.S. GSE residential mortgage-backed securities | $ | | $ | | $ | | $ | | ||||
Corporate bonds |
| |
| |
| |
| | ||||
Mortgage servicing rights |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
September 30, 2021 | ||||||||||||
Fair Value Measurements Using: | ||||||||||||
Quoted Prices In | ||||||||||||
Active Markets | Significant | |||||||||||
|
| for Identical |
| Significant Other |
| Unobservable | ||||||
Carrying | Assets | Observable Inputs | Inputs | |||||||||
(In thousands) | Amount | (Level 1) | (Level 2) | (Level 3) | ||||||||
Financial assets: | ||||||||||||
Available-for-sale securities: | ||||||||||||
U.S. GSE residential mortgage-backed securities | $ | | $ | | $ | | $ | | ||||
Corporate bonds |
| |
| |
| |
| | ||||
Mortgage servicing rights |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
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.
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. Fair value of loan servicing rights related to residential mortgage loans at March 31, 2022 was determined based on discounted expected future using discount rates ranging from
26
The fair value of loan servicing rights for SBA loans at March 31, 2022 was determined based on discounted expected future using discount rates ranging from
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:
Three Months Ended March 31, |
| Six Months Ended March 31, | ||||||||||
(in thousands) |
| 2022 |
| 2021 | 2022 |
| 2021 | |||||
Balance, October 1 | $ | | $ | |
| $ | | $ | | |||
Additions |
| |
| |
| |
| | ||||
Adjustment to fair value |
| ( |
| ( |
| ( |
| ( | ||||
Balance, March 31 | $ | | $ | | $ | | $ | | ||||
Assets Measured at Fair Value on a Non-recurring Basis
The Company had
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 March 31, 2022 and September 30, 2021:
March 31, 2022 | |||||||||||||||
Fair Value Measurements Using: | |||||||||||||||
|
|
| Quoted Prices In |
|
|
|
|
|
| ||||||
Active Markets | Significant | ||||||||||||||
for Identical | Significant Other | Unobservable | |||||||||||||
Carrying | Assets | Observable Inputs | Inputs | Total Fair | |||||||||||
(In thousands) | Amount | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||
Financial assets: | |||||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | $ | | |||||
Securities held-to-maturity |
| |
| |
| |
| |
| | |||||
Securities available-for-sale |
| |
| |
| |
| |
| | |||||
Loans, net |
| |
| |
| |
| |
| | |||||
FHLB stock |
| |
| N/A |
| N/A |
| N/A |
| N/A | |||||
Accrued interest receivable |
| |
| |
| |
| |
| | |||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Time deposits |
| |
| |
| |
| |
| | |||||
Demand and other deposits |
| |
| |
| |
| |
| | |||||
Borrowings |
| |
| |
| |
| |
| | |||||
Subordinated debentures |
| |
| |
| |
| |
| | |||||
Accrued interest payable |
| |
| |
| |
| |
| | |||||
27
September 30, 2021 | |||||||||||||||
Fair Value Measurements Using: | |||||||||||||||
Quoted Prices In | |||||||||||||||
Active Markets | Significant | ||||||||||||||
for Identical | Significant Other | Unobservable | |||||||||||||
Carrying | Assets | Observable Inputs | Inputs | Total Fair | |||||||||||
(In thousands) | Amount | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||
Financial assets: | |||||||||||||||
Cash and cash equivalents |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Securities held-to-maturity |
| |
| |
| |
| |
| | |||||
Securities available-for-sale |
| |
| |
| |
| |
| | |||||
Loans, net |
| |
| |
| |
| |
| | |||||
FHLB stock |
| |
| N/A |
| N/A |
| N/A |
| N/A | |||||
Accrued interest receivable |
| |
| |
| |
| |
| | |||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Time deposits |
| |
| |
| |
| |
| | |||||
Demand and other deposits |
| |
| |
| |
| |
| | |||||
Borrowings |
| |
| |
| |
| |
| | |||||
Subordinated debentures | | | | | | ||||||||||
Accrued interest payable |
| |
| |
| |
| |
| | |||||
9. LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of a loss is probable and an amount or range of loss can be reasonably estimated. The Company’s management does not believe there now are such matters that will have a material effect on the financial statements.
