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Part I.
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Item 1.
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Item 1A.
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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Part II.
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Item 5.
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43
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Item 6.
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Item 7.
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Item 7A.
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Item 8.
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Item 9.
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105
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Part III.
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106
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Item 11.
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Item 12.
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Part IV.
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Item 16.
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FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks
and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of Hanover Bancorp, Inc. and its subsidiary, including statements preceded by, followed
by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,”
“might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference
include, but are not limited to: (1) the impact of the COVID-19 pandemic and the government’s response to the pandemic on our operations as well as those of our customers and on the economy generally and in our market area specifically, (2)
competitive pressures among depository institutions may increase significantly; (3) changes in the interest rate environment may reduce interest margins; (4) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions
may vary substantially from period to period; (5) general economic conditions may be less favorable than expected; (6) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic
conditions; (7) legislative or regulatory changes or actions may adversely affect the businesses in which Hanover Bancorp, Inc. is engaged; (8) changes and trends in the securities markets may adversely impact Hanover Bancorp, Inc.; (9) a delayed
or incomplete resolution of regulatory issues could adversely impact our planning; (10) difficulties in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may expect
from such acquisitions; (11) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (12) the outcome of any future regulatory
and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of Hanover Bancorp, Inc. are included in Item 1A of this Annual Report on Form 10-K and in Hanover Bancorp
Inc.’s other filings with the Securities and Exchange Commission (the “Commission”). These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from Hanover
Bancorp, Inc. Hanover Bancorp, Inc. assumes no obligation to update forward-looking statements at any time.
Overview
Hanover Bancorp, Inc. (“Hanover”) is a New York corporation which is the holding company for Hanover Community Bank (the “Bank”), a New York chartered community commercial bank focusing on highly
personalized and efficient services and products responsive to local needs. 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. We also have an administrative office in Hauppauge, Suffolk County New York, which helps service our municipal deposit customers, and are in the process of opening a branch office in
Freehold, New Jersey. As of September 30, 2021, we had total assets of $1.48 billion, total loans of $1.25 billion, total deposits of $1.16 billion and total stockholders’ equity of $122.5 million.
The Bank was originally organized in 2009, with a focus on serving the South Asian community in Nassau County. After incurring financial and regulatory setbacks, the Bank was recapitalized in
2012 (the “2012 recapitalization”). Following the 2012 recapitalization, the Bank adopted a strategic plan focused on providing differentiated consumer and commercial banking services to clients in the western Long Island markets and New York
City boroughs, particularly the Queens and Brooklyn markets. As a result, the Bank has grown its balance sheet significantly both through organic loan and deposit growth, as well as highly opportunistic acquisitions. The Bank’s management team
has utilized their strong local community ties along with their experience with both federal and New York bank regulatory agencies to create a bank that we believe emphasizes strong credit quality, a solid balance sheet without the burden of the
troubled legacy assets of other banks, and a robust capital base.
On May 26, 2021, the Company completed its previously announced acquisition of Savoy Bank (“Savoy”), a privately held commercial bank founded to provide banking services to small business owners
in and around New York City. With the Savoy acquisition, we have expanded our commercial banking capabilities significantly, with a particular focus on small business clients and SBA lending.
In 2019, we acquired Chinatown Federal Savings Bank (“CFSB”) for a total purchase price of $13.6 million. We acquired total assets of $141.3 million, total loans of $93.6 million and total
deposits of $110.0 million, as well as three branches in Manhattan and Brooklyn, NY (one of which, the Canal Street branch, was subsequently closed). The transaction helped us enhance and diversify our funding profile and further enhance our
visibility in the New York City market where much of our lending activities have taken place.
Our one- to four-family residential mortgage segment has a particular niche focus on non-conforming loans, primarily secured by both owner-occupied and investment properties. The segment has
proven particularly appealing to Asian American borrowers in the New York City boroughs. We offer a variety of deposit accounts to both businesses and consumers through our branch network, which we believe complements our niche lending efforts.
Additionally, we have expanded our deposit products to include a full line of municipal banking accounts, which is allowing us to capture additional customers in our operating footprint.
Lending Activities
Our lending strategy is to maintain a broadly diversified loan portfolio based on the type of customer (i.e., businesses versus individuals), type of loan product (e.g., owner occupied commercial
real estate, commercial loans, etc.), geographic location and industries in which our business customers are engaged (e.g., manufacturing, retail, hospitality, etc.). 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 high-quality 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.
Residential real estate. We originate mainly non-qualified, alternative documentation, single-family residential mortgage loans through broker referrals
or our branch network to accommodate the needs of diverse communities in the New York City MSA. We offer multiple products, including our Residential Investor Program (RIP), which is designed specifically for two- to four-family units. Other one-
to four-family credit products include home equity loans and first-time home buyer loans. We take a comprehensive approach to mortgage underwriting, resulting in an average loan-to-value of the portfolio at origination of 56% and an average FICO
score of 716.
Our one- to four-family residential real estate portfolio is secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in
the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of properties pledged as collateral on
loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.
We originate non-qualified one- to four-family residential mortgage loans both to sell and hold for investment. Single-family residential mortgage loans held for sale are generally sold with the
servicing rights released. We sell many of these non-qualified single-family residential mortgage loans to other financial institutions, including banks and non-banks. While our loan sales to date have been primarily to one financial institution,
we expect to expand our network of purchasers that will acquire our one- to four-family loan products.
Commercial real estate. We offer real estate loans secured by owner occupied and non-owner occupied commercial properties, including 1-4 family properties
and multi-family residential properties and construction and land development loans. Our management team has an extensive knowledge of the markets where we operate and our borrowers and focuses on what we believe to be high quality credits with
acceptable loan-to-value ratios, income-producing properties with strong cash flow characteristics, and strong collateral profiles. Our loan-to-value policy limits are 75% for commercial real estate loans. The weighted average LTV was 60% for
this portfolio, and the debt service coverage ratio was 1.54x.
Within the commercial real estate portfolio, multi-family loans are secured primarily by rent controlled/stabilized multi-family properties located in New York City. The real estate securing our
existing non-owner occupied commercial real estate loans is primarily multi-family, mixed-use and commercial properties. Owner-occupied properties include a wide variety of property types, including offices, warehouses, retail centers, and
hotels. Our owner-occupied lending efforts were significantly enhanced with the Savoy merger.
Our construction portfolio is small, representing only $15.4 million in total balances at September 30, 2021. Our construction and land development loans are comprised of residential
construction, commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans. These loans are typically Prime-based and have maturities of fewer than 18 months. As
of September 30, 2021, 100% of our real estate construction loan portfolio was secured by commercial properties.
Commercial and industrial. We provide a mix of variable and fixed rate commercial and industrial loans, which we refer to as C&I loans. The loans are
typically made to small and medium-sized businesses for working capital needs, business expansions and for trade financing. We extend commercial business loans on an unsecured and secured basis for working capital, accounts receivable and
inventory financing, machinery and equipment purchases, and other business purposes. Generally, lines of credit have maturities ranging from twelve to twenty- four months, and “term loans” have maturities ranging from five to ten years. C&I
loans generally provide for floating interest rates, with interest only payments for lines of credit and monthly payments of both principal and interest for term loans. We expect C&I lending to be a key component of our growth going forward.
Prior to the acquisition of Savoy, we had a very limited portfolio of commercial and industrial loans. Savoy brought significant expertise in this area. As of September 30, 2021, our commercial and industrial loans comprised $172.3 million, or
13.8%, of loans held for investment.
Small Business Administration Loans. Our Small Business Administration (“SBA”) loans are secured by commercial real estate or are C&I loans that are
secured by business assets. Our participation in SBA lending, excluding activities related to the Paycheck Protection Program (“PPP”) were a direct result of the merger transaction with Savoy, including acquiring their SBA portfolio, employees
and infrastructure. We offer mostly SBA 7(a) variable-rate and fixed-rate loans. We originate all loans to hold for investment and move loans to available for sale as management decides which loans to sell. We generally sell the 75% guaranteed
portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or to finance the purchase of real estate, equipment or
business expansions. SBA loans secured by real estate have maturities of up to 25 years, with non-real estate secure loans having maturities of less than 10 years. In addition to real estate, collateral may include inventory, accounts receivable
and equipment.
SBA loans are originated subject to personal guarantees and may include real estate belonging to guarantors as collateral. We monitor SBA loans by collateral type. From time to time, we will also
originate SBA 504 loans, which are real estate backed commercial mortgages where we have the first mortgage and the SBA has the second mortgage on the property. We also, from time-to-time, originate loans guaranteed by the United States
Department of Agriculture, which have characteristics that are similar to those of SBA 7(a) loans. We originate all such loans through our loan officers and through brokers.
As of September 30, 2021, our SBA and other government guaranteed loan portfolio (excluding loans related to the PPP) totaled $77.0 million, of which $13.8 million is guaranteed by the SBA and
$63.2 million is unguaranteed (representing the non-guaranteed portion retained by the bank). Of the government guaranteed lending, $70.5 million is secured by real estate and $6.5 million is secured by business or personal assets. We monitor the
SBA portfolio by type of real estate collateral. As of September 30, 2021, $41.1 million, or 53.4%, of SBA loans are secured by hotel/motels and $6.0 million, or 7.8%, by retailers, including restaurants. We further analyze the SBA portfolio by
location. As of September 30, 2021, $33.8 million, or 43.8%, is located in New Jersey, $21.5 million, or 27.9%, is located in New York; $12.5 million, or 16.2%, is located in Pennsylvania; and the remaining $9.3 million, or 12.1%, is located in
other states.
Deposits and Funding
Checking accounts consists of both retail and business demand deposit products. NOW accounts consist of both retail and business interest-bearing transaction accounts that have minimum balance
requirements. Money market accounts consist of products that provide a market rate of interest to depositors. Our savings accounts consist of statement type accounts. Time deposits consist of certificates of deposit, including those held in IRA
accounts, and brokered certificates of deposit.
We have also begun a municipal banking business, which we believe has the potential to produce a significant level of deposits and cost-effective rates. The business provides banking services to public
municipalities, including counties, cities, towns, and school districts throughout the Long Island area. We believe this effort is differentiated in that the customers are long-term relationships of our team and are not transactional in nature.
Furthermore, our focus is banking municipalities that are core to our branch footprint and where our brand resonates. This initiative is also consistent with our branch-lite and highly efficient approach to growing our balance sheet. The team and
relationships we have allow us to compete throughout the Long Island market without the expense constraints of physical locations. As of September 30, 2021, we had $350.5 million in municipal deposits at an average rate of 0.23%.
Deposits serve as the primary source of funding for our interest-earning assets, but also generate non-interest revenue through insufficient funds fees, stop payment fees, safe deposit rental
fees, foreign ATM fees and debit card interchange and other miscellaneous fees.
Employees and Human Capital Resources
As of September 30, 2021, we employed approximately 136 full-time employees. None of these employees are covered by a collective bargaining agreement. The Company provides its
employees with comprehensive benefits, some of which are provided on a contributory basis, including medical and dental plans, a 401(k) savings plan with a company match component and short-term and long-term disability coverage. Additional
benefits offered include paid time off, life insurance and employee assistance. The Company's compensation package is designed to maintain market competitive total rewards programs for all employees in order to attract and retain superior talent.
