SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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
incorporation or organization) Identification No.)
33 Carlisle Street
Hanover, Pennsylvania 17331
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (717) 637-2201
Securities Registered Pursuant To Section 12(b) Of The Act: None
Securities Registered Pursuant To Section 12(g) Of The Act:
Common Stock - Par Value $1.11 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive Proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 15, 1996, was $52,888,649.
The number of shares outstanding of the issuer's common stock as of
February 15, 1996: Common Stock, $1.11 Par Value -- 3,108,118 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Hanover Bancorp, Inc. Proxy Statement for the Annual
Shareholders Meeting to be held April 9, 1996, are incorporated by reference
into Part III.
<PAGE>
HANOVER BANCORP, INC.
FORM 10-K INDEX
PART I PAGE #
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 4
Item 4 - Submission of Matters to a Vote of Security Holders. . . . 4
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters. . . . . . . . . . . . . . . . 4
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . 4
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 4
Item 8 - Financial Statements and Supplementary Data. . . . . . . . 4
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure. . . . . . . . . . 4
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . . 5
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . 5
Item 12 - Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . 5
Item 13 - Certain Relationships and Related Transactions. . . . . . 5
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . 5
Item 15 - Signatures. . . . . . . . . . . . . . . . . . . . . . . . 7
<PAGE>
PART I
ITEM 1 - BUSINESS
HANOVER BANCORP, INC. - GENERAL
The registrant, Hanover Bancorp, Inc. (the "Corporation"), was incorporated
under the laws of the Commonwealth of Pennsylvania on August 2, 1983. The
Corporation is a one-bank holding company registered under the Bank Holding
Company Act of 1956 as amended, owning all the outstanding shares of its
subsidiary, Bank of Hanover and Trust Company.
The Corporation is registered with and subject to the regulatory
supervision of the Securities and Exchange Commission and the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") and the
Bank is subject to regulatory supervision of the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation ("FDIC"). The
Corporation's administrative offices are located at 33 Carlisle Street,
Hanover, Pennsylvania 17331 (telephone number 717-637-2201).
BANK OF HANOVER AND TRUST COMPANY
Bank of Hanover and Trust Company (the "Bank") is the Corporation's wholly-
owned bank subsidiary and was first organized in 1835 under the laws of the
Commonwealth of Pennsylvania. The Bank conducts its business principally
through eleven full service banking offices and one loan production office
located in York and Adams Counties, Pennsylvania. At December 31, 1995, the
Bank had total deposits of $279,372,000; total assets of $332,753,000; and
net loans of $211,649,000.
The Bank offers a wide variety of banking services to all segments of its
service area. The Bank's lending services include commercial, financial and
agricultural revolving lines of credit and term loans, construction loans,
residential mortgage loans and installment and other personal loans. These
lending activities involve varying degrees of credit risk. In general,
commercial, financial and agricultural loans expose the Bank to the most
credit risk while residential mortgage loans involve the least risk. In
order to keep this risk at an acceptable overall level, the Bank strives to
maintain a diversified loan portfolio. The specific underwriting standards
such as loan to value ratios and collateral requirements are defined within
a formal written lending policy and vary from category to category. The
Bank's deposit services include commercial and personal checking accounts,
savings and time accounts, certificates of deposit, and safety deposit
services. The Bank is also a member of the MAC system and offers 24-hour
automated teller machine service at six of its Hanover offices, both of its
Gettysburg offices and at its offices in Littlestown, New Oxford and
Rossville as well as three remote service locations in Hanover.
Individual trust services offered by the Bank include the administration of
estates, trust and agency accounts. Corporate trust services include acting
as trustee for employee benefit plans.
The Bank is not dependent upon a single customer or a small number of
customers, the loss of which would have a material adverse effect on the Bank
or the Corporation.
COMPETITION
Commercial banking in Pennsylvania is highly competitive. In addition to
competition with banks of similar size, the Bank competes directly in its
market area with larger banking and other financial service organizations
which have substantially greater resources and serve broader geographic
markets.
<PAGE>
Competing within the Bank's market area, defined as York and Adams
Counties, are 208 offices of area financial institutions, including
commercial banks, savings banks and credit unions. According to Sheshunoff
Information Services, Inc.'s Branches of Pennsylvania - 1995, combined total
deposits of these financial institutions was $5,448,842,000 as of June 30,
1994.
STAFF
The total number of full-time equivalent persons employed by the Bank as of
December 31, 1995, was 197.75. Most employees participate in the Bank's
pension plan and are provided with group life, health and major medical
insurance. Management considers employee relations to be very good.
SUPERVISION AND REGULATION
The Corporation as a "bank holding company" under the Federal Bank Holding
Company Act (the "Act") is regulated and examined by the Federal Reserve
Board. The Act restricts the business activities and acquisitions that may
be engaged in, or made by the Corporation. As a "bank holding company" for
purposes of Pennsylvania state banking law, the Corporation is regulated and
supervised by the Pennsylvania Department of Banking.
Other Federal and Pennsylvania laws regulate, restrict and sometimes
prohibit certain activities of, or transactions between, a corporation's
banking subsidiaries and a corporation itself and its other subsidiaries.
These laws include limitations on the loans by a bank's subsidiaries to
affiliated companies and on the amount of dividends that may be declared by
a bank's subsidiaries (see Note 12 to the Consolidated Financial Statements).
The Bank is a member of the FDIC. Accordingly, its operations are subject
to regulation and examination by the State of Pennsylvania and the FDIC.
GOVERNMENTAL MONETARY POLICIES
The earnings of the Corporation and the Bank are affected by domestic
economic conditions and the monetary and fiscal policies of the United States
Government and its agencies. An important function of the Federal Reserve
System is to regulate the money supply and interest rates. Among the
instruments used to implement those objectives are open market operations in
United States government securities and changes in reserve requirements
against member bank deposits. These instruments are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates charged on
loans or paid for deposits.
As a banking institution, the policies and regulations of the Federal
Reserve Board have a significant effect on its deposits, loans and investment
growth, as well as the rate of interest earned and paid, and are expected to
affect the Bank's operations in the future. The effect of such policies and
regulations upon the future business and earnings of the Corporation and the
Bank cannot be predicted.
<PAGE>
ITEM 2 - PROPERTIES
The Corporation's headquarters is located in its Administration Center at
33 Carlisle Street, Hanover, Pennsylvania 17331. In addition to the
Administration Center, the Bank owns the following unencumbered banking
offices:
MAIN OFFICE YORK STREET OFFICE
25 Carlisle Street 951 York Street
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NEW OXFORD OFFICE HANOVER CROSSING OFFICE
318 Lincolnway East 453 Eisenhower Drive
New Oxford, Adams County Hanover, York County
Pennsylvania 17350 Pennsylvania 17331
OPERATIONS CENTER WEST MANCHESTER OFFICE (Building)
1040 High Street 1511 Kenneth Road
Hanover, York County York, York County
Pennsylvania 17331 Pennsylvania 17404
(Opening March 18, 1996)
The Bank also owns the following unencumbered property:
Vacant 2-acre tract of land located at the intersection of Pennsylvania
Route 74 and Wellsville Road in the Borough of Wellsville, York County,
Pennsylvania which was for possible branch development and is now listed for
sale.
The Bank leases the following properties:
PLAZA OFFICE SOUTH HANOVER OFFICE
880 Carlisle Street 1049 Baltimore Street
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NORTH MALL OFFICE ROSSVILLE OFFICE
Carlisle Street Extended 3405 Rosstown Road
Hanover, York County Wellsville, York County
Pennsylvania 17331 Pennsylvania 17365
GETTYSBURG EAST OFFICE LITTLESTOWN OFFICE
1275 York Road 400 West King Street
Gettysburg, Adams County Littlestown, Adams County
Pennsylvania 17325 Pennsylvania 17340
DOWNTOWN GETTYSBURG OFFICE WEST YORK LOAN PRODUCTION OFFICE
6 York Street 1550 Kenneth Road
Gettysburg, Adams County York, York County
Pennsylvania 17325 Pennsylvania 17404
WEST MANCHESTER OFFICE (Land)
1511 Kenneth Road
York, York County
Pennsylvania 17404
(Opening March 18, 1996)
<PAGE>
ITEM 3 - 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 authorites.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
COMMON STOCK MARKET PRICES AND DIVIDENDS on page 33 of the 1995 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
Hanover Bancorp, Inc.'s SELECTED CONSOLIDATED FINANCIAL DATA on page 11 of
the 1995 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS on pages 13 through 32 of the 1995 Annual Report to Shareholders
is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the related Notes to the
Financial Statements on pages 36 through 55 of the 1995 Annual Report to
Shareholders are incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACOOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ELECTION OF DIRECTORS on pages 5 through 7 and OFFICERS OF THE
CORPORATION and PRINCIPAL OFFICERS OF THE BANK on pages 15 through 16
of the 1996 Proxy Statement are incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS, COMPENSATION COMMITTEE REPORT, SUMMARY
COMPENSATION TABLE and RETIREMENT BENEFITS on pages 8 through 15
of the 1996 Proxy Statement are incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
OWNERSHIP OF SECURITIES BY THE CORPORATION'S DIRECTORS, NOMINEES AND
PRINCIPAL OFFICERS on pages 3 through 4 and OFFICERS OF THE CORPORATION
and PRINCIPAL OFFICERS OF THE BANK on pages 15 through 16 of the 1996
Proxy Statement are incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS on page 17 of the 1996 Proxy Statement are
incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
A. (1) and (2) Consolidated Financial Statements and Schedules.
Included within Exhibit (13).
(3) Exhibits as required by Item 601 of Regulation S-K.
(3)(a)(1) Articles of Incorporation previously
filed as Exhibit 3a to the Corporation's 1991
Form 10-K filed March 27, 1992, are hereby
incorporated by reference.
(3)(a)(2) Amendments to Article 4 of the Articles
of Incorporation previously filed as Exhibit 3a to the
Corporation's 1993 Form 10-K filed March 11, 1994, are hereby
incorporated by reference.
(3)(b) The By-laws of the Corporation previously
filed as Exhibit 3b to the Corporation's 1991
Form 10-K filed March 27, 1992, are hereby
incorporated by reference.
(3)(c) Amendment to Article 5.A. of the Articles
of Incorporation previously filed as Exhibit 3c to the
Corporation's 1994 Form 10-K filed March 20, 1995, are hereby
incorporated by reference.
(13) 1995 Annual Report to Shareholders.
<PAGE>
(22) The registrant has one subsidiary, Bank of
Hanover and Trust Company, 25 Carlisle Street,
Hanover, Pennsylvania 17331, incorporated
in Pennsylvania.
(23) Consents of independent auditors.
(27) Financial Data Schedule.
(28) Additional Exhibits.
(99)(a) Auditor's Report. Included within Exhibit (13).
(99)(b) Proxy Statement and Notice of Annual
Meeting of Shareholders to be held April 9,
1996, are hereby incorporated by reference.
(99)(c) Form of Proxy for Annual Meeting of
Shareholders to be held April 9, 1996, is
hereby incorporated by reference.
B. There were no reports filed on Form 8-K for the quarter
ended December 31, 1995.
C and D. Exhibits and Financial Statement Schedules. All
other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instruction or
are inapplicable and, therefore, have been omitted.
<PAGE>
ITEM 15 - SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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. (Registrant)
BY: /S/ J. Bradley Scovill February 16, 1996
J. Bradley Scovill Date
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on February 16, 1996, by the following persons on
behalf of the registrant and in the capacities indicated.
/S/ Michael D. Bross /S/ Thomas M. Bross, Jr.
Michael D. Bross Thomas M. Bross, Jr.
Director Director,
Vice Chairman of the Board
/S/ S. Forry Eisenhart, Jr. /S/ Bertram F. Elsner
S. Forry Eisenhart, Jr. Bertram F. Elsner
Director Director
/S/ J. Daniel Frock /S/ John S. Hollinger, Jr.
J. Daniel Frock John S. Hollinger, Jr.
Director Director
/S/ Terrence L. Hormel /S/ Earl F. Noel, Jr.
Terrence L. Hormel Earl F. Noel, Jr.
Director, Director
Chairman of the Board
/S/ Vincent P. Pisula /S/ Charles W. Test
Vincent P. Pisula, MD Charles W. Test
Director Director
/S/ J. Bradley Scovill /S/ Gerald M. Warner
J. Bradley Scovill Gerald M. Warner
Director, President and Secretary and Treasurer
Chief Executive Officer (Principal Accounting and
(Principal Executive Officer) Financial Officer)
(front cover page)
HANOVER BANCORP, INC.
1995 ANNUAL REPORT
AND FORM 10-K
Managing Opportunities
While Maintaining Balance
<PAGE>
1 Financial Highlights
2 Letter to Shareholders
5 Managing Opportunities While Maintaining Balance
11 Selected Consolidated Financial Data
12 Distribution od Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Rate Spread
13 Management's Discussion and Analysis of Financial Condition and Results
of Operations
33 Common Stock Market Prices and Dividends
35 Report of Ernst & Young LLP,
36 Consolidation Statements of Income
37 Consolidated Balance Sheets
38 Consolidated Statements of Shareholders' Equity
39 Consolidated Statement of Cash Flows
40 Notes to Consolidated Financial Statements
56 Form 10-K
64 Directors and Officers
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(In Thousands, Except Ratios and Per Share Data)
<CAPTION>
1995 1994
<S> <C> <C>
FOR THE YEAR
Interest income $ 24,181 $ 20,311
Interest expense 11,409 8,517
Net interest income 12,772 11,794
Provision for loan losses 360 125
Income before income taxes 4,516 4,504
Income taxes 960 1,020
Net income 3,556 3,484
Cash dividends paid 1,243 1,144
Return on average assets 1.10% 1.19%
Return on average equity 11.62% 12.34%
AT YEAR END
Total assets $337,222 $308,354
Loans (net) 211,649 189,898
Deposits 278,234 251,752
Shareholders' equity 32,862 27,565
Book value of Trust Department assets 132,812 135,849
PER COMMON SHARE DATA*
Book value $ 10.58 $ 8.88
Net income 1.14 1.12
Cash dividends .41 .37
<FN>
* ALL PER COMMON SHARE DATA HAS BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO
THE 3 FOR 2 STOCK SPLIT PAID IN APRIL 1995 AND THE 5% STOCK DIVIDEND ISSUED
IN APRIL 1994.
</TABLE>
NATURE OF THE BUSINESS
Hanover Bancorp, Inc. is a Pennsylvania, one-bank holding company with
headquarters in Hanover, Pennsylvania. Bank of Hanover and Trust Company,
the Corporation's wholly-own subsidiary, was incorporated in 1835 and is
Hanover's oldest and only remaining independent financial institution. The
Corporation's full service banking business is conducted through its
subsidiary, which operates eleven branch offices in York and Adams Counties,
Pennsylvania, and a loan production office in York, Pennsylvania. Hanover
Bancorp's income is derived primarily from the operations of Bank of Hanover
and Trust Company.
<PAGE>
HANOVER BANCORP, INC.
TO OUR SHAREHOLDERS
This year constitutes the culmination of a strategic plan begun in 1990-
1991 with a very specific primary objective: to build a highly
professional, competitive, profitable community banking franchise. In order
to accomplish this objective, change and growth needed to be methodically
and intentionally managed, beginning from a solid base. Our plan required
significant up-front investment in facilities, technology and people. The
confidence to invest in our future stemmed from our vision of the market.
We anticipated that significant competitive changes, primarily resulting
from bank consolidations, would give a well-positioned community bank
strategic competitive advantage. These anticipated changes in the market
have, in fact, taken place. We are now beginning to see the return on our
"positioning" investments.
Earnings for the year ended December 31, 1995 were a record $3,556,000,
an increase of 2.07 percent compared to $3,484,000 earned during 1994.
Total assets as of December 31, 1995 were $337,222,000, up 9.36 percent
from $308,354,000 on December 31, 1994. Total net loans increased 11.45
percent during the year, to $211,649,000 from $189,898,000 a year earlier.
This increase incorporates the sale of $11,634,000 of principally mortgage
loans in the secondary market. Total deposits were $278,234,000 at
December 31, 1995 versus $251,752,000 a year earlier, an increase of 10.52
percent.
Return on average assets and return on average shareholders' equity were
1.10 percent and 11.62 percent, respectively, on December 31, 1995,
compared to 1.19 percent and 12.34 percent for December 31, 1994. Earnings
per share for the year ended December 31, 1995 were $1.14, an increase of
1.79 percent compared to $1.12 for 1994. Cash dividends paid to
shareholders during 1995 totaled $1,243,000 ($.40 per share), an 8.65
percent increase over the $1,144,000 ($.37 per share) paid in 1994.
Please refer to the Management's Discussion and Analysis section of this
annual report for a detailed review of our operating performance for 1995.
During the past few years we have aggressively pursued growth
opportunities. Our assets have grown from $246.1 million at year-end 1990
to $337.2 million as of December 31, 1995. Maintaining balance while
pursuing these opportunities has been key to our performance. While
growing, we have focused equally on traditional community banking values
and sophisticated systems for "next generation banking"--high-tech and high-
touch services. We believe we are successfully balancing the scales.
Aggressive geographic expansion followed the contours of our natural
market: York and Adams Counties, and the Hanover market that includes
northern Carroll County, Maryland. In this five year period, an office
relocation and a total of four new banking offices, including our full
service regional office in Gettysburg, and eight new automated teller
machines (ATMs) were established in locations convenient to the
neighborhoods and work places of our customers. Over this period, the
number of transactions grew 53 percent. By mid-year 1996, our expansion
program will be complete with the opening of our York regional headquarters
<PAGE>
(March, 1996) and the relocation of our South Hanover office.
Effectively implemented automation should be seamless, and its process
invisible to the customer. During 1996 we will have completed the
automation of a variety of customer service processes begun over the past
three years, including loans, deposits, and telebanking; as well as a
variety of back office processes. The enhanced productivity resulting from
these technological advances will position the Bank to handle significant
increases in business volume without substantial investments for a few
years.
People are an indispensable element of our success. From 1990 to year-
end 1995, Bank of Hanover nearly doubled its full time staff and upgraded
the compensation system to attract and retain employees of the highest
professional caliber. Staff growth has reached a plateau, but our emphasis
upon training, skills development and productivity will continue.
