Hanover Bancorp, Inc. /MD HNVR US Equity☆

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 of our operations for the fiscal years ended September 30, 2022 and 2021, 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

We are 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 New York State 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 and employs 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, Forest Hills, Flushing, Sunset Park, Manhattan and Chinatown, New York and Freehold, New Jersey. In addition, we have received regulatory approval to open a new office in Hauppauge, New York In Suffolk County, which we expect to open in early 2023.

At September 30, 2022, on a consolidated basis we had $1.84 billion in total assets, $172.6 million in total stockholders’ equity, $1.62 billion in total loans, $1.53 billion in total deposits and 162 full-time equivalent employees.

Significant Factors Affecting Our Business

The COVID-19 pandemic has caused widespread economic disruption in our metropolitan New York trade area. We have actively participated in state and local programs designed to mitigate the impacts of the COVID-19 pandemic on individuals and small businesses.

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A key program under the CARES Act is the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”) which provided funding to qualifying businesses and organizations. These loans are 100% guaranteed by the SBA and have no allowance for loan losses allocated to them based on the nature of the guarantee. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020, subject to extension to five years with the consent of the lender) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Under this program, we have originated approximately $366.1 million in principal amount of PPP loans to local borrowers. As of September 30, 2022, borrowers had received forgiveness or have made payments on $355.9 million in PPP loans.

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. We believe the more critical accounting and reporting policies that currently affect our financial condition and results of operations include the accounting for the allowance for loan losses. Accordingly, 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 for further details.

Allowance for Loan Losses

We establish an allowance for loan losses that represents management’s best estimate of probable credit losses inherent in the portfolio at the balance sheet date. Estimates for loan losses are determined by management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the allowance for loan losses, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require additions to the allowance for loan losses or may require that certain loan balances be charged off or downgraded to criticized loan categories when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. See Note 1, “Summary of Significant Accounting Policies” and Note 4, “Loans” to the accompanying Consolidated Financial Statements contained in Item 8 for further details.

Results of Operations for the year ended September 30, 2022 compared to the year ended September 30, 2021

To facilitate review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the consolidated statements of income.

For the year ended September 30, 2022, we recognized net income of $23.6 million, or $3.68 per diluted share, compared to net income of $10.9 million, or $2.28 per diluted share, for the year ended September 30, 2021. This increase was primarily due to a $19.5 million increase in net interest income, principally due to growth in interest-earning assets and a widening of the Company’s net interest margin.

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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.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ September 30,

Selected Balance Sheet Data: ​ ​ ​ ​ ​ ​ ​ ​ ​

Securities available-for-sale, at fair value ​ $ 12,285 ​ $ 7,747 ​ $ 6,035

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended September 30,

Selected Operating Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Selected Financial Data and Other Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Return on average assets ​ 1.55 % 0.99 % 0.58 %

Yield on average interest earning assets ​ 4.66 % 4.63 % 4.87 %

Cost of average interest bearing liabilities ​ 0.62 % 0.81 % 1.87 %

Net interest rate spread ​ 4.04 % 3.82 % 3.00 %

Net interest rate margin ​ 4.18 % 3.97 % 3.29 %

Average equity to average assets ​ 9.59 % 8.61 % 8.80 %

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Analysis of Results of Operations

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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 September 30, 2022 was $61.3 million, an increase of 46.9% from $41.7 million for the year ended September 30, 2021. The increase was primarily driven by a $416.8 million increase in average interest-earning assets, primarily due to the acquisition of Savoy, as well as continued organic loan growth in our markets, particularly in loans secured by multifamily properties.

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Net interest margin was 4.18% for the year ended September 30, 2022, an increase of 21 basis points from 3.97% for the year ended September 30, 2021. The Company’s average yield on interest-earning assets for the year ended September 30, 2022 was 4.66%, an increase of 3 basis points from 4.63% for the year ended September 30, 2021.

Average interest-bearing liabilities were $1.16 billion for the year ended September 30, 2022, an increase of $297.6 million compared to $859.8 million for the year ended September 30, 2021. The increase was primarily attributable to growth in interest-bearing deposits, which increased by $336.0 million during fiscal year 2022 from both the acquisition of Savoy and organic growth in our markets. The Company’s average cost of interest-bearing liabilities was 0.62% for the year ended September 30, 2022, a decrease of 19 basis points compared to 0.81% for the year ended September 30, 2021. This decrease is due to the Company’s strategic decision to replace higher rate consumer deposits with lower rate municipal deposits. Wholesale deposits at September 30, 2022 totaled $416.9 million, an increase of 18.9% compared to September 30, 2021.

