Hanover Bancorp, Inc. /MD (HNVR) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition and results of our operations for the fiscal years ended September 30, 2023 and 2022, 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, government guaranteed loans, residential loans, business loans and lines of credit. The Bank also offers its customers, among other things, access to 24-hour ATM service with no fees, free checking with interest, telephone banking, advanced technologies in mobile and internet banking for its consumer and business customers and safe deposit boxes. Our corporate administrative office is located in Mineola, New York where the Bank also operates a full-service branch office. Additional branches are located in Garden City Park, Hauppauge, Forest Hills, Flushing, Sunset Park, Manhattan and Chinatown, New York and Freehold, New Jersey. We opened the Bank’s Hauppauge Business Banking Center in Hauppauge, Suffolk County, New York in May 2023.
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In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. Accordingly, the Company will report a transition quarter that runs from October 1, 2023 through December 31, 2023 (the “Stub Period”). The Company’s next full fiscal year will be the calendar year January 1, 2024 through December 31, 2024. As a result, all references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to a quarter or year are to the Company’s historical fiscal quarter or fiscal year unless stated otherwise.
At September 30, 2023, on a consolidated basis we had $2.15 billion in total assets, $185.9 million in total stockholders’ equity, $1.87 billion in total loans, $1.74 billion in total deposits and 176 full-time equivalent employees.
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. Actual results could differ significantly from those estimates. 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. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and goodwill.
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 3, “Loans” to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Goodwill
Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level, at least annually or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Company has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.
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The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. As of August 31, 2023, the Company elected to proceed to a quantitative calculation to compare the reporting unit's fair value with its carrying value. The results of the evaluation indicated that fair value exceeded the carrying value of the reporting unit.
Goodwill impairment testing is performed annually as of August 31 and no impairment charges were incurred. Future unfavorable conditions could result in goodwill impairment. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) general macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (2) industry and market conditions such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development; (3) changes in cost factors such as increases in labor, or other costs that have a negative effect on earnings and cash flows; (4) overall financial performance for both actual and expected performance; (5) Entity and reporting unit–specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; litigation; or a change in the composition or carrying amount of net assets; and (6) a sustained decrease in share price in both absolute terms and relative to peers, if applicable. See Note 1, “Summary of Significant Accounting Policies” and Note 10, “Goodwill and Other Intangible Assets” to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Results of Operations for the year ended September 30, 2023 compared to the year ended September 30, 2022
For the year ended September 30, 2023, we recognized net income of $15.2 million, or $2.05 per diluted share (including Series A preferred shares), compared to net income of $23.6 million, or $3.68 per diluted share, for the year ended September 30, 2022. The decline in net income recorded for the fiscal year ended September 30, 2023 from the comparable 2022 period resulted primarily from a decrease in net interest income, a decrease in gain on sale of loans due to a lower volume of SBA loan sales, zero residential loan sales in the current year and depressed secondary market premiums early in the year, a decrease in purchase accounting accretion and an increase in non-interest expense. The increase in non-interest expense was primarily due to growth related increases in compensation and benefits, occupancy and equipment, data processing, professional fees, federal deposit insurance premiums and other expenses.
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Set forth below are our selected consolidated financial and other data. Our business is primarily the business of our Bank. This financial data is derived in part from, and should be read in conjunction with, our consolidated financial statements.
