The purpose of this amendment is to include the Financial Data Schedule.
FORM 10-Q - Amendment No. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12524
Hanover Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2219814
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
33 Carlisle Street, Hanover, Pennsylvania 17331
(address of principal executive office and zip code)
(717) 637-2201
Registrant's Telephone Number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING September 30, 1995
Common Stock, 3,106,651 shares
par value $1.11 per share
<PAGE>
INDEX
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Page #
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1995, and December 31, 1994. . . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended September 30, 1995 and 1994 . . . . . . 4
Nine Months Ended September 30, 1995 and 1994. . . . . . . 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994. . . . . . . 6
Sources and Uses of Funds. . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 10
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders. . 19
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
September 30 December 31
1995 1994
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 13,771 $ 9,397
Federal funds sold 900 2,152
CASH AND CASH EQUIVALENTS 14,671 11,549
Interest bearing deposits with other banks 55 22
Investment securities:
Available-for-sale 88,135 90,184
Held-to-maturity (market value -
$3,960 and $5,524 respectively) 4,008 5,631
92,143 95,815
Loans:
Commercial, financial, and agricultural 25,557 25,587
Real estate-construction 4,032 2,942
Real estate-commercial mortgage 25,699 21,090
Real estate-residential mortgage 93,985 86,843
Consumer 63,107 55,934
212,380 192,396
Less: Allowance for loan losses (2,702) (2,498)
NET LOANS 209,678 189,898
Premises and equipment 5,247 5,232
Accrued income receivable 2,311 2,167
Other assets 2,912 3,671
TOTAL ASSETS $327,017 $308,354
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 23,243 $ 22,435
Interest bearing 245,361 229,317
TOTAL DEPOSITS 268,604 251,752
Borrowed funds:
Federal Home Loan Bank borrowings 15,157 17,300
Other borrowings 8,495 9,136
23,652 26,436
Accrued interest 2,273 1,226
Other liabilities 905 1,064
Dividends payable 311 311
TOTAL LIABILITIES 295,745 280,789
SHAREHOLDERS' EQUITY:
Common stock 3,448 3,458
Surplus 18,594 18,573
Retained earnings 8,540 6,966
Unrealized gains on securities
available-for-sale 690 (1,432)
TOTAL SHAREHOLDERS' EQUITY 31,272 27,565
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $327,017 $308,354
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Income
<CAPTION>
(Unaudited)
Three Months Ended
September 30
1995 1994
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,687 $ 3,765
Interest on federal funds sold 87 100
Investment securities:
Taxable 978 898
Tax Exempt 405 309
1,383 1,207
Other interest income 82 60
Total Interest Income 6,239 5,132
INTEREST EXPENSE:
Interest on deposits 2,670 1,925
Interest on borrowed funds 349 237
Total Interest Expense 3,019 2,162
Net Interest Income 3,220 2,970
PROVISION FOR LOAN LOSSES 90 -
Net Interest Income After
Provision For Loan Losses 3,130 2,970
OTHER INCOME:
Trust department income 165 150
Service charges on deposit accounts 212 176
Other operating income 82 190
Securities gains 27 119
486 635
OTHER EXPENSE:
Salaries 1,168 1,059
Pensions and other employee benefits 264 239
Occupancy expense 205 180
Equipment expense 213 204
Marketing and advertising 109 71
FDIC Insurance 11 135
Other operating expense 612 539
2,582 2,427
Income Before Income Taxes 1,034 1,178
INCOME TAXES 209 283
NET INCOME $ 825 $ 895
PER SHARE DATA:
Net income $ .27 $ .29
Cash dividends $ .10 $ .09
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Income
<CAPTION>
(Unaudited)
Nine Months Ended
September 30
1995 1994
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $13,324 $10,922
Interest on federal funds sold 303 368
Investment securities:
Taxable 2,871 2,442
Tax Exempt 1,169 987
4,040 3,429
Other interest income 181 147
Total Interest Income 17,848 14,866
INTEREST EXPENSE:
Interest on deposits 7,415 5,503
Interest on borrowed funds 997 622
Total Interest Expense 8,412 6,125
Net Interest Income 9,436 8,741
PROVISION FOR LOAN LOSSES 270 125
Net Interest Income After
Provision For Loan Losses 9,166 8,616
OTHER INCOME:
Trust department income 495 450
Service charges on deposit accounts 613 513
Other operating income 284 606
Securities gains 295 286
1,687 1,855
OTHER EXPENSE:
Salaries 3,298 3,100
Pensions and other employee benefits 800 720
Occupancy expense 583 529
Equipment expense 652 558
Marketing and advertising 307 218
FDIC Insurance 295 397
