EDGAR 10-K Filing

Company CIK: 1828588
Filing Year: 2025
Filename: 1828588_10-K_2025_0001558370-25-003018.json

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ITEM 1. BUSINESS
Item 1.Business
Overview
Hanover Bancorp, Inc. (“Hanover”) is currently a New York corporation which is the holding company for Hanover Community Bank (the “Bank”), a New York chartered community commercial bank focusing on highly personalized and efficient services and products responsive to local needs. In 2024, our Board and shareholders approved a proposal to redomicile the Company in Maryland, and the Company is in the process of completing the change in its state of incorporation from New York to Maryland. The Bank operates as a locally headquartered, community-oriented bank serving customers throughout the New York metro area from offices in Nassau, Suffolk, Queens, Kings (Brooklyn) and New York (Manhattan) Counties, New York, and Freehold, Monmouth County, New Jersey. We opened the Bank’s Hauppauge Business Banking Center in Hauppauge, Suffolk County, New York in May 2023. In addition, we have recently received regulatory approval to open a new branch in Port Jefferson, Suffolk County, New York, which we expect to open in early 2025. As of December 31, 2024, we had total assets of $2.31 billion, total loans of $1.99 billion, total deposits of $1.95 billion and total stockholders’ equity of $196.6 million.
The Bank was originally organized in 2009, with a focus on serving the South Asian community in Nassau County. After incurring financial and regulatory setbacks, the Bank was recapitalized in 2012 (the “2012 Recapitalization”). Following the 2012 Recapitalization, the Bank adopted a strategic plan focused on providing differentiated consumer and commercial banking services to clients in the western Long Island markets and New York City boroughs, particularly the Queens and Brooklyn markets. As a result, the Bank has grown its balance sheet significantly both through organic loan and deposit growth, as well as highly opportunistic acquisitions. The Bank’s management team has utilized its strong local community ties and experience with federal and New York bank regulatory agencies to create a bank that we believe emphasizes strong credit quality, a solid balance sheet, and a robust capital base.
In 2019, we acquired Chinatown Federal Savings Bank (“CFSB”). The transaction helped us enhance and diversify our funding profile and further enhance our visibility in the New York City market where much of our lending activities take place.
On May 26, 2021, the Company completed the acquisition of Savoy Bank (“Savoy”), a privately held commercial bank founded to provide banking services to small business owners in and around New York City. With the Savoy acquisition, we expanded our commercial banking capabilities significantly, with a particular focus on small business clients and Small Business Administration (“SBA”) lending.
In May 2022, the Company completed an initial public offering (“IPO”) of its common stock resulting in net proceeds of $27.7 million. The Company listed its shares on The Nasdaq Global Select Market in connection with the IPO.
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. Accordingly, the Company reported a transition quarter that ran from October 1, 2023 through December 31, 2023 (“transition period”). The Company’s current full fiscal year is the calendar year January 1, 2024 through December 31, 2024 (“calendar 2024”).
Our one- to four-family residential mortgage segment has a particular niche focus on non-conforming loans, primarily secured by owner-occupied and investment properties. The segment has proven particularly appealing to Asian American borrowers in the New York City boroughs. We offer a variety of deposit accounts to businesses and consumers through our branch network, which we believe complements our niche lending efforts. Additionally, we have expanded our deposit products to include a full line of municipal banking accounts, which has allowed us to capture additional customers in our operating footprint. During the fourth calendar quarter of 2023, we began offering business banking services to the legal, licensed cannabis industry, initially in New York state. We now offer these services in New Jersey and may in the future consider opening accounts for licensed entities in other states.
Lending Activities
Our lending strategy is to maintain a broadly diversified loan portfolio based on the type of customer (i.e., businesses versus individuals), type of loan product (e.g., owner occupied commercial real estate, commercial loans, etc.), geographic location and industries in which our business customers are engaged (e.g., manufacturing, retail, hospitality, wholesale distribution, construction, etc.). We offer personal and business loans on a secured and unsecured basis, SBA and USDA guaranteed loans, revolving lines of credit, commercial mortgage loans, and one- to four-family non-qualified mortgages secured by primary and secondary residences that may be owner occupied or investment properties, home equity loans, bridge loans and other personal purpose loans.
Residential real estate. We originate mainly non-qualified, alternative documentation, single-family residential mortgage loans through broker referrals or our branch network to accommodate the needs of diverse communities in the New York City MSA. We offer multiple products, including our Residential Investor Program (“RIP”), which is designed specifically for two- to four-family units. Other one- to four-family credit products include home equity loans and first-time home buyer loans.
Our one- to four-family residential real estate portfolio is secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of properties pledged as collateral on loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.
We originate non-qualified one- to four-family residential mortgage loans both to sell and hold for investment. Single-family residential mortgage loans held for sale are generally sold with the servicing rights released. However, with higher market interest rates experienced 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 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.
Commercial real estate. We offer real estate loans secured by owner occupied and non-owner occupied commercial properties, including one- to four-family properties and multi-family residential properties and construction and land development loans. Our management team has extensive knowledge of the markets where we operate and our borrowers. We focus on what we believe to be high quality credits with acceptable loan-to-value ratios, income- producing properties with strong cash flow and collateral profiles. The weighted average LTV was 59% for this portfolio as of December 31, 2024.
Within the commercial real estate portfolio, multi-family loans are secured primarily by rent controlled/stabilized multi-family properties located in New York City. The real estate securing our existing non-owner occupied commercial real estate loans is primarily multi-family, mixed-use and commercial properties. Owner-occupied properties comprise a wide variety of property types, including offices, warehouses, retail centers, and hotels.
Our construction portfolio is small, representing only $13.5 million in total balances at December 31, 2024. Our construction and land development loans are comprised of commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans. These loans are typically Prime-based and have maturities of fewer than 18 months. As of December 31, 2024, 100% of our real estate construction loan portfolio was secured by commercial properties.
Commercial and industrial. We provide a mix of variable and fixed rate commercial and industrial loans, which we refer to as C&I loans. The loans are typically made to small and medium-sized businesses for working capital needs, business expansions and trade financing. We extend commercial business loans on an unsecured and secured basis for working capital, accounts receivable and inventory financing, machinery and equipment purchases, and other business purposes. Generally, lines of credit have maturities ranging from twelve to twenty- four months, and “term loans” have maturities ranging from five to ten years. C&I loans generally provide for floating interest rates, with interest only payments for lines of credit and monthly payments of both principal and interest for term loans. We expect C&I lending to be a key component of our growth going forward. As of December 31, 2024, our commercial and industrial loans comprised $168.9 million, or 8.5%, of total loans held for investment.
Small Business Administration Loans. Our SBA loans are secured by commercial real estate and/or business assets. We offer mostly SBA 7(a) variable-rate loans. We originate all loans to hold for investment and move loans to available for sale as management decides which loans to sell. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or to finance the purchase of real estate, equipment or business expansions. SBA loans secured by real estate have maturities of up to 25 years, with non-real estate secure loans generally having maturities of 10 years. In addition to real estate, collateral may include inventory, accounts receivable and equipment.
SBA loans are originated subject to personal guarantees and may include real estate belonging to guarantors as collateral. We monitor SBA loans by collateral type. From time to time, we will also originate SBA 504 loans, which are real estate backed commercial mortgages where we have first mortgages and the SBA has second mortgages on the properties. We also, from time-to-time, originate loans guaranteed by the United States Department of Agriculture (“USDA”), which have characteristics that are similar to those of SBA 7(a) loans. We originate all such loans through our loan officers and brokers to borrowers located in, and secured by collateral located in, New York and New Jersey, our primary trade area, as well as in other states across the country.
Deposits and Funding
Checking accounts consist of retail and business demand deposit products. NOW accounts consist of retail and business interest-bearing transaction accounts that have minimum balance requirements. Money market accounts consist of products that provide market rates of interest to depositors. Our savings accounts consist of statement type accounts. Time deposits consist of certificates of deposit, including those held in IRA accounts, and brokered certificates of deposit.
We also have a municipal banking business, which has produced a significant level of deposits at cost-effective rates. The business provides banking services to public municipalities, including counties, cities, towns, and school districts, throughout the Long Island area. We believe this business is differentiated from our competitors in that the customers are long-term relationships of our team and are not transactional in nature. Furthermore, our focus is banking municipalities that are core to our branch footprint and where our brand resonates. This initiative is also consistent with our branch-lite and highly efficient approach to growing our balance sheet. The team and relationships we have allow us to compete throughout the Long Island market without the expense constraints of multiple physical locations. As of December 31, 2024, we had $509.3 million in municipal deposits at a weighted average rate of 3.72%.
Deposits serve as the primary source of funding for our interest-earning assets, but also generate non-interest revenue through insufficient funds fees, stop payment fees, safe deposit rental fees, ATM fees and debit card interchange and other miscellaneous fees.
Employees and Human Capital Resources
As of December 31, 2024, we employed 185 full-time employees. None of these employees are covered by a collective bargaining agreement. The Company provides its employees with comprehensive benefits, some of which are provided on a contributory basis, including medical, Health Savings Account contribution for eligible plans, a 401(k) savings plan with a company match component and short-term and long-term disability coverage. Additional benefits offered include paid time off, dental, vision, life insurance and employee assistance. The Company’s compensation package is designed to maintain market competitive total rewards programs for all employees in order to attract and retain superior talent. We also implemented flexible scheduling, which has allowed us to remain competitive.
Competition
The financial services industry is highly competitive. We compete for loans, deposits, and financial services in all of our principal markets. We compete directly with other bank and nonbank institutions located within our markets, internet-based banks, out-of-market banks and bank holding companies that advertise in or otherwise serve our markets, money market funds and other mutual funds, brokerage houses, and various other financial institutions. Additionally, we compete with insurance companies, leasing companies, regulated small loan companies, credit unions, governmental agencies and commercial entities offering financial services products, including nonbank lenders and so-called financial technology companies. Competition involves, among other things, efforts to retain current customers and to obtain new loans and deposits, the scope and types of services offered, interest rates paid on deposits and charged on loans, as well as other aspects of banking. We also face direct competition from subsidiaries of bank holding companies that have far greater assets and resources than ours.
Supervision and Regulation
Overview
The Bank is chartered under the laws of the state of New York. Its deposits are insured under the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits, but it is not a member of the Federal Reserve System. The lending, investment, deposit-taking, and other business authority of the Bank is governed primarily by state and federal law and regulations, and the Bank is prohibited from engaging in any operations not authorized by such laws and regulations. The Bank is subject to extensive regulation, supervision and examination by, and the enforcement authority of, the New York Department of Financial Services (the “DFS”) and the FDIC, its primary federal regulator. The regulatory structure establishes a comprehensive framework of activities in which a non-member bank may engage and is primarily intended for the protection of depositors, customers and the DIF. The regulatory structure gives the regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
The Company is a bank holding company, due to its control of the Bank, and is therefore subject to the requirements of the Bank Holding Company Act of 1956, as amended (the “BHCA”), and regulation and supervision by the Board of Governors of the Federal Reserve System (“FRB”). The Company files reports with and is subject to periodic examination by the FRB. Any change in the applicable laws and regulations could have a material adverse impact on the Company and the Bank and their operations and the Company’s shareholders.
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Wall Street and Consumer Protection Act (the “Dodd-Frank Act”). While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for banks and their holding companies. In addition, the Economic Growth Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Bank Regulation
Loans and Investments
State commercial banks and trust companies have authority to originate and purchase any type of loan, including commercial, commercial real estate, residential mortgages or consumer loans. Aggregate loans by a state commercial bank or trust company to any single borrower or group of related borrowers are generally limited to 15% of the Bank’s capital stock, surplus fund and undivided profits, plus an additional 10% if secured by specified readily marketable collateral.
Federal and state law and regulations limit the Bank’s investment authority. Generally, a state non-member bank is prohibited from investing in corporate equity securities for its own account other than the equity securities of companies through which the bank conducts its business. Under federal and state regulations, a New York state non-member bank may invest in investment securities for its own account up to specified limits depending upon the type of security. “Investment securities” are generally defined as marketable obligations that are investment grade and not predominantly speculative in nature.
Lending Standards and Guidance
The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies.
The FDIC, the Office of the Comptroller of the Currency (the “OCC”), and the FRB have also jointly issued the “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). The CRE Guidance, which addresses land development, construction, and certain multi-family loans, as well as commercial real estate loans, does not establish specific lending limits but rather reinforces and enhances these agencies’ existing regulations and guidelines for such lending and portfolio management. Specifically, the CRE Guidance provides that a bank has a concentration in CRE lending if (1) total reported loans for construction, land development, and other land represent 100% or more of total risk-based capital; or (2) total reported loans secured by multi-family properties, non-farm non-residential properties (excluding those that are owner-occupied), and loans for construction, land development, and other land represent 300% or more of total risk-based capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
Federal Deposit Insurance
The Bank is a member of the DIF, which is administered by the FDIC. The Bank’s deposit accounts are insured by the FDIC, generally up to a maximum of $250,000 per depositor.
The FDIC imposes deposit insurance assessments against all insured depository institutions. An institution’s assessment rate depends upon the perceived risk of the institution to the DIF, with institutions deemed less risky paying lower rates. Assessments for institutions of less than $10 billion of total assets, such as the Bank, are based on financial measures and supervisory ratings derived from statistical models estimating the probability of failure within three years. Assessment rates (inclusive of possible adjustments) range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking.
By final rule adopted in October 2022, the FDIC increased the initial base deposit insurance assessment rates by 2 basis points beginning in the first quarterly assessment period of 2023. As a result, effective January 1, 2023, assessment rates for institutions of the Bank’s size ranged from 3.5 to 32 basis points. A significant increase in insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank. We cannot predict what deposit insurance assessment rates will be in the future.
The FDIC may terminate the insurance of an institution’s deposits upon finding that the institution has engaged in unsafe and unsound practices, is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank knows of no practice, condition or violation that might lead to termination of its deposit insurance.
Capitalization
The Bank is subject to risk-based and leverage capital standards by which all banks are evaluated in terms of capital adequacy. Federal banking agencies have broad powers to take corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized”, “significantly undercapitalized,” or “critically undercapitalized.” FDIC rules define these five capital categories. Under current FDIC regulations, a bank is deemed to be “well capitalized” if the bank has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 8% or greater, has a common equity tier 1 capital ratio of 6.5% or greater, has a leverage ratio of 5% or greater, and is not subject to any order or final capital directive by the FDIC to meet and maintain a specific capital level for any capital measure. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it received an unsatisfactory safety and soundness examination rating. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. As of December 31, 2024, the Bank was a “well-capitalized” bank, as defined by its primary federal regulator.
Each of the bank regulatory agencies have issued rules that amend their capital guidelines for interest rate risk and require such agencies to consider in their evaluation of a bank’s capital adequacy, the exposure of a bank’s capital and economic value to changes in interest rates. These rules do not establish an explicit supervisory threshold. The agencies have indicated that they intend, at a subsequent date, to incorporate explicit minimum requirements for interest rate risk into their risk-based capital standards and have proposed a supervisory model to be used together with bank internal models to gather data and propose, at a later date, explicit minimum requirements.
The United States is a member of the Basel Committee on Banking Supervision (the “Basel Committee”) that provides a forum for regular international cooperation on banking supervisory matters. The Basel Committee develops guidelines and supervisory standards and is best known for its international standards on capital adequacy. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, officially identified by the Basel Committee as “Basel III.” In July 2013, the US bank regulatory agencies published final rules to implement the Basel III capital framework and revise the framework for the risk-weighting of assets. The Basel III rules, among other things, narrow the definition of regulatory capital. As of January 1, 2019, Basel III requires bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. Basel III also provides for a “countercyclical capital buffer,” an additional capital requirement that generally is to be imposed when national regulators determine that excess aggregate credit growth has become associated with a buildup of systemic risk, in order to absorb losses during periods of economic stress. Banking institutions that maintain insufficient capital to comply with the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Additionally, the Basel III framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests, including a liquidity coverage ratio (“LCR”) designed to ensure that the banking entity maintains a level of unencumbered high-quality liquid assets greater than or equal to the entity’s expected net cash outflow for a 30-day time horizon under an acute liquidity stress scenario, and a net stable funding ratio (“NSFR”) designed to promote more medium and long-term funding based on the liquidity characteristics of the assets and activities of banking entities over a one-year time horizon. The LCR and NSFR rules do not apply to us due to our asset size.
The final BASEL III capital rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $3.0 billion or more, and top-tier savings and loan holding companies, referred to as banking organizations. As finally implemented, Basel III requires banking organizations to maintain: (a) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%; (b) a minimum ratio of tier 1 capital to risk- weighted assets of at least 6.0%; (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk- weighted assets of at least 8.0%; and (d) a minimum leverage ratio of 3.0%, calculated as the ratio of tier 1 capital balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). In addition, the rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5%, effectively raising the foregoing capital requirements by 2.5%.
As a result of the capital conservation buffer rules, if the Bank fails to maintain the required minimum capital conservation buffer, the Bank may be unable to make capital distributions to us, which could negatively impact our ability to pay dividends, service debt obligations or repurchase common stock. In addition, such a failure could result in a restriction on our ability to pay certain cash bonuses to executive officers, negatively impacting our ability to retain key personnel. As of December 31, 2024, the Bank’s current capital levels exceeded the applicable minimum capital requirements, including the capital conservation buffer, as prescribed in the Basel III capital rules.
As a result of the Economic Growth Act, banking regulatory agencies adopted a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than $10 billion that are not determined to be ineligible by their primary federal regulator due to their risk profile, which is referred to as a Qualifying Community Bank. The new definition expanded the ways that a Qualifying Community Bank may meet its capital requirements and be deemed “well capitalized.” The new rule establishes a community bank leverage ratio, or CBLR, equal to the tangible equity capital divided by the average total consolidated assets. Currently the minimum required CBLR is 9.0%.
A Qualifying Community Bank that meets the CBLR is considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.
The Bank did not elect into the CBLR framework.
Safety and Soundness Standards
Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to, among other things, internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and information security standards. In general, the guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired and require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. The FDIC also has issued guidance on risks banks may face from third-party relationships (e.g., relationships under which the third-party provides services to the bank). The guidance generally requires the Bank to perform adequate due diligence on the third-party, appropriately document the relationship, and perform adequate oversight and auditing, in order to the limit the risks to the Bank.
Prompt Corrective Regulatory Action
Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The final rule that increased regulatory capital standards also adjusted the prompt corrective action tiers as of January 1, 2015 to conform to the revised capital standards. As described above, the Bank has not elected to follow the CBLR so the generally applicable prompt corrective action requirements remain applicable to the Bank. Under prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized”: total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a common equity tier 1 capital ratio of 6.5% or greater, a leverage ratio of 5% or greater, and not be subject to any order or final capital directive by the FDIC to meet and maintain a specific capital level for any capital measure.
Non-member banks that have insufficient capital are subject to certain mandatory and discretionary supervisory measures. For example, a bank that is “undercapitalized” (i.e., fails to comply with any regulatory capital requirement) is subject to growth, capital distribution (including dividend) and other limitations, and is required to submit a capital restoration plan; a holding company that controls such a bank is required to guarantee that the bank complies with the restoration plan. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” A “significantly undercapitalized” bank is subject to additional restrictions. Non-member banks deemed by the FRB or FDIC to be “critically undercapitalized” also may not make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any material transactions outside the ordinary course of business after 60 days of obtaining such status, and are subject to the appointment of a receiver or conservator within 270 days after obtaining such status.
Dividends
Under federal and state law and applicable regulations, a New York state chartered bank may generally declare a dividend, without approval from the DFS, in an amount equal to its year-to-date net income plus the prior two years’ net income less dividends already paid. Dividends exceeding those amounts require application to and approval by the DFS. To pay a cash dividend, a non-member bank must also maintain an adequate capital conservation buffer under the capital rules discussed above.
Incentive Compensation Guidance
The FRB, OCC, FDIC, other federal banking agencies and DFS have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations, including non-member banks and bank holding companies, do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor, which for the Bank is the FDIC and for the Company is the FRB, may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, provisions of the Basel III regime described above limit discretionary bonus payments to bank and bank holding company executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. The scope and content of the banking regulators’ policies on incentive compensation are likely to continue evolving.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act govern transactions between an insured depository institution and its affiliates, which includes the Company. The FRB has adopted Regulation W, which implements and interprets Sections 23A and 23B, in part by codifying prior FRB interpretations.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution or a “financial subsidiary” under federal law is not treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the FRB has the discretion to treat subsidiaries of a bank as affiliates on a case-by-case basis. Section 23A limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus. There is an aggregate limit of 20% of the bank’s capital stock and surplus for such transactions with all affiliates. The term “covered transaction” includes, among other things, the making of a loan to an affiliate, a purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate and the acceptance of securities of an affiliate as collateral for a loan. All such transactions are required to be on terms and conditions that are consistent with safe and sound banking practices and no transaction may involve the acquisition of any “low quality asset” from an affiliate unless certain conditions are satisfied. Certain covered transactions, such as loans to or guarantees on behalf of an affiliate, must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending upon the type of collateral. In addition, Section 23B requires that any covered transaction (and specified other transactions) between a bank and an affiliate must be on terms and conditions that are substantially the same, or at least as favorable, to the bank, as those that would be provided to a non-affiliate.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an insider) and certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O. The aggregate amount of a bank’s loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to non-member banks. Aggregate loans by a bank to its insiders and insiders’ related interests may not exceed 15% of the bank’s unimpaired capital and unimpaired surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, such as education loans and certain residential mortgages, a bank’s loans to its executive officers may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any loan to an insider or a related interest of an insider be approved in advance by a majority of the board of directors of the bank, with any interested director not participating in the voting, if the loan, when aggregated with any existing loans to that insider or the insider’s related interests, would exceed the higher of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not involve more than a normal risk of repayment. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
Enforcement
The DFS and the FDIC have extensive enforcement authority over non-member banks to correct unsafe or unsound practices and violations of law or regulation. Such authority includes the issuance of cease-and-desist orders, assessment of civil money penalties and removal of officers and directors. The FDIC may also appoint a conservator or receiver for a non-member bank under specified circumstances, such as where (i) the bank’s assets are less than its obligations to creditors, (ii) the bank is likely to be unable to pay its obligations or meet depositors’ demands in the normal course of business, or (iii) a substantial dissipation of bank assets or earnings has occurred due to a violation of law of regulation or unsafe or unsound practices. Separately, the Superintendent of the DFS also has the authority to appoint a receiver or liquidator of any state-chartered bank or trust company under specified circumstances, including where (i) the bank is conducting its business in an unauthorized or unsafe manner, (ii) the bank has suspended payment of its obligations, or (iii) the bank cannot with safety and expediency continue to do business.
Federal Reserve System
Under federal law and regulations, the Bank is required to maintain sufficient liquidity to ensure safe and sound banking practices. Regulation D, promulgated by the FRB, imposes reserve requirements on all depository institutions, including the Bank, which maintain transaction accounts or nonpersonal time deposits. In March 2020, due to a change in its approach to monetary policy due to the COVID-19 pandemic, the FRB implemented a final rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The FRB has indicated that it has no plans to re-impose reserve requirements but may do so in the future if conditions warrant.
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to periodic examination by the DFS and FDIC. Federal and state regulations generally require periodic on-site examinations for all depository institutions. The Bank is required to pay an annual assessment to the DFS and FDIC to fund the agencies’ operations.
Community Reinvestment Act and Fair Lending Laws Federal Regulation
Under the Community Reinvestment Act (“CRA”), as implemented by the FDIC, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC to assess the Bank’s record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent examination, the Bank was rated “Satisfactory” with respect to its CRA compliance. The banking regulatory agencies have recently substantially amended their regulations implementing the CRA to, among other things, move away from standards based upon the location of a bank’s branches and toward a focus on the location of its loans. These regulations have staggered effective dates, and management has not yet determined the impact of these new regulations as a whole on the Bank.
New York State Regulation
The Bank is also subject to provisions of the New York State Banking Law that impose continuing and affirmative obligations upon a banking institution organized in New York State to serve the credit needs of its local community. Such obligations are substantially similar to those imposed by the CRA. The latest New York State CRA rating received by the Bank is “Satisfactory.”
USA PATRIOT Act and Money Laundering
The Bank is subject to the Bank Secrecy Act (“BSA”), which incorporates several laws, including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and related regulations. The USA PATRIOT Act gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the BSA, Title III of the USA PATRIOT Act implemented measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other things, Title III of the USA PATRIOT Act and the related regulations require:
● Establishment of anti-money laundering compliance programs that include policies, procedures, and internal controls; the designation of a BSA officer; a training program; and independent testing;
● Filing of certain reports with Financial Crimes Enforcement Network and law enforcement that are designated to assist in the detection and prevention of money laundering and terrorist financing activities;
● Establishment of a program specifying procedures for obtaining and maintaining certain records from customers seeking to open new accounts, including verifying the identity of customers;
● In certain circumstances, compliance with enhanced due diligence policies, procedures and controls designed to detect and report money- laundering, terrorist financing and other suspicious activity;
● Monitoring account activity for suspicious transactions; and
● A heightened level of review for certain high-risk customers or accounts.
The USA PATRIOT Act also includes prohibitions on maintaining correspondent accounts for foreign shell banks and requires compliance with record keeping obligations with respect to correspondent accounts of foreign banks.
The bank regulatory agencies have increased the regulatory scrutiny of the BSA and anti-money laundering programs maintained by financial institutions. Significant penalties and fines, as well as other supervisory orders may be imposed on a financial institution for non-compliance with these requirements. In addition, for financial institutions engaging in a merger transaction, federal bank regulatory agencies must consider the effectiveness of the financial institution’s efforts to combat money laundering activities. The Bank has adopted policies and procedures to comply with these requirements.
Privacy Laws
The Bank is subject to a variety of federal and state privacy laws, which govern the collection, safeguarding, sharing and use of customer information, and require that financial institutions have in place policies regarding information privacy and security. For example, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and practices for sharing nonpublic information with third parties, provide advance notice of any changes to the policies and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. It also requires banks to safeguard personal information of consumer customers. Some state laws also protect the privacy of information of state residents and require adequate security for such data, and certain state laws may, and issued federal regulations do, in some circumstances, require the Bank to notify affected individuals of security breaches of computer databases that contain their personal information. These laws and regulations may also require the Bank to notify law enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data.
