FORM 10-Q - AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12524
Hanover Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2219814
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
33 Carlisle Street, Hanover, Pennsylvania 17331
(address of principal executive office and zip code)
(717) 637-2201
Registrant's Telephone Number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING March 31, 1996
Common Stock, 3,105,068 shares
par value $1.11 per share
<PAGE>
INDEX
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Page #
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1996, and December 31, 1995. . . . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended March 31, 1996 and 1995 . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 . . . . . . . 5
Sources and Uses of Funds. . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 10
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
March 31 December 31
1996 1995
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 13,623 $ 11,055
Federal funds sold 27,025 5,600
CASH AND CASH EQUIVALENTS 40,648 16,655
Interest bearing deposits with other banks 52 913
Investment securities:
Available-for-sale 71,863 87,964
Held-to-maturity (market value -
$3,916 and $9,978 respectively) 3,898 9,941
75,761 97,905
Loans:
Commercial, financial, and agricultural 26,287 26,062
Real estate-construction 5,801 5,384
Real estate-commercial mortgage 26,183 25,739
Real estate-residential mortgage 96,681 95,227
Consumer 60,864 61,457
215,816 213,869
Less: Allowance for loan losses (2,265) (2,220)
NET LOANS 213,551 211,649
Premises and equipment 6,156 5,806
Accrued income receivable 2,198 2,355
Other assets 2,348 1,939
TOTAL ASSETS $340,714 $337,222
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 26,312 $ 27,214
Interest bearing 256,719 251,020
TOTAL DEPOSITS 283,031 278,234
Borrowed funds:
Federal Home Loan Bank borrowings 13,817 14,006
Other borrowings 8,110 8,947
21,927 22,953
Accrued interest 2,205 1,873
Other liabilities 997 958
Dividends payable 342 342
TOTAL LIABILITIES 308,502 304,360
SHAREHOLDERS' EQUITY:
Common stock 3,447 3,449
Surplus 18,618 18,606
Retained earnings 9,685 9,253
Unrealized gains on securities
available-for-sale 462 1,554
TOTAL SHAREHOLDERS' EQUITY 32,212 32,862
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $340,714 $337,222
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Income
<CAPTION>
(Unaudited)
Three Months Ended
March 31
1996 1995
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,673 $ 4,147
Interest on federal funds sold 136 77
Investment securities:
Taxable 827 945
Tax Exempt 480 388
1,307 1,333
Other interest income 126 51
Total Interest Income 6,242 5,608
INTEREST EXPENSE:
Interest on deposits 2,713 2,243
Interest on borrowed funds 293 325
Total Interest Expense 3,006 2,568
Net Interest Income 3,236 3,040
PROVISION FOR LOAN LOSSES 120 90
Net Interest Income After
Provision For Loan Losses 3,116 2,950
OTHER INCOME:
Trust department income 174 165
Service charges on deposit accounts 205 193
Other operating income 114 89
Securities gains 77 98
570 545
OTHER EXPENSE:
Salaries 1,220 1,039
Pensions and other employee benefits 322 288
Occupancy expense 237 192
Equipment expense 212 216
Marketing and advertising 78 75
FDIC Insurance 1 142
Other operating expense 569 537
2,639 2,489
Income Before Income Taxes 1,047 1,006
INCOME TAXES - Note 7 220 201
NET INCOME $ 827 $ 805
PER SHARE DATA:
Net income $ .27 $ .26
Cash dividends $ .11 $ .10
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
(Unaudited)
Three Months Ended
March 31
1996 1995
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 827 $ 805
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 120 90
Provision for depreciation and amortization 170 163
Securities gains (78) (90)
