FORM 10-Q
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, 1996
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, 1996
Common Stock, 2,997,014 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, 1996, and December 31, 1995. . . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended September 30, 1996 and 1995 . . . . . . 4
Nine Months Ended September 30, 1996 and 1995. . . . . . . 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995. . . . . . . 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. . . . . 11
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . 21
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
September 30 December 31
1996 1995
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 17,071 $ 11,055
Federal funds sold 4,930 5,600
CASH AND CASH EQUIVALENTS 22,001 16,655
Interest bearing deposits with other banks 80 913
Investment securities:
Available-for-sale 65,859 87,964
Held-to-maturity (market value -
$10,666 and $9,978 respectively) 10,705 9,941
76,564 97,905
Loans:
Commercial, financial, and agricultural 30,151 26,062
Real estate-construction 4,473 5,384
Real estate-commercial mortgage 30,764 25,739
Real estate-residential mortgage 114,204 95,227
Consumer 67,422 61,457
247,014 213,869
Less: Allowance for loan losses (2,376) (2,220)
NET LOANS 244,638 211,649
Premises and equipment 6,980 5,806
Accrued income receivable 2,233 2,355
Other assets 3,194 1,939
TOTAL ASSETS $355,690 $337,222
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 29,688 $ 27,214
Interest bearing 269,850 251,020
TOTAL DEPOSITS 299,538 278,234
Borrowed funds:
Federal Home Loan Bank borrowings 11,189 14,006
Other borrowings 10,143 8,947
21,332 22,953
Accrued interest 2,534 1,873
Other liabilities 995 958
Dividends payable 360 342
TOTAL LIABILITIES 324,759 304,360
SHAREHOLDERS' EQUITY:
Common stock 3,327 3,449
Surplus 18,640 18,606
Retained earnings 8,889 9,253
Unrealized gains on securities
available-for-sale 75 1,554
TOTAL SHAREHOLDERS' EQUITY 30,931 32,862
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $355,690 $337,222
<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
1996 1995
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,262 $ 4,687
Interest on federal funds sold 144 87
Investment securities:
Taxable 738 978
Tax Exempt 265 405
1,003 1,383
Other interest income 114 82
Total Interest Income 6,523 6,239
INTEREST EXPENSE:
Interest on deposits 2,816 2,670
Interest on borrowed funds 247 349
Total Interest Expense 3,063 3,019
Net Interest Income 3,460 3,220
PROVISION FOR LOAN LOSSES 120 90
Net Interest Income After
Provision For Loan Losses 3,340 3,130
OTHER INCOME:
Trust department income 174 165
Service charges on deposit accounts 227 212
Other operating income 130 82
Securities gains 133 27
664 486
OTHER EXPENSE:
Salaries 1,298 1,168
Pensions and other employee benefits 270 264
Occupancy expense 231 205
Equipment expense 223 213
Marketing and advertising 118 109
FDIC Insurance --- 11
Other operating expense 675 612
2,815 2,582
Income Before Income Taxes 1,189 1,034
INCOME TAXES 303 209
NET INCOME $ 886 $ 825
PER SHARE DATA:
Net income $ .29 $ .27
Cash dividends $ .12 $ .10
<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
1996 1995
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $14,800 $13,324
Interest on federal funds sold 662 303
Investment securities:
Taxable 2,250 2,871
Tax Exempt 1,023 1,169
3,273 4,040
Other interest income 295 181
Total Interest Income 19,030 17,848
INTEREST EXPENSE:
Interest on deposits 8,209 7,415
Interest on borrowed funds 811 997
Total Interest Expense 9,020 8,412
Net Interest Income 10,010 9,436
PROVISION FOR LOAN LOSSES 360 270
Net Interest Income After
Provision For Loan Losses 9,650 9,166
OTHER INCOME:
Trust department income 542 495
Service charges on deposit accounts 655 613
Other operating income 366 284
Securities gains 476 295
2,039 1,687
OTHER EXPENSE:
Salaries 3,780 3,298
Pensions and other employee benefits 908 800
Occupancy expense 689 583
Equipment expense 674 652
Marketing and advertising 335 307
FDIC Insurance 2 295