Consumer Finance Regulations
The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. In this regard, the CFPB has several rules that implement various provisions of the Dodd-Frank Act that were specifically identified as being enforced by the CFPB. While the Bank is subject to the CFPB regulations, because it has less than $10 billion in total consolidated assets, the FDIC and the DFS are responsible for examining and supervising the Bank’s compliance with these consumer financial laws and regulations. In addition, the Bank is subject to certain state laws and regulations designed to protect consumers.
Other Regulations
The Bank’s operations are also subject to federal laws applicable to credit transactions, such as:
● The Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
● The Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
● The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
● The Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race, religion, sex and other prohibited factors in extending credit;
● The Fair Credit Reporting Act, governing the use of credit reports on consumers and the provision of information to credit reporting agencies;
● Unfair or Deceptive Acts or Practices laws and regulations;
● The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
● The rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of the Bank are further subject to the:
● The Truth in Savings Act, which specifies disclosure requirements with respect to deposit accounts;
● The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
● The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
● The Check Clearing for the 21st Century Act, which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
● State unclaimed property or escheatment laws; and
● Cybersecurity regulations, including but not limited to those implemented by DFS.
Holding Company Regulations
General
The Company, as a bank holding company controlling the Bank, is subject to regulation and supervision by the FRB under the BHCA. The Company is periodically examined by and required to submit reports to the FRB and must comply with the FRB’s rules and regulations. Among other things, the FRB has authority to restrict activities by a bank holding company that are deemed to pose a serious risk to the subsidiary bank.
Permissible Activities
A bank holding company is generally prohibited from engaging in non-banking activities or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than those permitted for a bank holding company. Such activities can include insurance underwriting and investment banking. The Company has not elected “financial holding company” status.
Capitalization
Bank holding companies are subject to consolidated regulatory capital requirements that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to depository institutions. As a result, consolidated regulatory capital requirements identical to those applicable to the subsidiary banks generally apply to bank holding companies. However, the FRB has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and subsequent legislation and the related issuance of regulations by the FRB have increased the threshold for the exception to $3.0 billion of consolidated assets. Consequently, bank holding companies such as the Company with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the FRB.
Source of Strength
Section 616 of the Dodd-Frank Act codified the FRB’s “source-of-strength” doctrine for bank subsidiaries of bank holding companies. The FRB has issued regulations requiring that all bank holding companies serve as a source of strength to their subsidiary depository institutions by providing financial, managerial and other support in times of an institution’s distress. Under this regulation, where a bank is experiencing severe financial distress, its parent bank holding company may be required to make financial contributions to the bank.
Dividends and Stock Repurchases
The FRB has issued a policy statement regarding the payment of dividends by holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior consultation with FRB staff concerning dividends in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.
The regulatory guidance also states that a bank holding company should consult with FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.
There is a separate requirement that a bank holding company give the FRB prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
These regulatory policies may affect our ability to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition of Control of the Company
Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the FRB has prior written notice and has not issued a notice disapproving the proposed acquisition. In evaluating such notices, the FRB takes into consideration such factors as the financial resources, competence, experience and integrity of the acquirer, the future prospects of the bank holding company involved and its subsidiary bank and the competitive effects of the acquisition. In January 2020, the Federal Reserve substantially revised its control regulations. Under the revised rule, control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the BHC. Where an investor holds less than 25%, the Federal Reserve provides the following four-tiered approach to determining control: (1) less than 5%; (2) 5%-9.99%; (3) 10%-14.99%; and (4) 15%-24.99%. In addition to the four tiers, the Federal Reserve takes into account substantive activities, including director service, business relationships, business terms, officer/employee interlocks, contractual powers, and proxy contests for directors. The Federal Reserve Board may require the company to enter into passivity and, if other companies are making similar investments, anti-association commitments. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, as is the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Federal Securities Laws
Hanover Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission. Hanover Bancorp, Inc. is a reporting company subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold shareholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, we will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as the Company remains a “non-accelerated filer” and a “smaller reporting company,” respectively, under Commission regulations (generally less than $75 million and $250 million, respectively, of voting and non-voting equity held by non-affiliates or less than $100 million in annual revenue). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. We have elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by nonaffiliates).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Additional Information
The Company makes available, free of charge, through its internet website www.hanoverbank.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as its proxy statement for its Annual Meeting of Shareholders, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (the “SEC”). Materials filed with the SEC are available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and should not be considered part of this document. You can request a copy of our Annual Report on Form 10-K free of charge by sending a written request to Hanover Bancorp, Inc., Attn: Corporate Secretary, 80 East Jericho Turnpike, Mineola, New York 11501. Please include your contact information with the request.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Set forth below is a summary of those risks, and then a more detailed discussion of the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations, cash flows, liquidity and the value of our securities. The risks and uncertainties described below are not the only risks we face.
Summary of Risk Factors
● Our one- to four- family residential mortgage lending and certain niche loan products could expose us to credit risks that may be different than would apply to a more diversified or traditional loan portfolio.
● Our business and operations are concentrated in the New York metropolitan area, and we are sensitive to adverse changes in the local economy.
● We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate and compliance risks, which may have an adverse effect on our business, financial condition and results of operations if we are unable to manage such risks.
● SBA and other government guaranteed lending programs are an increasingly important part of our business, and changes to SBA or other government guaranteed lending programs, including funding for such programs, or the rules governing such programs or other government guaranteed lending programs, may adversely affect our profitability. In addition, we may incur greater risk on our SBA and other government guaranteed lending as we seek to expand our guaranteed lending activities outside of our primary market area.
● We have begun offering banking services to businesses in the state licensed cannabis industry, and this could expose us to liabilities and regulatory compliance costs.
● Our liquidity and capital needs, particularly given our growth strategy, may suffer if not managed effectively or if capital is not available on terms acceptable to us.
● Our ability to sustain growth will diminish if we are unable to continue to make commercially attractive acquisitions, or if we are unable to realize the benefits of prior or future acquisitions in a reasonable timeframe.
● We operate in a highly competitive market and face increasing competition from traditional and new financial services providers.
● We are dependent on key personnel and the unexpected loss of their services, or if we are unable to attract new personnel as we execute our growth strategy, will adversely impact our financial condition.
● We operate in a highly regulated industry, and the current regulatory framework and any future legislative and regulatory changes, may have an adverse effect on our business, financial condition and results of operations.
● We are subject to risks associated with our dependency on our information technology and telecommunications systems and third-party servicers including exposures to systems failures, interruptions or breaches of security.
● Due to the limited public float and trading volume of our stock, our stock price may be volatile, which could result in substantial losses for investors.
● Anti-takeover provisions in our charter and under New York and Federal law could limit certain shareholder actions.
ECONOMIC, MARKET AND INVESTMENT RISKS
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation rose sharply at the end of 2021 and remained at an elevated level through 2024. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
If we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, we may experience a material adverse effect on our financial condition and results of operations.
If we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, we may experience a material adverse effect on our financial condition and results of operations. We must maintain sufficient funds to respond to the needs of depositors and borrowers. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also receive funds from loan repayments, investment maturities and income on other interest-earning assets. While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area. Additionally, deposit balances can decrease if customers perceive alternative investments as providing a better risk/return tradeoff. Accordingly, as a part of our liquidity management, we must use a number of funding sources in addition to deposits and repayments and maturities of loans and investments, which may include Federal Home Loan Bank of New York advances, Federal Reserve Bank of New York’s discount window advances, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, pay our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
A lack of liquidity could also attract increased regulatory scrutiny and result in potential restraints imposed on us by regulators. Depending on the capitalization status and regulatory treatment of depository institutions, including whether an institution is subject to a supervisory prompt corrective action directive, certain additional regulatory restrictions and prohibitions may apply, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits.
Our financial flexibility would be severely constrained if we were unable to maintain our access to funding or if adequate financing were not available at acceptable interest rates. Further, if we were required to rely more heavily on more expensive funding sources to support liquidity, our revenues may not increase proportionately to cover our increased costs. In this case, our operating margins and profitability would be adversely affected. If alternative funding sources were no longer available to us, we may need to sell a portion of our investment and/or loan portfolio to raise funds, which, depending upon market conditions, could result in us realizing a loss on the sale of such assets. As of December 31, 2024, we had a net unrealized loss of $1.3 million on our available for-sale investment securities portfolio as a result of the higher interest rate environment. Our investment securities totaled $87.5 million, or 3.8% of total assets, at December 31, 2024. The details of this portfolio are included in Note 2 to the consolidated financial statements.
A substantial portion of our business is in the New York metro area, therefore, our business is particularly vulnerable to an economic downturn in our primary market area.
We primarily serve businesses, municipalities and individuals located in the New York metro area. As a result, we are exposed to risks associated with lack of geographic diversification. The occurrence of an economic downturn in the New York metro area, could impact the credit quality of our assets, the businesses of our customers and the ability to expand our business. Our success significantly depends upon the growth in population, income levels, deposits and housing in our market area. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively affected.
In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2024, 67% of our commercial real estate loan portfolio was secured by real estate located in the five boroughs of New York City and Nassau County, New York. Adverse developments affecting commerce or real estate values in the local economies in our primary market areas could increase the credit risk associated with our loan portfolio and have an adverse impact on our revenues and financial condition. In particular, we may experience increased loan delinquencies, which could result in a higher provision for credit losses and increased charge-offs. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, financial condition and results of operations.
We also obtain a significant volume of deposits from municipal customers, primarily in Nassau and Suffolk Counties in New York. Approximately 26.1% of our deposits are from municipal customers, although no single municipal customer represents a concentration risk. A prolonged economic downturn which adversely effects tax revenues or other governmental funding sources could have an adverse impact on our ability to gather cost efficient deposits, and fund our loans and other investments, thereby adversely affecting our results of operations.
We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.
At December 31, 2024, approximately $1.8 billion, or 91%, of our total loan portfolio was secured by real estate, almost all of which is located in our primary lending market. Future declines in the real estate values in the New York metro area and Nassau County and surrounding markets could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for credit losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of our other real estate owned (“OREO”) and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of our OREO, and our allowance for credit losses may not reflect accurate loan impairments. This could have an adverse effect on our business, financial condition or results of operations.
We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs and potential risks associated with the ownership of the real property, or consumer protection initiatives or changes in state or federal law may substantially raise the cost of foreclosure or prevent us from foreclosing at all.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we would be exposed to the risks inherent in the ownership of real estate. Although we held no OREO properties at December 31, 2024, it is possible that in future periods we may take title to OREO properties in the event of defaults on outstanding loans. The amount that we, as a mortgagee, may realize after a default depends on factors outside of our control, including, but not limited to, general or local economic conditions, environmental cleanup liabilities, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged properties, our ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules, and natural disasters. Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate, or writedowns in the value of OREO, could have an adverse effect on our business, financial condition and results of operations.
Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the time and expense associated with the foreclosure process or prevent us from foreclosing at all. A number of states in recent years have either considered or adopted foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in default. Additionally, federal regulators have prosecuted a number of mortgage servicing companies for alleged consumer law violations. If new state or federal laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers, such could have an adverse effect on our business, financial condition and results of operations.
Other aspects of our business may be adversely affected by unfavorable economic, market, and political conditions.
An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business:
● a decrease in the demand for our loans and other products we offer;
● a decrease in our deposit balances due to overall reductions in the number or value of client accounts;
● a decrease in the value of collateral securing our loans;
● an increase in the level of nonperforming and classified loans;
● an increase in provisions for credit losses and loan charge-offs;
● a decrease in net interest income derived from our lending and deposit gathering activities;
● a decrease in our ability to access the capital markets; and
● an increase in our operating expenses associated with attending to the effects of certain circumstances listed above.
Various market conditions also affect our operating results. Real estate market conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of credit, which impacts the rates and terms at which we offer loans. Stock market downturns often reflect broader economic deterioration and/or a downward trend in business earnings which may adversely affect businesses’ ability to raise capital and/or service their debts. Political and electoral changes, developments, conflicts and conditions (such as fiscal policy changes proposed) have in the past introduced, and may in the future introduce, additional uncertainty that could also affect our operating results negatively.
LENDING ACTIVITIES RISKS
Small Business Administration lending is an increasingly important part of our business. Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
Our SBA lending program is dependent upon the U.S. federal government. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress or funding for the SBA program may also have a material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could materially and adversely affect our business, results of operations and financial condition.
The SBA’s 7(a) Loan Program is the SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. Typically, we sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales result in premium income for us at the time of sale and create a stream of future servicing income, as we retain the servicing rights to these loans. For the reasons described above, we may not be able to continue originating these loans or selling them in the secondary market. Furthermore, even if we are able to continue to originate and sell SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors. When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us. Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could materially and adversely affect our business, financial condition or results of operations.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably.
The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose us to various credit and default risks.
We have historically originated an increasingly significant number of SBA loans, and sold a significant portion of the guaranteed portions of these loans on the secondary market. We generally retain the non-guaranteed portions of the SBA loans that we originate. Consequently, as of December 31, 2024, we held $187.4 million of SBA loans on our balance sheet, $134.1 million of which consisted of the non-guaranteed portion of SBA loans and $53.3 million consisted of the guaranteed portion of SBA loans. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans. We generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations would be adversely impacted.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loans and the manner in which they were originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolio, our liquidity, results of operations and financial condition could be adversely affected.
We are expanding the geographic scope of our SBA, and other government guaranteed lending, and this may expose us to greater and additional risks than lending in our primary trade area.
Historically, our SBA and other government guaranteed lending has been to customers, and secured by collateral, located primarily on our metropolitan New York trade area. However, we have hired lending personnel in other parts of the country to expand our market share of SBA and other government guaranteed lending. This geographic expansion of our government guaranteed lending may expose us to greater and different risks than lending in our trade area. For example, upon a default we will need to comply with local legal requirements and court rules, which may be more or less advantageous to borrowers than those in New York and New Jersey, which may make collecting upon collateral more difficult and expensive. We may also need to hold and operate property or business assets in remote locales, making it more difficult and expensive for management to oversee the assets. We may also have less knowledge of the markets in areas in which we may now lend, making underwriting decisions riskier.
The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions.
We expect that gains on the sale of U.S. government guaranteed loans will comprise a meaningful component of our revenue. The determination of these gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S. government guaranteed loans. The value of the retained unguaranteed portion of the loans and servicing rights are determined based on market derived factors such as prepayment rates, current market conditions and recent loan sales. Deferred fees and costs are determined using internal analysis of the cost to originate loans. Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability. In addition, while we believe these valuations reflect fair value and such valuations are subject to validation by an independent third party, if such valuations are not reflective of fair market value then our business, results of operations and financial condition may be materially and adversely affected.
Imposition of limits by bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.
In 2006, the OCC, the FDIC, and the FRB, or collectively, the Agencies, issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” or the “CRE Guidance.” Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure will receive increased supervisory scrutiny where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our commercial real estate and multi-family loans balance have decreased 4% combined for the year ended December 31, 2024 and commercial real estate loans represent 385% of our risk-based capital at December 31, 2024, a decrease from 432% at December 31, 2023 and 448% at September 30, 2023.
In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending, or the “2015 Statement.” In the 2015 Statement, the Agencies, among other things, indicated the intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary federal regulator, were to impose restrictions on the amount of such loans we can hold in our portfolio or require us to implement additional compliance measures, for reasons noted above or otherwise, our earnings could be adversely affected as would our earnings per share.
The residential mortgage loans that we originate consist primarily of non-conforming residential mortgage loans which may be considered less liquid and more risky.
The residential mortgage loans that we originate consist primarily of non-conforming residential mortgage loans, which are typically considered to have a higher degree of risk and are less liquid than conforming residential mortgage loans. We attempt to address this enhanced risk through our underwriting process, and by generally requiring three months principal, interest, taxes and insurance reserves. These loans also present pricing risk as rates change, and our sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other financial institutions may change from time to time, which could result in a lower volume of corresponding loan originations. In addition, when we sell the non-conforming residential mortgage loans, we are required to make certain representations and warranties to the purchaser regarding such loans. Under those agreements, we may be required to repurchase the non-conforming residential mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. Additionally, if repurchase and indemnity demands increase on loans that we sell from our portfolio, our liquidity, results of operations and financial condition could be adversely affected.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most banks, our earnings and cash flows depend to a great extent upon the level of our net interest income, or the difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.
When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. An increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. Conversely, a decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume and our overall results of operations. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.
CREDIT RISKS
We may not be able to measure and limit our credit risk adequately, which could lead to unexpected losses.
The primary component of our business involves making loans to our clients. The business of lending is inherently risky, including risks that the principal or interest on any loan will not be repaid in a timely manner or at all or that the value of any collateral supporting the loan will be insufficient to cover losses in the event of a default. These risks may be affected by the strength of the borrower’s business and industry, and local, regional and national market and economic conditions. Many of our loans are made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as managing the concentration of our loans within specific industries, loan types and geographic areas, and our credit approval practices may not adequately reduce credit risk. Further, our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting clients and the quality of the loan portfolio. A failure to effectively measure and manage the credit risk associated with our loan portfolio could lead to unexpected losses and have an adverse effect on our business, financial condition and results of operations.
Our emphasis on one- to four- family residential mortgage loans involves risks that could adversely affect our financial condition and results of operations.
Our loan portfolio includes a significant concentration of one- to four- family residential mortgage loans. As of December 31, 2024, we had $729.3 million in one- to four- family residential mortgage loans, representing 37% of our total loan portfolio. Approximately 91% of these loans are secured by properties in the five boroughs of New York City and Nassau County, New York and 66% of these loans are rental properties and are not owner-occupied. These loans expose us to credit risks that may be different from those related to loans secured by owner-occupied properties or commercial loans. Adverse developments affecting commerce or real estate values in the local economies in our primary market areas could increase the credit risk associated with our loan portfolio and have an adverse impact on our revenues and financial condition. In addition, economic downturns in New York City could affect levels of employment in the New York metro area, which may affect the demand for rental housing. Any increase in rental vacancies, or reductions in rental rates, could adversely impact our borrowers and their ability to repay their loans. Any sustained period of increased non-payment, delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, financial condition and results of operations.
Our niche lending products may expose us to greater risk than traditional lending products.
A significant portion of our lending activity is related to certain niche lending products, such as loans secured by investor owned, non-owner occupied one- to four-family properties and loans without third-party income verifications, which are considered non-qualified mortgage loans and which may expose us to greater risk of credit loss than that associated with more traditional lending products. Non-qualified mortgage loans are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. For the year ended December 31, 2024 and fiscal year ended September 30, 2023, we originated $130.4 million and $196.0 million in non-qualified mortgage loans, respectively. During the year ended December 31, 2024 we sold into the secondary market $37.6 million of our non-qualified mortgages. There were no such sales for the fiscal year ended September 30, 2023. Although we have developed underwriting standards and procedures designed to reduce the risk of loss, we can provide no assurance that these standards and procedures will be effective in reducing losses. Should we incur credit losses, it could adversely affect our results of operations.
The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.
We target our business development and marketing strategy primarily to serve the banking and financial services needs of small- to medium-sized businesses and real estate owners. These small- to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small- to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas could cause us to incur substantial credit losses that could negatively affect our financial condition and results of operations.
Our allowance for credit losses may not be adequate to cover actual losses.
We maintain an allowance for credit losses that represents management’s judgment of expected credit losses and risks inherent in our loan portfolio. As of December 31, 2024, our allowance for credit losses totaled $22.8 million, which represented approximately 1.15% of our total loans held for investment. The level of the allowance reflects management’s continuing evaluation of general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels, adequacy of collateral and historical peer charge-off data. The determination of the appropriate level of our allowance for credit losses is inherently highly subjective and requires management to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes.
Our federal and state regulators, as an integral part of their examination process, review our methodology for calculating, and the adequacy of, our allowance for credit losses and may direct us to make additions to the allowance based on their judgments about information available to them at the time of their examination. Further, if actual charge-offs in future periods exceed the amounts allocated to our allowance for credit losses, we may need additional provisions for credit losses to restore the adequacy of our allowance for credit losses. While we believe our allowance for credit losses is appropriate for the risk identified in our loan portfolio, we cannot provide assurance that we will not further increase the allowance for credit losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. We also cannot be certain that actual results will be consistent with forecasts and assumptions used in our modeling. Any of these occurrences could materially and adversely affect our financial condition and results of operations.
If our non-performing assets increase, our earnings will be adversely affected.
At December 31, 2024, our non-performing assets, which consist of non-performing loans and OREO (of which we had none at December 31, 2024), were $16.4 million, or 0.71% of total assets. Our non-performing assets adversely affect our net income in various ways:
● we record interest income only on the cash basis or cost-recovery method for non-accrual loans and we do not record interest income for OREO;
● we must provide for expected credit losses through a current period charge to the provision for credit losses;
● non-interest expense increases when we write down the value of properties in our OREO portfolio to reflect changing market values;
● there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees; and
● the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
If additional borrowers become delinquent and do not pay their loans, and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase, which could have a material adverse effect on our financial condition and results of operations.
We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.
The use of statistical and quantitative models, and other quantitative and qualitative analyses, is necessary for bank decision-making, and the employment of such analyses is becoming increasingly widespread in our operations.
Liquidity stress testing, interest rate sensitivity analysis, the identification of possible violations of anti-money laundering regulations and the estimation of credit losses are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to annual Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, stress testing and the Comprehensive Capital Analysis and Review submissions, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.
We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements are able to be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress-testing in the future, adverse regulatory scrutiny. Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making.
LIQUIDITY RISKS
If we do not manage our liquidity effectively, our business could suffer.
Liquidity is essential for the operation of our business. Market conditions, unforeseen outflows of funds or other events could have a negative effect on our level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business transactions at a reasonable cost and in a timely manner. If our access to stable and low-cost sources of funding, such as client deposits, is reduced, we may need to use alternative funding, which could be more expensive or of limited availability. Further evolution in the regulatory requirements relating to liquidity and risk management also may impact us negatively. For more information on these regulations and other regulatory changes, see the section entitled “Supervision and Regulation.” Any substantial, unexpected or prolonged changes in the level or cost of liquidity could affect our business adversely.
Our growth strategy may require us to raise additional capital in the future to fund such growth, and the unavailability of additional capital on terms acceptable to us could adversely affect us or our growth.
Although we believe we have sufficient capital to meet our capital needs for our immediate growth plans, we will continue to need capital to support our longer-term growth plans. Our ability to access the capital markets, if needed, will depend on a number of factors, including the state of the financial markets. If capital is not available on favorable terms when we need it, we will have to either issue common stock or other securities on less than desirable terms or curtail our growth until market conditions become more favorable. Any diminished ability to raise additional capital, if needed, could subject us to liability, restrict our ability to grow, require us to take actions that would affect our earnings negatively or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely. Such events could have a material adverse effect on our business, financial condition and results of operations.
STRATEGIC RISKS
If we do not effectively execute our strategic plans, we will not achieve our growth objectives and our business and results of operations may be negatively affected.
Our growth depends upon successful, consistent execution of our business strategies. A failure to execute these strategies may impact growth negatively. A failure to grow, whether organically or through strategic acquisitions, may have an adverse effect on our business. The challenges arising from generating organic or strategic growth may include preserving valuable relationships with employees, clients and other business partners and delivering enhanced products and services. Execution of our business strategies also may require certain regulatory approvals or consents, which may include approvals of the FRB, the FDIC, the DFS and other domestic regulatory authorities. These regulatory authorities may impose conditions on the activities or transactions contemplated by our business strategies, which may negatively impact our ability to realize fully the expected benefits of certain opportunities.
Any failure by us to manage acquisitions and other significant transactions successfully may have a material adverse effect on our results of operations, financial condition, and cash flows.
Our ability to grow revenues, earnings and cash flows at or above our historical rates depends in part upon our ability to identify, appropriately price, successfully acquire, and integrate businesses to realize anticipated synergies by integrating cultures, accounting, data processing and internal control systems. Promising acquisitions are difficult to identify and complete for a number of reasons, including high valuations, competition among prospective buyers, and the need to satisfy applicable closing conditions, including any conditions to receiving the required regulatory approvals. To the extent we enter into transactions to acquire complementary businesses and/or technologies, we may not achieve the expected benefits of such transactions, which could result in increased costs, lowered revenues, ineffective deployment of capital, regulatory concerns, exit costs or diminished competitive position or reputation. These risks may be increased if the acquired company operates in a geographic location where we do not already have significant business operations. Integration and other risks can be more pronounced for larger and more complicated transactions, transactions outside of our core business space, or if multiple transactions are pursued simultaneously. The failure to successfully integrate acquired entities and businesses or failure to produce results consistent with the financial model used in the analysis of our acquisitions, investments, joint ventures or strategic alliances may cause us to incur asset write-offs, restructuring costs or other unanticipated expenses which may have a material adverse effect on our results of operations, financial position, and cash flows. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend additional resources to grow our business organically.
We have grown and may continue to grow through acquisitions.
Over the last several years, we have grown rapidly through both organic growth and acquisitions. On August 9, 2019, we consummated the acquisition of CFSB. On May 26, 2021, we consummated the acquisition of Savoy. These two acquisitions added $780.8 million in total assets, $452.6 million in deposits and $676.3 million in loans, as well as four branch offices in New York City. As part of our growth strategy, we intend to pursue prudent and commercially attractive acquisitions that will position us to capitalize on market opportunities. To be successful as a larger institution, we must successfully integrate the operations and retain the customers of acquired institutions, attract and retain the management required to successfully manage larger operations, and control costs.
Future results of operations will depend in large part on our ability to successfully integrate the operations of the acquired institutions and retain the customers of those institutions. If we are unable to successfully manage the integration of the separate cultures, customer bases and operating systems of the acquired institutions, and any other institutions that may be acquired in the future, our results of operations may be adversely affected.
In addition, to successfully manage substantial growth, we may need to increase non-interest expenses through additional personnel, leasehold and data processing costs, among others. In order to successfully manage growth, we may need to adopt and effectively implement policies, procedures and controls to maintain credit quality, control costs and oversee our operations. No assurance can be given that we will be successful in this strategy.
We may be challenged to successfully manage our business as a result of the strain on management and operations that may result from growth. The ability to manage growth will depend on our ability to continue to attract, hire and retain skilled employees. Success will also depend on the ability of our officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage employees.
Finally, substantial growth may stress regulatory capital levels, and may require us to raise additional capital in the future. No assurance can be given that we will be able to raise any required capital, or that we will be able to raise capital on terms that are beneficial to stockholders.
Attractive acquisition opportunities may not be available to us in the future.
We expect that other banking and financial service companies, many of which have significantly greater resources than we do and have a deep and liquid trading market, will compete with us in acquiring other financial institutions, if we pursue such acquisitions in the future. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators will consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and stockholders’ earnings per share.
