ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. As a result of the change in year end, the Company filed a Transition Report on Form 10-Q with the SEC on February 13, 2024, which included unaudited financial statements as of December 31, 2023 and for the three months then ended and for comparative purposes we presented financial statements for the three months ended December 31, 2022. In this report, our discussion and analysis will present the more significant factors affecting our financial condition at December 31, 2024 and December 31, 2023. For the results of operations, our discussion and analysis will present the more significant factors affecting the periods presented as follows:
The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. Unless the context otherwise specifies or requires, references herein to “we” or “us” include Hanover Bancorp, Inc. and Hanover Bank on a consolidated basis.
Business Overview
We are currently a New York corporation which became the holding company for the Bank in 2016. The Bank, a community commercial bank focusing on highly personalized and efficient services and products responsive to local needs, commenced operations in 2009 and was incorporated under the laws of the State of New York. As a New York State chartered bank, the Bank is subject to regulation by the DFS and the FDIC. As a bank holding company, we are subject to regulation and examination by the FRB.
The Bank offers a full range of financial services including a complete suite of consumer and commercial banking products and services, including multi-family and commercial mortgages, government guaranteed loans, residential loans, business loans and lines of credit. The Bank also offers its customers, among other things, access to 24-hour ATM service with no fees, free checking with interest, telephone banking, advanced technologies in mobile and internet banking for its consumer and business customers and safe deposit boxes. Our corporate administrative office is located in Mineola, New York where the Bank also operates a full-service branch office. Additional branches are located in Garden City Park, Hauppauge, Forest Hills, Flushing, Sunset Park, Manhattan and Chinatown, New York and Freehold, New Jersey. The Bank has received regulatory approval to open a full-service branch in Port Jefferson, New York. Business development staff have already joined the Bank in anticipation of the opening of this location. The Bank expects this site to be fully operational in the first half of 2025.
At December 31, 2024, on a consolidated basis we had $2.31 billion in total assets, $196.6 million in total stockholders’ equity, $1.99 billion in total loans, $1.95 billion in total deposits and 185 full-time equivalent employees.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Our significant accounting policies and effects of new accounting pronouncements are discussed in detail in Note 1, “Summary of Significant Accounting Policies” to the accompanying Consolidated Financial Statements contained in Item 8. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for credit losses and goodwill.
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Allowance for Credit Losses
On October 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and judgment and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an analysis is completed and an allowance may be established or a full or partial charge off could be recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of lending management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in management’s judgment, should be charged off. Although management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. The Bank considers its primary lending area to be the New York metro area. A substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
Goodwill
Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level, at least annually or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Company has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.
The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. As of November 30, 2024, the Company elected to proceed to a quantitative calculation to compare the reporting unit's fair value with its carrying value. The results of the evaluation indicated that fair value exceeded the carrying value of the reporting unit.
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Annual goodwill impairment testing was performed as of November 30 and no impairment charges were incurred. Future unfavorable conditions could result in goodwill impairment. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) general macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (2) industry and market conditions such as a deterioration in the environment in which we operate, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), a change in the market for our products or services, or a regulatory or political development; (3) changes in cost factors such as increases in labor, or other costs that have a negative effect on earnings and cash flows; (4) overall financial performance for both actual and expected performance; (5) Entity and reporting unit–specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; litigation; or a change in the composition or carrying amount of net assets; and (6) a sustained decrease in share price in both absolute terms and relative to peers, if applicable. See Note 1, “Summary of Significant Accounting Policies” and Note 10, “Goodwill and Other Intangible Assets” to the accompanying Consolidated Financial Statements contained in Item 8 for further details.
Results of Operations for the year ended December 31, 2024 (“calendar 2024”) compared to fiscal year ended September 30, 2023 (“fiscal 2023”)
For calendar 2024, we recognized net income of $12.3 million, or $1.66 per diluted share (including Series A preferred shares), compared to net income of $15.2 million, or $2.05 per diluted share (including Series A preferred shares) for fiscal 2023. The decrease in net income recorded for calendar 2024 from fiscal 2023 resulted from a decrease in net interest income, an increase in the provision for credit losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income. The increase in the provision for credit losses was primarily related to the recording of a $4.0 million provision for credit losses in June 2024 that was mainly attributable to an ACL on an individually evaluated loan of $2.5 million and $1.1 million related to ongoing enhancements to the CECL model. The increase in non-interest income is primarily related to the increases in the gain on sale of loans held-for-sale and loan servicing and fee income which were partially offset by a decrease in other operating income. In September 2023, the Company settled ongoing litigation and received a settlement payment of $975 thousand which was recorded in other income. The increase in non-interest expense was primarily attributed to additional staff for the SBA, C&I Banking and Operations teams.
Set forth below are our selected consolidated financial and other data. Our business is primarily the business of our Bank. This financial data is derived in part from, and should be read in conjunction with, our consolidated financial statements.
