Form 10-K
UNITED STATES
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
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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. ( )
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 28, 1997, was $47,643,936.
The number of shares outstanding of the issuer's common stock as of
February 28, 1997: Common Stock, $1.11 Par Value -- 2,969,099 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Hanover Bancorp, Inc. Proxy Statement for the Annual
Shareholders Meeting to be held April 22, 1997, 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 . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 5
Item 4 - Submission of Matters to a Vote of Security Holders. . . . 5
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters. . . . . . . . . . . . . . . . 5
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . . 5
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 5
Item 8 - Financial Statements and Supplementary Data. . . . . . . . 5
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure. . . . . . . . . . 5
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . . 6
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . 6
Item 12 - Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . 6
Item 13 - Certain Relationships and Related Transactions. . . . . . 6
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . 6
Item 15 - Signatures. . . . . . . . . . . . . . . . . . . . . . . . 8
<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, 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 1996 which favorably impacted the Corporation's loan
demand and corresponding asset growth. Economic cycles, specifically
economic downturns, may have an adverse effect on the Corporation's asset
growth, delinquency rates, etc. Throughout economic cycles, the diverse
nature of the local economy should allow the Corporation's market to
experience growth at levels which compare favorably to national trends.
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 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 located in York
and Adams Counties, Pennsylvania. At December 31, 1996, the Bank had
total deposits of $297,865,000; total assets of $353,837,000; and net
loans of $252,170,000.
<PAGE>
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 five of its Hanover
offices, both of its Gettysburg offices and at its offices in
Littlestown, New Oxford, Rossville and York as well as ten remote
service locations in Hanover, York, Dover, East Berlin and Carlisle.
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.
Competing within the Bank's market area, defined as York and
Adams Counties, are 211 offices of area financial institutions,
including commercial banks, savings banks and credit unions. According
to Sheshunoff Information Services, Inc.'s Branches of Pennsylvania -
1996, combined total deposits of these financial institutions was
$5,514,866,000 as of June 30, 1995.
STAFF
The total number of full-time equivalent persons employed by the
Bank as of December 31, 1996, was 204.71. Most employees are provided
with group life, health and major medical insurance and are eligible for
the Bank's defined contribution 401(k) Plan. Management considers
employee relations to be very good.
<PAGE>
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 and the Bank's deposits are insured by the FDIC to the
extent provided by law.
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 financial 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
BALTIMORE STREET OFFICE EISENHOWER DRIVE OFFICE
1416 Baltimore Street 453 Eisenhower Drive
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NEW OXFORD OFFICE WEST MANCHESTER OFFICE(Building)
318 Lincolnway East 1511 Kenneth Road
New Oxford, Adams County York, York County
Pennsylvania 17350 Pennsylvania 17404
OPERATIONS CENTER
1040 High Street
Hanover, York County
Pennsylvania 17331
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:
CARLISLE STREET OFFICE ROSSVILLE OFFICE
880 Carlisle Street 3405 Rosstown Road
Hanover, York County Wellsville, York County
Pennsylvania 17331 Pennsylvania 17365
DOWNTOWN GETTYSBURG LITTLESTOWN OFFICE
OFFICE 400 West King Street
6 York Street Littlestown, Adams County
Gettysburg, Adams County Pennsylvania 17340
Pennsylvania 17325
WEST MANCHESTER
GETTYSBURG EAST OFFICE OFFICE (Land)
1275 York Road 1511 Kenneth Road
Gettysburg, Adams County York, York County
Pennsylvania 17325 Pennsylvania 17404
<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 authorities.
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 39 of the 1996 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 1996 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 12 through 38 of the 1996 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 41 through 66 of the 1996 Annual Report to
Shareholders are incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" on pages 6 through 8 and "Officers of the
Corporation" and "Principal Officers of the Bank" on page 15 of the
1997 Proxy Statement are incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
"Compensation of Directors", "Compensation Committee Report", "Executive
Compensation", and "Retirement Benefits" on pages 8 through 14
of the 1997 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 page 5 and "Officers of the Corporation" and
"Principal Officers of the Bank" on page 15 of the 1997 Proxy Statement
are incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions" on page 16 of the 1997 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.
<PAGE>
(3)(a)(3) 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.
(3)(b)(1) 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)(b)(2) Amendments to Article II, Section 1.9 and
Article III, Section 4 of the Corporation's By-laws are
hereby incorporated by reference from the Registrant's
Form 8K filed on March 6, 1997.
(13) 1996 Annual Report to Shareholders.
(21) 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 22,
1997, are hereby incorporated by reference.
(99)(c) Form of Proxy for Annual Meeting of
Shareholders to be held April 22, 1997, is
hereby incorporated by reference.
B. There were no reports filed on Form 8-K for the quarter
ended December 31, 1996.
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 requirements 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 21, 1997
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 by the following persons on behalf of the
registrant and in the capacities and the dates indicated.
/s/ Michael D. Bross February 21, 1997
Michael D. Bross Date
Director
/s/Thomas M. Bross, Jr February 21, 1997
Thomas M. Bross, Jr. Date
Director,
Vice Chairman of the Board
/s/ S. Forry Eisenhart, Jr. February 21, 1997
S. Forry Eisenhart, Jr. Date
Director
/s/ Bertram F. Elsner February 21, 1997
Bertram F. Elsner Date
Director
/s/ J. Daniel Frock February 21, 1997
J. Daniel Frock Date
Director
/s/ John S. Hollinger, Jr. February 21, 1997
John S. Hollinger, Jr. Date
Director
/s/ Terrence L. Hormel February 21, 1997
Terrence L. Hormel Date
Director,
Chairman of the Board
<PAGE>
/s/ Earl F. Noel, Jr. February 21, 1997
Earl F. Noel, Jr. Date
Director
/s/ Vincent P. Pisula February 21, 1997
Vincent P. Pisula, MD Date
Director
/s/ Charles W. Test February 21, 1997
Charles W.Test Date
Director
/s/ J. Bradley Scovill February 21, 1997
J. Bradley Scovill Date
Director, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas J. Paholsky February 21, 1997
Thomas J. Paholsky Date
Treasurer
(Principal Accounting and
Financial Officer)
(FRONT COVER PAGE)
HANOVER
BANCORP
INC.
Strengthening Bonds
Connecting High-Tech with High-Touch
Creating Custom-Fit Solutions
1996 Annual Report
and Form 10-K
<PAGE>
TABLE OF CONTENTS
1 Financial Highlights
2 Letter to Shareholders
5 Strengthening Bonds.
Connecting High-Tech With High-Touch..
Creating Custom-Fit Solutions.
11 Selected Consolidated Financial Data
12 Management's Discussion and Analysis of
Financial Condition and Results of Operations
39 Common Stock Market Prices and Dividends
41 Consolidated Statement of Income
42 Consolidated Balance Sheet
43 Consolidated Statement of Shareholders' Equity
44 Consolidated Statement of Cash Flows
45 Notes to Consolidated Financial Statements
67 Report of Independent Auditors and
Information for Shareholders
68 Glossary of Terms
70 Form 10-K
77 Directors and Officers
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(In Thousands, Except Ratios and Per Share Data)
<CAPTION>
Percent
1996 1995 Change
<S> <C> <C> <C>
FOR THE YEAR
Net interest income.... $13,272 $12,483 6.3%
Provision for loan losses... 480 360 33.3%
Net income... 3,580 3,556 0.7%
Cash dividends... 1,390 1,274 9.1%
Return on average assets... 1.04% 1.10%
Return on average equity... 11.22% 11.62%
AT YEAR END
Total assets... $356,129 $337,222 5.6%
Loans... 254,573 213,869 19.0%
Deposits... 297,004 278,234 6.7%
Shareholders' equity... 31,541 32,862 (4.0)%
Book value of Trust Department
assets... 127,833 132,812 (3.7)%
PER COMMON SHARE DATA
Book value... $10.62 $ 10.58 3.8%
Net income... 1.18 1.14 3.5%
Cash dividends... .46 .41 12.2%
</TABLE>
NATURE OF THE BUSINESS
Hanover Bancorp, Inc. is a Pennsylvania business corporation that is
a one-bank holding company with headquarters in Hanover,
Pennsylvania. Bank of Hanover and Trust Company, the Corporation's
wholly-owned subsidiary, was incorporated in 1835 and is Hanover's
oldest and only remaining independent financial institution. The
Corporation's full service commercial banking business, including
trust services, is conducted through its subsidiary, which operates
eleven branch offices in York and Adams Counties, Pennsylvania.
Hanover Bancorp's income is derived primarily from the operations of
Bank of Hanover and Trust Company.
<PAGE>
TO OUR SHAREHOLDERS
A number of financial indicators from 1996 are sending us a clear
message, confirming that we've logged a solid year of progress and
that we are poised for substantial earnings improvement. Earnings for
the year ended December 31, 1996 were $3.6 million. Total assets as
of December 31, 1996 were $356.1 million up 5.6 percent from $337.2
million at December 31, 1995. The Corporation experienced loan growth
of 19.0 percent from year end 1995 to year end 1996, while deposits
grew 6.7 percent over the same time period.
We are beginning to see momentum in key areas, particularly the steady
increase to record levels of net interest income, a prelude to the
revenue growth and increased profitability for which we have been
positioning for the past several years. Net interest income for the
year was 6.3 percent higher than 1995. Each quarter, net interest
income has exhibited a strong, steady growth trend, declining only
once since the first quarter of 1993.
In combination with this positive revenue trend, successful management
of our overhead expenses is another major factor in achieving our
earnings goals. Overhead expense plateaued as we fully absorbed the
impact of significant franchise investment during the last half of
1996. The management of overhead expense is best measured by the
efficiency ratio, which is the cost to generate one dollar of revenue.
In 1996, our efficiency ratio was .67 versus .66 in 1995, a reflection
of the additional expansion related costs. The trends of increasing
revenues and stabilizing overhead expenses will translate into future
improvement of our efficiency ratio. In 1997, we anticipate movement
toward our goal of a .60 efficiency ratio. Once again, the quarterly
trend in this ratio, with the fourth quarter below .66 after peaking
at nearly .70 earlier in the year, exhibits a progression to support
these expectations. Many other factors contributed to our financial
performance in 1996 and are discussed in detail in the Management's
Discussion and Analysis section of this annual report.
Our opportunities for future growth and market development are
enhanced by the current market climate. We are thriving amidst the
banking industry's trend of continued consolidation. During 1996, our
local market experienced more acquisitions and mergers, altering our
competitors and the competitive environment, thus intensifying the
sense of disconnection and uncertainty for customers of those
institutions.
Our strategic competitive advantage is the ability to deliver a
complete and sophisticated array of financial services for our
customers coupled with genuine neighborly rapport forming strong,
multifaceted relationships. We call this unique flavor of seamless,
cross-functional sales and service "next generation banking".
Everything about "next generation banking" is a conscious effort to
accentuate customer service, from the strategically-laid floor plan of
our branches to being personally greeted at the door. This new concept
in delivery of sales and service was fully implemented with the
opening of the West Manchester office in York last May, and the
October relocation of the South Hanover office to Baltimore Street.
It's receiving an enthusiastic response from customers as evidenced by
loan, deposit and transactional performance that exceeded projections.
For example, Baltimore Street customers have made that office the
third highest in number of monthly transactions, and the strongest
performer in new account activity in our organization. Since January
1996 to year-end, consumer loan volume increased 148 percent and
deposits increased 25 percent at the Baltimore Street office.
"Next generation banking" combines several strategies to connect us to
continued growth and profitability over the next few years leading
into the 21st century. These strategies have formed the foundation
for the favorable market position we enjoy today. We'll continue to
build on...
<PAGE>
...delivering extraordinary customer service. By training and cross-
training talented staff, and effectively equipping them, Bank of
Hanover is developing a culture intent upon exceeding customer
expectations on a daily basis. Many customers have confirmed that we
are succeeding in our progression toward this goal, as you will read
in the customer profiles which are featured later in this report.
While striving to provide extraordinary customer service, we are also
...building ever-stronger relationships as we become the complete
financial services center to an increasing number of customers. Our
strengths set us apart from virtually every other competitor in our
market. We now have the depth and breadth of a full financial
services center, comparable to regional competitors, but surpass them
in building strong customer relationships. As a community bank, we
still provide the local, personalized service so important to our
customers. They cannot. Our ability to link commercial services,
trust and investment services, retirement plans, mortgage and retail
products, and assemble a custom portfolio of services to satisfy each
customer's needs, is unequaled by other community banks. Introduction
of progressive products and services strengthen our ties even more.
Meanwhile, our strong capital position allows
...leveraging of capital and our delivery system to continue to
capture growth in assets, market share and return to shareholders. We
have made our investment to build infrastructure, and now we will
increase shareholder value by generating the asset growth that will
allow us to more profitably leverage our capital. Further, in March
of 1996, Bank of Hanover initiated a stock buyback program.
Purchasing 141,312 shares of outstanding common stock by year-end
improved return on shareholder's equity and supported our 3.5 percent
growth in earnings per share. Another important component of
shareholder value is the annual dividend. Since the formation of
Hanover Bancorp, Inc., in 1983, the Corporation has steadily increased
its annual dividend. In 1996, the dividend rate increased $.05 per
share, representing a 12.2 percent increase over the dividend of the
previous year. Other key elements in successfully enhancing
shareholder value include...
...controlling overhead costs by improving efficiencies, making
shrewd investments in technology, and managing staff growth. Our very
intentional approach to technology investment is a case in point. As
we invest in new technology, ongoing consideration is given to ways to
achieve greater efficiencies with these investments -- looking for
solutions which benefit both the customer and the internal service
delivery system. Overhead costs are also significantly impacted by
personnel expenses. The growth in staff, which was necessitated by
our aggressive expansion phase, has now plateaued. In addition to
meeting the basic requirements for serving our customers and
processing the increased volume of business, we have strengthened our
expertise in key sales areas, as well as positioned the bank,
operationally, to handle anticipated future growth. A measure of our
ability to effectively manage this component of overhead expenses is
the ratio of assets-per-employee. Currently, our assets per employee
is $1.7 million: our interim goal is to achieve $2 million.
<PAGE>
Moving forward, our success lies in capitalizing on our investments.
Our recent expansion program has already contributed to significant
market share growth. We now anticipate earnings per share growth to
build significantly in 1997 and 1998. We have shifted our focus from
franchise building to customer relationship building and will continue
to enhance our role as a customer-responsive, diversified financial
services company. Bank of Hanover has evolved from a traditional
banking organization to a sales organization which retails and
distributes a full range of commercial, consumer, trust and investment
services. As we continue this evolution, we must clearly identify
customer needs and deliver seamless cross-functional service to meet
those needs. Therefore, "next generation banking" will remain at the
forefront of everything we do. This is the key to building value for
our customers and ultimately for 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>
The Strength of
First-Name Banking
It's an all-too familiar story. But with an "American Dream"
ending. When a manufacturing plant closed, Pat Sweeney's job ended.
Yet Pat and his wife Gloria, along with their sons Patrick Jr. and
Dennis, turned misfortune into opportunity by starting their own
business.
"I couldn't say to any bank that I had run a business before. But,
we did have a good plan, good people and good customers. We needed a
financial institution to take some risk." Pat Sweeney recalls. "We
evaluated several financial institutions before choosing Bank of
Hanover. They had the foresight and willingness to look beyond our
business inexperience, to the opportunity.
