UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
( ) 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 $.83 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 March 31, was $57,075,626.
The number of shares outstanding of the issuer's common stock as of
March 31, 2000: Common Stock, $.83 Par Value - 3,884,189 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts of the Hanover Bancorp, Inc. 1999 Annual Report to
Shareholders, which is included at Exhibit 13, is incorporated by reference
into Part II.
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<PAGE>
HANOVER BANCORP, INC.
FORM 10-K/A INDEX
PART I PAGE #
Item 1 - Business 3
Item 2 - Properties 10
Item 3 - Legal Proceedings 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters 11
Item 6 - Selected Financial Data 11
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 11
Item 8 - Financial Statements and Supplementary Data 11
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 11
PART III
Item 10 - Directors and Executive Officers of the Registrant 12
Item 11 - Executive Compensation 12
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 12
Item 13 - Certain Relationships and Related Transactions 12
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K 12
Item 15 - Signatures 14
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<PAGE>
PART I
Readers should consider all references to "Form 10-K" in this document
to refer to this amended annual report on Form 10-K/A. This amendment includes
excerpts from the definitive Proxy Statement for the 2000 Annual Shareholders
Meeting as an exhibit that had been incorporated by reference in the original
10-K filing.
The management of Hanover Bancorp, Inc. has made forward-looking
statements in this Annual Report on Form 10-K and in documents which it
incorporates by reference. These forward-looking statements may be subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of Hanover Bancorp,
Inc. and its subsidiaries, Bank of Hanover and Trust Company and HOVB Investment
Co., or the combined company. When words such as "believes", "expects",
"anticipates" or similar expressions occur in the Form 10-K, management is
making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this Form 10-K and in the documents that this Form 10-K
incorporates by reference, could affect the future financial results of Hanover
Bancorp, Inc. and its subsidiaries, both individually and collectively, and
could cause those results to differ materially from those expressed in the
forward-looking statements contained or incorporated by reference in this Form
10-K. These factors include: operating, legal and regulatory risks; economic,
political and competitive forces affecting our banking, securities, asset
management and credit services businesses; and the risk that our analyses of
these risks and forces could be incorrect and or that the strategies developed
to address them could be unsuccessful.
ITEM 1 - BUSINESS
HANOVER BANCORP, INC.
The registrant, Hanover Bancorp, Inc., 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 Pennsylvania Bank Holding Company
Act of 1956. It owns all the outstanding shares of its subsidiaries, Bank of
Hanover and Trust Company and HOVB Investment Co. 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. The bank is
subject to regulatory supervision of the Pennsylvania Department of Banking and
the Federal Deposit Insurance Corporation. The corporation's administrative
offices are located at 33 Carlisle Street, Hanover, Pennsylvania 17331
(telephone number 717-637-2201).
BANK OF HANOVER AND TRUST COMPANY
Bank of Hanover and Trust Company is the corporation's wholly-owned bank
subsidiary and was first organized in 1835 under the laws of the Commonwealth
of Pennsylvania. The bank conducts its business principally through eleven
full service banking offices located in York and Adams Counties, Pennsylvania.
At December 31, 1999, the bank had total deposits of $396,632,000; total assets
of $496,902,000; and net loans of $295,274,000.
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
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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 automated teller machine service at all of its
full service offices, as well as at 8 remote service locations in Hanover,
York, Dover, East Berlin and Carlisle.
Individual trust and investment 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.
HOVB INVESTMENT CO.
HOVB Investment Co., a wholly-owned subsidiary of the corporation, was
incorporated in Delaware in 1999. Its principal activity is the holding of and
investing in equity securities.
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 173 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 $5,413,625,000 as of June 30, 1999.
STAFF
The total number of full-time equivalent persons employed by the bank as
of December 31, 1999, was 198. The bank provides employees 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 Federal Reserve Board regulates and examines the operations of all
bank holding companies organized under the United States Bank Holding Company
Act, including the corporation. The act also restricts the business activities
in which the corporation may engage and that acquisitions which the corporation
may make. The Pennsylvania Department of Banking also regulates and supervises
the operations of the corporation because it is organized as a bank holding
company under Pennsylvania law.
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 14 to the Consolidated Financial Statements).
The bank is a member of the Federal Deposit Insurance Corporation, and
the FDIC insures the bank's deposits to the extent provided by law. The FDIC
also regulates and examines the bank's activities. The Pennsylvania Department
of Banking also regulates the bank's activities.
4
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On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, which is also known as the Financial Services
Modernization Act. The act repeals some Depression-era banking laws and will
permit banks, insurance companies and securities firms to engage in each others'
businesses after complying with certain conditions and regulations which are
yet to be finalized. The act grants to community banks the power to enter new
financial markets as a matter of right that larger institutions have managed to
do on an ad hoc basis. At this time, management has no plans to pursue these
additional possibilities.
Management does not believe that the Financial Services Modernization
Act will have an immediate positive or negative material effect on operations.
However, the act may have the result of increasing the amount of competition
that our company faces from larger financial service companies, many of whom
have substantially more financial resources than our company, which may now
offer banking services in addition to insurance and brokerage services.
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation which, if they were implemented,
would have a material adverse effect upon the liquidity, capital resources, or
results of operations, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future
may have, a negative impact on the corporation's results of operations.
GOVERNMENTAL MONETARY POLICIES
Domestic economic conditions and the monetary and fiscal policies of the
United States Government and its agencies affect the earnings of the corporation
and its subsidiaries. The Federal Reserve System regulates the money supply and
interest rates. The Federal Reserve buys and sells United States government
securities in the open market and controls reserve requirements against member
bank deposits in its efforts to affect the money supply. These efforts 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.
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<PAGE>
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 18 through 34 of filing) of the Registrant's
1999 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 amortized cost of investments at the
dates indicated (in thousands):
<CAPTION>
December 31.
1999 1998 1997
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $ 95,182 $ 87,166 $70,032
Obligations of states and political
subdivisions 59,839 43,134 21,753
Other securities 23,642 12,837 3,353
TOTAL $178,663 $143,137 $95,138
</TABLE>
<TABLE>
The following table sets forth the maturities of investment securities at December 31, 1999
(in thousands, except rates):
<CAPTION>
After One After Five
Year And Years And
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 securities and
obligations of other U.S. Government
agencies and corporations $ 6,025 6.06% $ 6,351 6.44% $17,025 6.29% $ 65,781 6.57%
Obligations of states and political
subdivisions - - 1,095 7.13% 4,247 6.48% 54,497 7.61%
Other securities - - 5,997 6.55% - - 17,645 4.34%
TOTAL $ 6,025 6.06% $13,443 6.55% $21,272 6.33% $137,923 6.70%
<FN>
Weighted average yields are based on amortized cost. Additionally, yields on tax-exempt obligations have been
computed on a fully taxable equivalent basis assuming a tax rate of 34%.
</FN>
</TABLE>
Other information required by this item is set forth within
"Management's Discussion and Analysis" (pages 18 through 34 of filing) of the
Registrant's 1999 Annual Report to Shareholders, excerpts of which are included
at Exhibit 13, and is incorporated herein by reference.
6
<PAGE>
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,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 46,750 $ 43,803 $ 35,254 $ 31,991 $ 26,062
Real estate-construction 5,714 5,429 5,666 3,775 5,384
Real estate-commercial mortgage 48,663 44,750 34,216 29,563 25,739
Real estate-residential mortgage 130,151 130,196 135,217 119,383 95,227
Consumer 67,697 65,162 67,122 69,861 61,457
TOTAL $298,975 $289,340 $277,475 $254,573 $213,869
</TABLE>
<TABLE>
The following table shows the amounts of loans outstanding as of December 31, 1999,
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 And
Within Within After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 17,627 $ 17,774 $ 11,349 $ 46,750
Real estate-construction 1,789 933 2,991 5,714
Real estate-commercial mortgage 3,519 3,752 41,393 48,663
Real estate-residential mortgage 3,391 15,219 111,541 130,151
Consumer 5,779 56,400 5,518 67,697
TOTAL $ 32,105 $ 94,078 $172,792 $298,975
Loans maturing after one year with:
Fixed interest rates $ 82,617 $129,890
Variable interest rates 11,461 42,902
TOTAL $ 94,078 $172,792
</TABLE>
Other information required by this item is set forth within
"Management's Discussion and Analysis" (pages 18 through 34 of filing) of the
Registrant's 1999 Annual Report to Shareholders, excerpts of which are included
at Exhibit 13, and is incorporated herein by reference.
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<PAGE>
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>
1999 1998 1997 1996 1995
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
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to 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 $ 1,088 32.0% $ 703 30.6% $ 1,120 25.1% $ 839 24.2% $ 576 24.2%
Real estate -
construction 25 1.9% 23 1.9% 24 2.0% 16 1.5% 17 2.5%
Real estate -
residential mortgage 494 43.5% 501 45.0% 500 48.7% 420 46.9% 319 44.5%
Consumer 653 22.6% 645 22.5% 666 24.2% 690 27.4% 594 28.8%
Unallocated 1,441 1,533 598 438 714
TOTAL $ 3,701 100.0% $ 3,405 100.0% $ 2,908 100.0% $ 2,403 100.0% $ 2,220 100.0%
</TABLE>
Other information required by this item is set forth within
"Management's Discussion and Analysis" (pages 18 through 34 of filing) of the
Registrant's 1999 Annual Report to Shareholders, excerpts of which are
included at Exhibit 13, and is incorporated herein by reference.
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,
1999 1998 1997
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 35,687 $ 31,168 $ 27,994
Interest bearing demand deposits 40,537 1.33% 33,552 1.33% 29,062 1.33%
Savings deposits 18,845 2.07% 19,899 2.07% 22,346 2.04%
Money market deposits 98,161 3.48% 87,843 3.58% 70,577 3.37%
Time deposits 191,978 5.26% 171,974 5.52% 163,107 5.59%
TOTAL $385,208 $344,436 $313,086
</TABLE>
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<PAGE>
<TABLE>
The following table presents a maturity distribution of time certificates over $100,000 (in thousands):
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
MATURING IN
3 months or less $ 3,908 $ 1,485
4-6 months 3,705 1,751
7-12 months 3,455 3,933
Over 12 months 11,879 9,411
TOTAL $22,947 $16,580
</TABLE>
<TABLE>
The following table presents the annual maturities of time deposits at December 31, 1999 (in thousands):
<CAPTION>
Annual
Maturities
<S> <C>
2000 $ 99,609
2001 49,779
2002 20,893
2003 11,002
2004 1,321
2005 and thereafter 13,382
$195,986
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The information required by this item is set forth within "Selected
Consolidated Financial Data" (page 17 of filing) of the Registrant's 1999
Annual Report to Shareholders, excerpts of which are included at Exhibit 13,
and is incorporated herein by reference.
VII. SHORT-TERM BORROWINGS
<TABLE>
Short-term borrowings and weighted average interest rates outstanding at December 31 are
summarized as follow (in thousands, except percentages):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased $ 300 6.00% $ - - $ - -
Securities sold under repurchase agreements 13,572 4.57% 13,227 4.01% 9,915 4.87%
FHLB borrowings 5,894 5.78% 1,317 7.30% 796 5.94%
Other 1,500 4.54% 1,107 4.12% 1,722 4.59%
$ 21,266 4.92% $ 15,651 4.29% $12,433 4.90%
<FN>
The securities sold under repurchase agreements represent collateral to the lending party and are
primarily U.S. Treasury and agency securities. These securities are maintained under the
corporation's control.
</FN>
</TABLE>
<TABLE>
The maximum amounts of securities sold under repurchase agreements outstanding at any
month-end during each year of the reporting period were as follows (in thousands, except percentages):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Amount $13,610 $13,227 $11,957
Date February 28 December 31 July 31
</TABLE>
<TABLE>
The daily average amounts outstanding and interest rates of securities sold under repurchase
agreements for each reporting period were as follows (in thousands, except percentages):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Average outstanding $10,873 $9,376 $8,171
Weighted-average interest rate 4.25% 4.58% 4.70%
</TABLE>
Other information required by this item is set forth within "Notes to
Consolidated Financial Statements" (pages 18 through 34 of filing) of the
Registrant's 1999 Annual Report to Shareholders, excerpts of which are included
at Exhibit 13, and is incorporated herein by reference
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<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 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-A York Road 1511 Kenneth Road
Gettysburg, Adams County York, York County
Pennsylvania 17325 Pennsylvania 17404
EAST YORK
2215 East Market Street
York, York County
Pennsylvania 17402
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ITEM 3 - LEGAL PROCEEDINGS
In the opinion of the management of the corporation and its
subsidiaries, there are no proceedings pending to which the corporation
and/or its subsidiaries is a party or to which their property is subject,
which, if determined adversely to the corporation or its subsidiaries, would be
material in relation to the corporation's and its subsidiaries undivided
profits or financial condition. There are no proceedings pending other than
ordinary routine litigation incident to the business of the corporation or it's
subsidiaries. In addition, no material proceedings are pending or are known to
be threatened or contemplated against the corporation or it's subsidiaries by
government authorities.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this item is set forth within the
Registrant's 1999 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 1999 Annual Report to Shareholders (page 17 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 1999 Annual Report to Shareholders (pages 18 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 18 through 34 of filing) of the Registrant's
1999 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 1999 Annual Report to Shareholders (pages 38 through 61 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.
11
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the headings
"Information about Nominees and Continuing Directors", "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" within the
Registrant's definitive Proxy Statement for the 2000 Annual Shareholders
Meeting, excerpts of which are included at Exhibit 99.5, and is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is set forth under the headings
"Compensation of Directors", "Compensation Committee Report", "Compensation
Committee Interlocks and Insider Participation", "Summary Compensation Table",
"Option Grants in Last Fiscal Year", "Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year End Values", "Pension Plan", "401(k) Plan",
"Severance Agreement" and "Shareholder Return Performance Graph" within the
Registrant's definitive Proxy Statement for the 2000 Annual Shareholders
Meeting, excerpts of which are included at Exhibit 99.5, and is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the headings
"Principal Owners of the Corporation's Stock" and "Stock Ownership by the
Corporation's Directors, Nominees and Principal Officers" within the
Registrant's definitive Proxy Statement for the 2000 Annual Shareholders
Meeting, excerpts of which are included at Exhibit 99.5, and is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the heading
"Certain Transactions" within the Registrant's definitive Proxy Statement for
the 2000 Annual Shareholders Meeting, excerpts of which are included at Exhibit
99.5, and 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.
