10. 27. 2023
Hanover Bancorp, Inc. Reports Earnings for the Third Calendar Quarter and Fiscal Year 2023 and Declares $0.10 Quarterly Cash Dividend
Third Calendar Quarter and Fiscal Year Performance Highlights
Net Income: Net income for the quarter ended September 30, 2023 totaled $3.5 million or $0.48 per diluted share (including Series A preferred shares). Net income for the quarter ended June 30, 2023 totaled $3.1 million or $0.42 per diluted share (including Series A preferred shares). The Company recorded net income for the fiscal year ended September 30, 2023 of $15.2 million or $2.05 per diluted share, compared to $23.6 million or $3.68 per diluted share in the comparable 2022 fiscal year.
Strong Liquidity Position: At September 30, 2023, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $534.7 million or approximately 204% of uninsured deposit balances.
Deposit Activity: Total deposits increased $141.4 million or 8.9% from June 30, 2023. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 85% of total deposits at September 30, 2023.
Loan Growth: Loans totaled $1.87 billion, a net increase of $51.1 million, or 11.2% annualized, from June 30, 2023, primarily driven by growth in niche-residential, conventional C&I and SBA loans.
Banking Initiatives: At September 30, 2023, the Company’s existing banking initiatives, all of which emphasize both loan and deposit growth, are continuing to gain traction:
SBA & USDA Banking: SBA gains on sale increased by approximately 40% from June 2023, and the Bank was included in the SBA’s list of top lenders by volume for the SBA’s 9/30/23 fiscal year, placing 43rd out of 1,615 banks with Agency authorized volume of $139 million.
C&I Banking: Deposits at the Hauppauge Business Banking Center, the nexus of the Bank’s commercial banking activities, reached $36.1 million, and loans originated by the C&I Banking Team totaled $88.7 million through the fiscal year ended September 30, 2023.
Residential Banking: The Bank achieved $196.0 million in closed loans for the fiscal year ended September 30, 2023. Currently, the Company’s pipeline is approximately $67 million with a weighted average yield of 7.39% before origination and other fees which average 50-100 bps and an average 61% LTV.
Accumulated Other Comprehensive Loss, Net of Tax, was $1.3 million, reflecting the relatively small size of the Company’s investment portfolio and representing approximately 0.71% of total capital at September 30, 2023.
Capital Strength: The Bank’s Tier 1 leverage ratio was 9.16% and its Total Risk-Based capital ratio was 14.60% at September 30, 2023, each significantly above the regulatory minimums (including the capital conservation buffer) for a well-capitalized institution. The Company’s Tangible Common Equity ratio was 7.81% at September 30, 2023, 7.77% at June 30, 2023, and 8.41% at September 30, 2022.
Tangible Book Value Per Share: Tangible book value per share (including Series A preferred shares) increased to $22.73 at September 30, 2023 from $22.26 at June 30, 2023 and $21.00 at September 30, 2022.
Share Repurchase Program: On October 5, 2023, the Company announced that its Board of Directors approved a Share Repurchase Program. Under this program, the Company may purchase up to 366,050 shares, or approximately 5% of its outstanding common stock, in the open market or in private transactions.
Quarterly Cash Dividend: The Company’s Board of Directors approved a $0.10 per share cash dividend on both common and Series A preferred shares payable on November 15, 2023 to stockholders of record on November 8, 2023.
Mineola, NY – October 26, 2023 – Hanover Bancorp, Inc. (“Hanover” or “the Company” – NASDAQ: HNVR), the holding company for Hanover Community Bank (“the Bank”), today reported results for the quarter and fiscal year ended September 30, 2023 and the payment of a $0.10 per share cash dividend on both common and Series A preferred shares payable on November 15, 2023 to stockholders of record on November 8, 2023.
Earnings Summary for the Quarter Ended September 30, 2023
The Company reported net income for the quarter ended September 30, 2023 of $3.5 million or $0.48 per diluted share (including Series A preferred shares), versus $5.8 million or $0.79 per diluted share in the comparable period a year ago and $3.1 million or $0.42 per diluted share for the quarter ended June 30, 2023. Returns on average assets and average stockholders’ equity were 0.66% and 7.58%, respectively, in the quarter ended September 30, 2023, versus 1.39% and 13.45%, respectively, in the comparable quarter of 2022, and 0.60% and 6.82%, respectively, in the quarter ending June 30, 2023.