We find them to be very professional and accommodating to all
of our business and personal financial needs. One of our company's
needs was providing the right kinds of employee benefits. Rita
Szymanski, the bank's employee benefits officer, assisted us with
providing retirement plans that our employees were accustomed to
elsewhere, like a 401(k) plan. She makes a presentation to all of our
employees periodically about how to get the most from retirement
planning. She encourages them to call at any time. Our employees
want to know that someone is taking care of their money and they
really like having that direct access to the Bank. I don't think you
can get that kind of service anywhere else." Pat adds, "I know the
president, the Board members, and most of the staff on a first name
basis. It's a personal approach. The way a banking relationship
should be. Bank of Hanover really knows us and cares about our
business."
As a community-based complete financial services center, we are
now well positioned to be the bank of choice in the markets we serve.
Each piece of our past five year strategic plan is in place,
interlocking with the other, and strengthening our competitive
position. For customers, we tailor programs to meet individual needs
and excel in relationship banking backed by our full spectrum of
banking products and services. By working as partners in excellence
with our talented and knowledgeable team, we add to proficient
performance and job satisfaction. And, we further enhance our
technological capabilities by coupling them with a human touch, or, as
we say, "high-tech, high-touch." Our competitive advantage is a
combination of all the above. We call it "next generation banking"
and it is unsurpassed by any of our competitors, regional or local.
Over the next few pages, you'll experience how Bank of Hanover is
strengthening bonds, connecting technology with people, and creating
custom-fit solutions -- putting "next generation banking" at the
forefront of everything we do -- to build ever-stronger relationships
with our customers.
Strengthening Bonds
The employees of Bank of Hanover realize that success is molded
daily by experiences that test and strengthen the company's mettle.
And that continued success is assured when linked with other strong
companies and individuals to forge a chain of secure, lasting
relationships.
At the core of everything we do is extraordinary customer service.
We are not satisfied with anything less within our corporate family as
we know that's the key to satisfying customers and building strong
relationships -- recognizing their needs first, then ensuring complete
solutions beyond their expectations -- or going the extra mile.
<PAGE>
Of course, exceptional customer service has to be cultivated,
recognized and rewarded. As an employer, we're committed to hiring
the right people and equipping them well. Employees learn how to
"dazzle" customers during training programs such as Achieving
Extraordinary Customer Relations and with management development
curricula that emphasizes coaching skills and navigating change. We
inspire and cheer each other on, with "hero cards", which celebrates
the efforts of our co-workers on behalf of a customer or fellow team
member. We reward performance with innovative programs, such as sales
compensation plans for mortgage originators and "Building Trust", a
referral incentive program that accounted for over $2.6 million in new
assets under management during 1996. Training and motivating our
staff strengthens our ability to provide value-added service to
customers, improves our efficiency, and further validates our
commitment to true community banking. What the customer experiences
is a team sincerely working to know you as more than an account
number, helping you find answers to your questions, and doing whatever
it takes to get the job done right. That's why words such as
"relationship" and "friendship" figure so strongly in the things
customers say about us. We know you.
Our customers want sophisticated, complete financial services
without losing the familiarity and community connections that Bank of
Hanover uniquely delivers. They enjoy being greeted by name and
introduced to the expert who has the information and authority needed
to get answers. It's relationship banking, not transaction-oriented.
A good friend helping another.
We're more than just a traditional bank. Many consider us a
primary source of financial information. Customers appreciate having
financial guidance they can use, such as our consultative approach to
a customer's complete financial picture. The Bank's quarterly
newsletters, Smart Choices and Enrichment, offer articles to help
people make informed decisions about their finances. Members of our
mature market account, Choice 50, have responded enthusiastically to
our bus trips and social events. It's another way we are getting to
know our customers on a first name basis. They appreciate our
acknowledgment of their interests and lifestyles.
Giving our neighborhoods the strength and vitality they need to
build and prosper is important to us. Our employees show that serving
people is not just a 9-5 commitment. They bring the same measure of
heart and spirit to their after-hours community initiatives as they do
to their daily work commitments. Over 75 community and non-profit
organizations benefit from employee volunteer service. We have a
vested interest in our communities. We know that our involvement
strengthens them and makes them a better place to live, work and raise
our families.
Making Connections Concrete
For Hanover Concrete, the road to success is paved with a smart
combination of technology and personalized service which is precisely
what owners Ron, Bonnie and David Albright appreciate about Bank of
Hanover as well.
The Albright family entrust business and personal financial
matters to the Bank's Chad Clabaugh, executive vice president of sales
and service, and other staff members. According to Bonnie "We're
looking to grow at all locations, always looking for new ideas. Bank
of Hanover can help us with that because they have a knack for
service. They are honest, fair, diplomatic, and they provide quality
products -- values shared by all the people at Hanover Concrete.
The Bank's full range of integrated financial services makes the
financial side of business easy. The cash management account, for
example, sweeps to payroll, or to accounts payable, or wherever it's
needed." When the Albrights needed capital to open their Gettysburg
plant, they wanted to move fast for competitive reasons. They
approached Bank of Hanover because they knew the decision would be
prompt and professionally handled with total confidentiality. Ron
recalls, "We put a proposal together. In a little over a month the
deal was completed." David adds, "Bank of Hanover's financial
consulting expertise makes it possible for us to run the business
smoothly."
<PAGE>
"The bottom line is, you draw on service. And that
willingness to meet needs is what draws us to Bank of Hanover," says
Bonnie. "Like us, they have grown and expanded yet remain focused on
personal and community needs. That's what makes us so comfortable
working with them, and it fits our business philosophy perfectly."
Connecting High-Tech with High-Touch
Connecting customer needs with automated solutions is clearly one
of Bank of Hanover's strategic capabilities. In some bank settings,
technology can be missing or mis-applied, or overwhelm and feel like
high-priced overkill. Our aim is to provide effortless technology
connections that serve in just the right ways and in just the right
amounts. Technology with a human touch.
You see technology in action when our sales teams make laptop
computer presentations right at your place of business. Or when you
visit a branch office and preview product and service options via the
Plus System, our customer-friendly PC presentation program. The Trust
Department's Daily Valuation program, a new component of Employee
Benefits (retirement) plans, provides daily values of mutual fund
shares. An optional portion of the program provides answers to
inquiries and allows selection of investment choices by telephone,
toll-free.
Merchants also benefit from our new automated night depository
system. As noted in the August 16, 1996 issue of the Central Penn
Business Journal, it's available on the East Coast exclusively at Bank
of Hanover's new Baltimore Street office. This system connects
several solutions to merchants' needs: the need for a fast deposit and
receipt method, and next-day, no waiting availability of cash for
register drawers. The next morning, customers who ordered cash visit
their private lockbox to find it ready. No standing in line. No
teller tie-ups. A perfect example of "high-tech, high-touch."
To see how technology computes to bottom-line benefits for
customers, as well as the Bank, let's look behind the scenes at
several initiatives: the bulk filing system, LaserPro loan
documentation, and TeleBank. Bulk filing of checks streamlined the
process and made it less labor intensive for us, even as it delivers
more timely statements to customers. The preparation of loan
documentation by the Bank's LaserPro computer system affords on-the-
spot time savings for the customer and well coordinated processing for
the Bank. TeleBank, the automated version of TeleServices, is able to
provide answers to routine questions, representing 35% of the total
incoming call volume to TeleServices. Offloading a portion of these
calls to the new TeleBank system, enables TeleServices personnel to
spend more time on outbound telemarketing, and new loan and deposit
account generation. In all cases, technology has allowed the Bank to
effectively redeploy our employees to enhance customer service and
improve efficiency.
We believe technology has its' place, but we are not substituting
it for the human connection. At a time when other banks are closing
numerous offices and relying extensively on faceless PC's and
telephone connections, we remain committed to providing the best of
both -- the convenience of technology combined with the human touch.
We've extended hours to accommodate our "working customers" busy
lifestyles. They experience this "high-touch" service when they visit
our offices as early as 7:30 a.m. and as late as 8:00 p.m. at a
growing number of locations. After we close, technology enables us to
continue to service our customers through 24-hour automated teller
machines and TeleBank. Customers may even leave a voice message on
TeleBank that will be promptly answered by a customer service
specialist the following business day. Our mortgage originators are
available when it best suits the customer, including nights and
weekends. Their customers are provided a day and evening (home)
telephone number, as well as the ability to reach their banker by
pager when needed.
<PAGE>
Through traditional and alternative delivery channels, technology
enables us to always be accessible to our customers. We connect
technology with customers' specific needs. And always, with the warmth
of the human touch.
Prescribing Financial Solutions
Hanover Pediatrics has never been sidelined by a financial "bug"
thanks to early diagnosis and treatment by a trusted caregiver--Bank
of Hanover. Dr. Alandete makes the financial story of his growing
pediatrics practice sound as easy as one of those large-piece puzzles
his younger patients enjoy. It's the story of a bank working pro-
actively and providing expert advice.
"When I came to Hanover in 1967, I had a banking relationship from
Harrisburg. A senior executive from Bank of Hanover approached me.
Since then we have maintained a good relationship," explains Dr.
Alandete.
Bank of Hanover handles all of the business as well as my personal
banking needs." His partners, Drs. Masucci and Kim, are also Bank of
Hanover customers. When the pediatric group decided to purchase and
renovate the former Visiting Nurses Association building, Bank of
Hanover's custom-fit commercial financing solution helped complete the
three month transition smoothly. Dr. Alandete appreciates the Bank's
willingness to understand his professional and personal financial
needs, taking a consultative approach to assembling his financial
picture, and cites his working relationship with Jeff Dice, senior
vice president, commercial lending, as an example. "It's more than a
business relationship. It's a good friendship. I've talked to Jeff
many times, whenever I'm considering a project. He always gives me
good advice."
Custom-fit-Solutions
Sometimes banks offer services that don't fit quite right.
Prepackaged products that are all or nothing (and priced accordingly).
"Service" features that don't flex. Products that just won't piece
together for a total solution. Customer service that is out of town.
Way out of town.
Bank of Hanover offers custom-fit solutions across its full
spectrum of products and services, to every customer. That's a huge
claim. The proof is in the versatile and flexible products and
services we provide to our customers. Bank of Hanover's consultative
services can help guide into place even the most difficult pieces of a
customer's total financial picture.
Our custom-fit solutions deliver benefits to business and
personal portfolios, alike. Take, for instance, Bank of Hanover's new
Index Fund. It keeps pace with the market on a weekly basis with a
variable interest rate tied to the 91-day Treasury Bill. It's safe
because it's federally insured, and it can link to other conveniences,
such as 24-hour MAC and TeleBank access, and check writing. Services
from the Bank, our Trust and Investment Division and our affiliate
Pillar Financial, interlock in many combinations. Receive a financial
profile analysis. Add estate planning and annuities. Explore
"lifecycle investing" with Managed Series Trust mutual funds.
Coupling our range of insurance and brokerage products with other
banking services means flexibility and one-stop convenience.
There are many ways we work with future home owners, too.
Probably the most significant investment anyone will ever make is the
purchase of their home. Bank of Hanover's Homeflex Advantage program,
which is the umbrella for over forty mortgage products that help
prospective home owners finance the home they want, with terms they
can afford. It combines the flexibility of shopping in a full service
environment with the advantage of powerful negotiating tools.
Shopper'sflex facilitates loan pre-qualifications so they can shop and
negotiate price with confidence, while Buyer'sflex offers pre-
approvals which translate into a quicker close for the buyer. And
because our mortgage specialists don't put people, or their homes, in
a one-size-fits-all box, they are more likely to qualify for a Bank of
Hanover loan.
<PAGE>
On the business side, we take a consultative approach, discussing
options and formulating a package of flexible alternatives that
satisfy their needs exactly. Take, for example, a small business with
limited transactions. Our Business Advantage account provides a
simplified solution. It offers the convenience of a business checking
account without the frustrations of figuring out earnings credit.
Businesses also appreciate the availability of services such as the
Cash Flow Manager, an accounts receivable management and financing
program that eliminates the hassles of billing and collection and
turns accounts receivable into cash on a daily basis. And for any
business, large or small, we structure a selection of employee
benefits that are attractive, flexible, and cost-effective. Programs
such as Corporate Paycheck Direct, pension and 401(k) plans, SEP/IRAs,
and profit sharing plans yield benefits for businesses and their
employees. The possibilities are endless. Bank of Hanover allows you
to assemble your own Big Picture of financial services without any
rough edges or missing pieces.
Connections.
Sophisticated products and services with technology that delivers.
Superior staff and customer service. Spirited community involvement.
The convenience and power of custom-fit solutions. At Bank of
Hanover, we are moving forward into the 21st century of banking. We
have our pieces in place, aligned precisely as planned. "Next
generation banking" will remain at the forefront of everything we do.
We know that our customers, employees and shareholders will benefit
from our ability to build relationships that are thoroughly
professional, yet as strong as a good friendship. Bank of Hanover has
been, and will be, uniting customers and solutions for generations.
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands, Except Ratios, Per Share Data and Statistics)
<CAPTION>
Year-Ended December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Loans... $254,573 $213,869 $192,396 $173,536 $166,902
Total assets... 356,129 337,222 308,354 278,430 270,319
Total deposits... 297,004 278,234 251,752 231,464 233,078
Shareholders' equity - core (1)... 30,943 31,308 28,997 26,392 23,770
Shareholders' equity - total... 31,541 32,862 27,565 28,354 23,770
Total average assets... 344,146 321,949 293,079 272,554 256,247
Total average equity... 31,910 30,602 28,246 25,043 22,307
EARNINGS DATA
Interest income... $ 25,420 $ 23,892 $ 20,094 $ 19,807 $ 21,090
Interest expense... 12,148 11,409 8,517 8,730 10,372
Net interest income... 13,272 12,483 11,577 11,077 10,718
Provision for loan losses... 480 360 125 645 650
Other income... 2,912 2,594 2,458 2,254 1,552
Other expenses... 10,986 10,201 9,406 8,800 7,654
Net income... 3,580 3,556 3,484 3,374 3,123
Return on average assets... 1.04% 1.10% 1.19% 1.24% 1.22%
Return on average equity - core (1)... 11.41% 11.75% 12.45% 13.47% 14.00%
Return on average equity - total... 11.22% 11.62% 12.34% 13.47% 14.00%
Efficiency ratio 67.10% 65.97% 64.42% 62.96% 58.40%
CAPITAL
Equity to assets (average)... 9.26% 9.51% 9.64% 9.19% 8.71%
Leverage ratio... 8.79% 9.54% 9.44% 9.31% 8.99%
Cash dividends ... $ 1,390 $ 1,274 $ 1,181 $ 1,076 $1,018
Dividend payout ratio... 38.83% 35.83% 33.90% 31.89% 32.60%
ASSET QUALITY
Nonperforming assets to total loans... .21% .17% .41% .34% .38%
Allowance to nonperforming assets... 443% 597% 319% 381% 331%
PER COMMON SHARE DATA (2)
Net income... $ 1.18 $ 1.14 $ 1.12 $ 1.10 $ 1.02
Cash dividends... .46 .41 .37 .35 .33
Book value - core equity (1)... 10.42 10.08 9.34 8.54 7.75
Book value - total equity... 10.62 10.58 8.88 9.18 7.75
Market value ... 18.50 18.75 19.17 15.87 11.43
STATISTICS
Full service branch offices.... 11 11 10 10 8
Employees (full time equivalents) ... 205 198 157 146 120
<FN>
Core equity includes all equity accounts except the component
related to the application of FASB 115 which was adopted on December
31, 1993.
