Hanover Bancorp, Inc. /MD (HNVR) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition and results of our operations for the years ended September 30, 2021, 2020 and 2019, respectively. The purpose of this
discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. Unless the context otherwise specifies or requires, references herein to “we”
or “us” include Hanover Bancorp, Inc. and Hanover Bank on a consolidated basis.
Business Overview
We are a New York corporation which became the holding company for the Bank in 2016. The Bank, a community commercial bank focusing on highly personalized and efficient services and products
responsive to local needs, commenced operations in 2009 and was incorporated under the laws of the State of New York. As a New York State chartered bank, the Bank is subject to regulation by the New York State DFS and the FDIC. As a bank holding
company, we are subject to regulation and examination by the FRB.
The Bank offers a full range of financial services and employs a complete suite of consumer and commercial banking products and services, including multi-family and commercial mortgages,
residential loans, business loans and lines of credit. The Bank also offers its customers, among other things, access to 24-hour ATM service with no fees, free checking with interest, telephone banking, advanced technologies in mobile and internet
banking for its consumer and business customers and safe deposit boxes. Our corporate administrative office is located in Mineola, New York where the Bank also operates a full-service branch office. Additional branches are located in Garden City
Park, Forest Hills, Flushing, Sunset Park, Manhattan and Chinatown, New York.
At September 30, 2021, on a consolidated basis we had $1.48 billion in total assets, $122.5 million in total stockholders’ equity, $1.25 billion in total loans, $1.16 billion in total deposits and
136 full-time equivalent employees.
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Significant Factors Impacting Financial Results
During the year ended September 30, 2021, we completed the acquisition of Savoy, which increased our total assets by approximately $650 million and expanded our SBA lending, commercial and consumer
loan products. This acquisition was a core driver of growth in our key performance indicators and our financial results. See Note 2, "Acquisitions" to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
The COVID-19 pandemic has caused widespread economic disruption in our metropolitan New York trade area. We have actively participated in state and local programs designed to mitigate the impacts
of the COVID-19 pandemic on individuals and small businesses. The CARES Act provides entities with optional temporary relief from certain accounting and financial reporting requirements under GAAP. The CARES Act allows financial institutions to
suspend application of certain troubled debt restructuring (“TDR”) accounting guidance under Accounting Standards Codification (“ASC”) 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and 60 days after the
end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay
the payment of principal or interest or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers
Affected by the Coronavirus to encourage insured depository institutions to work with borrowers and provide relief to those affected by the COVID-19 pandemic and to provide further interpretation of when a borrower is experiencing financial
difficulty, specifically indicating that if the modification is either short term (e.g. six months or less) or mandated by federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under
ASC 310-40, and so the modification will not be treated as a TDR.
We continue 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 our loan portfolio.
During 2020, we modified 393 loans totaling $220.4 million in principal amount of loans in forbearance. As of September 30, 2021, 79 of these loans totaling $39.1 million in principal amount had been repaid in full. As of September 30, 2021, 303
modified loans totaling $161.8 million in principal amount exited forbearance and resumed scheduled payments, and 11 modified loans totaling $19.5 million in principal amount remain in forbearance. Of the modified loans remaining in forbearance as
of September 30, 2021, seven loans totaling $7.9 million in principal amount have been downgraded to criticized and 10 loans totaling $5.2 million in principal amount are now classified as non-accrual. Pursuant to the provision of the CARES Act,
none of these loans are treated as TDRs. These loans will continue to be monitored for further downgrade depending on their individual circumstances. The remaining loans are primary residence loans covered under New York State Law 9-x which
provides full payment deferral up to 360 days.
Another key program under the CARES Act is the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”) which provided funding to qualifying businesses and
organizations. These loans are 100% guaranteed by the SBA and have no allowance for loan losses allocated to them based on the nature of the guarantee. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020,
subject to extension to five years with the consent of the lender) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Under this program, we have originated approximately $366.1 million in principal amount of
PPP loans to local borrowers. As of September 30, 2021, borrowers had applied for and received forgiveness on $225.4 million in PPP loans.
Additionally, the CARES Act provides for relief on existing and new SBA loans through the Small Business Debt Relief program. As part of the SBA Small Business Debt Relief, the SBA will
automatically pay principal, interest, and fees of certain SBA loans for a period of six months for both existing loans and new loans issued prior to September 27, 2020. On December 27, 2020, the Consolidated Appropriations Act authorized a second
round of SBA payments on covered loans approved before March 27, 2020, for a two-month period beginning with the first payment due on the loan on or after February 1, 2021, and for an additional three-month period for certain eligible borrowers.
For new loans approved beginning on February 2, 2021 and ending on September 30, 2021, the SBA will make the payments for a three-month period subject to the availability of funds. At September 30, 2021, approximately nine loans, representing
approximately $7.2 million in aggregate reported balance, are eligible for this relief. The CARES Act also provides for mortgage payment relief and a foreclosure moratorium.
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Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. We believe the more
critical accounting and reporting policies that currently affect our financial condition and results of operations include the accounting for the allowance for loan losses and the valuation of assets acquired and liabilities assumed in business
combinations. Accordingly, our significant accounting policies and effects of new accounting pronouncements are discussed in detail in Note 1, “Summary of Significant Accounting Policies” to the accompanying Consolidated Financial Statements
contained in Item 8 for further details.
Allowance for Loan Losses
We establish an allowance for loan losses that represents management’s best estimate of probable credit losses inherent in the portfolio at the balance sheet date. Estimates for loan losses are
determined by management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans,
concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic
conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the allowance for loan losses, could change significantly. As an integral part of
their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded to
criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. See Note 1, “Summary of Significant Accounting Policies” and
Note 5, “Allowance for Loan Losses” to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Valuation of Assets Acquired and Liabilities Assumed in Business Combinations
We account for acquisitions under FASB Accounting Standards Codification Topic 805, Business Combinations ("ASC Topic 805"), which requires the use of the
acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the
fair value of the loans acquired incorporates assumptions regarding credit risk.
Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of
the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30, but for which a discount is
attributable, at least in part to credit quality, are also accounted for under this guidance. In accordance with FASB ASC Topic 310-20, the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
See Note 1, “Summary of Significant Accounting Policies,” and Note 2, "Acquisitions" to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
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Results of Operations for the year ended September 30, 2021 compared to the year ended September 30, 2020
To facilitate review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the consolidated statements of
operations.
For the year ended September 30, 2021, we recognized net income of $10.9 million, or $2.28 per diluted share, compared to net income of $5.0 million, or $1.18 per diluted share, for the year
ended September 30, 2020. This increase was primarily due to a $14.6 million increase in net interest income as a result of the increase in interest-earning assets primarily derived from our acquisition of Savoy, as well as significant reduction in
our interest rate paid on deposits and borrowings.
We recorded net income of $5.0 million, or $1.18 per diluted common share, for the fiscal year ended September 30, 2020, compared to $8.1 million, or $2.06 per diluted common share, for the
fiscal year ended September 30, 2019. The reduction in earnings in 2020 resulted from a $5.1 million increase in total non-interest expenses, principally due to growth in personnel and branch facilities as a result of the CFSB acquisition, a $3.4
million decrease in non-interest income and a $0.6 million increase in the provision for loan losses due to economic concerns primarily related to the COVID-19 pandemic. Partially offsetting these factors was a $4.7 million improvement in net
interest income and a reduction in Hanover’s effective income tax rate to 20.0% in 2020 from 24.1% in 2019.
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Set forth below are our selected consolidated financial and other data. Our business is primarily the business of our Bank. This financial data is derived in part from, and
should be read in conjunction with, our consolidated financial statements.
| September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | |||||||||
| Selected Balance Sheet Data: | ||||||||||||
| Securities available-for-sale, at fair value | $ | 7,747 | $ | 6,035 | $ | 911 | ||||||
| Securities held-to-maturity | 8,611 | 10,727 | 12,030 | |||||||||
| Loans held for investment | 1,247,125 | 725,019 | 720,442 | |||||||||
| Total assets | 1,484,641 | 851,606 | 848,836 | |||||||||
| Total deposits | 1,164,662 | 664,760 | 650,286 | |||||||||
| Total stockholders' equity | 122,529 | 78,043 | 848,836 | |||||||||
| Year Ended September 30, | ||||||||||||
| (amounts in thousands) | 2021 | 2020 | 2019 | |||||||||
| Selected Operating Data: | ||||||||||||
| Total interest income | $ | 48,675 | $ | 40,133 | $ | 34,497 | ||||||
| Total interest expense | 6,967 | 13,011 | 12,076 | |||||||||
| Net interest income | 41,708 | 27,122 | 22,421 | |||||||||
| Provision for loan losses | 1,000 | 1,250 | 650 | |||||||||
| Total non-interest income | 3,349 | 1,364 | 4,770 | |||||||||
| Total non-interest expense | 30,005 | 21,022 | 15,887 | |||||||||
| Income before income taxes | 14,052 | 6,214 | 10,654 | |||||||||
| Income tax expense | 3,201 | 1,240 | 2,569 | |||||||||
| Net income | 10,851 | 4,974 | 8,085 | |||||||||
| Selected Financial Data and Other Data: | ||||||||||||
| Return on average equity | 0.99 | % | 0.58 | % | 1.16 | % | ||||||
| Return on average assets | 11.53 | % | 6.63 | % | 12.71 | % | ||||||
| Yield on average interest earning assets | 4.63 | % | 4.87 | % | 5.07 | % | ||||||
| Cost of average interest bearing liabilities | 0.81 | % | 1.87 | % | 2.07 | % | ||||||
| Net interest rate spread | 3.82 | % | 3.00 | % | 3.00 | % | ||||||
| Net interest rate margin | 3.97 | % | 3.29 | % | 3.30 | % | ||||||
| Average equity to average assets | 8.61 | % | 8.80 | % | 9.11 | % |
Analysis of Results of Operations
Net Interest Income
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment
securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of
earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities,
repricing frequencies, and loan prepayment behavior.
Net interest income for the year ended September 30, 2021 was $41.7 million, an increase of 53.8% from $27.1 million for the year ended September 30, 2020. The increase was primarily driven by a
$226.0 million increase in average interest-earning assets, primarily due to the acquisition of Savoy, as well as continued organic loan growth in our markets, particularly in commercial real estate. The Company also continued its efforts to
increase its on-balance sheet liquidity position, which led to an increase in average investment securities and interest-bearing deposits at other financial institutions of $9.8 million.
Net interest income for the year ended September 30, 2020 was $27.1 million, an increase of 21.0% from $22.4 million for the year ended September 30, 2019. The improvement in fiscal year 2020 net
interest income resulted from a $143.8 million increase in average total interest-earning assets, coupled with a 20 basis point reduction in the cost of average total interest-bearing liabilities to 1.87% from 2.07%.
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Net interest margin was 3.97% for the year ended September 30, 2021, an increase of 68 basis points from 3.29% for the year ended September 30, 2020. The Company’s average yield on interest-earning
assets for the year ended September 30, 2021 was 4.63%, a decrease of 24 basis points from 4.87% for the year ended September 30, 2020. The decrease was primarily due to a decrease in the yield earned on portfolio loans, which was 5.11% for the
year ended September 30, 2021, as compared to 5.38% for the year ended September 30, 2020. The decrease in yield on portfolio loans was due to continued pricing pressure on new and renewed portfolio loans, coupled with a higher concentration of
lower yielding PPP loans acquired in the Savoy transaction. The average yield earned on the investment securities portfolio for the year ended September 30, 2021 was 4.07%, an increase of 31 basis points from 3.76% earned for the year ended
September 30, 2020.
