FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X )QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12524
Hanover Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2219814
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
33 Carlisle Street, Hanover, Pennsylvania 17331
(address of principal executive office and zip code)
(717) 637-2201
Registrant's Telephone Number, including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING March 31, 1997
Common Stock, 2,966,774 shares
par value $1.11 per share
<PAGE>
INDEX
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Page #
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1997, and December 31, 1996. . . . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended March 31, 1997 and 1996 . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . 7
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
March 31 December 31
1997 1996
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 17,986 $ 15,955
Federal funds sold 3,425 ---
CASH AND CASH EQUIVALENTS 21,411 15,955
Interest bearing deposits with other banks 28 72
Short-term investments 2,994 ---
Investment securities:
Available-for-sale 71,533 72,005
Held-to-maturity (market value -
$4,058 and $4,087 respectively) 4,076 4,097
75,609 76,102
Loans:
Commercial, financial, and agricultural 30,979 31,991
Real estate-construction 5,271 3,775
Real estate-commercial mortgage 32,720 29,563
Real estate-residential mortgage 120,505 119,383
Consumer 69,154 69,861
258,629 254,573
Less: Allowance for loan losses (2,459) (2,403)
NET LOANS 256,170 252,170
Premises and equipment 7,030 7,075
Accrued income receivable 2,443 2,348
Other assets 3,549 2,407
TOTAL ASSETS $369,234 $356,129
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 32,112 $ 29,128
Interest bearing 275,459 267,876
TOTAL DEPOSITS 307,571 297,004
Borrowed funds:
Federal Home Loan Bank borrowings 12,404 13,052
Other borrowings 13,676 11,248
26,080 24,300
Accrued interest 2,387 2,116
Other liabilities 1,341 811
Dividends payable 356 357
TOTAL LIABILITIES 337,735 324,588
SHAREHOLDERS' EQUITY:
Common stock 3,293 3,296
Surplus 18,659 18,659
Unrealized gains on securities
available-for-sale 88 598
Retained earnings 9,459 8,988
TOTAL SHAREHOLDERS' EQUITY 31,499 31,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $369,234 $356,129
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Income
<CAPTION>
(Unaudited)
Three Months Ended
March 31
1997 1996
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,441 $ 4,603
Interest on federal funds sold 29 136
Interest on short-term investments 6 85
Investment securities:
Taxable 809 868
Tax Exempt 322 480
1,131 1,348
Total Interest Income 6,607 6,172
INTEREST EXPENSE:
Interest on deposits 2,806 2,713
Interest on borrowed funds 326 293
Total Interest Expense 3,132 3,006
Net Interest Income 3,475 3,166
PROVISION FOR LOAN LOSSES 150 120
Net Interest Income After
Provision For Loan Losses 3,325 3,046
OTHER INCOME:
Trust department income 188 174
Service charges on deposit accounts 238 205
Other operating income 166 160
Securities gains 65 77
657 616
OTHER EXPENSE:
Salaries 1,247 1,220
Pensions and other employee benefits 285 299
Occupancy expense 232 237
Equipment expense 246 212
Marketing and advertising 110 78
FDIC Insurance 9 1
Other operating expense 696 568
2,825 2,615
Income Before Income Taxes 1,157 1,047
INCOME TAXES 287 220
NET INCOME $ 870 $ 827
PER SHARE DATA:
Net income $ .29 $ .27
Cash dividends $ .12 $ .11
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
(Unaudited)
Three Months Ended
March 31
1997 1996
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 870 $ 827
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 150 120
Provision for depreciation and amortization 219 170
Securities gains (65) (78)
(Increase)decrease in net deferred tax assets (184) 224
(Increase)decrease in interest receivable (95) 157
Increase in interest payable 271 332
Increase in other assets (696) (323)
Increase in other liabilities 144 296
Increase (decrease) in accrued taxes 386 (4)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,000 1,721
INVESTING ACTIVITIES:
Net increase in loans (5,665) (4,096)
Proceeds of loan sales 1,515 2,074
Proceeds from sale of
available-for-sale investment securities 3,873 29,884
Proceeds from maturities of investment securities 1,574 2,127
Purchases of investment securities (5,661) (10,531)
Proceeds from maturities of short-term investments --- 17,850
Purchases of short-term investments (2,950) (17,902)
Purchases of premises and equipment (174) (520)
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES (7,488) 18,886
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 12,431 6,041
Net decrease in certificates of
deposit and other time deposits (1,864) (1,244)
Net increase (decrease) in borrowed funds 1,780 (1,026)
Cash dividends paid (357) (342)
Proceeds from issuance of common stock --- 13
Repurchase and retirement of common stock (46) (56)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 11,944 3,386
INCREASE IN CASH AND CASH EQUIVALENTS 5,456 23,993
Cash and cash equivalents at beginning of period 15,955 16,655
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,411 $40,648
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Notes to Consolidated Financial Statements
(1) In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments which are of a normal
recurring nature necessary to present fairly Hanover Bancorp, Inc's.
