UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-12524
HANOVER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2219814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 Carlisle Street
Hanover, Pennsylvania 17331
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (717) 637-2201
Securities Registered Pursuant To Section 12(b) Of The Act: None
Securities Registered Pursuant To Section 12(g) Of The Act:
Hanover Bancorp Inc. Common Stock - Par Value $1.11 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive Proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of February 28, 1998, was $65,445,135.
The number of shares outstanding of the issuer's common stock as of
February 28, 1998: Common Stock, $1.11 Par Value -- 2,944,866 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Hanover Bancorp, Inc. 1997 Annual Report to
Shareholders which is included at Exhibit 13 and the definitive Proxy
Statement for the 1998 Annual Shareholders Meeting to be held April 21,
1998, are incorporated by reference into Parts II and III, respectively.
1
<PAGE>
HANOVER BANCORP, INC.
FORM 10-K INDEX
PART I PAGE #
Item 1 - Business 3
Item 2 - Properties 8
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters 9
Item 6 - Selected Financial Data 9
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 9
Item 8 - Financial Statements and Supplementary Data 9
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 9
PART III
Item 10 - Directors and Executive Officers of the Registrant 9
Item 11 - Executive Compensation 9
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 10
Item 13 - Certain Relationships and Related Transactions 10
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K 10
Item 15 - Signatures 12
2
<PAGE>
PART I
ITEM 1 - BUSINESS
HANOVER BANCORP, INC.
The registrant, Hanover Bancorp, Inc. (the "Corporation"), was
incorporated under the laws of the Commonwealth of Pennsylvania on August
2, 1983. The Corporation is a one-bank holding company registered under
the Bank Holding Company Act of 1956 as amended, owning all the outstanding
shares of its subsidiary, Bank of Hanover and Trust Company.
The Corporation is registered with and subject to the regulatory
supervision of the Securities and Exchange Commission and the Board of
Governors of the Federal Reserve System (Federal Reserve Board) and the
Bank is subject to regulatory supervision of the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation (FDIC). The
Corporation's administrative offices are located at 33 Carlisle Street,
Hanover, Pennsylvania 17331 (telephone number 717-637-2201).
BANK OF HANOVER AND TRUST COMPANY
Bank of Hanover and Trust Company (the Bank) is the Corporation's
wholly- owned bank subsidiary and was first organized in 1835 under the
laws of the Commonwealth of Pennsylvania. The Bank conducts its business
principally through ten full service banking offices located in York and
Adams Counties, Pennsylvania. At December 31, 1997, the Bank had total
deposits of $330,687,000; total assets of $403,173,000; and net loans of
$274,567,000.
The Bank offers a wide variety of banking services to all segments of
its service area. The Bank's lending services include commercial,
financial and agricultural revolving lines of credit and term loans,
construction loans, residential mortgage loans and installment and other
personal loans. These lending activities involve varying degrees of credit
risk. In general, commercial, financial and agricultural loans expose the
Bank to the most credit risk while residential mortgage loans involve the
least risk. In order to keep this risk at an acceptable overall level, the
Bank strives to maintain a diversified loan portfolio. The specific
underwriting standards such as loan to value ratios and collateral
requirements are defined within a formal written lending policy and vary
from category to category. The Bank's deposit services include commercial
and personal checking accounts, savings and time accounts, certificates of
deposit, and safety deposit services. The Bank is also a member of the MAC
system and offers 24-hour automated teller machine service at all of its
offices, as well as ten remote service locations in Hanover, York, Dover,
East Berlin and Carlisle.
Individual trust services offered by the Bank include the
administration of estates, trust and agency accounts. Corporate trust
services include acting as trustee for employee benefit plans.
The Bank is not dependent upon a single customer or a small number of
customers, the loss of which would have a material adverse effect on the
Bank or the Corporation.
COMPETITION
Commercial banking in Pennsylvania is highly competitive. In addition
to competition with banks of similar size, the Bank competes directly in
its market area with larger banking and other financial service
organizations which have substantially greater resources and serve broader
geographic markets.
Competing within the Bank's market area, defined as York and Adams
Counties, are 175 offices of area financial institutions, including
commercial banks, savings and loan institutions and savings banks. As
determined through the FDIC's website (http://www.fdic.gov), combined
total deposits of these financial institutions were $5,437,360,000 as of
June 30, 1997.
STAFF
The total number of full-time equivalent persons employed by the Bank
as of December 31, 1997, was 201.68. Most employees are provided with
group life, health and major medical insurance and are eligible for the
Bank's defined contribution 401(k) Plan. Management considers employee
relations to be very good.
SUPERVISION AND REGULATION
The Corporation, as a "bank holding company" under the Federal
Bank Holding Company Act (the "Act"), is regulated and examined by the
Federal Reserve Board. The Act restricts the business activities and
acquisitions that may be engaged in, or made by the Corporation. As a
"bank holding company" for purposes of Pennsylvania state banking law,
the Corporation is regulated and supervised by the Pennsylvania Department
of Banking.
Other Federal and Pennsylvania laws regulate, restrict and sometimes
prohibit certain activities of, or transactions between, a corporation's
banking subsidiaries and a corporation itself and its other subsidiaries.
These laws include limitations on the loans by a bank's subsidiaries to
affiliated companies and on the amount of dividends that may be declared by
a bank's subsidiaries (see Note 13 to the Consolidated Financial
Statements).
The Bank is a member of the FDIC. Accordingly, its operations are
subject to regulation and examination by the State of Pennsylvania and the
FDIC and the Bank's deposits are insured by the FDIC to the extent
provided by law.
3
<PAGE>
GOVERNMENTAL MONETARY POLICIES
The earnings of the Corporation and the Bank are affected by domestic
economic conditions and the monetary and fiscal policies of the United
States Government and its agencies. An important function of the Federal
Reserve System is to regulate the money supply and interest rates. Among
the instruments used to implement those objectives are open market
operations in United States government securities and changes in reserve
requirements against member bank deposits. These instruments are used in
varying combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may also affect rates
charged on loans or paid for deposits.
As a financial institution, the policies and regulations of the
Federal Reserve Board have a significant effect on its deposits, loans and
investment growth, as well as the rate of interest earned and paid, and are
expected to affect the Bank's operations in the future. The effect of
such policies and regulations upon the future business and earnings of the
Corporation and the Bank cannot be predicted.
EFFECTS OF INFLATION
The majority of the assets and liabilities of a financial institution
are monetary in nature, and therefore, differ greatly from most commercial
and industrial companies that have significant investments in fixed assets
or inventories. However, inflation does have an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity-to-assets ratio. An important effect of this can be the
reduction of the proportion of earnings paid out in cash dividends.
Another significant effect of inflation is on other expenses, which tend to
rise more rapidly during periods of general inflation. Finally, the most
important impact is the influence that inflation expectations have on the
level and volatility of market interest rates.
STATISTICAL DATA
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential
The information required by this item is set forth within
"Management's Discussion and Analysis" (pages 21 through 34 of filing)
of the Registrant's 1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated herein by reference.
II. Investment Portfolio
<TABLE>
The following table sets forth the book value of investments at the
dates indicated (In Thousands):
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies
and corporations $70,032 $49,881 $53,212
State and political
subdivisions 21,753 22,069 32,147
Other 3,353 3,246 4,218
TOTAL $95,138 $75,196 $89,577
</TABLE>
4
<PAGE>
<TABLE>
The following table sets forth the maturities of investment securities
at December 31, 1997 (In Thousands Except Rates):
<CAPTION>
Maturing
After One But After Five But
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Rate Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and other
U.S. Government
agencies and
corporations $3,131 5.83% $18,958 6.17% $10,695 6.74% $37,248 6.99%
State and political
subdivisions 800 9.20% 1,797 8.66% 2,128 7.82% 17,028 9.03%
Other --- --- --- --- --- --- 3,353 4.65%
TOTAL $3,931 6.52% $20,755 6.39% $12,823 6.92% $57,629 7.46%
<FN>
Weighted average yields on tax-exempt obligations have been computed on a fully taxable-equivalent basis assuming a tax rate
of 34%.
</TABLE>
Other information required by this item is set forth within
"Management's Discussion and Analysis" (pages 21 through 34 of filing)
of the Registrant's 1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated herein by reference.
III. Loan Portfolio
<TABLE>
The following table shows the Corporation's loan distribution by type
at the end of the last five years
(In Thousands):
<CAPTION>
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 35,254 $ 31,991 $ 26,062 $ 25,587 $ 31,655
Real estate-construction 5,666 3,775 5,384 2,942 2,365
Real estate-commercial mortgage 34,216 29,563 25,739 21,090 17,099
Real estate-residential mortgage 135,217 119,383 95,227 86,843 75,109
Consumer 67,122 69,861 61,457 55,934 47,308
TOTAL $277,475 $254,573 $213,869 $192,396 $173,536
</TABLE>
5
<PAGE>
<TABLE>
The following table shows the amounts of loans outstanding as of
December 31, 1997, which, based on remaining scheduled repayments of
principal, are due in the periods indicated. Also, the amounts due after
one year are classified according to the sensitivity of changes in interest
rates (In Thousands):
<CAPTION>
Maturing
After
One But
Within Within After
One Yr Five Yrs Five Yrs Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $12,928 $14,254 $ 8,072 $ 35,254
Real estate-construction 3,792 --- 1,874 5,666
Real estate-commercial mortgage 2,703 1,840 29,673 34,216
Real estate-residential mortgage 6,064 15,066 114,087 135,217
Consumer 4,379 60,135 2,608 67,122
TOTAL $29,866 $91,295 $156,314 $277,475
Loans maturing after one year with:
Fixed interest rates $86,031 $108,498
Variable interest rates 5,264 47,816
TOTAL $91,295 $156,314
</TABLE>
Other information required by this item is set forth within
"Management's Discussion and Analysis" (pages 21 through 34 of filing)
of the Registrant's 1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated herein by reference.
IV. Summary of Loan Loss Experience
<TABLE>
The following table shows the allocation of the loan loss allowance at the
dates indicated (In Thousands, Except Ratios):
<CAPTION>
Year-Ended December 31,
1997 1996 1995 1994 1993
Percent Percent Percent Percent Percent
Of Loans Of Loans Of Loans Of Loans Of Loans
In Each In Each In Each In Each In Each
Category Category Category Category Category
To To To To To
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial,
agricultural
and real estate-
commercial
mortgage $ 888 25.1% $ 668 24.2% $ 387 24.2% $1,139 24.3% $1,475 28.1%
Real estate-
construction 24 2.0% 16 1.5% 17 2.5% 6 1.5% 6 1.4%
Real estate-
residential
mortgage 473 48.7% 393 46.9% 296 44.5% 261 45.1% 213 43.3%
Consumer 605 24.2% 631 27.4% 537 28.8% 483 29.1% 402 27.2%
Unallocated 918 --- 695 --- 983 --- 609 --- 158 ---
TOTAL $2,908 100.0% $2,403 100.0% $2,220 100.0% $2,498 100.0% $2,254 100.0%
</TABLE>
Other information required by this item is set forth within
"Management's Discussion and Analysis" (pages 21 through 34 of filing)
of the Registrant's 1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated herein by reference.
6
<PAGE>
V. DEPOSITS
<TABLE>
The average daily amount and rate of deposits (all domestic) is summarized
for the periods indicated in the following table
(In Thousands, Except Rates):
<CAPTION>
Year-Ended December 31,
1997 1996 1995
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 27,994 $ 26,892 $ 24,502
Interest bearing
demand deposits 29,062 1.33% 27,726 1.50% 25,686 1.94%
Savings deposits 22,346 2.04% 25,943 2.10% 28,378 2.55%
Money market deposits 70,577 3.37% 53,845 2.80% 51,455 2.91%
Time deposits 163,107 5.59% 154,489 5.55% 134,436 5.47%
TOTAL $313,086 $288,895 $264,457
</TABLE>
<TABLE>
The following table presents a maturity distribution of time certificates
of deposits over $100,000 (In Thousands):
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
MATURING IN
3 months or less $ 4,023 $10,510
4-6 months 1,246 1,329
7-12 months 2,659 2,194
Over 12 months 5,393 4,274
TOTAL $13,321 $18,307
</TABLE>
<TABLE>
The following table presents the annual maturities of time deposits at
December 31, 1997 (In Thousands):
<CAPTION>
Annual
Maturities
<S> <C>
1998 $ 94,093
1999 36,589
2000 19,414
2001 6,859
2002 1,249
2003 and thereafter 7,620
$165,824
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The information required by this item is set forth within "Selected
Consolidated Financial Data" (page 20 of filing) of the Registrant's
1997 Annual Report to Shareholders, excerpts of which are included at
Exhibit 13, and is incorporated herein by reference.
VII. SHORT-TERM BORROWINGS
The information required by this item is set forth within "Notes to
Consolidated Financial Statements" (pages 42 through 54 of filing) of
the Registrant's 1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated herein by reference
7
<PAGE>
ITEM 2 - PROPERTIES
The Corporation's headquarters is located in its Administration
Center at 33 Carlisle Street, Hanover, Pennsylvania 17331. In addition to
the Administration Center, the Bank owns the following unencumbered banking
offices:
MAIN OFFICE TELESERVICES CENTER
25 Carlisle Street 951 York Street
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
BALTIMORE STREET EISENHOWER DRIVE
OFFICE OFFICE
1416 Baltimore Street 453 Eisenhower Drive
Hanover, York County Hanover, York County
Pennsylvania 17331 Pennsylvania 17331
NEW OXFORD WEST MANCHESTER
OFFICE OFFICE (Building)
318 Lincolnway East 1511 Kenneth Road
New Oxford, Adams County York, York County
Pennsylvania 17350 Pennsylvania 17404
OPERATIONS CENTER
1040 High Street
Hanover, York County
Pennsylvania 17331
The Bank also owns the following unencumbered property: Vacant 2-acre
tract of land located at the intersection of Pennsylvania Route 74 and
Wellsville Road in the Borough of Wellsville, York County, Pennsylvania
which was for possible branch development.
The Bank leases the following properties:
CARLISLE STREET OFFICE ROSSVILLE OFFICE
880 Carlisle Street 3405 Rosstown Road
Hanover, York County Wellsville, York County
Pennsylvania 17331 Pennsylvania 17365
DOWNTOWN GETTYSBURG LITTLESTOWN
OFFICE OFFICE
6 York Street 400 West King Street
Gettysburg, Adams County Littlestown, Adams County
Pennsylvania 17325 Pennsylvania 17340
GETTYSBURG EAST WEST MANCHESTER
OFFICE OFFICE (Land)
1275 York Road 1511 Kenneth Road
Gettysburg, Adams County York, York County
Pennsylvania 17325 Pennsylvania 17404
ITEM 3 - LEGAL PROCEEDINGS
In the opinion of the management of the Corporation and the Bank, there
are no proceedings pending to which the Corporation and/or Bank
is a party or to which their property is subject, which, if
determined adversely to the Corporation or Bank, would be material in
relation to the Corporation's and the Bank's undivided profits or
financial condition. There are no proceedings pending other than ordinary
routine litigation incident to the business of the Corporation or the Bank.
In addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation or the Bank by
government authorities.
8
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this item is set forth within the
Registrant's 1997 Annual Report to Shareholders (pages 35 through
36 of filing), excerpts of which are included at Exhibit 13, and
is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item is set forth within the
Registrant's 1997 Annual Report to Shareholders (page 20 of filing),
excerpts of which are included at Exhibit 13, and is incorporated
herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is set forth within the
Registrant's 1997 Annual Report to Shareholders (pages 21 through
34 of filing), excerpts of which are included at Exhibit 13, and
is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth within
"Management's Discussion and Analysis" (pages 21 through 34 of filing)
of the Registrant's 1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth within the
Registrant's 1997 Annual Report to Shareholders (pages 37 through
54 of filing), excerpts of which are included at Exhibit 13, and
is incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth on pages 4
through 6 and pages 12 through 14 of the Registrant's definitive Proxy
Statement for the 1998 Annual Shareholders Meeting, which is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is set forth on
pages 6 through 12 of the Registrant's definitive Proxy Statement
for the 1998 Annual Shareholders Meeting, which is incorporated
herein by reference.
9
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth on pages 2 through 3 and
pages 12 through 13 of the Registrant's definitive Proxy Statement for the
1998 Annual Shareholders Meeting, which is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth on page 14 of the
Registrant's definitive Proxy Statement for the 1998 Annual Shareholders
Meeting, which is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are included by reference in Part
II, Item 8 hereof:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
This item is omitted because the required information is
either not applicable, not required or is shown in the respective
financial statements or in the notes thereto.
3. The following Exhibits are filed herewith or incorporated by
reference as a part of this Annual Report.
3(i) a. Articles of Incorporation previously
filed as Exhibit 3a to the Corporation's 1991 Form 10-K
filed March 27, 1992, are hereby incorporated by reference.
b. Amendments to Article 4 of the Articles of
Incorporation previously filed as Exhibit 3a to the
Corporation's 1993 Form 10-K filed March 11, 1994, are
hereby incorporated by reference.
c. Amendment to Article 5.A. of the Articles of
Incorporation previously filed as Exhibit 3c to the
Corporation's 1994 Form 10-K filed March 20, 1995, are
hereby incorporated by reference.
3(ii) a. The By-laws of the Corporation
previously filed as Exhibit 3b to the Corporation's 1991
Form 10-K filed March 27, 1992, are hereby incorporated by
reference.
b. Amendments to Article II, Section 1.a and
Article III, Section 4 of the Corporation's By-laws are
hereby incorporated by reference from the Registrant's Form
10-K filed on March 21 1997.
c. Amendment to Article III Section 1.c of the
Corporation's By-laws are hereby incorporated by reference
from the Registrant's Form 10-Q filed on November 14, 1997.
10
<PAGE>
10.1 Hanover Bancorp, Inc. Omnibus Stock Plan
(incorporated by reference to the Registrant's Registration
Statement on Form S-8, No. 33-73470, filed with the commission
on 12/27/93).
10.2 Severence Agreement with Chief Executive Officer.
11 Statement re: computation of per share earnings (The
information required by this item is set forth within "Notes
to Consolidated Financial Statements" (pages 42 through 54
of filing) of the Registrant's 1997 Annual Report to
Shareholders, excerpts of which are included at Exhibit 13,
and is incorporated herein by reference).
13 Excerpts from the 1997 Annual Report to Shareholders.
21 Subsidiaries of the Registrant
23 Consent of independent auditors.
27 Financial Data Schedule.
(b) There were no reports filed on Form 8-K for the quarter ended
December 31, 1997.
(c) The exhibits required by this item are listed under item 14(a)3
above.
(d) Not applicable.
11
<PAGE>
ITEM 15 - SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 20, 1998.
Hanover Bancorp, Inc. (Registrant)
BY: /s/ J. Bradley Scovill
J. Bradley Scovill
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated, on March 20, 1998.
/s/ Michael D. Bross
Michael D. Bross
Director
/s/ Thomas M. Bross, Jr.
Thomas M. Bross, Jr.
Director,
/s/ S. Forry Eisenhart, Jr.
S. Forry Eisenhart, Jr.
Director
/s/ Bertram F. Elsner
Bertram F. Elsner
Director
/s/ J. Daniel Frock
J. Daniel Frock
Director
/s/ Gordon S. Haaland
Dr. Gordon S. Haaland
Director
/s/ John S. Hollinger, Jr.
John S. Hollinger, Jr.
Director
Vice Chairman of the Board
/s/ Terrence L. Hormel
Terrence L. Hormel
Director,
Chairman of the Board
/s/ Earl F. Noel, Jr.
Earl F. Noel, Jr.
Director
/s/ Vincent P. Pisula
Dr. Vincent P. Pisula
Director
12
<PAGE>
/s/ Charles W. Test
Charles W. Test
Director
/s/ J. Bradley Scovill
J. Bradley Scovill
Director, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas J. Paholsky
Thomas J. Paholsky
Treasurer
(Principal Accounting and
Financial Officer)
13
<PAGE>
EXHIBIT INDEX
Page Number
in Filing
Exhibit No. (if applicable)
3(i) a. Articles of Incorporation previously filed as Exhibit
3a to the Corporation's 1991 Form 10-K filed
March 27, 1992, are hereby incorporated by reference.
b. Amendments to Article 4 of the Articles of Incorporation
previously filed as Exhibit 3a to the Corporation's 1993
Form 10-K filed March 11, 1994, are hereby incorporated
by reference.
c. Amendment to Article 5.A. of the Articles of
Incorporation previously filed as Exhibit 3c to the
Corporation's 1994 Form 10-K filed March 20, 1995, are
hereby incorporated by reference.
3(ii) a. The By-laws of the Corporation previously filed as
Exhibit 3b to the Corporation's 1991 Form 10-K filed
March 27, 1992, are hereby incorporated by reference.
b. Amendments to Article II, Section 1.a and Article III,
Section 4 of the Corporation's By-laws are hereby
incorporated by reference from the Registrant's
Form 10-K filed on March 21 1997.
c. Amendment to Article III Section 1.c of the Corporation's
By-laws are hereby incorporated by reference from the
Registrant's Form 10-Q filed on November 14,1997.
10.1 Hanover Bancorp, Inc. Omnibus Stock Plan (incorporated
by reference to the Registrant's Registration Statement
on Form S-8, No. 33-73470, filed with the commission on
12/27/93).
10.2 Severence Agreement with Chief Executive Officer. 15
11 Statement re: computation of per share earnings
(The information required by this item is set forth
within "Notes to Consolidated Financial Statements"
(pages 42 through 54 of filing) of the Registrant's
1997 Annual Report to Shareholders, excerpts of which
are included at Exhibit 13, and is incorporated
herein by reference).
13 Excerpts from the 1997 Annual Report to Shareholders. 19
21 Subsidiaries of the Registrant 55
23 Consent of independent auditors. 56
27 Financial Data Schedule. 57
14
EXHIBIT 10.1
SEVERANCE AGREEMENT
THIS AGREEMENT is made on the 22nd day of March, 1995, by and between
HANOVER BANCORP INC., a Pennsylvania bank holding company, with offices at
25 Carlisle Street, P.O. Box 513, Hanover, Pennsylvania 17331 (the
"Corporation"), BANK OF HANOVER AND TRUST COMPANY, a Pennsylvania Bank with
offices at 25 Carlisle Street, P.O. Box 513, Hanover, Pennsylvania, 17331
(the "Bank") and J. BRADLEY SCOVILL, an adult individual who resides at
Hanover, PA ("Executive").
WHEREAS, Executive is the President and CEO of the Bank, and is an
integral part of the management team of the Bank; and
WHEREAS, as a result of changes in federal and state banking laws,
there has been a dramatic increase in the number of mergers and other
acquisitions of Pennsylvania banks. While the Bank and Corporation remain
committed to the policy of remaining an independent bank, they recognize
that they might nevertheless be acquired as a result of an unsolicited
takeover attempt or in a negotiated transaction. Executive will play a
critical role in any such acquisition, as it falls principally upon his and
the other members of Management to vigorously and aggressively represent
and protect the interests of the shareholders of the Bank and Corporation;
and
WHEREAS, the Bank and Corporation believe that Executive should not be
forced to sacrifice his future financial security in order to fulfill his
responsibilities to the shareholders. The Boards of Directors of the Bank
and Corporation have carefully considered this problem and have determined
that it should be addressed. Specifically, the Boards of Directors have
concluded that basic financial protection should be provided to Executive
in the form of certain limited severance benefits payable in the event that
he is discharged or resigns following, and for reasons relating to a change
in control of the Bank and/or Corporation; and
WHEREAS, the purpose of this Agreement is to define these severance
benefits and to specify the conditions under which they are to be paid.
This Agreement is not intended to affect the terms of Executive's
employment at will in the absence of a change in control of the Bank and/or
Corporation. Accordingly, although this Agreement will take effect upon
execution as a binding legal obligation of the Bank and/or Corporation, it
will become operative only upon a change in control of the Bank as that
concept is defined below.
WITNESSETH:
NOW, THEREFORE, in consideration of Executive's continuing service to
the Bank and Corporation and of the mutual covenants and undertakings
hereinafter set forth, and intending to be legally bound, the parties
hereby agree as follows:
1. Undertakings of the Bank and Corporation
The Bank and Corporation shall provide to Executive the severance
benefits specified in Paragraph 5 below in the event that at any time
following a change in control of the Bank and/or Corporation:
(a) Executive is discharged by the Bank, other than for Cause
pursuant to Paragraph 3 below; or
(b) Executive resigns from the Bank and Corporation for Good
Reason pursuant to Paragraph 4 below.
(c) Executive's employment needs to have been terminated within
one (1) year of a change in control in order for him to receive any
benefits under this Agreement.
2. Change in Control
(a) For purposes of this Agreement, a Change in Control of the
Bank or Corporation shall mean a change in control of the kind that would
be required to be reported in response to Item 1 of Form 8-K promulgated by
the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934, and as in effect on the date hereof.
15
<PAGE>
(b) Without Limitation of the foregoing, a Change in Control of
the Bank or Corporation shall be deemed to have occurred upon the
occurrence of any of the following events:
(1) Any person or group of persons acting in concert, shall have
acquired, directly or indirectly, beneficial ownership (as defined in
Rule 13d-3(a) of the SEC) of forty (40%) percent or more of the
outstanding shares of the voting stock of the Bank or Corporation;
(2) The composition of the Boards of Directors of the Bank or
Corporation shall have changed such that during any period of two
consecutive years during the terms of this Agreement, the persons who
at the beginning of such period were members of the Boards of
Directors cease for any reason to constitute a majority of the Boards
of Directors, unless the nomination or election of each director who
was not a director at the beginning of such period was approved in
advance by directors representing not less that two-thirds of the
directors then in office who were directors at the beginning of the
period; or
(3) The Bank or Corporation shall be merged or consolidated with
or its assets purchased by another corporation and as a result of such
merger, consolidation or sale of assets, less than a majority of the
outstanding voting stock of the surviving, resulting or purchasing
corporation is owned, immediately after the transaction, by the
holders of the voting stock of the Bank or Corporation outstanding
immediately before the transaction.
3. Discharge for Cause
(a) The Bank or Corporation may at any time following a Change
in Control discharge Executive for Cause, in which event Executive shall
not be entitled to receive the severance benefits specified in Paragraphs 5
and 6 below.
(b) For purposes of this Agreement, the Bank or Corporation
shall have Cause to discharge Executive only under the following
circumstances:
(i) Executive shall have committed an act of dishonesty
constituting a felony and resulting or intending to result directly or
indirectly in gain or personal enrichment at the expense of the Bank
or Corporation; or
(ii) Executive shall have deliberately and intentionally
refused (for reasons other than incapacity due to accident or physical
or mental illness) to perform his duties to the Bank or Corporation
for a period of 30 consecutive days following the receipt by him of
written notice from the Bank or Corporation setting forth in detail
the facts upon which the Bank or Corporation relies in concluding that
Executive has deliberately and intentionally refused to perform such
duties.
4. Resignation for Good Reason
(a) Executive may at any time following a Change in Control
resign from the Bank and Corporation for Good Reason, in which event
Executive shall be entitled to receive the severance benefits specified in
Paragraphs 5 and 6 below.
(b) For purposes of this Agreement, Executive shall have Good
Reason to resign under the following circumstances:
(i) The Bank or Corporation, without Executive's prior
written consent, shall have changed or attempted to change in any
significant respect the authority, duties, compensation, benefits or
other terms or conditions of Executive's employment; or
(ii) Executive shall have determined in good faith and in
his sole and absolute discretion that he is unable to work
harmoniously and effectively with the new management of the Bank and
Corporation or that he is otherwise unable effectively to carry out
her duties and discharge his responsibilities to the Bank and
Corporation.
16
<PAGE>
5. Severance Benefits
The severance benefits to be provided to Executive by the Bank
and Corporation under this Agreement are as follows:
(a) The Bank shall pay to Executive each month during the
Severance Benefit Period an amount equal to one-twelfth his base annual
salary. Executive's base annual salary shall be deemed to be that annual
salary (as further defined in '280G of the Tax Code) that is being paid to
Executive on January 1st of the year in which the Change of Control shall
occur. The payment is to be made on or before the 15th day of the next
following month. It is understood that the Bank shall withhold from the
payment such amounts as may be required under any applicable federal, state
or local law.
(b) The Bank and Corporation shall at their expense provide to
Executive throughout the Severance Benefit Period life, medical, health,
accident and disability insurance and a survivor's income benefit in form,
substance and amount which is in each case substantially equivalent to that
provided to him before the commencement of the Severance Benefit Period,
whichever Executive shall in each case select.
6. Severance Benefit Period
The Severance Benefit Period shall commence upon the effective
date of Executive's discharge (for reasons other than Cause) or resignation
(for Good Reason) and shall terminate upon the expiration of a period of a
period of 1.5 (18 months) years.
7. Mitigation and Setoff
Executive shall be required to mitigate the amount of any payment
or benefit provided for in Paragraph 5 above by seeking employment or
otherwise in a substantially similar position and the Bank and Corporation
shall be entitled to setoff against the amount of any payment or benefit
provided for in Paragraph 5 above by any amounts earned by Executive in
other employment during the Severance Benefit Period.
8. Successors and Parties in Interest
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Bank and Corporation and their successors and assigns,
including, without limitation, any corporation which acquires, directly or
indirectly, by purchase, merger, consolidation or otherwise, all or
substantially all of the business or assets of the Bank and Corporation.
Without limitation of the foregoing, the Bank and Corporation shall require
any such successor, by agreement in form and substance satisfactory to
Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that it is required to be performed by
the Bank and Corporation. Failure to obtain such assumption and agreement
shall serve as Good Reason for termination under Paragraph 4.
(b) This Agreement is binding upon and shall inure to the
benefit of Executive, his heirs and personal representatives.
9. Rights Under Other Plans
This Agreement is not intended to reduce, restrict or eliminate
any benefit to which Executive may otherwise be entitled at the time of his
discharge or resignation under any employee benefit plan of the Bank and
Corporation then in effect.
