HANOVER BANCORP, INC. Cautionary Statement Regarding Forward-Looking Statements - This document contains a number of forward-looking statements, including statements about the financial condition, results of operations, earnings outlook and prospects of the Company. Forward-looking statements are typically identified by words such as "should," "likely," "plan," "believe," "expect," "anticipate," "intend," "outlook," "estimate," "forecast," "target," "project," "goal" and other similar words and expressions. The forward-looking statements involve certain risks and uncertainties. The ability of the Company to predict results or the actual effects of its plans and strategies is subject to inherent uncertainty. Factors that may cause actual results or earnings to differ materially from such forward-looking statements include those set forth in Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2022 , as updated by the Company's subsequent filings with theSEC and, among others, the following:
Changes in monetary and fiscal policies of the FRB and the U. S. Government,
? particularly related to changes in interest rates and inflation, may affect
interest margins and the fair value of financial instruments;
? Changes in general economic conditions, either nationally or in our market
areas, that are worse than expected;
? The ability to enhance revenue through increased market penetration, expanded
lending capacity and product offerings;
Occurrence of natural or man-made disasters or calamities, including health
emergencies, the spread of infectious diseases, pandemics such as COVID-19, or
? outbreaks of hostilities, such as between
climate change, and the ability of the Company to deal effectively with disruptions caused by the foregoing;
The effects of COVID-19, including, but not limited to, the length of time that
the pandemic continues, the development of new variants of the virus and their
impact, the potential future imposition of further restrictions on travel, the
measures adopted by federal, state and local governments, the health of
? employees and the potential inability of employees to work due to illness,
quarantine or government mandates, the business continuity plans of customers
and vendors, the increased likelihood of cybersecurity risk, data breaches, or
fraud due to employees working from home, the ability of borrowers to repay
their loans and the effect of the pandemic on the general economy and
businesses of borrowers;
? Legislative, regulatory or policy changes;
? Downturns in demand for loan, deposit and other financial services in the
Company's market area;
? Increased competition from other banks and non-bank providers of financial
services;
? Technological changes and increased technology-related costs; and
? Changes in accounting principles, or the application of generally accepted
accounting principles.
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Because these forward-looking statements are subject to assumptions and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements. You are cautioned not to place
undue reliance on these statements, which speak only as of the date of this
document or the date of any document incorporated by reference in this document.
All subsequent written and oral forward-looking statements concerning matters
addressed in this document and attributable to the Company or any person acting
on its behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this document. Except to the extent
required by applicable law or regulation, the Company undertakes no obligation
to update these forward-looking statements to reflect events or circumstances
after the date of this document or to reflect the occurrence of unanticipated
events.
Non-GAAP Disclosure - This discussion includes discussions of the Company's
tangible common equity ("TCE") ratio, tangible common equity and tangible
assets, non-GAAP financial measures. A non-GAAP financial measure is a numerical
measure of historical or future financial performance, financial position or
cash flows that excludes or modifies amounts that are required to be disclosed
in the most directly comparable measure calculated and presented in accordance
with U.S. GAAP. The Company believes that these non-GAAP financial measures
provide both management and investors a more complete understanding of the
underlying operational results and trends and the Company's marketplace
performance. The presentation of this additional information is not meant to be
considered in isolation or as a substitute for the numbers prepared in
accordance with U.S. GAAP and may not be comparable to similarly titled measures
used by other financial institutions.
With respect to the calculations and reconciliations of tangible common equity,
tangible assets and the TCE ratio, please see Liquidity and Capital Resources
contained herein for a reconciliation to the most directly comparable GAAP
measure.
Executive Summary - The Company is a one-bank holding company incorporated in
2016. The Company operates as the parent for its wholly owned subsidiary, the
Bank, which commenced operations in 2008. The income of the Company is primarily
derived through the operations of the Bank. Unless the context otherwise
requires, references herein to the Company include the Company and the Bank on a
consolidated basis.