The decline in net income recorded in the third calendar quarter of 2023 from the comparable 2022 quarter resulted from two primary factors. The first was a decrease in net interest income. The second was an increase in non-interest expense largely due to growth related increases in compensation and benefits, occupancy and equipment and federal deposit insurance premiums, which were partially offset by a decrease in the provision for loan losses and an increase in non-interest income. During the quarter the Company settled ongoing litigation and received a settlement payment of $975 thousand recorded in non-interest income, which added $0.10 per diluted share to earnings per share in the quarter. In addition, the Company’s effective tax rate increased to 24.9% in the third calendar quarter of 2023 from 22.7% in the comparable year ago period due to increased business in other states, related to our SBA and USDA lending program, coupled with lower pre-tax income.
Net interest income was $11.8 million for the quarter ended September 30, 2023, a decrease of $4.6 million, or 28.2% versus the comparable 2022 period due to compression of the Company’s net interest margin to 2.29% in the 2023 quarter from 4.04% in the comparable 2022 quarter. The yield on interest earning assets increased to 5.61% in the 2023 quarter from 4.82% in the comparable 2022 quarter, an increase of 79 basis points, offset by a 294 basis point increase in the cost of interest-bearing liabilities to 3.95% in 2023 from 1.01% in the third calendar quarter of 2022. The continued rise in interest rates driven by the Federal Reserve and, to a lesser extent, the Company’s decision to maintain increased liquidity as a result of recent industry events resulted in the higher cost of funds.
Earnings Summary for the Fiscal Year Ended September 30, 2023
For the fiscal year ended September 30, 2023, the Company reported net income of $15.2 million or $2.05 per diluted share (including Series A preferred shares), versus $23.6 million or $3.68 per diluted share a year ago. The Company recorded adjusted (non-GAAP) net income (excluding merger-related expenses and severance and retirement expenses and the litigation settlement payment) of $14.8 million or $2.00 per diluted share for the fiscal year ended September 30, 2023, versus adjusted (non-GAAP) net income of $23.8 million or $3.71 per diluted share in the comparable 2022 fiscal year. In connection with the Company’s initial public offering in May 2022, average shares outstanding increased to 7,319,040 for the fiscal year ended September 30, 2023 from 6,302,328 in the comparable period of 2022.
The decline in net income recorded for the fiscal year ended September 30, 2023 from the comparable 2022 period resulted primarily from a decrease in net interest income, a decrease in gain on sale of loans due to a lower volume of SBA loan sales and depressed secondary market premiums early in the year, a decrease in purchase accounting accretion and an increase in non-interest expense. The increase in non-interest expense was primarily due to growth related increases in compensation and benefits, occupancy and equipment, data processing, professional fees, federal deposit insurance premiums and other expenses. At the beginning of the year, the FDIC instituted a 2bps increase in the base deposit insurance assessment rate which accounted for approximately 31% of the increase in our deposit insurance premiums year over year.
Net interest income was $54.5 million for the fiscal year ended September 30, 2023, a decrease of $6.8 million, or 11.0% from the comparable 2022 period primarily due to compression of the Company’s net interest margin to 2.85% in the 2023 period from 4.18% in the comparable 2022 period. The year over year decrease in purchase accounting accretion accounted for 20 basis points of the decline in the net interest margin. The yield on interest earning assets increased to 5.49% in the 2023 period from 4.66% in the comparable 2022 period, an increase of 83 basis points that was offset by a 256 basis point increase in the cost of interest-bearing liabilities to 3.18% in 2023 from 0.62% in the comparable 2022 period due to the rapid and significant rise in interest rates.
Michael P. Puorro, Chairman and Chief Executive Officer, commented on the Company’s quarterly results: “We are pleased with our consistent results in the third quarter of 2023 and excited to see increasing returns from our investments in SBA and USDA and C&I Banking. Coupled with our sustained focus on cost management, these new initiatives will enhance earnings and capital growth into the future. Both increasing fee income and cost management have been significant focuses in our efforts to mitigate margin compression, which is impacting the entire financial sector. The Hanover Bank brand continues to grow in our key markets, and we look forward to building on our reputation for creative solutions and unparalleled service.”
Balance Sheet Highlights
Total assets at September 30, 2023 were $2.15 billion versus $1.84 billion at September 30, 2022. Total deposits at September 30, 2023 increased to $1.74 billion compared to $1.53 billion at September 30, 2022. During the quarter ended September 30, 2023, total deposits increased $141.4 million from June 30, 2023. This deposit growth has enabled us to lessen our reliance on higher cost wholesale borrowings while also lowering our loan to deposit ratio from 114% at June 30, 2023 to 108% at September 30, 2023. We are targeting a loan to deposit ratio of less than 100% by the end of the calendar year.
