ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition and results or our operations for the years ended December 31, 2025 and 2024, respectively. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. Unless the context otherwise specifies or requires, references herein to “we” or “us” include Hanover Bancorp, Inc. and Hanover Bank on a consolidated basis.
Business Overview
The Company is a Maryland corporation and is the holding company for the Bank. The Bank, a community commercial bank focusing on highly personalized and efficient services and products responsive to local needs, commenced operations in 2009 and is 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, the Company is subject to regulation and examination by the FRB.
The Company completed its core processing system conversion to FIS Horizon in February 2025. This conversion, coupled with our recently refreshed corporate logo, exemplifies our momentum towards a more technologically advanced, modern and digitally forward-thinking bank.
The Company was added to the Russell 2000 Index in June 2025. The Russell 2000 Index encompasses the 2,000 largest U.S.-traded stocks by objective, market-capitalization rankings, and style attributes. The Russell Indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies.
The Bank offers a full range of financial services including a complete suite of consumer, commercial, and municipal banking products and services, including multifamily 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, Port Jefferson, Forest Hills, Flushing, Sunset Park, Rockefeller Center and Bowery, New York and Freehold, New Jersey. It is expected that the Company will once again expand its geographic footprint with the opening of a full-service branch in a state-of-the-art facility in downtown Riverhead, New York. Business development staff have already joined the Company in anticipation of the opening of this location. Subject to regulatory approvals, the Bank expects to open the branch in late 2026. The Company expects that a temporary office location in Riverhead will be operational by the end of the first quarter of 2026.
At December 31, 2025, on a consolidated basis we had $2.38 billion in total assets, $200.3 million in total stockholders’ equity, $2.00 billion in total loans, $2.03 billion in total deposits and 194 full-time equivalent employees.
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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
The allowance for credit losses (“ACL”) 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.
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The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. As of November 30, 2025, 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.
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Results of Operations for the year ended December 31, 2025 compared to the year ended December 31, 2024
For the year ended December 31, 2025, we recognized net income of $7.5 million, or $1.00 per diluted share (including Series A preferred shares), compared to net income of $12.3 million, or $1.66 per diluted share (including Series A preferred shares) for the year ended December 31, 2024. The decrease in net income recorded for the year ended December 31, 2025 from the year ended December 31, 2024 resulted from an increase in the provision for credit losses, a decrease in non-interest income, and an increase in non-interest expense. These were partially offset by an increase in net interest income. The increase in the provision for credit losses was largely impacted by $14.2 million in net charge-offs in 2025. The decrease in non-interest income is primarily related to the decrease in the gain on sale of loans held-for-sale which was partially offset by the increases in loan servicing and fee income and service charges on deposit accounts. The increase in non-interest expense was primarily related to the increase in salaries and employees benefits and the one-time core system conversion expenses.
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,
Selected Balance Sheet Data:
Securities available-for-sale, at fair value $ 99,552 $ 83,755
Securities held-to-maturity 1,017 3,758
Year Ended December 31,
Selected Operating Data:
Provision for credit losses 10,382 4,940
Selected Financial Data and Other Data:
Return on average equity 3.73 % 6.45 %
Return on average assets 0.33 % 0.55 %
Yield on average interest earning assets 5.94 % 6.12 %
Cost of average interest bearing liabilities 3.88 % 4.40 %
Net interest rate spread 2.06 % 1.72 %
Net interest margin 2.75 % 2.44 %
Average equity to average assets 8.89 % 8.57 %
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Analysis of Results of Operations
Net Interest Income
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, and loan prepayment behavior.
Net interest income for the year ended December 31, 2025 was $60.5 million, an increase of 13.9% from $53.1 million for the year ended December 31, 2024. Net interest margin was 2.75% for the year ended December 31, 2025, an increase of 31 basis points from 2.44% for the year ended December 31, 2024. The Company’s total interest expense decreased by $9.9 million, or 12.4%, as the average cost of interest-bearing liabilities for the year ended December 31, 2025 was 3.88%, a decrease of 52 basis points, from 4.40% for the year ended December 31, 2024. However, total interest income decreased by $2.5 million, or 1.9%, as the average yield on interest-earning assets for the year ended December 31, 2025 was 5.94%, a decrease of 18 basis points from 6.12% for the year ended December 31, 2024.
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,
Average Average Average Average
Assets:
Interest-earning assets
Non interest-earning assets:
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Non-interest bearing deposits 223,564 196,595
Stockholders' equity 200,676 191,323
Net interest rate spread(3) 2.06 % 1.72 %
(2) Includes non-accrual loans.