The Bank operates as a locally headquartered, community-oriented bank, serving
customers throughout the New York metro area from offices in Nassau , Queens ,
Kings (Brooklyn ) and New York (Manhattan ) Counties, New York and Freehold in
Monmouth County, New Jersey . We also expect to open an office in Hauppauge ,
Suffolk County, New York in early 2023. We principally focus our lending
activities on loans that we originate to borrowers located in our market areas.
With a passion for excellence in our approach to products, services, and
solutions, we strive to create a first-class banking experience that exceeds our
clients' expectations, shows our employees they are our greatest resource,
positively impacts the communities we serve and inspires the confidence of our
shareholders and stakeholders. We offer personal and commercial business loans
on a secured and unsecured basis, SBA and USDA guaranteed loans, revolving lines
of credit, commercial mortgage loans, and one- to four-family non-qualified
mortgages secured by primary and secondary residences that may be owner occupied
or investment properties, home equity loans, bridge loans and other personal
purpose loans.
The Bank works to provide more direct, personal attention than management
believes is offered by competing financial institutions, the majority of which
are branch offices of banks headquartered outside of the Bank's primary trade
area. By striving to employ professional, responsive and knowledgeable staff,
the Bank believes it offers a superior level of service to its customers. As a
result of senior management's availability for consultation on a daily basis,
the Bank believes it offers customers a quicker response on loan applications
and other banking transactions, as well as greater certainty that these
transactions will actually close, than competitors, whose decisions may be made
in distant headquarters.
The Bank has historically been able to generate additional income by
strategically originating and selling its primary lending products to other
financial institutions at premiums. In December 2021 , the SBA approved the
Bank's application to process loans under the SBA's Preferred Lender Program,
enabling the Bank to process SBA applications under delegated authority from the
SBA and enhancing the Bank's ability to compete more effectively for SBA lending
opportunities. The Bank expects that it will continue to originate loans, for
its own portfolio and for sale, which will result in continued growth in
interest income while also realizing gains on the sale of loans to others.
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The Bank finances most of its activities through a combination of deposits, including non-interest-bearing demand, savings, NOW and money market deposits as well as time deposits, and both short- and long-term borrowings. The Company's chief competition includes local banks within its market area,New York City money center banks and regional banks, as well as non-bank lenders, including fintech lenders. Financial Performance Summary As of or for the three months endedDecember 31, 2022 and 2021 (dollars in thousands, except per share data) Three months ended December 31, 2022 2021 Revenue (1)$ 16,675 $ 17,644 Non-interest expense 8,271 8,264 Provision for loan losses 1,500 900 Net income 5,338 6,537 Net income per share - diluted 0.72 1.16 Return on average assets 1.18 % 1.80 %
Return on average stockholders' equity (2) 12.04 % 20.52 % Tier 1 leverage ratio
10.34 % 9.92 %
Common equity tier 1 risk-based capital ratio 14.17 % 14.44 % Tier 1 risk-based capital ratio
14.17 % 14.44 %
Total risk-based capital ratio 15.30 % 15.52 %
Tangible common equity ratio (non-GAAP) (2) 8.05 % 7.63 % Total stockholders' equity/total assets (3) 8.95 % 8.87 %
(1) Represents net interest income plus total non-interest income.
(2) Includes common stock and Series A preferred stock for the quarter ended
December 31, 2022 .
(3) The ratio of total stockholders' equity to total assets is the mostcomparable GAAP measure to the non-GAAP tangible common equity ratio
presented herein.
AtDecember 31, 2022 the Company, on a consolidated basis, had total assets of$2.0 billion , total deposits of$1.5 billion and total stockholders' equity of$177.6 million . The Company recorded net income of$5.3 million , or$0.72 per diluted share (includes Series A preferred shares), for the three months endedDecember 31, 2022 compared to net income of$6.5 million , or$1.16 per diluted share, for the same period in 2021. The$1.2 million decrease in earnings for the three months endedDecember 31, 2022 versus the comparable 2021 period was primarily due to a$1.0 million decrease in non-interest income coupled with a$600 thousand increase in the provision for loan losses expense due to growth in the loan portfolio in the quarter endedDecember 31, 2022 .