2.1 Agreement and Plan of Merger dated January 25, 2000 between Hanover
Bancorp, Inc. and Sterling Financial Corporation previously filed as
Exhibit 2.1 to the corporation's Current Report on Form 8-K filed January
25, 2000, are hereby incorporated by reference.
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3(i). Articles of Incorporation previously filed as Exhibit 3(i) to
the corporation's June 30, 1998 Form 10-Q filed August 14, 1998,
are hereby incorporated by reference.
3(ii). The By-laws of the corporation previously filed as Exhibit
3(ii) to the corporation's current report on Form 8-K filed April 25,
2000, are hereby incorporated by reference.
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 previously
filed as Exhibit 10.2 to the corporation's December 31, 1997 Form
10-K filed March 27, 1998, is hereby incorporated by reference.
11 Statement regarding computation of per share earnings (The
information required by this item is set forth within "Notes to
Consolidated Financial Statements" (pages 42 through 61 of filing)
of the Registrant's 1998 Annual Report to Shareholders, excerpts of
which are included at Exhibit 13, and is incorporated herein by
reference).
13 Excerpts from the 1999 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
99.1 Investment Agreement dated January 25, 2000 between Hanover Bancorp, Inc.
and Sterling Financial Corporation previously filed as Exhibit 99.1 to the
corporation's Current Report on Form 8-K filed January 25, 2000, are hereby
incorporated by reference.
99.2 Option dated January 25, 2000 previously filed as Exhibit 99.2 to the
corporation's Current Report on Form 8-K filed January 25, 2000, are hereby
incorporated by reference.
99.3 Press Release dated January 26, 2000 previously filed as Exhibit 99.3 to
the corporation's Current Report on Form 8-K filed January 25, 2000, are hereby
incorporated by reference.
99.4 Transaction Information previously filed as Exhibit 99.4 to the
corporation's Current Report on Form 8-K filed January 25, 2000, are hereby
incorporated by reference.
99.5 Excerpts from the definitive Proxy Statement for the 2000 Annual
Shareholders Meeting.
(b) There were no reports filed on Form 8-K for the quarter ended December 31,
1999.
(c) The exhibits required by this item are listed under item 14(a) 3 above.
(d) Not applicable.
13
<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 April 21, 2000.
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 April 21, 2000.
/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
Vice Chairman of the Board
/s/ J. Daniel Frock
J. Daniel Frock
Director
/s/ Dr. Gordon S. Haaland
Dr. Gordon S. Haaland
Director
/s/ Stewart E. Hartman, Jr.
Stewart E. Hartman, Jr.
Director
/s/ Terrence L. Hormel
Terrence L. Hormel
Director,
Chairman of the Board
/s/ Earl F. Noel, Jr.
Earl F. Noel, Jr.
Director
/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)
14
<PAGE>
EXHIBIT INDEX
Page
Number
in Filing
Exhibit No. (if applicable)
2.1 Agreement and Plan of Merger dated January 25, 2000 between Hanover
Bancorp, Inc. and Sterling Financial Corporation previously filed as
Exhibit 2.1 to the corporation's Current Report on Form 8-K filed January
25, 2000, are hereby incorporated by reference.
3(i). Articles of Incorporation previously filed as Exhibit 3(i)
to the corporation's current report on Form 8-K filed April 25,
2000, are hereby incorporated by reference.
3(ii). The By-laws of the corporation previously filed as
Exhibit 3(ii) to the corporation's current report on Form 8-K filed
April 25, 2000, are hereby incorporated by reference.
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 previously
filed as Exhibit 10.2 to the corporation's December 31, 1997
Form 10-K filed March 27, 1998, is hereby incorporated by
reference.
11 Statement regarding computation of per share earnings (The
information required by this item is set forth within "Notes to
Consolidated Financial Statements" (pages 42 through 61 of
filing) of the Registrant's 1999 Annual Report to
Shareholders, excerpts of which are included at Exhibit 13, and
is incorporated herein by reference).
13 Excerpts from the 1999 Annual Report to Shareholders. 16
21 Subsidiaries of the Registrant. 62
23 Consent of independent auditors. 63
27 Financial Data Schedule. 64
99.1 Investment Agreement dated January 25, 2000 between Hanover
Bancorp, Inc. and Sterling Financial Corporation previously filed
as Exhibit 99.1 to the corporation's Current Report on Form 8-K
filed January 25, 2000, are hereby incorporated by reference.
99.2 Option dated January 25, 2000 previously filed as Exhibit
99.2 to the corporation's Current Report on Form 8-K filed January
25, 2000, are hereby incorporated by reference.
99.3 Press Release dated January 26, 2000 previously filed as
Exhibit 99.3 to the corporation's Current Report on Form 8-K filed
January 25, 2000, are hereby incorporated by reference.
99.4 Transaction Information previously filed as Exhibit 99.4 to the
corporation's Current Report on Form 8-K filed January 25, 2000, are
hereby incorporated by reference.
99.5 Excerpts from the definitive Proxy Statement for the 2000
Annual Shareholders Meetings. 65
15
<PAGE>
EXHIBIT 13
EXCERPTS FROM THE 1999 ANNUAL REPORT TO SHAREHOLDERS
NATURE OF THE BUSINESS
Hanover Bancorp, Inc., a Pennsylvania business corporation, 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 financial institution. The
corporation's full service commercial banking business, including trust and
investment services, is conducted through this subsidiary, which operates
eleven 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.
HOVB Investment Co., a wholly-owned subsidiary of the corporation, was
incorporated in Delaware in 1999. It's principal activity is the holding of
and investing in equity securities.
16
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios, per share data and statistics)
<CAPTION>
Year-Ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Loans $298,975 $289,340 $277,475 $254,573 $213,869
Total assets 503,924 470,093 406,356 356,129 337,222
Deposits 396,509 364,008 329,951 297,004 278,234
Shareholders' equity - core (1) 37,767 35,740 32,662 30,943 31,308
Shareholders' equity - total 32,748 36,944 34,314 31,541 32,862
Total average assets 487,956 426,934 377,604 344,146 321,949
Total average equity 35,451 35,972 32,616 31,910 30,602
EARNINGS DATA
Interest income $ 33,909 $ 31,239 $ 28,319 $ 25,420 $ 23,892
Interest expense 17,817 15,854 13,941 12,148 11,409
Net interest income 16,092 15,385 14,378 13,272 12,483
Provision for loan losses 640 1,060 910 480 360
Other income 3,903 3,361 2,589 2,310 2,014
Other expenses 13,661 12,907 11,549 10,986 10,201
Net income 4,746 4,251 3,807 3,580 3,556
Return on average assets 0.97% 1.00% 1.01% 1.04% 1.10%
Return on average equity - core (1 12.79% 12.32% 11.92% 11.41% 11.75%
Return on average equity - total 13.39% 11.82% 11.67% 11.22% 11.62%
Efficiency ratio (3) 64.22% 64.40% 65.36% 67.10% 65.97%
CAPITAL
Equity to assets (average) 7.27% 8.43% 8.64% 9.27% 9.51%
Leverage ratio 7.29% 8.04% 8.19% 8.79% 9.54%
Cash dividends declared $ 1,799 $ 1,644 $ 1,472 $ 1,390 $ 1,274
Dividend payout ratio 37.91% 38.67% 38.67% 38.83% 35.83%
ASSET QUALITY
Nonperforming assets to total loans 0.31% 0.35% 0.35% 0.21% 0.17%
Allowance to nonperforming assets 403% 333% 302% 443% 597%
PER COMMON SHARE DATA (2)
Net income - basic and diluted $ 1.21 $ 1.08 $ 0.97 $ 0.88 $ 0.86
Cash dividends declared 0.46 0.42 0.37 0.34 0.31
Book value - core equity (1) 9.73 9.07 8.35 7.82 7.56
Book value - total equity 8.43 9.38 8.77 7.97 7.93
Market value 14.88 17.38 17.06 13.88 14.06
STATISTICS
Full service branch offices 11 10 10 11 11
Employees (full time equivalents) 198 196 202 205 198
<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 accumulated other comprehensive income.
(2) All per common share data has been adjusted to give retroactive effect to the 4 for 3 stock split paid
in June 1998 and the 3 for 2 stock split paid in April 1995.
(3) Excluding the non-recurring expense related to the pension plan termination in 1998.
</FN>
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following pages contain "Management's Discussion and Analysis" of
Hanover Bancorp, Inc.'s 1999 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 38.
SUMMARY OF EARNINGS AND FINANCIAL CONDITION
The year of 1999 was a successful year of financial performance for
Hanover Bancorp, Inc. The corporation met or exceeded goals for accelerating
growth in both earnings per share and return on equity. Total assets exceeded
the $500 million mark, further leveraging the capital base through the
combination of loan and deposit growth and implementation of investment
strategies. Asset quality measures remained relatively strong, evidencing a
disciplined approach to growth. 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 1999 was $4.7 million, an increase of $495,000 or 11.6%
from 1998. Earnings per share (EPS) was $1.21, an increase $.13 or 12.0% from
$1.08 in 1998. Return on average equity (ROE) was 12.79% in 1999 versus 12.32%
in 1998, computed using core equity (total equity excluding accumulated other
comprehensive income). These increases were driven primarily by continued
growth in total revenues, combining traditional balance sheet growth with an
expanding base of fee revenue generating products and services.
Net Interest Income
Net interest income continues to be the largest component of the
corporation's operating revenues, contributing over 80% of total operating
revenues. A portion of the corporation's interest income is tax-exempt,
therefore it is more appropriate to analyze net interest income on a fully
taxable equivalent basis. This basis adjusts tax free income to an amount that
would have been earned if the income were fully taxable. Table 10 reconciles
net interest income shown in the financial statements to a fully tax equivalent
basis.
Net interest income increased by $1.1 million or 6.6% on a fully taxable
equivalent basis in 1999. This change in net interest income is the result of
variations in both the balances of earning assets and interest bearing
liabilities as well as the average rates received on earning assets and average
rates paid on interest bearing liabilities. The impact of changes in the
balances of earning assets and interest bearing liabilities are referred to as
volume variances, while the impact of changes in average rates received or paid
are referred to as rate variances. Table 1 summarizes these variances.
The positive volume variance of $1.5 million reflects the $61.7 million
growth in the average volume of earning assets, resulting from loan and deposit
growth and increased investment security activity, as further discussed under
the headings for these balance sheet categories. While this growth has
positively impacted net interest income, it has also contributed to the
continued decline in net interest margin, as the following explains.
18
<PAGE>
Net interest margin dropped 31 basis points from 1998 to 3.74%. The
general interest rate environment has contributed in large part to the shrinking
margin. 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. The treasury yield curve continued to be relatively flat in
1999 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 between these two maturity points
averaged 88 basis points in 1998 and 1999, compared to 140 basis points from
1995 to 1997, and 331 basis points from 1991 to 1994. While the corporation
has grown in this environment, the growth has been at narrower spreads between
assets and liabilities and thus has had a cumulative negative impact on net
interest margin. This is most clearly evidenced in the investment activity
conducted over the past several years which was funded by Federal Home Loan Bank
of Pittsburgh borrowings. While these transactions were completed at relatively
narrow spreads, they have generated additional net interest income and have thus
positively impacted profitability.
Of further note in analyzing net interest income are the rate variances
outlined in Table 1. The long term trend in generally declining interest rates
was halted in mid-1999 as the market anticipated a change in Federal Reserve
monetary policy. Despite this change in the second half of 1999, the results
for the year reflected a decline in the yield earned on assets of a greater
degree than the rate paid on liabilities. Historically low levels of interest
rates brought about significant refinancing activity in 1998 which resulted in
accelerated prepayments of loans and investments and the impact continued to
carry over into 1999 results. Also, though rates generally declined on new
deposits through the first part of 1999, the continued shift of the funding base
to relatively higher rate sources caused the overall cost of funds to decline
less than the yield on earning assets.
<TABLE>
Table 1
VOLUME - RATE ANALYSIS
(in thousands)
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due To Increase (Decrease) Due To
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $ 912 $ (916) $ (4) $1,484 $ (99) $1,385
Investment securities 2,654 (99) 2,555 2,164 (269) 1,895
Federal funds sold and other 528 (36) 492 (154) (6) (160)
TOTAL INTEREST INCOME 4,095 (1,052) 3,043 3,494 (374) 3,120
INTEREST BEARING LIABILITIES
Interest bearing demand deposits 93 (1) 92 60 - 60
Savings deposits (22) 2 (20) (50) 5 (45)
Money market deposits 361 (91) 270 611 160 771
Time deposits 1,067 (453) 614 491 (120) 371
Borrowed funds 1,111 (104) 1,007 784 (28) 756
TOTAL INTEREST EXPENSE 2,610 (647) 1,963 1,895 18 1,913
NET INTEREST INCOME (FTE) $1,485 $ (405) $1,080 $1,599 $ (392) $1,207
<FN>
Tax-exempt income is on a fully taxable equivalent basis using a tax rate of 34% for 1999, 1998
and 1997. 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.
</FN>
</TABLE>
19
<PAGE>
Provision For Loan Losses
The corporation's loan loss provision during 1999 was $640,000, a
decrease of $420,000 from 1998. The level of the provision and the decrease
from the prior year reflects a decrease in net charge-offs from 1998 of
$219,000, as well as the evaluation of numerous factors focused on maintaining
a loan loss allowance that adequately reflects the risk inherent in the loan
portfolio. The loan loss allowance and asset quality measures are more fully
discussed in the Risk Management section that follows.
Net Securities Gains
Net securities gains totaled $384,000 in 1999, a decrease of $565,000
from 1998. Gains on sales of equity securities comprised $373,000 of this total
in 1999 versus $876,000 for 1998. These gains resulted from sales from the
corporation's financial sector stock holdings. Management realized gains on
holdings where valuations were considered excessive or to have reached peak
levels. The corporation holds these equity securities 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.
In addition, gains for the year included $11,000 realized through debt
securities sales executed as part of ongoing portfolio and balance sheet
management strategies. In 1998, $73,000 in net gains were realized from debt
securities sales. All sales resulting in gains or losses were from available-
for-sale securities.