The following table presents daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis for the periods presented:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended September 30,

​ ​ Average ​ ​ Average ​ Average ​ ​ Average ​ Average ​ Average

Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest-earning assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest-bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(2) Includes non-accrual loans and loans held for sale.

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The following table details the variances in net interest income caused by changes in average interest rates and average volume for the periods presented:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Increase (decrease) due to change in:

Interest income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Provision for Loan Losses

The provision for loan losses was $4.5 million for the year ended September 30, 2022, an increase of $3.5 million compared to $1.0 million for the year ended September 30, 2021. The increase was primarily due to loan growth recorded in fiscal year 2022. Total net charge-offs were $0.2 million and $0.3 million for the years ended September 30, 2022, and 2021, respectively.

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include recent growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. See additional discussion under "Asset Quality - Analysis of Allowance for Loan Losses” section.

Non-Interest Income

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended September 30,

Loan servicing and fee income ​ $ 2,885 ​ $ 1,207 ​ $ 385

Service charges on deposit accounts ​ 232 ​ 127 ​ 62

Net gain on sale of loans held for sale ​ 5,143 ​ 1,307 ​ 917

Net gain on sale of investments available-for-sale ​ 105 ​ 240 ​ —

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Non-interest income was $8.9 million for the year ended September 30, 2022, an increase of $5.5 million from $3.3 million for the year ended September 30, 2021. This increase was primarily driven by gains on the sale of loans held for sale representing full year of SBA loan sales. The increase in loan servicing and fee income was due to the increase in loan balances and growth in the volume of loans serviced by the Company.

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Non-Interest Expense

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended September 30,

​

Non-interest expense was $35.2 million for the year ended September 30, 2022, an increase of $5.2 million from $30.0 million for the year ended September 30, 2021. The overall increase in non-interest expenses was primarily from growth in compensation and benefits related to increased headcount. The increase in headcount has resulted from several factors including organic growth, the opportunistic addition of experienced executives to implement new product initiatives such as expanded commercial real estate and commercial and industrial lending, and an increase in personnel from the May 2021 acquisition of Savoy.

Income Taxes

Income tax expense was $6.9 million for the year ended September 30, 2022, an increase from $3.2 million for the year ended September 30, 2021. The effective income tax rate for the years ended September 30, 2022 and 2021 was 22.8%.

Analysis of Results 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:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30,

Investment securities available-for-sale: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Investment securities held-to-maturity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

U.S. GSE commercial mortgage-backed ​ ​ ​ ​ ​ ​

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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 portfolio included no gross unrealized gains and gross unrealized losses of $1.1 million at September 30, 2022, compared to gross unrealized gains of $0.6 million and gross unrealized losses of $5 thousand at September 30, 2021. Management believes that all of its unrealized losses on individual investment securities at September 30, 2022 and 2021 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 illustrates the maturity distribution and weighted average yield for amortized cost of our investment securities as of September 30, 2022 and 2021, on a contractual maturity basis.

Investment Securities Portfolio by Expected Maturities(1)

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30, 2022

​ ​ 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 ​ $ — — % $ 1,256 2.30 %

U.S. GSE commercial mortgage-backed securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Due after one year through five years ​ — — ​ 2,636 2.68 %

Corporate bonds ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Due after five years through ten years ​ 12,700 5.19 % — — %

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30, 2021

​ ​ 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 within one year ​ $ 25 -0.99 % $ — — ​

Due after one year through five years ​ ​ 1 ​ -3.75 % ​ — ​ — ​

U.S. GSE commercial mortgage-backed securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Due after one through five years ​ — — ​ 2,694 2.68 %

Corporate bonds ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Due after one year through five years ​ ​ — — ​ 1,500 5.00 %

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Loans

At September 30, 2022, our loan portfolio was $1.62 billion, an increase of $376.4 million from $1.25 billion at September 30, 2021. The Company has experienced continued growth in multifamily, commercial real estate and residential mortgage loans. These increases are slightly offset by the continued forgiveness or payoff of PPP loans that were granted in fiscal year 2020 as a result of the COVID-19 pandemic.