Other operating expense 1,890 1,763
8,278 7,698
Income Before Income Taxes 3,411 3,155
INCOME TAXES 786 654
NET INCOME $ 2,625 $ 2,501
PER SHARE DATA:
Net income $ .86 $ .81
Cash dividends $ .34 $ .30
<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
1996 1995
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,625 $ 2,501
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 360 270
Provision for depreciation and amortization 566 504
Securities gains (476) (295)
Deferred income taxes, net 232 150
(Increase)/decrease in interest receivable 122 (144)
Increase in interest payable 661 1,047
Increase in other assets (977) (484)
Increase/(decrease) in other liabilities 458 (17)
Decrease in accrued taxes (167) (142)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,404 3,390
INVESTING ACTIVITIES:
Net increase in loans (39,059) (25,698)
Proceeds of loan sales 5,710 5,648
Proceeds from sale of
available-for-sale investment securities 39,888 11,913
Proceeds from maturities of investment securities 45,279 27,585
Purchases of investment securities (64,758) (32,349)
Purchases of premises and equipment (1,740) (519)
NET CASH USED IN
INVESTING ACTIVITIES (14,680) (13,420)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 11,783 1,534
Net increase in certificates of
deposit and other time deposits 9,521 15,318
Net decrease in borrowed funds (1,621) (2,784)
Cash dividends paid (1,018) (932)
Dividends paid in lieu of fractional shares --- (6)
Proceeds from issuance of common stock 37 22
Repurchase and retirement of common stock (2,080) ---
NET CASH PROVIDED BY
FINANCING ACTIVITIES 16,622 13,152
INCREASE IN CASH AND CASH EQUIVALENTS 5,346 3,122
Cash and cash equivalents at beginning of period 16,655 11,549
CASH AND CASH EQUIVALENTS AT END OF PERIOD $22,001 $14,671
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOURCES & USES OF FUNDS
<CAPTION>
Increase (Decrease)
September 30 Since December 31, 1995
1996 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Sources:
Deposits
Non-interest bearing $ 29,688 $ 2,474 9.09%
Interest bearing 269,850 18,830 7.50%
Total deposits 299,538 21,304 7.66%
Borrowed funds 21,332 (1,621) (7.06)%
Other liabilities 3,889 716 22.57%
Shareholders' equity 30,931 (1,931) (5.88)%
TOTAL SOURCES $355,690 $18,468 5.48%
Funding Uses:
Interest earning assets
Interest bearing deposits $ 80 $ (833) (91.24)%
Investment securities 76,564 (21,341) (21.80)%
Federal funds sold 4,930 (670) (11.96)%
Loans, net 244,638 32,989 15.59%
Total interest earning assets 326,212 10,145 3.21%
Other assets 29,478 8,323 39.34%
TOTAL USES $355,690 $18,468 5.48%
</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, 1996, and December 31, 1995, the
results of its operations for three months and nine months ended
September 30, 1996 and 1995, and cash flows for the nine months ended
September 30, 1996 and 1995.
(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, 1995.
(4) Net income and cash dividends per share are based on the weighted
average number of shares outstanding which were 3,016,820 during the
quarter ended September 30, 1996; 3,106,537 during the quarter ended
September 30, 1995; 3,062,355 during the nine months ended September 30,
1996; and 3,105,975 during the nine months ended September 30, 1995.
Shares outstanding, as well as all other per share data, have been
adjusted to reflect the three for two split paid April 1, 1995.
(5) The results of operations for the nine month period ended September 30,
1996, are not necessarily indicative of the results that may be expected
for the year ended December 31, 1996.
(6) The Corporation considers the allowance for loan losses adequate at this
time.
Beginning in 1995, the Corporation adopted Financial Accounting
Standards Board (FASB) No. 114 "Accounting by Creditors for Impairment
of a Loan" and Statement No. 118 "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". In accordance with
these standards, the following tables are presented which summarize the
Corporation's loan loss allowance activity and which provide information
relating to its impaired loans.