financial position as of March 31, 1997, and December 31, 1996, the
results of its operations for the three months ended March 31, 1997
and 1996 and cash flows for the three months ended March 31, 1997 and
1996.
(2) The information contained in this report is unaudited and is subject
to year-end adjustment and audit.
(3) These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996.
(4) Net income and cash dividends per share are based on the weighted
average number of shares outstanding which were 2,968,858 during the
quarter ended March 31, 1997 and 3,105,068 during the quarter ended
March 31, 1996.
(5) The results of operations for the three month period ended March 31,
1997, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
(6) 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.
(7) 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"; however, the provisions of FASB 125, in
regards to mortgage servicing rights, are essentially the same as
those of FASB 122. 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 did
not have nor is expected to have, a material impact on the
Corporation's liquidity, capital resources or results of operations.
(8) Certain reclassifications have been made to the 1996 financial
statements to conform with the 1997 presentation.
***********
<PAGE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
The consolidated operations of Hanover Bancorp Inc., (the
"Corporation") are derived primarily from the operations of its wholly-
owned subsidiary, the Bank of Hanover and Trust Company (the "Bank"). The
following discussion and analysis sets forth results of operations through
the first quarter of 1997, including basic performance trends. There are
no known trends, events or uncertainties that will have or are likely to
have a material effect on the Corporation's liquidity, capital resources or
operations.
All forward looking information contained in this discussion and
analysis is based on management's current knowledge of factors affecting
the Corporation's business. Actual results may differ due to unforeseen
events such as, but not limited to, a significant downturn in the economic
environment, legislative changes or additional requirements mandated by the
numerous regulatory authorities. All such forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
First Quarter of 1997 Compared to First Quarter of 1996:
Net income for the three months ended March 31, 1997, was $870,000, an
increase of $43,000 or 5.2% over the 1996 level of $827,000. On a per
share basis, 1997 first quarter results equalled $0.29 per share versus
$0.27 per share during the prior year, a 7.4% increase. The larger
relative increase in earnings per share reflects the positive impact of the
stock repurchase program, after absorbing the "cost" of reducing the
capital base.
Net interest income is the largest component of the Corporation's
operating revenues. Changes in net interest income are the result of
flucuations in the balance sheet and/or mix of earning assets and interest
bearing liabilities, as well as changes in their yields and costs.
Net interest income on a fully taxable equivalent basis was $3.7
million for the quarter ended March 31, 1997, an increase of $217,000 from
1996's level of $3.5 million. Net interest margin also increased seven
basis points from 4.35% in 1996 to 4.42% in 1997. These two measures
increased primarily due to growth in earning assets, specifically loans,
and the resulting increase in the proportion of loans to earning assets.
The provision for loan losses during the first three months of 1997
was $150,000 compared to $120,000 during the same period of 1996. The
increase was largely reflective of the growth in the Corporation's loan
portfolio. Management remains committed to making loan loss provisions
which adequately cover the risk inherent in the loan portfolio.