Facility expansion, systems automation, and personnel--the main factors
influencing efficiency--are represented in "overhead expense". Expressed
as a ratio, overhead expense as a percentage of net interest income plus
non-interest income, will show our progress in efficiently managing
overhead. Prior to our recent franchise expansion and technological
enhancement phase, we maintained an enviable efficiency ratio in relation
to our peer group. As a predictable result of our investments in growth,
that ratio rose to 67% by the end of 1995. Our goal is to push back down
through the 60% level as we move forward.
In terms of capacity, the Bank is now positioned to meet customer needs
throughout our market, which is characterized overall by economic diversity
and strength. Our market also presents a number of important niche
opportunities in the context of certain demographic changes: growth of the
senior market, growth of the young professionals segment, low unemployment,
increasing housing needs and entrepreneurial business expansion. Therefore,
Bank of Hanover is targeting the following profitable market niches which
are consistent with our mission and capabilities as an authentic community
bank: _ Small business, _ Residential mortgage financing, _ Automobile
financing, especially the pre-owned vehicles and indirect (dealer)
financing markets, _ The over 50 - mature market, _ Investments and
financial planning. Later in this report we'll discuss the strategic
advantages we possess, as an authentic community bank, that position us to
better serve these niche markets.
We will continue to emphasize cross-marketing of the Bank's services in
customer-responsive ways. This capability opens up significant and exciting
possibilities, as we seek to build customer relationships. For a single
customer, personal banking needs may naturally lead to financial planning,
trust or business services--or any combination of services to meet any
conceivable financial need.
During the past six months, our Board of Directors welcomed two new
members. Earl F. "Patty" Noel, Jr., President and CEO of Yazoo Mills,
Inc., of New Oxford, joined the Board this past September. Mr. Noel's
proven business and community leadership has been a valuable asset to our
organization. Also, in January of this year, J. Bradley Scovill was
promoted to President and CEO of Hanover Bancorp, Inc., in addition to his
role as President and CEO of Bank of Hanover. In his new capacity, Mr.
<PAGE>
Scovill, sits on the holding company's Board as well as the Bank's Board of
Directors.
As the Bank moves into 1996 and shifts its focus from franchise building
to relationship building, it will continue to enhance its role as a
customer-responsive, diversified financial services company. As always,
the true measure of our success in managing opportunities for next
generation community banking while maintaining our balance, is the value
delivered to you, our shareholder.
Sincerely,
/S/ Terrence L. Hormel
Terrence L. Hormel
Chairman of the Board
/S/ J. Bradley Scovill
J. Bradley Scovill
President and CEO
<PAGE>
Managing Opportunities While Maintaining Balance
Authentic Community Banking
"Things do not change; we change."
--Thoreau, Walden
Based in the greater Hanover area, Bank of Hanover serves a region
comprised of York, Adams and northern Carroll Counties--each with unique
communities. These communities are a kind of Walden to the vast majority of
people who live in them. Not ideal, mind you, but home. A special place,
with distinctions worth preserving. In fact, throughout this section of our
Annual Report, you will read what our regional vice presidents have to say
about the homegrown uniqueness and opportunities in their respective
markets.
The residents of our communities do not wish to be stereotyped or forced
into pigeon holes. They are well aware that the world is changing, but wish
to be influenced by these changes on their own terms. Fair enough. That's
the wonderful leverage enjoyed by strong communities of quality. And, oh
yes. Not just any bank, or any bank product or service, will do.
Anticipating seismic changes in the industry and the economy over the next
decade, Bank of Hanover in 1990-1991 mapped out a five year strategic plan
that would ensure long term shareholder value by growing resources and
capitalizing on opportunities in our market. The plan promised, and has
delivered, two realities:
_ an unprecedented degree of change and market share expansion
_ "best of both worlds" banking to the communities we serve. Combining
"high-tech" and "high-touch". Sophisticated systems and services,
rooted in traditional values. Professional service coupled with
neighborly rapport.
As we enter 1996, Bank of Hanover, as well as our customers and
shareholders, will begin to fully reap the benefits of those years of
change, growth and investment. We are not an out-of-town bank wearing a
local mask. We are an authentic community bank, and as such, Bank of
Hanover is well positioned to manage opportunity for the current and next
generation of bank customers and services.
Scott Sturgill knows Hanover, PA and Carroll County, MD
During a decade plus-long banking career, Scott has observed his community
evolve in terms of banking service needs.
"Sure, Hanover has a more conservative segment of customers who enjoy our
traditional banking services. However, we are observing a growing
proportion of customers--especially younger adults and newcomers-- who are
seeking a wider variety of banking services and lending opportunities, who
buy mutual funds and may have multiple bank relationships. Our goal is to
further enhance these relationships and others, as we continue to serve new
generations of customers.
<PAGE>
Consider physicians moving into the area. When they are just starting out,
they're interested in loans for their first office, as well as their first
home. We offer fast turnaround and responsive service. I know of one
physician who is now opening a second location just a few years after
opening his first office. When other physicians learn that Bank of Hanover
provides superior service, in addition to the full range of financial
products they require -- they seek us out. Word-of-mouth often proves to
be our best advertising.
Customers value our ability to provide business consultation. Recently a
customer came to us for a loan in the $50-60,000 range. After evaluating
the business based on our experience in that industry, we suggested that
more funding may be needed to accomplish their business objectives, and
explained why. The customer agreed, and was pleased when we came back with
a $100,000 approved loan.
One thing we're doing right is going out and meeting the customer. Our
prospective customers say, 'You're going to come out here? My bank never
does that!' I remember having to tell a prospective customer the name of
his banker at a competing bank. After a while, these people aren't
prospects anymore, they're customers."
Managing Opportunities
"How big are you going to get?"
Bank of Hanover very deliberately defines its natural market as extending
through York and Adams Counties and the Hanover market, which includes
northern Carroll County. We are getting "that big" as quickly as we can,
while doing so profitably. Our objective is to become or remain the market
share leader in each of the communities we serve. From the customers'
perspective, "that big" means being able to offer products, service and a
delivery system suited to the needs and tastes of current and future
generations. Our customers expect both sophisticated banking systems and
local, personal service. The ability to keep "both worlds" in balance is
not easily cultivated, but it does make us unique in the market we serve.
How does the Bank manage the cost of delivery to a variety of demographic
tastes and needs? During 1995, we completed restructuring of our delivery
system according to these three regions, each with its own full service
regional headquarters and staff, including regional vice presidents
accountable for customer service and performance within their market. (By
contrast, our competitors may have one counterpart covering all three
regions). This regional presence provides convenient one-stop banking,
whether our customers are looking for commercial, consumer or trust and
investment services. Moreover, staff can effectively know customers (by
name), visit them at their place of business, and be fully engaged in the
life of the community.
Regional presence also enables nimble response to niche business
opportunities. Let's take a closer look at a few of these: alternative
investment products, vehicle loans, mortgages, the "mature market" and
entrepreneurial, or "small", businesses.
A powerful triad consisting of Bank of Hanover, the Bank's Trust and
<PAGE>
Investment Division, and Pillar Financial, provides a full range of
solutions to customers' investment needs. No longer confined to a choice of
CDs, a customer can also receive a financial profile analysis, or add
estate planning or annuities to his or her portfolio of investment
services. Cross-referrals have grown thirty times from earlier 1995 levels.
Managed Series Trust mutual funds offer "lifecycle investing". After
considering the customer's stage of life and financial goals, an
appropriate mutual fund portfolio is made available. These investment
options provide the same full range of alternative investments found at
brokerage firms and insurance companies.
When they connect with Bank of Hanover's dealer network, new and used
vehicle dealerships have ready access to approved loans at very competitive
rates. Our responsive staff makes it possible to have loan approval faxed
within 20 minutes of the dealer's phone call to us.
We visit realtors and home buyers, toting our laptops, making it easier
than ever to select from a broad range of mortgage services. Two new Bank
of Hanover services simplify shopping for and buying a home, and give our
customers more negotiating power. With SHOPPER'Sflex, customers can pre-
qualify for a loan, then shop for their home, stress-free. The BUYER'Sflex
program pre-approves loans for qualified customers who are ready to buy.
Our professional mortgage originators don't put people, or their homes, in
a "one size fits all" box, so you're more likely to qualify for a Bank of
Hanover loan.
Another lifestyle-specific set of services to the "mature market"
acknowledges the purchasing power and preferences of older customers. Our
special benefits program serves these customers by providing social and
travel opportunities, financial services, and consumer education tailored
to their active, independent lifestyles.
"Small businesses" pack a wallop in terms of individual potential and
aggregate power. During 1995 we made over 2,600 calls to commercial
customers alone. Bank of Hanover services, such as Corporate Paycheck
Direct, empower employers and employees to gain financial strength.
Flexibility and creativity are two words you just don't associate with
bankers, especially in today's "fit the mold" lending environment. Yet our
ability to remain flexible and seek creative solutions on behalf of
customers is precisely what sets us apart; values that enable Bank of
Hanover to successfully manage opportunities.
Ron Smith and Adams County: Banking on each other for over 28 years
Without a doubt, agriculture and tourism dominate the Adams County
landscape, but smaller businesses, with fifty employees or less, complete
and enhance the picture, according to banking veteran Ron Smith.
Our customers want to be considered a big player, to know that there's
mutually perceived value in the relationship--and that's precisely the
consideration we give them.
Bank of Hanover is prepared to seek out the niche opportunities and seek
out customers. Our brand of customer responsiveness is very appealing in
Adams County, where our larger competitors are simply not giving these
<PAGE>
customers the attention they deserve. It certainly makes a difference that
our employees live, work and invest in the local community. You may
wonder, what does that really have to do with banking? Let me tell you.
There is a customer rapport and empathy for their needs which simply can't
be developed any other way. Some examples: Carolyn Wagaman, Downtown
Gettysburg Office Teller, was the regional head of the local March of Dimes
walk in 1995. Carolyn and Teresa Baadte, Downtown Gettysburg Office
Manager, visited local elementary schools to participate in a reading
program using banking illustrations. Staff and customers work together on
Our Neighbor's Christmas, to help families who might not otherwise have
Christmas at all.
Now here's an example of how rapport with the community translates into the
banking relationship. There was a business well known in the community that
had hit a rough spot. The larger institution it had worked with two years
earlier would have kicked out the loan. We worked through the relationship,
knowing this customer deserved the opportunity to perform.
We emerged from the experience respecting each other, and demonstrating we
can take a longer view than just this quarter's numbers.
Positioned for Next Generation Banking
"What will be left for the branches to do?"
With banking services going to where our customers are--in the work place,
in the home, on the computer--will branches die, or become obsolete?
Far from it. The next generation of branches will be the financial services
center for your community. They will be invitingly comfortable, efficient
places to do business. Expect solutions to any and all of your financial
needs--deposits, investments, consumer and commercial loans--and the power to
resolve problems on the spot. It's relationship-based banking, not
transaction-oriented. Expect to be greeted by name by a customer service
staff member who will direct you to the right expert with the information
you need. Cross-training ensures that every staff member can answer most of
your questions or know where to quickly get the rest of the answers. For
retail customers, the "merchant box" area, with boxes similar to safety
deposit boxes, combines the convenience of self-service with the efficiency
of a dedicated space. You won't have to stand in line to wait for service.
With platform automation in place, deposit customers will be able to view
on-screen comparative benefits of choices in checking, savings and IRAs,
and make fast selections. Automation makes fast work of the paperwork for
deposit and loan customers. Speaking of automation, TeleBank provides push-
button access to account information and funds transfer and payment options
from any touch-tone phone, 24 hours per day, seven days a week. TeleBank
will continue to expand services, so that banking by telephone continues to
be a convenient option for you. Our on-line teller system will make
available current information about accounts, diminishing the potential
for fraud and making deposits available for immediate withdrawal, in
accordance with the Federal government's Funds Availability guidelines.
"Next generation banking" is available in 1996 at the new West Manchester
<PAGE>
office in York. This full service regional branch will serve as a prototype
for others, including our upcoming South Hanover office relocation .
Behind the scenes, it's the professional expertise and skills of Bank of
Hanover employees that make the technology and systems work seamlessly. A
major thrust in training continues to develop the technical and service
expertise of staff members.
Organization-wide training in extraordinary customer relations will be
instituted during 1996. We also believe that the career interests of every
employee need to be fully explored and valued, and will continue to develop
appropriate evaluation and training opportunities.
After all, people are at the heart of Bank of Hanover's brand of banking.
Those whose vision of "next generation banking" is a sterile, computer-to-
computer efficiency that provides look-alike, impersonal services via
intrusive marketing methods, may be better served by another bank. Our
vision of the future requires the synergy of the right people and systems
to provide banking products and services so flexible, that every one of our
customers will feel they were custom-tailored to fit their needs and
lifestyle.
Bank of Hanover. Local. Independent. As unique as the communities we serve.
Bernie Wible and York County: Two decades of shared history, 21st Century-
ready
York's historical roots notwithstanding, Bernie Wible appreciates the
diversity of a community that grows increasingly cosmopolitan without
losing its traditional values.
You can't point to just one or two main industries in York and that bodes
well for the community in all kinds of economic weather. The upticks may
not be quite as high, but the downticks are certainly not as low. It's an
even-keeled economic community with a good work ethic. Speaking of ethics,
Bank of Hanover's values fit well with the value system of the York area.
Family is important. Active involvement in civic affairs and events.
Attention to details. Customer responsiveness. We've had a very favorable
reception in York. When customers enter our new office in West Manchester
Township, they meet bank staff whose first priority is excellent customer
service. Our customers soon discover they have a one-stop financial
services relationship with Bank of Hanover, with services tailored to suit
their specific situation. Likewise, our retail customers appreciate the
"merchant box" space developed just for them, because their time is
valuable.
Although there are cost-conscious customers, Yorkers are willing to try new
services and technologies. Witness the population growth in the southern
part of York County. It's very competitive right now. We have to be
creative, flexible, and have a real sharp pencil. Maybe it means creative
financing with longer terms than are the industry norm, and below-market,
fixed rate financing funded through the Federal Home Loan Bank. Big city
capability coupled with small town values. In fact, that's what attracted a
New York City-based client to us. He became aware of Bank of Hanover
through a division of his business located here. We now handle his
<PAGE>
commercial and his personal banking needs.
The bottom line is, our people, service and systems are ideally suited to
the area, and in a competitive banking environment, that makes a world of
difference."
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands, Except Ratios and Per Share Data)
<CAPTION>
Year-Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Net loans $211,649 $189,898 $171,282 $164,820 $158,104
Total assets 337,222 308,354 278,430 270,319 250,766
Total deposits 278,234 251,752 231,464 233,078 216,227
Shareholders' equity (core *) 31,308 28,997 26,392 23,770 21,668
Shareholders' equity (total) 32,862 27,565 28,354 23,770 21,668
Total average assets 321,949 293,079 272,554 256,247 245,834
Total average equity 30,602 28,246 25,043 22,307 20,697
EARNINGS DATA
Interest income $ 24,181 $ 20,311 $ 20,018 $ 21,311 $ 22,770
Interest expense 11,409 8,517 8,730 10,372 12,934
Net interest income 12,772 11,794 11,288 10,939 9,836
Provision for loan losses 360 125 645 650 735
Net interest income after
provision for loan losses 12,412 11,669 10,643 10,289 9,101
Other income 2,430 2,352 2,151 1,380 1,476
Other expenses 10,326 9,517 8,908 7,703 6,860
Income before income taxes 4,516 4,504 3,886 3,966 3,717
Net income 3,556 3,484 3,374 3,123 2,905
Cash dividends paid 1,243 1,144 1,065 990 942
RATIOS
Return on average assets 1.10% 1.19% 1.24% 1.22% 1.18%
Return on average equity (core *) 11.75% 12.45% 13.47% 14.00% 14.04%
Return on average equity (total) 11.62% 12.34% 13.47% 14.00% 14.04%
Equity to assets (average) 9.51% 9.64% 9.19% 8.71% 8.42%
Dividend payout 34.96% 32.84% 31.89% 31.70% 32.43%
Net loans to assets (average) ** 63.16% 60.17% 59.50% 61.61% 64.62%
PER COMMON SHARE DATA ***
Net income $ 1.14 $ 1.12 $ 1.10 $ 1.02 $ .95
Cash dividends .41 .37 .35 .33 .31
Book value (core equity *) 10.08 9.34 8.54 7.75 7.07
Book value (total equity) 10.58 8.88 9.18 7.75 7.07
<FN>
* CORE EQUITY INCLUDES ALL EQUITY ACCOUNTS EXCEPT THE COMPONENT RELATED TO THE APPLICATION OF FASB 115 WHICH WAS ADOPTED ON
DECEMBER 31,1993.
** CERTAIN RECLASSIFICATIONS HAVE BEEN MADE IN ORDER TO PRESENT A MORE ACCURATE YEAR-TO-YEAR COMPARISON.
*** ALL PER COMMON SHARE DATA HAS BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE 3 FOR 2 STOCK SPLIT PAID IN APRIL 1995, THE 5%
STOCK DIVIDEND ISSUED IN APRIL 1994, THE 3 FOR 2 STOCK SPLIT PAID IN MAY 1993 AND THE 10% STOCK DIVIDEND ISSUED IN JULY 1992.
