Hanover Bancorp(HNVR) - 2022 Q4 - Annual Report

Part I Business Overview Hanover Bancorp, Inc. is a New York-based holding company for Hanover Community Bank, offering personalized community commercial banking services in the New York metropolitan area, with significant growth driven by strategic acquisitions - Hanover Bancorp, Inc. is the holding company for Hanover Community Bank, a New York State-chartered community commercial bank, focused on providing personalized services and products to the New York metropolitan area[16] - The company achieved significant growth through the acquisitions of Chinatown Federal Savings Bank (2019) and Savoy Bank (2021), enhancing funding sources and expanding commercial banking and SBA lending capabilities[18][19] - The company's loan portfolio is diversified, including one-to-four family residential mortgages (with a focus on non-conforming loans), commercial real estate loans, commercial and industrial loans, and SBA/USDA guaranteed loans, with plans to expand its guaranteed lending business nationwide[21][23][26][29][33] - Deposit products include retail and commercial demand deposits, NOW accounts, money market accounts, savings accounts, and time deposits, with municipal deposits being a significant source of low-cost funding[34][35][36] - As of September 30, 2022, the company had 162 full-time employees, offering comprehensive benefits and market-competitive compensation packages, and implementing flexible work arrangements to attract and retain talent[37] - The company faces intense competition from other banks, non-bank institutions, internet banks, money market funds, brokerage firms, and FinTech companies[39] Overview Hanover Bancorp, Inc. is a New York-based holding company for Hanover Community Bank, providing personalized community commercial banking services in the New York metropolitan area - Hanover Bancorp, Inc. is the holding company for Hanover Community Bank, a New York State-chartered community commercial bank, focused on providing personalized services and products to the New York metropolitan area[16] Key Financial Data as of September 30, 2022 | Indicator | Amount (Millions of USD) | | :--- | :--- | | Total Assets | 1,840 | | Total Loans | 1,620 | | Total Deposits | 1,530 | | Total Stockholders' Equity | 172.6 | Lending Activities The company's lending strategy focuses on maintaining a diversified loan portfolio across various customer types, loan products, geographies, and industries, including residential, commercial real estate, C&I, and SBA/USDA guaranteed loans - The company's lending strategy is to maintain a diversified loan portfolio, including individual and commercial customers, various loan products (such as owner-occupied commercial real estate, commercial loans), geographical locations, and industries[21] - The company primarily offers individual and commercial loans (secured and unsecured), SBA and USDA guaranteed loans, revolving lines of credit, commercial mortgage loans, and one-to-four family non-conforming mortgage loans[21][22] - Residential real estate loans primarily consist of non-conforming, alternative documentation single-family residential mortgages, with an average loan-to-value (LTV) ratio of 56%[23] - Commercial real estate loans include owner-occupied and non-owner-occupied commercial properties, multi-family residential properties, and construction and land development loans, with a weighted average LTV of 61%[26] - Commercial and Industrial (C&I) loans are primarily extended to small and medium-sized businesses for working capital, business expansion, and trade finance, accounting for 2.8% of total loans as of September 30, 2022[29] - SBA loans are primarily SBA 7(a) floating-rate loans, with 75% of the guaranteed portion typically sold, and plans to expand the guaranteed lending business nationwide[31][33] Deposits and Funding The company offers a range of deposit products, with municipal banking serving as a significant source of low-cost funding for its interest-earning assets - Deposit products include demand deposits, NOW accounts, money market accounts, savings accounts, and time deposits[34] - Municipal banking is a significant deposit business, with municipal deposits totaling $416.9 million and an average interest rate of 1.19% as of September 30, 2022[35] - Deposits are the primary funding source for the company's interest-earning assets, while also generating non-interest income through various fees[36] Employees and Human Capital Resources As of September 30, 2022, the company employed 162 full-time staff, providing competitive compensation and benefits, and utilizing flexible work arrangements to attract and retain talent - As of September 30, 2022, the company had 162 full-time employees, offering comprehensive benefits (medical, 401(k) matching, paid time off, etc.) and market-competitive compensation packages[37] - The company implements flexible work arrangements to remain competitive and is committed to attracting and retaining top talent[37] Competition The company operates in a highly competitive financial services industry, vying with various institutions for customer retention, new loans, and deposits - The financial services industry is highly competitive, with the company competing for loans, deposits, and financial services with various banks, non-bank institutions, internet banks, money market funds, brokerage firms, and FinTech companies[39] - Competition primarily manifests in customer retention, acquisition of new loans and deposits, scope and type of services, and interest rates on deposits and loans[39] Supervision and Regulation The company operates under extensive regulation by New York State and federal authorities, with a framework designed to protect depositors and ensure financial stability, impacting lending, capital, and operational activities - The bank is extensively regulated by the New York State Department of Financial Services (DFS) and the Federal Deposit Insurance Corporation (FDIC), while the holding company is regulated by the Board of Governors of the Federal Reserve System (FRB)[40][41] - The regulatory framework aims to protect depositors, customers, and the deposit insurance fund, granting regulators broad discretion[40] - The Economic Growth, Regulatory Relief, and Consumer Protection Act modified certain financial reform rules, providing regulatory relief for smaller depository institutions with assets under $10 billion[42] - Bank lending and investment authority are restricted by federal and state laws, with total loans to a single borrower generally limited to 15% of the bank's capital, surplus, and undivided profits (with an additional 