| | | | | | | |
|---|---|---|---|---|---|---|
| | September 30, | |||||
| (in thousands) | | 2023 | | 2022 | ||
| Selected Balance Sheet Data: | | | | | | |
| Securities available-for-sale, at fair value | | $ | 10,889 | | $ | 12,285 |
| Securities held-to-maturity | | 4,108 | | 4,414 | ||
| Loans | | 1,874,562 | | 1,623,531 | ||
| Total assets | | 2,149,535 | | 1,840,058 | ||
| Total deposits | | 1,735,070 | | 1,528,106 | ||
| Total stockholders' equity | | 185,907 | | 172,584 |
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | Year Ended September 30, | ||||||
| (dollars in thousands) | | 2023 | | 2022 | | ||
| Selected Operating Data: | | | | | | | |
| Total interest income | | $ | 105,043 | | $ | 68,429 | |
| Total interest expense | | 50,551 | | 7,175 | | ||
| Net interest income | | 54,492 | | 61,254 | | ||
| Provision for loan losses | | 3,432 | | 4,450 | | ||
| Total non-interest income | | 8,848 | | 8,872 | | ||
| Total non-interest expense | | 39,721 | | 35,181 | | ||
| Income before income taxes | | 20,187 | | 30,495 | | ||
| Income tax expense | | 5,023 | | 6,939 | | ||
| Net income | | 15,164 | | 23,556 | | ||
| | | | | | | | |
| Selected Financial Data and Other Data: | | | | | | | |
| Return on average equity | | 8.40 | % | 16.14 | % | ||
| Return on average assets | | 0.77 | % | 1.55 | % | ||
| Yield on average interest earning assets | | 5.49 | % | 4.66 | % | ||
| Cost of average interest bearing liabilities | | 3.18 | % | 0.62 | % | ||
| Net interest rate spread | | 2.31 | % | 4.04 | % | ||
| Net interest rate margin | | 2.85 | % | 4.18 | % | ||
| Average equity to average assets | | 9.13 | % | 9.59 | % |
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, 2023 was $54.5 million, a decrease of 11.0% from $61.3 million for the year ended September 30, 2022 primarily due to compression of the Company’s net interest margin.
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Net interest margin was 2.85% for the year ended September 30, 2023, a decrease of 133 basis points from 4.18% for the year ended September 30, 2022. The Company’s total interest income increased by $36.6 million, or 53.5%, as the average yield on interest-earning assets for the year ended September 30, 2023 was 5.49%, an increase of 83 basis points from 4.66% for the year ended September 30, 2022. However, total interest expense increased by $43.4 million, or 604.5%, reflecting the rapid and significant rise in interest rates driven by the Federal Reserve and, to a lesser extent, the Company’s decision to maintain increased liquidity as a result of recent industry events resulted in the higher cost of funds as the average rate on interest bearing liabilities increased to 3.18% from 0.62%.
Average interest-bearing liabilities were $1.59 billion for the year ended September 30, 2023, an increase of $430.5 million compared to $1.16 billion for the year ended September 30, 2022. The increase was primarily attributable to growth in interest-bearing deposits and borrowings, which increased by $240.5 million and $78.1 million, respectively, during fiscal year 2023.
The following table presents daily average balances, interest, yield/cost, and net interest margin on a fully tax-equivalent basis for the periods presented:
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended September 30, | |||||||||||||||
| | | 2023 | | 2022 | | ||||||||||||
| | | Average | | | Average | | Average | | | Average | | ||||||
| (dollars in thousands) | | Balance | | Interest | | Yield/Cost | | Balance | | Interest | | Yield/Cost | | ||||
| Assets: | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Loans(1)(2) | | $ | 1,771,878 | | $ | 97,560 | 5.51 | % | $ | 1,344,369 | | $ | 67,005 | 4.98 | % | ||
| Investment securities(1) | | 16,007 | | 806 | 5.04 | % | 12,788 | | 484 | 3.78 | % | ||||||
| Interest-earning balances and other | | | 126,740 | | | 6,677 | | 5.27 | % | | 109,922 | | | 940 | | 0.86 | % |
| Total interest-earning assets | | 1,914,625 | | 105,043 | 5.49 | % | 1,467,079 | | 68,429 | 4.66 | % | ||||||
| Other assets | | 62,248 | | | 55,295 | | | ||||||||||
| Total assets | | $ | 1,976,873 | | | $ | 1,522,374 | | | ||||||||
| | | | | | | | | | | | | | | | | | |
| Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Savings, NOW and money market deposits | | $ | 997,068 | | $ | 32,647 | 3.27 | % | $ | 737,057 | | $ | 3,166 | 0.43 | % | ||
| Time deposits | | 420,495 | | 11,204 | 2.66 | % | 313,435 | | 2,209 | 0.70 | % | ||||||
| Total interest-bearing deposits | | 1,417,563 | | 43,851 | 3.09 | % | 1,050,492 | | 5,375 | 0.51 | % | ||||||
| Borrowings | | 145,705 | | 5,396 | 3.70 | % | 82,362 | | 469 | 0.57 | % | ||||||
| Subordinated debentures | | 24,593 | | 1,304 | 5.30 | % | 24,533 | | 1,331 | 5.43 | % | ||||||
| Total interest-bearing liabilities | | 1,587,861 | | 50,551 | 3.18 | % | 1,157,387 | | 7,175 | 0.62 | % | ||||||
| Non-interest bearing deposits | | 184,051 | | | 206,484 | | | ||||||||||
| Other liabilities | | 24,390 | | | 12,526 | | | ||||||||||
| Total liabilities | | | 1,796,302 | | | | | | | | 1,376,397 | | | | | | |
| Stockholders' equity | | | 180,571 | | | | | | | | 145,977 | | | | | | |
| Total liabilities and stockholders' equity | | $ | 1,976,873 | | | | | | | $ | 1,522,374 | | | | | | |
| Net interest rate spread(3) | | | | | | | | 2.31 | % | | | | | | | 4.04 | % |
| Net interest income/margin(4) | | | | | $ | 54,492 | | 2.85 | % | | | | $ | 61,254 | | 4.18 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | There is no income tax exempt interest recorded for loans or investment securities for the periods presented. |
| Column 1 | Column 2 |
|---|---|
| (2) | Includes non-accrual loans. |
| Column 1 | Column 2 |
|---|---|
| (3) | Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| Column 1 | Column 2 |
|---|---|
| (4) | Net interest margin represents net interest income divided by average interest-earning assets. |
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The following table details the variances in net interest income caused by changes in interest rates and volume for the periods presented:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | 2023 vs. 2022 | |||||||
| | | Increase (decrease) due to change in: | |||||||
| (in thousands) | | Volume | Rate | Total | |||||
| Interest income | | | | | | | | | |
| Loans | | $ | 22,986 | | $ | 7,569 | | $ | 30,555 |
| Investment securities | | 139 | | 183 | | 322 | |||
| Interest-earning balances and other | | 165 | | 5,572 | | 5,737 | |||
| Total interest income | | 23,290 | | 13,324 | | | 36,614 | ||
| Interest expense | | | | | | | | | |
| Savings, NOW and money market deposits | | | 1,494 | | | 27,987 | | | 29,481 |
| Time deposits | | 983 | | 8,012 | | 8,995 | |||
| Borrowings | | 603 | | 4,324 | | 4,927 | |||
| Subordinated debentures | | (27) | | — | | (27) | |||
| Total interest expense | | 3,053 | | 40,323 | | 43,376 | |||
| Net increase (decrease) in net interest income | | $ | 20,237 | | $ | (26,999) | | $ | (6,762) |
Provision for Loan Losses
The provision for loan losses was $3.4 million for the year ended September 30, 2023 compared to $4.5 million for the year ended September 30, 2022. Total net charge-offs were $1.6 million and $0.2 million for the years ended September 30, 2023, and 2022, respectively.
Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include recent growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. See additional discussion under "Asset Quality - Analysis of Allowance for Loan Losses” section.
Non-Interest Income
| | | | | | | |
|---|---|---|---|---|---|---|
| | | | | | | |
| | | Year Ended September 30, | ||||
| (in thousands) | | 2023 | 2022 | |||
| Loan servicing and fee income | | $ | 2,709 | | $ | 2,885 |
| Service charges on deposit accounts | | 275 | | 232 | ||
| Net gain on sale of loans held for sale | | 4,093 | | 5,143 | ||
| Net gain on sale of investments available-for-sale | | — | | 105 | ||
| Other income | | 1,771 | | 507 | ||
| Total non-interest income | | $ | 8,848 | | $ | 8,872 |
Non-interest income was $8.8 million for the year ended September 30, 2023, a slight decrease of $24 thousand from $8.9 million for the year ended September 30, 2022. Net gain on the sale of loans held for sale decreased in 2023 due to a lower volume of SBA loan sales, zero residential loans sales in the current year and depressed secondary market premiums early in the year. In addition, offsetting this decline, in September 2023, the Company settled ongoing litigation and received a settlement payment of $975 thousand recorded in Other income.