Other operating expense 1,763 1,586
7,698 7,108
Income Before Income Taxes 3,155 3,363
INCOME TAXES 654 763
NET INCOME $ 2,501 $ 2,600
PER SHARE DATA:
Net income $ .81 $ .84
Cash dividends $ .30 $ .27
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
(Unaudited)
Nine Months Ended
September 30
1995 1994
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,501 $ 2,600
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 270 125
Provision for depreciation and amortization 504 428
Securities gains (295) (286)
Deferred income taxes, net 150 ---
Increase in interest receivable (144) (21)
Increase in interest payable 1,047 538
Increase in other assets (484) (556)
Decrease in other liabilities (17) (100)
Increase/(decrease) in accrued taxes (142) 165
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,390 2,893
INVESTING ACTIVITIES:
Net increase in loans (25,698) (19,452)
Proceeds of loan sales 5,648 8,299
Proceeds from sale of
available-for-sale investment securities 11,913 21,760
Proceeds from maturities of investment securities 27,585 27,233
Purchases of investment securities (32,349) (59,800)
Purchases of premises and equipment (519) (1,111)
NET CASH USED IN
INVESTING ACTIVITIES (13,420) (23,071)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 1,534 9,568
Net increase in certificates of
deposit and other time deposits 15,318 10,000
Net increase/(decrease) in borrowed funds (2,784) 6,416
Cash dividends paid (932) (854)
Dividends paid in lieu of fractional shares (6) (12)
Proceeds from issuance of common stock 22 314
NET CASH PROVIDED BY
FINANCING ACTIVITIES 13,152 25,432
INCREASE IN CASH AND CASH EQUIVALENTS 3,122 5,254
Cash and cash equivalents at beginning of period 11,549 12,996
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,671 $18,250
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOURCES & USES OF FUNDS
<CAPTION>
Increase (Decrease)
September 30 Since December 31, 1994
1995 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Sources:
Deposits
Non-interest bearing $ 23,243 $ 808 3.60%
Interest bearing 245,361 16,044 7.00%
Total deposits 268,604 16,852 6.69%
Borrowed funds 23,652 (2,784) (10.53)%
Other liabilities 3,489 888 34.14%
Shareholders' equity 31,272 3,707 13.45%
TOTAL SOURCES $327,017 $18,663 6.05%
Funding Uses:
Interest earning assets
Interest bearing deposits $ 55 $ 33 150.00%
Investment securities 92,143 (3,672) (3.83)%
Federal funds sold 900 (1,252) (58.18)%
Loans, net 209,678 19,780 10.42%
Total interest earning assets 302,776 14,889 5.17%
Other assets 24,241 3,774 18.44%
TOTAL USES $327,017 $18,663 6.05%
</TABLE>
<PAGE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Notes to Consolidated Financial Statements
(1) In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments which are of a normal
recurring nature necessary to present fairly Hanover Bancorp, Inc's.
financial position as of September 30, 1995, and December 31, 1994, the
results of its operations for three months and nine months ended
September 30, 1995 and 1994, and cash flows for the nine months ended
September 30, 1995 and 1994.
(2) The information contained in this report is unaudited and is subject to
year-end adjustment and audit.
(3) These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Net income and cash dividends per share are based on the weighted
average number of shares outstanding which were 3,106,537 during the
quarter ended September 30, 1995; 3,105,603 during the quarter ended
September 30, 1994; 3,105,975 during the nine months ended September 30,
1995; and 3,103,725 during the nine months ended September 30, 1994.
Shares outstanding, as well as all other per share data, have been
adjusted to reflect the three for two split paid April 1, 1995, and the
five percent stock dividend paid April 1, 1994.
(5) The results of operations for the nine month period ended September 30,
1995, are not necessarily indicative of the results that may be expected
for the year ended December 31, 1995.
(6) The Corporation considers the allowance for loan losses adequate at this
time.
In May 1993, The Financial Accounting Standards Board (FASB) issued
Statement No. 114, "Accounting by Creditors for Impairment of a Loan".
In October of 1994 FASB also issued Statement No. 118, "Accounting by
Creditors for Impairment--Income Recognition and Disclosures", which
amends certain features of Statement No. 114. Both of these standards
were adopted, as required, beginning January 1, 1995. Statement No. 114
requires that certain impaired loans be reported at the present value of
expected future cash flows using the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. This
new standard applies to all loans that are identified as being impaired.
