FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12524
Hanover Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2219814
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
33 Carlisle Street, Hanover, Pennsylvania 17331
(address of principal executive office and zip code)
(717) 637-2201
Registrant's Telephone Number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING June 30, 1996
Common Stock, 3,034,785 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 -
June 30, 1996, and December 31, 1995. . . . . . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended June 30, 1996 and 1995 . . . . . . . . . 4
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . 6
Sources and Uses of Funds . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements. . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 11
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
June 30 December 31
1996 1995
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 12,724 $ 11,055
Federal funds sold 19,790 5,600
CASH AND CASH EQUIVALENTS 32,514 16,655
Interest bearing deposits with other banks 44 913
Investment securities:
Available-for-sale 60,314 87,964
Held-to-maturity (market value -
$14,342 and $9,978 respectively) 14,352 9,941
74,666 97,905
Loans:
Commercial, financial, and agricultural 28,764 26,062
Real estate-construction 6,321 5,384
Real estate-commercial mortgage 27,500 25,739
Real estate-residential mortgage 106,490 95,227
Consumer 62,682 61,457
231,757 213,869
Less: Allowance for loan losses (2,339) (2,220)
NET LOANS 229,418 211,649
Premises and equipment 6,664 5,806
Accrued income receivable 2,277 2,355
Other assets 2,796 1,939
TOTAL ASSETS $348,379 $337,222
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 28,220 $ 27,214
Interest bearing 268,225 251,020
TOTAL DEPOSITS 296,445 278,234
Borrowed funds:
Federal Home Loan Bank borrowings 9,253 14,006
Other borrowings 8,582 8,947
17,835 22,953
Accrued interest 2,370 1,873
Other liabilities 627 958
Dividends payable 333 342
TOTAL LIABILITIES 317,610 304,360
SHAREHOLDERS' EQUITY:
Common stock 3,368 3,449
Surplus 18,628 18,606
Retained earnings 9,033 9,253
Unrealized gains on securities
available-for-sale (260) 1,554
TOTAL SHAREHOLDERS' EQUITY 30,769 32,862
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $348,379 $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
June 30
1996 1995
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,865 $ 4,490
Interest on federal funds sold 382 139
Investment securities:
Taxable 685 948
Tax Exempt 278 376
963 1,324
Other interest income 55 48
Total Interest Income 6,265 6,001
INTEREST EXPENSE:
Interest on deposits 2,680 2,502
Interest on borrowed funds 271 323
Total Interest Expense 2,951 2,825
Net Interest Income 3,314 3,176
PROVISION FOR LOAN LOSSES 120 90
Net Interest Income After
Provision For Loan Losses 3,194 3,086
OTHER INCOME:
Trust department income 194 165
Service charges on deposit accounts 223 208
Other operating income 122 113
Securities gains 266 170
805 656
OTHER EXPENSE:
Salaries 1,262 1,091
Pensions and other employee benefits 316 248
Occupancy expense 221 186
Equipment expense 239 223
Marketing and advertising 139 123
FDIC Insurance 1 142
Other operating expense 646 614
2,824 2,627
Income Before Income Taxes 1,175 1,115
INCOME TAXES 263 244
NET INCOME $ 912 $ 871
PER SHARE DATA:
Net income $ .30 $ .28
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 Income
<CAPTION>
(Unaudited)
Six Months Ended
June 30
1996 1995
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,538 $ 8,637
Interest on federal funds sold 518 216
Investment securities:
Taxable 1,512 1,893
Tax Exempt 758 764
2,270 2,657
Other interest income 181 99
Total Interest Income 12,507 11,609
INTEREST EXPENSE:
Interest on deposits 5,393 4,745
Interest on borrowed funds 564 648
Total Interest Expense 5,957 5,393
Net Interest Income 6,550 6,216
PROVISION FOR LOAN LOSSES 240 180
Net Interest Income After
Provision For Loan Losses 6,310 6,036