(1) Certain reclassifications have been made in order to present a
more accurate year-to-year comparison.
(2) 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>
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 1996 results of operations and financial
condition, 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 30 as well as the letter to
shareholders beginning on page 2.
SUMMARY OF EARNINGS AND FINANCIAL CONDITION
Hanover Bancorp, Inc. achieved another year of improved earnings in
1996 highlighted by the completion of the market expansion plans and
the establishment of a stock repurchase program. Results were
favorably impacted by growing momentum in revenues, derived from the
maturing of new branch offices and the corporate-wide sales culture,
despite increasing competitive pricing pressures. These efforts were
completed during 1996 and the absorption of the related costs largely
offset the revenue growth for the year. Though net income grew only
modestly as a result, the return to shareholders improved both in
terms of earnings and dividends per share. Earnings per share was
positively impacted by the repurchase program, after absorbing the
"cost" of reducing the capital base. The increase in dividends per
share reflected an increase in the dividend payout rate.
The continued growth in the Corporation was reflected in the
December 31, 1996 total assets of $356.1 million, an increase of $18.9
million or nearly 6% from the prior year end. The Corporation remains
well capitalized with risk-adjusted core capital and total capital
ratios well above regulatory minimums. Asset quality measures also
remained very strong at a time when industry trends show increasing
delinquency and bankruptcy levels.
<PAGE>
RESULTS OF OPERATIONS
Net Income
Net income for 1996 was $3.6 million, an increase of $24,000 from
1995. Growth in revenues, both net interest income and other income,
were offset by increases in other expense. Earnings per share of $1.18
in 1996 was an increase of $.04 or 3.5% over the prior year. This
increase was due in part to the stock repurchase program, further
discussed herein.
Return on average assets (ROA) was 1.04% in 1996 compared to 1.10%
in 1995. Return on average equity (ROE) was 11.22% in 1996 versus
11.62% in 1995. The decline in these ratios is primarily the result
of balance sheet growth which has generated improving revenue trends
but were offset to date by higher operating expenses.
Net Interest Income
Net interest income is the largest component of the Corporation's
operating revenues. 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, as
detailed in Tables 1 and 12 and as discussed below.
Net interest income increased by $614,000 or 4.6% on a fully taxable
equivalent basis in 1996. The increase in net interest income was
primarily due to the volume of earning assets, which increased on
average $19.4 million in 1996. Net interest margin declined 8 basis
points to 4.34%. The decrease in this ratio is best explained by
exploring the shift in the composition of earning assets (mix) during
the year. As a result of ongoing portfolio and balance sheet
management strategies made in response to the rising interest rate
environment during the first half of the year, a significant portion
of long-term investments were sold. The proceeds from these sales
were held in lower yielding federal funds sold for a part of the year,
until rates stabilized and then were used to fund loan demand or were
reinvested. Despite the positive impact of a growing proportion of
loans to earning assets, the "cost" of this interest rate risk
management strategy had a negative impact on margin. In addition,
increasing competitive pressures impacted loan and deposit pricing,
particularly in efforts to attract new deposits to fund the growth in
the loan portfolio. However, the quarterly progression of net
interest income during 1996 showed positive momentum from the
expanding earning asset base.
Provision For Loan Losses
The Corporation's loan loss provision during 1996 was $480,000, an
increase of $120,000 from 1995. The increase was largely reflective of
the growth in the Corporation's loan portfolio. The Corporation
remains committed to making loan loss provisions which maintain an
allowance that adequately reflects the risk inherent in the loan
portfolio. This is more fully discussed in the Risk Management
section which follows.
<PAGE>
Other Income
Other income is an increasingly important factor in the
Corporation's profitability. During 1996 other income increased
$318,000 or 12.3%. Trust department income increased $79,000 or
11.9%, largely related to a fee restructuring which was implemented at
the beginning of the year. Service charges on deposit accounts
increased $81,000 or 9.8% primarily as a result of growth in the
number of demand deposit accounts, the largest contributor of this
type of income. Other operating income increased during 1996 by
$136,000 or 26.0% due in part to a higher level of gains realized on
loan sales relative to 1995. In addition, the increase is reflective
of the higher loan and deposit levels. Securities gains increased by
$22,000 to $602,000. The gains largely resulted from sales of the
Corporation's community bank stock holdings. 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 securities. Accordingly, management
views the gains from these holdings as the realization of deferred
investment income. In addition, gains of $206,000 in 1996 were
generated through bond sales executed as part of ongoing portfolio and
balance sheet management strategies, such as the one discussed above,
which were primarily designed to manage interest rate risk.
Other Expense
Other expense increased $785,000 or 7.7% during 1996. Salaries and
employee benefits costs increased $657,000 or 11.9% due to additions
of management and staff related to expanding the branch network and
enhancing the internal infrastructure to facilitate this larger
network. Competitive salary pressures and higher benefits costs also
contributed to these increases. Occupancy-related expenses increased
$165,000 or 9.9% primarily due to additions and enhancements to the
Corporation's branch facilities and investments in technology.
Management believes that the investments mentioned above have
positioned the Corporation for increased future growth and
productivity. During 1996, the Corporation incurred the minimum level
of Federal Deposit Insurance Corporation (FDIC) insurance expense of
$2,000, a decrease of $293,000 or 99.3% from the prior year. 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 included in the "safest" category. Other operating
expenses increased $221,000 or 9.5% in 1996 related to the
Corporation's expansion.
Income Taxes
The level of tax-free income is the primary factor impacting the
Corporation's effective tax rate. The Corporation recognized an
income tax provision which resulted in an effective tax rate of 24%,
up from 21% in 1995. The increase was the result of ongoing
investment portfolio management which caused the levels of tax free
income to change.
<PAGE>
Analysis of 1995 Compared to 1994
Earnings in 1995 were $3.6 million, an increase of $72,000 over
1994. Earnings per share was $1.14, an increase of $.02 or 1.8% over
1994. Per share data has been restated, where appropriate, to reflect
stock dividends and stock splits. Net interest income increased by
$1,022,000 or 8.2% on a fully taxable equivalent basis in 1995. The
increase in net interest income was primarily due to growth in average
earning assets of $27.3 million or 9.8% in 1995. During 1995, net
interest margin decreased by 7 basis points, principally the result of
the increased cost of time deposits. In 1995, the loan loss provision
increased by $235,000 from 1994. The increase was largely reflective
of the growth in the Corporation's loan portfolio. Other income
increased $136,000 or 5.5%. Securities gains increased as a result of
sales of the Corporation's community bank stock holdings offset by a
decrease in other operating income, a result of reduced income
generated from Pillar Financial Services (Pillar), a third party that
contracted with the Bank during 1993 to sell fixed and variable
annuity products. In addition, other operating income decreased due to
the non-recurring elimination in 1994 of a trust reserve. Other
expense increased $795,000 or 8.5% during 1995. Increases in salaries
and employee benefits costs, occupancy-related expenses and other
operating expenses reflected the expansion of the Corporation's branch
facilities and investments in technology. FDIC insurance expense
decreased during 1995 as a result of premium rate changes instituted
by the FDIC during the third quarter of 1995.
<PAGE>
<TABLE>
Table 1
VOLUME - RATE ANALYSIS
(In Thousands)
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans... $2,310 $(262) $ 2,048 $2,351 $896 $3,247
Investment securities... (1,204) 11 (1,193) 377 374 751
Federal funds sold and other... 541 (43) 498 (271) 187 (84)
TOTAL INTEREST INCOME... 1,647 (294) 1,353 2,457 1,457 3,914
INTEREST BEARING LIABILITIES
Interest bearing demand deposits...37 (120) (83) 24 (6) 18
Savings deposits... (59) (121) (180) (58) 9 (49)
Money market deposits... 68 (62) 6 (84) 133 49
Time deposits... 1,112 114 1,226 1,185 1,280 2,465
Other liabilities... (226) (4) (230) 209 200 409
TOTAL INTEREST EXPENSE... 932 (193) 739 1,276 1,616 2,892
NET INTEREST INCOME... $ 715 $(101) $ 614 $1,181 $ (159) $1,022
<FN>
Tax-Exempt income is on fully taxable equivalent basis using
a tax rate of 3.4% for 1996, 1995 and 1994. The change in interest
due to both volume and rate has been allocated proportionately between
volume and rate based on the absolute dollar amounts of the change in
each.
</TABLE>
<PAGE>
FINANCIAL CONDITION
The Corporation's total assets were $356.1 million as of December 31,
1996, up $18.9 million or 5.6% from the $337.2 million level at December
31, 1995. Loans increased by $40.7 million or 19.0% from 1995 to 1996
while deposits increased by $18.8 million or 6.8% during the same period.
Total shareholders' equity at year-end 1996 and 1995 was $31.5 million and
$32.9 million, respectively. The decrease in capital from 1995 to 1996 was
primarily attributable to the decrease in unrealized gains on available-
for-sale securities due mainly to a higher level of market interest rates
and the stock repurchase program.
Trends in Sources and Uses of Funds
The Corporation uses funds primarily to support its lending
activities. Average net loans increased $27.0 million or 13.3% in
1996 and $27.0 million or 15.3% in 1995. The Corporation experienced
growth in each major category of loans. Average consumer, residential
mortgage and commercial loans increased $14.0 million, $4.6 million
and $8.0 million, respectively, during 1996. In 1995 average
consumer, residential mortgage and commercial loans increased $10.2
million, $7.8 million and $9.2 million, respectively. The development
of the Corporation's newly-opened facilities in Gettysburg,
Littlestown and York (in 1996) as well as the relocation of an
existing facility in Hanover (also in 1996) supported this overall
growth in both 1996 and 1995. Also contributing to these increases
were successful loan promotion programs, proactive sales efforts and
competitive pricing strategies. 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. It
should be noted that this growth in outstanding loans was net of loans
sold of $9.9 million in 1996 and $11.6 million in 1995. With this overall loan
growth, average net loans as a percent of average total assets increased from
60.2% in 1994 to 63.2% in 1995 to 66.9% in 1996.
Average investment securities, another major use of funds, decreased
by $17.2 million during 1996. Of this change, taxable issues
decreased $13.2 million and tax exempt issues decreased $4.0 million.
Conversely, average federal funds sold and other investments increased
$10.0 million in 1996. In 1995, average investment securities
increased $5.6 million while average federal funds sold and other
investments decreased $5.5 million. The shifts in the mix of the
investment portfolio reflect strategies developed in response to
varying interest rate environments. As eluded to above, when rates
began to rise in the early part of 1996, the Corporation sold a
significant portion of longer-term, fixed rate, available-for-sale
holdings and held the proceeds in federal funds sold. In this more
asset sensitive position, the Corporation was able to redeploy the
funds in higher yielding assets when market interest rates increased.
Specifically, the proceeds were used to supplement deposit growth as
funding for loan demand, and a portion of the proceeds were reinvested
into the investment portfolio. In 1995, as rates were declining, the
Corporation purchased longer-term, fixed rate securities in order to
"lock-in" higher yields.
Average non-interest earning assets increased $2.5 million or 12.1%
in 1996 compared to $1.8 million or 9.9% in 1995. The change in this
category was primarily due to increased average investment in cash and
due from banks and fixed assets of $931,000 and $1.3 million,
respectively, in 1996 and $1.0 million and $232,000, respectively, in
1995. The higher cash balance was due in part to the additional cash
required to operate new branch facilities. In addition, this increase
resulted from growth in demand deposit accounts. These accounts,
particularly retail merchant accounts, typically have a higher volume
of cash and check deposit activity which boosts the Corporation's cash
and due from balance on an ongoing basis. As discussed above, the
increased average levels of fixed assets were related to adding and
enhancing facilities as well as investments in technology.
Deposits continue to be the most important funding source and the
primary support for the Corporation's growth. Total average deposits
increased $24.4 million or 9.2% in 1996 while increasing $22.3 million
or 9.2% in 1995. Average interest bearing deposits increased $22.0
<PAGE>
million or 9.2% during 1996 and increased $20.0 million or 9.1% in
1995. This growth has principally come from certificates of deposit
(CDs) which increased $20.0 million and $24.1 million on average for
the 2 years. Average savings accounts, interest bearing demand
deposits and money market accounts have collectively remained
relatively stable, increasing by $2.0 million in 1996 and decreasing
by $4.1 million in 1995. Non-interest bearing demand deposits
increased $2.4 million in both 1996 and 1995. Again, this overall
deposit account growth during 1996 and 1995 was due largely to the
continued development of the Corporation's branch network. This
expansion has helped to offset the outflow of funds, principally from
savings and money market accounts, into aggressively priced bank and
non-bank alternative products. The CD growth during the past 2 years
occurred in a competitive pricing environment largely driven by a need
to generate funds to support loan demand. During the last half of
1996, total deposits remained relatively flat and the Corporation is
exploring new product offerings in response to this trend.
Other interest bearing liabilities decreased $4.0 million or 16.9%
and grew $4.1 million or 20.5% during 1996 and 1995, respectively.
The reduction in 1996 was primarily due to a lower level of Federal
Home Loan Bank of Pittsburgh (FHLB) borrowings. The 1995 increase
was due to higher average levels of FHLB borrowings and repurchase
agreements. FHLB borrowings are used primarily to match fund specific
investments and loans and to manage the balance sheet and interest
rate risk and thus may fluctuate from year to year.
The growth in average shareholders' equity of $1.3 million or 4.3%
in 1996 and $2.4 million or 8.3% in 1995 was primarily attributable to
the retention of earnings. Also affecting equity in 1996 was the
stock repurchase program.
<PAGE>
<TABLE>
Table 2
TRENDS IN SOURCES AND USES OF FUNDS
(In Thousands, Except Percentages)
<CAPTION>
1996 1995 1994
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... $230,321 $26,982 13% $203,339 $26,988 5% $176,351 $14,188 9%
Investment securities:
Taxable.. 52,702 (13,179) (20)% 65,88 11,125 2% 64,756 (4,053) (6)%
Tax-exempt... 21,682 (4,039) (16)% 25,721 4,433 21% 21,288 (1,738) (8)%
Federal funds sold and
other... 16,754 9,978 147% 6,776 (5,493) (45)% 12,269 8,799 254%
Interest earning assets... 321,459 19,742 7% 301,717 27,053 10% 274,664 17,196 7%
Non-interest earning assets...22,687 2,455 12% 20,232 1,817 10% 18,415 3,329 22%
TOTAL USES... $344,146 $22,197 7% $321,949 $28,870 10% $293,079 $20,525 8%
FUNDING SOURCES
Interest bearing deposits.. $262,003 $22,048 9% $239,955 $19,968 9% $219,987 $10,395 5%
Other interest bearing
liabilities... 19,794 (4,036) (17)% 23,830 4,052 20% 19,778 3,761 23%
Interest bearing
liabilities... 281,797 18,012 7% 263,785 24,020 10% 239,765 14,156 6%
Non-interest bearing
deposits... 26,892 2,390 10% 24,502 2,364 11% 22,138 3,394 18%
Other non-interest bearing
liabilities... 3,547 487 16% 3,060 130 4% 2,930 (228) (7)%
Shareholders' equity... 31,910 1,308 4% 30,602 2,356 8% 28,246 3,203 13%
TOTAL SOURCES... $344,146 $22,197 7% $321,949 $28,870 10% $293,079 $20,525 8%
</TABLE>
<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 10% or more of shareholders' equity at December 31, 1996,
with the exception of the U.S. Government and U.S. Government-
sponsored agencies.