In addition, the statement affects troubled debt restructuring involving
a modification of terms. It does not apply to large groups of smaller
balance homogeneous loans that are evaluated collectively such as
installment or residential mortgage loans. Statement No. 118
prescribes how a creditor should report income on impaired loans and
clarifies Statement 114's disclosure requirements.
Generally, loans considered impaired under 114 would be the
Corporation's non-homogeneous non-accrual loans. However, a loan may
also be considered impaired under 114 if it is currently performing
according to its terms but it is probable that the loan will not perform
as such in the future.
<PAGE>
The Bank's methodology for determining the necessary reserve on impaired
loans prior to FASB 114 was consistent with this statement's guidance.
Specifically, the standard allows the loan to be reported at the fair
value of the collateral if collateral dependent. Historically, the
majority of impaired loans have been collateral dependent and have been
evaluated in this manner. In addition, the Corporation's methodology
for identifying problem loans was consistent with Statement 114's
guidance for identifying impaired loans. Therefore, this statement has
not had a significant impact on the Corporation's determination of the
necessary allowance for loan losses nor on its level of impaired loans.
As in the past, the Corporation will charge-off or charge-down a loan
considered impaired under FASB 114 when management has concluded, after
ongoing evaluation, that future collection of the principal or a portion
of the principal is unlikely.
<TABLE>
Transactions in the allowance for loan losses were as follows (in thousands)
<CAPTION>
September 30 December 31
1995 1994
<S> <C> <C>
Balance at beginning of period $2,498 $2,254
Recoveries on loans 69 395
Provision charged to operations 270 125
Loans charged-off (135) (276)
Balance at end of period $2,702 $2,498
</TABLE>
At September 30, 1995, the recorded investment in loans that are considered
to be impaired under statement 114 was $1.24 million, of which $6,000 was on
non-accrual basis. The related allowance for credit losses for this amount
was $334,000. The average recorded investment in impaired loans during the
period ended September 30, 1995 was approximately $1.47 million. For the
period ended September 30, 1995 the company recognized interest income on
these loans of $95,000, which included $500 of interest income recognized
using the cash basis method of income recognition.
At December 31, 1994, the Corporation had total non-accrual loans of
$650,000. Of this amount, $592,000 would have been considered impaired under
Statement 114. In addition, a total of $1.21 million would have been
considered impaired under this new standard as of December 31, 1994.
***********
<PAGE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
The consolidated operations of Hanover Bancorp, Inc. (the "Corporation")
are derived primarily from the operations of its wholly-owned subsidiary, the
Bank of Hanover and Trust Company (the "Bank"). The following discussion and
analysis sets forth results of operations through the third quarter of 1995,
including basic performance trends. There are no known trends, events or
uncertainties that will have or are reasonably likely to have material effect
on the Corporation's liquidity, capital resources or operations.
Third Quarter of 1995 Compared to Third Quarter of 1994:
Net income for the three months ended September 30, 1995, was $825,000,
a decrease of $70,000 over the same period in 1994. On a per share basis,
1995 third quarter results equalled $0.27 per share in comparison to $0.29
per share during the prior year.
Total interest income for the three months ended September 30, 1995, was
$6.2 million, an increase of $1.1 million over the same period in 1994.
Interest and fees on loans, interest on investment securities and other
interest income increased by $922,000, $176,000 and $22,000, respectively, as
a result of volume and market rate increases. Interest on federal funds sold
declined by $13,000 primarily due to volume decreases.
Interest expense for the three months ended September 30, 1995, was $3.0
million, an increase of $857,000 from the same period in 1994. Interest on
deposits and interest on borrowed funds increased by $745,000 and $112,000,
respectively as a result of volume and market interest rate increases.
Borrowed funds include fed funds purchased, Federal Home Loan Bank (FHLB)
borrowings and securities sold under agreement to repurchase. The FHLB
borrowings are utilized to match fund earning assets.
The provision for loan losses during the third quarter of 1995 was
$90,000 compared with a provision of zero during 1994. Management is
continuing its policy of making provisions as required in order to maintain
a strong reserve level relative to the total loans outstanding. The
necessary reserve level is based on a current and prospective assessment of
the overall loan portfolio quality and potential specific losses.
The net result of the increases in the above three areas was a $160,000
increase in the Corporation's net interest income after loan loss provision.