The Company's return on average assets and return on average stockholders'
equity were 1.18% and 12.04%, respectively, for the three months ended
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Total non-accrual loans at December 31, 2022 were $10.6 million , or 0.61% of
total loans, compared to $12.3 million , or 0.76% of total loans at September 30,
2022 and $6.1 million , or 0.48% of total loans, at December 31, 2021 . The
allowance for loan losses as a percentage of total non-accrual loans amounted to
136%, 105% and 153% at December 31, 2022 , September 30, 2022 and December 31,
2021 , respectively.
The Company's operating efficiency ratio was 49.6% for the three months ended
Critical Accounting Policies, Judgments and Estimates - To prepare financial statements in conformity withU.S. GAAP, the Company's management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Critical accounting estimates are accounting estimates where (a) the nature of the estimate is material due to levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and (b) the impact of the estimate on financial condition or operating performance is material. The Company considers the determination of the allowance for loan losses its most critical accounting policy, practice and use of estimates. The Company uses available information to recognize probable and reasonably estimable losses on loans. Future additions to the allowance may be necessary based upon changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. The allowance for loan losses is increased by a provision for loan losses charged against income and is decreased by charge-offs, net of recoveries. Loan losses are recognized in the period the loans, or portion thereof, are deemed uncollectible. The adequacy of the allowance to cover any inherent loan losses in the portfolio is evaluated on a quarterly basis. Financial Condition - Total assets of the Company were$2.0 billion atDecember 31, 2022 versus$1.8 billion atSeptember 30, 2022 . Total loans atDecember 31, 2022 were$1.7 billion , compared to total loans of$1.6 billion atSeptember 30, 2022 . Total deposits were$1.5 billion atDecember 31, 2022 andSeptember 30, 2022 . Total borrowings and subordinated debt atDecember 31, 2022 were$262.9 million , including$224.8 million of outstanding FHLB advances, compared to$126.3 million atSeptember 30, 2022 . For the three months endedDecember 31, 2022 , the Company's loan portfolio, net of sales, grew by$123.3 million to$1.7 billion . AtDecember 31, 2022 , the residential loan portfolio amounted to$576.5 million , or 33.0% of total loans. Commercial real estate loans, including multi-family loans and construction and land development loans, continue to make up a greater proportion of our loan portfolio and totaled$1.1 billion or 64.3% of total loans atDecember 31, 2022 . Commercial loans, including PPP loans, totaled$46.2 million or 2.6% of total loans. Total deposits were$1.5 billion atDecember 31, 2022 andSeptember 30, 2022 . Core deposit balances, which consist of demand, NOW, savings and money market deposits, represented 74.4% and 77.8% of total deposits atDecember 31, 2022 andSeptember 30, 2022 , respectively. At those dates, demand deposit balances represented 13.1% and 14.3% of total deposits. Beginning in late 2020, we began a municipal deposit program. The program is based upon relationships of our management team, rather than bid based transactions. AtDecember 31, 2022 , total municipal deposits were$383.6 million , representing 25.3% of total deposits, compared to$416.9 million atSeptember 30, 2022 , representing 27.3% of total deposits. The rate on the municipal deposit portfolio was 2.66% atDecember 31, 2022 . Borrowings atDecember 31, 2022 were$238.3 million , including$8.5 million in PPPLF funding, versus$101.8 million , including$9.0 million in PPPLF funding atSeptember 30, 2022 . PPPLF borrowings declined as borrowers had received forgiveness or have made payments on PPP loans. AtDecember 31, 2022 , the Company had$224.8 million of outstanding FHLB advances as compared to$92.8 million atSeptember 30, 2022 . 30