10. Termination
This Agreement may not be terminated except by mutual consent of
the parties, as evidenced by a written instrument duly executed by the
Bank, Corporation and Executive.
17
<PAGE>
11. Notices
All notices and other communications required to be given
hereunder shall be in writing and shall be deemed to have been given or
made when hand delivered or when mailed, certified mail, return receipt
requested, to the Bank, Corporation, or to Executive, as the case may be,
at their respective addresses set forth above.
12. Severability
In the event that any provision of this Agreement shall be held
to be invalid or unenforceable by any court of competent jurisdiction, such
provision shall be deemed severable from the remainder of the Agreement and
such holding shall not invalidate or render unenforceable any other
provision of this Agreement.
13. Governing Law, Jurisdiction and Venue
This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania. In the event that any
party shall institute any suit or other legal proceeding, whether in law or
in equity, arising from or relating to this Agreement, the courts of the
Commonwealth of Pennsylvania shall have exclusive jurisdiction and venue
shall lie exclusively in the Court of Common Pleas of York County.
14. Entire Agreement
This Agreement constitutes the entire agreement between the
parties's concerning the subject matter hereof and supersedes all prior
written or oral agreements or understandings between them. No terms or
provision of this Agreement may be changed, waived, amended or terminated,
except by written instrument duly executed by the Bank, Corporation and by
Executive.
IN WITNESS WHEREOF, this Agreement is executed the day and year first
above written.
ATTEST: HANOVER BANCORP INC.
/s/ Gerald M. Warner, Secretary By /s/ Terrence L. Hormel
BANK OF HANOVER AND TRUST COMPANY
By /s/ Terrence L. Hormel
WITNESS:
Beverly A. Schimp /s/ J. Bradley Scovill
42764
18
EXHIBIT 13
EXCERPTS FROM THE 1997 ANNUAL REPORT TO SHAREHOLDERS
NATURE OF THE BUSINESS
Hanover Bancorp, Inc. is a Pennsylvania business corporation that is a
one-bank holding company with headquarters in Hanover, Pennsylvania. Bank of
Hanover and Trust Company, the Corporation's wholly-owned subsidiary, was
incorporated in 1835 and is Hanover's oldest and only remaining
independent financial institution. The Corporation's full service
commercial banking business, including trust services, is conducted through
its subsidiary, which operates ten full service branch offices in York and
Adams Counties, Pennsylvania, a drive-up location at the bank's
TeleServices Center and a trust and investment office in a local retirement
community. Hanover Bancorp's income is derived primarily from the
operations of Bank of Hanover and Trust Company.
19
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands, Except Ratios, Per Share Data and Statistics)
<CAPTION>
Year-Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Loans $277,475 $254,573 $213,869 $192,396 $173,536
Total assets 406,356 356,129 337,222 308,354 278,430
Deposits 329,951 297,004 278,234 251,752 231,464
Shareholders' equity - core (1) 32,662 30,943 31,308 28,997 26,392
Shareholders' equity - total 34,314 31,541 32,862 27,565 28,354
Total average assets 377,604 344,146 321,949 293,079 272,554
Total average equity 32,616 31,910 30,602 28,246 25,043
EARNINGS DATA
Interest income $28,319 $ 25,420 $ 23,892 $ 20,094 $ 19,807
Interest expense 13,941 12,148 11,409 8,517 8,730
Net interest income 14,378 13,272 12,483 11,577 11,077
Provision for loan losses 910 480 360 125 645
Other income 2,589 2,310 2,014 2,174 1,953
Other expenses 11,549 10,986 10,201 9,406 8,800
Net income 3,807 3,580 3,556 3,484 3,374
Return on average assets 1.01% 1.04% 1.10% 1.19% 1.24%
Return on average equity - core (1) 11.92% 11.41% 11.75% 12.45% 13.47%
Return on average equity - total 11.67% 11.22% 11.62% 12.34% 13.47%
Efficiency ratio 65.36% 67.10% 65.97% 64.42% 62.96%
CAPITAL
Equity to assets (average) 8.64% 9.27% 9.51% 9.64% 9.19%
Leverage ratio 8.19% 8.79% 9.54% 9.44% 9.31%
Cash dividends declared $ 1,472 $ 1,390 $ 1,274 $ 1,181 $ 1,076
Dividend payout ratio 38.67% 38.83% 35.83% 33.90% 31.89%
ASSET QUALITY
Nonperforming assets to total loans .35% .21% .17% .41% .34%
Allowance to nonperforming assets 302% 443% 597% 319% 381%
PER COMMON SHARE DATA (2)
Net income - basic and diluted $ 1.29 $ 1.18 $ 1.14 $ 1.12 $ 1.10
Cash dividends declared .50 .46 .41 .37 .35
Book value - core equity (1) 11.13 10.42 10.08 9.34 8.54
Book value - total equity 11.70 10.62 10.58 8.88 9.18
Market value 22.75 18.50 18.75 19.17 15.87
STATISTICS
Full service branch offices 10 11 11 10 10
Employees (full time equivalents) 202 205 198 157 146
<FN>
Certain reclassifications have been made in order to present a more accurate year-to-year comparison
(1) Core equity includes all equity accounts except the component related to the application of FASB 115 which was adopted
on December 31, 1993.
(2) All per common share data has been adjusted to give retroactive effect to the 3 for 2 stock split paid in April 1995,
the 5% stock dividend issued in April 1994 and the 3 for 2 stock split paid in May 1993.
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following pages contain "Management's Discussion and Analysis" of
Hanover Bancorp, Inc.'s 1997 results of operations and financial
condition, including comparison with prior year's results and
identification of possible risks and trends. This review should be read in
conjunction with the consolidated financial statements and related notes
beginning on page 23 as well as the letter to shareholders beginning on
page 2.
All forward looking information contained in "Management Discussion and
Analysis" and other statements contained in this report are 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, changes
in interest rates, 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
SUMMARY OF EARNINGS AND FINANCIAL CONDITION
The year of 1997 was one of marked improvement in financial
performance for Hanover Bancorp, Inc. With the completion of the market
expansion strategy in 1996, the Corporation experienced growing momentum in
revenues and stabilizing operating costs, which led to improved core
profitability. The Corporation also capitalized on the positive movement
in the general bank stock market by realizing securities gains from its
portfolio. These revenues were offset in part by a special loan loss
provision taken in the fourth quarter to raise the allowance to a level
more comparable with industry standards. Total assets eclipsed the $400
million level, highlighted by the successful introduction of a new money
market account and another year of strong loan growth. Asset quality
measures also remained very strong at a time when industry trends show
increasing delinquency and bankruptcy levels. The Corporation remains well
capitalized with risk-adjusted core capital and total capital ratios above
regulatory minimums.
RESULTS OF OPERATIONS
Net Income
Net income for 1997 was $3.8 million, an increase of $227,000 or 6.3% from
1996. Earnings per share (EPS) increased $.11 or 9.3% in 1997 to $1.29
from $1.18 in 1996. Return on average equity (ROE) was 11.67% in 1997
versus 11.22% in 1996. These increases were driven primarily by improved
core earnings as revenue growth more substantially outpaced the normal
increases in the expense base. The increases in EPS and ROE were also due
in part to the stock repurchase program, further discussed herein.
Net Interest Income
Net interest income is the largest component of the Corporation's
operating revenues. Changes in net interest income are the result of
fluctuations in the balance and/or mix of earning assets and interest
bearing liabilities, as well as changes in their yields and costs, as
detailed in Tables 1 and 11 and as discussed below.
Net interest income increased by $1.0 million or 7.2% on a fully taxable
equivalent basis in 1997. This increase was principally due to the $31.8
million increase in the average volume of earning assets, resulting from
loan and deposit growth and increased investment security activity, as
further discussed herein. Net interest margin declined 10 basis points
from 1996 to 4.24%. 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 spurred by growth in a new indexed,
variable rate money market deposit account introduced in 1997 and growth in
longer term certificates of deposit (CDs) at promotional rates. The
margin was also affected by investment activity which was funded by Federal
Home Loan Bank of Pittsburgh (FHLB) borrowings at relatively narrow
spreads. Although product introduction, promotional pricing and
investment/funding strategies have lowered the Corporation's margin as
anticipated by management, they have generated additional net interest
income and have thus positively impacted EPS and ROE.
In addition to these internal factors, external forces have contributed to
this year's margin decline and to the general decline the Corporation has
experienced over the past few years. Specifically, strong competition in
the local market has resulted in more aggressive pricing on both loans and
deposits. In addition, the general interest rate environment has
contributed to the shrinking margin. The treasury yield curve continued to
be relatively flat in 1997 compared to historic standards. This flatness
is measured by reference to the shortest maturity (3 months) and the
longest maturity (30 years) on the yield curve. The difference or spread
averaged 140 basis points from 1995 to 1997, compared to an average of 331
basis points from 1991 to 1994. While favorable economic conditions,
namely moderate growth and the low threat of inflation, support a generally
positive business climate, they contribute to an interest rate environment
which is challenging in terms of net interest margin.
21
<PAGE>
<TABLE>
Table 1
VOLUME - RATE ANALYSIS
(In Thousands)
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $2,813 $ (68) $2,745 $2,310 $(262) $ 2,048
Investment securities 459 (7) 452 (1,204) 11 (1,193)
Federal funds sold and other (416) 31 (385) 541 (43) 498
TOTAL INTEREST INCOME 2,856 (44) 2,812 1,647 (294) 1,353
INTEREST BEARING LIABILITIES
Interest bearing demand deposits 19 (49) (30) 37 (120) (83)
Savings deposits (74) (14) (88) (59) (121) (180)
Money market deposits 525 347 872 68 (62) 6
Time deposits 481 61 542 1,112 114 1,226
Borrowed funds 467 30 497 (226) (4) (230)
TOTAL INTEREST EXPENSE 1,418 375 1,793 932 (193) 739
NET INTEREST INCOME (FTE) $1,438 $(419) $1,019 $ 715 $(101) $ 614
<FN>
Tax-exempt income is on a fully taxable equivalent basis using a tax rate of 34% for 1997, 1996 and 1995. The change in
interest due to both volume and rate has been allocated proportionately between volume and rate based on the absolute dollar
amounts of the change in each.
</TABLE>
Provision For Loan Losses
The Corporation's loan loss provision during 1997 was $910,000, an
increase of $430,000 from 1996. The increase was reflective of the
continued growth in the Corporation's loan portfolio as asset quality
measures remained favorable. The Corporation remains committed to making
loan loss provisions which maintain an allowance that adequately reflects
the risk inherent in the loan portfolio. This is more fully discussed in
the Risk Management section which follows. A special provision of $250,000
was taken during the fourth quarter of 1997 primarily to boost the
allowance above the industry standard of 1% of loans.
Net Securities Gains
Net securities gains totaled $670,000 in 1997, an increase of $68,000 from
1996. Equity gains comprised $730,000 of this total in 1997 versus
$396,000 for 1996. These gains resulted from sales from the
Corporation's community bank stock holdings. The bank stock market
continued to experience favorable valuations during 1997. As such,
management realized gains on certain holdings where valuations were
considered excessive or to have reached peak levels. The Corporation holds
these community bank stocks primarily for their potential long-term market
appreciation as the dividend yields are significantly less than those of
alternative debt securities. Accordingly, management views the gains from
these holdings as the realization of deferred investment income. At year-
end 1997, the unrealized appreciation in the equity securities portfolio
stood at $1.1 million, up from $540,000 at year-end 1996. Offsetting these
gains in 1997 were net losses of $60,000 realized through debt securities
sales executed as part of ongoing portfolio and balance sheet management
strategies. In 1996, $206,000 in net gains were realized from debt
securities sales. All sales resulting in gains or losses were from
available-for-sale (AFS) securities.
Other Income
Other fee-based income is an increasingly important component of the
Corporation's profitability. During 1997 other income increased $279,000
or 12.1%. The increase in service charges on deposit accounts was due to
higher overdraft fees, resulting from a change in collection philosophy,
and higher automated teller machine (ATM) fees generated by noncustomer
surcharging. Other operating income increased as a result of higher loan
fees, and higher income realized through mortgage loan sale activity. The
increase in loan fees is reflective of the growth in the loan portfolio
while mortgage-related income increased as a result of higher sales volumes
relative to 1996.
22
<PAGE>
Other Expense
Other expense increased $563,000 or 5.1% during 1997. Personnel related
expenses (salaries and benefits) increased $68,000 or 1.1% year over year.
This is reflective of a net decrease in full time equivalents from 205 at
year-end 1996 to 202 at year-end 1997. In addition, temporarily unfilled
vacancies during 1997 and reduced healthcare costs contributed to the
stabilizing of these key cost components. The increase in occupancy and
equipment expenses was associated with the full impact of a branch opening
in March 1996, a branch relocation in October 1996 and the addition of six
remote service ATMs in December 1996. The increase was also impacted by
continued technology investments. Marketing and advertising expenses
increased largely as a result of increased promotional activity. The
higher other operating expenses were primarily due to increased
expenditures related to technology enhancements, the outsourcing of certain
operational functions, and employee development.
The stabilizing level of operating expense, along with the increases in
operating revenues, favorably impacted the Corporation's efficiency ratio
(the cost to generate one dollar of revenue) which declined 174 basis
points from 67.10% in 1996 to 65.36% in 1997.
Income Taxes
The level of tax-free income is the primary factor impacting the
Corporation's effective tax rate. The Corporation recognized an income
tax provision which resulted in an effective tax rate of 26.5% in 1997, up
from 24.1% in 1996. This increase was the result of a lower level of tax-
free assets in 1997 relative to 1996 and the impact of state corporate
income taxes at the holding company.
Analysis of 1996 Compared to 1995
Net income for 1996 was $3.6 million, an increase of $24,000 from 1995.
Growth in revenues, both net interest income and other income, was offset
by increases in other expense. Earnings per share of $1.18 in 1996 was an
increase of $.04 or 3.5% over the prior year. This increase was due in
part to the stock repurchase program initiated in 1996.
Net interest income increased by $614,000 or 4.6% on a fully taxable
equivalent basis in 1996. The increase in net interest income was mainly
due to the volume of average earning assets, which increased $19.4 million
in 1996. Net interest margin declined 8 basis points to 4.34%. Despite
the positive impact of a growing proportion of loans to earning assets, the
"cost" of ongoing portfolio and balance sheet management strategies
made in response to a rising interest rate environment in early 1996 had a
negative impact on margin. In addition, increasing competitive pressures
impacted loan and deposit pricing, particularly in efforts to attract new
deposits to fund the growth in the loan portfolio.
The Corporation's loan loss provision during 1996 was $480,000, an
increase of $120,000 from 1995. The increase was reflective of the growth
in the Corporation's loan portfolio.
Net securities gains increased by $22,000 to $602,000. The gains largely
resulted from sales of the Corporation's community bank stock holdings.
During 1996 other income increased $296,000 or 14.7%. Trust department
income increased $79,000 or 11.9%, due to a fee restructuring which was
implemented at the beginning of the year. Service charges on deposit
accounts increased $81,000 or 9.8% as a result of growth in the number of
demand deposit accounts, the largest contributor of this type of income.