December 31, September 30,
Selected Balance Sheet Data:
Securities available-for-sale, at fair value $ 83,755 $ 61,419 $ 10,889
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Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
Selected Operating Data:
Selected Financial Data and Other Data:
Return on average equity 6.45 % 8.10 % 8.40 %
Return on average assets 0.55 % 0.69 % 0.77 %
Yield on average interest earning assets 6.12 % 5.91 % 5.49 %
Cost of average interest bearing liabilities 4.40 % 4.19 % 3.18 %
Net interest rate spread 1.72 % 1.72 % 2.31 %
Net interest rate margin 2.44 % 2.40 % 2.85 %
Average equity to average assets 8.57 % 8.58 % 9.13 %
Analysis of Results of Operations
Net Interest Income
Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, and loan prepayment behavior.
Net interest income for calendar 2024 was $53.1 million, a decrease of 2.6% from $54.5 million for fiscal 2023. Net interest margin was 2.44% for calendar 2024, a decrease of 41 basis points from 2.85% for fiscal 2023. The Company’s total interest income increased by $28.0 million, or 26.6%, as the average yield on interest-earning assets for calendar 2024 was 6.12%, an increase of 63 basis points from 5.49% for fiscal 2023. However, total interest expense increased by $29.4 million, or 58.1%, as the average cost interest-bearing liabilities for calendar 2024 was 4.40%, an increase of 122 basis points, from 3.18% for fiscal 2023 due to the rapid and significant rise in market interest rates and the competitive deposit environment and, to a lesser extent, the Company’s decision to increase liquidity as a result of the industry events over the last two years. Together, this resulted in the higher cost of funds.
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The following table presents daily average balances, interest, yield/cost, and net interest margin on a fully tax-equivalent basis for the periods presented:
Year Ended December 31, Fiscal Year Ended September 30,
Average Average Average Average
Assets:
Interest-earning assets
Non interest-earning assets:
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Stockholders' equity 191,323 180,571
Net interest rate spread(3) 1.72 % 2.31 %
(2) Includes non-accrual loans.
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Three Months Ended December 31,
Average Average Average Average
Assets:
Interest-earning assets
Non interest-earning assets:
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Stockholders' equity 184,368 175,922
Net interest rate spread(3) 1.72 % 3.09 %
(2) Includes non-accrual loans.
The following table details the variances in net interest income caused by changes in interest rates and volume for the periods presented:
Year Ended December 31, 2024 vs.
Fiscal Year Ended September 30, 2023
Increase (decrease) due to change in:
(in thousands) Volume Rate Total
Interest income
Interest-earning balances and other (2,946) 329 (2,617)
Interest expense
Subordinated debentures — — —
Net increase (decrease) in net interest income $ 7,709 $ (9,109) $ (1,400)
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Three Months Ended December 31,
Increase (decrease) due to change in:
(in thousands) Volume Rate Total
Interest income
Interest-earning balances and other 1,179 261 1,440
Interest expense
Savings, NOW and money market deposits 755 6,028 6,783
Subordinated debentures (8) — (8)
Net increase (decrease) in net interest income $ 2,808 $ (5,413) $ (2,605)
Provision for Credit Losses
The provision for credit losses was $4.9 million (including a $0.2 million provision for unfunded comments) for calendar 2024 compared to $3.4 million (including no provision for unfunded comments) for fiscal 2023. Total net charge-offs were $1.6 million for both calendar 2024 and fiscal 2023. See additional discussion under "Asset Quality - Allowance for Credit Losses” section.
Non-Interest Income
Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
Loan servicing and fee income $ 3,690 $ 778 $ 2,709
Service charges on deposit accounts 469 85 275
Net gain on sale of investments available-for-sale 31 — —
Non-interest income was $15.3 million for calendar 2024, an increase of $6.5 million from $8.8 million for fiscal 2023. The increase in non-interest income is primarily related to the increases in the net gain on sale of loans held for sale and loan servicing and fee income which were partially offset by a decrease in other income. In September 2023, the Company settled ongoing litigation and received a settlement payment of $975 thousand which was recorded in other income.
Non-Interest Expense
Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
Federal deposit insurance premiums 1,418 375 1,259
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Non-interest expense was $47.1 million for calendar 2024, an increase of $7.4 million from $39.7 million for fiscal 2023. The increase in non-interest expense was primarily attributed to additional staff for the SBA, C&I Banking and Operations teams.
Income Taxes
Income tax expense was $4.0 million for calendar 2024, a decrease from $5.0 million for fiscal 2023. The decline in income tax expense reflects lower net income in calendar 2024. The effective income tax rate for calendar 2024 was 24.6% compared to 24.9% for fiscal 2023.
Results of Operations for three months ended December 31, 2023 (transition period) compared to three months ended December 31, 2022
The comparison of the results for the three months ended December 31, 2023 with the results for the three months ended December 31, 2022 can be found in the “Management’s Discussion and Analysis” section in the Company’s Transition Report on Form 10-Q for the transition period from October 1, 2023 to December 31, 2023, filed with the SEC on February 13, 2024.