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Liquidity and Capital Resources - Liquidity management is defined as both the Company's and the Bank's ability to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These 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 theFederal Reserve , FHLB and correspondent banks, which totaled$152.3 million and$150.0 million atDecember 31, 2022 andSeptember 30, 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. Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect the Company's ability to meet liquidity needs, including variations in the markets served, loan demand, its asset/liability mix, its reputation and credit standing in its markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. Among these are changes in the local and national economies, competition from other financial institutions and changes in market interest rates. The Company's primary sources of funds are cash provided by deposits, which may include brokered and listing service deposits, and borrowings, proceeds from maturities and sales of securities and cash provided by operating activities. AtDecember 31, 2022 , total deposits were$1.5 billion , of which$210.3 million were time deposits scheduled to mature within the next 12 months. Based on historical experience, the Company expects to be able to replace a substantial portion of those maturing deposits with comparable deposit products. AtDecember 31, 2022 andSeptember 30, 2022 , the Company had$238.3 million and$101.8 million , respectively, in borrowings used to fund the growth in the Company's loan portfolio. The Liquidity and Wholesale Funding Policy of the Bank establishes specific policies and operating procedures governing liquidity levels to assist management in developing plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders' equity. AtDecember 31, 2022 , the Bank had access to approximately$884.5 million in FHLB lines of credit for overnight or term borrowings, of which$406.8 million of municipal letters of credit,$187.0 million in overnight borrowings and$37.8 million in term borrowings were outstanding. AtDecember 31, 2022 , the Bank had access to approximately$65 million in unsecured lines of credit extended by correspondent banks, if needed, for short-term funding purposes.$5.0 million in overnight borrowings were outstanding under lines of credit with correspondent banks atDecember 31, 2022 . The Company strives to maintain an efficient level of capital, commensurate with its risk profile, on which a competitive rate of return to stockholders will be realized over both the short and long term. Capital is managed to enhance stockholder value while providing flexibility for management to act opportunistically in a changing marketplace. Management continually evaluates the Company's capital position in light of current and future growth objectives and regulatory guidelines. Total stockholders' equity increased to$177.6 million atDecember 31, 2022 from$172.6 million atSeptember 30, 2022 , primarily due to net income recorded during the three months endedDecember 31, 2022 . The Bank is subject to regulatory capital requirements. The Bank's tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 10.34%, 14.17%, 14.17% and 15.30%, respectively, atDecember 31, 2022 , exceeding all the regulatory guidelines for a well-capitalized institution, the highest regulatory capital category. Moreover, capital rules also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above minimum capital requirements. AtDecember 31, 2022 , the Bank's capital buffer was in excess of requirements. 31
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The Company did not repurchase any shares of its common stock during the three
months ended
The Company's total stockholders' equity to total assets ratio and the Company's
tangible common equity to tangible assets ratio ("TCE ratio") were 8.95% and
8.05%, respectively, at December 31, 2022 versus 9.38% and 8.41%, respectively,
at September 30, 2022 and 8.87% and 7.63%, respectively, at December 31, 2021 .
The ratio of total stockholders' equity to total assets is the most comparable
U.S. GAAP measure to the non-GAAP TCE ratio presented herein. The ratio of
tangible common equity to tangible assets, or TCE ratio, is calculated by
dividing total stockholders' equity by total assets, after reducing both amounts
by intangible assets. The TCE ratio is not required by U.S. GAAP or by
applicable bank regulatory requirements, but is a metric used by management to
evaluate the adequacy of our capital levels. Since there is no authoritative
requirement to calculate the TCE ratio, our TCE ratio is not necessarily
comparable to similar capital measures disclosed or used by other companies in
the financial services industry. Tangible common equity and tangible assets are
non-GAAP financial measures and should be considered in addition to, not as a
substitute for or superior to, financial measures determined in accordance with
U.S. GAAP. Set forth below are the reconciliations of tangible common equity to
U.S. GAAP total stockholders' equity and tangible assets to U.S. GAAP total
assets at December 31, 2022 (in thousands). (See also Non-GAAP Disclosure
contained herein.)
