Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; filed May 12, 2023. The quarter is not the calendar quarter ending June 30. Figures below are consolidated; dollar amounts are in millions unless stated otherwise.
Business context and financial position
Hanover is a community-oriented bank serving the New York metro area and parts of New Jersey. It planned to open a Hauppauge business banking center in May 2023 as part of efforts to expand commercial and industrial (C&I) lending and diversify funding and loans.
- At March 31, 2023, assets were $2,071.7, loans held for investment were $1,787.4 gross ($1,772.5 net of allowance), deposits were $1,707.3, and stockholders’ equity was $180.5.
- Since September 30, 2022, loans grew $163.8 net of sales, deposits increased $179.2, and total assets rose $231.7.
- Loan mix remained concentrated in real estate: commercial real estate, including multifamily and construction, represented 63.2% of loans; residential real estate was 33.4%; commercial loans were 3.3%.
Results and key metrics
| Metric | Three months ended March 31, 2023 | Prior-year quarter | Six months ended March 31, 2023 | Prior-year period |
|---|---|---|---|---|
| Revenue (net interest income plus non-interest income) | $15.7 | $17.4 | $32.4 | $35.1 |
| Net interest income | $13.9 | $14.7 | $29.2 | $30.0 |
| Provision for loan losses | $0.9 | $0.5 | $2.4 | $1.4 |
| Non-interest income | $1.8 | $2.7 | $3.2 | $5.0 |
| Non-interest expense | $10.6 | $9.4 | $18.8 | $17.6 |
| Net income | $3.2 | $5.9 | $8.5 | $12.4 |
| Diluted EPS | $0.43 | $1.00 | $1.15 | $2.15 |
| Net interest margin | 3.04% | 4.26% | 3.26% | 4.32% |
- Quarterly net interest margin excluding Savoy acquisition purchase-accounting adjustments was 2.97%, versus 3.86% a year earlier; six-month adjusted margin was 3.20%, versus 3.90%.
- Quarterly return on average assets was 0.68% versus 1.63%; return on average equity was 7.24% versus 17.83%. The operating efficiency ratio increased to 67.4% from 54.1%.
- For the six months, operating cash flow was $7.5 versus $9.7 in the prior-year period; investing cash outflow was $166.3 versus $31.1; financing cash inflow was $213.2 versus a $18.1 outflow. Cash and cash equivalents ended at $204.4, up from $149.9 at September 30, 2022.
- At March 31, borrowings were $137.0 and subordinated debentures were $24.6. FHLB advances were $131.0, including $100.7 of extended-duration term advances added in March. The company reported $65 of unused unsecured correspondent-bank lines and access to $933.3 of FHLB lines, subject to stated collateral and letter-of-credit commitments.
Changes, outlook, risks and unusual items
- Earnings declined as deposit and borrowing costs rose faster than asset yields. Quarterly cost of interest-bearing liabilities rose to 2.94% from 0.44%; the yield on interest-earning assets increased to 5.47% from 4.60%. Management cited rapid rate increases and deposit competition.
- Lower loan-sale gains reduced non-interest income: loans sold were $12.8 in the quarter versus $16.2, with gains of $1.0 versus $1.6. Management attributed weaker SBA guaranteed-loan sale premiums and delayed closings to market conditions and borrower considerations.
- Quarterly expense increased $1.2 year over year, primarily from occupancy, professional fees and other expenses, including legal/consulting costs and regulatory assessments. Staffing for SBA/USDA and C&I teams, severance, and accelerated restricted-stock expense for a retiring executive were also discussed.
- The allowance for loan losses was $14.9, or 0.83% of loans, versus $12.8 (0.79%) at September 30, 2022. Non-accrual loans were $10.3, or 0.58% of loans, down from $12.3 (0.76%). The allowance covered 144% of non-accrual loans. Management considered the allowance adequate but noted future provisions or charge-offs may be required.
- Liquidity sources totaled $602.2, which management said equaled approximately 216% of uninsured deposits. The company reported a low level of uninsured deposits but warned that unexpected withdrawals could increase reliance on more costly secondary funding, constrain growth or require asset sales. It also noted the March 2023 failures of Silicon Valley Bank and Signature Bank and their potential effects on confidence, funding costs, regulation and markets.
- Bank regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 13.93%, Tier 1 risk-based 12.88%, common equity Tier 1 12.88%, and Tier 1 leverage 9.79%. Management stated the Bank remained well capitalized.
- Interest-rate models estimated that an immediate +400-basis-point shock would reduce economic value of equity by 52.4% and 12-month net interest income by 19.2%. The filing cautions that model assumptions and the unusual rate environment limit predictive value.
- Management expected reduced year-over-year secondary-market premiums for government-guaranteed loan sales and aimed to grow C&I, SBA and USDA lending. No quantified earnings or margin guidance was provided. A $0.10-per-share dividend on common and Series A preferred shares was approved, payable May 17, 2023.
- Two acquired Savoy Bank purchased credit-impaired loans were charged off; the filing reports $457,000 of charge-offs for the six-month period. The company exchanged 150,000 common shares for Series A preferred stock; the preferred shares have no voting rights and participate in dividends on the same per-share basis as common shares.
- The company planned to adopt CECL on October 1, 2023. It had not determined the amount of any transition adjustment or the overall effect on results or financial condition. Management reported no legal proceedings expected to materially affect the company and no material changes to previously disclosed risk factors other than banking-industry risks.
Important facts for investors to verify
- Deposit composition and stability, including uninsured, municipal and time deposits, upcoming maturities, and the continuing availability and cost of contingent funding.
- Whether margin pressure and deposit repricing continue, and whether the March FHLB advances improve liquidity without unduly increasing funding costs.
- Loan growth, real-estate concentration, criticized and delinquent loans, charge-offs, and the adequacy of the allowance as CECL adoption approaches.
- Future SBA and other loan-sale volumes, premiums and closing delays, together with progress in diversifying into C&I lending.
- Actual performance relative to the interest-rate sensitivity models and capital/liquidity effects of further rate, regulatory or banking-sector changes.