Analysis of Financial Condition
Investment Securities
Our investment securities portfolio, which is structured with minimum credit exposure, is intended to provide us with adequate liquidity, flexibility in asset/liability management, and a source of stable income. Investment securities classified as available-for-sale are carried at fair value in the consolidated statements of financial condition, while investment securities classified as held-to-maturity are shown at amortized cost in the consolidated statements of financial condition.
The following table summarizes the amortized cost and fair value of investment securities:
Balance at December 31, Balance at September 30,
Investment securities available-for-sale:
U.S. Treasury securities $ 19,995 $ 20,000 $ — $ — $ — $ —
Investment securities held-to-maturity:
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.
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Our investment securities available-for-sale portfolio included gross unrealized gains of $0.3 million and gross unrealized losses of $1.6 million at December 31, 2024, compared to gross unrealized gains of $0.1 million and gross unrealized losses of $2.0 million at December 31, 2023. Management believes that all of its unrealized losses on individual investment securities at December 31, 2024 and 2023 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments. Accordingly, management considers these unrealized losses to be temporary in nature. We do not have the intent to sell these investment securities with unrealized losses and, more likely than not, will not be required to sell these investment securities before fair value recovers to amortized cost.
The tables below illustrate the maturity distribution and weighted average yield and amortized cost of our investment securities as of December 31, 2024 and 2023, on a contractual maturity basis.
Investment Securities Portfolio by Expected Maturities(1)
Balance at December 31, 2024
Available-for-Sale Held-to-Maturity
Amortized Weighted Amortized Weighted
(dollars in thousands) Cost Average Yield Cost Average Yield
U.S. GSE residential mortgage-backed securities
Due after five years through ten years $ — — % $ 885 2.32 %
U.S. GSE commercial mortgage-backed securities
Due after one year through five years — — % 2,499 2.68 %
Due after five years through ten years 1,520 4.62 % — — %
U.S. Treasury securities
Due in one year or less 19,995 4.37 % — — %
Collateralized loan obligations
Due after five years through ten years 27,284 6.12 % — — %
Due after ten years 4,987 6.10 % — — %
Corporate bonds
Due after one year through five years 1,000 8.75 % — — %
Due after five years through ten years 19,282 5.90 % — — %
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Balance at December 31, 2023
Available-for-Sale Held-to-Maturity
Amortized Weighted Amortized Weighted
(dollars in thousands) Cost Average Yield Cost Average Yield
U.S. GSE residential mortgage-backed securities
Due after five years through ten years $ — — % $ 1,044 2.31 %
U.S. GSE commercial mortgage-backed securities
Due after one year through five years — 2,561 2.68 %
Collateralized loan obligations
Due after five years through ten years 3,824 7.24 % — —
Due after ten years 46,459 6.90 % — —
Corporate bonds
Due after five years through ten years 12,700 5.19 % — —
Loans
At December 31, 2024, our loan portfolio totaled $1.99 billion, an increase of $28.3 million from $1.96 billion at December 31, 2023. Growth was concentrated primarily in residential, SBA and C&I loans.
The following table provides the composition of the Company’s loan portfolio by type at the dates indicated:
At December 31, At September 30,
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Real estate:
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The following table provides information of our total loan portfolio at December 31, 2024 by the earlier of the maturity or next repricing date. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Adjustable rate loans are included in the period which their interest rates are next scheduled to adjust. The table does not reflect the impact of prepayments and scheduled principal amortization.
Commercial
Residential Multi- Commercial and
(in thousands)
The following table presents the Company’s loans held for investment as of December 31, 2024 with maturity or next repricing due after December 31, 2025 according to rate type and loan category:
(in thousands) Fixed Adjustable Total
Real estate:
Construction — — —
At December 31, 2024, the Company’s residential loan portfolio (including home equity) amounted to $729.3 million, with an average loan balance of $483 thousand and a weighted average loan-to-value ratio of 57%. Commercial real estate, multi-family and construction loans totaled $1.09 billion at December 31, 2024, with an average loan balance of $1.5 million and a weighted average loan-to-value ratio of 59%. As will be discussed below, approximately 37% of the multifamily portfolio is subject to rent regulation. The Company’s commercial real estate concentration ratio continued to improve, decreasing to 385% of capital at December 31, 2024 from 432% of capital at December 31, 2023, with loans secured by office space accounting for 2.45% of the total loan portfolio and totaling $48.7 million.
The Bank’s investments in diversification continue to deliver results, with the volume of SBA & USDA loans originated for sale and the volume of residential loans originated for sale sustaining momentum. We expect the volume of activity to increase in 2025. We originated $161.0 million and sold $111.7 million of SBA loans for the year ended December 31, 2024. We originated $131.0 million and sold $38.0 million of residential loans for the year ended December 31, 2024. Because we continue to prioritize the management of liquidity and capital, new business development with respect to residential and SBA & USDA lending is largely focused on originations for sale over portfolio growth. Conversely, portfolio growth is the primary focus of our C&I Banking initiative, which continues to drive deposit and loan growth at our Hauppauge Business Banking Center and will expand with the pending launch of our Port Jefferson branch.