For the year ended September 30, 2022, the Bank realized an increase in loans secured by multi-family properties of $308.1 million, representing growth of approximately 116%. This increase was the result of the Bank’s desire to leverage capital and expertise in favor of dependable asset growth with an attractive risk profile. The weighted average LTV of our multi-family loans in the year ending September 30, 2022 was 64%, and the weighted average debt service coverage ratio was 1.38x. Our success in achieving this volume of originations is based on the expertise of our commercial real estate lending team, which has deep and long-standing relationships with mortgage brokers in New York and New Jersey. The Bank’s underwriting prioritizes the lower of rents allowable under applicable rent regulations or market rents. Loans secured by one or more properties with more than 10 units are originated without recourse to ownership, but the Bank considers the credit scores, financial strength and global debt service capacity of principals in its evaluation of loans. The Bank generally strives to collect a minimum origination fee of 25 basis points and charges a minimum interest rate of 150 basis points over the 5-year United States Treasury Rate. Loans typically have a 10-year term with an interest rate reset commencing in the sixth year of the term. Prepayment penalties vary but generally consist of a sliding percentage of the principal amount, ranging from 5% to 0%, based on the length of time loans remain on the Bank’s balance sheet.

The following table provides the composition of the Company’s loans held for investment:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30,

Real estate: ​ ​ ​ ​ ​

​

The following table provides information for the contractual maturity and interest-rate profile of the Company’s commercial and industrial and real estate construction loans held for investment:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30, 2022

​ ​ ​ ​ ​ Due After One ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ Year But ​ ​ ​ ​ ​ ​

​ ​ Due within ​ Within Five ​ Due After ​ ​ ​

(in thousands) ​ One Year ​ Years ​ Five Years ​ Total

By Loan Type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

By Interest Rate Type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30, 2021

​ ​ ​ ​ ​ Due After One ​ ​ ​ ​

​ ​ ​ ​ ​ Year But ​ ​ ​ ​ ​ ​

​ ​ Due within ​ Within Five ​ Due After ​ ​ ​

(in thousands) ​ One Year Years ​ Five Years Total

By Loan Type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

By Interest Rate Type: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Credit Policies and Procedures

Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers, reviewed by Credit Administration, and a sample of these loans are tested by the Company’s third-party independent loan reviewer. The testing program includes an evaluation of a sample of both new and existing loans, including large loans, loans that are identified as having potential credit weaknesses, and loans past due 90 days or more and still accruing. We strive to maintain the loan portfolio in accordance with our loan underwriting policies that result in loans specifically tailored to the needs of our market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies. Generally, we do not engage in significant volumes of lease financing, highly leveraged transactions or loans to customers domiciled outside the United States.

Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process we maintain an internally-classified, adversely-risk-rated loan list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the allowance is allocated based on management’s judgment and historical experience.

Acquired loans are recorded at fair value as of the loan’s acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date, recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in additional allowance for loan losses.

A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. If applicable, the Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.

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Asset Quality

We consider asset quality to be of primary importance and employ a formal internal loan review process to ensure adherence to our lending policy as approved by our Board of Directors. It is the responsibility of each lending officer to assign an appropriate risk grade to every loan originated. The Company’s internal credit risk review function, through focused review and sampling, validates the accuracy of commercial loan risk grades. Each loan risk grade corresponds to an estimated default probability. In addition, as a given loan’s credit quality improves or deteriorates, the Company will update the borrower’s risk grade accordingly. The function of determining the allowance for loan losses is fundamentally driven by the risk grade system. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in our market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. Our policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a nonaccrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.

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.

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Balance at September 30, ​

​

Total nonaccrual loans were $12.3 million at September 30, 2022, an increase from total nonaccrual loans of $7.0 million at September 30, 2021. The increase in nonaccrual loans in 2022 was driven by loans acquired from Savoy that were not classified as purchased-credit impaired as of the acquisition, which totaled $5.3 million at September 30, 2022, but experienced credit deterioration subsequent to the acquisition.

Analysis of Allowance for Loan Losses

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases the allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least monthly. In addition, on a monthly basis our Board of Directors reviews the loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss allowance. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors deriving from our history of operations. In addition to our history, management also considers the loss experience and allowance levels of other similar banks and the historical experience encountered by our management and senior lending officers prior to joining us. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan

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losses and may require us to make additions for estimated losses based upon judgments different from those of management.

Management uses the risk-grading program, as described under "Asset Quality," to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. Generally, we do not engage in significant lease financing, highly leveraged transactions or loans to customers domiciled outside the United States.

Management follows a loan review program designed to evaluate the credit risk in our loan portfolio. Through this loan review process, we maintain an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and the allowance is allocated based on management’s judgment and historical experience.

Acquired loans are recorded at fair value as of the loan’s acquisition date and allowances are recorded for post-acquisition credit quality deterioration. Subsequent to the acquisition date, recurring analyses are performed on the credit quality of acquired loans to determine if expected cash flows have changed. Based upon the results of the individual loan reviews, revised impairment amounts are calculated which could result in additional allowance for loan losses.

