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Item 8. Financial Statements and Supplementary Data

2023-12-21 compared with 2022-12-23 · 292 added, 281 removed, 979 unchanged (37% of the section changed)

2 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Hanover Bancorp, Inc.

Stockholders and Board of Directors of Hanover Bancorp, Inc.

Mineola, New York

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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.

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.

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Total securities

Loans held for investment

Allowance for loan losses

Loans held for investment, net

Premises and equipment, net

Operating lease assets

Accrued interest receivable

Prepaid pension

Prepaid post retirement plan

Stock in Federal Home Loan Bank ("FHLB"), at cost

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Loan servicing rights

Deferred income taxes

Deferred income taxes, net

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Subordinated debentures

Operating lease liabilities

Accrued interest payable

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STOCKHOLDERS' EQUITY

Preferred stock (par value $ 0.01 ;

Preferred stock, Series A (par value $ 0.01 ;

15,000,000 shares authorized;

issued and outstanding 150,000 and none , respectively)

Common stock (par value $ 0.01 ;

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Retained earnings

Accumulated other comprehensive (loss) income, net of tax

Accumulated other comprehensive loss, net of tax

TOTAL STOCKHOLDERS' EQUITY

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Data processing

Advertising and promotion

Acquisition costs

Professional fees

Federal deposit insurance premiums

Other expenses

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Income tax expense

Earnings per common share:

Earnings per share:

The accompanying notes are an integral part of these consolidated financial statements.

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Other comprehensive (loss) income, net of tax:

Change in unrealized (loss) gain on securities available for sale arising during the period, net of tax of ($ 215 ) and $ 77 , respectively

Unrealized losses on investment securities available for sale:

Change in unrealized loss on securities available for sale arising during the period, net of tax of ($ 293 ) and ($ 215 ), respectively

Reclassification adjustment for gains realized in net income, net of tax of $ 0 and $ 24 , respectively

Total other comprehensive (loss) income, net of tax

Net change in unrealized gains (losses) on securities available for sale

Unrealized gains on cash flow hedges:

Change in unrealized gain on cash flow hedges arising during the period, net of tax of $ 97 and $ 0 , respectively

Total other comprehensive loss, net of tax

Total comprehensive income, net of tax

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Balance at October 1, 2021

Other comprehensive income, net of tax

Stock-based compensation

Common stock issued in purchase of Savoy Bank

Savoy Bank acquisition rollover options

Issuance of common stock

Balance at September 30, 2021

Other comprehensive loss, net of tax

Issuance of common stock in lieu of directors' fees

Cash dividends paid ($ 0.10 per share)

Cash dividends declared ($ 0.10 per share)

Stock-based compensation

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Balance at September 30, 2022

Other comprehensive loss, net of tax

Cash dividends declared ($ 0.10 per share)

Stock-based compensation

Stock awards granted, net of forfeitures

Shares received related to tax withholding

Preferred stock issued in exchange for common stock

Exercise of stock options

Balance at September 30, 2023

The accompanying notes are an integral part of these consolidated financial statements.

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Depreciation and amortization

Amortization of right-of-use assets

Net gain on sale of securities available-for-sale

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Deferred tax expense

Decrease in accrued interest receivable

(Increase) decrease in other assets

Decrease in accrued interest payable

Increase in other liabilities

(Increase) decrease in accrued interest receivable

Increase in other assets

Increase (decrease) in accrued interest payable

Increase (decrease) in other liabilities

Payments on operating leases

Net cash provided by operating activities

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Purchases of securities available-for-sale

Purchases of restricted securities

Purchases of restricted securities, net

Proceeds from sales of securities available-for-sale

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Principal repayments of securities available-for-sale

Redemptions of restricted securities

Proceeds from sales of loans

Net (increase) decrease in loans

Net increase in loans

Purchases of premises and equipment

Cash acquired in business combination

Cash consideration paid in acquisition

Net cash (used in) provided by investing activities

Net cash used in investing activities

Cash flows from financing activities:

Net increase in deposits

Advances of term and overnight FHLB borrowings

Repayments of FHLB advances

Proceeds from term FHLB advances

Repayments of term FHLB advances

Repayments of Federal Reserve Bank borrowings

Proceeds from issuance of subordinated debentures, net of issuance costs

Repayment of note payable

(Repayments) proceeds of other short-term borrowings, net

Payments related to tax withholding for equity awards

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Net proceeds from issuance of common stock

Net cash provided by (used in) financing activities

(Decrease) increase in cash and cash equivalents

Proceeds from exercise of stock options

Net cash provided by financing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Transfers from portfolio loans to loans held-for-sale

Transfers from loans held-for-sale to portfolio loans

Fair value of tangible assets acquired

Fair value of liabilities assumed

Common stock issued in business combination

Preferred stock issued in exchange for common stock

Lease liabilities arising from obtaining right-of-use assets

Other assets received in satisfaction of a loan

The accompanying notes are an integral part of these consolidated financial statements.

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Hanover Bancorp, Inc.

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

(the “Company”) is 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.

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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.

These reclassifications had an immaterial effect on the Company’s consolidated financial statements and had no effect on prior year net income or stockholders’ equity.

Use of Estimates

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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.

The United States economy is currently experiencing a level of price inflation not experienced since the late 1970's and early 1980's.

