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 September 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 September 30, 1997
Common Stock, 2,934,400 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 -
September 30, 1997, and December 31, 1996 . . . . . . . 3
Consolidated Statements of Income -
Three Months Ended September 30, 1997 and 1996 . . . . 4
Consolidated Statements of Income -
Nine Months Ended September 30, 1997 and 1996 . . . . . 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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>
PART I. FINANCIAL INFORMATION
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
September 30 December 31
1997 1996
(In thousands of dollars)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 14,385 $ 15,955
Federal funds sold 8,700 ---
CASH AND CASH EQUIVALENTS 23,085 15,955
Interest bearing deposits with other banks 38 72
Investment securities:
Available-for-sale 92,802 72,005
Held-to-maturity (market value -
$3,004 and $4,087 respectively) 2,990 4,097
95,792 76,102
Loans:
Commercial, financial, and agricultural 32,082 31,991
Real estate-construction 4,730 3,775
Real estate-commercial mortgage 33,261 29,563
Real estate-residential mortgage 130,062 119,383
Consumer 68,219 69,861
268,354 254,573
Less: Allowance for loan losses (2,616) (2,403)
NET LOANS 265,738 252,170
Premises and equipment 7,012 7,075
Accrued income receivable 2,572 2,348
Other assets 3,052 2,407
TOTAL ASSETS $397,289 $356,129
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing $ 25,483 $ 29,128
Interest bearing 297,549 267,876
TOTAL DEPOSITS 323,032 297,004
Borrowed funds:
Short-term borrowings 11,273 13,052
Long-term borrowings 25,528 11,248
36,801 24,300
Accrued interest 2,781 2,116
Other liabilities 1,107 811
Dividends payable 381 357
TOTAL LIABILITIES 364,102 324,588
SHAREHOLDERS' EQUITY:
Common stock, $1.11 par value; authorized,
shares issued and outstanding: 1997-2,934,400
shares; 1996-2,969,441 shares 3,256 3,296
Surplus 18,679 18,659
Unrealized gains on securities
available-for-sale 1,195 598
Retained earnings 10,057 8,988
TOTAL SHAREHOLDERS' EQUITY 33,187 31,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $397,289 $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
September 30
1997 1996
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,764 $ 5,194
Interest on federal funds sold 182 144
Interest on short-term investments 47 75
Investment securities:
Taxable 957 777
Tax Exempt 297 265
1,254 1,042
Total Interest Income 7,247 6,455
INTEREST EXPENSE:
Interest on deposits 3,217 2,816
Interest on borrowed funds 402 247
Total Interest Expense 3,619 3,063
Net Interest Income 3,628 3,392
PROVISION FOR LOAN LOSSES 180 120
Net Interest Income After
Provision For Loan Losses 3,448 3,272
OTHER INCOME:
Trust department income 178 174
Service charges on deposit accounts 291 227
Other operating income 205 151
Securities gains 89 133
763 685
OTHER EXPENSE:
Salaries 1,314 1,298
Pensions and other employee benefits 229 247
Occupancy expense 236 231
Equipment expense 257 223
Marketing and advertising 128 118
FDIC Insurance 10 ---
Other operating expense 721 651
2,895 2,768
Income Before Income Taxes 1,316 1,189
INCOME TAXES 344 303
NET INCOME $ 972 $ 886
PER SHARE DATA:
Net income $ .33 $ .29
Cash dividends declared $ .13 $ .12
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Consolidated Statements of Income
<CAPTION>
(Unaudited)
Nine Months Ended
September 30
1997 1996
(In thousands of dollars,
except per share data)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $16,845 $14,577
Interest on federal funds sold 309 662
Interest on short-term investments 112 178
Investment securities:
Taxable 2,611 2,367
Tax Exempt 894 1,023
3,505 3,390
Total Interest Income 20,771 18,807
INTEREST EXPENSE:
Interest on deposits 9,017 8,209
Interest on borrowed funds 1,080 811
Total Interest Expense 10,097 9,020
Net Interest Income 10,674 9,787
PROVISION FOR LOAN LOSSES 480 360
Net Interest Income After
Provision For Loan Losses 10,194 9,427
OTHER INCOME:
Trust department income 554 542
Service charges on deposit accounts 791 655
Other operating income 535 462
Securities gains 283 476
2,163 2,135
OTHER EXPENSE:
Salaries 3,883 3,780
Pensions and other employee benefits 805 822
Occupancy expense 706 689
Equipment expense 746 674
Marketing and advertising 383 335
FDIC Insurance 28 2
Other operating expense 2,083 1,849
8,634 8,151
Income Before Income Taxes 3,723 3,411
INCOME TAXES 959 786
NET INCOME $ 2,764 $ 2,625
PER SHARE DATA:
Net income $ .94 $ .86
Cash dividends declared $ .37 $ .34
<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)
Nine Months Ended
September 30
