FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X )QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 1997
Common Stock, 2,939,663 shares
par value $1.11 per share
<PAGE>
INDEX
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Page #
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 1997, and December 31, 1996 . . . . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended June 30, 1997 and 1996 . . . . . . . 4
Consolidated Statements of Income -
Six Months Ended June 30, 1997 and 1996 . . . . . . . . 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 8
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
June 30 December 31
1997 1996
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 18,083 $ 15,955
Federal funds sold 16,225 ---
CASH AND CASH EQUIVALENTS 34,308 15,955
Interest bearing deposits with other banks 26 72
Short-term investments 4,982 ---
Investment securities:
Available-for-sale 73,146 72,005
Held-to-maturity (market value -
$2,884 and $4,087 respectively) 2,885 4,097
76,031 76,102
Loans:
Commercial, financial, and agricultural 30,985 31,991
Real estate-construction 4,379 3,775
Real estate-commercial mortgage 33,763 29,563
Real estate-residential mortgage 126,398 119,383
Consumer 67,443 69,861
262,968 254,573
Less: Allowance for loan losses (2,538) (2,403)
NET LOANS 260,430 252,170
Premises and equipment 7,114 7,075
Accrued income receivable 2,448 2,348
Other assets 3,222 2,407
TOTAL ASSETS $388,561 $356,129
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 31,398 $ 29,128
Interest bearing 294,546 267,876
TOTAL DEPOSITS 325,944 297,004
Borrowed funds:
Short-term borrowings 13,149 13,052
Long-term borrowings 13,603 11,248
26,752 24,300
Accrued interest 2,514 2,116
Other liabilities 929 811
Dividends payable 353 357
TOTAL LIABILITIES 356,492 324,588
SHAREHOLDERS' EQUITY:
Common stock 3,248 3,296
Surplus 18,669 18,659
Unrealized gains on securities
available-for-sale 558 598
Retained earnings 9,594 8,988
TOTAL SHAREHOLDERS' EQUITY 32,069 31,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $388,561 $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
June 30
1997 1996
In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,640 $ 4,780
Interest on federal funds sold 98 382
Interest on short-term investments 59 18
Investment securities:
Taxable 845 722
Tax Exempt 275 278
1,120 1,000
Total Interest Income 6,917 6,180
INTEREST EXPENSE:
Interest on deposits 2,994 2,680
Interest on borrowed funds 352 271
Total Interest Expense 3,346 2,951
Net Interest Income 3,571 3,229
PROVISION FOR LOAN LOSSES 150 120
Net Interest Income After
Provision For Loan Losses 3,421 3,109
OTHER INCOME:
Trust department income 188 194
Service charges on deposit accounts 262 223
Other operating income 164 151
Securities gains 129 266
743 834
OTHER EXPENSE:
Salaries 1,322 1,262
Pensions and other employee benefits 291 276
Occupancy expense 238 221
Equipment expense 243 239
Marketing and advertising 145 139
FDIC Insurance 9 1
Other operating expense 666 630
2,914 2,768
Income Before Income Taxes 1,250 1,175
INCOME TAXES 328 263
NET INCOME $ 922 $ 912
PER SHARE DATA:
Net income $ .32 $ .30
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 Income
<CAPTION>
(Unaudited)
Six Months Ended
June 30
1997 1996
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 11,081 $ 9,383
Interest on federal funds sold 127 518
Interest on short-term investments 65 103
Investment securities:
Taxable 1,654 1,590
Tax Exempt 597 758
2,251 2,348
Total Interest Income 13,524 12,352
INTEREST EXPENSE:
Interest on deposits 5,800 5,393
Interest on borrowed funds 678 564
Total Interest Expense 6,478 5,957
Net Interest Income 7,046 6,395
PROVISION FOR LOAN LOSSES 300 240
Net Interest Income After
Provision For Loan Losses 6,746 6,155
OTHER INCOME:
Trust department income 376 368
Service charges on deposit accounts 500 428
Other operating income 330 311
Securities gains 194 343
1,400 1,450
OTHER EXPENSE:
Salaries 2,569 2,482
Pensions and other employee benefits 576 575
Occupancy expense 470 458
Equipment expense 489 451
Marketing and advertising 255 217
FDIC Insurance 18 2
Other operating expense 1,362 1,198
5,739 5,383
Income Before Income Taxes 2,407 2,222
INCOME TAXES 615 483
NET INCOME $ 1,792 $ 1,739
PER SHARE DATA:
Net income $ .61 $ .56
Cash dividends $ .24 $ .22
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
(Unaudited)
Six Months Ended
June 30
1997 1996
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,792 $ 1,739
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 300 240
Provision for depreciation and amortization 439 365
Securities gains (194) (343)
(Increase)decrease in net deferred tax assets (184) 224
(Increase)decrease in interest receivable (100) 78
Increase in interest payable 398 497
Increase in other assets (611) (399)
Increase in other liabilities 50 183
Increase (decrease) in accrued taxes 68 (261)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,958 2,323
INVESTING ACTIVITIES:
Net increase in loans (13,187) (21,561)
