Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. The interim financial statements are unaudited. Unless otherwise noted, dollar amounts are in millions.
Business context and financial performance
Hanover is a New York-based bank holding company serving the New York metropolitan area and parts of New Jersey. Its lending includes residential and commercial real estate, multifamily, commercial and industrial, and SBA loans. Comparisons of balance-sheet amounts are to September 30, 2021; income-statement comparisons are to the corresponding 2021 periods.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $16.6 in 2022; $11.1 in 2021 | $51.7 in 2022; $27.2 in 2021 |
| Net interest income | $14.8; $10.4 | $44.8; $25.6 |
| Net income | $5.3; $0.2 | $17.7; $3.8 |
| Diluted earnings per share | $0.80; $0.05 | $2.92; $0.85 |
| Net interest margin | 4.05%; 3.74% | 4.23%; 3.69% |
| Non-interest expense | $8.7; $10.7 | $26.4; $22.0 |
| Provision for loan losses | $1.0; none | $2.4; $0.3 |
At June 30, 2022, total assets were $1,609.8, net loans $1,404.9, deposits $1,349.5, cash and cash equivalents $134.0, and stockholders’ equity $167.4. Total loans held for investment before allowance were $1,415.8, up from $1,247.1 at September 30, 2021. The allowance for loan losses was $10.9, or 0.77% of loans.
Cash provided by operating activities was $17.2 for the nine months; investing activities used $159.4, chiefly reflecting loan growth, and financing activities provided $109.6. Cash and cash equivalents declined $32.6 during the period.
Material changes and notable events
- Third-quarter net income rose to $5.3 from $0.2, reflecting higher net interest income and non-interest income and lower expenses. The lower expenses chiefly reflected the prior-year Savoy acquisition costs. For the nine-month comparison, expense increased $4.3, primarily due to higher staffing and operating costs after the acquisition, partly offset by lower acquisition costs.
- Net interest income increased with growth in earning assets and a lower cost of interest-bearing liabilities; management cited improved deposit mix. Average interest-bearing liability cost was 0.50% in the quarter versus 0.70% a year earlier.
- Non-interest income benefited from loan sales: gains were $0.8 in the quarter and $3.9 year to date. Year-to-date loan-sale gains increased from $0.7 in 2021; loan servicing and fee income also rose.
- Hanover completed its IPO on May 10, 2022, selling 1,466,250 shares at $21 per share. Net proceeds were $27.7. The company declared a $0.10-per-share dividend payable in June.
- Deposits increased to $1,349.5 from $1,164.7; core deposits were 77.9% of deposits. Municipal deposits totaled $444.6 across 20 clients. Borrowings declined to $57.0 from $159.6, primarily as Paycheck Protection Program Liquidity Facility borrowings fell with PPP loan forgiveness and repayments. Subordinated debentures were $24.6.
Credit, liquidity, capital, outlook and risks
- Non-accrual loans increased to $12.5, or 0.88% of loans, from $7.0, or 0.56%, at September 30, 2021. Management said these loans were well collateralized and had no specific reserves. The allowance covered 87% of non-accrual loans. Special Mention and Substandard loans totaled $32.6, down from $51.9; management noted acquired Savoy SBA exposures and uncertainty around borrower performance after government support ends.
- Management considered the allowance adequate but warned future provisions or charge-offs may be required as economic conditions, loan performance, collateral values, or other factors change. It identifies the allowance estimate as a critical accounting judgment.
- Liquidity included $134.0 of cash and cash equivalents. The Bank had access to approximately $183.3 of additional FHLB borrowing capacity, as well as $55 of unsecured correspondent-bank lines; $0.25 was drawn on those lines. Management noted $175.6 of time deposits were scheduled to mature within 12 months and expected to replace a substantial portion based on historical experience.
- The Bank was classified as well capitalized. Its June 30 ratios included a 11.64% Tier 1 leverage ratio, 16.27% common equity Tier 1 ratio and 17.32% total risk-based capital ratio. The company reported a 9.29% tangible common equity ratio, a non-GAAP measure.
- Interest-rate sensitivity estimates show that a 400-basis-point rate increase would reduce economic value of equity by 28.0%, while estimated 12-month net interest income would increase 2.1%. Management said modeled results were within policy limits.
- The filing provides no specific earnings or growth guidance. Management described cautious consideration of loan-portfolio expansion as the local economy recovered and expected continued loan originations both for portfolio and sale.
- Risks include interest-rate and economic changes, credit quality, deposit competition and funding availability, COVID-19 effects, regulation, and operational, technology and cybersecurity risks. Management stated that there were no material changes to previously disclosed risk factors and no legal proceedings expected to materially affect results or financial condition.
- Hanover planned to adopt lease accounting guidance on October 1, 2022 and did not expect a material impact. CECL adoption was scheduled for October 1, 2023; the company said adoption may materially affect its financial statements.
Important facts for investors to verify
- Whether loan growth and higher net interest income can continue as funding costs respond to rising rates and deposit mix changes.
- Trends in non-accrual loans, criticized loans, charge-offs, and allowance adequacy, particularly across commercial real estate, multifamily and acquired SBA exposures.
- Stability and concentration of municipal deposits, upcoming time-deposit maturities, and access to wholesale funding and liquidity.
- How much earnings depend on loan-sale gains, purchase-accounting accretion and expense reductions related to the prior-year acquisition.
- Actual sensitivity to interest-rate movements versus modeled results, and the effects of CECL adoption and the new lease standard.