1997 1996
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,764 $ 2,625
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 480 360
Provision for depreciation and amortization 664 566
Securities gains (283) (476)
(Increase)decrease in net deferred tax assets (184) 232
(Increase)decrease in interest receivable (224) 122
Increase in interest payable 665 661
Increase in other assets (649) (977)
Increase in other liabilities 14 458
Increase (decrease) in accrued taxes 162 (167)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,409 3,404
INVESTING ACTIVITIES:
Net increase in loans (22,490) (39,059)
Proceeds of loan sales 8,442 5,710
Proceeds from sale of
available-for-sale investment securities 7,566 39,888
Proceeds from maturities of investment securities 5,945 10,351
Purchases of investment securities (32,013) (30,652)
Proceeds from maturities of short-term investments 25,000 34,928
Purchases of short-term investments (24,966) (34,106)
Purchases of premises and equipment (601) (1,740)
NET CASH USED IN
INVESTING ACTIVITIES (33,117) (14,680)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 20,865 11,783
Net increase in certificates of
deposit and other time deposits 5,163 9,521
Net increase (decrease) in borrowed funds 12,501 (1,621)
Cash dividends paid (1,066) (1,018)
Proceeds from issuance of common stock 22 37
Repurchase and retirement of common stock (647) (2,080)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 36,838 16,622
INCREASE IN CASH AND CASH EQUIVALENTS 7,130 5,346
Cash and cash equivalents at beginning of period 15,955 16,655
CASH AND CASH EQUIVALENTS AT END OF PERIOD $23,085 $22,001
<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 September 30, 1997, and December 31, 1996,
the results of its operations for the three months and nine months
ended September 30, 1997 and 1996 and cash flows for the nine months
ended September 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 2,935,541 during the
quarter ended September 30, 1997; 3,016,820 during the quarter ended
September 30, 1996; 2,952,668 during the nine months ended September
30, 1997; and 3,062,355 during the nine months ended September 30,
1996.
(5) The results of operations for the nine month period ended September
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 for loan losses 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 superseded 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 third 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.
Third Quarter of 1997 Compared to Third Quarter of 1996:
Net income for the three months ended September 30, 1997, increased
9.7% from 1996 while earnings per share (EPS) increased 13.8% during the
same period. The larger relative increase in EPS reflects the positive
impact of the stock repurchase programs, as further discussed herein.
Net interest income on a fully taxable equivalent basis was $3.8
million for the quarter ended September 30, 1997, an increase of $248,000
or 7.0% from 1996's level of $3.6 million. This increase was due to higher
earning asset levels, driven mainly by deposit and loan growth. Net
interest margin decreased 17 basis points from 4.32% in 1996 to 4.15% in
1997. This decrease was primarily attributable to higher funding costs
caused by a shift in the funding mix towards more costly sources. This
shift has mainly been to an indexed, variable rate money market deposit
account introduced by the Corporation at the beginning of 1997. In
addition, there has been a shift to longer term certificates of deposit
(CDs) as a result of a recent promotion (further discussed herein).
Although this deposit growth has lowered the Corporation's margin, as was
anticipated by management, it has generated additional net interest income
and has positively impacted EPS and Return on Equity (ROE).
The provision for loan losses during the third quarter of 1997
increased $60,000 or 50% 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 September 30, 1997 increased
$78,000 or 11.4% over the same period in 1996. This increase was
principally due to higher service charges on deposit accounts and income
realized through mortgage loan sale activity, offset by lower securities
gains. The increase in service charges on deposit accounts was due
primarily to higher overdraft fees, resulting from a change in collection
philosophy, and higher automated teller machine (ATM) fees generated by
newly instituted noncustomer surcharging. Mortgage loan sale activity
income increased as a result of higher sales volumes relative to 1996. The
reduced level of securities gains was due to lower sales activity within
the Corporation's community bank stock portfolio.