OTHER INCOME:
Trust department income 368 330
Service charges on deposit accounts 428 401
Other operating income 236 202
Securities gains 343 268
1,375 1,201
OTHER EXPENSE:
Salaries 2,482 2,130
Pensions and other employee benefits 638 536
Occupancy expense 458 378
Equipment expense 451 439
Marketing and advertising 217 198
FDIC Insurance 2 284
Other operating expense 1,215 1,151
5,463 5,116
Income Before Income Taxes 2,222 2,121
INCOME TAXES 483 445
NET INCOME $ 1,739 $ 1,676
PER SHARE DATA:
Net income $ .56 $ .54
Cash dividends $ .22 $ .20
<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)
Six Months Ended
June 30
1996 1995
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,739 $ 1,676
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 240 180
Provision for depreciation and amortization 365 332
Securities gains (343) (267)
Deferred income taxes, net 224 150
Decrease in interest receivable 78 73
Increase in interest payable 497 771
Increase in other assets (399) (100)
Increase/(decrease) in other liabilities 183 (107)
Decrease in accrued taxes (261) (201)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,323 2,507
INVESTING ACTIVITIES:
Net increase in loans (21,561) (18,822)
Proceeds of loan sales 3,552 4,229
Proceeds from sales of
available-for-sale investment securities 39,538 7,250
Proceeds from maturities of investment securities 22,560 17,427
Purchases of investment securities (40,396) (15,083)
Purchases of premises and equipment (1,223) (284)
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES 2,470 (5,283)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 10,362 6,960
Net increase in certificates of
deposit and other time deposits 7,849 11,843
Net decrease in borrowed funds (5,118) (1,585)
Cash dividends paid (684) (621)
Dividends paid in lieu of fractional shares --- (6)
Proceeds from issuance of common stock 25 9
Repurchase and retirement of common stock (1,368) ---
NET CASH PROVIDED BY
FINANCING ACTIVITIES 11,066 16,600
INCREASE IN CASH AND CASH EQUIVALENTS 15,859 13,824
Cash and cash equivalents at beginning of period 16,655 11,549
CASH AND CASH EQUIVALENTS AT END OF PERIOD $32,514 $25,373
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOURCES & USES OF FUNDS
<CAPTION>
Increase (Decrease)
June 30 Since December 31, 1995
1996 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Sources:
Deposits
Non-interest bearing $ 28,220 $ 1,006 3.70%
Interest bearing 268,225 17,205 6.85%
Total deposits 296,445 18,211 6.55%
Borrowed funds 17,835 (5,118) (22.30)%
Other liabilities 3,330 157 4.95%
Shareholders' equity 30,769 (2,093) (6.37)%
TOTAL SOURCES $348,379 $11,157 3.31%
Funding Uses:
Interest earning assets
Interest bearing deposits $ 44 $ (869) (95.18)%
Investment securities 74,666 (23,239) (23.74)%
Federal funds sold 19,790 14,190 253.39%
Loans, net 229,418 17,769 8.40%
Total interest earning assets 323,918 7,851 2.48%
Other assets 24,461 3,306 15.63%
TOTAL USES $348,379 $11,157 3.31%
</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 June 30, 1996, and December 31, 1995, the
results of its operations for the three and six months ended June 30,
1996 and 1995 and cash flows for the six months ended June 30, 1996 and
1995.
(2) The information contained in this report is unaudited and is subject to
year-end adjustment and audit.
(3) These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995.
(4) Net income and cash dividends per share are based on the weighted
average number of shares outstanding which were 3,062,907 during the
quarter ended June 30, 1996; 3,105,788 during the quarter ended June 30,
1995; 3,085,373 during the six months ended June 30, 1996; and 3,105,690
during the six months ended June 30, 1995. Shares outstanding, as well
as all other per share data, have been adjusted to reflect the three for
two split paid April 1, 1995.
(5) The results of operations for the six month period ended June 30, 1996,
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996.