Other income for the three months ended March 31, 1997 was $657,000,
an increase of $41,000 over the same period in 1996. Trust department
income and service charges on deposit accounts increased by $14,000 and
$33,000, respectively, while securities gains decreased by $12,000. Trust
income increased due to higher levels of assets under management. Service
charges on deposit accounts increased primarily as a result of growth in
the number of demand deposit accounts, the largest contributor of this type
of income. The securities gains are reflective of ongoing portfolio and
balance sheet management strategies.
Total other expense during the first quarter of 1997 was $2.8 million,
an increase of $210,000 over the same period in 1996. Salaries and
employee benefits, occupancy-related
<PAGE>
expenses, and other operating expenses increased by $13,000, $29,000, and
$128,000, respectively. This growth was largely associated with the full
impact of a branch opening in March 1996 and a branch relocation in October
1996. The increase in occupancy-related expenses was also due to
investment in automated teller machines and technology. Additionally,
other operating expenses were up due to non-recurring expenditures for
technology consultation and employee recruiting. Marketing and advertising
increased by $32,000 primarily as a result of increased promotional
activity and timing differences.
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 24.8% for the quarter
ended March 31, 1997 up from the 21.0% rate in 1996. The increase was the
result of ongoing investment portfolio management which caused the levels
of tax-free income to change.
<TABLE>
Trends in Sources and Uses of Funds
<CAPTION>
Increase (Decrease)
March 31 Since December 31, 1996
1997 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Uses:
Interest earning assets:
Loans $258,629 $ 4,056 1.6%
Investment securities 75,609 (493) (.6)%
Federal funds sold and other
short-term investments 6,447 6,375 N/M
Total interest earning assets 340,685 9,938 3.0%
Other assets 28,549 3,167 12.5%
TOTAL USES $369,234 $13,105 3.7%
Funding Sources:
Deposits:
Non-interest bearing $ 32,112 $ 2,984 10.2%
Interest bearing 275,459 7,583 2.8%
Total deposits 307,571 10,567 3.6%
Other interest bearing liabilities 26,080 1,780 7.3%
Other liabilities 4,084 800 24.4%
Shareholders' equity 31,499 (42) (.1)%
TOTAL SOURCES $369,234 $13,105 3.7%
</TABLE>
Deposits are the most important funding source and the primary support
for the Corporation's growth. Total deposits increased $10.6 million
during the first three months of 1997. Interest bearing deposits increased
by $7.6 million while non-interest bearing deposits increased by $3.0
million. The growth in interest bearing deposits consisted of a $9.5
million increase in NOW accounts, money market accounts and savings
accounts and a $1.9 million decrease in certificates of deposit. The
changes in these categories were primarily due to the introduction of a
new indexed variable-rate money market account at the beginning of 1997.
This new product was successful in generating new funds but it also drew
funds from the Corporation's existing products. The increase in demand
deposits was largely the result of high month-end deposit activity and was
temporary. Other interest
<PAGE>
bearing liabilities increased by $1.8 million primarily due to additional
levels of Federal Home Loan Bank of Pittsburgh (FHLB) borrowings. These
borrowings are used to manage the balance sheet and interest rate risk and
to match fund specific investments and loans.
The Corporation uses funds primarily to support its lending
activities. Loans outstanding increased by $4.1 million from December 31,
1996 to March 31, 1997. This increase was net of loans sold of $1.5
million. Most of this growth came from the commercial category.
Investment securities, another major use of funds, remained fairly constant
during the first three months of 1997, decreasing by $493,000. Federal
funds sold and other short-term investments increased by $6.4 million
during this same period. This increase was due primarily to the deposit
growth outpacing the typically slower first quarter loan growth, and
management's anticipation that these funds would be needed in the short-
term to support a "catch up" in loan demand. Other assets, increased $3.2
million mainly due to an increase in cash and due from banks. This balance
is prone to day-to-day fluctuation and therefore this increase was not
unusual.
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.