10. BORROWINGS
Federal Home Loan Bank (“FHLB”) Advances
At March 31, 2022 and September 30, 2021, FHLB advances outstanding were $
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $
The following table sets forth the contractual maturities and weighted average interest rates of the Company’s fixed rate FHLB advances (in thousands):
Balance at March 31, | ||||||
2022 | ||||||
Weighted | ||||||
Contractual Maturity |
| Amount |
| Average Rate | ||
2022 | $ | — | — | % | ||
2023 | | | % | |||
2024 |
| |
| | % | |
2025 |
| |
| | % | |
Total | $ | |
| | % | |
28
Balance at September 30, | ||||||
2021 | ||||||
Weighted | ||||||
Contractual Maturity |
| Amount |
| Average Rate | ||
2022 | $ | | | % | ||
2023 | | | % | |||
2024 | | | % | |||
2025 |
| |
| | % | |
Total | $ | |
| | % | |
Federal Reserve Borrowings
At March 31, 2022 and September 30, 2021, the Company’s borrowings from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) were $
Correspondent Bank Borrowings
At March 31, 2022, approximately $
11. SUBORDINATED DEBENTURES
In October 2020, the Company completed the private placement of $
At March 31, 2022 and September 30, 2021, the unamortized issuance costs of the Notes were $
29
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and six months ended March 31, 2022 and 2021:
| Unrealized Gains and |
| ||||
Losses on Available- | ||||||
for-Sale Debt | ||||||
(in thousands) | Securities | Total | ||||
Balance at January 1, 2022 | $ | | $ | | ||
Other comprehensive loss |
| ( |
| ( | ||
Amount reclassified from accumulated other comprehensive income |
| ( |
| ( | ||
Balance at March 31, 2022 | $ | ( | $ | ( | ||
Unrealized Gains and |
| |||||
Losses on Available- | ||||||
for-Sale Debt | ||||||
(in thousands) | Securities | Total | ||||
Balance at January 1, 2021 | $ | | $ | | ||
Other comprehensive income |
| |
| | ||
Amount reclassified from accumulated other comprehensive income |
| ( |
| ( | ||
Balance at March 31, 2021 | $ | | $ | | ||
| Unrealized Gains and |
| ||||
Losses on Available- | ||||||
for-Sale Debt | ||||||
(in thousands) | Securities | Total | ||||
Balance at October 1, 2021 | $ | | $ | | ||
Other comprehensive loss |
| ( |
| ( | ||
Amount reclassified from accumulated other comprehensive income |
| ( |
| ( | ||
Balance at March 31, 2022 | $ | ( | $ | ( | ||
Unrealized Gains and |
| |||||
Losses on Available- | ||||||
for-Sale Debt | ||||||
(in thousands) | Securities | Total | ||||
Balance at October 1, 2020 | $ | | $ | | ||
Other comprehensive income |
| |
| | ||
Amount reclassified from accumulated other comprehensive income |
| ( |
| ( | ||
Balance at March 31, 2021 | $ | | $ | | ||
The following represents the reclassification out of accumulated other comprehensive income for the three and six months ended March 31, 2022 and 2021.
Three Months Ended | Six Months Ended | |||||||||||||
March 31, | March 31, | Affected Line Item in Consolidated | ||||||||||||
(in thousands) |
| 2022 | 2021 | 2022 | 2021 |
| Statements of Income | |||||||
Realized gains on securities available-for-sale | $ | | $ | | $ | | $ | | Gain on sale of investment securities available-for-sale, net | |||||
Tax effect |
| |
| |
| |
| |
| Income tax expense | ||||
Net of tax | $ | | $ | | $ | | $ | | ||||||
30
13. SUBSEQUENT EVENTS
On May 10, 2022, the Company completed an initial public offering (“IPO”) of its common stock and sold
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, 2021, as updated by the Company’s subsequent filings with the SEC and, among others, the following:
| ● | Changes in monetary and fiscal policies of the FRB and the U. S. Government, particularly related to changes in interest rates; |
| ● | Changes in general economic conditions; |
| ● | The ability to enhance revenue through increased market penetration, expanded lending capacity and product offerings; |
| ● | Occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics such as COVID-19, or outbreaks of hostilities, such as between Russia and Ukraine, or the effects of climate change, and the ability of the Company to deal effectively with disruptions caused by the foregoing; |
| ● | The effects of COVID-19, including, but not limited to, the length of time that the pandemic continues, the effectiveness of the vaccination program and accompanying vaccination rates, the development of new variants of the virus and their impact, the potential future imposition of further restrictions on travel, the measures adopted by federal, state and local governments, the health of employees and the potential inability of employees to work due to illness, quarantine or government mandates, the business continuity plans of customers and vendors, the increased likelihood of cybersecurity risk, data breaches, or fraud due to employees working from home, the ability of borrowers to repay their loans and the effect of the pandemic on the general economy and businesses of borrowers; |
| ● | Legislative or regulatory changes; |
| ● | Downturns in demand for loan, deposit and other financial services in the Company’s market area; |
| ● | Increased competition from other banks and non-bank providers of financial services; |
| ● | Technological changes and increased technology-related costs; and |
| ● | Changes in accounting principles, or the application of generally accepted accounting principles. |
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 or the date of any document incorporated by reference in this document. All subsequent written and oral forward-looking statements concerning the merger or other 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
32
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, Queens, Kings (Brooklyn) and New York (Manhattan) Counties, New York and Freehold in Monmouth County New Jersey. We principally focus our lending activities on loans that we originate to borrowers located in our market areas. We seek to be the premier provider of lending products and services in our market area, meeting the credit needs of business and individual borrowers in the communities that we serve. We offer personal and commercial 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 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 of 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 certainty that these transactions will actually close, than competitors, whose decisions may be made in distant headquarters.
The COVID-19 pandemic has caused widespread economic disruption in the Bank’s metropolitan New York trade area. The Company has actively participated in state and local programs designed to mitigate the impacts of the COVID-19 pandemic on individuals and small businesses and it continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing an appropriate allowance for loan losses on its loan portfolio. Although the local economy has continued to recover, management continues to cautiously consider opportunities to expand the loan portfolio.
The Bank has historically been able to generate additional income by strategically originating and selling its primary lending products to other financial institutions at premiums. In December 2021, the SBA approved the Bank’s application to process loans under the SBA’s Preferred Lender Program, 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. The Bank expects that it will continue to originate loans, for its own portfolio and for sale, which will result in continued growth in interest income while also realizing gains on the sale of loans to others.