It is therefore difficult to predict the response of consumers and businesses to this level of inflation, and its impact on the economy.

In addition, in order to attempt to control and reduce the level of inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions.

It is unclear whether the Federal Reserve’s efforts will be successful, and what impact they may have on the United States’ economy.

It is possible that that the combined effects of inflation and increases in market interest rates could cause the economy of the United States to enter a recession, which could negatively impact the businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our results of operations.

Significant Group Concentrations of Credit Risk

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The Company does not have any significant concentrations to any one industry or customer.

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

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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

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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.

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.

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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.

A substantial portion of the Bank’s loans are secured by real estate in these areas.

Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region.

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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.

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.

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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

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Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount.

If the Company later determines that all or a portion

of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income.

If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income.

Changes in valuation allowances are reported within non-interest expense on the income statement.

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Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Foreclosed Assets

Foreclosed assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.

Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through similar legal agreement.

These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.

If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense.

Operating costs after acquisition are expensed.

Premises and Equipment

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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.

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, which are 39 years for buildings and 2 to 10 years for furniture, fixtures and equipment.

Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.

Repairs and maintenance costs are recorded as a component of non-interest expense as incurred.

Leases are classified as operating or finance leases at the lease commencement date.

Currently, the Company does not have any leases classified as financing leases.

The Company leases certain locations and equipment.

The Company records leases on the Consolidated Statements of Financial Condition in the form of an operating lease liability for the present value of future minimum payments under the lease terms and a right-of-use asset equal to the lease liability adjusted for such items as deferred or prepaid rent, lease incentives, any impairment of the right-of-use asset.

The discount rate used in determining the lease liability is based upon incremental borrowing rates the Company could obtain for similar loans as of the date of commencement or renewal.

The Company does not record leases on the Consolidated Statements of Financial Condition that are classified as short term (12 months or less).

Short-term lease payments are recognized in the income statement on a straight-line basis over the lease term.

Certain leases may include one or more options to renew.

The exercise of lease renewal options is typically at the Company’s discretion, and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised.

Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated.

The Company does not sublease any of its leased properties.

The Company does not lease properties from any related parties.

Goodwill and Other Intangible Assets

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Core deposit intangible assets are amortized on an accelerated method over their estimated useful life of 10 years .

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.

The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.

Such financial instruments are recorded when they are funded.

The Company records cash flow hedges at the inception of the derivative contract based on the Company’s intentions and belief as to likely effectiveness as a hedge.

Cash flow hedges represent a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.

For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income (“OCI”) and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.

The changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings.

Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.

Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.

Accrued settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income.

Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship.

This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items.

The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income.

When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.

The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position.

The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements.

All the contracts to which the Company is a party settle monthly or quarterly.

In addition, the Company obtains collateral above certain thresholds of the fair value of its derivatives for each counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business.

Debt Issuance Costs

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Potentially dilutive common shares are excluded from the computation of dilutive EPS in the periods in which the effect would be anti-dilutive.

Series A Preferred Stock

Holders of the Company’s Series A preferred stock will be entitled to receive dividends when, as and if declared by the Company’s board of directors, in the same per share amount as the common stockholders.

No dividends will be payable on the common stock unless a dividend identical to that paid on the common stock is paid at the same time on the Series A preferred stock.

Therefore Series A preferred stock is treated as common stock for EPS calculations.

Series A preferred stock has no voting rights.

In the event of a dissolution of the Company, Series A preferred stock is entitled to the payment of any declared and unpaid dividend, and then will share in dissolution proceeds, if any, with the shares of common stock.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss).

Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate components of stockholders’ equity.

Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and unrealized gains and losses on cash flow hedges which are also recognized as separate components of stockholders’ equity.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Management does not believe there now are such matters that will have a material effect on the financial statements.

Income tax expense is comprised of two components, current and deferred.

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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 16.

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Compensation cost is recognized for stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) issued to employees and directors based upon the fair value of these awards at the date of grant.

A Black-Scholes

model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used to estimate the fair value for RSAs and RSUs.

A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used to estimate the fair value for RSAs and RSUs.

Compensation cost is recognized over the required service period, generally defined as the vesting period.

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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

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.

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:

(in thousands)

Cash and due from banks

Investment securities available-for-sale

Loans held for sale

Loans held for investment

Premises and equipment, net

Core deposit intangible

Accrued interest receivable

Total assets acquired

Accrued interest payable

Other liabilities and accrued expenses

Total liabilities assumed

Net assets acquired

Total consideration

(a) Represents the fair value adjustments on net book value of loans, which includes an interest rate mark and credit mark adjustment, the write-off of deferred fees/costs and premiums and the elimination of Savoy’s allowance for loan losses.

(b) Represents the fair value adjustments to reflect the fair value of premises and equipment.

(c) Represents the fair value of core deposit intangible recorded, which is amortized on an accelerated basis over the estimated average life of the deposit base.

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

(e) Represents an adjustment to other assets acquired.

The largest adjustment was the net deferred tax assets resulting from the fair value adjustment related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.

(f) Represents the fair value adjustments on time deposits, which is treated as a reduction of interest expense over the remaining term of the time deposits.

(g) Represents the fair value adjustments on an FHLB borrowing, which is treated as a reduction to interest expense over the life of the borrowing.