The Corporation accounts for investment securities under Financial
Accounting Standards Board (FASB) Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". This standard
requires classification of investments into three categories, "held-
to-maturity" (HTM), "available-for-sale" (AFS) or "trading", as
further defined in Note 1 of the financial statements. The
Corporation does not maintain a trading account and has classified no
securities in this category. HTM securities are required to be
carried on the financial statements at amortized cost. 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 HTM classification places restrictions on
the Corporation's ability to sell securities or to transfer securities
into the AFS classification. Since the Corporation wants the
flexibility to respond to changing balance sheet needs through
investment portfolio management, it has chosen to classify only a
small portion of its portfolio in this category. At December 31,
1996, 5.4% of the portfolio was classified as HTM in comparison to
4.3% at December 31, 1995.
The Corporation generally intends to hold investment securities 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). The
Corporation's guidelines do, however, permit prudent and reasonable
sales of investments before their maturity dates to support interest
rate risk management strategies, meet liquidity needs and carry out
tax planning objectives 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 decreased $15.8 million or 17.2% from $91.9
million at December 31, 1995, to $76.1 million at year-end 1996. The
significant decrease during 1996 was the result of the portfolio
management strategy discussed in the Trends in Sources and Uses of
Funds section. Most of the $40.2 million of sales executed during
1996 were related to this strategy. Sales from the Corporation's
equity portfolio also contributed slightly to this total. As
previously discussed, a portion of these proceeds were reinvested
primarily into intermediate and long-term, fixed rate taxable and tax-
exempt securities.
At December 31, 1996, the Corporation's investment portfolio carried
total unrealized gains of $1.4 million and unrealized losses of
$509,000. At year-end 1995, unrealized gains were $2.7 million and
unrealized losses were $339,000. The net unrealized gain at 1996
represents 1.2% of the portfolio in comparison to 2.7% at 1995. The
decline in the net unrealized gain from 1995 to 1996 was primarily the
result of the general increase in the level of market interest rates
during 1996.
<PAGE>
<TABLE>
Table 3
INVESTMENT PORTFOLIO
(In Thousands, Except Rates)
<CAPTION>
The following table sets forth the book value of investments at the dates indicated:
December 31,
1996 1995 1994
<S> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies
and corporations... $49,881 $53,212 $63,667
State and political
subdivisions... 22,069 32,147 27,584
Other... 3,246 4,218 6,734
TOTAL... $75,196 $89,577 $97,985
</TABLE>
<TABLE>
The following table sets forth the maturities of investment
securities at December 31, 1996:
<CAPTION>
Maturing
After One But After Five But
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Rate Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and other
U.S. Government
agencies and
corporations... $1,406 6.35% $26,556 5.92% $6,047 6.62% $15,872 6.90%
State and political
subdivisions... 1,605 6.81% 2,288 9.40% 739 9.14% 17,437 8.78%
Other... 8 5.47% --- --- --- --- 3,238 4.47%
TOTAL... $3,019 6.59% $28,844 6.20% $6,786 6.90% $36,547 7.58%
<FN>
Weighted average yields on tax-exempt obligations have been computed
on a fully taxable-equivalent basis assuming a tax rate of 34%.
</TABLE>
<PAGE>
<TABLE>
Table 4
LOAN PORTFOLIO
(In Thousands)
<CAPTION>
Refer to the Trends in Sources and Uses of Funds for discussion of
the loan portfolio. The following table shows the Corporation's
loan distribution by type at the end of the last five years:
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural... $ 31,991 $ 26,062 $ 25,587 $ 31,655 $ 31,913
Real estate-construction... 3,775 5,384 2,942 2,365 1,860
Real estate-mortgage... 148,946 120,966 107,933 92,208 95,021
Consumer... 69,861 61,457 55,93 447,308 38,108
TOTAL... $254,573 $213,869 $192,396 $173,536 $166,902
</TABLE>
<TABLE>
The following table shows the amounts of loans outstanding as of
December 31, 1996, which, based on remaining scheduled repayments of
principal, are due in the periods indicated. In addition, the amounts
due after one year are listed according to the sensitivity of changes
in interest rates.
<CAPTION>
Maturing
After One
Within But Within After
One Yr Five Yrs Five Yrs Total
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural... $11,118 $10,486 $ 10,387 $ 31,991
Real estate-construction... 2,143 358 1,274 3,775
Real estate-mortgage... 7,076 15,275 126,595 148,946
Consumer... 4,188 61,847 3,826 69,861
TOTAL... $24,525 $ 87,966 $142,082 $254,573
Loans maturing after one year with:
Fixed interest rates... $83,761 $ 92,339
Variable interest rates... 4,205 49,743
TOTAL.. $87,966 $142,082
</TABLE>
<PAGE>
<TABLE>
Table 5
DEPOSITS
(In Thousands, Except Rates)
<CAPTION>
Refer to the Trends in Sources and Uses of Funds for discussion of
the deposit portfolio. The average daily amount and rate of deposits
(all domestic) is summarized for the periods indicated in the
following table:
Year-Ended December 31,
1996 1995 1994
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Non-interest bearing
demand deposits... $ 26,892 $ 24,502 $ 22,138
Interest bearing
demand deposits... 27,726 1.50% 25,686 1.94% 24,446 1.97%
Savings deposits... 25,943 2.10% 28,378 2.55% 30,640 2.52%
Money market deposits... 53,845 2.80% 51,455 2.91% 54,505 2.66%
Time deposits... 154,489 5.55% 134,436 5.47% 110,396 4.43%
TOTAL... $288,895 $264,457 $242,125
</TABLE>
<TABLE>
The following table presents the annual maturities of time deposits at December 31, 1996:
<CAPTION>
Annual
Maturities
<S> <C>
1997... $ 96,745
1998... 42,810
1999... 12,164
2000... 3,792
2001... 1,963
2002 and thereafter... 3,724
$161,198
</TABLE>
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.
Upon carefully evaluating the capital level necessary to satisfy
the above criteria, the Board of Directors approved in the first
quarter of 1996 a plan to purchase, in open market and privately
negotiated transactions, up to 150,000 shares of its outstanding
common stock. The objective of this plan is to more effectively
deploy the Corporation's capital. In combination with increased
earnings over time, the resulting reduction in total capital and
shares outstanding is expected to improve return on equity and
earnings per share and support the market for Hanover Bancorp, Inc.
stock. As of December 31, 1996, the Corporation had purchased 141,312
shares. Upon purchase, these shares were retired rather than carried
as treasury stock.
At December 31, 1996, total shareholders' equity was $31.5 million,
a decrease of $1.4 million or 4.0% from $32.9 million at the end of
1995. This change consisted of a decrease of $365,000 in capital
stock, surplus and undivided profits (core equity) and a decrease of
$956,000 in unrealized gains on AFS securities resulting from the
application of FASB 115. The decrease in the core equity during 1996
was primarily the result of the stock repurchase ($2.6 million), net
of earnings retained ($2.2 million). The change in the unrealized
gains on AFS securities was due to the increased level of market
interest rates in 1996.
<PAGE>
The Corporation continued to increase dividend returns to its
shareholders in 1996. Dividends per share for 1996, 1995 and 1994
were $.46, $.41 and $.37, respectively. The dividend payout ratios
for the same periods were 38.8%, 35.8% and 33.9%. The dividend rate
is determined by the Board of Directors after considering the
Corporation's capital requirements and projected level of earnings.
In addition to cash dividends, a 3 for 2 stock split was paid on April
1, 1995 and a 5% stock dividend was paid on April 1, 1994.
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 $57,000, $35,000 and $314,000 was raised through these
sources in 1996, 1995 and 1994, respectively.
<TABLE>
Table 6
CAPITAL RATIOS
(In Thousands, Except Ratios)
<CAPTION>
The following table sets forth capital ratios for the Corporation and
its bank subsidiary:
1996 1995
<S> <C> <C>
Hanover Bancorp, Inc.
Tier 1 capital to risk-adjusted assets... 12.87% 14.34%
Total capital to risk-adjusted assets... 13.87% 15.36%
Leverage ratio... 8.79% 9.54%
Bank of Hanover and Trust Company
Tier 1 capital to risk-adjusted assets... 11.78% 12.13%
Total capital to risk-adjusted assets... 12.78% 13.16%
Leverage ratio... 8.06% 8.12% RISK MANAGEMENT
</TABLE>
<PAGE>
RISK MANAGEMENT
Asset Quality
The Corporation has policies and procedures designed to control
credit risk and to maintain the quality of its loan portfolio. These
include underwriting standards for new origination's and ongoing
monitoring and reporting of asset quality and adequacy of the reserve
for loan losses.
During 1996, the Corporation continued its strategy of maintaining
a diversified loan portfolio. The Corporation has emphasized
originating small business, residential mortgage and consumer loans.
The focus of this business strategy is that a loan base built on a
greater number of relatively smaller credits, provides greater
stability and reduces the Corporation's dependence 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 materially impacting
the allowance for loan losses. As a result of this strategy and the
general economic conditions of the market area, the Corporation
achieved loan growth of $40.7 million or 19.0% during 1996 while
maintaining a portfolio mix very similar to 1995. At year-end 1996,
commercial, financial and agricultural loans and loans secured by
commercial real estate remained at 24.2% of total loans. Real estate
construction loans decreased from 2.5% of total loans at year-end 1995
to 1.5% at year-end 1996. During this same period, loans secured by
residential real estate increased from 44.5% to 46.9% of total loans
and consumer loans decreased from 28.8% to 27.4% of total loans.
The Corporation's commercial, consumer and mortgage loans are
principally to borrowers within York and Adams Counties, Pennsylvania,
where it operates full service branches. 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 other real estate (ORE)
and other repossessed assets. These loans are typically returned to
performing status when the loan is brought current and has performed
in accordance with contractual terms for a reasonable period of time.
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
considered restructured if the original interest rate, repayment terms
or both were modified due to the deterioration in the financial
condition of the borrower. Real estate loans are classified as ORE
upon foreclosure proceedings, a receipt of a deed in lieu of
foreclosure or an in-substance foreclosure involving actual possession
of the collateral.
Year-end 1996 non-accrual loans remained low at $38,000, up from
the year-end 1995 level of $10,000. Loans past due 90 days or more
increased from $24,000 in 1995 to $166,000 in 1996. At December 31,
1996, $242,000 in loans were classified as restructured, compared to
$292,000 at December 31, 1995. The loans affected were classified as
restructured due to a modification of the maturity date which caused 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 increased from $46,000 in
1995 to $96,000 in 1996. The overall increase in nonperforming assets
from year to year was due in part to turnover experienced in the
Bank's resource recovery area, the department primarily responsible
for collection efforts, and thus is considered temporary. In
addition, the increase is reflective of the higher level of loans
outstanding. Nonperforming assets as a percentage of loans at
December 31, 1996 remained relatively low at .21% in comparison to
.17% at 1995. This statistic exhibits the Corporation's ongoing
commitment to effectively managing credit risk and compares favorably
with peer statistics.
<PAGE>
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
probability that noncompliance may occur. Those loans that management
feels the likelihood of future noncompliance is probable (as opposed
to possible) are considered impaired under FASB Statement No. 114,
"Accounting by Creditors of Impairment of a loan". At December 31,
1996, total potential problem loans, as determined by the
Corporation's internal loan review process, totaled $2.8 million
compared to $2.0 million for December 31, 1995. Of these amounts,
$562,000 and $654,000 were considered impaired under FASB 114 for 1996
and 1995, respectively. Management constantly monitors the status of
these loans and their likelihood of becoming nonperforming loans.
<TABLE>
Table 7
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(In Thousands)
<CAPTION>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-accrual loans... $ 38 $ 10 $650 $484 $504
Accruing loans past due
90 days or more... 166 24 17 40 38
Restructured loans... 242 292 --- --- ---
Other real estate and
other repossessed assets... 96 46 115 67 87
TOTAL NONPERFORMING ASSETS... $542 $372 $782 $591 $629
NON-ACCRUAL LOANS BY CATEGORY
Commercial, financial
and agricultural... $ --- $ --- $479 $482 $119
Real estate-mortgage... 16 --- 141 --- 381
Consumer... 22 10 30 2 4
$ 38 $ 10 $650 $484 $504
PAST DUE LOANS BY CATEGORY
Commercial, financial
and agricultural... $ 16 $ --- $ --- $ --- $ ---
Real estate-mortgage... 65 --- 6 24 14
Consumer... 85 24 11 16 24
$166 $ 24 $ 17 $ 40 $ 38
RESTRUCTURED LOANS BY CATEGORY
Commercial, financial
and agricultural... $ 12 $ 13 $ --- $ --- $ ---
Real estate-mortgage... 230 279 --- --- ---
$242 $292 $ --- $ --- $ ---
December 31,
1996 1995 1994
Non-accrual loans and restructured loans... $280 $302 $650
Interest income that would have been
recorded under original terms... 28 29 107
Interest income recorded during the period... 28 28 78
Interest lost for the year... 0 1 29
</TABLE>
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential future losses in the
portfolio. Management's methodology in evaluating the adequacy of the
allowance considers potential specific losses, past loan loss
experience, the volume, growth and composition of the loan portfolio
and the current economic conditions and trends. At December 31, 1996,
management feels that the allowance for loan losses is adequate to
cover potential future losses within the overall portfolio.
The allowance approximated .94%, 1.04% and 1.30% of total loans
outstanding at December 31, 1996, 1995 and 1994, respectively. The
allowance as a percentage of total loans decreased during 1996,
primarily as a result of the strong growth in the loan portfolio
during the year. The reserve provides strong coverage when measured
as a ratio of nonperforming assets; specifically, 443%, 597% and 319%
at December 31, 1996, 1995 and 1994, respectively.
Effective in 1995, the Corporation adopted FASB 114. 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 standard applies to all loans that are
identified as being impaired. In addition, the statement addresses
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 consumer or residential
mortgage loans. Generally, loans considered impaired under FASB 114
would be the Corporation's non-homogeneous, non-accrual loans and
restructured loans. However, a loan may also be considered 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 consumer 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
judgments regarding risk of error in specific allocations, other
potential exposures in the loan portfolio, economic conditions and
trends, and other factors. The result of this process is presented in
Table 8.
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 loans are written down to
fair value upon the earlier of foreclosure proceedings, a receipt of a
deed in lieu of foreclosure or an in-substance foreclosure involving
actual possession of the collateral.
In 1996, the Corporation realized net charge-offs of $297,000 in
comparison to net charge-offs of $638,000 in 1995. The difference
between 1995 and 1996 was primarily due to a large individual
commercial charge-off made in 1995. The resulting net charge-offs for
commercial, financial and agricultural loans were $88,000 and $566,000
for 1996 and 1995, respectively. Net charge-offs on consumer loans
increased from $99,000 in 1995 to $209,000 in 1996. The increase is
largely the result of the strong growth that has been realized in the
consumer loan portfolio during the past several years, as well as a
general industry trend of increasing consumer related delinquencies
and charge-offs. The absence of net charge-offs in real estate
mortgage loans during 1996 was consistent with prior years.