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
Balance at beginning of period $2,220 $2,498
Recoveries on loans 54 125
Provision charged to operations 360 360
Loans charged-off (258) (763)
Balance at end of period $2,376 $2,220
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
Recorded investment in loans considered
impaired under FASB 114 $ 884 $ 946
Impaired loans on nonaccrual status $ 57 $ ---
Impaired loans with no related
allowance due to write-downs $ 583 $ 654
Impaired loans not written-down 301 292
$ 884 $ 946
Allowance related to impaired loans $ --- $ ---
Average recorded investment in impaired
loans during the period $ 909 $1,490
Related amount of interest income
recognized on impaired loans $ 62 $ 132
Amount of interest income on
impaired loans using the cash
basis method of accounting $ 1 $ 4
</TABLE>
(7) Three accounting standards recently issued by the Financial
Accounting Standards Board (FASB) were adopted by the Corporation
effective January 1, 1996. FASB 123 "Accounting for Stock Based
Compensation" was issued in October 1995. This statement
encourages but does not require companies to recognize compensation
expense for stock-based awards based on their fair value on the
grant date. Companies have the option to continue following the
existing intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 which often results in no compensation
expense. However, companies that choose the latter method are
required to provide pro forma disclosures of what net income and
earnings per share would have been had the new fair value method
been used. In addition, the standard requires all companies to
make significantly more disclosures regarding employee stock
options than are currently required. The Corporation has chosen
to continue to follow the existing intrinsic value method and to
provide the additional required pro forma disclosures in its 1996
annual financial statements.
FASB 122, "Accounting for Mortgage Servicing Rights, an Amendment
of FASB Statement No. 65", was issued in May 1995. This statement
requires that a separate asset be recognized for the rights to
service mortgage loans for others, regardless of how these rights
are acquired. The total cost of the mortgage loans, whether
purchased or originated, should be allocated between the loans and
the mortgage servicing rights based on their relative fair values.
The standard also requires that the capitalized mortgage servicing
rights be assessed for impairment based on the fair value of those
rights and that any impairment be recognized through a valuation
<PAGE>
allowance. As discussed further herein, this statement will be
superseded by FASB 125.
FASB No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", was issued in March
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, FASB 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.
The adoption of these new standards did not have nor is expected to
have a material effect on the Corporation's liquidity, capital
resources, or results of operations.
(8) On January 19, 1996, the Board of Directors authorized an amendment
to the Bank's noncontributory defined benefit pension plan to
freeze benefits as of March 31, 1996. The plan will be
administered in frozen status until such time as management deems
termination appropriate. On September 16, 1996, approximately two
thirds of the plan's accumulated benefit obligation was settled via
the purchase of annuity contracts. As a result of the plan
curtailment and the partial settlement, the Corporation recognized
a curtailment gain and a settlement loss in accordance with FASB
Statement No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits." These events were not material to the Corporation's
results of operations.
***********
<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 1996, including basic performance trends.
There are no known trends, events or uncertainties that will have or are
likely to have a material effect on the Corporation's liquidity, capital
resources or operations.
Third Quarter of 1996 Compared to Third Quarter of 1995:
Net income for the three months ended September 30, 1996, was
$886,000, an increase of $61,000 over the 1995 level of $825,000. On a
per share basis, 1996 third quarter results equalled $0.29 per share
versus $0.27 per share during the prior year.
Total interest income for the three months ended September 30,
1996, was $6.5 million, an increase of $284,000 over the same period in
1995. Interest and fees on loans increased by $575,000 primarily as a
result of volume increases. Interest on federal funds sold increased
while interest on investment securities decreased for a net decrease of
$323,000 as a result of investment portfolio restructuring as further
discussed herein.
