Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021; financial statements are unaudited. Comparisons of operating results are to the three months ended December 31, 2020, while balance-sheet comparisons are generally to September 30, 2021. Hanover is a New York community banking holding company operating through Hanover Community Bank in the New York metropolitan area. The quarter includes Savoy Bank, acquired May 26, 2021, so year-over-year comparisons reflect a larger combined company.
Financial performance and condition
| Metric | Quarter / period-end result | Comparable-period change or context |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $17.6 million | Up 131.8% from $7.6 million |
| Net interest income | $15.3 million | Up $7.9 million; net interest margin was 4.39%, versus 3.53%. Excluding $1.6 million of purchase-accounting accretion and amortization, adjusted margin was 3.90% versus 3.76%. |
| Net income / diluted EPS | $6.5 million / $1.16 | Versus $1.5 million / $0.36 |
| Non-interest income | $2.4 million | Versus $0.3 million; includes $1.5 million of loan-sale gains. |
| Non-interest expense | $8.3 million | Up 47.8% from $5.6 million, primarily reflecting Savoy-related personnel, facilities and activity. |
| Provision for loan losses | $0.9 million | Versus $0.1 million |
| Cash flow | Operating: +$6.5 million; investing: −$24.2 million; financing: −$33.8 million | Cash and cash equivalents decreased $51.6 million to $115.0 million. |
| Assets / loans | Total assets: $1.458 billion; loans held for investment: $1.277 billion | Loans increased $29.8 million from September 30; management reported portfolio growth of $30.3 million net of sales. |
| Deposits / borrowings | Deposits: $1.177 billion; borrowings: $113.3 million | Deposits rose about $12.1 million; borrowings declined $46.4 million from September 30. |
| Equity / capital | Stockholders’ equity: $129.4 million; tangible common equity ratio: 7.63% | Bank capital ratios: 9.92% Tier 1 leverage, 14.44% CET1 and Tier 1 risk-based, and 15.52% total risk-based. Bank remained “well capitalized.” |
Asset quality, funding and other metrics
- Non-accrual loans were $6.1 million, or 0.48% of loans, compared with $7.0 million, or 0.56%, at September 30. The allowance was $9.4 million, equal to 0.73% of loans and 153% of non-accrual loans. Management considered it adequate and said non-accrual loans were well collateralized; no specific reserves were recorded for them.
- Special Mention and Substandard loans totaled $42.4 million, down from $51.9 million at September 30. Management attributed criticized loans in part to the acquired Savoy portfolio, including SBA borrowers whose performance could be affected when government assistance ends.
- Core deposits represented 72.2% of deposits, up from 67.6% at September 30. Municipal deposits were $407.1 million, with an average rate of 0.19%. Time deposits of $243.2 million were scheduled to mature within 12 months.
- Period-end borrowings included $65.3 million of PPP Liquidity Facility funding and $47.9 million of FHLB advances. Hanover also reported approximately $55 million of available unsecured correspondent-bank lines and access to FHLB facilities, subject to existing usage and collateral.
- Return on average assets was 1.80%, return on average common equity was 20.52%, and the operating efficiency ratio was 46.8%, versus 0.71%, 7.62% and 73.4%, respectively, a year earlier.
Material changes and management commentary
- Net income increased approximately $5.0 million year over year. Management cited higher net interest income and non-interest income, partly offset by higher operating expenses and loan-loss provision.
- Average interest-earning assets increased 67.6%, principally due to loans. Management also cited a lower average cost of interest-bearing liabilities (0.48% versus 1.26%), improved deposit mix and lower average funding costs. Savoy purchase-accounting accretion and amortization contributed $1.6 million to net interest income.
- Loan sales were approximately $35.2 million, with $1.5 million of net gains, versus approximately $8.4 million of sales and $181,000 of gains in the prior-year quarter. The filing says Hanover received SBA Preferred Lender Program approval in December 2021, enabling delegated processing of SBA applications.
- Management said it continued to approach loan growth cautiously amid COVID-19 uncertainty, while expecting to originate loans both for its portfolio and for sale. The filing provides no quantified earnings, growth or margin guidance.
- On January 25, 2022, after quarter-end, the board approved Hanover’s first cash dividend: $0.10 per common share, payable February 15 to shareholders of record February 8. No cash dividend was declared during the reported quarter.
Risks, contingencies and unusual items
- Management identified COVID-19 and its variants, economic conditions, borrower repayment capacity, interest-rate and monetary-policy changes, competition, regulation, technology and cybersecurity among the risks that could affect results. It cautioned that actual results may differ from forward-looking statements.
- Merger benefits, cost savings and operational efficiencies may take longer than expected or may not be fully realized; client or partner attrition and integration challenges are also identified risks.
- The $17.5 million of goodwill recorded in the Savoy acquisition is not tax deductible. Acquisition-related purchase accounting materially affected reported net interest income.
- Loan-loss estimates are a critical accounting judgment; future provisions or charge-offs may be needed, and regulatory review could result in required allowance changes. Hanover expected to adopt CECL on October 1, 2023 and said adoption could materially affect its financial statements.
- Off-balance-sheet commitments to originate loans and under unused lines of credit were approximately $72 million; outstanding letters of credit were approximately $786,000. Management said it knew of no legal matters expected to have a material adverse effect.
- Interest-rate sensitivity analysis showed estimated economic value of equity declining 18.4% under a +400-basis-point scenario; estimated 12-month net interest income declined 0.6% in that scenario. Management said results were within policy limits.
Important facts for investors to verify
- How much of the year-over-year earnings and margin improvement is sustainable after Savoy purchase-accounting accretion and the effects of acquisition-driven balance-sheet growth?
- Whether deposit growth, particularly municipal deposits, remains stable and what funding costs and deposit retention look like as time deposits mature and interest rates change.
- Trends in criticized, delinquent and non-accrual loans—especially acquired SBA credits—and whether the allowance remains adequate as government support and forbearance programs unwind.
- Whether the loan-sale channel and SBA Preferred Lender Program deliver recurring fee and gain income, and whether reported loan growth is achieved without weakening underwriting or liquidity.
- Integration progress, realization of Savoy-related synergies, and any changes to capital, liquidity or credit risks; also verify the subsequent dividend payment and ongoing regulatory capacity to upstream dividends.