Proceeds of loan sales 4,627 3,552
Proceeds from sale of
available-for-sale investment securities 7,336 39,538
Proceeds from maturities of investment securities 4,575 4,710
Purchases of investment securities (11,706) (18,347)
Proceeds from maturities of short-term investments 13,000 17,850
Purchases of short-term investments (17,936) (22,049)
Purchases of premises and equipment (478) (1,223)
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES (13,769) 2,470
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 28,034 10,362
Net increase in certificates of
deposit and other time deposits 906 7,849
Net increase (decrease) in borrowed funds 2,452 (5,118)
Cash dividends paid (713) (684)
Proceeds from issuance of common stock 11 25
Repurchase and retirement of common stock (526) (1,368)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 30,164 11,066
INCREASE IN CASH AND CASH EQUIVALENTS 18,353 15,859
Cash and cash equivalents at beginning of period 15,955 16,655
CASH AND CASH EQUIVALENTS AT END OF PERIOD $34,308 $32,514
<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 June 30, 1997, and December 31, 1996, the
results of its operations for the three months and six months ended
June 30, 1997 and 1996 and cash flows for the six months ended June
30, 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 2,953,971 during the
quarter ended June 30, 1997; 3,062,907 during the quarter ended June
30, 1996; 2,961,373 during the six months ended June 30, 1997; and
3,085,373 during the six months ended June 30, 1996.
(5) The results of operations for the six month period ended June 30,
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 second 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.
Second Quarter of 1997 Compared to Second Quarter of 1996:
Net income for the three months ended June 30, 1997, increased 1.1%
from 1996 while earnings per share increased 6.7% during the same period.
The larger relative increase in earnings per share reflects the positive
impact of the stock repurchase programs, as further discussed herein.
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 June 30, 1997, an increase of $331,000 or
9.7% from 1996's level of $3.4 million. Net interest margin also increased
six basis points from 4.25% in 1996 to 4.31% in 1997. Net interest income
increased due to higher earning asset levels, driven by loan and deposit
growth. The margin increase was attributable to the resulting increase in
the proportion of loans to earning assets offset by higher funding costs
caused by a shift in the funding mix towards more costly sources.
Specifically, the shift has mainly been to an indexed, variable rate money
market deposit account introduced by the Corporation at the beginning of
1997. This product was created to spur deposit growth which has recently
been relatively flat. In addition, 1996's margin was impacted by balance
sheet management strategies which sacrificed yield in order to "shorten
up" the balance sheet temporarily for anticipated higher rates.
The provision for loan losses during the second quarter of 1997
increased $30,000 or 25% over the same period of 1996. The increase was
commensurate with the growth in the Corporation's loan portfolio.
Other income for the three months ended June 30, 1997 decreased
$91,000 or 10.9% over the same period in 1996. This decrease was
principally due to lower securities gains offset by higher service charges
on deposit accounts. The reduced level of securities gains was primarily a
function of ongoing portfolio and balance sheet management strategies. In
addition, the Corporation realized fewer gains from its community bank
stock portfolio than in 1996. Service charges on deposit accounts
increased primarily as a result of growth in the number of demand deposit
accounts, which generate the majority of this income.
<PAGE>
Total other expense during the quarter ended June 30, 1997 was
$146,000 or 5.3% higher than in 1996 due primarily to increases in salaries
and employee benefits, occupancy-related expenses, and other operating
expenses. These increases were 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 impacted by the placement
of six remote service automated teller machines in local supermarkets in
December 1996 as well as continued technology investments.
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 26.2% for the quarter
ended June 30, 1997 up from the 22.4% rate in 1996. The increase was the
result of ongoing investment portfolio management which caused the levels
of tax-free income to change.
Six Months ended June 30, 1997 Compared to the Six Months Ended June 30,
1996:
Net income for the six months ended June 30, 1997, increased $53,000
or 3.0% from the same period in 1996. Earnings per share increased $.05 or
8.9% from 1996 to 1997 while return on equity increased fifty six basis
points or 5.2% to 11.27% in 1997 from 10.71% in 1996. Again, the stock
repurchase program positively impacted earnings per share and return on
equity in terms of leveraging the net income growth.