Other Income
Other fee-based income has been an area of strategic focus and is
progressively making a more significant contribution to the corporation's
profitability. During 1999 other income increased $542,000 or 16.1%. Trust and
investment services income increased $173,000 or 17.6% in 1999 in part due to
the growth in assets under management of 16.8%. The corporation continues to
strategically position this division with personnel, technology, and marketing
initiatives to provide investment management products and services to businesses
and individuals. Deposit service charges grew by $332,000 or 25.3%. This
increase is attributable to the overall growth in the deposit base. More
specifically, the increase was supported by the continued growth in the debit
card product introduced in 1998 and greater overdraft fees due to fee increases
implemented in the second half of 1998 and revisions to procedures related to
direct and ACH debit payments.
20
<PAGE>
Other Expense
Other expense increased $754,000 or 5.8% during 1999. It should be
noted that 1998 included a non-recurring expense of $252,000 related to the
termination of the bank's pension plan, which had been frozen in 1996.
Adjusting for this item, other expense increased $1.0 million or 7.9% year
over year. Personnel related expenses (salaries and benefits) increased
$195,000 or 2.9%. Full time equivalents of 198 at year-end 1999 were up by 2
from the prior year-end. Depreciation expense on equipment increased $74,000
in 1999 resulting from investments in technology enhancements such as a PC
network and various software systems. Professional and service fees increased
$413,000 or 43.3% due to payments to outside firms providing the PC help desk
and network administration and investment services record keeping functions,
costs related to other technology consulting services and increased ATM
processing, legal and recruiting expenses. Other operating expenses in 1998
included the expense related to the pension plan termination, noted above.
Other operating expense in 1999 reflects greater supply costs related to various
deposit account products. The corporation's efficiency ratio (the cost to
generate one dollar of revenue) improved 18 basis points from 64.40% in 1998
to 64.22% in 1999.
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 21.9% in 1999, down from
25.8% in 1998. This decrease was the result of a higher level of tax-free
assets in 1999 relative to the prior year.
Analysis of 1998 Compared to 1997
Net income for 1998 was $4.3 million, an increase of $444,000 or 11.7%
from 1997. Earnings per share increased $.11 or 11.3% in 1998 to $1.08
from $.97 in 1997. Return on average equity was 12.32% in 1998 versus
11.92% in 1997, computed using core equity. These increases were driven
primarily by marked growth in other income, helping to offset the continued
challenge to maintain traditional net interest margin.
Net interest income increased by $1.2 million or 8.0% on a fully taxable
equivalent basis in 1998. This increase was principally due to $46.8 million
growth in the average volume of earning assets, resulting from loan and deposit
growth and increased investment security activity. Net interest margin
dropped 19 basis points from 1997 to 4.05%. The general interest rate
environment contributed in large part to the shrinking margin. Declining
interest rates during 1998 contributed to the decline in the yield earned on
assets by a greater degree than the rate paid on liabilities. Historically low
levels of interest rates brought about significant refinancing activity which
resulted in accelerated prepayments of loans and investments. Also, though
rates generally declined on new deposits and borrowings, the continued shift of
the funding base to relatively higher rate sources caused the overall cost of
funds to decline less than the yield on earning assets.
The corporation's loan loss provision during 1998 was $1.1 million, an
increase of $150,000 from 1997. The level of the provision and the increase over
the prior year reflected an increase in net charge-offs from 1997 of $158,000.
21
<PAGE>
Net securities gains totaled $949,000 in 1998, an increase of $279,000
from 1997. Gains on sales of equity securities comprised $876,000 of this total
in 1998 versus $730,000 for 1997. These gains resulted from sales from the
corporation's financial sector stock holdings. In addition, gains for the year
included $73,000 realized through debt securities sales executed as part of
ongoing portfolio and balance sheet management strategies. In 1997, $60,000 in
net losses were realized from debt securities sales. All sales resulting in
gains or losses were from available-for-sale securities.
During 1998 other income increased $772,000 or 29.8%. This increase
reflected the introduction of new fee generation sources as well as the
expansion of existing products and services. Trust department income increased
$156,000 or 20.8% in 1998 in part due to the growth in assets under management
of 10.7%. Deposit service charges grew by $228,000 or 21.0%. The introduction
of a debit card in early 1998 provided a new source of fee income which totaled
$105,000. The remaining increase in deposit service charges reflects a full year
of higher ATM fees generated by non-customer surcharging and an increased level
of overdraft fees. Other operating income increased $388,000 or 51.5%,
principally as a result of increased residential mortgage activity.
Other expense increased $1.4 million or 11.8% during 1998. This
increase included a non-recurring expense of $252,000 related to the termination
of the bank's pension plan, which had been frozen in 1996. Excluding this item,
other expense increased $1.1 million or 9.6% year over year. Personnel related
expenses (salaries and benefits) increased $526,000 or 8.4%. Salaries for the
mortgage department were a primary contributor to this increase, resulting from
volume-based compensation of mortgage originators. Also contributing to the
increase were additions to investment services and retail loan sales staffs.
However, full time equivalents of 196 at year-end 1998 were down by 6 from the
prior year-end. Depreciation expense on equipment increased $113,000 in 1998
resulting from investments in technology enhancements such as a PC network and
various software systems. Professional and service fees increased $266,000 or
38.7% due to contracting the PC help desk and network administration functions,
costs related to other strategic technology consulting services and a full year
of outsourcing the ATM processing and courier services. Other operating expenses
included the expense related to the pension plan termination, noted above, and
was also impacted by an increase in telecommunication expenses resulting from
the full implementation of a wide area network. The substantial increases in
operating revenues favorably impacted the corporation's efficiency ratio (the
cost to generate one dollar of revenue) which declined 96 basis points from
65.36% in 1997 to 64.40% in 1998.
22
<PAGE>
FINANCIAL CONDITION
The corporation's total assets were $503.9 million as of December 31,
1999, up $33.8 million or 7.2% from December 31, 1998. (Refer to Table 2.) In
1999, while loan outstandings grew at a rate of 3%, deposits grew at a faster
pace of 9%. 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
1999 1998 $ %
<S> <C> <C> <C> <C>
Funding Sources
Deposits $ 396,509 $ 364,008 $32,501 8.9%
Borrowed funds 70,321 64,787 5,534 8.5%
Other liabilities 4,346 4,354 (8) (0.2%)
Shareholders' equity 32,748 36,944 (4,196)(11.4%)
TOTAL SOURCES $ 503,924 $ 470,093 $33,831 7.2%
Funding Uses
Loans $ 295,274 $ 285,935 $ 9,339 3.3%
Investment securities 171,058 144,961 26,097 18.0%
Federal funds sold and short-term investments 396 8,694 (8,298)(95.4%)
Other assets 37,196 30,503 6,693 21.9%
TOTAL USES $ 503,924 $ 470,093 $33,831 7.2%
</TABLE>
Loans
Loans outstanding increased by $9.6 million or 3.3% from year-end 1998
to year-end 1999, reaching $299.0 million. (Refer to Table 3.) It should be
noted that this loan growth was net of loans sold of $14.4 million. The
commercial loan and commercial mortgage loan categories increased by $2.9
million and $3.9 million, respectively, evidencing the success of the
corporation's continued strategy of providing products and services to existing
business customers and attracting new relationships in our local markets. The
increase in the consumer category was principally the result of growth in
personal loans to individuals as part of an overall commercial account
relationship.
<TABLE>
Table 3
Loans
(in thousands, except percentages)
<CAPTION>
December 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 46,750 $ 43,803 $ 2,947 6.7%
Real estate-construction 5,714 5,429 285 5.2%
Real estate-commercial mortgage 48,663 44,750 3,913 8.7%
Real estate-residential mortgage 130,151 130,196 (45) -
Consumer 67,697 65,162 2,535 3.9%
298,975 289,340 9,635 3.3%
Allowance for loan losses (3,701) (3,405) (296) 8.7%
$295,274 $285,935 $ 9,339 3.3%
</TABLE>
23
<PAGE>
Investment Securities
During 1999 investment securities increased $35.5 million or 24.8% and
ended the year at $178.7 million, excluding the net unrealized gains (losses) on
securities available-for-sale. (Refer to Table 4.) This increase, in part,
reflects the trends in loans and deposits during 1999. As deposit growth
outpaced loan growth during the year, excess funding was used in the investment
portfolio. Much of the investment activity during 1999 was focused on fixed
rate mortgage-backed securities with intermediate average lives and tax-free
municipal securities. These securities provided the appropriate characteristics
with respect to yield and maturity relative to the management of the overall
balance sheet. In addition, the corporation continued a strategy to grow the
equity securities portfolio to position itself for long-term appreciation in
this segment of the market.
The shift from net unrealized gains to unrealized losses on securities
available-for-sale of $9.4 million from year-end 1998 to 1999 principally
reflects the impact of higher market interest rates on the corporation's debt
securities portfolio. Approximately 73% of the investment securities portfolio
is in fixed-rate mortgage-backed and municipal securities. These relatively
longer-term securities have been part of various arbitrage strategies
(investments funded with specific borrowings with matching maturity or repricing
characteristics) as well as serving as surrogates for residential mortgage loan
production which is sold to generate fee income. However, due to their
relatively longer-term, call features and prepayment variability, the market
value on these types of securities are particularly sensitive to changes in
market rates of interest.
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. 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. The sales executed in 1999 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, 1999, with the
exception of the U.S. Government and U.S. Government-sponsored agencies.
Investment securities are accounted for under Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Primarily all of the holdings 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.
24
<PAGE>
<TABLE>
Table 4
Investment Securities
(In Thousands, Except Percentages)
<CAPTION>
December 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of the U.S.
Government and its agencies $ 16,840 $ 21,779 $ (4,939) (22.7%)
Obligations of states and political subdivisions 59,840 43,134 16,706 38.7%
Corporate securities 11,474 4,478 6,996 156.2%
Mortgage-backed securities 78,342 65,387 12,955 19.8%
Total debt securities 166,496 134,778 31,718 23.5%
Equity securities 12,167 8,359 3,808 45.6%
178,663 143,137 35,526 24.8%
Net unrealized (losses) gains on securities available-for-sa (7,605) 1,824 (9,429) (516.9%)
$ 171,058 $ 144,961 $ 26,097 18.0%
</TABLE>
Deposits
Deposits are the most important funding source and the primary support
for the corporation's growth. Total outstanding deposits were $396.5 million at
December 31, 1999, an increase of $32.5 million or 8.9% from 1998. (Refer to
Table 5.) This overall growth came in nearly all categories of deposits. Most
notable was the increase in demand or checking-type accounts. Non-interest
bearing demand deposits grew $3.2 million or 9.6% while interest bearing demand
deposits grew $4.5 million or 11.4%. This growth not only reflected success in
establishing new accounts with individuals, but also growth in business
relationships. The increase in money market deposits was due to the continued
growth in the indexed money market account introduced in early 1997, as well as
an increase in traditional statement savings accounts. These two categories
grew $4.4 million and $3.5 million in 1999, respectively. Finally, the increase
in time deposits was achieved despite a relatively non-aggressive approach to
pricing in an environment of strong competitive pressures.
<TABLE>
Table 5
Deposits
(in thousands, except percentages)
<CAPTION>
December 31, Change
1999 1998 $ %
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 37,072 $ 33,827 $ 3,245 9.6%
Interest bearing demand deposits 43,921 39,418 4,503 11.4%
Savings deposits 17,435 17,712 (277) (1.6%)
Money market deposits 102,096 92,515 9,581 10.4%
Time deposits:
CDs under $100,000 173,038 163,956 9,082 5.5%
CDs over $100,000 22,947 16,580 6,367 38.4%
$ 396,509 $ 364,008 $32,501 8.9%
</TABLE>
25
<PAGE>
Borrowed Funds
Total borrowed funds increased $5.5 million or 8.5% during 1999 to a
level of $70.3 million at December 31, 1999. (Refer to Table 6.) This increase
was the net result of $10 million in new borrowings during 1999 net of the
exercise of put options on $4 million of advances and payments on amortizing
advances. The new borrowings included a fixed rate advance with features which
allow the FHLB to convert to a variable rate of interest. These features are
described in greater detail in Note 7. Also included in the new borrowings was
a short-term borrowing to meet year-end funding needs. 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
1999 1998 $ %
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements $ 13,572 $ 13,227 $ 345 2.6 %
FHLB borrowings 54,949 50,453 4,496 8.9 %
Other 1,800 1,107 693 62.6 %
$ 70,321 $ 64,787 $ 5,534 8.5 %
</TABLE>
Capital and Dividends
At December 31, 1999, total shareholders' equity was $32.7 million, a
decrease of $4.2 million or 11.4% from December 31, 1998. This change consisted
of an increase of $2.0 million in capital stock, surplus and undivided profits
(core equity) and a decrease of $6.2 million in accumulated other comprehensive
income or specifically, net unrealized gains on available-for-sale securities
(net of tax effects). The increase in core equity was primarily the result of
earnings retained. The change in the net unrealized gains on
available-for-sale securities was due to the impact of the higher level of
market interest rates at December 31, 1999 compared to December 31, 1998, which
negatively influenced the debt securities portfolio 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 1998 reflect the growth in total assets and stock repurchase
activity.
On April 17, 1998, the Board of Directors approved a 4-for-3 stock split,
payable June 1, 1998. This action was taken to enhance the marketability and
liquidity of the corporation's stock.
26
<PAGE>
During 1996, the Board of Directors approved a program to repurchase, in
open market and privately negotiated transactions, up to 200,000 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 186,667 shares of common stock on April 18,
1997. Buyback activity was suspended in 1998 due to the increased valuation in
the corporation's stock. However, in 1999 this activity was reinstated as the
economics in consideration of a reduced stock price met the original goal of
this program. During 1999, nearly 67,000 shares were repurchased for a total of
$1.1 million. As of December 31, 1999, 90,996 shares remained under the 1997
authorization.
The corporation continued to increase dividends to its shareholders in
1999. Dividends per share for 1999, 1998 and 1997 were $.46, $.42 and $.37,
respectively. The resulting dividend payout ratios for the same periods were
37.9%, 38.7% and 38.7%. 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. In
1999, shares were also issued pursuant to the exercise of stock options. A total
of $147,000, $480,000 and $31,000 was raised through these sources in 1999, 1998
and 1997, respectively.
<TABLE>
Table 7
Capital Ratios
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
HANOVER BANCORP, INC.