Net interest margin was 3.29% for the year ended September 30, 2020, a slight decrease from 3.30% for the year ended September 30, 2019. The average rate on total interest-earning assets declined
by 20 basis points to 4.87% for the year ended September 30, 2020, as compared to the same period in 201. This reduction in yield reflects the increase in average lower yielding cash balances of $42.2 million year over year, despite increases of
$101.5 million in average loans and eight basis points in the average loan yield to 5.38%.
Average interest-bearing liabilities were $859.8 million for the year ended September 30, 2021, an increase of $162.8 million compared to $697.0 million for the year ended September 30, 2020. The
increase was primarily attributable to growth in interest-bearing deposits, which increased by $117.0 million during fiscal year 2021 from both the acquisition of Savoy and organic growth in our markets. The Company’s average cost of
interest-bearing liabilities was 0.81% for the year ended September 30, 2021, a decrease of 106 basis points compared to 1.87% for the year ended September 30, 2020. This decrease is due to the Company’s strategic decision to replace higher rate
customer deposits with lower rate municipal deposits. Wholesale deposits comprised 30.1% of total deposits at September 30, 2021, an increase from 2.2% of total deposits at September 30, 2020.
Average interest-bearing liabilities were $697.0 million for the year ended September 30, 2020, an increase of $114.4 million compared to $582.6 million for the year ended September 30, 2019.
Average core deposits, consisting of demand, savings, NOW and money market deposits, increased by $44.9 million to $251.1 for the year ended September 30, 2020, while average total deposits increased by $161.2 million to $669.5 million for the year
ended September 30, 2020. The Company’s average cost of interest-bearing liabilities was 1.87% for the year ended September 30, 2020, a decrease of 20 basis points compared to 2.07% for the year ended September 30, 2019. The lower cost of funds for
the year ended September 30, 2020 was largely the result of a shift in the deposit mix to a greater concentration of non-interest-bearing demand deposit balances.
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The following table presents daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis for the periods presented:
| Year Ended September 30, | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||||||||||||||
| Loans(1)(2) | $ | 934,066 | $ | 47,685 | 5.11 | % | $ | 717,834 | $ | 38,641 | 5.38 | % | $ | 616,353 | $ | 32,660 | 5.30 | % | ||||||||||||||||||
| Investment securities(1) | 16,845 | 685 | 4.07 | % | 13,907 | 523 | 3.76 | % | 12,851 | 427 | 3.32 | % | ||||||||||||||||||||||||
| Interest-earning balances and other | 99,348 | 305 | 0.31 | % | 92,506 | 969 | 1.05 | % | 51,209 | 1,410 | 2.75 | % | ||||||||||||||||||||||||
| Total interest-earning assets | 1,050,259 | 48,675 | 4.63 | % | 824,247 | 40,133 | 4.87 | % | 680,413 | 34,497 | 5.07 | % | ||||||||||||||||||||||||
| Other assets | 42,675 | 27,807 | 17,453 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,092,934 | $ | 852,054 | $ | 697,866 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||
| Savings, NOW and money market deposits | $ | 333,996 | $ | 903 | 0.27 | % | $ | 179,106 | $ | 1,445 | 0.81 | % | $ | 160,073 | $ | 2,510 | 1.57 | % | ||||||||||||||||||
| Time deposits | 380,473 | 3,822 | 1.00 | % | 418,384 | 9,180 | 2.19 | % | 302,124 | 6,725 | 2.23 | % | ||||||||||||||||||||||||
| Total interest-bearing deposits | 714,469 | 4,725 | 0.66 | % | 597,490 | 10,625 | 1.78 | % | 462,197 | 9,235 | 2.00 | % | ||||||||||||||||||||||||
| Borrowings | 121,246 | 955 | 0.79 | % | 99,550 | 2,386 | 2.40 | % | 120,376 | 2,841 | 2.36 | % | ||||||||||||||||||||||||
| Subordinated debentures | 24,088 | 1,287 | 5.34 | % | - | - | 0.00 | % | - | - | 0.00 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 859,803 | 6,967 | 0.81 | % | 697,040 | 13,011 | 1.87 | % | 582,573 | 12,076 | 2.07 | % | ||||||||||||||||||||||||
| Non-interest-bearing deposits | 128,540 | 72,007 | 46,132 | |||||||||||||||||||||||||||||||||
| Other liabilities | 10,519 | 8,031 | 5,573 | |||||||||||||||||||||||||||||||||
| Stockholders' equity | 94,072 | 74,976 | 63,588 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,092,934 | $ | 852,054 | $ | 697,866 | ||||||||||||||||||||||||||||||
| Net interest income and interest rate spread | 3.82 | % | 3.00 | % | 3.00 | % | ||||||||||||||||||||||||||||||
| Net interest margin | $ | 41,708 | 3.97 | % | $ | 27,122 | 3.29 | % | $ | 22,421 | 3.30 | % |
(1) There is no income tax exempt interest recorded for loans or investment securities for the periods presented.
(2) Includes non-accrual loans and loans held for sale.