A loan is considered to be impaired under GAAP when, based upon current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. The Company calculates a specific reserve for each loan that has been deemed impaired, which include nonaccrual loans and TDRs. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective interest rate, and/or the value of collateral. If foreclosure is probable or the loan is collateral dependent, impairment is measured using the fair value of the loan’s collateral, less estimated costs to sell.

The allowance for loan losses was $12.8 million at September 30, 2022, an increase of $4.2 million from $8.6 million at September 30, 2021 due to growth in the loan portfolio. The ratio of the allowance for loan losses to total portfolio loans was 0.79% and 0.69% at September 30, 2022, and 2021, respectively.

The Company experienced $0.2 million in net charge-offs during the year ended September 30, 2022, a decrease compared to net charge-offs of $0.3 million during the year ended September 30, 2021. The Company has recorded an immaterial amount of recoveries during the years ended September 30, 2022 and 2021, respectively.

The following table presents the allocation of the allowance for loan losses by loan category for the periods presented:

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ At September 30, ​

​ ​ ​ % of ​ ​ % of ​ ​ % of ​ ​ % of ​ ​ % of ​

​ ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​

Construction ​ 115 0.89 % — — ​ — — ​ — — ​ — — ​

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The following table presents information related activity in the allowance for loan losses for the periods presented:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended September 30, ​

Charge-Offs: ​ ​ ​ ​ ​ ​

Residential real estate ​ — ​ (267) ​ — ​ — ​ — ​

Multi-family ​ (66) ​ (32) ​ — ​ — ​ — ​

Commercial real estate ​ — ​ (30) ​ (224) ​ — ​ — ​

Commercial and industrial ​ (92) ​ — ​ (300) ​ — ​ — ​

Construction ​ — ​ — ​ — ​ — ​ — ​

Consumer ​ — ​ — ​ — ​ — ​ — ​

Total loan charge-offs ​ (158) ​ (329) ​ ​ (524) ​ ​ — ​ ​ — ​

Recoveries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Commercial and industrial ​ — ​ 12 ​ — ​ — ​ — ​

Total recoveries ​ — ​ ​ 12 ​ ​ — ​ ​ — ​ ​ — ​

Total net charge-offs ​ (158) ​ (317) ​ ​ (524) ​ ​ — ​ ​ — ​

Sources of Funds and Liquidity

Liquidity management is defined as both our and the Bank’s ability to meet our 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 $149.9 million and $166.0 million at September 30, 2022 and 2021, 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 our ability to meet liquidity needs, including variations in the markets served, loan demand, asset/liability mix, reputation and credit standing in our 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.

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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 September 30, 2022 were $1.53 billion, an increase of $363.4 million from total deposits of $1.16 billion at September 30, 2021.

The following is our average deposits and weighted-average interest rates paid thereon for the past three fiscal years:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended September 30, ​

​ ​ Average Average ​ ​ Average Average ​ Average Average ​

(dollars in thousands) ​ Balance Rate ​ ​ Balance Rate ​ Balance Rate ​

​

As discussed previously, during fiscal year 2022 the Company made the strategic decision to allow higher cost consumer deposits to run-off and replace these funding sources with municipal deposits, which have a significantly lower average interest rate. The Company had total wholesale deposits of $416.9 million at September 30, 2022, which comprised 27.3% of total deposits, an increase of $66.4 million or 18.9% from $350.5 million, at September 30, 2021. These lower rates were partially offset by deposits acquired from Savoy, which have a higher average rate.

As of September 30, 2022 and 2021, we held $87.9 million and $60.2 million, respectively, of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The following table sets forth the maturity of time deposits exceeding the FDIC insurance limit as of September 30. 2022:

​

​ ​ ​ ​

​ ​ September 30,

Three months or less ​ $ 10,192

Over three months through six months ​ 8,471

Over six months through 12 months ​ 17,817

​

Borrowings

The total carrying value of our borrowings was $126.3 million at September 30, 2022, a decrease of $57.8 million from $184.2 million at September 30, 2021. At September 30, 2022, $66.9 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, securities sold under agreements to repurchase and Federal funds purchased. Many short-term funding sources, particularly Federal funds purchased and securities sold under agreements to repurchase, are expected to be reissued and, therefore, do not represent an immediate need for cash. 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.

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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 will initially 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 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 September 30, 2022, the Company had access to approximately $276.4 million in FHLB lines of credit for overnight or term borrowings, of which $55.0 million in overnight borrowings and $37.8 million in term borrowings were outstanding. At September 30, 2022, approximately $65.0 million in unsecured lines of credit extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at September 30, 2022.