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
33
Company’s chief competition includes local banks within its market area, as well as New York City money center banks and regional banks, as well as non-bank lenders, including fintech lenders.
On May 26, 2021, the acquisition of Savoy was completed. Historical financial information prior to the June 30, 2021 quarter includes only the operations of Hanover.
Financial Performance Summary
As of or for the three and six months ended March 31, 2022 and 2021
(dollars in thousands, except per share data)
Three months ended | Six months ended | |||||||||||||
March 31, | March 31, | |||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Revenue (1) | $ | 17,416 | $ | 8,494 | $ | 35,061 | $ | 16,107 | ||||||
Non-interest expense |
| 9,357 | 5,725 |
| 17,622 | 11,315 | ||||||||
Provision for loan losses |
| 500 | 200 |
| 1,400 | 300 | ||||||||
Net income |
| 5,860 | 2,055 |
| 12,397 | 3,574 | ||||||||
Net income per common share - diluted |
| 1.00 | 0.48 |
| 2.15 | 0.84 | ||||||||
Return on average assets |
| 1.63 | % | 0.97 | % |
| 1.72 | % | 0.84 | % | ||||
Return on average common stockholders' equity |
| 17.83 | % | 10.28 | % |
| 19.16 | % | 8.95 | % | ||||
Tier 1 leverage ratio |
| 10.06 | % | 12.00 | % |
| 10.06 | % | 12.00 | % | ||||
Common equity tier 1 risk-based capital ratio |
| 14.76 | % | 21.23 | % |
| 14.76 | % | 21.23 | % | ||||
Tier 1 risk-based capital ratio |
| 14.76 | % | 21.23 | % |
| 14.76 | % | 21.23 | % | ||||
Total risk-based capital ratio |
| 15.85 | % | 22.49 | % |
| 15.85 | % | 22.49 | % | ||||
Tangible common equity ratio (non-GAAP) |
| 7.90 | % | 9.06 | % |
| 7.90 | % | 9.06 | % | ||||
Total common stockholders' equity/total assets (2) |
| 9.13 | % | 9.24 | % |
| 9.13 | % | 9.24 | % | ||||
| (1) | Represents net interest income plus total non-interest income. |
| (2) | The ratio of total common stockholders’ equity to total assets is the most comparable GAAP measure to the non-GAAP tangible common equity ratio presented herein. |
At March 31, 2022 the Company, on a consolidated basis, had total assets of $1.5 billion, total deposits of $1.2 billion and total stockholders’ equity of $134.8 million. The Company recorded net income of $5.9 million, or $1.00 per diluted common share, for the three months ended March 31, 2022 compared to net income of $2.1 million, or $0.48 per diluted common share, for the same period in 2021 and $12.4 million, or $2.15 per diluted share, for the six months ended March 31, 2022 compared to net income of $3.6 million, or $0.84 per diluted share, for the same period in 2021.
The $3.8 million increase in earnings for the three months ended March 31, 2022 versus the comparable 2021 period was primarily due to a $6.9 million increase in net interest income coupled with a $2.0 million improvement in non-interest income. Partially offsetting these positive factors was a $3.7 million increase in total operating expenses, principally resulting from growth in compensation and benefits due largely to an increase in personnel from the acquisition of Savoy in May 2021, a $1.1 million increase in the provision for income taxes, coupled with a $300 thousand increase in the provision for loan losses expense due to growth in the loan portfolio in the quarter ended March 31, 2022.
The $8.8 million increase in net income for the six months ended March 31, 2022 versus the year ago was primarily due to a $14.9 million increase in net interest income coupled with a $4.0 million improvement in non-interest income. Partially offsetting these positive factors was a $6.3 million increase in total operating expenses, principally resulting from growth in compensation and benefits due largely to an increase in personnel from the acquisition of Savoy in May 2021, a $2.7 million increase in provision for income taxes, coupled with an $1.1 million increase in the provision for loan losses expense due to growth in the loan portfolio.
The Company’s return on average assets and return on average common stockholders’ equity were 1.63% and 17.83%, respectively, for the three months ended March 31, 2022 versus 0.97% and 10.28%, respectively, for the comparable 2021
34
period, and 1.72% and 19.16% for the six months ended March 31, 2022, versus 0.84% and 8.95%, respectively, for the prior year period.
Total non-accrual loans at March 31, 2022 were $10.5 million, or 0.81% of total loans, compared to $7.0 million, or 0.56% of total loans at September 30, 2021 and $9.4 million, or 1.22% of total loans, at March 31, 2021. Management believes all of the Company’s non-accrual loans at March 31, 2022 are well collateralized and no specific reserves have been taken with regard to these loans. The allowance for loan losses as a percentage of total non-accrual loans amounted to 94%, 122% and 87% at March 31, 2022, September 30, 2021 and March 31, 2021, respectively.
The Company’s operating efficiency ratio was 54.1% for the three months ended March 31, 2022 versus 69.4% a year ago. The significant improvement in the operating efficiency ratio was due to a $6.9 million increase in net interest income and $2.0 million increase in non-interest income (primarily gain on sale of loans held-for-sale) partially offset by a $3.6 million increase in operating expenses (primarily compensation and benefits).