<PAGE>
<TABLE>
Table 8
LOAN LOSS EXPERIENCE
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at January 1... $2,220 $2,498 $2,254 $2,082 $1,734
CHARGE-OFFS
Commercial, financial and agricultural... 119 575 156 389 443
Real estate-construction... --- --- --- --- ---
Real estate-mortgages... --- 65 --- 67 ---
Consumer... 241 123 120 112 170
TOTAL CHARGE-OFFS... 360 763 276 568 613
RECOVERIES
Commercial, financial and agricultural... 31 9 370 69 286
Real estate-construction... --- --- --- --- ---
Real estate-mortgages... --- 92 2 --- ---
Consumer... 32 24 23 26 25
TOTAL RECOVERIES... 63 125 395 95 311
NET (RECOVERIES) CHARGE-OFFS 297 638 (119) 473 302
Provision charged to operations... 480 360 125 645 650
Balance at December 31... $2,403 $2,220 $2,498 $2,254 $2,082
Ratio of net (recoveries) charge-offs
to average loans outstanding... .13% .31% (.07)% .29% .19%
Ratio of allowance for loan losses
to nonperforming assets... 443% 597% 319% 381% 331%
</TABLE>
<TABLE>
Table 9
ALLOCATION FOR LOAN LOSS ALLOWANCE
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1996 1995 1994 1993 1992
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
To To To To To
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial,
agricultural
and real estate-
commercial
mortgage... $ 668 24.2% $ 387 24.2% $1,139 24.3% $1,475 28.3% $1,350 32.5%
Real estate-
construction... 16 1.5% 17 2.5% 6 1.5% 6 1.4% 5 1.1%
Real estate-
residential
mortgage... 393 46.9% 296 44.5% 261 45.1% 213 43.1% 193 43.6%
Consumer.. 631 27.4% 537 28.8% 483 29.1% 402 27.2% 267 22.8%
Unallocated... 695 --- 983 --- 609 --- 158 --- 267 ---
TOTAL... $2,403 100.0% $2,220 100.0% $2,498 100.0% $2,254 100.0% $2,082 100.0%
</TABLE>
<PAGE>
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 procedures to control its liquidity position
and 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 CDs of $100,000 or more) are generated
through the community office network and represent a relatively stable
source of funds. On December 31, 1996, 78.3% of total assets were
funded by core deposits compared to 78.0% in 1995. At year-end 1996,
CDs over $100,000 were 5.1% of total assets and were 4.5% of total
assets at year end 1995.
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, 1996, $3.0 million of
investment securities were scheduled to mature in 1 year or less,
while principal payments on mortgage-backed securities averaged
$372,000 per month during 1996. Loan portfolio repayments and
maturities also provide funds for managing liquidity. In 1996, the
Corporation received an average of approximately $5.8 million in loan
repayments per month. In addition, the sale of portfolio loans
provides an alternative for the management of liquidity. In 1996,
$9.9 million of loans, mainly residential mortgage loans, were sold by
the Corporation. Proceeds from these sales provided funding to meet
customers' ongoing credit needs.
The Corporation maintains borrowing arrangements with several
correspondent banks and the FHLB 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 $18.7 million.
<PAGE>
<TABLE>
Table 10
TIME CERTIFICATES OF DEPOSIT OVER $100,000
(In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
MATURING IN
3 months or less... $10,510 $ 7,197
4-6 months... 1,329 2,360
7-12 months... 2,194 3,356
Over 12 months... 4,274 2,331
TOTAL $18,307 $15,244
</TABLE>
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 management process
is to maximize net interest income while controlling risk to prudent
levels. Currently, 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.
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 primarily
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 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. The Corporation strives 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 in order to
maintain or increase the level of net interest income.
As can be seen by reference to Table 11, the Corporation had a
cumulative gap within one year at December 31, 1996 of positive $2.2
million and a rate sensitivity ratio of positive .62%. At December
31, 1995, the Corporation had a positive gap of $22.0 million and a
rate sensitivity ratio of positive 6.51%. This shift in the gap
position from 1995 to 1996 was primarily due to the Corporation's
strong loan growth during 1996. Due to the fairly neutral gap
position at 1996, changes in the present rate environment should not
materially impact the Corporation's net interest income in the short-
term. As part of ongoing analysis, management revised the assumptions
related to the repricing of its non-maturity deposits (i.e. checking,
NOW and savings accounts, etc.) during 1996. These revisions are
reflected in the December 31, 1995 data for comparative purposes.
<PAGE>
The Corporation employs several strategies in its management of
interest rate risk. As detailed previously, managing the investment
portfolio is an important aspect to controlling the Corporation's
exposure to interest rate risk. The Corporation also uses FHLB
advances to manage interest risk through match funding. Match
funding involves funding specific assets with advances that have
similar amounts and maturities. This strategy enables the Corporation
to offer competitive rates on intermediate-term, fixed rate loans for
which deposit funding is not available, without incurring material
interest rate risk. Finally, sales of fixed rate residential mortgage
loans in the secondary market also serves to manage interest risk.
These loans carry inherent interest rate risk since they have
maturities of 15 to 30 years. A total of $9.2 million and $10.8
million in 15 and 30 year mortgages were sold in 1996 and 1995,
respectively.
<PAGE>
<TABLE>
Table 11
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... $53,024 $17,418 $51,726 $105,534 $26,871
Investment securities:
Taxable... 1,417 3,193 6,270 32,897 9,508
Tax-exempt... 240 --- 1,285 2,208 18,178
Federal funds sold and other... 72 --- --- --- ---
Interest earning assets... 54,753 20,611 59,281 140,639 54,557
Interest bearing
demand deposits... --- --- --- 22,731 5,683
Savings deposits... --- --- 1,010 18,033 4,508
Money market deposits... --- 3,196 5,648 38,464 7,405
Time deposits... 35,320 16,937 56,333 49,597 3,011
Other interest bearing
liabilities... 12,195 1,037 771 6,651 3,646
Interest bearing
liabilities... 47,515 21,170 63,762 135,476 24,253
Rate sensitivity gap:
Periodic gap... $ 7,238 $ (559) $(4,481) $ 5,163 $30,304
Cumulative gap... $ 7,238 $ 6,679 $ 2,198 $ 7,361 $37,665
Rate sensitivity ratio:
Periodic ratio... 2.03% ( 0.15)% (1.26)% 1.45% 8.51%
Cumulative ratio... 2.03% 1.88% 0.62% 2.07% 10.58%
</TABLE>
REGULATORY ISSUES
Although the United States Supreme Court has rendered a decision
in favor of nationwide insurance sales by banks and barring states
from blocking insurance sales by national banks in towns with
populations of no more than 5,000, the entrance of banks into the
insurance industry is hotly contested. On the heels of the Supreme
Court's ruling, the Office of the Comptroller of the Currency has
issued draft guidelines for national banks to sell insurance. This
federal guidance, however, will not necessarily ease state
restrictions which currently hinder bank insurance sales. States that
have traditionally been opposed to bank insurance sales could impose
licensing requirements and other restrictions hampering bank insurance
activities. Because the insurance industry is opposed to banks
selling and underwriting insurance, it is difficult to determine to
what extent banks will be allowed to engage in insurance activities
and the regulatory costs that will be attached to such activities.
Congress is currently considering legislative reform centered on
repealing the Glass-Steagall Act which prohibits commercial banks from
engaging in the securities industry. The holding company structure
would be regulated by the Federal Reserve Board, and its subsidiaries
would be supervised by the applicable regulator based on their
respective functions.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of, and
restrictions on, the business of the Corporation and the Bank. It
cannot be predicted whether such legislation will be adopted or, if
adopted, how such legislation would affect the business of the
Corporation and the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Corporation's and the Bank's business is particularly susceptible to
being affected by federal legislation and regulations that may
increase the cost of doing business. 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 of the Corporation will be immaterial.
<PAGE>
Further, the business of the Corporation is also affected by the
state of the financial services industry in general. As a result of
legal and industry changes, management predicts that the industry will
continue to experience an increase in consolidations and mergers as
the financial services industry strives for greater cost efficiencies
and market share. management believes that such consolidations and
mergers may enhance its competitive position as a community bank.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 to recapitalize the Savings Association
Insurance Fund (SAIF) administered by the FDIC and to provide for
repayment of the Financial Institution Collateral Obligation (FICO)
bonds issued by the United States Treasury Department. Pursuant to
this legislation, the FDIC levied a one-time special assessment on
SAIF deposits equal to 65.7 cents per $100 of the SAIF-assessable
deposit base as of March 31, 1995.
During the years 1997, 1998 and 1999, the average regular annual
deposit insurance assessment is estimated to be about 1.29 cents per
$100 of deposits for Bank Insurance Fund (BIF) deposits and 6.44 cents
per $100 of deposits for SAIF deposits. Individual institution's
assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the
assessments as necessary to maintain the funds at their target capital
ratios provided by law. After 1999, BIF and SAIF will share the FICO
costs equally. Under current estimates, BIF and SAIF assessment bases
would each be assessed at the rate of approximately 2.43 cents per
$100 of deposits. The FICO bonds will mature in 2018-2019, ending the
interest payment obligation.
Since the Corporation does not hold any SAIF insured deposits, it
was not subject to the special assessment and it will only be liable
for the BIF assessment rate from 1997 to 1999.
The law also provides that BIF and SAIF are to merge to form the
Deposit Insurance Fund ("DIF") at the beginning of 1999, provided that
there are no SAIF institutions in existence at that time. Merger of
the Funds will require state laws to be amended in those states
authorizing savings associations to eliminate that authorization
(state chartered savings banks will not be affected). This provision
reflects Congress's apparent intent to merge thrift and commercial
bank charters by January 1999; however, no law has yet been enacted to
achieve that purpose.
The Act also provides regulatory relief to the financial services
industry relative to environmental risks, frequency of examinations,
and the simplification of forms and disclosures.
The regulation will increase the Corporation's FDIC insurance
premium costs slightly from the current level beginning in 1997.
Management does not believe that this law will materially impact the
Corporation's liquidity, capital resources or results of operations.
<PAGE>
In June 1996 the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities". FASB 125
addresses the accounting for all types of securitization transactions,
securities lending and repurchase agreements, collateralized borrowing
arrangements, and other transactions involving the transfer of
financial assets. This statement will supersede FASB Statement No.
(122) , "Accounting for Mortgage Servicing Rights, An Amendment of
FASB Statement No. 65" as discussed in Note 16. This statement is
generally effective for transactions that occur after December 31,
1996. As amended by FASB Statement No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125", certain
provisions of the statement will be effective beginning after December
31, 1997. This new standard has not had nor is expected to have, a
material impact on the Corporation's liquidity, capital resources or
results of operations.
Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation,
which if they were implemented, would have a material adverse effect
upon the liquidity, capital resources or results of operations,
although the general cost of compliance with numerous and multiple
federal and state laws and regulations does have, and in the future
may have, a negative impact on the Corporation's results of
operations.
During the first quarter of 1996 the Pennsylvania State Department
of Banking completed a routine examination of the Bank including an
assessment of asset quality. During 1995 the FDIC completed a similar
examination of the Bank. Also during 1995, the Federal Reserve Bank
of Philadelphia completed a routine examination of the Corporation.
<PAGE>
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. Finally, the
most important impact is the influence that inflation expectations
have on the level and volatility of market interest rates. As
presented earlier in this discussion, management attempts to maintain
a position between rate sensitive assets and liabilities that protects
net interest income against wide interest rate fluctuations.
<PAGE>
<TABLE>
Table 12
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST RATE SPREAD
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1996 1995 1994
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 (1)(2)... $232,643 $20,111 8.64% $205,970 $18,063 8.77% $178,737 $14,816 8.29%
Investment securities:
Taxable... 52,702 3,179 6.03% 65,881 3,945 5.99% 64,756 3,586 5.54%
Tax-exempt (2)... 21,682 2,017 9.30% 25,721 2,444 9.50% 21,288 2,052 9.64%
Federal funds sold
and other assets... 16,754 903 5.39% 6,776 405 5.98% 12,269 489 3.99%
TOTAL INTEREST
EARNING ASSETS... 323,781 26,210 8.09% 304,348 24,857 8.17% 277,050 20,943 7.56%
NON-INTEREST EARNING ASSETS
Cash and due
from banks... 10,404 9,473 8,460
Premises and
equipment... 6,579 5,276 5,044
Other assets... 5,704 5,483 4,911
Allowance for loan
losses (2,322) (2,631) (2,386)
TOTAL ASSETS... $344,146 $321,949 $293,079
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Demand deposits... $ 27,726 416 1.50% $ 25,686 499 1.94% $ 24,446 481 1.97%
Savings deposits... 25,943 544 2.10% 28,378 724 2.55% 30,640 773 2.52%
Money market deposits... 53,845 1,505 2.80% 51,455 1,499 2.91% 54,505 1,450 2.66%
Time deposits... 154,489 8,577 5.55% 134,436 7,351 5.47% 10,396 4,886 4.43%
Other liabilities... 19,794 1,106 5.59% 23,830 1,336 5.61% 19,778 927 4.69%
TOTAL INTEREST
BEARING
LIABILITIES 281,797 12,148 4.31% 263,785 11,409 4.33% 239,765 8,517 3.55%
NON-INTEREST BEARING LIABILITIES
Demand deposits... 26,892 24,502 22,138
Other liabilities... 3,547 3,060 2,930
TOTAL LIABILITIES... 312,236 291,347 264,833
SHAREHOLDERS' EQUITY... 31,910 30,602 28,246
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY... $344,146 $321,949 $293,079
NET INTEREST INCOME/NET
INTEREST MARGIN... 14,062 4.34% 13,448 4.42% 12,426 4.49%
Taxable-equivalent adjustment (2)... (790) (965) (849)
NET INTEREST INCOME
PER FINANCIAL STATEMENTS... $13,272 $12,483 $11,577
<FN>
(1) NON-ACCRUAL LOANS HAVE BEEN INCLUDED WITHIN THIS CATEGORY.
(2) THE TAXABLE-EQUIVALENT ADJUSTMENTS FOR TAX-EXEMPT ASSETS HAVE BEEN COMPUTED ASSUMING A TAX RATE OF 34% FOR 1996, 1995 AND
1994.
</TABLE>
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
As of January 31, 1997, the approximate number of shareholders of
record of the Corporation's common stock was 1,518. 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, 1996. 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.
BID-ASKED PRICES FOR COMMON STOCK AND DIVIDENDS DECLARED
<TABLE>
<CAPTION>
1996 1995
Stock Price Cash Stock Price Cash
Range Dividend Range Dividend
<S> <C> <C> <C> <C>
QUARTER ENDED
March 31... $18.00 - $19.25 $0.11 $18.67 - $19.67 $0.10
June 30... 18.13 - 19.13 0.11 18.25 - 19.50 0.10
September 30... 18.25 - 19.00 0.12 18.25 - 19.25 0.10
December 31... 18.00 - 19.00 0.12 18.25 - 19.25 0.11
<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.
</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.
<PAGE>
Hanover Bancorp, Inc. is quoted 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. Hanover
Bancorp, Inc. common stock trades in the local over the counter market
and current price information is available from account executives at
most brokerage firms as well as the following firms which are
designated 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
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
Hopper Soliday & Co., Inc.
