Hanover Bancorp, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022, compared with fiscal 2021. This filing reports annual results, not standalone fourth-quarter results. Hanover is the holding company for Hanover Community Bank, serving the New York metropolitan area and New Jersey.
Financial performance and condition
| Metric | FY2022 / Sept. 30, 2022 | FY2021 / Sept. 30, 2021 |
|---|---|---|
| Net income | $23.6 million; diluted EPS $3.68 | $10.9 million; diluted EPS $2.28 |
| Net interest income | $61.3 million | $41.7 million |
| Net interest margin | 4.18% | 3.97% |
| Return on average assets / equity | 1.55% / 16.14% | 0.99% / 11.53% |
| Total assets | $1.84 billion | $1.48 billion |
| Loans held for investment | $1.62 billion | $1.25 billion |
| Total deposits | $1.53 billion | $1.16 billion |
| Stockholders’ equity | $172.6 million | $122.5 million |
- Net interest income increased 46.9%, principally from growth in average interest-earning assets, including the Savoy acquisition and organic lending. Net interest margin rose 21 basis points.
- Non-interest income rose to $8.9 million from $3.3 million, mainly reflecting higher gains on loan sales, including a full year of SBA loan-sale activity. Non-interest expense increased to $35.2 million from $30.0 million, primarily from compensation and staffing growth.
- Provision for loan losses was $4.5 million, versus $1.0 million; net charge-offs were $0.2 million. The allowance was $12.8 million, or 0.79% of loans held for investment.
- Operating cash flow was $25.0 million, compared with $13.2 million. Investing activities used $374.1 million, largely reflecting a $454.5 million net increase in loans; financing activities provided $332.5 million. Cash and cash equivalents ended at $149.9 million, down from $166.5 million.
- Deposits were the primary funding source. Borrowings on the balance sheet were $101.8 million, alongside $24.6 million of subordinated debentures. The Bank had $55.0 million of overnight and $37.8 million of term FHLB advances outstanding, plus $65 million of available correspondent-bank lines. Bank regulatory capital ratios exceeded applicable minimums; the Bank was classified as well capitalized.
Material changes and business developments
- Loans grew $376.4 million year over year. Multifamily loans increased $308.1 million, approximately 116%; commercial real estate and residential mortgage loans also grew. C&I loans fell to $45.8 million from $172.3 million, in part as PPP balances ran off.
- Deposits increased $363.4 million. Management said it allowed higher-cost consumer deposits to run off and emphasized lower-cost municipal deposits. Municipal deposits totaled $416.9 million, or 27.3% of deposits, at an average rate of 1.19%.
- Hanover completed its IPO in May 2022, raising approximately $27.7 million net of costs. Total equity increased by $50.1 million, also reflecting annual earnings. The common stock began Nasdaq trading under HNVR in May 2022.
- Unrealized losses on investment securities totaled $1.1 million at September 30, 2022; management attributed them primarily to interest-rate movements, not credit deterioration, and reported no other-than-temporary impairment.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management planned to expand government-guaranteed lending geographically, including through a Southeast-based team expected to begin originating loans in 2023, and expected to open a Hauppauge, New York branch in early 2023.
- Key exposures include concentration in the New York metro area and real estate lending: about 96% of loans were secured by real estate, and 78% of the real estate portfolio was located in New York City’s five boroughs and Nassau County. CRE loans were 453% of risk-based capital at September 30, 2022; the filing notes heightened supervisory attention may apply to CRE concentrations.
- Nonperforming assets rose to $13.5 million, or 0.73% of assets, from $9.5 million, or 0.64%. Nonaccrual loans increased to $12.3 million; management attributed the increase in part to acquired Savoy loans that deteriorated after acquisition.
- Other disclosed risks include rising interest rates and deposit competition, reliance on municipal funding and loan-sale counterparties, SBA program and guarantee risks, acquisition integration, local real estate values, and cybersecurity and third-party service-provider risks. The company expected to adopt CECL on October 1, 2023; its effect was still being evaluated.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls because Hanover was an emerging growth company.
Important facts for investors to verify
- Whether loan growth and higher net interest margin persist as rates, funding costs and deposit competition change.
- Credit performance in multifamily and other CRE portfolios, including nonaccrual trends, collateral values, and the significance of the 453% CRE-to-capital measure.
- Municipal deposit stability and concentration, including the maturity and renewal profile of deposits and uninsured time deposits ($87.9 million above the FDIC insurance limit).
- Sustainability of SBA and mortgage loan-sale income, servicing-right valuations, and Hanover’s reliance on a limited set of loan purchasers.
- The eventual CECL adoption effect, and execution, costs and returns from planned geographic expansion and the Hauppauge branch.