Tier 1 capital to risk-adjusted assets 11.63% 12.02%
Total capital to risk-adjusted assets 12.79% 13.16%
Leverage ratio 7.29% 8.04%
BANK OF HANOVER AND TRUST COMPANY
Tier 1 capital to risk-adjusted assets 9.72% 10.43%
Total capital to risk-adjusted assets 10.92% 11.60%
Leverage ratio 6.03% 6.93%
</TABLE>
27
<PAGE>
RISK MANAGEMENT
Asset Quality
The corporation has policies and procedures designed to manage credit
risk and to maintain the quality of its loan portfolio. These include prudent
underwriting standards for new loan originations, ongoing monitoring and
reporting of asset quality measures and the adequacy of the allowance for loan
losses.
The corporation makes commercial, consumer and residential mortgage
loans principally to borrowers within York and Adams Counties, Pennsylvania,
where the bank 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, other real estate and other
repossessed assets. The corporation generally classifies a loan as non-accrual
when full collection of principal or interest is doubtful and the loan becomes
90 days or more past due as to principal or 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. Non-accrual 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 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 other real estate following foreclosure
proceedings, a receipt of a deed in lieu of foreclosure or an in-substance
foreclosure involving actual possession of the collateral.
The corporation's nonperforming assets remain low relative to total
loans and compare favorably to peer statistics. Nonperforming assets at December
31, 1999 were $918,000 compared to $1.0 million at December 31, 1998. (Refer to
Table 8.). As a percentage of total loans, nonperforming assets at December 31,
1999 were .31%, down from .35% at December 31, 1998.
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 perform under 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
interest. These loans are rated according to their probability of
nonperformance. Those loans that management feels the likelihood of future
nonperformance 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, 1999, total potential problem loans, as determined by the
corporation's internal loan review process, totaled $1.8 million compared to
$1.2 million at December 31, 1998. Of these amounts, $929,000 and $379,000
were considered impaired under FASB 114 at 1999 and 1998, respectively.
Management regularly 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,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 446 $ 517 $ 331 $ 38 $ 10
Accruing loans past due 90 days or more 131 425 174 166 24
Restructured loans - - 221 242 292
Other real estate and
other repossessed assets 341 81 236 96 46
TOTAL NONPERFORMING ASSETS $ 918 $1,023 $ 962 $ 542 $ 372
NON-ACCRUAL LOANS BY CATEGORY
Commercial, financial and agricultural $ 126 $ 81 $ - $ - $ -
Real estate - construction 80 - - - -
Real estate-mortgage 240 426 331 16 -
Consumer - 10 - 22 10
$ 446 $ 517 $ 331 $ 38 $ 10
PAST DUE LOANS BY CATEGORY
Commercial, financial and agricultural $ 119 $ 153 $ - $ 16 $ -
Real estate-mortgage - 204 153 65 -
Consumer 12 68 21 85 24
$ 131 $ 425 $ 174 $ 166 $ 24
RESTRUCTURED LOANS BY CATEGORY
Commercial, financial and agricultural $ - $ - $ - $ 12 $ 13
Real estate-mortgage - - 221 230 279
$ - $ - $ 221 $ 242 $ 292
</TABLE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
<S> <C> <C> <C>
Non-accrual loans and restructured loans $ 446 $ 517 $ 552
Interest income that would have been
recorded under original terms 39 50 48
Interest income recorded during the period 8 21 39
Interest lost for the year 31 29 9
</TABLE>
Allowance for Loan Losses
Management believes that the allowance for loan losses is adequate to
absorb estimated credit losses within the overall loan portfolio. In evaluating
the adequacy of the allowance, management considers the overall growth in the
portfolio, ongoing analysis of individual credits, adverse situations that could
affect a borrower's ability to repay, prior and current loss experience, and
economic conditions and trends. This methodology is described in detail in the
Allowance for Loan Losses section of Note 1.
29
<PAGE>
The allowance for loan losses at December 31, 1999 was $3.7 million
compared to $3.4 million at year-end 1998. The allowance as a percent of total
loans outstanding was 1.24% and 1.18% at December 31, 1999, and 1998,
respectively. In terms of coverage, the allowance measured as a ratio of
nonperforming assets was 403% and 333% at 1999 and 1998, respectively. The
increase from year to year is primarily due to Management's decision to make
continued provisions to maintain the loan loss allowance in recognition of the
level of charge-off activity, the level of potential problem loans and growth in
the commercial portion of the loan portfolio.
While asset quality measures remain relatively favorable, the higher proportion
of these larger commercial loans represents potentially greater risk of loss.
The corporation recognizes this exposure in establishing and maintaining its
loan loss allowance.
Management charges the allowance for loan losses when it determines that
the prospects for recovering the principal have significantly diminished.
Subsequent recoveries, if any, are credited to the allowance. In 1999, the
corporation realized net charge-offs of $344,000 in comparison to net
charge-offs of $563,000 during 1998, a decrease of $219,000. (Refer to Table
9.). Net charge-offs to average loans outstanding decreased from .20% in 1998 to
.12% in 1999. This decrease was primarily related to reduced losses incurred in
the bank's indirect lending portfolio.
<TABLE>
Table 9
Allowance For Loan Losses
(in thousands, except ratios)
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,405 $2,908 $2,403 $2,220 $2,498
CHARGE-OFFS
Commercial, financial and agricultural 70 4 72 119 575
Real estate-commercial and residential mortgages 214 128 - - 65
Consumer 344 639 514 241 123
TOTAL CHARGE-OFFS 628 771 586 360 763
RECOVERIES
Commercial, financial and agricultural 137 49 87 31 9
Real estate-commercial and residential mortgages 17 3 1 - 92
Consumer 130 156 93 32 24
TOTAL RECOVERIES 284 208 181 63 125
NET CHARGE-OFFS 344 563 405 297 638
Provision charged to operations 640 1,060 910 480 360
Balance at end of year $ 3,701 $3,405 $2,908 $2,403 $2,220
Ratio of net charge-offs
to average loans outstanding 0.12% 0.20% 0.15% 0.13% 0.31%
Ratio of allowance for loan losses
to nonperforming assets 403% 333% 302% 443% 597%
</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 has established policies and procedures to
control its liquidity position and to provide for potential future needs.
The corporation's liquidity position is enhanced by a relatively stable
funding base. The ratio of deposits (excluding CDs of $100,000 or more) to total
assets at December 31, 1999 was 74.1% while the ratio of CDs of $100,000 or more
and other borrowed funds to total assets was 18.5%. These same ratios were
73.9% and 17.3% at December 31, 1998.
In addition to a stable deposit base, the investment portfolio provides
a consistent stream of cash flows and maturities to support liquidity needs. At
December 31, 1999, $6.0 million of investment securities were scheduled to
mature in one year or less, while principal payments on mortgage-backed
securities averaged $1.2 million a month during 1999. Loan portfolio repayments
and maturities also provide funds for managing liquidity. In 1999, the
corporation received an average of approximately $9.4 million in loan repayments
per month. In addition, the sale of portfolio loans provides an alternative for
the management of liquidity. In 1999, $14.4 million of 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. Through these relationships, the corporation has available
short-term funding of approximately $8 million. In addition, it has access to
the Federal Home Loan Bank for both short-term and long-term funding needs of
approximately $47 million.
Market Risk
In January 1997, the Securities and Exchange Commission 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. There is no
material use of financial instruments which would be classified as derivatives
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 maintain a
balance between risk and reward such that net interest income is maximized while
risk is maintained at a tolerable level.
31
<PAGE>
The corporation uses gap and simulation analyses 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. The corporation had a cumulative gap within one year at December 31,
1999 of negative $14.0 million or 2.79% of total assets. At December 31, 1998,
the corporation had a positive gap of $19.5 million or 4.15% of total assets.
This shift to a negative gap position from 1998 to 1999 was largely the result
of lengthening of maturities in the investment portfolio, the rolling down of
maturities of certificates of deposit, growth in rate sensitive deposit products
and a decrease in anticipated prepayments on loans and mortgage-backed
securities. These factors were in part offset by growth in more rate sensitive
commercial loans.
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
over time.
Based on the results of the simulation model as of December 31, 1999,
the corporation would expect net interest income to decrease over the next
twelve months by 4.3% assuming an immediate upward shift in market interest
rates of 200 basis points, and to increase by 1.1% if rates shifted downward in
the same manner. At December 31, 1998, annual net interest income was expected
to decrease by .9% in the upward scenario and to decrease by 1.5% in the
downward scenario. Consistent with the gap results, the change from year to year
reflects the shift to a more liability sensitive position. The simulation
results are largely affected by the corporation's holdings of approximately $44
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.
32
<PAGE>
YEAR 2000
During 1999, the corporation completed preparations for the Year 2000
date change. All software, hardware and systems were inventoried and assessed
for Year 2000 readiness. Any non-compliant items were upgraded or replaced.
Testing ensured that all mission-critical systems would function correctly in
the Year 2000 and beyond, properly handling all date-sensitive data.
Utilizing information from written vendor surveys, Internet sites and
internal testing, the corporation assessed the Year 2000 readiness of vendors
and service providers. Through a written survey and loan officer contact, the
corporation assessed the Year 2000 readiness of customers holding significant
commercial loans. The corporation established Year 2000 compliance as a factor
in its credit decisions and loan documentation.
To date, the corporation has successfully managed the transition to the
Year 2000 and experienced no significant problems. Limited exposure exists with
certain specific future dates. However, those dates have already been tested and
verified as part of the overall Year 2000 assessment. Management will continue
monitoring all areas to ensure that business will not be disrupted.
The corporation's contingency plans continue to be maintained in the
event of unexpected Year 2000 problems. The corporation has updated its
disaster recovery plan and assigned corporate-wide team leaders. This plan
encompasses contingencies for mission-critical mainframe and PC-based
applications, third-party relationships and environmental systems. A Year 2000
contingency plan was also developed. This plan addresses aspects outside of the
locus of control such as telecommunications, electric companies and other
utility companies. The procedures in the disaster recovery and Year 2000
contingency plans are reassessed for thoroughness and validity on a regular
basis.
The cost of becoming Year 2000 compliant has been insignificant to date
and management believes that any remaining costs will not have a material impact
on future results of operations.
Failure of the corporation or third parties to correct Year 2000 issues
could cause disruption of operations resulting in increased operating costs and
other adverse effects. In addition, to the extent customers' financial positions
are weakened as a result of Year 2000 issues, credit quality could be affected.
It is not possible to predict with certainty all of the adverse effects that may
result from a failure of the corporation or third parties to become fully Year
2000 compliant or whether such effects could have a material impact on the
corporation.
On October 19, 1998, Congress enacted the Year 2000 Information and
Readiness Disclosure Act (the "Act"). The purpose of the Act is (1) to promote
the free disclosure and exchange of information related to Year 2000 readiness;
(2) to assist in effectively and rapidly responding to Year 2000 problems; and
(3) to establish uniform legal principles in connection with the disclosure and
exchange of information related to Year 2000 readiness. In accordance with the
Act, all of the corporation's communications regarding Year 2000 readiness
efforts are designated as Year 2000 Readiness Disclosures.
33
<PAGE>
<TABLE>
Table 10
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME/MARGIN ANALYSIS
(In Thousands, Except Ratios)
<CAPTION>
Year-Ended December 31,
1999 1998 1997
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) $293,427 $24,237 8.26% $282,590 $24,241 8.58% $265,293 $22,856 8.62%
Investment securities:
Taxable 109,601 6,619 6.04% 86,796 5,332 6.14% 61,089 3,839 6.28%
Tax-exempt (2) 44,095 3,479 7.89% 26,517 2,211 8.34% 19,882 1,809 9.10%
Federal funds sold and other as 17,010 850 5.00% 6,495 358 5.51% 9,286 518 5.58%
TOTAL INTEREST EARNING
ASSETS 464,133 35,185 7.58% 402,398 32,142 7.99% 355,550 29,022 8.16%
NON-INTEREST EARNING ASSETS
Cash and due from banks 15,411 12,675 10,953
Premises and equipment 7,117 7,312 7,045
Other assets 4,934 7,782 6,593
Allowance for loan losses (3,639) (3,233) (2,537)
TOTAL ASSETS $487,956 $426,934 $377,604
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Demand deposits $ 40,537 538 1.33% $ 33,552 446 1.33% $ 29,062 386 1.33%
Savings deposits 18,845 391 2.07% 19,899 411 2.07% 22,346 456 2.04%
Money market deposits 98,161 3,418 3.48% 87,843 3,148 3.58% 70,577 2,377 3.37%
Time deposits 191,978 10,104 5.26% 171,974 9,490 5.52% 163,107 9,119 5.59%
Borrowed funds 62,369 3,366 5.40% 41,863 2,359 5.64% 27,959 1,603 5.73%
TOTAL INTEREST BEARING
LIABILITIES 411,890 17,817 4.33% 355,131 15,854 4.46% 313,051 13,941 4.45%
NON-INTEREST BEARING LIABILITIES
Demand deposits 35,687 31,168 27,994
Other liabilities 4,928 4,663 3,943
TOTAL LIABILITIES 452,505 390,962 344,988
SHAREHOLDERS' EQUITY 35,451 35,972 32,616
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $487,956 $426,934 $377,604
NET INTEREST SPREAD 3.26% 3.52% 3.71%
NET INTEREST INCOME (FTE)/
NET INTEREST MARGIN 17,368 3.74% 16,288 4.05% 15,081 4.24%
Taxable-equivalent adjustment (2) (1,276) (903) (703)
NET INTEREST INCOME PER
FINANCIAL STATEMENTS $16,092 $15,385 $14,378
<FN>
(1) Non-accrual loans have been included within this category.
(2) The taxable-equivalent adjustment for tax-exempt assets has been computed assuming a tax rate of 34% for 1999, 1998 and 1997.
</FN>
</TABLE>
34
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
As of February 29, 2000, the approximate number of shareholders of record
of the corporation's common stock was 1,528. 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,
1999. 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>
1999 1998
Stock Price Cash Stock Price Cash
Range Dividend Range Dividend
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED
March 31 $ 16.00 - $ 17.75 $ 0.11 $16.69 - $21.00 $ 0.10
June 30 15.75 - 17.00 0.11 19.22 - 22.50 0.10
September 30 15.00 - 17.00 0.12 17.75 - 23.00 0.11
December 31 14.63 - 15.38 0.12 17.00 - 20.00 0.11
<FN>
Stock prices and cash dividends have been adjusted retroactivley to reflect the impact
of the 4 for 3 stock split effective June 1, 1998, rounded to the nearest cent.