<PAGE>
Non-interest income during the third quarter of 1995 was $486,000, a
decrease of 149,000 from the same period in 1994. The overall decline in
this area was primarily due to the decreases in other operating income and
securities gains of 108,000 and $92,000, respectively. Other operating
income dropped from the past year largely because 1994's income was unusually
high due to income recognized through the elimination of a trust reserve. In
addition, income from Pillar Financial Services (Pillar), the third party
insurance agency the Corporation has contracted to sell annuity and insurance
products, was down from a year ago. The decrease in securities gains was
the product of sales executed as part of ongoing portfolio and balance sheet
management strategies. Trust income and service charges on deposit accounts
increased by $15,000 and $36,000, respectively. The increase in trust income
was mainly due to growth in assets under management. Service charges on
deposit accounts increased primarily as a result of growth in demand deposit
accounts, the major contributor of this type of income.
Total non-interest expense during the third quarter of 1995 was $2.6
million, an increase of $155,000 over the same period in 1994. Salaries,
pensions and other employee benefits, occupancy expenses, equipment expenses
and other operating expenses increased collectively by $241,000. This
expense growth was largely related to the Corporation's expansion of its
branch office network and its investment in technology. Competitive salary
and wage pressures and inflation also contributed to these increases.
Marketing expenses were up $38,000 due to the fact that more product
promotions were run relative to last year. The decrease of $124,000 in FDIC
insurance was the result of a substantial rate reduction instituted by the
FDIC during the third quarter of 1995. The annual rate per $100 of deposits
was decreased from 23 cents to 4 cents, or 83%. This reduction was effective
as of June 1, 1995. Therefore, the FDIC insurance expense was overstated as
of June 30, 1995 since June's accrual was based on the prior rate. The
Corporation has opted to allocate June's over-accrual between the third and
fourth quarters.
During the third quarter of 1995, Hanover Bancorp's tax provision was
$209,000, a decrease of $74,000 over the same period in 1994. This decrease
was due to an increased level of tax-exempt securities over the prior year.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
30, 1994:
Net income for the nine months ended September 30, 1995, was $2.5
million, a decrease of $99,000 over the same period in 1994. On a per share
basis, earnings for the first nine months of this year were $.81 as compared
to $.84 for 1994.
Total interest income for the period ended September 30, 1995, was $17.8
million, an increase of $3.0 million from the same period in 1994. The
increases in interest and fees on loans, interest on investment securities,
and other interest income of $2.4 million, $611,000, and $34,000,
respectively, were due to increases in both market interest rates and
volumes. The decline in interest on federal funds sold of $65,000 was the
result of lower volumes.
Interest expense for the nine months ended September 30, 1995, was $8.4
million, an increase of $2.3 million from the same period in the prior year.
Interest on deposits and interest on borrowed funds increased by $1.9 million
and $375,000, respectively, due to volume and rate increases.
<PAGE>
For the first nine months of 1995, the Corporation's loan loss provision
was $270,000 compared to $125,000 during the same period in 1994, an increase
of $145,000. As stated earlier, management has been funding the reserve for
potential loan losses at a level consistent with its evaluation of the
overall quality of the portfolio and potential specific losses.
The overall impact of the increases in interest income, interest expense
and the provision for loan losses was an increase of $550,000 in net interest
income after the provision for loan losses over the prior year.
For the nine months ended September 30, 1995 non-interest income was
$1.7 million, a decrease of $168,000 from the same period in 1994. Causing
this decline was the $322,000 decrease in other operating income. This
category was down primarily as a result of a significant loss of income from
Pillar Financial Services. With respect to this income, there appears to be
an inverse relationship between the interest rate environment and the amount
of income earned. To illustrate, as market interest rates began to rise in
the latter part of 1994, Pillar's sales of annuity products and the
Corporation's corresponding income began to decline. Many investors were no
longer inclined to seek alternative investments such as those offered by
Pillar since the returns on more traditional investments such Certificates of
Deposit (C.D.s) were significantly higher. The opposite was true when
interest rates were at low levels. That is, alternative investments were
more attractive because C.D. returns were so low. This inverse relationship
may cause some income volatility from period to period in changing interest
rate environments. However, management believes that the potential for
supplemental income from this source justifies the increased volatility. In
addition, other operating income dropped from the past year because of the
trust reserve mentioned earlier that was recognized to income in 1994.