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Commercial Real Estate Statistics
A significant portion of the Bank’s commercial real estate portfolio consists of loans secured by Multi-Family and CRE-Investor owned real estate that are predominantly subject to fixed interest rates for an initial period of 5 years. The Bank’s exposure to Land/Construction loans is minor at $13.5 million, all at floating interest rates, and CRE-owner occupied loans have a mix of floating rates. As shown below, 23% of the loan balances in these combined portfolios will mature in 2025 and 2026, with another 55% maturing in 2027.
Floating Rate 3 716 239 9.22 % Floating Rate — — — — %
CRE Investor Portfolio Fixed Rate Reset/Maturity Schedule
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Rental breakdown of Multi-Family portfolio
The table below segments our portfolio of loans secured by Multi-Family properties based on rental terms and location. As shown below, 63% of the combined portfolio is secured by properties subject to free market rental terms, which is the dominant tenant type. Both the Market Rent and Stabilized Rent segments of our portfolio present very similar average borrower profiles. The portfolio is primarily located in the New York City boroughs of Brooklyn, the Bronx and Queens.
Multi-Family Loan Portfolio - Loans by Rent Type
($000's omitted) ($000's omitted)
Location
Location
Office Property Exposure
The Bank’s exposure to the Office market is minor at $49 million. This portfolio has a 2.27x weighted average DSCR, a 54% weighted average LTV and less than $400,000 of exposure in Manhattan.
Asset Quality
Nonperforming Assets
The following table presents information regarding nonperforming assets for the periods presented. The Company did not own any repossessed property for the periods presented.
Balance at
Balance at December 31, September 30,
Loans greater than 90 days past due — — 128
Total nonaccrual loans were $16.4 million at December 31, 2024, an increase from total nonaccrual loans of $14.5 million at December 31, 2023.
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Reserve for Unfunded Commitments
The Company maintains a reserve, recorded in other liabilities, associated with unfunded loan commitments accepted by borrowers. The amount of the reserve was $0.3 million at December 31, 2024 and $0.1 million at December 31, 2023. This reserve is determined based upon the outstanding volume of loan commitments at the end of each period. Any increases or reductions in this reserve are recognized in the provision for credit losses.
Allowance for Credit Losses
The allowance for credit losses was $22.8 million at December 31, 2024, an increase of $3.1 million from $19.7 million at December 31, 2023. The ratio of the allowance for credit losses to total portfolio loans was 1.15% at December 31, 2024, inclusive of a $3.2 million allowance on individually analyzed loans, versus 1.00% at December 31, 2023, which does not include the aforementioned allowance for individually analyzed loans.
The Company experienced $1.6 million in net charge-offs both for calendar 2024 and fiscal 2023. The Company has recorded recoveries of $18 thousand and $103 thousand for calendar 2024 and fiscal 2023, respectively.
The following table presents the allocation of the allowance for credit losses by loan category for the periods presented:
At December 31, At September 30,
% of % of % of
Total Total Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans
The following table presents information related activity in the allowance for credit losses for the periods presented:
Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
Impact of adopting ASC 326 — 4,095 —
Charge-Offs:
Residential real estate (280) — —
Multi-family (765) — (959)
Commercial real estate (30) — —
Commercial and industrial (572) — (734)
Construction — — —
Consumer — — —
Total loan charge-offs (1,647) — (1,693)
Recoveries:
Multi-family — 567 —
Commercial and industrial 18 110 103
Total net (charge-offs) recoveries (1,629) 677 (1,590)
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Sources of Funds and Liquidity
Liquidity management is defined as the ability of the Company and the Bank to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments, such as fed funds sold, the marketability of securities available-for-sale and interest-bearing deposits due from the Federal Reserve Bank of New York, Federal Home Loan Bank (the “FHLB”) and correspondent banks, which totaled $246.6 million and $238.6 million at December 31, 2024 and 2023, respectively. These liquid assets may include assets that have been pledged primarily against municipal deposits or borrowings. Liquidity is also provided by the maintenance of a base of core deposits, cash and non-interest-bearing deposits due from banks, the ability to sell or pledge marketable assets and access to lines of credit.
Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served, loan demand, its asset/liability mix, its reputation and credit standing in its markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. Among these are changes in the local and national economies, competition from other financial institutions and changes in market interest rates.
The Liquidity and Wholesale Funding Policy of the Bank establishes specific policies and operating procedures governing liquidity levels to assist management in developing plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. Daily, management receives a current cash position update to ensure that all obligations are satisfied. On a weekly basis, appropriate senior management receives a current liquidity position report and a ninety day forecasted cash flow to ensure that all short-term obligations will be met and there is sufficient liquidity available.