Off-Balance Sheet Arrangements

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At September 30, 2022 and 2021, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $73.1 million and $105.7 million, respectively.

Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2022 and 2021, letters of credit outstanding were approximately $0.8 million.

Capital Resources

Total stockholders’ equity was $172.6 million at September 30, 2022, an increase of $50.1 million from stockholders’ equity of $122.5 million at September 30, 2021. The increase was primarily due to a $27.7 million increase in common stock and surplus from net proceeds from the public offering of our common stock in May 2022 and net income earned for the year ended September 30, 2022.

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

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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.

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:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ September 30,

​

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.

​

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

​

ITEM 8. Financial Statements and Supplementary Data

​

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​

​

​

​ 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 September 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, 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 September 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, 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. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

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.

​

Crowe LLP

​

We have served as the Company’s auditor since 2019.

Livingston, New Jersey

December 22, 2022

​

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HANOVER BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except share and per share amounts)

​

​ ​ ​ ​ ​ ​

​ September 30,

​ ​ ​ ​ ​ ​

ASSETS ​ ​ ​ ​ ​

Cash and non-interest-bearing deposits due from banks $ 9,934 ​ $ 8,302

Securities: ​ ​ ​ ​ ​

Available for sale, at fair value 12,285 ​ 7,747

Accrued interest receivable 8,546 ​ 9,363

Stock in Federal Home Loan Bank ("FHLB"), at cost 6,280 ​ 3,714

Other intangible assets 399 ​ 480

LIABILITIES AND STOCKHOLDERS’ EQUITY ​

Deposits: ​

Accrued interest payable 915 ​ 1,290

COMMITMENTS AND CONTINGENT LIABILITIES ​ — ​ ​ —

STOCKHOLDERS' EQUITY ​ ​ ​

Accumulated other comprehensive (loss) income, net of tax (620) ​ 256

​

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 September 30,

INTEREST INCOME ​ ​

Other interest income 940 ​ 305

INTEREST EXPENSE ​

Savings, NOW and money market deposits 3,166 ​ 903

Net interest income after provision for loan losses 56,804 ​ 40,708

NON-INTEREST INCOME ​

Loan servicing and fee income 2,885 ​ 1,207

Service charges on deposit accounts 232 ​ 127

Gain on sale of loans held-for-sale 5,143 ​ 1,307

Gain on sale of securities available-for-sale 105 ​ 240

NON-INTEREST EXPENSE ​

Advertising and promotion 348 ​ 118

Earnings per common 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 September 30,

Other comprehensive (loss) income, net of tax: ​ ​ ​

Total other comprehensive (loss) income, net of tax (876) ​ 100

Total comprehensive income, net of tax $ 22,680 ​ $ 10,951

​

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)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ Accumulated Other Total

​ ​ Common Stock ​ Common ​ ​ ​ Retained ​ Comprehensive ​ Stockholders'

​ ​ (Shares) ​ Stock ​ Surplus ​ Earnings ​ (Loss) Income, Net ​ Equity

Other comprehensive income, net of tax — ​ — ​ — ​ — ​ 100 ​ 100

Savoy Bank acquisition rollover options — ​ — ​ 1,269 ​ — ​ — ​ 1,269

Issuance of common stock 5,127 ​ — ​ 113 ​ — ​ — ​ 113

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive loss, net of tax — ​ — ​ — ​ — ​ (876) ​ (876)

Issuance of common stock in lieu of directors' fees 2,384 ​ — ​ 42 ​ — ​ — ​ 42

Cash dividends paid ($0.10 per share) — ​ — ​ — ​ (2,052) ​ — ​ (2,052)

Stock-based compensation — ​ — ​ 1,684 ​ — ​ — ​ 1,684

​

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 September 30,

Cash flows from operating activities: ​ ​ ​ ​ ​ ​

Provision for loan losses ​ 4,450 ​ 1,000

Depreciation and amortization ​ 1,663 ​ 1,444

Net gain on sale of securities available-for-sale ​ (105) ​ (240)

Stock-based compensation ​ 1,684 ​ 901

Net gain on sale of loans held-for-sale ​ (5,143) ​ (1,307)

Net accretion of premiums, discounts and loan fees and costs ​ (3,570) ​ (3,604)

Amortization of intangible assets ​ 81 ​ 32

Amortization of debt issuance costs ​ 55 ​ 72

Loan servicing rights valuation adjustments ​ 495 ​ 251

Decrease in accrued interest receivable ​ 817 ​ 1,924

(Increase) decrease in other assets ​ (5) ​ 1,398

Decrease in accrued interest payable ​ (375) ​ (134)