COMPETITION RISKS
Competition in originating loans and attracting deposits may adversely affect our profitability.
We operate in a highly competitive banking market and face substantial competition in originating loans. This competition currently comes principally from other banks, savings institutions, mortgage banking companies, credit unions and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.
In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations, which may increase our cost of funds or negatively impact our liquidity.
We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Our inability to compete successfully in the markets in which we operate could have an adverse effect on our business, financial condition or results of operations.
We need to invest in innovation, and the inability or failure to do so may affect our business and earnings negatively.
Our success in the competitive environment in which we operate requires consistent investment of capital and human resources in innovation, particularly in light of the current “FinTech” environment, in which financial institutions are investing significantly in new technologies, such as artificial intelligence, machine learning, blockchain and other distributed ledger technologies, and developing potentially industry-changing new products, services and industry standards in order to attract clients. Our investment is directed at meeting the needs of our clients, adapting existing products and services to the evolving standards and demands of the marketplace, and maintaining the security of our systems and building a platform for future innovation and competitive advantage that is scalable. Among other things, investing in innovation helps keep us relevant and client-focused while maintaining acceptable margins. Our investment also focuses on enhancing the delivery of our products and services, such as our recent implementation of digital payment channels, such as mobile wallets, contactless debit cards and Zelle. Falling significantly behind our competition in this area could adversely affect our business opportunities, growth and earnings. There are substantial risks and uncertainties associated with innovation efforts, including an increased risk that new and emerging technologies may expose us to increased cybersecurity and other information technology vulnerability and threats. Expected timetables for the introduction and development of new products or services may not be achieved, and price and profitability targets may not be met. Further, our revenues and costs may fluctuate because new products and services generally require start-up costs while corresponding revenues take time to develop or may not develop at all.
KEY PERSONNEL RISKS
We rely heavily on our executive management team and other key personnel for our successful operation, and we could be adversely affected by the unexpected loss of their services.
Our success depends in large part on the performance of our key personnel at the Bank that have substantial experience and tenure with the Bank and in the markets that we serve. Our continued success and growth depend in large part on the efforts of these key personnel, the support of our Directors, and ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees to complement and succeed to our core senior management team.
If we are not able to attract, retain and motivate other key personnel, our business could be negatively affected.
Our future success depends in large part on our ability to retain and motivate our existing employees and attract new employees. Competition for the best employees can be intense, and there can be no assurance that we will be successful in our efforts to recruit and retain key personnel. Factors that affect our ability to attract and retain talented and diverse employees include compensation and benefits programs, profitability, opportunities for advancement, flexible working conditions, availability of qualified persons and our reputation. Our ability to attract and retain key executives and other employees may be hindered as a result of existing and potential regulations applicable to incentive compensation and other aspects of our compensation programs. These regulations may not apply to some of our competitors and to other institutions with which we compete for talent. The unexpected loss of services of key personnel, both in business line and corporate functions, could have a material adverse impact on our net income and financial condition because of the loss of their knowledge of our markets, operations and clients, their years of industry experience, and their technical skills. Similarly, the loss of key employees, either individually or as a group, could adversely affect our clients’ perception of our abilities and, accordingly, our reputation.
REGULATORY AND COMPLIANCE RISKS
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could adversely affect us and our future growth.
Banks are highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements from government agencies such as the FRB, the FDIC and the DFS, which govern almost all aspects of our operations. These laws and regulations are not intended to protect our shareholders. Rather, these laws and regulations are intended to protect our clients, depositors, the DIF, and the overall financial stability of the United States. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions that the Bank can pay to the Company and the Company can pay to its shareholders, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than required under generally accepted accounting principles (“GAAP”). Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional operating costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, enforcement actions and fines and other penalties, any of which could adversely affect our results of operations, regulatory capital levels and the price of our common stock. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition and results of operations.
Federal and State banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
As part of the bank regulatory process, the FDIC, the New York State DFS, and the FRB periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, one of these banking agencies were to determine that the financial condition, capital adequacy, asset quality, earnings prospects, management capability, liquidity, asset sensitivity to market risks, asset management, risk management or other aspects of any of our operations have become unsatisfactory, or that the Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against the Company, the Bank or their respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance and terminate the Bank’s charter to operate. If we become subject to such regulatory actions, our business, financial condition, results of operations and reputation could be adversely affected.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
Economic conditions that contributed to the financial crisis in 2008, particularly in the financial markets, resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. There can be no guarantee that regulators or other third parties will not seek to impose such additional requirements on financial institutions, such as extending additional regulations to small banks with less than $10 billion in assets. Compliance with these regulations has and may continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Federal and state regulatory agencies frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
Increases in FDIC insurance premiums could adversely affect our earnings and results of operations.
The deposits of our bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments as determined according to the calculation described in “Supervision and Regulation-Deposit Insurance.” In addition, the FDIC has the ability to assess special assessments against insured depository institutions if required to recapitalize the DIF. Increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our business, financial condition and results of operations.
Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We operate in an environment that imposes income taxes on our operations at both the federal and state levels to varying degrees and we try to minimize the impact of these taxes. Any change in tax laws or regulations, or new interpretation of an existing law or regulation, could significantly alter the tax impact on our financial results.
The net deferred tax asset reported on our balance sheet generally represents the tax benefit of future deductions from taxable income for items that have already been recognized for financial reporting purposes. The bulk of these deferred tax assets consists of deferred loan loss deductions and deferred compensation deductions. The net deferred tax asset is measured by applying currently enacted income tax rates to the accounting period during which the tax benefit is expected to be realized. As of December 31, 2024, our net deferred tax asset was $1.6 million.
Failure to comply with stringent capital requirements could result in regulatory criticism, requirements and restrictions.
The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which it must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial condition. These limitations establish a maximum percentage of eligible retained income that could be utilized for these actions.
Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The BSA, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the U.S. Department of the Treasury (the “Treasury Department”), to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and the Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the Treasury Department’s Office of Foreign Assets Control (“OFAC”).
In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our anti-money laundering program. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the inability to obtain regulatory approvals to proceed with certain aspects of our business plans, including acquisitions and de novo branching.
We are subject to numerous laws and regulations of certain regulatory agencies, such as the Consumer Financial Protection Bureau, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA directs all insured depository institutions to help meet the credit needs of the local communities in which they are located, including low- and moderate-income neighborhoods. Each institution is examined periodically by its primary federal regulator, which assesses the institution’s performance. The Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers.
Adverse supervisory findings regarding an institution’s performance under the CRA, fair lending or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, financial condition and results of operations.
The FRB may require us to commit capital resources to support the Bank, and we may not have sufficient access to such capital resources.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine and FRB regulations implementing it, the FRB may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so.
Our deposit services for businesses in the state licensed cannabis industry could expose us to liabilities and regulatory compliance costs.
Commencing in fourth calendar quarter of 2023, we implemented specialized deposit and lending services intended for cannabis-related business customers (“CRBs”). Medical use cannabis, as well as recreational use businesses, are legal in numerous states and the District of Columbia, including our primary markets of New York and New Jersey. However, such businesses are not legal at the federal level, and marijuana remains a Schedule I drug under the Controlled Substances Act of 1970. In 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published guidelines for financial institutions servicing state legal cannabis businesses. We have implemented a comprehensive control framework that includes written policies and procedures related to the on-boarding of such businesses and the monitoring and maintenance of such business accounts that comports with the FinCEN guidance. Additionally, our policies call for due diligence review of CRBs before they are on-boarded, including confirmation that businesses requiring licenses are properly licensed and maintain their licenses in good standing in the applicable state. Throughout the relationships, our policies call for continued monitoring of the businesses, including periodic site visits, confirmation that licenses are in good standing and reviews of business and compliance data, as applicable, to determine that the businesses continue to satisfy our requirements. The Bank may offer additional banking products and services to CRBs in the future. While we believe our policies and procedures allow us to operate in compliance with the FinCEN guidelines, there can be no assurance that compliance with the FinCEN guidelines will protect us from federal prosecution or other regulatory sanctions. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the federal government’s enforcement position could potentially subject us to criminal prosecution and other regulatory sanctions. As a general matter, the medical and recreational cannabis business is considered high-risk, thus increasing the risk of a regulatory action against our BSA/AML program that would likely have adverse consequences, including but not limited to, preventing us from undertaking mergers, acquisitions and other expansion activities.
TECHNOLOGY RISKS
Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.
We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.
Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.
If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.
In recent years, several financial services firms suffered successful cyber-attacks launched both domestically and from abroad, resulting in the disruption of services to clients, loss or misappropriation of sensitive or private information, and reputational harm. Further, information security risks for financial institutions like us are significant in part because of the evolving proliferation of new technologies, the use of the internet, mobile devices, and cloud technologies to conduct financial transactions and the increased sophistication and activities of hackers, terrorists, organized crime and other external parties, including foreign state actors. In addition, our clients often use their own devices, such as computers, smart phones and tablets, to manage their accounts, which may heighten the risk of system failures, interruptions or security breaches. If we fail to continue to upgrade our technology infrastructure and monitor our vendors to ensure effective information security relative to the type, size and complexity of our operations, we could become more vulnerable to cyber-attack and, consequently, subject to significant regulatory penalties.
Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. However, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.
We have a continuing need for technological change, and we may not have the resources to implement new technology effectively, or we may experience operational challenges when implementing new technology or technology needed to compete effectively with larger institutions may not be available to us on a cost-effective basis.
The financial services industry undergoes rapid technological changes with frequent introductions of new technology-driven products and services, including developments in telecommunications, data processing, automation, internet-based banking, debit cards and so-called “smart cards” and remote deposit capture. In addition to serving clients better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, at least in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We offer electronic banking services for consumer and business customers via our website, www.hanoverbank.com, including internet banking and electronic bill payment, as well as mobile banking. We also offer debit cards, ATM cards, and automatic and ACH transfers. We may experience operational challenges as we implement these new technology enhancements or products, which could impair our ability to realize the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for our technology needs may not be able to develop on a cost-effective basis the systems that will enable us to keep pace with such developments. As a result, competitors may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose clients seeking new technology-driven products and services to the extent we are unable to provide such products and services. Accordingly, the ability to keep pace with technological change is important and the failure to do so could adversely affect our business, financial condition and results of operations.
OPERATIONAL RISKS
Many types of operational risks can affect our earnings negatively.
We regularly assess and monitor operational risk in our businesses. Despite our efforts to assess and monitor operational risk, our risk management framework may not be effective in all cases. Factors that can impact operations and expose us to risks varying in size, scale and scope include:
● failures of technological systems or breaches of security measures, including, but not limited to, those resulting from computer viruses or cyber-attacks;
● unsuccessful or difficult implementation of computer systems upgrades;
● human errors or omissions, including failures to comply with applicable laws or corporate policies and procedures;
● theft, fraud or misappropriation of assets, whether arising from the intentional actions of internal personnel or external third parties;
● breakdowns in processes, breakdowns in internal controls or failures of the systems and facilities that support our operations;
● deficiencies in services or service delivery;
● negative developments in relationships with key counterparties, third-party vendors, or employees in our day-to-day operations; and
● external events that are wholly or partially beyond our control, such as pandemics, geopolitical events, political unrest, natural disasters or acts of terrorism.
While we have in place many controls and business continuity plans designed to address these factors and others, these plans may not operate successfully to mitigate these risks effectively. If our controls and business continuity plans do not mitigate the associated risks successfully, such factors may have a negative impact on our business, financial condition or results of operations. In addition, an important aspect of managing our operational risk is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions. We continue to enhance our risk management program to support our risk culture. Nonetheless, if we fail to provide the appropriate environment that sensitizes all of our employees to managing risk, our business could be impacted adversely.
Our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We are subject to certain operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.
We rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control systems and compliance requirements. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards, adverse business decisions or their implementation, or customer attrition due to potential negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to our reputation.
We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.
In the course of our business, we may foreclose on and take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those properties, we may not have adequate remedies against the prior owners or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability. Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property and, as a result, we may suffer a loss upon collection of the loan. Any significant environmental liabilities could have an adverse effect on our business, financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We outsource some of our operational activities and accordingly depend on a number of relationships with third-party service providers. Specifically, we rely on third parties for certain services, including, but not limited to, our core banking, web hosting and other processing services. Our business depends on the successful and uninterrupted functioning of our third-party servicers. The failure of these systems, a cybersecurity breach involving any of our third-party service providers or the termination or change in terms of a third-party software license or service agreement on which any of these systems is based could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third- party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. Replacing vendors or addressing other issues with our third-party service providers could entail significant delay, expense and disruption of service. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
In addition, the Bank’s primary federal regulator, the FDIC, has issued guidance outlining the expectations for third-party service provider oversight and monitoring by financial institutions. The federal banking agencies, including the FDIC, have also issued enforcement actions against financial institutions for failure in oversight of third-party providers and violations of federal banking law by such providers when performing services for financial institutions. Accordingly, our operations could be interrupted if any of our third-party service providers experience difficulty, are subject to cybersecurity breaches, terminate their services or fail to comply with banking regulations, which could adversely affect our business, financial condition and results of operations. In addition, our failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against the Bank, which could adversely affect our business, financial condition and results of operations.
Pandemics, natural disasters, global climate change, acts of terrorism and global conflicts may have a negative impact on our business and operations.
Pandemics, natural disasters, global climate change, acts of terrorism, global conflicts or other similar events have in the past, and may in the future have, a negative impact on our business and operations. These events impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations and may have other adverse effects on us in ways that we are unable to predict.
Our business operations could be disrupted if significant portions of our workforce were unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. Further, work-from-home and other modified business practices may introduce additional operational risks, including cybersecurity and execution risks, which may result in inefficiencies or delays, and may affect our ability to, or the manner in which we, conduct our business activities. Disruptions to our clients could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans.
Legal and regulatory proceedings and related matters could adversely affect us.
We have been and may in the future become involved in legal and regulatory proceedings. We consider most of our historical proceedings to be in the normal course of our business or typical for the industry; however, it is difficult to assess the outcome of these matters, and we may not prevail in any current or future proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or reputation, or our financial condition and results of our operations.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
COMMON STOCK AND TRADING RISKS
The price of our common stock could be volatile.
The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:
● general economic conditions and overall market fluctuations;
● actual or anticipated fluctuations in our quarterly or annual operating results;
● changes in accounting standards, policies, guidance, interpretations or principles;
● the public reaction to our press releases, our other public announcements and our filings with the SEC;
● changes in financial estimates and recommendations by securities analysts following our stock;
● changes in earnings estimates by securities analysts or our ability to meet those estimates;
● the operating and stock price performance of other comparable companies;
● the trading volume of our common stock;
● new technology used, or services offered, by competitors; and
● changes in business, legal or regulatory conditions, or other developments affecting the financial services industry, participants in our industry, and publicity regarding our business or any of our significant customers or competitors.
The realization of any of the risks described in this Item 1A “Risk Factors” section could have a material adverse effect on the market price of our common stock. In addition, the stock market experiences extreme volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect investor confidence and could affect the trading price of our common stock over the short, medium or long term, regardless of our actual performance. We cannot predict the extent to which a more active trading market in our common stock may develop or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control.
The holders of our existing and future debt obligations will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest.
Shares of our common stock are equity interests and do not constitute indebtedness. In the event of any liquidation, dissolution or winding up of our business or of the Bank, our common stock would rank below all claims of debt holders against us. As of December 31, 2024, we had outstanding approximately $25.0 million in aggregate principal amount of subordinated notes. Our debt obligations are senior to our shares of common stock. As a result, we must make payments on our debt obligations before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our debt obligations must be satisfied before any distributions can be made to the holders of our common stock. To the extent that we issue additional debt obligations, the additional debt obligations will be of equal rank with, or senior to, our existing debt obligations and senior to our shares of common stock.
Our dividend policy may change without notice and our future ability to pay dividends is subject to restrictions.
We have no obligation to continue paying dividends. Any future determination relating to the payment of dividends on our common stock will depend on a number of factors, including regulatory restrictions, our earnings and financial condition, our liquidity and capital requirements, the general economic climate, contractual restrictions, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant by our Board of Directors. The FRB has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital. The guidance provides that we inform and consult with the FRB prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure, including interest on the subordinated debt obligations, and our other debt obligations. For further information see “Supervision and Regulation-Dividends.”

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
ITEM 2. Properties
The Bank owns its administrative headquarters and its Garden City Park branch and leases seven other branch locations. Our banking offices are located in Kings, Nassau, Suffolk, New York and Queens Counties in New York and in Monmouth County in New Jersey. In addition, we have recently received regulatory approval to open a new branch in Port Jefferson, Suffolk County, New York, which we expect to open in early 2025. Set forth below is certain information about the Bank’s offices:
● Headquarters and Mineola Branch - 80 East Jericho Turnpike, Mineola, New York - this building has a branch on the first floor and Hanover’s corporate and administrative offices on the second and third floors and was opened in 2017.
● Garden City Park Branch - 2131 Jericho Turnpike, Garden City Park, New York - this one-story building houses the Bank’s original branch as well as its Residential Banking Team.
● Flushing Branch - 138-29 39th Avenue, Flushing, New York - this is a ground floor branch opened in 2019.
● Forest Hills Branch - 71-15 Austin Street, Forest Hills, New York - this is a ground floor branch opened in 2017.
● Sunset Park Branch - 5512 8th Avenue, Brooklyn, New York - this three-story building has a branch on the ground floor and administrative offices on the second and third floors.
● Bowery Branch - 109 Bowery, New York, New York - this three-story building has a branch on the ground floor and administrative offices on the second and third floors.
● Rockefeller Center Branch - 600 5th Avenue, New York, New York - this is a branch located on the 17th floor of a 26-floor commercial building and was acquired as part of the Savoy transaction.
● Freehold Branch - 4400 Route 9, Freehold, NJ - this branch and administrative office is located on the second floor of three-story commercial office building.
● Hauppauge Branch - 410 Motor Parkway, Hauppauge, New York - this branch is located on the third floor of a commercial office building and was opened in May 2023.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. Legal Proceedings
From time to time we are party to various litigation matters incidental to the conduct of our business. At December 31, 2024 and 2023, we are not party to any such legal proceeding the resolution of which we believe would have a material adverse effect on our business, financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. Mine Safety Disclosures
Not applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of Hanover Bancorp, Inc. trades on The Nasdaq Global Select Market under the symbol “HNVR”. As of December 31, 2024, we had approximately 415 holders of record of our common stock, not including the number of persons or entities holding stock in nominee or the street name through various banks and brokers.
We have paid a cash dividend of $0.10 per share on a quarterly basis to holders of our common stock. The future determination of our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock, and other factors deemed relevant by our Board of Directors.
There were no sales of unregistered securities during the quarter ended December 31, 2024.
On October 5, 2023, the Company announced that the Board of Directors approved a share repurchase program. Under the repurchase program, the Company may repurchase up to 366,050 shares of its common stock, or approximately 5% of its then outstanding shares. The timing and amount of purchases will be dictated by a number of factors.
Under the share repurchase program, repurchases will be made from time to time by the Company in the open market as conditions allow, or in privately negotiated transactions. The Company has not made any repurchases of its common stock under the program through the filing date of this Annual Report on Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. As a result of the change in year end, the Company filed a Transition Report on Form 10-Q with the SEC on February 13, 2024, which included unaudited financial statements as of December 31, 2023 and for the three months then ended and for comparative purposes we presented financial statements for the three months ended December 31, 2022. In this report, our discussion and analysis will present the more significant factors affecting our financial condition at December 31, 2024 and December 31, 2023. For the results of operations, our discussion and analysis will present the more significant factors affecting the periods presented as follows:
● the calendar year ended December 31, 2024 (“calendar 2024”) compared to the fiscal year ended September 30, 2023 (“fiscal 2023”); and
● the transition period from October 1, 2023 through December 31, 2023 (“transition period”) compared to the year earlier period October 1, 2022 through December 31, 2022.
The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. Unless the context otherwise specifies or requires, references herein to “we” or “us” include Hanover Bancorp, Inc. and Hanover Bank on a consolidated basis.
Business Overview
We are currently a New York corporation which became the holding company for the Bank in 2016. The Bank, a community commercial bank focusing on highly personalized and efficient services and products responsive to local needs, commenced operations in 2009 and was incorporated under the laws of the State of New York. As a New York State chartered bank, the Bank is subject to regulation by the DFS and the FDIC. As a bank holding company, we are subject to regulation and examination by the FRB.
The Bank offers a full range of financial services including a complete suite of consumer and commercial banking products and services, including multi-family and commercial mortgages, government guaranteed loans, residential loans, business loans and lines of credit. The Bank also offers its customers, among other things, access to 24-hour ATM service with no fees, free checking with interest, telephone banking, advanced technologies in mobile and internet banking for its consumer and business customers and safe deposit boxes. Our corporate administrative office is located in Mineola, New York where the Bank also operates a full-service branch office. Additional branches are located in Garden City Park, Hauppauge, Forest Hills, Flushing, Sunset Park, Manhattan and Chinatown, New York and Freehold, New Jersey. The Bank has received regulatory approval to open a full-service branch in Port Jefferson, New York. Business development staff have already joined the Bank in anticipation of the opening of this location. The Bank expects this site to be fully operational in the first half of 2025.
At December 31, 2024, on a consolidated basis we had $2.31 billion in total assets, $196.6 million in total stockholders’ equity, $1.99 billion in total loans, $1.95 billion in total deposits and 185 full-time equivalent employees.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Our significant accounting policies and effects of new accounting pronouncements are discussed in detail in Note 1, “Summary of Significant Accounting Policies” to the accompanying Consolidated Financial Statements contained in Item 8. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for credit losses and goodwill.
Allowance for Credit Losses
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 an allowance 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.
Goodwill
Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level, at least annually or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Company has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.
The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. As of November 30, 2024, the Company elected to proceed to a quantitative calculation to compare the reporting unit's fair value with its carrying value. The results of the evaluation indicated that fair value exceeded the carrying value of the reporting unit.
Annual goodwill impairment testing was performed as of November 30 and no impairment charges were incurred. Future unfavorable conditions could result in goodwill impairment. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) general macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (2) industry and market conditions such as a deterioration in the environment in which we operate, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), a change in the market for our products or services, or a regulatory or political development; (3) changes in cost factors such as increases in labor, or other costs that have a negative effect on earnings and cash flows; (4) overall financial performance for both actual and expected performance; (5) Entity and reporting unit-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; litigation; or a change in the composition or carrying amount of net assets; and (6) a sustained decrease in share price in both absolute terms and relative to peers, if applicable. See Note 1, “Summary of Significant Accounting Policies” and Note 10, “Goodwill and Other Intangible Assets” to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Results of Operations for the year ended December 31, 2024 (“calendar 2024”) compared to fiscal year ended September 30, 2023 (“fiscal 2023”)
For calendar 2024, we recognized net income of $12.3 million, or $1.66 per diluted share (including Series A preferred shares), compared to net income of $15.2 million, or $2.05 per diluted share (including Series A preferred shares) for fiscal 2023. The decrease in net income recorded for calendar 2024 from fiscal 2023 resulted from a decrease in net interest income, an increase in the provision for credit losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income. The increase in the provision for credit losses was primarily related to the recording of a $4.0 million provision for credit losses in June 2024 that was mainly 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. The increase in non-interest income is primarily related to the increases in the gain on sale of loans held-for-sale and loan servicing and fee income which were partially offset by a decrease in other operating income. In September 2023, the Company settled ongoing litigation and received a settlement payment of $975 thousand which was recorded in other income. The increase in non-interest expense was primarily attributed to additional staff for the SBA, C&I Banking and Operations teams.
Set forth below are our selected consolidated financial and other data. Our business is primarily the business of our Bank. This financial data is derived in part from, and should be read in conjunction with, our consolidated financial statements.
December 31,
September 30,
(in thousands)
Selected Balance Sheet Data:
Securities available-for-sale, at fair value
$
83,755
$
61,419
$
10,889
Securities held-to-maturity
3,758
4,041
4,108
Loans
1,985,524
1,957,199
1,874,562
Total assets
2,312,110
2,270,060
2,149,535
Total deposits
1,954,283
1,904,595
1,735,070
Total stockholders' equity
196,638
184,830
185,907
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(dollars in thousands)
Selected Operating Data:
Total interest income
$
133,022
$
31,155
$
105,043
Total interest expense
79,930
18,496
50,551
Net interest income
53,092
12,659
54,492
Provision for credit losses
4,940
3,432
Total non-interest income
15,339
3,254
8,848
Total non-interest expense
47,112
10,670
39,721
Income before income taxes
16,379
5,043
20,187
Income tax expense
4,033
1,280
5,023
Net income
12,346
3,763
15,164
Selected Financial Data and Other Data:
Return on average equity
6.45
%
8.10
%
8.40
%
Return on average assets
0.55
%
0.69
%
0.77
%
Yield on average interest earning assets
6.12
%
5.91
%
5.49
%
Cost of average interest bearing liabilities
4.40
%
4.19
%
3.18
%
Net interest rate spread
1.72
%
1.72
%
2.31
%
Net interest rate margin
2.44
%
2.40
%
2.85
%
Average equity to average assets
8.57
%
8.58
%
9.13
%
Analysis of Results of Operations
Net Interest Income
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, and loan prepayment behavior.
Net interest income for calendar 2024 was $53.1 million, a decrease of 2.6% from $54.5 million for fiscal 2023. Net interest margin was 2.44% for calendar 2024, a decrease of 41 basis points from 2.85% for fiscal 2023. The Company’s total interest income increased by $28.0 million, or 26.6%, as the average yield on interest-earning assets for calendar 2024 was 6.12%, an increase of 63 basis points from 5.49% for fiscal 2023. However, total interest expense increased by $29.4 million, or 58.1%, as the average cost interest-bearing liabilities for calendar 2024 was 4.40%, an increase of 122 basis points, from 3.18% for fiscal 2023 due to the rapid and significant rise in market 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. Together, this resulted in the higher cost of funds.
