10-Q: Hanover Bancorp Q3 2025: Net Income Flat, NIM Improves

Hanover Bancorp reports flat net income for Q3 2025 at $3.5 million, driven by improved net interest margin offset by higher credit loss provisions and lower loan sale gains.

Summary

• Net income for the three months ended September 30, 2025, was $3.5 million, remaining flat compared to the same period in 2024.
• Net income for the nine months ended September 30, 2025, decreased to $7.5 million from $8.4 million in the comparable 2024 period.
• Net interest income increased by $2.1 million for Q3 2025 compared to Q3 2024, and by $5.4 million for the nine months ended September 30, 2025, compared to the same period in 2024.
• Net interest margin improved to 2.74% in Q3 2025 from 2.37% in Q3 2024.
• Provision for credit losses increased to $1.4 million in Q3 2025 from $0.2 million in Q3 2024.
• Non-interest income decreased by $1.2 million in Q3 2025, primarily due to lower gains on sale of loans held for sale.
• Total assets were $2.3 billion at September 30, 2025, consistent with December 31, 2024.
• Total deposits were $2.0 billion at September 30, 2025, consistent with December 31, 2024.
• Total non-accrual loans increased to $17.2 million (0.86% of total loans) at September 30, 2025, from $16.4 million (0.82%) at December 31, 2024.
• The allowance for credit losses as a percentage of total non-accrual loans decreased to 130% at September 30, 2025, from 139% at December 31, 2024.
• The Company completed its core data processing system conversion to FIS Horizon in February 2025, incurring $3.2 million in non-recurring expenses.
• Hanover Bancorp was added to the Russell 2000 Index in late June 2025.
• The Bank opened a full-service branch in Port Jefferson, Long Island, New York in June 2025.
• The Bank's commercial real estate concentration ratio decreased to 362% of capital at September 30, 2025, from 385% at December 31, 2024.
• The Board approved a $0.10 per share cash dividend for common and Series A preferred shares, payable November 20, 2025.
• The Company repurchased 25,264 shares of common stock for $546 thousand during the nine months ended September 30, 2025.

Sentiment

Score: 6

Explanation: The company shows resilience with improved net interest margin and efficiency, and strong capital ratios. However, flat net income, increased non-accrual loans, higher credit loss provisions, and lower loan sale gains indicate ongoing challenges in a difficult operating environment. Strategic initiatives like the system conversion and branch expansion are positive long-term moves.

Positives

• Net interest income increased by $2.1 million for Q3 2025 and $5.4 million for the nine months ended September 30, 2025, year-over-year.
• Net interest margin improved to 2.74% in Q3 2025 from 2.37% in Q3 2024, and to 2.73% for the nine months ended September 30, 2025, from 2.41% in the comparable 2024 period.
• Efficiency ratio improved to 66.71% for Q3 2025 from 71.75% in Q3 2024.
• Total stockholders' equity increased to $201.8 million at September 30, 2025, from $196.6 million at December 31, 2024.
• The Bank remains "well capitalized" under regulatory frameworks, with all capital ratios exceeding minimum requirements (Tier 1 leverage 9.15%, Common Equity Tier 1 13.13%, Total Risk-Based 14.38%).
• Commercial real estate concentration ratio decreased to 362% of capital from 385%, indicating improved risk management.
• Undrawn liquidity sources totaled $712.2 million, approximately 253% of uninsured deposit balances, demonstrating strong liquidity.
• Addition to the Russell 2000 Index in June 2025 enhances visibility and market access.
• Successful core data processing system conversion to FIS Horizon in February 2025, modernizing operations.
• Expansion with a new full-service branch in Port Jefferson in June 2025 and continued growth in C&I lending.
• Municipal deposit program continues to provide a stable and lower-cost funding source, totaling $513.6 million (26.0% of total deposits).

Negatives

• Net income for the nine months ended September 30, 2025, decreased to $7.5 million from $8.4 million in the comparable 2024 period.
• Provision for credit losses increased significantly to $1.4 million in Q3 2025 from $0.2 million in Q3 2024.
• Non-interest income decreased by $1.2 million in Q3 2025, primarily due to a $1.4 million decrease in gain on sale of loans held for sale.
• SBA loan originations and gains on sale were lower than expected due to higher interest rates, reduced small business demand, and tightened credit standards.
• Total non-accrual loans increased to $17.2 million (0.86% of total loans) at September 30, 2025, from $16.4 million (0.82%) at December 31, 2024.
• Allowance for credit losses as a percentage of total non-accrual loans decreased to 130% at September 30, 2025, from 139% at December 31, 2024, indicating less coverage.
• Total loans having credit risk ratings of Special Mention and Substandard increased to $66.4 million at September 30, 2025, from $40.8 million at December 31, 2024.
• One-time core system conversion expenses of $3.2 million impacted nine-month non-interest expense.
• Salaries and employee benefits increased by $2.1 million for the nine months ended September 30, 2025, due to additional headcount and lower deferred loan origination costs.

