10-K: Hanover Bancorp Reports Mixed 2025 Results Amid Credit Cleanup

Hanover Bancorp, Inc. reported a decrease in net income for fiscal year 2025 to $7.5 million, down from $12.3 million in 2024, primarily due to increased credit loss provisions and one-time conversion expenses, despite growth in net interest income.

Summary

• Net income decreased to $7.5 million ($1.00 diluted EPS) for the year ended December 31, 2025, compared to $12.3 million ($1.66 diluted EPS) for the year ended December 31, 2024.
• Net interest income increased by 13.9% to $60.5 million in 2025 from $53.1 million in 2024, with net interest margin improving to 2.75% from 2.44%.
• Provision for credit losses significantly increased to $10.4 million in 2025 from $4.9 million in 2024, largely impacted by $14.2 million in net charge-offs in 2025.
• Non-interest income decreased by $2.5 million to $12.8 million, primarily due to a $3.6 million decrease in net gain on sale of loans held for sale.
• Non-interest expense increased by $5.9 million to $53.0 million, driven by a $2.3 million increase in salaries and employee benefits and $3.2 million in one-time core system conversion expenses.
• Total assets grew to $2.38 billion at December 31, 2025, from $2.31 billion at December 31, 2024.
• Total loans increased to $2.00 billion at December 31, 2025, from $1.99 billion at December 31, 2024.
• Total deposits increased to $2.03 billion at December 31, 2025, from $1.95 billion at December 31, 2024, with municipal deposits growing by 37.6% to $700.7 million.
• The Company completed its core processing system conversion to FIS Horizon in February 2025 and was added to the Russell 2000 Index in June 2025.
• A strategic credit cleanup was initiated in Q4 2025, removing $9.6 million of non-performing loans (NPLs) from the balance sheet.
• Nonaccrual loans increased to $21.6 million at December 31, 2025, from $16.4 million at December 31, 2024.
• The allowance for credit losses decreased to $18.7 million (0.93% of total loans) at December 31, 2025, from $22.8 million (1.15% of total loans) at December 31, 2024.
• The Bank remains 'well-capitalized' under Basel III Capital Rules.
• On March 12, 2026, the Company completed a private placement of $35 million in fixed-to-floating rate subordinated notes due 2036, intending to redeem existing $25 million notes and for general corporate purposes.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a mixed report with significant credit quality concerns overshadowing positive net interest income growth and strategic initiatives. The substantial increase in charge-offs and provision for credit losses indicates underlying asset quality issues that warrant caution, despite management's 'credit cleanup' efforts.

Positives

• Net interest income increased by 13.9% to $60.5 million for the year ended December 31, 2025.
• Net interest margin improved to 2.75% in 2025 from 2.44% in 2024.
• Total assets grew to $2.38 billion at December 31, 2025.
• Total deposits increased to $2.03 billion, with municipal deposits growing by 37.6% to $700.7 million.
• Successful completion of core processing system conversion to FIS Horizon in February 2025, enhancing technological capabilities.
• Inclusion in the Russell 2000 Index in June 2025, increasing market visibility.
• Residential loan originations reached $246 million in 2025, the highest level since 2019.
• The commercial real estate concentration ratio improved to 360% of capital at December 31, 2025, from 385% at December 31, 2024.
• The Bank is categorized as 'well-capitalized' by its primary federal regulator.
• Proactive strategic credit cleanup in Q4 2025, removing $9.6 million of non-performing loans from the balance sheet.
• Strong liquidity position with $776.9 million in undrawn liquidity sources, approximately 255% of uninsured deposit balances.
• Successful private placement of $35 million in subordinated notes in March 2026, providing capital for general corporate purposes and debt redemption.