(6) The Corporation considers the allowance for loan losses adequate at this
time.
Beginning in 1995, the Corporation adopted Financial Accounting
Standards Board (FASB) No. 114 "Accounting by Creditors for Impairment
of a Loan" and Statement No. 118 "Accounting by Creditors for
Impairment-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>
June 30 December 31
1996 1995
<S> <C> <C>
Balance at beginning of period $2,220 $2,498
Recoveries on loans 44 125
Provision charged to operations 240 360
Loans charged-off (165) (763)
Balance at end of period $2,339 $2,220
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
<S> <C> <C>
Recorded investment in loans considered
impaired under FASB 114 $ 879 $ 946
Loans above on nonaccrual status $ 40 $ -
Impaired loans with no related
allowance due to write-downs $ 593 $ 654
Impaired loans not written-down 286 292
$ 879 $ 946
Allowance related to the above loans $ - $ -
Average recorded investment in impaired
loans during the period $ 926 $1,490
Related amount of interest income
recognized on these impaired loans $ 42 $ 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 second 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.
Second Quarter of 1996 Compared to Second Quarter of 1995:
Net income for the three months ended June 30, 1996, was $912,000, an
increase of $41,000 over the 1995 level of $871,000. On a per share basis,
1995 second quarter results equalled $0.30 per share versus $0.28 per share
during the prior year.
Total interest income for the three months ended June 30, 1996, was $6.3
million, an increase of $264,000 over the same period in 1995. Interest and
fees on loans increased by $375,000 primarily as a result of volume
increases. Interest on federal funds sold increased while interest on
investment securities decreased for a net decrease of $118,000 as a result of
an investment portfolio restructuring as further discussed herein.
Interest expense for the three months ended June 30, 1996, was $3.0
million, an increase of $126,000 over the same period in the prior year.
Interest on deposits increased by $178,000 due to volume increases.
Interest on borrowed funds, which includes fed funds purchased, Federal Home
Loan Bank (FHLB) borrowings and securities sold under agreement to
repurchase, decreased by $52,000 as a result of decreases in volumes.
The provision for loan losses in the second quarter of 1996 was
$120,000, an increase of $30,000 over that charged during the same period of
1995. Management is continuing its policy of providing reasonable additions
to the reserve for loan losses on an ongoing basis. The amount of the
provision is based on 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 $108,000 from 1995 to
1996.
<PAGE>
Non-interest income for the three months ended June 30, 1996 was
$805,000, an increase of $149,000 over the same period in 1995. Trust
department income, service charges on deposit accounts and securities gains
increased by $29,000, $15,000 and $96,000, respectively. Trust department
income increased primarily due to a fee restructuring instituted at the
beginning of 1996. Service charges on deposit accounts increased largely as
the result of demand deposit account growth. The increase in securities
gains was the result of sales executed as part of ongoing portfolio and
balance sheet management strategies primarily designed to manage interest
rate risk.
Total non-interest expense during the second quarter of 1996 was $2.8
million, an increase of $197,000 over the same period in 1995. This increase
was primarily due to growth in salaries and employee benefits, occupancy-
related expenses and other operating expenses of $239,000, $51,000 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 during the quarter ended June 30, 1996 were $263,000, an
increase of $19,000 from the same period in 1995. This provision translates
into an effective tax rate of 22.4% for the period in comparison to a 21.9%
rate during 1995.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995:
Net income for the six months ended June 30, 1996, was $1.7 million, an
increase of $63,000 over the level realized in 1995. On a per share basis,
earnings for the first six months of this year were $.56, $.02 higher than
last year's per share income of $.54.
Total interest income for the period ended June 30, 1996, was $12.5
million, an increase of $898,000 from the same period in 1995. Interest and
fees on loans increased by $901,000 due to volume increases and higher
average rate levels. Interest on federal funds grew while interest on
investments declined, netting to a decrease of $85,000, as a result of an
investment portfolio restructuring as further discussed herein.