(h) Represents an adjustment to other liabilities assumed.

A summary of total consideration paid is as follows:

(in thousands, except share data)

Common stock issued ( 1,357,567 shares issued)

Rollover options

Cash payments to common shareholders

Total consideration paid

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.

The Company engaged a third-party specialist to develop the fair value estimate of Savoy’s loan portfolio as of the acquisition date in accordance with ASC 820.

Inputs and assumptions used in the fair value estimate of the loan portfolio, include interest rate, servicing, credit and liquidity risk, and required equity return.

The fair value of loans was calculated using a discounted cash flow analysis based on the remaining maturity and repricing terms.

Cash flows were adjusted by estimating future credit losses and the rate of prepayments.

Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.

There was no carryover of Savoy’s allowance for loan losses associated with the loans that were acquired, as the loans were initially recorded at fair value as of the acquisition date.

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years and the amortization is based on dollar weighted deposit runoff on an annualized basis.

The fair value of retail demand and interest-bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.

The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Other borrowed funds include a borrowing from the FHLB.

The fair value of this borrowing was estimated by discounting the contractual future cash flows using FHLB rates offered of similar maturities.

During the fiscal fourth quarter of 2021, the Company revised its initial estimates and assumptions regarding the valuation of acquired deferred tax assets.

Because such revision occurred during the first 12 months following the date of acquisition and was not the result of an event that occurred subsequent to the acquisition date, the Company has increased goodwill recorded by $ 1.1 million to reflect this change in estimate.

Acquisition costs are expensed as incurred as a component of non-interest expense and primarily include, but are not limited to, severance costs, professional services, data processing fees, and marketing and advertising expenses.

The Company incurred total acquisition costs of $ 250 thousand and $ 4.4 million during the years ended September 30, 2022 and 2021, respectively.

The Company has determined the above noted acquisition constitutes a business combination as defined by ASC Topic 805, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed.

The Company has recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with ASC Topic 805.

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Savoy acquisition as of the merger date:

(in thousands)

Contractually required principal and interest at acquisition

Contractual cash flows not expected to be collected (non-accretable discount)

Expected cash flows at acquisition

Interest component of expected cash flows (accretable discount)

Fair value of acquired purchased credit impaired loans

Adoption of New Accounting Standards

Standards Adopted in Fiscal Year 2023

On October 1, 2022, the Company adopted ASU No.

2016-02 “Leases (Topic 842)” and subsequent amendments thereto, which requires the Company to recognize most leases on the balance sheet.

The Company adopted the standard under a modified retrospective approach as of the date of adoption and elected to apply several of the available practical expedients, including:

1) carryover of historical lease determination and lease classification conclusions, 2) carryover of historical initial direct cost balances for existing leases, and 3) accounting for lease and non-lease components in contracts in which the Company is a lessee as a single lease component.

Adoption of the leasing standard resulted in the recognition of operating right-of-use assets, and operating lease liabilities of approximately $ 10 million as of October 1, 2022.

These amounts were determined based on the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate as of the date of adoption.

There was no material impact to the timing of expense or income recognition in the Company’s Consolidated Statements of Income.

Prior periods were not restated and continue to be presented under legacy GAAP.

Disclosures about the Company’s leasing activities are presented in Note 5.

In December 2022, the Financial Accounting Standards Board (the “FASB”) issued ASU 2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848” that extends the period of time preparers can utilize the reference rate reform relief guidance.

In 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when LIBOR would cease being published.

In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

To ensure relief in Topic 848 covers the period of time during which a significant number of modifications may take place, ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

For all entities, the amendments in ASU 2022-06 are effective upon issuance.

The Company adopted this ASU on July 1, 2023.

The adoption of this standard did not have material effect on the Company’s operating results or financial condition.

Standards That Have Not Yet Been Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses Topic 326:

Measurement of Credit Losses on Financial Instruments.

The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses, which is referred to as the current expected credit loss (“CECL”) methodology, and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates.

In November 2019, the FASB adopted changes to delay the effective date of ASU 2016-13 to 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies.

As the Company is a smaller reporting company under SEC regulations, the Company is eligible for the delay and will adopt CECL effective October 1, 2023.

The Company has reviewed the potential impact to our securities portfolio, which primarily consists of U.S.

government sponsored entities, mortgage-backed securities and corporate bonds which have no history of credit loss and have strong credit ratings.

The Company does not expect the standard to have a material impact on its financial statements as it relates to the Company’s securities portfolio.

The Company is also currently evaluating the impact the CECL model will have on our accounting and allowance for loan losses.

The Company has engaged a third-party to assist in the development of a CECL model for the calculation of the allowance for loan and lease losses in preparation for the change to the current expected credit loss model.

The Company has also engaged a third-party to perform a model validation of its CECL model.

The Company is also in the process of updating its policies, procedures and internal controls accordingly.

The Company will adopt the ASU using the required modified retrospective method with a one-time cumulative effect adjustment to retained earnings, net of tax, as of the beginning of the reporting period.

The Company is in the process of finalizing its CECL calculation for adoption.

In March 2022, the FASB issued ASU 2022-02, which eliminates creditor accounting guidance for troubled debt restructurings (“TDRs”) for entities that have adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and enhances Vintage Disclosures of Gross Writeoffs.