Negatives

• Net income decreased significantly by 39.3% to $7.5 million in 2025 from $12.3 million in 2024.
• Diluted EPS decreased to $1.00 in 2025 from $1.66 in 2024.
• Provision for credit losses more than doubled to $10.4 million in 2025 from $4.9 million in 2024.
• Net charge-offs increased substantially to $14.2 million in 2025 from $1.6 million in 2024.
• Non-interest income declined by $2.5 million, primarily due to a $3.6 million decrease in net gain on sale of loans held for sale.
• Non-interest expense increased by $5.9 million, including $3.2 million in one-time core system conversion expenses.
• Total interest income decreased by $2.5 million, or 1.9%, in 2025.
• Nonaccrual loans increased to $21.6 million at December 31, 2025, from $16.4 million at December 31, 2024.
• Allowance for credit losses decreased by $4.1 million, from $22.8 million to $18.7 million, despite increased charge-offs.
• SBA loan originations and gains on sale were lower due to high interest rates, changes to SBA operating procedures, a less favorable economic outlook for many business owners, tightened credit, and a government shutdown in Q4 2025.
• Multifamily rent-regulated exposure in New York, approximately $175.9 million (9% of total loan portfolio), could be adversely impacted by New York legislation limiting rent increases.
• Approximately 3% ($14 million) of the multifamily stabilized loan portfolio would have proforma Debt Service Coverage Ratios (DSCRs) less than 1x under stress testing, although projected Loan-to-Value (LTVs) remain under 100%.

Risks

• Inflationary pressures and rising prices may affect results of operations and financial condition, particularly for small to medium-sized businesses.
• Inability to adequately manage liquidity, deposits, capital levels, and interest rate risk could have a material adverse effect.
• A substantial portion of business is in the New York metro area, making it particularly vulnerable to an economic downturn in this primary market.
• The performance of New York multifamily real estate loans could be adversely impacted by regulation, such as rent control legislation.
• A significant number of loans are secured by real estate, and a downturn in the local real estate market could negatively impact profitability.
• Engagement in lending secured by real estate may lead to foreclosure costs and risks associated with property ownership, or increased foreclosure costs due to consumer protection initiatives.
• Other aspects of business may be adversely affected by unfavorable economic, market, and political conditions.
• The SBA lending program is dependent upon the U.S. federal government, facing specific risks associated with program changes, government shutdowns, and potential recovery claims for technical deficiencies.
• The non-guaranteed portion of SBA loans retained on the balance sheet exposes the company to various credit and default risks.
• Expanded geographic scope of government-guaranteed lending may expose the company to greater and additional risks than lending in its primary trade area.
• The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions, and significant errors could result in material revenue misstatements.
• Imposition of limits by bank regulators on Commercial Real Estate (CRE) lending activities could curtail growth and adversely affect earnings, as CRE loans represent 360% of risk-based capital.
• Residential mortgage loans primarily consist of non-conforming loans, which may be considered less liquid and riskier, and could lead to repurchase obligations.
• Interest rate shifts may reduce net interest income and otherwise negatively impact financial condition and results of operations.
• Inability to adequately measure and limit credit risk could lead to unexpected losses.
• Emphasis on oneto four-family residential mortgage loans, particularly rental properties, involves risks that could adversely affect financial condition and results of operations.
• Niche lending products may expose the company to greater risk of credit loss than traditional lending products.
• Smallto medium-sized businesses that the company lends to may have fewer resources to weather adverse business developments, impairing their ability to repay loans.
• The allowance for credit losses may not be adequate to cover actual losses, and federal and state regulators may require additions.
• An increase in non-performing assets would adversely affect earnings.
• Dependence on the use of data and modeling in management's decision-making, with risks from faulty data or flawed approaches.
• If liquidity is not managed effectively, the business could suffer.
• The growth strategy may require raising additional capital in the future, and unavailability on acceptable terms could adversely affect growth.
• Municipal deposits are an important source of funds, and a reduced level of such deposits may hurt profits.
• Failure to effectively execute strategic plans could negatively affect business and results of operations.
• Any failure to manage acquisitions and other significant transactions successfully may have a material adverse effect.
• Competition in originating loans and attracting deposits may adversely affect profitability.
• The need to invest in innovation; inability or failure to do so may affect business and earnings negatively.
• Heavy reliance on the executive management team and other key personnel; unexpected loss of their services could adversely affect operations.
• Operating in a highly regulated environment; changes in laws and regulations or failure to comply could adversely affect the company and its future growth.
• Federal and State banking agencies periodically conduct examinations; failure to comply with any supervisory actions could adversely affect the company.
• Legislative and regulatory actions taken now or in the future may increase costs and impact business, governance structure, financial condition, or results of operations.
• Increases in FDIC insurance premiums could adversely affect earnings and results of operations.
• Changes in tax laws and regulations, or changes in the interpretation of existing tax laws and regulations, may have a material adverse effect.
• Failure to comply with stringent capital requirements could result in regulatory criticism, requirements, and restrictions.
• Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations, particularly due to deposit services for the state-licensed cannabis industry.
• Subject to numerous laws and regulations of certain regulatory agencies, such as the Consumer Financial Protection Bureau, including the Community Reinvestment Act and fair lending laws; failure to comply could lead to a wide variety of sanctions.
• The FRB may require commitment of capital resources to support the Bank, and the company may not have sufficient access to such capital resources.
• Cyber-attacks or other security breaches could adversely affect operations, net income, or reputation.
• A continuing need for technological change; inability to implement new technology effectively or cost-effectively may lead to operational challenges or competitive disadvantage.
• Many types of operational risks (e.g., system failures, human errors, fraud, third-party issues, external events) can affect earnings negatively.
• The ability to maintain reputation is critical to the success of the business, and failure to do so may materially adversely affect performance.
• Subject to certain operational risks, including customer, employee, or third-party fraud and data processing system failures and errors.
• May be subject to environmental liabilities in connection with real properties owned and foreclosures on real estate assets.
• Operations could be interrupted if third-party service providers experience difficulty, terminate their services, or fail to comply with banking regulations.
• Pandemics, natural disasters, global climate change, acts of terrorism, and global conflicts may have a negative impact on business and operations.
• Legal and regulatory proceedings and related matters could adversely affect the company.
• Societal responses to climate change could adversely affect business and performance, including indirectly through impacts on customers.
• The price of common stock could be volatile.
• Holders of existing and future debt obligations will have priority over common stock with respect to payment in the event of liquidation, dissolution, or winding up and with respect to the payment of interest.
• The dividend policy may change without notice, and future ability to pay dividends is subject to restrictions.
• The inability to receive dividends from the subsidiary bank could impact the ability to maintain or increase the current level of cash dividends paid to stockholders.