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Non-Interest Expense
| | | | | | | |
|---|---|---|---|---|---|---|
| | | | | | | |
| | | Year Ended September 30, | ||||
| (in thousands) | 2023 | 2022 | ||||
| Salaries and employee benefits | | $ | 20,652 | | $ | 19,665 |
| Occupancy and equipment | | 6,359 | | 5,633 | ||
| Data processing | | 1,951 | | 1,629 | ||
| Acquisition costs | | — | | 250 | ||
| Professional fees | | 3,145 | | 2,568 | ||
| Federal deposit insurance premiums | | | 1,259 | | | 368 |
| Other expenses | | 6,355 | | 5,068 | ||
| Total non-interest expense | | $ | 39,721 | | $ | 35,181 |
Non-interest expense was $39.7 million for the year ended September 30, 2023, an increase of $4.5 million from $35.2 million for the year ended September 30, 2022. The increase in non-interest expense was primarily due to growth related increases in compensation and benefits, occupancy and equipment, data processing, professional fees, federal deposit insurance premiums and other expenses. At the beginning of the year, the FDIC instituted a 2bps increase in the base deposit insurance assessment rate which accounted for approximately 31% of the increase in our deposit insurance premiums year over year.
Income Taxes
Income tax expense was $5.0 million for the year ended September 30, 2023, a decrease from $6.9 million for the year ended September 30, 2022. The decline in income tax expense reflects lower net income in 2023. The effective income tax rate for the years ended September 30, 2023 and 2022 was 24.9% and 22.8%, respectively.
Analysis 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 statements of financial condition, while investment securities classified as held-to-maturity are shown at amortized cost in the consolidated statements of financial condition.
The following table summarizes the amortized cost and fair value of investment securities:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Balance at September 30, | ||||||||||
| | | 2023 | | 2022 | ||||||||
| (in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||
| Investment securities available-for-sale: | | | | | | | | | ||||
| U.S. GSE residential mortgage-backed securities | | $ | 322 | | $ | 142 | | $ | 375 | | $ | 242 |
| Corporate bonds | | 12,700 | | 10,747 | | 12,700 | | 12,043 | ||||
| Total investment securities available-for- sale | | 13,022 | | 10,889 | | 13,075 | | 12,285 | ||||
| Investment securities held-to-maturity: | | | | | | | | | | | | |
| U.S. GSE residential mortgage-backed securities | | 1,531 | | 1,353 | | 1,778 | | 1,618 | ||||
| U.S. GSE commercial mortgage-backed | | | | | ||||||||
| securities | | 2,577 | | 2,407 | | 2,636 | | 2,477 | ||||
| Total investment securities held-to-maturity | | 4,108 | | 3,760 | | 4,414 | | 4,095 | ||||
| Total investment securities | | $ | 17,130 | | $ | 14,649 | | $ | 17,489 | | $ | 16,380 |
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We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.
Our investment securities portfolio included no gross unrealized gains and gross unrealized losses of $2.5 million at September 30, 2023, compared to no gross unrealized gains and gross unrealized losses of $1.1 million at September 30, 2022. Management believes that all of its unrealized losses on individual investment securities at September 30, 2023 and 2022 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. We do not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.
The tables below illustrate the maturity distribution and weighted average yield and amortized cost of our investment securities as of September 30, 2023 and 2022, on a contractual maturity basis.
Investment Securities Portfolio by Expected Maturities(1)
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Balance at September 30, 2023 | |||||||||
| | | Available-for-Sale | | Held-to-Maturity | |||||||
| | Amortized | Weighted | Amortized | Weighted | |||||||
| (dollars in thousands) | | Cost | | Average Yield | | Cost | | Average Yield | |||
| U.S. GSE residential mortgage-backed securities | | | | | | | | | | | |
| Due after five years through ten years | | $ | — | — | % | $ | 1,080 | 2.31 | % | ||
| Due after ten years | | 322 | 3.28 | % | 451 | 2.66 | % | ||||
| | | 322 | 3.28 | % | 1,531 | 2.41 | % | ||||
| U.S. GSE commercial mortgage-backed securities | | | | | | | | | | | |
| Due after one year through five years | | — | — | | 2,577 | 2.68 | % | ||||
| | | — | — | | 2,577 | 2.68 | % | ||||
| Corporate bonds | | | | | | | | | | | |
| Due after five years through ten years | | 12,700 | 5.19 | % | — | — | % | ||||
| | | 12,700 | 5.19 | % | — | — | % | ||||
| Total investment securities | | $ | 13,022 | 5.14 | % | $ | 4,108 | 2.58 | % |
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Balance at September 30, 2022 | |||||||||
| | | Available-for-Sale | | Held-to-Maturity | |||||||
| | Amortized | Weighted | Amortized | Weighted | |||||||
| (dollars in thousands) | | Cost | | Average Yield | | Cost | | Average Yield | |||
| U.S. GSE residential mortgage-backed securities | | | | | | | | | | | |
| Due after five years through ten years | | $ | — | — | % | $ | 1,256 | 2.30 | % | ||
| Due after ten years | | 375 | 3.02 | % | 522 | 2.66 | % | ||||
| | | 375 | 3.02 | % | 1,778 | 2.41 | % | ||||
| U.S. GSE commercial mortgage-backed securities | | | | | | | | | | | |
| Due after one through five years | | — | — | | 2,636 | 2.68 | % | ||||
| | | — | — | | 2,636 | 2.68 | % | ||||
| Corporate bonds | | | | | | | | | | | |
| Due after five years through ten years | | 12,700 | 5.19 | % | — | — | % | ||||
| | | 12,700 | 5.19 | % | — | — | % | ||||
| Total investment securities | | $ | 13,075 | 5.13 | % | $ | 4,414 | 2.57 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | There is no income tax exempt interest recorded for investment securities for the periods presented. |
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Loans
At September 30, 2023, our loan portfolio was $1.87 billion, an increase of $251.1 million from $1.62 billion at September 30, 2022. Year over year growth was concentrated primarily in residential, commercial real estate and C&I loans.