This ASU eliminates Subtopic 310-40 guidance for TDRs, and requires creditors to apply the loan refinancing and restructuring guidance in Subtopic 310-20 when evaluating modifications granted to borrowers experiencing financial difficulty to determine whether the modification is considered a continuation of an existing loan or a new loan.

The vintage disclosure component of the ASU requires entities to disclose current-period gross writeoffs by origination year for financing receivables and investment leases within the scope of Subtopic 326-20.

The Company will adopt ASU 2022-02 concurrently with the adoption of ASU 2016-13.

Investment Securities

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at September 30, 2022 and 2021 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at September 30, 2023 and 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

September 30, 2023

Gross Unrealized

(in thousands)

7 unchanged sentences

Total held to maturity securities

Total investment securities

September 30, 2022

7 unchanged sentences

GSE commercial mortgage-backed securities

Corporate bonds

Total held to maturity securities

Total investment securities

The amortized cost and fair value of investment securities at September 30, 2023, by contractual maturity, are shown below.

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Securities held to maturity:

One to five years

Five to ten years

GSE residential mortgage-backed securities

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(1) Amount does not include associated income tax of $ 0 and $ 24 for year ended September 30, 2023 and 2022, respectively.

The following tables summarizes gross unrealized losses and fair values of investment securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2022 and 2021.

The following tables summarize gross unrealized and unrecognized losses and fair values of investment securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized or unrecognized loss position at September 30, 2023 and 2022.

September 30, 2023

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Total available-for-sale

Less than Twelve Months

Twelve Months or Longer

Held-to-maturity:

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GSE residential mortgage-backed securities

Corporate bonds

Total available-for-sale

Less than Twelve Months

Twelve Months or Longer

Held-to-maturity:

Corporate bonds

GSE residential mortgage-backed securities

GSE commercial mortgage-backed securities

Total held-to-maturity

There was no other than temporary impairment loss recognized on any securities at September 30, 2023 or 2022.

Unrealized losses on corporate bonds have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions.

Unrealized losses on corporate bonds have not been recognized into income because the decline in fair value is largely due to changes in interest rates and other market conditions, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.

The issuers continue to make timely principal and interest payments on the bonds.

The fair value is expected to recover as the bonds approach maturity.

The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2023 and 2022

The mortgage-backed securities held by the Company were issued by U.S government-sponsored entities and agencies.

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Total loans, net

The Company was a participant in the Paycheck Protection Program (“PPP”), administered by the Small Business Administration under the CARES Act, to provide guaranteed loans to qualifying businesses and organizations.

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.

As of September 30, 2022, borrowers had received forgiveness or had made payments on $ 355.9 million in PPP loans.

The Company’s PPP loans outstanding, included in commercial and industrial loans in the table above, totaled $ 10.2 million and $ 140.4 million at September 30, 2022 and 2021, respectively.

The Company’s Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), loans outstanding, included in commercial and industrial (“C&I”) loans in the table above, totaled $ 4.8 million and $ 10.2 million at September 30, 2023 and 2022, respectively.

SBA loans of $ 1.0 million and $ 4.9 million included in commercial real estate and C&I loans, respectively, in the table above were sold as of September 30, 2023 and settled in early October 2023.

As of September 30, 2023 and 2022, the Company was servicing approximately $ 255.7 million and $ 246.0 million, respectively, of loans for others.

The Company had no loans held for sale as of September 30, 2022 and 2021.

In the years ended September 30, 2023 and 2022, the Company sold approximately $ 51.8 million and $ 80.3 million, respectively, of loans and recognized gains on the sales of loans of $ 4.1 million and $ 5.1 million, respectively.

7 unchanged sentences

Total recorded investment

The Company has recorded an allowance for loan losses of $ 50 thousand and $ 0 related to these loans at September 30, 2022 and 2021, respectively.

The following table presents a summary of changes in accretable difference on purchased loans accounted for under ASC 310-30:

Year Ended September 30,

(in thousands)

Balance at beginning of period

Accretable differences acquired

Adjustments to accretable difference due to changes in expected cash flows

Other changes, net

Ending balance

The Company has recorded an allowance for loan losses of $ 0 and $ 50 thousand related to these loans at September 30, 2023 and 2022, respectively.

During the year ended September 30, 2023, two purchased credit impaired loans acquired in the Savoy Bank acquisition totaling $ 457 thousand were charged off to the allowance for loan losses.

The Company continuously monitors the credit quality of its loan receivables.

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The loan is inadequately protected by current sound worth and paying capacity of the obligor or collateral pledged, if any.

Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt.

Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

The loan has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “pass” rated loans.

Loans listed as “not rated” are homogenous residential and consumer type loans which are evaluated based on payment performance as previously disclosed in the aging of past due loans.

Loans not meeting the criteria above are considered to be pass rated loans.

The following tables represent loans categorized by class and internally assigned risk grades.

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Construction and land development

(1) Of the residential real estate non-accrual loans, $ 1,227 were not past due and $ 1,924 were greater than 89 days past due.

(2) Multi-family non-accrual loans at September 30, 2022 were greater than 89 days past due.

(3) Commercial real estate non-accrual loans at September 30, 2022 were greater than 89 days past due.

(4) Commercial and industrial non-accrual loans at September 30, 2022 were greater than 89 days past due.

