Hanover Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 2025

Cautionary Statement Regarding Forward-Looking Statements - This document contains a number of forward-looking statements, including statements about the financial condition, results of operations, earnings outlook and prospects of the Company. Forward-looking statements are typically identified by words such as “should,” “likely,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “target,” “project,” “goal” and other similar words and expressions. The forward-looking statements involve certain risks and uncertainties. The ability of the Company to predict results or the actual effects of its plans and strategies is subject to inherent uncertainty.

Factors that may cause actual results or earnings to differ materially from such forward-looking statements include those set forth in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, as updated by the Company’s subsequent filings with the SEC and, among others, the following:

• Changes in monetary and fiscal policies of the FRB and the U. S. Government, particularly related to changes in interest rates, money supply and inflation, may affect interest margins and the fair value of financial instruments;
• Changes in general economic conditions, either nationally or in our market areas, including due to increased market volatility related to government policy or the impact of tariffs or trade policy, that are different than expected;
• The ability to enhance revenue through increased market penetration, expanded lending capacity and product offerings;
• Occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, or outbreaks of hostilities, such as between Russia and Ukraine and in the Middle East, or the effects of climate change, and the ability of the Company to deal effectively with disruptions caused by the foregoing;
• Legislative, regulatory or policy changes;
• Downturns in demand for loan, deposit and other financial services in the Company’s market area;
• Increased competition from other banks and non-bank providers of financial services;
• Technological changes and increased technology-related costs;
• A breach of our information systems security, including the occurrence of a cyber incident or a deficiency in cyber security; and
• Changes in accounting principles, or the application of generally accepted accounting principles.

Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this document. All subsequent written and oral forward-looking statements concerning matters addressed in this document and attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

Non-GAAP Disclosure - This discussion includes discussions of the Company’s tangible common equity (“TCE”) ratio, TCE, tangible assets and efficiency ratio, all of which are non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or modifies amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with U.S. GAAP. The Company believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and the Company’s marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other financial institutions.

With respect to the calculations and reconciliations of TCE, tangible assets and the TCE ratio, please see Liquidity and Capital Resources contained herein for a reconciliation to the most directly comparable GAAP measure.

Executive Summary – The Company is a one-bank holding company incorporated in 2016. The Company operates as the parent for its wholly owned subsidiary, the Bank, which commenced operations in 2008. The income of the Company is primarily derived through the operations of the Bank. Unless the context otherwise requires, references herein to the Company include the Company and the Bank on a consolidated basis.

The Company completed its core processing system conversion to FIS Horizon in February 2025. This conversion, coupled with our recently refreshed corporate logo, exemplifies our momentum towards a more technologically advanced, modern and digitally forward-thinking bank.

The Company was added to the Russell 2000 Index in late June 2025. The Russell 2000 Index encompasses the 2,000 largest U.S.-traded stocks by objective, market-capitalization rankings, and style attributes. The Russell Indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies.

The Bank operates as a locally headquartered, community-oriented bank, serving customers throughout the New York metro area from offices in Nassau, Suffolk, Queens, Kings (Brooklyn) and New York (Manhattan) Counties, New York and Freehold in Monmouth County, New Jersey. We opened the Bank’s Hauppauge Business Banking Center in Hauppauge, Suffolk County, New York in May 2023. This location is the nexus of our expanded commercial lending and deposit activities that are integral to the ongoing diversification of our balance sheet as we fill the void left by the diminishing number of commercial banks in the NYC Metro area. In June 2025, we opened a full-service branch in Port Jefferson, on Long Island, New York to serve the thriving Suffolk County area. During the fourth quarter of 2023, we began offering business banking services to the legal, licensed cannabis industry, initially in New York state. We now offer these services in New Jersey and may in the future consider opening accounts for licensed entities in other states. We offer personal and business loans on a secured and unsecured basis, SBA and USDA guaranteed loans, revolving lines of credit, commercial mortgage loans, and one- to four-family non-qualified mortgages secured by primary and secondary residences that may be owner occupied or investment properties, home equity loans, bridge loans and other personal purpose loans.