The following table details the variances in net interest income caused by changes in average interest rates and average volume for the periods presented:
| 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (decrease) due to change in: | ||||||||||||||||||||||||
| (in thousands) | Average volume | Average rate | Total | Average volume | Average rate | Total | ||||||||||||||||||
| Interest income | ||||||||||||||||||||||||
| Loans | $ | 11,127 | $ | (2,083 | ) | $ | 9,044 | $ | 5,455 | $ | 526 | $ | 5,981 | |||||||||||
| Investment securities | 117 | 45 | 162 | 37 | 59 | 96 | ||||||||||||||||||
| Interest-earning balances and other | 67 | (731 | ) | (664 | ) | 539 | (980 | ) | (441 | ) | ||||||||||||||
| Total interest income | 11,311 | (2,769 | ) | $ | 8,542 | 6,031 | (395 | ) | $ | 5,636 | ||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Savings, NOW and money market deposits | $ | 780 | $ | (1,322 | ) | $ | (542 | ) | $ | 269 | $ | (1,334 | ) | $ | (1,065 | ) | ||||||||
| Time deposits | (775 | ) | (4,583 | ) | (5,358 | ) | 2,553 | (98 | ) | 2,455 | ||||||||||||||
| Borrowings | 434 | (1,865 | ) | (1,431 | ) | (370 | ) | (85 | ) | (455 | ) | |||||||||||||
| Subordinated debentures | 1,287 | - | 1,287 | - | - | - | ||||||||||||||||||
| Total interest expense | 1,726 | (7,770 | ) | (6,044 | ) | 2,452 | (1,517 | ) | $ | 935 | ||||||||||||||
| Net increase in net interest income | $ | 9,585 | $ | 5,001 | $ | 14,586 | $ | 3,579 | $ | 1,122 | $ | 4,701 |
Provision for Loan Losses
The provision for credit losses was $1.0 million for the year ended September 30, 2021, a decrease of $0.3 million compared to $1.3 million for the year ended September 30, 2020. The decrease was
primarily due to a higher provision recorded in fiscal year 2020 due to economic uncertainty due to the COVID-19 pandemic. The Company did not incur a significant increase to reserves because of the pandemic during fiscal year 2021. Total net
charge-offs were $0.3 million and $0.5 million for the years ended September 30, 2021 and 2020, respectively.
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The provision for credit losses was $1.3 million for the year ended September 30, 2020, an increase of $0.6 million compared to $0.7 million for the year ended September 30, 2019. Total net
charge-offs were $0.5 million and $0 for the years ended September 30, 2020 and 2019, respectively.
Provision for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management
considers factors that include recent growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated
value of any underlying collateral, prevailing economic conditions and other relevant factors. See additional discussion under "Asset Quality - Analysis of Allowance for Loan Losses” section.
Non-Interest Income
| Year Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | ||||||||
| Loan fees and service charges | $ | 703 | $ | 301 | $ | 185 | |||||
| Loan servicing income | 504 | 84 | 160 | ||||||||
| Service charges on deposit accounts | 127 | 62 | 64 | ||||||||
| Net gain on sale of investments available-for-sale | 240 | - | - | ||||||||
| Net gain on sale of loans held-for-sale | 1,307 | 917 | 4,361 | ||||||||
| Other income | 468 | - | - | ||||||||
| Total non-interest income | $ | 3,349 | $ | 1,364 | $ | 4,770 |
Non-interest income was $3.3 million for the year ended September 30, 2021, an increase of $1.9 million from $1.4 million for the year ended September 30, 2020. This 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.
Non-interest income was $1.4 million for the year ended September 30, 2020, a decrease of $3.4 million from $4.8 million for the year ended September 30, 2018. This decrease was principally due
to a reduction in the volume of loans sold during fiscal year 2020 due to the COVID-19 pandemic.
Non-Interest Expense
| Year Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | ||||||||
| Salaries and employee benefits | $ | 15,009 | $ | 11,182 | $ | 9,041 | |||||
| Occupancy and equipment | 4,978 | 4,462 | 2,835 | ||||||||
| Data processing | 1,280 | 911 | 662 | ||||||||
| Advertising and promotion | 118 | 296 | 487 | ||||||||
| Acquisition costs | 4,430 | 450 | 737 | ||||||||
| Professional fees | 1,706 | 2,070 | 775 | ||||||||
| Other | 2,484 | 1,651 | 1,350 | ||||||||
| Total non-interest expense | $ | 30,005 | $ | 21,022 | $ | 15,887 |
Non-interest expense was $30.0 million for the year ended September 30, 2021, an increase of $9.0 million from $21.0 million for the year ended September 30, 2020. The overall increase in non-interest expenses was
primarily driven by the additional headcount, facilities and transaction volume associated with the acquisition of Savoy. Acquisition costs incurred in fiscal year 2021 were primarily due to the Savoy acquisition and consisted of professional
services and other charges directly associated with the transaction. 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.
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Non-interest expense was $21.0 million for the year ended September 30, 2020, an increase of $5.1 million from $15.9 million for the year ended September 30, 2019. The
increase was primarily due to higher salaries and employee benefits of $2.1 million and increased occupancy and equipment expenses of $1.6 million, reflecting the CFSB acquisition.
Income Taxes
Income tax expense was $3.2 million for the year ended September 30, 2021, an increase from $1.2 million for the year ended September 30, 2020. The effective income tax rate for the year ended
September 30, 2021 was 22.8%, compared to an effective tax rate of 20.0% for the year ended September 30, 2020. The increase in our effective tax rate was driven primarily by the impact of additional state filings and the non-deductible transaction
costs, both related to the acquisition.
Analysis of Results of Financial Condition
Investment Securities
Our investment securities portfolio, which is structured with minimum credit exposure, is intended to provide us with adequate liquidity, flexibility in asset/liability management, and a source of
stable income. Investment securities classified as available-for-sale are carried at fair value in the consolidated balance sheet, while investment securities classified as held-to-maturity are shown at amortized cost in the consolidated balance
sheet.
The following table summarizes the amortized cost and fair value of investment securities:
| Balance at September 30, | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| (in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||
| Investment securities available-for-sale: | |||||||||||||||||||||||
| U.S. GSE residential mortgage-backed securities | $ | 722 | $ | 833 | $ | 838 | $ | 962 | $ | 883 | $ | 911 | |||||||||||
| Corporate bonds | 6,700 | 6,914 | 5,000 | 5,073 | - | - | |||||||||||||||||
| Total investment securities available-for-sale | 7,422 | 7,747 | 5,838 | 6,035 | 883 | 911 | |||||||||||||||||
| Investment securities held-to-maturity: | |||||||||||||||||||||||
| U.S. GSE residential mortgage-backed securities | 2,417 | 2,491 | 4,478 | 4,596 | 5,729 | 5,748 | |||||||||||||||||
| U.S. GSE commercial mortgage-backed securities | 2,694 | 2,869 | 2,749 | 3,002 | 2,801 | 2,904 | |||||||||||||||||
| Corporate bonds | 3,500 | 3,505 | 3,500 | 3,533 | 3,500 | 3,539 | |||||||||||||||||
| Total investment securities held-to-maturity | 8,611 | 8,865 | 10,727 | 11,131 | 12,030 | 12,191 | |||||||||||||||||
| Total investment securities | $ | 16,033 | $ | 16,612 | $ | 16,565 | $ | 17,166 | $ | 12,913 | $ | 13,102 |
We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the
level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of
investments made into the available-for-sale and held-to-maturity investment categories.