10% for secured loans)[43][44] - Federal banking agencies have established real estate lending standards and guidelines, requiring banks to develop diversified, prudent underwriting standards and risk management practices, particularly for commercial real estate loan concentrations[45][46] - Bank deposits are insured by the FDIC up to $250,000 per depositor, and the FDIC has the authority to adjust insurance assessment rates[47][48][50] - The bank is subject to risk-weighted and leverage capital standards, and as of September 30, 2022, was deemed a 'well-capitalized' institution[52] - Basel III requires banks and bank holding companies to maintain higher capital levels and introduces a capital conservation buffer, restricting dividends and share repurchases[54][56][57] - Federal law mandates 'prompt corrective action' for institutions failing to meet minimum capital requirements, categorizing them into five levels based on capital adequacy[62][64] - New York State-chartered bank dividends are restricted by net income, requiring DFS approval for amounts exceeding specified limits, and must maintain adequate capital conservation buffers[66] - The Federal Reserve Board, OCC, FDIC, and other agencies have issued incentive compensation guidelines aimed at preventing excessive risk-taking[67] - Sections 23A and 23B of the Federal Reserve Act and FRB's Regulation W restrict transactions between banks and their affiliates, requiring fair terms[68][69][71] - Loans from the bank to executive officers, directors, 10% or more shareholders, and their related interests are subject to conditions and restrictions under Section 22(h) of the Federal Reserve Act and Regulation O[72] - The DFS and FDIC possess broad enforcement powers, including corrective actions, fines, removal of officers and directors, and even appointment of conservators or liquidators[73] - Banks are required to submit periodic reports to and undergo examinations by the DFS and FDIC, and pay annual assessment fees[75][76] - Banks are subject to the Community Reinvestment Act (CRA) and Fair Lending Laws, requiring them to meet the credit needs of their communities, particularly low- and moderate-income areas, and undergo regular evaluations[77][78] - Banks are subject to the Bank Secrecy Act (BSA) and the USA PATRIOT Act, requiring them to establish anti-money laundering compliance programs, file suspicious activity reports, verify customer identities, and monitor account activity[78][79][81][82] - Banks are subject to federal and state privacy laws, requiring them to protect customer information and potentially notify affected individuals and regulators in the event of a data breach[83] - The Consumer Financial Protection Bureau (CFPB) has broad rulemaking authority over consumer protection laws, with the FDIC and DFS responsible for overseeing bank compliance with these laws[84] - The CARES Act provided for COVID-19 related loan modifications, temporary reduction in the community bank leverage ratio, the Paycheck Protection Program (PPP), and payment deferrals for federally backed mortgages[85][86] Risk Factors The company faces diverse risks, including economic and market uncertainties from the COVID-19 pandemic, lending-specific risks such as SBA loan dependency and commercial real estate concentration, and broader operational, regulatory, and technological challenges, all potentially impacting financial performance - The COVID-19 pandemic poses significant risks to the company's business and operating results, potentially leading to borrower non-performance, increased allowance for loan losses, decreased consumer and business spending, and higher operating costs[112][113][114][117] - The company's business is concentrated in the New York metropolitan area, where an economic downturn or changes in local regulations could adversely affect asset quality, customer business, and business expansion[120][121] - A significant portion of the company's loans are collateralized by real estate, and a downturn in the local real estate market could materially impair collateral values and increase the allowance for loan losses[123] - The SBA lending business relies on the U.S. federal government, and any changes to SBA programs or rules, or government default/shutdown, could impact profitability[132] - The unguaranteed portion of SBA loans held by the company carries higher credit risk, and the sale of guaranteed portions involves repurchase risk[135][136] - Expanding SBA and other government-guaranteed lending operations beyond the primary trade area may expose the company to greater geographic and legal risks[138] - Concentration in commercial real estate loans may face heightened scrutiny from banking regulators, potentially limiting growth and affecting earnings[140][141] - The company primarily originates non-conforming residential mortgage loans, which have lower liquidity and higher risk, potentially facing pricing risk and repurchase demands[142][144] - Changes in interest rates could reduce net interest income, affect loan demand and prepayment rates, and increase deposit competition[145][146] - Lending activities inherently involve risks, particularly for small and medium-sized businesses, which could lead to unexpected losses[147][152] - The determination of the allowance for loan losses is highly subjective, and actual losses may exceed the allowance, or regulators may require an increase in the allowance[153][154] - The implementation of the Current Expected Credit Loss (CECL) accounting standard may result in increased and volatile allowance for loan losses[155] - An increase in non-performing assets will adversely affect net income, including reduced interest income, increased allowance for loan losses, higher non-interest expenses, and diversion of management's attention[156][157] - The company relies on data and models for decision-making, and erroneous data or models could lead to poor decisions or regulatory scrutiny[159][161] - Failure to effectively manage liquidity or inability to obtain additional capital on acceptable terms could hinder the company's growth[162][163] - Failure to effectively execute strategic plans or successfully integrate acquired businesses could adversely affect business and operating results[165][166][168] - The company's rapid growth places strain on management capabilities, administrative, and operational infrastructure, requiring continuous investment and resource allocation[217] - The financial services industry is highly competitive, and failure to compete successfully could adversely affect business, financial condition, or operating results[174][175][176][177] - Failure to continuously invest