Deferred income taxes, net 224 150
Decrease in interest receivable 157 60
Increase in interest payable 332 317
Increase in other assets (323) (232)
Increase (decrease) in other liabilities 296 (26)
Increase (decrease) in accrued taxes (4) 15
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,721 1,252
INVESTING ACTIVITIES:
Net increase in loans (4,096) (6,929)
Proceeds of loan sales 2,074 222
Proceeds from sales of
available-for-sale investment securities 29,884 2,141
Proceeds from maturities of investment securities 19,977 9,571
Purchases of investment securities (28,433) (4,258)
Purchases of premises and equipment (520) ( 49)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 18,886 698
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 6,041 2,191
Net increase (decrease) in certificates of deposit
and other time deposits (1,244) 6,750
Net decrease in borrowed funds (1,026) (2,963)
Cash dividends paid (342) (311)
Dividends paid in lieu of fractional shares --- (6)
Proceeds from issuance of common stock 13 ---
Repurchase and retirement of common stock (56) ---
NET CASH PROVIDED BY
FINANCING ACTIVITIES 3,386 5,661
INCREASE IN CASH AND CASH EQUIVALENTS 23,993 7,611
Cash and cash equivalents at beginning of period 16,655 11,549
CASH AND CASH EQUIVALENTS AT END OF PERIOD $40,648 $19,160
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOURCES & USES OF FUNDS
<CAPTION>
Increase (Decrease)
March 31 Since December 31, 1995
1996 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Sources:
Deposits
Non-interest bearing $ 26,312 $ (902) (3.31)%
Interest bearing 256,719 5,699 2.27%
Total deposits 283,031 4,797 1.72%
Borrowed funds 21,927 (1,026) (4.47)%
Other liabilities 3,544 371 11.69%
Shareholders' equity 32,212 (650) (1.98)%
TOTAL SOURCES $340,714 $ 3,492 1.04%
Funding Uses:
Interest earning assets
Interest bearing deposits $ 52 $ (861) (94.30)%
Investment securities 75,761 (22,144) (22.62)%
Federal funds sold 27,025 21,425 382.59%
Loans, net 213,551 1,902 .90%
Total interest earning assets 316,389 322 .10%
Other assets 24,325 3,170 14.98%
TOTAL USES $340,714 $ 3,492 1.04%
</TABLE>
<PAGE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Notes to Consolidated Financial Statements
(1) In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments which are
of a normal recurring nature necessary to present fairly Hanover
Bancorp, Inc's. financial position as of March 31, 1996, and
December 31, 1995, the results of its operations for the three
months ended March 31, 1996 and 1995 and cash flows for the three
months ended March 31, 1996 and 1995.
(2) The information contained in this report is unaudited and is
subject to year-end adjustment and audit.
(3) These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
(4) Net income and cash dividends per share are based on the weighted
average number of shares outstanding which were 3,105,068 during
the quarter ended March 31, 1996, and 3,105,590 during the quarter
ended March 31, 1995. Shares outstanding, as well as all other per
share data, has been adjusted to reflect the three for two stock
split paid April 1, 1995.
(5) The results of operations for the three month period ended March
31, 1996, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
(6) The Corporation considers the allowance for loan losses adequate at
this time.
Beginning in 1995, the Corporation adopted Financial Accounting
Standards Board (FASB) No. 114 "Accounting by Creditors for
Impairment of a Loan" and Statement No. 118 "Accounting by
Creditors for Impairment-Income Recognition and Disclosures". In
accordance with these standards, the following tables are presented
which summarize the Corporation's loan loss allowance activity and
which provide information relating to its impaired loans.