The following table presents daily average balances, interest, yield/cost, and net interest margin on a fully tax-equivalent basis for the periods presented:
Year Ended December 31,
Fiscal Year Ended September 30,
Average
Average
Average
Average
(dollars in thousands)
Balance
Interest
Yield/Cost
Balance
Interest
Yield/Cost
Assets:
Interest-earning assets
Loans(1)(2)
$
2,005,524
$
122,970
6.13
%
$
1,771,878
$
97,560
5.51
%
Investment securities(1)
98,238
5,991
6.10
%
16,007
5.04
%
Interest-earning balances and other
70,238
4,061
5.78
%
126,740
6,677
5.27
%
Total interest-earning assets
2,174,000
133,022
6.12
%
1,914,625
105,043
5.49
%
Non interest-earning assets:
Other assets
59,028
62,248
Total assets
$
2,233,028
$
1,976,873
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings, NOW and money market deposits
$
1,160,115
$
51,457
4.44
%
$
997,068
$
32,647
3.27
%
Time deposits
483,668
21,060
4.35
%
420,495
11,204
2.66
%
Total interest-bearing deposits
1,643,783
72,517
4.41
%
1,417,563
43,851
3.09
%
Borrowings
149,667
6,109
4.08
%
145,705
5,396
3.70
%
Subordinated debentures
24,660
1,304
5.29
%
24,593
1,304
5.30
%
Total interest-bearing liabilities
1,818,110
79,930
4.40
%
1,587,861
50,551
3.18
%
Non-interest bearing deposits
196,595
184,051
Other liabilities
27,000
24,390
Total liabilities
2,041,705
1,796,302
Stockholders' equity
191,323
180,571
Total liabilities and stockholders' equity
$
2,233,028
$
1,976,873
Net interest rate spread(3)
1.72
%
2.31
%
Net interest income/margin(4)
$
53,092
2.44
%
$
54,492
2.85
%
(1) There is no income tax exempt interest recorded for loans or investment securities for the periods presented.
(2) Includes non-accrual loans.
(3) Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.
Three Months Ended December 31,
Average
Average
Average
Average
(dollars in thousands)
Balance
Interest
Yield/Cost
Balance
Interest
Yield/Cost
Assets:
Interest-earning assets
Loans(1)(2)
$
1,910,409
$
28,394
5.90
%
$
1,681,460
$
21,979
5.19
%
Investment securities(1)
56,834
6.56
%
16,509
5.09
%
Interest-earning balances and other
123,596
1,821
5.85
%
35,770
4.23
%
Total interest-earning assets
2,090,839
31,155
5.91
%
1,733,739
22,572
5.17
%
Non interest-earning assets:
Other assets
58,106
63,107
Total assets
$
2,148,945
$
1,796,846
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings, NOW and money market deposits
$
1,039,062
$
11,547
4.41
%
$
910,732
$
4,764
2.08
%
Time deposits
541,475
5,231
3.83
%
357,994
1,547
1.71
%
Total interest-bearing deposits
1,580,537
16,778
4.21
%
1,268,726
6,311
1.97
%
Borrowings
146,167
1,392
3.78
%
98,576
2.67
%
Subordinated debentures
24,626
5.25
%
24,573
5.39
%
Total interest-bearing liabilities
1,751,330
18,496
4.19
%
1,391,875
7,308
2.08
%
Non-interest bearing deposits
187,216
204,256
Other liabilities
26,031
24,793
Total liabilities
1,964,577
1,620,924
Stockholders' equity
184,368
175,922
Total liabilities and stockholders' equity
$
2,148,945
$
1,796,846
Net interest rate spread(3)
1.72
%
3.09
%
Net interest income/margin(4)
$
12,659
2.40
%
$
15,264
3.49
%
(1) There is no income tax exempt interest recorded for loans or investment securities for the periods presented.
(2) Includes non-accrual loans.
(3) Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.
The following table details the variances in net interest income caused by changes in interest rates and volume for the periods presented:
Year Ended December 31, 2024 vs.
Fiscal Year Ended September 30, 2023
Increase (decrease) due to change in:
(in thousands)
Volume
Rate
Total
Interest income
Loans
$
13,649
$
11,761
$
25,410
Investment securities
4,981
5,186
Interest-earning balances and other
(2,946)
(2,617)
Total interest income
15,684
12,295
27,979
Interest expense
Savings, NOW and money market deposits
5,937
12,873
18,810
Time deposits
1,888
7,968
9,856
Borrowings
Subordinated debentures
-
-
-
Total interest expense
7,975
21,404
29,379
Net increase (decrease) in net interest income
$
7,709
$
(9,109)
$
(1,400)
Three Months Ended December 31,
2023 vs. 2022
Increase (decrease) due to change in:
(in thousands)
Volume
Rate
Total
Interest income
Loans
$
3,197
$
3,218
$
6,415
Investment securities
Interest-earning balances and other
1,179
1,440
Total interest income
5,028
3,555
8,583
Interest expense
Savings, NOW and money market deposits
6,028
6,783
Time deposits
1,081
2,603
3,684
Borrowings
Subordinated debentures
(8)
-
(8)
Total interest expense
2,220
8,968
11,188
Net increase (decrease) in net interest income
$
2,808
$
(5,413)
$
(2,605)
Provision for Credit Losses
The provision for credit losses was $4.9 million (including a $0.2 million provision for unfunded comments) for calendar 2024 compared to $3.4 million (including no provision for unfunded comments) for fiscal 2023. Total net charge-offs were $1.6 million for both calendar 2024 and fiscal 2023. See additional discussion under "Asset Quality - Allowance for Credit Losses” section.
Non-Interest Income
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Loan servicing and fee income
$
3,690
$
$
2,709
Service charges on deposit accounts
Net gain on sale of loans held for sale
10,940
2,326
4,093
Net gain on sale of investments available-for-sale
-
-
Other income
1,771
Total non-interest income
$
15,339
$
3,254
$
8,848
Non-interest income was $15.3 million for calendar 2024, an increase of $6.5 million from $8.8 million for fiscal 2023. The increase in non-interest income is primarily related to the increases in the net gain on sale of loans held for sale and loan servicing and fee income which were partially offset by a decrease in other income. In September 2023, the Company settled ongoing litigation and received a settlement payment of $975 thousand which was recorded in other income.
Non-Interest Expense
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Salaries and employee benefits
$
25,600
$
5,242
$
20,652
Occupancy and equipment
7,222
1,746
6,359
Data processing
2,096
1,951
Professional fees
3,079
3,145
Federal deposit insurance premiums
1,418
1,259
Other expenses
7,697
2,048
6,355
Total non-interest expense
$
47,112
$
10,670
$
39,721
Non-interest expense was $47.1 million for calendar 2024, an increase of $7.4 million from $39.7 million for fiscal 2023. The increase in non-interest expense was primarily attributed to additional staff for the SBA, C&I Banking and Operations teams.
Income Taxes
Income tax expense was $4.0 million for calendar 2024, a decrease from $5.0 million for fiscal 2023. The decline in income tax expense reflects lower net income in calendar 2024. The effective income tax rate for calendar 2024 was 24.6% compared to 24.9% for fiscal 2023.
Results of Operations for three months ended December 31, 2023 (transition period) compared to three months ended December 31, 2022
The comparison of the results for the three months ended December 31, 2023 with the results for the three months ended December 31, 2022 can be found in the “Management’s Discussion and Analysis” section in the Company’s Transition Report on Form 10-Q for the transition period from October 1, 2023 to December 31, 2023, filed with the SEC on February 13, 2024.
Analysis of Financial Condition
Investment Securities
Our investment securities portfolio, which is structured with minimum credit exposure, is intended to provide us with adequate liquidity, flexibility in asset/liability management, and a source of stable income. Investment securities classified as available-for-sale are carried at fair value in the consolidated statements of financial condition, while investment securities classified as held-to-maturity are shown at amortized cost in the consolidated statements of financial condition.
The following table summarizes the amortized cost and fair value of investment securities:
Balance at December 31,
Balance at September 30,
(in thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Investment securities available-for-sale:
U.S. Treasury securities
$
19,995
$
20,000
$
-
$
-
$
-
$
-
U.S. GSE residential mortgage-backed securities
11,016
10,645
U.S. GSE commercial mortgage-backed securities
1,520
1,503
-
-
-
-
Collateralized loan obligations
32,271
32,477
50,283
50,266
-
-
Corporate bonds
20,282
19,130
12,700
10,952
12,700
10,747
Total investment securities available-for- sale
85,084
83,755
63,292
61,419
13,022
10,889
Investment securities held-to-maturity:
U.S. GSE residential mortgage-backed securities
1,259
1,178
1,480
1,384
1,531
1,353
U.S. GSE commercial mortgage-backed securities
2,499
2,431
2,561
2,451
2,577
2,407
Total investment securities held-to-maturity
3,758
3,609
4,041
3,835
4,108
3,760
Total investment securities
$
88,842
$
87,364
$
67,333
$
65,254
$
17,130
$
14,649
We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.
Our investment securities available-for-sale portfolio included gross unrealized gains of $0.3 million and gross unrealized losses of $1.6 million at December 31, 2024, compared to gross unrealized gains of $0.1 million and gross unrealized losses of $2.0 million at December 31, 2023. Management believes that all of its unrealized losses on individual investment securities at December 31, 2024 and 2023 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. We do not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.
The tables below illustrate the maturity distribution and weighted average yield and amortized cost of our investment securities as of December 31, 2024 and 2023, on a contractual maturity basis.
Investment Securities Portfolio by Expected Maturities(1)
Balance at December 31, 2024
Available-for-Sale
Held-to-Maturity
Amortized
Weighted
Amortized
Weighted
(dollars in thousands)
Cost
Average Yield
Cost
Average Yield
U.S. GSE residential mortgage-backed securities
Due after five years through ten years
$
-
-
%
$
2.32
%
Due after ten years
11,016
4.51
%
2.66
%
11,016
4.51
%
1,259
2.42
%
U.S. GSE commercial mortgage-backed securities
Due after one year through five years
-
-
%
2,499
2.68
%
Due after five years through ten years
1,520
4.62
%
-
-
%
1,520
4.62
%
2,499
2.68
%
U.S. Treasury securities
Due in one year or less
19,995
4.37
%
-
-
%
19,995
4.37
%
-
-
%
Collateralized loan obligations
Due after five years through ten years
27,284
6.12
%
-
-
%
Due after ten years
4,987
6.10
%
-
-
%
32,271
6.12
%
-
-
%
Corporate bonds
Due after one year through five years
1,000
8.75
%
-
-
%
Due after five years through ten years
19,282
5.90
%
-
-
%
20,282
6.04
%
-
-
%
Total investment securities
$
85,084
5.45
%
$
3,758
2.59
%
Balance at December 31, 2023
Available-for-Sale
Held-to-Maturity
Amortized
Weighted
Amortized
Weighted
(dollars in thousands)
Cost
Average Yield
Cost
Average Yield
U.S. GSE residential mortgage-backed securities
Due after five years through ten years
$
-
-
%
$
1,044
2.31
%
Due after ten years
3.26
%
2.66
%
3.26
%
1,480
2.41
%
U.S. GSE commercial mortgage-backed securities
Due after one year through five years
-
2,561
2.68
%
-
-
2,561
2.68
%
Collateralized loan obligations
Due after five years through ten years
3,824
7.24
%
-
-
Due after ten years
46,459
6.90
%
-
-
50,283
6.93
%
-
-
Corporate bonds
Due after five years through ten years
12,700
5.19
%
-
-
12,700
5.19
%
-
-
Total investment securities
$
63,292
6.56
%
$
4,041
2.58
%
(1) There is no income tax exempt interest recorded for investment securities for the periods presented.
Loans
At December 31, 2024, our loan portfolio totaled $1.99 billion, an increase of $28.3 million from $1.96 billion at December 31, 2023. Growth was concentrated primarily in residential, SBA and C&I loans.
The following table provides the composition of the Company’s loan portfolio by type at the dates indicated:
At December 31,
At September 30,
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real estate:
Residential
$
729,254
36.73
%
$
714,843
36.52
%
$
657,332
35.07
%
Multi-family
550,570
27.73
%
572,849
29.27
%
578,895
30.88
%
Commercial
522,805
26.33
%
548,012
28.00
%
537,314
28.66
%
Total real estate
1,802,629
90.79
%
1,835,704
93.79
%
1,773,541
94.61
%
Commercial and industrial
168,909
8.51
%
107,912
5.52
%
87,575
4.67
%
Construction
13,483
0.68
%
13,170
0.67
%
13,021
0.70
%
Consumer
0.02
%
0.02
%
0.02
%
Total loans
1,985,524
100.00
%
1,957,199
100.00
%
1,874,562
100.00
%
Allowance for credit losses
22,779
19,658
14,686
Total loans, net
$
1,962,745
$
1,937,541
$
1,859,876
The following table provides information of our total loan portfolio at December 31, 2024 by the earlier of the maturity or next repricing date. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Adjustable rate loans are included in the period which their interest rates are next scheduled to adjust. The table does not reflect the impact of prepayments and scheduled principal amortization.
Commercial
Residential
Multi-
Commercial
and
Time to Reprice/Mature
Real Estate
Family
Real Estate
Industrial
Construction
Consumer
Total
(in thousands)
One year or less
$
152,354
$
36,710
$
146,082
$
147,033
$
13,483
$
-
$
495,662
More than one year to five years
457,234
512,053
356,057
17,161
-
1,342,524
More than five years to fifteen years
48,710
1,807
19,002
4,715
-
74,718
After fifteen years
70,956
-
1,664
-
-
-
72,620
Total
$
729,254
$
550,570
$
522,805
$
168,909
$
13,483
$
$
1,985,524
The following table presents the Company’s loans held for investment as of December 31, 2024 with maturity or next repricing due after December 31, 2025 according to rate type and loan category:
Due After December 31, 2025
(in thousands)
Fixed
Adjustable
Total
Real estate:
Residential
$
124,957
$
451,943
$
576,900
Multi-family
21,800
492,060
513,860
Commercial
52,908
323,815
376,723
Total real estate
199,665
1,267,818
1,467,483
Commercial and industrial
16,095
5,781
21,876
Construction
-
-
-
Consumer
-
Total loans
$
216,263
$
1,273,599
$
1,489,862
At December 31, 2024, the Company’s residential loan portfolio (including home equity) amounted to $729.3 million, with an average loan balance of $483 thousand and a weighted average loan-to-value ratio of 57%. Commercial real estate, multi-family and construction loans totaled $1.09 billion at December 31, 2024, with an average loan balance of $1.5 million and a weighted average loan-to-value ratio of 59%. As will be discussed below, approximately 37% of the multifamily portfolio is subject to rent regulation. The Company’s commercial real estate concentration ratio continued to improve, decreasing to 385% of capital at December 31, 2024 from 432% of capital at December 31, 2023, with loans secured by office space accounting for 2.45% of the total loan portfolio and totaling $48.7 million.
The Bank’s investments in diversification continue to deliver results, with the volume of SBA & USDA loans originated for sale and the volume of residential loans originated for sale sustaining momentum. We expect the volume of activity to increase in 2025. We originated $161.0 million and sold $111.7 million of SBA loans for the year ended December 31, 2024. We originated $131.0 million and sold $38.0 million of residential loans for the year ended December 31, 2024. Because we continue to prioritize the management of liquidity and capital, new business development with respect to residential and SBA & USDA lending is largely focused on originations for sale over portfolio growth. Conversely, portfolio growth is the primary focus of our C&I Banking initiative, which continues to drive deposit and loan growth at our Hauppauge Business Banking Center and will expand with the pending launch of our Port Jefferson branch.
Commercial Real Estate Statistics
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 $13.5 million, all at floating interest rates, and CRE-owner occupied loans have a mix of floating rates. As shown below, 23% of the loan balances in these combined portfolios will mature in 2025 and 2026, with another 55% maturing in 2027.
Multi-Family Market Rent Portfolio Fixed Rate Reset/Maturity Schedule
Multi-Family Stabilized Rent Portfolio Fixed Rate Reset/Maturity Schedule
Calendar Period
  
# Loans
Total O/S ($000's omitted)
Avg O/S ($000's omitted)
Avg Interest Rate
Calendar Period
# Loans
Total O/S ($000's omitted)
Avg O/S ($000's omitted)
Avg Interest Rate
$
16,416
$
1,642
4.30
%
$
19,527
$
1,395
4.82
%
118,503
3,292
3.66
%
42,901
2,145
3.67
%
176,490
2,486
4.30
%
124,773
2,354
4.22
%
29,858
1,659
6.15
%
10,221
7.14
%
4,957
7.70
%
4,346
1,087
6.38
%
2030+
4.47
%
2030+
1,169
5.41
%
Fixed Rate
346,863
2,426
4.29
%
Fixed Rate
202,937
1,897
4.36
%
Floating Rate
9.22
%
Floating Rate
-
-
-
-
%
Total
$
347,579
$
2,381
4.30
%
Total
$
202,937
$
1,897
4.36
%
CRE Investor Portfolio Fixed Rate Reset/Maturity Schedule
Calendar Period
  
# Loans
Total O/S ($000's omitted)
Avg O/S ($000's omitted)
Avg Interest Rate
$
23,439
$
6.12
%
44,679
1,354
4.87
%
163,358
1,815
5.03
%
31,803
1,060
6.63
%
2,378
7.03
%
2030+
5,745
6.24
%
Fixed Rate
271,402
1,364
5.33
%
Floating Rate
27,103
2,710
8.95
%
Total CRE-Inv.
$
298,505
$
1,428
5.66
%
Rental breakdown of Multi-Family portfolio
The table below segments our portfolio of loans secured by Multi-Family properties based on rental terms and location. As shown below, 63% of the combined portfolio is secured by properties subject to free market rental terms, which is the dominant tenant type. Both the Market Rent and Stabilized Rent segments of our portfolio present very similar average borrower profiles. The portfolio is primarily located in the New York City boroughs of Brooklyn, the Bronx and Queens.
Multi-Family Loan Portfolio - Loans by Rent Type
Rent Type
  
# Notes
Outstanding Loan Balance
% of Total Multi-Family
Avg Loan Size
LTV
Current DSCR
Avg # of Units
($000's omitted)
($000's omitted)
Market
$
347,579
%
$
2,381
61.6
%
1.39
Location
Manhattan
$
17,840
%
$
2,549
51.9
%
1.62
Other NYC
$
244,408
%
$
2,628
61.2
%
1.38
Outside NYC
$
85,331
%
$
1,855
64.8
%
1.39
Stabilized
$
202,937
%
$
1,897
62.4
%
1.39
Location
Manhattan
$
9,035
%
$
1,506
44.7
%
1.59
Other NYC
$
174,888
%
$
1,965
63.2
%
1.38
Outside NYC
$
19,014
%
$
1,584
64.4
%
1.40
Office Property Exposure
The Bank’s exposure to the Office market is minor at $49 million. This portfolio has a 2.27x weighted average DSCR, a 54% weighted average LTV and less than $400,000 of exposure in Manhattan.
Asset Quality
Nonperforming Assets
The following table presents information regarding nonperforming assets for the periods presented. The Company did not own any repossessed property for the periods presented.
Balance at
Balance at December 31,
September 30,
(dollars in thousands)
Nonaccrual loans
$
16,368
$
14,451
$
14,933
Loans greater than 90 days past due
-
-
Total nonperforming loans/assets
$
16,368
$
14,451
$
15,061
Nonperforming loans as a percentage of loans held-for- investment
0.82
%
0.74
%
0.80
%
Non-performing assets as a percentage of total assets
0.71
%
0.64
%
0.70
%
Allowance for credit losses as a percentage of nonperforming loans
139.17
%
136.03
%
97.51
%
Total nonaccrual loans were $16.4 million at December 31, 2024, an increase from total nonaccrual loans of $14.5 million at December 31, 2023.
Reserve for Unfunded Commitments
The Company maintains a reserve, recorded in other liabilities, associated with unfunded loan commitments accepted by borrowers. The amount of the reserve was $0.3 million at December 31, 2024 and $0.1 million at December 31, 2023. This reserve is determined based upon the outstanding volume of loan commitments at the end of each period. Any increases or reductions in this reserve are recognized in the provision for credit losses.
Allowance for Credit Losses
The allowance for credit losses was $22.8 million at December 31, 2024, an increase of $3.1 million from $19.7 million at December 31, 2023. The ratio of the allowance for credit losses to total portfolio loans was 1.15% at December 31, 2024, inclusive of a $3.2 million allowance on individually analyzed loans, versus 1.00% at December 31, 2023, which does not include the aforementioned allowance for individually analyzed loans.
The Company experienced $1.6 million in net charge-offs both for calendar 2024 and fiscal 2023. The Company has recorded recoveries of $18 thousand and $103 thousand for calendar 2024 and fiscal 2023, respectively.
The following table presents the allocation of the allowance for credit losses by loan category for the periods presented:
At December 31,
At September 30,
% of
% of
% of
Total
Total
Total
(dollars in thousands)
Amount
Loans
Amount
Loans
Amount
Loans
Residential real estate
$
6,236
0.86
%
$
5,001
0.70
%
$
4,778
0.73
%
Multi-family
5,284
0.96
%
4,671
0.82
%
4,206
0.73
%
Commercial real estate
5,605
1.07
%
8,390
1.53
%
3,197
0.59
%
Commercial and industrial
5,447
3.22
%
1,419
1.31
%
2,368
2.70
%
Construction
1.34
%
0.93
%
0.80
%
Consumer
5.37
%
13.32
%
7.76
%
Total allowance for credit losses
$
22,779
1.15
%
$
19,658
1.00
%
$
14,686
0.78
%
The following table presents information related activity in the allowance for credit losses for the periods presented:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(dollars in thousands)
Beginning balance
$
19,658
$
14,686
$
12,844
Impact of adopting ASC 326
-
4,095
-
Provision for credit losses
4,750
3,432
Charge-Offs:
Residential real estate
(280)
-
-
Multi-family
(765)
-
(959)
Commercial real estate
(30)
-
-
Commercial and industrial
(572)
-
(734)
Construction
-
-
-
Consumer
-
-
-
Total loan charge-offs
(1,647)
-
(1,693)
Recoveries:
Multi-family
-
-
Commercial and industrial
Total recoveries
Total net (charge-offs) recoveries
(1,629)
(1,590)
Ending balance
$
22,779
$
19,658
$
14,686
Allowance for credit losses to total loans held-for- investment
1.15
%
1.00
%
0.78
%
Net (charge-offs) recoveries to average loans held-for-investment
(0.08)
%
0.04
%
(0.09)
%
Sources of Funds and Liquidity
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 Bank of New York, Federal Home Loan Bank (the “FHLB”) and correspondent banks, which totaled $246.6 million and $238.6 million at December 31, 2024 and 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.
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 Liquidity and Wholesale Funding Policy of the Bank establishes specific policies and operating procedures governing liquidity levels to assist management in developing plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. Daily, management receives a current cash position update to ensure that all obligations are satisfied. On a weekly basis, appropriate senior management receives a current liquidity position report and a ninety day forecasted cash flow to ensure that all short-term obligations will be met and there is sufficient liquidity available.
As of December 31, 2024, we held $252.0 million of deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At December 31, 2024, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $713.1 million, or approximately 283% of uninsured deposit balances.
Deposits
We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source.
Total deposits at December 31, 2024 were $1.95 billion, an increase of $49.7 million from total deposits of $1.90 billion at December 31, 2023. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 87% of total deposits at December 31, 2024. Time deposits of $481.6 million are 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.
The following is our average deposits and weighted-average interest rates paid thereon for the periods presented:
Year Ended December 31,
Three Months Ended December 31,
Fiscal Year Ended September 30,
2023 (transition period)
Average
Average
Average
Average
Average
Average
(dollars in thousands)
Balance
Rate
Balance
Rate
Balance
Rate
Non-interest bearing demand
$
196,595
0.00
%
$
187,216
0.00
%
$
184,051
0.00
%
Savings
48,749
2.21
%
50,191
1.79
%
87,637
1.30
%
NOW
631,267
4.56
%
539,194
4.58
%
545,827
3.40
%
Money market
480,099
4.49
%
449,677
4.50
%
363,604
3.57
%
Time deposits
483,668
4.35
%
541,475
3.83
%
420,495
2.66
%
Total average deposits
$
1,840,378
3.94
%
$
1,767,753
3.77
%
$
1,601,614
2.74
%
The Company had municipal deposits of $509.3 million at December 31, 2024, which comprised 26.1% of total deposits, a decrease of $18.8 million or 3.6% from $528.1 million at December 31, 2023.
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 $85.0 million, $2.7 million and $5.5 million, or 4.4%, 0.1% and 0.3% of total deposits, respectively, at December 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.
As of December 31, 2024 and 2023, we held $106.4 million and $107.3 million, respectively, of time deposits that meet or exceed the FDIC insurance limit. The following table sets forth the maturity of time deposits that meet or exceed the FDIC insurance limit of as of December 31, 2024:
December 31,
(in thousands)
Three months or less
$
39,784
Over three months through twelve months
59,126
Over one year through three years
7,181
Over three years
Total
$
106,350
See Note 6, “Deposits” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
Borrowings
The total carrying value of our borrowings was $132.5 million at December 31, 2024, a decrease of $21.1 million from $153.6 million at December 31, 2023. The Company added $100.7 million of extended duration FHLB term advances in March 2023 to provide additional liquidity and enhance the interest rate sensitivity profile. At December 31, 2024, $7.1 million of these borrowings were classified as short-term, while the remaining was classified as long- term. Short-term borrowings are comprised of short-term FHLB advances. Long-term funding is comprised of long-term FHLB advances and subordinated debentures. The Company will prepay FHLB advances from time to time as funding needs change. See Note 7, “Borrowings” and Note 8, “Subordinated Debentures” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
In October 2020, the Company completed the private placement of $25.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due in 2030. The Notes bear interest, payable semi-annually, at the rate of 5.00% per annum, until October 15, 2025. From and including October 15, 2025 through maturity, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month SOFR plus 487.4 basis points. The Company may, at its option, beginning with the interest payment date of October 15, 2025, but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, subject to the receipt of any required regulatory approval. The Notes are not subject to redemption at the option of the holder. The Company used a portion of the net proceeds to pay off an existing holding company note in October 2020 and used the remainder of the net proceeds for acquisition financing and general corporate purposes, including contributing equity capital to the Bank.
At December 31, 2024, the Bank had a total borrowing capacity of $698.0 million at the FHLB, of which $492.1 million was used to collateralize municipal deposits and $107.8 million was utilized for term advances. At December 31, 2024, the Bank had a $247.2 million collateralized line of credit from the Federal Reserve Bank of New York’s discount window with no outstanding borrowings. At December 31, 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 December 31, 2024.
Derivatives
We utilize derivative instruments in the form of interest rate swaps to hedge our exposure to interest rate risk in conjunction with our overall asset/liability management process. In accordance with accounting requirements, we formally designate all of our hedging relationships as either fair value hedges or cash flow hedges, and document the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness.
At December 31, 2024, our derivative instruments were comprised of interest rate swaps with a total notional amount of $125.0 million. These instruments are intended to manage the interest rate exposure relating to certain brokered certificates of deposit and certain fixed rate residential mortgages.