The Bank works to provide more direct, personal attention to customers than management believes is offered by competing financial institutions, the majority of which are headquartered outside of the Bank’s primary trade area and are represented locally by branch offices. By striving to employ professional, responsive and knowledgeable staff, the Bank believes it offers a superior level of service to its customers. As a result of senior management’s availability for consultation on a daily basis, the Bank believes it offers customers quicker responses on loan applications and other banking transactions, as well as greater and earlier certainty as to whether these transactions will actually close, than competitors, whose decisions may take longer and be made in distant headquarters.

Historically, the Bank has generated additional income by strategically originating and selling residential and government guaranteed loans to other financial institutions at premiums, while also retaining servicing rights in some sales. However, with the rapid and significant rise in market interest rates in recent years, the appetite among the Bank’s purchasers of residential loans for pools of loans declined, eliminating the Bank’s ability to sell residential loans in its portfolio on desirable terms. In response, the Bank developed a flow origination program under which the Bank originates individual loans for sale to specific buyers, thereby positioning the Bank to resume residential loan sales and generate fee income to complement sale premiums earned from the sale of the guaranteed portion of SBA loans. The Bank is an approved SBA Preferred Lender, enabling the Bank to process SBA applications under delegated authority from the SBA and enhancing the Bank’s ability to compete more effectively for SBA lending opportunities.

The Bank remains focused on expanding its core verticals and continues to originate loans for its portfolio and for sale in the secondary market under its residential flow origination program. The Bank originated $62.2 million in residential loans in the quarter ended June 30, 2025. During the quarters ended June 30, 2025 and 2024, the Company sold $23.7 million and $2.9 million, respectively, of residential loans under its flow origination program and recorded gains on sale of loans held-for-sale of $0.5 million and $0.1 million, respectively.

During the quarters ended June 30, 2025 and 2024, the Company sold approximately $22.3 million and $28.0 million, respectively, in government guaranteed SBA loans and recorded gains on sale of loans held-for-sale of $1.8 million and $2.5 million, respectively. SBA loan originations and gains on sale were lower than expected due to a confluence of factors. One factor is the impact of the “higher-for-longer” interest rate environment that management believes has both worsened the financial condition of and reduced demand among small business borrowers, resulting in a lower volume of creditworthy customers. Another factor is the negative impact of and uncertainty created by tariffs, which we believe have also dampened loan demand among borrowers in certain industries. A third factor is the Bank’s decision to tighten credit standards over the course of the last year. Although management continues to believe this to be a prudent measure, it has nonetheless resulted in a lower volume of loan approvals, causing the Bank to re-evaluate the number and caliber of its business development officers. Taken together these and other factors have adversely impacted SBA loan originations and closings. With the addition of additional business development officers in the second half of 2025, we anticipate higher volumes of eligible loans as we transition into 2026. The Bank concluded the second quarter of 2025 with C&I loan originations of approximately $29.3 million. Based on its existing pipeline, the Bank expects C&I lending and deposit activity to grow as the year progresses.

The Bank finances most of its activities through a combination of deposits, including non-interest-bearing demand, savings, NOW and money market deposits as well as time deposits, and both short- and long-term borrowings. The Company’s chief competition includes local banks within its market area, New York City money center banks and regional banks, as well as non-bank lenders, including fintech lenders.

Financial Performance Summary

As of or for the three and six months ended June 30, 2025 and 2024

(dollars in thousands, except per share data)

(1) Represents net interest income plus total non-interest income.

(2) Includes common stock and Series A preferred stock.

(3) The ratio of total stockholders’ equity to total assets is the most comparable GAAP measure to the non-GAAP tangible common equity ratio presented herein.

(4) Represents non-interest expense divided by the sum of net interest income and non-interest income.

At June 30, 2025 the Company, on a consolidated basis, had total assets of $2.3 billion, total deposits of $2.0 billion and total stockholders’ equity of $198.9 million. The Company recorded net income of $2.4 million, or $0.33 per diluted share (including Series A preferred shares) for the three months ended June 30, 2025 compared to net income of $0.8 million, or $0.11 per diluted share (including Series A preferred shares), for the same period in 2024.

The $1.6 million increase in earnings for the three months ended June 30, 2025, versus the comparable 2024 quarter resulted from a $1.5 million increase in net interest income and a $1.7 million decrease in provision for credit losses. These were partially offset by a $0.9 million increase in non-interest expenses, particularly salaries and employee benefits increase of $0.5 million, and a $0.6 million increase in income tax expense.