Ratios
Total stockholders' equity (3) $ 177,628 Total assets $ 1,983,692 8.95% (1)
Less: goodwill (19,168) Less: goodwill (19,168)
Less: core deposit intangible (381) Less: core deposit intangible (381)
Tangible common equity (3)
$ 1,964,143 8.05% (2)
(1) The ratio of total stockholders' equity to total assets is the most
comparable GAAP measure to the non-GAAP tangible common equity ratio
presented herein.
(2) TCE ratio
(3) Includes common stock and Series A preferred stock.
All dividends must conform to applicable statutory requirements. The Company's ability to pay dividends to stockholders depends on the Bank's ability to pay dividends to the Company. Additionally, the ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. UnderNew York law, a bank may pay a dividend on its common stock only out of net profits, and must obtain the approval of the Superintendent of the DFS if the total of all dividends declared by a bank or trust company in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. The Company's Board of Directors approved the payment of a$0.10 per share cash dividend on both common and Series A preferred shares payable onFebruary 14, 2023 to stockholders of record onFebruary 7, 2023 . 32
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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. AtDecember 31, 2022 andSeptember 30, 2022 , commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately$78 million and$73 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. AtDecember 31, 2022 andSeptember 30, 2022 , letters of credit outstanding were approximately$817 thousand . Results of Operations - Comparison of the Three Months EndedDecember 31, 2022 and 2021 - The Company recorded net income of$5.3 million during the three months endedDecember 31, 2022 versus net income of$6.5 million in the comparable three month period a year ago. The decline in earnings for the three months endedDecember 31, 2022 versus the comparable 2021 quarter resulted primarily from a$1.0 million or 40.6%, decrease in non-interest income, a$600 thousand increase in the provision for loan losses expense due to growth in the loan portfolio in the fourth calendar quarter of 2022 and a decrease in purchase accounting accretion. Gains on the sales of the guaranteed portion of SBA loans were lower than expected in the 2022 quarter due to various factors, including the sustained reduction in SBA premiums and loan closing delays due to borrower considerations.
Net Interest Income and Margin
Net interest income remained flat at$15.3 million for the three months endedDecember 31, 2022 and the comparable 2021 quarter due to the compression of the Company's net interest margin to 3.49% in the 2022 quarter from 4.39% in the comparable 2021 quarter. The yield on interest earning assets increased to 5.17% in the 2022 quarter from 4.77% in the comparable 2021 quarter, an increase of 40 basis points, offset by a 160 basis point increase in the cost of interest-bearing liabilities to 2.08% in 2022 from 0.48% in the fourth calendar quarter of 2021. Included in net interest income was accretion and amortization of purchase accounting adjustments of$265 thousand during the three months endedDecember 31, 2022 and$1.6 million in the three months endedDecember 31, 2021 arising from the acquisition ofSavoy Bank . Excluding these purchase accounting adjustments, the adjusted net interest margin was 3.43% and 3.90% in the quarter endedDecember 31, 2022 and 2021, respectively. 33 Table of Contents NET INTEREST INCOME ANALYSIS For the Three Months Ended December 31, 2022 and 2021 (dollars in thousands) 2022 2021 Average Average Average Average Balance Interest Rate Balance Interest Rate
Assets: Interest-earning assets Loans$ 1,681,460 $ 21,979 5.19 %$ 1,253,827 $ 16,381 5.18 % Investment securities 16,509 212 5.09 % 15,634 155 3.93 % Interest-earning cash 29,281 275 3.73 % 106,660 38 0.14 %