Risks

• Changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates, money supply, and inflation, may affect interest margins and the fair value of financial instruments.
• Changes in general economic conditions, either nationally or in market areas, including due to increased market volatility related to government policy or the impact of tariffs or trade policy, that are different than expected and the impact of changing political conditions or federal government shutdowns.
• Occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, or outbreaks of hostilities (such as between Russia and Ukraine and in the Middle East), or the effects of climate change, and the ability of the Company to deal effectively with disruptions caused by the foregoing.
• Legislative, regulatory, or policy changes, including those relating to banking, securities, rent regulation and housing, financial accounting and reporting, environmental protection, and insurance matters, and the impact of such changes, as well as the ability to comply with such changes in a timely manner.
• Downturns in demand for loan, deposit, and other financial services in the Company's market area and the adequacy of the allowance for credit losses.
• Increased competition from other banks and non-bank providers of financial services.
• Technological changes and increased technology-related costs.
• A breach of information systems security, including the occurrence of a cyber incident or a deficiency in cybersecurity.
• Changes in accounting principles, or the application of generally accepted accounting principles.
• Certain model limitations are inherent in the methodology used in the Economic Value of Equity (EVE) and Net Interest Income (NII) measurements, which may oversimplify how actual yields and costs respond to changes in market interest rates.
• The models used for EVE and NII assume constant composition of interest-sensitive assets and liabilities, not considering strategic plans or responses to rate changes, and assume immediate, parallel, instantaneous, and uniform changes in interest rates.
• Data derived from historical performance in models may deviate from actual performance of loan prepayments, rate sensitivities, and average life assumptions as interest rates change, impacting results.
• Certain assets held as collateral for individually analyzed loans may be exposed to future deterioration in fair value, particularly due to changes in real estate markets or usage.

Future Outlook

The Company expects C&I lending and deposit activity to grow as the year progresses, based on its existing pipeline. Management anticipates a normalized effective tax rate of 25.0% for the remainder of the year. The Company believes that the overall demand for multifamily housing in its market will allow borrowers to proactively address any adverse impact from rate resets or maturities. Cash flow hedges are expected to remain fully effective during their remaining term.

Management Comments

• "The Company completed its core processing system conversion to FIS Horizon in February 2025. This conversion, coupled with our recently refreshed corporate logo, exemplifies our momentum towards a more technologically advanced, modern and digitally forward-thinking bank."
• "SBA loan originations and gains on sale were lower than expected due to a confluence of factors. One factor is the impact of the higher-for-longer interest rate environment that management believes has both worsened the financial condition of and reduced demand among small business borrowers, resulting in a lower volume of creditworthy customers. Another factor is the negative impact of and uncertainty created by tariffs, which we believe have also dampened loan demand among borrowers in certain industries. A third factor is the Banks decision to tighten credit standards over the course of the last year. Although management continues to believe this to be a prudent measure, it has nonetheless resulted in a lower volume of loan approvals."
• "We believe that this core deposit business will continue to provide a stable source of funding for the Companys lending products at costs lower than both consumer deposits and market-based borrowings."
• "The Company will selectively explore Commercial Real Estate opportunities with an emphasis on relationship based Commercial Real Estate lending."
• "Based on the maturities and rate resets in the previous 12 months, we believe the overall demand for multifamily housing in our market will allow our borrowers to address any adverse impact proactively."

Industry Context

The banking industry is currently navigating a 'higher-for-longer' interest rate environment, which is impacting loan demand and credit quality, particularly for small businesses and certain real estate segments. The decline in appetite for residential loan pools among purchasers, as noted by Hanover, reflects broader market shifts in secondary mortgage markets. The Company's focus on expanding core verticals and municipal deposits aligns with a trend among community banks to secure stable, lower-cost funding in a competitive deposit landscape. The mention of filling the void left by diminishing commercial banks in the NYC Metro area suggests consolidation and opportunities for smaller, community-focused institutions. The expansion into the legal cannabis industry banking services reflects a growing niche market for financial institutions willing to navigate complex regulatory environments.