Net interest income on a fully taxable equivalent basis was $7.4
million for the period ended June 30, 1997, an increase of $549,000 or 8.0%
from the $6.8 million 1996 level. Net interest margin also increased six
basis points from 4.30% in 1996 to 4.36% in 1997. Net interest income
increased due to higher earning asset levels, driven by loan and deposit
growth. The margin increase was attributable to the resulting increase in
the proportion of loans to earning assets offset by higher funding costs
caused by a shift in the funding mix towards more costly sources. In
addition, 1996's margin was impacted by the balance sheet management
strategies discussed earlier.
The provision for loan losses during the six months ended June 30,
1997 was $300,000 compared to $240,000 during the same period of 1996, an
increase of 60,000 or 25%. 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 first six months of 1997 was $50,000 or 3.4%
lower than in 1996. The decrease was principally due to a decrease in
securities gains offset by an increase in service charges on deposit
accounts. The reduced level of securities gains was primarily a function
of ongoing portfolio and balance sheet management strategies. Service
charges on deposit accounts increased primarily as a result of growth in
the number of demand deposit accounts.
Total other expense during the first half of 1997 was $356,000 or
6.6% higher than in 1996. The increases in salaries and employee benefits,
occupancy-related expenses, and other operating expenses were 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 primarily as a result of increased
promotional activity. The stabilizing level of overhead expense, along
with the increases in operating revenues, have favorably impacted the
Corporation's efficiency ratio (the cost to generate one dollar of revenue)
which declined ninety six basis points from 67.71% in 1996 to 66.75% in
1997.
<PAGE>
The Corporation recognized an income tax provision which resulted in
an effective tax rate of 25.6% for the six months ended June 30, 1997 up
from the 21.7% rate in 1996. The increase was the result of lower tax free
income due to ongoing investment portfolio management.
<TABLE>
Trends in Sources and Uses of Funds
<CAPTION>
Increase (Decrease)
June 30 Since December 31, 1996
1997 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Uses:
Interest earning assets:
Loans $262,968 $ 8,395 3.3%
Investment securities 76,031 (71) (.1)%
Federal funds sold and other
short-term investments 21,233 21,161 N/M
Total interest earning assets 360,232 29,485 8.9%
Other assets 28,329 2,947 11.6%
TOTAL USES $388,561 $32,432 9.1%
Funding Sources:
Deposits:
Non-interest bearing $ 31,398 $ 2,270 7.8%
Interest bearing 294,546 26,670 10.0%
Total deposits 325,944 28,940 9.7%
Other interest bearing liabilities 26,752 2,452 10.1%
Other liabilities 3,796 512 15.6%
Shareholders' equity 32,069 528 1.7%
TOTAL SOURCES $388,561 $32,432 9.1%
</TABLE>
The Corporation uses funds primarily to support its lending
activities. Loans outstanding increased by $8.4 million or 3.3% from
December 31, 1996 to June 30, 1997. This increase was net of loans sold of
$4.6 million. Most of this growth came from the commercial and residential
mortgage categories. Investment securities, another major use of funds,
remained fairly constant through the first six months of 1997, decreasing
by $71,000. Federal funds sold and other short-term investments increased
by $10.0 million after factoring out an $11.2 million temporary deposit
discussed further below. This increase was due primarily to deposit
growth, fueled by the success of the new money market account, outpacing
loan growth. Other assets increased $2.9 million mainly due to an increase
in cash and due from banks. This balance is prone to day-to-day
fluctuation.
Deposits are the most important funding source and the primary support
for the Corporation's growth. During the first six months of 1997, total
deposits increased $17.7 million or 6.0% after excluding an $11.2 million
temporary money market deposit. This deposit was from an estate in the
process of being settled. Interest bearing deposits increased by $15.4
million while non-interest bearing deposits increased by $2.3 million. The
growth in interest bearing deposits consisted of a $14.5 million increase
in NOW accounts, money market accounts and savings accounts and a $906,000
increase in certificates of deposit. The increase in the savings-type
categories was primarily due to growth in the new money market account
discussed earlier. 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 bearing liabilities
increased by $2.5 million primarily
<PAGE>
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.
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. During
the second quarter of 1997, the Corporation completed this program. The
main goal of this buyback was to effectively deploy capital in an effort to
increase shareholder value. Since its inception, the resulting reduction
in total capital and shares outstanding, in combination with increased
earnings (after absorbing the "cost" of reducing the capital base) has
translated into improved return on equity and earnings per share.
