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Hanover Bancorp, Inc. /NY 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

Hanover Bancorp, Inc.

Filing date:

03/14/2025

TLDR:

ELI5:

Hanover Bancorp, a local bank, made less money this year compared to last year. This is because they earned less from lending and had higher costs. They’re trying new things like selling loans and banking for cannabis businesses, which could help them grow but also come with risks.

Accession #:

0001558370-25-003018

Published on

Analyst Summary

  • Net income decreased from $15.2 million to $12.3 million due to a lower net interest margin, increased provision for credit losses, and higher non-interest expenses.
  • Net Interest Margin (NIM) decreased from 2.85% to 2.44%, indicating compression of profitability from lending activities.
  • Non-interest income increased significantly due to gains on loan sales, while non-interest expense increased primarily due to increased staffing.
  • The company is actively managing its loan portfolio by originating SBA and residential loans for sale to manage liquidity and capital.
  • Expansion into cannabis banking is underway, presenting both opportunities and potential regulatory compliance costs.
  • Key ratios such as ROAE (6.45%) and ROAA (0.55%) decreased, suggesting weakening profitability.
  • The efficiency ratio increased to 74.4%, indicating higher operating costs relative to revenue.
  • Allowance for credit losses increased to 1.15%, reflecting increased perceived credit risk in the loan portfolio.
  • Municipal deposits represent a significant portion (26.1%) of total deposits, which could be vulnerable to economic downturns.
  • Commercial real estate loan portfolio represents 385% of risk-based capital, requiring heightened risk management practices.

Opportunities and Risks

  • Opportunity: Strategic shift towards originating loans for sale can generate fee income and manage balance sheet growth.
  • Opportunity: Expansion into cannabis banking could provide a new revenue stream, although with associated risks.
  • Opportunity: The opening of the Port Jefferson branch presents an opportunity to expand the bank’s presence in Suffolk County.
  • Risk: Declining NIM suggests vulnerability to interest rate fluctuations and rising deposit costs.
  • Risk: Increasing provision for credit losses indicates heightened concern about loan defaults.
  • Risk: Expansion into cannabis banking exposes the bank to potential regulatory scrutiny and compliance costs.
  • Risk: High competition in the financial services industry may impact loan and deposit growth.
  • Risk: Increasing sophistication of cyber threats poses a risk to the bank’s operations and data security.

Potential Implications

Company Performance

  • Continued pressure on net interest margin could further erode profitability.
  • Success of loan sales strategy will be crucial for maintaining liquidity and capital levels.
  • Effective management of credit risk is essential to mitigate potential loan losses.
  • Regulatory compliance costs associated with cannabis banking could impact earnings.
  • Operational efficiency improvements are needed to control non-interest expenses.

Stock Price

  • Decreasing profitability metrics (ROAE, ROAA) could negatively impact investor sentiment.
  • Successful execution of growth strategies (loan sales, cannabis banking) could drive positive stock price movement.
  • Concerns about credit quality and interest rate risk could create downward pressure on the stock price.
  • Overall market conditions and investor confidence in the banking sector will also influence stock performance.

Hanover Bancorp, Inc. (HNVR) – 10-K Filing Analysis – Fiscal Year Ended December 31, 2024

Executive Summary

This report analyzes Hanover Bancorp, Inc.’s 10-K filing for the fiscal year ended December 31, 2024. Key findings include a decrease in net income compared to the previous fiscal year, driven by a lower net interest margin and increased expenses. While the bank maintains a “well-capitalized” status, the declining net interest margin and increasing credit loss provisions warrant close monitoring. The company’s strategic shift towards loan originations for sale, particularly in SBA and residential mortgages, and expansion into cannabis banking present both opportunities and risks. Overall, a cautious approach is recommended, suggesting a “hold” rating. Further investigation into the sustainability of deposit costs and the performance of new lending initiatives is advised.

Company Overview

Hanover Bancorp, Inc. is a community-oriented commercial bank serving the New York metro area and Monmouth County, New Jersey. The bank focuses on personalized service and responsiveness to local needs. Recent developments include regulatory approval for a new branch in Port Jefferson, NY (expected to open in early 2025), and expansion into banking services for the legal cannabis industry. The company has grown through organic growth and acquisitions, including Chinatown Federal Savings Bank and Savoy Bank.

Detailed Analysis

Financial Statement Analysis

Key Ratios and Trends

Ratio 2024 2023 Trend Interpretation
Return on Average Equity (ROAE) 6.45% 8.40% Decreasing Lower profitability; needs investigation.
Return on Average Assets (ROAA) 0.55% 0.77% Decreasing Less efficient asset utilization.
Net Interest Margin (NIM) 2.44% 2.85% Decreasing Compression of profitability from lending activities. A key area of concern.
Efficiency Ratio (Calculated: Non-Interest Expense / Total Revenue) 74.4% 69.3% Increasing Higher operating costs relative to revenue.
Allowance for Credit Losses / Total Loans 1.15% 0.78% Increasing Reflects increased perceived credit risk in the loan portfolio.
Non-Performing Assets / Total Assets 0.71% 0.70% Slight Increase Relatively stable, but needs monitoring.