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
Balance at beginning of period $2,220 $2,498
Recoveries on loans 32 125
Provision charged to operations 120 360
Loans charged-off (107) (763)
Balance at end of period $2,265 $2,220
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
Recorded investment in loans considered
impaired under FASB 114 $ 923 $ 946
Loans above on nonaccrual status $ 61 $ -
Impaired loans with no related
allowance due to write-downs $ 609 $ 654
Impaired loans not written-down 314 292
$ 923 $ 946
Allowance related to the above loans $ - $ -
Average recorded investment in impaired
loans during the period $ 961 $1,490
Related amount of interest income
recognized on these impaired loans $ 22 $ 132
Amount of interest income above
using the cash basis method
of accounting $ 1 $ 4
</TABLE>
(7) Three accounting standards recently issued by the Financial
Accounting Standards Board (FASB) were adopted by the Corporation
effective January 1, 1996. FASB 123 "Accounting for Stock Based
Compensation" was issued in October 1995. This statement
encourages but does not require companies to recognize compensation
expense for stock-based awards based on their fair value on the
grant date. Companies have the option to continue following the
existing intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 which often results in no compensation
expense. However, companies that choose the latter method are
required to provide pro forma disclosures of what net income and
earnings per share would have been had the new fair value method
been used. In addition, the standard requires all companies to
make significantly more disclosures regarding employee stock
options than are currently required. The Corporation has chosen
to continue to follow the existing intrinsic value method and to
provide the additional required pro forma disclosures in its 1996
annual financial statements.
FASB 122, "Accounting for Mortgage Servicing Rights", was issued in
May 1995. This statement requires that a separate asset be
recognized for the rights to service mortgage loans for others,
regardless of how these rights are acquired. The total cost of the
mortgage loans, whether purchased or originated, should be
allocated between the loans and the mortgage servicing rights based
on their relative fair values. The standard also requires that the
capitalized mortgage servicing rights be assessed for impairment
based on the fair value of those rights and that any impairment be
recognized through a valuation allowance.
<PAGE>
FASB No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", was issued in March
1995. This standard prescribes the accounting for the impairment
of long-lived assets, such as property, plant and equipment;
identifiable intangibles, including patents and trademarks; and
goodwill related to those assets. In addition, FASB 121 defines
the accounting for long-lived assets and identifiable intangibles
that a company plans to dispose of, other than those that are part
of a discontinued operation.
The adoption of these new standards did not have nor is expected to
have a material effect on the Corporation's liquidity, capital
resources, or results of operations.
***********
<PAGE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
The consolidated operations of Hanover Bancorp Inc., (the "Corporation")
are derived primarily from the operations of its wholly-owned subsidiary, the
Bank of Hanover and Trust Company (the "Bank"). The following discussion and
analysis sets forth results of operations through the first quarter of 1996,
including basic performance trends. There are no known trends, events or
uncertainties that will have or are reasonably likely to have a material
effect on the Corporation's liquidity, capital resources or operations.
First Quarter of 1996 Compared to First Quarter of 1995:
Net income for the three months ended March 31, 1996, was $827,000, an
increase of $22,000 from the same period in 1995. On a per share basis, 1996
first quarter results was $0.27 versus $0.26 per share during the prior year.
Total interest income for the three months ended March 31, 1996, was
$6.2 million, an increase of $634,000 from the same period in 1995. Interest
and fees on loans increased $526,000 as a result of volume increases and
market interest rate increases. Interest on federal funds sold and other
investments increased by $59,000 and $75,000, respectively, primarily due to
increased volumes. Interest on investment securities decreased by $26,000 as
a result of lower volumes. The volume changes in the Corporation's
investment securities and federal funds sold were related to an investment
portfolio restructuring as further discussed herein.
Interest expense for the three months ended March 31, 1996, was $3.0
million, an increase of $438,000 from the same period in the prior year.
Interest on deposits increased by $470,000 due to volume growth and increased
market interest rates. Interest on other funds, including fed funds
purchased, securities sold under agreement to repurchase and Federal Home
Loan Bank (FHLB) borrowings, decreased by $32,000 as a result of volume
decreases.
The provision for loan losses was $120,000 for the first quarter of
1996, compared to $90,000 for the first quarter of 1995. Management is
continuing its policy of providing reasonable additions to the reserve for
loan losses on an ongoing basis. The amount of the provision is based on a
current and prospective assessment of overall loan portfolio quality and
potential specific losses.