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 $1.5 billion at March 31, 2022 and September 30, 2021. Total loans at March 31, 2022 were $1.3 billion, compared to total loans of $1.2 billion at September 30, 2021. Total deposits were $1.2 billion at March 31, 2022 and September 30, 2021. Total borrowings at March 31, 2022 were $100.4 million, including $37.9 million of outstanding FHLB advances.
For the six months ended March 31, 2022, the Company’s loan portfolio, net of sales, grew by $40.6 million to $1.3 billion. At March 31, 2022, the residential loan portfolio amounted to $424.5 million, or 32.9% of total loans. Commercial real estate loans, including multi-family loans and construction and land development loans, totaled $792.0 million or 61.4% of total loans at March 31, 2022. Commercial loans, including PPP loans, totaled $72.5 million or 5.6% of total loans.
Total deposits were $1.2 billion at March 31, 2022 and September 30, 2021. Core deposit balances, which consist of demand, NOW, savings and money market deposits, represented 76.7% and 67.6% of total deposits at March 31, 2022 and September 30, 2021, respectively. At those dates, demand deposit balances represented 16.0% and 16.4% of total deposits. Beginning in late 2020, we began a municipal deposit program. The program is based upon relationships of our management team, rather than bid based transactions. At March 31, 2022, total municipal deposits were $405.0 million, representing 19 separate governmental clients, compared to $350.5 million at September 30, 2021, representing 18 separate governmental clients. The average rate on the municipal deposit portfolio was 0.18% at March 31, 2022.
Borrowings at March 31, 2022 were $75.8 million, including $37.9 million in PPPLF funding, versus $159.6 million at September 30, 2021. At March 31, 2022, the Company had $37.9 million of outstanding FHLB advances as compared to $42.0 million at September 30, 2021. At September 30, 2021, the Company’s borrowings from the PPPLF were $117.7 million, and have declined as PPP loans are forgiven by the SBA.
Liquidity and Capital Resources – Liquidity management is defined as both the Company’s and the Bank’s ability to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These
35
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 $127.1 million and $166.5 million at March 31, 2022 and September 30, 2021, respectively. These liquid assets may include assets that have been pledged primarily against municipal deposits or borrowings. Liquidity is also provided by the maintenance of a base of core deposits, cash and non-interest-bearing deposits due from banks, the ability to sell or pledge marketable assets and access to lines of credit.
Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect 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 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, and borrowings, proceeds from maturities and sales of securities and cash provided by operating activities. At March 31, 2022, total deposits were $1.2 billion, of which $203.9 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 March 31, 2022 and September 30, 2021, the Company had $75.8 million and $159.6 million, respectively, in borrowings used to fund the growth in the Company’s loan portfolio.
The Liquidity and Wholesale Funding Policy of the Bank establishes specific policies and operating procedures governing liquidity levels to assist management in developing plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. At March 31, 2022, the Bank had access to approximately $622.5 million in FHLB lines of credit for overnight or term borrowings, of which $418.7 million of municipal letters of credit and $37.9 million in term borrowings were outstanding. At March 31, 2022, the Bank had access to approximately $55 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 March 31, 2022.
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 both the short and long term. 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 $134.8 million at March 31, 2022 from $122.5 million at September 30, 2021, primarily due to net income recorded during the six months ended March 31, 2022.
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 10.06%, 14.76%, 14.76% and 15.85%, respectively, at March 31, 2022, exceeding all the 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 March 31, 2022, the Bank’s capital buffer was in excess of requirements.
The Company did not repurchase any shares of its common stock during the six months ended March 31, 2022.
The Company’s total stockholders’ equity to total assets ratio and the Company’s tangible common equity to tangible assets ratio (“TCE ratio”) were 9.13% and 7.90%, respectively, at March 31, 2022 versus 8.25% and 7.02%, respectively,
36
at September 30, 2021 and 9.24% and 9.06%, respectively, at March 31, 2021. 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 common 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 common stockholders’ equity and tangible assets to U.S. GAAP total assets at March 31, 2022 (in thousands). (See also Non-GAAP Disclosure contained herein.)
|
|
| Ratios | |||||||
Total common stockholders' equity | $ | 134,768 | Total assets | $ | 1,476,681 | 9.13% | (1) | |||
Less: goodwill |
| (19,168) | Less: goodwill | (19,168) |
| |||||
Less: core deposit intangible |
| (438) | Less: core deposit intangible | (438) |
| |||||
Tangible common equity | $ | 115,162 | Tangible assets | $ | 1,457,075 | 7.90% | (2) |
| (1) | The ratio of total common stockholders’ equity to total assets is the most comparable GAAP measure to the non-GAAP tangible common equity ratio presented herein. |
| (2) | TCE ratio |
All dividends must conform to applicable statutory 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.
No cash dividends were declared by the Company during the six months ended March 31, 2021. On January 25, 2022 the Company’s Board of Directors approved the payment of a $0.10 per common share cash dividend payable on February 15, 2022, to stockholders of record on February 8, 2022. This was the Company’s first cash dividend.
Off-Balance Sheet Arrangements - The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At March 31, 2022 and September 30, 2021, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $71 million and $106 million, respectively.
Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk
37
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2022 and September 30, 2021, letters of credit outstanding were approximately $1.4 million and $786 thousand, respectively.