FHLB stock and other investments 6,489 106 6.48 5,252 42 3.17 Total interest-earning assets 1,733,739 22,572 5.17 % 1,381,373 16,616 4.77 % Non interest-earning assets: Cash and due from banks 10,614 8,264 Other assets 52,493 49,011 Total assets$ 1,796,846 $ 1,438,648 Liabilities and stockholders' equity: Interest-bearing liabilities Savings, NOW and money market deposits$ 910,732 $ 4,763 2.07 %$ 609,251 $ 366 0.24 % Time deposits 357,994 1,547 1.71 % 346,448 491 0.56 % Total interest-bearing deposits 1,268,726 6,310 1.97 % 955,699 857 0.36 % Fed funds purchased & FHLB & FRB advances 98,576 664 2.67 126,058 160 0.50 Subordinated debentures 24,573 334 5.39 % 24,499 330 5.34 % Total interest-bearing liabilities 1,391,875 7,308 2.08
% 1,106,256 1,347 0.48 % Demand deposits 204,256 192,161 Other liabilities 24,793 13,834 Total liabilities 1,620,924 1,312,251 Stockholders' equity 175,922 126,397 Total liabilities and stockholders' equity$ 1,796,846 $ 1,438,648 Net interest income and interest rate spread 3.09 % 4.29 % Net interest margin$ 15,264 3.49 %$ 15,269 4.39 %
Provision and Allowance for Loan Losses
The Company recorded a$1.5 million provision for loan losses expense for the three months endedDecember 31, 2022 versus$900 thousand recorded for the comparable period in 2021. The adequacy of the provision and the resulting allowance for loan losses, which was$14.4 million atDecember 31, 2022 , is determined by management's ongoing review of the loan portfolio including, among other things, impaired loans, past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect the borrower's ability to repay and estimated fair value of any underlying collateral securing loans. Moreover, management evaluates changes, if any, in underwriting standards, collection, charge-off and recovery practices, the nature or volume of the portfolio, lending staff, concentration of loans, as well as current economic conditions and other relevant factors. Management believes the allowance for loan losses is adequate to provide for probable and reasonably estimable losses atDecember 31, 2022 . (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.) 34 Table of Contents Non-interest Income Non-interest income decreased by$1.0 million for the three months endedDecember 31, 2022 versus the comparable 2021 period. This decline was largely driven by the decrease in net gain on sale of loans. For the three months endedDecember 31, 2022 and 2021, the Company sold loans totaling approximately$8.1 million and$35.2 million , respectively, recognizing net gains of$578 thousand and$1.5 million , respectively. Gains on the sales of the guaranteed portion of SBA loans were lower than expected in the 2022 quarter due to various factors, including the sustained reduction in SBA premiums and loan closing delays due to borrower considerations. Non-Interest Income For the three months ended December 31, 2022 and 2021 (dollars in thousands) Three months ended December 31, (in thousands) 2022 2021 Loan servicing and fee income$ 678 $ 690 Service charges on deposit accounts 63 63 Net gain on sale of loans held for sale 578 1,492 Other income 92 130 Total non-interest income$ 1,411 $ 2,375 Non-interest Expense Total non-interest expense remained flat at$8.3 million for the three months endedDecember 31, 2022 versus the comparable 2021 quarter. Salaries and benefits decreased by$607 thousand , offset by the increases in the remaining components of non-interest expense. Non-Interest Expense For the three months ended December 31, 2022 and 2021 (dollars in thousands) Three months ended December 31, (in thousands) 2022 2021 Salaries and employee benefits$ 4,332 $ 4,939 Occupancy and equipment 1,477 1,413 Data processing 418 366 Advertising and promotion 150 33 Professional fees 683 499 Other expenses 1,211 1,014 Total non-interest expense$ 8,271 $ 8,264 The Company recorded income tax expense of$1.6 million for an effective tax rate of 22.7% for the three months endedDecember 31, 2022 versus income tax expense of$1.9 million for an effective tax rate of 22.9% in the comparable 2021 period. 35 Table of Contents Asset Quality - Total non-accrual loans atDecember 31, 2022 were$10.6 million , or 0.61% of total loans, compared to$12.3 million , or 0.76% of total loans atSeptember 30, 2022 and$6.1 million , or 0.48% of total loans, atDecember 31, 2021 . The allowance for loan losses as a percentage of total non-accrual loans amounted to 136%, 105% and 153% atDecember 31, 2022 ,September 30, 2022 andDecember 31, 2021 , respectively.