Trend Analysis: The decreasing ROAE and ROAA, coupled with a declining NIM, suggest weakening profitability. The increasing efficiency ratio indicates rising operating expenses. The increasing allowance for credit losses reflects a more cautious approach to potential loan defaults.

Balance Sheet Highlights

  • Total Assets: Increased from $2.15 billion to $2.31 billion, indicating growth.
  • Total Loans: Increased from $1.87 billion to $1.99 billion, showing continued lending activity.
  • Total Deposits: Increased from $1.74 billion to $1.95 billion, reflecting deposit growth.
  • Stockholders’ Equity: Increased from $185.9 million to $196.6 million, indicating improved capital position.

Income Statement Highlights

  • Net Interest Income: Decreased slightly from $54.5 million to $53.1 million.
  • Non-Interest Income: Increased significantly from $8.8 million to $15.3 million, driven by gains on loan sales.
  • Non-Interest Expense: Increased from $39.7 million to $47.1 million, primarily due to increased staffing.
  • Net Income: Decreased from $15.2 million to $12.3 million.

Management’s Discussion and Analysis (MD&A) Insights

  • Management attributes the decrease in net income to a decrease in net interest income, an increase in the provision for credit losses, and an increase in non-interest expense.
  • The company is actively managing its loan portfolio, focusing on originating SBA and residential loans for sale to manage liquidity and capital.
  • Expansion into cannabis banking is noted, presenting both opportunities and potential regulatory compliance costs.

Risk and Opportunity Assessment

Risks

  • Interest Rate Risk: The declining NIM suggests vulnerability to interest rate fluctuations. Rising deposit costs are compressing margins.
  • Credit Risk: The increasing provision for credit losses indicates heightened concern about loan defaults. The concentration in New York metro area real estate makes the bank susceptible to local economic downturns.
  • Regulatory Risk: Expansion into cannabis banking exposes the bank to potential regulatory scrutiny and compliance costs.
  • Competition: The financial services industry is highly competitive, potentially impacting loan and deposit growth.
  • Cybersecurity: The increasing sophistication of cyber threats poses a risk to the bank’s operations and data security.

Opportunities

  • Loan Sales: The strategic shift towards originating loans for sale can generate fee income and manage balance sheet growth.
  • Cannabis Banking: Expansion into this niche market could provide a new revenue stream, although with associated risks.
  • New Branch: The opening of the Port Jefferson branch presents an opportunity to expand the bank’s presence in Suffolk County.

Uncommon Metrics

  • Municipal Deposits: A significant portion of deposits (26.1%) are from municipal customers, which could be vulnerable to economic downturns affecting tax revenues.
  • Commercial Real Estate Concentration: The commercial real estate loan portfolio represents 385% of risk-based capital, requiring heightened risk management practices.

Conclusion and Actionable Insights

Hanover Bancorp faces challenges related to declining profitability and increasing expenses. While the bank is well-capitalized and pursuing growth opportunities, the risks associated with interest rate fluctuations, credit quality, and regulatory compliance warrant a cautious approach.

Overall Assessment: Hold

Recommendations:

  • Monitor NIM: Closely track the net interest margin and implement strategies to manage deposit costs and improve loan yields.
  • Assess Credit Quality: Conduct thorough credit risk assessments and maintain adequate loan loss reserves, particularly in the commercial real estate portfolio.
  • Manage Regulatory Risk: Ensure robust compliance programs for cannabis banking and other regulatory requirements.
  • Evaluate Efficiency: Identify opportunities to improve operational efficiency and control non-interest expenses.
  • Diversify Loan Portfolio: Reduce concentration in New York metro area real estate and explore opportunities for geographic diversification.

Financial Analysis of Hanover Bancorp (HNVR) – December 31, 2024

1. Commentary

Hanover Bancorp’s financial performance in 2024 shows a mixed picture. Net income decreased compared to the previous fiscal year, despite a significant increase in total interest income. This decline was primarily due to a substantial rise in total interest expense and provision for credit losses. The balance sheet reflects growth in total assets, loans, and deposits, indicating continued expansion. While profitability metrics declined, capital ratios remain strong, suggesting a stable financial foundation.

2. Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin

    • Metric: Not applicable for banks as they don’t have “Cost of Goods Sold”.
  • Operating Profit Margin

    • Metric: Income Before Income Taxes / Total Revenue = $16,379 / ($133,022 + $15,339) = 11.05%
  • Net Profit Margin

    • Metric: Net Income / Total Revenue = $12,346 / ($133,022 + $15,339) = 8.32%
    • Return on Assets (ROA)

      • Metric: Net Income / Average Total Assets = $12,346 / $2,233,028 = 0.55%
    • Return on Equity (ROE)

      • Metric: Net Income / Average Stockholders’ Equity = $12,346 / $191,323 = 6.45%
    • Earnings Per Share (EPS) – Basic

      • Metric: $1.67
    • Earnings Per Share (EPS) – Diluted

      • Metric: $1.66

    Liquidity

    • Current Ratio

      • Metric: Current Assets / Current Liabilities. To calculate this, we need to identify current assets and current liabilities.
        Current Assets = Cash and cash equivalents + Securities available for sale + Loans held for sale + Accrued interest receivable = $162,857 + $83,755 + $12,404 + $11,849 = $270,865
        Current Liabilities = Deposits + Borrowings + Accrued interest payable + Other liabilities = $211,656 + $1,244,857 + $497,770 + $107,805 + $1,532 + $18,138 = $2,081,736
        Current Ratio = $270,865 / $2,081,736 = 0.13
    • Quick Ratio (Acid-Test Ratio)

      • Metric: (Current Assets – Inventory) / Current Liabilities. Since a bank does not have inventory, this is the same as the current ratio. 0.13
    • Cash Ratio

      • Metric: Cash and Cash Equivalents / Current Liabilities = $162,857 / $2,081,736 = 0.08

    Solvency/Leverage

    • Debt-to-Equity Ratio

      • Metric: Total Liabilities / Total Stockholders’ Equity = $2,115,472 / $196,638 = 10.76
    • Debt-to-Assets Ratio

      • Metric: Total Liabilities / Total Assets = $2,115,472 / $2,312,110 = 0.91
    • Interest Coverage Ratio (Times Interest Earned)

      • Metric: Earnings Before Interest and Taxes / Interest Expense = ($16,379 + $79,930) / $79,930 = 1.21

    Activity/Efficiency

    • Inventory Turnover

      • Metric: Not applicable for banks.
    • Days Sales Outstanding (DSO)

      • Metric: Not directly applicable for banks.
    • Days Payable Outstanding (DPO)

      • Metric: Not directly applicable for banks.
    • Asset Turnover

      • Metric: Total Revenue / Average Total Assets = ($133,022 + $15,339) / $2,233,028 = 0.067 or 6.7%

    Valuation

    • Price-to-Earnings Ratio (P/E)

      • Metric: Market Cap / Net Income. Market Cap = Shares Outstanding * Stock Price = 7,152,127 * $22.70 = $162,353,283. Net Income = $12,346,000. P/E = $162,353,283 / $12,346,000 = 13.15
    • Price-to-Book Ratio (P/B)

      • Metric: Market Cap / Book Value of Equity. Book Value of Equity = $196,638,000. P/B = $162,353,283 / $196,638,000 = 0.83
    • Price-to-Sales Ratio (P/S)

      • Metric: Market Cap / Total Revenue. Total Revenue = $133,022,000 + $15,339,000 = $148,361,000. P/S = $162,353,283 / $148,361,000 = 1.09
    • Enterprise Value to EBITDA (EV/EBITDA)

      • Metric: (Market Cap + Total Debt – Cash) / EBITDA. Total Debt = Borrowings + Subordinated Debentures = $107,805,000 + $24,689,000 = $132,494,000. Cash = $162,857,000. EBITDA = Net Income + Interest Expense + Taxes + Depreciation and Amortization = $12,346 + $79,930 + $4,033 + $2,090 = $98,499. EV = $162,353 + $132,494 – $162,857 = $131,990. EV/EBITDA = $131,990 / $98,499 = 1.34

    Growth Rates

    • Revenue Growth

      • Metric: (Current Year Revenue – Prior Year Revenue) / Prior Year Revenue. ($148,361 – $105,043 – $8,848) / ($105,043 + $8,848) = 31.8%
    • Net Income Growth

      • Metric: (Current Year Net Income – Prior Year Net Income) / Prior Year Net Income. ($12,346 – $15,164) / $15,164 = -18.6%
    • EPS Growth

      • Metric: (Current Year EPS – Prior Year EPS) / Prior Year EPS. ($1.67 – $2.07) / $2.07 = -19.3%

    Other Relevant Metrics

    • Net Interest Margin (NIM)

      • Metric: Net Interest Income / Average Interest-Earning Assets = $53,092 / $2,174,000 = 2.44%
    • Efficiency Ratio

      • Metric: Total Non-Interest Expense / Total Revenue = $47,112 / ($133,022 + $15,339) = 31.75%

    ⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️