</TABLE>
<PAGE>
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST RATE SPREAD
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1995 1994 1993
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans * $205,970 $18,218 8.84% $178,737 $14,882 8.33% $164,286 $14,548 8.86%
Investment securities:
Taxable 61,892 3,766 6.08% 61,313 3,441 5.61% 68,809 3,766 5.47%
Tax-exempt 25,721 1,613 6.27% 21,288 1,354 6.36% 23,026 1,460 6.34%
Federal funds sold and other assets 10,765 584 5.42% 15,712 634 4.04% 3,470 244 7.03%
TOTAL INTEREST EARNING ASSETS $304,348 $24,181 7.95% $277,050 $20,311 7.33% $259,591 $20,018 7.71%
Taxable-equivalent adjustment ** 965 849 947
Taxable-equivalent yield $25,146 8.26% $21,160 7.64% $20,965 8.08%
NON-INTEREST EARNING ASSETS
Cash and due from banks $ 9,473 $ 8,460 $ 6,795
Premises and equipment 5,276 5,044 4,560
Other assets 5,483 4,911 3,731
Allowance for loan losses (2,631) (2,386) (2,123)
TOTAL ASSETS $321,949 $293,079 $272,554
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Demand deposits $ 25,686 $ 499 1.94% $ 24,446 $ 481 1.97% $ 21,031 $ 518 2.46%
Savings deposits 28,378 724 2.55% 30,640 773 2.52% 28,976 838 2.89%
Money market deposits 51,455 1,499 2.91% 54,505 1,450 2.66% 48,787 1,424 2.92%
Time deposits 134,436 7,351 5.47% 110,396 4,886 4.43% 110,798 5,280 4.76%
Other liabilities 23,830 1,336 5.61% 19,778 927 4.69% 16,017 670 4.19%
TOTAL INTEREST BEARING LIABILITIES $263,785 $11,409 4.33% $239,765 $ 8,517 3.55% $225,609 $ 8,730 3.87%
NON-INTEREST BEARING LIABILITIES
Demand deposits $ 24,502 $ 22,138 $ 18,744
Other liabilities 3,060 2,930 3,158
291,347 264,833 247,511
SHAREHOLDERS' EQUITY 30,602 28,246 25,043
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $321,949 $293,079 $272,554
Net interest income $12,772 $11,794 $11,288
Net yield on interest earning assets 4.20% 4.26% 4.35%
Net taxable-equivalent yield
on interest earning assets $13,737 4.51% $12,643 4.56% $12,235 4.71%
<FN>
* NON-ACCRUAL LOANS HAVE BEEN INCLUDED WITHIN THIS CATEGORY.
** THE TAXABLE-EQUIVALENT ADJUSTMENTS FOR TAX-EXEMPT ASSETS HAVE BEEN COMPUTED ON A FULLY TAX-EQUIVALENT BASIS
ASSUMING A TAX RATE OF 34% FOR 1995, 1994 AND 1993.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following pages contain "Management's Discussion and Analysis" of
Hanover Bancorp, Inc.'s 1995 financial condition and results of operations,
including comparison with prior year's results and identification of
possible risks and trends. This review should be read in conjunction with
the consolidated financial statements and related footnotes beginning on
page 28 as well as the letter to shareholders beginning on page 2.
Summary of Earnings and Financial Condition
Hanover Bancorp, Inc. (the "Corporation") achieved record net income of
$3.6 million in 1995, an increase of $72,000 (2.1%) from 1994. Earnings in
1994 increased $110,000 (3.3%) over 1993's earnings of $3.4 million.
Earnings per share of $1.14 in 1995 represent an increase of $.02 (1.8%)
over the $1.12 earned in 1994. During 1994 earnings per share increased
$.02 (1.8%) over the $1.10 earned in 1993. Per share data has been
restated, where appropriate, to reflect a 3 for 2 stock split effective
April 1, 1995, a 5% stock dividend paid April 1, 1994 and a 3 for 2 stock
split effective May 15, 1993.
Return on average assets (ROA) was 1.10% in 1995 compared to 1.19% in
1994 and 1.24% in 1993. Return on average equity (ROE) was 11.62% in 1995,
12.34% in 1994 and 13.47% in 1993. The recent decline in these ratios, as
further discussed herein, is primarily the result of significant growth in
both average shareholders' equity and total assets combined with increases
in other expenses related to the expansion of the Corporation's franchise.
<TABLE>
TRENDS IN SOURCES AND USES OF FUNDS
(In Thousands, Except Ratios)
<CAPTION>
1995 1994 1993
Increase/ Increase/ Increase/
Average (Decrease) Average (Decrease) Average (Decrease)
Balance Amount % Balance Amount % Balance Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FUNDING USES
Net loans $203,339 $26,988 15% $176,351 $14,188 9% $162,163 $ 4,279 3%
Investment securities:
Taxable 61,892 579 1% 61,313 (7,496) (11)% 68,809 7,516 12%
Tax-exempt 25,721 4,433 21% 21,288 (1,738) (8)% 23,026 4,901 27%
Federal funds sold and other 10,765 (4,947) (31)% 15,712 12,242 353% 3,470 (2,356) (40)%
Interest earning assets 301,717 27,053 10% 274,664 17,196 7% 257,468 14,340 6%
Non-interest earning assets 20,232 1,817 10% 18,415 3,329 22% 15,086 1,967 15%
TOTAL USES $321,949 $28,870 10% $293,079 $20,525 8% $272,554 $16,307 6%
FUNDING SOURCES
Interest bearing deposits $239,955 $ 19,968 9% $219,987 $10,395 5% $209,592 $ 3,952 2%
Other interest bearing
liabilities 23,830 4,052 20% 19,778 3,761 23% 16,017 7,529 89%
Interest bearing liabilities 263,785 24,020 10% 239,765 14,156 6% 225,609 11,481 5%
Non-interest bearing deposits 24,502 2,364 11% 22,138 3,394 18% 18,744 2,578 16%
Other non-interest bearing
liabilities 3,060 130 4% 2,930 (228) (7)% 3,158 (488) (13)%
Shareholders' equity 30,602 2,356 8% 28,246 3,203 13% 25,043 2,736 12%
TOTAL SOURCES $321,949 $28,870 10% $293,079 $20,525 8% $272,554 $16,307 6%
</TABLE>
The Corporation's total assets were $337.2 million as of December 31, 1995, up
$28.9 million (9.4%) from the $308.4 million level at December 31, 1994. Total
shareholders' equity at year-end 1995 and 1994 were $32.9 million and $27.6
million, respectively. The increase in total capital from 1994 to 1995 is
primarily attributable to fluctuations in unrealized gains (losses) on
available-for-sale securities resulting from the decline in market interest
rates during the latter half of 1995. Average equity to average assets was
9.51% and 9.64% for 1995 and 1994, respectively. The Corporation's risk-based
capital ratios at December 31, 1995, were 12.97% (Tier 1) and 13.89% (Total),
compared to 13.39% (Tier 1) and 14.55% (Total) for 1994.
<PAGE>
Non-performing assets, including non-accrual and renegotiated loans, accruing
loans past due 90 days or more and other real estate (ORE) and other
repossessed assets, totalled $372,000 or .17% of loans at December 31, 1995.
These figures compare to $782,000 or .41% of loans at year-end 1994.
The Corporation remains committed to maintaining the allowance for loan losses
at an adequate level. The allowance totalled $2.2 million at the end of 1995,
a decrease of $278,000 from $2.5 million at December 31, 1994. The allowance
equalled 1.04% of loans and 597% of nonperforming loans at December 31, 1995,
compared to 1.30% and 319% at the end of 1994.
The Corporation, through its subsidiary, Bank of Hanover and Trust Company
(the "Bank"), functions as a financial intermediary and its business is linked
to the economic strength and stability of the market it serves. This market,
which includes portions of York and Adams Counties in Pennsylvania and Carroll
County in northern Maryland, displayed economic stability during 1995 which
favorably impacted the Corporation's loan demand and corresponding asset
growth. Recent economic indicators suggest that the economy is experiencing a
slowdown from the growth rate of a year ago. This slowdown may to continue
during 1996 and may have an adverse effect on the Corporation's asset growth,
delinquency rates, etc. Throughout economic cycles, the diverse nature of the
local economy has allowed the Corporation's market to experience growth at
levels which compare favorably to national trends.
Summary of Sources and Uses of Funds
Total average funding sources increased by $28.9 million (9.9%) in 1995
compared to $20.5 million (7.5%) in 1994. The largest component of the 1995
increase was $20.0 million (9.1%) growth in interest bearing deposits. Average
certificates of deposit (CDs) increased $24.1 million while average savings
accounts, interest bearing demand deposits and money market accounts decreased
collectively by $4.1 million. In addition, non-interest bearing demand
deposits increased $2.4 million (10.7%) in 1995. In 1994 interest bearing
deposits increased $10.3 million (5.0%).
<TABLE>
RATE - VOLUME ANALYSIS
(In Thousands)
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) Increase (Decrease)
Due to (1) Due to (1)
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $2,367 $ 969 $3,336 $1,234 $(900) $ 334
Investment securities 300 284 584 (534) 103 (431)
Federal funds sold and other (233) 183 (50) 534 (144) 390
TOTAL INTEREST INCOME $2,434 $1,436 $3,870 $1,234 $(941) $ 293
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 24 $ (6) $ 18 $ 77 $(114) $ (37)
Savings deposits (58) 9 (49) 46 (111) (65)
Money market deposits (84) 133 49 158 (132) 26
Time deposits 1,185 1,280 2,465 (19) (375) (394)
Other liabilities 209 200 409 170 87 257
TOTAL INTEREST EXPENSE $1,276 $1,616 $2,892 $ 432 $(645) $(213)
NET INTEREST INCOME $1,158 $ (180) $ 978 $ 802 $(296) $ 506
<FN>
(1) THE CHANGE IN INTEREST DUE TO BOTH RATE AND VOLUME HAS BEEN ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE
RELATIONSHIP OF THE ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH.
</TABLE>
<PAGE>
Regular savings accounts, interest bearing checking accounts and money market
accounts contributed to this growth, while CDs declined. Non-interest bearing
deposits also increased by $3.4 million (18.1%) in 1994. This overall deposit
account growth during 1995 and 1994 was due largely to continued development of
the Corporation's recently opened Adams county facilities in Gettysburg and
Littlestown. The CD growth of 1995 and the shift in the deposit mix from 1994
to 1995 are also the result of the rebound in CD rates that occurred during the
latter part of 1994 and early 1995. As these rates became more attractive, CDs
again emerged as an alternative to non-traditional investments such as mutual
funds and annuities which gained popularity in the low rate environment of 1993
and early 1994. Through competitive pricing, the Corporation capitalized on
this renewed interest in CDs. In addition, consumers transferred funds from
their money market and savings deposit accounts to CDs to take advantage of
improved yields available in 1995. Many of these consumers were utilizing
these accounts as a means of remaining liquid in anticipation of higher future
yields. Other interest bearing liabilities grew $4.1 million (20.5%) and $3.8
million (23.5%) during 1995 and 1994, respectively. These increases were due
to higher average levels of Federal Home Loan Bank (FHLB) borrowings and
repurchase agreements. Finally, growth in average shareholders' equity of $2.4
million (8.3%) in 1995 and $3.2 million (12.8%) in 1994, was primarily
attributable to retained earnings.
The Corporation uses funds primarily to support its lending activities. In
1995, average net loans increased $27.0 million (15.3%) compared to an increase
of $14.2 million (8.7%) in 1994. Residential mortgages totalling $10.8 million
and $8.0 million were sold in the secondary markets in 1995 and 1994,
respectively, with the proceeds used to fund additional loan demand. The
Corporation experienced growth in each of its loan areas. Average retail
loans, average mortgage loans and average commercial loans increased
approximately $10.2 million, $7.7 million and $9.1 million, respectively,
during 1995. The development of the Corporation's Adams County facilities
supported this overall growth. Also contributing to the growth were
management's recent focus on creating a more sales-oriented corporate culture
and loan promotion programs. In 1994 consumer loans and mortgage loans
increased by approximately $13.2 million and $2.0 million, respectively, while
commercial loans decreased by $658,000. The trend towards greater growth in
the retail segments reflects pricing and business development strategies
designed to diversify the composition of the loan portfolio, and the general
economic and interest rate environment. As a result of overall loan growth,
average net loans as a percent of average total assets increased to 63.2% in
1995 compared to 60.2% in 1994. Average investment securities, another major
use of funds, increased by $579,000 (.9%) and $4.4 million (20.8%) in the
taxable and tax-exempt categories, respectively, during 1995. Average federal
funds sold and other investments decreased by $4.9 million (31.5%). These
figures compare to decreases of $7.5 million (10.9%) and $1.7 million (7.5%) in
the taxable and tax-exempt categories, respectively, and an increase in federal
funds sold and other investments of $12.2 million (352.8%) during 1994. The
shift in the mix of the investment portfolio reflects a strategy during 1995 to
position the portfolio for a declining rate environment. The decline in
market interest rates during 1995, and the forecasts for additional declines,
spurred management to extend maturities on a portion of the investment
portfolio. This move was mainly accomplished by reinvesting a portion of
federal funds sold in long-term tax-exempt municipal securities. In addition
to securing greater long term yields, management reinvested in these securities
to achieve increased tax benefits. The Corporation also extended the
investment portfolio by reinvesting a portion of its adjustable rate mortgage-
backed securities holdings into fixed-rate, intermediate-term taxable bonds and
mortgage-backed securities. Average non-interest earning assets increased
$1.8 million (9.9%) in 1995 compared to $3.3 million (22.1%) in 1994. The
change in this category was primarily due to increased average investment in
cash and due from banks and fixed assets of $1.1 million and $232,000,
<PAGE>
respectively, in 1995 and $1.7 million and $475,000, respectively, in 1994.
The increased investment in cash and due from banks was mainly the result of
growth in retail merchant deposit accounts. These accounts typically have a
high daily volume of cash and foreign check deposit activity which boosts the
Corporation's cash and due from balance on an ongoing basis. The higher cash
balance was also due to the additional cash required to operate new community
offices. As will be discussed in more detail herein, the increased average
levels of fixed assets were related to adding or renovating facilities and
investments in technology.
Results of Operations
Net interest income (defined as total interest income and fees generated on
earning assets minus total interest expense paid on deposits and other funding
sources) is the largest component of the Corporation's operating income.
Changes in net interest income are the result of fluctuations in the balance
and/or mix of earning assets and interest bearing liabilities, as well as
changes in their yields and costs.
Net interest income increased by $978,000 (8.3%) in 1995 to $12.8 million
from $11.8 million in 1994. This compares to an increase of $506,000 (4.5%) in
1994 from $11.3 million in 1993. The increase in net interest income during
each of the past two years was primarily due to growth in average earning
assets of $27.1 million (9.8%) in 1995 and $17.2 million (6.7%) in 1994. These
increases compare to growth in interest bearing liabilities of $24.0 million
(10.0%) during 1995 and $14.2 million (6.3%) during 1994. Average interest
rates on interest earning assets and interest bearing liabilities during 1995
increased by .62% and .78%, respectively, resulting in a .05% decrease in net
interest margin (on a fully tax equivalent basis) to 4.51%. The decrease in
net interest margin during 1995 was primarily due to the 1.04% increase in the
average rate paid on time deposits. During 1995 market pricing on certificates
of deposit was competitive. In order to retain CDs which were maturing and to
provide funding for strong loan demand, management priced these deposits
aggressively for much of the year. Overall, the net interest margin has
remained relatively stable in light of the fluctuations in market interest
rates and the growth that the Corporation has experienced during the past
several years.
The Corporation's loan loss provision during 1995 was $360,000, an increase
of $235,000 (188.0%) from 1994. In 1994 the loan loss provision decreased
$520,000 (80.6%) from $645,000 in 1993 to $125,000. During 1995 the
Corporation realized net charge-offs of $638,000 compared to net recoveries of
$119,000 during 1994. The resulting ratios of loan loss reserve to total
loans were 1.04% and 1.30%, respectively, for 1995 and 1994 while the ratios of
loan loss reserve to nonperforming assets were 597% and 319%, respectively.
The Corporation remains committed to making loan loss provisions which maintain
an allowance that adequately reflects the risk inherent in the loan portfolio.
Management believes that the current loan loss allowance is sufficient to cover
these potential losses.
Other income, including securities gains, increased approximately $78,000
(3.3%) during 1995 compared with an increase of $201,000 (9.3%) during 1994.
Trust department income increased $70,000 (11.8%) in 1995 compared to a $34,000
(6.1%) increase in 1994. These increases in trust income were primarily due to
higher average levels of managed assets. Service charges on deposit accounts
increased $126,000 (18.0%) to $827,000 in 1995 compared to an increase of
$83,000 (13.4%) in 1994 to $701,000 from the 1993 level of $618,000. The
increases in both years were primarily the result of growth in demand deposit
accounts, specifically growth in commercial accounts. Other operating income
decreased $414,000 (53.5%) in 1995 while increasing $101,000 (15.0%) in 1994.
This category declined in 1995 largely as a result of reduced income
(approximately $205,000) generated from Pillar Financial Services (Pillar), a
third party that contracted with the Bank during 1993 to sell fixed and
<PAGE>
variable annuity products. In addition, other operating income in 1995
decreased from the prior year due to the non-recurring elimination in 1994 of a
trust reserve of approximately $145,000 no longer deemed necessary by
management. The 1994 increase was due to additional income (approximately
$155,000) generated from the Bank's affiliation with Pillar. In addition,
other income was up due to the elimination of the trust reserve mentioned
above. With respect to the income generated through Pillar, 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 as CDs had risen significantly.
The opposite was true when interest rates were at low levels. That is,
alternative investments were more attractive because CD returns were so low.
This inverse relationship may cause some income volatility from period to
period in a changing interest rate environment.
<TABLE>
CAPITAL RATIOS
(In Thousands, Except Ratios)
<CAPTION>
1995 1994
<S> <C> <C>
Tier 1 capital $ 31,308 $ 28,997
Tier 2 capital 2,220 2,498
TOTAL QUALIFYING CAPITAL $ 33,528 $ 31,495
Risk adjusted total assets
(including off-balance sheet exposures) $241,368 $216,566
Ratios
Tier 1 risk-based capital ratio 12.97% 13.39%
Minimum required Tier 1 capital ratio 4.00% 4.00%
Total risk-based capital ratio 13.89% 14.55%
Minimum required total capital ratio 8.00% 8.00%
Leverage ratio 9.28% 9.40%
Primary capital ratio 9.94% 10.13%
</TABLE>
However, management believes that the potential income from this source
justifies the increased volatility. Securities gains increased by $296,000
(104.2%) in 1995 to $580,000 from $284,000 in 1994. In 1994 securities gains
decreased by $17,000 (5.6%) from $301,000 in 1993. The increased security
gains in 1995 resulted largely from the sale of several community bank stock
holdings which had substantial gains. 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. Accordingly, management views the gains from these holdings as
the realization of deferred investment income. In addition, gains were
generated through bond sales executed as part of ongoing portfolio and balance
sheet management strategies primarily designed to manage interest rate risk.
Other income, from all sources, is an increasingly important factor in the
Corporation's profitability. Income generated in this area offsets a portion
of the expenses associated with the Corporation's expansion program.