In the first quarter of 1996, the Board of Directors approved a
program to repurchase, in open market and privately negotiated
transactions, up to 150,000 shares of its outstanding common stock. At
March 31, 1997 the number of shares purchased through this program totaled
143,976. Upon purchase, these shares were retired rather than carried as
treasury stock. The ultimate goal of this buyback is to support the market
for Hanover Bancorp, Inc. stock through a more effective deployment of
capital. Since its inception, the resulting reduction in total capital and
shares outstanding, in combination with increased earnings, has translated
into improved return on equity and earnings per share. Based on these
positive results, the Board of Directors, after carefully evaluating the
capital level necessary to satisfy the criteria described above, approved
another program to repurchase up to 140,000 shares of common stock on April
18, 1997.
At March 31, 1997, total shareholders' equity was $31.5 million, a
decrease of $42,000 from December 31, 1996. This change consisted of an
increase of $468,000 in capital stock, surplus and undivided profits (core
equity) and a decrease of $510,000 in unrealized gains on AFS securities.
The increase in the core equity during 1997 was primarily the result of
earnings retained. The change in the unrealized gains on AFS securities
was due to the increased level of market interest rates in 1997.
During the quarter ended March 31, 1997, the Board of Directors
declared a cash dividend of $.12 per share payable May 1, 1997, an increase
of $.01 per share from a year ago. The Corporation relies on net income
rather than retained earnings for the payment of dividends to shareholders.
The dividend rate is determined by the Board of Directors after considering
the level of internal capital growth necessary to maintain an appropriate
ratio of equity to assets and the projected level of earnings. Management
anticipates that the internal growth rate of equity is more than adequate
to support the Corporation's asset growth.
<PAGE>
<TABLE>
The following table sets forth capital ratios for the Corporation and its
bank subsidiary:
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
Hanover Bancorp, Inc.
Tier 1 capital to risk-adjusted assets 12.63% 12.87%
Total capital to risk-adjusted assets 13.62% 13.87%
Leverage ratio 8.82% 8.79%
Bank of Hanover and Trust Company
Tier 1 capital to risk-adjusted assets 11.13% 11.78%
Total capital to risk-adjusted assets 12.13% 12.78%
Leverage ratio 7.76% 8.06%
</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:
Tier I
Total Capital Capital to
to Risk-Adjusted Risk-Adjusted
Assets Assets Leverage
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
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.
<PAGE>
Asset Quality and Allowance for Loan Losses:
The following tables illustrate the Corporation's nonperforming asset
position as of March 31, 1997 compared to its position at December 31,
1996.
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
<S> <C> <C>
Non-accrual loans $ 29 $ 38
Accruing loans past due 90 days or more 1,349 166
Restructured loans 240 242
Other real estate and other
repossessed assets 92 96
Total non-performing assets $1,710 $ 542
Non-accrual loans by category
Commercial, financial and agricultural $ --- $ ---
Real estate-construction --- ---
Real estate-mortgage 15 16
Consumer 14 22
$ 29 $ 38
Past due loans by category
Commercial, financial and agricultural $ 189 $ 16
Real estate-construction --- ---
Real estate-mortgage 1,119 65
Consumer 41 85
$1,349 $ 166
Restructured loans by category
Commercial, financial and agricultural $ 12 $ 12
Real estate-construction --- ---
Real estate-mortgage 228 230
Consumer --- ---
$ 240 $ 242
</TABLE>
Nonperforming assets were .66% of total loans at March 31, 1997
compared to .21% at December 31, 1996. The increase in nonperforming
assets was primarily due to one commercial borrower becoming delinquent.
Management is actively working with the borrower and a positive resolution
is expected in the short-term. In addition, potential problem loans at
March 31, 1997, as determined by the Corporation's internal review process,
were $2.5 million in comparison to $2.8 million at December 31, 1996. Of
these amounts, $512,000 and $562,000 were considered impaired under FASB
114 for March 31, 1997 and December 31, 1996, respectively. Loans
considered impaired under FASB 114 represent those potential problem loans
which management feels are probable (as opposed to possible) to result in
future noncompliance in addition to the Corporation's applicable nonaccrual
loans and restructured loans.
