Hanover Bancorp Inc NY

Previous wording

Historically, the Bank has generated additional income by strategically originating and selling residential and government guaranteed loans to other financial institutions at premiums, while also retaining servicing rights in some sales. However, with increases in interest rates in recent years, the demand by purchasers of residential loans for pools of loans declined, eliminating the Bank’s ability to sell residential loans in its portfolio on desirable terms. Commencing in late 2023, the Bank initiated development of a flow origination program under which the Bank expects to originate individual loans for sale to specific buyers, thereby positioning the Bank to resume residential loan sales and generate fee income to complement sale premiums earned from the origination of SBA loans. The Bank is an approved SBA Preferred Lender, 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.

Current wording

Historically, the Bank has generated additional income by strategically originating and selling residential and government guaranteed loans to other financial institutions at premiums, while also retaining servicing rights in some sales. However, with the rapid increases in interest rates in recent years, the appetite among the Bank’s purchasers of residential loans for pools of loans declined, eliminating the Bank’s ability to sell residential loans in its portfolio on desirable terms. Commencing in late 2023, the Bank initiated development of a flow origination program under which the Bank originates individual loans for sale to specific buyers, thereby positioning the Bank to resume residential loan sales and generate fee income to complement sale premiums earned from the sale of the guaranteed portion of SBA loans. The Bank is an approved SBA Preferred Lender, 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.

Previous wording

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.

Current wording

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

Previous wording

As of or for the three months ended March 31, 2024 and 2023

Current wording

As of or for the three and six months ended June 30, 2024 and 2023

Previous wording

At March 31, 2024 the Company, on a consolidated basis, had total assets of $2.3 billion, total deposits of $1.9 billion and total stockholders’ equity of $189.5 million. The Company recorded net income of $4.1 million, or $0.55 per diluted share (including Series A preferred shares), for the three months ended March 31, 2024 compared to net income of $3.2 million, or $0.43 per diluted share (including Series A preferred shares), for the same period in 2023.

Current wording

At June 30, 2024 the Company, on a consolidated basis, had total assets of $2.3 billion, total deposits of $1.9 billion and total stockholders’ equity of $190.1 million. The Company recorded net income of $0.8 million, or $0.11 per diluted share (including Series A preferred shares), for the three months ended June 30, 2024 compared to net income of $3.1 million, or $0.42 per diluted share (including Series A preferred shares), for the same period in 2023.

Previous wording

The $0.9 million increase in earnings for the three months ended March 31, 2024, versus the comparable 2023 period resulted primarily from a $1.8 million increase in non-interest income and a $0.6 million decrease in the provision for credit losses expense, which were partially offset by a $1.0 million decrease in net interest income, reflecting the continued impact of higher funding costs resulting from the rapid rise in interest rates driven by the Federal Reserve, a $0.3 million increase in income tax expense and a $0.2 million increase in non-interest expense.

Current wording

The $2.3 million decrease in earnings for the three months ended June 30, 2024, versus the comparable 2023 period resulted from a $3.5 million increase in the provision for credit losses expense, a $1.1 million increase in non-interest expense and a $0.3 million decrease in net interest income, reflecting the continued impact of higher funding costs resulting from the higher interest rates driven by the Federal Reserve, which were partially offset by a $1.6 million increase in non-interest income, consisting primarily of gain on sale of loans held-for-sale, and a $1.0 million decrease in income tax expense.

Previous wording

The Company’s return on average assets and return on average stockholders’ equity were 0.74% and 8.70%, respectively, for the three months ended March 31, 2024, versus 0.68% and 7.24%, respectively, for the comparable 2023 period.

Current wording

The Company’s return on average assets and return on average stockholders’ equity were 0.15% and 1.77%, respectively, for the three months ended June 30, 2024, versus 0.60% and 6.82%, respectively, for the comparable 2023 period.