<PAGE>
Other expenses increased $809,000 (8.5%) during 1995 to $10.3 million from
$9.5 million in 1994. During 1994 other expenses increased by $609,000 (6.8%)
from $8.9 million in 1993. Salary expense increased $379,000 (9.2%) and
$394,000 (10.6%) during 1995 and 1994, respectively, while pensions and other
employee benefits increased by $146,000 (15.6%) and $71,000 (8.2%),
respectively. These increases reflect additions to management and staff
related to the opening of new facilities, competitive salary pressures and
higher benefits costs. Occupancy and equipment expenses increased $90,000
(12.7%) and $102,000 (13.3%), respectively, during 1995 and $34,000 (5.0%) and
$131,000 (20.6%), respectively, in 1994. These increases were primarily due to
the addition and renovation of the Corporation's facilities and investments in
technology. Management believes that the investments mentioned above have
positioned the Corporation for increased future growth and productivity. FDIC
insurance expense decreased $239,000 (44.8%) during 1995 and grew $19,000
(3.7%) during 1994. The decrease in 1995 was the result of a substantial rate
reduction instituted by the FDIC during the third quarter of 1995 which was
effective June 1, 1995. The annual rate per $100 of deposits was decreased
from $.23 to $.04, or 83%. The FDIC instituted the premium rate reductions as
a result of the recapitalization of the Bank Insurance Fund (BIF) and its
effort to more fully reflect banks' risk profiles by expanding the spread
between rates paid by the "safest" and "riskiest" institutions. The increase
in 1994 was due to increased deposit levels. Marketing expenses increased
$80,000 (23.8%) during 1995 in comparison to decreasing $13,000 (3.7%) in 1994.
Marketing expenses increased during 1995 primarily as a result of increased
promotional activity over 1994. Other operating expenses increased $251,000
(11.9%) in 1995 and decreased $27,000 (1.3%) in 1994. The increased expenses
in 1995 were related to the Corporation's expansion program.
Investing in tax-free securities and loans has been the Corporation's primary
strategy to minimize income taxes along with other actions which serve to defer
taxes until later years. The Corporation's income tax provision was $960,000,
$1.0 million and $752,000 for 1995, 1994 and 1993, respectively. These
provisions resulted in effective tax rates of 21% in 1995, 23% in 1994 and 19%
in 1993. The improved effective tax rate during 1995 was primarily the result
of an increased level of tax-exempt investment security income. The increase
in this income was the result of the tax-exempt securities purchases executed
as part of the investment portfolio strategy mentioned earlier.
Capital Resources and Dividends
The Corporation has an ongoing strategic objective of maintaining a capital
base which supports the pursuit of profitable business opportunities, provides
resources to absorb the risks inherent in its activities and meets/exceeds all
regulatory requirements. At December 31, 1995, total shareholders' equity was
$32.9 million, an increase of $5.3 million (19.2%) from $27.6 million at the
end of 1994. This 1995 change consisted of $2.3 million (8.4%) of growth in
capital stock, surplus and undivided profits and an increase of $3.0 million
(10.8%) in unrealized gains (losses) on securities available-for-sale (AFS) due
to the application of FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
<PAGE>
<TABLE>
RELATIONSHIP BETWEEN SIGNIFICANT FINANCIAL RATIOS
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Return on average shareholders' equity 11.6% 12.3% 13.5%
Earnings retained 65.0% 67.2% 68.1%
Internal capital growth * 8.0% 8.9% 9.7%
<FN>
* THE INTERNAL CAPITAL GROWTH RATIO WAS CALCULATED USING TOTAL SHAREHOLDERS'
EQUITY EXCLUDING THE UNREALIZED GAINS OR LOSSES ON SECURITIES AVAILABLE-FOR-
SALE.
</TABLE>
<TABLE>
TIME CERTIFICATES OF DEPOSIT OVER $100,000 (In Thousands)
<CAPTION>
1995 1994
<S> <C> <C>
MATURING IN
3 months or less $7,197 $2,946
4-6 months 2,360 949
7-12 months 3,356 714
Over 12 months 2,331 2,395
TOTAL $15,244 $7,004
</TABLE>
This change in the unrealized gains (losses) on AFS securities was the
result of the decline in market interest rates that occurred during 1995
combined with a high percentage of securities designated as AFS. As of
December 31, 1995, $85.6 million (89.6%) of the $95.6 million (amortized cost)
investment portfolio was classified as AFS. Management has chosen to classify
a high percentage of securities as AFS to provide flexibility for managing the
Corporation's changing balance sheet needs. Without the AFS designation,
regulations and accounting standards would restrict management's ability to
utilize the investment portfolio to respond to changing interest rates and
liquidity needs. While fluctuating market values of AFS securities have an
accounting effect on total capital, the Corporation remains positioned to
pursue its business plan of controlled growth and expansion and exceeds all
equity related regulatory minimums as illustrated in the accompanying Capital
Ratios table.
Growth in capital stock, surplus and undivided profits during 1995 was due
to record earnings, 65.0% of which were retained to support the Corporation's
future growth. Cash dividends paid totalled $1.2 million in 1995, an increase
of $99,000 (8.7%) over 1994, which increased $79,000 (7.4%) over 1993. The
dividend rate is determined by the Board of Directors after considering the
Corporation's capital requirements and projected level of earnings. Dividend
payout ratios were 35.0%, 32.8% and 31.9% for 1995, 1994 and 1993,
respectively. In addition to cash dividends, a 3 for 2 stock split was paid on
April 1, 1995, a 5% stock dividend was paid on April 1, 1994 and a 3 for 2
stock split was paid in May 1993. (See Note 11 to the Consolidated Financial
Statements.)
The Corporation also generates capital through a dividend reinvestment plan.
This plan allows existing shareholders to reinvest their cash dividends into
shares of Hanover Bancorp, Inc. common stock. In addition, capital is raised
through an employee stock purchase plan and through the Bank's defined
contribution 401(k) plan. A total of $35,000, $314,000 and $330,000 was raised
through these sources in 1995, 1994 and 1993, respectively.
Liquidity
Liquidity is the ability to meet funding requirements of customers' deposit
withdrawals or credit needs at a reasonable cost. The Corporation's
Asset/Liability Management Committee (ALCO) has established policies and
<PAGE>
procedures to control its liquidity position and has established plans to
provide for potential future needs.
Maintaining a high percentage of "core" deposits is a fundamental component
of managing the Corporation's liquidity position. Core deposits (all deposits
except deposits of $100,000 or more) are generated through the community office
network and represent a stable, relatively low-cost source of funds. On
December 31, 1995, 78.0% of total assets were funded by core deposits compared
to 79.4% in 1994.
In addition to maintaining a stable deposit base, the Corporation has access
to a varied and high quality investment portfolio. This portfolio provides a
consistent stream of cash flows and maturities to support liquidity needs. At
December 31, 1995, $13.2 million of investment securities were scheduled to
mature in one year or less while principal payments on mortgage-backed
securities averaged $778,000 per month during 1995. Repayments, maturities and
sales of assets held in the loan portfolio also provide funds utilized in
managing liquidity. In 1995 the Corporation received an average of
approximately $4.8 million in loan repayments per month. Selling loans is
another option in the management of liquidity. In 1995 $11.6 million of loans,
mainly residential mortgage loans, were sold by the Corporation.
The Corporation maintains borrowing arrangements with several correspondent
banks and the FHLB of Pittsburgh, as well as access to the discount window at
the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs.
Through these relationships, the Bank has available short-term credit of
approximately $15 million.
Asset/Liability Management
The Corporation actively manages its interest rate sensitivity, or repricing
characteristics of its assets and liabilities, through its ALCO. The primary
objective of the asset/liability (A/L) process is to maximize net interest
income while controlling balance sheet risks to prudent levels. The
Corporation's challenge is to properly balance interest rate risk (the impact
of changing interest rates on net interest income), liquidity risk (the ability
to effectively meet demands for cash), and capital adequacy (the ability to
support strategic plans and provide an attractive return to shareholders). The
ALCO develops strategies which address these risks in the broader context of
the Corporation's strategic plan, current and projected economic conditions,
changing customer needs and competition. The ALCO, which consists of
management representing each major function in addition to finance, meets
monthly and reports to the Board of Directors on a monthly basis.
A/L management philosophy at the Corporation continued to focus on
conservative funding strategies and maintaining strong capital and reserves
during 1995. Equity capital as a percent of total assets was 9.7% at December
31, 1995, and the loan loss reserve was 1.04% of total loans and 597% of non-
performing assets. Generating stable core deposits rather than more expensive
and volatile large certificates of deposit is also an ongoing strategy. At
year-end 1995, core deposits represented 78.0% of total assets while large
certificates accounted for 4.52%. These key balance sheet indicators of
financial strength and stability reflect the conservative A/L philosophy
employed by the ALCO in the past year.
Management of interest rate risk is a primary concern of the ALCO.
Eliminating this risk altogether is not necessarily the ALCO's goal since some
degree of rate sensitivity may enhance earnings. The process attempts to
insure that the level of risk inherent in the balance sheet is understood and
that the risk is constantly monitored in light of changing market conditions.
The Corporation uses "gap" analysis to measure and manage interest rate risk.
The gap report assigns each interest earning asset and interest bearing
liability to a time frame reflecting its next repricing or maturity date.
Incorporated into this process are the trends in prepayments on loan balances
and mortgage-backed securities. These trends are closely monitored by
<PAGE>
management. Evaluations are based on historical patterns and current and
forecasted levels of interest rates. The difference between total interest-
sensitive assets and liabilities at each time frame represents the interest
sensitivity gap for that interval. A positive gap generally indicates that
rising interest rates during a particular interval will increase net interest
income, since more assets will reprice than liabilities. The opposite is true
for a negative gap position. At December 31, 1995, the Corporation's
cumulative gap position within one year was negative $31.3 million or 9.29% of
total assets. This level of exposure to rate risk falls within the
Corporation's policy of maintaining a rate sensitivity ratio (gap as a percent
of total assets) between positive and negative ten percent. With forecasts for
declining interest rates, the Corporation should be in a favorable position
with respect to maintaining or 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.
The Corporation employs several strategies in its management of interest
rate risk. One is the selling of fixed rate residential mortgage loans in the
secondary market. These loans carry inherent interest rate risk since they
have maturities of fifteen to thirty years. In addition, the sales proceeds
provide funding to meet customers' ongoing credit needs. During 1995 a total
of $10.8 million in fifteen and thirty year mortgages were sold in this
fashion. Another strategy utilized by the Corporation is the purchasing of
funds from the FHLB of Pittsburgh to match-fund (approximately equal amounts
and maturities) specific credit programs. This resource enables the Corporation
to offer competitive rates on intermediate-term loans for which deposit funding
is not available, without incurring material interest rate risk. It also
profitably leverages the capital resources of the Corporation and contributes
to ROE. A total of $14.0 million in funds purchased from the FHLB were on the
books at December 31, 1995, compared to $17.3 million a year earlier.
Additional purchases are anticipated in future years when appropriate.
Finally, active management of the Corporation's investment portfolio provides
flexibility to deal with fluctuating interest rates.
In October 1994 the Financial Accounting Standards Board issued Statement
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments". This new standard was effective for the financial
statements issued for the fiscal year ended December 31, 1995. Statement No.
119 prescribes new disclosures about derivatives and other financial
instruments. Derivative financial instruments are defined as futures,
forwards, swaps, option contracts or other financial instruments with similar
characteristics. At present, the Corporation does not utilize such instruments
in its management of interest rate risk or in any other capacity. Therefore,
this new statement does not currently impact the Corporation.
<PAGE>
Investment Securities
The Corporation manages its investment portfolio consistent with established
policies which include guidelines for liquidity, earnings, rate sensitivity and
pledging needs. The Corporation has no concentrations of investment securities
in any single issuer that comprise ten percent or more of shareholders' equity
at December 31, 1995, with the exception of the U.S. Government and U.S.
Government-sponsored agencies.
In May 1993 the FASB issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Corporation adopted the
provisions of the new standard in its financial statements effective December
31, 1993. This standard requires classification of investments into three
categories, "held-to-maturity" (HTM), "available-for-sale" (AFS) or "trading".
The Corporation does not maintain a trading account and has classified no
securities in this category. The HTM classification places severe restrictions
on the Corporation's ability to sell securities in response to changes in its
liquidity needs, tax planning objectives or interest rate risk position, or to
transfer securities into either the AFS or trading classification. HTM
securities are required to be carried on the financial statements at amortized
cost. Approximately $9.9 million of securities were classified as HTM at
December 31, 1995, in comparison to $5.6 million as of December 31, 1994. The
remainder of the investment portfolio, $88.0 million (inclusive of net
unrealized gains of $2.4 million) in 1995, and $90.2 million (inclusive of net
unrealized losses of $2.2 million) in 1994, were classified as AFS. This
category provides the flexibility necessary to respond to the Corporation's
changing balance sheet needs through effective investment portfolio management.
AFS securities are carried on the financial statements at fair value. The
unrealized gains or losses, net of deferred income taxes, are reflected in
shareholders' equity.
The Corporation generally intends to hold investment securities until
maturity in accordance with long-term objectives and policy guidelines. These
guidelines do not allow for gains trading in the portfolio (selling investments
prior to maturity to realize market appreciation while continuing to hold
securities with unrealized market losses). As a result, the Corporation does
not maintain a trading account. The Corporation's guidelines do, however,
permit prudent and reasonable sales of investments before their maturity dates
to support liquidity needs, tax planning objectives and interest rate risk
position adjustments which may be necessary, from time to time, due to changes
in interest rates, balance sheet mix and/or laws, rules and regulations.
Investment securities increased $2.1 million (2.2%) from $95.8 million at
December 31, 1994, to $97.9 million at year-end 1995. At December 31, 1995,
the Corporation's investment portfolio carried total unrealized gains of $2.7
million and unrealized losses of $339,000. At year-end 1994, unrealized gains
were $808,000 and unrealized losses were $3.1 million. The reversal from a net
loss position in 1994 to a net gain position in 1995 was the result of the
decline in market interest rates during 1995. The net unrealized gain in 1995
represents 2.5% of the portfolio. A total of $21.9 million of debt and equity
securities were sold during 1995, the majority of which were executed to
support interest rate risk management objectives. Specifically, the
Corporation adjusted its investment portfolio structure in order to better
position the balance sheet for declining interest rates. Also, as previously
mentioned, certain sales of the Corporation's equity holdings were conducted on
the basis that they were excellent selling opportunities. Management believes
that there will be no material effect on future earnings due to securities
sales executed during 1995 and there are no plans to sell securities in a
manner which would have a material impact on the short-term or long-term
profitability, liquidity or capital resources of the Corporation.
<PAGE>
<TABLE>
INTEREST RATE SENSITIVITY GAPS
(In Thousands, Except Ratios)
<CAPTION>
0-30 31-90 91-364 1-5 Over 5
Days Days Days Years Years
<S> <C> <C> <C> <C> <C>
Loans $50,786 $20,594 $43,501 $74,437 $25,326
Investment securities:
Taxable 2,889 3,120 19,140 21,526 7,920
Tax-exempt 130 200 1,577 2,769 26,741
Federal funds sold and other 9,502 4,230 --- 2,320 ---
Interest earning assets $63,307 $28,144 $64,218 $101,052 $59,987
Interest bearing demand deposits $ 444 $ 891 $ 5,345 $20,043 $ ---
Savings deposits 424 848 5,986 19,077 ---
Money market deposits 48,551 --- --- --- ---
Time deposits 28,022 11,981 68,348 40,198 862
Other interest bearing liabilities 9,462 4,533 2,152 4,169 2,637
Interest bearing liabilities $86,903 $18,253 $81,831 $83,487 $ 3,499
Rate sensitivity gap:
Periodic gap $(23,596) $ 9,891 $(17,613) $ 17,565 $56,488
Cumulative gap $(23,596) $(13,705) $(31,318) $(13,753) $42,735
Rate sensitivity ratio:
Periodic ratio (7.00)% 2.93% (5.22)% 5.21% 16.75%
Cumulative ratio (7.00)% (4.06)% (9.29)% (4.08)% 12.67%
</TABLE>
<TABLE>
DEPOSITS
The average daily amount of deposits is summarized for the periods indicated
in the following table
(In Thousands, Except Ratios):
<CAPTION>
Year-Ended December 31,
1995 1994 1993
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC BANK OFFICE
Non-interest bearing
Demand deposits $ 24,502 $ 22,138 $ 18,744
Interest bearing
Demand deposits 25,686 1.94% 24,446 1.97% 21,031 2.46%
Savings deposits 28,378 2.55% 30,640 2.52% 28,976 2.89%
Money market deposits 51,455 2.91% 54,505 2.66% 48,787 2.92%
Time deposits 134,436 5.47% 110,396 4.43% 110,798 4.76%
TOTAL $264,457 $242,125 $228,336
</TABLE>
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
The following table sets forth the carrying value of investments at the dates indicated:
(In Thousands)
<CAPTION>
December 31
1995 1994 1993
<S> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $53,333 $61,429 $44,897
State and political
subdivisions 33,844 27,248 27,335
Other 10,728 7,138 13,656
TOTAL $97,905 $95,815 $85,888
</TABLE>
<TABLE>
The following table sets forth the maturities of investment securities at December 31, 1995. Weighted average yields on tax-
exempt obligations have been computed on a fully taxable-equivalent basis assuming a tax rate of 34%.
(In Thousands)
<CAPTION>
Maturing
After One But After Five But
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
<S>
U.S. Treasury and <C> <C> <C> <C> <C> <C> <C> <C>
other U.S.
Government
agencies and
corporations $ 4,295 6.25% $16,613 5.76% $5,340 6.36% $27,085 6.87%
State and
political
subdivisions 2,496 7.74% 3,001 8.43% 633 10.80% 27,714 9.07%
Other 6,528 5.94% 104 5.45% --- --- % 4,096 4.50%
TOTAL $13,319 5.99% $19,718 5.78% $5,973 6.46% $58,895 6.39%
Tax-equivalent
adjustment for
calculation of
yield $ 51 $ 77 $ 22 $ 793
</TABLE>
<PAGE>
<TABLE>
LOAN PORTFOLIO
The following table shows the Corporation's loan distribution by type at the end of the last five years:
(In Thousands)
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 26,062 $ 25,587 $ 31,655 $ 31,913 $ 37,228
Real estate-construction 5,384 2,942 2,365 1,860 4,656
Real estate-mortgage 120,966 107,933 92,208 95,021 89,420
Installment 61,457 55,934 47,308 38,108 28,534
TOTAL $213,869 $192,396 $173,536 $166,902 $159,838
</TABLE>
<TABLE>
The following table shows the amounts of loans outstanding as of December 31, 1995, which, based on remaining scheduled
repayments of principal, are due in the periods indicated. Also, the amounts due after one year are classified according to the
sensitivity of changes in interest rates.