<PAGE>
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Quarter ended Year ended
March 31, December 31,
1997 1996
<S> <C> <C>
Balance at beginning of period $2,403 $2,220
Recoveries on loans 48 63
Provision charged to operations 150 480
Loans charged-off (142) (360)
Balance at end of period $2,459 $2,403
</TABLE>
The Corporation remains committed to making monthly provisions in
order to maintain a strong allowance relative to its level of specific
potential losses and to its growing overall loan portfolio. A total
provision of $150,000 was made during the first three months of 1997. The
resulting allowance for loan losses at March 31, 1997 was $2.5 million in
comparison to $2.4 million at December 31, 1996. This allowance
approximated .95% of total loans and 144% of nonperforming assets at March
31, 1997 versus .94% and 443% at year end 1996. Management feels that the
allowance for loan losses is adequate to cover potential losses within the
overall portfolio.
Liquidity and Asset/Liability Management:
Asset/liability management can be divided into two primary functions:
1) assuring adequate liquidity and, 2) maintaining an appropriate balance
between rate-sensitive interest earning assets and rate-sensitive interest
bearing liabilities. The goal of the Corporation's Liquidity Management
Program is to meet the cash flow requirements of customers for either
deposit withdrawals or loans. To meet its liquidity needs, the Corporation
looks to a number of sources on both sides of its balance sheet. On the
asset side of the balance sheet, the Corporation relies on federal funds
sold, short-term investments, maturities in the investment portfolio,
principal repayments on outstanding loans and amortizing investment
securities and sales of loans in the secondary markets. On March 31, 1997,
the balance of the federal funds sold account was $3.4 million while short-
term investments totaled $3.0 million. A total of $3.1 million of the
Corporation's investment portfolio was scheduled to mature in one year or
less. Additionally, an average of $5.7 million in loan principal
repayments and $310,000 in mortgage-backed and asset-backed securities
repayments were received by the Corporation during each month of the first
three months of 1997. Also during this period, the Corporation sold $1.5
million of loans in the secondary markets.
In addition to the liquidity provided by these categories of assets,
the Corporation's liquidity is enhanced by a high ratio of stable "core"
deposits (total deposits less certificates of deposit in excess of
$100,000) to total assets. On March 31, 1997, 78.8% of total assets were
funded with core deposits while 4.5% were funded with certificates of
deposit in excess of $100,000.
Finally, as part of its Liquidity Management Program, the Corporation
maintains borrowing agreements with several correspondent banks, the FHLB
of Pittsburgh, as well as access to the Discount Window at the Federal
Reserve Bank of Philadelphia. Through these relationships, the Corporation
has available short-term credit of approximately $18.7 million.
Maintaining an appropriate balance between rate sensitive interest
earning assets and interest bearing liabilities is a method of avoiding
fluctuations in net interest income and profits due to changes in interest
rates. An interest sensitivity mismatch or GAP results from either an
excess of rate sensitive assets (positive gap) or rate sensitive
liabilities (negative gap) being repriced in a given time period. A
positive GAP generally indicates that rising interest rates during a
particular interval will increase net
<PAGE>
interest income, while a negative GAP generally means the opposite. The
Corporation strives to maintain a rate sensitivity ratio (rate sensitive
assets minus rate sensitive liabilities divided by total assets) over
various time frames of between plus and minus 10%. This ratio is deemed
prudent because it allows the Corporation sufficient latitude to redeploy
assets in response to a change in the level of interest rates and maintain
or increase the level of net interest income.
The following table shows the respective interest sensitivity GAPs on
March 31, 1997 and December 31, 1996, for several different time intervals.
This GAP analysis takes into consideration the current estimated
prepayments on loans and amortizing investment securities. The Corporation
had a gap within one year at March 31, 1997 of negative $2.2 million and a
rate sensitivity ratio of negative .60% in comparison to a positive gap of
$2.2 million and a rate sensitivity ratio of positive .62% at December 31,
1996. This shift in the gap position was primarily due to growth in the
new indexed money market account discussed above. Due to the fact that the
current GAP position is fairly neutral, changes in the present rate
environment should not materially impact the Corporation's net interest
income in the short-term.