Previous wording

Total non-accrual loans at March 31, 2024 were $14.9 million, or 0.74% of total loans, compared to $14.5 million, or 0.74% of total loans at December 31, 2023 and $10.3 million, or 0.58% of total loans, at March 31, 2023. The allowance for credit losses as a percentage of total non-accrual loans amounted to 134%, 136% and 144% at March 31, 2024, December 31, 2023 and March 31, 2023, respectively.

Current wording

Total non-accrual loans at June 30, 2024 were $15.8 million, or 0.79% of total loans, compared to $14.5 million, or 0.74% of total loans at December 31, 2023 and $10.7 million, or 0.58% of total loans, at June 30, 2023. The allowance for credit losses as a percentage of total non-accrual loans amounted to 149%, 136% and 144% at June 30, 2024, December 31, 2023 and June 30, 2023, respectively.

Previous wording

The Company’s operating efficiency ratio was 65.4% for the three months ended March 31, 2024, versus 67.4% a year ago. The improvement in the operating efficiency ratio was due to the increase in non-interest income, which was partially offset by a decrease in net interest income resulting from the rapid rise in market interest rates and an increase in non-interest expense.

Current wording

The Company’s operating efficiency ratio was 69.2% for the three months ended June 30, 2024, versus 68.3% in the year ago period. The increase in the operating efficiency ratio was due to the increase in non-interest expense and a decrease in net interest income resulting from the rise in market interest rates, which was partially offset by an increase in non-interest income.

Previous wording

On October 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and judgment and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an analysis is completed and a specific reserve may be established or a full or partial charge off could be recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of lending management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in management’s judgment, should be charged off. Although management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. The Bank considers its primary lending area to be the New York metro area. A substantial portion of the Bank’s loans are secured by real estate in these areas. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

Current wording

On October 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and judgment and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an analysis is completed and a specific reserve may be established or a full or partial charge off could be recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of lending management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in management’s judgment, should be charged off. Although management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. The Bank considers its primary lending area to be the New York metro area. A substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

Previous wording

Financial Condition – Total assets of the Company were $2.3 billion at March 31, 2024 and $2.3 billion at December 31, 2023. Total securities available for sale at March 31, 2024 was $92.7 million, an increase of $31.3 million from December 31, 2023, primarily driven by growth in U.S. Treasury securities. Total loans at March 31, 2024 were $2.0 billion, compared to total loans of $2.0 billion at December 31, 2023. Total deposits were $1.9 billion at March 31, 2024, versus $1.9 billion at December 31, 2023. Total borrowings and subordinated debt at March 31, 2024 were $173.6 million, including $126.7 million of outstanding FHLB advances, compared to $153.6 million at December 31, 2023.

Current wording

Financial Condition – Total assets of the Company were $2.3 billion at June 30, 2024 and at December 31, 2023. Total securities available for sale at June 30, 2024 was $98.8 million, an increase of $37.4 million from December 31, 2023, primarily driven by growth in U.S. Treasury securities, corporate bonds and mortgage-backed securities. Total loans at June 30, 2024 and December 31, 2023 were $2.0 billion. Total deposits were $1.9 billion at June 30, 2024 and at December 31, 2023. Total borrowings and subordinated debt at June 30, 2024 were $173.6 million, including $146.7 million of outstanding FHLB advances, compared to $153.6 million at December 31, 2023.

Previous wording

For the three months ended March 31, 2024, the Company’s loan portfolio, net of sales, grew by $48.3 million to $2.0 billion. At March 31, 2024, the residential loan portfolio amounted to $756.9 million, or 37.7% of total loans. Commercial real estate loans, including multi-family loans and construction and land development loans, total $1.1 billion or 56.1% of total loans at March 31, 2024. Commercial and industrial loans, including PPP loans, totaled $123.4 million or 6.2% of total loans. The Company’s commercial real estate concentration ratio continued its steady decline, decreasing to 416% of capital at March 31, 2024 from 432% of capital at December 31, 2023, with loans secured by office space totaling 2.3% of the loan portfolio and $46.0 million. This portfolio included less than $400 thousand of exposure in Manhattan office space. A significant portion of the Bank’s commercial real estate portfolio consists of loans secured by Multi-Family and CRE-Investor owned real estate that are predominantly subject to fixed interest rates for an initial period of 5 years. The Bank’s exposure to Land/Construction loans is minor at $10 million, all at floating interest rates, and CRE-owner occupied loans have a sizable mix of floating rates.

