Hanover Bancorp, Inc. — Q1 2024 Form 10-Q
Business context and reporting period. Hanover Bancorp is a bank holding company whose principal subsidiary, Hanover Community Bank, serves the New York metropolitan area and parts of New Jersey. The unaudited quarter ended March 31, 2024 is compared with Q1 2023 for results and with December 31, 2023 for balance-sheet changes. The company changed its fiscal year-end to December 31; 2024 is its first calendar-year fiscal year.
Key financial results
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior date |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $16.5 million | $15.7 million in Q1 2023 |
| Net interest income | $12.9 million | $13.9 million in Q1 2023 |
| Net interest margin | 2.41% | 3.04% in Q1 2023 |
| Provision for credit losses | $0.3 million | $0.9 million in Q1 2023 |
| Non-interest income | $3.6 million | $1.8 million in Q1 2023 |
| Non-interest expense | $10.8 million | $10.6 million in Q1 2023 |
| Net income / diluted EPS | $4.1 million / $0.55 | $3.2 million / $0.43 in Q1 2023 |
| Return on average assets / equity | 0.74% / 8.70% | 0.68% / 7.24% in Q1 2023 |
| Assets / loans / deposits | $2.31 billion / $2.01 billion / $1.92 billion | Assets $2.27 billion / loans $1.96 billion / deposits $1.90 billion at Dec. 31, 2023 |
| Cash and cash equivalents | $136.5 million | $177.2 million at Dec. 31, 2023 |
| Operating cash flow | $3.6 million | $1.4 million in Q1 2023 |
| Stockholders’ equity | $189.5 million; 8.21% of assets | $184.8 million at Dec. 31, 2023 |
Material changes and balance-sheet detail
- Net income rose about $0.9 million year over year. Higher non-interest income and a lower credit-loss provision more than offset weaker net interest income, higher taxes and modestly higher operating expense.
- Interest income increased to $32.4 million from $25.1 million, but interest expense rose more sharply, to $19.5 million from $11.1 million. Asset yield increased to 6.03% from 5.47%, while the cost of interest-bearing liabilities rose to 4.33% from 2.94%.
- Loan-sale gains increased to $2.5 million from $1.0 million; the company sold approximately $26.7 million of loans, primarily government-guaranteed SBA loans, compared with $12.8 million a year earlier. Management attributed the higher gains to stronger secondary-market premiums for SBA loans.
- Loans grew $48.3 million net of sales during the quarter. Residential real estate represented 37.7% of loans; commercial real estate, multifamily and construction loans together represented 56.1%. The commercial real estate concentration ratio declined to 416% of capital from 432% at year-end.
- Deposits increased $12.7 million, or 0.7%. Core deposits were 75.8% of deposits, up from 72.6%. Municipal deposits rose to $576.3 million, or 30.1% of deposits, which management said partly reflected seasonal variation. The loan-to-deposit ratio was 105%, compared with 103% at year-end.
- Borrowings were $149.0 million, up from $129.0 million at year-end; this included $20.0 million drawn on correspondent-bank lines. Borrowings plus subordinated debt totaled $173.6 million. The company reported $118.0 million of additional FHLB borrowing capacity and approximately $72 million of available unsecured correspondent lines.
- Reported liquidity sources, including cash, unencumbered securities and secured and unsecured funding capacity, totaled $644.1 million, about 265% of uninsured deposits. Approximately 87% of deposits were insured or collateralized. Time deposits of $437.0 million were scheduled to mature within 12 months.
- The Bank’s total risk-based capital ratio was 14.19%, common equity tier 1 ratio 12.99%, and tier 1 leverage ratio 8.90%. The Bank was categorized as well capitalized; the holding company is not subject to consolidated regulatory capital requirements under the stated policy.
Credit quality, outlook and risks
- Nonaccrual loans were $14.9 million, or 0.74% of loans, versus $14.5 million, or 0.74%, at year-end and $10.3 million, or 0.58%, a year earlier. Nonperforming assets were $17.9 million, or 0.78% of assets, including $3.0 million of loans over 90 days past due that were still accruing.
- The allowance for credit losses was $19.9 million, or 0.99% of loans, versus $19.7 million, or 1.00%, at year-end. Net loan charge-offs were $85,000 in Q1 2024. Special Mention and Substandard loans totaled $42.8 million, compared with $42.4 million at year-end; there were no Doubtful-rated loans.
- Management said residential loan applications were slower than usual in Q1 and that it continued to prioritize loan pricing over volume. It expects application volume to build during the year and plans to develop a flow-origination program for residential loans sold to specific buyers. The filing provides no quantitative earnings or margin guidance.
- Management identified interest-rate and funding-cost pressure as significant factors: the rapid rise in rates increased deposit and borrowing costs, compressing net interest margin. In the company’s modeled +400-basis-point scenario, estimated economic value of equity declined 38.2% and 12-month net interest income declined 21.4%; management cautioned that these models have limitations and are not precise forecasts.
- Other stated risks include economic and real-estate-market deterioration, concentration in the New York metropolitan area, competition, deposit and loan demand changes, regulatory or policy changes, technology costs and cybersecurity incidents. Management noted that office-secured loans were 2.3% of the loan portfolio ($46.0 million), with less than $0.4 million of Manhattan office exposure.
- The company adopted CECL on October 1, 2023. Adoption produced a one-time $4.0 million reduction to retained earnings before tax effects ($3.2 million net of tax), primarily from an additional loan allowance. Q1 2024 and prior-year credit-loss figures therefore reflect different accounting methodologies.
- Subsequent to quarter-end, the company agreed on April 25, 2024 to exchange up to 125,000 shares of a large shareholder’s voting common stock for newly issued nonvoting Series A preferred shares. Shareholders had approved a proposed change of incorporation from New York to Maryland, subject to regulatory approval.
- The company declared a $0.10-per-share dividend payable May 15, 2024. It reported no repurchases under its authorization for up to 366,050 shares. It also reported no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse impact.
Important facts for investors to verify
- Whether margin and funding costs stabilize, particularly as time deposits mature and the loan-to-deposit ratio remains above 100%.
- Whether the planned residential loan flow-origination program produces the anticipated volume, sale gains and servicing income.
- Trends in nonaccrual, past-due and risk-rated loans, especially commercial real estate, and the adequacy of the CECL allowance and its assumptions.
- The composition, stability and cost of municipal, brokered and other wholesale funding, alongside liquidity availability and uninsured-deposit exposure.
- Regulatory approval and terms of the Maryland incorporation change and the post-quarter common-to-preferred share exchange.