(1) Purchased credit impaired loans at September 30, 2023 were greater than 89 days past due.

6 unchanged sentences

Construction and land development

(1) Of the residential real estate non-accrual loans, $ 1,026 were 61 days past due and $ 4,528 were greater than 89 days past due.

(2) Multi-family non-accrual loans at September 30, 2021 were greater than 89 days past due.

(3) Commercial real estate non-accrual loans at September 30, 2021 were greater than 89 days past due.

(4) Of the total $ 10,241 purchased credit impaired loans, $ 2,519 were greater than 89 days past due.

(1) Purchased credit impaired loans at September 30, 2022 were greater than 89 days past due.

The following table presents information related to impaired loans by portfolio segment as of and for the years ended September 30, 2023 and 2022:

16 unchanged sentences

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed to determine if that borrower is currently in payment default under any of its obligations or whether there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

The Company has seven and six loans that are classified as a troubled debt restructuring at September 30, 2022 and 2021 with a total recorded investment of $ 2.3 million and $ 1.6 million, respectively.

The Company has six and seven loans that are classified as a troubled debt restructurings at September 30, 2023 and 2022 with a total recorded investment of $ 1.7 million and $ 2.3 million, respectively.

The Company has no t allocated any specific reserves for these loans at September 30, 2023 and 2022.

1 unchanged sentence

There are no troubled debt restructurings for which there was a payment default during 2023 and 2022 for loans that were modified during the twelve- month period prior to default.

A loan is considered to be in payment default once it is 90 day s contractually past due under the modified terms.

The following table presents loans modified as troubled debt restructurings that occurred during the year ending September 30, 2022:

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

There were no new troubled debt restructurings recorded for the year ended September 30, 2023.

The following table presents loans modified as troubled debt restructurings that occurred during the year ended September 30, 2022:

Pre-Modification

4 unchanged sentences

There was no increase in the allowance for loan losses and no charge-offs during the year ended September 30, 2022 for the troubled debt restructurings described above.

There were no new troubled debt restructurings recorded for the year ended September 30, 2021.

The following tables represent the activity in the allowance for loan losses by portfolio segment for the years ended September 30, 2023 and 2022:

45 unchanged sentences

Depreciation and amortization was $ 1.8 million and $ 1.7 million for the years ended September 30, 2023 and 2022, respectively.

Operating Leases

The Company enters into leases in the normal course of business primarily for branch locations, back-office operations locations, business development offices, and equipment.

The Company’s leases have remaining terms ranging from 2 to 10 years , some of which include renewal or termination options to extend the lease for up to 5 years and some include options to terminate the lease upon notification.

The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants.

The Company has no leases that are subject to sublease agreements.

As of September 30, 2023, the Company had lease liabilities totaling $ 10.9 million and right-of-use assets totaling $ 10.2 million.

As of September 30, 2023, the weighted average remaining lease term was 7 years and the weighted average discount rate was 4.5 %.

Total lease costs for the year ended September 30, 2023 was $ 2.1 million.

Future undiscounted lease payments for operating leases with initial terms of one year or more as of September 30, 2023 are as follows:

(dollars in thousands)

Years Ending September 30,

Total undiscounted lease payments

imputed interest

Net lease liability

The following table details the components of deposits:

12 unchanged sentences

At September 30, 2023 and 2022, FHLB term borrowings outstanding were $ 126.7 million and $ 37.8 million, respectively, all of which were fixed rate.

At September 30, 2022, the Company had $ 55.0 million in FHLB overnight borrowings outstanding at a rate of 3.29 %.

There were no overnight borrowings outstanding at September 30, 2021.

The following table sets forth the contractual maturities and weighted average interest rates of the Company’s fixed rate FHLB overnight and term advances:

At September 30, 2023 and 2022, the Company had FHLB overnight borrowings outstanding of $ 49.0 million and $ 55.0 million at the rate of 5.59 % and 3.29 %, respectively.

The following table sets forth the contractual maturities in the next five years of the balance sheet date and weighted average interest rates of the Company’s fixed rate FHLB advances (dollars in thousands):

Balance at September 30,

3 unchanged sentences

2026, rates from 4.29 % to 4.98 %

2027, rates from 4.13 % to 4.74 %

2028, rates from 3.99 % to 4.58 %

Total term advances

5 unchanged sentences

2025, rates from 0.56 % to 0.59 %

Total term advances

1 unchanged sentence

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances.

The advances were collateralized by $ 822.2 million and $ 432.7 million of residential and commercial mortgage loans under a blanket lien arrangement at September 30, 2022 and 2021, respectively.

The advances were collateralized by residential and commercial mortgage loans under a blanket lien arrangement at September 30, 2023 and 2022, respectively.

Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to an additional total of $ 291.2 million at September 30, 2023.

2 unchanged sentences

The borrowings have a rate of 0.35 % and the maturity date will equal the maturity date of the underlying PPP loan pledged to secure the extension of credit.

The maturity date of a PPP loan is either two or five years from origination date.

The Company utilized the PPPLF to fund PPP loan production.

The borrowings are fully secured by pledged PPP loans as of September 30, 2022 and 2021.

Correspondent Bank Borrowings

3 unchanged sentences

In October 2020, the Company completed the private placement of $ 25.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to certain qualified institutional buyers and accredited investors.