</FN>
</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 14 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:
F.J. Morrissey & Co., Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103
(215) 563-8500
Ryan, Beck & Company
220 South Orange Avenue
Head Trader
Livingston, NJ 07039
(800) 395-7936
35
<PAGE>
Janney Montgomery Scott, Inc.
Times Building
Suburban Square, Suite 400
Ardmore, PA 19003
(215) 665-6000
Monroe Securities, Inc.
47 State Street, 2nd Floor
Rochester, NY 14614
(800) 766-5560
Sandler O'Neill & Partners, L.P.
Two World Trade Center
104th Floor
New York, NY 10048
(212) 466-7800
Tucker Anthony, Inc.
1World Financial Center, Tower A
New York, NY 10281
(212) 225-8000
GVR Co.
One Financial Place
440 South La Salle Street
Suite 3030
Chicago, IL 60605
(800) 638-8602
Hill, Thompson Magid & Co.
15 Exchange Place, 8th Floor
Jersey City, NJ 07302
(800) 631-3083
36
<PAGE>
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 subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally
accepted in the United States. 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 subsidiaries at December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/S/ Ernst & Young LLP
Harrisburg, Pennsylvania
February 1, 2000
37
<PAGE>
<TABLE>
Consolidated Balance Sheets
(in thousands of dollars, except per share data)
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,251 $ 17,539
Federal funds sold - 8,635
Cash and cash equivalents 20,251 26,174
Interest bearing deposits with other banks 367 59
Short-term investments 29 -
Investment securities:
Available-for-sale 169,388 143,202
Held-to-maturity (market value - $1,673 and $1,794, respectively) 1,670 1,759
171,058 144,961
Loans:
Commercial, financial and agricultural 46,750 43,803
Real estate-construction 5,714 5,429
Real estate-commercial mortgage 48,663 44,750
Real estate-residential mortgage 130,151 130,196
Consumer 67,697 65,162
298,975 289,340
Less: Allowance for loan losses (3,701) (3,405)
Net loans 295,274 285,935
Premises and equipment 6,984 7,236
Accrued interest receivable 3,466 2,938
Other assets 6,495 2,790
TOTAL ASSETS $ 503,924 $ 470,093
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 37,072 $ 33,827
Interest bearing 359,437 330,181
396,509 364,008
Borrowed Funds:
Short-term 21,266 15,651
Long-term 49,055 49,136
70,321 64,787
Accrued interest payable 2,386 2,453
Other liabilities 1,494 1,468
Dividends payable 466 433
TOTAL LIABILITIES 471,176 433,149
Shareholders' Equity
Preferred stock, $2.50 par value; authorized, 2,000,000 shares;
no shares issued or outstanding - -
Common Stock, $.83 par value; authorized, 9,000,000 shares;
issued and outstanding: 1999-3,883,272 shares;
1998-3,940,375 shares 3,223 3,270
Surplus 18,271 19,144
Accumulated other comprehensive income (5,019) 1,204
Retained earnings 16,273 13,326
TOTAL SHAREHOLDERS' EQUITY 32,748 36,944
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 503,924 $ 470,093
BOOK VALUE PER SHARE $ 8.43 $ 9.38
<FN>
See accompanying notes.
</FN>
</TABLE>
38
<PAGE>
<TABLE>
Consolidated Statements of Income
(in thousands of dollars, except per share data)
<CAPTION>
Year-Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $24,144 $24,090 $22,768
Interest on federal funds sold 780 352 370
Interest on short-term investments 70 6 148
Interest on investment securities:
Taxable 6,619 5,332 3,839
Tax-exempt 2,296 1,459 1,194
8,915 6,791 5,033
TOTAL INTEREST INCOME 33,909 31,239 28,319
INTEREST EXPENSE
Interest on deposits 14,450 13,495 12,338
Interest on borrowed funds 3,367 2,359 1,603
TOTAL INTEREST EXPENSE 17,817 15,854 13,941
NET INTEREST INCOME 16,092 15,385 14,378
PROVISION FOR LOAN LOSSES 640 1,060 910
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,452 14,325 13,468
NET SECURITIES GAINS 384 949 670
OTHER INCOME
Trust and investment services income 1,155 982 776
Service charges on deposit accounts 1,645 1,313 1,085
Other operating income 1,103 1,066 728
TOTAL OTHER INCOME 3,903 3,361 2,589
OTHER EXPENSE
Salaries 5,786 5,697 5,198
Employee benefits 1,162 1,056 1,029
Occupancy expense 951 895 942
Equipment expense 1,219 1,113 1,009
Marketing and advertising 416 432 485
Professional and service fees 1,367 954 688
Other operating expense 2,760 2,760 2,198
TOTAL OTHER EXPENSE 13,661 12,907 11,549
INCOME BEFORE INCOME TAXES 6,078 5,728 5,178
INCOME TAXES 1,332 1,477 1,371
NET INCOME $ 4,746 $ 4,251 $ 3,807
PER SHARE DATA
Net income - basic and diluted $ 1.21 $ 1.08 $ 0.97
Cash dividends declared 0.46 0.42 0.37
<FN>
See accompanying notes.
</FN>
</TABLE>
39
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity
(in thousands, except shares and per share data)
<CAPTION>
Accumulated Other
Shares Common Comprehensive Retained
Outstanding Stock Surplus Income Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,959,255 $ 3,296 $18,659 $ 598 $ 8,988 $31,541
Comprehensive income:
Net income for 1997 - - - - 3,807 3,807
Other comprehensive income
Change in net unrealized gains on securities
available-for-sale, net of tax effects and
reclassification adjustment (1) - - - 1,054 - 1,054
Comprehensive income 4,861
Cash dividends declared: $.37 per share - - - - (1,472) (1,472)
Issue of common stock 2,602 3 28 - - 31
Repurchase and retirement of common stock (49,904) (42) - - (605) (647)
Balance, December 31, 1997 3,911,953 3,257 18,687 1,652 10,718 34,314
Comprehensive income:
Net income for 1998 - - - - 4,251 4,251
Other comprehensive income
Change in net unrealized gains on securities
available-for-sale, net of tax effects and
reclassification adjustment (1) - - - (448) - (448)
Comprehensive income 3,803
Cash dividends declared: $.42 per share - - - - (1,644) (1,644)
Cash paid in lieu of fractional shares and other (437) (10) - - 1 (9)
Issue of common stock 28,859 23 457 - - 480
Balance, December 31, 1998 3,940,375 3,270 19,144 1,204 13,326 36,944
Comprehensive income:
Net income for 1999 - - - - 4,746 4,746
Other comprehensive income
Change in net unrealized gains (losses) on securities
available-for-sale, net of tax effects and
reclassification adjustment (1) - - - (6,223) - (6,223)
Comprehensive income (1,477)
Cash dividends declared: $.46 per share - - - - (1,799) (1,799)
Cash paid in lieu of fractional shares and other (23) - - - - -
Issue of common stock 9,851 8 139 - - 147
Repurchase and retirement of common stock (66,931) (55) (1,012) - - (1,067)
Balance, December 31, 1999 3,883,272 $ 3,223 $18,271 $ (5,019) $16,273 $32,748
<FN>
(1) The components of other comprehensive income are shown separately in Note 10.
See accompanying notes.
</FN>
</TABLE>
40
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
Year-Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,746 $ 4,251 $ 3,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 640 1,060 910
Provision for depreciation and amortization 1,095 1,008 883
Securities gains (384) (949) (670)
Increase in net deferred tax assets (39) (200) (27)
Increase in interest receivable (528) (294) (296)
Increase (decrease) in interest payable (67) 119 218
(Increase) decrease in other assets (460) 436 (905)
Increase in other liabilities 58 441 135
Increase (decrease) in accrued taxes (32) (107) 189
Loans originated for sale (12,975) (21,256) (6,324)
Proceeds from sale of loans originated for sale 14,442 19,948 5,930
NET CASH PROVIDED BY
OPERATING ACTIVITIES 6,496 4,457 3,850
INVESTING ACTIVITIES
Net increase in loans (11,446) (22,509) (29,553)
Proceeds from sale of loans - 11,389 6,640
Proceeds from sale of available-for-sale investment securities 28,516 10,690 16,420
Proceeds from maturities of investment securities 17,900 21,710 8,288
Purchases of investment securities (81,558) (79,450) (43,980)
Proceeds from maturities of short-term investments 8,000 1,600 32,000
Purchases of short-term investments (8,337) (40) (33,547)
Purchases of premises and equipment (843) (1,228) (824)
NET CASH USED IN
INVESTING ACTIVITIES (47,768) (57,838) (44,556)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
money market accounts, and savings accounts 17,052 19,345 28,321
Net increase in certificates of deposit and other time deposits 15,449 14,712 4,626
Net increase in borrowed funds 5,534 26,902 13,585
Cash dividends paid (1,766) (1,593) (1,447)
Cash paid in lieu of fractional shares - (9) -
Proceeds from issuance of common stock 147 480 31
Repurchase and retirement of common stock (1,067) - (647)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 35,349 59,837 44,469
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,923) 6,456 3,763
Cash and cash equivalents at beginning of year 26,174 19,718 15,955
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,251 $ 26,174 $ 19,718
<FN>
See accompanying notes.
</FN>
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles Of Consolidation: The consolidated financial statements include the
accounts of the corporation and its wholly-owned subsidiaries, Bank of Hanover
and Trust Company and HOVB Investment Co. 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: Loans for which the corporation does not have the ability or intent to
hold for the foreseeable future or until maturity are classified as held for
sale. These loans are carried at the lower of cost or market value. Market
value is determined by reference to secondary market pricing. 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.
42
<PAGE>
Allowance For Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb estimated credit losses within
the overall loan portfolio. Management's methodology in evaluating the adequacy
of the allowance considers the overall growth in the portfolio, ongoing analysis
of individual credits, adverse situations that could affect a borrower's ability
to repay, prior and current loss experience, and economic conditions and trends.
Loans that are identified as impaired are 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. Large groups of smaller balance homogeneous loans are
evaluated collectively such as consumer or residential mortgage loans.
Generally, loans considered impaired are the corporation's non-homogeneous,
non-performing loans. In addition, certain potential problem loans may be
considered impaired.
Each loan identified as impaired is evaluated periodically to estimate any
potential losses for which a specific allowance should be established. Since
most of these loans are collateral-dependent, this estimate is normally based on
the lower of the most recently appraised value of the collateral or the recorded
investment in the loan. 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 allowances, allocated allowances 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, current charge-off
trends, historical loss experience in each category, recent portfolio growth,
loan composition changes and economic trends. As a supplement to the specific
individual and allocated allowances, an unallocated general allowance is also
established. The determination of this unallocated portion inherently involves
a higher degree of uncertainty and is based on judgments regarding risk of error
in specific allocations, other potential exposures due to possibly incomplete
knowledge of the loan portfolio, economic conditions and trends, and other
factors.
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
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
management's determination that the underlying collateral value has declined,
foreclosure proceedings, a receipt of a deed in lieu of foreclosure or an
in-substance foreclosure involving actual possession of the collateral.
Premises And Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization, which is computed on the
straight-line method. Costs related to designing software configuration and
interfaces, and installing software to hardware are capitalized.
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.
43
<PAGE>
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 $17,884,000 and $1,317,000,
respectively, during the year-ended December 31, 1999; $15,735,000 and
$1,430,000, respectively, during the year-ended December 31, 1998; and
$13,723,000 and $1,444,000, respectively, during the year-ended December 31,
1997.
The decrease in net unrealized gains on available-for-sale securities of
$6,223,000 (net of $3,206,000 in deferred tax effects) during the period ended
December 31, 1999, the decrease of $448,000 (net of $231,000 in deferred tax
effects) during the period ended December 31, 1998 and the increase of
$1,054,000 (net of $543,000 in deferred tax effects) during the period ended
December 31, 1997 are non-cash transactions for purposes of the statements of
cash flows.
Reclassifications: Certain reclassifications have been made to the 1998 and
1997 financial statements and accompanying notes to conform with the 1999
presentation.
NOTE 2--RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The banking subsidiary is required to maintain reserve balances with the
Federal Reserve Bank. The average amount of those balances for the year-ended
December 31, 1999, approximated $6,361,000.
NOTE 3--INVESTMENT SECURITIES
<TABLE>
The following is a summary of the investment portfolio by respective security category (in thousands):
<CAPTION>
December 31, 1999
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 $ 16,840 $ 121 $ (196) $ 16,765
Obligations of states and political subdivisions 58,352 290 (3,386) 55,256
Corporate securities 11,474 - (331) 11,143
Mortgage-backed securities 78,160 3 (3,017) 75,146
Total debt securities 164,826 414 (6,930) 158,310
Equity securities 12,167 196 (1,285) 11,078
TOTAL AVAILABLE-FOR-SALE SECURITIES $ 176,993 $ 610 $ (8,215) $ 169,388
HELD-TO-MATURITY SECURITIES
Obligations of states and political subdivisions $ 1,488 $ 17 $ (10) $ 1,495
Mortgage-backed securities 182 - (4) 178
TOTAL HELD-TO-MATURITY SECURITIES $ 1,670 $ 17 $ (14) $ 1,673
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
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 $ 21,779 $ 319 $ (15) $ 22,083
Obligations of states and political subdivisions 41,646 1,293 (184) 42,755
Corporate securities 4,478 - (233) 4,245
Mortgage-backed securities 65,116 589 (127) 65,578
Total debt securities 133,019 2,201 (559) 134,661
Equity securities 8,359 641 (459) 8,541
TOTAL AVAILABLE-FOR-SALE SECURITIES $ 141,378 $ 2,842 $ (1,018) $ 143,202
HELD-TO-MATURITY SECURITIES
Obligations of states and political subdivisions $ 1,488 $ 43 $ - $ 1,531
Mortgage-backed securities 271 - (8) 263
TOTAL HELD-TO-MATURITY SECURITIES $ 1,759 $ 43 $ (8) $ 1,794
</TABLE>
<TABLE>
The amortized cost and estimated market value of debt securities at December 31, 1999, 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)
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 6,024 $ 6,032
Due after one year through five years 2,025 2,024
Due after five years through ten years 5,315 5,089
Due after ten years 73,302 70,019
86,666 83,164
Mortgage-backed securities 78,160 75,146
Equity securities 12,167 11,078
$ 176,993 $ 169,388
HELD-TO-MATURITY
Due in one year or less $ - $ -
Due after one year through five years - -
Due after five years through ten years - -
Due after ten years 1,488 1,495
1,488 1,495
Mortgage-backed securities 182 178
$ 1,670 $ 1,673
</TABLE>
45
<PAGE>
Proceeds from the sale of investments in debt and equity securities
during 1999, 1998 and 1997 were $28,516,000, $10,690,000 and $16,420,000,
respectively. Gross gains realized on these sales were $620,000, $949,000 and
$882,000, respectively. Gross losses realized on these sales were $236,000 in
1999 and $212,000 in 1997. There were no gross losses realized during 1998. Net
unrealized losses on securities available-for-sale, net of the related deferred
tax effects, included as a separate component of shareholders' equity, were
$5,019,000 at December 31, 1999. Net unrealized gains on securities
available-for-sale, net of the related deferred tax effects, included as a
separate component of shareholder's equity, were $1,204,000 at December 31,
1998.