<PAGE>
Interest expense for the six months ended June 30, 1996, was $6.0
million, an increase of $564,000 from the same period in 1995. Interest on
deposits increased by $648,000 due to volume increases and higher average
rate levels. Interest on other borrowed funds decreased by $84,000 because
of lower volumes.
During the first half of 1996, the Corporation's loan loss provision was
$240,000 compared to the $180,000 charged during 1995, an increase of
$60,000. As stated earlier, management is funding the reserve for potential
loan losses at a level consistent with its evaluation of the overall quality
of the portfolio and potential specific losses.
Net interest income after the provision for loan losses increased by
$274,000 from 1995 to 1996 as a result of the changes in the above key
components.
Non-interest income during the first half of 1996 was $1.4 million, an
increase of $174,000 over the same period last year. Contributing to this
growth were increases in trust department income, service charges on deposit
accounts, other operating income and securities gains of $38,000, $27,000,
$34,000 and $75,000, respectively. Trust department income was mainly up due
to the revised fee structure mentioned above. The increase in service
charges on deposit accounts reflect continued growth in demand deposit
accounts, the major producer of this type of income. The increase in other
operating income was largely due to higher fees realized through loan sales
during 1996 compared to 1995. The increase in securities gains was the
result of sales executed as part of ongoing portfolio and balance sheet
management strategies primarily designed to manage interest rate risk.
Non-interest expenses increased $347,000 to $5.5 million during the
first six months of 1996 compared to the same period in 1995. Personnel
related expenses, facilities expenses, and other operating expenses increased
in the aggregate by $610,000. These increases were primarily associated with
the Corporation's expansion of its branch office network and the
corresponding investments in additional staff and technology to facilitate
this larger network. Competitive salary/wage pressures and inflation also
contributed to these increases. Offsetting these increases was a reduction
in FDIC insurance of $282,000 related to the premium rate changes mentioned
earlier.
As of June 30, 1996, the Corporation's tax provision was $483,000, an
increase of $38,000 from the same period in 1995. This provision translates
into an effective tax rate of 21.7% compared to a 21.0% rate during 1995.
<PAGE>
Statement of Cash Flows:
The Corporation's cash and cash equivalents increased by $15.9 million
between December 31, 1995, and June 30, 1996 to a level of $32.5 million.
Net cash provided by operating activities was $2.3 million of which net
income provided $1.7 million. Net income was augmented by a total of $1.3
million 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 $302,000 for the decreases in deferred
income taxes and interest receivable for cash received that was not included
in income. A combined total of $660,000, 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 $343,000 were deducted to reflect noncash income
recognized.
Net cash provided by investing activities totalled $2.5 million. The
net investment in the loan portfolio was $18.0 million after deducting the
$3.6 million in loan sales. This increase was primarily due to a successful
spring loan promotion program. In addition, this increase was largely
related to growth experienced by the Corporation's developing, newly opened
branch facilities. Net cash of $21.7 million was provided through investment
portfolio activity during the first six months of 1996. Proceeds from sales
and maturities contributed $39.5 million and $22.6 million, respectively,
while purchases of investment securities utilized $40.4 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 half of 1996. The proceeds have been held in federal funds
sold until the rate environment stabilizes. Purchases of premises and
equipment used $1.2 million in cash. These purchases were primarily related
to investments in new branch facilities.
Financing activities provided $11.1 million during the first half of
1996. Demand deposits, NOW accounts, money market accounts and savings
accounts provided $10.4 million while certificates of deposit and other time
deposits (CDs) provided $7.8 million. This overall increase in deposit
levels was largely the result of continued growth experienced by the
Corporation's developing branch facilities. A decrease in borrowed funds
and cash dividends paid of $5.1 million and $684,000, respectively, used
cash. The decrease in borrowed funds was primarily caused by the paydown,
via the exercise of put options, of FHLB advances as part of overall balance
sheet management strategies. Also utilizing $1.4 million of cash was the
repurchase and retirement of common stock related to a stock purchase plan as
further discussed herein. Proceeds from the issuance of common stock,
generated through the Corporation's employee stock purchase plan, contributed
$25,000 in cash.