The net impact of the above changes on the Corporation's net interest
income after loan loss provision was an increase of $166,000 from 1995 to
1996.
<PAGE>
Non-interest income for the three months ended March 31, 1996 was
$570,000, an increase of $25,000 over the same period in 1995. Trust
department income, service charges on deposit accounts and other operating
income increased by $9,000, $12,000 and $25,000, respectively, while
securities gains decreased by $21,000. Trust department income increased
primarily due to a fee restructuring effective the beginning of 1996.
Service charges on deposit accounts increased largely as the result of demand
deposit account growth, specifically commercial accounts. The increase in
other operating income was primarily due to increased fees realized through
a higher volume of loan sales during 1996 compared to 1995. The decrease in
securities gains was an outcome of sales conducted in response to the market
conditions and strategies at the time.
Total non-interest expense during the first quarter of 1996 was $2.6
million, an increase of $150,000 over the same period in 1995. This increase
was primarily due to growth in salaries, pensions and other employee
benefits, occupancy, and other operating expenses of $181,000, $34,000,
$45,000 and $32,000, respectively. This growth was mainly associated with
the Corporation's expansion of its branch office network. Competitive
salary/wage pressures and inflation also contributed to these increases.
The $141,000 decrease in FDIC insurance premiums was due to the substantial
rate reductions instituted by the FDIC during the third quarter of 1995. The
FDIC revised the premium rates as a result of the recapitalization of the
Bank Insurance Fund (BIF) and in an effort to more fully reflect banks' risk
profiles by expanding the spread between rates paid by the "safest" and
"riskiest" institutions. This revision has translated into a reduction for
the Corporation since the Bank is currently included in the "safest"
category. Management anticipates remaining in this category in the future
and thus should continue to realize significantly reduced FDIC premium
expenses going forward.
Income taxes for the first quarter of 1996 were $220,000, an increase of
$19,000 from the same period in 1995. This provision translates into an
effective tax rate of 21.0% for the period in comparison to a 20.0% rate
during 1995.
<PAGE>
Statement of Cash Flows:
The Corporation's cash and cash equivalents increased by $24.0 million
between December 31, 1995, and March 31, 1996 to a level of $40.6 million.
Net cash provided by operating activities was $1.7 million of which net
income provided $827,000. Net income was augmented by a total of $918,000
for the provision for loan losses, the provision for depreciation and
amortization and the increases in interest payable and other liabilities to
reflect expenses charged to income that did not require cash outlays. In
addition, net income was increased by $381,000 for the decreases in deferred
income taxes and interest receivable for cash received that was not included
in income. A combined total of $327,000, representing the increase in other
assets and the decrease in accrued taxes was deducted from net income in
consideration of cash expenditures made but not charged to expense. Finally
the securities gains of $78,000 were deducted to reflect noncash income
recognized.
Net cash provided by investing activities totalled $18.9 million. The
net investment in the loan portfolio was $2.0 million after deducting the
$2.1 million in loan sales. This increase was primarily related to
residential mortgage loan growth which was largely spurred by the
attractively low rates present during the early part of 1996. Net cash of
$21.4 million was provided through investment portfolio activity during the
first quarter of 1995. Proceeds from sales and maturities contributed $29.9
million and $20.0 million, respectively, while purchases of investment
securities utilized $28.4 million. The high volume of sales was the result
of ongoing portfolio and balance sheet management strategies in response to
the volatile interest rate environment during the first quarter of 1996. The
proceeds have been held in federal funds sold until the rate environment
stabilizes. Purchases of premises and equipment used $520,000 in cash.
These purchases were primarily related to the addition of a new branch
facility.
Financing activities provided $3.4 million during the first quarter of
1996. Demand deposits, NOW accounts, money market accounts and savings
accounts provided $6.0 million while certificates of deposit and other time
deposits (CDs) used $1.2 million. The decrease in certificates is somewhat
distorted since the Corporation lost a large municipal CD during the first
quarter of approximately $6.0 million. This overall increase in deposit
levels was largely the result of continued growth experienced by the
Corporation's developing branch facilities. A decrease in borrowed funds
and cash dividends of $1.0 million and $342,000, respectively, used cash.