Securities, having a carrying value of $67,143,000 at December 31, 1999
and $49,472,000 at December 31, 1998 were pledged to secure public deposits,
repurchase agreements and other purposes required by law.
NOTE 4-LOANS AND ALLOWANCE FOR LOAN LOSSES
Residential mortgage loans originated for sale had a carrying value
of $284,000 and $1,751,000 at December 31, 1999 and 1998, respectively.
<TABLE>
Transactions in the allowance for loan losses were as follows (in thousands):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 3,405 $ 2,908 $2,403
Recoveries on loans 284 208 181
Provision charged to operations 640 1,060 910
Loans charged-off (628) (771) (586)
Balance at end of year $ 3,701 $ 3,405 $2,908
</TABLE>
<TABLE>
The following table provides information relating to the corporation's impaired loans (in thousands):
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Impaired loans with no related allowance due to write-downs $ 277 $ 379
Impaired loans with a related allowance 1,213 537
Recorded investment in impaired loans $ 1,490 $ 916
Impaired loans on non-accrual status $ 442 $ 468
Allowance related to impaired loans $ 427 $ 25
Average recorded investment in impaired loans during the period $ 1,014 $1,050
Related amount of interest income recognized on impaired loans $ 85 $ 73
Amount of interest income on impaired loans using the cash
basis method of accounting $ 39 $ 10
</TABLE>
46
<PAGE>
NOTE 5--PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment includes the following at December 31 (in thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Premises $ 6,929 $ 6,822
Equipment 7,808 7,080
14,737 13,902
Less accumulated depreciation and amortization (7,753) (6,666)
$ 6,984 $ 7,236
</TABLE>
The corporation recognized depreciation and amortization expense of $1,095,000,
$1,008,000 and $883,000 for 1999, 1998 and 1997, respectively.
<TABLE>
The corporation and its subsidiaries occupy certain facilities under lease arrangements and lease certain equipment. Rentals
amounted to $327,000, $294,000 and $295,000 in 1999, 1998 and 1997, respectively. Minimum annual rental commitments at
December 31, 1999, under noncancelable leases, principally for real estate and equipment, are payable as follows (in thousands):
<CAPTION>
Annual Rental
Payments
<S> <C>
2000 $ 297
2001 303
2002 277
2003 279
2004 284
2005 and thereafter 1,894
Total minimum lease payments $ 3,334
</TABLE>
NOTE 6--SHORT-TERM BORROWINGS
<TABLE>
Short-term borrowings and weighted average interest rates outstanding at December 31, 1999 and 1998 are summarized as follows
(in thousands, except percentages):
<CAPTION>
1999 1998
<S> <C> <C> <C> <C>
Federal funds purchased $ 300 6.00% $ - -
Securities sold under repurchase agreements 13,572 4.57% 13,227 4.01%
FHLB borrowings 5,894 5.78% 1,317 7.30%
Other 1,500 4.54% 1,107 4.12%
$ 21,266 4.92% $15,651 4.29%
<FN>
The securities sold under repurchase agreements represent collateral to the lending party and are
primarily U.S. Treasury and agency securities. These securities are maintained under the
corporation's control.
</FN>
</TABLE>
47
<PAGE>
NOTE 7--LONG-TERM BORROWINGS
<TABLE>
The following table presents the annual maturities and weighted average rates of long-term borrowings at December 31, 1999
(in thousands):
<CAPTION>
Annual Weighted
Maturities Average Rate
<S> <C> <C>
2001 $ 1,763 6.67%
2002 16,092 5.92%
2003 1,200 6.75%
2004 - -
2005 and thereafter 30,000 5.42%
$ 49,055 5.66%
</TABLE>
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. The carrying value of the eligible collateral pledged at
December 31, 1999 was $102,353,000 and $105,295,000 at December 31, 1998. These
advances are subject to restrictions or penalties related to prepayment.
Interest expense on long-term borrowings was $2,758,000, $1,808,000 and
$1,059,000 during 1999, 1998 and 1997, respectively.
Included in long-term borrowings at December 31, 1999, were $2.2 million
of amortizing advances with remaining amortization periods ranging from 8 to 28
months and final maturities through 2002. Also, $44.0 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 1 and 71 months from December 31, 1999, and the advances have final
maturities through 2014. At December 31, 1999, all advances had fixed rates of
interest.
NOTE 8--SHAREHOLDERS' EQUITY
On April 17, 1998, the Board of Directors declared a 4 for 3 stock split
payable June 1, 1998, to shareholders of record May 1, 1998. Related to this
split, the Board of Directors also approved an amendment to the Articles of
Incorporation to increase the number of authorized shares of common stock from
6,750,000 shares to 9,000,000 shares and to reduce the par value per share from
$1.11 to $.83. 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, 1999, 94,586
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, 1999, 21,045 shares were available.
48
<PAGE>
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
63,000 shares of common stock for issuance under the plan. As of December 31,
1999, 45,644 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 252,000 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, 1999, 109,980 shares were available for the granting
of additional awards. To date, only awards of stock options have been made from
the plan.
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 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 1999, 1998 and
1997, respectively, were: risk free interest rates of 6.41%, 4.87% and 5.77%;
dividend yields of 3.23%, 2.48% and 2.30%; volatility factors of .160, .146 and
.134; 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>
1999 1998 1997
<S> <C> <C> <C>
Pro forma net income $ 4,648 $ 4,169 $ 3,762
Pro forma net income per share-basic and diluted $ 1.18 $ 1.06 $ 0.96
</TABLE>
49
<PAGE>
<TABLE>
A summary of the corporation's stock option activity, and related information is as follows:
<CAPTION>
1999 1998 1997
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 99,322 $ 15.87 97,555 $ 15.30 61,481 $ 14.19
Granted 31,315 15.37 30,193 17.31 42,616 16.74
Exercised (3,960) 14.06 (13,903) 14.37 - -
Forfeited (2,520) 17.31 (14,523) 16.48 (6,542) 14.23
Outstanding at end of year 124,157 $ 15.77 99,322 $ 15.87 97,555 $ 15.30
Exercisable at end of year 37,369 $ 14.15 34,289 $ 14.20 24,897 $ 14.38
Weighted-average fair value of
options granted during the year $ 3.55 $ 3.82 $ 4.35
</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, 1999 ranged from $13.88 to $17.38.
The weighted average remaining contractual life of those options is 7.95 years.
<TABLE>
The following table sets forth capital ratios for the corporation and its bank subsidiary at December 31:
<CAPTION>
HANOVER BANCORP, INC. 1999 1998
<S> <C> <C>
Tier 1 capital to risk-adjusted assets 11.63% 12.02%
Total capital to risk-adjusted assets 12.79% 13.16%
Leverage ratio 7.29% 8.04%
BANK OF HANOVER AND TRUST COMPANY
Tier 1 capital to risk-adjusted assets 9.72% 10.43%
Total capital to risk-adjusted assets 10.92% 11.60%
Leverage ratio 6.03% 6.93%
</TABLE>
50
<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:
Tier I
Total Capital Capital to
to Risk-Adjusted Risk-Adjusted
Assets Assets Leverage
Well capitalized 10% or above and 6% or above and 5% or above
Adequately
capitalized 8% or above and 4% or above and 4% or above
Undercapitalized under 8% or under 4% or under 4%
Significantly
undercapitalized under 6% or under 3% or under 3%
Critically
undercapitalized 2% or under
The appropriate federal bank regulatory agency has authority to downgrade
an institution's capital designation by one category if it determines that an
institution is in an unsafe or unsound condition or is engaging in unsafe or
unsound practices.
FDICIA provides for increased supervision for banks not rated in one of the
highest categories under the "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,
1999 1998 1997
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted
net income per share-net income $ 4,746,000 $4,251,000 $3,807,000
DENOMINATOR:
Denominator for basic net income per share-
weighted average shares outstanding 3,922,144 3,933,587 3,930,705
Effect of dilutive securities:
Employee stock options 1,119 17,959 731
Denominator for diluted net income per share-
adjusted weighted average shares outstanding 3,923,263 3,951,546 3,931,436
Basic net income per share $ 1.21 $ 1.08 $ 0.97
Diluted net income per share $ 1.21 $ 1.08 $ 0.97
</TABLE>
51
<PAGE>
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 of June 1998.
Note 10 --OTHER COMPREHENSIVE INCOME
<TABLE>
The components of other comprehensive income are as follows (in thousands):
<CAPTION>
Before-Tax Tax Net-of-Tax
Amount Effects Amount
<S> <C> <C> <C>
Year-ended December 31, 1997
Change in net unrealized gains on securities
available-for-sale $ 2,267 $ 771 $ 1,496
Less: reclassification adjustment for net gains
realized in net income (670) (228) (442)
Other comprehensive income $ 1,597 $ 543 $ 1,054
Year-ended December 31, 1998
Change in net unrealized gains on securities
available-for-sale $ 270 $ 92 $ 178
Less: reclassification adjustment for net gains
realized in net income (949) (323) (626)
Other comprehensive income $ (679) $ (231) $ (448)
Year-ended December 31, 1999
Change in net unrealized gains (losses) on securities
available-for-sale $ (9,045) $ (3,075) $ (5,970)
Less: reclassification adjustment for net gains
realized in net income (384) (131) (253)
Other comprehensive income $ (9,429) $ (3,206) $ (6,223)
</TABLE>
52
<PAGE>
NOTE 11- INCOME TAXES
<TABLE>
The significant components of the corporation's deferred tax assets and liabilities as of December 31, 1999 and 1998,
respectively, which are included in other assets are as follows (in thousands):
<CAPTION>
1999 1998
<S> <C> <C>
DEFERRED TAX ASSETS
Net unrealized securities losses $2,586 $ -
Loan loss reserve 1,001 901
Deferred loan fees 75 96
Deferred compensation 221 212
Other 48 43
Total deferred tax assets 3,931 1,252
DEFERRED TAX LIABILITIES
Net unrealized securities gains - 620
Depreciation 222 198
Accretion 115 80
Other 98 103
Total deferred tax liabilities 435 1,001
Net deferred tax assets $3,496 $ 251
</TABLE>
<TABLE>
The provision for income taxes included in the accompanying Statements of Income consists of the following (in thousands):
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current $1,434 $1,660 $1,502
Deferred (102) (183) (131)
$1,332 $1,477 $1,371
</TABLE>
<TABLE>
A reconciliation of the federal statutory corporate income tax rate to the corporation's effective tax rate is as
follows:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal statutory tax rate 34.0 % 34.0 % 34.0 %
Tax-exempt interest income (13.7)% (10.3)% (8.8)%
Other 1.6 % 2.1 % 1.3 %
Effective tax rate 21.9 % 25.8 % 26.5 %
</TABLE>
Income taxes applicable to realized net securities gains included in the
provision for income taxes totaled $131,000 in 1999, $323,000 in 1998 and
$228,000 in 1997.
53
<PAGE>
NOTE 12-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 started making a discretionary
annual contribution to all eligible employees. The corporation's expense for
the defined contribution plan, including the discretionary contribution, was
$216,000, $212,000 and $205,000 in 1999, 1998 and 1997, 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. On
September 16, 1996, approximately two-thirds of the plan's benefit obligation
was settled via the purchase of annuity contracts. The Plan was administered in
frozen status until the termination date of July 24, 1998. As of December 31,
1998, all benefit obligations were settled through the distribution of plan
assets.
In 1996, as a result of the plan curtailment and the partial settlement,
the corporation recognized a curtailment gain and a settlement loss. In 1998,
as a result of the termination and final settlement, a settlement loss was
recognized. These events were accounted for in accordance with Financial
Accounting Standards Board Statement No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits".
<TABLE>
The following table sets forth the plan's funded status and amounts recognized in the corporation's
balance sheet at December 31, 1999 and 1998 (in thousands):
<CAPTION>
1999 1998
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ - $ 1,041
Interest cost - 73
Actuarial loss - 93
Allocation of surplus to plan participants - 13
Benefits paid - (1,220)
Benefit obligation at end of year - -
Change in plan assets
Fair value of plan assets at beginning of year - 1,174
Actual return on plan assets - 46
Benefits paid - (1,220)
Fair value of plan assets at end of year - -
Funded status - -
Unrecognized net actuarial loss - -
Prepaid benefit cost $ - $ -
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Year-Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Components of net periodic benefit cost
Interest cost $ - $ 73 $ 73
Actual return on plan assets - (46) (100)
Net amortization and deferral - (36) 21
Net periodic pension cost before settlement - (9) (6)
Settlement loss - 261 -
Net pension cost after settlement $ - $ 252 $ (6)
</TABLE>
NOTE 13--RELATED PARTY TRANSACTIONS
The bank has granted loans to the officers and directors of the corporation
and its subsidiaries 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 $4,656,000 and $4,037,000 at December 31, 1999 and 1998,
respectively. During 1999, $997,000 of new loans were made and repayments
totaled $378,000.
In addition, the bank has securities sold under repurchase agreements to
the directors of the corporation and its subsidiaries 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 $167,000 and $5,218,000 at December 31,
1999 and 1998, respectively.