Current wording

At June 30, 2024, the residential loan portfolio amounted to $761.0 million, or 37.8% of total loans. Commercial real estate loans, including multi-family loans and construction and land development loans, total $1.1 billion or 55.3% of total loans at June 30, 2024. Commercial and industrial loans totaled $139.2 million or 6.9% of total loans. The Company’s commercial real estate concentration ratio continued to improve, decreasing to 403% of capital at June 30, 2024 from 432% of capital at December 31, 2023, with loans secured by office space totaling 2.3% of the loan portfolio and $46.2 million. This portfolio included less than $400 thousand of exposure in Manhattan office space. A significant portion of the Bank’s commercial real estate portfolio consists of loans secured by Multi-Family and CRE-Investor owned real estate that are predominantly subject to fixed interest rates for an initial period of 5 years. The Bank’s exposure to Land/Construction loans is minor at $10 million, all at floating interest rates, and CRE-owner occupied loans have a sizable mix of floating rates.

Previous wording

Total deposits were $1.9 billion at March 31, 2024, versus $1.9 billion at December 31, 2023, reflecting an increase of $12.7 million or 0.7%. Our loan to deposit ratio was 105% at March 31, 2024 and 103% at December 31, 2023. Core deposit balances, which consist of demand, NOW, savings and money market deposits, represented 75.8% and 72.6% of total deposits at March 31, 2024 and December 31, 2023, respectively. At those dates, demand deposit balances represented 10.6% and 10.9% of total deposits. Although core deposits grew to $1.5 billion as of March 31, 2024 from $1.4 billion as of December 31, 2023, demand deposit balances decreased from $207.8 million to $202.9 million during the same period. This decrease was confined to deposits made by residential loan borrowers in anticipation of residential loan closings. These funds comprise the equity residential borrowers are required to contribute to residential loan closings and the volume of these deposits rises and falls in proportion to the volume of anticipated residential loan closings. As the pace of residential lending increases, the volume of demand deposits will increase accordingly. Demand deposits, net of balances related to residential loan closings, grew to $180.4 million as of March 31, 2024 from $166.4 million as of December 31, 2023, an increase of 8.5%. The Company’s municipal deposit program is built on long-standing relationships developed in the local marketplace. This core deposit business will continue to provide a stable source of funding for the Company’s lending products at costs lower than both consumer deposits and market-based borrowings. The Company continues to broaden its municipal deposit base and currently services 37 customer relationships. At March 31, 2024, total municipal deposits were $576.3 million, representing 30.1% of total deposits, compared to $528.1 million at December 31, 2023, representing 27.7% of total deposits. Total municipal deposits increased by $48.3 million or 9.1% from December 31, 2023 pirmarily due to seasonal variations. The weighted average rate on the municipal deposit portfolio was 4.65% at March 31, 2024.