Interest expense for the three months ended September 30, 1996,
was $3.1 million, an increase of $44,000 over the same period in the
prior year. Interest on deposits increased by $146,000 due mainly to
volume increases. Interest on borrowed funds, which includes fed funds
purchased, Federal Home Loan Bank (FHLB) borrowings and securities sold
under agreement to repurchase, decreased by $102,000 as a result of a
reduced level of borrowings.
The provision for loan losses in the third quarter of 1996 was
$120,000, an increase of $30,000 over that charged during the same
period of 1995. Management is continuing its policy of providing
reasonable additions to the reserve for loan losses on an ongoing basis.
The amount of the provision is based on the growth in the loan
portfolio, a current and prospective assessment of overall portfolio
quality and potential specific losses.
The net impact of the above changes on the Corporation's net
interest income after loan loss provision was an increase of $210,000
from 1995 to 1996.
<PAGE>
Other income for the three months ended September 30, 1996 was
$664,000, an increase of $178,000 over the same period in 1995. Service
charges on deposit accounts, other operating income and securities gains
increased by $15,000, $48,000 and $106,000, respectively. Service
charges on deposit accounts increased largely as a result of demand
deposit account growth. The growth in other operating income was
largely related to the increased loan and deposit levels. The
increased securities gains primarily resulted from the sales of several
community bank stock holdings which were held for their long term market
appreciation.
Total other expense during the third quarter of 1996 was $2.8
million, an increase of $233,000 over the same period in 1995. This
increase was primarily due to growth in salaries and employee benefits,
occupancy-related expenses and other operating expenses of $136,000,
$36,000 and $63,000, respectively. This growth was mainly associated
with the Corporation's expansion of its branch office network.
Competitive salary/wage pressures and inflation also contributed to
these increases.
Income taxes during the quarter ended September 30, 1996 were
$303,000, an increase of $94,000 from the same period in 1995. This
provision translates into an effective tax rate of 25.5% for the period
in comparison to a 20.2% rate during 1995. This increased tax expense
was primarily due to the lower proportion of tax free income.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995:
Net income for the nine months ended September 30, 1996, was $2.6
million, an increase of $124,000 over the level realized in 1995. On a
per share basis, earnings for the first nine months of this year were
$.86, $.05 higher than last year's per share income of $.81.
Total interest income for the period ended September 30, 1996, was
$19.0 million, an increase of $1.2 million from the same period in 1995.
Interest and fees on loans increased by $1.5 million due to volume
increases. Interest on federal funds grew while interest on investments
declined, netting to a decrease of $408,000, as a result of an
investment portfolio restructuring as further discussed herein. Other
interest income increased $114,000 from 1995 to 1996 as a result of
higher volumes.
Interest expense for the nine months ended September 30, 1996, was
$9.0 million, an increase of $608,000 from the same period in 1995.
Interest on deposits increased by $794,000 due to volume increases and
slightly higher average rate levels. Interest on other borrowed funds
decreased by $186,000 because of lower volumes.
<PAGE>
For the first nine months of 1996, the Corporation's loan loss
provision was $360,000 compared to the $270,000 charged during 1995, an
increase of $90,000. As stated earlier, management is funding the
reserve for potential loan losses at a level consistent with the growth
in loans outstanding, its evaluation of the overall quality of the
portfolio and potential specific losses.
Net interest income after the provision for loan losses increased
by $484,000 from 1995 to 1996 as a result of the changes in the above
key components.
Other income during the nine months ended September 30, 1996 was
$2.0 million, an increase of $352,000 over the same period last year.
Contributing to this growth were increases in trust department income,
service charges on deposit accounts, other operating income and
securities gains of $47,000, $42,000, $82,000 and $181,000,
respectively. Trust department income was largely up due to a fee
restructuring which was instituted at the beginning of 1996. The
increase in service charges on deposit accounts reflect continued growth
in demand deposit accounts, the major producer of this type of income.
The increase in other operating income was due largely to higher loan
and deposit levels. The increase in securities gains was the result of
sales executed as part of ongoing portfolio and balance sheet management
strategies primarily designed to manage interest rate risk.
