Hanover Bancorp (HNVR): High-Risk Lending and Operational Headwinds Threaten Growth

Hanover Bancorp (HNVR) has emerged as a cautionary tale in the banking sector, with its recent financial performance and strategic choices raising significant red flags for investors. While the bank boasts a solid liquidity position and improved asset quality, its reliance on high-risk commercial real estate (CRE) lending, operational execution challenges, and margin pressures create a precarious path forward. Let’s dissect the risks and metrics that make HNVR a high-stakes investment.

Financial Performance: Adjusted Figures Mask Underlying Weakness

Despite reporting an adjusted net income of $4.1 million for Q1 2025—a figure that excludes $2.6 million in one-time core system conversion costs—HNVR’s GAAP net income plummeted to $1.5 million, down 63% year-over-year. This stark disparity underscores the reliance on non-GAAP metrics to present a rosier picture. While net interest income rose due to a declining cost of funds, non-interest expenses surged by $4.2 million compared to Q1 2024, driven by conversion costs and higher compensation.

The efficiency ratio, a critical gauge of cost management, spiked to 87.1% under GAAP (vs. 65.4% in Q1 2024), reflecting poor expense control. Even after adjusting for one-time costs, the 69.8% ratio remains elevated compared to peer averages of ~60%, signaling operational inefficiencies.

Loan Portfolio: CRE Concentration and Geopolitical Risks

The bank’s loan strategy hinges on CRE and multifamily lending, but these portfolios carry outsized risks. While HNVR reduced its CRE concentration ratio to 369% of capital (down from 416% in Q1 2024), this level remains alarmingly high. A mere 10% decline in real estate values could wipe out the bank’s entire capital buffer.

Adding to the risk, 63% of multifamily loans are concentrated in New York City boroughs like Brooklyn and the Bronx, where 37% of properties face rent regulation. These caps on rental income growth could strangle cash flows for borrowers, especially as permit delays and regulatory hurdles slow loan origination.

The CRE portfolio’s maturity profile is equally concerning: 31% of multifamily and CRE loans will reset or mature by 2026, with average rates of 3.66%–4.45%. If rates rise, borrowers may struggle to refinance, leading to potential defaults.

Operational Challenges: System Upgrades and Regulatory Delays

The bank’s $2.6 million core system conversion—a critical modernization effort—has already caused disruptions and added to costs. While this upgrade aims to streamline operations, implementation risks could further strain an already pressured balance sheet.

Regulatory hurdles are another drag. SBA loan origination delays, driven by procedural changes and permit bottlenecks, reduced fee income in Q1. Management attributes these delays to external factors, but the slow pace of closing deals in its $255 million pipeline threatens revenue growth.

Market Risks: Margin Pressure and Deposit Competition

HNVR’s liability-sensitive balance sheet leaves it vulnerable to rising rates. While its net interest margin expanded to 2.68% in Q1 2025, this improvement relied on falling deposit costs. If the Federal Reserve halts rate cuts or begins hiking, the cost of funds could rise sharply, squeezing margins.

Deposit competition is also intensifying. Though municipal deposits (89% of total) provide stability, consumer deposit costs remain elevated. HNVR’s $517 million in municipal deposits at 3.71% are a double-edged sword: they reduce risk but limit growth in higher-yielding consumer loans.

Conclusion: Risks Outweigh Rewards for Now

Hanover Bancorp’s Q1 2025 results reveal a bank at a crossroads. While its liquidity ($679 million undrawn) and asset quality (NPLs reduced to 0.60% of loans) are stable, its reliance on high-risk CRE lending and operational execution challenges create significant downside risks.

Key red flags include:
- CRE Overhang: A 369% concentration of CRE to capital, with 31% of loans maturing/resetting by 2026.
- Execution Gaps: SBA origination delays and system conversion costs highlight poor operational control.
- Margin Vulnerability: A 2.68% net interest margin, which could contract if rates rise or deposit costs stabilize.

Investors should proceed with caution. While HNVR’s dividend remains intact and its tangible book value holds at $23.62 per share, the risks of a CRE market downturn or regulatory pushback on concentrations are too great to ignore. Until the bank diversifies its loan book and proves operational efficiency, this stock remains a high-risk bet.