Throughout the COVID-19 pandemic, the health and safety of our associates, clients, and the communities we serve has been our top priority. We continue to monitor both the local, national, and
global impact and update guidelines and practices in accordance with recommendations by the Center for Disease Control and Prevention, local, state, and federal agencies. In response to the pandemic, we quickly implemented extensive safety measures
to protect our associates, including heightened sanitary precautions, protective supplies, suspended non-essential business travel, directed associates to work remotely when possible and limited in-person meetings. We also implemented flexible
scheduling and additional emergency paid leave options to support associates if they were impacted by the pandemic and unable to work.
Competition
The financial services industry is highly competitive. We compete for loans, deposits, and financial services in all of our principal markets. We compete directly with other bank and nonbank
institutions located within our markets, internet-based banks, out-of-market banks and bank holding companies that advertise or otherwise serve our markets, money market funds and other mutual funds, brokerage houses, and various other financial
institutions. Additionally, we compete with insurance companies, leasing companies, regulated small loan companies, credit unions, governmental agencies and commercial entities offering financial services products, including nonbank lenders and
so-called financial technology companies. Competition involves, among other things, efforts to retain current customers and to obtain new loans and deposits, the scope and types of services offered, interest rates paid on deposits and charged on
loans, as well as other aspects of banking. We also face direct competition from subsidiaries of bank holding companies that have far greater assets and resources than ours.
Supervision and Regulation
Overview
The Bank is chartered under the laws of the state of New York. Its deposits are insured under the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation
(the “FDIC”) up to applicable legal limits, but it is not a member of the Federal Reserve System. The lending, investment, deposit-taking, and other business authority of the Bank is governed primarily by state and federal law and regulations and
the Bank is prohibited from engaging in any operations not authorized by such laws and regulations. The Bank is subject to extensive regulation, supervision and examination by, and the enforcement authority of, the New York Department of
Financial Services (the “DFS”) and the FDIC, its primary federal regulator. The regulatory structure establishes a comprehensive framework of activities in which a non-member bank may engage and is primarily intended for the protection of
depositors, customers and the DIF. The regulatory structure gives the regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
The Company is a bank holding company, due to its control of the Bank, and is therefore subject to the requirements of the Bank Holding Company Act of 1956, as amended, and regulation and
supervision by the Board of Governors of the Federal Reserve System (“FRB”). The Company files reports with and is subject to periodic examination by the FRB. Any change in the applicable laws and regulations could have a material adverse impact
on the Company and the Bank and their operations and the Company’s shareholders.
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) was enacted to modify or remove certain financial reform rules and regulations, including some of those
implemented under the Dodd-Frank Wall Street and Consumer Protection Act (the “Dodd-Frank Act”). While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the
regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for banks and their holding
companies. In addition, the Economic Growth Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real
estate loans.
Bank Regulation
Loans and Investments
State commercial banks and trust companies have authority to originate and purchase any type of loan, including commercial, commercial real estate, residential mortgages or consumer loans.
Aggregate loans by a state commercial bank or trust company to any single borrower or group of related borrowers are generally limited to 15% of the Bank’s capital stock, surplus fund and undivided profits, plus an additional 10% if secured by
specified readily marketable collateral.
Federal and state law and regulations limit the Bank’s investment authority. Generally, a state non-member bank is prohibited from investing in corporate equity securities for its own account
other than the equity securities of companies through which the bank conducts its business. Under federal and state regulations, a New York state non-member bank may invest in investment securities for its own account up to specified limits
depending upon the type of security. “Investment securities” are generally defined as marketable obligations that are investment grade and not predominantly speculative in nature.
Lending Standards and Guidance
The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the
purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards
(including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’
Interagency Guidelines for Real Estate Lending Policies.
The FDIC, the Office of the Comptroller of the Currency (the “OCC”), and the FRB have also jointly issued the “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices”
(the “CRE Guidance”). The CRE Guidance, which addresses land development, construction, and certain multi-family loans, as well as commercial real estate loans, does not establish specific lending limits but rather reinforces and enhances these
agencies’ existing regulations and guidelines for such lending and portfolio management. Specifically, the CRE Guidance provides that a bank has a concentration in CRE lending if (1) total reported loans for construction, land development, and
other land represent 100% or more of total risk-based capital; or (2) total reported loans secured by multi-family properties, non-farm non-residential properties (excluding those that are owner-occupied), and loans for construction, land
development, and other land represent 300% or more of total risk-based capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ
heightened risk management practices that address key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis
and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
Federal Deposit Insurance
The Bank is a member of the DIF, which is administered by the FDIC. The Bank’s deposit accounts are insured by the FDIC, generally up to a maximum of $250,000 per depositor.
The FDIC imposes deposit insurance assessments against all insured depository institutions. An institution’s assessment rate depends upon the perceived risk of the institution to the DIF, with
institutions deemed less risky paying lower rates. Currently, assessments for institutions of less than $10 billion of total assets are based on financial measures and supervisory ratings derived from statistical models estimating the probability
of failure within three years. Assessment rates (inclusive of possible adjustments) currently range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the range of assessments
uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking.
The FDIC has the authority to increase insurance assessments. A significant increase in insurance premiums would have an adverse effect on the operating expenses and results of operations of the
Bank. We cannot predict what deposit insurance assessment rates will be in the future.
The FDIC may terminate the insurance of an institution’s deposits upon finding that the institution has engaged in unsafe and unsound practices, is in an unsafe and unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank knows of no practice, condition or violation that might lead to termination of its deposit insurance.
Capitalization
The Bank is subject to risk-based and leverage capital standards by which all banks are evaluated in terms of capital adequacy. Federal banking agencies have broad powers to take corrective
action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized”, “significantly undercapitalized,” or
“critically undercapitalized.” FDIC rules define these five capital categories. Under current FDIC regulations, a bank is deemed to be “well capitalized” if the bank has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 8% or greater, has a common equity tier 1 capital ratio of 6.5% or greater, has a leverage ratio of 5% or greater, and is not subject to any order or final capital directive by the FDIC to meet and maintain a specific capital
level for any capital measure. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it received an unsatisfactory safety and soundness examination rating. Calculation of all
types of regulatory capital is subject to deductions and adjustments specified in the regulations. As of September 30, 2021, the Bank was a “well-capitalized” bank, as defined by its primary federal regulator.
Each of the bank regulatory agencies have issued rules that amend their capital guidelines for interest rate risk and require such agencies to consider in their evaluation of a bank’s capital
adequacy, the exposure of a bank’s capital and economic value to changes in interest rates. These rules do not establish an explicit supervisory threshold. The agencies intend, at a subsequent date, to incorporate explicit minimum requirements
for interest rate risk into their risk-based capital standards and have proposed a supervisory model to be used together with bank internal models to gather data and hopefully propose, at a later date, explicit minimum requirements.
The United States is a member of the Basel Committee on Banking Supervision (the “Basel Committee”) that provides a forum for regular international cooperation on banking supervisory matters. The
Basel Committee develops guidelines and supervisory standards and is best known for its international standards on capital adequacy. In December 2010, the Basel Committee released its final framework for strengthening international capital and
liquidity regulation, officially identified by the Basel Committee as “Basel III.” In July 2013, the US bank regulatory agencies published final rules to implement the Basel III capital framework and revise the framework for the risk-weighting of
assets. The Basel III rules, among other things, narrow the definition of regulatory capital. As of January 1, 2019, Basel III requires bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater
emphasis on common equity. Basel III also provides for a “countercyclical capital buffer,” an additional capital requirement that generally is to be imposed when national regulators determine that excess aggregate credit growth has become
associated with a buildup of systemic risk, in order to absorb losses during periods of economic stress. Banking institutions that maintain insufficient capital to comply with the capital conservation buffer will face constraints on dividends,
equity repurchases and compensation based on the amount of the shortfall. Additionally, the Basel III framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests, including a liquidity coverage
ratio (“LCR”) designed to ensure that the banking entity maintains a level of unencumbered high-quality liquid assets greater than or equal to the entity’s expected net cash outflow for a 30-day time horizon under an acute liquidity stress
scenario, and a net stable funding ratio (“NSFR”) designed to promote more medium and long-term funding based on the liquidity characteristics of the assets and activities of banking entities over a one-year time horizon. The LCR rules do not
apply to us due to our asset size. The federal regulatory agencies have not yet proposed rules to implement the NSFR.
The final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $3.0 billion or more, and top-tier savings and loan holding companies,
referred to as banking organizations. As finally implemented, Basel III requires banking organizations to maintain: (a) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%; (b) a minimum ratio of tier 1 capital to risk- weighted
assets of at least 6.0%; (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk- weighted assets of at least 8.0%; and (d) a minimum leverage ratio of 3.0%, calculated as the ratio of tier 1 capital balance sheet exposures
plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). In addition, the rules also limit a banking organization’s capital distributions and certain discretionary bonus payments
if the banking organization does not hold a “capital conservation buffer” of 2.5%, effectively raising the foregoing capital requirements by 2.5%.
As a result of the capital conservation buffer rules, if the Bank fails to maintain the required minimum capital conservation buffer, the Bank may be unable to make capital distributions to us,
which could negatively impact our ability to pay dividends, service debt obligations or repurchase common stock. In addition, such a failure could result in a restriction on our ability to pay certain cash bonuses to executive officers,
negatively impacting our ability to retain key personnel. As of September 30, 2021, our current capital levels and those of the Bank meet the applicable minimum capital requirements, including the capital conservation buffer, as prescribed in the
Basel III capital rules.
As a result of the Economic Growth Act, banking regulatory agencies adopted a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than
$10 billion and that are not determined to be ineligible by their primary federal regulator due to their risk profile, which is referred to as a Qualifying Community Bank. The new definition expanded the ways that a Qualifying Community Bank may
meet its capital requirements and be deemed “well capitalized.” The new rule establishes a community bank leverage ratio, or CBLR, equal to the tangible equity capital divided by the average total consolidated assets. Regulators have established
the CBLR at 8.5% through calendar year 2021 and 9% thereafter. On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in response to the COVID-19 pandemic, which
temporarily reduced the CBLR to 8%.
A Qualifying Community Bank that meets the CBLR is considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital
requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.
The Bank did not elect into the CBLR framework and, at September 30, 2021, the Bank’s capital exceeded all applicable requirements.
Safety and Soundness Standards
Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to, among other things, internal controls, information and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and information security standards. In general, the guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired and require appropriate systems and practices to identify and manage the risks and exposures specified in
the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer,
employee, director, or principal shareholder. The FDIC also has issued guidance on risks banks may face from third-party relationships (e.g., relationships under which the third-party provides services to the bank). The guidance generally
requires the Bank to perform adequate due diligence on the third-party, appropriately document the relationship, and perform adequate oversight and auditing, in order to the limit the risks to the Bank.
Prompt Corrective Regulatory Action
Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the
statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The final rule that increased regulatory capital standards also adjusted the prompt corrective action tiers as of January 1, 2015 to conform to the revised capital standards. As described above,
the Bank has not elected to follow the CBLR so the generally applicable prompt corrective action requirements remain applicable to the Bank. Under prompt corrective action requirements, insured depository institutions are required to meet the
following in order to qualify as “well capitalized:” total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a common equity tier 1 capital ratio of 6.5% or greater, a leverage ratio of 5% or greater,
and not subject to any order or final capital directive by the FDIC to meet and maintain a specific capital level for any capital measure.
Non-member banks that have insufficient capital are subject to certain mandatory and discretionary supervisory measures. For example, a bank that is “undercapitalized” (i.e., fails to comply with
any regulatory capital requirement) is subject to growth, capital distribution (including dividend) and other limitations, and is required to submit a capital restoration plan; a holding company that controls such a bank is required to guarantee
that the bank complies with the restoration plan. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” A “significantly undercapitalized” bank is subject to additional
restrictions. Non-member banks deemed by the FRB or FDIC to be “critically undercapitalized” also may not make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any
material transactions outside the ordinary course of business after 60 days of obtaining such status, and are subject to the appointment of a receiver or conservator within 270 days after obtaining such status.