1725 Oregon Pike
Lancaster, PA 17601
(717) 560-3000
Legg Mason Wood Walker, Inc.
1818 Market Street
Philadelphia, PA 19103
(800) 888-6673
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
<CAPTION>
Year-Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans... $20,007 $17,929 $14,665
Interest on federal funds sold... 707 346 441
Interest on short-term investments... 196 59 48
Investment securities: Taxable... 3,179 3,945 3,586
Tax-exempt... 1,331 1,613 1,354
4,510 5,558 4,940
TOTAL INTEREST INCOME... 25,420 23,892 20,094
INTEREST EXPENSE
Interest on deposits... 11,042 10,073 7,590
Interest on borrowed funds... 1,106 1,336 927
TOTAL INTEREST EXPENSE... 12,148 11,409 8,517
NET INTEREST INCOME... 13,272 12,483 11,577
PROVISION FOR LOAN LOSSES... 480 360 125
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES... 12,792 12,123 11,452
OTHER INCOME
Trust department income... 742 663 593
Service charges on deposit accounts... 908 827 701
Other operating income... 660 524 880
Securities gains... 602 580 284
TOTAL OTHER INCOME... 2,912 2,594 2,458
OTHER EXPENSE
Salaries... 5,075 4,498 4,119
Pensions and other employee benefits... 1,084 1,004 874
Occupancy expense... 927 798 708
Equipment expense... 906 870 768
Marketing and advertising... 451 416 336
FDIC insurance... 2 295 534
Other operating expense... 2,541 2,320 2,067
TOTAL OTHER EXPENSE... 10,986 10,201 9,406
INCOME BEFORE INCOME TAXES... 4,718 4,516 4,504
INCOME TAXES... 1,138 960 1,020
NET INCOME... $ 3,580 $ 3,556 $ 3,484
PER SHARE DATA
Net income... $ 1.18 $ 1.14 $ 1.12
Cash dividends... $ .46 $ .41 $ .37
<FN>
See Accompanying Notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Per Share Data)
<CAPTION>
December 31,
1996 1995
<S>
ASSETS <C> <C>
Cash and due from banks $ 15,955 $ 11,055
Federal funds sold --- 5,600
CASH AND CASH EQUIVALENTS 15,955 16,655
Interest bearing deposits with other banks 72 913
Short-term investments --- 5,973
Investment securities: Available-for-sale 72,005 87,964
Held-to-maturity (market value--$4,087 and $4,005, respectively) 4,097 3,968
76,102 91,932
Loans:
Commercial, financial and agricultural 31,991 26,062
Real estate-construction 3,775 5,384
Real estate-commercial mortgage 29,563 25,739
Real estate-residential mortgage 119,383 95,227
Consumer 69,861 61,457
254,573 213,869
Less: Allowance for loan losses (2,403) (2,220)
NET LOANS 252,170 211,649
Premises and equipment 7,075 5,806
Accrued income receivable 2,348 2,355
Other assets 2,407 1,939
TOTAL ASSETS $356,129 $337,222
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 29,128 $ 27,214
Interest bearing 267,876 251,020
297,004 278,234
Borrowed funds: Short-term borrowings 13,052 14,660
Long-term borrowings 11,248 8,293
24,300 22,953
Accrued interest 2,116 1,873
Other liabilities 811 958
Dividends payable 357 342
TOTAL LIABILITIES 324,588 304,360
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: 1996-2,969,441 shares; 1995-3,107,336 shares 3,296 3,449
Surplus 18,659 18,606
Unrealized gains on securities available-for-sale, net 598 1,554
Retained earnings 8,988 9,253
TOTAL SHAREHOLDERS' EQUITY 31,541 32,862
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $356,129 $337,222
Book value per share $ 10.62 $ 10.58
<FN>
See Accompanying Notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Per Share Data)
<CAPTION>
Unrealized
Common Gains and Retained
Stock Surplus Losses Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994... $3,274 $15,844 $1,962 $7,274 $28,354
Net income for 1994... --- --- --- 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 1995... --- --- --- 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
Net income for 1996... --- --- --- 3,580 3,580
Cash dividends:
$0.46 per share... --- --- --- (1,390) (1,390)
Issue of common stock:
3,435 shares at an average
price of $16.71 per share... 4 53 --- --- 57
Repurchase and retirement of common stock... (157) --- --- (2,455) (2,612)
Net adjustment to unrealized gains
(losses) on securities available-for-sale,
net of tax effects of $492... --- --- (956) --- (956)
Balance, December 31, 1996... $3,296 $18,659 $ 598 $8,988 $31,541
<FN>
See Accompany Notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<CAPTION>
Year-Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income... $ 3,580 $ 3,556 $ 3,484
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses... 480 360 125
Provision for depreciation and amortization... 776 673 590
Securities gains.. (602) (580) (284)
(Increase) decrease in net deferred tax assets... (166) 206 44
(Increase) decrease in interest receivable... 7 (188) (231)
Increase in interest payable... 243 647 186
(Increase) decrease in other assets (62) 240 (753)
Increase (decrease) in other liabilities... 249 (223) (170)
Increase (decrease) in accrued taxes... (143) (136) 122
NET CASH PROVIDED BY OPERATING ACTIVITIES... 4,362 4,555 3,113
INVESTING ACTIVITIES
Increase in loans... (50,891) (33,746) (27,532)
Proceeds from loan sales... 9,890 11,635 8,791
Proceeds from sale of available-for-sale investment securities...
40,230 21,860 22,466
Proceeds from maturities of investment securities... 12,279 23,966 20,328
Purchases of investment securities... (37,526) (36,838) (57,581)
Proceeds from maturities of short-term investments... 40,928 7,503 11,500
Purchases of short-term investments... (34,114) (14,367) (11,340)
Purchases of premises and equipment... (2,045) (1,247) (1,202)
NET CASH USED IN INVESTING ACTIVITIES... (21,249) (21,234) (34,570)
FINANCING ACTIVITIES
Net increase (decrease) in demand, money market and savings
deposits... 6,983 (1,408) 5,006
Net increase in certificates of deposit and other time deposits...
11,787 27,890 15,282
Net increase (decrease) in borrowed funds ... 1,347 (3,483) 10,564
Cash dividends paid... (1,375) (1,243) (1,144)
Cash paid in lieu of fractional shares... --- (6) (12)
Proceeds from issuance of common stock... 57 35 314
Repurchase and retirement of common stock... (2,612) --- ---
NET CASH PROVIDED BY FINANCING ACTIVITIES... 16,187 21,785 30,010
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (700) 5,106 (1,447)
Cash and cash equivalents at beginning of year... 16,655 11,549 12,996
CASH AND CASH EQUIVALENTS AT END OF YEAR... $ 15,955 $ 16,655 $11,549
<FN>
See Accompany Notes.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
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: The Corporation accounts for its
investment securities under the Financial Accounting Standards Board
(FASB) Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". 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 and adjusted for amortization of
premiums and accretion of discounts. 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 and
accretion of discounts. 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.
Interest and dividends are included in interest income from
investments. Premiums are amortized to call and discounts are
accreted to maturity under the interest method except for mortgage-
backed securities where the recognition period is based on the
estimated lives. Such amortization and accretion is included in
interest income from investments. The cost of securities sold is
determined principally under the specific identification method.
Loans: Interest on 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 judgment as to the collection of principal. Loan
origination fees, net of certain direct origination costs, are
deferred and recognized over the life of the related loan as a yield
adjustment.
Allowance For Loan Losses: Management maintains the
allowance at a level believed adequate to absorb potential losses in
the portfolio. Factors considered in evaluating the adequacy of the
allowance include potential specific losses, past loan loss
experience, the volume, growth and composition of the loan portfolio
and the current economic conditions and trends. The allowance is
increased by provisions charged to operations and reduced by net
charge-offs.
The Corporation adopted FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan", and FASB Statement No. 118,
"Accounting by Creditors for Impairment--Income Recognition and
Disclosures". Under FASB 114, the 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. FASB 118 prescribes how a
<PAGE>
creditor should report income on impaired loans and clarifies FASB
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 and amortization computed
on the straight-line method.
Income Taxes: The Corporation accounts for income taxes
pursuant to the provisions of FASB Statement No. 109, "Accounting for
Income Taxes." Under FASB 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 3,043,047 during 1996;
3,106,298 during 1995; and 3,104,196 shares during 1994, 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 statement 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 $11,905,000 and $1,217,000,
respectively, during the year-ended December 31, 1996; $10,762,000 and
$1,322,000, respectively, during the year-ended December 31, 1995; and
$8,331,000 and $892,000, respectively, during the year-ended December
31, 1994.
The decrease in unrealized gains on available-for-sale securities of
$956,000 (net of $492,000 in deferred tax effects) during the period
ended December 31, 1996, the increase of $2,986,000 (net of
$1,538,000 in deferred tax effects) during the period ended December
31, 1995 and the decrease of $3,394,000 (net of $1,749,000 in deferred
tax effects) during the period ended December 31, 1994 are non-cash
transactions for purposes of the statement of cash flows.
Reclassifications: Certain reclassifications have been
made to the 1995 and 1994 financial statements and accompanying notes
to conform with the 1996 presentation.
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, 1996, approximated $3,382,000.
<PAGE>
NOTE 3--INVESTMENT SECURITIES
The following is a summary of the investment portfolio by respective
security category ((In Thousands):
<TABLE>
AVAILABLE-FOR-SALE SECURITIES
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury securities
and obligations of the U.S.
Government and its agencies... $28,047 $ 89 $(214) $27,922
Obligations of states and
political subdivisions... 18,582 611 (45) 19,148
Mortgage-backed securities... 21,232 135 (210) 21,157
Total debt securities... 67,861 835 (469) 68,227
Equity securities... 3,238 543 (3) 3,778
TOTAL AVAILABLE-
FOR-SALE SECURITIES... $71,099 $1,378 $(472) $72,005
</TABLE>
<TABLE>
HELD-TO-MATURITY SECURITIES
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996
Obligations of states and
political subdivisions... $3,487 $27 $(13) $3,501
Mortgage-backed securities... 610 -- (24) 586
TOTAL HELD-TO-
MATURITY SECURITIES... $4,097 $27 $(37) $4,087
</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, 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>
<PAGE>
<TABLE>
HELD-TO-MATURITY SECURITIES
<CAPTION>
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
TOTAL HELD-TO-
MATURITY SECURITIES... $3,968 $55 $(18) $4,005
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
(In Thousands)
<TABLE>
Estimated
Amortized Market
Cost Value
AVAILABLE-FOR-SALE
<CAPTION>
<S> <C> <C>
Due in one year or less... $ 1,926 $ 1,936
Due after one year through five years... 24,854 24,903
Due after five years throughten years... 4,399 4,325
Due after ten years... 15,450 15,906
46,629 47,070
Mortgage-backed securities... 21,232 21,157
Equity securities... 3,238 3,778
$71,099 $72,005
HELD-TO-MATURITY
<CAPTION>
<S> <C> <C>
Due in one year or less... $ 1,080 $ 1,081
Due after one year through five years... 80 79
Due after five years throughten years... 340 344
Due after ten years... 1,987 1,997
3,487 3,501
Mortgage-backed securities... 610 586
$ 4,097 $ 4,087
</TABLE>
Proceeds from the sale of investments in debt and equity securities during
1996, 1995 and 1994 were $40,230,000, $21,860,000 and $22,466,000,
respectively. Gross gains realized on these sales were $970,000,
$628,000 and $492,000, respectively. Gross losses realized on these
sales were $368,000, $48,000 and $208,000, respectively. Net
unrealized gains on securities available-for-sale net of the related
deferred tax effects, included as a separate component of
shareholders' equity, were $598,000 at December 31, 1996, and
$1,554,000 at December 31, 1995.
Securities, having a carrying value of $46,311,000 at December 31, 1996,
and $37,594,000 at December 31, 1995 were pledged to secure public
deposits, repurchase agreements and other purposes required by law.
<PAGE>
<TABLE>
NOTE 4--ALLOWANCE FOR LOAN LOSSES
<CAPTION>
Transactions in the allowance for loan losses were as follows
(In Thousands):
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year... $2,220 $2,498 $2,254
Recoveries on loans... 63 125 395
Provision charged to operations... 480 360 125
Loans charged-off... (360) (763) (276)
Balance at end of year... $2,403 $2,220 $2,498
</TABLE>
The following table provides information relating to the Corporation's
impaired loans (In Thousands)
<TABLE>
December 31, December 31,
1996 1995
<S> <C> <C>
Impaired loans with no related
allowance due to write-downs... $ 562 $ 654
Impaired loans with no related
allowance necessary... 242 292
Recorded investment in impaired loans... $ 804 $ 946
Impaired loans on non-accrual status... $ --- $ ---
Allowance related to impaired loans... $ --- $ ---
Average recorded investment in impaired
loans during the period... $ 88 $1,490
Related amount of interest income
recognized on impaired loans... $ 81 $ 132
Amount of interest income on
impaired loans using the cash
basis method of accounting ... $ 1 $ 4
</TABLE>
<PAGE>
NOTE 5--PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment includes the following at December 31(In Thousands):
1996 1995
<S> <C> <C>
Premises... $6,609 $ 5,298
Equipment... 5,692 5,106
12,301 10,404
Less accumulated depreciation and amortization... (5,226) (4,598)
$7,075 $ 5,806
</TABLE>
The Corporation recognized depreciation and amortization expense of
$776,000, $673,000 and $590,000 for 1996, 1995 and 1994, respectively.
The Corporation and its subsidiary occupy certain facilities under
lease arrangements and lease certain equipment. Rentals amounted to
$369,000, $391,000 and $320,000 in 1996, 1995 and 1994, respectively.
Minimum annual rental commitments at December 31, 1996, under
noncancelable leases, principally for real estate and equipment, are
payable as follows (In Thousands):
Annual Rental
Payments
1997... $ 242
1998... 245
1999... 253
2000... 228
2001... 232
2002 and thereafter... 2,463
Total minimum lease payments... $3,663
NOTE 6--SHORT-TERM BORROWINGS
<TABLE>
Short-term borrowings outstanding at December 31, 1996 and 1995 are
summarized as follows (In Thousands):
1996 1995
<S> <C> <C>
Federal funds purchased... $ 2,000 $ ---
Securities sold under repurchase agreements... 8,866 8,447
Other... 2,186 6,213
$13,052 $14,660
</TABLE>
<PAGE>
Other short-term borrowings consist of loans from the Federal Home
Loan Bank of Pittsburgh (FHLB) with maturities of one year or less and
the Treasury Tax and Loan Note Option program.
The maximum amounts of securities sold under repurchase agreements
outstanding at any month-end during each year of the reporting period
were as follows (In Thousands):
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Amount... $9,728 $9,114 $8,636
Date... November 30 October 31 December 31
</TABLE>
The daily average amounts outstanding of securities sold under
repurchase agreements for each reporting period were as follows (In Thousands):
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Average outstanding... $6,932 $7,588 4,086
</TABLE>
The securities sold under repurchase agreements were U.S. Treasury and
agency securities and were maintained under the Corporation's control.
NOTE 7--LONG-TERM BORROWINGS
The Bank utilizes the services of the Federal Home Loan Bank of
Pittsburgh (FHLB) by periodically borrowing funds to provide match
funding for specific loan and investment activities and rate risk
management. The advances are fully collateralized as specified by the
FHLB. Qualifying collateral includes U.S. Treasury, agency and
mortgage-backed securities and residential real estate loans. These
advances are subject to restrictions or penalties related to
prepayment.