<TABLE>
HANOVER BANCORP CONSOLIDATED GAP ANALYSIS
<CAPTION>
0-30 31-90 91-365
DAYS DAYS DAYS
(In thousands of dollars)
<S> <C> <C> <C>
March 31, 1997:
Interest Earning Assets $61,032 $19,663 $63,104
Interest Bearing Liabilities 56,988 16,341 72,670
Rate Sensitivity GAP:
Periodic Gap $ 4,044 $ 3,322 $(9,566)
Cumulative Gap $ 4,044 $ 7,366 $(2,200)
Rate Sensitivity Ratio
Periodic Gap 1.10% .90% (2.59)%
Cumulative Gap 1.10% 1.99% (.60)%
December 31, 1996:
Rate Sensitivity GAP:
Periodic Gap $ 7,238 $ (559) $(4,481)
Cumulative Gap $ 7,238 $ 6,679 $ 2,198
Rate Sensitivity Ratio
Periodic Gap 2.03% (.15)% (1.26)%
Cumulative Gap 2.03% 1.88% .62%
</TABLE>
<PAGE>
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.
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 expects that the industry will continue to
experience 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 and the combined rate thereafter.
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.
<PAGE>
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 beginning in 1997. This law did not have, nor is expected
to have, a material impact on the Corporation's liquidity, capital
resources or results of operations.
In February 1997, FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". This standard changes the current
method of calculating primary earnings per share specifically as it relates
to the treatment of the dilutive effect of stock options. This statement
is effective for financial statements for periods ending after December 15,
1997. Management does not anticipate that this standard will have a
material impact on the Corporation's earnings per share.
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 1997 the FDIC completed a routine
examination of the Bank including an assessment of asset quality. During
1996 the Pennsylvania State Department of Banking completed a similar
examination of the Bank.
<PAGE>
PART II. OTHER INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Item 1. Legal Proceedings
In the opinion of the management of the Corporation and the Bank,
there are no proceedings pending to which the Corporation and/or Bank is a
party or to which their property is subject, which, if determined adversely
to the Corporation or Bank, would be material in relation to the
Corporation's and the Bank's undivided profits or financial condition.
There are no proceedings pending other than ordinary routine litigation
incident to the business of the Corporation or the Bank. In addition, no
material proceedings are pending or are known to be threatened or
contemplated against the Corporation or the Bank by government authorities.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held April 22, 1997.
(b)-(c) One matter was voted upon, as follows:
Four directors were elected, as below:
Votes Votes
Term Cast Cast Votes
Expires "For" "Against" "Abstained"
Re-elected
Terrence L. Hormel 2000 2,582,777 60,793 0
Vincent P. Pisula, M.D. 2000 2,629,139 14,431 0
Charles W. Test 2000 2,629,705 13,865 0
S.Forry Eisenhart, Jr. 2000 2,639,106 4,464 0
Directors whose term continued after meeting
Bertram F. Elsner 1998
J. Daniel Frock 1998
John S. Hollinger, Jr. 1998
Michael D. Bross 1999
Thomas M. Bross, Jr. 1999
Earl F. Noel, Jr. 1999
J. Bradley Scovill 1999
(d) None.
Item 5. Other Information - None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
On March 6, 1997 the Corporation filed a Form 8-K disclosing
the following information:
Item 5. Other Events - On January 17, 1997, the Board of Directors
of the Registrant adopted two amendments to the Corporation's By-
laws which became effective on that date. The specific By-laws and
the nature of the amendments are as follows:
Article II, Section 1.a. - The date of the annual meeting of the
shareholders was changed from the second Tuesday of April to a date
no later than April 30 of each year.
Article III, Section 4. - The date the Board of Directors meets
annually for reorganization was changed from the third Friday of
April to the third Friday of May.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER BANCORP, INC.
Date: May 14, 1997 \S\ J. Bradley Scovill
J. Bradley Scovill
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 \S\ Thomas J. Paholsky
Thomas J. Paholsky
Treasurer
(Principal Accounting and
Financial Officer)
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