Additional information regarding our use of interest rate derivatives is presented in Note 1 and Note 9 to Consolidated Financial Statements contained in Item 8.
Off-Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to 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 December 31, 2024 and 2023, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $130.3 million and $143.4 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 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 December 31, 2024 and 2023, letters of credit outstanding were approximately $0.8 million and $3.9 million, respectively.
Capital Resources
Total stockholders’ equity was $196.6 million at December 31, 2024, an increase of $11.8 million from stockholders’ equity of $184.8 million at December 31, 2023. The increase was primarily due to an increase of $9.4 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 $12.3 million for the year ended December 31, 2024, which was offset by $2.9 million of dividends declared. The accumulated other comprehensive loss at December 31, 2024 was 0.68% of total equity and was comprised of a $1.0 million after tax net unrealized loss on the investment portfolio and a $0.3 million after tax net unrealized loss on derivatives.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. We use our capital primarily for our lending activities as well as acquisitions and expansions of our business and other operating requirements.
In addition to establishing the minimum regulatory requirements, the regulations limit the Bank’s ability to pay dividends to the Company and to pay certain compensation to its executives if the Bank does not hold a capital conservation buffer consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The Bank’s capital conservation buffer was greater than 2.5% of risk-weighted assets at December 31, 2024.
The Bank capital level is characterized as "well-capitalized" under the Basel III Capital Rules. A summary of the Bank’s regulatory capital amounts and ratios are presented below:
December 31,
September 30,
(dollars in thousands)
Total capital
$
220,696
$
210,071
$
205,786
Tier 1 capital
201,744
193,324
190,928
Common equity tier 1 capital
201,744
193,324
190,928
Total capital ratio
14.58
%
14.31
%
14.60
%
Tier 1 capital ratio
13.32
%
13.17
%
13.55
%
Common equity tier 1 capital ratio
13.32
%
13.17
%
13.55
%
Tier 1 leverage ratio
9.13
%
9.08
%
9.16
%
Under a policy of the Federal Reserve applicable to bank holding companies with less than $3.0 billion in consolidated assets, the Company is not subject to consolidated regulatory capital requirements.
On October 5, 2023, the Company announced that the Board of Directors approved a stock repurchase program. Under the 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 March 14, 2025, the filing date of this Annual Report on Form 10-K.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. The Company’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, matured or repriced in any given period of time. The Company’s earnings or the net value of its portfolio will change under different interest rate scenarios. The principal objective of the Company’s asset/liability management program is to maximize net interest income within an acceptable range of overall risk, including both the effect of changes in interest rates and liquidity risk.
The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics, (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, and (iii) entering into interest rate swap agreements.
The following presents the Company’s economic value of equity (“EVE”) and net interest income (“NII”) sensitivities at December 31, 2024 (dollars in thousands). The results are within the Company’s policy limits.
At December 31, 2024
Interest Rates
Estimated
Estimated Change in EVE
Interest Rates
Estimated
Estimated Change in NII(1)
(basis points)
EVE
Amount
%
(basis points)
NII(1)
Amount
%
+200
$
167,512
$
(33,849)
(16.8)
+200
$
53,696
$
(6,606)
(11.0)
+100
184,567
(16,794)
(8.3)
+100
57,063
(3,239)
(5.4)
201,361
60,302
214,522
13,161
6.5
63,927
3,625
6.0
232,123
30,762
15.3
67,119
6,817
11.3
245,099
43,738
21.7
69,792
9,490
15.7
_________________________
(1)
Assumes 12 month time horizon.
Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the speed with which interest rates may change, the projections noted above on the Company’s EVE and net interest income can be expected to differ from actual results.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements and Supplementary Data
Crowe LLP
Independent Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Hanover Bancorp, Inc.
Mineola, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Hanover Bancorp Inc. and Subsidiary (the "Company") as of December 31, 2024, December 31, 2023 and September 30, 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for years ended December 31, 2024 and September 30, 2023 and three months ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, December 31, 2023 and September 30, 2023, and the results of its operations and its cash flows for years ended December 31, 2024 and September 30, 2023 and three months ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph - Change In Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective October 1, 2023 due to the adoption of ASC 326, Financial Instruments - Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company’s auditor since 2019.
Livingston, New Jersey
March 14, 2025
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
December 31,
September 30,
ASSETS
Cash and non-interest-bearing deposits due from banks
$
12,768
$
10,277
$
5,496
Interest-bearing deposits due from banks
150,089
166,407
186,614
Federal funds sold
-
Total cash and cash equivalents
162,857
177,207
192,624
Securities held to maturity, fair value of $3,609, $3,835 and $3,760 at December 31, 2024 and 2023 and September 30, 2023, respectively (net of allowance for credit losses of $0 at December 31, 2024 and 2023)
3,758
4,041
4,108
Securities available for sale, at fair value (net of allowance for credit losses of $0 at December 31, 2024 and 2023)
83,755
61,419
10,889
Loans held for sale
12,404
8,904
-
Loans
1,985,524
1,957,199
1,874,562
Allowance for credit losses (1)
(22,779)
(19,658)
(14,686)
Loans, net
1,962,745
1,937,541
1,859,876
Premises and equipment, net
15,337
15,886
16,057
Operating lease assets
8,337
9,754
10,193
Accrued interest receivable
11,849
11,915
10,636
Prepaid post retirement plan
3,377
3,503
3,534
Stock in Federal Home Loan Bank ("FHLB"), at cost
7,885
8,612
10,547
Goodwill
19,168
19,168
19,168
Other intangible assets
Loan servicing rights
6,016
4,668
4,479
Deferred income taxes
1,569
2,463
1,509
Other assets
12,803
4,668
5,588
TOTAL ASSETS
$
2,312,110
$
2,270,060
$
2,149,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing demand
$
211,656
$
207,781
$
185,731
Savings, NOW and money market
1,244,857
1,174,616
1,019,263
Time
497,770
522,198
530,076
Total deposits
1,954,283
1,904,595
1,735,070
Borrowings
107,805
128,953
179,849
Subordinated debentures ($25,000 face amount less unamortized debt issuance costs of $311, $365 and $379 at December 31, 2024 and 2023 and September 30, 2023, respectively)
24,689
24,635
24,621
Operating lease liabilities
9,025
10,459
10,899
Accrued interest payable
1,532
1,724
1,821
Other liabilities
18,138
14,864
11,368
TOTAL LIABILITIES
2,115,472
2,085,230
1,963,628
COMMITMENTS AND CONTINGENT LIABILITIES
-
-
-
STOCKHOLDERS' EQUITY
Preferred stock, Series A (par value $0.01; 15,000,000 shares authorized; issued and outstanding 275,000 at December 31, 2024 and 150,000 at December 31, 2023 and September 30, 2023)
5,041
2,963
2,963
Common stock (par value $0.01; 17,000,000 shares authorized; issued and outstanding 7,152,127, 7,195,012 and 7,170,419 at December 31, 2024, December 31, 2023 and September 30, 2023, respectively)
Surplus
124,937
125,694
125,501
Retained earnings
67,922
58,551
58,693
Accumulated other comprehensive loss, net of tax
(1,334)
(2,450)
(1,322)
TOTAL STOCKHOLDERS' EQUITY
196,638
184,830
185,907
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
2,312,110
$
2,270,060
$
2,149,535
(1)
Commencing on October 1, 2023 the allowance calculation is based on the current expected credit loss methodology. Prior to October 1, 2023 the calculation was based on the incurred loss methodology. Refer to Note 1 for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
INTEREST INCOME
Loans
$
122,970
$
28,394
$
97,560
Taxable securities
5,991
Other interest income
4,061
1,821
6,677
Total interest income
133,022
31,155
105,043
INTEREST EXPENSE
Savings, NOW and money market deposits
51,457
11,547
32,647
Time deposits
21,060
5,231
11,204
Borrowings
7,413
1,718
6,700
Total interest expense
79,930
18,496
50,551
Net interest income
53,092
12,659
54,492
Provision for credit losses (1)
4,940
3,432
Net interest income after provision for credit losses
48,152
12,459
51,060
NON-INTEREST INCOME
Loan servicing and fee income
3,690
2,709
Service charges on deposit accounts
Gain on sale of loans held-for-sale
10,940
2,326
4,093
Gain on sale of securities available-for-sale
-
-
Other income
1,771
Total non-interest income
15,339
3,254
8,848
NON-INTEREST EXPENSE
Salaries and employee benefits
25,600
5,242
20,652
Occupancy and equipment
7,222
1,746
6,359
Data processing
2,096
1,951
Professional fees
3,079
3,145
Federal deposit insurance premiums
1,418
1,259
Other expenses
7,697
2,048
6,355
Total non-interest expense
47,112
10,670
39,721
Income before income tax expense
16,379
5,043
20,187
Income tax expense
4,033
1,280
5,023
NET INCOME
$
12,346
$
3,763
$
15,164
Earnings per share:
BASIC
$
1.67
$
0.51
$
2.07
DILUTED
$
1.66
$
0.51
$
2.05
(1)
Commencing on October 1, 2023 the allowance calculation is based on the current expected credit loss methodology. Prior to October 1, 2023 the calculation was based on the incurred loss methodology. Refer to Note 1 for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
Net income
$
12,346
$
3,763
$
15,164
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities available for sale:
Change in unrealized gain (loss) on securities available for sale arising during the period, net of tax of $120, $56 and ($293), respectively
(1,050)
Reclassification adjustment for gains realized in net income, net of tax of ($7), $0 and $0, respectively
(24)
-
-
Net change in unrealized gains (losses) on securities available for sale
(1,050)
Unrealized gains (losses) on cash flow hedges:
Change in unrealized gain (loss) on cash flow hedges arising during the period, net of tax of $188, ($369) and $97, respectively
(1,332)
Total other comprehensive income (loss), net of tax
1,116
(1,128)
(702)
Total comprehensive income, net of tax
$
13,462
$
2,635
$
14,462
The accompanying notes are an integral part of these consolidated financial statements.
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share data)
Accumulated Other
Total
Common Stock
Preferred
Common
Retained
Comprehensive
Stockholders'
(Shares)
Stock
Stock
Surplus
Earnings
(Loss) Income, Net
Equity
Balance at October 1, 2022
7,285,648
$
-
$
$
126,656
$
46,475
$
(620)
$
172,584
Net income
-
-
-
-
15,164
-
15,164
Other comprehensive loss, net of tax
-
-
-
-
-
(702)
(702)
Cash dividends declared ($0.10 per share)
-
-
-
-
(2,946)
-
(2,946)
Stock-based compensation
-
-
1,870
-
-
1,871
Stock awards granted, net of forfeitures
32,901
-
-
-
-
-
-
Shares received related to tax withholding
(8,744)
-
-
(170)
-
-
(170)
Preferred stock issued in exchange for common stock
(150,000)
2,963
(2)
(2,961)
-
-
-
Exercise of stock options
10,614
-
-
-
-
Balance at September 30, 2023
7,170,419
2,963
125,501
58,693
(1,322)
185,907
Cumulative effect adjustment for adoption of ASU 2016-13
-
-
-
-
(3,170)
-
(3,170)
Balance at October 1, 2023 (as adjusted for change in accounting principle)
7,170,419
2,963
125,501
55,523
(1,322)
182,737
Net income
-
-
-
-
3,763
-
3,763
Other comprehensive loss, net of tax
-
-
-
-
-
(1,128)
(1,128)
Cash dividends declared ($0.10 per share)
-
-
-
-
(735)
-
(735)
Stock-based compensation
-
-
-
-
-
Stock awards granted, net of forfeitures
10,432
-
-
-
-
-
-
Shares received related to tax withholding
(19,239)
-
-
(335)
-
-
(335)
Exercise of stock options
33,400
-
-
-
-
Balance at December 31, 2023
7,195,012
2,963
125,694
58,551
(2,450)
184,830
Net income
-
-
-
-
12,346
-
12,346
Other comprehensive income, net of tax
-
-
-
-
-
1,116
1,116
Cash dividends declared ($0.10 per share)
-
-
-
-
(2,975)
-
(2,975)
Stock-based compensation
-
-
-
1,587
-
-
1,587
Stock awards granted, net of forfeitures
53,718
-
-
-
-
-
-
Shares received related to tax withholding
(10,773)
-
-
(198)
-
-
(198)
Preferred stock issued in exchange for common stock
(125,000)
2,078
(1)
(2,077)
-
-
-
Exercise of stock options, net
39,170
-
(69)
-
-
(68)
Balance at December 31, 2024
7,152,127
$
5,041
$
$
124,937
$
67,922
$
(1,334)
$
196,638
The accompanying notes are an integral part of these consolidated financial statements.
HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
Cash flows from operating activities:
Net income
$
12,346
3,763
$
15,164
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses (1)
4,940
3,432
Depreciation and amortization
2,090
1,812
Amortization of right-of-use assets
1,718
1,608
Net gain on sale of securities available-for-sale
(31)
-
-
Stock-based compensation
1,587
1,871
Net gain on sale of loans held-for-sale
(10,940)
(2,326)
(4,093)
Net amortization (accretion) of premiums, discounts and loan fees and costs
1,006
(748)
Amortization of intangible assets
Amortization of debt issuance costs
Loan servicing rights valuation adjustments
Deferred tax expense
1,196
Decrease (increase) in accrued interest receivable
(1,279)
(2,090)
Increase in other assets
(9,543)
(1,325)
(1,768)
(Decrease) increase in accrued interest payable
(192)
(97)
Increase (decrease) in other liabilities
3,069
3,538
(264)
Payments on operating leases
(1,735)
(440)
(1,517)
Net cash provided by operating activities
5,899
4,114
16,401
Cash flows from investing activities:
Purchases of securities available-for-sale
(622,629)
(50,499)
-
Repayments (purchases) of restricted securities, net
1,935
(4,267)
Proceeds from sales of securities available-for-sale
1,763
-
-
Principal repayments of securities held to maturity
Principal repayments of securities available-for-sale
599,203
Proceeds from sales of loans
166,963
23,162
50,359
Net increase in loans
(190,831)
(111,676)
(299,397)
Purchases of premises and equipment
(1,292)
(356)
(3,407)
Net cash used in investing activities
(45,817)
(137,356)
(256,360)
Cash flows from financing activities:
Net increase in deposits
49,942
169,619
207,472
Proceeds from term FHLB advances
-
-
100,725
Repayments of term FHLB advances
(18,860)
-
(11,800)
Proceeds from Federal Reserve Bank borrowings
20,000
-
-
Repayments of Federal Reserve Bank borrowings
(22,288)
(1,896)
(4,768)
Repayments of other short-term borrowings, net
-
(49,000)
(6,000)
Payments related to tax withholding for equity awards
(198)
(335)
(170)
Cash dividends paid
(2,960)
(731)
(2,929)
Exercise of stock options, net
(68)
Net cash provided by financing activities
25,568
117,825
282,636
(Decrease) increase in cash and cash equivalents
(14,350)
(15,417)
42,677
Cash and cash equivalents, beginning of period
177,207
192,624
149,947
Cash and cash equivalents, end of period
$
162,857
177,207
$
192,624
Supplemental cash flow information:
Interest paid
$
80,122
18,593
$
49,645
Income taxes paid
4,034
4,404
Supplemental non-cash disclosure:
Transfers from portfolio loans to loans held-for-sale
$
159,523
29,740
$
51,816
Preferred stock issued in exchange for common stock
2,078
-
2,963
Lease liabilities arising from obtaining right-of-use assets
-
1,791
Other assets received in satisfaction of a loan
-
-
(1)
Commencing on October 1, 2023 the allowance calculation is based on the current expected credit loss methodology. Prior to October 1, 2023 the calculation was based on the incurred loss methodology. Refer to Note 1 for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.
HANOVER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Hanover Bancorp, Inc. (the “Company”) is currently a New York corporation which is the holding company for Hanover Community Bank (the “Bank”). The Bank, headquartered in Mineola, New York, is a New York State chartered bank. The Bank commenced operations on November 4, 2008 and is a full-service bank providing personal and business lending and deposit services. As a New York State chartered, non-Federal Reserve member bank, the Bank is subject to regulation by the New York State Department of Financial Services (“DFS”) and the Federal Deposit Insurance Corporation. The Company is subject to regulation and examination by the Board of Governors of the FRB. At the Company’s annual shareholder meeting held on March 5, 2024, the shareholders approved a change in its state of incorporation from the State of New York to the State of Maryland subject to regulatory approval, which has been received. The Company is in the process of completing its reincorporation in Maryland.
Basis of Presentation
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. The Company’s current fiscal year is the calendar year January 1, 2024 through December 31, 2024.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications had an immaterial effect on the Company’s consolidated financial statements and had no effect on prior periods net income or stockholders’ equity.
Use of Estimates
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located in Nassau, Queens and Kings Counties and surrounding areas of New York State. Note 3 discusses the types of lending that the Company engages in. Although the Company has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. The Company does not have any significant concentrations to any one industry or customer.
Cash and Cash Equivalents
For purposes of reporting consolidated cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash and cash equivalents also include interest-bearing deposits in banks and federal funds sold. Interest-bearing deposits in other financial institutions mature within 90 days and are carried at cost. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with original maturities of 90 days or less.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Investment Securities
Investment securities are classified as held-to-maturity or available-for-sale at the time of purchase. Investment securities classified as held-to-maturity, which management has the positive intent and ability to hold to maturity, are reported at amortized cost. Investment securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income. Any decision to sell investment securities available for sale would be based on various factors, including, but not limited to, asset / liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory capital considerations.
Premiums are amortized and discounts accreted using the interest method over the remaining terms of the related securities. Premiums on callable securities are amortized to their earliest call date. Dividend and interest income are recognized when earned. Sales of investment securities are recorded at trade date, with realized gains and losses on sales determined using the specific identification method and included in non-interest income.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
Allowance for Credit Losses - Held-to-Maturity Securities
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities was $9 thousand at both December 31, 2024 and 2023, respectively, and is excluded from the estimate of credit losses.
The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
Management classifies the held-to-maturity portfolio into the following major security types: Mortgage backed: residential and commercial. All mortgage-backed: residential and commercial securities held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.
Allowance for Credit Losses - Available-For-Sale Securities
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $0.6 million and $0.8 million at December 31, 2024 and 2023, respectively, and is excluded from the estimate of credit losses.
Federal Home Loan Bank Stock
As a member of the FHLB of New York, the Company is required to maintain an investment in the stock of the FHLB based upon the amount of outstanding FHLB borrowings. This stock does not have a readily determinable fair value and is carried at cost. Both cash and stock dividends are reported as income.
Loans Held for Sale
Loans held for sale are carried at estimated fair value in the aggregate as determined by outstanding commitments from investors. Gains or losses on loan sales are recognized at the time of sale and are determined by the difference between net sales proceeds and the principal balance of the loans sold, adjusted for net deferred loan fees or costs. Loan origination and commitment fees, net of certain direct loan origination costs, are deferred as an adjustment to the carrying value of the loan until it is sold.
Loans and Loan Interest Income Recognition
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs and an allowance for credit losses. The loan portfolio is segmented into residential real estate, multi-family, commercial real estate, commercial and industrial, construction and land development, and consumer loans. Accrued interest receivable totaled $10.9 million, $10.8 million and $9.9 million at December 31, 2024 and 2023 and September 30, 2023, respectively, and was reported in Accrued interest receivable on the Consolidated Statements of Financial Condition and is excluded from the estimate of credit losses.
Interest income on loans is accrued on the unpaid principal balance and credited to income as earned. Interest income on loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Net loan origination fees and costs are deferred and accreted/amortized to interest income over the contractual life of loans using the level-yield method, adjusted for actual prepayments.
Allowance for Credit Losses - Loans
The allowance for credit losses (“ACL”)is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The quantitative component of the estimate relies on the statistical relationship between the projected value of an economic indicator and the implied historical loss experience among a curated group of peers. The Company utilized regression analyses of peer data, in which the Company was included, and where observed credit losses and selected economic factors were used to determine suitable loss drivers for modeling the lifetime rates of probability of default (PD). A loss given default rate (LGD) is assigned to each pool for each period based on these PD outcomes. The model primarily utilizes an expected discounted cash flow (DCF) analysis with a remaining life (RL) approach used limitedly and which does not have a material impact to the allowance. Consumer loans uses RL and are immaterial to total ACL. The DCF analysis is run at the instrument-level and incorporates an array of loan-specific data points and segment-implied assumptions to determine the lifetime expected loss attributable to each instrument. An implicit "hypothetical loss" is derived for each period of the DCF, and helps establish the present value of future cash flows for each period. The reserve applied to a specific instrument is the difference between the sum of the present value of future cash flows and the amortized cost basis of the loan at the measurement date. The RL approach utilizes projected loss rates based on the remaining life of a loan pool. It is utilized when a regression analysis could not provide adequate correlation of PD and external economic factors on which to base projected losses. During the year ended December 31, 2024, the Company updated the model utilized for the commercial and industrial allowance for credit loss loan segment from RL to DCF. The update was due to the strong statistical relationship now supporting the DCF calculation. The change in methodology did not have a material impact to the allowance reserve for the commercial and industrial loan segment.
Portfolio segments are the level at which loss assumptions are applied to a pool of loans based on the similarity of risk characteristics inherent in the included instruments, relying on FFIEC Call Report codes. The loss driver for each loan portfolio segment is derived from a readily available and reasonable economic forecast, chiefly the Federal Open Market Committee (“FOMC”) of the Federal Reserve's projections of civilian unemployment and year-over-year U.S. GDP growth. Forecasts are applied over a four-quarter period and revert to the lookback period's historical mean for the economic indicator over a four-quarter horizon, thereafter on a straight-line basis.
The model incorporates qualitative factor adjustments in order to calibrate the model for risk in each portfolio segment that may not be captured through quantitative analysis. Determinations regarding qualitative adjustments are reflective of management's expectation of loss conditions differing from those already captured in the quantitative component of the model. Factors that the Company considers include a) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; b) changes in international, national, regional, and local conditions; c) changes in the nature and volume of the portfolio and term loans; d) changes in experience, depth, and ability of lending management; e) changes in volume and severity of past due loans and other similar conditions; f) changes in the quality of the Bank’s loan review system; g) changes in the value of underlying collateral for collateral dependent loans; h) the existence and effect of any concentrations of credit and changes in the levels of such concentrations; and i) the effects of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.
Allowance for credit losses are aggregated for the major loan segments, with similar characteristics, summarized below. However, for the purposes of calculating reserves, these segments may be further broken down into loan classes by risk characteristics that include but are not limited to FFIEC Call Report codes, industry type, geographic location, and collateral type.
One-to-four family residential mortgage loans involve certain risks such as interest rate risk and risk of nonpayment. Adjustable-rate loans decrease the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by the overall health of the economy, including unemployment rates and housing prices.
Commercial real estate lending entails additional risks as compared with single-family residential property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. Loans in this classification include income producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are located largely in the Bank’s primary market area. The cash flows of the income producing investment properties could be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on credit quality. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending could have an adverse effect on credit quality.
Multifamily lending entails additional risks as compared with single-family residential property lending, but less when compared to commercial real estate lending. Loans in this classification include income producing residential investment properties of five or more units. Loans are made to established owners with a proven and demonstrable record of strong performance. Loans are secured by a first mortgage lien on the subject property. Repayment is derived generally from the rental income generated from the property and may be supplemented by the owners’ personal cash flow. Credit risk arises with changes in economic conditions that could cause an increase in vacancy rates or decline in property value.
Commercial and industrial lending is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business. Generally, these loans are primarily secured by inventories and other assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality in this loan class.
The Company’s construction loan portfolio covers the development of commercial properties. Construction loans involve the disbursement of funds during construction with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans because their ultimate repayment depends on the satisfactory completion of construction and is sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Repayment is dependent on completion of the project and the subsequent financing of the completed project as a commercial real estate loan, and in some instances on the rent or sale of the underlying project.
Consumer loans generally have shorter terms and higher interest rates than other lending but generally involve more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. Repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan. Therefore, the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.
Allowance for Credit losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is reported on the Consolidated Statements of Financial Condition in the other liabilities section and is adjusted through a provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the commitment’s estimated useful life.
Servicing Rights
The Company originates and sells mortgage loans in the secondary market and may retain the servicing of these loans. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported within non-interest expense on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Fees earned for servicing loans are reported on the statements of income as loan servicing income when the related mortgage loan payments are collected. The amortization of loan servicing rights is netted against loan servicing fee income. Servicing fees totaled $2.6 million and $2.0 million for the years ended December 31, 2024 and September 30, 2023, respectively, and $0.6 million for the three months ended December 31, 2023. Late fees and ancillary fees related to loan servicing are not material.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Foreclosed Assets
Foreclosed assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, which are 39 years for buildings and 2 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of non-interest expense as incurred.
Leases
Leases are classified as operating or finance leases at the lease commencement date. Currently, the Company does not have any leases classified as financing leases. The Company leases certain locations and equipment. The Company records leases on the Consolidated Statements of Financial Condition in the form of an operating lease liability for the present value of future minimum payments under the lease terms and a right-of-use asset equal to the lease liability adjusted for such items as deferred or prepaid rent, lease incentives, and any impairment of the right-of-use asset. The discount rate used in determining the lease liability is based upon incremental borrowing rates the Company could obtain for similar loans as of the date of commencement or renewal.
The Company does not record leases on the Consolidated Statements of Financial Condition that are classified as short term (12 months or less). Short-term lease payments are recognized in the income statement on a straight-line basis over the lease term. Certain leases may include one or more options to renew. The exercise of lease renewal options is typically at the Company’s discretion, and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated. The Company does not sublease any of its leased properties. The Company does not lease properties from any related parties.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the balance sheet.
Core deposit intangible assets are amortized on an accelerated method over their estimated useful life of 10 years.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Derivatives
The Company records fair value hedges and cash flow hedges at the inception of the derivative contract based on the Company’s intentions and belief as to likely effectiveness as a hedge. Fair value hedges represent a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment. Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair value changes. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income (“OCI”) and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. The changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.
Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Accrued settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.
The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All the contracts to which the Company is a party settle monthly or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its derivatives for each dealer counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business.
Debt Issuance Costs
The costs attributable to issuing a debt instrument are reported on the Consolidated Statements of Financial Condition as a deduction from the face amount of the note and amortized as interest expense over the term of the note.
Earnings Per Share (“EPS”)
Basic EPS is net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted EPS includes the dilutive effect of additional potential common shares issuable under stock options. Potentially dilutive common shares are excluded from the computation of dilutive EPS in the periods in which the effect would be anti-dilutive.