The Corporation paid $511,000 in interest on long-term borrowings
during 1996, $673,000 in 1995 and $526,000 in 1994.
Included in long term borrowings at December 31, 1996, was $3.3
million of amortizing advances with remaining amortization periods
ranging from 75 to 165 months and final maturities through 2003.
Also, $3.0 million of advances had conversion features whereby the
FHLB may convert the advances to variable rates with subsequent
quarterly resets. Upon conversion, the Corporation has the option of
putting the advances back to the FHLB. The conversion features extend
between 3 and 20 months from December 31, 1996, and the advances have
final maturities through 2001. At December 31, 1996, all advances had
fixed rates of interest.
<TABLE>
The following table presents the annual maturities and weighted
average rates of long-term borrowings at December 31, 1996 (In Thousands):
Weighted
Annual Maturities Average Rate
<S> <C> <C>
1998... $ 795 5.94%
1999... 1,317 7.31%
2000... 948 6.98%
2001... 4,820 5.98%
2002 and thereafter... 3,368 6.87%
$11,248 6.48%
</TABLE>
<PAGE>
NOTE 8--SHAREHOLDERS' EQUITY
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, 1996, 105,075 shares were available.
The Corporation also maintains an employee stock purchase plan.
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, 1996, 41,771 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, 1996, 21,045
shares were available.
The Corporation adopted an omnibus stock plan effective January 15,
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 pursuant to awards under this plan
which must be granted within ten years from the effective date. As of
December 31, 1996, 142,892 shares were available for the granting of
additional awards. To date, only awards of incentive stock options
have been made from the plan.
<PAGE>
Financial Accounting Standards Board (FASB) Statement No. 123,
"Accounting for Stock Based Compensation", became effective in 1996.
This statement encourages companies to recognize compensation expense
for stock-based awards based on their fair value. The statement
allows companies to continue to follow the existing intrinsic value
method under Accounting Principles Board (APB) Opinion No. 25 with the
requirement that disclosures be provided which present pro forma net
income and earnings per share, had the new fair value method been
used. The Corporation has elected to continue to follow APB 25 to
account for its employee stock options. Since the Corporation has set
the exercise price equal to the market price of the underlying stock
on the date of grant, no compensation expense is recognized under this
method.
The pro forma information regarding net income and earnings per
share under the fair value method was determined with the aid of a
Black-Scholes option pricing model. This option pricing model, like
other models, requires the input of subjective assumptions. The
weighted-average assumptions for 1996 and 1995, respectively, were:
risk free interest rates of 6.25% and 5.76%; dividend yields of 2.57%
and 2.34%; volatility factors of .132 and .147; and a weighted average
expected life of ten years.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
Furthermore, these disclosures are required to be applied
prospectively from 1995. Therefore, the initial impact on pro forma
net income may not be representative of future compensation expense
since the impact of awards prior to 1995 are not considered. The
Corporation's pro forma information is as follows
(In Thousands,Except Per Share Data):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Net income before stock options... $3,580 $3,556
Compensation expense from stock options... 29 1
Pro forma net income... $3,551 $3,555
Net income per share before stock options $ 1.18 $ 1.14
Pro forma net income per share... $ 1.17 $ 1.14
</TABLE>
<PAGE>
<TABLE>
A summary of the Corporation's stock option activity, and related
information is as follows:
<CAPTION>
December 31,
1996 1995
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 46,820 $18.97 24,438 $19.17
Granted... 5,280 18.52 22,382 18.76
Exercised... --- --- --- ---
Forfeited... (5,992) 18.97 --- ---
Outstanding at end of year... 46,108 $18.92 46,820 $18.97
Exercisable at end of year... --- ---
Weighted-average fair value of
options granted during the year... $4.73 $4.91
</TABLE>
Options granted under the plan have 10 year terms and vest and
become fully exercisable at the end of 3 years of continued
employment. Exercise prices for options outstanding as of December
31, 1996, ranged from $18.50 to $19.17. The weighted average
remaining contractual life of those options is 8.63 years.
<TABLE>
The following table sets forth capital ratios for the Corporation and its
bank subsidiary:
1996 1995
<S> <C> <C>
Hanover Bancorp, Inc.
Tier 1 capital to risk-adjusted assets... 12.87% 14.34%
Total capital to risk-adjusted assets... 13.87% 15.36%
Leverage ratio... 8.79% 9.54%
Bank of Hanover and Trust Company
Tier 1 capital to risk-adjusted assets... 11.78% 12.13%
Total capital to risk-adjusted assets... 12.78% 13.16%
Leverage ratio... 8.06% 8.12%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
established five levels of capital at which insured depository
institutions will be "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized". The regulators adopted regulations to implement
the requirements of FDICIA. The Bank has been deemed "well
capitalized". Under the regulations, the required minimum capital
ratios for each category of institutions are, with certain exceptions,
as follows:
<TABLE>
Tier I
Total Capital Capital to
to Risk-Adjusted Risk-Adjusted
Assets Assets Leverage
<S> <C> <C>
Well capitalized 10% or above and 6% or above and 5% or above
Adequately
capitalized 8% or above and 4% or above and 4% or above
Undercapitalized Under 8% or Under 4% or Under 4%
Significantly
undercapitalized Under 6% or Under 3% or Under 3%
Critically
undercapitalized 2% or under
</TABLE>
<PAGE>
The appropriate federal bank regulatory agency has authority to downgrade an
institution's capital designation by one category if it determines that an
institution is in an unsafe or unsound condition or is engaging in unsafe or
unsound practices.
FDICIA provides for increased supervision for banks not rated in one of the
highest categories under the "Camel" composite bank rating system.
Undercapitalized institutions are required to submit capital restoration plans
to the appropriate federal banking regulator and are subject to restrictions
on operations, including prohibitions on branching, engaging in new activities,
paying management fees, making capital distributions such as dividends, and
growing without regulatory approval.
NOTE 9-FEDERAL INCOME TAXES
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, 1996 and 1995, respectively, which are included
in other assets in 1996 and other liabilities in 1995, are as follows
(In Thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
DEFERRED TAX ASSETS
Loan loss reserve... $ 560 $ 498
Deferred loan fees... 166 205
Deferred compensation... 215 207
Other... 92 34
Total deferred tax assets... 1,033 944
DEFERRED TAX LIABILITIES
Unrealized securities gains... 308 801
Depreciation... 171 156
Accretion... 51 98
Pension... 84 85
Other... 83 127
Total deferred tax liabilities... 697 1,267
Net deferred tax assets (liabilities)...$ 336 $ (323)
</TABLE>
The provision for federal income taxes included in the accompanying
Statement of Income consists of the following (In Thousands):
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Current payable... $1,244 $1,080 $ 967
Deferred... (106) (120) 53
$1,138 $ 960 $1,020
</TABLE>
A reconciliation of the federal statutory corporate income tax rate
to the Corporation's effective tax rate is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory tax rate... 34.0% 34.0% 34.0%
Tax-exempt interest income.. (10.3)% (13.2)% (12.0)%
Other .5% .4% .7%
Effective tax rate... 24.2% 21.2% 22.7%
</TABLE>
Income taxes applicable to realized net securities gains included in the
provision for income taxes totaled $205,000 in 1996, $197,000 in 1995 and
$97,000 in 1994.
NOTE 10-RETIREMENT PLANS
On January 19, 1996, the Board of Directors authorized an
amendment to curtail the Bank's defined benefit pension plan. Under
the curtailment, pension benefits were frozen as of March 31, 1996.
The plan will be administered in frozen status until such time as
management deems termination and final settlement appropriate. While
in frozen status, the funding policy of the Bank will be to make
contributions as necessary to meet the minimum funding requirements
set forth in the Employee Retirement Income Security Act of 1974. On
September 16, 1996, approximately two-thirds of the plan's accumulated
<PAGE>
benefit obligation was settled via the purchase of annuity contracts.
As a result of the plan curtailment and the partial settlement,
the Corporation recognized a curtailment gain and a settlement loss in
accordance with Financial Accounting Standards Board (FASB) Statement
No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits". These
events were not material to the Corporation's results of operations.
The following table sets forth the plan's funded status and
amounts recognized in the Corporation's financial statements at
December 31, 1996 and 1995 (In Thousands):
<TABLE>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $988 in 1996 and $2,855 in 1995... $ (988) $(2,907)
Projected benefit obligation for service rendered to date ... $ (988) $(3,463)
Plan assets at fair value ... 1,142 3,092
Plan assets in excess of (less than)
projected benefit obligation ... .. 154 (371)
Unrecognized net loss... 92 681
Unrecognized net transition asset... --- (10)
Unrecognized prior service cost... --- (81)
Prepaid pension costs... $246 $ 219
</TABLE>
<TABLE>
Year-Ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Net pension costs included the following components:
Service costs... $ --- $ 92 $ 105
Interest costs on
projected benefit obligation 166 224 193
Actual return on plan assets (92) (352) (83)
Net amortization and deferral 88) 122 (156)
Net periodic pension costs... $ (14) $ 86 $ 59
</TABLE>
<PAGE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7% at December
31, 1996 and December 31, 1995. The rate of increase in future
compensation levels was 5% at December 31, 1995. The expected long-
term rate of return on plan assets was 7% in 1996 and 8% in 1995 and
1994. Plan assets are invested primarily in corporate bonds, common
stocks, U.S. Government securities and certificates of deposit. Among
the common stock investments, the plan held 6,183 shares of Hanover
Bancorp, Inc. stock at December 31, 1996 with a market value of
approximately $113,000.
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 the maximum allowable contribution as
established by the Internal Revenue Service. The Corporation matches,
in cash, 50% of the participant's contribution up to 4% of the
participant's base salary/wages. Beginning in 1996, as an alternative
to providing benefits under the pension plan, the Corporation also
made a discretionary annual contribution to all eligible employees.
The Corporation's expense for the defined contribution plan ,
including the discretionary contribution, was $177,000, $64,000 and
$56,000 in 1996, 1995 and 1994, respectively.
NOTE 11--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 $2,786,000, $3,301,000 and $2,102,000 at
December 31, 1996, 1995 and 1994, respectively. During 1996, $573,000
of new loans were made, and repayments totaled $1,088,000.
<PAGE>
NOTE 12--HANOVER BANCORP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
(In Thousands)
<TABLE>
December 31,
<S> <C> <C>
BALANCE SHEET 1996 1995
ASSETS
Cash ... $ 861 $ 1,138
Investment securities:
Available-for-sale... 2,424 4,439
Held-to-maturity... --- ---
2,424 4,439
Accrued income receivable... 10 30
Other assets... 337 338
Investment in Bank of
Hanover and Trust Company... 28,451 27,451
TOTAL ASSETS... $32,083 $33,396
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable... $ 357 $ 342
Other liabilities... 185 192
TOTAL LIABILITIES... 542 534
Shareholders' Equity:
Common stock... 3,296 3,449
Surplus... 18,659 18,606
Unrealized gains on securities
available-for-sale... 598 1,554
Retained earnings... 8,988 9,253
TOTAL SHAREHOLDERS' EQUITY... 31,541 32,862
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY... $32,083 $33,396
</TABLE>
<PAGE>
<TABLE>
Year-Ended
December 31,
<S> <C> <C> <C>
STATEMENT OF INCOME 1996 1995 1994
INTEREST INCOME
Investment securities:
Taxable... $ 55 $ 54 $ 21
Tax-exempt... 57 157 219
112 211 240
Interest on short-term investments... --- 4 9
TOTAL INTEREST INCOME... 112 215 249
OTHER INCOME
Securities gains... 363 135 47
OTHER EXPENSE
Other operating expense... 95 87 100
Income before applicable income taxes
(credit) and equity in undistributed
income of subsidiary... 380 263 196
INCOME TAXES (CREDIT) ... 86 23 (12)
Income before equity in undistributed
income of subsidiary... 294 240 208
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY
Bank of Hanover and Trust Company... 3,286 3,316 3,276
NET INCOME... $3,580 $3,556 $3,484
</TABLE>
<PAGE>
<TABLE>
Year-Ended December 31,
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS 1996 1995 1994
OPERATING ACTIVITIES
Net income... $3,580 $3,556 $3,484
Adjustments to reconcile net income to
net cash provided by operating activities:
Securities gains... (363) (135) (47)
Decrease in interest receivable... 20 22 6
Increase (decrease) in other liabilities... 2 (3) 1
Increase (decrease) in accrued taxes... 11 33 (12)
Equity in undistributed income
of subsidiary... (3,286) (3,316) (3,276)
NET CASH PROVIDED BY
OPERATING ACTIVITIES... (36) 157 156
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale
investment securities... 2,666 993 1,033
Proceeds from maturities of
investment securities... --- 341 200
Purchases of investment securities... (348) (544) (1,817)
Proceeds from maturities of
short-term investments... --- 600 144
Purchases of short-term investments... --- (600) ---
Cash dividends received from subsidiary... 1,371 1,243 1,144
NET CASH PROVIDED BY
INVESTING ACTIVITIES... 3,689 2,033 704
FINANCING ACTIVITIES
Cash dividends paid (1,375) (1,243) (1,144)
Cash paid in lieu of fractional shares... --- (6) (12)
Proceeds from issuance of common stock... 57 35 314
Repurchase and retirement of common stock... (2,612) --- ---
NET CASH USED IN
FINANCING ACTIVITIES (3,930) (1,214) (842)
INCREASE (DECREASE) IN CASH... (277) 976 18
Cash at beginning of year... 1,138 162 144
CASH AT END OF YEAR... $ 861 $1,138 $ 162
</TABLE>
<PAGE>
The Corporation relies on dividends from Bank of Hanover and Trust
Company to fund 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, 1996, retained earnings of the
Bank available for dividends were $19,347,000. 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, 1996, these restricted net assets amounted to $7,783,000.
<PAGE>
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
December 31, 1996
Carrying Fair
Amount Value
<S> <C> <C>
Financial Assets
Cash and short-term investments $16,027 $16,027
Investment securities 76,102 76,092
Loans 254,573
Less: Allowance for loan losses (2,403)
Net loans... 252,170 255,232
TOTAL FINANCIAL ASSETS... $344,299 $347,351
FINANCIAL LIABILITIES
Deposits... $297,004 $296,996
Short-term borrowings... 13,052 13,052
Long-term borrowings... 11,248 11,526
TOTAL FINANCIAL LIABILITIES... $321,304 $321,574
</TABLE>
<TABLE>
December 31, 1995
Carry Fair
Amount Value
<S> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments... $ 23,541 $ 23,541
Investment securities... 91,932 91,969
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
Short-term borrowings... 14,660 14,660
Long-term borrowings.. 8,293 8,669
TOTAL FINANCIAL LIABILITIES... $301,187 $302,200
</TABLE>
<PAGE>
Financial Accounting Standards Board (FASB) 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 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. FASB 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.
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments 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: 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.
Deposits: 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.
Short-term borrowings: The carrying amounts of federal funds
purchased,borrowings under repurchase agreements and other short-term
borrowings approximate their fair values.
Long-term borrowings: Fair values for long-term 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.
<PAGE>
NOTE 14--COMMITMENTS
As of December 31, 1996, the Bank had commitments outstanding to
extend credit totaling $41,035,000 and commitments under outstanding
standby letters of credit totaling $2,714,000. 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.