Other operating income increased during 1996 by $136,000 or 26.0% due in
part to a higher level of gains realized on loan sales relative to 1995.
In addition, the increase was reflective of higher loan and deposit levels.
Other expense increased $785,000 or 7.7% during 1996. Salaries and
employee benefits costs increased $657,000 or 11.9% due to additions of
management and staff related to expanding the branch network and enhancing
the internal infrastructure to facilitate this larger network. Occupancy-
related expenses increased $165,000 or 9.9% primarily due to additions and
enhancements to the Corporation's branch facilities and investments in
technology. During 1996, the Corporation incurred the minimum level of
Federal Deposit Insurance Corporation (FDIC) insurance expense of $2,000.
This decrease of $293,000 or 99.3% from the prior year was due to a
revision in premiums as part of the recapitalization of the Bank Insurance
Fund by the FDIC in the third quarter of 1995. Other operating expenses
increased $221,000 or 9.5% in 1996 due to the Corporation's expansion.
23
<PAGE>
FINANCIAL CONDITION
The Corporation's total assets were $406.4 million as of December 31,
1997, up $50.2 million or 14.1% from December 31, 1996. (Refer to Table 2.)
This growth continued a trend resulting from the Corporation's market
expansion activities. In 1997, though loan growth was once again strong at
nearly 9%, deposits grew at a faster pace of 11%. As a result, the excess
funding was used to increase the investment securities portfolio along with
borrowings which supported specific investment strategies.
<TABLE>
Table 2
TRENDS IN SOURCES AND USES OF FUNDS
(In Thousands, Except Percentages)
<CAPTION>
December 31, Change
1997 1996 $ %
<S> <C> <C> <C> <C>
FUNDING SOURCES
Deposits $329,951 $297,004 $32,947 11.1%
Borrowed funds 37,885 24,300 13,585 55.9%
Other liabilities 4,206 3,284 922 28.1%
Shareholders'equity 34,314 31,541 2,773 8.8%
TOTAL SOURCES $406,356 $356,129 $50,227 14.1%
FUNDING USES
Loans $274,567 $252,170 $22,397 8.9%
Investment securities 97,641 76,102 21,539 28.3%
Federal funds sold and
short-term investments 5,694 72 5,622 N/M
Other assets 28,454 27,785 669 2.4%
TOTAL USES $406,356 $356,129 $ 50,227 14.1%
<FN>
N/M - Not meaningful
</TABLE>
Loans
Loans outstanding increased by $22.9 million or 9.0% from year-end 1996
to year-end 1997, reaching $277.5 million. (Refer to Table 3.) It should
be noted that this loan growth was net of loans sold of $12.6 million. The
commercial and residential mortgage categories increased by $7.9 million
and $17.7 million, respectively, while consumer loans decreased by $2.7
million. The continued development of the Corporation's recently opened
facilities in Gettysburg, Littlestown and York as well as the relocation of
an existing facility in Hanover supported the overall growth in the
commercial and residential mortgage portfolios. Also contributing to these
increases were proactive sales efforts, several loan promotion programs, as
well as competitive pricing strategies. The decrease in the consumer
category was the result of lower dealer loan activity spurred by slower
automobile sales and increased competition in addition to the sale of the
student loan portfolio.
24
<PAGE>
<TABLE>
Table 3
LOANS
(In Thousands, Except Percentages)
<CAPTION>
December 31, Change
1997 1996 $ %
<S> <C> <C> <C> <C>
Commercial,
financial and agricultural $ 35,254 $ 31,991 $ 3,263 10.2%
Real estate-construction 5,666 3,775 1,891 50.1%
Real estate-commercial mortgage 34,216 29,563 4,653 15.7%
Real estate-residential mortgage 135,217 119,383 15,834 13.3%
Consumer 67,122 69,861 (2,739) (3.9)%
277,475 254,573 22,902 9.0%
Allowance for loan losses (2,908) (2,403) (505) 21.0%
$274,567 $252,170 $22,397 8.9%
</TABLE>
Investment Securities
During 1997 investment securities increased $19.9 million or 26.5% and
ended the year at $95.1 million, excluding the FASB 115 component. (Refer
to Table 4.) This net activity reflects the trends in loans and deposits
during 1997. As deposit growth outpaced loan growth during the year,
excess funding became available and was deployed in the investment
portfolio. In addition, this increase was the result of a transaction
which funded approximately $10 million of investment securities with FHLB
borrowings. Management viewed this transaction as an opportunity to
generate additional net interest income and boost EPS and ROE without
incurring significant interest rate risk. Much of the investment activity
during 1997 was focused on mortgage-backed securities with variable interest
rates or fixed rates with intermediate average lives. This emphasis,
driven largely by rate risk management objectives, offset the short-term
rate sensitive nature of the deposit base resulting from growth in the
indexed money market account. At December 31, 1997, $13.2 million of
mortgage-backed securities had variable rates of interest with repricing
terms of 1 month to 3 years. The increase in the net unrealized gains on
securities available-for-sale of $1.6 million from year-end 1996 to 1997
was a result of lower market interest rates and favorable bank stock
valuations.
The Corporation manages its investment portfolio in accordance with
established policies which include guidelines for liquidity, earnings, rate
sensitivity and pledging needs. These guidelines call for investment
securities to be held with long-term objectives and do not allow for gains
trading (selling investments prior to maturity to realize market
appreciation, while continuing to hold securities with unrealized market
losses). The guidelines do, however, permit prudent and reasonable sales
of investments before their maturity dates to support interest rate risk
and balance sheet management strategies, meet liquidity needs and carry out
tax planning objectives. Most of the $16.4 million of sales executed in
1997 were for these purposes. The Corporation had no concentrations of
investment securities in any single issuer that comprise 10% or more of
shareholders' equity at December 31, 1997, with the exception of the U.S.
Government and U.S. Government-sponsored agencies.
Investment securities are accounted for under Financial Accounting
Standards Board (FASB) Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Most of the holdings
(approximately 95%) are classified as available-for-sale in order to
maintain flexibility with respect to managing the portfolio. The remaining
holdings are classified as held-to-maturity.
25
<PAGE>
<TABLE>
Table 4
INVESTMENT SECURITIES
(In Thousands, Except Percentages)
<CAPTION>
December 31, Change
1997 1996 $ %
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of the U.S.
Government and its agencies $23,566 $28,047 $(4,481) (16.0)%
Obligations of states
and political subdivisions 21,753 22,069 (316) (1.4)%
Mortgage-backed securities 46,466 21,842 24,624 112.7%
Total debt securities 91,785 71,958 19,827 27.6%
Equity securities 3,353 3,238 115 3.6%
95,138 75,196 19,942 26.5%
Net unrealized gains on
securities available-for-sale 2,503 906 1,597 176.3%
$97,641 $76,102 $21,539 28.3%
</TABLE>
Deposits
Deposits are the most important funding source and the primary support
for the Corporation's growth. Total outstanding deposits were $330.0
million at December 31,1997, an increase of $32.9 million or 11.1% from
1996. (Refer to Table 5.) This overall growth was supported by the
continued development of the Corporation's branch network. The increase
in money market deposits was due to the growth in the new indexed money
market account introduced in early 1997. This account grew to $34.0
million by year-end and, while it drew funds away from the Corporation's
existing products, it was successful in generating new deposits of more
than 50% of the year-end account balance. The increase in time deposits
was largely due to a promotion which targeted longer-term CDs, in an effort
to further manage the interest rate risk resulting from growth in the short-
term rate sensitive account. The decrease in non-interest bearing demand
deposits was due in part to a reclassification of certain program accounts
to the interest bearing demand deposit category, in addition to the normal
fluctuations in this category. The decrease in the savings category was
due primarily to the shift in funds to the new money market account.
<TABLE>
Table 5
DEPOSITS
(In Thousands, Except Percentages)
<CAPTION>
December 31, Change
1997 1996 $ %
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 28,383 $ 29,128 $ (745) (2.6)%
Interest bearing demand deposits 32,413 28,413 4,000 14.1%
Savings deposits 19,923 23,552 (3,629) (15.4)%
Money market deposits 83,408 54,713 28,695 52.4%
Time deposits:
CDs under $100,000 152,503 142,891 9,612 6.7%
CDs over $100,000 13,321 18,307 (4,986) (27.2)%
$329,951 $297,004 $32,947 11.1%
</TABLE>
26
<PAGE>
Borrowed Funds
Total borrowed funds increased $13.6 million or 55.9% during 1997 to a
level of $37.9 million at December 31, 1997. (refer to Table 6.) Most of
this increase was due to the higher level of FHLB borrowings which were
part of the investment transaction referred to earlier. The borrowings
were predominately fixed rate advances with features which allow the FHLB
to convert to a variable rate of interest. These features are described in
greater detail in Note 7. FHLB borrowings have become an increasingly
important source of funding for the Corporation. In addition to being a
source for match-funding opportunities, they are used to manage the balance
sheet, liquidity, and interest rate risk.
<TABLE>
Table 6
BORROWED FUNDS
(In Thousands, Except Percentages)
<CAPTION>
December 31, Change
1997 1996 $ %
<S> <C> <C> <C> <C>
Federal funds purchased $ --- $ 2,000 $(2,000) (100.0)%
Securities sold under
repurchase agreements 9,915 8,866 1,049 11.8%
FHLB borrowings 26,248 12,623 13,625 107.9%
Other 1,722 811 911 112.3%
$37,885 $24,300 $13,585 55.9%
</TABLE>
Capital and Dividends
At December 31, 1997, total shareholders' equity was $34.3 million, an
increase of $2.8 million or 8.8% from December 31, 1996. This change
consisted of an increase of $1.7 million in capital stock, surplus and
undivided profits (core equity) and an increase of $1.1 million in net
unrealized gains on AFS securities (net of tax effects). The increase in
the core equity was primarily the result of earnings retained offset by
shares repurchased. The change in the net unrealized gains on AFS
securities was due to the lower level of market interest rates at December
31, 1997 compared to December 31, 1996 as well as increased bank stock
valuations.
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 or exceeds all regulatory requirements. As reflected
in Table 7, the Corporation continues to meet these objectives with strong
year-end capital levels. The Bank remains above the regulatory minimums
for "well capitalized". The decline in the ratios from 1996 reflects
dividends to the holding company to support the stock repurchase program.
During 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 its control, 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 December 31, 1997, 28,740 shares were repurchased under this
program.
The Corporation continued to increase dividends to its shareholders in
1997. Dividends per share for 1997, 1996 and 1995 were $.50, $.46 and
$.41, respectively. The resulting dividend payout ratios for the same
periods were 38.7%, 38.8% and 35.8%. The dividend rate is determined by
the Board of Directors after considering the Corporation's capital
requirements and projected level of earnings.
In addition to earnings retained, capital is generated through several
other sources. The dividend reinvestment plan allows existing shareholders
to reinvest their cash dividends and limited optional cash payments into
shares of Hanover Bancorp, Inc. common stock. Capital is also raised
through an employee stock purchase plan and through the Bank's defined
contribution 401(k) plan. A total of $31,000, $57,000 and $35,000 was
raised through these sources in 1997, 1996 and 1995, respectively.
27
<PAGE>
<TABLE>
Table 7
CAPITAL RATIOS
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
HANOVER BANCORP, INC.
Tier 1 capital to risk-adjusted assets 12.47% 12.87%
Total capital to risk-adjusted assets 13.58% 13.87%
Leverage ratio 8.19% 8.79%
BANK OF HANOVER AND TRUST COMPANY
Tier 1 capital to risk-adjusted assets 10.82% 11.78%
Total capital to risk-adjusted assets 11.93% 12.78%
Leverage ratio 7.09% 8.06%
</TABLE>
RISK MANAGEMENT
Asset Quality
The Corporation has policies and procedures designed to control credit
risk and to maintain the quality of its loan portfolio. These include
underwriting standards for new originations and ongoing monitoring and
reporting of asset quality and adequacy of the allowancefor loan losses.
The Corporation's commercial, consumer and residential mortgage loans are
principally to borrowers within York and Adams Counties, Pennsylvania,
where it operates full service branches. The commercial loan portfolio is
well diversified with no industry comprising greater than 10% of total
loans outstanding.
Nonperforming assets include non-accrual and restructured loans, accruing
loans past due 90 days or more and other real estate (ORE) and other
repossessed assets. These loans are typically returned to performing
status when the loan is brought current and has performed in accordance
with contractual terms for a reasonable period of time.
A loan generally is classified as non-accrual when full collection of
principal or interest is doubtful and a loan becomes 90 days or more past
due as to principal or interest, unless management determines that the
estimated net realizable value of the collateral is sufficient to cover the
principal and accrued interest. When a loan is placed on non-accrual
status, unpaid interest credited to income in the current year is reversed
and unpaid interest accrued in prior years is charged to the allowance for
loan losses. A loan is considered restructured if the original interest
rate, repayment terms or both were modified due to the deterioration in the
financial condition of the borrower. Real estate loans are classified as
ORE upon foreclosure proceedings, a receipt of a deed in lieu of
foreclosure or an in-substance foreclosure involving actual possession of
the collateral.
Nonperforming assets at December 31, 1997 were $962,000, an increase of
$420,000 from 1996. (Refer to Table 8.) Non-accrual loans and other real
estate (ORE) and other repossessed assets increased by $293,000 and
$140,000, respectively, while loans past due 90 days or more and
restructured loans remained relatively constant. Nonperforming assets as a
percent of loans increased from .21% in 1996 to .35% in 1997. Despite the
increases year over year, the Corporation's nonperforming assets remain
low relative to the loan base and compare favorably to peer statistics.
Potential problem loans are defined as performing loans which have
characteristics that cause management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and
which may result in the reporting of these loans as nonperforming loans in
the future. The Corporation's potential problem loans, or its
"watchlist", consist primarily of commercial loans which are less than
90 days past due and still accruing. These loans are rated according to
the probability that noncompliance may occur. Those loans that management
feels the likelihood of future noncompliance is probable (as opposed to
possible) are considered impaired under FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan". At December 31,
1997, total potential problem loans, as determined by the Corporation's
internal loan review process, totaled $2.8 million, the same level as
December 31, 1996. Of these amounts, $470,000 and $562,000 were considered
impaired under FASB 114 at 1997 and 1996, respectively. Management
constantly monitors the status of these loans and their likelihood of
becoming nonperforming loans.
28
<PAGE>
<TABLE>
Table 8
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(In Thousands)
<CAPTION>
December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual loans $331 $ 38 $ 10 $650 $484
Accruing loans past due 90 days or more 174 166 24 17 40
Restructured loans 221 242 292 --- ---
Other real estate and
other repossessed assets 236 96 46 115 67
TOTAL NONPERFORMING ASSETS $962 $542 $372 $782 $591
NON-ACCRUAL LOANS BY CATEGORY
Commercial, financial and agricultural $--- $--- $--- $479 $482
Real estate-mortgage 331 16 --- 141 ---
Consumer --- 22 10 30 2
$331 $ 38 $ 10 $650 $484
PAST DUE LOANS BY CATEGORY
Commercial, financial and agricultural $--- $ 16 $--- $--- $---
Real estate-mortgage 153 65 --- 6 24
Consumer 21 85 24 11 16
$174 $166 $ 24 $ 17 $ 40
RESTRUCTURED LOANS BY CATEGORY
Commercial, financial and agricultural $--- $ 12 $ 13 $--- $---
Real estate-mortgage 221 230 279 --- ---
$221 $242 $292 $--- $---
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Non-accrual loans and restructured loans $552 $280 $302
Interest income that would have been
recorded under original terms 48 28 29
Interest income recorded during the period 39 28 28
Interest lost for the year 9 0 1
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential future losses in the portfolio.