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Our investment securities portfolio included gross unrealized gains of $0.6 million and an immaterial amount of gross unrealized losses at September 30, 2021, compared to gross unrealized gains of
$0.6 million and no gross unrealized losses at September 30, 2020. Management believes that all of its unrealized losses on individual investment securities at September 30, 2021 are the result of fluctuations in interest rates and do not reflect
deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. We do not have the intent to sell these investment securities with unrealized losses and, more likely
than not, will not be required to sell these investment securities before fair value recovers to amortized cost.
The table below illustrates the maturity distribution and weighted average yield for amortized cost of our investment securities as of September 30, 2021, on a contractual maturity basis.
Investment Securities Portfolio by Expected Maturities(1)
| Balance at September 30, 2021 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| (in thousands) | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | ||||||||||||
| U.S. GSE residential mortgage-backed securities | ||||||||||||||||
| Due within one year | $ | 25 | -0.99 | % | $ | - | - | |||||||||
| Due after one year through five years | 1 | -3.75 | % | - | - | |||||||||||
| Due after ten years | 696 | 2.44 | % | 2,417 | 2.29 | % | ||||||||||
| 722 | 2.01 | % | 2,417 | 2.29 | % | |||||||||||
| U.S. GSE commercial mortgage-backed securities | ||||||||||||||||
| Due after one year through five years | - | - | 2,694 | 2.68 | % | |||||||||||
| - | - | 2,694 | 2.68 | % | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Due after one year through five years | - | - | 1,500 | 5.00 | % | |||||||||||
| Due after five years through ten years | 6,700 | 4.61 | % | 2,000 | 5.25 | % | ||||||||||
| Due after ten years | - | - | - | - | ||||||||||||
| 6,700 | 4.61 | % | 3,500 | 5.14 | % | |||||||||||
| Total investment securities | $ | 7,422 | 4.36 | % | $ | 8,611 | 3.57 | % |
| Balance at September 30, 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| (in thousands) | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | ||||||||||||
| U.S. GSE residential mortgage-backed securities | ||||||||||||||||
| Due after five years through ten years | $ | - | - | $ | - | - | ||||||||||
| Due after one year through five years | - | - | - | - | ||||||||||||
| Due after ten years | 838 | 2.73 | % | 4,478 | 2.19 | % | ||||||||||
| 838 | 2.73 | % | 4,478 | 2.29 | % | |||||||||||
| U.S. GSE commercial mortgage-backed securities | ||||||||||||||||
| Due after five years through ten years | - | - | 2,749 | 2.68 | % | |||||||||||
| - | - | 2,749 | 2.68 | % | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Due after one year through five years | - | - | - | - | ||||||||||||
| Due after five years through ten years | 5,000 | 5.75 | % | 3,500 | 5.79 | % | ||||||||||
| Due after ten years | - | - | - | - | ||||||||||||
| 5,000 | 5.75 | % | 3,500 | 5.14 | % | |||||||||||
| Total investment securities | $ | 5,838 | 5.32 | % | $ | 10,727 | 3.49 | % |
(1) There is no income tax exempt interest recorded for investment seciurities for the periods presented.
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Loans
At September 30, 2021, our loan portfolio was $1.25 billion, an increase of $522.1 million from $725.0 million at September 30, 2020. This increase was primarily due to the acquisition of Savoy.
The Company has also experienced additional growth in commercial real estate and construction loans as economic conditions continue to improve. These increases are slightly offset by the continued payoff of PPP loans that were granted in fiscal
year 2020 as a result of the COVID-19 pandemic.