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. 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
FASB Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of", was issued
in March 1995 and was effective in 1996. 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. This standard has not had, nor
is expected to have, a material effect on the Corporation's liquidity,
capital resources, or results of operations.
In May 1995, FASB Statement No. 122, "Accounting for Mortgage
Servicing Rights, an Amendment of FASB Statement No. 65", was issued
and became effective in 1996. This statement amends certain
provisions of FASB 65 "Accounting for Certain Mortgage Banking
Activities", to require rights to service mortgage loans for othersbe
recognized as separate assets, regardless of whether acquired through
purchase or origination of mortgage loans. Effective for mortgage
servicing rights after December 31, 1996, this standard will be
superseded by FASB Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" .
The provisions of FASB 125, in regards to mortgage servicing rights,
are essentially the same as FASB 122 . This statement, has not had,
nor is expected to have, a material effect on the Corporation's
liquidity, capital resources or results of operations.
FASB Statement No. 123, "Accounting for Stock Based Compensation",
was issued in October 1995 and was effective in 1996. As detailed in
Note 8, this standard has not had, nor is expected to have, a material
effect on the Corporation's liquidity, capital resources or results of
operations.
<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, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are
the responsibility of the Corporation's management. Our
responsibility is to express an opinion on 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, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Harrisburg, Pennsylvania
January 24, 1997
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 22, 1997, 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/Assistant Treasurer, Hanover Bancorp, Inc., 33
Carlisle Street, Hanover, Pennsylvania 17331.
<PAGE>
GLOSSARY OF TERMS
Book Value - Total common shareholders' equity divided by the
number of common shares outstanding.
Tier I (Core) Capital - Shareholders' equity,
excluding net unrealized gains (losses) on securities, net of tax,
plus minority interests in consolidated subsidiaries less goodwill and
intangible assets other than purchased mortgage servicing rights
acquired after February 18, 1992.
Tier I Capital Ratio - Tier I capital divided by risk-
adjusted assets.
Cost of Interest Bearing Funds - Interest
expense divided by average interest bearing liabilities.
Efficiency Ratio - Recurring non-interest expense divided
by recurring non-interest income, excluding net securities gains, plus
net interest income on a fully taxable equivalent basis.
Fully Taxable Equivalent (FTE) - Adjustment
made, for comparative purposes, of an amount equivalent to federal
income taxes that would have been paid if income on tax-exempt
securities and loans were taxable at the statutory rate of 34%.
Interest Bearing Liabilities - Liabilities upon
which interest is paid for the use of funds, such as savings, money
market and time deposits, short term borrowings and long-term
borrowings.
Interest Earning Assets - Assets that generate
interest income and yield-related fee income, such as loans,
securities and short-term investments.
Leverage Ratio - Core capital divided by current quarter
average assets, adjusted for the exclusion of average net realized
gains (losses) on securities, less the same deductions for core
capital.
Liquidity - The ability of a corporation to generate adequate
funds to meet its cash flow requirements.
Net Income Per Common Share - Net income less
preferred dividend requirements, if any, divided by the average number
of common shares outstanding and common stock equivalents in each
period.
Net Interest Income - The difference between interest
income on interest earning assets and interest expense on interest
bearing liabilities.
Net Interest Margin - Net interest income on a fully
taxable equivalent basis divided by average interest earning assets.
Net Interest Spread - The difference between the yield
on interest earning assets and the cost of interest bearing funds.
Non-accrual Loans - Loans on which interest accruals have
been discontinued due to borrowers' financial difficulties.
Nonperforming Assets - Non-accrual loans, renegotiated
debt on which interest rates or terms of repayment have been
materially revised, real estate properties acquired through
foreclosure, repossessed assets and bank properties not in use.
<PAGE>
Provision for Loan Losses - A charge against income
to maintain the reserve for loan losses at a level to cover potential
future loan losses.
Reserve for Loan Losses - A valuation allowance
offset against total loans on the balance sheet representing the
amount considered by management to be adequate to cover estimated
losses inherent in the loan portfolio.
Return on Average Assets - A profitability measure
calculated by dividing net income by average total assets.
Return on Average Equity - A profitability measure
calculated by dividing net income by average total shareholders'
equity.
Risk-Adjusted Assets - The sum of balance sheet assets
weighted by credit risk factors plus risk-weighted credit equivalent
amounts of off-balance sheet financial instruments.
Tier II (Total) Capital - Tier I (Core) Capital plus
reserve for loan losses (limited to 1.25% of total risk adjusted
assets) plus subordinated debt.
Tier II Capital Ratio - Tier II capital divided by
risk adjusted assets.
Yield on Interest Earnings Assets - Interest
income on a fully taxable equivalent basis divided by average interest
earning assets.
<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, 1996. 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. ( )
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 28, 1997, was $47,643,936.
The number of shares outstanding of the issuer's common stock as of
February 28, 1997: Common Stock, $1.11 Par Value -- 2,969,099 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Hanover Bancorp, Inc. Proxy Statement for the Annual
Shareholders Meeting to be held April 22, 1997, 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 74
Item 2 - Properties 76
Item 3 - Legal Proceedings 76
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 39
Item 6 - Selected Financial Data 11
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 8 - Financial Statements and Supplementary Data 41
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 1,70
A. (1) and (2) Consolidated Financial Statements and Schedules.
(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)(a)(3) 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.
(3)(b)(1) 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)(b)(2) Amendments to Article II, Section 1.9 and
Article III, Section 4 of the Corporation's By-laws are
hereby incorporated by reference from the Registrant's
Form 8K filed on March 6, 1997.
(21) 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 67
(99)(b) Proxy Statement and Notice of Annual
Meeting of Shareholders to be held April 22,
1997, are hereby incorporated by reference.
(99)(c) Form of Proxy for Annual Meeting of
Shareholders to be held April 22, 1997, is
hereby incorporated by reference.
B. There were no reports filed on Form 8-K for the quarter
ended December 31, 1996.
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 77
<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, 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 1996 which favorably impacted the
Corporation's loan demand and corresponding asset growth. Economic
cycles, specifically economic downturns, may have an adverse effect on
the Corporation's asset growth, delinquency rates, etc. Throughout
economic cycles, the diverse nature of the local economy should allow the
Corporation's market to experience growth at levels which compare
favorably to national trends.
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 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 located in
York and Adams Counties, Pennsylvania. At December 31, 1996, the Bank
had total deposits of $297,865,000; total assets of $353,837,000; and
net loans of $252,170,000.
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 five of
its Hanover offices, both of its Gettysburg offices and at its offices
in Littlestown, New Oxford, Rossville and York as well as ten remote
service locations in Hanover, York, Dover, East Berlin and Carlisle.
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.
<PAGE>
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.
Competing within the Bank's market area, defined as York and Adams
Counties, are 211 offices of area financial institutions, including
commercial banks, savings banks and credit unions. According to
Sheshunoff Information Services, Inc.'s Branches of Pennsylvania -
1996, combined total deposits of these financial institutions was
$5,514,866,000 as of June 30, 1995.
STAFF
The total number of full-time equivalent persons employed by the
Bank as of December 31, 1996, was 204.71. Most employees are provided
with group life, health and major medical insurance and are eligible
for the Bank's defined contribution 401(k) Plan. 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 and the Bank's deposits are insured by the FDIC to the extent
provided by law.
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 financial 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
BALTIMORE STREET OFFICE EISENHOWER DRIVE OFFICE
1416 Baltimore Street 453 Eisenhower Drive
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NEW OXFORD OFFICE WEST MANCHESTER OFFICE (Building)
318 Lincolnway East 1511 Kenneth Road
New Oxford, Adams County York, York County
Pennsylvania 17350 Pennsylvania 17404
OPERATIONS CENTER
1040 High Street
Hanover, York County
Pennsylvania 17331
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:
CARLISLE STREET OFFICE ROSSVILLE OFFICE
880 Carlisle Street 3405 Rosstown Road
Hanover, York County Wellsville, York County
Pennsylvania 17331 Pennsylvania 17365
DOWNTOWN GETTYSBURG LITTLESTOWN OFFICE
OFFICE 400 West King Street
6 York Street Littlestown, Adams County
Gettysburg, Adams County Pennsylvania 17340
Pennsylvania 17325
WEST MANCHESTER
GETTYSBURG EAST OFFICE OFFICE (Land)
1275 York Road 1511 Kenneth Road
Gettysburg, Adams County York, York County
Pennsylvania 17325 Pennsylvania 17404
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.
<PAGE>
SIGNATURES
Pursuant to the requirements 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 21, 1997
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 by the following persons on behalf of the
registrant and in the capacities and the dates indicated.
/s/ Michael D. Bross February 21, 1997
Michael D. Bross Date
Director
/s/Thomas M. Bross, Jr February 21, 1997
Thomas M. Bross, Jr. Date
Director,
Vice Chairman of the Board
/s/ S. Forry Eisenhart, Jr. February 21, 1997
S. Forry Eisenhart, Jr. Date
Director
/s/ Bertram F. Elsner February 21, 1997
Bertram F. Elsner Date
Director
/s/ J. Daniel Frock February 21, 1997
J. Daniel Frock Date
Director
/s/ John S. Hollinger, Jr. February 21, 1997
John S. Hollinger, Jr. Date
Director
/s/ Terrence L. Hormel February 21, 1997
Terrence L. Hormel Date
Director,
Chairman of the Board
<PAGE>
/s/ Earl F. Noel, Jr. February 21, 1997
Earl F. Noel, Jr. Date
Director
/s/ Vincent P. Pisula February 21, 1997
Vincent P. Pisula, MD Date
Director
/s/ Charles W. Test February 21, 1997
Charles W.Test Date
Director
/s/ J. Bradley Scovill February 21, 1997
J. Bradley Scovill Date
Director, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas J. Paholsky February 21, 1997
Thomas J. Paholsky Date
Treasurer
(Principal Accounting and
Financial Officer)
<PAGE>
HANOVER BANCORP, INC. DIRECTORS AND OFFICERS
DIRECTORS
Michael D. Bross
Owner
Stonewood Farm and Berwick
Enterprises -1987*
Thomas M. Bross, Jr.
Retired Chairman 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*
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
<PAGE>
Thomas M. Bross, Jr.
Vice Chairman of the Board
J. Bradley Scovill
President and Chief Executive Officer
Thomas J. Paholsky
Treasurer
Gerald M. Warner
Secretary and Assistant Treasurer
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
Executive Vice President
Sales and Services Group
William J. Callaghan
Senior Vice President
Operations Division
Jeffrey K. Dice
Senior Vice President
Credit Services Division
Jacquelyn A. Lebow
Senior Vice President
Marketing Division
Thomas J. Paholsky
Senior Vice President
Finance/Control Division
James A. Smiley
Senior Vice President
Trust and Investment
Services Division
Carol M. Wuenschel
Senior Vice President
Human Resources Division
Gerald M. Warner
Vice President & Comptroller
Finance/Control Division
John T. Weber
Vice President
Internal Auditor
Lisa Stough Cookson
Vice President
Mortgage Services Manager
Terrence M. Gingrow
Vice President
Commercial Lending Manager
<PAGE>
J. Gregory Greco
Vice President
Regional Commercial Business
Development Officer
Surina T. Jan
Vice President
Compliance/Loan Review Manager
Christine E. Schwartz
Vice President
Management Information
Systems Manager
Joyce M. Smith
Vice President
Assistant Operations
Division Manager
Ronald H. Smith
Vice President
Adams County Regional
Administrator
Paul J. Stevenson
Vice President
Trust Services 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
York Street Office
<PAGE>
Debra A. Eck
Assistant Vice President
Staff Accountant
L. John Hicks
Assistant Vice President
Retail Credit Services
Faye E. Inners
Assistant Vice President
Community Office Manager
New Oxford Office
Tammy J. Kehr
Assistant Vice President
Community Office Manager
Baltimore Street Office
Michael A. Matten
Assistant Vice President
Community Office Manager
Carlisle Street Office
Patricia R. Ormond
Assistant Vice President
Community Office Manager
Main Office
Kevin E. Owens
Assistant Vice President
Community Office Manager
Rossville Office
Wendy L. Rittenhouse
Assistant Vice President
Community Office Manager
West Manchester Office
Cheryl E. Small
Assistant Vice President
Marketing Division
<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
1416 Baltimore Street* ROSSVILLE OFFICE
453 Eisenhower Drive* 3405 Rosstown Road, Wellsville* LITTLESTOWN OFFICE
637-2201 432-9625 400 West King Street*
359-8188
WEST MANCHESTER OFFICE
* MAC PLUS LOCATION 1511 Kenneth Road, York*
764-0155
<PAGE>
(BACK COVER PAGE)
BANK OF HANOVER
25 Carlisle Street
Hanover, PA 17331
(717) 637-2201
<PAGE>
APPENDIX I
DESCRIPTION OF GRAPHS INCLUDED IN 1996 ANNUAL REPORT
Graph Graph
Location Description
Page 1. Stacked bar graph of net income per share and dividends
per share over the past five years.*
Page 11. Bar graph of total assets over the past five years.*
Page 11. Bar graph of net income over the past five years.*
Page 16. Bar graph of net interest income over the past five
years.*
Page 17. Stacked bar graph of deposits and loans
over the past five years*.
Page 26. Bar graph of the Bank's leverage ratio over the past
five years. The five ratios compared in the graph were
as follows: 1992 - 7.67%; 1993 - 7.92%; 1994 - 7.99%;
1995 - 8.12%; 1996 - 8.06%.
Page 29. Bar graph of the ratio of nonperforming assets to total
loans over the past five years*.
Page 29. Bar graph of the ratio of the allowance for loan losses
to nonperforming assets over the past five years*.
* The content of this graph is narratively presented at SELECTED
CONSOLIDATED FINANCIAL DATA on page 11.
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 24, 1997
included in the 1996 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
24, 1997, 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, 1996.
\s\ Ernst & Young LLP
Harrisburg, Pennsylvania
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,955
<INT-BEARING-DEPOSITS> 72
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,005
<INVESTMENTS-CARRYING> 4,097
<INVESTMENTS-MARKET> 4,087
<LOANS> 254,573
<ALLOWANCE> 2,403
<TOTAL-ASSETS> 356,129
<DEPOSITS> 297,004
<SHORT-TERM> 13,052
<LIABILITIES-OTHER> 3,284
<LONG-TERM> 11,248
<COMMON> 3,296
0
0
<OTHER-SE> 28,245
<TOTAL-LIABILITIES-AND-EQUITY> 356,129
<INTEREST-LOAN> 20,007
<INTEREST-INVEST> 4,510
<INTEREST-OTHER> 903
<INTEREST-TOTAL> 25,420
<INTEREST-DEPOSIT> 11,042
<INTEREST-EXPENSE> 12,148
<INTEREST-INCOME-NET> 13,272
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 602
<EXPENSE-OTHER> 10,986
<INCOME-PRETAX> 4,718
<INCOME-PRE-EXTRAORDINARY> 3,580
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,580
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.10
<LOANS-NON> 38
<LOANS-PAST> 166
<LOANS-TROUBLED> 242
<LOANS-PROBLEM> 2,800
<ALLOWANCE-OPEN> 2,220
<CHARGE-OFFS> 360
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 2,403
<ALLOWANCE-DOMESTIC> 2,403
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