Management's methodology in evaluating the adequacy of the allowance
considers potential specific losses, past loan loss experience, the volume,
growth and composition of the loan portfolio and the current economic
conditions and trends. Management believes that the allowance for loan
losses is adequate to cover potential future losses within the overall
portfolio. The allowance approximated 1.05% and .94% of total loans
outstanding at December 31, 1997, and 1996, respectively. This statistic
increased from year to year primarily as a result of the $250,000 special
provision referred to earlier. With the loan growth the Corporation has
experienced during the past few years, this ratio has fallen below the
industry standard of 1.00%. This special provision was taken to raise the
allowance above this standard and to bring the Corporation more in line
with its peers. In terms of coverage, the allowance measured as a ratio of
nonperforming assets was 302% and 443% for 1997 and 1996, respectively.
Effective in 1995, the Corporation adopted FASB 114. This statement
requires certain impaired loans to be reported at the present value of
expected future cash flows, or as a practical expedient, at the loan's
observable market price, or the fair value of the collateral if collateral-
dependent. This standard applies to all loans that are identified as
impaired. In addition, the statement addresses troubled debt
restructurings involving a modification of terms. It does not apply to
large groups of smaller balance homogeneous loans that are evaluated
collectively such as consumer or residential mortgage loans. Generally,
loans considered impaired under FASB 114 would be the Corporation's non-
homogeneous, non-accrual loans and restructured loans. However, a loan may
also be considered impaired under FASB 114 if it is currently performing
according to its terms, but it is probable that the loan will not perform
as such in the future.
29
<PAGE>
Each loan identified as impaired under FASB 114 is evaluated periodically
to estimate any potential losses for which a specific reserve should be
established. Since most of these loans are collateral-dependent, this
estimate is normally based on a comparison of the most recent appraised
value of the collateral and the recorded investment in the loan. If the
collateral value is the lower amount of the two, the potential loss would
be the difference between them. If the loan is not collateral-dependent,
the same procedure would be followed except that the present value of the
expected future cash flows would replace the collateral value. In
addition to these specific individual reserves, allocated reserves are
established for the commercial, mortgage and consumer portfolios. These
allocations are based on the overall level of loans identified as problem
or potential problem, past loan loss experience, adjusted for recent
portfolio growth and economic trends. As a supplement to the specific
individual and allocated reserves, an unallocated general reserve is also
established. This unallocated portion is determined based on judgments
regarding risk of error in specific allocations, other potential exposures
in the loan portfolio, economic conditions and trends, and other factors.
At December 31, 1997, the unallocated portion of the allowance was
determined to be $918,000 versus $695,000 at December 31, 1996.
The allowance for loan losses is charged when management determines the
prospects for recovering the principal have significantly diminished.
Subsequent recoveries, if any, are credited to the allowance. Loans
identified as impaired under FASB 114 are charged-off when management has
concluded, after ongoing evaluation of the impaired loans, that repayment
is unlikely. Installment loans that are 90 to 120 days past due are
charged-off, unless current scheduled payments are being received. Real
estate loans are written down to fair value upon the earlier of foreclosure
proceedings, a receipt of a deed in lieu of foreclosure or an in-substance
foreclosure involving actual possession of the collateral.
In 1997, the Corporation realized net charge-offs of $405,000 in
comparison to net charge-offs of $297,000 in 1996. (Refer to Table 9.).
The consumer portfolio was the source of this increase as net charge-offs
grew from $209,000 in 1996 to $421,000 in 1997. This increase has been the
result of growing delinquencies within the Corporation's consumer loan
portfolio, which has been common to the industry. Net charge-offs to
average loans outstanding during 1997 remained relatively low at .15%
compared to .13% for 1996.
<TABLE>
Table 9
Allowance For Loan Losses
(In Thousands, Except Ratios)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,403 $2,220 $2,498 $2,254 $2,082
CHARGE-OFFS
Commercial, financial and agricultural 72 119 575 156 389
Real estate-mortgages --- --- 65 --- 67
Consumer 514 241 123 120 112
TOTAL CHARGE-OFFS 586 360 763 276 568
RECOVERIES
Commercial, financial and agricultural 87 31 9 370 69
Real estate-mortgages 1 --- 92 2 ---
Consumer 93 32 24 23 26
TOTAL RECOVERIES 181 63 125 395 95
NET CHARGE-OFFS (RECOVERIES) 405 297 638 (119) 473
Provision charged to operations 910 480 360 125 645
Balance at end of year $2,908 $2,403 $2,220 $2,498 $2,254
Ratio of net charge-offs (recoveries)
to average loans outstanding .15% .13% .31% (.07)% .29%
Ratio of allowance for loan losses
to nonperforming assets 302% 443% 597% 319% 381%
</TABLE>
30
<PAGE>
Liquidity
Liquidity is the ability to meet funding requirements of customers'
deposit withdrawals or credit needs at a reasonable cost. The
Corporation's Asset/Liability Management Committee (ALCO) has established
policies and procedures to control its liquidity position and to provide
for potential future needs.
Maintaining a high percentage of "core" deposits is a fundamental
component of managing the Corporation's liquidity position. Core deposits
(all deposits except CDs of $100,000 or more) are generated through the
community office network and represent a relatively stable source of funds.
On December 31, 1997, 77.9% of total assets were funded by core deposits
compared to 78.3% in 1996. At year-end 1997, CDs over $100,000 were 3.3%
of total assets while they represented 5.1% of total assets at year-end
1996.
In addition to maintaining a stable deposit base, the Corporation has
access to a varied and high quality investment portfolio. This portfolio
provides a consistent stream of cash flows and maturities to support
liquidity needs. At December 31, 1997, $3.9 million of investment
securities were scheduled to mature in 1 year or less, while principal
payments on mortgage-backed securities averaged $420,000 per month during
1997. Loan portfolio repayments and maturities also provide funds for
managing liquidity. In 1997, the Corporation received an average of
approximately $6.9 million in loan repayments per month. In addition, the
sale of portfolio loans provides an alternative for the management of
liquidity. In 1997, $12.6 million of loans, mainly residential mortgage
loans, were sold by the Corporation. Proceeds from these sales provided
funding to meet customers' ongoing credit needs.
The Corporation maintains short-term borrowing arrangements with several
correspondent banks and the discount window at the Federal Reserve Bank of
Philadelphia. In addition, it has access to the FHLB for permanent funding
needs. Through these relationships, the Bank has available short-term
funding of approximately $10 million and permanent funding of approximately
$80 million.
Market Risk
In January 1997, the Securities and Exchange Commission (SEC) issued new
disclosure rules related to derivatives and exposures to market risk from
derivative financial instruments, other financial instruments and certain
derivative commodity instruments. These rules became effective for the
Corporation's December 31, 1997 financial statements. Market risk
includes interest rate risk, foreign currency exchange rate risk, commodity
price risk and equity price risk. 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. As further discussed within, the
Corporation's primary market risk is interest rate risk from its financial
assets and liabilities. Derivatives are not presently utilized and thus
the expanded policy disclosures are not applicable
Interest rate risk is the exposure to fluctuations in the Corporation's
current and future net interest income from movements in interest
rates. This exposure results from differences between the amounts of
interest earning assets and interest bearing liabilities that reprice
within a specified time period.
The primary objective of the Corporation's asset/liability management
process is to maximize current and future net interest income within
acceptable levels of interest rate risk while satisfying liquidity and
capital requirements. Management recognizes that a certain amount of
interest rate risk is inherent and appropriate yet is not essential to the
Corporation's profitability. Thus the goal of interest rate risk
management is to strike a balance between risk and reward such that net
interest income is maximized while risk is maintained at a tolerable level.
The Corporation uses "gap" and simulation analysis for measuring
interest rate risk. These methods allow management to regularly monitor
both the direction and magnitude of the Corporation's risk exposure. The
Corporation primarily uses the securities portfolio and FHLB advances to
manage its interest rate risk position. Additionally, pricing, promotion
and product development activities are directed in an effort to emphasize
the term or repricing characteristics that best meet current interest rate
risk objectives. At present, off-balance sheet instruments are not used
by the Corporation.
Gap analysis assigns each interest earning asset and interest bearing
liability to a time frame reflecting its next repricing or maturity date.
Incorporated into this process are the trends in prepayments on loan
balances and mortgage-backed securities. The difference between total
interest-sensitive assets and liabilities at each time frame represents the
interest sensitivity gap for that interval. A positive gap generally
indicates that rising interest rates during a particular interval will
increase net interest income, since more assets will reprice than
liabilities. The opposite is true for a negative gap position. As can be
seen by reference to this analysis in Table 10, the Corporation had a
cumulative gap within one year at December 31, 1997 of positive $6.3
million and a rate sensitivity ratio of positive 1.55%. At December 31,
1996, the Corporation had a positive gap of $2.2 million and a rate
sensitivity ratio of positive .62%. This shift in the gap position from
1996 to 1997 was largely the result of an increase in anticipated
prepayments on loans and mortgage-backed securities arising from the lower
interest rate environment.
31
<PAGE>
Simulation analysis prospectively evaluates the effect of upward and
downward changes in interest rates on net interest income. This process is
largely dependent on the underlying assumptions. Key assumptions in the
model include maturity and repricing characteristics of the financial
assets and liabilities, prepayments on amortizing assets, other imbedded
options, nonmaturity deposit sensitivity and loan and deposit growth and
pricing. These assumptions are inherently uncertain due to the timing,
magnitude and frequency of rate changes and changes in market conditions
and management strategies, among other factors. In addition, the
Corporation has not yet developed alternative prepayment or balance sheet
growth assumptions for the various rate scenarios. Therefore the model
cannot precisely estimate net interest income or predict the impact of
higher or lower interest rates on net interest income. However, the model
is useful in that it helps to quantify interest rate risk and it provides a
relative gauge of the Corporation's interest rate risk position.
Based on the results of the simulation model as of December 31, 1997, the
Corporation would expect net interest income to decrease over the next
twelve months by 3.1% assuming an immediate upward shift in market
interest rates of 200 basis points, and to increase by .9% if rates shifted
downward in the same manner. The more pronounced change in the upward
scenario is primarily due to the Corporation's holdings of approximately
$18 million of convertible FHLB borrowings These borrowings contain
features which allow the FHLB to convert them from fixed rate to variable
rate after a specified time period. The model assumes that in the upward
scenario the FHLB would exercise these options as soon as they become
available. The conversion feature of these advances cannot be reflected
in the gap analysis which is a key factor explaining why the gap shows a
fairly neutral position while the simulation analysis indicates a more
liability sensitive position.
<TABLE>
Table 10
INTEREST RATE SENSITIVITY GAPS
(In Thousands, Except Ratios)
<CAPTION>
December 31, 1997
0-30 31-90 91-364 1-5 Over 5
Days Days Days Years Years
<S> <C> <C> <C> <C> <C>
Loans $52,545 $17,394 $60,878 $123,257 $23,401
Investment securities:
Taxable 8,313 3,237 12,481 35,360 14,074
Tax-exempt 330 --- 390 1,798 19,155
Federal funds sold and other 5,694 --- --- --- ---
Interest earning assets 66,882 20,631 73,749 160,415 56,630
Interest bearing demand deposits --- --- --- 25,931 6,482
Savings deposits --- --- 1,060 11,318 7,545
Money market deposits 33,971 5,086 3,164 34,600 6,587
Time deposits 30,140 15,761 53,353 59,806 6,764
Other interest bearing liabilities 12,162 48 224 24,240 1,211
Interest bearing liabilities 76,273 20,895 57,801 155,895 28,589
Rate sensitivity gap:
Periodic gap $(9,391) $ (264) $15,948 $ 4,520 $28,041
Cumulative gap $(9,391) $(9,655) $ 6,293 $ 10,813 $38,854
Rate sensitivity ratio:
Periodic ratio (2.31)% (0.06)% 3.92% 1.11% 6.90%
Cumulative ratio (2.31)% (2.38)% 1.55% 2.66% 9.56%
</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.
32
<PAGE>
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.
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 increased the Corporation's FDIC insurance premium costs
slightly 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.
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. However, 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.
IMPACT OF YEAR 2000
Many older computer programs were designed using two digits rather than
four to define the applicable year. As a result, those computer programs
have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. This situation, known by
many as the Year 2000 (Y2K) Issue, applies not only to the systems utilized
by the Corporation but also to the systems utilized by creditors, vendors
and suppliers of the Corporation.
The Corporation has completed the awareness and initial assessment phases
of a Year 2000 Issues project. The full assessment, renovation and
validation phases are expected to be largely completed by December 31,
1998, which is prior to any anticipated impact on its operating systems.
The Corporation believes that with modifications to existing software and
conversions to new software expected in the ordinary course of business,
the Year 2000 Issue will not pose significant operational problems for its
computer systems nor result in significant costs. However, if such
modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 Issue could have a material impact on the
operations of the Corporation.
The costs of the project and the date on which the Corporation believes
it will complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
33
<PAGE>
<TABLE>
Table 11
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME/MARGIN ANALYSIS
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (1) (2) $265,293 $22,856 8.62% $232,643 $20,111 8.64% $205,970 $18,063 8.77%
Investment securities:
Taxable 61,089 3,839 6.28% 52,702 3,179 6.03% 65,881 3,945 5.99%
Tax-exempt (2) 19,882 1,809 9.10% 21,682 2,017 9.30% 25,721 2,444 9.50%
Federal funds sold and other assets 9,286 518 5.58% 16,754 903 5.39% 6,776 405 5.98%
TOTAL INTEREST EARNING ASSETS 355,550 29,022 8.16% 323,781 26,210 8.09% 304,348 24,857 8.17%
NON-INTEREST EARNING ASSETS
Cash and due from banks 10,953 10,404 9,473
Premises and equipment 7,045 6,579 5,276
Other assets 6,593 5,704 5,483
Allowance for loan losses (2,537) (2,322) (2,631)
TOTAL ASSETS $377,604 $344,146 $321,949
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Demand deposits $29,062 386 1.33% $ 27,726 416 1.50% $ 25,686 499 1.94%
Savings deposits 22,346 456 2.04% 25,943 544 2.10% 28,378 724 2.55%
Money market deposits 70,577 2,377 3.37% 53,845 1,505 2.80% 51,455 1,499 2.91%
Time deposits 163,107 9,119 5.59% 154,489 8,577 5.55% 134,436 7,351 5.47%
Borrowed funds 27,959 1,603 5.73% 19,794 1,106 5.59% 23,830 1,336 5.61%
TOTAL INTEREST BEARING LIABILITIES 313,051 13,941 4.45% 281,797 12,148 4.31% 263,785 11,409 4.33%
NON-INTEREST BEARING LIABILITIES
Demand deposits 27,994 26,892 24,502
Other liabilities 3,943 3,547 3,060
TOTAL LIABILITIES 344,988 312,236 291,347
SHAREHOLDERS' EQUITY 32,616 31,910 30,602
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $377,604 $344,146 $321,949
NET INTEREST SPREAD 3.71% 3.78% 3.84%
NET INTEREST INCOME (FTE)/
NET INTEREST MARGIN 15,081 4.24% 14,062 4.34% 13,448 4.42%
Taxable-equivalent adjustment (2) (703) (790) (965)
NET INTEREST INCOME PER FINANCIAL
STATEMENTS $14,378 $13,272 $12,483
<FN>
(1) Non-accrual loans have been included within this category.