Dividends
Under federal and state law and applicable regulations, a non-member bank may generally declare a dividend, without approval from the DFS, in an amount equal to its year-to-date net income plus
the prior two years’ net income less dividends already paid. Dividends exceeding those amounts require application to and approval by the DFS. To pay a cash dividend, a non-member bank must also maintain an adequate capital conservation buffer
under the capital rules discussed above.
Incentive Compensation Guidance
The FRB, OCC, FDIC, other federal banking agencies and DFS have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations, including
non-member banks and bank holding companies, do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their
incentive compensation arrangements and related risk-management, control and governance processes. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor, which for the Bank is the FDIC and the Company
is the FRB, may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, provisions of the Basel III regime described above limit discretionary
bonus payments to bank and bank holding company executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. The scope and content of the banking regulators’ policies on incentive compensation are likely to
continue evolving.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act govern transactions between an insured depository institution and its affiliates, which includes the Company. The FRB has adopted Regulation W,
which implements and interprets Sections 23A and 23B, in part by codifying prior FRB interpretations.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution or a
“financial subsidiary” under federal law is not treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the FRB has the discretion to treat subsidiaries of a bank as affiliates on a case-by-case basis. Section 23A
limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus. There is an aggregate limit of 20% of the bank’s capital stock
and surplus for such transactions with all affiliates. The term “covered transaction” includes, among other things, the making of a loan to an affiliate, a purchase of assets from an affiliate, the issuance of a guarantee on behalf of an
affiliate and the acceptance of securities of an affiliate as collateral for a loan. All such transactions are required to be on terms and conditions that are consistent with safe and sound banking practices and no transaction may involve the
acquisition of any “low quality asset” from an affiliate unless certain conditions are satisfied. Certain
covered transactions, such as loans to or guarantees on behalf of an affiliate, must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending upon the
type of collateral. In addition, Section 23B requires that any covered transaction (and specified other transactions) between a bank and an affiliate must be on terms and conditions that are substantially the same, or at least as favorable, to
the bank, as those that would be provided to a non-affiliate.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an insider) and certain entities affiliated with any such person (an insider’s related
interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O. The aggregate amount of a bank’s loans to any insider and the insider’s related interests may not exceed the
loans-to-one-borrower limit applicable to non-member banks. Aggregate loans by a bank to its insiders and insiders’ related interests may not exceed 15% of the bank’s unimpaired capital and unimpaired surplus plus an additional 10% of unimpaired
capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the bank’s unimpaired capital and
unimpaired surplus. With certain exceptions, such as education loans and certain residential mortgages, a bank’s loans to its executive officers may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and unimpaired
surplus, but in no event more than $100,000. Regulation O also requires that any loan to an insider or a related interest of an insider be approved in advance by a majority of the board of directors of the bank, with any interested director not
participating in the voting, if the loan, when aggregated with any existing loans to that insider or the insider’s related interests, would exceed the higher of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans
must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not involve more than a
normal risk of repayment. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over
other employees of the bank.
Enforcement
The DFS and the FDIC have extensive enforcement authority over non-member banks to correct unsafe or unsound practices and violations of law or regulation. Such authority
includes the issuance of cease-and-desist orders, assessment of civil money penalties and removal of officers and directors. The FDIC may also appoint a conservator or receiver for a non-member bank under specified circumstances, such as where
(i) the bank’s assets are less than its obligations to creditors, (ii) the bank is likely to be unable to pay its obligations or meet depositors’ demands in the normal course of business, or (iii) a substantial dissipation of bank assets or
earnings has occurred due to a violation of law of regulation or unsafe or unsound practices. Separately, the Superintendent of the DFS also has the authority to appoint a receiver or liquidator of any state-chartered bank or trust company under
specified circumstances, including where (i) the bank is conducting its business in an unauthorized or unsafe manner, (ii) the bank has suspended payment of its obligations, or (iii) the bank cannot with safety and expediency continue to do
business.
Under federal law and regulations, the Bank is required to maintain sufficient liquidity to ensure safe and sound banking practices. Regulation D, promulgated by the FRB, imposes reserve
requirements on all depository institutions, including the Bank, which maintain transaction accounts or nonpersonal time deposits. In March 2020, due to a change in its approach to monetary policy due to the COVID-19 pandemic, the FRB implemented
a final rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The FRB has indicated that it has no plans to re-impose reserve requirements but may do so in the future if conditions warrant.
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to periodic examination by the DFS and FDIC. Federal and state regulations generally require periodic on-site examinations for
all depository institutions. The Bank is required to pay an annual assessment to the DFS and FDIC to fund the agencies’ operations.
Community Reinvestment Act and Fair Lending Laws
Federal Regulation
Under the Community Reinvestment Act (“CRA”), as implemented by the FDIC, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of
products and services that it believes are best suited to its particular community. The CRA requires the FDIC to assess the Bank’s record of meeting the credit needs of its community and to take that record into account in its evaluation of
certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or conditioning the
approval of an application. As of the date of its most recent examination, the Bank was rated “Satisfactory” with respect to its CRA compliance.
New York State Regulation
The Bank is also subject to provisions of the New York State Banking Law that impose continuing and affirmative obligations upon a banking institution organized in New York State to serve the
credit needs of its local community. Such obligations are substantially similar to those imposed by the CRA. The latest New York State CRA rating received by the Bank is “Satisfactory.”
USA PATRIOT Act and Money Laundering
The Bank is subject to the Bank Secrecy Act (“BSA”), which incorporates several laws, including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and related regulations. The USA PATRIOT Act gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the BSA, Title III of the USA PATRIOT Act implemented measures intended to encourage information sharing among bank
regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other things, Title III of the USA PATRIOT Act and the related regulations require:
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Establishment of anti-money laundering compliance programs that includes policies, procedures, and internal controls; the designation of a BSA officer; a training program; and independent testing;
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Filing of certain reports to Financial Crimes Enforcement Network and law enforcement that are designated to assist in the detection and prevention of money laundering and terrorist financing activities;
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Establishment of a program specifying procedures for obtaining and maintaining certain records from customers seeking to open new accounts, including verifying the identity of customers;
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In certain circumstances, compliance with enhanced due diligence policies, procedures and controls designed to detect and report money-laundering, terrorist financing and other suspicious activity;
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Monitoring account activity for suspicious transactions; and
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A heightened level of review for certain high-risk customers or accounts.
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The USA PATRIOT Act also includes prohibitions on correspondent accounts for foreign shell banks and requires compliance with record keeping obligations with respect to correspondent accounts of
foreign banks.
The bank regulatory agencies have increased the regulatory scrutiny of the BSA and anti-money laundering programs maintained by financial institutions. Significant penalties and fines, as well as
other supervisory orders may be imposed on a financial institution for non-compliance with these requirements. In addition, for financial institutions engaging in a merger transaction, federal bank regulatory agencies must consider the
effectiveness of the financial institution’s efforts to combat money laundering activities. The Bank has adopted policies and procedures to comply with these requirements.
Privacy Laws
The Bank is subject to a variety of federal and state privacy laws, which govern the collection, safeguarding, sharing and use of customer information, and require that financial institutions
have in place policies regarding information privacy and security. For example, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the
financial institution’s privacy policy and practices for sharing nonpublic information with third parties, provide advance notice of any changes to the policies and provide such customers the opportunity to “opt out” of the sharing of certain
personal financial information with unaffiliated third parties. It also requires banks to safeguard personal information of consumer customers. Some state laws also protect the privacy of information of state residents and require adequate
security for such data, and certain state laws may, and newly issued federal regulations do, in some circumstances, require the Bank to notify affected individuals of security breaches of computer databases that contain their personal
information. These laws and regulations may also require the Bank to notify law enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data.
Consumer Finance Regulations
The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or
abusive” acts and practices. In this regard, the CFPB has several rules that implement various provisions of the Dodd-Frank Act that were specifically identified as being enforced by the CFPB. While the Bank is subject to the CFPB regulations,
because it has less than $10 billion in total consolidated assets, the FDIC and the DFS are responsible for examining and supervising the Bank’s compliance with these consumer financial laws and regulations. In addition, the Bank is subject to
certain state laws and regulations designed to protect consumers.
The Coronavirus Aid, Relief and Economic Security Act
The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the COVID-19 pandemic and stimulate the economy. The law had several provisions relevant to financial
institutions, including:
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Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes;
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Temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;
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The establishment of the PPP, a specialized low-interest forgivable loan program funded by the U.S. Treasury Department and administered through the SBA’s 7(a) loan guaranty program to support businesses affected by the COVID-19
pandemic; and
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The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their
mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day period
upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on
the borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period
beginning March 18, 2020, extended by federal mortgage-backing agencies to September 30, 2021. In addition, New York has placed a moratorium on evictions and foreclosures through January 15, 2022 for those experiencing a hardship related
to COVID-19.
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Other Regulations
The Bank’s operations are also subject to federal laws applicable to credit transactions, such as:
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The Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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The Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and
escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
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The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
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The Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race, religion, sex and other prohibited factors in extending credit;
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The Fair Credit Reporting Act, governing the use of credit reports on consumers and the provision of information to credit reporting agencies;
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Unfair or Deceptive Acts or Practices laws and regulations;
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The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such
federal laws.
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The operations of the Bank are further subject to the:
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The Truth in Savings Act, which specifies disclosure requirements with respect to deposit accounts;
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The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines
and other electronic banking services;
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The Check Clearing for the 21st Century Act, which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
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State unclaimed property or escheatment laws; and
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Cybersecurity regulations, including but not limited to those implemented by DFS.
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Holding Company Regulations
General
The Company, as a bank holding company controlling the Bank, is subject to regulation and supervision by the FRB under the BHCA. The Company is periodically examined by and required to submit
reports to the FRB and must comply with the FRB’s rules and regulations. Among other things, the FRB has authority to restrict activities by a bank holding company that are deemed to pose a serious risk to the subsidiary bank.
Permissible Activities
A bank holding company is generally prohibited from engaging in non-banking activities or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in
non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary,
investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and
indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding
company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. A “financial holding company” may engage in a broader array of financial
activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. The Company has not elected “financial holding company” status.
Capitalization
Bank holding companies are subject to consolidated regulatory capital requirements, which have historically been similar to, though less stringent than, those for the Bank. Federal legislation,
however, required the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions
themselves. As a result, consolidated regulatory capital requirements identical to those applicable to the subsidiary banks generally apply to bank holding companies. However, the FRB has provided a “Small Bank Holding Company” exception to its
consolidated capital requirements, and subsequent legislation and the related issuance of regulations by the FRB have increased the threshold for the exception to $3.0 billion of consolidated assets. Consequently, bank holding companies such as
the Company with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the FRB.
Source of Strength
Section 616 of the Dodd-Frank Act codified the FRB’s “source-of-strength” doctrine for bank subsidiaries of bank holding companies. The FRB has issued regulations requiring that
all bank holding companies serve as a source of strength to their subsidiary depository institutions by providing financial, managerial and other support in times of an institution’s distress. Under this regulation, where a bank is experiencing
severe financial distress, its parent bank holding company may be required to make financial contributions to the bank.
Dividends and Stock Repurchases
The FRB has issued a policy statement regarding the payment of dividends by holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only
if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior consultation
with FRB staff concerning dividends in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall
rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.