Results of Operations – Comparison of the Three Months Ended March 31, 2022 and 2021 – The Company recorded net income of $5.9 million during the three months ended March 31, 2022 versus net income of $2.1 million in the comparable three month period a year ago. The increase in earnings for the three months ended March 31, 2022 versus the comparable 2021 period was primarily due to a $6.9 million, or 89.0%, increase in net interest income coupled with a $2.0 million improvement in non-interest income. Partially offsetting these positive factors was a $3.7 million increase in total operating expenses, principally resulting from growth in compensation and benefits due largely to an increase in personnel from the acquisition of Savoy in May 2021, coupled with an $300 thousand increase in the provision for loan losses expense due to growth in the loan portfolio in the second fiscal quarter of 2022.
Net Interest Income and Margin
The $6.9 million improvement in net interest income was largely attributable to growth in average interest-earning assets of 68.5%, primarily loans, and a 47 basis point increase in the net interest margin to 4.26% in 2022 from 3.79% in the year ago period. The wider net interest margin was largely due to a 52 basis point reduction in the average cost of interest-bearing liabilities to 0.44% in the 2022 period. Included in net interest income was accretion and amortization of purchase accounting adjustments of $1.3 million during the three months ended March 31, 2022 arising from the acquisition of Savoy. Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.86% and 3.80% in the quarter ended March 31, 2022 and 2021, respectively.
The lower cost of average interest-bearing liabilities in 2022 resulted from an improved deposit mix. Lower cost core deposits (demand, NOW, savings and money market accounts) increased by $531.0 million while higher cost certificates of deposit declined by $18.9 million compared to the year ago period.
38
NET INTEREST INCOME ANALYSIS
For the Three Months Ended March 31, 2022 and 2021
(dollars in thousands)
2022 | 2021 | ||||||||||||||||
Average | Average | Average | Average | ||||||||||||||
(in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||
Assets: | |||||||||||||||||
Interest-earning assets | |||||||||||||||||
Loans | $ | 1,274,485 | $ | 15,749 |
| 5.01 | % | $ | 742,004 | $ | 9,133 |
| 4.99 | % | |||
Investment securities |
| 11,547 |
| 106 |
| 3.72 | % |
| 17,595 |
| 182 |
| 4.20 | % | |||
Interest-earning balances and other |
| 114,889 |
| 45 |
| 0.16 | % |
| 70,465 |
| 19 |
| 0.11 | % | |||
FHLB stock and other investments | 4,062 | 41 | 4.09 | 3,714 | 46 | 5.02 | |||||||||||
Total interest-earning assets |
| 1,404,983 |
| 15,941 |
| 4.60 | % |
| 833,778 |
| 9,380 |
| 4.56 | % | |||
Non interest-earning assets: | |||||||||||||||||
Cash and due from banks |
| 8,405 |
|
|
|
|
| 5,576 |
|
|
|
| |||||
Other assets |
| 47,243 |
|
|
|
|
| 23,797 |
|
|
|
| |||||
Total assets | $ | 1,460,631 |
|
|
|
| $ | 863,151 |
|
|
|
| |||||
Liabilities and stockholders' equity: | |||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||
Savings, NOW and money market deposits | $ | 696,240 | $ | 345 |
| 0.20 | % | $ | 247,336 | $ | 157 |
| 0.26 | % | |||
Time deposits |
| 306,363 |
| 401 |
| 0.53 | % |
| 334,804 |
| 915 |
| 1.11 | % | |||
Total interest-bearing deposits |
| 1,002,603 |
| 746 |
| 0.30 | % |
| 582,140 |
| 1,072 |
| 0.75 | % | |||
Fed funds purchased FHLB FRB advances | 87,948 | 117 | 58,807 | 180 | 1.24 | ||||||||||||
Subordinated debentures |
| 24,527 |
| 334 |
| 5.52 | % |
| 24,476 |
| 326 |
| 5.40 | % | |||
Total interest-bearing liabilities |
| 1,115,078 |
| 1,197 |
| 0.44 | % |
| 665,423 |
| 1,578 |
| 0.96 | % | |||
Demand deposits |
| 199,630 |
|
|
|
|
| 107,884 |
|
|
|
| |||||
Other liabilities |
| 12,662 |
|
|
|
|
| 8,764 |
|
|
|
| |||||
Total liabilities | 1,327,370 | 782,071 | |||||||||||||||
Stockholders' equity |
| 133,261 |
|
|
|
|
| 81,080 |
|
|
|
| |||||
Total liabilities and stockholders' equity | $ | 1,460,631 |
|
|
|
| $ | 863,151 |
|
|
|
| |||||
Net interest income and interest rate spread |
|
|
|
|
| 4.16 | % |
|
|
|
|
| 3.60 | % | |||
Net interest margin |
|
| $ | 14,744 |
| 4.26 | % |
|
| $ | 7,802 |
| 3.79 | % | |||
Provision and Allowance for Loan Losses
The Company recorded a $500 thousand provision for loan losses expense for the three months ended March 31, 2022 versus a $200 thousand expense recorded for the comparable period in 2021. The adequacy of the provision and the resulting allowance for loan losses, which was $9.9 million at March 31, 2022, 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 the 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, 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 March 31, 2022. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)
Non-interest Income
Non-interest income increased by $2.0 million for the three months ended March 31, 2022 versus 2021. This increase was largely driven by increases in net gain on sale of loans and loan servicing and fee income. For the three months ended March 31, 2022 and 2021, the Company sold loans totaling approximately $16.2 million and $9.4 million, respectively, recognizing net gains of $1.6 million and $295 thousand, respectively. The increase in loan fees and deposit service charges was primarily driven by increases in loan and deposit balances, primarily as a result of the acquisition of Savoy. The increase in income related to loan servicing rights was due to growth in the volume of loans serviced by the Company, primarily due to the acquisition of Savoy.