Current wording

Total deposits were $1.9 billion at June 30, 2024 and at December 31, 2023, reflecting an increase of $37.3 million or 2.0%. Our loan to deposit ratio was 104% at June 30, 2024 and 103% at December 31, 2023. Core deposit balances, which consist of demand, NOW, savings and money market deposits, represented 76.1% and 72.6% of total deposits at June 30, 2024 and December 31, 2023, respectively. At those dates, demand deposit balances represented 10.3% and 10.9% of total deposits. Although core deposits grew to $1.5 billion as of June 30, 2024 from $1.4 billion as of December 31, 2023, demand deposit balances decreased from $207.8 million to $199.9 million during the same period. This decrease was confined to deposits made by residential loan borrowers in anticipation of residential loan closings. These funds comprise the equity residential borrowers are required to contribute to residential loan closings and the volume of these deposits rise and fall in proportion to the volume of anticipated residential loan closings. As the pace of residential lending increases, the volume of demand deposits will increase accordingly. Demand deposits, net of balances related to residential loan closings, grew to $177.8 million as of June 30, 2024 from $166.4 million as of December 31, 2023, an increase of 6.8%. The Company’s municipal deposit program is built on long-standing relationships developed in the local marketplace. This core deposit business will continue to provide a stable source of funding for the Company’s lending products at costs lower than both consumer deposits and market-based borrowings. The Company continues to broaden its municipal deposit base and currently services 39 customer relationships. At June 30, 2024, total municipal deposits were $452.6 million, representing 23.3% of total deposits, compared to $528.1 million at December 31, 2023, representing 27.7% of total deposits. Total municipal deposits decreased by $75.5 million or 14.3% from December 31, 2023 pirmarily due to seasonal variations. The weighted average rate on the municipal deposit portfolio was 4.61% at June 30, 2024. The aggregate amount of the Company’s outstanding uninsured deposits was $675.7 million or 34.8% of total deposits as of June 30, 2024 and $771.0 million or 40.5% of total deposits as of December 31, 2023.

Previous wording

Borrowings at March 31, 2024 were $149.0 million, including $2.3 million in PPPLF funding, versus $129.0 million, including $2.3 million in PPPLF funding at December 31, 2023. At March 31, 2024, the Company had $126.7 million of outstanding FHLB advances as compared to $126.7 million at December 31, 2023. The Company had $20.0 million in borrowings outstanding under lines of credit with correspondent banks at March 31, 2024 and none at December 31, 2023. The Company utilizes a number of strategies to manage interest rate risk, including interest rate swap agreements which currently provide a benefit to net interest income.

Current wording

Borrowings at June 30, 2024 were $149.0 million, including $2.3 million in PPPLF funding, versus $129.0 million, including $2.3 million in PPPLF funding at December 31, 2023. At June 30, 2024, the Company had $146.7 million of outstanding FHLB advances as compared to $126.7 million at December 31, 2023. The Company had no borrowings outstanding under lines of credit with correspondent banks at June 30, 2024 and December 31, 2023. The Company utilizes a number of strategies to manage interest rate risk, including interest rate swap agreements which currently provide a benefit to net interest income.

Previous wording

Liquidity and Capital Resources – Liquidity management is defined as the ability of the Company and the Bank 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 the Federal Reserve, FHLB and correspondent banks, which totaled $136.5 million and $177.2 million at March 31, 2024 and December 31, 2023, 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. At March 31, 2024, liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $644.1 million, representing approximately 265% of uninsured deposit balances.

Current wording

Liquidity and Capital Resources – Liquidity management is defined as the ability of the Company and the Bank 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 the Federal Reserve, FHLB and correspondent banks, which totaled $141.1 million and $177.2 million at June 30, 2024 and December 31, 2023, 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. At June 30, 2024, liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $617.6 million.

Previous wording

The Company’s primary sources of funds are cash provided by deposits, which may include brokered and listing service deposits, borrowings, proceeds from maturities and sales of securities and cash provided by operating activities. At March 31, 2024, total deposits were $1.9 billion, of which $437.0 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. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 87% of total deposits at March 31, 2024. At March 31, 2024 and December 31, 2023, the Company had $149.0 million and $129.0 million, respectively, in borrowings outstanding.

Current wording

The Company’s primary sources of funds are cash provided by deposits, which may include brokered and listing service deposits, borrowings, proceeds from maturities and sales of securities and cash provided by operating activities. At June 30, 2024, total deposits were $1.9 billion, of which $446.0 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. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 87% of total deposits at June 30, 2024. At June 30, 2024 and December 31, 2023, the Company had $149.0 million and $129.0 million, respectively, in borrowings outstanding.