Increase in other liabilities ​ 128 ​ 239

Net cash provided by operating activities ​ 25,049 ​ 13,192

Cash flows from investing activities: ​ ​ ​ ​ ​ ​

Purchases of securities available-for-sale ​ (8,000) ​ (4,700)

Purchases of restricted securities ​ (7,132) ​ (494)

Proceeds from sales of securities available-for-sale ​ 2,105 ​ 3,240

Principal repayments of securities held to maturity ​ 4,191 ​ 2,100

Principal repayments of securities available-for-sale ​ 335 ​ 338

Redemptions of restricted securities ​ 4,566 ​ 1,645

Purchases of premises and equipment ​ (1,122) ​ (2,079)

Cash acquired in business combination ​ — ​ 59,155

Cash consideration paid in acquisition ​ — ​ (32,991)

Net cash (used in) provided by investing activities ​ (374,146) ​ 89,850

Cash flows from financing activities: ​ ​ ​ ​ ​ ​

Advances of term and overnight FHLB borrowings ​ 75,000 ​ —

Repayments of Federal Reserve Bank borrowings ​ (108,710) ​ (149,242)

Repayment of note payable ​ — ​ (15,000)

Payments related to tax withholding for equity awards ​ (28) ​ —

Cash dividends paid ​ (2,052) ​ —

Net proceeds from issuance of common stock ​ 27,771 ​ 113

Net cash provided by (used in) financing activities ​ 332,500 ​ (16,707)

(Decrease) increase in cash and cash equivalents ​ (16,597) ​ 86,335

Cash and cash equivalents, beginning of period ​ 166,544 ​ 80,209

Cash and cash equivalents, end of period ​ $ 149,947 ​ $ 166,544

Supplemental cash flow information: ​ ​

Supplemental non-cash disclosure: ​ ​ ​ ​ ​ ​

Transfers from portfolio loans to loans held-for-sale ​ $ 80,277 ​ $ 47,826

Transfers from loans held-for-sale to portfolio loans ​ ​ — ​ ​ 2,493

Fair value of tangible assets acquired ​ — ​ 653,380

Fair value of liabilities assumed ​ — ​ 605,815

Common stock issued in business combination ​ — ​ 31,252

​

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. (the “Company”) is a New York corporation which became the holding company for Hanover Community Bank (the “Bank”) in 2016. 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.

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.

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.

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.

Risks and Uncertainties

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The COVID-19 pandemic has adversely affected, local, national and global economic activity. Various actions taken to help mitigate the spread of COVID-19 included restrictions on travel, quarantines and government mandated closures of various businesses. The outbreak caused significant disruptions to the economy and disrupted banking and other financial activity in the areas in which the Company operates.

The CARES Act was enacted in March 2020 to, among other things, provide emergency assistance to individuals, families and businesses affected by the COVID-19 pandemic. The ongoing effects of the COVID-19 pandemic may materially and adversely affect the Company’s financial condition and results of operations in future periods, and it is unknown what the complete financial impact will be to the Company. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the coronavirus, the new “waves” of COVID-19 infections, the spread of new variants of the virus and the distribution of vaccines and vaccination rates, among others. It is possible that estimates made in the financial statements could be materially and adversely impacted due to these conditions. The CARES Act expired on December 31, 2021.

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 4 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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Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting. This method requires the use of fair values in determining the carrying values of the purchased assets and assumed liabilities, which are recorded at fair value at acquisition date, and identifiable intangible assets are recorded at fair value. Costs directly related to the business combinations are recorded as expenses as they are incurred. Fair values are subject to adjustment for up to one year after the closing date of an acquisition as additional information relative to closing date fair values become available.

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.

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. 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.

The Company evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, the Company considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

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.

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Loans Held for Sale

Loans held for sale are carried at the lower of cost or 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 loan losses. The loan portfolio is segmented into residential real estate, commercial real estate, multifamily, commercial and industrial, construction, and consumer loans.

Interest income on loans is accrued and credited to income as earned. Net loan origination fees and costs are deferred and accreted/amortized to interest income over the loan’s contractual life using the level-yield method, adjusted for actual prepayments.

Acquired loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Acquired loans are evaluated upon acquisition and classified as either purchased credit impaired or purchased non-impaired. Purchased credit impaired loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. For purchased credit impaired loans, expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the remaining life of the loans (accretable yield) using a level yield method if the timing and amount of the future cash flows is reasonably estimable. The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows after the acquisition date are recognized immediately through the provision for loan losses. For purchased non-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the economic life of the loans using a method that approximates the interest method.