39
Non-Interest Income
For the three and six months ended March 31, 2022 and 2021
(dollars in thousands)
Three months ended | Six months ended | |||||||||||
March 31, | March 31, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Loan servicing and fee income | $ | 734 | $ | 139 | $ | 1,424 | $ | 222 | ||||
Service charges on deposit accounts |
| 46 |
| 17 |
| 109 |
| 32 | ||||
Net gain on sale of investments available-for-sale |
| 105 |
| 240 |
| 105 |
| 240 | ||||
Net gain on sale of loans held for sale |
| 1,575 |
| 295 |
| 3,067 |
| 476 | ||||
Other income |
| 212 |
| 1 |
| 343 |
| 8 | ||||
Total non-interest income | $ | 2,672 | $ | 692 | $ | 5,048 | $ | 978 | ||||
Non-interest Expense
Total non-interest expense increased by $3.6 million for the three months ended March 31, 2022 versus 2021. The overall increase in non-interest expenses was primarily driven by the additional headcount, facilities and transaction volume associated with the acquisition of Savoy. The increase in other non-interest expenses is primarily due to increased assessment charges and correspondent banking fees due to the increased size of the Company.
Non-Interest Expense
For the three and six months ended March 31, 2022 and 2021
(dollars in thousands)
Three months ended | Six months ended | |||||||||||
March 31, | March 31, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Salaries and employee benefits | $ | 5,618 | $ | 3,268 | $ | 10,557 | $ | 6,376 | ||||
Occupancy and equipment |
| 1,370 |
| 1,209 |
| 2,783 |
| 2,380 | ||||
Data processing |
| 392 |
| 270 |
| 759 |
| 515 | ||||
Advertising and promotion |
| 153 |
| 19 |
| 186 |
| 67 | ||||
Acquisition costs |
| — |
| 151 |
| — |
| 296 | ||||
Professional fees |
| 640 |
| 308 |
| 1,139 |
| 720 | ||||
Other expenses |
| 1,184 |
| 500 |
| 2,198 |
| 961 | ||||
Total non-interest expense | $ | 9,357 | $ | 5,725 | $ | 17,622 | $ | 11,315 | ||||
The Company recorded income tax expense of $1.7 million for an effective tax rate of 22.5% for the three months ended March 31, 2022 versus income tax expense of $514 thousand for an effective tax rate of 20.0% in the comparable 2021 period.
Results of Operations – Comparison of the Six Months Ended March 31, 2022 and 2021 –The Company recorded net income of $12.4 million during the six months ended March 31, 2022 versus $3.6 million in the comparable six months a year ago. The $8.8 million increase in earnings for the six months ended March 31, 2022 versus the comparable 2021 period was primarily due to a $14.9 million or 98.4% increase in net interest income and a $4.1 million increase in non-interest income, partially offset by a $1.1 million increase in the provision for loan losses, a $6.3 million increase in non-interest expense and a $3.6 million increase in provision for income taxes versus the comparable 2021 period. The Company’s effective tax rate increased to 22.7% in 2022 from 20.4% a year ago.
The $14.9 million or 98.4% improvement in net interest income was largely attributable to growth in average interest-earning assets of $564.1 million, primarily in loans and a 66-basis point reduction in the yield on average total interest-bearing liabilities to 0.46% from 1.12% a year ago, largely due to a 58-basis point decline in the average cost of savings and time deposits. Reflecting the improvement in net interest income, the Company’s net interest margin widened to 4.32% for the six months ended March 31, 2022 versus 3.66% for the same period a year ago.
40
The lower cost of interest-bearing liabilities in 2022 was also the result of a $36.8 million reduction in average time deposit balances, coupled with increases in lower cost average savings deposits and non-interest-bearing demand deposit balances of $17.3 million and $100.2 million, respectively.