Other expenses increased $580,000 to $8.3 million during the first
nine months of 1996 compared to the same period in 1995. Personnel
related expenses, facilities expenses, and other operating expenses
increased in the aggregate by $845,000. These increases were primarily
associated with the Corporation's expansion of its branch office network
and the corresponding investments in additional staff and technology to
facilitate this larger network. Competitive salary/wage pressures and
inflation also contributed to these increases. Offsetting these
increases was a reduction in FDIC insurance of $293,000 related to
premium rate changes instituted by the FDIC during the third quarter of
1995. The FDIC revised the premium rates as a result of the
recapitalization of the Bank Insurance Fund (BIF) and in an effort to
more fully reflect banks' risk profiles by expanding the spread between
rates paid by the "safest" and "riskiest" institutions. This revision
has translated into a reduction for the Corporation since the Bank is
currently included in the "safest" category. These costs will increase
slightly from the current level as further discussed herein.
For the nine months ended September 30, 1996, the Corporation's tax
provision was $786,000, an increase of $132,000 from the same period in
1995. This provision translates into an effective tax rate of 23.0%
compared to a 20.7% rate during 1995. The increased tax burden was
primarily caused by the lower proportion of tax free income.
<PAGE>
Statement of Cash Flows:
The Corporation's cash and cash equivalents increased by $5.3
million between December 31, 1995, and September 30, 1996 to a level of
$22.0 million.
Net cash provided by operating activities was $3.4 million of which
net income provided $2.6 million. Net income was augmented by a total
of $926,000 for the provision for loan losses and the provision for
depreciation and amortization to reflect expenses charged to income that
did not require cash outlays. The securities gains of $476,000 were
deducted from operating activities since they were captured in proceeds
from sales of available-for-sale (AFS) securities in investing
activities.
Net cash used by investing activities totalled $14.7 million. The
net investment in the loan portfolio was $33.3 million after deducting
the $5.7 million in loan sales. Much of this activity was attributable
to a successful spring loan promotion program. In addition, the
increase was largely related to growth experienced by the Corporation's
developing, newly opened branch facilities. Net cash of $20.4 million
was provided through investment portfolio activity during the first nine
months of 1996. Proceeds from sales of AFS securities and maturities
contributed $39.9 million and $45.3 million, respectively, while
purchases of investment securities utilized $64.8 million. The high
volume of sales was the result of ongoing portfolio and balance sheet
management strategies made in response to the volatile interest rate
environment during the first half of 1996. The proceeds were held in
federal funds sold until the rate environment stabilized and have been
used to fund the strong loan growth. Purchases of premises and
equipment used $1.7 million in cash. These purchases were primarily
related to investments in new branch facilities.
Financing activities provided $16.6 million during the nine months
ended September 30, 1996. Demand deposits, NOW accounts, money market
accounts and savings accounts provided $11.8 million while certificates
of deposit and other time deposits (CDs) provided 9.5 million. This
overall increase in deposit levels was largely the result of continued
growth experienced by the Corporation's developing branch facilities.
A decrease in borrowed funds and cash dividends paid of $1.6 million and
$1.0 million, respectively, used cash. Also utilizing $2.1 million of
cash was the repurchase and retirement of common stock related to a
stock purchase plan as further discussed herein. Proceeds from the
issuance of common stock, generated through the Corporation's employee
stock purchase plan, contributed $37,000 in cash.
<PAGE>
Asset Quality and Allowance for Loan Losses:
<TABLE>
The following tables illustrate the Corporation's nonperforming asset
position as of September 30, 1996 compared to its position at December
31, 1995.