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The following table details the variances in net interest income caused by changes in interest rates and volume for the periods presented:
Year Ended December 31,
Increase (decrease) due to change in:
(in thousands) Volume Rate Total
Interest income
Investment securities (58) (243) (301)
Interest-earning balances and other 1,806 (766) 1,040
Interest expense
Savings, NOW and money market deposits 740 (8,957) (8,217)
Subordinated debentures — 215 215
Net increase in net interest income $ 1,117 $ 6,268 $ 7,385
Provision for Credit Losses
The provision for credit losses was $10.4 million (including a $0.3 million provision for unfunded commitments) for the year ended December 31, 2025 compared to $4.9 million (including a $0.2 million provision for unfunded commitments) for the year ended December 31, 2024. Total net charge-offs were $14.2 million and $1.6 million for the years ended December 31, 2025 and 2024, respectively. For more information, see "Asset Quality - Allowance for Credit Losses.”
Non-Interest Income
Year Ended December 31,
Loan servicing and fee income $ 4,270 $ 3,690
Service charges on deposit accounts 750 469
Net gain on sale of loans held for sale 7,345 10,940
Net gain on sale of securities available-for-sale 215 31
Non-interest income was $12.8 million for the year ended December 31, 2025, a decrease of $2.5 million from $15.3 million for the year ended December 31, 2024. The decrease in non-interest income is primarily related to a $3.6 million decrease in the net gain on sale of loans held for sale which was partially offset by a $0.6 million increase in loan servicing and fee income, a $0.3 million increase in service charges on deposit accounts and a $0.2 million increase in net gain on sale on securities available-for-sale.
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Non-Interest Expense
Year Ended December 31,
Salaries and employee benefits $ 27,886 $ 25,600
Federal deposit insurance premiums 1,388 1,418
Conversion expenses 3,180 —
Non-interest expense was $53.0 million for the year ended December 31, 2025, an increase of $5.9 million from $47.1 million for the year ended December 31, 2024. The increase in non-interest expense was primarily related to increases of $2.3 million in salaries and employees benefits and one-time core system conversion expenses of $3.2 million. The increase in salaries and employee benefits was primarily related to additional headcount to staff the new Port Jefferson branch and expansion of the C&I lending vertical and lower deferred loan origination costs partially offset by lower incentive compensation expense resulting from reduced lending activity.
Income Taxes
Income tax expense was $2.5 million for the year ended December 31, 2025, a decrease from $4.0 million for the year ended December 31, 2024. The decline in income tax expense reflects lower net income in the year ended December 31, 2025. The effective income tax rate for the year ended December 31, 2025 was 24.8% compared to 24.6% for the year ended December 31, 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,
Investment securities available-for-sale:
Investment securities held-to-maturity:
U.S. GSE residential mortgage-backed securities 1,017 976 1,259 1,178
U.S. GSE commercial mortgage-backed securities — — 2,499 2,431
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We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.
Our investment securities available-for-sale portfolio included gross unrealized gains of $0.6 million and gross unrealized losses of $0.9 million at December 31, 2025, compared to gross unrealized gains of $0.3 million and gross unrealized losses of $1.6 million at December 31, 2024. Management believes that all of the unrealized losses on individual investment securities at December 31, 2025 and 2024 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, 2025 and 2024, on a contractual maturity basis.
Investment Securities Portfolio by Expected Maturities(1)
Balance at December 31, 2025
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 $ — — % $ 1,017 2.45 %
Due after ten years 18,055 4.92 % — — %
U.S. GSE residential collateralized mortgage obligations
Due after ten years 11,691 5.33 % — — %
U.S. GSE commercial mortgage-backed securities
Due after ten years 2,583 4.61 % — — %
U.S. Treasury securities
Due in one year or less 4,495 3.55 % — — %
Collateralized loan obligations
Due after five years through ten years 4,993 5.45 % — — %
Due after ten years 27,765 5.52 % — — %
Corporate bonds
Due after one year through five years 2,000 8.06 % — — %
Due after five years through ten years 26,750 6.43 % — — %
Due after ten years 1,500 7.00 % — — %
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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 $ — — % $ 885 2.32 %
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 % — — %
U.S. Treasury securities
Due in one year or less 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 % — — %
Corporate bonds
Due after one year through five years 1,000 8.75 % — — %
Due after five years through ten years 19,282 5.90 % — — %
Loans
At December 31, 2025, our loan portfolio totaled $2.00 billion, an increase of $15.2 million from $1.99 billion at December 31, 2024.