Also utilizing $56,000 of cash was the repurchase and retirement of common
stock related to a stock purchase plan as further discussed herein.
<PAGE>
Asset Quality and Allowance for Loan Losses:
The following tables illustrate the Corporation's problem asset position as
of March 31, 1996 compared to its position at December 31, 1995.
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
Non-accrual loans $ 61 $ 10
Accruing loans past due 90 days or more 5 24
Restructured loans 253 292
Other real estate and other
repossessed assets 29 46
Total non-performing assets $ 348 $ 372
Non-accrual loans by category
Commercial, financial and agricultural $ 61 $ -
Real estate-construction - -
Real estate-mortgage - -
Installment - 10
$ 61 $ 10
Past due loans by category
Commercial, financial and agricultural $ - $ -
Real estate-construction - -
Real estate-mortgage - -
Installment 5 24
$ 5 $ 24
Restructured loans by category
Commercial, financial and agricultural $ 12 $ 13
Real estate-construction - -
Real estate-mortgage 241 279
Installment - -
$ 253 $ 292
</TABLE>
Non-performing assets remained at a relatively low level at March 31,
1996. Nonperforming assets were .16% of total loans at March 31, 1996
compared to .17% at December 31, 1995. In addition, potential problem loans
at March 31, 1996, as determined by the Corporation's internal review
process, remained at $2.0 million, the same level as December 31, 1995. Of
these amounts, $609,000 and $654,000 were considered impaired under FASB 114
for March 31, 1996 and December 31, 1995, respectively. Loans considered
impaired under FASB 114 represent those potential problem loans which
management feels are probable (as opposed to possible) to result in future
noncompliance in addition to the Corporation's applicable nonaccrual loans
and restructured loans.
<PAGE>
The Corporation remains committed to making monthly provisions in order
to maintain a strong allowance relative to its level of specific potential
losses and to its growing overall loan portfolio. A total provision of
$120,000 was made during the first three months of 1996. The resulting
allowance for loan losses at March 31, 1996 was $2.3 million in comparison to
$2.2 million at December 31, 1995. This allowance approximated 1.05% of
total loans and 651% of nonperforming assets at March 31, 1996 versus 1.04%
and 597% at year end 1995. Management feels that the allowance for loan
losses is adequate to cover potential losses within the overall portfolio.
Liquidity and Interest Rate Sensitivity:
Asset/liability management can be divided into two primary functions:
1) assuring adequate liquidity and, 2) maintaining an appropriate balance
between rate-sensitive interest earning assets and rate-sensitive interest
bearing liabilities. The goal of the Corporation's Liquidity Management
Program is to meet the cash flow requirements of customers for either deposit
withdrawals or loans. To meet its liquidity needs, the Corporation looks to
a number of sources on both sides of its balance sheet. On the asset side of
the balance sheet, the Corporation relies on federal funds sold, short term
money market investments, maturities in the investment portfolio, principal
repayments on outstanding loans and amortizing investment securities and
sales of loans in the secondary markets. On March 31, 1996, the balance of
the federal funds sold account was $27.0 million. Along with the liquidity
provided by federal funds sold, a total of $7.5 million or 9.9% of the
Corporation's $75.8 million investment portfolio were scheduled to mature in
one year or less. Additionally, an average of $4.8 million in loan principal
repayments and $532,000 in mortgage- and asset-backed securities repayments
were received by the Corporation during each month of the first quarter of
1996.
In addition to the liquidity provided by these categories of assets, the
Corporation's liquidity is enhanced by a high ratio of stable "core" deposits
(total deposits less certificates of deposit in excess of $100,000) to total
assets. On March 31, 1996, 79.5% of total assets were funded with core
deposits while 3.6% were funded with certificates of deposit in excess of
$100,000. In addition, 4.1% of total assets were funded by FHLB borrowings
which provide match funding for assets with similar maturities.