The Notes 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, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (“SOFR”) plus 487.4 basis points.

The Notes bear interest, payable semi-annually, at the rate of 5.00 % per annum, until October 15, 2025.

From and including October 15, 2025 through maturity, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 487.4 basis points.

The Company may, at its option, beginning with the interest payment date of October 15, 2025, but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, subject to the receipt of any required regulatory approval.

4 unchanged sentences

The Notes are presented net of unamortized issuance costs in the Company’s Consolidated Statements of Financial Condition.

Cash Flow Hedges of Interest Rate Risk

As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position.

The notional amount of the interest rate swap does not represent the amount exchanged by the parties.

The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

The Company executed its first interest rate swap agreement in June 2023 and two additional in September 2023.

Interest rate swaps with notional amounts totaling $ 75.0 million as of September 30, 2023 were designated as cash flow hedges of certain Brokered Certificates of Deposit.

The swaps were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income.

The aggregate fair value of the swaps is recorded in other assets/(other liabilities) with changes in fair value recorded in other comprehensive income (loss).

The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective.

The Company expects the hedges to remain fully effective during the remaining term of the swaps.

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the consolidated statements of income relating to the cash flow derivative instruments for the periods indicated:

Year Ended September 30,

(in thousands)

Gain recognized in other comprehensive income

Gain (loss) recognized in interest expense

The following table reflects the cash flow hedges included in the consolidated statements of financial condition as of the dates indicated:

September 30, 2023

September 30, 2022

(in thousands)

Included in other assets/(liabilities):

Interest rate swaps related to Brokered Certificates of Deposit

Credit-Risk-Related Contingent Features

The Company has minimum collateral posting thresholds with certain of its derivative counterparties.

If the termination value of derivatives is a net liability position, the Company is required to post collateral against its obligations under the agreements.

However, if the termination value of derivatives is a net asset position, the counterparty is required to post collateral to the Company.

At September 30, 2023, the Company received $ 0.7 million in collateral from its counterparties under the agreements in a net asset position.

Goodwill and Other Intangible Assets

9 unchanged sentences

Other intangible assets at end of period

The Company has identified one reporting unit for purposes of testing goodwill for impairment, which is the Company as a whole.

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value.

At August 31, 2022, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill.

The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

The Company has identified the reporting unit for purposes of testing goodwill for impairment, the Bank, which is a component of the operating segment.

In assessing impairment, the Company has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

If, after assessing the totality of such events or circumstances, the Company determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company would not be required to perform a quantitative impairment test.

Due to recent declines in bank stock prices and events impacting the banking industry, the Company performed a quantitative impairment analysis at August 31, 2023.

The annual quantitative assessment of goodwill for the reporting unit was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approaches”).

The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value.

The market approaches take into consideration fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives.

The result of the income approach was weighted 50% and the results of the market approaches comprised the remaining 50% in determining the fair value of the reporting unit.

The results of the annual quantitative impairment analysis indicated that the fair value exceeded the carrying value of the reporting unit.

No impairment charges were required to be recorded in the years ended September 30, 2023 and 2022.

The following table presents the gross carrying amount and accumulated amortization for the Company’s other intangible assets, which consist of core deposit intangibles:

19 unchanged sentences

State taxes, net of federal benefit

Non-deductible transaction costs

Salaries deduction limitation

Non-deductible expenses

Change in valuation allowance

5 unchanged sentences

Allowance for loan losses and other contingent liabilities

Operating lease liability

Net operating loss carryforwards

Compensation and related benefit obligations

Purchase accounting fair value adjustments

Unrealized loss on securities AFS

Purchase accounting fair value adjustments

Organizational costs

Mortgage servicing rights

Total deferred tax assets

1 unchanged sentence

Deferred fees and costs

Operating lease asset

Unrealized gain on derivatives

Mortgage servicing rights

Tax bad debt reserve

Unrealized gain on securities AFS

Total deferred tax liabilities

3 unchanged sentences

The Company has net operating loss carryforwards available for state income tax purposes of approximately $ 35.1 million.

For state purposes, $ 12.4 million expires in 2025 and the remaining $ 18.6 million will begin to expire in 2036.

The Company has net operating loss carryforwards available for city income tax purposes of approximately $ 7.3 million, of which $ 0.5 million will expire in 2025 and the remaining $ 6.8 million will begin to expire in 2037.

ASC 740, Income Taxes , provides for the recognition of deferred tax assets if realization of such assets is more likely than not.

For state purposes, $ 12.4 million expires in 2025 with the remaining balance of $ 22.7 million will begin to expire in 2036.

The Company has net operating loss carryforwards for city income tax purposes of approximately $ 8.8 million, of which $ 0.5 million will expire in 2025 and the remaining balance of $ 8.3 million will begin to expire in 2037.

The Company has recorded a federal deferred tax asset as, based upon an analysis of the evidence, it is more likely than not that such federal deferred tax asset will be recoverable.

1 unchanged sentence

Specifically, this legislation provides for a state and city subtraction modification for which the Company qualifies.

This subtraction modification causes the Company to consistently generate net operating losses for New York State and New York City purposes and it

will continue to do so for the foreseeable future.

