Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2022 (the company’s fiscal first quarter; filed February 13, 2023). Unless noted otherwise, figures are unaudited and dollars are in millions.
Business context and financial performance
Hanover is a one-bank holding company operating Hanover Community Bank in the New York metropolitan area and New Jersey. It provides commercial and personal lending and deposit services, with a substantial real estate lending portfolio.
| Metric | Quarter ended Dec. 31, 2022 | Comparable 2021 quarter |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $16.675 | $17.644 |
| Net interest income | $15.264 | $15.269 |
| Net income | $5.338 | $6.537 |
| Diluted earnings per share | $0.72 | $1.16 |
| Provision for loan losses | $1.500 | $0.900 |
| Non-interest expense | $8.271 | $8.264 |
| Net interest margin | 3.49% | 4.39% |
| Return on average assets / equity | 1.18% / 12.04% | 1.80% / 20.52% |
Net income fell about 18% year over year. Management attributed the decline primarily to lower non-interest income, higher loan-loss provision, and reduced purchase-accounting accretion. The effective tax rate was 22.7%, compared with 22.9%.
Balance sheet, liquidity and capital
- At December 31, 2022, total assets were $1,983.7, loans held for investment were $1,746.8 gross ($1,732.4 net), deposits were $1,517.7, and stockholders’ equity was $177.6.
- Since September 30, loans grew $123.3 net of sales, while deposits declined $10.5. Borrowings rose to $238.3 from $101.8; subordinated debentures were an additional $24.6. Cash and cash equivalents were $152.3.
- Quarterly cash flows were $6.1 provided by operations, $129.4 used in investing, and $125.6 provided by financing; cash increased $2.4.
- Core deposits were 74.4% of deposits, down from 77.8%. Municipal deposits were $383.6, or 25.3% of deposits. The bank had $210.3 of time deposits scheduled to mature within 12 months.
- FHLB advances totaled $224.8, including $187.0 overnight borrowings at 4.61%. The company reported $199.1 of additional FHLB borrowing capacity based on collateral and FHLB stock, plus approximately $60 of available correspondent-bank lines in the borrowings note.
- The bank’s total risk-based capital ratio was 15.30%, CET1 ratio 14.17%, and tier 1 leverage ratio 10.34%; management said the bank remained well capitalized. The company’s total equity-to-assets ratio was 8.95% and its non-GAAP tangible common equity ratio was 8.05%.
Material changes and asset quality
- Interest income increased, but funding costs rose sharply: the cost of interest-bearing liabilities increased to 2.08% from 0.48%, while the yield on interest-earning assets rose to 5.17% from 4.77%. The reported margin contracted; excluding acquisition-related purchase-accounting adjustments, adjusted margin was 3.43% versus 3.90%.
- Non-interest income declined to $1.411 from $2.375, mainly because loan-sale gains fell to $0.578 from $1.492. Loan sales were approximately $8.1 versus $35.2. Management cited lower SBA premiums and borrower-related closing delays.
- Gross loans increased to $1,746.8 from $1,623.5. Commercial real estate, multifamily, and construction/land-development loans together represented about 64.3% of total loans.
- The allowance for loan losses rose to $14.4, or 0.82% of loans, from $12.8, or 0.79%. Non-accrual loans were $10.6 (0.61% of loans), down from $12.3 (0.76%) at September 30 but up from $6.1 a year earlier. Nonperforming assets were $11.8, or 0.59% of assets.
- Loans rated Special Mention or Substandard totaled $25.6, down from $32.6 at September 30; management said these were mainly associated with the acquired Savoy portfolio. Troubled debt restructurings were $1.8. The quarter had no loan charge-offs and $0.060 in recoveries.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management said it expects continued loan originations for both portfolio growth and sale, including SBA lending; results remain subject to forward-looking risks.
- Key stated risks include interest-rate and inflation changes, economic deterioration, credit quality and borrower repayment, deposit competition and funding costs, competition, regulatory or accounting changes, and disruption from pandemics or other events. Management considers the allowance adequate but notes future additions or charge-offs may be necessary.
- Interest-rate sensitivity modeling showed estimated 12-month net interest income declining 25.9% under a +400-basis-point shock and increasing 5.8% under a -100-basis-point shock. The filing says results were within company policy limits.
- The company adopted lease accounting on October 1, 2022, adding approximately $10 of operating lease assets and liabilities. It expected to adopt CECL on October 1, 2023 and was evaluating the impact.
- During the quarter, 150,000 Series A preferred shares were issued in exchange for common shares. The preferred shares have no voting rights and participate in dividends on the same per-share basis as common stock. A $0.10-per-share dividend was declared for payment in February 2023.
- Management reported no legal proceedings expected to materially affect results or financial condition, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether higher deposit and wholesale funding costs continue to outpace asset-yield gains and pressure net interest margin.
- Loan growth, real estate concentration, criticized and non-accrual loans, and the adequacy of the allowance as the portfolio expands.
- Deposit stability and concentration, including municipal deposits and upcoming time-deposit maturities, as well as reliance on FHLB and other borrowings.
- Whether SBA loan-sale volumes and premiums recover, given their effect on non-interest income.
- The eventual CECL adoption impact and the assumptions behind interest-rate sensitivity and liquidity disclosures.