Previous wording

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 loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. Daily, management receives a current cash position update to ensure that all obligations are satisfied. On a weekly basis, appropriate senior management receives a current liquidity position report and a ninety day forecasted cash flow to ensure that all short-term obligations will be met and there is sufficient liquidity available. At March 31, 2024, the Bank had a total of $126.7 million in term and overnight borrowings outstanding with the FHLB. At March 31, 2024, the Bank had access to an additional $118.0 million in FHLB lines of credit. At March 31, 2024, the Bank’s borrowings from the Federal Reserve’s PPPLF were $2.3 million. At March 31, 2024, the Bank had access to approximately $72 million in unsecured lines of credit extended by correspondent banks, if needed, for short-term funding purposes. The Company had $20.0 million in borrowings outstanding under lines of credit with correspondent banks at March 31, 2024.

Current wording

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 loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. Daily, management receives a current cash position update to ensure that all obligations are satisfied. On a weekly basis, appropriate senior management receives a current liquidity position report and a ninety day forecasted cash flow to ensure that all short-term obligations will be met and there is sufficient liquidity available. At June 30, 2024, the Bank had a total of $146.7 million in term and overnight borrowings outstanding with the FHLB. At June 30, 2024, the Bank had access to an additional $372.2 million in secured funding through FHLB and FRB. At June 30, 2024, the Bank’s borrowings from the Federal Reserve’s PPPLF were $2.3 million. At June 30, 2024, the Bank had access to approximately $92 million in unsecured lines of credit extended by correspondent banks, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at June 30, 2024.

Previous wording

Our sources of wholesale funding included brokered certificates of deposit, listing service certificates of deposit and insured cash sweep (“ICS”) reciprocal deposits in excess of 20% of total liabilities, which balances totaled approximately $91.8 million, $8.2 million and $0, or 4.8%, 0.4% and 0.0% of total deposits, respectively, at March 31, 2024. We utilized brokered certificates of deposit and listing service certificates of deposit as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our brokered certificates of deposit, we utilized interest rate swap contracts to effectively extend their duration and to fix their cost.

Current wording

Our sources of wholesale funding included brokered certificates of deposit, listing service certificates of deposit and insured cash sweep (“ICS”) reciprocal deposits in excess of 20% of total liabilities, which balances totaled approximately $91.7 million, $6.5 million and $42.2 million, or 4.7%, 0.3% and 2.2% of total deposits, respectively, at June 30, 2024. We utilized brokered certificates of deposit and listing service certificates of deposit as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our brokered certificates of deposit, we utilized interest rate swap contracts to effectively extend their duration and to fix their cost.

Previous wording

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 the short and long terms. 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 was $189.5 million at March 31, 2024 compared to $184.8 million at December 31, 2023. The $4.7 million increase was primarily due to an increase of $3.3 million in retained earnings and a decrease of $1.2 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $4.1 million for the quarter ended March 31, 2024, which was offset by $0.7 million of dividends declared. The accumulated other comprehensive loss at March 31, 2024 was 0.68% of total equity and was comprised of a $1.2 million after tax net unrealized loss on the investment portfolio and a $0.1 million after tax net unrealized loss on derivatives.

Current wording

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 the short and long terms. 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 was $190.1 million at June 30, 2024 compared to $184.8 million at December 31, 2023. The $5.2 million increase was primarily due to an increase of $3.4 million in retained earnings and a decrease of $1.1 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $4.9 million for the six months ended June 30, 2024, which was offset by $1.5 million of dividends declared. The accumulated other comprehensive loss at June 30, 2024 was 0.70% of total equity and was comprised of a $1.4 million after tax net unrealized loss on the investment portfolio, partially offset by a $0.1 million after tax net unrealized gain on derivatives.