Offsetting the decline in other operating income were increases in trust
department income, service charges on deposit accounts, and securities gains
of $45,000, $100,000 and $9,000, respectively. Trust Department income was
up mainly due to an increased level of assets under management. The increase
in service charges on deposit accounts reflects growth in demand deposit
accounts. The increase in securities gains resulted largely from the sale
of several of the portfolio's community bank stock holdings which were deemed
to be excellent selling opportunities. The corporation holds these
community bank stocks primarily for their potential long-term market
appreciation since the dividend yields are significantly less than those of
alternative debt investments. In addition, other sales were executed as part
of ongoing portfolio and balance sheet management strategies primarily
designed to manage interest rate risk.
Non-interest expenses increased $590,000 to $ 7.7 million during the
first nine months of 1995 compared to the same period in 1994. Personnel-
related expenses, facilities expenses, and other operating expenses increased
in the aggregate by $603,000. These increases were primarily associated with
the Corporation's expansion of its branch office network and the
corresponding investments in technology to facilitate this larger network.
Competitive salary/wage pressures and inflation also contributed to these
increases. Marketing expenses increased by $89,000 primarily as a result of
the increased promotional activity mentioned earlier. Finally, FDIC
insurance decreased by $102,000 due to the rate reduction instituted by the
FDIC during the third quarter of 1995 as discussed above.
<PAGE>
As of September 30, 1995, the Corporation's tax provision was $654,000,
a decrease of $109,000 from the same period in 1994. This provision
translates into an effective tax rate of 20.7% compared to a 22.7% rate
during 1994. This lower effective rate was due primarily to an increase in
the level of tax-exempt investment securities over the prior year.
Statement of Cash Flows:
The Corporation's cash and cash equivalents increased by $3.1 million
between December 31, 1994 and September 30, 1995 to a level of $14.7 million.
Net cash provided by operating activities of $3.4 million was primarily
generated from the net income of $2.5 million. Net income was augmented by
a total of $1.8 million for the provision for loan losses, the provision for
depreciation and amortization and the increase in interest payable to reflect
expenses charged to income that did not require cash outlays. In addition,
net income was increased by $150,000 for the decrease in deferred income
taxes for cash received that was not included in income. A combined total of
$643,000, representing the increase in other assets and the decreases in
other liabilities and accrued taxes, was deducted from net income in
consideration of cash expenditures made but not charged to expense. The
aggregate total of the securities gains and the increase in interest
receivable of $439,000 was deducted to reflect noncash income recognized.
Net cash used in investing activities totalled $13.4 million. The net
investment in the loan portfolio was $20.1 million after deducting the $5.6
million in loan sales. This growth in loan activity was due largely to the
continued development of the Corporation's recently-opened branch facilities.
Also contributing to this growth were management's recent focus on creating
a more sales-oriented corporate culture and aggressive loan promotion
programs. Net cash of $7.1 million was provided through investment portfolio
activity during the first nine months of 1995. Proceeds from market sales
and maturities contributed $11.9 million and $27.6 million, respectively,
while purchases of investment securities utilized $32.3 million. The market
sales of available-for-sale securities were executed as part of ongoing
portfolio and balance sheet management strategies. Finally, purchases of
premises and equipment used $519,000 in cash.
Financing activities provided $13.2 million during the period ended
September 30, 1995. Demand deposits, NOW accounts, money market accounts and
savings accounts provided $1.5 million while certificates of deposit and
other time deposits contributed $15.3 million. The significant increase in
deposit levels was again largely the result of continued growth experienced
by the Corporation's new facilities. In addition, through competitive
pricing, the Corporation has continued to capitalize on the strong investor
interest in certificates of deposit (CDs). A decrease in borrowed funds
used $2.8 million of cash. This decrease was mainly due to the maturities of
several FHLB borrowings. Also utilizing cash were the cash dividends and
dividends paid in lieu of fractional shares of $932,000 and $6,000,
respectively. Finally, proceeds from the issuance of common stock provided
$22,000 in cash.
<PAGE>
Asset Quality:
The following tables illustrate the Corporation's problem asset position as
of September 30, 1995 compared to its position at December 31, 1994.