(2) The taxable-equivalent adjustment for tax-exempt assets has been computed assuming tax rate of 34% for 1997, 1996 and 1995.
</TABLE>
34
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
As of February 28, 1998, the approximate number of shareholders of record
of the Corporation's common stock was 1,524. The accompanying table sets
forth the range of bid-asked prices for the common stock and dividends
declared by Hanover Bancorp, Inc. during the most recent eight quarters
ended December 31, 1997. The bid price for Hanover Bancorp, Inc. common
stock for the period indicated here represents inter-dealer prices without
adjustment for retail mark-up, mark-down or commission and does not
necessarily represent actual transactions.
<TABLE>
BID-ASKED PRICES FOR COMMON STOCK AND DIVIDENDS DECLARED
<CAPTION>
1997 1996
Stock Price Cash Stock Price Cash
Range Dividend Range Dividend
<S> <C> <C> <C> <C>
QUARTER ENDED
March 31 $17.00 - $18.50 $0.12 $18.00 - $19.25 $0.11
June 30 17.00 - 17.88 0.12 18.13 - 19.13 0.11
September 30 17.13 - 22.50 0.13 18.25 - 19.00 0.12
December 31 21.25 - 24.00 0.13 18.00 - 19.00 0.12
</TABLE>
The Corporation expects to continue its policy of paying regular
quarterly dividends although there is no assurance as to future dividends
because they are dependent on future earnings, capital requirements and
financial condition. The Corporation has no restrictions affecting the
payment of dividends except those presented in Note 13 of the Notes to
Consolidated Financial Statements.
Hanover Bancorp, Inc. is quoted under the symbol "HOVB" on the O.T.C.
Electronic Bulletin Board, an automated quotation service, made available
through, and governed by, the NASDAQ system. Hanover Bancorp, Inc. common
stock trades in the local over-the-counter market and current price
information is available from account executives at most brokerage firms as
well as the following firms which are designated market makers of Hanover
Bancorp, Inc.'s common stock:
35
<PAGE>
F.J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19102
(800) 842-8928
Janney Montgomery Scott, Inc.
1801 Market Street,
10th Floor
Philadelphia, PA 19102
(800) 526-6397
(215) 665-6000 or
49 East Market Street
York, PA 17405
(717) 845-4511 or
(717) 632-4545
Fahnestock & Co., Inc.
110 Wall Street
New York, NY 10004
(800) 221-5588
Monroe Securities, Inc.
47 State Street
Rochester, NY 14614
(716) 546-5560
Sandler O'Neill & Partners, L.P.
Two World Trade Center
104th Floor
New York, NY 10048
(800) 635-6860
Hopper Soliday & Co., Inc.
1725 Oregon Pike
Lancaster, PA 17601
(717) 560-3000
Legg Mason Wood Walker, Inc.
1818 Market Street
Philadelphia, PA 19103
(800) 888-6673
Ryan, Beck & Company
3 Parkway
Philadelphia, PA 19102
(800) 223-8969 in PA
(215) 568-4433 elsewhere
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS AND INFORMATION FOR SHAREHOLDERS
REPORT OF INDEPENDENT AUDITORS
THE SHAREHOLDERS AND BOARD OF DIRECTORS
HANOVER BANCORP, INC.
We have audited the accompanying consolidated balance sheets of Hanover
Bancorp, Inc. and its wholly-owned subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hanover Bancorp, Inc. and its wholly-owned subsidiary at December 31, 1997
and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Harrisburg, Pennsylvania
January 22, 1998
INFORMATION FOR SHAREHOLDERS
Dividend Reinvestment and Stock Purchase Plan
Hanover Bancorp, Inc. offers a dividend reinvestment program whereby all
shareholders of record may reinvest their dividends into additional shares
of the Corporation. Information concerning this optional program is
available by contacting Hanover Bancorp, Inc., 33 Carlisle Street, Hanover,
Pennsylvania 17331.
Annual Meeting
The Annual Meeting of the Shareholders of Hanover Bancorp, Inc. is
scheduled to be held April 21, 1998, at 9:30 a.m. at the Hanover Country
Club located on Lincolnway East, Abbottstown, Pennsylvania.
Copies of 10-K
Copies of Hanover Bancorp, Inc.'s Form 10-K or additional copies of the
Annual Report may be obtained without charge upon written request to Gerald
M. Warner, Secretary/Assistant Treasurer, Hanover Bancorp, Inc., 33
Carlisle Street, Hanover, Pennsylvania 17331. In addition, the Securities
and Exchange Commission (SEC) maintains a web site which makes available
information pertaining to registrants whom file electronically with the
SEC. As such, Hanover Bancorp, Inc. filings, including Form 10K, can be
obtained from the SEC web site at http: // www.sec.gov.
37
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $15,643 $ 15,955
Federal funds sold 4,075 ---
Cash and cash equivalents 19,718 15,955
Interest bearing deposits with other banks 23 72
Short-term investments 1,596 ---
Investment securities:
Available-for-sale 94,814 72,005
Held-to-maturity (market value--$2,868 and $4,087, respectively) 2,827 4,097
97,641 76,102
Loans:
Commercial, financial and agricultural 35,254 31,991
Real estate-construction 5,666 3,775
Real estate-commercial mortgage 34,216 29,563
Real estate-residential mortgage 135,217 119,383
Consumer 67,122 69,861
277,475 254,573
Less: Allowance for loan losses (2,908) (2,403)
Net loans 274,567 252,170
Premises and equipment 7,016 7,075
Accrued interest receivable 2,644 2,348
Other assets 3,151 2,407
TOTAL ASSETS $406,356 $356,129
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 28,383 $ 29,128
Interest bearing 301,568 267,876
329,951 297,004
Borrowed funds:
Short-term 12,433 13,052
Long-term 25,452 11,248
37,885 24,300
Accrued interest payable 2,334 2,116
Other liabilities 1,490 811
Dividends payable 382 357
TOTAL LIABILITIES
372,042 324,588
Shareholders' equity:
Preferred stock, $2.50 par value; authorized, 2,000,000 shares;
no shares issued or outstanding --- ---
Common stock, $1.11 par value; authorized, 6,750,000 shares;
issued and outstanding: 1997-2,933,965 shares;
1996-2,969,441 shares 3,257 3,296
Surplus 18,687 18,659
Net unrealized gains on securities available-for-sale,
net of tax effects 1,652 598
Retained earnings 10,718 8,988
TOTAL SHAREHOLDERS' EQUITY 34,314 31,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $406,356 $356,129
BOOK VALUE PER SHARE $ 11.70 $ 10.62
<FN>
See accompanying notes.
</TABLE>
38
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
<CAPTION>
Year-Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $22,768 $20,007 $17,929
Interest on federal funds sold 370 707 346
Interest on short-term investments 148 196 59
Investment securities:
Taxable 3,839 3,179 3,945
Tax-exempt 1,194 1,331 1,613
5,033 4,510 5,558
TOTAL INTEREST INCOME 28,319 25,420 23,892
INTEREST EXPENSE
Interest on deposits 12,338 11,042 10,073
Interest on borrowed funds 1,603 1,106 1,336
TOTAL INTEREST EXPENSE 13,941 12,148 11,409
NET INTEREST INCOME 14,378 13,272 12,483
PROVISION FOR LOAN LOSSES 910 480 360
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,468 12,792 12,123
NET SECURITIES GAINS 670 602 580
OTHER INCOME
Trust department income 751 742 663
Service charges on deposit accounts 1,085 908 827
Other operating income 753 660 524
TOTAL OTHER INCOME 2,589 2,310 2,014
OTHER EXPENSE
Salaries 5,198 5,075 4,498
Pensions and other employee benefits 1,029 1,084 1,004
Occupancy expense 942 927 798
Equipment expense 1,009 906 870
Marketing and advertising 485 451 416
FDIC insurance 38 2 295
Other operating expense 2,848 2,541 2,320
TOTAL OTHER EXPENSE 11,549 10,986 10,201
INCOME BEFORE INCOME TAXES 5,178 4,718 4,516
INCOME TAXES 1,371 1,138 960
NET INCOME $ 3,807 $ 3,580 $ 3,556
PER SHARE DATA
Net income-basic and diluted $ 1.29 $ 1.18 $ 1.14
Cash dividends declared .50 .46 .41
<FN>
See accompanying notes.
</TABLE>
39
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Shares and Per Share Data)
<CAPTION>
Unrealized
Common Gains and Retained
Stock Surplus Losses Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $3,458 $18,573 $(1,432) $6,966 $27,565
Net income for 1995 --- --- --- 3,556 3,556
Cash dividends:
$0.41 per share --- --- --- (1,274) (1,274)
Cash paid in lieu of fractional shares and other (11) --- --- 5 (6)
Issue of common stock:
2,044 shares at an average price of $16.85 per share 2 33 --- --- 35
Net adjustment to net unrealized gains (losses) on securities
available-for-sale, net of tax effects of $1,538 --- --- 2,986 --- 2,986
Balance, December 31, 1995 3,449 18,606 1,554 9,253 32,862
Net income for 1996 --- --- --- 3,580 3,580
Cash dividends:
$0.46 per share --- --- --- (1,390) (1,390)
Issue of common stock:
3,435 shares at an average price of $16.71 per share 4 53 --- --- 57
Repurchase and retirement of common stock:
141,312 shares at an average price of $18.48 per share (157) --- --- (2,455) (2,612)
Net adjustment to net unrealized gains (losses) on securities
available-for-sale, net of tax effects of $492 --- --- (956) --- (956)
Balance, December 31, 1996 3,296 18,659 598 8,988 31,541
Net income for 1997 --- --- --- 3,807 3,807
Cash dividends:
$0.50 per share . --- --- --- (1,472) (1,472)
Issue of common stock:
1,952 shares at an average price of $15.78 per share 3 28 --- --- 31
Repurchase and retirement of common stock:
37,428 shares at an average price of $17.29 per share (42) --- --- (605) (647)
Net adjustment to net unrealized gains (losses) on securities
available-for-sale, net of tax effects of $543 --- --- 1,054 --- 1,054
Balance, December 31, 1997 $3,257 $18,687 $1,652 $10,718 $34,314
<FN>
See accompanying notes.
</TABLE>
40
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Year-Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,807 $ 3,580 $ 3,556
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 910 480 360
Provision for depreciation and amortization 883 776 673
Net securities gains (670) (602) (580)
(Increase) decrease in net deferred tax assets (27) (166) 206
(Increase) decrease in interest receivable (296) 7 (188)
Increase in interest payable 218 243 647
(Increase) decrease in other assets (905) (62) 240
Increase (decrease) in other liabilities 135 249 (223)
Increase (decrease) in accrued taxes 189 (143) (136)
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,244 4,362 4,555
INVESTING ACTIVITIES
Increase in loans (35,877) (50,891) (33,746)
Proceeds from loan sales 12,570 9,890 11,635
Proceeds from sale of available-for-sale investment securities 16,420 40,230 21,860
Proceeds from maturities of investment securities 8,288 12,279 23,966
Purchases of investment securities (43,980) (37,526) (36,838)
Proceeds from maturities of short-term investments 32,000 40,928 7,503
Purchases of short-term investments (33,547) (34,114) (14,367)
Purchases of premises and equipment (824) (2,045) (1,247)
NET CASH USED IN INVESTING ACTIVITIES (44,950) (21,249) (21,234)
FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and money market deposits 28,321 6,983 (1,408)
Net increase in time deposits 4,626 11,787 27,890
Net increase (decrease) in borrowed funds 13,585 1,347 (3,483)
Cash dividends paid (1,447) (1,375) (1,243)
Cash paid in lieu of fractional shares --- --- (6)
Proceeds from issuance of common stock 31 57 35
Repurchase and retirement of common stock (647) (2,612) ---
NET CASH PROVIDED BY FINANCING ACTIVITIES 44,469 16,187 21,785
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,763 (700) 5,106
Cash and cash equivalents at beginning of year 15,955 16,655 11,549
CASH AND CASH EQUIVALENTS AT END OF YEAR $19,718 $ 15,955 $ 16,655
<FN>
See accompanying notes.
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles Of Consolidation: The consolidated financial statements include
the accounts of the Corporation and its wholly-owned subsidiary, Bank of
Hanover and Trust Company. All significant intercompany transactions and
accounts have been eliminated.
Investment Securities: The Corporation accounts for its investment
securities under Financial Accounting Standards Board (FASB) Statement No.
115, "Accounting for Certain Investments in Debt and Equity
Securities". Management determines the appropriate classification of
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-
maturity when the Corporation has the ability and positive intent to hold
the securities to maturity. Securities held-to-maturity are carried at
cost and adjusted for amortization of premiums and accretion of discounts.
Declines in value judged to be other than temporary are included in net
securities gains (losses).
Debt securities not classified as held-to-maturity and equity
securities are classified as available-for-sale. Securities available-for-
sale are stated at fair value, with the net unrealized gains and losses
reported as a separate component of shareholders' equity, net of tax
effect. The cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts. Realized
gains and losses on securities available-for-sale and declines in value
judged to be other than temporary are included in net securities gains
(losses). The decision to sell such securities is based on management's
assessment of changes in economic or financial market conditions, interest
rate risk and the Corporation's financial position and liquidity.
Interest and dividends are included in interest income from investments.
Premiums are amortized to call and discounts are accreted to maturity under
the interest method except for mortgage-backed securities where the
recognition period is based on the estimated lives. Such amortization and
accretion is included in interest income from investments. The cost of
securities sold is determined principally under the specific identification
method.
Loans: Interest on loans is recognized based upon the amount of principal
outstanding. The accrual of interest is generally discontinued for a loan
when full collection of the principal or interest is doubtful and a loan
becomes 90 days or more past due. Subsequent payments received on these
non-accrual loans are either applied against principal or reported as
interest income, according to management's judgment as to the collection
of principal. Loan origination fees, net of certain direct origination
costs, are deferred and recognized over the life of the related loan as a
yield adjustment.
Allowance For Loan Losses: Management maintains the allowance at a level
believed adequate to absorb potential losses in the portfolio. Factors
considered in evaluating the adequacy of the allowance include potential
specific losses, past loan loss experience, the volume, growth and
composition of the loan portfolio and the current economic conditions and
trends. The allowance is increased by provisions charged to operations and
reduced by net charge-offs.