Total other expense during the quarter ended September 30, 1997 was
$127,000 or 4.6% higher than in 1996 due primarily to increases in
equipment expense and other operating expenses. The increase in equipment
expense was associated with the full impact of a
<PAGE>
branch opening in March 1996 and a branch relocation in October 1996. In
addition, this increase was impacted by the placement of six remote service
ATMs in local supermarkets in December 1996 as well as continued technology
investments. The increase in other operating expenses was largely due to
non-recurring expenditures for technology consultation and employee
recruiting. Salary related expenses were positively impacted by temporary
unfilled vacancies and reduced healthcare costs.
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 26.1% for the quarter
ended September 30, 1997 up from the 25.5% rate in 1996. The increase was
the result of ongoing investment portfolio management which caused the
levels of tax-free income to change.
Nine Months ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996:
Net income for the nine months ended September 30, 1997, increased
$139,000 or 5.3% from the same period in 1996. EPS increased $.08 or 9.3%
from 1996 to 1997 while ROE increased 54 basis points to 11.47% in 1997
from 10.93% in 1996. Again, the stock repurchase programs positively
impacted EPS and ROE.
Net interest income on a fully taxable equivalent basis was $11.2
million for the period ended September 30, 1997, an increase of $796,000 or
7.7% from the $10.4 million 1996 level. Net interest margin decreased 2
basis points from 4.31% in 1996 to 4.29% in 1997. Net interest income
increased due to higher earning asset levels, driven by loan and deposit
growth. The margin decrease was the result of higher funding costs caused
by the shift in the deposit mix, as discussed above, offset by an increase
in the proportion of loans to earning assets.
The provision for loan losses during the nine months ended September
30, 1997 was $480,000 compared to $360,000 during the same period of 1996,
an increase of $120,000 or 33.3%. The increase was largely reflective of
the growth in the Corporation's loan portfolio. Management remains
committed to maintaining a loan loss reserve which adequately covers the
risk inherent in the loan portfolio.
Other income for the first nine months of 1997 was $28,000 or 1.3%
higher than in 1996. The increase was principally due to higher service
charges on deposit accounts and income realized through mortgage loan sale
activity, offset by lower securities gains. The increase in service
charges on deposit accounts was due primarily to higher overdraft fees, and
higher ATM fees as discussed above, while the higher mortgage sale income
was due to increased sales activity. The reduced level of securities
gains was primarily a function of ongoing portfolio and balance sheet
management strategies in addition to lower community bank stock sales.
Total other expense during the nine months ended September 30, 1997
was $483,000 or 5.9% higher than in 1996. The increases in occupancy-
related expenses were largely associated with the full impact of the 1996
expansion activities in addition to investment in ATMs and technology. The
expenditures for technology consultation and employee recruiting
contributed to the increase in other operating expenses. Marketing and
advertising increased primarily as a result of increased promotional
activity. As discussed above, salary expenses benefited from unfilled
vacancies and lower healthcare costs. 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 157 basis points from 67.62% in 1996 to
66.05% in 1997.
<PAGE>
The Corporation recognized an income tax provision which resulted in
an effective tax rate of 25.8% for the nine months ended September 30, 1997
up from the 23.0% 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)
September 30 Since December 31, 1996
1997 Amount Percent
(In thousands of dollars)
<S> <C> <C> <C>
Funding Uses:
Interest earning assets:
Loans $268,354 $13,781 5.4%
Investment securities 95,792 19,690 25.9%
Federal funds sold and other
short-term investments 8,738 8,666 N/M
Total interest earning assets 372,884 42,137 12.7%
Other assets 24,405 (977) (3.8)%
TOTAL USES $397,289 $41,160 11.6%
Funding Sources:
Deposits:
Non-interest bearing $ 25,483 $(3,645) (12.5)%
Interest bearing 297,549 29,673 11.1%
Total deposits 323,032 26,028 8.8%
Other interest bearing liabilities 36,801 12,501 51.4%
Other liabilities 4,269 985 30.0%
Shareholders' equity 33,187 1,646 5.2%
TOTAL SOURCES $397,289 $41,160 11.6%
</TABLE>
The Corporation uses funds primarily to support its lending
activities. Loans outstanding increased by $13.8 million or 5.4% from
December 31, 1996 to September 30, 1997. This increase was net of loans
sold of $8.4 million. Most of this growth came from the commercial and
residential mortgage categories. Much of the growth in the residential
real estate category was generated through a recent promotion. Investment
securities, another major use of funds, increased $19.7 million or 25.9%
through the first nine months of 1997. Federal funds sold and other short-
term investments also increased by $8.7 million during this period. The
increases in investment securities and federal funds sold were due
primarily to deposit growth, fueled by the success of the new money market
account and CD promotion, outpacing loan growth. In addition, investment
securities increased as a result of a match funding transaction with a
Federal Home Loan Bank of Pittsburgh (FHLB) borrowing executed in the
latter part of September. Management viewed this transaction as an
opportunity to generate additional net interest income and boost EPS and
ROE without incurring significant interest rate risk. The transaction will
effectively lower the net interest margin since the spread is more narrow
than the Corporation's overall spread.