The Company had $313.2 million in total municipal deposits at September 30, 2023, at a weighted average rate of 4.53% versus $416.9 million at a weighted average rate of 1.19% at September 30, 2022. The Company’s municipal deposit program is built on long-standing relationships developed in the local marketplace. This core deposit business will continue to provide a stable source of funding for the Company’s lending products at costs lower than those of consumer deposits and market-based borrowings. The Company continues to broaden its municipal customer deposit base as evidenced by the increase in the number of relationships year over year.
Total borrowings at September 30, 2023 were $179.8 million, including $4.1 million in Federal Reserve Paycheck Protection Program Liquidity Facility advances, with a weighted average rate and term of 4.10% and 24 months, respectively. At September 30, 2023 and 2022, the Company had $126.7 million and $37.8 million, respectively, of term FHLB advances outstanding. The Company added $100.7 million of extended duration FHLB term advances in March 2023 to provide additional liquidity and enhance the interest rate sensitivity profile. The Company had $49.0 million and $55.0 million of FHLB overnight borrowings outstanding at September 30, 2023 and 2022, respectively. The Company utilizes a number of strategies to manage interest rate risk, including interest rate swap agreements which currently provides a benefit to net interest income. During the second quarter of 2023, the Company executed its first pay fixed, receive floating interest rate swap with a notional amount totaling $25.0 million for a four-year term at a fixed rate of 3.89%. During the third quarter of 2023, the Company executed two additional pay fixed, receive floating interest rate swaps with a notional amount totaling $50.0 million for a three-year term at a fixed rate of 4.59%.
Stockholders’ equity increased to $185.9 million at September 30, 2023 from $172.6 million at September 30, 2022, resulting in an increase in tangible book value per share (including Series A preferred shares) to $22.73 at September 30, 2023 from $21.00 at September 30, 2022. This increase was primarily due to net income earned during the fiscal year ended September 30, 2023. The accumulated other comprehensive loss at September 30, 2023 was minimal at 0.71% of total equity and was comprised of a $1.6 million after tax net unrealized loss on the investment portfolio that was partially offset by a $0.3 million after tax net unrealized gain on derivatives.
Loan Portfolio Growth and Allowance for Loan Losses
On a linked quarter basis, the Company exhibited net loan growth of $51.1 million, an 11.2% increase on an annualized basis. For the twelve months ended September 30, 2023, the Bank’s loan portfolio grew to $1.87 billion, for an increase of 15.5%. Year over year growth was concentrated primarily in residential, commercial real estate loans and C&I loans. At September 30, 2023, the Company’s residential loan portfolio (including home equity) amounted to $657.3 million, with an average loan balance of $484 thousand and a weighted average loan-to-value ratio of 57%. Commercial real estate and multifamily loans totaled $1.13 billion at September 30, 2023, with an average loan balance of $1.5 million and a weighted average loan-to-value ratio of 60%. The Company’s commercial real estate concentration ratio was 448% of capital at September 30, 2023 versus 457% of capital at June 30, 2023, with loans secured by office space accounting for 2.5% of the total loan portfolio and totaling $47.1 million. The Company’s loan pipeline at September 30, 2023 is approximately $299 million, with approximately 95% being niche-residential, conventional C&I and SBA and USDA lending opportunities. The Company was included in the SBA’s list of top lenders by volume for their 9/30/23 fiscal year, placing 43rd out of 1,615 banks up from 73rd place in the prior year.
Historically, the Bank has generated additional income by strategically originating and selling residential and government guaranteed loans to other financial institutions at premiums, while also retaining servicing rights in some sales. However, due to the pace of interest rate increases since 2022, the Bank’s secondary market sale activity remains less active, and the Bank continues originating residential loans for its own portfolio. During the quarter ended September 30, 2023, the Company sold $18.4 million in SBA loans and recorded gains on the sale of loans held-for-sale of $1.5 million. The Company recorded gains of $1.2 million on the sale of SBA loans in the quarter ended September 30, 2022. During the fiscal year ended September 30, 2023, the Company sold $51.8 million in SBA loans and recorded gains on the sale of loans held-for-sale of $4.1 million. The Company recorded gains of $5.1 million on the sale primarily of SBA and performing residential loans in the fiscal year ended September 30, 2022.