Series A Preferred Stock
Holders of the Company’s Series A preferred stock will be entitled to receive dividends when, as and if declared by the Company’s board of directors, in the same per share amount as the common stockholders. No dividend for any quarterly period will be payable on the common stock unless a dividend identical to that paid on the common stock is paid at the same time on the Series A preferred stock. Therefore, Series A preferred stock is treated as common stock for EPS calculations. Series A preferred stock has no voting rights. In the event of a dissolution of the Company, Series A preferred stock is entitled to the payment of any declared and unpaid dividend, and then will share in dissolution proceeds, if any, with the shares of common stock.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and unrealized gains and losses on cash flow hedges which are also recognized as separate components of stockholders’ equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Income Taxes
Income tax expense is comprised of two components, current and deferred. The current component reflects taxes payable or refundable for a current period based on applicable tax laws, and the deferred component represents the tax effects of temporary differences between amounts recognized for financial accounting and tax purposes. Deferred tax assets and liabilities reflect the tax effects of such differences that are anticipated to result in taxable or deductible amounts in the future, when the temporary differences reverse. Deferred tax assets are recognized if it is more likely than not they will be realized, and may be reduced by a valuation allowance if it is more likely than not that all or some portion will not be realized.
Tax positions that are uncertain but meet a more likely than not recognition threshold are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest expense and penalties on uncertain tax positions as a component of income tax expense and recognizes interest income on refundable income taxes as a component of other non-interest income.
Fair Value Measurements
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Revenue From Contracts With Customers
Revenue from contracts with customers generally comprises deposit service fees, which are included as a component of other non-interest income in the accompanying Consolidated Statements of Income. The Company identifies the performance obligations included in the contracts with customers, determines the transaction price, allocates the transaction price to the performance obligations, as applicable, and recognizes revenue when performance obligations are satisfied, which is generally at the point services are performed for the customer.
Operating Segments
The Company has one reportable segment, "Community Banking." While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.
Stock Compensation Plans
Compensation cost is recognized for stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) issued to employees and directors based upon the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used to estimate the fair value for RSAs and RSUs.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
Supplemental Executive Retirement Plan
In connection with the previous acquisition of Chinatown Federal Savings Bank (“CFSB”), the assets of the CFSB Supplemental Executive Retirement Plan (“CFSB SERP”) are included in the Consolidated Statements of Financial Condition. The CFSB SERP provides benefits to two former executives of CFSB and the assets of the CFSB SERP are held in a Rabbi Trust which was fully funded prior to the acquisition of CFSB by the Company. The Company has no further liability or obligation with respect to the CFSB SERP assets other than record keeping. No ongoing valuation of the assets will be obtained and the amount of plan assets will continue to be equal to the liability reflected on the Consolidated Statement of Financial Condition. The SERP liability is included in other liabilities on the Consolidated Statement of Financial Condition.
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, enhancing disclosure requirements for reportable segments of public business entities, focusing on significant expense categories and the amounts for each reportable segment, where significant expense categories are defined as those that are regularly reported to an entity’s chief operating decision maker and included in the segment’s reported measures of profit or loss. ASU 2023-07 became effective for the Company on January 1, 2024. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) on October 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. In November 2019, the FASB adopted changes to delay the effective date of ASU 2016-13 to 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As the Company is a smaller reporting company under SEC regulations, the Company was eligible for and elected delayed adoption of the ASU until October 1, 2023. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses, which is referred to as the current expected credit loss (“CECL”) methodology, and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. Results for reporting periods beginning after October 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. On October 1, 2023, the Company recognized a one-time cumulative effect adjustment to retained earnings, of $4.0 million, or $3.2 million, net of tax effects, of which $0.1 million reflected a reduction of allowance for credit losses on unfunded commitments, $4.1 million reflected additional allowance related to the loan portfolio, and no adjustment was recognized related to the securities portfolio.
In March 2022, the FASB issued ASU 2022-02, which eliminates creditor accounting guidance for troubled debt restructurings (“TDRs”) for entities that have adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and enhances Vintage Disclosures of Gross Writeoffs. This ASU eliminates Subtopic 310-40 guidance for TDRs, and requires creditors to apply the loan refinancing and restructuring guidance in Subtopic 310-20 when evaluating modifications granted to borrowers experiencing financial difficulty to determine whether the modification is considered a continuation of an existing loan or a new loan. The vintage disclosure component of the ASU requires entities to disclose current-period gross writeoffs by origination year for financing receivables and investment leases within the scope of Subtopic 326-20. The Company adopted ASU 2022-02 prospectively, beginning October 1, 2023, concurrently with the aforementioned ASU 2016-13. The Company did not have any loans that were both experiencing financial difficulties and modified during the three months ended December 31, 2023. Refer to Note 3 for reportable modifications made during the year ended December 31, 2024.
Standards That Have Not Yet Been Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, which will require public business entities to disclose annually a tabular rate reconciliation, including specific items such as state and local income tax, tax credits, nontaxable or nondeductible items, among others, and a separate disclosure requiring disaggregation of reconciling items as described above which equal or exceed 5% of the product of multiplying income from continuing operations by the applicable statutory income tax rate. The ASU is effective for all public business entities for annual periods beginning after December 15, 2024. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
Note 2. Investment Securities
The following tables summarize the amortized cost, fair value and allowance for credit losses of securities available for sale and securities held to maturity at December 31, 2024 and 2023 and September 30, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:
December 31, 2024
Gross
Gross
Allowance
Amortized
Unrealized
Unrealized
for Credit
(in thousands)
Cost
Gains
Losses
Losses
Fair Value
Available for sale:
U.S. Treasury securities
$
19,995
$
$
-
$
-
$
20,000
U.S. GSE residential mortgage-backed securities
11,016
-
(371)
-
10,645
U.S. GSE commercial mortgage-backed securities
1,520
-
(17)
-
1,503
Collateralized loan obligations
32,271
-
-
32,477
Corporate bonds
20,282
(1,217)
-
19,130
Total available for sale securities
$
85,084
$
$
(1,605)
$
-
$
83,755
Gross
Gross
Allowance
Amortized
Unrecognized
Unrecognized
for Credit
Cost
Gains
Losses
Fair Value
Losses
Held to maturity:
U.S. GSE residential mortgage-backed securities
$
1,259
$
-
$
(81)
$
1,178
$
-
U.S. GSE commercial mortgage-backed securities
2,499
-
(68)
2,431
-
Total held to maturity securities
$
3,758
$
-
$
(149)
$
3,609
$
-
December 31, 2023
Gross
Gross
Allowance
Amortized
Unrealized
Unrealized
for Credit
(in thousands)
Cost
Gains
Losses
Losses
Fair Value
Available for sale:
U.S. GSE residential mortgage-backed securities
$
$
-
$
(108)
$
-
$
Collateralized loan obligations
50,283
(99)
-
50,266
Corporate bonds
12,700
-
(1,748)
-
10,952
Total available for sale securities
$
63,292
$
$
(1,955)
$
-
$
61,419
Gross
Gross
Allowance
Amortized
Unrecognized
Unrecognized
for Credit
Cost
Gains
Losses
Fair Value
Losses
Held to maturity:
U.S. GSE residential mortgage-backed securities
$
1,480
$
-
$
(96)
$
1,384
$
-
U.S. GSE commercial mortgage-backed securities
2,561
-
(110)
2,451
-
Total held to maturity securities
$
4,041
$
-
$
(206)
$
3,835
$
-
September 30, 2023
Gross
Gross
Amortized
Unrealized
Unrealized
(in thousands)
Cost
Gains
Losses
Fair Value
Available for sale:
U.S. GSE residential mortgage-backed securities
$
$
-
$
(180)
$
Corporate bonds
12,700
-
(1,953)
10,747
Total available for sale securities
$
13,022
$
-
$
(2,133)
$
10,889
Gross
Gross
Amortized
Unrecognized
Unrecognized
Cost
Gains
Losses
Fair Value
Held to maturity:
U.S. GSE residential mortgage-backed securities
$
1,531
$
-
$
(178)
$
1,353
U.S. GSE commercial mortgage-backed securities
2,577
-
(170)
2,407
Total held to maturity securities
$
4,108
$
-
$
(348)
$
3,760
The amortized cost and fair value of investment securities at December 31, 2024, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single date are shown separately.
December 31, 2024
Amortized
Fair
(in thousands)
Cost
Value
Securities available for sale:
Due in one year or less
$
19,995
$
20,000
Due after one year through five years
1,000
1,013
Five to ten years
46,566
45,586
Beyond ten years
4,987
5,008
U.S. GSE residential mortgage-backed securities
11,016
10,645
U.S. GSE commercial mortgage-backed securities
1,520
1,503
Total securities available for sale
85,084
83,755
Securities held to maturity:
U.S. GSE residential mortgage-backed securities
1,259
1,178
U.S. GSE commercial mortgage-backed securities
2,499
2,431
Total securities held to maturity
3,758
3,609
Total investment securities
$
88,842
$
87,364
At December 31, 2024 and 2023 and September 30, 2023, investment securities with a carrying amount of $28.9 million, $2.0 million and $2.0 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
There were no holdings of securities of any one issuer in an amount greater than 10% of stockholders' equity at December 31, 2024 and 2023 and September 30, 2023.
The following table presents a summary of realized gains and losses from the sale of investment securities:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Proceeds from sales
$
1,763
$
-
$
-
Gross realized gains on sales
$
$
-
$
-
Gross realized losses on sales
-
-
-
Total realized gains, net(1)
$
$
-
$
-
(1) Amount does not include associated income tax of $7 for year ended December 31, 2024.
The following tables summarize securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2024 and 2023 and September 30, 2023, aggregated by major security type and length of time in a continuous unrealized loss position.
December 31, 2024
Less than Twelve Months
Twelve Months or Longer
Total
Gross
Gross
Gross
Unrealized
Unrealized
Number of
Unrealized
(in thousands, except number of securities)
Fair Value
Losses
Fair Value
Losses
Securities
Fair Value
Losses
Available-for-sale:
U.S. GSE residential mortgage-backed securities
$
9,523
$
(227)
$
1,122
$
(144)
$
10,645
$
(371)
U.S. GSE commercial mortgage-backed securities
1,503
(17)
-
-
1,503
(17)
Corporate bonds
2,823
(56)
10,338
(1,161)
13,161
(1,217)
Total available-for-sale
$
13,849
$
(300)
$
11,460
$
(1,305)
$
25,309
$
(1,605)
December 31, 2023
Less than Twelve Months
Twelve Months or Longer
Total
Gross
Gross
Gross
Unrealized
Unrealized
Number of
Unrealized
(in thousands, except number of securities)
Fair Value
Losses
Fair Value
Losses
Securities
Fair Value
Losses
Available-for-sale:
U.S. GSE residential mortgage-backed securities
$
-
$
-
$
$
(108)
$
$
(108)
Collateralized loan obligations
12,352
(99)
-
-
12,352
(99)
Corporate bonds
1,080
(120)
9,872
(1,628)
10,952
(1,748)
Total available-for-sale
$
13,432
$
(219)
$
10,073
$
(1,736)
$
23,505
$
(1,955)
September 30, 2023
Less than Twelve Months
Twelve Months or Longer
Total
Gross
Gross
Gross
Unrealized
Unrealized
Number of
Unrealized
(in thousands, except number of securities)
Fair Value
Losses
Fair Value
Losses
Securities
Fair Value
Losses
Available-for-sale:
U.S. GSE residential mortgage-backed securities
$
-
$
-
$
$
(180)
$
$
(180)
Corporate bonds
1,080
(120)
9,667
(1,833)
10,747
(1,953)
Total available-for-sale
$
1,080
$
(120)
$
9,809
$
(2,013)
$
10,889
$
(2,133)
There was no other than temporary impairment loss recognized on any securities during the year ended September 30, 2023.
Assessment of Available for Sale Debt Securities for Credit Risk
Management assesses the decline in fair value of investment securities periodically. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. The following is a discussion of the credit quality characteristics of portfolio segments carrying unrealized losses at December 31, 2024 and 2023.
Obligations of U.S. Government agencies and sponsored entities
The mortgage-backed securities held by the Company were issued by U.S government-sponsored entities and agencies. The decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality. The Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company considers these securities to carry zero loss estimates and no allowance for credit losses was recorded at December 31, 2024 and 2023.
Corporate bonds
The Company’s corporate bond portfolio is comprised of subordinated debt issues of community and regional banks. Management considers the credit quality of each individual investment. Management reviewed the collectability of these investments, considering such factors as the financial condition of the issuers, reported regulatory capital ratios, and credit ratings, when available, and other factors. All corporate bond debt securities continue to accrue interest and make payments as expected with no defaults or deferrals on the part of the issuers. The Company considers the potential credit risk of the issuers to be immaterial and has not allocated an allowance for credit losses on its corporate bond portfolio as of December 31, 2024 and 2023.
Collateralized loan obligations (“CLO”)
The Company’s CLO portfolio is comprised of an actively managed portfolio of senior secured Class A Notes. Management considers the credit quality of each individual investment. Management reviewed the collectability of these investments, taking into account such factors as the financial condition of the issuers and credit ratings, when available and other factors. All CLO securities continue to accrue interest and make payments as expected with no defaults or deferrals on the part of the issuers. The Company considers the potential credit risk of the issuers to be immaterial and has not allocated an allowance for credit losses on its CLO portfolio as of December 31, 2023.
Note 3. Loans
The following table sets forth the major classifications of loans:
December 31,
September 30,
(in thousands)
Residential real estate
$
729,254
$
714,843
$
657,332
Multi-family
550,570
572,849
578,895
Commercial real estate
522,805
548,012
537,314
Commercial and industrial
168,909
107,912
87,575
Construction and land development
13,483
13,170
13,021
Consumer
Total loans
1,985,524
1,957,199
1,874,562
Allowance for credit losses
(22,779)
(19,658)
(14,686)
Total loans, net
$
1,962,745
$
1,937,541
$
1,859,876
The Company had $11.0 million and $8.9 million of SBA loans held for sale at December 31, 2024 and 2023, respectively. The Company had $1.4 million of residential real estate loans held for sale at December 31, 2024 and none at December 31, 2023. SBA loans of $1.0 million and $4.9 million included in commercial real estate and C&I loans, respectively, in the table above were sold as of September 30, 2023 and settled in early October 2023.
As of December 31, 2024 and 2023 and September 30, 2023, the Company was servicing approximately $338.8 million, $262.8 million and $255.7 million, respectively, of loans for others. In the years ended December 31, 2024 and September 30, 2023, the Company sold approximately $159.1 million and $51.8 million, respectively, of loans and recognized gains on the sales of loans of $10.9 million and $4.1 million, respectively. For the three months ended December 31, 2023, the Company sold loans totaling approximately $29.7 million recognizing net gains of $2.3 million.
The Company continuously monitors the credit quality of its loan receivables. Credit quality is monitored by reviewing certain credit quality indicators. Management has determined that internally assigned credit risk ratings by loan segment are the key credit quality indicators that best assist management in monitoring the credit quality of the Company’s loan receivables.
The Company has adopted a credit risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign a credit risk rating to each loan in their portfolio at origination. When the lender learns of important financial developments, the risk rating is reviewed and adjusted if necessary. In addition, the Company engages a third-party independent loan reviewer that performs semi-annual reviews of a sample of loans, validating the credit risk ratings assigned to such loans. The credit risk ratings play an important role in the establishment of the credit loss provision and to confirm the adequacy of the allowance for credit losses.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. The Company uses the following definitions for risk ratings:
Special Mention: The loan has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the Company’s credit position at some future date.
Substandard: The loan is inadequately protected by current sound worth and paying capacity of the obligor or collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: The loan has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above are considered to be pass rated loans.
The following table summarizes the Company’s loans by year of origination and internally assigned credit risk at December 31, 2024 and gross charge-offs for the year ended December 31, 2024:
Revolving
Term Loans Amortized Cost by Origination Year
Revolving
Loans to
(in thousands)
  
Prior
Loans
Term Loans
Total
Residential real estate (1)
Pass
$
81,599
$
180,498
$
193,204
$
58,694
$
33,539
$
143,580
$
-
$
25,004
$
716,118
Special Mention
1,199
2,110
-
-
5,946
Substandard
-
-
3,467
-
1,418
6,667
Total Residential real estate
82,006
181,889
194,468
60,482
35,649
147,815
-
26,422
728,731
Current period gross charge-offs
$
-
$
$
-
$
-
$
$
$
-
$
-
$
Multi-family
Pass
2,814
3,393
292,430
159,094
35,368
56,158
-
-
549,257
Special Mention
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
Total Multi-family
2,814
3,393
292,430
159,957
35,368
56,608
-
-
550,570
Current period gross charge-offs
-
-
-
-
-
-
Commercial real estate
Pass
50,579
78,564
173,301
78,044
21,870
104,957
-
-
507,315
Special Mention
-
1,709
3,866
1,298
-
-
8,183
Substandard
-
-
-
2,790
4,034
-
-
7,307
Total Commercial real estate
50,579
79,475
175,010
84,700
22,752
110,289
-
-
522,805
Current period gross charge-offs
-
-
-
-
-
-
-
Commercial and industrial
Pass
68,836
73,744
8,834
6,022
1,375
2,496
-
-
161,307
Special Mention
-
-
-
2,252
Substandard
2,500
1,261
-
-
5,350
Total Commercial and industrial
69,114
74,810
11,334
7,827
2,429
3,395
-
-
168,909
Current period gross charge-offs
-
-
-
-
Construction and land development
Pass
3,288
-
5,473
-
-
-
-
9,682
Special Mention
-
-
-
3,801
-
-
-
-
3,801
Substandard
-
-
-
-
-
-
-
-
-
Total Construction and land development
3,288
-
9,274
-
-
-
-
13,483
Current period gross charge-offs
-
-
-
-
-
-
-
-
-
Consumer
Pass
-
-
-
-
-
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Total Consumer
-
-
-
-
-
Current period gross charge-offs
-
-
-
-
-
-
-
-
-
Total Loans
$
205,572
$
343,147
$
673,315
$
322,240
$
96,198
$
318,107
$
-
$
26,422
$
1,985,001
Gross charge-offs
$
$
$
-
$
$
$
$
-
$
-
$
1,647
(1)
Certain fixed rate residential mortgage loans are included in a fair value hedging relationship. The amortized cost excludes a contra asset of $523,000 related to basis adjustments for loans in the closed portfolio under the portfolio layer method at December 31, 2024. These basis adjustments would be allocated to the amortized cost of specific loans within the pool if the hedge was de-designated. See “Note 9 - Derivates” for more information on the fair value hedge.
The following table summarizes the Company’s loans by year of origination and internally assigned credit risk at December 31, 2023:
Revolving
Term Loans Amortized Cost by Origination Year
Revolving
Loans to
(in thousands)
  
Prior
Loans
Term Loans
Total
Residential real estate (1)
Pass
$
191,238
$
207,166
$
64,906
$
39,772
$
79,581
$
98,150
$
-
$
24,975
$
705,788
Special Mention
-
-
-
-
-
-
Substandard
-
-
4,185
-
7,184
Total Residential real estate
191,238
207,906
64,906
40,970
83,996
99,077
-
25,631
713,724
Multi-family
Pass
3,533
299,217
162,678
36,592
10,854
56,601
-
-
569,475
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
1,580
1,794
-
-
-
-
3,374
Total Multi-family
3,533
299,217
164,258
38,386
10,854
56,601
-
-
572,849
Commercial real estate
Pass
86,834
187,570
80,761
26,300
42,476
95,265
-
-
519,206
Special Mention
-
1,852
8,433
3,647
6,427
-
-
20,652
Substandard
-
-
-
6,826
1,129
-
-
8,154
Total Commercial real estate
86,834
189,422
89,194
26,792
52,949
102,821
-
-
548,012
Commercial and industrial
Pass
74,352
11,392
10,015
4,407
5,274
-
-
105,566
Special Mention
-
-
-
-
-
-
1,453
Substandard
-
-
-
-
Total Commercial and industrial
74,352
11,392
11,194
4,442
6,261
-
-
107,912
Construction and land development
Pass
3,613
8,653
-
-
-
-
-
13,170
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Total Construction and land development
3,613
8,653
-
-
-
-
-
13,170
Consumer
Pass
-
-
-
-
-
-
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Total Consumer
-
-
-
-
-
-
Total Loans
$
357,187
$
711,637
$
338,205
$
110,590
$
148,070
$
264,760
$
-
$
25,631
$
1,956,080
(1)
Certain fixed rate residential mortgage loans are included in a fair value hedging relationship. The amortized cost excludes a contra asset of $1,119,000 related to basis adjustments for loans in the closed portfolio under the portfolio layer method at December 31, 2023. These basis adjustments would be allocated to the amortized cost of specific loans within the pool if the hedge was de-designated. See “Note 9 - Derivates” for more information on the fair value hedge.
The following table presents loans categorized by class and internally assigned risk grades at September 30, 2023.
September 30, 2023
Special
(in thousands)
Pass
Mention
Substandard
Doubtful
Total
Residential real estate
$
648,012
$
$
8,564
$
-
$
657,332
Multi-family
576,443
-
2,452
-
578,895
Commercial real estate
518,508
9,444
9,362
-
537,314
Commercial and industrial
86,110
-
87,575
Construction and land development
13,021
-
-
-
13,021
Consumer
-
-
-
Total
$
1,842,519
$
10,740
$
21,303
$
-
$
1,874,562
Allowance for Credit Losses on Unfunded Commitments
The Company has recorded an ACL for unfunded credit commitments, which is recorded in other liabilities. The provision for credit losses on unfunded commitments is recorded within the provision for credit losses on the Company’s income statement for the year ended December 31, 2024. The following table presents the allowance for credit losses for unfunded commitments for the periods indicated:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Balance at beginning of period
$
$
$
Provision for credit losses
(46)
-
Balance at end of period
$
$
$
The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2024 and 2023:
December 31, 2024
Nonaccrual
Loans Past
With No
Due Over
Allowance
89 Days
(in thousands)
for Credit Loss
Nonaccrual
Still Accruing
Residential real estate
$
5,497
$
5,497
$
-
Multi-family
-
Commercial real estate
5,300
5,325
-
Commercial and industrial
1,567
4,682
-
Construction and land development
-
-
-
Consumer
-
-
-
Total
$
13,228
$
16,368
$
-
December 31, 2023
Nonaccrual
Loans Past
With No
Due Over
Allowance
89 Days
(in thousands)
for Credit Loss
Nonaccrual
Still Accruing
Residential real estate
$
4,369
$
4,369
$
-
Multi-family
1,794
3,374
-
Commercial real estate
5,976
6,000
-
Commercial and industrial
-
Construction and land development
-
-
-
Consumer
-
-
-
Total
$
12,847
$
14,451
$
-
The Company recognized $205 thousand, $155 thousand and $131 thousand of interest income on nonaccrual loans during the year ended December 31, 2024, the three months ended December 31, 2023 and the fiscal year ended September 30, 2023, respectively.
Individually Analyzed Loans
Effective October 1, 2023, the Company began analyzing loans on an individual basis when management determined that the loan no longer exhibited risk characteristics consistent with the risk characteristics existing in its designed pool of loans, under the Company’s CECL methodology. Loans individually analyzed include certain nonaccrual loans.
As of December 31, 2024, the amortized cost basis of individually analyzed loans amounted to $16.4 million, of which $15.6 million were considered collateral dependent. For collateral dependent loans where foreclosure is probable or the borrower is experiencing financial difficulty and repayment is likely to be substantially provided through the sale or operation of the collateral, the ACL is measured based on the difference between the fair value of the collateral adjusted for sales costs and the amortized cost basis of the loan, at measurement date. Certain assets held as collateral may be exposed to future deterioration in fair value, particularly due to changes in real estate markets or usage.
The following tables present the amortized cost basis and related allowance for credit loss of individually analyzed loans considered to be collateral dependent as of December 31,2024 and 2023.
December 31, 2024
(in thousands)
Amortized Cost Basis
Related Allowance
Residential real estate (1)
$
5,783
$
-
Multi-family (2)
-
Commercial real estate (2)
5,235
-
Commercial and industrial (1) (2) (3)
3,753
2,500
Total
$
15,635
$
2,500
(1)
Secured by residential real estate
(2)
Secured by commercial real estate
(3)
Secured by business assets
December 31, 2023
(in thousands)
Amortized Cost Basis
Related Allowance
Residential real estate (1)
$
4,226
$
-
Multi-family (2)
3,356
Commercial real estate (2)
5,986
Commercial and industrial (1)
-
Total
$
13,840
$
(1)
Secured by residential real estate
(2)
Secured by commercial real estate
The following table presents information related to impaired loans by portfolio segment as of and for the fiscal year ended September 30,2023:
September 30, 2023
Unpaid
Interest
Average
Principal
Recorded
Allowance
Income
Recorded
(in thousands)
Balance
Investment
Allocated
Recognized
Investment
With no related allowance recorded:
Residential real estate
$
7,484
$
7,477
$
-
$
$
4,243
Multi-family
3,282
2,452
-
2,489
Commercial real estate
6,118
6,119
-
-
5,761
Commercial and industrial
-
Total
$
17,730
$
16,660
$
-
$
$
12,924
Past Due Loans
The following tables present the aging of the amortized cost basis in past due loans as of December 31, 2024 and 2023 by class of loans:
(in thousands)
30 - 59
60 - 89
Greater than
Days
Days
89 Days
Total
Loans Not
December 31, 2024
Past Due
Past Due
Past Due
Past Due
Past Due
Total
Residential real estate
$
5,215
$
3,362
$
4,229
$
12,806
$
716,448
$
729,254
Multi-family
1,442
-
-
1,442
549,128
550,570
Commercial real estate
1,347
-
5,325
6,672
516,133
522,805
Commercial and industrial
2,533
4,305
7,499
161,410
168,909
Construction and land development
-
-
-
-
13,483
13,483
Consumer
-
-
-
-
Total
$
10,537
$
4,023
$
13,859
$
28,419
$
1,957,105
$
1,985,524
(in thousands)
30 - 59
60 - 89
Greater than
Days
Days
89 Days
Total
Loans Not
December 31, 2023
Past Due
  
Past Due
Past Due
Past Due
Past Due
Total
Residential real estate
$
4,508
$
2,360
$
4,369
$
11,237
$
703,606
$
714,843
Multi-family
-
-
3,374
3,374
569,475
572,849
Commercial real estate
2,666
3,212
6,000
11,878
536,134
548,012
Commercial and industrial
1,521
106,391
107,912
Construction and land development
-
-
-
-
13,170
13,170
Consumer
-
-
-
-
Total
$
7,929
$
6,127
$
13,954
$
28,010
$
1,929,189
$
1,957,199
At September 30, 2023, past due and non-accrual loans disaggregated by portfolio segment were as follows:
(in thousands)
Past Due and Non-Accrual
30 - 59
60 - 89
Greater than
Total past
Purchased
Days
Days
89 Days
due and
Credit
Total
September 30, 2023
Past Due
Past Due
Past Due
Non-accrual
Non-accrual
Impaired(1)
Current
Loans
Residential real estate
$
2,314
$
$
-
$
5,750
$
8,732
$
-
$
648,600
$
657,332
Multi-family
-
-
-
2,452
2,452
-
576,443
578,895
Commercial real estate
3,765
-
6,119
10,742
-
526,572
537,314
Commercial and industrial
1,444
-
-
2,056
85,391
87,575
Construction and land development
-
-
-
-
-
-
13,021
13,021
Consumer
-
-
-
-
-
-
Total
$
7,523
$
1,526
$
-
$
14,933
$
23,982
$
$
1,850,452
$
1,874,562
(1) Purchased credit impaired loans at September 30, 2023 were greater than 89 days past due.