For the year ended September 30, 2023, the Bank realized an increase in residential mortgage loans of $139.9 million, representing growth of approximately 27%. Loans secured by commercial real estate properties increased by $64.2 million, representing growth of approximately 14%. Commercial and industrial loans increased by $39.7 million, representing growth of approximately 87%.
The following table provides the composition of the Company’s loan portfolio by type at the dates indicated:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At September 30, | | At September 30, | ||||||||
| | 2023 | | 2022 | |||||||||
| | | Amount | | Percent | | Amount | | Percent | ||||
| | | (Dollars in thousands) | ||||||||||
| Real estate: | | | | | | | | | ||||
| Residential | | $ | 657,332 | | 35.07 | % | | $ | 516,258 | | 31.80 | % |
| Multi-family | | 578,895 | | 30.88 | % | | 575,061 | | 35.42 | % | ||
| Commercial | | 537,314 | | 28.66 | % | | 472,984 | | 29.13 | % | ||
| Total real estate | | 1,773,541 | | 94.61 | % | | 1,564,303 | | 96.35 | % | ||
| Commercial and industrial | | 87,575 | | 4.67 | % | | 46,285 | | 2.85 | % | ||
| Construction | | 13,021 | | 0.70 | % | | 12,907 | | 0.80 | % | ||
| Consumer | | 425 | | 0.02 | % | | 36 | | — | % | ||
| Total loans | | 1,874,562 | | 100.00 | % | | 1,623,531 | | 100.00 | % | ||
| Allowance for loan losses | | 14,686 | | | | | 12,844 | | | |||
| Total loans, net | | $ | 1,859,876 | | | | | $ | 1,610,687 | | | |
The following table provides information for the contractual maturities of our total loan portfolio at September 30, 2023. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
| | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | Commercial | | | | | | | | | | ||
| | | Residential | | Multi- | | Commercial | | and | | | | | | | | | | ||||
| Time to Reprice/Mature | | Real Estate | | Family | | Real Estate | | Industrial | | Construction | | Consumer | | Total | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | |
| One year or less | $ | 139,821 | $ | 21,527 | $ | 155,703 | | $ | 76,229 | | $ | 11,726 | | $ | — | $ | 405,006 | ||||
| More than one year to five years | | | 381,071 | | | 555,147 | | | 358,819 | | | 9,300 | | | 1,295 | | | — | | | 1,305,632 |
| More than five years to fifteen years | | | 61,827 | | | 2,221 | | | 22,300 | | | 2,046 | | | — | | | 425 | | | 88,819 |
| After fifteen years | | 74,613 | | — | | 492 | | — | | — | | — | | 75,105 | |||||||
| Total | | $ | 657,332 | | $ | 578,895 | | $ | 537,314 | | $ | 87,575 | | $ | 13,021 | | $ | 425 | | $ | 1,874,562 |
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The following table presents the Company’s loans held for investment as of September 30, 2023 that are contractually due after September 30, 2024 according to rate type and loan category:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Due After September 30, 2024 | ||||||||
| (in thousands) | | Fixed | | Adjustable | | Total | |||
| Real estate: | | | | | | | | | |
| Residential | | $ | 139,642 | | $ | 377,869 | | $ | 517,511 |
| Multi-family | | 19,549 | | 537,819 | | 557,368 | |||
| Commercial | | | 64,789 | | | 316,822 | | | 381,611 |
| Total real estate | | | 223,980 | | | 1,232,510 | | | 1,456,490 |
| Commercial and industrial | | 8,150 | | 3,196 | | 11,346 | |||
| Construction | | — | | 1,295 | | 1,295 | |||
| Consumer | | 425 | | — | | 425 | |||
| Total loans | | $ | 232,555 | | $ | 1,237,001 | | $ | 1,469,556 |
Credit Policies and Procedures
Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers, reviewed by Credit Administration, and a sample of these loans are tested by the Company’s third-party independent loan reviewer. The testing program includes an evaluation of a sample of both new and existing loans, including large loans, loans that are identified as having potential credit weaknesses, and loans past due 90 days or more and still accruing. We strive to maintain the loan portfolio in accordance with our loan underwriting policies that result in loans specifically tailored to the needs of our market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. Generally, we do not engage in significant volumes of lease financing, highly leveraged transactions or loans to customers domiciled outside the United States.
Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process we maintain an internally-classified, adversely-risk-rated loan list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the allowance is allocated based on management’s judgment and historical experience.
Acquired loans are recorded at fair value as of the loan’s acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date, recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in additional allowance for loan losses.
A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. If applicable, the Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.
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Asset Quality
We consider asset quality to be of primary importance and employ a formal internal loan review process to ensure adherence to our lending policy as approved by our Board of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. The Company’s internal credit risk review function, through focused review and sampling, validates the accuracy of commercial loan risk grades. Each loan risk grade corresponds to an estimated default probability. In addition, as a given loan’s credit quality improves or deteriorates, the Company will update the borrower’s risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in our market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.
Nonperforming Assets
The following table presents information regarding nonperforming assets for the periods presented. The Company did not own any repossessed property for the periods presented.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Balance at September 30, | |||||
| (dollars in thousands) | | | 2023 | | | 2022 | |
| Nonaccrual loans | | $ | 14,933 | | $ | 12,281 | |
| Loans greater than 90 days past due | | 128 | | 1,231 | | ||
| Total nonperforming assets | | $ | 15,061 | | $ | 13,512 | |
| Performing TDRs | | $ | 1,727 | | $ | 2,370 | |
| Nonaccrual loans as a percentage of loans held-for- investment | | 0.80 | % | 0.76 | % | ||
| Non-performing assets as a percentage of total assets | | 0.70 | % | 0.73 | % |
Total nonaccrual loans were $14.9 million at September 30, 2023, an increase from total nonaccrual loans of $12.3 million at September 30, 2022. At September 30, 2023, non-performing assets totaled $15.1 million of which $8.4 million represented legacy Savoy originated loans that were either written down to fair value at the acquisition date or are 100% guaranteed by the SBA. Subsequent to September 30, 2023, a $1.1 million non-performing residential investor loan paid in full and $0.1 million in nonaccrual interest was collected.
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Analysis of Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases the allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least monthly. In addition, on a monthly basis our Board of Directors reviews the loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss allowance. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors deriving from our history of operations. In addition to our history, management also considers the loss experience and allowance levels of other similar banks and the historical experience encountered by our management and senior lending officers prior to joining us. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan 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 $14.7 million at September 30, 2023, an increase of $1.8 million from $12.8 million at September 30, 2022 due to growth in the loan portfolio. The ratio of the allowance for loan losses to total portfolio loans was 0.78% and 0.79% at September 30, 2023, and 2022, respectively.
The Company experienced $1.6 million in net charge-offs during the year ended September 30, 2023, an increase compared to net charge-offs of $0.2 million during the year ended September 30, 2022. The cumulative charge-offs of $1.2 million during the fourth fiscal quarter were primarily related to one multi-family loan for which the Bank had a specific reserve approximately equal to the charge-off for that loan. The Company has recorded recoveries of $0.1 million and $0 during the years ended September 30, 2023 and 2022, respectively.