Deposits are the most important funding source and the primary support
for the Corporation's growth. During the first nine months of 1997, total
deposits increased $26.0 million or 8.8%. Interest bearing deposits
increased by $29.7 million while non-interest bearing deposits decreased by
$3.6 million. The growth in interest bearing deposits consisted of a $24.5
million increase in NOW accounts, money market accounts and savings
accounts and a $5.2 million increase in CDs. The increase in the savings-
type categories
<PAGE>
was primarily due to growth in the new money market account discussed
earlier. This new product was successful in generating new funds although
it drew funds from the Corporation's existing products. The increase in
CDs was primarily due to the recent promotion mentioned earlier. The
decrease in demand deposits was due in part to a reclass of certain program
accounts to the NOW category, in addition to normal day-to-day
fluctuations. Other interest bearing liabilities increased by $12.5
million or 51.4% primarily due to the additional FHLB borrowing obtained to
match fund the investment securities discussed above. In addition to being
a source for match funding opportunities, these borrowings are used to
manage the balance sheet and interest rate risk.
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 ROE and EPS. Management views these performance
indicators 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
September 30, 1997 28,740 shares were repurchased under this program. Under
both programs, all shares repurchased were retired rather than carried as
treasury stock.
At September 30, 1997, total shareholders' equity was $33.2 million,
an increase of $1.6 million from December 31, 1996. This change consisted
of an increase of $1.0 million in capital stock, surplus and undivided
profits (core equity) and an increase of $597,000 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 lower level of market
interest rates at September 30, 1997 compared to December 31, 1996 as well
as increased bank stock valuations.
During the quarter ended September 30, 1997, the Board of Directors
declared a cash dividend of $.13 per share payable November 1, 1997, an
increase of $.01 or 8.3% 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>
As can be seen by the following tables, the Corporation and the Bank remain
well capitalized as defined by the regulatory authorities.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Hanover Bancorp, Inc.
Tier 1 capital to risk-adjusted assets 12.56% 12.87%
Total capital to risk-adjusted assets 13.59% 13.87%
Leverage ratio 8.34% 8.79%
Bank of Hanover and Trust Company
Tier 1 capital to risk-adjusted assets 10.79% 11.78%
Total capital to risk-adjusted assets 11.83% 12.78%
Leverage ratio 7.16% 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 September 30, 1997 compared to its position at December 31,
1996.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Non-accrual loans $ 274 $ 38
Accruing loans past due 90 days or more 311 166
Restructured loans 223 242
Other real estate and other
repossessed assets 79 96
Total non-performing assets $ 887 $ 542
Non-accrual loans by category
Commercial, financial and agricultural $ --- $ ---
Real estate-construction --- ---
Real estate-mortgage 274 16
Consumer --- 22
$ 274 $ 38
Past due loans by category
Commercial, financial and agricultural $ 65 $ 16
Real estate-construction --- ---
Real estate-mortgage 241 65
Consumer 5 85
$ 311 $ 166
Restructured loans by category
Commercial, financial and agricultural $ --- $ 12
Real estate-construction --- ---
Real estate-mortgage 223 230
Consumer --- ---
$ 223 $ 242
</TABLE>
Nonperforming assets were .33% of total loans at September 30, 1997
compared to .21% at December 31, 1996. In addition, potential problem
loans at September 30, 1997, as determined by the Corporation's internal
review process, were $3.0 million in comparison to $2.8 million at December
31, 1996. Of these amounts, $493,000 and $562,000 were considered impaired
under FASB 114 for September 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
September 30, December 31,
1997 1996
<S> <C> <C>
Balance at beginning of period $2,403 $2,220
Recoveries on loans 115 63
Provision charged to operations 480 480
Loans charged-off (382) (360)
Balance at end of period $2,616 $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 $480,000 was made during the nine months ended September 30,
1997. The resulting allowance for loan losses at September 30, 1997 was
$2.6 million in comparison to $2.4 million at December 31, 1996. This
allowance approximated .97% of total loans and 295% of nonperforming assets
at September 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 Interest Rate Risk 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. The Corporation's liquidity position is
enhanced by a relatively stable funding base. The ratio of deposits
(excluding CDs over $100,000) to total assets was 78.3% at September 30,
1997, while CDs over $100,000 and other borrowed funds to total assets was
12.3%. To manage 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
September 30, 1997, the balance of the federal funds sold account was $8.7
million, while a total of $2.1 million of the Corporation's investment
portfolio was scheduled to mature in one year or less. Additionally, an
average of $7.1 million in loan principal repayments and $336,000 in
mortgage-backed and asset-backed securities repayments were received by the
Corporation during each month of the first nine months of 1997. Also
during this period, the Corporation sold $8.4 million of loans in the
secondary markets.
