Hanover Bancorp, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. This is an annual report, not a quarterly filing. Hanover is a New York community bank holding company serving the New York metropolitan area.
Business context
Hanover completed its acquisition of Savoy Bank on May 26, 2021, adding approximately $650 million in assets and expanding its commercial, C&I and SBA lending businesses. The acquisition materially affected year-over-year comparisons. At year-end, Hanover reported $1.48 billion in assets, $1.25 billion in loans, $1.16 billion in deposits and $122.5 million in stockholders’ equity.
Key financial metrics
| Metric | FY2021 / September 30, 2021 | FY2020 / September 30, 2020 |
|---|---|---|
| Net income | $10.9 million | $5.0 million |
| Diluted earnings per share | $2.28 | $1.18 |
| Net interest income | $41.7 million | $27.1 million |
| Net interest margin | 3.97% | 3.29% |
| Provision for loan losses | $1.0 million | $1.25 million |
| Non-interest income | $3.35 million | $1.36 million |
| Non-interest expense | $30.0 million | $21.0 million |
| Cash provided by operating activities | $13.2 million | $0.6 million |
| Cash and cash equivalents | $166.5 million | $80.2 million |
| Total deposits | $1.165 billion | $664.8 million |
| Loans held for investment | $1.247 billion | $725.0 million |
| Allowance for loan losses | $8.55 million | $7.87 million |
| Borrowings and subordinated debt | $184.2 million combined | $100.1 million in borrowings; no subordinated notes outstanding |
Reported net income rose 118%, primarily reflecting Savoy-related asset growth and lower deposit and borrowing costs. Net interest income increased 53.8%; average interest-bearing liability cost declined to 0.81% from 1.87%. The average yield on interest-earning assets decreased to 4.63% from 4.87%. FY2021 non-interest expense included $4.43 million of acquisition costs.
Cash flow and liquidity: Investing activities provided $89.9 million, including cash acquired in the Savoy transaction; financing activities used $16.7 million. The company reported $432.7 million of available FHLB borrowing capacity and $55.0 million of available correspondent-bank lines at year-end. Municipal deposits were $350.5 million, or about 30% of deposits, and management identified these as a lower-cost funding source.
Capital and credit: The Bank was classified as well-capitalized. Its total risk-based capital ratio was 15.59%, CET1 ratio 14.54%, and leverage ratio 9.45%. Nonaccrual loans increased to $7.03 million from $0.95 million; net charge-offs were $0.32 million. The allowance was 0.69% of loans, down from 1.09%, partly reflecting acquired loans recorded at fair value without an acquisition-date allowance.
Material changes versus the prior year
- Total assets increased about 74%, loans about 72%, and deposits about 75%, with Savoy the principal driver.
- Commercial real estate loans rose to $348.6 million from $113.6 million; C&I loans rose to $172.3 million from $21.1 million. Hanover disclosed that CRE loans were 263% of risk-based capital, up from 119%, and warned of possible heightened regulatory scrutiny.
- Stockholders’ equity increased to $122.5 million from $78.0 million, largely reflecting 1.36 million shares issued as Savoy consideration. Goodwill rose to $19.2 million from $1.9 million.
- Subordinated notes of $25 million were issued in October 2020, bearing 5.00% interest through October 2025 and then floating at three-month SOFR plus 487.4 basis points.
Outlook, risks and unusual items
The filing provides no quantified earnings, growth or margin guidance. Management describes continued growth through commercial lending, SBA lending, municipal deposits and potential acquisitions. Hanover was not yet an SBA Preferred Lender and said it intended to apply; approval was not assured.
- COVID-19 remained a significant uncertainty. Of $220.4 million in modified loans, $19.5 million remained in forbearance at year-end; certain loans were downgraded or placed on nonaccrual. Hanover had originated about $366.1 million of PPP loans, of which $225.4 million had received forgiveness.
- Credit and collateral risks include concentration in New York-area real estate, non-owner-occupied residential mortgages, CRE, and SBA exposure to hotels/motels. About 82% of real estate loans were secured in New York City’s five boroughs and Nassau County.
- Other risks include interest-rate and funding-cost changes, reliance on municipal deposits, acquisition integration and valuation, SBA program changes, competition, regulatory compliance, cybersecurity and third-party service disruptions.
- Hanover stated it did not anticipate cash dividends in the foreseeable future. Its common stock had no established public trading market at the filing date.
- 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 was not engaged to attest to internal-control effectiveness.
Important facts for investors to verify
- The selected financial data appears to mislabel or transpose return ratios: it reports ROE of 0.99% and ROA of 11.53%, which do not align with the reported income and average balance figures. Verify against the original financial statements.
- The narrative reports nonperforming assets of $9.5 million, or 0.64% of assets, while the asset-quality table reports $7.03 million and 0.47%. Reconcile the discrepancy; the table lists no OREO.
- Assess post-acquisition loan performance and the adequacy of reserves, particularly given higher nonaccrual loans and an allowance ratio reduced by growth and acquired loans.
- Review CRE concentration, municipal-deposit stability, available borrowing capacity and debt maturities, including the $25 million subordinated notes.
- Track Savoy integration costs and benefits, SBA Preferred Lender application status, PPP forgiveness and remaining pandemic-related forbearances.