The following table provides the composition of the Company’s loans held for investment:
| Balance at September 30, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| Residential | $ | 444,011 | $ | 454,073 | $ | 465,422 | $ | 372,673 | $ | 238,251 | ||||||||||
| Multi-family | 266,294 | 136,539 | 139,504 | 132,301 | 120,143 | |||||||||||||||
| Commercial | 348,641 | 113,615 | 108,197 | 48,669 | 59,190 | |||||||||||||||
| Total real estate | 1,058,946 | 704,227 | 713,123 | 553,643 | 417,584 | |||||||||||||||
| Commercial and industrial | 172,274 | 21,100 | 7,353 | 6,736 | 5,715 | |||||||||||||||
| Construction | 15,374 | - | - | - | - | |||||||||||||||
| Consumer | 11 | 24 | 501 | 24 | 86 | |||||||||||||||
| Gross loans | 1,246,605 | 725,351 | 720,977 | 560,403 | 423,385 | |||||||||||||||
| Net deferred loan costs (fees) | 520 | (332 | ) | (535 | ) | (1,023 | ) | (758 | ) | |||||||||||
| Total loans held for investment | $ | 1,247,125 | $ | 725,019 | $ | 720,442 | $ | 559,380 | $ | 422,627 |
The following table provides information for the contractual maturity and interest-rate profile of the Company’s commercial and industrial and real estate construction loans held for investment:
| Balance at September 30, 2021 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Due within One Year | Due After One Year But Within Five Years | Due After Five Years | Total | |||||||||||
| By Loan Type: | |||||||||||||||
| Commercial and industrial | $ | 29,689 | $ | 129,503 | $ | 13,082 | $ | 172,274 | |||||||
| Real estate construction | 8,761 | 2,789 | 3,824 | 15,374 | |||||||||||
| Total | $ | 38,450 | $ | 132,292 | $ | 16,906 | $ | 187,648 | |||||||
| By Interest Rate Type: | |||||||||||||||
| Fixed rate | $ | 21,986 | $ | 123,823 | $ | 183 | $ | 145,992 | |||||||
| Variable rate | 16,464 | 8,469 | 16,723 | 41,656 | |||||||||||
| Total | $ | 38,450 | $ | 132,292 | $ | 16,906 | $ | 187,648 |
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| Balance at September 30, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Due within One Year | Due After One Year But Within Five Years | Due After Five Years | Total | |||||||||||
| By Loan Type: | |||||||||||||||
| Commercial and industrial | $ | 2,322 | $ | 18,123 | $ | 655 | $ | 21,100 | |||||||
| Real estate construction | - | - | - | - | |||||||||||
| Total | $ | 2,322 | $ | 18,123 | $ | 655 | $ | 21,100 | |||||||
| By Interest Rate Type: | |||||||||||||||
| Fixed rate | $ | - | $ | 17,825 | $ | 206 | $ | 18,031 | |||||||
| Variable rate | - | 298 | 449 | 747 | |||||||||||
| Total | $ | - | $ | 18,123 | $ | 655 | $ | 18,778 |
Credit Policies and Procedures
Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this
program, risk grades are initially assigned by loan officers, reviewed by Credit Administration, and a sample of these loans are tested by the Company's third-party independent loan reviewer. The testing program includes an evaluation of a sample
of both new and existing loans, including large loans, loans that are identified as having potential credit weaknesses, and loans past due 90 days or more and still accruing. We strive to maintain the loan portfolio in accordance with our loan
underwriting policies that result in loans specifically tailored to the needs of our market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. Generally, we do not engage in significant
volumes of lease financing, highly leveraged transactions or loans to customers domiciled outside the United States.
Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process we maintain an internally-classified, adversely-risk-rated loan
list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the
estimated value of the underlying collateral, the borrower's ability to repay, the borrower's payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the
allowance is allocated based on management's judgment and historical experience.
Acquired loans are recorded at fair value as of the loan's acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date,
recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in
additional allowance for loan losses.
A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the
loan. If applicable, the Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the
loan’s effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.
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Asset Quality
We consider asset quality to be of primary importance and employ a formal internal loan review process to ensure adherence to our
lending policy as approved by our Board of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. The Company's internal credit risk review function, through focused review and
sampling, validates the accuracy of commercial loan risk grades. Each loan risk grade corresponds to an estimated default probability. In addition, as a given loan's credit quality improves or deteriorates, the Company will update the borrower's
risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings,
particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in our market area and other factors. For loans
determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as
it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management's estimate of the
appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a
thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.
Nonperforming Assets
The following table presents information regarding nonperforming assets for the periods presented. The Company did not own any repossessed property for the periods presented.
| Balance at September 30, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||
| Nonaccrual loans | $ | 7,028 | $ | 953 | $ | 1,613 | $ | - | $ | - | ||||||||||
| Loans greater than 90 days past due | - | 296 | 629 | - | - | |||||||||||||||
| Total nonperforming assets | $ | 7,028 | $ | 1,249 | $ | 2,242 | $ | - | $ | - | ||||||||||
| Performing TDRs | $ | 455 | $ | 454 | $ | 454 | $ | 354 | $ | 562 | ||||||||||
| Nonaccrual loans as a percentage of loans held-for-investment | 0.56 | % | 0.13 | % | 0.22 | % | 0.00 | % | 0.00 | % | ||||||||||
| Non-performing assets as a percentage of total assets | 0.47 | % | 0.15 | % | 0.26 | % | 0.00 | % | 0.00 | % |
Total nonaccrual loans were $7.0 million at September 30, 2021, an increase from total nonaccrual loans of $1.0 million at September 30, 2020. The increase in nonaccrual loans was driven by loans
acquired from Savoy that were not classified as purchased-credit impaired as of the acquisition, which totaled $2.3 million at September 30, 2021, but experienced credit deterioration subsequent to the acquisition. The remaining increase related to
residential mortgage loans that were initially granted a forbearance due to the COVID-19 pandemic but were not able to resume normal payments. The amount of interest that would have been recorded on nonaccrual loans had the loans not been
classified as nonaccrual was $0.9 million and $0.1 million for the years ended September 30, 2021 and 2020, respectively.
Analysis of Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases the allowance for loan losses by provisions charged to
operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least monthly. In addition, on a monthly basis our Board of Directors reviews the
loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss allowance. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the
portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors
deriving from our history of operations. In addition to our history, management also considers the loss experience and allowance levels of other similar banks and the historical experience encountered by our management and senior lending officers
prior to joining us. In addition, regulatory agencies, as an integral part of their examination process, periodically review allowance for loan losses and may require us to make additions for estimated losses based upon judgments different from
those of management.
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Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. Generally,
we do not engage in significant lease financing, highly leveraged transactions or loans to customers domiciled outside the United States.
Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list that helps
management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the
underlying collateral, the borrower's ability to repay, the borrower's payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the allowance is allocated
based on management's judgment and historical experience.
Acquired loans are recorded at fair value as of the loan's acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date,
recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in
additional allowance for loan losses.
A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the
loan. The Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective
interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.
The allowance for loan losses was $8.6 million at September 30, 2021, an increase of $0.7 million from $7.9 million at September 30, 2020. The ratio of the allowance for loan losses to total
portfolio loans was 0.69% and 1.09% at September 30, 2021 and 2020, respectively.
The allowance for loan losses was $7.9 million at September 30, 2020, an increase of $0.8 million from $7.1 million at September 30, 2019. The increase is largely the result of additional estimated
probable incurred losses resulting from economic concerns related to the COVID-19 pandemic.