The Company’s return on average assets and return on average stockholders’ equity were 0.44% and 4.93%, respectively, for the three months ended June 30, 2025, versus 0.15% and 1.77%, respectively, for the comparable 2024 quarter.

Total non-accrual loans at June 30, 2025 were $12.7 million, or 0.64% of total loans, compared to $16.4 million, or 0.82% of total loans at December 31, 2024 and $15.8 million, or 0.79% of total loans, at June 30,2024. The allowance for credit losses as a percentage of total non-accrual loans amounted to 171%, 139% and 149% at June 30, 2025, December 31, 2024 and June 30, 2024, respectively.

The Company’s operating efficiency ratio was 68.73% for the three months ended June 30, 2025, versus 69.18% in the June 30, 2024 quarter.

Critical Accounting Policies, Judgments and Estimates - To prepare financial statements in conformity with U.S. GAAP, the Company’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Critical accounting estimates are accounting estimates where (a) the nature of the estimate is material due to levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and (b) the impact of the estimate on financial condition or operating performance is material. At June 30, 2025, there have been no material changes to the Company’s critical accounting policies as compared to the critical accounting policies disclosed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2024.

Financial Condition – Total assets of the Company were $2.3 billion at June 30, 2025 and at December 31, 2024. Total securities available for sale at June 30, 2025 were $102.6 million, an increase of $18.9 million from December 31, 2024, primarily driven by growth in collateralized mortgage obligations, collateralized loan obligations and corporate bonds. Total loans at June 30, 2025 and December 31, 2024 were $2.0 billion. Total deposits were $2.0 billion at June 30, 2025 and at December 31, 2024. Total borrowings and subordinated debt at June 30, 2025 and December 31, 2024 were $132.5 million, including $107.8 million of outstanding FHLB advances.

At June 30, 2025, the residential loan portfolio amounted to $738.8 million, or 37.6% of total loans. Commercial real estate loans, including multi-family loans and construction and land development loans, totaled $1.1 billion or 54.8% of total loans at June 30, 2025. Commercial and industrial loans totaled $148.9 million or 7.6% of total loans.

Total deposits were $2.0 billion at June 30, 2025 and at December 31, 2024. Our loan to deposit ratio was 101% at June 30, 2025 and 102% at December 31, 2024. Core deposit balances, which consist of demand, NOW, savings and money market deposits, represented 73.8% and 74.5% of total deposits at June 30, 2025 and December 31, 2024, respectively. At those dates, demand deposit balances represented 12.5% and 10.8% of total deposits. The Company’s municipal deposit program is built on long-standing relationships developed in the local marketplace. This core deposit business will continue to provide a stable source of funding for the Company’s lending products at costs lower than both consumer deposits and market-based borrowings. The Company continues to broaden its municipal deposit base and currently services 40 customer relationships. At June 30, 2025, total municipal deposits were $517.4 million, representing 26.5% of total deposits, compared to $509.3 million at December 31, 2024, representing 26.1% of total deposits. The weighted average rate on the municipal deposit portfolio was 3.67% at June 30, 2025. The aggregate amount of the Company’s outstanding uninsured deposits was $250.6 million or 12.9% of total deposits as of June 30, 2025 and $252.0 million or 12.9% of total deposits as of December 31, 2024.

Borrowings at June 30, 2025 and December 31, 2024 were $107.8 million, comprised of outstanding FHLB advances. The Company had no borrowings outstanding under lines of credit with correspondent banks at June 30, 2025 and December 31, 2024.

Commercial Real Estate Statistics

The Company continues to actively manage its Multi-Family and Commercial Real Estate portfolios which resulted in a reduction in the commercial real estate concentration ratio to 368% of capital at June 30, 2025 from 385% at December 31, 2024. The Company will selectively explore Commercial Real Estate opportunities with an emphasis on relationship based Commercial Real Estate lending.

A significant portion of the Bank’s commercial real estate portfolio consists of loans secured by 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 $8.2 million, all at floating interest rates. As shown below, 31% of the loan balances in these combined portfolios will either have a rate reset or mature in 2025 and 2026, with another 57% with rate resets or maturing in 2027.