The regulatory guidance also states that a bank holding company should consult with FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank
holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in
which the redemption or repurchase occurred.
There is a separate requirement that a bank holding company give the FRB prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a
purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an
exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
These regulatory policies may affect our ability to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition of Control of the Company
Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the FRB has prior written notice and has not issued a notice disapproving
the proposed acquisition. In evaluating such notices, the FRB takes into consideration such factors as the financial resources, competence, experience and integrity of the acquirer, the future prospects the bank holding company involved and its
subsidiary bank and the competitive effects of the acquisition. In January 2020, the Federal Reserve substantially revised its control regulations. Under the revised rule, control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the BHC. Where an investor holds less than 25%, the Federal Reserve provides the following four-tiered approach to determining control: (1) less than 5%; (2) 5%-9.99%; (3) 10%-14.99%; and
(4) 15%-24.99%. In addition to the four tiers, the Federal Reserve takes into account substantive activities, including director service, business relationships, business terms, officer/employee interlocks, contractual powers, and proxy contests
for directors. The Federal Reserve Board may require the company to enter into passivity and, if other companies are making similar investments, anti-association commitments.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under
the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold shareholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation
payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal
control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, we will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as the
Company remains a “non-accelerated filer” and a “smaller reporting company,” respectively, under Commission regulations (generally less than $75 million and $250 million, respectively, of voting and non-voting equity held by non-affiliates or
less than $100 million in annual revenue). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first
required to file a registration statement. We have elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii)
the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the
date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange
Commission regulations (generally, at least $700 million of voting and non-voting equity held by nonaffiliates).
Additional Information
The Company makes available, free of charge, through its internet website www.hanoverbank.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after electronically filing such material with the
Securities and Exchange Commission (the “SEC”). Materials filed with the SEC are available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and
should not be considered part of this document. You can request a copy of our Annual Report on Form 10-K free of charge by sending a written request to Hanover Bancorp, Inc., Attn: Corporate Secretary, 80 East Jericho Turnpike, Mineola, New York
11501. Please include your contact information with the request.
As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Set forth below is a summary of those risks,
and then a more detailed discussion of the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations, cash flows, liquidity and the value of our
securities. The risks and uncertainties described below are not the only risks we face.
Summary of Risk Factors
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We are subject to risks associated with the COVID-19 pandemic, which could have an adverse effect on our business, financial condition and results of operations.
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Our reliance on one- to four- family residential mortgage lending and certain niche loan products could expose us to credit risks that may be different than would apply to a more diversified or traditional loan portfolio.
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Our business and operations are concentrated in the New York metropolitan area, and we are sensitive to adverse changes in the local economy.
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We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate and compliance risks, which may have an adverse effect on our business, financial
condition and results of operations if we are unable to manage such risks.
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SBA lending is an increasingly important part our business, and changes to the SBA programs, or the rules governing such programs, and our ability to qualify as a Preferred SBA lender, may adversely affect our profitability.
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Our liquidity and capital needs, particularly given our growth strategy, may suffer if not managed effectively or if capital is not available on terms acceptable to us.
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Our ability to continue to grow will diminish if we are unable to continue to make commercially attractive acquisitions, or if we are unable to realize the benefits of prior or future acquisitions in a reasonable timeframe.
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We operate in a highly competitive market and face increasing competition from traditional and new financial services providers.
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We are dependent on key personnel and the unexpected loss of their services, or if we are unable to attract new personnel as we execute our growth strategy, will adversely impact our financial condition.
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We operate in a highly regulated industry, and the current regulatory framework and any future legislative and regulatory changes, may have an adverse effect on our business, financial condition and results of operations.
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We are subject to risks associated with our dependency on our information technology and telecommunications systems and third-party servicers including exposures to systems failures, interruptions or breaches of security.
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We do not anticipate paying cash dividends in the near future.
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Anti-takeover provisions in our charter and under New York law could limit certain shareholder actions.
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ECONOMIC, MARKET AND INVESTMENT RISKS
The ongoing global COVID-19 outbreak could harm our business and results of operations, and such effects will depend on future developments, which are highly uncertain and are
difficult to predict.
The COVID-19 pandemic continues to negatively impact economic and commercial activity and financial markets, both globally and within the United States. In our market area, stay-at-home orders,
travel restrictions and closure of non-essential businesses — and similar orders imposed across the United States to restrict the spread of COVID-19 in 2020 — resulted in significant business and operational disruptions, including business
closures, supply chain disruptions, and mass layoffs and furloughs. Although local jurisdictions have subsequently lifted stay-at-home orders and moved to phased opening of businesses, worker shortages, vaccine and testing requirements, new
variants of COVID-19 and other health and safety recommendations have impacted the ability of businesses to return to pre-pandemic levels of activity and employment.
The COVID-19 pandemic has had a specific impact on our business, including: (1) causing some of our borrowers to be unable to meet existing payment obligations, particularly borrowers
disproportionately affected by business shutdowns and travel restrictions; (2) legal and regulatory requirements that require us to provide payment deferrals to certain customers adversely affected by the pandemic and which limit our ability to
foreclose on certain property securing certain of our loans, (3) requiring us to increase our allowance for loan losses; and (4) affecting consumer and business spending, borrowing and savings habits. The ultimate risk posed by the COVID-19
pandemic remains highly uncertain; however, COVID-19 poses a material risk to our business, financial condition and results of operations. Other factors likely to have an adverse effect on our results of operations include:
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risks to the capital markets due to the volatility in financial markets that may impact the performance of our investment securities portfolio;
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effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;
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declines in demand for loans and other banking services and products, as well as increases in our non-performing loans, owing to the effects of COVID-19 in the markets served by the Bank and on the business of borrowers of the Bank;
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declines in demand resulting from adverse impacts of the virus on businesses deemed to be “non-essential” by governments in the markets served by the Bank;
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reduced fees as we waive certain fees for our customers impacted by the COVID-19 pandemic; and
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higher operating costs, increased cybersecurity risks and potential loss of productivity while we work remotely.
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Lastly, our commercial real estate and multi-family loans are dependent on the profitable operation and management of the properties securing such loans. The longer the pandemic persists, the
stronger the likelihood that COVID-19 could have a significant adverse impact by reducing the revenue and cash flows of our borrowers, impacting the borrowers’ ability to repay their loans, increasing the risk of delinquencies and defaults, and
reducing the collateral value underlying the loans.
The extent to which the COVID-19 pandemic will ultimately affect our financial condition and results of operations is unknown and will depend, among other things, on the duration of the pandemic,
the actions undertaken by national, state and local governments and health officials to contain the virus or mitigate its effects, the safety and effectiveness of the vaccines that have been developed and the ability of pharmaceutical companies and
governments to continue to manufacture and distribute those vaccines, changes to interest rates, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume. Any one or a combination of these
factors could negatively impact our business, financial condition and results of operations and prospects.
Customary means to collect non-performing assets may be prohibited or impractical during the COVID-19 pandemic, and there is a risk that collateral securing a non-performing
asset may deteriorate if we choose not to, or are unable to, foreclose on collateral in a timely manner.
Federal and state banking agencies and government entities, including New York State, have adopted regulations or put in place executive orders that restrict or limit our ability to take certain
actions with respect to delinquent borrowers that we would otherwise have taken in the ordinary course of business, such as customary collection and foreclosure activities. Specifically, New York State has placed a “moratorium” on evictions and
foreclosures and the moratorium has recently been extended through January 15, 2022 for people experiencing a hardship related to COVID-19. If the moratorium is extended further, or if the backlog of foreclosure cases are not processed efficiently,
there is an increased risk that the collateral value may deteriorate if we choose not to, or are unable to, foreclose on the collateral on a timely basis.
A substantial portion of our business is in the New York metro area, therefore, our business is particularly vulnerable to an economic downturn in our primary market area.
We primarily serve businesses, municipalities and individuals located in the New York metro area. As a result, we are exposed to risks associated with lack of geographic diversification. The
occurrence of an economic downturn in the New York metro area, or adverse changes in laws or regulations in New York due to the adverse effects of the COVID-19 pandemic or otherwise, could impact the credit quality of our assets, the businesses of
our customers and the ability to expand our business. Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area. If the communities in which we operate do not grow or if prevailing
economic conditions locally or nationally are unfavorable, our business may be negatively affected.
In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of September 30, 2021, 82% of
our real estate loan portfolio was secured by real estate located in the five boroughs of New York City and Nassau County, New York. Adverse developments affecting commerce or real estate values in the local economies in our primary market areas
could increase the credit risk associated with our loan portfolio and have an adverse impact on our revenues and financial condition. In particular, we may experience increased loan delinquencies, which could result in a higher provision for loan
losses and increased charge-offs. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues,
financial condition and results of operations.
We also obtain a significant volume of deposits from municipal customers, primarily in Nassau and Suffolk Counties in New York. Approximately 30.1% of our deposits are from municipal customers,
although no single municipal customer represents a concentration risk. A prolonged economic downturn which adversely effects tax revenues or other governmental funding sources could have an adverse impact on our ability to gather cost efficient
deposits, and fund our loans and other investments, thereby adversely affecting our results of operations.
We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.
At September 30, 2021, approximately $1.06 billion, or 85%, of our total loan portfolio was secured by real estate, almost all of which is located in our primary lending market.
Future declines in the real estate values in the New York metro area and Nassau County and surrounding markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon
foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for loan losses to address the decrease in the value of the real estate securing our loans, which could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not
accurately describe the net value of the asset.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the
property at the time the appraisal is made and, as real estate values may change significantly in value in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the
net value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and
other valuation techniques to establish the value of our other real estate owned (“OREO”) and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate,
our consolidated financial statements may not reflect the correct value of our OREO, and our allowance for loan losses may not reflect accurate loan impairments. This could have an adverse effect on our business, financial condition or results of
operations.
We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs and potential risks
associated with the ownership of the real property, or consumer protection initiatives or changes in state or federal law may substantially raise the cost of foreclosure or prevent us from foreclosing at all.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we
would be exposed to the risks inherent in the ownership of real estate. Although we held no OREO properties at September 30, 2021, it is possible that in future periods we may take title to OREO properties in the event of defaults on outstanding
loans. The amount that we, as a mortgagee, may realize after a default depends on factors outside of our control, including, but not limited to, general or local economic conditions, environmental cleanup liabilities, assessments, interest rates,
real estate tax rates, operating expenses of the mortgaged properties, our ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules, and natural disasters. Our inability to manage the
amount of costs or size of the risks associated with the ownership of real estate, or writedowns in the value of OREO, could have an adverse effect on our business, financial condition and results of operations.
Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the time and expense associated with the foreclosure process or prevent us from
foreclosing at all. A number of states in recent years have either considered or adopted foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in default. Additionally, federal
regulators have prosecuted a number of mortgage servicing companies for alleged consumer law violations. If new state or federal laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers,
such could have an adverse effect on our business, financial condition and results of operations.
Other aspects of our business may be adversely affected by unfavorable economic, market, and political conditions.
An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business:
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a decrease in the demand for our loans and other products we offer;
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a decrease in our deposit balances due to overall reductions in the number or value of client accounts;
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a decrease in the value of collateral securing our loans;
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an increase in the level of nonperforming and classified loans;
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an increase in provisions for credit losses and loan charge-offs;
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a decrease in net interest income derived from our lending and deposit gathering activities;
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a decrease in our ability to access the capital markets; and
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an increase in our operating expenses associated with attending to the effects of certain circumstances listed above.