Previous wording

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 8.90%, 12.99%, 12.99% and 14.19%, respectively, at March 31, 2024, exceeding all 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. At March 31, 2024, the Bank’s capital buffer was in excess of requirements.

Current wording

exceeding all 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. At June 30, 2024, the Bank’s capital buffer was in excess of requirements.

Previous wording

On October 5, 2023, the Company announced that the Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Company may repurchase up to 366,050 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in the open market as conditions allow, or in privately negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has not made any stock repurchases under the program. The remaining buyback authority under the share repurchase program remained at 366,050 shares as of March 31, 2024.

Current wording

On October 5, 2023, the Company announced that the Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Company may repurchase up to 366,050 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in the open market as conditions allow, or in privately negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has not made any stock repurchases under the program. The remaining buyback authority under the share repurchase program therefore remained at 366,050 shares as of June 30, 2024.

Previous wording

The Company’s total stockholders’ equity to total assets ratio and tangible common equity to tangible assets ratio (“TCE ratio”) were 8.21% and 7.43%, respectively, at March 31, 2024, versus 8.14% and 7.35%, respectively, at December 31, 2023 and 8.71% and 7.84%, respectively, at March 31, 2023. 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 March 31, 2024 (in thousands). (See also Non-GAAP Disclosure contained herein.)

Current wording

The Company’s total stockholders’ equity to total assets ratio and tangible common equity to tangible assets ratio (“TCE ratio”) were 8.15% and 7.38%, respectively, at June 30, 2024, versus 8.14% and 7.35%, respectively, at December 31, 2023 and 8.62% and 7.77%, respectively, at June 30, 2023. 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 June 30, 2024 (in thousands). (See also Non-GAAP Disclosure contained herein.)

Previous wording

Commitments to extend credit are agreements to lend to customers provided there are no violations of material conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At March 31, 2024 and December 31, 2023, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $136 million and $147 million, respectively.

Current wording

Commitments to extend credit are agreements to lend to customers provided there are no violations of material conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At June 30, 2024 and December 31, 2023, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $150 million and $147 million, respectively.

Previous wording

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 financings and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At March 31, 2024 and December 31, 2023, letters of credit outstanding were approximately $0.9 million and $3.9 million, respectively.

Current wording

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 financings and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At June 30, 2024 and December 31, 2023, letters of credit outstanding were approximately $0.8 million and $3.9 million, respectively.

Previous wording

Results of Operations – Comparison of the Three Months Ended March 31, 2024 and 2023 – The Company recorded net income of $4.1 million during the three months ended March 31, 2024, versus net income of $3.2 million in the comparable three month period a year ago. The increase in earnings for the three months ended March 31, 2024, versus the comparable 2023 quarter resulted primarily from a $1.8 million increase in non-interest income and a $0.6 million decrease in the provision for credit losses expense, which were partially offset by a $1.0 million decrease in net interest income, a $0.3 million increase in income tax expense and a $0.2 million increase in non-interest expense.

Current wording

Results of Operations – Comparison of the Three Months Ended June 30, 2024 and 2023 – The Company recorded net income of $0.8 million during the three months ended June 30, 2024, versus net income of $3.1 million in the comparable three month period a year ago. The decrease in earnings for the three months ended June 30, 2024, versus the comparable 2023 quarter resulted from a $3.5 million increase in the provision for credit losses expense, a $1.1 million increase in non-interest expense and a $0.3 million decrease in net interest income, which were partially offset by a $1.6 million increase in non-interest income, consisting primarily of gain on sale of loans held-for-sale, and a $1.0 million decrease in income tax expense.