CRE Investor Portfolio Fixed Rate Reset/Maturity Schedule

Stabilized Multi-Family Pro Forma Stress Results

The table below reflects a proforma stressed evaluation of the Bank’s multifamily stabilized loan portfolio, using the primary assumption for a revised Debt Service Coverage Ratio (“DSCR”) calculation, for all loans where the current interest rate is below 6%. The current balance for these loans is recast at 6% with a 30-year amortization. The chart below reflects the impact of these adjustments on the portfolio. The projected loan to value (“LTV”) assumption resets all loans using a 6% cap rate and the last reported property net operating income (“NOI”) to determine an implied property valuation and based on the current loan balance the resultant LTV.

Multi-Family Stabilized Rent Portfolio

As reflected above, the results show approximately 3%, or 10 loans totaling $18 million of the total multi-family portfolio would have proforma DSCR’s less than 1x, while maintaining projected weighted average LTV’s under 100%. Additionally, approximately 97% or 89 loans totaling $178 million, would possess DSCR’s greater than 1x while maintaining a projected weighted average LTV well within our policy guidelines. We believe the overall demand for multifamily housing in our market will allow our borrowers to address any adverse impact proactively, as evidenced by the maturities and rate resets in the previous 12 months which have been successfully refinanced with other institutions at market rates similar to those used in the above analysis.

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, 64% of the combined portfolio is secured by properties subject to free market rental terms, which is the dominant tenant type. Both the Market Rent and Stabilized Rent segments of our portfolio present very similar average borrower profiles. The portfolio is primarily located in the New York City boroughs of Brooklyn, the Bronx and Queens.

Multi-Family Loan Portfolio - Loans by Rent Type

Office Property Exposure

The Bank’s exposure to the Office market is minor. Loans secured by office space accounted for 2.48% of the total loan portfolio with a total balance of $48.9 million, of which less than 1% is located in Manhattan. The pool has a 2.48x weighted average DSCR, a 53% weighted average LTV and less than $350,000 of exposure in Manhattan.

Liquidity and Capital Resources – Liquidity management is defined as the ability of the Company and the Bank to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments, such as fed funds sold, the marketability of securities available for sale and interest-bearing deposits due from the Federal Reserve Bank of New York, FHLB and correspondent banks, which totaled $267.2 million and $246.6 million at June 30, 2025 and December 31, 2024, respectively. These liquid assets may include assets that have been pledged primarily against municipal deposits or borrowings. Liquidity is also provided by the maintenance of a base of core deposits, cash and non-interest-bearing deposits due from banks, the ability to sell or pledge marketable assets and access to lines of credit. At June 30, 2025, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $686.5 million or approximately 274% of uninsured deposit balances.

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 Company’s primary sources of funds are cash provided by deposits, which may include brokered and listing service deposits, borrowings, proceeds from maturities and sales of securities and cash provided by operating activities. At June 30, 2025, total deposits were $2.0 billion, of which $502.3 million were time deposits 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. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 87% of total deposits at June 30, 2025. At June 30, 2025 and December 31, 2024, the Company had $107.8 million in borrowings outstanding.

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 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. At June 30, 2025, the Bank had a total borrowing capacity of $814.1 million at the Federal Home Loan Bank of New York, of which $502.7 million was used to collateralize municipal deposits and $107.8 million was utilized for term advances. At June 30, 2025, the Bank had a $111.2 million collateralized line of credit from the Federal Reserve Bank of New York’s discount window with no outstanding borrowings. At June 30, 2025, the Bank had access to approximately $92 million in unsecured lines of credit extended by correspondent banks, if needed, for short-term funding purposes. No borrowings were outstanding under lines of credit with correspondent banks at June 30, 2025.

Our sources of wholesale funding included brokered deposits, listing service certificates of deposit and insured cash sweep (“ICS”) reciprocal deposits in excess of 20% of total liabilities, which balances totaled approximately $125.3 million, $2.4 million and $1.1 million, or 6.4%, 0.1% and 0.1% of total deposits, respectively, at June 30, 2025. We utilized brokered certificates of deposit and listing service certificates of deposit as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our brokered certificates of deposit, we utilized interest rate swap contracts to effectively extend their duration and to fix their cost.