The Company experienced $0.3 million in net charge-offs during the year ended September 30, 2021, a decrease compared to net charge-offs of $0.5 million during the year ended September 30, 2020.
The Company has recorded an immaterial amount of recoveries during the years ended September 30, 2021 and 2020, respectively.
The following table presents the allocation of the allowance for loan losses by loan category for the periods presented:
| At September 30, | ||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | % of Gross Loans | Amount | % of Gross Loans | Amount | % of Gross Loans | Amount | % of Gross Loans | Amount | % of Gross Loans | ||||||||||||||||||||||||||||||
| Residential real estate | $ | 4,155 | 0.94 | % | $ | 5,103 | 1.12 | % | $ | 4,647 | 1.00 | % | $ | 4,363 | 1.17 | % | $ | 2,659 | 1.12 | % | ||||||||||||||||||||
| Multi-family | 2,433 | 0.91 | % | 1,506 | 1.10 | % | 1,215 | 0.87 | % | 1,478 | 1.12 | % | 1,422 | 1.18 | % | |||||||||||||||||||||||||
| Commercial real estate | 1,884 | 0.54 | % | 1,221 | 1.07 | % | 1,193 | 1.10 | % | 500 | 1.03 | % | 651 | 1.10 | % | |||||||||||||||||||||||||
| Commercial and industrial | 79 | 0.05 | % | 38 | 0.18 | % | 75 | 1.02 | % | 152 | 2.26 | % | 62 | 1.08 | % | |||||||||||||||||||||||||
| Construction | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Consumer | 1 | 9.09 | % | 1 | 4.17 | % | 13 | 2.59 | % | - | - | 1 | 1.16 | % | ||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 8,552 | 0.69 | % | $ | 7,869 | 1.08 | % | $ | 7,143 | 0.99 | % | $ | 6,493 | 1.16 | % | $ | 4,795 | 1.13 | % |
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The following table presents information related activity in the allowance for loan losses for the periods presented:
| Year Ended September 30, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||
| Beginning balance | $ | 7,869 | $ | 7,143 | $ | 6,493 | $ | 4,795 | $ | 3,419 | ||||||||||
| Provision for loan losses | 1,000 | 1,250 | 650 | 1,698 | 1,376 | |||||||||||||||
| Charge-Offs: | ||||||||||||||||||||
| Residential real estate | (267 | ) | - | - | - | - | ||||||||||||||
| Multi-family | (32 | ) | - | - | - | - | ||||||||||||||
| Commercial real estate | (30 | ) | (224 | ) | - | - | - | |||||||||||||
| Commercial and industrial | - | (300 | ) | - | - | - | ||||||||||||||
| Construction | - | - | - | - | - | |||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||
| Total loan charge-offs | (329 | ) | (524 | ) | - | - | - | |||||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial and industrial | 12 | - | - | - | - | |||||||||||||||
| Total recoveries | 12 | - | - | - | - | |||||||||||||||
| Total net charge-offs | (317 | ) | (524 | ) | - | - | - | |||||||||||||
| Ending balance | $ | 8,552 | $ | 7,869 | $ | 7,143 | $ | 6,493 | $ | 4,795 | ||||||||||
| Allowance for loan losses to total loans held-for-investment(1)(2) | 0.69 | % | 1.09 | % | 0.99 | % | 1.16 | % | 1.13 | % | ||||||||||
| Net charge-offs to average loans held-for-investment | 0.03 | % | 0.07 | % | 0.00 | % | 0.00 | % | 0.00 | % |
(1) Calculation includes $140.4 million and $17.2 million of PPP loans at September 30, 2021 and 2020, respectively.
(2) Includes $426.6 million of loans acquired from Savoy that do not carry an allowance for loans losses as of September 30, 2021
Sources of Funds and Liquidity
Liquidity management is defined as both our and the Bank’s ability to meet our financial obligations on a continuous basis without material loss or disruption of normal operations. These
obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they
arise. Asset liquidity is provided by short-term investments, such as fed funds sold, the marketability of securities available-for-sale and interest-bearing deposits due from the Federal Reserve Bank of New York, Federal Home Loan Bank (the
“FHLB”) and correspondent banks, which totaled $166.0 million and $80.0 million at September 30, 2021 and 2020, respectively. These liquid assets may include assets that have been pledged primarily against municipal deposits or borrowings.
Liquidity is also provided by the maintenance of a base of core deposits, cash and non-interest-bearing deposits due from banks, the ability to sell or pledge marketable assets and access to lines of credit.
Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of
funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding.
Many factors affect our ability to meet liquidity needs, including variations in the markets served, loan demand, asset/liability mix, reputation and credit standing in our markets and general economic conditions. Borrowings and the scheduled
amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. Among these are changes in the local and
national economies, competition from other financial institutions and changes in market interest rates.
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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.
Deposits
We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts
generally pay interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source.
Total deposits at September 30, 2021 were $1.16 billion, an increase of $499.9 million from total deposits of $664.8 million at September 30, 2020. This increase is deposits was primarily the
result of the acquisition of Savoy.
The following is our average deposits and weighted-average interest rates paid thereon for the past two fiscal years:
| Year Ended September 30, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| (in thousands) | Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||||||||||
| Non-interest bearing demand | $ | 128,540 | 0.00 | % | $ | 72,007 | 0.00 | % | $ | 46,132 | 0.00 | % | ||||||||||||
| Savings | 48,995 | 0.20 | % | 41,223 | 0.45 | % | 25,688 | 1.01 | % | |||||||||||||||
| NOW | 153,595 | 0.26 | % | 37,774 | 0.63 | % | 40,764 | 0.86 | % | |||||||||||||||
| Money market | 131,406 | 0.30 | % | 100,109 | 1.02 | % | 93,621 | 2.03 | % | |||||||||||||||
| Time deposits | 380,473 | 1.00 | % | 418,384 | 2.19 | % | 302,124 | 2.23 | % | |||||||||||||||
| Total average deposits | $ | 843,009 | 0.56 | % | $ | 669,497 | 1.59 | % | $ | 508,329 | 1.82 | % |
As discussed previously, during fiscal year 2021 the Company made the strategic decision to allow higher cost consumer deposits to run-off and replace these funding sources with municipal
deposits, which have a significantly lower average interest rate. The Company had total wholesale deposits of $350.5 million at September 30, 2021, which comprised 30.1% of total deposits, an increase from $14.9 million, or 2.2% of total
deposits, at September 30, 2020. These lower rates were partially offset by deposits acquired from Savoy, which have a higher average rate.