<PAGE>
Asset Quality and Allowance for Loan Losses:
<TABLE>
The following tables illustrate the Corporation's nonperforming asset
position as of June 30, 1996 compared to its position at December 31, 1995.
<CAPTION>
June 30 December 31
1996 1995
<S> <C> <C>
Non-accrual loans $ 43 $ 10
Accruing loans past due 90 days or more 139 24
Restructured loans 246 292
Other real estate and other
repossessed assets 52 46
Total non-performing assets $ 480 $ 372
Non-accrual loans by category
Commercial, financial and agricultural $ 40 $ -
Real estate-construction - -
Real estate-mortgage 2 -
Installment 1 10
$ 43 $ 10
Past due loans by category
Commercial, financial and agricultural $ 25 $ -
Real estate-construction - -
Real estate-mortgage 98 -
Installment 16 24
$ 139 $ 24
Restructured loans by category
Commercial, financial and agricultural $ 12 $ 13
Real estate-construction - -
Real estate-mortgage 234 279
Installment - -
$ 246 $ 292
</TABLE>
Nonperforming assets remained at a relatively low level at June 30,
1996. Nonperforming assets were .21% of total loans at June 30, 1996
compared to .17% at December 31, 1995. In addition, potential problem loans
at June 30, 1996, as determined by the Corporation's internal review process,
remained at $2.0 million, the same level as December 31, 1995. Of these
amounts, $593,000 and $654,000 were considered impaired under FASB 114 for
June 30, 1996 and December 31, 1995, respectively. Loans considered impaired
under FASB 114 represent those potential problem loans which management feels
<PAGE>
are probable (as opposed to possible) to result in future noncompliance in
addition to the Corporation's applicable nonaccrual loans and restructured
loans.
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
$240,000 was made during the first six months of 1996. The resulting
allowance for loan losses at June 30, 1996 was $2.3 million in comparison to
$2.2 million at December 31, 1995. This allowance approximated 1.01% of
total loans and 487% of nonperforming assets at June 30, 1996 versus 1.04%
and 597% at year end 1995. Management feels that the allowance for loan
losses is adequate to cover potential losses within the overall portfolio.
Liquidity and Interest Rate Sensitivity:
Asset/liability management can be divided into two primary functions:
1) assuring adequate liquidity and, 2) maintaining an appropriate balance
between rate-sensitive interest earning assets and rate-sensitive interest
bearing liabilities. The goal of the Corporation's Liquidity Management
Program is to meet the cash flow requirements of customers for either deposit
withdrawals or loans. To meet its liquidity needs, the Corporation looks to
a number of sources on both sides of its balance sheet. On the asset side of
the balance sheet, the Corporation relies on federal funds sold, short term
money market investments, maturities in the investment portfolio, principal
repayments on outstanding loans and amortizing investment securities and
sales of loans in the secondary markets. On June 30, 1996, the balance of
the federal funds sold account was $19.8 million. Along with the liquidity
provided by federal funds sold, a total of $18.0 million or 24.2% of the
Corporation's $74.7 million investment portfolio was scheduled to mature in
one year or less. Additionally, an average of $5.5 million in loan principal
repayments and $438,000 in mortgage- and asset-backed securities repayments
were received by the Corporation during each month of the first half 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 June 30, 1996, 79.8% of total assets were funded with core
deposits while 5.3% were funded with certificates of deposit in excess of
$100,000. In addition, 2.7% 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 due to changes in interest
rates. An interest sensitivity mismatch or GAP results from either an excess
of rate sensitive assets (positive gap) or rate sensitive liabilities
(negative gap) being repriced in a given time period. A positive GAP
generally indicates that rising interest rates during a particular interval
will increase net interest income, while a negative GAP generally means the
opposite. The Corporation strives to maintain a rate sensitivity ratio (rate
sensitive assets minus rate sensitive liabilities divided by total assets)
<PAGE>
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
June 30, 1996, for several different time intervals. This GAP analysis takes
into consideration the current estimated prepayments on loans and amortizing
investment securities. The Corporation had a gap within one year of negative
$31.8 million, or a rate sensitivity ratio of negative 9.14%. 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.