The Company strives to maintain an efficient level of capital, commensurate with its risk profile, on which a competitive rate of return to stockholders will be realized over the short and long terms. Capital is managed to enhance stockholder value while providing flexibility for management to act opportunistically in a changing marketplace. Management continually evaluates the Company’s capital position in light of current and future growth objectives and regulatory guidelines. Total stockholders’ equity was $198.9 million at June 30, 2025 and $196.6 million at December 31, 2024. Retained earnings increased by $2.5 million due primarily to net income of $4.0 million for the six months ended June 30, 2025, which was offset by $1.5 million of dividends declared. The accumulated other comprehensive loss at June 30, 2025 was 0.62% of total equity and was comprised of a $0.7 million after tax net unrealized loss on the investment portfolio and a $0.5 million after tax net unrealized loss on derivatives.

The Bank is subject to regulatory capital requirements. The Bank’s tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 9.29%, 13.16%, 13.16% and 14.41%, respectively, at June 30, 2025, exceeding all regulatory guidelines for a well-capitalized institution, the highest regulatory capital category. Moreover, capital rules also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above the minimum capital requirements. At June 30, 2025, the Bank’s capital buffer was in excess of 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 June 30, 2025.

The Company’s total stockholders’ equity to total assets ratio and tangible common equity to tangible assets ratio (“TCE ratio”) were 8.60% and 7.83%, respectively, at June 30, 2025, versus 8.50% and 7.73%, respectively, at December 31, 2024. The TCE ratio is a non-GAAP ratio. The ratio of total stockholders’ equity to total assets is the most comparable U.S. GAAP measure to this non-GAAP ratio. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing total stockholders’ equity by total assets, after reducing both amounts by intangible assets. The TCE ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of our capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. Set forth below are the reconciliations of tangible common equity to U.S. GAAP total stockholders’ equity and tangible assets to U.S. GAAP total assets at June 30, 2025 (in thousands). (See also Non-GAAP Disclosure contained herein.)

(1) The ratio of total stockholders’ equity to total assets is the most comparable GAAP measure to the non-GAAP tangible common equity ratio presented herein.

(2) TCE ratio

(3) Includes common stock and Series A preferred stock.

All dividends must conform to applicable statutory and regulatory requirements. The Company’s ability to pay dividends to stockholders depends on the Bank’s ability to pay dividends to the Company. Additionally, the ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Under New York law, a bank may pay a dividend on its common stock only out of net profits, and must obtain the approval of the Superintendent of the DFS if the total of all dividends declared by a bank or trust company in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock.

The Company’s Board of Directors approved the declaration of a $0.10 per share cash dividend on both common and Series A preferred shares payable on August 13, 2025 to stockholders of record on August 6, 2025.

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 June 30, 2025 and December 31, 2024, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $151.4 million and $130.3 million, respectively.

Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financings and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At June 30, 2025 and December 31, 2024, letters of credit outstanding were approximately $0.2 million and $0.8 million, respectively.

Results of Operations – Comparison of the Three Months Ended June 30, 2025 and 2024 – The Company recorded net income of $2.4 million during the three months ended June 30, 2025, versus net income of $0.8 million in the comparable 2024 quarter. The $1.6 million increase in earnings for the three months ended June 30, 2025, versus the comparable 2024 quarter resulted from a $1.5 million increase in net interest income and a $1.7 million decrease in provision for credit losses. These were partially offset by a $0.9 million increase in non-interest expenses, particularly salaries and employee benefits increase of $0.5 million, and a $0.6 million increase in income tax expense.

Net Interest Income and Margin

The $1.5 million increase in net interest income for the three months ended June 30, 2025, versus the comparable 2024 quarter was due to improvement of the Company’s net interest margin to 2.76% in the 2025 quarter from 2.46% in the comparable 2024 quarter. The cost of interest-bearing liabilities decreased to 3.94% in the 2025 quarter from 4.48% in the comparable 2024 quarter, a decrease of 54 basis points. This decrease was partially offset by a 24 basis point decrease in the yield on interest earning assets to 5.98% in the 2025 quarter from 6.22% in the second quarter of 2024. Net interest income on a linked quarter basis increased $0.2 million or 1.13%, due to an 8 basis point increase in net interest margin resulting from a 7 basis point decrease in cost of interest-bearing liabilities, partially offset by a 3 basis point decrease on yield on interest earning assets.