The following table sets forth the contractual maturities of time deposits of $100,000 or more for the periods presented:
| September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | ||||||||
| Three months or less | $ | 69,530 | $ | 59,075 | $ | 38,372 | |||||
| Over three months through six months | 66,506 | 73,907 | 30,459 | ||||||||
| Over six months through 12 months | 51,485 | 83,940 | 94,411 | ||||||||
| Over 12 months | 90,603 | 39,111 | 84,311 | ||||||||
| Total | $ | 278,124 | $ | 256,033 | $ | 247,553 |
Borrowings
The total carrying value of our borrowings was $184.2 million at September 30, 2021, an increase of $84.0 million from $100.1 million at September 30, 2020. At September 30, 2021, $15.0 million
of these borrowings were classified as short-term, while the remaining was classified as long-term. Short-term borrowings are comprised of short-term FHLB advances, securities sold under agreements to repurchase and Federal funds purchased. Many
short-term funding sources, particularly Federal funds purchased and securities sold under agreements to repurchase, are expected to be reissued and, therefore, do not represent an immediate need for cash. Long-term funding is comprised of
long-term FHLB advances, subordinated notes and junior subordinated debentures. The Company will prepay FHLB advances from time to time as funding needs change. See Note 8, “Borrowings” to the accompanying Consolidated Financial Statements
contained in Item 8 for additional details.
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In October 2020, the Company completed the private placement of $25.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due in 2030. The Notes will initially bear
interest, payable semi-annually, at the rate of 5.00% per annum, until October 15, 2025. From and including October 15, 2025, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month
secured overnight financing rate plus 487.4 basis points. The Company may, at its option, beginning with the interest payment date of October 15, 2025 but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem
the Notes, in whole or in part, subject to the receipt of any required regulatory approval. The Notes are not subject to redemption at the option of the holder. The Company used a portion of the net proceeds to pay off the existing holding company
note in October 2020 and intends to use the remainder of the net proceeds for acquisition financing and general corporate purposes, including contributing equity capital to the Bank.
At September 30, 2021, the Company had access to approximately $432.7 million in FHLB lines of credit for overnight or term borrowings, of which $41.7 million in term borrowings were outstanding.
At September 30, 2021, approximately $55.0 million in unsecured lines of credit extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit
with correspondent banks at September 30, 2021.
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 September 30, 2021 and 2020, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated
amounted to approximately $105.7 million and $28.6 million, respectively. This increase was primarily attributable to the acquisition of Savoy.
Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to
facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the
creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2021 and 2020, letters of credit outstanding were
approximately $0.8 million and $0.2 million, respectively.
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Contractual Obligations
The following table summarizes contractual obligations to make future payments as of September 30, 2021:
| Payments Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Less than One Year | More Than One Year but Less than Three Years | More Than Three Years but Less than Five Years | After Five Years | Total | ||||||||||||||
| Time deposits | $ | 277,431 | $ | 74,307 | $ | 25,106 | $ | 992 | $ | 377,836 | |||||||||
| Subordinated debentures | - | - | - | 24,513 | 24,513 | ||||||||||||||
| FHLB borrowings | 4,000 | 30,900 | 7,080 | - | 41,980 | ||||||||||||||
| FRB borrowings | 10,980 | - | 106,682 | - | 117,662 | ||||||||||||||
| Operating leases | 1,886 | 3,869 | 3,572 | 4,729 | 14,056 | ||||||||||||||
| Standby letters of credit | 786 | - | - | - | 786 | ||||||||||||||
| Unused lines of credit(1) | 5,109 | 266 | 2 | 5,316 | 10,693 | ||||||||||||||
| Total contractual obligations | $ | 300,192 | $ | 109,342 | $ | 142,442 | $ | 35,550 | $ | 587,526 |
(1) Excludes those unconditionally cancellable
Capital Resources
Total stockholders’ equity was $122.5 million at September 30, 2021, an increase of $44.5 million from stockholders’ equity of
$78.0 million at September 30, 2020. The increase was primarily due to the 1.4 million common shares issued as consideration in connection with the acquisition of Savoy.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines
and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. We use our capital primarily for our lending activities as well as acquisitions
and expansions of our business and other operating requirements.
The Bank capital level is characterized as "well-capitalized" under the Basel III Capital Rules. A summary of the Bank’s regulatory
capital amounts and ratios are presented below:
| September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2021 | 2020 | 2019 | |||||||||
| Total capital | $ | 132,554 | $ | 95,079 | $ | 89,295 | ||||||
| Tier 1 capital | 123,666 | 89,275 | 83,424 | |||||||||
| Common equity tier 1 capital | 123,666 | 89,275 | 83,424 | |||||||||
| Total capital ratio | 15.59 | % | 20.57 | % | 19.07 | % | ||||||
| Tier 1 capital ratio | 14.54 | % | 19.32 | % | 17.81 | % | ||||||
| Common equity tier 1 capital ratio | 14.54 | % | 19.32 | % | 17.81 | % | ||||||
| Tier 1 leverage ratio | 9.45 | % | 11.22 | % | 10.47 | % |
Under a policy of the FRB, holding companies such as the Company with less than $3.0 billion in consolidated assets are not
subject to consolidated capital requirements.