55
<PAGE>
NOTE 14--HANOVER BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
(in thousands)
<TABLE>
<CAPTION>
December 31,
BALANCE SHEETS 1999 1998
<S> <C> <C>
ASSETS
Cash $ 123 $ 134
Investment securities:
Available-for-sale 152 5,821
Accrued interest receivable 3 2
Other assets 165 -
Investment in subsidiaries:
Bank of Hanover and Trust Company 25,997 31,568
HOVB Investment Co. 6,774 -
TOTAL ASSETS $33,214 $37,525
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other liabilities $ - $ 148
Dividends payable 466 433
TOTAL LIABILITIES 466 581
Shareholders' Equity:
Common stock 3,223 3,270
Surplus 18,271 19,144
Accumulated other comprehensive income (5,019) 1,204
Retained earnings 16,273 13,326
TOTAL SHAREHOLDERS' EQUITY 32,748 36,944
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,214 $37,525
</TABLE>
<TABLE>
<CAPTION>
Year-Ended December 31,
STATEMENTS OF INCOME 1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME
Interest on investment securities:
Taxable $ 85 $ 64 $ 60
Tax-exempt 13 13 29
TOTAL INTEREST INCOME 98 77 89
NET SECURITIES GAINS 101 725 526
OTHER EXPENSE
Other operating expense 128 135 130
Income before applicable income taxes and equity in undistributed
income of subsidiaries 71 667 485
INCOME TAXES (1) 248 169
Income before equity in undistributed income of subsidiaries 72 419 316
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
Bank of Hanover and Trust Company 4,466 3,832 3,491
HOVB Investment Co. 208 - -
NET INCOME $ 4,746 $ 4,251 $ 3,807
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Year-Ended December 31,
STATEMENTS OF CASH FLOWS 1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,746 $ 4,251 $3,807
Adjustments to reconcile net income to
net cash provided by operating activities:
Net securities gains (101) (725) (526)
(Increase) decrease in interest receivable (1) 9 (1)
Increase in other assets (165) - -
Increase (decrease) in other liabilities (80) 124 (10)
Increase (decrease) in accrued taxes (23) (201) 146
Equity in undistributed income of subsidiaries (4,674) (3,832) (3,491)
NET CASH USED IN OPERATING ACTIVITIES (298) (374) (75)
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale investment securities 1,469 1,273 1,230
Proceeds from maturities of investment securities - 200 -
Purchases of investment securities (2,496) (4,239) (894)
Cash contributions to subsidiaries (650) - -
Cash dividends received from subsidiaries 4,650 3,660 1,677
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,973 894 2,013
FINANCING ACTIVITIES
Cash dividends paid (1,766) (1,593) (1,447)
Cash paid in lieu of fractional shares - (9) -
Proceeds from issuance of common stock 147 480 31
Repurchase and retirement of common stock (1,067) - (647)
NET CASH USED IN FINANCING ACTIVITIES (2,686) (1,122) (2,063)
DECREASE IN CASH (11) (602) (125)
Cash at beginning of year 134 736 861
CASH AT END OF YEAR $ 123 $ 134 $ 736
</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, 1999, retained
earnings of the bank available for dividends were $21,486,000. 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, 1999,
these restricted net assets amounted to $7,783,000.
57
<PAGE>
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 20,647 $ 20,647 $ 26,233 $ 26,233
Investment securities 171,058 171,061 144,961 144,996
Loans 298,975 289,340
Less: Allowance for loan losses (3,701) (3,405)
Net loans 295,274 295,224 285,935 293,749
TOTAL FINANCIAL ASSETS $ 486,979 $ 486,932 $457,129 $464,978
FINANCIAL LIABILITIES
Deposits $ 396,509 $ 394,589 $364,008 $367,016
Short-term borrowings 21,266 21,266 15,651 15,651
Long-term borrowings 49,055 47,884 49,136 51,380
TOTAL FINANCIAL LIABILITIES $ 466,830 $ 463,739 $428,795 $434,047
</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.
58
<PAGE>
Deposits: The fair values disclosed for non-maturity 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.
Off-balance sheet items: The estimated fair value of unfunded loan commitments
and standby letters of credit approximate the notional amounts due to the
predominating variable rate and short-term nature of these items. The notional
amounts of these items totaled $52,204,000 and $61,146,000 at December 31, 1999
and 1998, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, the bank had commitments outstanding to extend
credit totaling $50,053,000 and commitments under outstanding standby letters of
credit totaling $2,151,000. 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.
The corporation is party to various legal proceedings generally incidental
to its business. Based on evaluation of these matters and discussions with
counsel, management believes that liabilities to the corporation arising from
these matters will not have a material adverse effect on the financial condition
of the corporation.
NOTE 17--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 collateralized. The commercial loan portfolio is well
diversified with no industry comprising greater than 10% of total loans
outstanding.
59
<PAGE>
NOTE 18--ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (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. Management does not currently utilize
discrete financial information to assess the performance of individual operating
segments. However, a profitability management system is currently under
development and will provide a means to further assess this reporting standard.
Possible future implementation of these disclosure requirements will have no
impact on the corporation's financial condition or results of operations.
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires the recognition of
derivative instruments as assets or liabilities, measured at fair value. In July
1999, FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement No. 133". This standard delayed the effective
date for FASB 133 to fiscal years beginning after June 15, 2000. Based upon the
corporation's preliminary review, FASB 133 is not expected to have an impact on
its liquidity, capital resources or results of operations.
In October 1998, FASB issued Statement No. 134, " Accounting for Mortgage
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise". This statement amends FASB Statement
No. 65, "Accounting for Certain Mortgage Banking Activities" to require that
after the securitization of mortgage loans, the classification of the resulting
mortgage-backed securities be based on the ability and intent to sell or hold
the securities. This standard was effective on January 1, 1999. The corporation
is not currently involved in any transactions which fall under the definitions
of this standard, therefore it has not had an impact on the corporation's
liquidity, capital resources or results of operations.
During the fourth quarter of 1999, FASB issued an Exposure Draft on
Business Combinations and Intangible Assets. Under the proposed draft,
companies would: account for all business combinations using the purchase
method; amortize goodwill over its useful economic life, but in no event over a
period longer than 20 years; present goodwill charges on a net-of-tax basis as
the last component of continuing operations on the income statement; recognize
negative goodwill as an extraordinary gain; and recognize all reliably
measurable identifiable intangible assets at their fair value, among other
recommendations. The FASB expects to issue a final statement in the fourth
quarter of 2000, applicable to business combinations and to intangible assets
acquired in transactions initiated after the issuance date of the final
statement.
NOTE 19 - SUBSEQUENT EVENT
On January 25, 2000, the corporation entered into an agreement to merge
with Sterling Financial Corporation. Sterling is a two-bank holding company
with assets of over $1 billion and is headquartered in Lancaster, PA. It is the
parent company for Bank of Lancaster County, N.A., in Lancaster, PA and First
National Bank of North East, in North East, MD.
Under the terms of the agreement, Hanover Bancorp shareholders will
receive .93 shares of Sterling Financial Corp. common stock for each share of
Hanover Bancorp common stock in a tax-free exchange. The merger, which is
subject to shareholder and regulatory approvals, is expected to be accounted for
as a pooling of interests. The Bank of Hanover and Trust Co. and HOVB
Investment Co. will operate as subsidiaries of Sterling after the merger is
completed.
60
<PAGE>
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
The following is a summary of the corporation's quarterly results (in thousands, except per share data):
<CAPTION>
Full
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
1999
Interest income $8,058 $8,346 $8,654 $8,851 $33,909
Interest expense 4,199 4,320 4,573 4,725 17,817
Net interest income 3,859 4,026 4,081 4,126 16,092
Provision for loan losses 195 195 150 100 640
Net securities gains 76 85 90 133 384
Other income 1,015 960 969 959 3,903
Other expense 3,388 3,423 3,461 3,389 13,661
Income taxes 303 309 329 391 1,332
Net income 1,064 1,144 1,200 1,338 4,746
Net income per share-basic and diluted 0.27 0.29 0.31 0.34 1.21
1998
Interest income $7,477 $7,804 $7,976 $7,982 $31,239
Interest expense 3,732 3,933 4,113 4,076 15,854
Net interest income 3,745 3,871 3,863 3,906 15,385
Provision for loan losses 445 210 210 195 1,060
Net securities gains 348 384 142 75 949
Other income 728 814 807 1,012 3,361
Other expense 3,094 3,455 3,134 3,224 12,907
Income taxes 341 371 379 386 1,477
Net income 941 1,033 1,089 1,188 4,251
Net income per share-basic and diluted 0.24 0.26 0.28 0.30 1.08
</TABLE>
61
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The registrant has the following two subsidiaries:
- - Bank of Hanover and Trust Company, which is headquartered at 25
Carlisle Street, Hanover, Pennsylvania 17331 and incorporated in
Pennsylvania.
- - HOVB Investment Co., which is headquartered at 103 Foulk Road,
Suite 202, Wilmington, DE 19803 and incorporated in Delaware.
62
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 1, 2000,
incorporated by reference in the Annual Report on Form 10-K of Hanover Bancorp,
Inc. for the year ended Decemer 31, 1999, with respect to the consolidated
financial statements included in this Form 10-K/A.
We also consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-78538) and Form S-8 (Nos. 33-73472, 33-73470
and 33-73796) of Hanover Bancorp, Inc. of our report dated February 1, 2000 with
respect to the consolidated financial statements of Hanover Bancorp, Inc.
incorporated by reference in this Annual Report (Form 10K/A) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Harrisburg, Pennsylvania
April 26, 2000
63
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 20,251
<INT-BEARING-DEPOSITS> 367
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 169,388
<INVESTMENTS-CARRYING> 1,670
<INVESTMENTS-MARKET> 1,673
<LOANS> 298,975
<ALLOWANCE> 3,701
<TOTAL-ASSETS> 503,924
<DEPOSITS> 396,509
<SHORT-TERM> 21,266
<LIABILITIES-OTHER> 4,346
<LONG-TERM> 49,055
0
0
<COMMON> 3,223
<OTHER-SE> 29,525
<TOTAL-LIABILITIES-AND-EQUITY> 503,924
<INTEREST-LOAN> 24,144
<INTEREST-INVEST> 8,915
<INTEREST-OTHER> 850
<INTEREST-TOTAL> 33,909
<INTEREST-DEPOSIT> 14,450
<INTEREST-EXPENSE> 17,817
<INTEREST-INCOME-NET> 16,092
<LOAN-LOSSES> 640
<SECURITIES-GAINS> 384
<EXPENSE-OTHER> 13,661
<INCOME-PRETAX> 6,078
<INCOME-PRE-EXTRAORDINARY> 4,746
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,746
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 3.47
<LOANS-NON> 446
<LOANS-PAST> 131
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,799
<ALLOWANCE-OPEN> 3,405
<CHARGE-OFFS> 628
<RECOVERIES> 284
<ALLOWANCE-CLOSE> 3,701
<ALLOWANCE-DOMESTIC> 3,701
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,441
</TABLE>
EXHIBIT 99.5
EXCERPTS FROM THE DEFINITIVE PROXY STATEMENT FOR THE 2000
ANNUAL SHAREHOLDERS MEETING.
Information about Nominees and Continuing Directors
Current Directors Whose Term Expires in 2000 and
Nominees for Director Whose Term Expires in 2003
TERRENCE L. HORMEL, age 51, is President of KeyMan Distribution
Resources, a contract supply chain services company. He is also Managing
Partner of PennTown Properties and General Partner of Hormel Associates which
are commercial real estate development and management companies. All of these
companies are located in Hanover, Pennsylvania. He is the Chairman of the Board
of Trustees at Hanover Hospital and a Trustee at Hanover Healthcorp, Inc. and
is past Chairman of the York County Industrial Development Corporation.
Mr. Hormel has served as the Chairman of the Board of Directors of Hanover since
1991 and of the bank since 1990. Mr. Hormel has served as a Director of Hanover
since August 1983, the bank since 1981 and HOVB Investment Co. since September,
1999. He is Chairman of the bank's Executive and Finance Committees. He is an
ex officio member of all committees of the bank's Board of Directors.
CHARLES W. TEST, age 73, is Chairman of the Board of C.W. Test Builder,
Inc., general contractors (since 1958) and owner of C.W. Test Orchards, land
development. Mr. Test has served as a Director of Hanover since 1983 and the
bank since 1973. He is Chairman of the bank's Building Committee and a member
of the bank's Audit and Compliance Committee. He is serving or has served on
the bank's Loan Committee during the past year.
S. FORRY EISENHART, Jr., age 50, is President and Chief Executive
Officer of Eisenhart Wallcoverings Company and Eisenhart Corp., a wallcoverings
manufacturer and distributor headquartered in Hanover, Pennsylvania. Mr.
Eisenhart has served as a Director of Hanover and the bank since August 1993.
He is Chairman of the bank's Investment Services Committee and a member of the
bank's Executive and Finance Committees. Mr. Eisenhart is serving or has served
on the Bank's Loan Committee during the past year.
Directors to Continue in Office Until 2001
BERTRAM F. ELSNER, age 63, is President and Chief Executive Officer of
Elsner Engineering Works, Inc., which designs and manufactures automatic
rewinding machines and specialty machinery. He has served as Vice Chairman of
the Board of Directors of Hanover and the bank since 1998. He has served as
Director of Hanover and the bank since December 1985. Mr. Elsner is Chairman
of the bank's Audit and Compliance Committee and a member of the bank's
Executive and Building Committees. He is serving or has served on the bank's
Loan Committee during the past year.
J. DANIEL FROCK, age 60, is co-owner and President of Frock Bros.
Trucking, Inc., which provides 48-state truck service to manufacturers and
shippers of industrial goods, food and agricultural products, and consumer
wares. Prior to joining Frock Bros. Trucking, Inc., Mr. Frock was employed by
Hanover Wire Cloth Division of CCX, Inc., most recently as Vice President of
Operations. He has served as a Director of Hanover and the bank since December
1985. Mr. Frock is a member of the Bank's Audit and Compliance and Investment
Services Committees. He is serving or has served on the bank's Loan Committee
during the past year.
GORDON A. HAALAND, PhD, age 60, is the President of Gettysburg College. He
previously served on the Board of First New Hampshire Bancorp in New Hampshire
for five years. Dr. Haaland has served as a Director of Hanover and bank since
December 1997. He is a member of the bank's Finance and Investment Services
Committees. He is serving or has served on the bank's Loan Committee during the
past year.