The Corporation accounts for impaired loans pursuant to the provisions
of FASB Statement No. 114, "Accounting by Creditors for Impairment of a
Loan", and FASB Statement No. 118, "Accounting by Creditors for
Impairment--Income Recognition and Disclosures". Under FASB 114, the
allowance for credit losses related to loans that are identified for
evaluation in accordance with this standard is based on the discounted cash
flows using the loans initial effective interest rate or the fair value of
the collateral for certain collateral-dependent loans. FASB 118
prescribes how a creditor should report income on impaired loans and
clarifies FASB 114's disclosure requirements. In accordance with FASB
118, the Corporation will continue to recognize interest income as
described in the loans section above.
Premises And Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization, which is computed on the
straight-line method.
Income Taxes: The Corporation accounts for income taxes pursuant to the
provisions of FASB Statement No. 109, "Accounting for Income Taxes."
Under FASB 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Use Of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Flow Information: For purposes of the statements of cash flows, the
Corporation considers cash and due from banks and federal funds sold as
cash and cash equivalents. Generally, federal funds are purchased and sold
for one-day periods.
Cash paid for interest and income taxes was $13,723,000 and $1,444,000,
respectively, during the year-ended December 31, 1997; $11,905,000 and
$1,217,000, respectively, during the year-ended December 31, 1996; and
$10,762,000 and $1,322,000, respectively, during the year-ended December
31, 1995.
The increase in net unrealized gains on available-for-sale securities of
$1,054,000 (net of $543,000 in deferred tax effects) during the period
ended December 31, 1997, the decrease of $956,000 (net of $492,000 in
deferred tax effects) during the period ended December 31, 1996 and the
increase of $2,986,000 (net of $1,538,000 in deferred tax effects) during
the period ended December 31, 1995 are non-cash transactions for purposes
of the statements of cash flows.
Reclassifications: Certain reclassifications have been made to the 1995
financial statements and accompanying notes to conform with the 1997 and
1996 presentation.
42
<PAGE>
NOTE 2--RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The banking subsidiary is required to maintain reserve balances with the
Federal Reserve Bank. The average amount of those balances for the year-
ended December 31, 1997, approximated $3,777,000.
NOTE 3--INVESTMENT SECURITIES
The following is a summary of the investment portfolio by respective
security category ((In Thousands):
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities
and obligations of the U.S.
Government and its agencies $23,566 $ 107 $ (15) $23,658
Obligations of states and
political subdivisions 19,231 883 --- 20,114
Mortgage-backed securities 46,161 436 (44) 46,553
Total debt securities 88,958 1,426 (59) 90,325
Equity securities 3,353 1,136 --- 4,489
TOTAL AVAILABLE-
FOR-SALE SECURITIES $92,311 $2,562 $ (59) $94,814
HELD-TO-MATURITY SECURITIES
Obligations of states and
political subdivisions $ 2,522 $ 48 $ --- $ 2,570
Mortgage-backed securities 305 --- (7) 298
TOTAL HELD-TO-
MATURITY SECURITIES $ 2,827 $ 48 $ (7) $ 2,868
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities
and obligations of the U.S.
Government and its agencies $28,047 $ 89 $(214) $27,922
Obligations of states and
political subdivisions 18,582 611 (45) 19,148
Mortgage-backed securities 21,232 135 (210) 21,157
Total debt securities 67,861 835 (469) 68,227
Equity securities 3,238 543 (3) 3,778
TOTAL AVAILABLE-FOR-
SALE SECURITIES $71,099 $1,378 $(472) $72,005
HELD-TO-MATURITY SECURITIES
Obligations of states and
political subdivisions $ 3,487 $ 27 $ (13) $ 3,501
Mortgage-backed securities 610 --- (24) 586
TOTAL HELD-TO-
MATURITY SECURITIES $4,097 $ 27 $ (37) $ 4,087
</TABLE>
43
<PAGE>
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. (In Thousands)
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 3,706 $ 3,713
Due after one year through five years 18,378 18,508
Due after five years through ten years 5,787 5,807
Due after ten years 14,926 15,744
42,797 43,772
Mortgage-backed securities 46,161 46,553
Equity securities 3,353 4,489
$92,311 $94,814
HELD-TO-MATURITY
Due in one year or less $ 80 $ 80
Due after one year through five years --- ---
Due after five years through ten years 340 343
Due after ten years 2,102 2,147
2,522 2,570
Mortgage-backed securities 305 298
$ 2,827 $ 2,868
</TABLE>
Proceeds from the sale of investments in debt and equity
securities during 1997, 1996 and 1995 were $16,420,000, $40,230,000 and
$21,860,000, respectively. Gross gains realized on these sales were
$882,000, $970,000 and $628,000, respectively. Gross losses realized on
these sales were $212,000, $368,000 and $48,000, respectively. Net
unrealized gains on securities available-for-sale, net of the related
deferred tax effects, included as a separate component of shareholders'
equity, were $1,652,000 at December 31, 1997 and $598,000 at December 31,
1996.
Securities having a carrying value of $40,667,000 at December 31, 1997,
and $46,311,000 at December 31, 1996 were pledged to secure public
deposits, repurchase agreements and other purposes required by law.
NOTE 4--ALLOWANCE FOR LOAN LOSSES
<TABLE>
Transactions in the allowance for loan losses were as follows (In Thousands):
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $2,403 $2,220 $2,498
Recoveries on loans 181 63 125
Provision charged to operations 910 480 360
Loans charged-off (586) (360) (763)
Balance at end of year $2,908 $2,403 $2,220
</TABLE>
44
<PAGE>
<TABLE>
The following table provides information relating to the Corporation's impaired loans (In Thousands) :
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Impaired loans with no related
allowance due to write-downs $470 $562
Impaired loans with no related
allowance necessary 412 242
Recorded investment in impaired loans $882 $804
Impaired loans on non-accrual status $191 $---
Allowance related to impaired loans $--- $---
Average recorded investment in impaired
loans during the period $759 $887
Related amount of interest income
recognized on impaired loans $ 69 $ 81
Amount of interest income on
impaired loans using the cash
basis method of accounting $--- $ 1
</TABLE>
NOTE 5--PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment includes the following at December 31 (In Thousands):
<CAPTION>
1997 1996
<S> <C> <C>
Premises $ 6,624 $6,609
Equipment 6,089 5,692
12,713 12,301
Less accumulated depreciation and amortization (5,697) (5,226)
$ 7,016 $7,075
</TABLE>
The Corporation recognized depreciation and amortization expense of
$883,000, $776,000 and $673,000 for 1997, 1996 and 1995, respectively.
The Corporation and its subsidiary occupy certain facilities under lease
arrangements and lease certain equipment. Rentals amounted to $295,000,
$369,000 and $391,000 in 1997, 1996 and 1995, respectively. Minimum annual
rental commitments at December 31, 1997, under noncancelable leases,
principally for real estate and equipment, are payable as follows (In
Thousands):
<TABLE>
<CAPTION>
Annual Rental
Payments
<S> <C>
1998 $ 249
1999 262
2000 238
2001 242
2002 233
2003 and thereafter 2,231
Total minimum lease payments $3,455
</TABLE>
45
<PAGE>
NOTE 6--SHORT-TERM BORROWINGS
<TABLE>
Short-term borrowings and rates outstanding at December 31, 1997 and
1996 are summarized as follows
(In Thousands, Except Percentages):
<CAPTION>
1997 1996
<S> <C> <C> <C> <C>
Federal funds purchased $ --- --- $ 2,000 5.00%
Securities sold under repurchase agreements 9,915 4.87% 8,866 4.84%
FHLB borrowings 796 5.94% 1,375 5.62%
Other 1,722 4.59% 811 5.16%
$ 12,433 4.90% $13,052 4.97%
</TABLE>
The securities sold under repurchase agreements were U.S. Treasury and
agency securities which were maintained under the Corporation's control.
NOTE 7--LONG-TERM BORROWINGS
The Bank utilizes the services of the Federal Home Loan Bank of Pittsburgh
(FHLB) by periodically borrowing funds to manage interest rate risk and to
provide match funding for specific loan and investment activities. The
advances are fully collateralized as specified by the FHLB. Qualifying
collateral includes U.S. Treasury, agency and mortgage-backed securities
and residential real estate loans. These advances are subject to
restrictions or penalties related to prepayment.
The Corporation paid $1,059,000 in interest on long-term borrowings
during 1997, $511,000 in 1996 and $673,000 in 1995.
Included in long-term borrowings at December 31, 1997, was $2.8 million
of amortizing advances with remaining amortization periods ranging from 63
to 153 months and final maturities through 2003. Also, $18.0 million of
advances had conversion features whereby the FHLB may convert the advances
to variable rates with subsequent quarterly resets. Upon conversion, the
Corporation has the option of putting the advances back to the FHLB. The
conversion features extend between 3 and 15 months from December 31, 1997,
and the advances have final maturities through 2002. At December 31, 1997,
all advances had fixed rates of interest.
<TABLE>
The following table presents the annual maturities and weighted average
rates of long-term borrowings at December 31, 1997
(In Thousands):
<CAPTION>
Annual Weighted
Maturities Average Rate
<S> <C> <C>
1999 $ 1,317 7.31%
2000 948 6.98%
2001 3,820 6.24%
2002 18,152 5.88%
2003 and thereafter 1,215 6.74%
$25,452 6.09%
</TABLE>
NOTE 8--SHAREHOLDERS' EQUITY
On January 20, 1995, the Board of Directors declared a 3 for 2 stock
split payable April 1, 1995, to shareholders of record March 15, 1995.
Related to this split, the Board of Directors also approved an amendment to
the Articles of Incorporation on January 20, 1995 to increase the number of
authorized shares of common stock from 4,500,000 shares to 6,750,000 shares
and to reduce the par value per share from $1.67 to $1.11. All per share
data was retroactively adjusted to reflect these actions.
The Corporation maintains a dividend reinvestment plan which allows
existing shareholders to reinvest cash dividends into additional shares of
the Corporation's common stock. The Corporation has reserved 130,000
shares of common stock for issuance under this plan. As of December 31,
1997, 105,075 shares were available.
The Bank offers shares of the Corporation's stock as one of several
investment options in its defined contribution 401(k) plan. The
Corporation has reserved 25,000 shares of common stock for issuance to
participants in the 401(k) plan. As of December 31, 1997, 21,045 shares
were available.
The Corporation also maintains an employee stock purchase plan. This
plan is intended to encourage employees of the Corporation and its
subsidiary to acquire a stake in the future of the Corporation. The plan
provides for the purchase of stock at 90% of the fair market value. The
Corporation has reserved 47,250 shares of common stock for issuance
under the plan. As of December 31, 1997, 39,801 shares were available.
The Corporation adopted an omnibus stock plan effective January 15, 1993.
This plan is intended to provide incentive compensation opportunities for
selected officers and key employees of the Corporation and its subsidiary.
The Corporation has reserved 189,000 shares of common stock for issuance
pursuant to awards under this plan which must be granted within ten years
from the effective date. As of December 31, 1997, 115,836 shares were
available for the granting of additional awards. To date, only awards of
incentive stock options have been made from the plan.
46
<PAGE>
Financial Accounting Standards Board (FASB) Statement No. 123,
"Accounting for Stock Based Compensation", became effective in 1996.
This statement encourages companies to recognize compensation expense for
stock-based awards based on their fair value. The statement allows
companies to continue to follow the existing intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock
Issued to Employees", with the requirement that disclosures be provided
which present pro forma net income and earnings per share, had the new fair
value method been used. The Corporation has elected to continue to follow
APB 25 to account for its employee stock purchase plan and employee stock
purchase plan and employee stock options. No compensation expense was
recognized under APB 25 for these plans.
The pro forma compensation expense for employee stock options under the
fair value method was determined with the aid of a Black-Scholes option
pricing model. This option pricing model, like other models, requires the
input of subjective assumptions. The weighted-average assumptions for
1997, 1996 and 1995, respectively, were: risk free interest rates of 5.77%,
6.25% and 5.76%; dividend yields of 2.30%, 2.57% and 2.34%; volatility
factors of .134, .132 and .147; and a weighted average expected life of ten
years.
For purposes of pro forma disclosures, the discount related to
the shares issued is considered compensation expense, whereas the estimated
fair value of the options is amortized to expense over the options'
vesting period. Furthermore, these disclosures are required
to be applied prospectively from 1995. Therefore, the initial impact on
pro forma net income may not be representative of future compensation
expense since the impact of option awards prior to 1995 are not considered.
<TABLE>
The Corporation's pro forma information for the years-ended December 31,
is as follows (In Thousands, Except Per Share Data):
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Pro forma net income $3,762 $3,551 $3,555
Pro forma net income per share - basic and diluted $ 1.28 $ 1.17 $ 1.14
</TABLE>
<TABLE>
A summary of the Corporation's stock option activity, and related information is as follows:
<CAPTION>
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 46,108 $18.92 46,820 $18.97 24,438 $19.17
Granted 31,962 22.33 5,280 18.52 22,382 18.76
Exercised --- --- --- --- --- ---
Forfeited (4,906) 18.97 (5,992) 18.97 --- ---
Outstanding at end of year 73,164 $20.41 46,108 $18.92 46,820 $18.97
Exercisable at end of year 18,670 $19.17 --- ---
Weighted-average fair value of
options granted during the year $ 5.80 $ 4.73 $ 4.91
</TABLE>
Options granted under the plan have ten-year terms and vest and become
fully exercisable at the end of three years of continued employment.
Exercise prices for options outstanding as of December 31, 1997 ranged from
$18.50 to $22.75. The weighted average remaining contractual life of those
options is 8.37 years.
<TABLE>
The following table sets forth capital ratios for the Corporation and its bank subsidiary:
<CAPTION>
1997 1996
<S> <C> <C>
HANOVER BANCORP, INC.
Tier 1 capital to risk-adjusted assets 12.47% 12.87%
Total capital to risk-adjusted assets 13.58% 13.87%
Leverage ratio 8.19% 8.79%
BANK OF HANOVER AND TRUST COMPANY
Tier 1 capital to risk-adjusted assets 10.82% 11.78%
Total capital to risk-adjusted assets 11.93% 12.78%
Leverage ratio 7.09% 8.06%
</TABLE>
47
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a framework for supervisory actions in an effort to
reduce the risks of possible long-term losses to the deposit insurance
funds. It established five levels of capital at which insured depository
institutions will be "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized". In 1992, the regulators adopted
regulations to implement the requirements of FDICIA. 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 "CAMELS" 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.
The Bank has been deemed "well capitalized".
NOTE 9 - NET INCOME PER SHARE
<TABLE>
The computation of basic and diluted net income per share is as follows:
<CAPTION>
Year-Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted
net income per share-net income $3,807,000 $3,580,000 $3,556,000
DENOMINATOR:
Denominator for basic net income per share-
weighted average shares outstanding 2,948,029 3,043,047 3,106,298
Effect of dilutive securities:
Employee stock options 537 --- ---
Denominator for diluted net income per share-
adjusted weighted average shares outstanding 2,948,566 3,043,047 3,106,298
Basic net income per share $ 1.29 $ 1.18 $ 1.14
Diluted net income per share $ 1.29 $ 1.18 $ 1.14
</TABLE>
For additional disclosures regarding the outstanding employee stock
options, see Note 8. The weighted average shares outstanding have been
retroactively restated to reflect the stock split.