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Various market conditions also affect our operating results. Real estate market conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of
credit, which impacts the rates and terms at which we offer loans. Stock market downturns often reflect broader economic deterioration and/or a downward trend in business earnings which may adversely affect businesses’ ability to raise capital
and/or service their debts. Political and electoral changes, developments, conflicts and conditions (such as fiscal policy changes proposed) have in the past introduced, and may in the future introduce, additional uncertainty that could also affect
our operating results negatively.
LENDING ACTIVITIES RISKS
Small Business Administration lending is an increasingly important part of our business. Our SBA lending program is dependent upon the U.S. federal government, and we face
specific risks associated with originating SBA loans.
Our SBA lending program is dependent upon the U.S. federal government. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the
lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided
by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress or funding for the SBA program may also have a
material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the
secondary market, which could materially and adversely affect our business, results of operations and financial condition.
The SBA’s 7(a) Loan Program is the SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. Typically, we sell
the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales result in premium income for us at the time of sale and create a stream of future servicing income, as we retain the servicing rights to these loans. For the reasons described above, we may not be able to continue originating these loans or selling them in the secondary market. Furthermore, even if we are able to continue to originate and sell SBA 7(a) loans
in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors. When we originate SBA loans, we incur credit risk on the
non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant
technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us. Generally, we do not maintain reserves or loss allowances for such
potential claims and any such claims could materially and adversely affect our business, financial condition or results of operations.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and
profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA
loans could adversely affect our ability to operate profitably.
We are not an SBA Preferred Lender, and this may adversely affect our ability to compete for and originate SBA loans.
Although Savoy was an SBA Preferred Lender, we are not currently an SBA Preferred Lender. SBA Preferred Lenders are able to bind the SBA to guarantee a loan without submitting the loan to the SBA
for approval, thereby allowing us to approve and originate new loans faster and more efficiently. Although we intend to apply to become an SBA Preferred Lender, we can provide you no assurance that we will be approved as an SBA Preferred Lender. If
we are not approved as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders and may have greater difficulty attracting new customers seeking SBA loans, and as a result we could experience a
material adverse effect to our financial results.
The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose us to various credit and
default risks.
We have historically originated, primarily through Savoy, a significant number of SBA loans, and sell a significant portion of the guaranteed portions of these loans on the secondary market. We
generally retain the non-guaranteed portions of the SBA loans that we originate. Consequently, as of September 30, 2021, we held $77.0 million of SBA loans on our balance sheet, $63.2 million of which consisted of the non-guaranteed portion of SBA
loans and $13.8 million consisted of the guaranteed portion of SBA loans. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans. We generally retain the
non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations would be adversely impacted.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loans and the
manner in which they were originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition,
if repurchase and indemnity demands increase on loans that we sell from our portfolio, our liquidity, results of operations and financial condition could be adversely affected.
The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions.
We expect that gains on the sale of U.S. government guaranteed loans will comprise a meaningful component of our revenue. The determination of these gains is based on assumptions regarding the
value of unguaranteed loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S. government guaranteed loans. The value of the retained unguaranteed portion of the
loans and servicing rights are determined based on market derived factors such as prepayment rates, current market conditions and recent loan sales. Deferred fees and costs are determined using internal analysis of the cost to originate loans.
Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and
profitability. In addition, while we believe these valuations reflect fair value and such valuations are subject to validation by an independent third party, if such valuations are not reflective of fair market value then our business, results of
operations and financial condition may be materially and adversely affected.
Imposition of limits by bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.
In 2006, the Office of the Comptroller of the Currency, (the “OCC”), the FDIC, and the FRB, or collectively, the Agencies, issued joint guidance entitled “Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices,” or the CRE Guidance. Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny
where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and
the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our commercial real estate loan balance has increased 207% during fiscal year 2021 and commercial real estate loans
represent 263% of our risk-based capital at September 30, 2021, an increase from 119% at September 30, 2020.
In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending, or the 2015 Statement. In the 2015 Statement, the Agencies, among other
things, indicated the intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary federal regulator, were to impose restrictions on the amount of such loans
we can hold in our portfolio or require us to implement additional compliance measures, for reasons noted above or otherwise, our earnings could be adversely affected as would our earnings per share.
The residential mortgage loans that we originate consist primarily of non-conforming residential mortgage loans which may be considered less liquid and more risky.
The residential mortgage loans that we originate consist primarily of non-conforming residential mortgage loans, which are typically considered to have a higher degree of risk and are less liquid
than conforming residential mortgage loans. We attempt to address this enhanced risk through our underwriting process, by requiring three months principal, interest, taxes and insurance reserves These loans also present pricing risk as rates
change, and our sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other financial institutions may change from time to time, which could result in a lower volume of corresponding loan originations. In
addition, when we sell the non-conforming residential mortgage loans, we are required to make certain representations and warranties to the purchaser regarding such loans. Under those agreements, we may be required to repurchase the non-conforming
residential mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. Additionally, if repurchase and indemnity demands increase on loans that we sell from our portfolio, our liquidity,
results of operations and financial condition could be adversely affected.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most banks, our earnings and cash flows depend to a great extent upon the level of
our net interest income, or the difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest
rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.
When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income.
Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. An increase in interest rates may, among other things, reduce
the demand for loans and our ability to originate loans and decrease loan repayment rates. Conversely, a decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and
increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume and our overall results of operations. Although our asset-liability management
strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation,
recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.
A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely
affect our net interest income and profitability.
In recent years the FRB’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability
to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease, and our interest expense may increase if we need to access higher cost non-core funding
sources or increase deposit rates to fund our operations. A continuation of a low interest rate environment or an increase in our cost of funds may adversely affect our net interest margin and net interest income, which would have an adverse effect
on our profitability.
CREDIT RISKS
We may not be able to measure and limit our credit risk adequately, which could lead to unexpected losses.
The primary component of our business involves making loans to our clients. The business of lending is inherently risky, including risks that the principal or interest on any loan will not be
repaid in a timely manner or at all or that the value of any collateral supporting the loan will be insufficient to cover losses in the event of a default. These risks may be affected by the strength of the borrower’s business and industry, and
local, regional and national market and economic conditions. Many of our loans are made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Our risk management
practices, such as managing the concentration of our loans within specific industries, loan types and geographic areas, and our credit approval practices may not adequately reduce credit risk. Further, our credit administration personnel, policies
and procedures may not adequately adapt to changes in economic or any other conditions affecting clients and the quality of the loan portfolio. A failure to effectively measure and manage the credit risk associated with our loan portfolio could
lead to unexpected losses and have an adverse effect on our business, financial condition and results of operations.
Our emphasis on one- to four- family residential mortgage loans involves risks that could adversely affect our financial condition and results of operations.
Our loan portfolio includes a significant concentration of one- to four- family residential mortgage loans. As of September 30, 2021, we had $444.0 million in one- to four- family residential
mortgage loans, representing 36% of our total loan portfolio. Approximately 92% of these loans are secured by properties in the five boroughs of New York City and Nassau County, New York and 58% of these loans are rental properties and are not
owner-occupied. These loans expose us to significant credit risks that may be different from those related to loans secured by owner-occupied properties or commercial loans. Adverse developments affecting commerce or real estate values in the local
economies in our primary market areas could increase the credit risk associated with our loan portfolio and have an adverse impact on our revenues and financial condition. In addition, economic downturns in New York City could affect levels of
employment in the New York metro area, which may affect the demand for rental housing. Any increase in rental vacancies, or reductions in rental rates, could adversely impact our borrowers and their ability to repay their loans. Any sustained
period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, financial condition and results of operations.
Our niche lending products may expose us to greater risk than traditional lending products.
A significant portion of our lending activity is related to certain niche lending products, such as loans secured by investor owned, non-owner occupied one- to four- family
properties and loans without third-party income verifications, which are considered non-qualified mortgage loans and which may expose us to greater risk of credit loss than that associated with more traditional lending products. Non-qualified
mortgage loans are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. For the years ended September 30, 2021 and 2020, we originated $106.4 million and $96.0 million in non-qualified mortgage loans,
respectively, During the years ended September 30, 2021 and 2020, we sold into the secondary market $32.1 million and $39.0 million, respectively of our non-qualified mortgages. We also have a concentration in the secondary market for our
non-qualified mortgage loans, as a substantial portion of our non-qualified mortgage loans have been sold to one purchaser. If we lose this purchaser, or any other purchaser of our loans, our resale market
may decline and we may not be able to sell our non-conforming residential mortgage loans at our current volume, which will significantly decrease our non-interest income as well as limit the number of non-conforming residential mortgage loans we
can originate without excess interest rate risk Although we have developed underwriting standards and procedures designed to reduce the risk of loss, we can provide no assurance that these standards and procedures will be effective in reducing
losses. Should we incur credit losses, it could adversely affect our results of operations.
The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.
We target our business development and marketing strategy primarily to serve the banking and financial services needs of small- to medium-sized businesses and real estate owners. These small- to
medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating
results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small- to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of
persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas
could cause us to incur substantial credit losses that could negatively affect our financial condition and results of operations.
Our allowance for loan losses may not be adequate to cover actual losses.
We maintain an allowance for loan losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio. As of September 30, 2021, our allowance for loan losses
totaled $8.6 million, which represents approximately 0.77% of our total loans held for investment, excluding PPP loans. The level of the allowance reflects management’s continuing evaluation of general economic conditions, diversification and
seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels, adequacy of collateral and historical peer charge-off data. The determination of the appropriate level of our allowance for loan losses is
inherently highly subjective and requires management to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes.
Effective October 1, 2023, we will be required to adopt the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update 2016-13, Financial
Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, commonly referred to as “CECL.” CECL changes the allowance for loan losses methodology from an incurred loss concept to an expected loss concept,
which is more dependent on future economic forecasts, assumptions and models than previous accounting standards and could result in increases in, and add volatility to, our allowance for loan losses and future provisions for loan losses. These
forecasts, assumptions, and models are inherently uncertain and are based upon management’s reasonable judgment in light of information currently available. Our allowance for loan losses may not be adequate to absorb actual credit losses, and
future provisions for credit losses could materially and adversely affect our operating results.
Our federal and state regulators, as an integral part of their examination process, review our methodology for calculating, and the adequacy of, our allowance for loan losses and may direct us to
make additions to the allowance based on their judgments about information available to them at the time of their examination. Further, if actual charge-offs in future periods exceed the amounts allocated to our allowance for loan losses, we may
need additional provisions for loan losses to restore the adequacy of our allowance for loan losses. While we believe our allowance for loan losses is appropriate for the risk identified in our loan portfolio, we cannot provide assurance that we
will not further increase the allowance for loan losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. We also cannot be certain that actual results will be consistent with
forecasts and assumptions used in our modeling. Any of these occurrences could materially and adversely affect our financial condition and results of operations.
If our non-performing assets increase, our earnings will be adversely affected.
At September 30, 2021, our non-performing assets, which consist of non-performing loans and OREO (of which we had none at September 30, 2021), were $9.5 million, or 0.64% of total assets. Our
non-performing assets adversely affect our net income in various ways:
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we record interest income only on the cash basis or cost-recovery method for non-accrual loans and we do not record interest income for OREO;
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we must provide for probable loan losses through a current period charge to the provision for loan losses;
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non-interest expense increases when we write down the value of properties in our OREO portfolio to reflect changing market values;
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there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees; and
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the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
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If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase, which could
have a material adverse effect on our financial condition and results of operations.
