Description

Hanover Bancorp (Ticker: HNVR) is a recently IPO’d branch-lite mid-size community bank based in New York and Western Long Island. Trading at 91% of its $23.12 book value and at just 107% of its $19.74 tangible book value, Hanover estimated P/E of 6.4x 2022e and 6.4x 2023e earnings puts it at a compelling discount to its peers.

This is especially so given that a series of mergers in the local banking market has left Hanover as the #2 community bank with assets under $5B. HNVR priced its IPO on 5/10/22 at $21 per share.

Hanover’s 107% P/TB compares favorably to its peers at 129% P/TB, while its earnings multiple of 6.4x 2023e compares to peers at 9.2x. Meanwhile, its ROA of 1.3% and ROTCE of 14% matches its peers.

An important element to keep in mind of that a year ago (May 2021), Hanover paid 125% of TBV to acquire Savoy Bank. It is very difficult to argue against a valuation that is at least 20% higher than Hanover’s current market value.

Hanover has many of the elements that are attractive in a community bank:

1. It is branch-lite, in fact, Savoy Bank had total loans of close to $600M with a single office in Midtown Manhattan.

2. The market is recently disrupted by a wave of M&A of other community banks.

3. They focus on specialty niches, which in Hanover’s case include a strong deposit base from local municipalities, an SBA program, active PPP lending, and a niche mortgage lending business focused on alt doc borrowers (originated at 55.6% LTV).

For those who want the highlights from the 249-page S-1, these are the items that jump out:

·  The bank was originally organized in 2009 but after incurring financial and regulatory setbacks, the bank was recapitalized in 2012 by a group led by the current Chairman and CEO Michael Puorro and current members of the board of directors.

·  Insider ownership is a very strong 23.4%. Here are the top five insider holders:

o   Michael Puorro, CEO, age 62, 5.1%

o   Robert Golden, age 58, 6.6%

o   Michael Katz, age 83, 4.2%

o   Metin Negrin, age 56,  3.9%

o   Elena Sisti, age 66, 2.3%

·  Average age of the board is 68 years old. The current President is 64 years old.

·  Has grown total assets from $70 million post 2012 recapitalization to a current $1.5B.

·  Tangible Book Value per share has a CAGR of 10% from 2016 to 2022q1 including a dilutive merger-of-equals.

·  Assets, loans, and deposits have CAGR’d at 30%, 30%, and 33% annually through that same time period.

·  Their municipal deposit program totals $407 million with an average rate of 0.19% on these deposits.

·  One to four-family residential mortgages are 36.3% of the total loan portfolio (excluding PPP loans). The average loan-to-value (LTV) of this portfolio at origination was 55.6% and the average FICO score was 745.

Please forgive the bullet points approach, but those are the key elements to understanding what else is going on with this bank.

Hanover’s residential mortgage business originates mainly non-qualified, alternative documentation single-family residential mortgage loans through broker referrals. What this means in practice is that this segment has proven particularly appealing to Asian American borrowers in the New York City boroughs. That business comprises 36.3% of HNVR’s total loan portfolio, excluding PPP loans, as of December 31, 2021.

Commercial Real Estate (including Multifamily) comprises 61% of total loans. These are primarily rent controlled/stabilized multi-family properties located in New York City.

There has been a wave of consolidations in HNVR’s geographic footprint since 2019. Acquired along the way have been:

·   Peoples United Financial

·   Investors Bancorp

·   Flagstar Bancorp

·   Webster Financial

·   Dime Community

·   SB One

·   Empire Bancorp

·   Bank Leumi

·   Westchester Bank

Hanover anticipates that they will be able to attract experienced bankers from these acquired institutions. HNVR believes that the disruption caused by the M&A wave has created an environment of underbanked customers.

They have successfully employed this strategy in the past to enhance critical aspects of their operations. For example, they only recently launched their municipal deposit program in late 2020. The program is based upon relationships of their management team, rather than bid based transactions. The total municipal deposits of $407.1 million represents 18 separate government clients at an average deposit rate of 0.19%.

According to LinkedIn, Hanover’s current Chief Municipal Officer used to work at Empire Bancorp, one of the consolidated banks on the list above.

Hanover believes that their pricing power is derived from their expertise in their chosen segments of non-conforming NYC lending, niche SBA and small business commercial banking, and their municipal deposit banking business. These all result in “long-term relationships that typically have less pricing volatility, particularly in rising rate environments.”

While remaining branch-lite, they did a very attractive tuck-in acquisition of Chinatown Federal Savings Bank (CFSB) in August 2019 that had three branches in Manhattan and Brooklyn, further lowering their deposit costs.

Putting it altogether:

“Furthermore, our execution on our municipal deposit program and our addition of several branches over the last few years, including through the CFSB acquisition, have allowed us to lower our deposit costs in the current environment, which has produced meaningful enhancements to our net interest margin and we believe positions us well for continued net interest margin expansion.”

Some other key slides from the S-1:

Hanover Community Bank Locations:

Per Office Comparison versus Peers:

Some final notes:

·  Credit quality is good. Since 2016, HNVR has incurred a total of $907,000 in cumulative net charge-offs (less than 10 bps of average loans over that cumulative time period).

·  Total non-accrual loans at 12/31/2021 were $6.1 million, or 0.51% of total loans, excluding loans Held-for-Sale and SBA PPP loans.

·  They have already completed the systems integration with Savoy Bank.

·  HNVR recently initiated its first quarterly cash dividend of $0.10 per share (1.9% yield).

Catalyst

Post-IPO re-pricing as investors get acquainted with the attractive niche banking segments.

Realization that these niches are less price-sensitive in a rising interest-rate environment.