Total accruing loans delinquent 30 days or more, excluding purchased
credit-impaired loans, amounted to
Total loans having credit risk ratings of Special Mention or Substandard were$25.6 million atDecember 31, 2022 versus$32.6 million atSeptember 30, 2022 . These were mainly from the acquired loan portfolio of Savoy. The acquired portfolio has a large component of SBA loans, which have been supported through the COVID-pandemic with assistance from the SBA. The high level of criticized loans in the Savoy portfolio results in part from a conservative view of these borrowers' ability to perform once government assistance ends, as well as specific instances of borrowers seeking assistance/deferrals/modifications due to the impact to their business. The Company's Special Mention and Substandard loans were comprised of residential real estate, multi-family, commercial real estate loans, commercial and industrial loans (including SBA facilities) and contruction loans atDecember 31, 2022 . The Company had no loans with a credit risk rating of Doubtful for the periods presented. All loans not having credit risk ratings of Special Mention, Substandard or Doubtful are considered pass loans.
At
AtDecember 31, 2022 , the Company's allowance for loan losses amounted to$14.4 million or 0.82% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 0.79% atSeptember 30, 2022 and 0.73% atDecember 31, 2021 . The Company recorded net loan recoveries of$60 thousand during the three months endedDecember 31, 2022 versus net loan charge-offs of$92 thousand for the three months endedSeptember 30, 2022 . The Company recorded net loan recoveries of$66 thousand during the three months endedDecember 31, 2021 . The Company recorded a$1.5 million provision for loan losses expense for the three months endedDecember 31, 2022 versus$900 thousand recorded for the comparable period in 2021. Adjustments to the Company's loss experience is based on management's evaluation of several environmental factors, including: changes in local, regional, national, and international economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments; changes in the nature and volume of the Company's portfolio and in the terms of the Company's loans; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans; changes in the quality of the Company's loan review system; changes in lending policies, procedures and strategies; changes in the value of underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company's existing portfolio. Management has determined that the current level of the allowance for loan losses is adequate in relation to the probable and reasonably estimable losses present in the portfolio. While management uses available information to recognize probable and reasonably estimable losses on loans, future additions to the allowance may be necessary and management may need to record loan charge-offs in future periods. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. (See also Critical Accounting Policies, Judgments and Estimates contained herein). 36 Table of Contents ASSET QUALITYDecember 31, 2022 versusSeptember 30, 2022 andDecember 31, 2021 (dollars in thousands) As of or for the three months ended 12/31/2022 9/30/2022 12/31/2021 Non-accrual loans$ 10,596 $ 12,281 $ 6,115 Non-accrual loans held for sale - - - Loans greater than 90 days past due 1,202 1,231 2,501 Other real estate owned - - - Total non-performing assets (1)$ 11,798
$ 13,512 $ 8,616 Performing TDRs$ 1,901 $ 2,370 $ 455 Loans held for sale - - -
Loans held for investment 1,746,810
1,623,531 1,277,434
Allowance for loan losses: Beginning balance$ 12,844 $ 10,886 $ 8,552 Provision 1,500 2,050 900 Charge-offs - (92) (66) Recoveries 60 - - Ending balance$ 14,404 $ 12,844 $ 9,386
Allowance for loan losses as a % of total loans (2) 0.82 %
0.79 % 0.73 %
Allowance for loan losses as a % of non-accrual loans (2) 136 % 105 % 153 % Non-accrual loans as a % of total loans (2) 0.61 %
0.76 % 0.48 %
Non-performing assets as a % of total loans, loans held for sale and other real estate owned
0.68 % 0.83 % 0.67 %
Non-performing assets as a % of total assets 0.59 %
0.73 % 0.59 %
Non-performing assets and performing TDRs, to total loans held for sale and investment
0.78 % 0.98 % 0.71 %
(1) Non-performing assets defined as non-accrual loans, non-accrual loans held
for sale, loans greater than 90 days past due and other real estate owned.
(2) Excludes loans held for sale.
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