During the third quarter of the calendar year 2023, the Bank recorded a provision for loan losses expense of $0.5 million. The September 30, 2023, allowance for loan losses balance was $14.7 million versus $12.8 million at September 30, 2022. The allowance for loan losses as a percent of total loans was 0.78% at September 30, 2023 versus 0.79% at September 30, 2022. The allowance for loan losses as a percent of total loans excluding acquired loans (“originated loans”) was 0.88% at September 30, 2023. The cumulative charge-offs of $1.2 million during the quarter were primarily related to one multi-family loan for which the Bank had a specific reserve approximately equal to the charge-off for that loan. At September 30, 2023, non-performing loans totaled $15.1 million of which $8.4 million represented legacy Savoy Bank originated loans that were either written down to fair value at the acquisition date or are 100% guaranteed by the SBA. All loans added to non-performing during the quarter are adequately secured by real estate. Subsequent to September 30, a $1.1 million non-performing residential investor loan paid in full. Non-performing loans were $10.8 million and $13.5 million at June 30, 2023 and September 30, 2022, respectively.
Net Interest Margin
The Bank’s net interest margin was 2.29% during the third calendar quarter of 2023 versus 4.04% in the comparable 2022 quarter. The decrease from the prior year quarter was primarily related to the increase in the total cost of funds, partially offset by the increase in the average yield on loans and to a lesser extent, the Company’s decision to increase liquidity as a result of the recent industry events. The margin compression reflects the effects of the rapid and significant rise in interest rates and the competitive deposit environment. Depending on future Federal Reserve interest rate decisions, we expect the margin to stabilize in the upcoming months.
Fiscal Year Change
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. Accordingly, the Company will report a transition quarter that runs from October 1, 2023 through December 31, 2023 (Stub Period). The Company’s next full fiscal year will be the calendar year January 1, 2024 through December 31, 2024.
About Hanover Community Bank and Hanover Bancorp, Inc.
Hanover Bancorp, Inc. (NASDAQ: HNVR), is a bank holding company for Hanover Community Bank, a community commercial bank focusing on highly personalized and efficient services and products responsive to client needs. Management and the Board of Directors are comprised of a select group of successful local businesspeople who are committed to the success of the Bank by knowing and understanding the metro-New York area’s financial needs and opportunities. Backed by state-of-the-art technology, Hanover offers a full range of financial services. Hanover employs a complete suite of consumer, commercial, and municipal banking products and services, including multi-family and commercial mortgages, residential loans, business loans and lines of credit. Hanover also offers its customers access to 24-hour ATM service with no fees attached, free checking with interest, telephone banking, advanced technologies in mobile and internet banking for our consumer and business customers, safe deposit boxes and much more. The Company’s corporate administrative office is located in Mineola, New York where it also operates a full-service branch office along with additional branch locations in Garden City Park, Hauppauge, Forest Hills, Flushing, Sunset Park, Rockefeller Center and Chinatown, New York, and Freehold, New Jersey.
Hanover Community Bank is a member of the Federal Deposit Insurance Corporation and is an Equal Housing/Equal Opportunity Lender. For further information, call (516) 548-8500 or visit the Bank’s website at www.hanoverbank.com.
Non-GAAP Disclosure
This discussion includes non-GAAP financial measures, including the Company’s adjusted operating earnings, adjusted returns on average assets and shareholders’ equity, and adjusted operating efficiency ratio. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The Company’s management believes that the presentation of non-GAAP financial measures provides both management and investors with a greater understanding of the Company’s operating results and trends in addition to the results measured in accordance with GAAP, and provides greater comparability across time periods. While management uses non-GAAP financial measures in its analysis of the Company’s performance, this information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP or considered to be more important than financial results determined in accordance with U.S. GAAP. The Company’s non-GAAP financial measures may not be comparable to similarly titled measures used by other financial institutions.
With respect to the calculations of adjusted operating net income and adjusted operating efficiency ratio for the periods presented in this discussion, reconciliations to the most comparable U.S. GAAP measures are provided in the tables that follow.
Forward-Looking Statements
This release may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and may be identified by the use of such words as "may," "believe," "expect," "anticipate," "should," "plan," "estimate," "predict," "continue," and "potential" or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Hanover Bancorp, Inc. Any or all of the forward-looking statements in this release and in any other public statements made by Hanover Bancorp, Inc. may turn out to be incorrect. They can be affected by inaccurate assumptions that Hanover Bancorp, Inc. might make or by known or unknown risks and uncertainties, including those discussed in our Annual Report on Form 10-K under Item 1A - Risk Factors, as updated by our subsequent filings with the Securities and Exchange Commission. Further, the adverse effect of the COVID-19 pandemic on the Company, its customers, and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time. Consequently, no forward-looking statement can be guaranteed. Hanover Bancorp, Inc. does not intend to update any of the forward-looking statements after the date of this release or to conform these statements to actual events.