Lending Risk

The principal business of the Bank is lending in one-to-four family residential mortgage loans, commercial real estate mortgage loans, multi-family mortgage loans, commercial and industrial loans and consumer loans. The Bank considers its primary lending area to be Nassau County and the New York City boroughs. A substantial portion of the Bank’s loans is secured by real estate in these areas. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region.

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 Company 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 significant 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

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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 families. 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.

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 Loan Losses

A loan is considered past due when it is not paid in accordance with its contractual terms. The accrual of income on loans, including impaired loans, and other loans in the process of foreclosure, is generally discontinued when a loan becomes 90 days or more delinquent, or when certain factors indicate that the ultimate collection of principal and interest is in doubt. Loans on which the accrual of income has been discontinued are designated as non-accrual loans. All previously accrued interest is reversed against interest income, and income is recognized subsequently only in the period that cash is received, provided no principal payments are due and the remaining principal balance outstanding is deemed collectible. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Company defines an impaired loan as a loan for which it is probable, based on current information, that the Company will not collect all amounts due in accordance with the contractual terms of the loan agreement. The Company has defined the population of impaired loans to be all non-accrual loans, loans risk rated 9 (Doubtful) or 10 (Loss), and all loans subject to a troubled debt restructuring (“TDR”). Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the expected future cash flows, discounted at the loan’s original effective interest rate, or the underlying collateral (less estimated costs to sell) if the loan is collateral dependent. Impairments are recognized through a charge to the allowance for loan losses for the amount that the loan’s carrying value exceeds the discounted cash flow analysis or estimated fair value of collateral (less estimated costs to sell) if the loan is collateral dependent.

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The allowance for loan losses is increased by the provision for loan losses charged against income and is decreased by charge-offs, net of recoveries. Loan losses are recognized in the period the loans, or portion thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less costs to sell, if it is determined that it is probable that recovery will come primarily from the sale of such collateral. The provision for loan losses is based on management’s evaluation of the adequacy of the allowance which considers, among other things, impaired loans, past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect the borrower’s ability to repay, and estimated fair value of any underlying collateral securing loans. Additionally, management evaluates changes, if any, in underwriting standards, collection, charge-off and recovery practices, the nature or volume of the portfolio, lending staff, concentration of loans, as well as current economic conditions, and other relevant factors. Management believes the allowance for loan losses is adequate to provide for probable and reasonably estimable losses at the statement of condition date.

The allowance for loan losses consists of the following components:

In underwriting a loan secured by real property, the Company requires an appraisal (or an automated valuation model) of the property by an independent licensed appraiser approved by the Company’s Board of Directors. The appraisal is subject to review by an independent third party hired by the Company. Management reviews and inspects properties before disbursement of funds during the term of a construction loan. Generally, management obtains updated appraisals when a loan is deemed impaired. These appraisals may be more limited than those prepared for the underwriting of a new loan. In addition, when the Company acquires other real estate owned, it generally obtains a current appraisal to substantiate the net carrying value of the asset at the time of foreclosure.

As noted above, the adjustments to the Company’s loss experience is based on management’s evaluation of several environmental factors, including:

● changes in the quality of the Company’s loan review system;

● changes in lending policies, procedures and strategies;

● changes in the value of underlying collateral for collateral-dependent loans;

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While management uses available information to recognize probable and reasonably estimable losses on loans, future additions to the allowance may be necessary based upon changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

A loan modification is deemed a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty; and 2) a concession is made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Once an obligation has been restructured, it continues to be considered restructured until paid in full or otherwise settled, sold or charged off. The Company records an impairment charge equal to the difference between the present value of estimated future cash flows under the restructured terms discounted at the original loan’s effective interest rate, or the underlying collateral value less costs to sell, if the loan is collateral dependent.

The allowance for loan and lease losses related to purchased credit impaired loans is based on an analysis that is performed each period to estimate the expected cash flows for each of the loan pools. To the extent that the expected cash flows of a loan pool have decreased since the acquisition date, the Company establishes an allowance for loan losses.

Loan Modifications Under the CARES Act

On March 27, 2020, the President of the United States signed the CARES Act, which provides entities with optional temporary relief from certain accounting and financial reporting requirements under GAAP.

The CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2021 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest or change the interest rate on the loan. In April 2020, federal banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing an appropriate allowance for loan and lease losses on its loan portfolio. The Company approved total loan modifications under the CARES Act of $220.4 million, of which $283 thousand and $19.5 million remain as of September 30, 2022 and 2021, respectively.

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 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

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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 $1.6 million and $0.6 million for the years ended September 30, 2022 and 2021, respectively. 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.