As a participating lender in the SBA’s Paycheck Protection Program, or PPP, we are subject to added risks, including credit, fraud, compliance and litigation risks.
With the adoption of the PPP program, we began processing loan applications under the PPP as an eligible lender with the benefit of a government guarantee of loans to small business clients, many
of whom may face difficulties even after being granted such a loan. PPP loans have contributed to our loan growth during 2020 and the first quarter of 2021, and more materially to the loan growth of Savoy prior to our acquisition of Savoy.
As a participant in the PPP, we face increased risks, particularly in terms of credit, fraud, compliance and litigation risks. The PPP opened to borrower applications shortly after the enactment of
its authorizing legislation, and, as a result, there is some ambiguity in the laws, rules and guidance regarding the program’s operation. Subsequent rounds of legislation and associated agency guidance have not clarified such ambiguities, and in
certain instances have potentially created additional inconsistencies. Accordingly, we are exposed to risks relating to compliance with PPP requirements, including the risk of becoming the subject of governmental investigations, enforcement
actions, private litigation and negative publicity.
We have additional credit risk with respect to PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced, such as
an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan
and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guarantee or, if it has already
paid under the guarantee, seek recovery of any loss related to the deficiency from the Bank.
Also, PPP loans are fixed, low interest rate loans that are guaranteed by the SBA and subject to numerous other regulatory requirements, and a borrower may apply to have all or a portion of the
loan forgiven. If PPP borrowers fail to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest rates for an extended period of time.
Furthermore, since the launch of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and
we may be exposed to the risk of litigation, from both customers and non-customers that approached us regarding PPP loans, relating to these or other matters. Also, many financial institutions throughout the country have been named in putative
class actions regarding the alleged non-payment of fees that may be due to certain agents who facilitated PPP loan applications. The costs and effects of litigation related to PPP participation could have an adverse effect on our business,
financial condition and results of operations.
We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability
or possibly subject us to regulatory scrutiny in the future.
The use of statistical and quantitative models, and other quantitative and qualitative analyses, is necessary for bank decision-making, and the employment of such analyses is becoming increasingly
widespread in our operations.
Liquidity stress testing, interest rate sensitivity analysis, the identification of possible violations of anti-money laundering regulations and the estimation of credit losses are all examples of
areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to annual Dodd-Frank Wall Street
Reform and Consumer Protection Act, or Dodd-Frank Act, stress testing and the Comprehensive Capital Analysis and Review submissions, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.
We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements
are able to be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could
negatively impact our decision-making ability or, if we become subject to regulatory stress-testing in the future, adverse regulatory scrutiny. Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their
outputs could similarly result in suboptimal decision-making.
LIQUIDITY RISKS
If we do not manage our liquidity effectively, our business could suffer.
Liquidity is essential for the operation of our business. Market conditions, unforeseen outflows of funds or other events could have a negative effect on our level or cost of funding, affecting our
ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business transactions at a reasonable cost and in a timely manner. If our access to stable and low-cost sources of funding, such
as client deposits, is reduced, we may need to use alternative funding, which could be more expensive or of limited availability. Further evolution in the regulatory requirements relating to liquidity and risk management also may impact us
negatively. For more information on these regulations and other regulatory changes, see the section entitled “Supervision and Regulation.” Any substantial, unexpected or prolonged changes in the level or
cost of liquidity could affect our business adversely.
Our growth strategy may require us to raise additional capital in the future to fund such growth, and the unavailability of additional capital on terms acceptable to us could
adversely affect us or our growth.
After giving effect to this offering, we believe that we will have sufficient capital to meet our capital needs for our immediate growth plans. However, we will continue to need capital to support
our longer-term growth plans. Our ability to access the capital markets, if needed, will depend on a number of factors, including the state of the financial markets. If capital is not available on favorable terms when we need it, we will have to
either issue common stock or other securities on less than desirable terms or curtail our growth until market conditions become more favorable. Any diminished ability to raise additional capital, if needed, could subject us to liability, restrict
our ability to grow, require us to take actions that would affect our earnings negatively or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely. Such events could have a material
adverse effect on our business, financial condition and results of operations.
STRATEGIC RISKS
If we do not effectively execute our strategic plans, we will not achieve our growth objectives and our business and results of operations may be negatively affected.
Our growth depends upon successful, consistent execution of our business strategies. A failure to execute these strategies may impact growth negatively. A failure to grow, whether organically or
through strategic acquisitions, may have an adverse effect on our business. The challenges arising from generating organic or strategic growth may include preserving valuable relationships with employees, clients and other business partners and
delivering enhanced products and services. Execution of our business strategies also may require certain regulatory approvals or consents, which may include approvals of the FRB, the FDIC, the DFS and other domestic regulatory authorities. These
regulatory authorities may impose conditions on the activities or transactions contemplated by our business strategies, which may negatively impact our ability to realize fully the expected benefits of certain opportunities.
Any failure by us to manage acquisitions and other significant transactions successfully may have a material adverse effect on our results of operations, financial condition,
and cash flows.
Our ability to grow revenues, earnings and cash flows at or above our historical rates depends in part upon our ability to identify, appropriately price, successfully acquire, and integrate
businesses to realize anticipated synergies by integrating cultures, accounting, data processing and internal control systems. Promising acquisitions are difficult to identify and complete for a number of reasons, including high valuations,
competition among prospective buyers, and the need to satisfy applicable closing conditions, including any conditions to receiving the required regulatory approvals. To the extent we enter into transactions to acquire complementary businesses
and/or technologies, we may not achieve the expected benefits of such transactions, which could result in increased costs, lowered revenues, ineffective deployment of capital, regulatory concerns, exit costs or diminished competitive position or
reputation. These risks may be increased if the acquired company operates in a geographic location where we do not already have significant business operations. Integration and other risks can be more pronounced for larger and more complicated
transactions, transactions outside of our core business space, or if multiple transactions are pursued simultaneously. The failure to successfully integrate acquired entities and businesses or failure to produce results consistent with the
financial model used in the analysis of our acquisitions, investments, joint ventures or strategic alliances may cause us to incur asset write-offs, restructuring costs or other unanticipated expenses which may have a material adverse effect on our
results of operations, financial position, and cash flows. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend additional resources to grow our business organically.
We have grown and may continue to grow through acquisitions.
Over the last several years, we have grown rapidly through both organic growth and acquisitions. On August 9, 2019, we consummated the acquisition of CFSB. On May 26, 2021, we consummated the
acquisition of Savoy. These two acquisitions added $780.8 million in total assets, $452.6 million in deposits and $676.3 in loans, as well as four branch offices in New York City. As part of our growth strategy, we intend to pursue prudent and
commercially attractive acquisitions that will position us to capitalize on market opportunities. To be successful as a larger institution, we must successfully integrate the operations and retain the customers of acquired institutions, attract and
retain the management required to successfully manage larger operations, and control costs.
Future results of operations will depend in large part on our ability to successfully integrate the operations of the acquired institutions and retain the customers of those institutions. If we are
unable to successfully manage the integration of the separate cultures, customer bases and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, our results of operations may be adversely
affected.
In addition, to successfully manage substantial growth, we may need to increase non-interest expenses through additional personnel, leasehold and data processing costs, among others. In order to
successfully manage growth, we may need to adopt and effectively implement policies, procedures and controls to maintain credit quality, control costs and oversee our operations. No assurance can be given that we will be successful in this
strategy.
We may be challenged to successfully manage our business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend on our ability
to continue to attract, hire and retain skilled employees. Success will also depend on the ability of our officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent customer
relationships and to hire, train and manage employees.
Finally, substantial growth may stress regulatory capital levels, and may require us to raise additional capital in the future. No assurance can be given that we will be able to raise any required
capital, or that we will be able to raise capital on terms that are beneficial to stockholders.
Attractive acquisition opportunities may not be available to us in the future.
We expect that other banking and financial service companies, many of which have significantly greater resources than we do and have a deep and liquid trading market, will compete with us in
acquiring other financial institutions, if we pursue such acquisitions in the future. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals.
If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators will consider our capital, liquidity, profitability,
regulatory compliance and levels of goodwill when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and stockholders’ earnings per share.
Our acquisition of businesses could negatively impact our financial condition.
As an important part of our business strategy, we acquire businesses, some of which may be material. Please see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for additional details. These acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which
could adversely affect our business and our financial condition:
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any business, technology, service or product that we acquire could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable, or we could fail to make such
business profitable;
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we may incur or assume significant debt in connection with our acquisitions which could cause a deterioration of our credit rating, result in increased borrowing costs and interest expense and diminish our future access to the capital
markets;
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acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long-term;
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pre-closing and post-closing acquisition-related earnings charges could adversely impact our results of operations in any given period, and the impact may be substantially different from period to period;
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acquisitions could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address, or for which we may incur additional costs;
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we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers;
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we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition;
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we may assume by acquisition unknown liabilities, known contingent liabilities that become realized, known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting
from the acquired company’s activities. The realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial condition or cause us to fail to meet our public financial reporting
obligations; and
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as a result of our acquisitions, we have recorded significant goodwill and intangible assets on our balance sheets. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment
of these assets, which could materially impact our financial statements.
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ACQUISITION RISKS
We may not fully realize the anticipated benefits of the acquisition of Savoy or realize such benefits within the timing anticipated.
On May 26, 2021, we acquired Savoy because we believe the acquisition will diversify our commercial lending and provide us with a new product line, Small Business Administration (“SBA”) lending,
while being accretive to our earnings. However, we may not be able to achieve the anticipated longterm strategic benefits of the acquisition within the timing anticipated or at all. For example, the benefits from the acquisition will be partially
offset by the significant costs incurred in completing the transaction. In addition, if we fail to attain Preferred Lender status with the SBA, it may negatively impact our ability to grow the SBA lending business. Any delays and challenges that
may be encountered in the post-acquisition process of consolidation could have an adverse effect on our business and results of operations and may affect the value of our common stock.
We may have operational challenges in managing Savoy’s business and staff following the acquisition.
Acquisitions inherently have risks including misjudging key elements of an acquisition or failing to integrate it in an efficient and timely manner that could disrupt operations. We may face
further operational challenges in managing Savoy’s business following the acquisition, which could have an adverse effect on our business and results of our operations, and may affect the value our common stock.
We may have failed to discover undisclosed liabilities of Savoy.
Our investigations and due diligence review of Savoy may have failed to discover undisclosed liabilities of Savoy. Such undisclosed liabilities may affect the results of operations of Savoy, and as
a result, could have an adverse effect on our business and results of operations and may adversely affect the value of our common stock.
COMPETITION RISKS
Competition in originating loans and attracting deposits may adversely affect our profitability.
We operate in a highly competitive banking market and face substantial competition in originating loans. This competition currently comes principally from other banks, savings institutions,
mortgage banking companies, credit unions and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the
ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the
interest rates we may charge on these loans.
In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured
investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may
offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to
generate the funds necessary for lending operations, which may increase our cost of funds or negatively impact our liquidity.
We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more
favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This
competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Our inability to compete
successfully in the markets in which we operate could have an adverse effect on our business, financial condition or results of operations.
We need to invest in innovation, and the inability or failure to do so may affect our business and earnings negatively.