<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 $125,110 $ 37,354 $162,464
Interest Bearing Liabilities 157,422 36,877 194,299
Interest Sensitivity GAP
June 30, 1996 (32,312) 477 (31,835)
Rate Sensitivity Ratio (9.27)% (.14)% ( 9.14)%
Interest Sensitivity GAP
December 31, 1995 $(19,306) $(12,012) $(31,318)
Rate Sensitivity Ratio (5.73)% (3.56)% (9.29)%
</TABLE>
<PAGE>
Capital Resources:
The Corporation's average equity to asset ratio was 9.55% during the
first six months of 1996 versus 9.35% for the first six 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 9.34% for
1996 compared to 9.41% for 1995. This decrease in the "core" capital ratio
was attributable to the stock repurchase plan discussed below along with
strong growth in assets.
As of June 30, 1996, Hanover Bancorp's "core" capital to risk-weighted
assets was 13.18%. Total capital to risk-weighted assets on the same date
was 14.18%. 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 regulatory authorities and the Corporation has not been
advised of any deficiency by them.
During the quarter ended June 30, 1996, the Board of Directors declared
a cash dividend of $.11 per share payable August 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.
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.
Regulatory Issues:
The passage of the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Reigle Community Development and Regulatory
Improvement Act may have a significant impact upon the Corporation. The key
provisions pertain to interstate banking and interstate branching as well as
a reduction in the regulatory burden on the banking industry. Since
September, 1995, bank holding companies may acquire banks in other states
without regard to state law. In addition, banks can merge with other banks
in another state beginning in June, 1997. States may adopt laws preventing
interstate branching but, if so, no out-of-state bank can establish a branch
in that state and no in-state bank may branch outside the state.
Pennsylvania amended the provisions of its banking code to authorize full
interstate banking and branching under Pennsylvania law and to facilitate the
operations of interstate banks in Pennsylvania. As a result of legal and
industry changes, management expects that consolidation will continue as the
financial services industry strives for greater cost efficiencies and market
share. Management believes that such consolidation may enhance its
<PAGE>
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.
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)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,724
<INT-BEARING-DEPOSITS> 44
<FED-FUNDS-SOLD> 19,790
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,314
<INVESTMENTS-CARRYING> 14,352
<INVESTMENTS-MARKET> 14,342
<LOANS> 231,757
<ALLOWANCE> 2,339
<TOTAL-ASSETS> 348,379
<DEPOSITS> 296,445
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,330
<LONG-TERM> 0
<COMMON> 3,368
0
0
<OTHER-SE> 27,401
<TOTAL-LIABILITIES-AND-EQUITY> 348,379
<INTEREST-LOAN> 9,538
<INTEREST-INVEST> 2,270
<INTEREST-OTHER> 699
<INTEREST-TOTAL> 12,507
<INTEREST-DEPOSIT> 5,393
<INTEREST-EXPENSE> 5,957
<INTEREST-INCOME-NET> 6,550
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 343
<EXPENSE-OTHER> 5,463
<INCOME-PRETAX> 2,222
<INCOME-PRE-EXTRAORDINARY> 1,739
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,739
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 0
<LOANS-NON> 43
<LOANS-PAST> 139
<LOANS-TROUBLED> 246
<LOANS-PROBLEM> 2,000
<ALLOWANCE-OPEN> 2,220
<CHARGE-OFFS> 165
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 2,339
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