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
<S> <C> <C>
Non-accrual loans $ 61 $ 650
Accruing loans past due 90 days or more 96 17
Other real estate 336 115
Total non-performing assets $ 493 $ 782
Non-accrual loans by category
Commercial, financial and agricultural $ - $ 479 (A)
Real estate-construction - -
Real estate-commercial mortgage - 105
Real estate-residential mortgage 37 36
Consumer 24 30
$ 61 $ 650
Past due loans by category
Commercial, financial and agricultural $ - $ -
Real estate-construction - -
Real estate-commercial mortgage 85 -
Real estate-residential mortgage - 6
Consumer 11 11
$ 96 $ 17
Potential problem loans, considered
impaired under FASB 114 $1,234 $1,212
Potential problem loans by category
Commercial, financial and agricultural $ - $ -
Real estate-construction - -
Real estate-commercial mortgage 1,234 (A) 1,212 (A)
Real estate-residential mortgage - -
Consumer - -
$1,234 $1,212
<FN>
(A) This balance is owed by one borrower.
</TABLE>
<PAGE>
As can be seen by these tables, the level of non-performing assets dropped
significantly during the first nine months of 1995. The drop was primarily
due to the reduction, through collection and charge-down, of a large
commercial non-accrual loan between December 31, 1994 and September 30, 1995.
Due to this decrease, the ratio of the allowance for loan losses as a
percentage of non-performing loans at September 30, 1995 increased to 1,721%
from the 375% level of December 31, 1994. The level of potential problem
loans, considered impaired under FASB 114 (or would have been considered
impaired had FASB 114 been in effect) remained essentially the same from
period to period. This balance represents a loan which management was aware
of information which caused it to believe that future non-compliance with the
loan repayment terms was probable. Due to this fact, management established
an allowance of $334,000, which was disclosed within note 6. above, equal to
the difference between the recorded value and the most recent appraised value
of the underlying collateral. Management has recently made the decision to
have the value of the underlying collateral reappraised in response to
additional facts learned regarding this loan during the third quarter.
Adjustments to the specific allowance will be made as necessary if the
reappraisal indicates a change in the value of the collateral. Management
feels that the allowance for loan losses is adequate to cover potential
losses within the overall portfolio, including the possible loss related to
the loan just discussed. Additionally, the Corporation remains committed to
making monthly provisions in order to maintain a strong reserve level
relative to the total loans outstanding. A total provision of $270,000 was
made during the first nine months of 1995. The resulting allowance as a
percentage of the total loans outstanding was 1.27% as of September 30, 1995
in comparison to the December 31, 1994's ratio of 1.30%.
Liquidity and Interest Rate Sensitivity:
Asset/liability management can be divided into two primary functions:
1) assuring adequate liquidity and, 2) maintaining an appropriate balance
between rate-sensitive interest earning assets and rate-sensitive interest
bearing liabilities. The goal of the Corporation's Liquidity Management
Program is to meet the cash flow requirements of our customers for either
deposit withdrawals or loans. To meet its liquidity needs, the Corporation
looks to a number of sources on both sides of its balance sheet. On the
asset side of the balance sheet, the Corporation relies on federal funds
sold, short term money market investments, maturities in the investment
portfolio, principal repayments on outstanding loans and amortizing
securities, and sales of loans in the secondary markets. On September 30,
1995, the balance of the federal funds sold account was $900,000. Along with
the liquidity provided by federal funds sold, a total of $7.0 million of the
Corporation's investment portfolio had maturities of one year or less. An
average of $4.7 million in loan principal repayments and $777,000 in
mortgage- and asset-backed securities repayments were received by the
Corporation during each month of the first nine months of 1995. Finally,
$5.6 million of loans, mainly residential mortgage loans, were sold in the
secondary market during the period ended September 30, 1995.
In addition to the liquidity provided by these categories of assets, the
Corporation's liquidity is enhanced by a high ratio of stable "core" deposits
(total deposits less certificates of deposit in excess of $100,000) to total
assets. On September 30, 1995, 79.7% of total assets were funded with core
deposits while 2.4% were funded with certificates of deposit in excess of
$100,000. An additional 4.6% of total assets were funded by FHLB borrowings
which provide match funding for assets with similar maturities.
<PAGE>
Finally, as part of its Liquidity Management Program, the Corporation
maintains borrowing agreements with several correspondent banks, the FHLB of
Pittsburgh, as well as access to the Discount Window at the Federal Reserve
Bank of Philadelphia.