The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) on October 1, 2023. The Company may occasionally make modifications to loans where the borrower is considered to be in financial distress. Types of modifications include principal reductions, significant payment delays, term extensions, interest rate reductions or a combination thereof. The amount of principal reduction is charged-off against the allowance for credit losses. The Company did not have any loans that were both experiencing difficulties and modified during the three months ended December 31, 2023. The Company had six loans that were classified as troubled debt restructurings under the old guidance, with a total recorded investment of $1.7 million at September 30, 2023. There were no new troubled debt restructurings recorded for the fiscal year ended September 30, 2023.
The following table presents the amortized cost basis of loans at December 31, 2024 that were both experiencing financial difficulty and modified during the year ended December 31, 2024, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.
% of
Total
Class of
Principal
Payment
Financing
(in thousands)
Reduction
Delay
Total
Receivable
Multi-family
$
$
-
$
0.16
%
Commercial and industrial
-
0.33
Total
$
$
$
1,427
0.07
%
The Company had no commitment to lend additional funds to the borrowers included in the previous table.
The Company monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. No such loans that have been modified in the last 12 months were past due.
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the year ended December 31, 2024.
Principal
Payment
(in thousands)
Reduction
Delay
Multi-family
$
$
-
Commercial and industrial
-
Upon the Company’s determination that a modified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. During the year ended December 31, 2024, no loans that were modified in the last 12 months to borrowers experiencing financial difficulty had a payment default. There were no troubled debt restructurings for which there was a payment default during the fiscal year ended September 30, 2023 for loans that were modified during the twelve-month period prior to default.
The following tables present the activity in the allowance by portfolio segment for the periods indicated:
Year Ended December 31, 2024
Commercial
Construction
Residential
Multi-
Commercial
and
and Land
Real Estate
Family
Real Estate
Industrial
Development
Consumer
Loans
Loans
Loans
Loans
Loans
Loans
Total
(in thousands)
Allowance for credit losses:
Beginning balance
$
5,001
$
4,671
$
8,390
$
1,419
$
$
$
19,658
Charge-offs
(280)
(765)
(30)
(572)
-
-
(1,647)
Recoveries
-
-
-
-
-
Provision for credit losses (1)
1,515
1,378
(2,755)
4,582
(28)
4,750
Ending balance
$
6,236
$
5,284
$
5,605
$
5,447
$
$
$
22,779
(1) Additional provision related to off-balance sheet exposure was a debit of $190 thousand for the year ended December 31, 2024.
Three Months Ended December 31, 2023 (transition period)
Commercial
Construction
Residential
Multi-
Commercial
and
and Land
Real Estate
Family
Real Estate
Industrial
Development
Consumer
Loans
Loans
Loans
Loans
Loans
Loans
Total
(in thousands)
Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326
$
4,778
$
4,206
$
3,197
$
2,368
$
$
$
14,686
Impact of adopting ASC 326
(217)
5,296
(1,201)
4,095
Charge-offs
-
-
-
-
-
-
-
Recoveries
-
-
-
-
Provision for credit losses
(271)
(103)
(6)
(2)
Ending balance
$
5,001
$
4,671
$
8,390
$
1,419
$
$
$
19,658
Fiscal Year Ended September 30, 2023
Commercial
Construction
Residential
Multi-
Commercial
and
and Land
Real Estate
Family
Real Estate
Industrial
Development
Consumer
Loans
Loans
Loans
Loans
Loans
Loans
Total
(in thousands)
Allowance for loan losses:
Beginning balance
$
3,951
$
4,308
$
3,707
$
$
$
$
12,844
Charge-offs
-
(959)
-
(734)
-
-
(1,693)
Recoveries
-
-
-
-
-
Provision for loan losses
(510)
2,238
(11)
3,432
Ending balance
$
4,778
$
4,206
$
3,197
$
2,368
$
$
$
14,686
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment evaluation method as of September 30, 2023:
September 30, 2023
Commercial
Construction
Residential
Multi-
Commercial
and
and Land
(in thousands)
Real Estate
Family
Real Estate
Industrial
Development
Consumer
Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Collectively evaluated for impairment
4,778
4,206
3,197
2,368
14,686
Purchased credit-impaired
-
-
-
-
-
-
-
Total ending allowance balance
$
4,778
$
4,206
$
3,197
$
2,368
$
$
$
14,686
Loans:
Loans individually evaluated for impairment
$
7,477
$
2,452
$
6,119
$
$
-
$
-
$
16,660
Loans collectively evaluated for impairment
649,855
576,443
531,195
86,835
13,021
1,857,774
Purchased credit-impaired
-
-
-
-
-
Total ending loans balance
$
657,332
$
578,895
$
537,314
$
87,575
$
13,021
$
$
1,874,562
Note 4. Premises and Equipment
The following table details the components of premises and equipment:
December 31,
September 30,
(in thousands)
Land
$
1,600
$
1,600
$
1,600
Buildings and improvements
10,876
10,868
10,868
Leasehold improvements
4,248
4,247
4,247
Furniture, fixtures and equipment
8,695
7,784
7,491
25,419
24,499
24,206
Less: Accumulated depreciation
(10,082)
(8,613)
(8,149)
Premises and equipment, net
$
15,337
$
15,886
$
16,057
Depreciation was $1.8 million and $1.6 million for the years ended December 31, 2024 and September 30, 2023, respectively, and $0.5 million for the three months ended December 31, 2023.
Note 5. Leases
Operating Leases
The Company enters into leases in the normal course of business primarily for branch locations, back-office operations locations, business development offices, and equipment. The Company’s leases have remaining terms ranging from 1 to 9 years, some of which include renewal or termination options to extend the lease for up to 5 years and some include options to terminate the lease upon notification. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants. The Company has no leases that are subject to sublease agreements.
As of December 31, 2024 and 2023 and September 30, 2023, the Company had lease liabilities totaling $9.0 million, $10.5 million and $10.9 million, respectively, and right-of-use assets totaling $8.3 million, $9.8 million and $10.2 million. As of December 31, 2024, the weighted average remaining lease term was 6 years and the weighted average discount rate was 4.4%. Total lease costs for the year ended December 31, 2024 and September 30, 2023 was $2.2 million and $2.1 million, respectively, and $0.5 million for the three months ended December 31, 2023.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2024 are as follows:
(dollars in thousands)
Years Ending December 31,
$
2,150
2,047
1,472
1,272
Thereafter
2,544
Total undiscounted lease payments
10,398
Less: imputed interest
1,373
Net lease liability
$
9,025
Note 6. Deposits
The following table details the components of deposits:
December 31,
September 30,
(in thousands)
Non-interest bearing:
Demand
$
211,656
$
207,781
$
185,731
Interest-bearing:
NOW
692,890
661,276
503,704
Money market
503,082
465,732
461,057
Savings
48,885
47,608
54,502
Time deposits $250,000 and greater
106,350
107,503
106,888
Time deposits less than $250,000
391,420
414,695
423,188
Total interest-bearing
1,742,627
1,696,814
1,549,339
Total deposits
$
1,954,283
$
1,904,595
$
1,735,070
The scheduled maturities of time deposits are as follows:
December 31,
(in thousands)
$
481,572
11,243
4,074
Thereafter
Total
$
497,770
Note 7. Borrowings
Federal Home Loan Bank (“FHLB”) Advances
At December 31, 2024 and 2023 and September 30, 2023, FHLB term borrowings outstanding were $107.8 million, $126.7 million and $126.7 million, respectively, all of which were fixed rate.
There were no FHLB overnight borrowings outstanding at December 31, 2024 and 2023. At September 30, 2023, the Company had FHLB overnight borrowings outstanding of $49.0 million at the fixed rate of 5.59%.
The following tables set forth the contractual maturities in the next five years of the balance sheet date and weighted average interest rates of the Company’s fixed rate FHLB advances (dollars in thousands):
Balance at December 31,
Weighted
Contractual Maturity
Amount
Average Rate
Overnight
$
-
-
%
2025, rates from 0.56% to 0.59%
7,080
0.58
%
2026, rates from 4.29% to 4.98%
40,475
4.50
%
2027, rates from 4.13% to 4.74%
40,250
4.32
%
2028, rates from 3.99% to 4.58%
20,000
4.18
%
Total term advances
107,805
4.11
%
Total FHLB advances
$
107,805
4.11
%
Balance at December 31,
Weighted
Contractual Maturity
Amount
Average Rate
Overnight
$
-
-
%
2024, rates from 0.39% to 2.53%
18,860
0.98
%
2025, rates from 0.56% to 0.59%
7,080
0.58
%
2026, rates from 4.29% to 4.98%
40,475
4.50
%
2027, rates from 4.13% to 4.74%
40,250
4.32
%
2028, rates from 3.99% to 4.58%
20,000
4.18
%
Total term advances
126,665
3.65
%
Total FHLB advances
$
126,665
3.65
%
Balance at September 30,
Weighted
Contractual Maturity
Amount
Average Rate
Overnight
$
49,000
5.59
%
2024, rates from 0.39% to 2.53%
18,860
0.98
%
2025, rates from 0.56% to 0.59%
7,080
0.58
%
2026, rates from 4.29% to 4.98%
40,475
4.50
%
2027, rates from 4.13% to 4.74%
40,250
4.32
%
2028, rates from 3.99% to 4.58%
20,000
4.18
%
Total term advances
126,665
3.65
%
Total FHLB advances
$
175,665
4.19
%
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by residential and commercial mortgage loans under a blanket lien arrangement at December 31, 2024 and 2023 and September 30, 2023. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to an additional total of $97.9 million, $187.1 million and $291.2 million at December 31, 2024 and 2023 and September 30, 2023, respectively.
Federal Reserve Borrowings
At December 31, 2024 and 2023 and September 30, 2023, the Company’s borrowings from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) were $0, $2.3 million and $4.1 million, respectively. The borrowings had a rate of 0.35% and the maturity date equaled the maturity date of the underlying PPP loan pledged to secure the extension of credit.
The Company also pledges residential and commercial loans and investments to the Federal Reserve Bank of New York’s Discount Window. Based on this collateral, the Company was eligible to borrow up to $247.2 million and $33.6 million as of December 31, 2024 and 2023, respectively. The Company did not have any outstanding borrowings against this line as of December 31, 2024 and 2023.
Correspondent Bank Borrowings
At December 31, 2024, approximately $92 million in unsecured lines of credit extended by correspondent banks were available to be utilized for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at December 31, 2024 and 2023 and September 30, 2023.
Note 8. Subordinated Debentures
In October 2020, the Company completed the private placement of $25.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to certain qualified institutional buyers and accredited investors. The Notes bear interest, payable semi-annually, at the rate of 5.00% per annum, until October 15, 2025. From and including October 15, 2025 through maturity, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 487.4 basis points. The Company may, at its option, beginning with the interest payment date of October 15, 2025, but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, subject to the receipt of any required regulatory approval. The Notes are not subject to redemption at the option of the holder. The portion of the proceeds of these subordinated notes contributed to the Bank are included as a component of the Bank’s Tier 1 capital for regulatory reporting.
At December 31, 2024 and 2023 and September 30, 2023, the unamortized issuance costs of the Notes were $0.3 million, $0.4 million and $0.4 million, respectively. For each of the years ended December 31, 2024 and September 30, 2023, $0.1 million of issuance costs were recorded in interest expense. For the three months ended December 31, 2023, $14 thousand of issuance costs were recorded in interest expense. The Notes are presented net of unamortized issuance costs in the Company’s Consolidated Statements of Financial Condition.
Note 9. Derivatives
As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
The following sets forth information regarding the Company’s derivative financial instruments as of the dates indicated:
Assets
Liabilities
Notional
Notional
(in thousands)
Amount
Fair Value (1)
Amount
Fair Value (1)
December 31, 2024
Cash flow hedges:
Interest rate swaps (Brokered Certificates of Deposit)
$
25,000
$
$
50,000
$
(451)
Fair value hedges:
Interest rate swaps (Loans)
-
-
50,000
(476)
Total
$
25,000
$
$
100,000
$
(927)
December 31, 2023
Cash flow hedges:
Interest rate swaps (Brokered Certificates of Deposit)
$
-
$
-
$
75,000
$
(1,256)
Fair value hedges:
Interest rate swaps (Loans)
-
-
50,000
(1,105)
Total
$
-
$
-
$
125,000
$
(2,361)
September 30, 2023
Cash flow hedges:
Interest rate swaps (Brokered Certificates of Deposit)
$
75,000
$
$
-
$
-
Fair value hedges:
Interest rate swaps (Loans)
-
-
-
-
Total
$
75,000
$
$
-
$
-
(1)
Derivatives in a positive position are recorded as “Other assets” and derivatives in a negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.
Cash Flow Hedges of Interest Rate Risk
Interest rate swaps with notional amounts totaling $75.0 million as of December 31, 2024 and 2023 and September 30, 2023, were designated as cash flow hedges of certain Brokered Certificates of Deposit. The swaps were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other assets/(other liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.
The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the consolidated statements of income relating to the cash flow derivative instruments for the periods indicated:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Gain (loss) recognized in other comprehensive income
$
$
(1,332)
$
Gain recognized in interest expense
Fair Value Hedges of Interest Rate Risk
On November 1, 2023, the Company entered into a three year interest rate swap with a notional amount totaling $50 million which was designated as a fair value hedge of certain fixed rate residential mortgages. The Company pays a fixed rate of 4.56% and receives a floating rate based on SOFR for the life of the agreement without an exchange of the underlying notional amount. The hedge was determined to be effective during the year ended December 31, 2024 and the Company expects the hedge to remain effective during the remaining term of the swap. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in interest income.
The following table presents the effects of the Company’s derivative instruments designated as fair value hedges on the Consolidated Statements of Income for the year ended December 31, 2024 and the three months ended December 31, 2023 (transition period). There were no fair value hedges for the year ended September 30, 2023.
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Net gain on hedged items recorded in interest income on loans
$
$
$
-
Gain on hedge recorded in interest income on loans
-
The following amounts were recorded on the Statement of Financial Condition related to cumulative basis adjustment for fair value hedges as of the dates indicated.
December 31,
September 30,
(in thousands)
Loans receivable:
Carrying amount of the hedged assets(1)
$
50,000
$
50,000
$
-
Fair value hedging adjustment included in the carrying amount of the hedged assets
1,119
-
(1)
This amount includes the amortized cost basis of the closed portfolios of loans receivable used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period. At December 31, 2024 and 2023, the amortized cost basis of the closed portfolios used in the hedging relationships were $379.3 million and $410.3 million, respectively. The cumulative basis adjustments associated with these hedging relationships were $0.5 million and $1.1 million, respectively, and the amounts of the designated hedged items were $50.0 million and $50.0 million, respectively.
Credit-Risk-Related Contingent Features
The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net liability position, the Company is required to post collateral against its obligations under the agreements. However, if the termination value of derivatives is a net asset position, the counterparty is required to post collateral to the Company. At December 31, 2024 and 2023, the Company posted $0.7 million and $2.2 million, respectively, in collateral to its counterparties in a net liability position. At September 30, 2023, the Company received $0.7 million in collateral from its counterparties under the agreements in a net asset position.
Note 10. Goodwill and Other Intangible Assets
FASB ASC 350, Intangibles - Goodwill and Other, requires a company to perform an impairment test on goodwill annually, or more frequently if events or changes in circumstance indicate that the asset might be impaired, by comparing the fair value of such goodwill to its recorded or carrying amount. If the carrying amount of goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess.
The following table presents activity for goodwill and other intangible assets, which consist of core deposit intangibles:
December 31,
September 30,
(in thousands)
Goodwill at beginning of period
$
19,168
$
19,168
$
19,168
Acquisition
-
-
-
Measurement period adjustment for previous acquisition
-
-
-
Goodwill at end of period
$
19,168
$
19,168
$
19,168
Other intangible assets at beginning of period
$
$
$
Acquisition
-
-
-
Amortization
(61)
(16)
(72)
Other intangible assets at end of period
$
$
$
The Company has identified the reporting unit for purposes of testing goodwill for impairment, the Bank, which is a component of the operating segment.
In assessing impairment, the Company has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, the Company determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company would not be required to perform a quantitative impairment test.
The Company elected to perform a quantitative impairment analysis at November 30, 2024. The annual quantitative assessment of goodwill for the reporting unit was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approaches”). The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value. The market approaches take into consideration fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives. The result of the income approach was weighted 50% and the results of the market approaches comprised the remaining 50% in determining the fair value of the reporting unit. The results of the annual quantitative impairment analysis indicated that the fair value exceeded the carrying value of the reporting unit.
No impairment charges were required to be recorded in the years ended December 31, 2024 and September 30, 2023 and the three months ended December 31, 2023.
The following table presents the gross carrying amount and accumulated amortization for the Company’s other intangible assets, which consist of core deposit intangibles:
December 31,
September 30,
(in thousands)
Gross carrying amount
$
$
$
Accumulated amortization
(267)
(206)
(190)
Net book value
$
$
$
At December 31, 2024, the weighted-average remaining life of the Company’s other intangible assets was 3.29 years.
The following table presents estimated future amortization expense for other intangible assets:
(in thousands)
$
Thereafter
Total
$
Note 11. Income Taxes
The following table details the components of income tax expense (benefit):
Three Months Ended
Fiscal Year
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Current:
Federal
$
2,565
$
$
2,997
State
Total current
3,439
1,004
3,827
Deferred:
Federal
1,135
State
(281)
Total deferred
(19)
1,395
Change in valuation allowance
(95)
(199)
Total income tax expense
$
4,033
$
1,280
$
5,023
The following table reflects a reconciliation of reported income tax expense to the amount that would result from applying the federal statutory rate of 21%:
Year Ended December 31,
Three Months Ended December 31,
Fiscal Year Ended September 30,
2023 (transition period)
Percentage
Percentage
Percentage
of Pre-tax
of Pre-tax
of Pre-tax
(in thousands)
Amount
Earnings
Amount
Earnings
Amount
Earnings
Federal income tax expense computed by applying the statutory rate to income before income taxes
$
3,439
21.0
%
$
1,059
21.0
%
$
4,239
21.0
%
State taxes, net of federal benefit
3.2
%
(204)
(4.0)
%
3.5
%
Salaries deduction limitation
0.2
%
-
-
%
0.2
%
Non-deductible expenses
(107)
(0.7)
%
(84)
(1.7)
%
-
%
Other
1.5
%
4.2
%
1.2
%
Change in valuation allowance
(95)
(0.6)
%
5.9
%
(199)
(1.0)
%
Income tax expense
$
4,033
24.6
%
$
1,280
25.4
%
$
5,023
24.9
%
The following table summarizes the composition of deferred tax assets and liabilities:
December 31,
September 30,
(in thousands)
Deferred tax assets:
Allowance for credit losses and other contingent liabilities
$
6,814
$
6,051
$
4,544
Operating lease liability
2,663
3,199
3,334
Net operating loss carryforwards
3,041
2,791
2,758
Compensation and related benefit obligations
1,616
1,278
Accrued SERP
1,072
1,081
Unrealized loss on securities AFS
Unrealized loss on derivatives
-
Purchase accounting fair value adjustments
Organizational costs
-
-
Total deferred tax assets
15,041
15,677
13,849
Deferred tax liabilities:
Deferred fees and costs
(6,527)
(5,245)
(4,383)
Operating lease asset
(2,460)
(2,983)
(3,118)
Depreciation
(919)
(1,188)
(1,354)
Unrealized gain on derivatives
(15)
-
(97)
Mortgage servicing rights
(12)
(13)
(14)
Other
(114)
(265)
(149)
Total deferred tax liabilities
(10,047)
(9,694)
(9,115)
Total
4,994
5,983
4,734
Valuation allowance
(3,425)
(3,520)
(3,225)
Net deferred tax asset
$
1,569
$
2,463
$
1,509
The Company does not have net operating loss carryforwards available for federal income tax purposes as of December 31, 2024. The Company has net operating loss carryforwards available for state income tax purposes of approximately $39.9 million. For state purposes, $9.2 million expires in 2035 and the remaining balance of $30.7 million will begin to expire in 2036. The Company has net operating loss carryforwards for city income tax purposes of approximately $9.2 million, of which $9.2 million will begin to expire in 2037.
The Company has recorded a federal deferred tax asset as, based upon an analysis of the evidence, it is more likely than not that such federal deferred tax asset will be recoverable. In March of 2014, New York State adopted legislation that benefited small community banks with less than $8 billion in average assets. Specifically, this legislation provides for a state and city subtraction modification for which the Company qualifies. This subtraction modification causes the Company to consistently generate net operating losses for New York State and New York City purposes and it will continue to do so for the foreseeable future. Accordingly, the Company has recorded a valuation allowance against the New York State and New York City portions of the deferred tax asset, as it is not more likely than not that such deferred tax assets will be recoverable. Management reassesses the need for a valuation allowance on an annual basis, or more frequently if warranted.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Connecticut, Florida, New Jersey, New York and Pennsylvania and the city of New York. The Company is no longer subject to examination by taxing authorities for years before 2020. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The Company has unrecorded tax benefits, and the Company does not expect the total amount of unrecognized income tax benefits to significantly increase in the next twelve months.
Note 12. Equity Compensation Plans
The Company’s 2021 and 2018 Equity Compensation Plans (the “2021 Plan” and the “2018 Plan”, respectively), provide for the grant of stock-based compensation awards to members of management, including employees and management officials, and members of the Board. Under the 2021 Plan, a total of 427,500 shares of the Company’s common stock or equivalents were approved for issuance, of which 230,966, 276,127 and 276,127 shares remain available for issuance at December 31, 2024 and 2023 and September 30, 2023, respectively. Of the total 346,000 shares of common stock approved for issuance under the 2018 Plan, 2,795, 11,352 and 21,784 shares remain available for issuance at December 31, 2024 and 2023 and September 30, 2023, respectively.
Stock Options
Stock options are granted with an exercise price equal to the fair market value of the Company’s common stock at the date of grant, and generally with vesting periods of three years and contractual terms of ten years. All stock options fully vest upon a change in control.
The fair value of stock options is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of the common stock of the Company’s peers. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Expected terms are based on historical data and represent the periods in which the options are expected to be outstanding. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
There were 99,392 stock options exercised resulting in the net issuance (after netting the value of the exercise price and/or certain tax liabilities) of 39,170 shares of common stock during the year ended December 31, 2024. There were 33,400 and 10,614 stock options exercised during the three months ended December 31, 2023 and the year ended September 30, 2023, respectively.
A summary of stock option activity follows (aggregate intrinsic value in thousands):
Weighted
Weighted
Average
Average
Aggregate
Remaining
Number of
Exercise
Intrinsic
Contractual
Options
Price
Value
Term
Outstanding, October 1, 2023
198,333
$
8.85
$
1,864
1.19 years
Granted
-
-
Exercised
(33,400)
5.04
Forfeited
(6,000)
16.25
Outstanding, December 31, 2023 (1)
158,933
$
9.37
$
1,314
1.14 years
Granted
-
-
Exercised
(99,392)
10.00
Forfeited
(1,541)
16.25
Outstanding, December 31, 2024 (1)
58,000
$
8.11
$
0.82 years
(1) All outstanding options are fully vested and exercisable
The following table presents information related to the stock option plan for the periods presented:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Intrinsic value of options exercised
$
$
$
Cash received from option exercises
Tax benefit from option exercises
There was no compensation expense attributable to stock options for the years ended December 31, 2024 and September 30, 2023 and the three months ended December 31, 2023.
Restricted Stock Awards
During the three months ended December 31, 2023, the year ended December 31, 2024 and the fiscal year ended September 30, 2023, restricted stock awards of 14,000 shares, 59,911 shares and 50,580 shares, respectively, were granted with a five-year vesting period. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.
A summary of restricted stock awards activity follows:
Weighted-Average
Number of
Grant Date Fair
Shares
Value
Unvested, October 1, 2023
245,004
$
19.71
Granted
14,000
17.70
Vested
(2,934)
21.49
Forfeited
(3,568)
19.74
Unvested, December 31, 2023
252,502
$
19.58
Granted
59,911
17.13
Vested
(70,017)
19.58
Forfeited
(6,193)
19.74
Unvested, December 31, 2024
236,203
$
18.95
Compensation expense attributable to restricted stock awards was $1.4 million and $1.7 million for the years ended December 31, 2024 and September 30, 2023, respectively, and $0.3 million for the three months ended December 31, 2023. As of December 31, 2024 and 2023 and September 30, 2023, there was $3.1 million, $3.5 million and $3.6 million of total unrealized compensation cost related to unvested restricted stock, expected to be recognized over a weighted-average term of 3.00 years, 3.32 years and 3.41 years, respectively. The total fair value of shares vested during the years ended December 31, 2024 and September 30, 2023 was $1.3 million and $1.4 million, respectively, and $0.1 million during the three months ended December 31, 2023.
Restricted Stock Units
Long Term Incentive Plan
Restricted stock units (“RSU”s) represent an obligation to deliver shares to a grantee at a future date if certain vesting conditions are met. RSUs are subject to a time-based vesting schedule and the satisfaction of performance conditions and are settled in shares of the Company's common stock. RSUs do not provide voting rights and RSUs may accrue dividends from the date of grant.