The following table provides the composition of the Company’s loan portfolio by type at the dates indicated:
At December 31,
Amount Percent Amount Percent
(Dollars in thousands)
Real estate:
Allowance for credit losses 18,694 22,779
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At December 31, 2025, the Company’s residential loan portfolio (including home equity loans) amounted to $777.0 million, with an average loan balance of $491 thousand and a weighted average loan-to-value ratio of 56%. Commercial real estate, multifamily and construction loans totaled $1.08 billion at December 31, 2025, with an average loan balance of $1.5 million and a weighted average loan-to-value ratio of 59%. As discussed below, approximately 36% of the multifamily portfolio is subject to rent regulation. The Company’s commercial real estate concentration ratio continues to improve, decreasing to 360% of capital at December 31, 2025 from 385% at December 31, 2024, with loans secured by office space accounting for 2.48% of the total loan portfolio and totaling $49.6 million at December 31, 2025.
The Bank originates loans for its portfolio and for sale in the secondary market under a residential flow origination program. During the years ended December 31, 2025 and 2024, the Company sold $92.3 million and $38.5 million, respectively, of residential loans under its flow origination program and recorded gains on sale of loans held-for-sale of $2.1 million and $0.9 million, respectively. Residential loan originations were $246 million for the year ended December 31, 2025, representing the highest origination levels since 2019.
During the years ended December 31, 2025 and 2024, the Company sold approximately $63.0 million and $112.7 million, respectively, in government guaranteed SBA loans and recorded gains on sale of loans held-for-sale of $5.2 million and $10.0 million, respectively. SBA loan originations and gains on sale continue to be lower due to a multitude of factors. High interest rates, changes to SBA standard operating procedures, a less favorable economic outlook for many business owners, the Bank’s prudent decision to tighten credit in 2025 and the government shutdown in the fourth quarter all adversely impacted the volume and approval of SBA loans and, therefore, gain on sale income.
The Bank concluded 2025 with C&I loan originations of approximately $95.3 million for the year ended December 31, 2025. Based on its existing pipeline, the Bank expects C&I lending and deposit activity to grow in 2026.
The following table provides information of our total loan portfolio at December 31, 2025 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
Commercial and
(in thousands)
The following table presents the Company’s loans held for investment as of December 31, 2025 with maturity or next repricing due after December 31, 2026 according to rate type and loan category:
Due After December 31, 2026
(in thousands) Fixed Adjustable Total
Real estate:
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Commercial Real Estate Statistics
The Company continues to actively manage its Multifamily and Commercial Real Estate portfolios which resulted in a reduction in the commercial real estate concentration ratio to 360% of capital at December 31, 2025 from 385% at December 31, 2024. The Company will selectively explore Commercial Real Estate opportunities with an emphasis on relationship based Commercial Real Estate lending.
A significant portion of the Bank’s commercial real estate portfolio consists of loans secured by Multifamily 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 as of December 31, 2025 is not significant at $11.1 million, all at floating interest rates. As shown below, as of December 31, 2025, 25% of the loan balances in these combined portfolios will either have a rate reset or mature in 2026, with another 56% with rate resets or maturing in 2027.
CRE Investor Portfolio Fixed Rate Reset/Maturity Schedule
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Stabilized Multifamily Pro Forma Stress Results
The table below reflects a proforma stressed evaluation of the Bank’s Multifamily stabilized loan portfolio as of December 31, 2025, using the primary assumption for a revised Debt Service Coverage Ratio (“DSCR”) calculation, for all loans where the current interest rate is below 6%. The current balance for these loans is recast at 5.75% (despite lower current market rates) with a 30-year amortization. The chart below reflects the impact of these adjustments on the portfolio. The projected loan to value (“LTV”) assumption resets all loans using a 6% cap rate (despite lower current cap rates) and the last reported property net operating income (“NOI”) to determine an implied property valuation and based on the current loan balance the resultant LTV.
Multifamily Stabilized Rent Portfolio (Loan Data as of 12/31/2025)
As reflected above, the results show approximately 3%, or 9 loans totaling $14 million of the total multifamily portfolio would have proforma DSCR’s less than 1x while maintaining projected weighted average LTV’s under 100%. Approximately 97% or 89 loans totaling $179 million would possess DSCR’s greater than 1x while maintaining a projected weighted average LTV well within our policy guidelines. Additionally, 74% of the stabilized loans and 73% of the entire multifamily portfolio are further secured with personal guarantees from the borrowers. Based on the maturities and rate resets in the previous 12 months, we believe the overall demand for multifamily housing in our market will allow our borrowers to address any adverse impact proactively. Of the previous 12 months maturities and rate resets, 22% of the loan pool successfully refinanced with other institutions and the balance remained with the Bank.