in innovation and new technologies could negatively impact business and earnings[178] - The company is highly dependent on its executive team and other key personnel, and unexpected departures or inability to attract new talent would have an adverse impact[179][180] - The company operates in a highly regulated environment, and failure to comply with laws and regulations or changes in regulations could increase costs, restrict business activities, and lead to penalties[181][183][184][186] - Increases in FDIC insurance premiums could adversely affect earnings and operating results[187] - Changes in tax laws and regulations could materially adversely affect business, financial condition, and operating results, particularly for the real estate market and loan demand[188][190][191] - Failure to comply with stringent capital requirements could lead to regulatory criticism, restrictions, and demands[192][194] - Failure to comply with the Bank Secrecy Act and anti-money laundering regulations could result in fines, regulatory actions, and restricted business plans[195][196] - The Federal Reserve Board may require the company to inject capital into the bank, but the company may not be able to obtain sufficient capital resources[199][200][201] - The discontinuation of LIBOR could lead to market volatility and affect the market value and liquidity of loans[202] - Cyberattacks or other security breaches could adversely affect operations, net income, or reputation[203][204][205][206][208] - Failure to effectively implement new technologies or inability to obtain cost-effective technology could negatively impact business and earnings[209][210] - Various operational risks, such as technology system failures, human error, fraud, internal control failures, and external events (e.g., pandemics, natural disasters), could negatively impact earnings[212] - The company's reputation is critical to its business success, and damage to its reputation could materially adversely affect operating results[213] - The company's rapid growth may not be sustainable, and growth-related expenses could impact profitability[214][215][216] - The company's operations could be disrupted by issues with third-party service providers, termination of services, or failure to comply with banking regulations[223][224] - Pandemics, natural disasters, acts of terrorism, and global conflicts could negatively impact business and operations[225][226] - Legal and regulatory proceedings could result in significant costs and diversion of management's attention, and any adverse rulings could adversely affect the business[228] - Societal responses to climate change could adversely affect business and performance, including through impacts on customers[229] - The company's common stock price may fluctuate, influenced by various factors including economic conditions, operating results, analyst expectations, and industry changes[230][231] - Holders of existing and future debt obligations have priority over common stock in liquidation, and the company's dividend policy may change at any time and is subject to restrictions[233][234] Unresolved Staff Comments As of the reporting period, the company has no unresolved staff comments - The company has no unresolved staff comments[235] Properties The company owns its administrative headquarters and one branch, leasing six others primarily in New York and New Jersey, with a new branch planned for early 2023 in Hauppauge, New York - The company owns its administrative headquarters and the Garden City Park branch, and leases six other branch locations, primarily in New York (Kings, Nassau, New York, Queens Counties) and New Jersey (Monmouth County)[236][237] - The company has received regulatory approval and expects to open a new branch in Hauppauge, New York, in early 2023[236][247] Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business but currently has no litigation expected to materially adversely affect its operations or financial condition - The company is involved in various legal proceedings from time to time in the ordinary course of its business, but currently has no legal proceedings expected to materially adversely affect its business[238] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[239] Part II Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities Hanover Bancorp, Inc.'s common stock began trading on Nasdaq Global Select Market on May 11, 2022, with 512 registered holders as of September 30, 2022, and the company plans to continue quarterly cash dividends subject to board approval and regulatory limits - Hanover Bancorp, Inc.'s common stock began trading on the Nasdaq Global Select Market under the symbol 'HNVR' on May 11, 2022[242] Common Stock Information as of September 30, 2022 | Indicator | Value | | :--- | :--- | | Number of Registered Holders | 512 | - The company plans to continue paying quarterly cash dividends, subject to board approval and regulatory restrictions, with future payments dependent on factors such as earnings, financial condition, liquidity, and capital requirements[243] Selected Financial Data This item is not applicable to the company - This item is not applicable[244] Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved significant financial growth in fiscal year 2022, with substantial increases in net income and net interest income driven by growth in interest-earning assets and an expanded net interest margin, while maintaining adequate allowance for loan losses and strong capital levels - The company achieved significant financial growth in fiscal year 2022, with substantial increases in net income and net interest income, primarily driven by growth in interest-earning assets and an expanded net interest margin[255][259] Comparison of Operating Results for Fiscal Years 2022 and 2021 | Indicator (Thousands of USD) | September 30, 2022 | September 30, 2021 | Change Amount | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Net Income | 23,556 | 10,851 | 12,705 | 117.1% | | Diluted Earnings Per Share | 3.68 | 2.28 | 1.40 | 61.4% | | Net Interest Income | 61,254 | 41,708 | 19,546 | 46.9% | | Net Interest Margin | 4.18% | 3.97% | 0.21% | - | | Provision for Loan Losses | 4,450 | 1,000 | 3,450 | 345.0% | | Non-Interest Income | 8,872 | 3,349 | 5,523 | 165.0% | | Non-Interest Expense | 35,181 | 30,005 | 5,176 | 17.2% | | Income Tax Expense | 6,939 | 3,201 | 3,738 | 116.8% | - The loan portfolio continued to grow, particularly in multi-family residential and commercial real estate loans, while PPP loan balances significantly decreased[278][279] Loan Portfolio Composition as of September 30, 2022 (Thousands of USD) | Loan Type | September 30, 2022 | September 30, 2021 | Change Amount | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Residential Real Estate | 515,316 | 444,011 | 71,305 | 16.1% | | Multi-Family Residential | 574,413 | 266,294 | 308,119 | 115.7% | | Commercial Real Estate | 472,511 | 348,641 | 123,870 | 35.5% | | Commercial and Industrial | 45,758 | 172,274 | (126,516) | -73.4% | | Construction and Land Development | 12,871 | 15,374 | (2,503) | -16.3% | | Consumer Loans | 22 | 11 | 11 | 100.0% | | Total Loans | 1,620,891 | 1,246,605 | 374,386 | 30.0% | | PPP Loans (included in Commercial and Industrial) | 10,200 | 140,400 | (130,200) | -92.7% | - The company strategically replaced high-cost consumer deposits with lower-cost municipal deposits, reducing the average cost of interest-bearing liabilities from 0.81% in fiscal year 2021 to 0.62% in fiscal year 2022[261][308] Deposit Composition as of September 30, 2022 (Thousands of USD) | Deposit Type | September 30, 2022 | September 30, 2021 | Change Amount | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Non-Interest-Bearing Demand Deposits | 219,225 | 191,537 | 27,688 | 14.5% | | Savings, NOW, and Money Market | 969,808 | 595,289 | 374,519 | 62.9% | | Time Deposits | 339,073 | 377,836 | (38,763) | -10.3% | | Total Deposits | 1,528,106 | 1,164,662 | 363,444 | 31.2% | - Total non-performing loans increased from $9.5 million in fiscal year 2021 to $13.5 million in fiscal year 2022, primarily driven by credit-deteriorated loans acquired from Savoy[291] Non-Performing Assets as of September 30, 2022 (Thousands of USD) | Indicator | September 30, 2022 | September 30, 2021 | Change Amount | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Non-Accrual Loans | 12,281 | 7,028 | 5,253 | 74.7% | | Loans Past Due 90 Days or More | 1,231 | 2,519 | (1,288) | -51.1% | | Total Non-Performing Assets | 13,512 | 9,547 | 3,965 | 41.5% | | Non-Performing Assets to Total Assets | 0.73% | 0.64% | 0.09% | - | | Allowance for Loan Losses | 12,844 | 8,552 | 4,292 | 50.2% | | Allowance for Loan Losses to Total Loans | 0.79% | 0.69% | 0.10% | - | - As of September 30, 2022, the company's stockholders' equity was $172.6 million, an increase of $50.1 million from 2021, primarily due to net proceeds from the May 2022 common stock offering and net income[317] - The bank's capital levels were rated 'well-capitalized' by federal regulators, in compliance with Basel III capital rules[320][494] Business Overview Hanover Bancorp, Inc. is the holding company for Hanover Community Bank, a New York State-chartered community commercial bank, offering a full range of financial services and products - Hanover Bancorp, Inc. is the holding company for Hanover Community Bank, a New York State-chartered community commercial bank, offering a full range of financial services and products[246][247] Consolidated Financial Data as of September 30, 2022 | Indicator | Amount (Millions of USD) | | :--- | :--- | | Total Assets | 1,840 | | Total Stockholders' Equity | 172.6 | | Total Loans | 1,620 | | Total Deposits | 1,530 | | Full-Time Employees | 162 | Significant Factors Affecting Our Business The COVID-19 pandemic significantly impacted the New York metropolitan area economy, leading the company to actively participate in the CARES Act's Paycheck Protection Program - The COVID-19 pandemic had a widespread impact on the New York metropolitan area economy, and the company actively participated in the Paycheck Protection Program (PPP) under the CARES Act[249][251] PPP Loan Status (Thousands of USD) | Indicator | Amount | | :--- | :--- | | Total PPP Loans Originated | 366,100 | | Amount Forgiven or Repaid as of September 30, 2022 | 355,900 | Critical Accounting Policies and Estimates The company's consolidated financial statements are prepared under GAAP, with the allowance for loan losses being a critical and highly subjective accounting policy requiring significant management estimates - The company prepares consolidated financial statements in accordance with GAAP, where the accounting for the allowance for loan losses is a critical and highly subjective policy involving estimates of economic conditions, loan portfolio characteristics, and historical loss experience[252][253] Results of Operations for the year ended September 30, 2022 compared to the year ended September 30, 2021 In fiscal year 2022, net income and net interest income significantly increased, driven by growth in interest-earning assets and an expanded net interest margin, despite higher loan loss provisions and non-interest expenses Operating Results for Fiscal Years 2022 and 2021 (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net Income | 23,556 | 10,851 | | Diluted Earnings Per Share | 3.68 | 2.28 | | Net Interest Income | 61,254 | 41,708 | | Provision for Loan Losses | 4,450 | 1,000 | | Non-Interest Income | 8,872 | 3,349 | | Non-Interest Expense | 35,181 | 30,005 | | Income Tax Expense | 6,939 | 3,201 | - The increase in net income was primarily driven by a $19.5 million growth in net interest income, attributed to the expansion of interest-earning assets and an increased net interest margin[255] Analysis of Results of Operations Net interest income grew significantly in fiscal year 2022 due to increased interest-earning assets and an expanded net interest margin, while non-interest income rose from loan sales and fees, and non-interest expenses increased due to higher personnel costs - Net interest income for fiscal year 2022 was $61.3 million, a 46.9% year-over-year increase, primarily driven by a $416.8 million increase in average interest-earning assets, with the net interest margin expanding from 3.97% to 4.18%[259][260] - Average interest-bearing liabilities increased, but due to the company's strategic replacement of high-rate consumer deposits with lower-rate municipal deposits, the average cost decreased from 0.81% to 0.62%[261] Analysis of Net Interest Income Changes (Thousands of USD) | Change Source | 2022 vs. 2021 (Total) | | :--- | :--- | | Loan Interest Income | 19,320 | | Investment Securities Interest Income | (201) | | Interest-Bearing Balances and Other Interest Income | 635 | | Total Interest Income | 19,754 | | Interest Expense on Savings, NOW, and Money Market Deposits | 2,263 | | Interest Expense on Time Deposits | (1,614) | | Interest Expense on Borrowings | (486) | | Interest Expense on Subordinated Debentures | 44 | | Total Interest Expense | 207 | | Net Increase in Net Interest Income | 19,547 | - The allowance for loan losses for fiscal year 2022 was $4.5 million, a 3.5-fold year-over-year increase, primarily due to loan portfolio growth[265] - Non-interest income for fiscal year 2022 was $8.9 million, a $5.5 million year-over-year increase, primarily benefiting from gains on the sale of loans held for sale, and increased loan servicing and fee income[267] Non-Interest Income Composition (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Loan Servicing and Fee Income | 2,885 | 1,207 | | Deposit Account Service Charges | 232 | 127 | | Net Gains on Sale of Loans Held for Sale | 5,143 | 1,307 | | Net Gains on Sale of Available-for-Sale Investments | 105 | 240 | | Other Income | 507 | 468 | | Total Non-Interest Income | 8,872 | 3,349 | - Non-interest expenses for fiscal year 2022 were $35.2 million, a $5.2 million year-over-year increase, primarily due to growth in salaries and employee benefits resulting from increased personnel[268] Non-Interest Expense Composition (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Salaries and Employee Benefits | 19,665 | 14,761 | | Occupancy and Equipment | 5,633 | 4,978 | | Data Processing | 1,629 | 1,280 | | Advertising and Promotion | 348 | 118 | | Acquisition Costs | 250 | 4,430 | | Professional Fees | 2,568 | 1,706 | | Other Expenses | 5,088 | 2,732 | | Total Non-Interest Expense | 35,181 | 30,005 | - Income tax expense for fiscal year 2022 was $6.9 million, with an effective tax rate of 22.8%[269] Analysis of Results of Financial Condition The company's financial condition as of September 30, 2022, shows a growing loan portfolio, particularly in multi-family and commercial real estate, with increased non-performing assets but adequate loan loss reserves, supported by diversified funding and strong capital levels - The investment securities portfolio aims to provide liquidity, asset/liability management flexibility, and a stable source of income, including available-for-sale securities and held-to-maturity securities[270] Investment Securities Portfolio (Thousands of USD) | Security Type | September 30, 2022 (Amortized Cost) | September 30, 2022 (Fair Value) | September 30, 2021 (Amortized Cost) | September 30, 2021 (Fair Value) | | :--- | :--- | :--- | :--- | :--- | | Available-for-Sale Securities | 13,075 | 12,285 | 7,422 | 7,747 | | Held-to-Maturity Securities | 4,414 | 4,095 | 8,611 | 8,865 | | Total Investment Securities | 17,489 | 16,380 | 16,033 | 16,612 | - As of September 30, 2022, the investment securities portfolio had unrealized losses of $1.1 million, which management considers temporary, primarily due to interest rate fluctuations[274] - As of September 30, 2022, the total loan portfolio was $1.62 billion, a year-over-year increase of $376.4 million, primarily driven by growth in multi-family residential and commercial real estate loans[278] - Multi-family residential loans grew by approximately 116%, with a weighted average LTV of 64% and a weighted average debt service coverage ratio of 1.38x[279] Loan Portfolio Composition (Thousands of USD) | Loan Type | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Residential Real Estate | 515,316 | 444,011 | | Multi-Family Residential | 574,413 | 266,294 | | Commercial Real Estate | 472,511 | 348,641 | | Commercial and Industrial | 45,758 | 172,274 | | Construction and Land Development | 12,871 | 15,374 | | Consumer Loans | 22 | 11 | | Total Loans | 1,620,891 | 1,246,605 | - The company assesses and manages the credit risk of its loan portfolio through internal loan review processes and a risk rating system, allocating the allowance for loan losses based on factors such as borrower repayment capacity, collateral value, and economic conditions[284][285][287][289] - As of September 30, 2022, total non-performing assets were $13.5 million, including $12.3 million in non-accrual loans, primarily driven by credit-deteriorated loans acquired from Savoy[291] Non-Performing Assets (Thousands of USD) | Indicator | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Non-Accrual Loans | 12,281 | 7,028 | | Loans Past Due 90 Days or More | 1,231 | 2,519 | | Total Non-Performing Assets | 13,512 | 9,547 | | Non-Performing Assets to Total Assets | 0.73% | 0.64% | - As of September 30, 2022, the allowance for loan losses was $12.8 million, an increase of $4.2 million from 2021, primarily due to loan portfolio growth[298] Allowance for Loan Losses Allocation (Thousands of USD) | Loan Category | September 30, 2022 (Amount) | September 30, 2022 (% of Total Loans) | September 30, 2021 (Amount) | September 30, 2021 (% of Total Loans) | | :--- | :--- | :--- | :--- | :--- | | Residential Real Estate | 3,951 | 0.77% | 4,155 | 0.94% | | Multi-Family Residential | 4,308 | 0.75% | 2,433 | 0.91% | | Commercial Real Estate | 3,707 | 0.78% | 1,884 | 0.54% | | Commercial and Industrial | 761 | 1.66% | 79 | 0.05% | | Construction and Land Development | 115 | 0.89% | — | — | | Consumer Loans | 2 | 9.09% | 1 | 9.09% | | Total | 12,844 | 0.79% | 8,552 | 0.69% | - Liquidity management is critical to the company's operations, primarily meeting financial obligations through deposits, short-term investments, available-for-sale securities, and credit lines[303][304][305] - As of September 30, 2022, total deposits were $1.53 billion, a year-over-year increase of $363.4 million, primarily driven by growth in non-interest-bearing demand deposits and savings, NOW, and money market deposits[308] Time Deposit Maturities (Thousands of USD) | Maturity Year | Amount | | :--- | :--- | | 2023 | 170,497 | | 2024 | 133,445 | | 2025 | 25,526 | | 2026 | 3,882 | | 2027 | 4,734 | | Thereafter | 989 | | Total | 339,073 | - As of September 30, 2022, total borrowings were $126.3 million, a year-over-year decrease of $57.8 million, including FHLB advances and Federal Reserve Bank borrowings[310] FHLB Advances (Thousands of USD) | Category | September 30, 2022 (Amount) | September 30, 2022 (Weighted Average Rate) | September 30, 2021 (Amount) | September 30, 2021 (Weighted Average Rate) | | :--- | :--- | :--- | :--- | :--- | | Overnight | 55,000 | 3.29% | — | — | | Term | 37,800 | 1.30% | 41,980 | 1.37% | | Total | 92,800 | 2.48% | 41,980 | 1.37% | - A $25 million fixed-to-floating rate subordinated debenture private placement was completed in October 2020, with an initial rate of 5.00% resetting after October 15, 2025, to SOFR plus 487.4 basis points[312][464] - As of September 30, 2022, the company had $73.1 million in loan commitments and lines of credit, and $0.8 million in standby letters of credit[315][316] - As of September 30, 2022, stockholders' equity was $172.6 million, an increase of $50.1 million from 2021, primarily from net proceeds of the common stock offering and net income[317] Bank Regulatory Capital (Thousands of USD) | Indicator | September 30, 2022 (Actual Amount) | September 30, 2022 (Actual Ratio) | September 30, 