Maintaining an appropriate balance between rate sensitive interest
earning assets and interest bearing liabilities is a method of avoiding
fluctuations in net interest income and profits. An interest sensitivity
mismatch or GAP results from either an excess of rate sensitive assets or
rate sensitive liabilities being repriced in a given time period. It is the
Corporation's policy to maintain a rate sensitivity ratio (rate sensitive
assets minus rate sensitive liabilities divided by total assets) of between
plus and minus 10%. This ratio is deemed prudent because it allows the
Corporation sufficient latitude to redeploy assets in response to a change in
the level of interest rates and maintain or increase the level of net
interest income.
The following table shows the respective interest sensitivity GAPs on
September 30, 1995 for several different time intervals. This GAP analysis
takes into consideration the current estimated prepayments on loans and
amortizing investment securities. The Corporation's rate sensitivity ratio
within one year of negative 10.64% was slightly above the Corporation's
guidelines mentioned above. Management does not anticipate a significant
increase in the Corporation's negative gap position in the future. With
forecasts for declining interest rates, the Corporation should be in a
favorable position with respect to maintaining or possibly enhancing future
net interest income. In the event that interest rates would rise, management
believes that the potential negative impact on the net interest margin would
not be material primarily because of the Corporation's ability to control the
magnitude of deposit repricing relative to asset repricing, specifically with
respect to the savings and NOW accounts. These accounts have historically
been less rate sensitive than other deposit accounts. In addition, management
has the ability to adjust the GAP position as necessary by repositioning its
large portfolio of available-for-sale investment securities.
<TABLE>
HANOVER BANCORP CONSOLIDATED GAP ANALYSIS
<CAPTION>
TOTAL
0 - 180 181-365 0 - 365
DAYS DAYS DAYS
(In thousands of dollars)
<S> <C> <C> <C>
Interest Earning Assets $109,168 $48,545 $157,713
Interest Bearing Liabilities 136,489 56,007 192,496
Interest Sensitivity GAP
September 30, 1995 (27,321) (7,462) (34,783)
Rate Sensitivity Ratio (8.35)% (2.28)% (10.64)%
Interest Sensitivity GAP
December 31, 1994 $(17,933) $ (18) $(17,951)
Rate Sensitivity Ratio (5.82)% (.01)% (5.82)%
</TABLE>
<PAGE>
Capital Resources:
The Corporation's average equity to asset ratio was 9.40% during the
first nine months of 1995 versus 9.81% for the first nine months of 1994.
Excluding the unrealized gains(losses) created by the application of SFAS No.
115, this ratio was 9.38% for 1995 compared to 9.63% for 1994. This
decrease in the "core" capital ratio was attributable to the strong growth in
assets experienced by the Corporation in the past twelve months. During the
quarter ended September 30, 1995, the Board of Directors declared a cash
dividend of $.10 per share payable November 1, 1995. The Corporation relies
on net income rather than retained earnings for the payment of dividends to
shareholders. The dividend rate is determined by the Board of Directors
after considering the Corporation's internal capital requirements and
projected level of earnings. A certain level of capital growth must be
achieved each year to maintain an appropriate ratio of equity to total
assets. Management anticipates that the internal growth rate of equity is
more than adequate to support the Corporation's asset growth, although with
the application of SFAS No. 115, the Corporation's total capital will
fluctuate somewhat as changes in market interest rates affect the market
value of the available-for-sale investment portfolio.
Also during the first quarter of 1995, the Board of Directors declared
a 3 for 2 stock split of the Corporation's common stock which was paid on
April 1, 1995, to shareholders of record March 15, 1995.
At the end of 1992, banks and bank holding companies were expected to
meet new capital ratios for qualifying total capital to risk weighted assets.
The new regulations were first proposed by the Federal Reserve Board in
January 1988. The principal objectives of establishing a risk-based capital
measurement framework are to achieve consistent international standards in
the measurement of and assessment of capital adequacy and to strengthen the
capital positions of major international banking organizations. As of
September 30, 1995, Hanover Bancorp's "core" capital to risk-weighted assets
was 13.01%. Total capital to risk-weighted assets on the same date was
14.16%. At present, the regulatory authorities require that the unrealized
gains(losses) generated by the application of FASB 115 be excluded from the
calculation of these ratios. These ratios are well above the minimums
required by the regulation and the Corporation has not been advised of any
deficiency by the regulatory authorities. Management has reviewed and will
continue to monitor the Corporation's asset mix, product pricing and
allowance for loan losses which are the areas determined to be most affected
by these requirements.