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Rental breakdown of Multifamily portfolio
The table below segments our portfolio of loans secured by Multifamily properties based on rental terms and location as of December 31 2025. As shown below, as of December 31, 2025, 64% 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.
Multifamily Loan Portfolio - Loans by Rent Type (Loan Data as of 12/31/2025)
($000's omitted) ($000's omitted)
Location
Location
Office Property Exposure
The Bank’s exposure to the Office market is not significant. Loans secured by office space accounted for 2.48% of the total loan portfolio as of December 31, 2025, with a total balance of $49.6 million, of which less than 1% is located in Manhattan. At December 31, 2025, this portfolio has a 2.30x weighted average DSCR, a 52% weighted average LTV and less than $350,000 of exposure in Manhattan.
Asset Quality
Nonperforming Assets
In the fourth quarter of 2025, the Company initiated a strategic credit cleanup and removed $9.6 million of non-performing loans (“NPLs”) from the balance sheet. Through proactive and focused NPL resolution, we have improved our credit risk profile with a combination of charge-offs and loan sales.
The following table presents information regarding nonperforming assets for the periods presented.
Balance at December 31,
Other real estate owned 650 —
Total non-performing loans as a percentage of total assets 0.91 % 0.71 %
Total non-performing assets as a percentage of total assets 0.93 % 0.71 %
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Total nonaccrual loans were $21.6 million at December 31, 2025, an increase from total nonaccrual loans of $16.4 million at December 31, 2024. The Bank had one other real estate owned property at December 31, 2025 with a $650 thousand carrying value. There were no properties in OREO at December 31, 2024.
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 $0.6 million at December 31, 2025 and $0.3 million at December 31, 2024. 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 $18.7 million at December 31, 2025, a decrease of $4.1 million from $22.8 million at December 31, 2024. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 0.93% at December 31, 2025, inclusive of a $2.1 million allowance on individually analyzed loans, versus 1.15% at December 31, 2024, inclusive of a $3.2 million allowance on individually analyzed loans.
In the fourth quarter of 2025, the Company initiated a strategic credit cleanup and recorded net charge-offs of $9.6 million. The $9.6 million consisted of a $4.0 million partial charge-off on a C&I loan that had deteriorated to non-performing status during the quarter. This loan is to a borrower whose business has been negatively impacted by tariffs and other economic challenges. In conjunction with the charge-off, a $1.0 million specific reserve has been established for this loan. The remaining $5.6 million was comprised of full and partial charge-offs on non-performing loans which had previously established specific reserves of $3.6 million. Of the $5.6 million charge-off, $709 thousand related to the sale of $5.0 million of one- to four-family residential non-performing loans.
The Company experienced $14.2 million in net charge-offs during the year ended December 31, 2025, an increase of $12.6 million compared to net charge-offs of $1.6 million during the year ended December 31, 2024. The Company has recorded recoveries of $34 thousand and $18 thousand during the years ended December 31, 2025 and 2024, respectively.
The following table presents the allocation of the allowance for credit losses by loan category for the periods presented:
At December 31,
% of % of
Total Total
(dollars in thousands) Amount Loans Amount Loans
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The following table presents information related activity in the allowance for credit losses for the periods presented:
Year Ended December 31,
Provision for credit losses 10,070 4,750
Charge-Offs:
Residential real estate (709) (280)
Multifamily (33) (765)
Commercial real estate (1,609) (30)
Commercial and industrial (11,838) (572)
Construction — —
Consumer — —
Recoveries:
Commercial and industrial 34 18
Total recoveries 34 18
Allowance for credit losses to total loans held-for- investment 0.93 % 1.15 %
Net charge-offs to average loans held-for-investment (0.71) % (0.08) %
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, FHLB and correspondent banks, which totaled $308.5 million and $246.6 million at December 31, 2025 and 2024, 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.
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As of December 31, 2025, we held $304.8 million of deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At December 31, 2025, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $776.9 million, or approximately 255% 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, 2025 were $2.03 billion, an increase of $74.1 million from total deposits of $1.95 billion at December 31, 2024. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 85% of total deposits at December 31, 2025. Time deposits of $501.0 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,
Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate
The Company had municipal deposits of $700.7 million at December 31, 2025, which comprised 34.5% of total deposits, an increase of $191.4 million or 37.6% from $509.3 million at December 31, 2024.