Our success in the competitive environment in which we operate requires consistent investment of capital and human resources in innovation, particularly in light of the current “FinTech”
environment, in which financial institutions are investing significantly in new technologies, such as artificial intelligence, machine learning, blockchain and other distributed ledger technologies, and developing potentially industry-changing new
products, services and industry standards in order to attract clients. Our investment is directed at meeting the needs of our clients, adapting existing products and services to the evolving standards and demands of the marketplace, and maintaining
the security of our systems and building a platform for future innovation and competitive advantage that is scalable. Among other things, investing in innovation helps keep us relevant and client-focused while maintaining acceptable margins. Our
investment also focuses on enhancing the delivery of our products and services, such as our recent implementation of digital payment channels, such as mobile wallets, contactless debit cards and Zelle. Falling
significantly behind our competition in this area could adversely affect our business opportunities, growth and earnings. There are substantial risks and uncertainties associated with innovation efforts, including an increased risk that new and
emerging technologies may expose us to increased cybersecurity and other information technology vulnerability and threats. Expected timetables for the introduction and development of new products or services may not be achieved, and price and
profitability targets may not be met. Further, our revenues and costs may fluctuate because new products and services generally require start-up costs while corresponding revenues take time to develop or may not develop at all.
KEY PERSONNEL RISKS
We rely heavily on our executive management team and other key personnel for our successful operation, and we could be adversely affected by the unexpected loss of their
services.
Our success depends in large part on the performance of our key personnel at the Bank that have substantial experience and tenure with the Bank and in the markets that we serve. Our continued
success and growth depend in large part on the efforts of these key personnel, the support of our Directors, and ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees to complement and
succeed to our core senior management team.
If we are not able to attract, retain and motivate other key personnel, our business could be negatively affected.
Our future success depends in large part on our ability to retain and motivate our existing employees and attract new employees. Competition for the best employees can be intense, and there can be
no assurance that we will be successful in our efforts to recruit and retain key personnel. Factors that affect our ability to attract and retain talented and diverse employees include compensation and benefits programs, profitability,
opportunities for advancement, flexible working conditions, availability of qualified persons and our reputation. Our ability to attract and retain key executives and other employees may be hindered as a result of existing and potential regulations
applicable to incentive compensation and other aspects of our compensation programs. These regulations may not apply to some of our competitors and to other institutions with which we compete for talent. The unexpected loss of services of key
personnel, both in business line and corporate functions, could have a material adverse impact on our net income and financial condition because of the loss of their knowledge of our markets, operations and clients, their years of industry
experience, and their technical skills. Similarly, the loss of key employees, either individually or as a group, could adversely affect our clients’ perception of our abilities and, accordingly, our reputation.
REGULATORY AND COMPLIANCE RISKS
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or
changes in them, or our failure to comply with them, could adversely affect us and our future growth.
Banks are highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements from government agencies such as the FRB, the FDIC and
the DFS, which govern almost all aspects of our operations. These laws and regulations are not intended to protect our shareholders. Rather, these laws and regulations are intended to protect our clients, depositors, the DIF, and the overall
financial stability of the United States. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions that the
Bank can pay to the Company and the Company can pay to its shareholders, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or
earlier charges to earnings or reductions in our capital than required under generally accepted accounting principles (“GAAP”). Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose
additional operating costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, enforcement
actions and fines and other penalties, any of which could adversely affect our results of operations, regulatory capital levels and the price of our common stock. Further, any new laws, rules and regulations could make compliance more difficult or
expensive or otherwise adversely affect our business, financial condition and results of operations.
Federal and State banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any
supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
As part of the bank regulatory process, the FDIC, the New York State Department of Financial Services, and the FRB periodically conduct examinations of our businesses, including compliance with
laws and regulations. If, as a result of an examination, one of these banking agencies were to determine that the financial condition, capital adequacy, asset quality, earnings prospects, management capability, liquidity, asset sensitivity to
market risks, asset management, risk management or other aspects of any of our operations have become unsatisfactory, or that the Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of
different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against the Company, the Bank or their respective officers or directors, to remove
officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance and terminate the Bank’s charter to operate. If we become subject
to such regulatory actions, our business, financial condition, results of operations and reputation could be adversely affected.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
Economic conditions that contributed to the financial crisis in 2008, particularly in the financial markets, resulted in government regulatory agencies and political bodies placing increased focus
and scrutiny on the financial services industry. There can be no guarantee that regulators or other third parties will not seek to impose such additional requirements on financial institutions, such as extending additional regulations to small
banks with less than $10 billion in assets. Compliance with these regulations has and may continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
Federal and state regulatory agencies frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Regulatory or legislative changes to laws
applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing,
attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make
any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
Increases in FDIC insurance premiums could adversely affect our earnings and results of operations.
The deposits of our bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments as determined according to the
calculation described in “Supervision and Regulation-Deposit Insurance.” In order to maintain a strong funding position and restore the reserve ratios of the DIF following the financial crisis, the FDIC increased deposit insurance assessment rates
and charged special assessments to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any
future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on
our business, financial condition and results of operations.
Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
We operate in an environment that imposes income taxes on our operations at both the federal and state levels to varying degrees and we try to minimize the impact of these taxes. Any change in tax
laws or regulations, or new interpretation of an existing law or regulation, could significantly alter the tax impact on our financial results.
The net deferred tax asset reported on our balance sheet generally represents the tax benefit of future deductions from taxable income for items that have already been recognized for financial
reporting purposes. The bulk of these deferred tax assets consists of deferred loan loss deductions and deferred compensation deductions. The net deferred tax asset is measured by applying currently enacted income tax rates to the accounting period
during which the tax benefit is expected to be realized. As of September 30, 2021, our net deferred tax asset was $3.6 million.
Tax rates may go up, which could negatively impact our net income and cash flow.
Certain provisions in the JOBS Act changing tax laws also included a number of provisions that have an impact on borrowers and the market for single- family residential real estate. Changes include
(i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and
(iv) a limitation on the deductibility of property taxes and state and local income taxes.
The changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future and could make it harder for
borrowers to make their loan payments. In addition, these changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, such as New York. If home ownership becomes less
attractive, demand for mortgage loans could decrease. The value of the properties securing loans in the loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in the
provision for loan losses, which would reduce profitability and could have a material adverse effect on our business, financial condition and results of operations.
Failure to comply with stringent capital requirements could result in regulatory criticism, requirements and restrictions.
The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which it must maintain. From time to time, regulators implement
changes to these regulatory capital adequacy guidelines. The FRB, the FDIC, and the OCC adopted final rules for the Basel III capital framework which became effective on January 1, 2015. These rules substantially amended the regulatory risk-based
capital rules formerly applicable to the Bank. The rules have been phased in over time beginning in 2015 and became fully phased-in in 2019. The rules provide for minimum capital ratios of (i) common equity Tier 1 risk-weighted capital ratio of
4.5%, (ii) Tier 1 risk-based capital ratio of 6%, and (iii) total risk-based capital ratio of 8%. As fully phased in, the rules also require a capital conservation buffer of 2.5% on top of the foregoing minimum capital ratios, resulting in an
effective requirement for minimum capital ratios of (a) common equity Tier 1 risk-weighted capital ratio of 7%, (b) Tier 1 risk-based capital ratio of 8.5%, and (c) total risk-based capital ratio of 10.5%. The failure to meet applicable regulatory
capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect client and investor
confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial condition. These limitations establish a maximum
percentage of eligible retained income that could be utilized for these actions.
Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and other laws and
regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement
Network, established by the U.S. Department of the Treasury (the “Treasury Department”), to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in
coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and the Internal Revenue Service. There is also increased scrutiny of compliance with the
sanctions programs and rules administered and enforced by the Treasury Department’s Office of Foreign Assets Control (“OFAC”).
In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our anti-money laundering program. If our policies, procedures
and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the inability to obtain regulatory approvals to proceed with certain aspects of our
business plans, including acquisitions and de novo branching.
We are subject to numerous laws and regulations of certain regulatory agencies, such as the Consumer Financial Protection Bureau, including the Community Reinvestment Act and
fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA directs all insured depository institutions to help meet the credit needs of the local communities in which they are located, including low- and moderate-income neighborhoods. Each
institution is examined periodically by its primary federal regulator, which assesses the institution’s performance. The Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending
requirements on financial institutions. The Consumer Financial Protection Bureau (the “CFPB”), the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the
Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that
offer financial products and services to consumers.
Adverse supervisory findings regarding an institution’s performance under the CRA, fair lending or consumer lending laws and regulations could result in a wide variety of sanctions, including
damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, financial condition and results of operations.
The FRB may require us to commit capital resources to support the Bank, and we may not have sufficient access to such capital resources.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of
strength” doctrine and FRB regulations implementing it, the FRB may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to
commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Any loans by a
holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by
the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the
institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse
effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so.
The discontinuance of LIBOR could cause or contribute to market volatility and could affect the market value and/or liquidity of our investments.
The relevant regulatory announcements about the phase out of the London Inter-bank Offering Rate (“LIBOR”), the possibility of changes being made to the basis on which LIBOR is calculated and
published (or its ceasing to be published), uncertainty as to whether or how any alternative reference rate may replace LIBOR, the ability of our third-party service providers and/or counterparties to support and process the Bank’s assets based on
an alternative reference rate, and any other actions taken by the ICE Benchmark Administration, the Financial Conduct Authority or any other entity with respect to LIBOR or its replacement (if any), could cause or contribute to market volatility
and could negatively affect the market value, availability and/or liquidity of the securities held in client portfolios. The unavailability or replacement of LIBOR may affect the valuation of certain of our investments, which may adversely affect
our performance. Management has determined to replace LIBOR as an index for its adjustable-rate loans with the Secured Overnight Finance Rate (“SOFR”), which will require revisions to outstanding loans tied to LIBOR. However, it is not possible at
this time to predict or ascertain what precise impact these changes will have on the Bank.
TECHNOLOGY RISKS
Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.
We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our business, operations, plans and
strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.
Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct
financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail,
text or voice mail, is an emerging threat targeting the customers of financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or
information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs
and/or cause losses.
If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and
financial loss.
In recent years, several financial services firms suffered successful cyber-attacks launched both domestically and from abroad, resulting in the disruption of services to clients, loss or
misappropriation of sensitive or private information, and reputational harm. Further, information security risks for financial institutions like us are significant in part because of the evolving proliferation of new technologies, the use of the
internet, mobile devices, and cloud technologies to conduct financial transactions and the increased sophistication and activities of hackers, terrorists, organized crime and other external parties, including foreign state actors. In addition, our
clients often use their own devices, such as computers, smart phones and tablets, to manage their accounts, which may heighten the risk of system failures, interruptions or security breaches. If we fail to continue to upgrade our technology
infrastructure and monitor our vendors to ensure effective information security relative to the type, size and complexity of our operations, we could become more vulnerable to cyber-attack and, consequently, subject to significant regulatory
penalties.
Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not
provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or
proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and
maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. However, these safeguards do not provide absolute assurance that
mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. As information security risks and cyber threats continue to
evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.
We have a continuing need for technological change, and we may not have the resources to implement new technology effectively, or we may experience operational challenges when
implementing new technology or technology needed to compete effectively with larger institutions may not be available to us on a cost-effective basis.
The financial services industry undergoes rapid technological changes with frequent introductions of new technology-driven products and services, including developments in telecommunications, data
processing, automation, internet-based banking, debit cards and so-called “smart cards” and remote deposit capture. In addition to serving clients better, the effective use of technology increases efficiency and enables financial institutions to
reduce costs. Our future success will depend, at least in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create
additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We offer electronic banking services for consumer and business customers via our website, www.hanoverbank.com, including Internet
banking and electronic bill payment, as well as mobile banking. We also offer debit cards, ATM cards, and automatic and ACH transfers. We may experience operational challenges as we implement these new technology enhancements or products, which
could impair our ability to realize the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for our technology needs may not be able to develop on
a cost-effective basis the systems that will enable us to keep pace with such developments. As a result, competitors may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a
competitive disadvantage. We may lose clients seeking new technology-driven products and services to the extent we are unable to provide such products and services. Accordingly, the ability to keep pace with technological change is important and
the failure to do so could adversely affect our business, financial condition and results of operations.