(In Thousands)
<CAPTION>
Maturing
After
One But
Within Within After
One Yr Five Yrs Five Yrs Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $12,181 $ 6,221 $ 7,660 $26,062
Real estate-construction 2,586 614 2,184 5,384
Real estate-mortgage 5,852 12,925 102,189 120,966
Installment 4,275 53,592 3,590 61,457
TOTAL $24,894 $73,352 $115,623 $213,869
Loans maturing after one year with:
Fixed interest rates $66,346 $ 75,598
Variable interest rates 7,006 40,025
TOTAL $73,352 $115,623
</TABLE>
<PAGE>
<TABLE>
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(In Thousands)
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 10 $650 $484 $504 $354
Accruing loans past due
90 days or more 24 17 40 38 48
Restructured loans 292 --- --- --- ---
Other real estate and other
repossessed assets 46 115 67 87 122
TOTAL NONPERFORMING $ 372 $782 $591 $629 $524
Non-accrual loans by category
Commercial, financial and
agricultural $--- $479 $482 $119 $223
Real estate-mortgage --- 141 --- 381 131
Installment 10 30 2 4 ---
$ 10 $650 $484 $504 $354
Past due loans by category
Real estate-construction --- --- --- --- 48
Real estate-mortgage --- 6 24 14 ---
Installment 24 11 16 24 ---
$ 24 $ 17 $ 40 $ 38 $ 48
Restructured loans by category
Commercial, financial and
agricultural $ 13 $--- $--- $ --- $---
Real estate-mortgage 279 --- --- --- ---
$292 $--- $--- $--- $---
</TABLE>
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
Non-accrual loans and restructured loans $302 $650 $484
Interest income that would have been
recorded under original terms 29 107 53
Interest income recorded during the period 28 78 28
Interest lost for the year 1 29 25
</TABLE>
Asset Quality
The Corporation has policies and procedures designed to control credit
risk and to maintain the quality of its loan and investment portfolios.
These include underwriting standards for new origination and ongoing
monitoring and reporting of asset quality and adequacy of the reserve for
loan losses.
During 1995 the Corporation continued its strategy of maintaining a
diversified loan portfolio. The Corporation has emphasized originating
small business, residential mortgage and consumer loans. The business
strategy behind this focus, is that a loan base built on a greater number
of relatively small credits provides greater stability and reduces the
Corporation's dependance on a small group of borrowers. Over time, it will
also serve to reduce the loan portfolio's overall credit risk since the
proportion of large individual exposures will decrease. These large
individual exposures, if they degenerate, have greater potential for
<PAGE>
materially impacting the allowance for loan losses. As a result of this
strategy and the general economic conditions of the Bank's market area, the
Corporation achieved loan growth of $21.4 million (11.2%) during 1995 while
maintaining essentially the same portfolio mix as 1994. Commercial,
financial and agricultural loans decreased slightly from 24.3% of total
loans at year-end 1994 to 24.2% at year-end 1995. During this same period,
real estate construction loans increased from 1.5% to 2.5% of total loans;
real estate mortgages decreased from 45.1% to 44.5% of total loans; and
installment loans decreased from 29.1% to 28.8% of total loans.
The Corporation's commercial, consumer and mortgage portfolios are
principally to borrowers within York and Adams Counties, Pennsylvania,
where it has full service branches and one loan production office. The
commercial loan portfolio is well diversified with no industry comprising
greater than 10% of total loans outstanding.
Nonperforming assets include non-accrual and renegotiated loans, accruing
loans past due 90 days or more and ORE (including foreclosures, deeds in
lieu of foreclosure and in-substance foreclosures) and other repossessed
assets. A loan generally is classified as non-accrual when full collection
of principal or interest is doubtful and a loan becomes 90 days or more
past due as to principal or interest, unless management determines that the
estimated net realizable value of the collateral is sufficient to cover the
principal and accrued interest. When a loan is placed on non-accrual
status, unpaid interest credited to income in the current year is reversed
and unpaid interest accrued in prior years is charged to the allowance for
loan losses. A loan is classified as restructured if the original interest
rate, repayment terms or both were modified due to the deterioration in the
financial condition of the borrower. Nonperforming loans are returned to
performing status when the loan is brought current and has performed in
accordance with contract terms for a reasonable period of time.
Nonperforming loans were .17% and .41% of total loans at December 31,
1995 and 1994, respectively. Year-end 1995 non-accrual loans totalled
$10,000 compared to $650,000 at year-end 1994. The decrease from year to
year was primarily due to the reduction, through collection and charge-
down, of a large commercial non-accrual loan during 1995. Loans past due
90 days or more remained essentially the same at $24,000 and $17,000,
respectively, for year-end 1995 and 1994. At December 31, 1995, $292,000
in loans were classified as restructured, compared to none at December 31,
1994. The nature of the restructure for the affected loans was a
modification of the maturity date which created a corresponding reduction
in the amount of the periodic payments. There were no interest rate
reductions, nor any forgiveness of principal or interest. ORE and other
repossessed assets decreased from $115,000 in 1994 to $46,000 in 1995.
When evaluated in the aggregate, these statistics exhibit the Corporation's
ongoing commitment to effectively managing credit risk.
Potential problem loans are defined by the Securities and Exchange
Commission (SEC) as performing loans which have characteristics that cause
management to have serious doubts as to the ability of the borrower to
comply with present loan repayment terms and which may result in the
reporting of these loans as nonperforming loans in the future. The
Corporation's potential problem loans or "watchlist" consist primarily of
commercial loans which are less than 90 days past due and still accruing.
These loans are rated according to the degree of probability that non
compliance will occur in order to determine whether they should be
considered as impaired under FASB 114. Only those loans for which
management feels it is probable (as opposed to possible) that future
noncompliance will occur are considered impaired under FASB 114. At
December 31, 1995, total potential problem loans, as determined by the
Corporation's internal loan review process, totalled $2.0 million compared
to $3.9 million for December 31, 1994. Of these amounts, $654,000 and $1.2
million were considered impaired (or would have been considered impaired
<PAGE>
had it been in effect) under FASB 114 for 1995 and 1994, respectively. The
significant decrease from 1994 was primarily due to the charge-down on a
single commercial real estate loan of $575,000 during 1995. A recent
appraisal of the underlying collateral on this loan indicated a significant
deterioration in its market value. As a result, management charged the
loan down to the net realizable value of the underlying collateral. The
overall decline in potential problem loans from 1994 to 1995 is primarily
the result of effective collection and work-out efforts and stable economic
conditions during 1995. Management constantly monitors the status of
potential problem loans and their likelihood of becoming nonperforming
loans. Should any of these potential problem loans deteriorate, the result
would be increased levels of nonperforming loans in the short-term.
Although the Corporation will experience fluctuations in its nonperforming
assets from period to period, nonperforming loans should not increase
significantly in the long-term.
<TABLE>
ALLOCATION FOR LOAN LOSS ALLOWANCE
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1995 1994 1993 1992 1991
Percent Percent Percent Percent Percent
Of Loans Of Loans Of Loans Of Loans Of Loans
In Each In Each In Each In Each In Each
Category Category Category Category Category
Allowance To Total Allowance To Total Allowance To Total Allowance To Total Allowance To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 535 24.2% $1,273 24.3% $1,266 28.3% $1,112 32.5% $ 797 35.2%
Real estate-
construction 11 2.5% 6 1.5% 6 1.4% 5 1.1% 5 2.9%
Real estate-
mortgages 101 44.5% 100 45.1% 95 43.1% 102 43.6% 109 44.0%
Installment 590 28.8% 510 29.1% 424 27.2% 380 22.8% 292 17.9%
Unallocated 983 --- 609 --- 463 --- 483 --- 531 ---
TOTAL $2,220 100.0% $2,498 100.0% $2,254 100.0% $2,082 100.0% $1,734 100.0%
</TABLE>
Allowance For Loan Losses
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the portfolio. Management's
methodology to determine the adequacy of the allowance considers specific
credit reviews, current economic conditions and trends, past loan loss
experience, and the volume, growth and composition of the loan portfolio.
At December 31, 1995, management feels that the allowance for loan losses
is adequate to cover potential losses within the overall portfolio.
Effective January 1, 1995, the Corporation adopted FASB Statement No. 114
(FASB 114), "Accounting by Creditors for Impairment of a Loan". This
Statement requires certain impaired loans to be reported at the present
value of expected future cash flows, or as a practical expedient, at the
loan's observable market price, or the fair value of the collateral if
collateral dependent. This new standard applies to all loans that are
identified as being impaired. In addition, the statement affects troubled
debt restructurings 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. Generally,
loans considered impaired under FASB 114 would be the Corporation's non-
homogeneous non-accrual loans. However, a loan may also be considered
<PAGE>
impaired under FASB 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.
Each loan identified as impaired under FASB 114 is evaluated periodically
to estimate any potential losses for which a specific reserve should be
established. Since most of these loans are collateral dependent, this
estimate is normally based on a comparison of the most recent appraised
value of the collateral and the recorded investment in the loan. If the
collateral value is the lower amount of the two, the potential loss would
be the difference between them. If the loan is not collateral dependent,
the same procedure would be followed except that the present value of the
expected future cash flows would replace the collateral value. In
addition to these specific individual reserves, allocated reserves are
established for the commercial, mortgage and installment portfolios. These
allocations are based on the overall level of loans identified as problem
or potential problem, past loan loss experience, adjusted for recent
portfolio growth and economic trends. As a supplement to the specific
individual and allocated reserves, an unallocated general reserve is also
established. This unallocated portion is determined based on judgements
regarding risk of error in specific allocations, other potential exposures
in the loan portfolio, economic conditions and trends, and other
factors.
The allocation presented in the accompanying table is based on estimates
and subjective judgments and is not necessarily indicative of the specific
amounts or loan categories in which losses may ultimately occur.
The allowance approximated 1.04%, 1.30% and 1.30% of total loans
outstanding and 597%, 319% and 381% of nonperforming loans outstanding at
December 31, 1995, 1994 and 1993, respectively. The allowance as a
percentage of total loans decreased during 1995 as a result of the large
charge-down discussed earlier. The percentage of the allowance allocated
to commercial, financial and agricultural loans decreased from 51% at year-
end 1994 to 24% at year-end 1995. This decrease reflects the significant
reduction in the Corporation's nonperforming loans and potential problem
loans from a year ago in addition to the large charge-down which
effectively recognized a specific reserve. The percentage of the allowance
allocated to real estate construction, real estate mortgages and
installment loans increased to 32% in 1995 from 25% in 1994. In addition,
the unallocated percentage increased from 24% at year-end 1994 to 44% at
year-end 1995.
The allowance for loan losses is charged when management determines the
prospects for recovering the principal have significantly diminished.
Subsequent recoveries, if any, are credited to the allowance. Loans
identified as impaired under FASB 114 are charged-off when management has
concluded, after ongoing evaluation of the impaired loans, that repayment
is unlikely. Installment loans that are 90 to 120 days past due are
charged-off unless current scheduled payments are being received. Real
estate mortgage loans are written down to fair value upon the earlier of a
receipt of a deed of foreclosure or a completion of foreclosure
proceedings.
<PAGE>
The composition of charge-offs and recoveries changed significantly
during 1995. In 1995 the Corporation realized net charge-offs of $638,000
in comparison to net recoveries of $119,000 in 1994 and net charge-offs in
1993 of $473,000. These fluctuations were primarily caused by the large
individual commercial charge-off made in 1995, combined with a higher than
normal level of commercial loan recoveries in 1994. The resulting net
charge-offs (recoveries) for commercial, financial and agricultural loans
were $566,000, $(214,000) and $320,000 for 1995, 1994 and 1993,
respectively. Net charge-offs on the combined installment loan categories
remained relatively stable at $99,000, $97,000 and $86,000 during 1995,
1994 and 1993, respectively. The absence of net charge-offs in real estate
mortgage loans during 1995 was consistent with past years with the
exception of 1993 which had one charge-off for $67,000.
Regulatory Matters
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 recently 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 predicts that
consolidation will continue as the 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.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (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 discussed 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 during 1995 since the bank is
currently among the "safest" category. Management anticipates remaining in
this category in the future and thus should continue to realize
<PAGE>
significantly reduced FDIC premium expenses going forward.
Management is currently evaluating three accounting standards recently
issued by the Financial Accounting Standards Board (FASB) which are
effective beginning in 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.
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. FASB 122, "Accounting for Mortgage
Servicing Rights", was issued in May 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 these standards will have a material
effect 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 1995 the FDIC completed a routine examination of the Bank
including an assessment of asset quality. During 1994 the Pennsylvania
State Department of Banking completed a similar examination. Also during
1995, the Federal Reserve Bank of Philadelphia completed a routine
examination of the Corporation.
Effects of Inflation
The majority of the assets and liabilities of a financial institution are
monetary in nature, and therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity-to-assets ratio. An important effect of this can be the
reduction of the proportion of earnings paid out in cash dividends.
Another significant effect of inflation is on other expenses, which tend to
rise more rapidly during periods of general inflation.
Management believes the most significant impact on financial results is
the Corporation's ability to react to changing interest rates. As
presented earlier in this discussion, management is attempting to maintain
a position between rate sensitive assets and liabilities that protects net
interest income against wide interest rate fluctuations.
<PAGE>
<TABLE>
LOAN LOSS EXPERIENCE
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance at January 1: $2,498 $2,254 $2,082 $1,734 $1,336
CHARGE-OFFS
Commercial, financial and
agricultural 575 156 389 443 548
Real estate-construction --- --- --- --- ---
Real estate-mortgages 65 --- 67 --- ---
Installment 88 64 65 74 46
Credit cards and related plans 35 56 47 96 40
TOTAL CHARGE-OFFS 763 276 568 613 634
RECOVERIES
Commercial, financial and
agricultural 9 370 69 286 285
Real estate-construction --- --- --- --- ---
Real estate-mortgages 92 2 --- --- ---
Installment 17 17 19 19 12
Credit cards and related plans 7 6 7 6 ---
TOTAL RECOVERIES 125 395 95 311 297
NET (RECOVERIES) CHARGE-OFFS 638 (119) 473 302 337
Provision charged to operations 360 125 645 650 735
Balance at December 31: $2,220 $2,498 $2,254 $2,082 $1,734
Ratio of net (recoveries)
charge-offs to average
loans outstanding .31% (.07)% .29% .19% .21%
Ratio of allowance for loan
losses to nonperforming assets 597% 319% 381% 331% 331%
</TABLE>
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
As of January 31, 1996, the approximate number of shareholders of record
of the Corporation's common stock was 1,480. The accompanying table sets
forth the range of bid-asked prices for the common stock and dividends
declared by Hanover Bancorp, Inc. during the most recent eight quarters
ended December 31, 1995. The bid price for Hanover Bancorp, Inc. common
stock for the period indicated here represents inter-dealer prices without
adjustment for retail mark-up, mark-down or commission and does not
necessarily represent actual transactions.
<TABLE>
BID-ASKED PRICES FOR COMMON STOCK AND DIVIDENDS DECLARED
<CAPTION>
1995 1994
Stock Price Cash Stock Price Cash
Range Dividend Range Dividend
<S> <C> <C> <C> <C>
QUARTER ENDED
March 31 $18.67 - $19.67 $0.10 $17.34 - $18.66 $0.087
June 30 18.25 - 19.50 0.10 18.34 - 19.66 0.093
September 30 18.25 - 19.25 0.10 19.00 - 20.00 0.093
December 31 18.25 - 19.25 0.11 19.00 - 20.00 0.093
<FN>
STOCK PRICES AND CASH DIVIDENDS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE IMPACT OF THE 3 FOR 2 STOCK SPLIT EFFECTIVE
APRIL 1, 1995 AND THE 5% STOCK DIVIDEND PAID APRIL 1, 1994.
</TABLE>
The Corporation expects to continue its policy of paying regular quarterly
dividends although there is no assurance as to future dividends because
they are dependent on future earnings, capital requirements and financial
condition. The Corporation has no restrictions affecting the payment of
dividends except those presented in Note 12 of the Notes to Consolidated
Financial Statements.
Hanover Bancorp, Inc. is listed under the symbol "HOVB" on the O.T.C.
Electronic Bulletin Board, an automated quotation service, made available
through, and governed by, the NASDAQ system. Current price information is
available from account executives at most brokerage firms as well as the
following firms which are registered market makers of Hanover Bancorp,
Inc.'s common stock:
F.J. Morrissey & Co., Inc.
1700 Market Street, Suite 1420
Philadelphia, PA 19102
(800) 842-8928
Ryan, Beck & Company
3 Parkway
Philadelphia, PA 19102
(800) 223-8969 in PA
(215) 568-4433 elsewhere
Janney Montgomery Scott, Inc.
1801 Market Street, 10th Floor
Philadelphia, PA 19102
(800) 526-6397
(215) 665-6000 or
49 East Market Street
York, PA 17405
(717) 845-4511 or
(717) 632-4545
<PAGE>
Fahnestock & Co., Inc.
110 Wall Street
New York, NY 10004
(800) 221-5588
Monroe Securities, Inc.
47 State Street
Rochester, NY 14614
(716) 546-5560
Ferris, Baker, Watts & Co.
100 Light Street
P.O. Box 1796
Baltimore, MD 21203
(410) 685-2600
Sandler O'Neill & Partners, L.P.
Two World Trade Center
104th Floor
New York, NY 10048
(800) 635-6860
Legg Mason Wood Walker, Inc.
1818 Market Street
Philadelphia, PA 19103
(800) 888-6673
Hopper Soliday & Co., Inc.
1725 Oregon Pike
Lancaster, PA 17601
(717) 560-3000
<PAGE>
REPORT OF INDEPENDENT AUDITORS AND INFORMATION FOR SHAREHOLDERS
REPORT OF INDEPENDENT AUDITORS
THE SHAREHOLDERS AND BOARD OF DIRECTORS
HANOVER BANCORP, INC.