Future Outlook

The Company expects C&I lending and deposit activity to grow in 2026. It also plans to expand its geographic footprint with a new full-service branch in downtown Riverhead, New York, in late 2026, preceded by a temporary office operational by the end of Q1 2026. Management believes the overall demand for multifamily housing in its market will allow borrowers to proactively address any adverse impact from rate resets/maturities. The Federal Reserve has indicated no plans to re-impose reserve requirements but may do so in the future if conditions warrant, and the Company anticipates data-based modeling will further penetrate bank decision-making, particularly in risk management.

Management Comments

• The Bank operates as a locally headquartered, community-oriented bank serving customers throughout the New York metro area.
• The Bank's management team has utilized its strong local community ties and experience with federal and New York bank regulatory agencies to create a bank that we believe emphasizes strong credit quality, a solid balance sheet, and a robust capital base.
• We believe this business [municipal banking] is differentiated from our competitors in that the customers are long-term relationships of our team and are not transactional in nature.
• Our focus is banking municipalities that are core to our branch footprint and where our brand resonates.
• We expect C&I lending to be a key component of our growth going forward.
• Management believes that all of the unrealized losses on individual investment securities at December 31, 2025 and 2024 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of these investments.
• Management believes our allowance for credit losses is appropriate for the risk identified in our loan portfolio.
• Management believes as of December 31, 2025, the Bank meets all capital adequacy requirements to which it is subject.
• We believe our policies and procedures allow us to operate in compliance with the FinCEN guidelines [for cannabis banking].

Industry Context

StockSavvy.ai notes that Hanover Bancorp's focus on community banking in the competitive New York metro area, coupled with niche lending in non-conforming residential mortgages and the legal cannabis industry, positions it uniquely. The significant increase in net charge-offs and provision for credit losses, alongside a decrease in loan sale gains, reflects broader industry challenges related to higher interest rates and a less favorable economic outlook impacting loan demand and credit quality, particularly for smaller businesses and government-guaranteed loan programs. The successful core system conversion and Russell 2000 Index inclusion indicate efforts to modernize and enhance market visibility, a common strategy among regional banks seeking to differentiate and attract capital.