2021 (Actual Amount) | September 30, 2021 (Actual Ratio) | | :--- | :--- | :--- | :--- | :--- | | Total Capital | 191,355 | 16.32% | 132,554 | 15.59% | | Tier 1 Capital | 178,340 | 15.21% | 123,666 | 14.54% | | Common Equity Tier 1 Capital | 178,340 | 15.21% | 123,666 | 14.54% | | Tier 1 Leverage Ratio | 178,340 | 10.90% | 123,666 | 9.45% | - As of September 30, 2022, the bank had $42.2 million in retained net income available for dividend payments to the holding company without regulatory approval[497] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - This item is not applicable[321] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for fiscal years 2022 and 2021, including balance sheets, income statements, comprehensive income statements, statements of changes in stockholders' equity, and cash flow statements, along with detailed notes on accounting policies, business combinations, and other financial disclosures - This section includes the company's consolidated financial statements as of September 30, 2022, and 2021, comprising the statements of financial condition, income, comprehensive income, changes in stockholders' equity, and cash flows[325][330][331][333][336][338] - The notes to the financial statements provide detailed disclosures on the company's accounting policies, business combinations (Savoy Bank acquisition), investment securities, loan portfolio, deposits, borrowings, goodwill and intangible assets, income taxes, equity compensation plans, related party transactions, regulatory matters, and fair value measurements[340][410][424][432][457][458][460][464][466][473][479][489][490][493][498][511][515][517][519] Report of Independent Registered Public Accounting Firm Crowe LLP issued an unqualified opinion on the company's consolidated financial statements for fiscal years 2022 and 2021, affirming fair presentation in accordance with U.S. GAAP, without an opinion on internal control effectiveness - Independent registered public accounting firm Crowe LLP issued an unqualified opinion on the company's consolidated financial statements as of September 30, 2022, and 2021, stating that the financial statements are fairly presented in all material respects in accordance with U.S. GAAP[325] - The audit was conducted in accordance with PCAOB standards, including assessing risks of material misstatement and examining evidence in the financial statements; the company was not required to undergo an internal control audit, thus no opinion was expressed on internal control effectiveness[326][327] Consolidated Statements of Financial Condition The consolidated statements of financial condition present the company's assets, liabilities, and stockholders' equity as of September 30, 2022, and 2021, reflecting growth in total assets and equity Consolidated Statements of Financial Condition (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | 149,947 | 166,544 | | Securities | 16,699 | 16,358 | | Loans, Net | 1,610,687 | 1,238,573 | | Goodwill | 19,168 | 19,168 | | Total Assets | 1,840,058 | 1,484,641 | | Liabilities and Stockholders' Equity | | | | Deposits | 1,528,106 | 1,164,662 | | Borrowings | 101,752 | 159,642 | | Subordinated Debentures | 24,568 | 24,513 | | Total Liabilities | 1,667,474 | 1,362,112 | | Total Stockholders' Equity | 172,584 | 122,529 | | Total Liabilities and Stockholders' Equity | 1,840,058 | 1,484,641 | Consolidated Statements of Income The consolidated statements of income detail the company's revenues, expenses, and net income for fiscal years 2022 and 2021, showing significant growth in net income Consolidated Statements of Income (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Interest Income | 68,429 | 48,675 | | Interest Expense | 7,175 | 6,967 | | Net Interest Income | 61,254 | 41,708 | | Provision for Loan Losses | 4,450 | 1,000 | | Non-Interest Income | 8,872 | 3,349 | | Non-Interest Expense | 35,181 | 30,005 | | Income Before Income Tax Expense | 30,495 | 14,052 | | Income Tax Expense | 6,939 | 3,201 | | Net Income | 23,556 | 10,851 | | Basic Earnings Per Share | 3.74 | 2.32 | | Diluted Earnings Per Share | 3.68 | 2.28 | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income present net income and other comprehensive income (loss) for fiscal years 2022 and 2021, reflecting the total change in equity from non-owner sources Consolidated Statements of Comprehensive Income (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net Income | 23,556 | 10,851 | | Other Comprehensive (Loss) Income, Net of Tax | (876) | 100 | | Total Comprehensive Income, Net of Tax | 22,680 | 10,951 | Consolidated Statements of Changes in Stockholders' Equity The consolidated statements of changes in stockholders' equity illustrate the movements in capital stock, surplus, retained earnings, and accumulated other comprehensive income (loss) for fiscal years 2022 and 2021 Consolidated Statements of Changes in Stockholders' Equity (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Capital Stock | 73 | 56 | | Surplus | 126,656 | 97,246 | | Retained Earnings | 46,475 | 24,971 | | Accumulated Other Comprehensive (Loss) Income, Net | (620) | 256 | | Total Stockholders' Equity | 172,584 | 122,529 | - The increase in stockholders' equity for fiscal year 2022 primarily resulted from $23.6 million in net income and $27.7 million in net proceeds from the common stock offering[337] Consolidated Statements of Cash Flows The consolidated statements of cash flows provide a breakdown of cash generated and used in operating, investing, and financing activities for fiscal years 2022 and 2021 Consolidated Statements of Cash Flows (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | 25,049 | 13,192 | | Net Cash from Investing Activities | (374,146) | 89,850 | | Net Cash from Financing Activities | 332,500 | (16,707) | | Net (Decrease) Increase in Cash and Cash Equivalents | (16,597) | 86,335 | | Cash and Cash Equivalents, End of Period | 149,947 | 166,544 | Note 1. Summary of Significant Accounting Policies This note outlines the company's significant accounting policies, including GAAP compliance, critical estimates like loan loss allowance, and the impact of COVID-19, business combinations, and new accounting standards - The company is the holding company for Hanover Community Bank, with the bank regulated by the New York State Department of Financial Services and the FDIC, and the holding company by the FRB[340] - Consolidated financial statements are prepared in accordance with GAAP, requiring management to make estimates and assumptions, with the accounting for the allowance for loan losses being a critical policy[342][252] - The COVID-19 pandemic could have a material adverse