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
Non-accrual loans $ 90 $ 10
Accruing loans past due 90 days or more 186 24
Restructured loans 244 292
Other real estate and other
repossessed assets 65 46
Total non-performing assets $ 585 $ 372
Non-accrual loans by category
Commercial, financial and agricultural $ 40 $ ---
Real estate-construction --- ---
Real estate-mortgage 19 ---
Installment 31 10
$ 90 $ 10
Past due loans by category
Commercial, financial and agricultural $ --- $ ---
Real estate-construction --- ---
Real estate-mortgage 151 ---
Installment 35 24
$ 186 $ 24
Restructured loans by category
Commercial, financial and agricultural $ 12 $ 13
Real estate-construction --- ---
Real estate-mortgage 232 279
Installment --- ---
$ 244 $ 292
</TABLE>
Nonperforming assets remained at a relatively low level at
September 30, 1996. Nonperforming assets were .24% of total loans at
September 30, 1996 compared to .17% at December 31, 1995. In addition,
potential problem loans at September 30, 1996, as determined by the
Corporation's internal review process, remained at $2.0 million, the
same level as December 31, 1995. Of these amounts, $583,000 and
$654,000 were considered impaired under FASB 114 for September 30, 1996
and December 31, 1995, respectively. Loans considered impaired under
FASB 114 represent those potential problem loans which management feels
are probable (as opposed to possible) to result in future noncompliance
in addition to the Corporation's applicable nonaccrual loans and
restructured loans.
<PAGE>
The Corporation remains committed to making monthly provisions in
order to maintain a strong allowance relative to its level of specific
potential losses and to its growing overall loan portfolio. A total
provision of $360,000 was made during the first nine months of 1996.
The resulting allowance for loan losses at September 30, 1996 was $2.4
million in comparison to $2.2 million at December 31, 1995. This
allowance approximated .96% of total loans and 406% of nonperforming
assets at September 30, 1996 versus 1.04% and 597% at year end 1995.
Management feels that the allowance for loan losses is adequate to cover
potential losses within the overall portfolio.
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 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 investment securities and
sales of loans in the secondary markets. On September 30, 1996, the
balance of the federal funds sold account was $4.9 million. Along with
the liquidity provided by federal funds sold, a total of $8.4 million or
10.9% of the Corporation's $76.6 million investment portfolio was
scheduled to mature in one year or less. Additionally, an average of
$5.6 million in loan principal repayments and $400,000 in mortgage- and
asset-backed securities repayments were received by the Corporation
during each month of the first nine months of 1996.
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, 1996, 78.7% of
total assets were funded with core deposits while 5.5% were funded with
certificates of deposit in excess of $100,000. In addition, 3.1% of
total assets were funded by FHLB borrowings which are primarily used to
provide match funding for assets with similar maturities.
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 due to changes in
interest rates. An interest sensitivity mismatch or GAP results from
either an excess of rate sensitive assets (positive gap) or rate
sensitive liabilities (negative gap) being repriced in a given time
period. A positive GAP generally indicates that rising interest rates
during a particular interval will increase net interest income, while
a negative GAP generally means the opposite. The Corporation strives to
maintain a rate sensitivity ratio (rate sensitive assets minus rate
<PAGE>
sensitive liabilities divided by total assets) over various time frames
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, 1996, for several different time intervals. This GAP
analysis takes into consideration the current estimated prepayments on
loans and amortizing investment securities. The Corporation had a gap
within one year at September 30, 1996 of negative $9.4 million and a
rate sensitivity ratio of negative 2.65% in comparison to a positive gap
of $8.4 million and a rate sensitivity ratio of positive 2.48% at
December 31, 1995. This negative shift in the gap position was
primarily due to the Corporation's strong loan growth during 1996. As
indicated, a negative gap position during a period of rising interest
rates may reduce net interest income. However, management believes that
the potential negative impact on the net interest margin, should rates
increase, would not be material. As part of ongoing analysis,
management revised the current assumptions related to the repricing of
its non-maturity deposits (i.e. checking, NOW and savings accounts,
etc). These revisions were incorporated into the GAP table below.