The following table, “Net Interest Income Analysis”, presents for the three months ended June 30, 2025 and 2024, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

NET INTEREST INCOME ANALYSIS

For the Three Months Ended June 30, 2025 and 2024

(dollars in thousands)

(1) Annualized.

(2) Includes non-accrual loans.

(3) Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

Provision and Allowance for Credit losses on Loans

The Company recorded a $2.2 million provision for credit losses on loans for the three months ended June 30, 2025, versus $3.9 million (after giving effect to an allowance for credit loss (“ACL”) on an individually evaluated loan of $2.5 million, and a $1.1 million provision resulting from ongoing enhancements to the current expected credit loss (“CECL”) model) in the quarter ended June 30, 2024. Net charge-offs of $3.5 million were incurred during the quarter ended June 30, 2025, of which $2.5 million is attributable to the charge-off of the aforementioned specific reserve established in June 2024 on an individually evaluated commercial loan. The June 30, 2025 allowance for credit losses was $21.6 million versus $22.8 million at December 31, 2024. The allowance for credit losses as a percentage of total loans was 1.10% at June 30, 2025 and 1.15% at December 31, 2024. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)

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 $0.5 million at June 30, 2025 and $0.3 million at December 31, 2024. This reserve is determined based upon the outstanding volume of loan commitments at the end of each period. Any increases or reductions in this reserve are recognized in the provision for credit losses.

Non-interest Income

Non-interest income decreased by $0.1 million for the three months ended June 30, 2025 versus the comparable 2024 quarter. The decrease in non-interest income is primarily related to the decrease in the net gain on sale of loans held for sale which were partially offset by increases in loan servicing and related fee income, and service charges on deposit accounts.

Non-Interest Income

For the three and six months ended June 30, 2025 and 2024

(in thousands)

Non-interest Expense

Total non-interest expense increased by $0.9 million for the three months ended June 30, 2025 versus the comparable 2024 quarter. The increase in non-interest expense was primarily related to increases in salaries and employee benefits as well as professional fees. The increase in salaries and employee benefits expense in the second quarter of 2025 versus the comparable 2024 quarter was primarily related to the staffing of the newly opened Port Jefferson branch and additions to the C&I Banking teams, partially offset by lower incentive compensation expense resulting from reduced lending activity and other expense reduction initiatives.

Non-Interest Expense

For the three and six months ended June 30, 2025 and 2024

(in thousands)

The Company recorded income tax expense of $0.9 million for an effective tax rate of 27.8% for the three months ended June 30, 2025, versus income tax expense of $0.3 million for an effective tax rate of 27.2% in the comparable 2024 quarter. We expect a normalized run rate of 25.0% for the remainder of the year.

Results of Operations – Comparison of the Six Months Ended June 30, 2025 and 2024 – The Company recorded net income of $4.0 million during the six months ended June 30, 2025, versus net income of $4.9 million in the comparable 2024 six month period. The $0.9 million decrease in earnings for the six months ended June 30, 2025, versus the comparable 2024 period resulted from a $6.1 million increase in non-interest expense, particularly a $2.2 million increase in salaries and employee benefits, and the one-time core system conversion expenses of $3.2 million. This was partially offset by a $3.2 million increase in net interest income, together with a $1.4 million decrease in the provision for credit losses, and a $0.5 million decrease in income tax expense.

Net Interest Income and Margin

The $3.2 million increase in net interest income for the six months ended June 30, 2025, versus the comparable 2024 period was due to the improvement of the Company’s net interest margin to 2.72% in the 2025 six month period from 2.43% in the comparable 2024 period. The cost of interest-bearing liabilities decreased to 3.98% in the 2025 six months period from 4.41% in the comparable 2024 period, a decrease of 43 basis points. This decrease was partially offset by a 13 basis point decrease in the yield on interest earning assets to 5.99% in the 2025 period from 6.12% in the comparable 2024 period. The increase in the net interest margin was a result of the late 2024 reductions in the Fed Funds effective rate and the liability sensitive nature of the Bank’s balance sheet.