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The following table presents the allocation of the allowance for loan losses by loan category for the periods presented:
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At September 30, | |||||||||
| | | | 2023 | | | 2022 | |||||
| | | | % of | | | % of | |||||
| | | | | | Gross | | | | | Gross | |
| (dollars in thousands) | | Amount | | Loans | | Amount | | Loans | | ||
| Residential real estate | | $ | 4,778 | 0.73 | % | $ | 3,951 | 0.77 | % | ||
| Multi-family | | 4,206 | 0.73 | % | 4,308 | 0.75 | % | ||||
| Commercial real estate | | 3,197 | 0.60 | % | 3,707 | 0.78 | % | ||||
| Commercial and industrial | | 2,368 | 2.77 | % | 761 | 1.66 | % | ||||
| Construction | | 104 | 0.80 | % | 115 | 0.89 | % | ||||
| Consumer | | 33 | 9.82 | % | 2 | 9.09 | % | ||||
| Total allowance for loan losses | | $ | 14,686 | 0.79 | % | $ | 12,844 | 0.79 | % |
The following table presents information related activity in the allowance for loan losses for the periods presented:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Year Ended September 30, | |||||
| (dollars in thousands) | | 2023 | | 2022 | |||
| Beginning balance | | $ | 12,844 | | $ | 8,552 | |
| Provision for loan losses | | 3,432 | | 4,450 | | ||
| Charge-Offs: | | | | ||||
| Residential real estate | | — | | — | | ||
| Multi-family | | (959) | | (66) | | ||
| Commercial real estate | | — | | — | | ||
| Commercial and industrial | | (734) | | (92) | | ||
| Construction | | — | | — | | ||
| Consumer | | — | | — | | ||
| Total loan charge-offs | | (1,693) | | (158) | | ||
| Recoveries: | | | | | | | |
| Commercial and industrial | | 103 | | — | | ||
| Total recoveries | | 103 | | | — | | |
| Total net charge-offs | | (1,590) | | (158) | | ||
| Ending balance | | $ | 14,686 | | $ | 12,844 | |
| Allowance for loan losses to total loans held-for- investment(1) | | 0.78 | % | 0.79 | % | ||
| Net charge-offs to average loans held-for-investment | | 0.09 | % | 0.01 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | Includes loans acquired from Savoy that do not carry an allowance for loans losses as of September 30 2023 and 2022. |
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 $192.6 million and $149.9 million at September 30, 2023 and 2022, respectively. These liquid assets may include assets that have been pledged primarily against municipal deposits or borrowings. Liquidity is also provided by the maintenance of a base of core deposits, cash and non-interest-bearing deposits due from banks, the ability to sell or pledge marketable assets and access to lines of credit.
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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. Daily, management receives a current cash position update to ensure that all obligations are satisfied. On a weekly basis, appropriate senior management receives a current liquidity position report and a ninety day forecasted cash flow to ensure that all short-term obligations will be met and there is sufficient liquidity available.
At September 30, 2023, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $534.7 million or approximately 204% of uninsured deposit balances.
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, 2023 were $1.74 billion, an increase of $207.0 million from total deposits of $1.53 billion at September 30, 2022. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 85% of total deposits at September 30, 2023.
The following is our average deposits and weighted-average interest rates paid thereon for the past two fiscal years:
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended September 30, | ||||||||||
| | | 2023 | | 2022 | | ||||||
| | | Average | Average | | | Average | Average | ||||
| (dollars in thousands) | | Balance | Rate | | | Balance | Rate | ||||
| Non-interest bearing demand | | $ | 184,051 | 0.00 | % | $ | 206,484 | 0.00 | % | ||
| Savings | | 87,637 | 1.30 | % | | 77,756 | 0.41 | % | |||
| NOW | | 545,827 | 3.40 | % | | 483,400 | 0.44 | % | |||
| Money market | | 363,604 | 3.57 | % | | 175,901 | 0.42 | % | |||
| Time deposits | | 420,495 | 2.66 | % | | 313,435 | 0.70 | % | |||
| Total average deposits | | $ | 1,601,614 | 2.74 | % | $ | 1,256,976 | 0.43 | % |
The Company had municipal deposits of $313.2 million at September 30, 2023, which comprised 18.1% of total deposits, a decrease of $103.7 million or 24.9% from $416.9 million, at September 30, 2022.
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Our sources of wholesale funding included brokered certificates of deposit, listing service certificates of deposit and insured cash sweep (“ICS”) reciprocal deposits in excess of 20% of total liabilities, whose balances totaled approximately $102.0 million, $15.9 million and $18.1 million, or 5.9%, 0.9% and 1.0% of total deposits, respectively, at September 30, 2023. We utilized brokered certificates of deposit and listing service certificates of deposit as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our brokered certificates of deposit we utilized interest rate swap contracts to effectively extend their duration and to fix their cost.