effect on the company's financial condition and operating results, with the extent of impact dependent on future developments[343][344] - The majority of the company's business is concentrated in Nassau, Queens, and Kings Counties, New York, and surrounding areas, with the ultimate collectability of the loan portfolio influenced by the economic conditions of this region[345][346] - The company accounts for business combinations using the acquisition method, with acquired assets and assumed liabilities measured at fair value[347] - Investment securities are classified as held-to-maturity (at amortized cost) and available-for-sale (at fair value, with unrealized gains and losses reported in other comprehensive income)[350] - Loans are reported at their outstanding principal balance, net of purchase premiums and discounts, deferred loan fees and costs, and the allowance for loan losses[356] - The loan portfolio includes one-to-four family residential mortgages, commercial real estate mortgages, multi-family residential mortgages, commercial and industrial loans, and consumer loans, primarily concentrated in the New York metropolitan area[360] - The allowance for loan losses is established through a provision for loan losses charged to earnings and is evaluated based on management's estimate of probable losses within the loan portfolio[371] - The CARES Act allowed financial institutions to suspend the application of certain TDR accounting guidance in response to COVID-19 related loan modifications[379][380] - The company may retain servicing rights when selling mortgage loans, with servicing rights initially recorded at fair value and subsequently measured using the amortization method[381] - Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually[387] - Income tax expense comprises current and deferred portions, with deferred tax assets and liabilities reflecting the tax effects of temporary differences between financial accounting and tax treatment[393] - The company uses the two-class method to calculate basic and diluted earnings per share[390][515] - The company has elected to adopt ASU 2016-02, Leases, in the first quarter of fiscal year 2023, resulting in an increase of approximately $10 million in assets and liabilities[404] - As a smaller reporting company, the company will adopt ASU 2016-13, Financial Instruments—Credit Losses (CECL), on October 1, 2023, which will change the methodology for measuring the allowance for loan losses[405][407] Note 2. Business Combinations This note details the company's acquisition of Savoy Bank on May 26, 2021, outlining the total purchase price, fair value of acquired assets and assumed liabilities, and the impact on commercial banking and SBA lending capabilities - On May 26, 2021, the company completed the acquisition of Savoy Bank, which was merged into Hanover Community Bank[410] - The final total acquisition price was $65.5 million, with each share of Savoy common stock receiving $3.246 in cash and 0.141 shares of the company's common stock[411] Summary of Fair Value of Assets Acquired and Liabilities Assumed in Savoy Bank Acquisition (Thousands of USD) | Item | Recorded Fair Value | | :--- | :--- | | Acquired Assets | | | Cash and Bank Deposits | 59,155 | | Loans | 577,863 | | Total Acquired Assets | 653,870 | | Liabilities Assumed | | | Deposits | 342,742 | | Borrowings | 258,548 | | Total Liabilities Assumed | 605,815 | | Goodwill | 17,457 | Total Consideration Paid (Thousands of USD) | Item | Amount | | :--- | :--- | | Common Stock Issued (1,357,567 shares) | 31,252 | | Rollover Options | 1,269 | | Cash Paid to Common Stockholders | 32,991 | | Total Consideration Paid | 65,512 | - This acquisition significantly expanded the company's commercial banking and SBA lending capabilities, with the related goodwill not deductible for income tax purposes[415] - Acquisition costs are expensed as incurred and were $0.25 million and $4.4 million for fiscal years 2022 and 2021, respectively[421] Note 3. Investment Securities This note details the company's investment securities portfolio, including available-for-sale and held-to-maturity securities, their amortized cost, fair value, and unrealized gains/losses, with management deeming unrealized losses as temporary Investment Securities Amortized Cost and Fair Value (Thousands of USD) | Security Type | September 30, 2022 (Amortized Cost) | September 30, 2022 (Fair Value) | September 30, 2021 (Amortized Cost) | September 30, 2021 (Fair Value) | | :--- | :--- | :--- | :--- | :--- | | Available-for-Sale Securities | 13,075 | 12,285 | 7,422 | 7,747 | | Held-to-Maturity Securities | 4,414 | 4,095 | 8,611 | 8,865 | | Total Investment Securities | 17,489 | 16,380 | 16,033 | 16,612 | Investment Securities Unrealized Gains and Losses (Thousands of USD) | Security Type | September 30, 2022 (Total Unrealized Gains) | September 30, 2022 (Total Unrealized Losses) | September 30, 2021 (Total Unrealized Gains) | September 30, 2021 (Total Unrealized Losses) | | :--- | :--- | :--- | :--- | :--- | | Available-for-Sale Securities | — | (790) | 326 | (1) | | Held-to-Maturity Securities | — | (319) | 258 | (4) | | Total | — | (1,109) | 584 | (5) | - As of September 30, 2022, investment securities had unrealized losses of $1.1 million, which management considers temporary, primarily due to interest rate fluctuations, with no intent to sell these securities[274][430][431] - As of September 30, 2022, $1.8 million of investment securities were pledged to secure public deposits and for other legally required or permitted purposes[426] Realized Gains and Losses on Sale of Investment Securities (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Proceeds from Sales | 2,105 | 3,240 | | Total Realized Gains | 105 | 240 | | Total Realized Losses | — | — | | Net Realized Gains | 105 | 240 | Note 4. Loans This note provides a detailed breakdown of the loan portfolio by type, including residential, multi-family, commercial real estate, and C&I loans, along with information on PPP loans, credit quality, non-accrual loans, and the allowance for loan losses Major Loan Classifications (Thousands of USD) | Loan Type | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Residential Real Estate | 515,316 | 444,011 | | Multi-Family Residential | 574,413 | 266,294 | | Commercial Real Estate | 472,511 | 348,641 | | Commercial and Industrial | 45,758 | 172,274 | | Construction and Land Development | 12,871 | 15,374 | | Consumer Loans | 22 | 11 | | Total Loans | 1,623,531 | 1,247,125 | | Allowance for Loan Losses | (12,844) | (8,552) | | Loans, Net | 1,610,687 | 1,238,573 | - As of September 30, 2022, PPP loan balances were $10.2 million, a