The following table, “Net Interest Income Analysis”, presents for the six months ended June 30, 2025 and 2024, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.

NET INTEREST INCOME ANALYSIS

For the Six Months Ended June 30, 2025 and 2024

(dollars in thousands)

(1) Annualized.

(2) Includes non-accrual loans.

(3) Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

Provision for Credit Losses on Loans

The Company recorded a $2.8 million provision for credit losses on loans for the six months ended June 30, 2025, versus $4.1 million recorded for the comparable period in 2024. The decrease was related to the matters discussed above under the comparison of results for the three month period. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)

Non-interest Income

Non-interest income increased by $0.1 million for the six months ended June 30, 2025 versus the comparable 2024 period. This increase was driven by a total $0.5 million increase in loan servicing and fee income and service charges on deposit accounts, which were partially offset by a $0.4 million decrease in net gain on sale of loans held for sale.

Non-interest Expense

Total non-interest expense increased by $6.1 million for the six months ended June 30, 2025 versus the comparable 2024 period. The increase in non-interest expense was primarily related to increases of $2.2 million in salaries and employee benefits and the one-time core system conversion expenses of $3.2 million. The increase in salaries and employee benefits expense for the six months ended June 30, 2025 versus the comparable 2024 period was primarily related to additional headcount to staff the new Port Jefferson branch and expansion of the C&I lending vertical and lower deferred loan origination costs partially offset by lower incentive compensation expense resulting from reduced lending activity.

The Company recorded income tax expense of $1.2 million for an effective tax rate of 23.0% for the six months ended June 30, 2025, versus income tax expense of $1.7 million for an effective tax rate of 25.3% in the comparable 2024 period.

Asset Quality - Total non-accrual loans at June 30, 2025 were $12.7 million, or 0.64% of total loans, compared to $16.4 million, or 0.82% of total loans at December 31, 2024, a decrease of $3.7 million. This decrease resulted primarily from the proactive sale of non-performing loans, satisfactions and the charge-off of a specific reserve established in June 2024 on an individually evaluated commercial loan. The allowance for credit losses as a percentage of total non-accrual loans amounted to 171%, 139% and 149% at June 30, 2025, December 31, 2024 and June 30, 2024, respectively.

Total loans having credit risk ratings of Special Mention and Substandard were $43.4 million at June 30, 2025, versus $40.8 million at December 31, 2024. The Company’s Special Mention and Substandard loans were comprised of residential real estate, multi-family, commercial real estate loans, commercial and industrial loans (including SBA facilities) and construction and land development loans at June 30, 2025. The Company had no loans with a credit risk rating of Doubtful for the periods presented. All loans not having credit risk ratings of Special Mention, Substandard or Doubtful are considered pass loans.

At June 30, 2025, the Company’s allowance for credit losses amounted to $21.6 million or 1.10% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 1.15% at December 31, 2024 and 1.17% at June 30, 2024. The Company recorded net loan charge-offs of $3.5 million for the three months ended June 30, 2025, of which $2.5 million is attributable to the aforementioned charge-off of a specific reserve on an individually evaluated commercial loan. Net loan charge-offs of $79 thousand were recorded during the three months ended June 30, 2024.

The Company recorded a $2.2 million provision for credit losses on loans for the three months ended June 30, 2025, versus $3.9 million recorded for the comparable period in 2024. Additional information regarding the ACL and the associated provisions recognized during the quarters ended June 30, 2025 and 2024 is presented in Note 4 to the unaudited consolidated financial statements. (See also Critical Accounting Policies, Judgments and Estimates contained herein).

ASSET QUALITY

June 30, 2025 versus December 31, 2024 and June 30, 2024

(dollars in thousands)

(1) Non-performing assets defined as non-accrual loans, non-accrual loans held for sale, loans greater than 90 days past due and accruing and other real estate owned.

(2) Excludes loans held for sale.

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 June 30, 2025 (dollars in thousands). The results are within the Company’s policy limits.

At June 30, 2025

(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.

Disclosure controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rule l3a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic reports filed with the Securities and Exchange Commission.

Changes in internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the risks disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the Securities and Exchange Commission.