<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 $102,189 $ 36,124 $138,313
Interest Bearing Liabilities 115,763 31,961 147,724
Interest Sensitivity GAP
September 30, 1996 (13,574) 4,163 (9,411)
Rate Sensitivity Ratio (3.82)% 1.17% (2.65)%
Interest Sensitivity GAP
December 31, 1995 $ 17,308 $ (8,942) $ 8,366
Rate Sensitivity Ratio 5.13% (2.65)% 2.48%
</TABLE>
<PAGE>
Capital Resources:
The Corporation's average equity to asset ratio was 9.36% during
the first nine months of 1996 versus 9.40% for the first nine months of
1995. With the application of SFAS 115, the Corporation's total capital
fluctuates somewhat as changes in market interest rates affect the
market value of the available-for-sale investment portfolio.
Excluding the unrealized gains (losses) created by the application of
SFAS 115, this ratio was 9.23% for 1996 compared to 9.38% for 1995.
This decrease in the "core" capital ratio was attributable to the stock
repurchase plan discussed below along with strong growth in assets.
As of September 30, 1996, Hanover Bancorp's "core" capital to risk-
weighted assets was 12.73%. Total capital to risk-weighted assets on
the same date was 13.71%. 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 within
the levels considered well capitalized by the regulatory authorities.
During the quarter ended September 30, 1996, the Board of Directors
declared a cash dividend of $.12 per share payable November 1, 1996, an
increase of $.01 per share. 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 level of internal capital growth necessary to maintain
an appropriate ratio of equity to assets and the projected level of
earnings. Management anticipates that the internal growth rate of
equity is more than adequate to support the Corporation's asset growth.
During the first quarter of 1996, the Board of Directors approved
a plan to purchase, in open market and privately negotiated
transactions, up to 150,000 shares of its outstanding common stock.
Upon purchase, these shares will be retired rather than be carried as
treasury stock. The objective of this plan is to more effectively
deploy the Corporation's capital. In combination with increased
earnings over time, the resulting reduction in total capital and shares
outstanding is expected to improve return on equity and earnings per
share and support the market for Hanover Bancorp, Inc. stock. As of
September 30, 1996, the Corporation had purchased 115,504 shares.
Regulatory Issues:
The passage of the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Reigle Community Development and
Regulatory Improvement Act may have a significant impact upon the
Corporation. The key provisions pertain to interstate banking and
interstate branching as well as a reduction in the regulatory burden on
the banking industry. Since September, 1995, bank holding companies may
acquire banks in other states without regard to state law. In addition,
banks can merge with other banks in another state beginning in June,
1997. States may adopt laws preventing interstate branching but, if so,
no out-of-state bank can establish a branch in that state and no in-
state bank may branch outside the state. Pennsylvania amended the
provisions of its banking code to authorize full interstate banking and
branching under Pennsylvania law and to facilitate the operations of
interstate banks in Pennsylvania. As a result of legal and industry
changes, management expects that consolidation will continue as the
<PAGE>
financial services industry strives for greater cost efficiencies and
market share. Management believes that such consolidation may enhance
its competitive position as a community bank. There are numerous
proposals before Congress to modify the financial services industry and
the way commercial banks operate. However, it is difficult to determine
at this time what effect such provisions may have until they are enacted
into law. Except as specifically described above, management believes
that the effect of the provisions of the aforementioned legislation on
the liquidity, capital resources, and results of operations will not be
material.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 to recapitalize the Savings Association
Insurance Fund ("SAIF") administered by the Federal Deposit Insurance
Corporation ("FDIC") and to provide for repayment of the FICO (Financial
Institution Collateral Obligation) bonds issued by the United States
Treasury Department. The FDIC will levy a one-time special assessment
on SAIF deposits equal to 65.7 cents per $100 of the SAIF-assessable
deposit base as of March 31, 1995.
During the years 1997, 1998 and 1999, the average regular annual
deposit insurance assessment is estimated to be about 1.29 cents per
$100 of deposits for BIF deposits and 6.44 cents per $100 of deposits
for SAIF deposits. Individual institution's assessments will continue
to vary according to their capital and management ratings. As always,
the FDIC will be able to raise the assessments as necessary to maintain
the funds at their target capital ratios provided by law. After 1999,
BIF and SAIF will share the FICO costs equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the
rate of approximately 2.43 cents per $100 of deposits. The FICO bonds
will mature in 2018-2019, ending the interest payment obligation.