We have audited the accompanying consolidated balance sheets of Hanover
Bancorp, Inc. and its wholly-owned subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of income, shareholders'
equity , and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion
of these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hanover Bancorp, Inc. and its wholly-owned subsidiary at December 31, 1995
and 1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 16 to the financial statements, in 1995 the
Corporation changed its method of accounting for impaired loans, and in
1993 the Corporation changed its methods of accounting for income taxes and
accounting for certain investments in debt and equity securities.
/S/ Ernst & Young LLP
Harrisburg, Pennsylvania
January 26, 1996
INFORMATION FOR SHAREHOLDERS
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Hanover Bancorp, Inc. offers a dividend reinvestment program whereby all
shareholders of record may reinvest their dividends into additional shares
of the Corporation. Information concerning this optional program is
available by contacting Hanover Bancorp, Inc., c/o Bank of Hanover and
Trust Company, 33 Carlisle Street, Hanover Pennsylvania 17331.
ANNUAL MEETING
The Annual Meeting of the Shareholders of Hanover Bancorp, Inc. is
scheduled to be held April 9, 1996, at 9:30 a.m. at the Hanover Country
Club located on Lincolnway East, Abbottstown, Pennsylvania.
COPIES OF 10-K
Additional copies of Hanover Bancorp, Inc.'s Annual Report and Form 10-K
may be obtained without charge upon written request to Gerald M. Warner,
Secretary/Treasurer, Hanover Bancorp, Inc., 33 Carlisle Street, Hanover,
Pennsylvania 17331.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
<CAPTION>
Year-Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $18,218 $14,882 $14,548
Interest on federal funds sold 346 441 94
Investment securities:
Taxable 3,766 3,441 3,766
Tax-exempt 1,613 1,354 1,460
5,379 4,795 5,226
Other interest income 238 193 150
TOTAL INTEREST INCOME 24,181 20,311 20,018
INTEREST EXPENSE
Interest on deposits 10,073 7,590 8,060
Interest on borrowed funds 1,336 927 670
TOTAL INTEREST EXPENSE 11,409 8,517 8,730
NET INTEREST INCOME 12,772 11,794 11,288
PROVISION FOR LOAN LOSSES 360 125 645
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,412 11,669 10,643
OTHER INCOME
Trust department income 663 593 559
Service charges on deposit accounts 827 701 618
Other operating income 360 774 673
Securities gains 580 284 301
TOTAL OTHER INCOME 2,430 2,352 2,151
OTHER EXPENSE
Salaries 4,498 4,119 3,725
Pensions and other employee benefits 1,081 935 864
Occupancy expense 798 708 674
Equipment expense 870 768 637
Marketing and advertising 416 336 349
FDIC insurance 295 534 515
Other operating expense 2,368 2,117 2,144
TOTAL OTHER EXPENSE 10,326 9,517 8,908
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR INCOME TAXES 4,516 4,504 3,886
INCOME TAXES 960 1,020 752
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3,556 3,484 3,134
CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING
FOR INCOME TAXES --- --- 240
NET INCOME $ 3,556 $ 3,484 $ 3,374
EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 1.14 $ 1.12 $ 1.02
Cumulative effect of accounting change --- --- .08
NET INCOME $ 1.14 $ 1.12 $ 1.10
Cash dividends per share $ .41 $ .37 $ .35
<FN>
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,055 $ 9,397
Federal funds sold 5,600 2,152
CASH AND CASH EQUIVALENTS 16,655 11,549
Interest bearing deposits with other banks 913 22
Investment securities: Available-for-sale 87,964 90,184
Held-to-maturity (market value--
$9,978 and $5,524, respectively) 9,941 5,631
97,905 95,815
Loans:
Commercial, financial and agricultural 26,062 25,587
Real estate-construction 5,384 2,942
Real estate-commercial mortgage 25,739 21,090
Real estate-residential mortgage 95,227 86,843
Consumer 61,457 55,934
213,869 192,396
Less: Allowance for loan losses (2,220) (2,498)
NET LOANS 211,649 189,898
Premises and equipment 5,806 5,232
Accrued income receivable 2,355 2,167
Other assets 1,939 3,671
TOTAL ASSETS $337,222 $308,354
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 27,214 $ 22,435
Interest bearing 251,020 229,317
TOTAL DEPOSITS 278,234 251,752
Borrowed funds: Federal Home Loan Bank borrowings 14,006 17,300
Other borrowings 8,947 9,136
22,953 26,436
Accrued interest 1,873 1,226
Other liabilities 958 1,064
Dividends payable 342 311
TOTAL LIABILITIES 304,360 280,789
Shareholders' Equity:
Preferred stock, $2.50 par value; authorized, 2,000,000 shares;
no shares issued or outstanding --- ---
Common stock, $1.11 par value; authorized, 6,750,000 shares; issued
and outstanding: 1995-3,107,336 shares; 1994-3,105,590 shares 3,449 3,458
Surplus 18,606 18,573
Unrealized gains (losses) on securities available-for-sale 1,554 (1,432)
Retained earnings 9,253 6,966
TOTAL SHAREHOLDERS' EQUITY 32,862 27,565
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $337,222 $308,354
Book value per share $ 10.58 $ 8.88
<FN>
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Per Share Data)
<CAPTION>
Unrealized
Common Gains and Retained Treasury
Stock Surplus Losses Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993 $3,246 $15,536 $ --- $4,988 $ --- $23,770
Net income for the year --- --- --- 3,374 --- 3,374
Cash dividends:
$0.35 per share --- --- --- (1,076) --- (1,076)
Cash paid in lieu of fractional shares and other 6 --- --- (12) --- (6)
Issue of common stock:
21,203 shares at an average price of $15.58 per share 22 308 --- --- --- 330
Net adjustment to unrealized gains (losses) on securities
available-for-sale, net of tax effects of $1,011 --- --- 1,962 --- --- 1,962
Balance December 31, 1993 3,274 15,844 1,962 7,274 --- 28,354
Net income for the year --- --- --- 3,484 --- 3,484
Cash dividends:
$0.37 per share --- --- --- (1,181) --- (1,181)
5% stock dividend issued:
April 1, 1994 164 2,435 --- (2,599) --- ---
Cash paid in lieu of fractional shares and other --- --- --- (12) --- (12)
Issue of common stock:
17,978 shares at an average price of $17.48 per share 20 294 --- --- --- 314
Net adjustment to unrealized gains (losses) on securities
available-for-sale, net of tax effects of $1,749 --- --- (3,394) --- --- (3,394)
Balance December 31, 1994 3,458 18,573 (1,432) 6,966 --- 27,565
Net income for the year --- --- --- 3,556 --- 3,556
Cash dividends:
$0.41 per share --- --- --- (1,274) --- (1,274)
Cash paid in lieu of fractional shares and other (11) --- --- 5 --- (6)
Issue of common stock:
2,044 shares at an average price of $16.85 per share 2 33 --- --- --- 35
Net adjustment to unrealized gains (losses) on securities
available-for-sale, net of tax effects of $1,538 --- --- 2,986 --- --- 2,986
Balance December 31, 1995 $3,449 $18,606 $1,554 $9,253 $ --- $32,862
<FN>
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Year-Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,556 $ 3,484 $ 3,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 360 125 645
Provision for depreciation and amortization 673 590 467
Securities gains (580) (284) (301)
Deferred income taxes, net 150 --- (240)
(Increase) decrease in interest receivable (188) (231) 133
Increase (decrease) in interest payable 647 186 (292)
(Increase) decrease in other assets 296 (709) (718)
Increase (decrease) in other liabilities (223) (170) 113
Increase (decrease) in accrued taxes (136) 122 30
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,555 3,113 3,211
INVESTING ACTIVITIES
Increase in loan (33,746) (27,532) (18,706)
Proceeds from loan sales 11,635 8,791 11,599
Proceeds from sale of available-for-sale
investment securities 21,860 22,466 22,144
Proceeds from maturities of investment securities 31,469 31,828 41,468
Purchases of investment securities (51,205) (68,921) (60,892)
Purchases of premises and equipment (1,247) (1,202) (563)
NET CASH USED IN INVESTING ACTIVITIES (21,234) (34,570) (4,950)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
accounts, money market accounts and savings accounts (1,408) 5,006 10,199
Net increase (decrease) in certificates of deposit
and other time deposits 27,890 15,282 (11,813)
Net increase (decrease) in borrowed funds (3,483) 10,564 4,965
Cash dividends paid (1,243) (1,144) (1,065)
Cash paid in lieu of fractional shares (6) (12) (6)
Proceeds from issuance of common stock 35 314 330
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,785 30,010 2,610
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,106 (1,447) 871
Cash and cash equivalents at beginning of year 11,549 12,996 12,125
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,655 $ 11,549 $ 12,996
<FN>
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles Of Consolidation: The consolidated financial statements include
the accounts of the Corporation and its wholly-owned subsidiary, Bank of
Hanover and Trust Company. All significant intercompany transactions and
accounts have been eliminated.
Investment Securities: In May 1993, the Financial Accounting Standards
Board issued Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". The Corporation adopted the provisions of the new
standard in its financial statements effective December 31, 1993.
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the
Corporation has the ability and positive intent to hold the securities to
maturity. Securities held-to-maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Realized
gains and losses on sales of securities held-to-maturity, while rare, and
declines in value judged to be other than temporary are included in net
securities gains (losses).
Debt securities not classified as held-to-maturity and equity securities
are classified as available-for-sale. Securities available-for-sale are
stated at fair value, with the unrealized gains and losses reported as a
separate component of shareholders' equity, net of tax effect. The
amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums to call and accretion of discounts to
maturity, or in the case of mortgage-backed securities, over the estimated
life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income
from investments. Realized gains and losses on securities available-for-
sale and declines in value judged to be other than temporary are included
in net securities gains (losses). The decision to sell such securities is
based on management's assessment of changes in economic or financial market
conditions, interest rate risk and the Corporation's financial position and
liquidity. The cost of securities sold is based on the specific
identification method.
Loans: Interest on commercial loans, mortgages and most consumer loans is
recognized based upon the amount of principal outstanding. The accrual of
interest is generally discontinued for a loan when full collection of the
principal or interest is doubtful and a loan becomes 90 days or more past
due. Subsequent payments received on these non-accrual loans are either
applied against principal or reported as interest income, according to
management's judgement as to the collection of principal.
Allowance For Loan Losses: Management reviews the loan portfolio and
determines a provision for loan losses necessary to increase the allowance
for loan losses to levels sufficient to cover possible losses in the
collection of loans based upon the borrower's ability to repay, past
collection experience, the risk characteristics of the loan portfolio and
such other factors which, in management's judgement, deserve current
recognition. The allowance is increased by provisions charged to
operations and reduced by net charge-offs.
Beginning in 1995, the Corporation adopted Financial Accounting Standards
Board (FASB) Statement No. 114, "Accounting by Creditors for Impairment of
a Loan" and Statement No. 118, "Accounting by Creditors for Impairment--
Income Recognition and Disclosures". Under Statement No. 114, the 1995
<PAGE>
allowance for credit losses related to loans that are identified for
evaluation in accordance with this standard is based on the discounted cash
flows using the loans initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans. Prior to 1995, the
allowance for credit losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. Statement No. 118 prescribes how a creditor should report
income on impaired loans and clarifies Statement 114's disclosure
requirements. In accordance with FASB 118, the Corporation will continue
to recognize interest income as described in the loans section above.
Premises And Equipment: Premises and equipment are stated at cost less
accumulated depreciation computed on the straight-line method.
Income Taxes: Effective January 1, 1993, the Corporation accounts for
income taxes pursuant to the provisions of Financial Accounting Standards
Board Statement No. 109. Under Statement No. 109, the liability method is
used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Net Income And Cash Dividends Per Share: Net income and cash dividends per
share are based on the weighted average number of shares outstanding which
were 3,106,298 during 1995; 3,104,196 shares during 1994; and 3,071,765
shares during 1993, retroactively restated to reflect stock dividends and
stock splits.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Flow Information: For purposes of the statements of cash flows, the
Corporation considers cash and due from banks and federal funds sold as
cash and cash equivalents. Generally, federal funds are purchased and sold
for one-day periods. Cash paid for interest and income taxes was
$10,762,000 and $1,322,000, respectively, during the year-ended December
31, 1995; $8,331,000 and $892,000, respectively, during the year-ended
December 31, 1994; and $9,022,000 and $710,000, respectively, during the
year-ended December 31, 1993.
The increase in unrealized gains on available-for-sale securities of
$2,986,000 (net of $1,538,000 in deferred tax effects) during the period
ended December 31, 1995, the decrease in unrealized gains on available-for-
sale securities of $3,394,000 (net of $1,749,000 in deferred tax effects)
during the period ended December 31, 1994 and the increase of $1,962,000
(net of $1,011,000 in deferred tax effects) during the period ended
December 31, 1993, are non-cash transactions for purposes of the statement
of cash flows.
Values of Financial Instruments: Financial Accounting Standards Board
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
<PAGE>
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. (See Note
13)
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans receivable: Fair values for loans are estimated using discounted
cash flow analyses using interest rates based on U.S. Government security
yields for similar terms adjusted for appropriate risks associated with
each instrument.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings and certain
types of money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates based on U.S.
Government security yields to a schedule of aggregated expected monthly
maturities on time deposits.
Federal Home Loan Bank borrowings: Fair values for FHLB borrowings are
estimated using a discounted cash flow calculation that applies interest
rates based on U.S. Government security yields to a schedule of
aggregated expected maturities.
Other borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
NOTE 2--RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The banking subsidiary is required to maintain reserve balances with the
Federal Reserve Bank. The average amount of those balances for the year-
ended December 31, 1995, approximated $2,038,000.
<PAGE>
NOTE 3--INVESTMENT SECURITIES
The following is a summary of the investment portfolio by respective
security category (In Thousands):
<TABLE>
<CAPTION>
Available-For-Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995
U.S. Treasury securities
and obligations of the
U.S. Government and its
agencies $19,655 $ 171 $ (97) $19,729
Obligations of states and
political subdivisions 29,043 1,701 (4) 30,740
Corporate securities 548 7 --- 555
Mortgage-backed securities 32,798 245 (199) 32,844
Total debt securities 82,044 2,124 (300) 83,868
Equity securities 3,565 552 (21) 4,096
TOTAL AVAILABLE-
FOR-SALE SECURITIES $85,609 $2,676 $ (321) $87,964
</TABLE>
<TABLE>
<CAPTION>
Held-To-Maturity Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995
Obligations of states and
political subdivisions $ 3,104 $ 49 $ (18) $ 3,135
Mortgage-backed securities 864 6 --- 870
Other debt securities 5,973 --- --- 5,973
TOTAL HELD-TO
-MATURITY SECURITIES $ 9,941 $ 55 $ (18) $ 9,978
</TABLE>
<TABLE>
<CAPTION>
Available-For-Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994
U.S. Treasury securities
and obligations of the
U.S. Government and its
agencies $19,570 $ 5 $ (617) $18,958
Obligations of states and
political subdivisions 22,915 178 (514) 22,579
Corporate securities 1,601 9 (2) 1,608
Mortgage-backed securities 44,324 60 (1,698) 42,686
Total debt securities 88,410 252 (2,831) 85,831
Equity securities 3,944 532 (123) 4,353
TOTAL AVAILABLE-FOR
-SALE SECURITIES $92,354 $ 784 $(2,954) $90,184
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Held-To-Maturity Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994
Obligations of states and
political subdivisions $ 4,669 $ 10 $ (129) $ 4,550
Mortgage-backed securities 962 14 (2) 974
TOTAL HELD-TO-
MATURITY SECURITIES $ 5,631 $ 24 $ (131) $ 5,524
</TABLE>
<TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. (In Thousands)
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 6,624 $ 6,672
Due after one year through
five years 14,632 14,746
Due after five years through
ten years 3,583 3,660
Due after ten years 24,407 25,946
49,246 51,024
Mortgage-backed securities 32,798 32,844
Equity securities 3,565 4,096
$85,609 $87,964
HELD-TO-MATURITY
Due in one year or less $ 6,543 $ 6,543
Due after one year through
five years 700 702
Due after five years through
ten years 65 67
Due after ten years 1,769 1,796
9,077 9,108
Mortgage-backed securities 864 870
$ 9,941 $ 9,978
</TABLE>
<PAGE>
Proceeds from the sale of investments in debt and equity securities
during 1995, 1994 and 1993 were $21,860,000, $22,466,000 and $22,144,000,
respectively. Gross gains realized on these sales were $628,000, $492,000
and $374,000, respectively. Gross losses realized on these sales were
$48,000, $208,000 and $73,000, respectively. Net unrealized gains
(losses) on securities available-for-sale net of the related deferred tax
effects, included as a separate component of shareholders' equity, were
$1,554,000 in 1995 and $(1,432,000) in 1994.
Securities, having a carrying value of $37,594,000 at December 31, 1995,
and $33,426,000 at December 31, 1994, were pledged to secure public
deposits, repurchase agreements and other purposes required by law.
NOTE 4--ALLOWANCES FOR LOAN LOSSES
<TABLE>
Transactions in the allowance for loan losses were as follows (In
Thousands):
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $2,498 $2,254 $2,082
Recoveries on loans 125 395 95
Provision charged to operations 360 125 645
Loans charged-off (763) (276) (568)
Balance at end of year $2,220 $2,498 $2,254
</TABLE>
At December 31, 1995, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $946,000, of which
none were on non-accrual basis. Included in this amount is $292,000 of
impaired loans for which an allowance was not required and $654,000 of
impaired loans that as a result of write-downs do not have an allowance for
credit losses. The average recorded investment in impaired loans during
the period ended December 31, 1995 was approximately $1.49 million. During
this period, the Corporation recognized interest income on these loans of
$132,000, which included $4,000 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 No. 114. The Corporation recorded $78,000 of interest
income on these loans in 1994. Interest income of $107,000 would have been
recorded on these loans according to their original terms.
NOTE 5--PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment includes the following at December 31 (In Thousands):
<CAPTION>
1995 1994
<S> <C> <C>
Premises $ 5,298 $ 4,724
Equipment 5,106 4,762
10,404 9,486
Less accumulated depreciation (4,598) (4,254)
$ 5,806 $ 5,232
</TABLE>
The Corporation and its subsidiary occupy certain facilities under lease
arrangements and lease certain equipment. Rentals amounted to $391,000,
$320,000 and $237,000 in 1995, 1994 and 1993, respectively.