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 two 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.

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 August 31 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.

Other intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible assets are amortized on an accelerated method over their estimated useful life of 10 years.

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.

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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 which are also recognized as separate components of stockholders’ equity.

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

The Company measures certain assets and liabilities on a fair value basis, in accordance with Accounting Standards Codification (ASC) Topic 820, "Fair Value Measurement." Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15. 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

While management monitors the revenue streams of the Company’s various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

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

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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

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases. The amendments in this update primarily replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for operating leases and sales type and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a right-of-use asset and lease liability equal to the present value of the lease payments. The right-of-use asset and lease liability should be derecognized in a manner that effectively yields a straight-line lease expense over the lease term. In addition to the changes to the lessee operating lease accounting requirements, the amendments also change the types of costs that can be capitalized related to a lease agreement for both lessees and lessors. The amendments also require additional disclosures for all lease types for both lessees and lessors. The FASB has subsequently issued additional ASUs intended to clarify guidance, provide implementation support, and provide an additional transition election. The amendments are effective on October 1, 2022, with early adoption permitted. The amendments must be applied on a modified retrospective basis. The Company adopted Topic 842 in the first fiscal quarter of 2023. The Company elected the transition option that will allow us to record a cumulative adjustment at the beginning of the period of adoption on October 1, 2022. The effect of adopting this standard was an approximate $10 million increase in assets and liabilities in the Company’s Consolidated Statements of Financial Condition as a result of recognizing right-of-use assets and lease liabilities.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on current expected credit losses, rather than incurred losses, to estimate credit losses on certain types of financial instruments (i.e. loans and held to maturity securities), including certain off-balance sheet financial instruments (i.e. commitments to extend credit and standby letters of credit that are not unconditionally cancellable). The CECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating credit losses. The allowance for credit losses for purchased financial assets with a more-than- insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through an allowance for credit losses with an offset (i.e. increase) to the purchase price at acquisition. Only subsequent changes in the allowance for credit losses are recorded as provision for loan losses for these assets. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of

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the beginning of the first reporting period in which the guidance is effective. As the Company is a smaller-reporting company under SEC regulations, the Company will adopt CECL on October 1, 2023. The Company is currently evaluating the potential impact the adoption of this ASU will have on its consolidated financial statements.

​

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Company will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022 for entities that have adopted ASU 2016-13, otherwise effective date is the same as ASU 2016-13. The Company will adopt ASU 2016-13 effective October 1, 2023 and will simultaneously implement ASU 2022-02.

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Note 2. Business Combinations

On May 26, 2021, the Company completed its previously announced acquisition of Savoy Bank pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 27, 2020, as amended, between the Company, the Bank and Savoy. Pursuant to the Merger Agreement, Savoy was merged with and into the Bank, with the Bank surviving, in a two-step transaction (collectively, the “Merger”).

The purchase price in the transaction was based upon the tangible book values of each of the Company and Savoy as of April 30, 2021 and calculated in accordance with the terms of the Merger Agreement. At the effective time of the Merger, each share of Savoy common stock, $1.00 par value (“Savoy Common Stock”) was converted into the right to receive (i) $3.246 in cash and (ii) 0.141 shares of the Company’s common stock. The final aggregate purchase price was $65.5 million, or $6.49 per Savoy share.

A final summary of the fair value of assets received and liabilities assumed are as follows:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ As Recorded Fair Value As Recorded

(in thousands) ​ by Savoy ​ Adjustments ​ by Hanover

Assets ​ ​ ​ ​ ​

Investment securities available-for-sale ​ 239 ​ — 239

Premises and equipment, net ​ 234 ​ (22) (b) 212

Core deposit intangible ​ — ​ 490 (c) 490

Liabilities ​ ​

Accrued interest payable ​ 1,050 ​ — 1,050

Other liabilities and accrued expenses ​ 3,817 ​ (342) (h) 3,475

Net assets acquired ​ ​ 48,055

Total consideration ​ ​ 65,512

(d) Represents an adjustment to accrued interest receivable acquired.

(h) Represents an adjustment to other liabilities assumed.

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​

A summary of total consideration paid is as follows:

​

​ ​ ​ ​

(in thousands, except share data) ​

Rollover options ​ ​ 1,269

Cash payments to common shareholders ​ 32,991

Total consideration paid ​ $ 65,512

​

With the Savoy acquisition, the Company significantly expanded its commercial banking and SBA lending capabilities. None of the goodwill associated with this acquisition is deductible for income tax purposes. All goodwill related to this acquisition was allocated to the Company’s only reporting unit, which is the Company as a whole.