OPERATIONAL RISKS
Many types of operational risks can affect our earnings negatively.
We regularly assess and monitor operational risk in our businesses. Despite our efforts to assess and monitor operational risk, our risk management framework may not be effective in all cases.
Factors that can impact operations and expose us to risks varying in size, scale and scope include:
| • |
failures of technological systems or breaches of security measures, including, but not limited to, those resulting from computer viruses or cyber-attacks;
|
| • |
unsuccessful or difficult implementation of computer systems upgrades;
|
| • |
human errors or omissions, including failures to comply with applicable laws or corporate policies and procedures;
|
| • |
theft, fraud or misappropriation of assets, whether arising from the intentional actions of internal personnel or external third parties;
|
| • |
breakdowns in processes, breakdowns in internal controls or failures of the systems and facilities that support our operations;
|
| • |
deficiencies in services or service delivery;
|
| • |
negative developments in relationships with key counterparties, third-party vendors, or employees in our day-to-day operations; and
|
| • |
external events that are wholly or partially beyond our control, such as pandemics, geopolitical events, political unrest, natural disasters or acts of terrorism.
|
While we have in place many controls and business continuity plans designed to address these factors and others, these plans may not operate successfully to mitigate these risks effectively. If our
controls and business continuity plans do not mitigate the associated risks successfully, such factors may have a negative impact on our business, financial condition or results of operations. In addition, an important aspect of managing our
operational risk is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions. We continue to enhance our risk
management program to support our risk culture. Nonetheless, if we fail to provide the appropriate environment that sensitizes all of our employees to managing risk, our business could be impacted adversely.
Our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to
expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part,
by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is
negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We have experienced rapid growth in recent periods, and our recent growth rates may not be indicative of our future growth.
We have experienced rapid organic and acquisition-driven growth in recent periods. As a strategy, we have focused on growth by aggressively pursuing business development opportunities. Our assets
have grown from $68.5 million at December 31, 2012 to $1.48 billion at September 30, 2021, representing a compound annual growth rate in excess of 36%. We cannot guarantee that we will sustain our recent asset and revenue growth rate in future
periods. Our asset and revenue growth may slow or our revenue may decline for a number of other reasons, including reduced demand for our services, increased competition, a decrease in the growth or reduction in size of our overall market, the
impacts to our business from the COVID-19 pandemic, or if we cannot capitalize on growth opportunities.
Although we believe that our growth strategy will support our long-term profitability and franchise value, the expenses associated with our growth, including compensation expense for the employees
needed to support this growth and leasehold and other expenses associated with our increasing number of office locations, has and may continue to affect our results. We expect our operating expenses to increase in future periods, and if our revenue
growth does not increase to offset these anticipated increases in our operating expenses, it will have a material adverse effect on our business, financial condition and results of operations and we may not be able to achieve or maintain
profitability. Further, our rapid growth may make it difficult to evaluate our future prospects. Our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and
model future growth. If we fail to achieve the necessary level of efficiency in our organization as it grows, or if we are not able to accurately forecast future growth, it could have a material adverse effect on our business, financial condition
and results of operations.
Our rapid growth has placed, and will continue to place, a significant strain on our management capabilities, administrative and operational infrastructure, facilities and other resources. To
effectively manage growth, we must continue to: improve our key business applications, processes, and computing infrastructure; enhance information and communication systems; and ensure that our policies and procedures evolve to reflect our current
operations. These enhancements and improvements will require additional investments and allocation of valuable management and employee time and resources. Failure to effectively manage growth could result in difficulty or delays in deploying our
solutions, declines in quality or client satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could materially adversely affect our business performance and
results of operations.
We are subject to certain operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.
We rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the
risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control systems and compliance requirements.
Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a
result of non-compliance with applicable regulatory standards, adverse business decisions or their implementation, or customer attrition due to potential negative publicity. In the event of a breakdown in our internal control systems, improper
operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to our reputation.
We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.
In the course of our business, we may foreclose on and take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we
could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in
connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial.
In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those properties, we may not have adequate remedies against the prior owners
or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally
will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability.
Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property and, as a result, we may suffer a loss upon collection of the loan. Any
significant environmental liabilities could have an adverse effect on our business, financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We outsource some of our operational activities and accordingly depend on a number of relationships with third-party service providers. Specifically, we rely on third parties for certain services,
including, but not limited to, our core banking, web hosting and other processing services. Our business depends on the successful and uninterrupted functioning of our third-party servicers. The failure of these systems, a cybersecurity breach
involving any of our third-party service providers or the termination or change in terms of a third-party software license or service agreement on which any of these systems is based could interrupt our operations. Because our information
technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. Replacing
vendors or addressing other issues with our third-party service providers could entail significant delay, expense and disruption of service. If an interruption were to continue for a significant period of time, our business, financial condition and
results of operations could be adversely affected. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
In addition, the Bank’s primary federal regulator, the FDIC has issued guidance outlining the expectations for third-party service provider oversight and monitoring by financial institutions. The
federal banking agencies, including the FDIC, have also issued enforcement actions against financial institutions for failure in oversight of third-party providers and violations of federal banking law by such providers when performing services for
financial institutions. Accordingly, our operations could be interrupted if any of our third-party service providers experience difficulty, are subject to cybersecurity breaches, terminate their services or fail to comply with banking regulations,
which could adversely affect our business, financial condition and results of operations. In addition, our failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against the Bank, which
could adversely affect our business, financial condition and results of operations.
Pandemics, natural disasters, global climate change, acts of terrorism and global conflicts may have a negative
impact on our business and operations.
Pandemics, including the continuing COVID-19 pandemic, natural disasters, global climate change, acts of terrorism, global conflicts or other similar events have in the past, and may in the future
have, a negative impact on our business and operations. These events impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States
or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations and may have other adverse effects on us in ways
that we are unable to predict.
Our business operations could be disrupted if significant portions of our workforce were unable to work effectively, including because of illness, quarantines, government actions, or other
restrictions in connection with the pandemic. Further, work-from-home and other modified business practices may introduce additional operational risks, including cybersecurity and execution risks, which may result in inefficiencies or delays, and
may affect our ability to, or the manner in which we, conduct our business activities. Disruptions to our clients could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. The escalation of the pandemic may
also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability.
Legal and regulatory proceedings and related matters could adversely affect us.
We have been and may in the future become involved in legal and regulatory proceedings. We consider most of our historical proceedings to be in the normal course of our business or typical for the
industry; however, it is difficult to assess the outcome of these matters, and we may not prevail in any current or future proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and
any adverse determination could have a materially adverse effect on our business, brand or reputation, or our financial condition and results of our operations.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change
their behavior as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases,
asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in
demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in
making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
COMMON STOCK AND TRADING RISKS
There is currently no established public market for our common stock.
Our common stock is not currently traded on an established public trading market, and we are unable to predict when or if an active, liquid trading market for our common stock may develop. Without
an active, liquid trading market for our common stock, shareholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our
common stock.
The holders of our existing and future debt obligations will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up
and with respect to the payment of interest.
Shares of our common stock are equity interests and do not constitute indebtedness. In the event of any liquidation, dissolution or winding up of our business or of the Bank, our common stock would
rank below all claims of debt holders against us. As of September 30, 2021, we had outstanding approximately $25.0 million in aggregate principal amount of subordinated notes. Our debt obligations are senior to our shares of common stock. As a
result, we must make payments on our debt obligations before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our debt obligations must be satisfied before any distributions
can be made to the holders of our common stock. To the extent that we issue additional debt obligations, the additional debt obligations will be of equal rank with, or senior to, our existing debt obligations and senior to our shares of common
stock.
We do not intend to pay cash dividends in the foreseeable future and our future ability to pay dividends is subject to restrictions.
We have not historically paid cash dividends and intend to retain earnings to support our continued growth. Therefore, we do not currently anticipate paying or declaring cash
dividends in the foreseeable future. Any future determination relating to the payment of dividends on our common stock will depend on a number of factors, including regulatory restrictions, our earnings and financial condition, our liquidity and
capital requirements, the general economic climate, contractual restrictions, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant by our Board of Directors. Investors seeking cash
dividends in the foreseeable future should not invest in our common stock. The FRB has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and
prospective earnings and level, composition and quality of capital. The guidance provides that we inform and consult with the FRB prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or
that could result in an adverse change to our capital structure, including interest on the subordinated debt obligations, and our other debt obligations. For further information see “Supervision and Regulation—Dividends.”
None.
The Bank owns its administrative headquarters and its Garden City Park branch and leases five other branch locations. Our banking offices are located in Kings, Nassau, New York and Queens
Counties in New York. In addition, we are in the process of opening a full-service branch in Freehold, New Jersey to better serve this market, where Savoy had originated SBA loans prior to the completion of the merger. Set forth below is certain
information about the Bank’s offices:
| • |
Headquarters and Mineola Branch — 80 East Jericho Turnpike, Mineola, New York — this building has a branch on the first floor and Hanover’s corporate and administrative offices on the second and third floors.
|
| • |
Garden City Park Branch — 2131 Jericho Turnpike, Garden City Park, New York — this one-story building houses the Bank’s original branch as well as its Loan Servicing Department.
|
| • |
Flushing Branch — 138-29 39th Avenue, Flushing, New York — this is a ground floor branch opened in 2019.
|
| • |
Forest Hills Branch — 71-15 Austin Street, Forest Hills, New York — this is a ground floor branch opened in 2017.
|
| • |
Sunset Park Branch — 5512 8th Avenue, Brooklyn, New York — this three-story building has a branch on the ground floor and administrative offices on the second and third floors.
|
| • |
Bowery Branch — 109 Bowery, New York, New York — this three-story building has a branch on the ground floor and administrative offices on the second and third floors.
|
| • |
Rockefeller Center Branch — 600 5th Avenue, New York, New York — this is a branch acquired as part of the Savoy transaction.
|
From time to time we are party to various litigation matters incidental to the conduct of our business. We are not presently party to any such legal proceeding the resolution of which we believe
would have a material adverse effect on our business, operating results, financial condition or cash flow.
Not applicable.
Part II
|
ITEM 5.
|
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
Our common stock has not been traded on an established public trading market, and quotations for our common stock are not reported on any market. As a result, there has been no regular market for
our common stock. As of September 30, 2021, there were 594 holders of record of our common stock.
We intend to follow a policy of retaining earnings, if any, to increase our net worth and capital ratios over the next few years. We have not historically declared or paid
dividends on our common stock and any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our earnings and financial condition, liquidity
and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock, and other factors deemed relevant by our Board of Directors.
Not applicable.
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.
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.
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.
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.
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%.
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.
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.
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.
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.
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.
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
|
||||||||
|
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.
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.
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
|
%
|
||||||||||||||||||||
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.
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.
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.
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.
Not applicable.
 |
|
|
Crowe LLP
Independent Member Crowe Global
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Hanover Bancorp, Inc.
Mineola, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Hanover Bancorp Inc. and Subsidiary (the "Company") as of
September 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
|
 |
|
|
Crowe LLP
|
We have served as the Company's auditor since 2019.
Livingston, New Jersey
December 22, 2021