This subtraction modification causes the Company to consistently generate net operating losses for New York State and New York City purposes and it will continue to do so for the foreseeable future.

Accordingly, the Company has recorded a valuation allowance against the New York State and New York City portions of the deferred tax asset, as it is not more likely than not that such deferred tax assets will be recoverable.

9 unchanged sentences

Of the total 346,000 shares of common stock approved for issuance under the 2018 Plan, 21,784 shares remain available for issuance at September 30, 2023.

Hanover assumed the 2013 Savoy Bank Stock Option Plan solely in connection with options to purchase Savoy common stock held by the former Chief Executive Officer of Savoy and which, under the terms of the Agreement and Plan of Merger between the Company and Savoy, were converted into options to purchase 71,900 shares of Hanover common stock.

Stock Options

11 unchanged sentences

(1) All outstanding options are fully vested and exercisable

The following table presents information related to the stock option plan for the periods presented:

Year Ended September 30,

(in thousands)

Intrinsic value of options exercised

Cash received from option exercises

Tax benefit from option exercises

There was no compensation expense attributable to stock options for the years ended September 30, 2023 and 2022, respectively.

Restricted Stock Awards

During the year ended September 30, 2022, restricted stock awards of 44,642 shares were granted with a three-year vesting period and 234,288 shares were granted with a five-year vesting period.

During the year ended September 30, 2023, restricted stock awards of 50,580 shares were granted with a five-year vesting period.

Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.

9 unchanged sentences

Long Term Incentive Plan

Restricted stock units (RSUs) represent an obligation to deliver shares to a grantee at a future date if certain vesting conditions are met.

RSUs are subject to a time-based vesting schedule, and/or the satisfaction of performance conditions, and are settled in shares of the Company's common stock.

Restricted stock units (“RSU”s) represent an obligation to deliver shares to a grantee at a future date if certain vesting conditions are met.

RSUs are subject to a time-based vesting schedule and the satisfaction of performance conditions and are settled in shares of the Company's common stock.

RSUs do not provide voting rights and RSUs may accrue dividends from the date of grant.

4 unchanged sentences

Unvested, September 30, 2023

During the year ended September 30, 2022, the Company granted 51,097 RSUs.

These performance-based RSUs cliff vest after three years and are subject to the achievement of the Company's pre-defined performance goals for the three-year period ending December 31, 2024.

Compensation expense attributable to RSUs was $ 0.2 million for the year ended September 30, 2022.

There was no compensation expense related to RSUs for the year ended September 30, 2021, as no RSUs were granted in 2021.

No RSUs were granted during the year ended September 30, 2023.

Performance-based RSUs granted in 2022 cliff vest after three years and are subject to the achievement of the Company's pre-defined performance goals for the three-year period ending December 31, 2024.

Compensation expense attributable to RSUs was $ 0.2 million for the years ended September 30, 2023 and 2022.

As of September 30, 2023, there was $ 0.3 million of total unrecognized compensation cost related to non-vested RSUs.

7 unchanged sentences

Deposits from principal officers, directors and their affiliates at September 30, 2023 and 2022 were $ 28.5 million and $ 12.8 million, respectively.

Commitments and Contingent Liabilities

Loan Commitments and Other Related Activities

4 unchanged sentences

The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The following represents commitments outstanding:

The contractual amounts of financial instruments with off-balance sheet risk were as follows:

September 30,

5 unchanged sentences

Unused lines of credit

The Company is obligated to make minimum annual rental payments under non-cancelable operating leases.

Projected minimum rentals under the existing leases are as follows:

(in thousands)

The leases contain certain renewal options and rent escalation clauses which are included in the table above.

In addition, the leases provide for additional payments based upon real estate taxes, interest and other charges.

Rent expense under operating leases for the years ended September 30, 2022 and 2021 approximated $ 1.9 million and $ 1.7 million, respectively.

Commitments to make loans are generally made for periods of 180 days or less.

The fixed rate loan commitments have interest rates ranging from 4.75 % to 7.50 % and maturities ranging from 10 years to 30 years .

Regulatory Matters

3 unchanged sentences

Failure to meet minimum capital requirements can initiate regulatory action.

The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

The effects of accumulated other comprehensive income or loss is not included in computing regulatory capital.

Management believes as of September 30, 2023, the Bank meets all capital adequacy requirements to which it is subject.

27 unchanged sentences

Tier 1 capital to average total assets

Dividend restrictions - The Company’s principal source of funds for dividend payments is dividends received from the Bank.

During 2022 the Bank made $ 0.4 million cash dividends to the Holding Company.

Dividend restrictions - The Company’s principal source of funds for dividend and debt service payments is dividends received from the Bank.

During 2023 the Bank paid $ 5.3 million in cash dividends to the Holding Company.

Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.

As of September 30, 2023, the Bank had $ 53.0 million of retained net income available for dividends to the Company, without obtaining regulatory approval.

The Holding Company made capital contributions of $ 26.0 million to the Bank.

Fair Value Measurements

50 unchanged sentences

The Company has determined these are classified as Level 2 inputs within the fair value hierarchy.

Derivatives represent interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.

The fair value of mortgage servicing rights are based on a valuation model that calculates the present value of estimated future servicing income.

1 unchanged sentence

Fair value of loan servicing rights related to residential mortgage loans at September 30, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 12.9 % to 15.4 %, prepayment speed of 26.25 % and a weighted average life ranging from 1.2 to 2.8 years.

