Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. The filing compares the quarter and six-month period with the same 2021 periods; the balance sheet is compared with September 30, 2021. Amounts below are in U.S. dollars unless stated otherwise.
Business context and financial performance
Hanover is a New York metro-area community bank focused on commercial and consumer lending and deposit services. The May 2021 acquisition of Savoy Bank expanded its commercial and SBA lending operations; accordingly, 2022 results include Savoy while the prior-year comparison generally does not.
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Net interest income | $14.7 million, versus $7.8 million | $30.0 million, versus $15.1 million |
| Net interest margin | 4.26%, versus 3.79% | 4.32%, versus 3.66% |
| Non-interest income | $2.7 million, versus $0.7 million | $5.0 million, versus $1.0 million |
| Net income | $5.9 million, versus $2.1 million | $12.4 million, versus $3.6 million |
| Diluted earnings per share | $1.00, versus $0.48 | $2.15, versus $0.84 |
| Operating efficiency ratio | 54.1%, versus 69.4% | 50.4%, versus 71.3% |
Quarterly return on average assets was 1.63% and return on average common equity was 17.83%; both improved from the prior-year quarter. The quarterly effective tax rate was 22.5%, compared with 20.0%.
Balance sheet, liquidity and credit
- At March 31, 2022, total assets were $1.477 billion, loans held for investment were $1.289 billion gross ($1.279 billion net), deposits were $1.230 billion, and stockholders’ equity was $134.8 million.
- Gross loans rose $41.9 million from September 30, 2021. Multi-family and commercial real estate loans increased, while commercial and industrial balances declined, in part as PPP loans were forgiven or repaid. PPP loans outstanding fell to $37.8 million from $140.4 million.
- Cash and cash equivalents were $127.1 million, down from $166.5 million. For the six months, operating cash flow was $9.7 million, investing cash outflow was $31.1 million, and financing cash outflow was $18.1 million.
- Deposits increased to $1.230 billion from $1.165 billion; lower-cost core deposits represented 76.7% of deposits, versus 67.6%. Municipal deposits were $405.0 million.
- Borrowings were $75.8 million, including $37.9 million of Federal Reserve PPP Liquidity Facility funding; subordinated debentures were an additional $24.5 million. FHLB advances were $37.9 million. The Bank also had approximately $165.9 million of additional FHLB borrowing capacity and $55 million of unused correspondent-bank lines.
- The allowance for loan losses was $9.9 million, or 0.77% of loans. Non-accrual loans were $10.5 million, or 0.81% of loans, up from $7.0 million and 0.56% at September 30, 2021. Management said these loans were well collateralized and had no specific reserves.
- The Bank’s capital ratios exceeded well-capitalized regulatory thresholds: total risk-based capital 15.85%, CET1 14.76%, and Tier 1 leverage 10.06%. The company-wide tangible common equity ratio was 7.90% (a non-GAAP measure).
Material changes, outlook and risks
Quarterly net income increased $3.8 million year over year, principally from a $6.9 million rise in net interest income and a $2.0 million rise in non-interest income. Six-month net income increased $8.8 million, reflecting $14.9 million more net interest income and $4.1 million more non-interest income. Growth in average earning assets and lower funding costs supported margin expansion. Savoy purchase-accounting accretion contributed $1.3 million to quarterly net interest income; excluding it, the quarter’s adjusted margin was 3.86%, versus 3.80% a year earlier.
Loan-sale gains were a significant source of non-interest income: the company recognized $1.6 million in the quarter and $3.1 million for six months, compared with $0.3 million and $0.5 million, respectively, in 2021. Higher salaries, benefits and other operating costs, largely associated with Savoy-related staffing, facilities and increased scale, partly offset revenue growth. Management expects continued loan originations for portfolio and sale, but the filing provides no specific earnings or growth guidance.
Management considered the allowance adequate but noted that future provisions or charge-offs may be needed and estimates could change. It highlighted uncertainty related to economic conditions, interest rates, COVID-19 and borrower repayment capacity. Criticized loans (Special Mention or Substandard) were $36.0 million, down from $51.9 million at September 30, 2021; management attributed many to the acquired Savoy portfolio and noted uncertainty about borrower performance after government assistance ends. Interest-rate modeling showed a +400 basis-point scenario reducing projected 12-month net interest income by 0.7% and economic value of equity by 29.8%.
After quarter-end, Hanover completed an IPO on May 10, 2022, selling 1.275 million shares at $21 each for estimated net proceeds of $24.0 million, before any overallotment exercise. The company declared its first cash dividend, $0.10 per share, payable in February 2022. Management reported no material legal proceedings and no changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- How much of the year-over-year earnings and balance-sheet growth reflects Savoy, purchase-accounting accretion, and loan-sale gains rather than recurring organic performance.
- Whether the higher non-accrual loan balance, criticized acquired loans and allowance remain manageable as borrower assistance programs end.
- How deposit pricing, municipal-deposit concentration, deposit maturities and borrowing needs evolve as interest rates change.
- The assumptions and potential consequences behind the disclosed rate-sensitivity analysis, particularly the modeled EVE decline under rising rates.
- The final IPO proceeds, any overallotment shares issued, and the effect of the share issuance on per-share results and capital.