Net Income: Net income for the quarter ended September 30, 2023 totaled $3.5 million or $0.48 per diluted share (including Series A preferred shares). Net income for the quarter ended June 30, 2023 totaled $3.1 million or $0.42 per diluted share (including Series A preferred shares). The Company recorded net income for the fiscal year ended September 30, 2023 of $15.2 million or $2.05 per diluted share, compared to $23.6 million or $3.68 per diluted share in the comparable 2022 fiscal year.
Strong Liquidity Position: At September 30, 2023, undrawn liquidity sources, which include cash and unencumbered securities and secured and unsecured funding capacity, totaled $534.7 million or approximately 204% of uninsured deposit balances.
Deposit Activity: Total deposits increased $141.4 million or 8.9% from June 30, 2023. Insured and collateralized deposits, which include municipal deposits, accounted for approximately 85% of total deposits at September 30, 2023.
Loan Growth: Loans totaled $1.87 billion, a net increase of $51.1 million, or 11.2% annualized, from June 30, 2023, primarily driven by growth in niche-residential, conventional C&I and SBA loans.
Banking Initiatives: At September 30, 2023, the Company’s existing banking initiatives, all of which emphasize both loan and deposit growth, are continuing to gain traction:
SBA & USDA Banking: SBA gains on sale increased by approximately 40% from June 2023, and the Bank was included in the SBA’s list of top lenders by volume for the SBA’s 9/30/23 fiscal year, placing 43rd out of 1,615 banks with Agency authorized volume of $139 million.
C&I Banking: Deposits at the Hauppauge Business Banking Center, the nexus of the Bank’s commercial banking activities, reached $36.1 million, and loans originated by the C&I Banking Team totaled $88.7 million through the fiscal year ended September 30, 2023.
Residential Banking: The Bank achieved $196.0 million in closed loans for the fiscal year ended September 30, 2023. Currently, the Company’s pipeline is approximately $67 million with a weighted average yield of 7.39% before origination and other fees which average 50-100 bps and an average 61% LTV.
Accumulated Other Comprehensive Loss, Net of Tax, was $1.3 million, reflecting the relatively small size of the Company’s investment portfolio and representing approximately 0.71% of total capital at September 30, 2023.
Capital Strength: The Bank’s Tier 1 leverage ratio was 9.16% and its Total Risk-Based capital ratio was 14.60% at September 30, 2023, each significantly above the regulatory minimums (including the capital conservation buffer) for a well-capitalized institution. The Company’s Tangible Common Equity ratio was 7.81% at September 30, 2023, 7.77% at June 30, 2023, and 8.41% at September 30, 2022.
Tangible Book Value Per Share: Tangible book value per share (including Series A preferred shares) increased to $22.73 at September 30, 2023 from $22.26 at June 30, 2023 and $21.00 at September 30, 2022.
Share Repurchase Program: On October 5, 2023, the Company announced that its Board of Directors approved a Share Repurchase Program. Under this program, the Company may purchase up to 366,050 shares, or approximately 5% of its outstanding common stock, in the open market or in private transactions.
Quarterly Cash Dividend: The Company’s Board of Directors approved a $0.10 per share cash dividend on both common and Series A preferred shares payable on November 15, 2023 to stockholders of record on November 8, 2023.
Mineola, NY – October 26, 2023 – Hanover Bancorp, Inc. (“Hanover” or “the Company” – NASDAQ: HNVR), the holding company for Hanover Community Bank (“the Bank”), today reported results for the quarter and fiscal year ended September 30, 2023 and the payment of a $0.10 per share cash dividend on both common and Series A preferred shares payable on November 15, 2023 to stockholders of record on November 8, 2023.
Earnings Summary for the Quarter Ended September 30, 2023
The Company reported net income for the quarter ended September 30, 2023 of $3.5 million or $0.48 per diluted share (including Series A preferred shares), versus $5.8 million or $0.79 per diluted share in the comparable period a year ago and $3.1 million or $0.42 per diluted share for the quarter ended June 30, 2023. Returns on average assets and average stockholders’ equity were 0.66% and 7.58%, respectively, in the quarter ended September 30, 2023, versus 1.39% and 13.45%, respectively, in the comparable quarter of 2022, and 0.60% and 6.82%, respectively, in the quarter ending June 30, 2023.
