Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2023; comparative income and cash-flow periods ended June 30, 2022. Balance-sheet comparisons are to September 30, 2022. The filing was signed August 11, 2023.
Business context and financial performance
Hanover is the holding company for Hanover Community Bank, a community bank serving the New York metro area and parts of New Jersey. It provides consumer and commercial lending and deposit services. The bank opened a Hauppauge business banking center in May 2023 and expanded its SBA/USDA and commercial-and-industrial teams.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net interest income | $13.5 million, versus $14.8 million in 2022 | $42.7 million, versus $44.8 million |
| Net income | $3.1 million, versus $5.3 million | $11.6 million, versus $17.7 million |
| Diluted EPS | $0.42, versus $0.80 | $1.57, versus $2.92 |
| Net interest margin | 2.68%, versus 4.05% | 3.05%, versus 4.23% |
| Return on average assets | 0.60%, versus 1.41% | 0.81%, versus 1.61% |
Quarterly revenue, defined by management as net interest income plus non-interest income, was $15.5 million versus $16.6 million. Nine-month revenue was $47.8 million versus $51.7 million. Non-interest expense was $10.6 million for the quarter and $29.4 million for nine months, up from $8.7 million and $26.4 million, respectively. The quarterly efficiency ratio was 68.3%, compared with 52.4% a year earlier. The filing does not provide a clear quarterly or nine-month operating cash-flow margin measure.
For the nine months, operating cash flow was $15.5 million versus $17.3 million; investing cash use was $209.8 million versus $159.4 million; and financing cash provided was $255.8 million versus $109.6 million. Cash and cash equivalents ended June at $211.5 million.
Financial position, liquidity and capital
- At June 30, total assets were $2.12 billion; loans held for investment, net, were $1.81 billion; deposits were $1.59 billion; and stockholders’ equity was $182.8 million. Compared with September 30, 2022, loans increased from $1.62 billion and deposits from $1.53 billion.
- Borrowings were $293.8 million, versus $101.8 million at September 30, 2022; subordinated debentures were an additional $24.6 million. FHLB advances totaled $289.7 million, including $160 million of overnight borrowing at 5.31%. The company said it added $100.7 million of term FHLB advances in March to support liquidity and its interest-rate profile.
- Core deposits were 71.4% of deposits, down from 77.8% at September 2022. Municipal deposits were $346.4 million, or 21.7% of deposits, versus $416.9 million, or 27.3%; their weighted-average rate was 3.79%. Time deposits of $389.4 million were scheduled to mature within 12 months.
- Management reported $485.8 million in liquidity sources, approximately 165% of uninsured deposits. Available funding included FHLB and correspondent-bank capacity; $92 million of correspondent-bank lines was undrawn. Management stated the Bank was well capitalized. Its June 30 total risk-based capital ratio was 14.24%, and Tier 1 leverage ratio was 9.16%.
Material changes and asset quality
Quarterly net income fell by $2.2 million year over year, primarily because net interest income declined $1.3 million and non-interest expense increased $1.8 million. For nine months, net income fell by $6.1 million, reflecting lower net interest income and non-interest income, higher expenses and loan-loss provision, and reduced Savoy acquisition-related purchase-accounting accretion.
Interest income rose, but funding costs increased faster: quarterly yield on interest-earning assets was 5.65% versus 4.45%, while the cost of interest-bearing liabilities rose to 3.52% from 0.50%. Nine-month figures were 5.44% versus 4.60% and 2.90% versus 0.47%, respectively. Management attributed margin pressure to rapid rate increases and competition for deposits.
- Loans grew to $1.82 billion from $1.62 billion at September 2022. Commercial real estate, including multifamily and construction loans, represented 62.0% of loans; residential real estate represented 34.3%.
- Non-accrual loans were $10.6 million, or 0.58% of loans, down from $12.3 million and 0.76% at September 2022. The allowance for loan losses was $15.4 million, or 0.84% of loans, versus $12.8 million and 0.79% at September 2022. Nine-month provision was $2.9 million, versus $2.4 million.
- Loans past due 30 days or more, excluding purchased credit-impaired loans, were $17.0 million, compared with $2.9 million at September 2022. Special Mention and Substandard loans totaled $25.9 million, down from $32.6 million. The company reported $1.7 million of performing troubled debt restructurings, all residential real estate.
- Gains on loan sales were $1.1 million for the quarter and $2.6 million for nine months, compared with $0.8 million and $3.9 million in 2022. Nine-month loan sales declined to $33.4 million from $60.9 million.
Outlook, risks and unusual items
- Management anticipated growth in SBA/USDA and commercial-and-industrial originations and deposit production in the second half of 2023. It forecast an effective tax rate of 24.5%–25.5% for the remainder of the year. The filing provides no specific earnings or revenue guidance.
- Management cited inflation, rising rates, potential recession, borrower repayment risk, deposit competition and uncertainty following bank failures as risks. It also warned that deposit outflows, funding costs, market confidence, higher FDIC assessments, regulation and capital requirements could adversely affect the company. Interest-rate sensitivity models showed estimated 12-month net interest income down 29.7% under a +400-basis-point scenario; management cautioned that model assumptions limit predictive value.
- The company adopted lease accounting on October 1, 2022, recognizing approximately $10 million of operating lease assets and liabilities. It issued $2.963 million of Series A preferred stock in exchange for common shares; the preferred stock has no voting rights and shares in common-stock dividends when declared.
- The company entered its first cash-flow hedge in June 2023: $25 million of interest-rate swaps tied to brokered certificates of deposit. Management estimated $0.3 million would be reclassified as a decrease in interest expense over the next 12 months.
- CECL adoption was scheduled for October 1, 2023. The company was developing and validating its model and said it could not yet determine the size of any opening retained-earnings adjustment or the overall financial impact.
- The board approved a $0.10-per-share cash dividend on common and Series A preferred shares, payable August 16, 2023. Management reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors beyond the banking-industry risks described in the filing.
Most important facts for investors to verify
- Deposit stability and repricing: core and municipal deposit trends, time-deposit maturities, deposit costs, and reliance on FHLB and other wholesale funding.
- Whether asset yields can outpace funding costs and stabilize net interest margin; assess the stated rate-sensitivity scenarios alongside their modeling limitations.
- Credit quality in the commercial real estate and multifamily portfolio, the rise in delinquent accruing loans, and the adequacy of the pre-CECL allowance.
- The eventual CECL transition impact, including any cumulative adjustment to retained earnings.
- Progress and economics of the planned second-half SBA/USDA and commercial lending expansion, including loan-sale volumes and fee income.
- Capital and dividend capacity, including the Bank’s regulatory capital position and the terms and treatment of Series A preferred stock.