As of December 31, 2024, we held $252.0 million of deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At December 31, 2024, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $713.1 million, or approximately 283% of uninsured deposit balances.
Deposits
We provide a range of deposit services, including non-interest bearing demand accounts, interest-bearing demand and savings accounts, money market accounts and time deposits. These accounts generally pay interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. Deposits continue to be our primary funding source.
Total deposits at December 31, 2024 were $1.95 billion, an increase of $49.7 million from total deposits of $1.90 billion at December 31, 2023. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 87% of total deposits at December 31, 2024. Time deposits of $481.6 million are scheduled to mature within the next 12 months. Based on historical experience, the Company expects to be able to replace a substantial portion of those maturing deposits with comparable deposit products.
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The following is our average deposits and weighted-average interest rates paid thereon for the periods presented:
Average Average Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate Balance Rate
The Company had municipal deposits of $509.3 million at December 31, 2024, which comprised 26.1% of total deposits, a decrease of $18.8 million or 3.6% from $528.1 million at December 31, 2023.
Our sources of wholesale funding included brokered certificates of deposit, listing service certificates of deposit and insured cash sweep (“ICS”) reciprocal deposits in excess of 20% of total liabilities, which balances totaled approximately $85.0 million, $2.7 million and $5.5 million, or 4.4%, 0.1% and 0.3% of total deposits, respectively, at December 31, 2024. We utilized brokered certificates of deposit and listing service certificates of deposit as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our brokered certificates of deposit, we utilized interest rate swap contracts to effectively extend their duration and to fix their cost.
As of December 31, 2024 and 2023, we held $106.4 million and $107.3 million, respectively, of time deposits that meet or exceed the FDIC insurance limit. The following table sets forth the maturity of time deposits that meet or exceed the FDIC insurance limit of as of December 31, 2024:
December 31,
Three months or less $ 39,784
Over three months through twelve months 59,126
Over one year through three years 7,181
Over three years 259
See Note 6, “Deposits” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
Borrowings
The total carrying value of our borrowings was $132.5 million at December 31, 2024, a decrease of $21.1 million from $153.6 million at December 31, 2023. The Company added $100.7 million of extended duration FHLB term advances in March 2023 to provide additional liquidity and enhance the interest rate sensitivity profile. At December 31, 2024, $7.1 million of these borrowings were classified as short-term, while the remaining was classified as long- term. Short-term borrowings are comprised of short-term FHLB advances. Long-term funding is comprised of long-term FHLB advances and subordinated debentures. The Company will prepay FHLB advances from time to time as funding needs change. See Note 7, “Borrowings” and Note 8, “Subordinated Debentures” to the accompanying Consolidated Financial Statements contained in Item 8 for additional details.
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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 bear interest, payable semi-annually, at the rate of 5.00% per annum, until October 15, 2025. From and including October 15, 2025 through maturity, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month SOFR plus 487.4 basis points. The Company may, at its option, beginning with the interest payment date of October 15, 2025, but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, subject to the receipt of any required regulatory approval. The Notes are not subject to redemption at the option of the holder. The Company used a portion of the net proceeds to pay off an existing holding company note in October 2020 and used the remainder of the net proceeds for acquisition financing and general corporate purposes, including contributing equity capital to the Bank.
At December 31, 2024, the Bank had a total borrowing capacity of $698.0 million at the FHLB, of which $492.1 million was used to collateralize municipal deposits and $107.8 million was utilized for term advances. At December 31, 2024, the Bank had a $247.2 million collateralized line of credit from the Federal Reserve Bank of New York’s discount window with no outstanding borrowings. At December 31, 2024, the Bank had access to approximately $92 million in unsecured lines of credit extended by correspondent banks, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at December 31, 2024.
Derivatives
We utilize derivative instruments in the form of interest rate swaps to hedge our exposure to interest rate risk in conjunction with our overall asset/liability management process. In accordance with accounting requirements, we formally designate all of our hedging relationships as either fair value hedges or cash flow hedges, and document the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness.
At December 31, 2024, our derivative instruments were comprised of interest rate swaps with a total notional amount of $125.0 million. These instruments are intended to manage the interest rate exposure relating to certain brokered certificates of deposit and certain fixed rate residential mortgages.
Additional information regarding our use of interest rate derivatives is presented in Note 1 and Note 9 to Consolidated Financial Statements contained in Item 8.
Off-Balance Sheet Arrangements
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to customers provided there are no violations of material conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2024 and 2023, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $130.3 million and $143.4 million, respectively.
Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financings and similar transactions. Collateral may be
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required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2024 and 2023, letters of credit outstanding were approximately $0.8 million and $3.9 million, respectively.