Finally, as part of its Liquidity Management Program, the Corporation
maintains borrowing agreements with several correspondent banks, the FHLB of
Pittsburgh, as well as access to the Discount Window at the Federal Reserve
Bank of Philadelphia.
Maintaining an appropriate balance between rate sensitive interest
earning assets and interest bearing liabilities is a method of avoiding
fluctuations in net interest income and profits. An interest sensitivity
mismatch or GAP results from either an excess of rate sensitive assets
(positive gap) or rate sensitive liabilities (negative gap) being repriced in
a given time period. A positive gap generally indicates that rising interest
rates during a particular interval will increase net interest income, while
a negative gap generally means the opposite. It is the Corporation's policy
<PAGE>
to maintain a rate sensitivity ratio (rate sensitive assets minus rate
sensitive liabilities divided by total assets) over various time frames of
between plus and minus 10%. This ratio is deemed prudent because it allows
the Corporation sufficient latitude to redeploy assets in response to a
change in the level of interest rates and maintain or increase the level of
net interest income.
The following table shows the respective interest sensitivity GAPs on
March 31, 1996, for several different time intervals. This GAP analysis
takes into consideration the current estimated prepayments on loans and
amortizing investment securities. The Corporation's rate sensitivity ratio
within one year was negative 11.17%. As indicated, a negative gap position
during a period of rising interest rates may reduce net interest income.
However, management believes that the potential negative impact on the net
interest margin, should rates continue to increase, 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 but are conservatively classified
for the GAP analysis. In addition, management has the ability to adjust the
GAP position as necessary by repositioning its large portfolio of available-
for-sale investment securities. Management does not anticipate a significant
increase in the Corporation's negative gap position in the future.
<TABLE>
HANOVER BANCORP CONSOLIDATED GAP ANALYSIS
<CAPTION>
TOTAL
0 - 180 181-365 0 - 365
DAYS DAYS DAYS
(In thousands of dollars)
<S> <C> <C> <C>
Interest Earning Assets $122,417 $ 31,275 $153,692
Interest Bearing Liabilities 147,884 43,851 191,735
Interest Sensitivity GAP
March 31, 1996 (25,467) (12,576) (38,043)
Rate Sensitivity Ratio (7.47)% (3.69)% (11.17)%
Interest Sensitivity GAP
December 31, 1995 $(19,306) $(12,012) $(31,318)
Rate Sensitivity Ratio (5.73)% (3.56)% (9.29)%
</TABLE>
Capital Resources:
The Corporation's average equity to asset ratio was 9.79% during the
first three months of 1996 versus 9.25% for the first three months of 1995.
With the application of SFAS 115, the Corporation's total capital fluctuates
somewhat as changes in market interest rates affect the market value of the
available-for-sale investment portfolio. Excluding the unrealized gains
(losses) created by the application of SFAS 115, this ratio was 9.41% for
1996 compared to 9.47% for 1995. This slight decrease in the "core" capital
ratio was attributable to the strong growth in assets experienced by the
Corporation during the past year.
<PAGE>
During the quarter ended March 31, 1996, the Board of Directors declared
a cash dividend of $.11 per share payable May 1, 1996. The Corporation
relies on net income rather than retained earnings for the payment of
dividends to shareholders. The dividend rate is determined by the Board of
Directors after considering the level of internal capital growth necessary to
maintain an appropriate ratio of equity to assets and the projected level of
earnings. Management anticipates that the internal growth rate of equity is
more than adequate to support the Corporation's asset growth.