Since the Corporation does not hold any SAIF insured deposits, it
will not be subject to the special assessment and it will only be liable
for the BIF assessment rate from 1997 to 1999.
The law also provides that BIF and SAIF are to merge to form the
Deposit Insurance Fund ("DIF") at the beginning of 1999, provided that
there are no SAIF institutions in existence at that time. Merger of the
Funds will require state laws to be amended in those states authorizing
savings associations to eliminate that authorization (state chartered
savings banks will not be affected). This provision reflects Congress's
apparent intent to merge thrift and commercial bank charters by January
1999; however, no law has yet been enacted to achieve that purpose.
The Act also provides regulatory relief to the financial services
industry relative to environmental risks, frequency of examinations, and
the simplification of forms and disclosures.
The regulation will increase the Corporation's FDIC insurance
premium costs slightly from the current level beginning in 1997.
Management does not believe that this law will materially impact the
Corporation's liquidity, capital resources or results of operations.
<PAGE>
In June 1996 the Financial Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125 (FASB 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." FASB 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements, and other
transactions involving the transfer of financial assets. This statement
will supersede FASB 122, discussed above, but will retain its impairment
provisions. This statement is generally effective for transactions that
occur after December 31, 1996. Certain transactions will be effective
beginning after December 31, 1997. Management does not anticipate that
this new standard will have a material impact on the Corporation's
liquidity, capital resources or results of operations.
Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation, which
if they were implemented, would have a material adverse effect upon the
liquidity, capital resources or results of operations, although the
general cost of compliance with numerous and multiple federal and state
laws and regulations does have, and in the future may have, a negative
impact on the Corporation's results of operations.
During the first quarter of 1996 the Pennsylvania State Department
of Banking completed a routine examination of the Bank including an
assessment of asset quality. During 1995 the FDIC completed a similar
examination of the Bank. Also during 1995, the Federal Reserve Bank of
Philadelphia completed a routine examination of the Corporation.
<PAGE>
PART II. OTHER INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Item 1. Legal Proceedings
In the opinion of the management of the Corporation and the Bank,
there are no proceedings pending to which the Corporation and/or Bank is
a party or to which their property is subject, which, if determined
adversely to the Corporation or Bank, would be material in relation to
the Corporation's and the Bank's undivided profits or financial
condition. There are no proceedings pending other than ordinary routine
litigation incident to the business of the Corporation or the Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation 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: November 12, 1996 \S\ J. Bradley Scovill
J. Bradley Scovill
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1996 \S\ Thomas J. Paholsky
Thomas J. Paholsky
Treasurer
(Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,071
<INT-BEARING-DEPOSITS> 80
<FED-FUNDS-SOLD> 4,930
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,859
<INVESTMENTS-CARRYING> 10,705
<INVESTMENTS-MARKET> 10,666
<LOANS> 247,014
<ALLOWANCE> 2,376
<TOTAL-ASSETS> 355,690
<DEPOSITS> 299,538
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,889
<LONG-TERM> 0
<COMMON> 3,327
0
0
<OTHER-SE> 27,604
<TOTAL-LIABILITIES-AND-EQUITY> 355,690
<INTEREST-LOAN> 14,800
<INTEREST-INVEST> 3,273
<INTEREST-OTHER> 957
<INTEREST-TOTAL> 19,030
<INTEREST-DEPOSIT> 8,209
<INTEREST-EXPENSE> 9,020
<INTEREST-INCOME-NET> 10,010
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 476
<EXPENSE-OTHER> 8,278
<INCOME-PRETAX> 3,411
<INCOME-PRE-EXTRAORDINARY> 2,625
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,625
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
<YIELD-ACTUAL> 0
<LOANS-NON> 90
<LOANS-PAST> 186
<LOANS-TROUBLED> 244
<LOANS-PROBLEM> 2,000
<ALLOWANCE-OPEN> 2,220
<CHARGE-OFFS> 258
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 2,376
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