<PAGE>
<TABLE>
Minimum annual rental commitments at December 31, 1995, under
noncancellable leases, principally for real estate and equipment, are
payable as follows (In Thousands):
<CAPTION>
Annual Rental
Payments
<S> <C>
1996 $ 283
1997 261
1998 249
1999 247
2000 228
2001 and thereafter 2,442
Total minimum lease payments $3,710
</TABLE>
At December 31, 1995, the Corporation had commitments of approximately
$870,000 related to the addition and relocation of branch facilities.
NOTE 6--LONG-TERM BORROWINGS
The Bank utilizes the services of the Federal Home Loan Bank (FHLB) of
Pittsburgh by periodically borrowing funds to provide match funding for
specific loan and investment activities. The Corporation paid $673,000 in
interest on long-term borrowings during 1995, $526,000 in 1994 and $463,000
in 1993.
The aggregate dollar amount of long-term borrowings was $8,293,000,
$11,300,000 and $9,300,000 at December 31, 1995, 1994 and 1993,
respectively.
<TABLE>
The following table presents the annual maturities of long-term
borrowings at December 31, 1995 (In Thousands):
<CAPTION>
Annual Maturities
of Long-Term Borrowings
<S> <C>
1997 $ 1,330
1998 2,248
1999 1,266
2000 287
2001 and thereafter 3,162
$ 8,293
</TABLE>
NOTE 7--SHORT-TERM BORROWINGS
Short-term borrowings consist of loans from the Federal Home Loan Bank
(FHLB) of Pittsburgh with maturities of one year or less, federal funds
purchased, repurchase agreements and the Treasury tax and loan note option
program. The interest rate on loans with FHLB varies with length of
maturities. The cost of federal funds purchased is approximately 25 basis
points above the rate of federal funds sold. Repurchase agreements are
typically written for one to ninety day periods with rates tied to
prevailing federal funds rates. The Treasury tax and loan funds carry a
cost of 25 basis points below the prevailing federal funds rate and are
subject to call.
Short-term borrowings outstanding at December 31, 1995, were $14,660,000
with a rate of approximately 5.16%.
<TABLE>
The maximum amounts of borrowings outstanding at any month-end during
each year of the reporting period were as follows (In Thousands):
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Amount 15,425 $15,136 $16,906
Date October 31 December 31 October 31
</TABLE>
<PAGE>
<TABLE>
Average amounts outstanding and weighted average rates thereon for each
reporting period were as follows (In Thousands):
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Average outstanding 13,072 $10,331 $6,586
Rate 5.08% 3.89% 3.14%
</TABLE>
NOTE 8--FEDERAL INCOME TAXES AND BANK SHARES TAX
In February 1992, the Financial Accounting Standards Board issued
Statement No. 109, "Accounting for Income Taxes". The Corporation adopted
the provisions of the new standard in its financial statements effective
January 1, 1993. (See Note 16) As permitted by the Statement, prior year
financial statements have not been restated to reflect the change in
accounting method. The cumulative effect as of January 1, 1993, of
adopting Statement No. 109 increased the deferred tax asset by $240,000.
Under Statement No. 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
<TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, 1995 and 1994, respectively, which are
included in other liabilities in 1995 and other assets in 1994 are as
follows (In Thousands):
<CAPTION>
1995 1994
<S> <C> <C>
DEFERRED TAX ASSETS
Unrealized security losses $ --- $ 737
Loan loss reserve 498 552
Deferred loan fees 205 288
Deferred compensation 207 201
Other 34 32
Total deferred tax assets $ 944 $1,810
DEFERRED TAX LIABILITIES
Unrealized securities gains $ 801 $ ---
Depreciation 156 134
Accretion 98 86
Pension 85 94
Other 127 75
Total deferred tax
liabilities $1,267 $ 389
Net deferred tax
assets (liabilities) $ (323) $1,421
</TABLE>
<TABLE>
The provision for federal income taxes included in the accompanying
Statement of Income consists of the following (In Thousands):
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current payable $1,080 $ 967 $754
Deferred (120) 53 (2)
$ 960 $1,020 $752
</TABLE>
<PAGE>
<TABLE>
A reconciliation of the statutory corporate income tax rate to the
Corporation's effective tax rate is as follows (In Thousands):
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Corporate income tax at
statutory rate $1,535 $1,531 $1,321
Tax-exempt income (594) (542) (616)
Other 19 31 47
$ 960 $1,020 $ 752
</TABLE>
Income taxes applicable to realized net securities gains included in the
provision for income taxes totalled $197,000 in 1995, $97,000 in 1994 and
$102,000 in 1993.
The 1995, 1994 and 1993 financial statements reflect shares tax expense
of approximately $216,000, $199,000 and $185,000, respectively.
NOTE 9--PENSION PLAN
The Bank has a defined benefit pension plan covering substantially all of
its full-time employees. Under the plan, pension benefits are a percentage
of average monthly pay and are based upon the five consecutive plan years
of highest pay out of the last ten years preceding retirement. The funding
policy of the Bank is to contribute annually an amount to meet the minimum
funding requirements set forth in the Employee Retirement Income Security
Act of 1974, plus such additional amounts as the Bank may determine to be
appropriate. Contributions are intended to provide not only benefits
attributed to past service but also for those expected to be earned in the
future. Plan assets are invested primarily in corporate bonds, common
stocks, U.S. Government securities and certificates of deposit.
<TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's financial statements at December 31, 1995
and 1994 (In Thousands):
<CAPTION>
1995 1994
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,855 in 1995 and $2,401 in 1994 $(2,907) $(2,456)
Projected benefit obligation for service
rendered to date (3,463) (2,890)
Plan assets at fair value 3,092 2,941
Plan assets in excess of (less than) projected
benefit obligation (371) 51
Unrecognized net loss 681 356
Unrecognized net transition asset (10) (10)
Unrecognized prior service cost (81) (88)
Prepaid Pension Costs $ 219 $ 309
</TABLE>
<TABLE>
<CAPTION>
Year-Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Net pension costs included the following components:
Service costs $ 92 $105 $137
Interest costs on projected benefit obligation 224 193 190
Actual return on plan assets (352) (83) (260)
Net amortization and deferral 122 (156) 24
Net periodic pension costs $ 86 $ 59 $ 91
</TABLE>
<PAGE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.00% at December
31, 1995, and 8.00% at December 31, 1994. The rate of increase in future
compensation levels was 5.00% at December 31, 1995 and 1994. The expected
long-term rate of return on plan assets was 8.00% in 1995, 1994 and 1993.
The Corporation also provides a defined contribution 401(k) plan to all
employees who have completed at least one year of employment as defined in
the plan and are 21 years of age. In each pay period a participant may
elect to defer up to 15% of base salary/wages for contribution to the plan
up to a maximum 1995 annual contribution of $9,240. The Corporation
matches, in cash, 50% of the participant's contribution up to 3% of the
participant's base salary/wages. The Corporation's expense for the defined
contribution plan was $64,000, $56,000 and $42,000 in 1995, 1994 and 1993,
respectively.
NOTE 10--RELATED PARTY TRANSACTIONS
The Corporation's subsidiary has granted loans to the officers and
directors of the Corporation and its subsidiary and to their associates.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collection. The aggregate dollar amount of these loans was
$3,301,000, $2,102,000 and $3,763,000 at December 31, 1995, 1994 and 1993,
respectively. During 1995, $1,521,000 of new loans were made, and
repayments totalled $322,000.
NOTE 11--SHAREHOLDERS' EQUITY
On March 20, 1993, the Board of Directors declared a 3 for 2 stock split
payable May 15, 1993, to shareholders of record May 14, 1993. On February
18, 1994, the Board of Directors declared a 5% stock dividend, payable
April 1, 1994, to shareholders of record March 15, 1994. On January 20,
1995, the Board of Directors declared a 3 for 2 stock split payable April
1, 1995, to shareholders of record March 15, 1995. Related to this split,
the Board of Directors also approved an amendment to the Articles of
Incorporation on January 20, 1995 to increase the number of authorized
shares of common stock from 4,500,000 shares to 6,750,000 shares and to
reduce the par value per share from $1.67 to $1.11. The stock dividend
transactions were valued based on the market prices of the Corporation's
stock on the dates of declaration. All per share data was retroactively
adjusted to reflect these actions.
The Corporation maintains a dividend reinvestment plan which allows
existing shareholders to reinvest cash dividends into additional shares of
the Corporation's common stock. The Corporation has reserved 130,000
shares of common stock for issuance under this plan. As of December 31,
1995, 105,075 shares were available.
<PAGE>
The Corporation adopted an omnibus stock plan during 1993. This plan is
intended to provide incentive compensation opportunities for selected
officers and key employees of the Corporation and its subsidiary. The
Corporation has reserved 189,000 shares of common stock for issuance under
this plan. As of December 31, 1995, 142,180 shares were available for the
granting of additional options. A summary of changes in common stock
options is as follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
<S> <C> <C>
Shares under options at December 31, 1993 --- ---
Options granted during the period 24,438 $19.17
Shares under options at December 31, 1994 24,438 $19.17
Options granted during the period 22,382 $18.75-19.17
Shares under options at December 31, 1995 46,820 $18.75-19.17
</TABLE>
The Corporation adopted an employee stock purchase plan during 1993.
This plan is intended to encourage employees of the Corporation and its
subsidiary to acquire a stake in the future of the Corporation. The
Corporation has reserved 47,250 shares of common stock for issuance under
the plan. As of December 31, 1995, 45,206 shares were available.
The Bank offers shares of the Corporation's stock as one of several
investment options in its defined contribution 401(k) plan. The
Corporation has reserved 25,000 shares of common stock for issuance to
participants in the 401(k) plan. As of December 31, 1995, 21,045 shares
were available.
<PAGE>
NOTE 12--HANOVER BANCORP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
(In Thousands)
<TABLE>
<CAPTION>
Year-Ended December 31,
1995 1994
<S> <C> <C>
BALANCE SHEETS
ASSETS
Cash $ 1,138 $ 162
Investment securities
U.S. Government and its agencies --- ---
State and municipal obligations 2,377 2,911
Other 2,062 1,701
4,439 4,612
Investment in Bank of Hanover and Trust Company 27,451 22,717
Accrued income receivable 30 53
Other assets 338 332
TOTAL ASSETS $33,396 $27,876
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 342 $ 311
Other liabilities 192 ---
TOTAL LIABILITIES 534 311
Shareholders' Equity
Common stock 3,449 3,458
Surplus 18,606 18,573
Unrealized gains on securities available-for-sale 1,554 (1,432)
Retained earnings 9,253 6,966
TOTAL SHAREHOLDERS' EQUITY 32,862 27,565
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,396 $27,876
</TABLE>
<TABLE>
<CAPTION>
Year-Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
STATEMENTS OF INCOME
INCOME
Interest on investments $ 213 $ 240 $ 243
Securities gains 135 47 77
Interest on balances with
depository institutions 2 9 11
TOTAL INCOME 350 296 331
EXPENSES 87 100 96
Income before applicable income taxes (credit)
and equity in undistributed income
of subsidiary 263 196 235
APPLICABLE INCOME TAXES (CREDIT) 23 (12) (2)
Income before equity in undistributed
income of subsidiary 240 208 237
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY
Bank of Hanover and Trust Company 3,316 3,276 3,137
NET INCOME $3,556 $3,484 $3,374
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year-Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
ACTIVITIES
Net income $3,556 $3,484 $3,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Securities gains (135) (47) (77)
Equity in undistributed income of subsidiary (3,316) (3,276) (3,137)
Decrease in accrued income receivable 22 6 30
Increase (decrease) in other liabilities 30 (11) 12
NET CASH PROVIDED BY OPERATING ACTIVITIES 157 156 202
INVESTING ACTIVITIES
Cash dividends received from subsidiary 1,243 1,144 1,065
Proceeds from sales and maturities
of investment securities 1,934 1,233 980
Purchases of investment securities (1,144) (1,673) (1,458)
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,033 704 587
FINANCING ACTIVITIES
Proceeds from issuance of common stock 35 314 330
Cash dividends paid (1,243) (1,144) (1,065)
Cash paid in lieu of fractional shares (6) (12) (6)
NET CASH USED IN FINANCING ACTIVES (1,214) (842) (741)
INCREASE IN CASH AND CASH EQUIVALENTS 976 18 48
Cash equivalents at beginning of year 162 144 96
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,138 $ 162 $ 144
</TABLE>
The Corporation relies on dividends from Bank of Hanover and Trust
Company for dividends paid to shareholders of the Corporation. Under
Pennsylvania statutes the Bank is restricted, unless prior regulatory
approval is obtained, in the amount of dividends which it may declare in
relation to its accumulated profits, less any required transfer to surplus.
At December 31, 1995, retained earnings of the Bank available for dividends
were $17,431,000. These restrictions have not had, nor are they expected
to have any impact on the Corporation's dividend policy. Other regulatory
restrictions limit the ability of the Bank to transfer net assets to the
Corporation. At December 31, 1995, these restricted net assets amounted to
$7,783,000.
<PAGE>
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
(In Thousands)
<TABLE>
<CAPTION>
December 31, 1995
Carrying Fair
Amount Value
<S> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 17,568 $ 17,568
Investment securities 97,905 97,942
Loans 213,869
Less: Allowance for loan losses (2,220)
Net loans 211,649 214,765
TOTAL FINANCIAL ASSETS $327,122 $330,275
FINANCIAL LIABILITIES
Deposits $278,234 $278,871
Federal Home Loan Bank borrowings 14,006 14,382
Other borrowings 8,947 8,947
TOTAL FINANCIAL LIABILITIES $301,187 $302,200
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Carrying Fair
Amount Value
<S> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 11,571 $ 11,571
Investment securities 95,815 95,708
Loans 192,396
Less: Allowance for loan losses (2,498)
Net loans 189,898 187,535
TOTAL FINANCIAL ASSETS $297,284 $294,814
FINANCIAL LIABILITIES
Deposits $251,752 $249,010
Federal Home Loan Bank borrowings 17,300 16,958
Other borrowings 9,136 9,136
TOTAL FINANCIAL LIABILITIES $278,188 $275,104
</TABLE>
NOTE 14--COMMITMENTS
As of December 31, 1995, the Bank had commitments outstanding to extend
credit totalling $46,126,000 and commitments under outstanding standby
letters of credit totalling $2,645,000. Credit commitments generally
require the customers to maintain certain credit standards and are funded
at rates and terms prevailing at the time of extension. Management does
not anticipate any material losses as a result of these credit commitments.
<PAGE>
NOTE 15--CONCENTRATIONS OF CREDIT RISK
Most of the Corporation's business activity, including loans and loan
commitments, is with customers located within York and Adams Counties,
Pennsylvania, where it has full service branches and one loan production
office. The Corporation's commercial, consumer and mortgage portfolios are
principally to borrowers in this market area and are generally fully
collateralized. The commercial loan portfolio is well diversified with no
industry comprising greater than 10% of total loans outstanding.
NOTE 16--ACCOUNTING CHANGES
In February 1992, the Financial Accounting Standards Board issued
Statement No. 109, "Accounting for Income Taxes". The Corporation adopted
the provisions of the new standard in its financial statements as of
January 1, 1993. As permitted by the Statement, prior year financial
statements have not been restated to reflect the change in accounting
method. The cumulative effect as of January 1, 1993, of adopting Statement
No. 109 increased net income by $240,000, or $0.08 per share.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". As permitted under the Statement, the
Corporation has elected to adopt the provisions of the new standard as of
the end of its current fiscal year. In accordance with the Statement,
prior period financial statements have not been restated to reflect the
change in accounting principle. The cumulative effect as of December 31,
1993, of adopting Statement 115 increased the ending balance of
shareholders' equity by $1,962,000 (net of $1,011,000 in deferred income
taxes) to reflect the net unrealized gain on securities classified as
available-for-sale, previously carried at amortized cost.
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.
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 did not have a significant
impact on the Corporation's determination of the necessary allowance for
loan losses nor on its level of impaired loans.
<PAGE>
NOTE 17--SUBSEQUENT EVENTS
On January 19, 1996, the Board of Directors authorized an amendment to
the Bank's noncontributory defined benefit plan to freeze benefits as of
March 31, 1996 in anticipation of terminating the plan by December 31,
1996. The settlement of the vested accumulated benefit obligation by
purchase of annuity contracts or rollovers to the bank's defined
contribution plan is expected to be completed during 1996 at which point
a gain or loss will be recorded. The exact impact on the Corporation is
unknown at this time. However, management does not anticipate that this
impact will be material to the financial statements.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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
incorporation or organization) Identification No.)
33 Carlisle Street
Hanover, Pennsylvania 17331
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (717) 637-2201
Securities Registered Pursuant To Section 12(b) Of The Act: None
Securities Registered Pursuant To Section 12(g) Of The Act:
Common Stock - Par Value $1.11 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive Proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 15, 1996, was $52,888,649.
The number of shares outstanding of the issuer's common stock as of
February 15, 1996: Common Stock, $1.11 Par Value -- 3,108,118 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Hanover Bancorp, Inc. Proxy Statement for the Annual
Shareholders Meeting to be held April 9, 1996, are incorporated by
reference into Part III.
<PAGE>
HANOVER BANCORP, INC.
FORM 10-K CROSS-REFERENCE INDEX
This Annual Report incorporates into a single document the requirements
of the Securities and Exchange Commission concerning Form 10-K and Annual
Report to shareholders. There has been no action by the Securities and
Exchange Commission, however, to approve or disapprove or pass upon the
accuracy or adequacy of this Annual Report.
PART I PAGE #
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . . 59
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 62
Item 4 - Submission of Matters to a Vote of Security Holders.
(This item omitted since it is not applicable.)
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters. . . . . . . . . . . . . . . . 33
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . 11
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 13
Item 8 - Financial Statements and Supplementary Data. . . . . . . . 36
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.
(This item omitted since it is not applicable.)
PART III
Item 10 - Directors and Executive Officers of the Registrant
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain Beneficial
Owners and Management
Item 13 - Certain Relationships and Related Transactions
(The information required by the items in this part has been
omitted since it will be contained in the definitive Proxy
Statement to be filed pursuant to Regulation 14A.)
<PAGE>
PART IV PAGE #
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . 1,56
A. (1) and (2) Consolidated Financial Statements.
(3) Exhibits as required by Item 601 of Regulation S-K.
(3)(a)(1) Articles of Incorporation previously
filed as Exhibit 3a to the Corporation's 1991
Form 10-K filed March 27, 1992, are hereby
incorporated by reference.