The decline in net income recorded in the third calendar quarter of 2023 from the comparable 2022 quarter resulted from two primary factors. The first was a decrease in net interest income. The second was an increase in non-interest expense largely due to growth related increases in compensation and benefits, occupancy and equipment and federal deposit insurance premiums, which were partially offset by a decrease in the provision for loan losses and an increase in non-interest income. During the quarter the Company settled ongoing litigation and received a settlement payment of $975 thousand recorded in non-interest income, which added $0.10 per diluted share to earnings per share in the quarter. In addition, the Company’s effective tax rate increased to 24.9% in the third calendar quarter of 2023 from 22.7% in the comparable year ago period due to increased business in other states, related to our SBA and USDA lending program, coupled with lower pre-tax income.
Net interest income was $11.8 million for the quarter ended September 30, 2023, a decrease of $4.6 million, or 28.2% versus the comparable 2022 period due to compression of the Company’s net interest margin to 2.29% in the 2023 quarter from 4.04% in the comparable 2022 quarter. The yield on interest earning assets increased to 5.61% in the 2023 quarter from 4.82% in the comparable 2022 quarter, an increase of 79 basis points, offset by a 294 basis point increase in the cost of interest-bearing liabilities to 3.95% in 2023 from 1.01% in the third calendar quarter of 2022. The continued rise in interest rates driven by the Federal Reserve and, to a lesser extent, the Company’s decision to maintain increased liquidity as a result of recent industry events resulted in the higher cost of funds.
Earnings Summary for the Fiscal Year Ended September 30, 2023
For the fiscal year ended September 30, 2023, the Company reported net income of $15.2 million or $2.05 per diluted share (including Series A preferred shares), versus $23.6 million or $3.68 per diluted share a year ago. The Company recorded adjusted (non-GAAP) net income (excluding merger-related expenses and severance and retirement expenses and the litigation settlement payment) of $14.8 million or $2.00 per diluted share for the fiscal year ended September 30, 2023, versus adjusted (non-GAAP) net income of $23.8 million or $3.71 per diluted share in the comparable 2022 fiscal year. In connection with the Company’s initial public offering in May 2022, average shares outstanding increased to 7,319,040 for the fiscal year ended September 30, 2023 from 6,302,328 in the comparable period of 2022.
The decline in net income recorded for the fiscal year ended September 30, 2023 from the comparable 2022 period resulted primarily from a decrease in net interest income, a decrease in gain on sale of loans due to a lower volume of SBA loan sales and depressed secondary market premiums early in the year, a decrease in purchase accounting accretion and an increase in non-interest expense. The increase in non-interest expense was primarily due to growth related increases in compensation and benefits, occupancy and equipment, data processing, professional fees, federal deposit insurance premiums and other expenses. At the beginning of the year, the FDIC instituted a 2bps increase in the base deposit insurance assessment rate which accounted for approximately 31% of the increase in our deposit insurance premiums year over year.
Net interest income was $54.5 million for the fiscal year ended September 30, 2023, a decrease of $6.8 million, or 11.0% from the comparable 2022 period primarily due to compression of the Company’s net interest margin to 2.85% in the 2023 period from 4.18% in the comparable 2022 period. The year over year decrease in purchase accounting accretion accounted for 20 basis points of the decline in the net interest margin. The yield on interest earning assets increased to 5.49% in the 2023 period from 4.66% in the comparable 2022 period, an increase of 83 basis points that was offset by a 256 basis point increase in the cost of interest-bearing liabilities to 3.18% in 2023 from 0.62% in the comparable 2022 period due to the rapid and significant rise in interest rates.
Michael P. Puorro, Chairman and Chief Executive Officer, commented on the Company’s quarterly results: “We are pleased with our consistent results in the third quarter of 2023 and excited to see increasing returns from our investments in SBA and USDA and C&I Banking. Coupled with our sustained focus on cost management, these new initiatives will enhance earnings and capital growth into the future. Both increasing fee income and cost management have been significant focuses in our efforts to mitigate margin compression, which is impacting the entire financial sector. The Hanover Bank brand continues to grow in our key markets, and we look forward to building on our reputation for creative solutions and unparalleled service.”
Balance Sheet Highlights
Total assets at September 30, 2023 were $2.15 billion versus $1.84 billion at September 30, 2022. Total deposits at September 30, 2023 increased to $1.74 billion compared to $1.53 billion at September 30, 2022. During the quarter ended September 30, 2023, total deposits increased $141.4 million from June 30, 2023. This deposit growth has enabled us to lessen our reliance on higher cost wholesale borrowings while also lowering our loan to deposit ratio from 114% at June 30, 2023 to 108% at September 30, 2023. We are targeting a loan to deposit ratio of less than 100% by the end of the calendar year.