Capital Resources
Total stockholders’ equity was $196.6 million at December 31, 2024, an increase of $11.8 million from stockholders’ equity of $184.8 million at December 31, 2023. The increase was primarily due to an increase of $9.4 million in retained earnings and a decrease of $1.1 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $12.3 million for the year ended December 31, 2024, which was offset by $2.9 million of dividends declared. The accumulated other comprehensive loss at December 31, 2024 was 0.68% of total equity and was comprised of a $1.0 million after tax net unrealized loss on the investment portfolio and a $0.3 million after tax net unrealized loss on derivatives.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and the regulatory framework for prompt corrective action prescribe specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. We use our capital primarily for our lending activities as well as acquisitions and expansions of our business and other operating requirements.
In addition to establishing the minimum regulatory requirements, the regulations limit the Bank’s ability to pay dividends to the Company and to pay certain compensation to its executives if the Bank does not hold a capital conservation buffer consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The Bank’s capital conservation buffer was greater than 2.5% of risk-weighted assets at December 31, 2024.
The Bank capital level is characterized as "well-capitalized" under the Basel III Capital Rules. A summary of the Bank’s regulatory capital amounts and ratios are presented below:
December 31, September 30,
Under a policy of the Federal Reserve applicable to bank holding companies with less than $3.0 billion in consolidated assets, the Company is not subject to consolidated regulatory capital requirements.
On October 5, 2023, the Company announced that the Board of Directors approved a stock repurchase program. Under the repurchase program, the Company may repurchase up to 366,050 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in the open market as conditions allow, or in privately negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has not made any stock repurchases under the program. The remaining buyback authority under the share repurchase program therefore remained at 366,050 shares as of March 14, 2025, the filing date of this Annual Report on Form 10-K.
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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. The Company’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, matured or repriced in any given period of time. The Company’s earnings or the net value of its portfolio will change under different interest rate scenarios. The principal objective of the Company’s asset/liability management program is to maximize net interest income within an acceptable range of overall risk, including both the effect of changes in interest rates and liquidity risk.
The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics, (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, and (iii) entering into interest rate swap agreements.
The following presents the Company’s economic value of equity (“EVE”) and net interest income (“NII”) sensitivities at December 31, 2024 (dollars in thousands). The results are within the Company’s policy limits.
(basis points) EVE Amount % (basis points) NII(1) Amount %
_________________________
(1) Assumes 12 month time horizon.
Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the speed with which interest rates may change, the projections noted above on the Company’s EVE and net interest income can be expected to differ from actual results.
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ITEM 8. Financial Statements and Supplementary Data
Crowe LLP
Independent Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Hanover Bancorp, Inc.
Mineola, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Hanover Bancorp Inc. and Subsidiary (the "Company") as of December 31, 2024, December 31, 2023 and September 30, 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for years ended December 31, 2024 and September 30, 2023 and three months ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, December 31, 2023 and September 30, 2023, and the results of its operations and its cash flows for years ended December 31, 2024 and September 30, 2023 and three months ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph - Change In Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective October 1, 2023 due to the adoption of ASC 326, Financial Instruments – Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company’s auditor since 2019.
Livingston, New Jersey
March 14, 2025
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share and per share amounts)
December 31, September 30,
ASSETS
Federal funds sold — 523 514
Loans held for sale 12,404 8,904 —
Stock in Federal Home Loan Bank ("FHLB"), at cost 7,885 8,612 10,547
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
COMMITMENTS AND CONTINGENT LIABILITIES — — —
STOCKHOLDERS' EQUITY
Accumulated other comprehensive loss, net of tax (1,334) (2,450) (1,322)
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)
Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
INTEREST INCOME
INTEREST EXPENSE
NON-INTEREST INCOME
Service charges on deposit accounts 469 85 275
Gain on sale of securities available-for-sale 31 — —
NON-INTEREST EXPENSE
Federal deposit insurance premiums 1,418 375 1,259
Earnings per share:
The accompanying notes are an integral part of these consolidated financial statements.