<PAGE>
Regulatory Issues:
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994. The legislation
permits interstate banking twelve months after its enactment into law. On
September 23, 1994, President Clinton signed into law the Community
Development/Regulatory Relief Bill (the "CDRR Bill") which became effective
on January 1, 1995. The CDRR Bill provides $382 million over a four year
period to fund community development projects in low- and moderate-income
neighborhoods through banks and community development financial institutions.
In addition, there is newly-enacted legislation and legislation currently
being considered by Congress and the Pennsylvania Department of Banking which
is anticipated to have an impact on the operations of the Corporation and its
subsidiary. This legislation has not, nor is expected to have a material
adverse impact on the Corporation's liquidity, capital resources, or results
of operations.
In December 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "Act") was signed into law. The Act addresses
recapitalization of the insurance fund. The Act contains provisions
concerning the utilization of risk-based assessments in generating deposit
insurance funds, a nominal change to deposit insurance coverage, assessment
reduction for bank's involvement in community related activities, the
computation of interest paid on deposit accounts and miscellaneous regulatory
procedures and standards to ensure the bank's safety and limit systemic risk.
Implementation of the provisions of the Act have not had nor are expected to
have a material adverse impact on the results of operation, capital resources
or liquidity of the Corporation.
As mentioned above, the FDIC recently revised premium insurance rates,
effective as of June 1995, in accordance with the recapitalization plan set
forth in the Federal Deposit Insurance Corporation Improvement Act of 1991.
This revised schedule of premiums more fully reflects Banks' risk profiles by
expanding the spread between rates paid by the "safest" and "riskiest"
institutions. As discussed, this revision has translated into a substantial
reduction in FDIC premium expense for the third quarter since the bank is
currently among the "safest" category. Management anticipates remaining in
this category in the future and thus should continue to realize significantly
reduced FDIC premium expenses going forward.
Management is currently evaluating two accounting standards recently
issued by the Financial Accounting Standards Board (FASB). SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" was issued in March 1995 and is effective for fiscal years
beginning after December 15, 1995. This standard prescribes the accounting
for the impairment of long-lived assets, such as property, plant and
equipment; identifiable intangibles, including patents and trademarks; and
goodwill related to those assets. In addition, SFAS 121 defines the
accounting for long-lived assets and identifiable intangibles that a company
plans to dispose of, other than those that are part of a discontinued
operation. SFAS No. 122, "Accounting for Mortgage Servicing Rights", was
issued in May 1995 and is also effective for fiscal years beginning after
December 15, 1995. This statement establishes new standards for the
accounting treatment of mortgage servicing rights retained by an institution
on sold or securitized mortgage loans. Management does not anticipate that
either of these standards will have a material effect on the Corporation's
liquidity, capital resources, or results of operations.
<PAGE>
PART II. OTHER INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a material
adverse effect on the consolidated financial position of the Corporation.
There are no proceedings pending other than the ordinary routine litigation
incident to the business of the Corporation and the Bank. In addition, no
material proceedings are pending or are known to be threatened or
contemplated against the Corporation and/or the Bank by government
authorities.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - Exhibit 27. Financial Data Schedule
B. Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER BANCORP, INC.
Date: January 2, 1996 \S\ J. Bradley Scovill
Executive Vice President and
Chief Operating Officer
(Principal Executive Officer)
Date: January 2, 1996 \S\ Gerald M. Warner
Secretary and Treasurer
(Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 13,771
<INT-BEARING-DEPOSITS> 55
<FED-FUNDS-SOLD> 900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 88,135
<INVESTMENTS-CARRYING> 4,008
<INVESTMENTS-MARKET> 3,960
<LOANS> 212,380
<ALLOWANCE> 2,702
<TOTAL-ASSETS> 327,017
<DEPOSITS> 268,604
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,489
<LONG-TERM> 0
<COMMON> 3,448
0
0
<OTHER-SE> 27,824
<TOTAL-LIABILITIES-AND-EQUITY> 327,017
<INTEREST-LOAN> 13,324
<INTEREST-INVEST> 4,040
<INTEREST-OTHER> 484
<INTEREST-TOTAL> 17,848
<INTEREST-DEPOSIT> 7,415
<INTEREST-EXPENSE> 8,412
<INTEREST-INCOME-NET> 9,436
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 295
<EXPENSE-OTHER> 7,698
<INCOME-PRETAX> 3,155
<INCOME-PRE-EXTRAORDINARY> 2,501
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,501
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 0
<LOANS-NON> 61
<LOANS-PAST> 96
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,234
<ALLOWANCE-OPEN> 2,498
<CHARGE-OFFS> 135
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 2,702
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