The Company had $313.2 million in total municipal deposits at September 30, 2023, at a weighted average rate of 4.53% versus $416.9 million at a weighted average rate of 1.19% at September 30, 2022. The Company’s municipal deposit program is built on long-standing relationships developed in the local marketplace. This core deposit business will continue to provide a stable source of funding for the Company’s lending products at costs lower than those of consumer deposits and market-based borrowings. The Company continues to broaden its municipal customer deposit base as evidenced by the increase in the number of relationships year over year.
Total borrowings at September 30, 2023 were $179.8 million, including $4.1 million in Federal Reserve Paycheck Protection Program Liquidity Facility advances, with a weighted average rate and term of 4.10% and 24 months, respectively. At September 30, 2023 and 2022, the Company had $126.7 million and $37.8 million, respectively, of term FHLB advances outstanding. The Company added $100.7 million of extended duration FHLB term advances in March 2023 to provide additional liquidity and enhance the interest rate sensitivity profile. The Company had $49.0 million and $55.0 million of FHLB overnight borrowings outstanding at September 30, 2023 and 2022, respectively. The Company utilizes a number of strategies to manage interest rate risk, including interest rate swap agreements which currently provides a benefit to net interest income. During the second quarter of 2023, the Company executed its first pay fixed, receive floating interest rate swap with a notional amount totaling $25.0 million for a four-year term at a fixed rate of 3.89%. During the third quarter of 2023, the Company executed two additional pay fixed, receive floating interest rate swaps with a notional amount totaling $50.0 million for a three-year term at a fixed rate of 4.59%.
Stockholders’ equity increased to $185.9 million at September 30, 2023 from $172.6 million at September 30, 2022, resulting in an increase in tangible book value per share (including Series A preferred shares) to $22.73 at September 30, 2023 from $21.00 at September 30, 2022. This increase was primarily due to net income earned during the fiscal year ended September 30, 2023. The accumulated other comprehensive loss at September 30, 2023 was minimal at 0.71% of total equity and was comprised of a $1.6 million after tax net unrealized loss on the investment portfolio that was partially offset by a $0.3 million after tax net unrealized gain on derivatives.
Loan Portfolio Growth and Allowance for Loan Losses
On a linked quarter basis, the Company exhibited net loan growth of $51.1 million, an 11.2% increase on an annualized basis. For the twelve months ended September 30, 2023, the Bank’s loan portfolio grew to $1.87 billion, for an increase of 15.5%. Year over year growth was concentrated primarily in residential, commercial real estate loans and C&I loans. At September 30, 2023, the Company’s residential loan portfolio (including home equity) amounted to $657.3 million, with an average loan balance of $484 thousand and a weighted average loan-to-value ratio of 57%. Commercial real estate and multifamily loans totaled $1.13 billion at September 30, 2023, with an average loan balance of $1.5 million and a weighted average loan-to-value ratio of 60%. The Company’s commercial real estate concentration ratio was 448% of capital at September 30, 2023 versus 457% of capital at June 30, 2023, with loans secured by office space accounting for 2.5% of the total loan portfolio and totaling $47.1 million. The Company’s loan pipeline at September 30, 2023 is approximately $299 million, with approximately 95% being niche-residential, conventional C&I and SBA and USDA lending opportunities. The Company was included in the SBA’s list of top lenders by volume for their 9/30/23 fiscal year, placing 43rd out of 1,615 banks up from 73rd place in the prior year.
Historically, the Bank has generated additional income by strategically originating and selling residential and government guaranteed loans to other financial institutions at premiums, while also retaining servicing rights in some sales. However, due to the pace of interest rate increases since 2022, the Bank’s secondary market sale activity remains less active, and the Bank continues originating residential loans for its own portfolio. During the quarter ended September 30, 2023, the Company sold $18.4 million in SBA loans and recorded gains on the sale of loans held-for-sale of $1.5 million. The Company recorded gains of $1.2 million on the sale of SBA loans in the quarter ended September 30, 2022. During the fiscal year ended September 30, 2023, the Company sold $51.8 million in SBA loans and recorded gains on the sale of loans held-for-sale of $4.1 million. The Company recorded gains of $5.1 million on the sale primarily of SBA and performing residential loans in the fiscal year ended September 30, 2022.