Also during the first quarter of 1996, the Board of Directors approved
a plan to purchase, in open market and privately negotiated transactions, up
to 150,000 shares of its outstanding common stock. Upon purchase, these
shares will be retired rather than be carried as treasury stock. The
objective of this plan is to more effectively deploy the Corporation's
capital. In combination with increased earnings over time, the resulting
reduction in total capital and shares outstanding is expected to improve
return on equity and earnings per share and support the market for Hanover
Bancorp, Inc. stock.
At the end of 1992, banks and bank holding companies were expected to
meet new capital ratios for qualifying total capital to risk weighted assets.
The new regulations were first proposed by the Federal Reserve Board in
January 1988. The principal objectives of establishing a risk-based capital
measurement framework are to achieve consistent international standards in
the measurement of and assessment of capital adequacy and to strengthen the
capital positions of major international banking organizations. As of March
31, 1996, Hanover Bancorp's "core" capital to risk-weighted assets was
13.42%. Total capital to risk-weighted assets on the same date was 14.38%.
The regulatory authorities require that the unrealized gains (losses)
generated by the application of FASB 115 be excluded from the calculation of
these ratios. These ratios are well above the minimums required by the
regulation and the Corporation has not been advised of any deficiency by the
regulatory authorities. Management has reviewed and will continue to monitor
the Corporation's asset mix, product pricing and allowance for loan losses
which are the areas determined to be most affected by these requirements.
Regulatory Issues:
The passage of the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Reigle Community Development and Regulatory
Improvement Act may have a significant impact upon the Corporation. The key
provisions pertain to interstate banking and interstate branching as well as
a reduction in the regulatory burden on the banking industry. Since
September, 1995, bank holding companies may acquire banks in other states
without regard to state law. In addition, banks can merge with other banks
in another state beginning in June, 1997. States may adopt laws preventing
interstate branching but, if so, no out-of-state bank can establish a branch
in that state and no in-state bank may branch outside the state.
Pennsylvania 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.
<PAGE>
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.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which if they were
implemented, would have a material adverse effect upon the liquidity, capital
resources or results of operations, although the general cost of compliance
with numerous and multiple federal and state laws and regulations does have,
and in the future may have, a negative impact on the Corporation's results of
operations.
During the first quarter of 1996 the Pennsylvania State Department of
Banking completed a routine examination of the Bank including an assessment
of asset quality. During 1995 the FDIC completed a similar examination of
the Bank. Also during 1995, the Federal Reserve Bank of Philadelphia
completed a routine examination of the Corporation.
<PAGE>
PART II. OTHER INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Item 1. Legal Proceedings
In the opinion of the management of the Corporation and the Bank, there
are no proceedings pending to which the Corporation and/or Bank is a party or
to which their property is subject, which, if determined adversely to the
Corporation or Bank, would be material in relation to the Corporation's and
the Bank's undivided profits or financial condition. There are no
proceedings pending other than ordinary routine litigation incident to the
business of the Corporation or the Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Corporation or the Bank by government authorities.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held April 9, 1996.
(b)-(c) One matter was voted upon, as follows:
Four directors were elected, as below:
Votes Votes
Term Cast Cast Votes
Expires "FOR" "AGAINST" "ABSTAINED"
Re-elected
Michael D. Bross 1999 2,474,703 1,008 0
Thomas M. Bross, Jr. 1999 2,473,241 2,470 0
Earl F. Noel, Jr. 1999 2,467,803 7,908 0
J. Bradley Scovill 1999 2,472,392 3,319 0
Directors whose term continued after meeting
Terrence L. Hormel 1997
Vincent P. Pisula, M.D. 1997
Charles W. Test 1997
S.Forry Eisenhart, Jr. 1997
Bertram F. Elsner 1998
J. Daniel Frock 1998
John S. Hollinger, Jr. 1998
(d) None.
<PAGE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER BANCORP, INC.
Date: August 14, 1996 \S\ J. Bradley Scovill
J. Bradley Scovill
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1996 \S\ Thomas J. Paholsky
Thomas J. Paholsky
Treasurer
(Principal Accounting and
Financial Officer)
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