Options to purchase 47,914 shares at $18.96 per share and 24,985
shares at $19.17 per share were outstanding during 1996 and 1995,
respectively, but were not included in the computation of diluted net
income per share because the options' exercise prices were greater
than the average market prices of the common shares and, therefore,
the effects would be antidilutive.
48
<PAGE>
NOTE 10- INCOME TAXES
The significant components of the Corporation's deferred tax assets and
liabilities as of December 31, 1997 and 1996, respectively, which are
included in other liabilities in 1997, and other assets in 1996, are as
follows (In Thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS
Loan loss reserve $ 732 $ 560
Deferred loan fees 135 166
Deferred compensation 220 215
Other 31 92
Total deferred tax assets 1,118 1,033
DEFERRED TAX LIABILITIES
Net unrealized securities gains 851 308
Depreciation 192 171
Accretion 63 51
Pension 67 84
Other 125 83
Total deferred tax liabilities 1,298 697
Net deferred tax assets (liabilities) $ (180) $ 336
</TABLE>
<TABLE>
The provision for income taxes included in the accompanying Statements of
Income consists of the following (In Thousands):
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current payable $1,502 $1,244 $1,080
Deferred (131) (106) (120)
$1,371 $1,138 $ 960
</TABLE>
<TABLE>
A reconciliation of the federal statutory corporate income tax rate to
the Corporation's effective tax rate is as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory tax rate 34.0% 34.0% 34.0%
Tax-exempt interest income (8.8)% (10.3)% (13.2)%
Other 1.3% .4% .5%
Effective tax rate 26.5% 24.1% 21.3%
</TABLE>
Income taxes applicable to realized net securities gains included in the
provision for income taxes totaled $228,000 in 1997, $205,000 in 1996 and
$197,000 in 1995.
NOTE 11-RETIREMENT PLANS
The Bank provides a defined contribution 401(k) plan to all employees who
have completed at least one year of employment as defined in the plan and
are 21 years of age. In each pay period a participant may elect to defer
up to 15% of base salary/wages for contribution to the plan up to the
maximum allowable contribution as established by the Internal Revenue
Service. The Bank matches, in cash, 50% of the participant's contribution
up to 4% of the participant's base salary/wages. Beginning in 1996, the
Bank also made a discretionary annual contribution to all eligible
employees. The Corporation's expense for the defined contribution plan,
including the discretionary contribution, was $205,000, $177,000 and
$64,000 in 1997, 1996 and 1995, respectively.
The Bank's defined benefit pension plan was curtailed on January 19,
1996. Under the curtailment, pension benefits were frozen as of March 31,
1996. The plan will be administered in frozen status until such time as
management deems termination and final settlement appropriate. While in
frozen status, the funding policy of the Bank will be to make contributions
as necessary to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. On September 16, 1996,
approximately two-thirds of the plan's accumulated benefit obligation was
settled via the purchase of annuity contracts.
49
<PAGE>
In 1996, as a result of the plan curtailment and the partial settlement,
the Corporation recognized a curtailment gain and a settlement loss in
accordance with Financial Accounting Standards Board (FASB) Statement No.
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits". These events were
not material to the Corporation's results of operations.
The actuarial present values of accumulated benefit obligations at
December 31, 1997, and 1996 were $1,041,000 and $988,000, respectively, all
of which were vested. The following table sets forth the plan's funded
status and amounts recognized in the Corporation's balance sheet at
December 31, 1997 and 1996 (In Thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Plan assets at fair value $1,174 $1,142
Projected benefit obligation for service rendered to curtailment (1,041) (988)
Plan assets in excess of projected benefit obligation 133 154
Unrecognized net loss 119 92
Unrecognized net transition asset --- ---
Unrecognized prior service cost --- ---
Prepaid pension costs $ 252 $ 246
</TABLE>
<TABLE>
Net periodic pension costs included the following components:
<CAPTION>
Year-Ended
December 31,
1997 1996 1995
<S> <C> <C> <C>
Service costs $ --- $ --- $ 92
Interest costs on projected benefit obligation 73 166 224
Actual return on plan assets (100) (92) (352)
Net amortization and deferral 21 (88) 122
Net periodic pension costs $ (6) $ (14) $ 86
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7% at December 31,
1997 and 1996. The rate of increase in future compensation levels was 5%
at December 31, 1995. The expected long-term rate of return on plan assets
was 7% in 1997 and 1996 and 8% in 1995. Plan assets are invested primarily
in mutual funds, common stocks, U.S. Government securities and certificates
of deposit. Among the common stock investments, the plan held 6,183 shares
of Hanover Bancorp, Inc. stock at December 31, 1996 with a market value of
approximately $113,000. No shares were held at December 31, 1997.
Dividends received by the plan from Hanover Bancorp, Inc. stock were $1,000
and $7,000 in 1997 and 1996, respectively.
NOTE 12--RELATED PARTY TRANSACTIONS
The Corporation's subsidiary has granted loans to the officers and
directors of the Corporation and its subsidiary and to their associates.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collection. The aggregate dollar amount of these loans was
$2,751,000 and $2,786,000 at December 31, 1997 and 1996, respectively.
During 1997, $300,000 of new loans were made, and repayments totaled
$335,000.
In addition, the Corporation's subsidiary has securities sold under
repurchase agreements to the directors of the Corporation and its
subsidiary and to their associates. Related party securities sold under
repurchase agreements are on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons. The aggregate dollar
amount of these agreements was $3,448,000 and $2,995,000 at December 31,
1997 and 1996, respectively.
50
<PAGE>
NOTE 13--HANOVER BANCORP, INC.
(PARENT COMPANY ONLY) FINANCIAL INFORMATION
(In Thousands)
<TABLE>
<CAPTION>
December 31,
BALANCE SHEETS 1997 1996
<S> <C> <C>
ASSETS
Cash $ 736 $ 861
Investment securities:
Available-for-sale 3,172 2,424
Accrued interest receivable 11 10
Other assets 2,160 337
Investment in Bank of Hanover and Trust Company 29,127 28,451
TOTAL ASSETS $35,206 $32,083
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 510 $ 185
Dividends payable 382 357
TOTAL LIABILITIES 892 542
Shareholders' Equity:
Common stock 3,257 3,296
Surplus 18,687 18,659
Net unrealized gains on securities
available-for-sale, net of tax effects 1,652 598
Retained earnings 10,718 8,988
TOTAL SHAREHOLDERS' EQUITY 34,314 31,541
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $35,206 $32,083
</TABLE>
<TABLE>
<CAPTION>
Year-Ended December 31,
STATEMENTS OF INCOME 1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Investment securities:
Taxable $ 60 $ 55 $ 54
Tax-exempt 29 57 157
89 112 211
Interest on short-term investments --- --- 4
TOTAL INTEREST INCOME 89 112 215
NET SECURITIES GAINS 526 363 135
OTHER EXPENSE
Other operating expense 130 95 87
Income before applicable income taxes
and equity in undistributed
income of subsidiary 485 380 263
INCOME TAXES 169 86 23
Income before equity in undistributed
income of subsidiary 316 294 240
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY
Bank of Hanover and Trust Company 3,491 3,286 3,316
NET INCOME $3,807 $3,580 $3,556
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Year-Ended December 31,
STATEMENTS OF CASH FLOWS 1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $3,807 $3,580 $3,556
Adjustments to reconcile net income to
net cash provided by operating activities:
Net securities gains (526) (363) (135)
(Increase) decrease in interest receivable (1) 20 22
Increase (decrease) in other liabilities (10) 2 (3)
Increase in accrued taxes 146 11 33
Equity in undistributed income of subsidiary (3,491) (3,286) (3,316)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (75) (36) 157
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale
investment securities 1,230 2,666 993
Proceeds from maturities of
investment securities --- --- 341
Purchases of investment securities (894) (348) (544)
Proceeds from maturities of
short-term investments --- --- 600
Purchases of short-term investments --- --- (600)
Cash dividends received from subsidiary 1,677 1,371 1,243
NET CASH PROVIDED BY
INVESTING ACTIVITIES 2,013 3,689 2,033
FINANCING ACTIVITIES
Cash dividends paid (1,447) (1,375) (1,243)
Cash paid in lieu of fractional shares --- --- (6)
Proceeds from issuance of common stock 31 57 35
Repurchase and retirement of common stock (647) (2,612) ---
NET CASH USED IN
FINANCING ACTIVITIES (2,063) (3,930) (1,214)
INCREASE (DECREASE) IN CASH (125) (277) 976
Cash at beginning of year 861 1,138 162
CASH AT END OF YEAR $ 736 $ 861 $1,138
</TABLE>
The Corporation relies on dividends from Bank of Hanover and Trust Company
to fund dividends paid to shareholders of the Corporation. Under
Pennsylvania statutes, the Bank is restricted, unless prior regulatory
approval is obtained, in the amount of dividends which it may declare in
relation to its accumulated profits, less any required transfer to surplus.
At December 31, 1997, retained earnings of the Bank available for dividends
were $19,337,000. These restrictions have not had, nor are they expected
to have any impact on the Corporation's dividend policy. Other regulatory
restrictions limit the ability of the Bank to transfer net assets to the
Corporation. At December 31, 1997, these restricted net assets amounted to
$7,783,000.
52
<PAGE>
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
(In Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 21,337 $ 21,337 $ 16,027 $ 16,027
Investment securities 97,641 97,682 76,102 76,092
Loans 277,475 254,573
Less: Allowance for loan losses (2,908) (2,403)
Net loans 274,567 278,959 252,170 255,232
TOTAL FINANCIAL ASSETS $393,545 $397,978 $344,299 $347,351
FINANCIAL LIABILITIES
Deposits $329,951 $330,226 $297,004 $296,996
Short-term borrowings 12,433 12,433 13,052 13,052
Long-term borrowings 25,452 25,698 11,248 11,526
TOTAL FINANCIAL LIABILITIES $367,836 $368,357 $321,304 $321,574
</TABLE>
Financial Accounting Standards Board (FASB) Statement No. 107,
"Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. FASB 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments.
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and short-term investments approximate those assets'
fair values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: Fair values for loans are estimated using discounted cash flow
calculation using interest rates based on U.S. Government security yields
for similar terms adjusted for appropriate risks associated with each
instrument.
Deposits: The fair values disclosed for demand deposits (e.g., interest
and non-interest checking, passbook savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for certificates
of deposit are estimated using a discounted cash flow calculation that
applies interest rates based on U.S. Government security yields to a schedule
of aggregated expected maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Long-term borrowings: Fair values for long-term borrowings are
estimated using a discounted cash flow calculation that applies interest
rates based on U.S. Government security yields to a schedule of aggregated
expected maturities.
NOTE 15--COMMITMENTS
As of December 31, 1997, the Bank had commitments outstanding to extend
credit totaling $56,270,000 and commitments under outstanding standby
letters of credit totaling $2,723,000. Credit commitments generally
require the customers to maintain certain credit standards and are funded
at rates and terms prevailing at the time of extension. Management does
not anticipate any material losses as a result of these credit commitments.
53
<PAGE>
NOTE 16--CONCENTRATIONS OF CREDIT RISK
Most of the Corporation's business activity, including loans and loan
commitments, is with customers located within York and Adams Counties,
Pennsylvania, where it has full service branches. The Corporation's
commercial, consumer and mortgage portfolios are principally to borrowers
in this market area and are generally fully collateralized. The commercial
loan portfolio is well diversified with no industry comprising greater than
10% of total loans outstanding.
NOTE 17--ACCOUNTING CHANGES
Financial Accounting Standards Board (FASB) Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", was issued in March 1995 and was effective in
1996. This standard prescribes the accounting for the impairment of long-
lived assets, such as property, plant and equipment; identifiable
intangibles, including patents and trademarks; and goodwill related to
those assets. In addition, FASB 121 defines the accounting for long-lived
assets and identifiable intangibles that a company plans to dispose of,
other than those that are part of a discontinued operation. This standard
has not had a material effect on the Corporation's liquidity, capital
resources, or results of operations.
FASB Statement No. 123, "Accounting for Stock Based Compensation", was
issued in October 1995 and was effective in 1996. As detailed in Note 8,
this standard has not had a material effect on the Corporation's
liquidity, capital resources or results of operations.
In June 1996, the FASB issued 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" which was adopted in 1996. 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 a material impact on the Corporation's liquidity, capital resources
or results of operations.
In February 1997, FASB issued Statement No. 128, "Earnings Per Share"
effective for financial statements for periods presented after December 15,
1997. This standard replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts presented have been calculated
in accordance with FASB 128 as detailed in Note 9.
In June 1997, FASB issued Statement 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. These disclosure requirements will have
no impact on the Corporation's financial condition or results of
operations.
In June 1997, FASB issued Statement 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. These disclosure requirements will have no impact on the
Corporation's financial condition or results of operations.
54
EXHIBIT 21
Subsidiaries of the Registrant
The registrant has one subsidiary--Bank of Hanover and Trust Company--
which is headquartered at 25 Carlisle Street, Hanover, Pennsylvania 17331
and incorporated in Pennsylvania.
55
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10K) of Hanover Bancorp, Inc. of our report dated January 22, 1998
included in the 1997 Annual Report to Shareholders of Hanover Bancorp,
Inc.
We also consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-7084) and Form S-8 (Nos. 33-73472; 33-
73470; and 33-73796) of Hanover Bancorp, Inc. of our report dated January
22, 1998, with respect to the consolidated financial statements of Hanover
Bancorp, Inc. incorporated by reference in this Annual Report (Form 10-K)
for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Harrisburg, Pennsylvania
March 25, 1998
56
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,643
<INT-BEARING-DEPOSITS> 23
<FED-FUNDS-SOLD> 4,075
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,814
<INVESTMENTS-CARRYING> 2,827
<INVESTMENTS-MARKET> 2,868
<LOANS> 277,475
<ALLOWANCE> 2,908
<TOTAL-ASSETS> 406,356
<DEPOSITS> 329,951
<SHORT-TERM> 12,433
<LIABILITIES-OTHER> 4,206
<LONG-TERM> 25,452
0
0
<COMMON> 3,257
<OTHER-SE> 31,057
<TOTAL-LIABILITIES-AND-EQUITY> 406,356
<INTEREST-LOAN> 22,768
<INTEREST-INVEST> 5,033
<INTEREST-OTHER> 518
<INTEREST-TOTAL> 28,319
<INTEREST-DEPOSIT> 12,338
<INTEREST-EXPENSE> 13,941
<INTEREST-INCOME-NET> 14,378
<LOAN-LOSSES> 910
<SECURITIES-GAINS> 670
<EXPENSE-OTHER> 11,549
<INCOME-PRETAX> 5,178
<INCOME-PRE-EXTRAORDINARY> 3,807
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,807
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 4.04
<LOANS-NON> 331
<LOANS-PAST> 174
<LOANS-TROUBLED> 221
<LOANS-PROBLEM> 2,800
<ALLOWANCE-OPEN> 2,403
<CHARGE-OFFS> 586
<RECOVERIES> 181
<ALLOWANCE-CLOSE> 2,908
<ALLOWANCE-DOMESTIC> 2,908
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