Management views earnings per share and return on equity as being two of
the more important factors, under the control of management, that drive
shareholder value. Based on this belief and the positive results achieved
through the first program, 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. As of June 30, 1997 21,798 shares were
repurchased under this program. Under both programs, all shares repurchased
were retired rather than carried as treasury stock.
At June 30, 1997, total shareholders' equity was $32.1 million, an
increase of $528,000 from December 31, 1996. This change consisted of an
increase of $568,000 in capital stock, surplus and undivided profits (core
equity) and a decrease of $40,000 in unrealized gains on AFS securities.
The increase in the core equity was primarily the result of earnings
retained offset by shares repurchased. The change in the unrealized gains
on AFS securities was due to the higher level of market interest rates at
June 30, 1997 compared to December 31, 1996.
During the quarter ended June 30, 1997, the Board of Directors
declared a cash dividend of $.12 per share payable August 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>
June 30, December 31,
1997 1996
<S> <C> <C>
Hanover Bancorp, Inc.
Tier 1 capital to risk-adjusted assets 12.34% 12.87%
Total capital to risk-adjusted assets 13.33% 13.87%
Leverage ratio 8.55% 8.79%
Bank of Hanover and Trust Company
Tier 1 capital to risk-adjusted assets 10.40% 11.78%
Total capital to risk-adjusted assets 11.40% 12.78%
Leverage ratio 7.20% 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:
<TABLE>
<CAPTION>
Tier I
Total Capital Capital to
to Risk-Adjusted Risk-Adjusted
Assets Assets Leverage
<S> <C> <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>
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 June 30, 1997 compared to its position at December 31, 1996.
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
<S> <C> <C>
Non-accrual loans $ 174 $ 38
Accruing loans past due 90 days or more 527 166
Restructured loans 226 242
Other real estate and other
repossessed assets 62 96
Total non-performing assets $ 989 $ 542
Non-accrual loans by category
Commercial, financial and agricultural $ --- $ ---
Real estate-construction --- ---
Real estate-mortgage 154 16
Consumer 20 22
$ 174 $ 38
Past due loans by category
Commercial, financial and agricultural $ --- $ 16
Real estate-construction --- ---
Real estate-mortgage 525 65
Consumer 2 85
$ 527 $ 166
Restructured loans by category
Commercial, financial and agricultural $ --- $ 12
Real estate-construction --- ---
Real estate-mortgage 226 230
Consumer --- ---
$ 226 $ 242
</TABLE>
Nonperforming assets were .38% of total loans at June 30, 1997
compared to .21% at December 31, 1996. The increase in nonperforming
assets was primarily due to one commercial loan, previously identified as a
potential problem loan, 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 June 30, 1997, as
determined by the Corporation's internal review process, were $3.3 million
in comparison to $2.8 million at December 31, 1996. Of these amounts,
$501,000 and $562,000 were considered impaired under FASB 114 for June 30,
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>
Period ended Year ended
June 30, December 31,
1997 1996
<S> <C> <C>
Balance at beginning of period $2,403 $2,220
Recoveries on loans 83 63
Provision charged to operations 300 480
Loans charged-off (248) (360)
Balance at end of period $2,538 $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 $300,000 was made during the first half of 1997. The
resulting allowance for loan losses at June 30, 1997 was $2.5 million in
comparison to $2.4 million at December 31, 1996. This allowance
approximated .97% of total loans and 257% of nonperforming assets at June
30, 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. At June 30, 1997,
the balance of the federal funds sold account was $5.0 million, excluding
the temporary deposit mentioned earlier, while short-term investments
totaled $5.0 million. A total of $1.2 million of the Corporation's
investment portfolio was scheduled to mature in one year or less.
Additionally, an average of $6.1 million in loan principal repayments and
$292,000 in mortgage-backed and asset-backed securities repayments were
received by the Corporation during each month of the first six months of
1997. Also during this period, the Corporation sold $4.6 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. At June 30, 1997, 78.5% (excluding the large
temporary deposit) of total assets were funded with core deposits while
4.9% 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 $19.0 million.