The following table summarizes the unvested performance-based RSU activity for the three months ended December 31, 2023 and the year ended December 31, 2024:
Weighted-Average
Number of
Grant Date Fair
Shares
Value
Unvested, October 1, 2023
38,271
$
19.73
Granted
-
-
Vested
-
-
Forfeited
-
-
Unvested, December 31, 2023
38,271
$
19.73
Granted
-
-
Vested
-
-
Forfeited
-
-
Unvested, December 31, 2024
38,271
$
19.73
No RSUs were granted during the three months ended December 31, 2023, the year ended December 31, 2024 and the fiscal year ended September 30, 2023. Performance-based RSUs granted in 2022 cliff vest after three years and are subject to the achievement of the Company's pre-defined performance goals for the three-year period ending December 31, 2024.
Compensation expense attributable to RSUs were $0.2 million and $0.2 million for the years ended December 31, 2024 and September 30, 2023, respectively, and $0.1 million for the three months ended December 31, 2023. As of December 31, 2024 and 2023 and September 30, 2023, there was $31 thousand, $0.3 million and $0.3 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 0.14 years, 1.14 years and 1.39 years, respectively.
Note 13. Related Party Transactions
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, their immediate families and their affiliated companies (commonly referred to as related parties). Loans to related parties were as follows:
(in thousands)
Beginning balance, October 1, 2023
$
2,852
New loans
-
Repayments
(19)
Ending balance, December 31, 2023
2,833
New loans
-
Repayments
(1,029)
Ending balance, December 31, 2024
$
1,804
Deposits from principal officers, directors and their affiliates at December 31, 2024 and 2023 and September 30, 2023 were $19.3 million, $22.6 million and $28.5 million, respectively.
Note 14. Loan Commitments and Other Related Activities
Some financial instruments such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk were as follows:
December 31,
September 30,
(in thousands)
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Standby letters of credit
$
$
-
$
3,924
$
-
$
$
-
Loan commitments outstanding
3,008
34,596
54,361
-
42,973
Unused lines of credit
14,415
78,501
6,887
81,883
4,561
72,078
Commitments to make loans are generally made for periods of 180 days or less. The fixed rate loan commitments at December 31, 2024 have interest rates ranging from 6.625% to 7.75% and maturities ranging from 3 years to 30 years. The fixed rate loan commitment at December 31, 2023 has an interest rate of 7.67% and a maturity of 5 years.
Note 15. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy regulations and, additionally, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory action. The effects of accumulated other comprehensive income or loss is not included in computing regulatory capital. Management believes as of December 31, 2024, the Bank meets all capital adequacy requirements to which it is subject.
In addition to the minimum capital requirements discussed above, the Bank is also required to maintain a capital buffer above the requirements set forth in the capital adequacy regulations. Failure to maintain the required buffer could impair the Bank’s ability to pay dividends to the Company and to pay certain compensation to its executives.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized or worse, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2024 and 2023 and September 30, 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
Under a policy of the Federal Reserve applicable to bank holding companies with less than $3.0 billion in consolidated assets, the Company is not subject to consolidated regulatory capital requirements.
The following table sets forth the Bank’s actual and required capital amounts (in thousands) and ratios under current regulations:
Minimum Capital
Minimum to Be Well
Adequacy Requirement
Capitalized Under
Minimum Capital
with Capital
Prompt Corrective
Actual Capital
Adequacy Requirement
Conservation Buffer
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2024
Total capital to risk-weighted assets
$
220,696
14.58
%
$
121,127
8.00
%
$
158,979
10.50
%
$
151,408
10.00
%
Tier 1 capital to risk-weighted assets
201,744
13.32
%
90,845
6.00
%
128,697
8.50
%
121,127
8.00
%
Common equity tier 1 capital to risk-weighted assets
201,744
13.32
%
68,134
4.50
%
105,986
7.00
%
98,416
6.50
%
Tier 1 capital to average total assets
201,744
9.13
%
88,382
4.00
%
N/A
N/A
110,478
5.00
%
December 31, 2023
Total capital to risk-weighted assets
$
210,071
14.31
%
$
117,472
8.00
%
$
154,182
10.50
%
$
146,840
10.00
%
Tier 1 capital to risk-weighted assets
193,324
13.17
%
88,104
6.00
%
124,814
8.50
%
117,472
8.00
%
Common equity tier 1 capital to risk-weighted assets
193,324
13.17
%
66,078
4.50
%
102,788
7.00
%
95,446
6.50
%
Tier 1 capital to average total assets
193,324
9.08
%
85,131
4.00
%
N/A
N/A
106,414
5.00
%
September 30, 2023
Total capital to risk-weighted assets
$
205,786
14.60
%
$
112,755
8.00
%
$
147,991
10.50
%
$
140,944
10.00
%
Tier 1 capital to risk-weighted assets
190,928
13.55
%
84,566
6.00
%
119,802
8.50
%
112,755
8.00
%
Common equity tier 1 capital to risk-weighted assets
190,928
13.55
%
63,425
4.50
%
98,661
7.00
%
91,613
6.50
%
Tier 1 capital to average total assets
190,928
9.16
%
83,338
4.00
%
N/A
N/A
104,173
5.00
%
Dividend restrictions - The Company’s principal source of funds for dividend and debt service payments is dividends received from the Bank. During 2024 the Bank paid $5.1 million in cash dividends to the Company. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of December 31, 2024, the Bank had $34.0 million of retained net income available for dividends to the Company, without obtaining regulatory approval, provided that the Bank satisfies the regulatory capital requirements, including the capital conservation buffer, disclosed above.
Note 16. Fair Value Measurements
FASB ASC No. 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
FASB ASC 820-10 also establishes a fair value hierarchy and describes three levels of inputs that may be used to measure fair values. The three levels within the fair value hierarchy are as follows:
● Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
● Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, rate volatility, prepayment speeds, credit ratings) or inputs that are derived principally or corroborated by market data, by correlation, or other means.
● Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Assets Measured at Fair Value on a Recurring Basis
The following table summarizes assets measured at fair value on a recurring basis:
December 31, 2024
Fair Value Measurements Using:
Quoted Prices In
Significant
Active Markets
Significant Other
Unobservable
Carrying
for Identical Assets
Observable Inputs
Inputs
(in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Available-for-sale securities:
U.S. Treasury securities
$
20,000
$
-
$
20,000
$
-
U.S. GSE residential mortgage-backed securities
10,645
-
10,645
-
U.S. GSE commercial mortgage-backed securities
1,503
-
1,503
-
Collateralized loan obligations
32,477
-
32,477
-
Corporate bonds
19,130
-
19,130
-
Loan servicing rights
6,016
-
-
6,016
Derivatives
-
-
Total
$
89,839
$
-
$
83,823
$
6,016
Financial liabilities:
Derivatives
$
$
-
$
$
-
December 31, 2023
Fair Value Measurements Using:
Quoted Prices In
Active Markets
Significant
for Identical
Significant Other
Unobservable
Carrying
Assets
Observable Inputs
Inputs
(In thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Available-for-sale securities:
U.S. GSE residential mortgage-backed securities
$
$
-
$
$
-
Collateralized loan obligations
50,266
-
50,266
-
Corporate bonds
10,952
-
10,952
-
Loan servicing rights
4,668
-
-
4,668
Total
$
66,087
$
-
$
61,419
$
4,668
Financial liabilities:
Derivatives
$
2,361
$
-
$
2,361
$
-
September 30, 2023
Fair Value Measurements Using:
Quoted Prices In
Active Markets
Significant
for Identical
Significant Other
Unobservable
Carrying
Assets
Observable Inputs
Inputs
(In thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Available-for-sale securities:
U.S. GSE residential mortgage-backed securities
$
$
-
$
$
-
Corporate bonds
10,747
-
10,747
-
Loan servicing rights
4,479
-
-
4,479
Derivatives
-
-
Total
$
15,813
$
-
$
11,334
$
4,479
The fair value for the securities available-for-sale was obtained from an independent broker based upon matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The Company has determined these are classified as Level 2 inputs within the fair value hierarchy.
Derivatives represent interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.
The fair value of mortgage servicing rights are based on a valuation model that calculates the present value of estimated future servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income. Fair value of loan servicing rights related to residential mortgage loans at December 31, 2024 was determined based on discounted expected future cash flows using discount rates ranging from 13.0% to 15.5%, prepayment speeds ranging from 18.0% to 19.4% and a weighted average life ranging from 2.0 to 3.5 years. Fair value at December 31, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 12.4% to 14.9%, prepayment speed of 26.25% and a weighted average life ranging from 1.6 to 2.8 years. Fair value at September 30, 2023 for mortgage servicing rights was determined based on discounted expected future cash flows using discount rates ranging from 12.9% to 15.4%, prepayment speed of 26.25% and a weighted average life ranging from 1.2 to 2.8 years.
The fair value of loan servicing rights for SBA loans at December 31, 2024 was determined based on discounted expected future cash flows using discount rates ranging from 5.5% to 43.4%, prepayment speeds ranging from 9.3% to 35.0% and a weighted average life ranging from 0.8 to 5.1 years. The fair value of loan servicing rights for SBA loans at December 31, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 9.6% to 41.5%, prepayment speeds ranging from 8.9% to 30.2% and a weighted average life ranging from 1.1 to 5.7 years. The fair value of loan servicing rights for SBA loans at September 30, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 10.1% to 41.6%, prepayment speeds ranging from 8.3% to 29.3% and a weighted average life ranging from 1.2 to 5.8 years.
The Company has determined these are mostly unobservable inputs and considers them Level 3 inputs within the fair value hierarchy.
The following table presents the changes in loan servicing rights for the periods presented:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Balance at beginning of period
$
4,668
$
4,479
$
4,353
Additions
2,157
Adjustment to fair value
(809)
(348)
(767)
Balance at end of period
$
6,016
$
4,668
$
4,479
Assets Measured at Fair Value on a Non-recurring Basis
There were no assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2024 and September 30, 2023 and for the years then ended.
Financial assets measured at fair value on a non-recurring basis as of December 31, 2023 include certain individually evaluated loans reported at fair value of the underlying collateral if repayment is expected solely from the collateral.
December 31, 2023
Fair Value Measurements Using:
Quoted Prices In
Significant
Active Markets
Significant Other
Unobservable
Carrying
for Identical Assets
Observable Inputs
Inputs
(in thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Individually evaluated loans - Multi-family
$
1,180
$
-
$
-
$
1,180
The fair value amounts shown in the table above are individually evaluated loans net of reserves allocated to said loans. The total reserves allocated to these loans were $397 thousand at December 31, 2023.
The table below presents additional quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis at December 31, 2023:
Range
December 31, 2023
Fair Value
Valuation Technique
Unobservable Input
(Weighted Average)
(Dollar in thousands)
Individually evaluated loans - Multi-family
$
1,180
Appraisal of collateral
Appraisal and
50.00%
adjustments (1)
(50.00%)
(1)
The appraisal of the underlying collateral property generally includes various significant unobservable inputs (level 3). This was performed by certified general appraisers. Management adjusted the appraisal downward for factors such as the condition of the property and liquidation expenses. The range of other appraisal adjustments and liquidation expenses are shown as a percentage of the appraisal.
Financial Instruments Not Measured at Fair Value
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value at December 31, 2024 and 2023 and September 30, 2023:
December 31, 2024
Fair Value Measurements Using:
Quoted Prices In
Active Markets
Significant
for Identical
Significant Other
Unobservable
Carrying
Assets
Observable Inputs
Inputs
Total Fair
(In thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Cash and cash equivalents
$
162,857
$
162,857
$
-
$
-
$
162,857
Securities held-to-maturity
3,758
-
3,609
-
3,609
Loans, net
1,962,745
-
-
1,940,452
1,940,452
Accrued interest receivable
11,849
-
10,918
11,849
Financial liabilities:
Time deposits
497,770
-
498,226
-
498,226
Demand and other deposits
1,456,513
1,456,513
-
-
1,456,513
Borrowings
107,805
-
107,530
-
107,530
Subordinated debentures
24,689
-
30,909
-
30,909
Accrued interest payable
1,532
1,527
-
1,532
December 31, 2023
Fair Value Measurements Using:
Quoted Prices In
Active Markets
Significant
for Identical
Significant Other
Unobservable
Carrying
Assets
Observable Inputs
Inputs
Total Fair
(In thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Cash and cash equivalents
$
177,207
$
177,207
$
-
$
-
$
177,207
Securities held-to-maturity
4,041
-
3,835
-
3,835
Loans, net
1,937,541
-
-
1,890,113
1,890,113
Accrued interest receivable
11,915
-
1,156
10,759
11,915
Financial liabilities:
Time deposits
522,198
-
520,022
-
520,022
Demand and other deposits
1,382,397
1,382,397
-
-
1,382,397
Borrowings
128,953
-
128,165
-
128,165
Subordinated debentures
24,635
-
26,601
-
26,601
Accrued interest payable
1,724
1,563
-
1,724
September 30, 2023
Fair Value Measurements Using:
Quoted Prices In
Active Markets
Significant
for Identical
Significant Other
Unobservable
Carrying
Assets
Observable Inputs
Inputs
Total Fair
(In thousands)
Amount
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Cash and cash equivalents
$
192,624
$
192,624
$
-
$
-
$
192,624
Securities held-to-maturity
4,108
-
3,760
-
3,760
Loans, net
1,859,876
-
-
1,798,916
1,798,916
Accrued interest receivable
10,636
-
9,907
10,636
Financial liabilities:
Time deposits
530,076
-
525,198
-
525,198
Demand and other deposits
1,204,994
1,204,994
-
-
1,204,994
Borrowings
179,849
-
176,693
-
176,693
Subordinated debentures
24,621
-
26,355
-
26,355
Accrued interest payable
1,821
1,768
-
1,821
Note 17. Parent Company Only Condensed Financial Information
Condensed parent company only financial statements of Hanover Bancorp, Inc. are as follows:
Condensed Balance Sheets
December 31,
September 30,
(in thousands)
ASSETS
Cash and due from banks
$
$
$
Investment in Bank
219,675
208,584
209,554
Other assets
1,176
Total Assets
$
221,633
$
209,756
$
211,128
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures
$
24,689
$
24,635
$
24,621
Accrued interest payable
Accrued expenses and other liabilities
Total Liabilities
24,995
24,926
25,221
Total Stockholders' Equity
196,638
184,830
185,907
Total Liabilities and Stockholders' Equity
$
221,633
$
209,756
$
211,128
Condensed Statements of Income
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Dividends received from Bank
$
5,150
$
1,100
$
5,300
Interest expense
(1,304)
(326)
(1,304)
Non-interest expense
(131)
(43)
(159)
Income before income taxes and equity in undistributed earnings of the Bank
3,715
3,837
Income tax benefit
Equity in undistributed earnings of the Bank
8,388
2,968
11,095
Net income
$
12,346
$
3,763
$
15,164
Condensed Statements of Cash Flows
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Cash flows from operating activities:
Net income
$
12,346
$
3,763
$
15,164
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of the Bank
(8,388)
(2,968)
(11,095)
Amortization of debt issuance costs
(Increase) decrease in other assets
(343)
(704)
Decrease in accrued interest payable
-
(313)
-
Net cash provided by operating activities
3,669
3,418
Cash flows from financing activities:
Exercise of stock options, net
(68)
Payments related to tax withholding for equity awards
(198)
(335)
(170)
Cash dividends paid
(2,960)
(731)
(2,929)
Net cash used in financing activities
(3,226)
(898)
(2,993)
Net increase (decrease) in cash and due from banks
(390)
Cash and due from banks, beginning of period
Cash and due from banks, end of period
$
$
$
Note 18. Earnings Per Share
The two-class method is used in the calculation of basic and diluted earnings per share (“EPS”). Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings. The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities.
The Company’s basic and diluted EPS calculations are presented in the following table:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands, except share and per share data)
Net income available to common stockholders
$
12,346
$
3,763
$
15,164
Less: Dividends paid and earnings allocated to participating securities
(384)
(118)
(561)
Income attributable to common stock
$
11,962
$
3,645
$
14,603
Weighted average common shares outstanding, including participating securities
7,403,758
7,324,133
7,319,040
Less: Weighted average participating securities
(245,599)
(245,685)
(278,211)
Weighted average common shares outstanding
7,158,159
7,078,448
7,040,829
Basic EPS
$
1.67
$
0.51
$
2.07
Income attributable to common stock
$
11,962
$
3,645
$
14,603
Weighted average common shares outstanding
7,158,159
7,078,448
7,040,829
Weighted average common equivalent shares outstanding
28,983
59,346
80,118
Weighted average common and equivalent shares outstanding
7,187,142
7,137,794
7,120,947
Diluted EPS
$
1.66
$
0.51
$
2.05
There were no stock options that were antidilutive at December 31, 2024 and 2023 and September 30, 2023.
Note 19. Accumulated Other Comprehensive (Loss) Income
The following presents changes in accumulated other comprehensive (loss) income by component, net of tax:
Unrealized Gains and
Gains and
Losses on Available-
Losses on
for-Sale Debt
Cash Flow
(in thousands)
Securities
Hedges
Total
Balance at January 1, 2024
$
(1,466)
$
(984)
$
(2,450)
Other comprehensive income, before reclassification
1,140
Amount reclassified from accumulated other comprehensive income
(24)
-
(24)
Net current period other comprehensive income
1,116
Balance at December 31, 2024
$
(1,035)
$
(299)
$
(1,334)
Unrealized Gains and
Gains and
Losses on Available-
Losses on
for-Sale Debt
Cash Flow
(in thousands)
Securities
Hedges
Total
Balance at October 1, 2023
$
(1,670)
$
$
(1,322)
Other comprehensive income (loss), before reclassification
(1,332)
(1,128)
Amount reclassified from accumulated other comprehensive income (loss)
-
-
-
Net current period other comprehensive income (loss)
(1,332)
(1,128)
Balance at December 31, 2023
$
(1,466)
$
(984)
$
(2,450)
Unrealized Gains and
Gains and
Losses on Available-
Losses on
for-Sale Debt
Cash Flow
(in thousands)
Securities
Hedges
Total
Balance at October 1, 2022
$
(620)
$
-
$
(620)
Other comprehensive (loss) income, before reclassification
(1,050)
(702)
Amount reclassified from accumulated other comprehensive loss
-
-
-
Net current period other comprehensive (loss) income
(1,050)
(702)
Balance at September 30, 2023
$
(1,670)
$
$
(1,322)
The following represents the reclassification out of accumulated other comprehensive (loss) income for the years ended December 31, 2024 and September 30, 2023 and the three months ended December 31, 2023:
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
Affected Line Item in Consolidated
(in thousands)
Statements of Income
Unrealized gains and losses on available-for-sale securities
Realized gains on securities available-for-sale
$
$
-
$
-
Gain on sale of investment securities available-for-sale, net
Tax effect
-
-
Income tax expense
Net of tax
$
$
-
$
-
Gains and losses on cash flow hedges
Interest rate contracts
$
-
$
-
$
-
Interest income (expense)
Tax effect
-
-
-
Income tax (expense) or benefit
Net of tax
$
-
$
-
$
-
Total reclassifications for the period, net of tax
$
$
-
$
-
Note 20. Segment Information
The Company’s reportable segment is determined by the Chief Executive Officer, who is the designated chief operating decision maker (the “CODM”). The Chief Executive Officer along with others in the Company’s executive management evaluates performance and allocates resources based upon analysis of the Company as one operating segment or unit. The activities of the Company comprise one reportable segment, "Community Banking." All of the Company’s activities are interrelated, and each activity is dependent and assessed based on the manner in which it supports the other activities of the Company. All the consolidated assets are attributable to the Community Banking segment.
The Company provides a range of community banking services, including commercial and consumer lending, personal and business banking, cash management services, and other financial services primarily to individuals, businesses, and municipalities in the New York metropolitan area.
The CODM is provided with the Company’s consolidated statements of financial condition and income and evaluates the Company’s operating results based on consolidated net interest income, non-interest income, non-interest expense, and net income, which can be seen on the consolidated statements of income. These results are used to measure the Company against its competitors. Other significant non-cash items assessed by the CODM are depreciation, amortization and provision for credit losses consistent with the reporting on the consolidated statements of cash flows. Expenditures for long-lived assets are also evaluated and are consistent with the reporting on the consolidated statements
of cash flows. Strategic plans and budget to actual monitoring are evaluated as one reportable segment. The actual results are used in assessing performance of the segment and in establishing compensation. All revenues are derived from banking operations within the United States, and for the year ended December 31, 2024, the three months ended December 31, 2023 and the fiscal year ended September 30, 2023, there was no customer that accounted for more than 10% of the Company's consolidated revenue.
Accounting policies of the Community Banking segment are the same as those described in Note 1.
Note 21. Revenue from Contracts with Customers
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Company’s sources of non-interest income. Items outside the scope of ASC 606 are noted as such.
Three Months Ended
Fiscal
Year Ended
December 31,
Year Ended
December 31,
(transition period)
September 30,
(in thousands)
Loan servicing and fee income(1)
$
3,690
$
$
2,709
Service charges on deposit accounts
Net gain on sale of loans held-for-sale(1)
10,940
2,326
4,093
Net gain on sale of investments available-for-sale(1)
-
-
Other income(2)
1,771
Total non-interest income
$
15,339
$
3,254
$
8,848
(1) Not included within the scope of ASC 606
(2) Other income includes merchant card processing fees of $48 and $47 for the year ended December 31, 2024 and September 30, 2023, respectively, and $6 for the three months ended December 31, 2023, which are included in the scope of ASC 606 and loan related fee income, recoveries on acquired loans and miscellaneous income totaling $161 and $1,724 for the year ended December 31, 2024 and September 30, 2023, respectively, and $59 for the three months ended December 31, 2023, which are not included in the scope of ASC 606. The Company settled ongoing litigation and received a settlement payment of $975 in the year ended September 30, 2023.
A description of the Company’s revenue streams included in the scope of ASC 606 is as follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Service-based fees, which include services such as ATM use fees, stop payment charges, wire transfers, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills its performance obligation to the customer. Account maintenance fees, which primarily relate to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies its performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on customer accounts are withdrawn from the customer’s account balance.
Note 22. Subsequent Events
On January 29, 2025 the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share on the Company’s common and preferred stock. The dividend was paid on February 19, 2025 to shareholders of record on February 12, 2025.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of December 31, 2024. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date.
(b)Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act. The Company’s internal control system is a process designed to provide reasonable assurance to the Company’s management, Board of Directors and shareholders regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As part of the Company’s program to comply with Section 404 of the Sarbanes-Oxley Act of 2002, our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024 (the “Assessment”). In making this Assessment, management used the control criteria framework of the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission published in its report entitled Internal Control - Integrated Framework (2013). Management’s Assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its Assessment with the Audit Committee.
Based on this Assessment, management determined that, as of December 31, 2024, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2024, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
This Annual Report does not include an attestation report of the independent registered public accounting firm because Hanover Bancorp, Inc. is an emerging growth company.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information responsive to this Item 10 is incorporated herein by reference to the Company’s definitive proxy statement for its 2025 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days of December 31, 2024.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information responsive to this Item 11 is incorporated herein by reference to the Company’s definitive proxy statement for its 2025 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days of December 31, 2024.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information responsive to this Item 12 is incorporated herein by reference to the Company’s definitive proxy statement for its 2025 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days of December 31, 2024.
The following table provides information with respect to the equity securities that are authorized for issuance under the Company’s equity compensation plans as of December 31, 2024.
Equity Compensation Plan Information
Number of securities
Number of securities
remaining available
to be issued upon
Weighted-average
for issuance under
exercise of
exercise price of
equity compensation
outstanding options,
outstanding options,
plans (excluding
warrants and rights
warrants and rights
securities reflected in
(A)
(B)
column (A)) (C)
Equity compensation plans approved by shareholders
58,000
$
8.11
2,795
Equity compensation plans not approved by shareholders
-
-
230,966
Total
58,000
$
8.11
233,761

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information responsive to this Item 13 is incorporated herein by reference to the Company’s definitive proxy statement for its 2025 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days of December 31, 2024.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
Information responsive to this Item 14 is incorporated herein by reference to the Company’s definitive proxy statement for its 2025 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days of December 31, 2024.
Part IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)Financial Statements and Schedules:
The following financial statements and supplementary data are filed as part of this annual report:
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 173)
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits. The following is a list of Exhibits to this annual report.
Exhibit
No.
Description
3.1
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1(i) to Registration Statement on Form S-4 filed on January 20, 2021)
3.1(i)
Certificate of Amendment to Certificate of Incorporation designation the of Series A Convertible Perpetual Preferred Stock filed with the New York Secretary of State on October 25, 2022 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 31, 2022 and Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 26, 2024)
3.1(ii)
Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on December 22, 2023)
10.1
Second Amended and Restated Employment Agreement effective as of the 1st day of January, 2015, by and between Michael P. Puorro and Hanover Community Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 30, 2021)
10.2
Amended and Restated Change in Control Agreement with Kevin Corbett (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on July 30, 2021)
10.3
Hanover Community Bank 2013 Stock Option Plan (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-4 filed on January 20, 2021)
10.4
Savoy Bank 2013 Stock Option Plan (incorporated by reference to Exhibit 4.2 to Form S-8 filed on June 17, 2021)
10.5
Hanover Community Bank 2016 Stock Option Plan (incorporated by reference to Exhibit 10.6 to Registration Statement on Form S-4 filed on January 20, 2021)
10.6
2018 Equity Compensation Plan (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-4 filed on January 20, 2021)
10.7
Hanover Bancorp 2021 Equity Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8- K filed on July 30, 2021)
10.8
Indenture between Hanover Bancorp, Inc. and U.S. Bank, National Association dated October 7, 2020 (incorporated by reference from Exhibit 10.8 to Registration Statement on Form S-4 filed on January 20, 2021)
10.9
First Supplemental Indenture between Hanover Bancorp, Inc. and U.S. Bank National Association dated October 7, 2020 (incorporated by reference from Exhibit 10.9 to Registration Statement on Form S-4 filed on January 20, 2021)
10.10
Second Amended and Restated Employment Agreement with McClelland Wilcox (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 27, 2023)
10.11
Employment Agreement with Lance P. Burke dated as of July 18, 2024 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 22, 2024)
10.12
Exchange Agreement with Castle Creek Capital Partners VIII, L.P. dated April 25, 2024 (incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 26, 2024)
Insider Trading Policy
21.1
Subsidiaries (incorporated by reference to Exhibit 21.1 to Registration Statement on Form S-4 filed on January 20, 2021)
23.1
Consent of Crowe LLP (filed herewith)
31.1
Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1
Section 1350 Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Section 1350 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
Compensation Recoupment Policy (incorporated by reference to Exhibit 97 to the Registrant’s Annual Report on Form 10-K filed on December 21, 2023)
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definitions Linkbase Document
Cover Page Interactive Data File (filed herewith)