NET INTEREST INCOME ANALYSIS
For the Six Months Ended March 31, 2022 and 2021
(dollars in thousands)
2022 | 2021 | ||||||||||||||||
Average | Average | Average | Average | ||||||||||||||
| Balance |
| Interest |
| Yield/Cost |
| Balance |
| Interest |
| Yield/Cost | ||||||
Assets: | |||||||||||||||||
Interest-earning assets: | |||||||||||||||||
Loans | $ | 1,264,043 | $ | 32,130 |
| 5.10 | % | $ | 733,283 | $ | 18,391 |
| 5.03 | % | |||
Investment securities |
| 13,613 |
| 260 |
| 3.83 | % |
| 17,052 |
| 355 |
| 4.18 | % | |||
Interest-earning cash |
| 110,729 |
| 84 |
| 0.15 | % |
| 74,758 |
| 40 |
| 0.11 | % | |||
FHLB stock and other investments | 4,664 | 83 | 3.57 | % | 3,819 | 91 | 4.78 | % | |||||||||
Total interest-earning assets |
| 1,393,049 |
| 32,557 |
| 4.69 | % |
| 828,912 |
| 18,877 |
| 4.57 | % | |||
Non interest-earning assets: | |||||||||||||||||
Cash and due from banks | 8,334 | 5,138 | |||||||||||||||
Other assets |
| 48,136 |
|
|
|
|
| 24,051 |
|
|
|
| |||||
Total assets | $ | 1,449,519 |
|
|
|
| $ | 858,101 |
|
|
|
| |||||
Liabilities and stockholders' equity: | |||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||
Savings, NOW and money market deposits | $ | 652,268 | $ | 711 |
| 0.22 | % | $ | 216,783 | $ | 274 |
| 0.25 | % | |||
Time deposits |
| 326,626 |
| 892 |
| 0.55 | % |
| 363,434 |
| 2,369 |
| 1.31 | % | |||
Total savings and time deposits |
| 978,894 |
| 1,603 |
| 0.33 | % |
| 580,217 |
| 2,643 |
| 0.91 | % | |||
Fed funds purchased FHLB FRB advances |
| 107,213 |
| 277 |
| 0.52 | % |
| 68,983 |
| 401 |
| 1.17 | % | |||
Note payable | — | — | — | % | 659 | 73 | 22.22 | % (1) | |||||||||
Subordinated debentures |
| 24,513 |
| 664 |
| 5.43 | % |
| 23,678 |
| 631 |
| 5.34 | % | |||
Total interest-bearing liabilities |
| 1,110,620 |
| 2,544 |
| 0.46 | % |
| 673,537 |
| 3,748 |
| 1.12 | % | |||
Demand deposits |
| 195,854 |
|
|
|
|
| 95,659 |
|
|
|
| |||||
Other liabilities |
| 13,254 |
|
|
|
|
| 8,844 |
|
|
|
| |||||
Total liabilities | 1,319,728 | 778,040 | |||||||||||||||
Stockholders' equity |
| 129,791 |
|
|
|
|
| 80,061 |
|
|
|
| |||||
Total liabilities stockholders' equity | $ | 1,449,519 |
|
|
|
| $ | 858,101 |
|
|
|
| |||||
Net interest rate spread |
|
|
|
|
| 4.23 | % |
|
|
|
|
| 3.45 | % | |||
Net interest income/margin |
|
| $ | 30,013 |
| 4.32 | % |
|
| $ | 15,129 |
| 3.66 | % | |||
| (1) | Includes impact of debt extinguishment charges. Excluding the impact of these charges, the average rate was 5.78%. |
The Company recorded a $1.4 million expense to the provision for loan losses for the six months ended March 31, 2022 versus a $300 thousand expense recorded for the comparable period in 2021. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)
Non-interest income increased by $4.0 million for the six months ended March 31, 2022 versus 2021. This increase was principally due to a $2.6 million increase in net gain on sale of loans held for sale and a $1.2 million increase in loan servicing and fee income. For the six months ended March 31, 2022 and 2021, the Company sold loans totaling approximately $51.4 million and $17.8 million, respectively, recognizing net gains of $3.1 million and $476 thousand, respectively.
Total non-interest expense increased by $6.3 million or 55.7% for the six months ended March 31, 2022 versus 2021, principally resulting from higher salaries and employee benefits of $4.2 million as the Company continued to grow and a $1.2 million increase in other expenses. The operating efficiency ratio, defined as total non-interest expense as a percentage of total revenue, was 50.4% for the six months ended March 31, 2022 compared to 71.3% in the comparable period of 2021.
41
The Company recorded income tax expense of $3.6 million for the six months ended March 31, 2022 resulting in an effective tax rate of 22.7%, versus income tax expense of $918 thousand and an effective tax rate of 20.4% in the comparable 2021 period.
Asset Quality - Total non-accrual loans at March 31, 2022 were $10.5 million, or 0.81% of total loans, compared to $7.0 million, or 0.56% of total loans at September 30, 2021 and $9.4 million, or 1.22% of total loans, at March 31, 2021. Management believes all of the Company’s non-accrual loans at March 31, 2022 are well collateralized and no specific reserves have been taken with regard to these loans. The allowance for loan losses as a percentage of total non-accrual loans amounted to 94%, 122% and 87% at March 31, 2022, September 30, 2021 and March 31, 2021, respectively.
Total accruing loans, excluding purchased credit-impaired loans, delinquent 30 days or more amounted to $3.3 million, $8.2 million and $1.3 million at March 31, 2022, September 30, 2021 and March 31, 2021, respectively.
Total loans having credit risk ratings of Special Mention or Substandard were $36.0 million at March 31, 2022 versus $51.9 million at September 30, 2021. These were mainly from the acquired loan portfolio of Savoy Bank. The acquired portfolio has a large component of SBA loans, which have been supported through the COVID-pandemic with assistance from the SBA. The high level of criticized loans in the Savoy portfolio results in part from a conservative view of these borrowers’ ability to perform once government assistance ends, as well as specific instances of borrowers seeking assistance/deferrals/modifications due to the impact to their business. The Company’s Special Mention and Substandard loans were comprised of residential real estate, multi-family, commercial real estate loans and commercial and industrial loans (including SBA facilities) at March 31, 2022. 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 March 31, 2022, the Company had $1.3 million in troubled debt restructurings (“TDRs”), consisting of residential real estate loans. The Company had TDRs amounting to $1.6 million and $1.7 million at September 30, 2021 and March 31, 2021, respectively.