<PAGE>
Maintaining an appropriate balance between rate sensitive interest
earning assets and interest bearing liabilities is a method of avoiding
fluctuations in net interest income and profits due to changes in interest
rates. An interest sensitivity mismatch or GAP results from either an
excess of rate sensitive assets (positive gap) or rate sensitive
liabilities (negative gap) being repriced in a given time period. A
positive GAP generally indicates that rising interest rates during a
particular interval will increase net interest income, while a negative
GAP generally means the opposite. The Corporation strives to maintain a
rate sensitivity ratio (rate sensitive assets minus rate sensitive
liabilities divided by total assets) over various time frames of between
plus and minus 10%. This ratio is deemed prudent because it allows the
Corporation sufficient latitude to redeploy assets in response to a change
in the level of interest rates and maintain or increase the level of net
interest income.
The following table shows the respective interest sensitivity GAPs on
June 30, 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 June 30, 1997 of negative $9.9 million and a
rate sensitivity ratio of negative 2.54% 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 relatively
small negative mismatch, 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>
June 30, 1997:
Interest Earning Assets $71,903 $17,747 $64,464
Interest Bearing Liabilities 77,168 17,852 68,968
Rate Sensitivity GAP:
Periodic Gap $(5,265) $ (105) $(4,504)
Cumulative Gap $(5,265) $(5,370) $(9,874)
Rate Sensitivity Ratio
Periodic Gap (1.35)% (.03)% (1.16)%
Cumulative Gap (1.35)% (1.38)% (2.54)%
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
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. 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.
<PAGE>
In January 1997, the SEC issued new disclosure rules related to
derivatives and exposures to market risk (e.g. interest rate risk, foreign
currency exchange rate risk, commodity price risk, equity price risk) from
derivative financial instruments, other financial instruments and certain
derivative commodity instruments. The new disclosure rules have two parts:
quantitative and qualitative market risk disclosures outside the financial
statements and accounting policy disclosures about derivatives in the notes
to the financial statements. For all banks and thrifts and other companies
with market capitalization in excess of $2.5 billion, the market risk
disclosures are effective for financial statements for years ending after
June 15, 1997. For all other affected registrants, these disclosures are
effective for years ending after June 15, 1998. The expanded policy
disclosures are effective for all registrants beginning with financial
statements for periods ending after June 15, 1997. The Corporation at
present does not utilize derivatives and thus the expanded policy
disclosures are not applicable. With respect to the market risk
disclosures, management is currently evaluating the new guidelines and the
impact they will have on the Corporation's year-end financial statements.
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. It 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.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". The focus of this statement is
to establish standards for reporting and displaying comprehensive income
and its components in the financial statements. The new standard is
effective for fiscal years beginning after December 15, 1997. Management
is currently evaluating the provisions of this statement and the impact it
may have on the Corporation's year-end financial statements.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement changes the way public business enterprises
report segment information in annual financial statements and also requires
these enterprises to report selected segment information in interim
financial reports to shareholders. The new statement is effective for
fiscal years beginning after December 15, 1997. Upon reviewing the
provisions of this statement, management does not believe that it will have
a material impact on the Corporation's financial statements.
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
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER BANCORP, INC.
Date: August 14, 1997 /s/ Bradley Scovill
J. Bradley Scovill
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1997 /s/ Thomas J. Paholsky
Thomas J. Paholsky
Treasurer
(Principal Accounting and
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,083
<INT-BEARING-DEPOSITS> 26
<FED-FUNDS-SOLD> 16,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,146
<INVESTMENTS-CARRYING> 2,885
<INVESTMENTS-MARKET> 2,884
<LOANS> 262,968
<ALLOWANCE> 2,538
<TOTAL-ASSETS> 388,561
<DEPOSITS> 325,944
<SHORT-TERM> 13,149
<LIABILITIES-OTHER> 3,796
<LONG-TERM> 13,603
<COMMON> 3,248
0
0
<OTHER-SE> 28,821
<TOTAL-LIABILITIES-AND-EQUITY> 388,561
<INTEREST-LOAN> 11,081
<INTEREST-INVEST> 2,251
<INTEREST-OTHER> 192
<INTEREST-TOTAL> 13,524
<INTEREST-DEPOSIT> 5,800
<INTEREST-EXPENSE> 6,478
<INTEREST-INCOME-NET> 7,046
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 194
<EXPENSE-OTHER> 5,739
<INCOME-PRETAX> 2,407
<INCOME-PRE-EXTRAORDINARY> 1,792
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,792
<EPS-PRIMARY> .61
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 174
<LOANS-PAST> 527
<LOANS-TROUBLED> 226
<LOANS-PROBLEM> 3,300
<ALLOWANCE-OPEN> 2,403
<CHARGE-OFFS> 248
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 2,538
<ALLOWANCE-DOMESTIC> 2,538
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