Comparison to Industry Standards

• The Bank's capital ratios (Tier 1 leverage 9.15%, Common Equity Tier 1 13.13%, Total Risk-Based 14.38%) exceed all regulatory guidelines for a "well-capitalized" institution (e.g., 5.00%, 6.50%, 10.00% respectively for well-capitalized status), indicating strong capital health compared to regulatory benchmarks.
• The commercial real estate concentration ratio decreased to 362% of capital, which is still above the 300% threshold often scrutinized by regulators for commercial real estate loans, though the trend is positive.
• The efficiency ratio of 66.71% for Q3 2025 is an improvement from 71.75% in Q3 2024. While specific industry benchmarks vary, a lower efficiency ratio is generally better, and this improvement suggests better cost management. Many well-performing banks aim for an efficiency ratio below 60%, so 66.71% indicates room for further improvement, but it's a positive trend.
• The allowance for credit losses as a percentage of total non-accrual loans at 130% is a decrease from 139% and 152% in prior periods. This indicates a reduction in coverage for non-accrual loans, which could be a point of concern compared to peers with higher coverage ratios, especially given the increase in non-accrual loans.
• The proforma stress test on the multi-family stabilized loan portfolio shows approximately 2.60% ($14 million) of the portfolio would have Debt Service Coverage Ratios (DSCRs) less than 1x under a 6% interest rate scenario, while maintaining projected weighted average Loan-to-Value (LTVs) under 100%. This provides transparency on potential vulnerabilities in a rising rate environment, which is a common stress test for real estate portfolios across the industry.

Corporate Governance

Legal Proceedings

• The Company is not subject to any legal proceedings which, if determined adversely, could have a materially adverse impact on its results of operations and financial condition.

Stakeholder Impact

• Shareholders: Experienced flat net income for the quarter and a decrease for the nine months, with diluted EPS slightly down. A dividend of $0.10 per share was declared, and the ongoing stock repurchase program aims to return value. Inclusion in the Russell 2000 Index may enhance visibility and liquidity.
• Employees: An increase in salaries and employee benefits for the nine months ended September 30, 2025, due to additional headcount, suggests growth in staffing and investment in human capital.
• Customers: Benefit from the expansion of services (e.g., Port Jefferson branch, cannabis banking services) and improved technology from the core system conversion. However, tightened credit standards for SBA loans may affect some small business borrowers.
• Creditors: Strong capital ratios and ample undrawn liquidity sources ($712.2 million, 253% of uninsured deposits) indicate a healthy financial position and ability to meet obligations.
• Regulators: The Bank maintains a "well capitalized" status, exceeding all regulatory capital requirements, and successfully completed its reincorporation with all necessary approvals, demonstrating compliance and sound financial management.

Next Steps

• Continue to expand Commercial and Industrial (C&I) lending and deposit activity.
• Selectively explore Commercial Real Estate opportunities with an emphasis on relationship-based lending.
• Monitor performance of loans modified to borrowers experiencing financial difficulty.
• Continue to broaden municipal deposit base.
• Potentially consider opening accounts for licensed cannabis entities in other states in the future.
• Redeem subordinated notes, in whole or in part, starting October 15, 2025, subject to regulatory approval.
• Pay a $0.10 per share cash dividend on common and Series A preferred shares on November 20, 2025.
• Continue stock repurchase program, with 340,786 shares remaining as of September 30, 2025.

Key Dates

Recommendation

The company demonstrates stability with an improving net interest margin and strong capital position, which are positive indicators in the current economic climate. However, the flat quarterly net income, declining nine-month net income, increasing non-accrual loans, and higher provision for credit losses suggest headwinds. The strategic initiatives like the system conversion and branch expansion are good long-term moves, but the immediate financial performance is mixed. Given the balanced positives and negatives, a "hold" recommendation is appropriate for investors awaiting clearer signs of sustained earnings growth and improved asset quality.

Keywords

Community Banking, Financial Results, Net Interest Margin, Loan Portfolio, Credit Quality, Deposits, Capital Ratios, Liquidity, Stock Repurchase, New York Metro Area, Commercial Real Estate, SBA Loans, Regulatory Capital, Interest Rate Risk, SEC Filing