At March 31, 2022, the Company’s allowance for loan losses amounted to $9.9 million or 0.77% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 0.69% at September 30, 2021 and 1.07% at March 31, 2021. The Company recorded no loan charge-offs or recoveries during the three months ended March 31, 2022, September 30, 2021 and March 31, 2021.
The Company recorded a $500 thousand provision for loan losses expense for the three months ended March 31, 2022 versus a $200 thousand expense recorded for the comparable period in 2021. 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
42
their judgments about information available to them at the time of their examination. (See also Critical Accounting Policies, Judgments and Estimates contained herein).
ASSET QUALITY
March 31, 2022 versus September 30, 2021 and March 31, 2021
(dollars in thousands)
As of or for the three months ended | ||||||||||
| 3/31/2022 |
| 9/30/2021 |
| 3/31/2021 | |||||
Non-accrual loans | $ | 10,470 | $ | 7,028 | $ | 9,350 | ||||
Non-accrual loans held for sale | — | — | — | |||||||
Other real estate owned | — | — | — | |||||||
Total non-performing assets (1) | $ | 10,470 | $ | 7,028 | $ | 9,350 | ||||
Purchased credit-impaired loans 90 days or more past due and still accruing | $ | 1,483 | $ | 2,519 | $ | 322 | ||||
Performing TDRs | 1,336 | 455 | 455 | |||||||
Loans held for sale | — | — | 893 | |||||||
Loans held for investment | 1,289,041 | 1,247,125 | 763,596 | |||||||
Allowance for loan losses: | ||||||||||
Beginning balance | $ | 9,386 | $ | 7,852 | $ | 7,979 | ||||
Provision | 500 | 700 | 200 | |||||||
Charge-offs | — | — | — | |||||||
Recoveries | — | — | — | |||||||
Ending balance | $ | 9,886 | $ | 8,552 | $ | 8,179 | ||||
Allowance for loan losses as a % of total loans (2) | 0.77 | % | 0.69 | % | 1.07 | % | ||||
Allowance for loan losses as a % of non-accrual loans (2) | 94 | % | 122 | % | 87 | % | ||||
Non-accrual loans as a % of total loans (2) | 0.81 | % | 0.56 | % | 1.22 | % | ||||
Non-performing assets as a % of total loans, loans held for sale and other real estate owned | 0.81 | % | 0.56 | % | 1.22 | % | ||||
Non-performing assets as a % of total assets | 0.71 | % | 0.47 | % | 1.05 | % | ||||
Non-performing assets, purchased credit-impaired loans 90 days or more past due and still accruing and performing TDRs, to total loans held for sale and investment | 1.03 | % | 0.80 | % | 1.32 | % | ||||
| (1) | Non-performing assets defined as non-accrual loans, non-accrual loans held for sale and other real estate owned. |
| (2) | Excludes loans held for sale. |
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
43
maximize net interest income within an acceptable range of overall risk, including both the effect of changes in interest rates and liquidity risk.
The following presents the Company’s economic value of equity (“EVE”) and net interest income (“NII”) sensitivities at March 31,2022 (dollars in thousands). The results are within the Company’s policy limits.
At March 31, 2022 | |||||||||||||||||||
Interest Rates | Estimated | Estimated Change in EVE | Interest Rates | Estimated | Estimated Change in NII(1) | ||||||||||||||
(basis points) |
| EVE |
| Amount |
| % |
| (basis points) |
| NII(1) |
| Amount |
| % | |||||
+400 | $ | 112,728 | $ | (47,825) |
| (29.8) | +400 | $ | 58,098 | $ | (386) |
| (0.7) | ||||||
+300 |
| 124,862 |
| (35,691) |
| (22.2) | +300 |
| 58,410 |
| (74) |
| (0.1) | ||||||
+200 |
| 137,402 |
| (23,151) |
| (14.4) | +200 |
| 58,683 |
| 199 |
| 0.3 | ||||||
+100 |
| 149,844 |
| (10,709) |
| (6.7) | +100 |
| 58,803 |
| 319 |
| 0.5 | ||||||
0 |
| 160,553 |
| 0 |
| 58,484 |
|
| |||||||||||
-100 |
| 176,597 |
| 16,044 |
| 10.0 | -100 |
| 56,372 |
| (2,112) |
| (3.6) | ||||||
| (1) | Assumes 12 month time horizon. |
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.
44
PART II
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 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, 2021, as filed with the Securities and Exchange Commission.
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. – OTHER INFORMATION
Not applicable.
45
ITEM 6. – EXHIBITS
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
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) |
46
EXHIBIT INDEX
Exhibit |
| Description |
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) |
47
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.
HANOVER BANCORP, INC. | |
Dated: May 16, 2022 | /s/ Michael P. Puorro |
Michael P. Puorro | |
Chairman Chief Executive Officer | |
(principal executive officer) | |
Dated: May 16, 2022 | /s/ Lance P. Burke |
Lance P. Burke | |
Executive Vice President Chief Financial Officer | |
(principal financial and accounting officer) |
48