In addition to the liquidity provided on the asset side, 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 $11.0 million
and available longer term credit of approximately $49.0 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 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
<PAGE>
liabilities divided by total assets) within one year 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
September 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 September 30, 1997 of positive
$2.2 million and a rate sensitivity ratio of positive .55% in comparison to
a positive gap of $2.2 million and a rate sensitivity ratio of positive
.62% at December 31, 1996. Throughout 1997, the Corporation's gap position
has become more negative with the growth of the new indexed money market
account. The recent CD promotion, which targeted longer maturities, has
helped to offset this increased negative sensitivity. Due to the fact that
the gap position is relatively 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>
September 30, 1997:
Interest Earning Assets $60,364 $18,126 $74,526
Interest Bearing Liabilities 66,310 23,482 61,037
Rate Sensitivity GAP:
Periodic Gap $(5,946) $ (5,356) $13,489
Cumulative Gap $(5,946) $(11,302) $ 2,187
Rate Sensitivity Ratio
Periodic Gap (1.50)% (1.35)% 3.40%
Cumulative Gap (1.50)% (2.84)% .55%
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>
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
<PAGE>
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.
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 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
<PAGE>
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 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 establishes standards for the reporting of
financial information from operating segments in annual and interim
financial statements. It requires that segment financial information be
reported on the basis that it is reported internally. FASB 131 is effective
for fiscal years beginning after December 15, 1997. Since this standard
addresses supplemental information disclosures, its adoption will not 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 - None
Item 5. Other Information -
On October 17, 1997, the Board of Directors of the Registrant adopted
an amendment to the Corporation's By-laws which became effective on
that date. The specific By-law and the nature of the amendment is as
follows:
Article III, Section 1.c. - The number of Directors that should be
elected at the Annual Shareholders Meeting shall be determined by the
Board of Directors (previously determined by the Shareholders).
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: November 14, 1997 /s/ Bradley Scovill
J. Bradley Scovill
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,385
<INT-BEARING-DEPOSITS> 38
<FED-FUNDS-SOLD> 8,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 92,802
<INVESTMENTS-CARRYING> 2,990
<INVESTMENTS-MARKET> 3,004
<LOANS> 268,354
<ALLOWANCE> 2,616
<TOTAL-ASSETS> 397,289
<DEPOSITS> 323,032
<SHORT-TERM> 11,273
<LIABILITIES-OTHER> 4,269
<LONG-TERM> 25,528
<COMMON> 3,256
0
0
<OTHER-SE> 29,931
<TOTAL-LIABILITIES-AND-EQUITY> 397,289
<INTEREST-LOAN> 16,845
<INTEREST-INVEST> 3,505
<INTEREST-OTHER> 421
<INTEREST-TOTAL> 20,771
<INTEREST-DEPOSIT> 9,017
<INTEREST-EXPENSE> 10,097
<INTEREST-INCOME-NET> 10,674
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 283
<EXPENSE-OTHER> 8,634
<INCOME-PRETAX> 3,723
<INCOME-PRE-EXTRAORDINARY> 2,764
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,764
<EPS-PRIMARY> .94
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 274
<LOANS-PAST> 311
<LOANS-TROUBLED> 223
<LOANS-PROBLEM> 3,000
<ALLOWANCE-OPEN> 2,403
<CHARGE-OFFS> 382
<RECOVERIES> 115
<ALLOWANCE-CLOSE> 2,616
<ALLOWANCE-DOMESTIC> 2,616
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