significant decrease from $140.4 million in 2021, primarily due to loan forgiveness or repayment[432] - The company sold approximately $80.3 million and $46.6 million in loans during fiscal years 2022 and 2021, respectively, realizing sales gains of $5.1 million and $1.3 million, respectively[433] - As of September 30, 2022, the carrying value of purchased credit-impaired loans was $1.231 million, comprising $0.602 million in commercial real estate and $0.629 million in commercial and industrial loans[434] - The company employs a credit risk rating system, categorizing loans into 'pass,' 'special mention,' 'substandard,' 'doubtful,' and 'loss' to monitor the credit quality of the loan portfolio[436][437][438][439][440] Past Due and Non-Accrual Loan Carrying Values (Thousands of USD) | Loan Type | September 30, 2022 (Total Past Due and Non-Accrual) | September 30, 2021 (Total Past Due and Non-Accrual) | | :--- | :--- | :--- | | Residential Real Estate | 4,463 | 8,187 | | Multi-Family Residential | 2,348 | 458 | | Commercial Real Estate | 6,811 | 2,955 | | Commercial and Industrial | 1,607 | 3,641 | | Construction and Land Development | — | — | | Consumer Loans | — | — | | Total | 15,229 | 15,241 | - As of September 30, 2022, total non-accrual loans were $12.3 million, an increase from $7.0 million as of September 30, 2021, primarily driven by credit-deteriorated loans acquired from Savoy[291][444] - As of September 30, 2022, the company had 7 loans classified as troubled debt restructurings (TDRs) with a carrying value of $2.3 million, for which no specific allowance was allocated[450][451] Allowance for Loan Losses Activity (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Beginning Balance | 8,552 | 7,869 | | Provision for Loan Losses | 4,450 | 1,000 | | Charge-offs | (158) | (329) | | Recoveries | — | 12 | | Ending Balance | 12,844 | 8,552 | Note 5. Premises and Equipment This note details the company's premises and equipment, including land, buildings, leasehold improvements, and furniture, net of accumulated depreciation and amortization Premises and Equipment Composition (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Land | 1,600 | 1,600 | | Buildings and Improvements | 10,862 | 9,974 | | Leasehold Improvements | 2,615 | 2,354 | | Furniture, Fixtures, and Equipment | 5,978 | 5,269 | | Construction in Progress | 111 | 1,124 | | Accumulated Depreciation and Amortization | (6,704) | (5,318) | | Premises and Equipment, Net | 14,462 | 15,003 | - Depreciation and amortization expense for fiscal years 2022 and 2021 was $1.7 million and $1.4 million, respectively[457] Note 6. Deposits This note provides a breakdown of the company's deposit composition, including non-interest-bearing demand deposits, interest-bearing deposits, and time deposits, along with their maturity profiles Deposit Composition (Thousands of USD) | Deposit Type | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Non-Interest-Bearing Demand Deposits | 219,225 | 191,537 | | Interest-Bearing Deposits (Savings, NOW, Money Market) | 969,808 | 595,289 | | Time Deposits ($250,000 and over) | 87,904 | 60,242 | | Time Deposits (Under $250,000) | 251,169 | 317,594 | | Total Deposits | 1,528,106 | 1,164,662 | Time Deposit Maturities (Thousands of USD) | Maturity Year | Amount | | :--- | :--- | | 2023 | 170,497 | | 2024 | 133,445 | | 2025 | 25,526 | | 2026 | 3,882 | | 2027 | 4,734 | | Thereafter | 989 | | Total | 339,073 | Note 7. Borrowings This note details the company's borrowings, primarily FHLB advances and Federal Reserve Bank borrowings, including their amounts, weighted average interest rates, and collateral arrangements FHLB Advances (Thousands of USD) | Category | September 30, 2022 (Amount) | September 30, 2022 (Weighted Average Rate) | September 30, 2021 (Amount) | September 30, 2021 (Weighted Average Rate) | | :--- | :--- | :--- | :--- | :--- | | Overnight | 55,000 | 3.29% | — | — | | Term | 37,800 | 1.30% | 41,980 | 1.37% | | Total | 92,800 | 2.48% | 41,980 | 1.37% | - FHLB advances are collateralized by $822.2 million in residential and commercial mortgage loans, and the company was eligible for an additional $183.6 million in borrowings as of September 30, 2022[461] - As of September 30, 2022, the company had $9.0 million in borrowings from the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (PPPLF) at an interest rate of 0.35%, fully collateralized by PPP loans[462] - As of September 30, 2022, the company had approximately $65.0 million in available unsecured interbank lines of credit, with no outstanding borrowings[463] Note 8. Subordinated Debentures This note describes the company's $25 million fixed-to-floating rate subordinated debenture private placement, maturing in 2030, with details on interest rates, reset terms, and redemption options - In October 2020, the company completed a $25 million fixed-to-floating rate subordinated debenture private placement, maturing in 2030[464] - The subordinated debentures bear an initial annual interest rate of 5.00% (until October 15, 2025), resetting quarterly thereafter to three-month SOFR plus 487.4 basis points[464] - The company has the option to redeem the subordinated debentures on or after October 15, 2025, subject to regulatory approval[464] - As of September 30, 2022, unamortized issuance costs for the subordinated debentures were $0.4 million, with $0.1 million in issuance costs recognized as interest expense for both fiscal years 2022 and 2021[465] Note 9. Goodwill and Other Intangible Assets This note outlines the company's goodwill and other intangible assets, which are not amortized but tested for impairment annually, with details on their carrying values and estimated future amortization - Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually[466] Goodwill and Other Intangible Assets Activity (Thousands of USD) | Item | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Goodwill, End of Period | 19,168 | 19,168 | | Other Intangible Assets, End of Period | 399 | 480 | | Total | 19,567 | 19,648 | - The company performs goodwill impairment testing as a single reporting unit, and a qualitative assessment as of August 31, 2022, indicated no impairment of goodwill[469][470] - As of September 30, 2022, the weighted average remaining useful life of other intangible assets (core deposit intangible) was 4.06 years[471] Estimated Future Amortization Expense for Other Intangible Assets (Thousands of USD) | Year | Amount | | :--- | :--- | | 2023 | 72 | | 2024 | 63 | | 2025 | 55 | | 2026 | 49 | | 2027 | 43 | | Thereafter | 117 | | Total | 399 | Note 10. Income Taxes This note details the company's income tax expense, including current and defe