Previous wording

The $1.0 million decline in net interest income for the three months ended March 31, 2024, versus the comparable 2023 quarter was largely due to the compression of the Company’s net interest margin to 2.41% in the 2024 quarter from 3.04% in the comparable 2023 quarter. The yield on interest earning assets increased to 6.03% in the 2024 quarter from 5.47% in the comparable 2023 quarter, an increase of 56 basis points. This increase was offset by a 139 basis point increase in the cost of interest-bearing liabilities to 4.33% in 2024 from 2.94% in the first quarter of 2023. The rapid rise in interest rates driven by the Federal Reserve and, to a lesser extent, the Company’s decision to maintain increased liquidity due to market conditions resulted in the higher cost of funds.

Current wording

The $0.3 million decline in net interest income for the three months ended June 30, 2024, versus the comparable 2023 quarter was due to compression of the Company’s net interest margin to 2.46% in the 2024 quarter from 2.68% in the comparable 2023 quarter. The yield on interest earning assets increased to 6.22% in the 2024 quarter from 5.65% in the comparable 2023 quarter, an increase of 57 basis points. This increase was offset by a 96 basis point increase in the cost of interest-bearing liabilities to 4.48% in 2024 from 3.52% in the second quarter of 2023. The year over year margin compression reflects the effects of the rapid and significant rise in interest rates and the competitive deposit environment and, to a lesser extent, the Company’s decision to increase liquidity as a result of the industry events over the last two years resulted in the higher cost of funds.

Previous wording

Provision and Allowance for Credit losses

Current wording

Provision and Allowance for Credit losses on Loans

Previous wording

The Company recorded a $0.3 million provision for credit losses expense for the three months ended March 31, 2024, versus $1.0 million recorded for the comparable period in 2023. The allowance for credit losses increased by $0.2 million, or 1.1%, to $19.9 milion, or 0.99% of total loans at March 31, 2024, from $19.7 million, or 1.00% of total loans at December 31, 2023. The increase in the allowance for credit losses on loans is mostly attributable to additional provisioning related to increased loan volume. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)

Current wording

The Company recorded a $3.9 million provision for credit losses expense on loans for the three months ended June 30, 2024, versus $0.5 million recorded for the comparable period in 2023. The allowance for credit losses increased by $4.0 million, or 20.3%, to $23.6 milion, or 1.17% of total loans at June 30, 2024, from $19.7 million, or 1.00% of total loans at December 31, 2023. The increase in the allowance for credit losses on loans is attributable to an ACL on an individually evaluated loan of $2.5 million and $1.1 million related to ongoing enhancements to the CECL model during the June 2024 quarter. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)

Previous wording

Total non-interest expense increased by $0.2 million for the three months ended March 31, 2024 versus the comparable 2023 quarter. The increase in non-interest expense was primarily in occupancy and equipment.

Current wording

Total non-interest expense increased by $1.1 million for the three months ended June 30, 2024 versus the comparable 2023 quarter. The increase in non-interest expense was primarily in salaries and employee benefits attributed to a strategically planned reduction in certain lending activity resulting in lower deferred origination costs.

Previous wording

The Company recorded income tax expense of $1.4 million for an effective tax rate of 24.9% for the three months ended March 31, 2024, versus income tax expense of $1.0 million for an effective tax rate of 23.2% in the comparable 2023 period. The increase in the effective tax rate is due to increased business in other states, related to our SBA and USDA lending program.

Current wording

The Company recorded income tax expense of $0.3 million for an effective tax rate of 27.2% for the three months ended June 30, 2024, versus income tax expense of $1.3 million for an effective tax rate of 29.9% in the comparable 2023 period.

Previous wording

Non-interest income increased by $1.8 million for the three months ended March 31, 2024 versus the comparable 2023 period. This increase was driven by a $1.5 million increase in net gain on sale of loans reflecting the strengthening of secondary market premiums for sales of SBA loans. For the three months ended March 31, 2024 and 2023, the Company sold the government guaranteed portion of SBA loans totaling approximately $26.7 million and $12.8 million, respectively, recognizing net gains of $2.5 million and $1.0 million, respectively.

