Hanover Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2021; financial statements are unaudited. The six-month comparison is for the six months ended March 31, 2021 versus March 31, 2020. Hanover is a New York community bank serving the New York metropolitan area, with lending concentrated in residential real estate and growing commercial real estate and commercial and industrial lending.
Key financial results
| Metric | Three months ended March 31, 2021 | Six months ended March 31, 2021 |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $8.5 million, up 22.1% year over year | $16.1 million, up 12.0% |
| Net interest income | $7.8 million, versus $6.5 million | $15.1 million, versus $13.3 million |
| Net income | $2.1 million, versus $249,000; diluted EPS $0.48 | $3.6 million, versus $2.0 million; diluted EPS $0.84 |
| Net interest margin | 3.79%, versus 3.06% | 3.66%, versus 3.16% |
| Provision for loan losses | $200,000, versus $1.0 million | $300,000, versus $1.0 million |
| Non-interest expense | $5.7 million, up 1.7% | $11.3 million, up 4.9% |
Quarterly return on average assets was 0.97% and return on average common equity was 10.28%. The efficiency ratio improved to 69.4% from 81.0%. Six-month operating cash flow was $2.5 million, compared with cash used of $582,000 in the prior-year period; investing activities used $39.4 million, largely reflecting loan growth, and financing activities provided $34.3 million.
Financial position and liquidity
- At March 31, 2021, total assets were $890.4 million, up from $851.6 million at September 30, 2020. Loans were $763.6 million, up $38.6 million, and deposits were $718.2 million, up $53.4 million.
- Cash and cash equivalents were $77.5 million. Core deposits (demand, NOW, savings and money market) reached $413.0 million, or 57.5% of deposits, compared with $270.0 million, or 40.6%, at September 30, 2020. Time deposits totaled $305.2 million; $263.9 million were scheduled to mature within 12 months.
- FHLB advances were $56.4 million. The company also had $24.5 million of subordinated debentures, making total borrowings and subordinated debt $80.9 million. It repaid $16.2 million of Federal Reserve PPP Liquidity Facility borrowings in January and used part of the October 2020 $25 million subordinated-note proceeds to repay a $15 million holding-company note.
- Management reported approximately $154 million of additional FHLB borrowing eligibility and $55 million of available unsecured correspondent-bank lines. Bank regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 22.49%, common equity tier 1 21.23%, and leverage 12.00%.
- No cash dividends were declared in the six-month period. Commitments to originate loans and unused lines of credit were approximately $34 million; letters of credit were approximately $107,000.
Changes, outlook, and risks
- Improved earnings reflected lower deposit and borrowing costs, wider net interest margin, and a lower loan-loss provision. Lower loan yields partly offset these gains. Quarterly non-interest income included a $240,000 gain on securities sales; six-month gains on loan sales fell to $476,000 from $902,000.
- Credit quality indicators weakened: non-accrual loans rose to $9.35 million, or 1.22% of loans, from $953,000, or 0.13%, at September 30, 2020. Management attributed the increase to credits previously granted forbearance and said the loans were well secured. The allowance was $8.2 million, or 1.07% of loans and 87% of non-accrual loans; no specific reserves were allocated to impaired loans. Special Mention and Substandard loans totaled $16.9 million, versus $8.2 million at September 30, 2020.
- COVID-19 remained a material uncertainty for borrowers, the local economy, credit losses and goodwill estimates. Of 393 modified loans totaling $220.4 million, 36 loans totaling $22.8 million remained in forbearance at quarter-end. PPP loans outstanding were $33.5 million.
- Management said local economic conditions showed signs of improvement but it continued to approach loan-portfolio expansion cautiously. The filing provides no formal quantified earnings or financial guidance. Management considered the allowance adequate but acknowledged future provisions or charge-offs may be required.
- Subsequent event: Savoy was acquired on May 26, 2021 in a stock-and-cash transaction valued at approximately $65.5 million. Hanover issued 1,357,567 shares. Management identified integration, cost savings, customer and employee retention, SBA lending integration and non-recurring integration costs as risks; timing and amount of those costs were not specified.
- Other disclosed risks include the concentration in New York-area residential and commercial real estate, interest-rate and deposit competition, growth-related operating costs, regulatory constraints on bank dividends, and cybersecurity and third-party service-provider risks. Management reported no legal matters it believed would materially affect the financial statements, and concluded disclosure controls were effective.
Investor facts to verify
- How non-accrual loans, forbearance exits, criticized loan ratings and collateral values evolve, and whether the allowance remains adequate.
- Post-quarter Savoy integration progress, total merger-related costs, realized synergies, SBA portfolio performance and the effect of 1.36 million newly issued shares on per-share results.
- Deposit retention and pricing, the refinancing of the $263.9 million of time deposits maturing within 12 months, and access to the stated contingent funding sources.
- The subordinated notes’ 5.00% coupon through October 2025, future floating-rate terms, and the parent company’s capacity to service debt if bank dividends are constrained.
- The filing marks “No” for having filed all required reports during the preceding 12 months; verify the company’s reporting history and the reason for that response.