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HANOVER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on cash flow hedges:
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
(Shares) Stock Stock Surplus Earnings (Loss) Income, Net Equity
Other comprehensive loss, net of tax — — — — — (702) (702)
Cash dividends declared ($0.10 per share) — — — — (2,946) — (2,946)
Stock-based compensation — — 1 1,870 — — 1,871
Stock awards granted, net of forfeitures 32,901 — — — — — —
Exercise of stock options 10,614 — — 106 — — 106
Net income — — — — 3,763 — 3,763
Other comprehensive loss, net of tax — — — — — (1,128) (1,128)
Cash dividends declared ($0.10 per share) — — — — (735) — (735)
Stock-based compensation — — — 360 — — 360
Exercise of stock options 33,400 — — 168 — — 168
Other comprehensive income, net of tax — — — — — 1,116 1,116
Cash dividends declared ($0.10 per share) — — — — (2,975) — (2,975)
Stock-based compensation — — — 1,587 — — 1,587
Exercise of stock options, net 39,170 — 1 (69) — — (68)
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)
Three Months Ended Fiscal
Year Ended December 31, Year Ended
December 31, (transition period) September 30,
Cash flows from operating activities:
Amortization of right-of-use assets 1,718 439 1,608
Net gain on sale of securities available-for-sale (31) — —
Net gain on sale of loans held-for-sale (10,940) (2,326) (4,093)
Amortization of intangible assets 61 16 72
Amortization of debt issuance costs 54 14 53
Loan servicing rights valuation adjustments 809 348 767
Decrease (increase) in accrued interest receivable 66 (1,279) (2,090)
(Decrease) increase in accrued interest payable (192) (97) 906
Increase (decrease) in other liabilities 3,069 3,538 (264)
Payments on operating leases (1,735) (440) (1,517)
Net cash provided by operating activities 5,899 4,114 16,401
Cash flows from investing activities:
Purchases of securities available-for-sale (622,629) (50,499) —
Repayments (purchases) of restricted securities, net 727 1,935 (4,267)
Proceeds from sales of securities available-for-sale 1,763 — —
Principal repayments of securities held to maturity 279 66 302
Principal repayments of securities available-for-sale 599,203 12 50
Purchases of premises and equipment (1,292) (356) (3,407)
Cash flows from financing activities:
Proceeds from term FHLB advances — — 100,725
Repayments of term FHLB advances (18,860) — (11,800)
Proceeds from Federal Reserve Bank borrowings 20,000 — —
Repayments of Federal Reserve Bank borrowings (22,288) (1,896) (4,768)
Repayments of other short-term borrowings, net — (49,000) (6,000)
Payments related to tax withholding for equity awards (198) (335) (170)
Exercise of stock options, net (68) 168 106
Supplemental cash flow information:
Supplemental non-cash disclosure:
Preferred stock issued in exchange for common stock 2,078 — 2,963
Other assets received in satisfaction of a loan — — 844
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 currently a New York corporation which is the holding company for Hanover Community Bank (the “Bank”). The Bank, headquartered in Mineola, New York, is a New York State chartered bank. The Bank commenced operations on November 4, 2008 and is a full-service bank providing personal and business lending and deposit services. As a New York State chartered, non-Federal Reserve member bank, the Bank is subject to regulation by the New York State Department of Financial Services (“DFS”) and the Federal Deposit Insurance Corporation. The Company is subject to regulation and examination by the Board of Governors of the FRB. At the Company’s annual shareholder meeting held on March 5, 2024, the shareholders approved a change in its state of incorporation from the State of New York to the State of Maryland subject to regulatory approval, which has been received. The Company is in the process of completing its reincorporation in Maryland.
Basis of Presentation
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. The Company’s current fiscal year is the calendar year January 1, 2024 through December 31, 2024.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications had an immaterial effect on the Company’s consolidated financial statements and had no effect on prior periods net income or stockholders’ equity.
Use of Estimates
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located in Nassau, Queens and Kings Counties and surrounding areas of New York State. Note 3 discusses the types of lending that the Company engages in. Although the Company has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. The Company does not have any significant concentrations to any one industry or customer.
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Cash and Cash Equivalents
For purposes of reporting consolidated cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash and cash equivalents also include interest-bearing deposits in banks and federal funds sold. Interest-bearing deposits in other financial institutions mature within 90 days and are carried at cost. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with original maturities of 90 days or less.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Investment Securities
Investment securities are classified as held-to-maturity or available-for-sale at the time of purchase. Investment securities classified as held-to-maturity, which management has the positive intent and ability to hold to maturity, are reported at amortized cost. Investment securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income. Any decision to sell investment securities available for sale would be based on various factors, including, but not limited to, asset / liability management strategies, changes in interest rates or prepayment risks, liquidity needs, or regulatory capital considerations.
Premiums are amortized and discounts accreted using the interest method over the remaining terms of the related securities. Premiums on callable securities are amortized to their earliest call date. Dividend and interest income are recognized when earned. Sales of investment securities are recorded at trade date, with realized gains and losses on sales determined using the specific identification method and included in non-interest income.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
Allowance for Credit Losses – Held-to-Maturity Securities
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities was $9 thousand at both December 31, 2024 and 2023, respectively, and is excluded from the estimate of credit losses.
The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
Management classifies the held-to-maturity portfolio into the following major security types: Mortgage backed: residential and commercial. All mortgage-backed: residential and commercial securities held by the Company are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.
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Allowance for Credit Losses – Available-For-Sale Securities
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $0.6 million and $0.8 million at December 31, 2024 and 2023, respectively, and is excluded from the estimate of credit losses.
Federal Home Loan Bank Stock
As a member of the FHLB of New York, the Company is required to maintain an investment in the stock of the FHLB based upon the amount of outstanding FHLB borrowings. This stock does not have a readily determinable fair value and is carried at cost. Both cash and stock dividends are reported as income.
Loans Held for Sale
Loans held for sale are carried at estimated fair value in the aggregate as determined by outstanding commitments from investors. Gains or losses on loan sales are recognized at the time of sale and are determined by the difference between net sales proceeds and the principal balance of the loans sold, adjusted for net deferred loan fees or costs. Loan origination and commitment fees, net of certain direct loan origination costs, are deferred as an adjustment to the carrying value of the loan until it is sold.