As of September 30, 2023 and 2022, we held $106.9 million and $87.9 million, respectively, of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The following table sets forth the maturity of time deposits exceeding the FDIC insurance limit as of September 30. 2023:
| | | | |
|---|---|---|---|
| | | September 30, | |
| (in thousands) | 2023 | ||
| Three months or less | | $ | 104,363 |
| Over three months through six months | | 253 | |
| Over six months through 12 months | | 1,005 | |
| Over 12 months | | 1,267 | |
| Total | | $ | 106,888 |
See Note 6, “Deposits” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
Borrowings
The total carrying value of our borrowings was $204.5 million at September 30, 2023, an increase of $78.2 million from $126.3 million at September 30, 2022. The Company added $100.7 million of extended duration FHLB term advances in March 2023 to provide additional liquidity and enhance the interest rate sensitivity profile. At September 30, 2023, $67.9 million of these borrowings were classified as short-term, while the remaining was classified as long- term. Short-term borrowings are comprised of short-term FHLB advances. Long-term funding is comprised of long-term FHLB advances and subordinated debentures. The Company will prepay FHLB advances from time to time as funding needs change. See Note 7, “Borrowings” and Note 8, “Subordinated Debentures” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
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 bear interest, payable semi-annually, at the rate of 5.00% per annum, until October 15, 2025. From and including October 15, 2025 through maturity, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month Secured Overnight Financing Rate 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 an existing holding company note in October 2020 and used the remainder of the net proceeds for acquisition financing and general corporate purposes, including contributing equity capital to the Bank.
At September 30, 2023, the Company had $49.0 million in overnight borrowings and $126.7 million in term borrowings outstanding both with the FHLB. At September 30, 2023, the Company had access to an additional $291.2 million in FHLB lines of credit. At September 30, 2023, approximately $92.0 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, 2023.
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Derivatives
We utilize derivative instruments in the form of interest rate swaps to hedge our exposure to interest rate risk in conjunction with our overall asset/liability management process. In accordance with accounting requirements, we formally designate all of our hedging relationships as either fair value hedges or cash flow hedges, and document the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness.
At September 30, 2023, our derivative instruments were comprised of interest rate swaps with a total notional amount of $75.0 million. These instruments are intended to manage the interest rate exposure relating to certain brokered certificates of deposit.
Additional information regarding our use of interest rate derivatives is presented in Note 1 and Note 9 to Consolidated Financial Statements contained in Item 8.
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, 2023 and 2022, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $119.6 million and $73.1 million, respectively.
Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2023 and 2022, letters of credit outstanding were approximately $0.5 million and $0.8 million, respectively.
Capital Resources
Total stockholders’ equity was $185.9 million at September 30, 2023, an increase of $13.3 million from stockholders’ equity of $172.6 million at September 30, 2022. The increase was primarily due to net income earned for the year ended September 30, 2023, less cash dividends paid to shareholders. Accumulated other comprehensive loss, net of tax, was $1.3 million, reflecting the relatively small size of the Company’s investment portfolio and representing approximately 0.71% of total capital at September 30, 2023.
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.
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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, | |||||
| (dollars in thousands) | | 2023 | | 2022 | | ||
| Total capital | $ | 205,785 | $ | 191,355 | |||
| Tier 1 capital | | 190,928 | | 178,340 | | ||
| Common equity tier 1 capital | | 190,928 | | 178,340 | | ||
| Total capital ratio | | 14.60 | % | 16.32 | % | ||
| Tier 1 capital ratio | | 13.55 | % | 15.21 | % | ||
| Common equity tier 1 capital ratio | | 13.55 | % | 15.21 | % | ||
| Tier 1 leverage ratio | | 9.16 | % | 10.90 | % |
Under a policy of the Federal Reserve applicable to bank holding companies with less than $3.0 billion in consolidated assets, the Company is not subject to consolidated regulatory capital requirements.
On October 5, 2023, the Company announced that the Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Company may repurchase up to 366,050 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in the open market as conditions allow, or in privately negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has not made any stock repurchases under the program. The remaining buyback authority under the share repurchase program remained at 366,050 shares as of December 21, 2023, the filing date of this Annual Report on Form 10-K.