During the third quarter of the calendar year 2023, the Bank recorded a provision for loan losses expense of $0.5 million. The September 30, 2023, allowance for loan losses balance was $14.7 million versus $12.8 million at September 30, 2022. The allowance for loan losses as a percent of total loans was 0.78% at September 30, 2023 versus 0.79% at September 30, 2022. The allowance for loan losses as a percent of total loans excluding acquired loans (“originated loans”) was 0.88% at September 30, 2023. The cumulative charge-offs of $1.2 million during the quarter were primarily related to one multi-family loan for which the Bank had a specific reserve approximately equal to the charge-off for that loan. At September 30, 2023, non-performing loans totaled $15.1 million of which $8.4 million represented legacy Savoy Bank originated loans that were either written down to fair value at the acquisition date or are 100% guaranteed by the SBA. All loans added to non-performing during the quarter are adequately secured by real estate. Subsequent to September 30, a $1.1 million non-performing residential investor loan paid in full. Non-performing loans were $10.8 million and $13.5 million at June 30, 2023 and September 30, 2022, respectively.
Net Interest Margin
The Bank’s net interest margin was 2.29% during the third calendar quarter of 2023 versus 4.04% in the comparable 2022 quarter. The decrease from the prior year quarter was primarily related to the increase in the total cost of funds, partially offset by the increase in the average yield on loans and to a lesser extent, the Company’s decision to increase liquidity as a result of the recent industry events. The margin compression reflects the effects of the rapid and significant rise in interest rates and the competitive deposit environment. Depending on future Federal Reserve interest rate decisions, we expect the margin to stabilize in the upcoming months.
Fiscal Year Change
In October 2023, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. Accordingly, the Company will report a transition quarter that runs from October 1, 2023 through December 31, 2023 (Stub Period). The Company’s next full fiscal year will be the calendar year January 1, 2024 through December 31, 2024.
About Hanover Community Bank and Hanover Bancorp, Inc.
Hanover Bancorp, Inc. (NASDAQ: HNVR), is a bank holding company for Hanover Community Bank, a community commercial bank focusing on highly personalized and efficient services and products responsive to client needs. Management and the Board of Directors are comprised of a select group of successful local businesspeople who are committed to the success of the Bank by knowing and understanding the metro-New York area’s financial needs and opportunities. Backed by state-of-the-art technology, Hanover offers a full range of financial services. Hanover employs a complete suite of consumer, commercial, and municipal banking products and services, including multi-family and commercial mortgages, residential loans, business loans and lines of credit. Hanover also offers its customers access to 24-hour ATM service with no fees attached, free checking with interest, telephone banking, advanced technologies in mobile and internet banking for our consumer and business customers, safe deposit boxes and much more. The Company’s corporate administrative office is located in Mineola, New York where it also operates a full-service branch office along with additional branch locations in Garden City Park, Hauppauge, Forest Hills, Flushing, Sunset Park, Rockefeller Center and Chinatown, New York, and Freehold, New Jersey.
Hanover Community Bank is a member of the Federal Deposit Insurance Corporation and is an Equal Housing/Equal Opportunity Lender. For further information, call (516) 548-8500 or visit the Bank’s website at www.hanoverbank.com.
Non-GAAP Disclosure
This discussion includes non-GAAP financial measures, including the Company’s adjusted operating earnings, adjusted returns on average assets and shareholders’ equity, and adjusted operating efficiency ratio. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The Company’s management believes that the presentation of non-GAAP financial measures provides both management and investors with a greater understanding of the Company’s operating results and trends in addition to the results measured in accordance with GAAP, and provides greater comparability across time periods. While management uses non-GAAP financial measures in its analysis of the Company’s performance, this information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP or considered to be more important than financial results determined in accordance with U.S. GAAP. The Company’s non-GAAP financial measures may not be comparable to similarly titled measures used by other financial institutions.
With respect to the calculations of adjusted operating net income and adjusted operating efficiency ratio for the periods presented in this discussion, reconciliations to the most comparable U.S. GAAP measures are provided in the tables that follow.
Forward-Looking Statements
This release may contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and may be identified by the use of such words as "may," "believe," "expect," "anticipate," "should," "plan," "estimate," "predict," "continue," and "potential" or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Hanover Bancorp, Inc. Any or all of the forward-looking statements in this release and in any other public statements made by Hanover Bancorp, Inc. may turn out to be incorrect. They can be affected by inaccurate assumptions that Hanover Bancorp, Inc. might make or by known or unknown risks and uncertainties, including those discussed in our Annual Report on Form 10-K under Item 1A - Risk Factors, as updated by our subsequent filings with the Securities and Exchange Commission. Further, the adverse effect of the COVID-19 pandemic on the Company, its customers, and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time. Consequently, no forward-looking statement can be guaranteed. Hanover Bancorp, Inc. does not intend to update any of the forward-looking statements after the date of this release or to conform these statements to actual events.
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