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 $110.0 million, $1.0 million and $0, or 5.4%, 0.0% and 0.0% of total deposits, respectively, at December 31, 2025. 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, 2025 and 2024, we held $108.2 million and $106.4 million, respectively, of time deposits of more than $250,000. The following table sets forth the maturity of these time deposits as of December 31, 2025:
December 31,
(in thousands) 2025
Three months or less $ 43,886
Over three months through twelve months 61,909
Over one year through three years 2,101
Over three years 266
See Note 6, “Deposits” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
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Borrowings
The total carrying value of our borrowings was $125.5 million at December 31, 2025, a decrease of $7.0 million from $132.5 million at December 31, 2024, due to the payoff of two FHLB advances that matured in 2025. At December 31, 2025, $40.5 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 due within 12 months. 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 issued $25 million of 10-year fixed-to-floating rate subordinated notes with a coupon rate of 5.00% fixed for the first five years. The Notes may now be redeemed by the Company and have a stated maturity of October 15, 2030, and bear interest until the maturity date or early redemption date at a variable rate equal to the then benchmark rate, which is a Three-Month Term Secured Overnight Financing Rate (SOFR) plus 487.4 basis points. As of December 31, 2025, the variable interest rate was 8.76%. 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, 2025, the Bank had a total borrowing capacity of $814.3 million at the FHLB, of which $704.5 million was used to collateralize municipal deposits and $100.7 million was utilized for term advances. At December 31, 2025, the Bank had a $97.3 million collateralized line of credit from the Federal Reserve Bank of New York discount window with no outstanding borrowings. At December 31, 2025, 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, 2025.
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, 2025, 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.
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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, 2025 and 2024, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $160.9 million and $130.3 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, 2025 and 2024, letters of credit outstanding were both approximately $0.8 million.
Capital Resources
Total stockholders’ equity was $200.3 million at December 31, 2025, an increase of $3.7 million from stockholders’ equity of $196.6 million at December 31, 2024. The increase was primarily due to an increase of $4.5 million in retained earnings and a decrease of $0.7 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $7.5 million for the year ended December 31, 2025, which was offset by $3.0 million of dividends declared. The accumulated other comprehensive loss at December 31, 2025 was 0.34% of total equity and was comprised of a $0.2 million after tax net unrealized loss on the investment portfolio and a $0.5 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, 2025.
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,
Common equity tier 1 capital ratio 12.90 % 13.32 %
Tier 1 leverage ratio 9.05 % 9.13 %
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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 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. 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. During the year ended December 31, 2025, the Company repurchased 81,975 shares of its common stock at an aggregate cost of $1.8 million. As of December 31, 2025, 284,075 shares remained available for repurchase under the Company’s share repurchase program.
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.
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The following presents the Company’s economic value of equity (“EVE”) and net interest income (“NII”) sensitivities at December 31, 2025 (dollars in thousands). The results are within the Company’s policy limits.
_________________________
(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.
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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, 2025 and 2024, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2025, 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, 2025 and 2024, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.
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 13, 2026
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
December 31,
ASSETS
Cash and non-interest-bearing deposits due from banks $ 95,791 $ 12,768
Operating lease assets 9,855 8,337
Prepaid post retirement plan 3,247 3,377
Stock in Federal Home Loan Bank ("FHLB"), at cost 7,792 7,885
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Operating lease liabilities 10,567 9,025
COMMITMENTS AND CONTINGENT LIABILITIES — —
STOCKHOLDERS' EQUITY
Accumulated other comprehensive loss, net of tax (680) (1,334)
The accompanying notes are an integral part of these consolidated financial statements.
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Year Ended December 31,
INTEREST INCOME
INTEREST EXPENSE
Savings, NOW and money market deposits 43,240 51,457
Provision for credit losses 10,382 4,940
Net interest income after provision for credit losses 50,095 48,152
NON-INTEREST INCOME
Loan servicing and fee income 4,270 3,690
Service charges on deposit accounts 750 469
Gain on sale of loans held-for-sale 7,345 10,940
Gain on sale of securities available-for-sale 215 31
NON-INTEREST EXPENSE
Occupancy and equipment 7,742 7,222
Federal deposit insurance premiums 1,388 1,418
Conversion expenses 3,180 —
Income before income tax expense 9,954 16,379
Earnings per share:
The accompanying notes are an integral part of these consolidated financial statements.