Comparison to Industry Standards

• StockSavvy.ai observes that the improvement in net interest margin (2.75% in 2025 vs. 2.44% in 2024) is a positive trend, potentially outperforming some peers struggling with deposit costs in a rising rate environment.
• The significant increase in net charge-offs to 0.71% of average loans held-for-investment in 2025 (from 0.08% in 2024) is notably higher than the average for well-managed community banks, which typically aim for charge-off ratios below 0.50%, suggesting a more aggressive credit cleanup or specific portfolio weaknesses.
• The Commercial Real Estate (CRE) concentration ratio of 360% of capital, while improved from 385%, remains above the 300% threshold that triggers increased supervisory scrutiny from regulators like the FDIC, indicating a higher-than-average exposure to this segment compared to more diversified institutions.

Corporate Governance

Legal Proceedings

• The Company is party to various litigation matters incidental to the conduct of its business, but as of December 31, 2025, no legal proceeding is believed to have a material adverse effect on its business, financial condition, or results of operations.

Related Party Transactions

• Loans to related parties totaled $1.7 million at December 31, 2025, a decrease from $1.8 million at January 1, 2025.
• Deposits from principal officers, directors, and their affiliates totaled $38.0 million at December 31, 2025, an increase from $19.3 million at December 31, 2024.

Stakeholder Impact

• Shareholders: Experienced decreased net income and diluted EPS, but the share repurchase program and recent dividend declaration may offer some support. Future dividends are subject to regulatory restrictions and the Bank's ability to pay dividends to the parent company.
• Employees: Benefited from increased salaries and employee benefits. The new Compensation Recoupment Policy introduces a clawback mechanism for executive officers' incentive compensation.
• Customers: Continue to receive personalized and efficient services, with expanded branch presence and new digital payment channels. Small-to-medium business customers, particularly those in niche lending segments like cannabis, face increased credit risk.
• Regulators: The Company remains 'well-capitalized' but faces increased scrutiny on credit quality, Commercial Real Estate concentrations, and compliance with BSA/AML programs, especially concerning cannabis banking services.
• Creditors: The recent private placement of $35 million in subordinated notes provides additional funding, with existing $25 million notes slated for redemption. Debt holders maintain priority over common stock in the event of liquidation.

Next Steps

• A temporary office location in Riverhead, New York, is expected to be operational by the end of the first quarter of 2026.
• A full-service branch in downtown Riverhead, New York, is expected to open in late 2026, subject to regulatory approvals.
• C&I lending and deposit activity are expected to grow in 2026.
• Management will reassess the need for a valuation allowance on deferred tax assets annually, or more frequently if warranted.
• The definitive Proxy Statement for the 2026 Annual Meeting of Shareholders will be filed with the SEC within 120 days of December 31, 2025.

Key Dates

Recommendation

StockSavvy.ai recommends a 'Hold' position. While Hanover Bancorp demonstrated strong net interest income growth and margin expansion, indicating effective core banking operations in a challenging rate environment, the significant deterioration in asset quality, evidenced by a sharp rise in net charge-offs and provision for credit losses, presents a material concern. The strategic credit cleanup is a necessary step, but its full impact and the underlying causes of the asset quality issues need further monitoring. The recent capital raise through subordinated notes provides liquidity and supports strategic initiatives, but the overall risk profile has increased. Investors should await clearer signs of stabilization in asset quality and sustained profitability before considering a more aggressive stance.

Keywords

Banking, Community Bank, Financial Services, Commercial Real Estate, Residential Mortgages, SBA Loans, Deposits, New York Metro Area, Long Island, New Jersey, SEC Filing, 10-K, Financial Results, Net Interest Income, Credit Losses, Non-performing Assets, Capital Adequacy, Regulatory Compliance, Cybersecurity, Share Repurchase, Subordinated Notes, Cannabis Banking