(3)(a)(2) Amendments to Article 4 of the Articles
of Incorporation previously filed as Exhibit 3a to the
Corporation's 1993 Form 10-K filed March 11, 1994, are hereby
incorporated by reference.
(3)(b) The By-laws of the Corporation previously
filed as Exhibit 3b to the Corporation's 1991
Form 10-K filed March 27, 1992, are hereby
incorporated by reference.
(3)(c) Amendment to Article 5.A. of the Articles
of Incorporation previously filed as Exhibit 3c to the
Corporation's 1994 Form 10-K filed March 20, 1995, are hereby
incorporated by reference.
(22) The registrant has one subsidiary, Bank of
Hanover and Trust Company, 25 Carlisle Street,
Hanover, Pennsylvania 17331, incorporated
in Pennsylvania.
(23) Consents of independent auditors.
(Filed separately.)
(27) Financial Data Schedule
(Filed electronically)
(28) Additional Exhibits.
(99)(a) Auditor's Report. . . . . . . . 35
(99)(b) Proxy Statement and Notice of Annual
Meeting of Shareholders to be held April 9,
1996, are hereby incorporated by reference.
(99)(c) Form of Proxy for Annual Meeting of
Shareholders to be held April 9, 1996, is
hereby incorporated by reference.
B. There were no reports filed on Form 8-K for the quarter
ended December 31, 1995.
C and D. Exhibits and Financial Statement Schedules. All
other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instruction or
are inapplicable and, therefore, have been omitted.
Item 15 - Signatures. . . . . . . . . . . . . . . . . . . . . . . . 63
<PAGE>
BUSINESS
HANOVER BANCORP, INC. - GENERAL
The registrant, Hanover Bancorp, Inc. (the "Corporation"), was
incorporated under the laws of the Commonwealth of Pennsylvania on August
2, 1983. The Corporation is a one-bank holding company registered under
the Bank Holding Company Act of 1956 as amended, owning all the outstanding
shares of its subsidiary, Bank of Hanover and Trust Company.
The Corporation is registered with and subject to the regulatory
supervision of the Securities and Exchange Commission and the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") and the
Bank is subject to regulatory supervision of the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation ("FDIC"). The
Corporation's administrative offices are located at 33 Carlisle Street,
Hanover, Pennsylvania 17331 (telephone number 717-637-2201).
BANK OF HANOVER AND TRUST COMPANY
Bank of Hanover and Trust Company (the "Bank") is the Corporation's
wholly-owned bank subsidiary and was first organized in 1835 under the laws
of the Commonwealth of Pennsylvania. The Bank conducts its business
principally through eleven full service banking offices and one loan
production office located in York and Adams Counties, Pennsylvania. At
December 31, 1995, the Bank had total deposits of $279,372,000; total
assets of $332,753,000; and net loans of $211,649,000.
The Bank offers a wide variety of banking services to all segments of its
service area. The Bank's lending services include commercial, financial
and agricultural revolving lines of credit and term loans, construction
loans, residential mortgage loans and installment and other personal loans.
These lending activities involve varying degrees of credit risk. In
general, commercial, financial and agricultural loans expose the Bank to
the most credit risk while residential mortgage loans involve the least
risk. In order to keep this risk at an acceptable overall level, the Bank
strives to maintain a diversified loan portfolio. The specific
underwriting standards such as loan to value ratios and collateral
requirements are defined within a formal written lending policy and vary
from category to category. The Bank's deposit services include commercial
and personal checking accounts, savings and time accounts, certificates of
deposit, and safety deposit services. The Bank is also a member of the MAC
system and offers 24-hour automated teller machine service at six of its
Hanover offices, both of its Gettysburg offices and at its offices in
Littlestown, New Oxford and Rossville as well as three remote service
locations in Hanover.
Individual trust services offered by the Bank include the administration
of estates, trust and agency accounts. Corporate trust services include
acting as trustee for employee benefit plans.
The Bank is not dependent upon a single customer or a small number of
customers, the loss of which would have a material adverse effect on the
Bank or the Corporation.
COMPETITION
Commercial banking in Pennsylvania is highly competitive. In addition to
competition with banks of similar size, the Bank competes directly in its
market area with larger banking and other financial service organizations
which have substantially greater resources and serve broader geographic
markets.
<PAGE>
Competing within the Bank's market area, defined as York and Adams
Counties, are 208 offices of area financial institutions, including
commercial banks, savings banks and credit unions. According to Sheshunoff
Information Services, Inc.'s Branches of Pennsylvania - 1995, combined
total deposits of these financial institutions was $5,448,842,000 as of
June 30, 1994.
STAFF
The total number of full-time equivalent persons employed by the Bank as
of December 31, 1995, was 197.75. Most employees participate in the Bank's
pension plan and are provided with group life, health and major medical
insurance. Management considers employee relations to be very good.
SUPERVISION AND REGULATION
The Corporation as a "bank holding company" under the Federal Bank
Holding Company Act (the "Act") is regulated and examined by the Federal
Reserve Board. The Act restricts the business activities and acquisitions
that may be engaged in, or made by the Corporation. As a "bank holding
company" for purposes of Pennsylvania state banking law, the Corporation is
regulated and supervised by the Pennsylvania Department of Banking.
Other Federal and Pennsylvania laws regulate, restrict and sometimes
prohibit certain activities of, or transactions between, a corporation's
banking subsidiaries and a corporation itself and its other subsidiaries.
These laws include limitations on the loans by a bank's subsidiaries to
affiliated companies and on the amount of dividends that may be declared by
a bank's subsidiaries (see Note 12 to the Consolidated Financial
Statements).
The Bank is a member of the FDIC. Accordingly, its operations are
subject to regulation and examination by the State of Pennsylvania and the
FDIC.
GOVERNMENTAL MONETARY POLICIES
The earnings of the Corporation and the Bank are affected by domestic
economic conditions and the monetary and fiscal policies of the United
States Government and its agencies. An important function of the Federal
Reserve System is to regulate the money supply and interest rates. Among
the instruments used to implement those objectives are open market
operations in United States government securities and changes in reserve
requirements against member bank deposits. These instruments are used in
varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may also affect rates
charged on loans or paid for deposits.
As a banking institution, the policies and regulations of the Federal
Reserve Board have a significant effect on its deposits, loans and
investment growth, as well as the rate of interest earned and paid, and are
expected to affect the Bank's operations in the future. The effect of such
policies and regulations upon the future business and earnings of the
Corporation and the Bank cannot be predicted.
<PAGE>
PROPERTIES
The Corporation's headquarters is located in its Administration Center at
33 Carlisle Street, Hanover, Pennsylvania 17331. In addition to the
Administration Center, the Bank owns the following unencumbered banking
offices:
MAIN OFFICE YORK STREET OFFICE
25 Carlisle Street 951 York Street
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NEW OXFORD OFFICE HANOVER CROSSING OFFICE
318 Lincolnway East 453 Eisenhower Drive
New Oxford, Adams County Hanover, York County
Pennsylvania 17350 Pennsylvania 17331
OPERATIONS CENTER WEST MANCHESTER OFFICE (Building)
1040 High Street 1511 Kenneth Road
Hanover, York County York, York County
Pennsylvania 17331 Pennsylvania 17404
(Opening March 18, 1996)
The Bank also owns the following unencumbered property:
Vacant 2-acre tract of land located at the intersection of Pennsylvania
Route 74 and Wellsville Road in the Borough of Wellsville, York County,
Pennsylvania which was for possible branch development and is now listed
for sale.
<PAGE>
The Bank leases the following properties:
PLAZA OFFICE SOUTH HANOVER OFFICE
880 Carlisle Street 1049 Baltimore Street
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NORTH MALL OFFICE ROSSVILLE OFFICE
Carlisle Street Extended 3405 Rosstown Road
Hanover, York County Wellsville, York County
Pennsylvania 17331 Pennsylvania 17365
GETTYSBURG EAST OFFICE LITTLESTOWN OFFICE
1275 York Road 400 West King Street
Gettysburg, Adams County Littlestown, Adams County
Pennsylvania 17325 Pennsylvania 17340
DOWNTOWN GETTYSBURG OFFICE WEST YORK LOAN PRODUCTION OFFICE
6 York Street 1550 Kenneth Road
Gettysburg, Adams County York, York County
Pennsylvania 17325 Pennsylvania 17404
WEST MANCHESTER OFFICE (Land)
1511 Kenneth Road
York, York County
Pennsylvania 17404
(Opening March 18, 1996)
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 authorites.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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. (Registrant)
BY: /S/ J. Bradley Scovill February 16, 1996
J. Bradley Scovill Date
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on February 16, 1996, by the following persons on behalf
of the registrant and in the capacities indicated.
/S/ Michael D. Bross /S/ Thomas M. Bross, Jr.
Michael D. Bross Thomas M. Bross, Jr.
Director Director,
Vice Chairman of the Board
/S/ S. Forry Eisenhart, Jr. /S/ Bertram F. Elsner
S. Forry Eisenhart, Jr. Bertram F. Elsner
Director Director
/S/ J. Daniel Frock /S/ John S. Hollinger, Jr.
J. Daniel Frock John S. Hollinger, Jr.
Director Director
/S/ Terrence L. Hormel /S/ Earl F. Noel, Jr.
Terrence L. Hormel Earl F. Noel, Jr.
Director, Director
Chairman of the Board
/S/ Vincent P. Pisula /S/ Charles W. Test
Vincent P. Pisula, MD Charles W. Test
Director Director
/S/ J. Bradley Scovill /S/ Gerald M. Warner
J. Bradley Scovill Gerald M. Warner
Director, President and Secretary and Treasurer
Chief Executive Officer (Principal Accounting and
(Principal Executive Officer) Financial Officer)
<PAGE>
HANOVER BANCORP, INC. DIRECTORS AND OFFICERS
Michael D. Bross
Owner
Stonewood Farm and Berwick
Enterprises -1987*
Thomas M. Bross, Jr.
Retired Charirman of the Board
Round Hill Foods, Inc.-1973*
S. Forry Eisenhart, Jr.
President and Chief Executive Officer
Eisenhart Wallcoverings Co. and
Eisenhart Corporation-1993*
Bertram F. Elsner
President and Chief Executive Officer
Elsner Engineering Works, Inc.-1985
J. Daniel Frock
President
Frock Bros. Trucking, Inc.-1985*
John S. Hollinger, Jr.
Manager and Owner
The Hollinger Group, Real Estate & Insurance Brokers-1978*
Terrence L. Hormel
President
Keyman Distribution Resources;
and Secretary/Treasurer
Keystone Distribution Center, Inc.-1981*
Earl F. Noel, Jr.
President
Yazoo Mills, Inc.-1995*
Dr. Vincent P. Pisula
Surgeon-1969*
J. Bradley Scovill
President and Chief Executive Officer
Hanover Bancorp, Inc. and
Bank of Hanover and Trust Company-1996*
Charles W. Test
Chairman of the Board
C.W. Test Builder, Inc.-1973*
<PAGE>
DIRECTORS EMERITUS
John D. Shafer
Retired Industrialist-1965*
Dr. Richard J. Stock
Retired Dentist-1942*
*YEAR FIRST ELECTED TO BOARD OF DIRECTORS
OFFICERS
Terrence L. Hormel
Chairman of the Board
Thomas M. Bross, Jr.
Vice Chairman of the Board
J. Bradley Scovill
President and Chief Executive Officer
Gerald M. Warner
Secretary and Treasurer
Beverly A. Schimp
Assistant Secretary
<PAGE>
BANK OF HANOVER AND TRUST COMPANY OFFICERS
Terrence L. Hormel
Chairman of the Board
Thomas M. Bross, Jr.
Vice Chairman of the Board
J. Bradley Scovill
President and Chief Executive Officer
Chad M. Clabaugh
Senior Vice President
Consumer Services Division
Jeffrey K. Dice
Senior Vice President
Credit Services Division
Wayne P. Kautz
Senior Vice President
Trust and Investment Services Division
Harold Lau
Senior Vice President
Operations Division
Jacquelyn A. Lebow
Senior Vice President
Marketing Division
Carol M. Wuenschel
Senior Vice President
Human Resources Division
Gerald M. Warner
Vice President & Comptroller
Finance/Control Division Manager
John T. Weber
Vice President
Internal Auditor
Lisa Stough Cookson
Vice President
Mortgage Services Manager
Robert G. Coradi
Vice President
Commercial Lending Manager
Gregory J. Greco
Vice President
Regional Commercial Business Development Officer
Surina T. Jan
Vice President
Compliance/Loan Review Manager
<PAGE>
Joyce M. Smith
Vice President
Assistant Operations Division Manager
Ronald Smith
Vice President
Adams County Regional Administrator
Paul J. Stevenson
Vice President
Trusts and Estates Manager
J. Scott Sturgill
Vice President
Hanover Regional Administrator
Rita M. Szymanski
Vice President
Employee Benefits Manager
Wanda G. Thoman
Vice President
Retail Credit Services Manager
Bernard E. Wible
Vice President
York Regional Administrator
Barbara J. Adelsberger
Assistant Vice President
Community Office Manager
Littlestown Office
Teresa J. Baadte
Assistant Vice President
Community Office Manager
Downtown Gettysburg Office
Lisa A. Bowersox
Assistant Vice President
Community Office Manager
Gettysburg East Office
Jeannie L. Craumer
Assistant Vice President
Trust Operations Officer
Nancy S. Dill
Assistant Vice President
Community Office Manager
Plaza Office
Debra A. Eck
Assistant Vice President
Staff Accountant
Faye E. Inners
Assistant Vice President
Community Office Manager
New Oxford Office
<PAGE>
Tammy J. Kehr
Assistant Vice President
Community Office Manager
South Hanover Office
Susan E. Kephart
Assistant Vice President
Trust New Business Development Officer
Patricia R. Ormond
Assistant Vice President
Community Office Manager
Main Office
Kevin E. Owens
Assistant Vice President
Community Office Manager
Rossville Office
Maria C. Pennings
Assistant Vice President
Community Office Manager
Hanover Crossing Office
Wendy L. Rittenhouse
Assistant Vice President
Community Office Manager
West Manchester Office
Patsy A. Stevens
Assistant Vice President
Deposit Services
Shanon R. Toal, Jr.
Assistant Vice President
Resource Recovery
<PAGE>
BANK OF HANOVER AND TRUST COMPANY
HANOVER OFFICES NEW OXFORD OFFICE GETTYSBURG OFFICES
25 Carlisle Street* 318 Lincolnway East* 1275-A York Road
880 Carlisle Street* 624-2103 6 York Street*
951 York Street* 337-9011
1049 Baltimore Street* ROSSVILLE OFFICE
453 Eisenhower Drive* 3405 Rosstown Road, Wellsville* LITTLESTOWN OFFICE
North Hanover Mall* 432-9625 400 West King Street*
637-2201 359-8188
WEST MANCHESTER OFFICE
* MAC PLUS LOCATION 1511 Kenneth Road, York*
764-0155
<PAGE>
(back cover page)
BANK OF HANOVER
AS UNIQUE AS THE COMMUNITIES WE SERVE
25 Carlisle Street
Hanover, PA 17331
(717) 637-2201
<PAGE>
APPENDIX I
DESCRIPTION OF GRAPHS INCLUDED IN 1995 ANNUAL REPORT
Graph Graph
Location Description
Page 1. Bar graph of net income over the past five years.*
Page 11. Bar graph of total assets over the past five years.*
Page 11. Stacked bar graph of net income per share and dividends per share
over the past five years.*
Page 13. Stacked bar graph of net interest income and net income over
the past five years.*
Page 14. Bar graph of return on average assets over the past five years.*
Page 17. Bar graph of total shareholders equity over the past five years.*
Page 20. Stacked bar graph of total deposits and total net loans over the
past five years.*
Page 29. Bar graph of the ratio of nonperforming assets to total loans
over the past five years. The five ratios compared in the graph
were as follows: 1991 - .33%; 1992 - .38%; 1993 - .34%;
1994 - .41%; 1995 - .17%.
Page 29. Bar graph of the total allowance for loan losses over the past
five years.**
* The content of this graph is narratively presented at SELECTED CONSOLIDATED
FINANCIAL DATA on page 11.
** The content of this graph is narratively presented at ALLOCATION FOR LOAN
LOSS ALLOWANCE on page 28.
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Hanover Bancorp, Inc. of our report dated January 26,
1996 included in the 1995 Annual Report to Shareholders of Hanover
Bancorp, Inc.
We also consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-7084) and Form S-8 (Nos. 33-73472; 33-
73470; and 33-73796) of Hanover Bancorp, Inc. of our report dated
January 26, 1996, with respect to the consolidated financial
statements of Hanover Bancorp, Inc. incorporated by reference in this
Annual Report (Form 10-K) for the year ended December 31, 1995.
/S/ Ernst & Young LLP
Harrisburg, Pennsylvania
March 8, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,055
<INT-BEARING-DEPOSITS> 913
<FED-FUNDS-SOLD> 5,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,964
<INVESTMENTS-CARRYING> 9,941
<INVESTMENTS-MARKET> 9,978
<LOANS> 213,869
<ALLOWANCE> 2,220
<TOTAL-ASSETS> 337,222
<DEPOSITS> 278,234
<SHORT-TERM> 14,660
<LIABILITIES-OTHER> 3,173
<LONG-TERM> 8,293
<COMMON> 3,449
0
0
<OTHER-SE> 29,413
<TOTAL-LIABILITIES-AND-EQUITY> 337,222
<INTEREST-LOAN> 18,218
<INTEREST-INVEST> 5,379
<INTEREST-OTHER> 584
<INTEREST-TOTAL> 24,181
<INTEREST-DEPOSIT> 10,073
<INTEREST-EXPENSE> 11,409
<INTEREST-INCOME-NET> 12,772
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 580
<EXPENSE-OTHER> 10,326
<INCOME-PRETAX> 4,516
<INCOME-PRE-EXTRAORDINARY> 3,556
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,556
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 4.20
<LOANS-NON> 10
<LOANS-PAST> 24
<LOANS-TROUBLED> 292
<LOANS-PROBLEM> 2,000
<ALLOWANCE-OPEN> 2,498
<CHARGE-OFFS> 763
<RECOVERIES> 125
<ALLOWANCE-CLOSE> 2,220
<ALLOWANCE-DOMESTIC> 1,237
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 983
</TABLE>