Current wording

Non-interest income increased by $3.5 million for the six months ended June 30, 2024 versus the comparable 2023 period. This increase was driven by a $3.0 million increase in net gain on sale of loans reflecting the strengthening of secondary market premiums for sales of SBA loans. For the six months ended June 30, 2024 and 2023, the Company sold approximately $54.7 million and $25.4 million, respectively in the government guaranteed portion of SBA loans, recognizing net gains of $5.0 million and $2.0 million, respectively.

Previous wording

Asset Quality - Total non-accrual loans at March 31, 2024 were $14.9 million, or 0.74% of total loans, compared to $14.5 million, or 0.74% of total loans at December 31, 2023 and $10.3 million, or 0.58% of total loans, at March 31, 2023. The allowance for credit losses as a percentage of total non-accrual loans amounted to 134%, 136% and 144% at March 31, 2024, December 31, 2023 and March 31, 2023, respectively.

Current wording

Asset Quality - Total non-accrual loans at June 30, 2024 were $15.8 million, or 0.79% of total loans, compared to $14.5 million, or 0.74% of total loans at December 31, 2023 and $10.6 million, or 0.58% of total loans, at June 30, 2023. The allowance for credit losses as a percentage of total non-accrual loans amounted to 149%, 136% and 144% at June 30, 2024, December 31, 2023 and June 30, 2023, respectively.

Previous wording

Total accruing loans delinquent 30 days or more, amounted to $16.9 million, $13.9 million and $9.0 million at March 31, 2024, December 31, 2023 and March 31, 2023, respectively.

Current wording

Total accruing loans delinquent 30 days or more, amounted to $16.1 million, $13.9 million and $17.0 million at June 30, 2024, December 31, 2023 and June 30, 2023, respectively.

Previous wording

Total loans having credit risk ratings of Special Mention and Substandard were $42.8 million at March 31, 2024, versus $42.4 million at December 31, 2023. The Company’s Special Mention and Substandard loans were comprised of residential real estate, multi-family, commercial real estate loans and commercial and industrial loans (including SBA facilities) at March 31, 2024. 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.

Current wording

Total loans having credit risk ratings of Special Mention and Substandard were $49.4 million at June 30, 2024, versus $42.4 million at December 31, 2023. The Company’s Special Mention and Substandard loans were comprised of residential real estate, multi-family, commercial real estate loans and commercial and industrial loans (including SBA facilities) at June 30, 2024. 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.

Previous wording

At March 31, 2024, the Company’s allowance for credit losses amounted to $19.9 million or 0.99% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 1.00% at December 31, 2023 and 0.83% at March 31, 2023. The Company recorded net loan charge-offs of $85 thousand during the three months ended March 31, 2024 versus net loan recoveries of $677 thousand for the three months ended December 31, 2023. The Company recorded net loan charge-offs of $457 thousand during the three months ended March 31, 2023.

Current wording

At June 30, 2024, the Company’s allowance for credit losses amounted to $23.6 million or 1.17% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 1.00% at December 31, 2023 and 0.84% at June 30, 2023. The Company recorded net loan charge-offs of $79 thousand during the three months ended June 30, 2024 versus loan charge-offs of $10 thousand during the three months ended June 30, 2023.

Previous wording

The Company recorded a $0.3 million provision for credit losses expense for the three months ended March 31, 2024, versus $1.0 million recorded for the comparable period in 2023. Additional information regarding the ACL and the associated provisions recognized during the quarters ended March 31, 2024 and 2023 is presented in Note 4 to the unaudited consolidated financial statements. (See also Critical Accounting Policies, Judgments and Estimates contained herein).

Current wording

The Company recorded a $3.9 million provision for credit losses expense on loans for the three months ended June 30, 2024, versus $0.5 million recorded for the comparable period in 2023. Additional information regarding the ACL and the associated provisions recognized during the quarters ended June 30, 2024 and 2023 is presented in Note 4 to the unaudited consolidated financial statements. (See also Critical Accounting Policies, Judgments and Estimates contained herein).