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ended December 31,
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on cash flow hedges:
Total other comprehensive income, net of tax 654 1,116
Total comprehensive income, net of tax $ 8,142 $ 13,462
The accompanying notes are an integral part of these consolidated financial statements.
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share data)
(Shares) Stock Stock Surplus Earnings Loss, Net Equity
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
Exercise of stock options, net 39,170 — 1 (69) — — (68)
Net income — — — — 7,488 — 7,488
Other comprehensive income, net of tax — — — — — 654 654
Cash dividends declared ($0.10 per share) — — — — (3,009) — (3,009)
Stock-based compensation — — — 1,572 — — 1,572
Stock repurchases (81,975) — (1) (1,829) — — (1,830)
Exercise of stock options, net 14,332 — — (468) — — (468)
The accompanying notes are an integral part of these consolidated financial statements.
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
Cash flows from operating activities:
Provision for credit losses 10,382 4,940
Depreciation and amortization 2,007 2,090
Amortization of right-of-use assets 2,088 1,718
Originations of loans held for sale (93,551) (39,986)
Proceeds from loans held for sale 90,726 39,527
Net gain on sale of securities available-for-sale (215) (31)
Gain on sale of fixed assets (included in other income) (167) —
Stock-based compensation 1,572 1,587
Net gain on sale of loans held-for-sale (7,345) (10,940)
Payments on operating leases (2,064) (1,735)
Amortization of intangible assets 54 61
Amortization of debt issuance costs 54 54
Loan servicing rights valuation adjustments 1,070 809
Deferred tax expense 2,001 594
Decrease in accrued interest receivable 69 66
Increase in other assets (1,356) (9,543)
Increase (decrease) in accrued interest payable 209 (192)
(Decrease) increase in other liabilities (1,783) 3,069
Net cash provided by operating activities 13,051 5,440
Cash flows from investing activities:
Purchases of securities available-for-sale (130,955) (622,629)
Redemptions of restricted securities, net 93 727
Proceeds from sales of securities available-for-sale 7,848 1,763
Principal repayments of securities held to maturity 2,738 279
Additions to premises and equipment (869) (1,292)
Proceeds from sales of fixed assets 300 —
Net cash used in investing activities (27,948) (45,358)
Cash flows from financing activities:
Repayments of term FHLB advances (7,080) (18,860)
Proceeds from Federal Reserve Bank borrowings — 20,000
Repayments of Federal Reserve Bank borrowings — (22,288)
Payments related to tax withholding for equity awards (779) (198)
Cash dividends paid (3,009) (2,960)
Repurchase of common stock of Hanover Bancorp, Inc. (1,830) —
Proceeds from exercise of stock options, net (468) (68)
Net cash provided by financing activities 60,944 25,568
Increase (decrease) in cash and cash equivalents 46,047 (14,350)
Cash and cash equivalents, beginning of period 162,857 177,207
Cash and cash equivalents, end of period $ 208,904 162,857
Supplemental cash flow information:
Supplemental non-cash disclosure:
Transfers from portfolio loans to loans held for sale $ 84,026 120,588
Preferred stock issued in exchange for common stock — 2,078
Lease liabilities arising from obtaining right-of-use assets 3,606 301
The accompanying notes are an integral part of these consolidated financial statements.
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HANOVER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Hanover Bancorp, Inc., a Maryland corporation (the “Company”) is the holding company for Hanover Community Bank (the “Bank”). On June 25, 2025, the Company completed its reincorporation from New York to Maryland (the “Reincorporation”). The Reincorporation was approved by the Company’s shareholders at the annual shareholder meeting held on March 5, 2024, by the Federal Reserve Bank of New York on July 5, 2024, and the New York State Department of Financial Services (the “DFS”) on November 20, 2024. Accordingly, the Company is incorporated in the State of Maryland.
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 DFS and the Federal Deposit Insurance Corporation (“FDIC”). The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “FRB”).
Basis of Presentation
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.
The Company completed its core data processing system conversion to FIS Horizon in February 2025. In connection with the conversion, the Company incurred non-recurring expenses of approximately $3.2 million, which was comprised of $2.2 million in consulting and audit fees, $0.7 million in deconversion fees to previous provider, and $0.3 million in training and other related charges.
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 year 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 New York metro area. 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.
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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 $2 thousand and $9 thousand at December 31, 2025 and 2024, 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.
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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 $1.0 million and $0.6 million at December 31, 2025 and 2024, 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