Fair value at September 30, 2021 for mortgage servicing rights was determined based on discounted expected future cash flows using discount rates ranging from 12.0 % to 14.5 %, prepayment speeds ranging from 24.18 % to 24.33 % and a weighted average life ranging from 1.96 to 3.3 years.

Fair value at September 30, 2022 for mortgage servicing rights was determined based on discounted expected future cash flows using discount rates ranging from 12.0 % to 14.5 %, prepayment speed of 26.25 % and a weighted average life ranging from 1.2 to 3.0 years.

The fair value of loan servicing rights for SBA loans at September 30, 2023 was determined based on discounted expected future cash flows using discount rates ranging from 10.09 % to 41.62 %, prepayment speeds ranging from 8.29 % to 29.26 % and a weighted average life ranging from 1.17 to 5.81 years.

5 unchanged sentences

Balance at beginning of period

Loan servicing rights obtained from acquisition of Savoy

Adjustment to fair value

59 unchanged sentences

Non-interest expense

Loss before income taxes and equity in undistributed earnings of the Bank

Income (loss) before income taxes and equity in undistributed earnings of the Bank

Income tax benefit

7 unchanged sentences

Amortization of debt issuance costs

Decrease (increase) in other assets

(Decrease) increase in accrued interest payable

(Decrease) increase in other liabilities

Net cash provided by (used in) operating activities

(Increase) decrease in other assets

Decrease in accrued interest payable

Decrease in other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

2 unchanged sentences

Cash flows from financing activities:

Proceeds from issuance of subordinated debentures, net of issuance costs

Repayment of note payable

Proceeds from exercise of stock options

Net proceeds from issuance of common stock

Payments related to tax withholding for equity awards

Cash dividends paid to common stockholders

Net cash provided by financing activities

Net (decrease) increase in cash and due from banks

Cash dividends paid

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and due from banks

Cash and due from banks, beginning of period

Cash and due from banks, end of period

Supplemental non-cash disclosures:

Common stock issued in acquisition

Stock options rolled over in acquisition

Earnings Per Share

1 unchanged sentence

Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings.

The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities.

The Company’s basic and diluted EPS calculations are presented in the following table:

12 unchanged sentences

There were no stock options that were antidilutive at September 30, 2023 and 2022.

Accumulated Other Comprehensive Income (Loss)

The following presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the years ended September 30, 2022 and 2021:

Accumulated Other Comprehensive (Loss) Income

The following presents changes in accumulated other comprehensive (loss) income by component, net of tax, for the years ended September 30, 2023 and 2022:

Unrealized Gains and

3 unchanged sentences

Balance at October 1, 2022

Other comprehensive loss, before reclassification

Amount reclassified from accumulated other comprehensive income

Net current period other comprehensive loss

Other comprehensive (loss) income, before reclassification

Amount reclassified from accumulated other comprehensive loss

Net current period other comprehensive (loss) income

Balance at September 30, 2023

4 unchanged sentences

Balance at October 1, 2021

Other comprehensive income, before reclassification

Other comprehensive loss, before reclassification

Amount reclassified from accumulated other comprehensive income

Net current period other comprehensive income

Net current period other comprehensive loss

Balance at September 30, 2022

The following represents the reclassification out of accumulated other comprehensive income for the years ended September 30, 2022 and 2021:

The following represents the reclassification out of accumulated other comprehensive (loss) income for the years ended September 30, 2023 and 2022:

September 30,

2 unchanged sentences

Statements of Income

Unrealized gains and losses on available-for-sale securities

Realized gains on securities available-for-sale

1 unchanged sentence

Income tax expense

Gains and losses on cash flow hedges

Interest rate contracts

Interest income (expense)

Income tax (expense) or benefit

Total reclassifications for the period, net of tax

Revenue from Contracts with Customers

12 unchanged sentences

(2) Other income includes merchant card processing fees of $ 47 and $ 33 for the year ended September 30, 2023 and 2022, respectively, which are included in the scope of ASC 606 and loan related fee income, recoveries on acquired loans and miscellaneous income totaling $ 1,724 and $ 474 for 2023 and 2022, respectively, which are not included in the scope of ASC 606.

The Company settled ongoing litigation and received a settlement payment of $ 975 in 2023.

A description of the Company’s revenue streams included in the scope of ASC 606 is as follows:

5 unchanged sentences

Service charges on customer accounts are withdrawn from the customer’s account balance.

Subsequent Events

On October 26, 2023 the Company’s Board of Directors declared a quarterly cash dividend of $ 0.10 per share on the Company’s common and preferred stock.

The dividend was paid on November 15, 2023 to shareholders of record on November 8, 2023.

On October 25, 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31.

Accordingly, the Company will report a transition quarter that runs from October 1, 2023 through December 31, 2023 (Stub Period).

The Company’s next full fiscal year will be the calendar year January 1, 2024 through December 31, 2024.

On October 5, 2023, the Company announced that its Board of Directors approved a Share Repurchase Program.

Under this program, the Company may purchase up to 366,050 shares, or approximately 5 % of its outstanding common stock, in the open market or in private transactions.

The Company has not made any repurchases of its common stock through the issuance date of this report.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data