Loans and Loan Interest Income Recognition
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs and an allowance for credit losses. The loan portfolio is segmented into residential real estate, multi-family, commercial real estate, commercial and industrial, construction and land development, and consumer loans. Accrued interest receivable totaled $10.9 million, $10.8 million and $9.9 million at December 31, 2024 and 2023 and September 30, 2023, respectively, and was reported in Accrued interest receivable on the Consolidated Statements of Financial Condition and is excluded from the estimate of credit losses.
Interest income on loans is accrued on the unpaid principal balance and credited to income as earned. Interest income on loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Net loan origination fees and costs are deferred and accreted/amortized to interest income over the contractual life of loans using the level-yield method, adjusted for actual prepayments.
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Allowance for Credit Losses - Loans
The allowance for credit losses (“ACL”)is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The quantitative component of the estimate relies on the statistical relationship between the projected value of an economic indicator and the implied historical loss experience among a curated group of peers. The Company utilized regression analyses of peer data, in which the Company was included, and where observed credit losses and selected economic factors were used to determine suitable loss drivers for modeling the lifetime rates of probability of default (PD). A loss given default rate (LGD) is assigned to each pool for each period based on these PD outcomes. The model primarily utilizes an expected discounted cash flow (DCF) analysis with a remaining life (RL) approach used limitedly and which does not have a material impact to the allowance. Consumer loans uses RL and are immaterial to total ACL. The DCF analysis is run at the instrument-level and incorporates an array of loan-specific data points and segment-implied assumptions to determine the lifetime expected loss attributable to each instrument. An implicit "hypothetical loss" is derived for each period of the DCF, and helps establish the present value of future cash flows for each period. The reserve applied to a specific instrument is the difference between the sum of the present value of future cash flows and the amortized cost basis of the loan at the measurement date. The RL approach utilizes projected loss rates based on the remaining life of a loan pool. It is utilized when a regression analysis could not provide adequate correlation of PD and external economic factors on which to base projected losses. During the year ended December 31, 2024, the Company updated the model utilized for the commercial and industrial allowance for credit loss loan segment from RL to DCF. The update was due to the strong statistical relationship now supporting the DCF calculation. The change in methodology did not have a material impact to the allowance reserve for the commercial and industrial loan segment.
Portfolio segments are the level at which loss assumptions are applied to a pool of loans based on the similarity of risk characteristics inherent in the included instruments, relying on FFIEC Call Report codes. The loss driver for each loan portfolio segment is derived from a readily available and reasonable economic forecast, chiefly the Federal Open Market Committee (“FOMC”) of the Federal Reserve's projections of civilian unemployment and year-over-year U.S. GDP growth. Forecasts are applied over a four-quarter period and revert to the lookback period's historical mean for the economic indicator over a four-quarter horizon, thereafter on a straight-line basis.
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The model incorporates qualitative factor adjustments in order to calibrate the model for risk in each portfolio segment that may not be captured through quantitative analysis. Determinations regarding qualitative adjustments are reflective of management's expectation of loss conditions differing from those already captured in the quantitative component of the model. Factors that the Company considers include a) changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; b) changes in international, national, regional, and local conditions; c) changes in the nature and volume of the portfolio and term loans; d) changes in experience, depth, and ability of lending management; e) changes in volume and severity of past due loans and other similar conditions; f) changes in the quality of the Bank’s loan review system; g) changes in the value of underlying collateral for collateral dependent loans; h) the existence and effect of any concentrations of credit and changes in the levels of such concentrations; and i) the effects of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses.
Allowance for credit losses are aggregated for the major loan segments, with similar characteristics, summarized below. However, for the purposes of calculating reserves, these segments may be further broken down into loan classes by risk characteristics that include but are not limited to FFIEC Call Report codes, industry type, geographic location, and collateral type.
One-to-four family residential mortgage loans involve certain risks such as interest rate risk and risk of nonpayment. Adjustable-rate loans decrease the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. Repayment risk can be affected by the overall health of the economy, including unemployment rates and housing prices.
Commercial real estate lending entails additional risks as compared with single-family residential property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. Loans in this classification include income producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are located largely in the Bank’s primary market area. The cash flows of the income producing investment properties could be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on credit quality. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending could have an adverse effect on credit quality.
Multifamily lending entails additional risks as compared with single-family residential property lending, but less when compared to commercial real estate lending. Loans in this classification include income producing residential investment properties of five or more units. Loans are made to established owners with a proven and demonstrable record of strong performance. Loans are secured by a first mortgage lien on the subject property. Repayment is derived generally from the rental income generated from the property and may be supplemented by the owners’ personal cash flow. Credit risk arises with changes in economic conditions that could cause an increase in vacancy rates or decline in property value.