STEWART E. HARTMAN, Jr., age 68, is President of Rutter's Farm Stores
and Corporate Officer of Rutter's Corporations. Rutter's Farm Stores operates
53 convenience stores in Pennsylvania and Maryland. Mr. Hartman has served as a
Director of Hanover and bank since October 1998. He is a member of the bank's
Finance and Audit and Compliance Committees. He is serving or has served on the
bank's Loan Committee during the past year.
Directors to Continue in Office Until 2002
MICHAEL D. BROSS, age 46, is President of Berwick Enterprises, Inc.
which is the operating company for The Bridges Golf Club. He is also owner of
Stonewood Farms which operates turkey farms and raises cutting horses. Prior to
the establishment of Stonewood Farms and Berwick Enterprises, Mr. Bross was
employed by Round Hill Foods, Inc., most recently as President. He is the son
of Director Thomas M. Bross, Jr. Mr. Bross has served as a Director of Hanover
and the bank since May 1987. He is a member of the bank's Building Committee.
He is serving or has served on the bank's Loan Committee during the past year.
THOMAS M. BROSS, Jr., age 78, is the former President and Chairman of
the Board of Round Hill Foods, Inc., New Oxford, Pennsylvania, a food processor.
He is the father of Director Michael D. Bross. Mr. Bross has served as a
Director of Hanover since August 1983 and the bank since 1973. He served as
Vice Chairman of the Board of Directors of Hanover and the bank from 1983 to
1997. He is serving or has served on the bank's Loan Committee during the past
year.
65
<PAGE>
EARL F. NOEL, Jr., age 54, is President of Yazoo Mills, Inc., a
manufacturer of paper tubes and cores, located in New Oxford, Pennsylvania.
Mr. Noel has served as a Director of Hanover and the bank since September 1995.
He is a member of the bank's Finance and Investment Services Committees. He is
or has served on the bank's Loan Committee during the past year.
J. BRADLEY SCOVILL, age 40, has been a Director, President and Chief
Executive Officer of Hanover since January 1996 and of the bank since December
1994. Mr. Scovill has served as a Director of HOVB Investment Co. since
September, 1999. He is an ex officio member of all committees of the bank's
Board of Directors, with the exception of the Audit and Compliance Committee.
Mr. Scovill previously served as the Treasurer of Hanover and the Chief
Financial Officer of the bank.
Executive Officers
The following persons are executive officers of Hanover:
<TABLE>
<CAPTION>
Age Director or Number Shares
as of Officer Officer Employee Beneficially
Name May 9, 2000 Position Since Since Owned
<S> <C> <C> <C> <C> <C>
Terrence L. Hormel 51 Chairman of the Board 1989 1983 25,360
Bertram F. Elsner 63 Vice Chairman 1998 1985 9,999
J. Bradley Scovill 40 President and 1991 1991 15,536
Chief Executive Officer
Thomas J. Paholsky 38 Treasurer/Secretary 1996 1996 1,532
</TABLE>
The following persons are executive officers of the bank:
<TABLE>
<CAPTION>
Age Director or Number Shares
as of Officer Officer Employee Beneficially
May 9, 2000 Position Since Since Owned
Name
<S> <C> <C> <C> <C> <C>
Terrence L. Hormel 51 Chairman of the Board 1989 1981 25,360
Bertram F. Elsner 63 Vice Chairman 1998 1985 9,999
J. Bradley Scovill 40 President and Chief 1991 1991 15,536
Executive Officer
Chad M. Clabaugh 39 Executive Vice President 1991 1981 349
Sales Group
Thomas J. Paholsky 38 Executive Vice President 1996 1996 1,532
Finance and Technology Group
Jeffrey K. Dice 51 Senior Vice President 1986 1982 1,459
Credit Services
Jacquelyn A. Lebow 42 Senior Vice President 1993 1993 303
Director of Marketing
D. Kathleen Phillips 43 Senior Vice President 1999 1999 --
Chief Technology Officer
Candy A. Sneeringer 29 Vice President 1998 1989 170
Director of Human Resources
John T. Weber 42 Vice President 1998 1989 730
Internal Auditor
</TABLE>
66
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
corporation's officers and directors, and persons who own more than 10% of the
registered class of the Corporation's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors, and greater than 10% shareholders are required by SEC
regulation to furnish the Corporation with copies of all filed Section 16(a)
forms.
Based solely on its review of the copies of such forms received by it,
or on written representation from reporting persons that no Forms 5 were
required for those persons, the Corporation believes that during the period
January 1, 1999, through December 31, 1999, its officers and directors were in
compliance with all Section 16(a) filing requirements applicable to them.
Compensation of Directors
Directors of the bank, including the Chairman of the Board, who are not
also employees, are entitled to fees at the rate of $1,500 per quarter, $350 per
regular board meeting and $150 for special board meetings and committee
meetings.
Terrence L. Hormel, as Chairman of the Board, receives an annual
retainer of $14,400. He receives no fees for committee meetings. Mr. Hormel
earned total fees of $24,600 during 1999. Aggregate fees paid to all directors
in 1999 were $129,400.
The bank has deferred compensation agreements with five current or
former directors. Under these agreements, participating directors elected to
forego receipt of director's fees for a period of five years in return for a
defined benefit over a ten year period. In order to account for this benefit,
the bank is required to fund a liability which recognizes the bank's future
contractual obligation to the participants. The bank is providing for cost
recovery through the purchase of life insurance policies covering the
participants of which the bank is the owner and beneficiary. Also, the bank has
split dollar agreements with four current directors who had previously
participated in deferred compensation agreements. Under the split dollar
agreements, the bank agrees to purchase a life insurance policy for the
participant until age 65. This life insurance policy is then split to provide
the participant with an undefined amount of compensation over a ten year period
while the bank maintains the policy in force to provide cost recovery. Since
there is no contractual obligation to provide a defined future benefit, the bank
is not required to fund a liability on behalf of the participant. The 1999
costs associated with the deferred compensation and split dollar agreements were
$38,055.
Compensation Committee Report
The Board has primary and ultimate responsibility for Hanover's
governance. The Board's fundamental task in discharging this responsibility,
which includes serving as steward for the shareholders' investment and fiduciary
for the customers' deposits, is to provide a capable staff of executive
officers, including the Chief Executive Officer. The Board delegates to these
executive officers the necessary authority to operate and manage Hanover's
resources to achieve the Board's stewardship and fiduciary goals.
Compensation of executive officers, including the Chief Executive
Officer, is an essential aspect of the Board's governance responsibilities. The
Boards' Executive Committee implements Hanover's Executive Compensation Policy.
This policy provides and maintains a salary and benefit program that rewards
executive officers for service to Hanover at a level sufficient to attract and
retain in each position the appropriate quality individual.
The compensation range for each position is determined through
evaluation of internal and external equity, labor market conditions, and
specific responsibilities set forth in the position description. Specific
compensation for each executive officer is based primarily on the performance
of the incumbent, as measured in the annual performance review, with the goal
of matching the officer's compensation to his or her "value added" to Hanover.
This "value added" is comprised of two components:
* The dollar value of adequately discharging the duties of the
office as measured by the pay scale for the position; and
* The extra value added by the incumbent's extraordinary effort
and results. Thus, the compensation for executive officers
consists of base salary plus performance-based incentives.
Performance-based incentives are determined within the framework of
Hanover's Incentive Compensation Program. The program is based upon the
achievement by corporate employees of targeted annual corporate financial
objectives. Incentive pools exist for all staff and officers as a component of
base salary. A Black Scholes valuation model is utilized for option awards.
Specific awards are determined to recognize the value of individual
contributions during the year.
In 1999, Hanover awarded both short- and long-term incentives. Short-
term incentives consisted of cash payments. Long-term incentives consisted of
stock option awards. A total of 31,315 options were awarded, of which 6,000
stock options were granted to Mr. Scovill, Hanover's and the bank's Chief
Executive Officer and the Bank. The Board of Directors based this award on the
program parameters and its subjective assessment.
The Compensation Committee does not deem Section 162(m) of the Internal
Revenue Code to be applicable to Hanover at this time. The committee will
monitor the future application of Section 162(m) to the compensation paid to its
executive officers and in the event that this section becomes applicable, the
committee intends to amend Hanover's compensation plans to preserve the
deductibility of the compensation payable under such plans.
The following directors served as members of the Compensation Committee:
T.L. Hormel, Chairman, S. F. Eisenhart, Jr., B. F. Elsner, and J. B. Scovill.
67
<PAGE>
Compensation Committee Interlocks and Insider Participation
Mr. J. Bradley Scovill, President and Chief Executive Officer of the
Corporation and the Bank, is a member of the Executive Committee. As a member
of the Executive Committee, Mr. Scovill participated in discussions relating to
compensation of executive officers of the Bank but he did not participate in
discussions relating to his compensation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Securities
Name and Other Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SAR'S(1) Payouts sation(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Bradley Scovill, 1999 $179,596 $18,000 $4,520 --- 6,000 --- $8,200
President and 1998 $161,866 $12,000 $4,899 --- 8,133 --- $8,202
Chief Executive 1997 $134,829 --- $4,447 --- 6,133 --- $7,479
Officer
Chad M Clabaugh, 1999 $94,839 $12,000 --- --- 2,800 --- $4,532
Executive 1998 $87,700 $ 6,000 --- --- 3,500 --- $3,054
Vice-President 1997 $72,358 --- --- --- 5,133 --- $2,097
<FN>
(1) The number of options are adjusted for a 4-for-3 stock split effective June 1, 1998.
(2) Consists of Bank of Hanover's contribution to the Hanover Bancorp, Inc. 401(k) Plan.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The following table shows all grants in 1999 of stock options to the
executive officer named in the summary compensation table above. All grants
were made under Hanover's Omnibus Stock Plan.
68
<PAGE>
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Individual Grants Appreciation
for Option Term
% of
Number of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
J. Bradley Scovill, 6,000 (1) 19.16% 17.38 1/1/09 34,200 106,200
President and Chief
Executive Officer
Chad M Clabaugh, 2,800 (2) 8.94% 14.88 12/31/09 26,200 66,400
Executive Vice President
<FN>
(1) Options were issued on January 1, 1999, under Omnibus Stock Plan and
will become exercisable on January 1, 2000, with no partial vesting
prior to January 1, 2002. All options must be exercised within ten
years of the grant date or they expire.
(2) Options were issued on December 31, 1999, under the Omnibus Stock Plan
and will become exercisable on December 31, 2000, with no partial
vesting prior to December 31, 2002. All options must be exercised
within ten years of the grant date or they expire.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table provides information concerning the option
exercises during the last fiscal year and the number and value of the
unexercised options to purchase Hanover's common stock granted to the executive
officer named in the summary compensation table above.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year-End(#) Options at Fiscal Year-End($)(2)
Shares
Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable(1) Exercisable Unexercisable(1)
<S> <C> <C> <C> <C> <C> <C>
J. Bradley Scovill --- -- 20,882 20,266 15,900 1,600
President and Chief
Executive Officer
Chad M. Clabaugh --- -- 6,576 11,433 4,300 --
Executive
Vice-President
<FN>
(1) Options are unexercisable because they have not yet vested under the terms of Hanover's Omnibus Stock Plan.
(2) Based on the market price per share as of December 31, 1999 ($14.88) and specific option exercise prices per share.
</FN>
</TABLE>
Pension Plan
On January 19, 1996, the Board of Directors authorized an amendment to
curtail the bank's defined benefit pension plan. Under the curtailment, pension
benefits were frozen and vested as of March 31, 1996. On September 16, 1996,
approximately two thirds of the plan's accumulated benefit obligation was
settled via the purchase of annuity contracts. The retirement plan was
terminated as of July 24, 1998 and all benefit obligations were settled through
the distribution of plan assets by December 31, 1998.
401(k) Plan
Effective January 1, 1985, the bank made available a 401(k) Plan to
eligible employees. The plan was designed to give employees a source of
financial security and an investment opportunity. The plan is intended to
comply with the requirements of Section 401(k) of the Internal Revenue Code and
is subject to the Employee Retirement Income Security Act of 1974. The plan is
administered by the bank's Investment Services Group which also acts as the
trustee of the plan.
69
<PAGE>
All employees of Hanover and the bank who have completed at least one
year of employment as defined in the plan and are 21 years of age are eligible
to participate in the plan. In each pay period a participant may elect to defer
up to 15% of base salary/wages and to have that amount contributed to the plan
by the bank on the participant's behalf, up to the maximum allowable
contribution as established by the Internal Revenue Service. In addition,
contributions made on behalf of "highly compensated" employees may be further
restricted as provided for in the Internal Revenue Code. The total amount of a
participant's contributions for a given month is allocated to the plan according
to its terms. Except as may be restricted by the Internal Revenue Code, a
matching contribution is made by the bank equal to 50% of the participant's
contributions for the month, up to 4% of the participant's base salary/wages.
Beginning in 1996, the plan was amended to provide for discretionary
contributions by the bank to all eligible employees. All funds are held in
trust and are invested by the trustee in accordance with the participant's
directions within the scope of investment alternatives available under the plan.
All elective, matching and discretionary contributions are 100% vested upon
placement into the plan.
Personal after-tax voluntary contributions made prior to January 1,
1988, may be withdrawn at any time upon the required notice. Participants may no
longer make personal after-tax contributions to the plan. Amounts contributed
to the plan on the participant's behalf, as described above, may be withdrawn
only in the event of financial hardship; however, any such withdrawal may not
include any earnings on pre-tax contributions credited to the participant's
account after December 31, 1988. Upon termination of employment or upon
attaining the age of 59 1/2, a participant's entire interest in the plan becomes
payable. A participant may receive a lump sum distribution or may, in certain
circumstances, elect to defer or receive installment payments.
Employer matching contributions and a discretionary contribution made
to all employees of Hanover and the bank during 1999 was $215,532.
Severance Agreement
On March 22, 1995, Hanover, the bank and J. Bradley Scovill, President
and Chief Executive Officer of Hanover and the bank, entered into a severance
agreement which is triggered upon a change of control of Hanover and the bank.
The agreement provides that if Mr. Scovill is discharged other than for cause,
or Mr. Scovill resigns from the successor to Hanover and/or the bank for good
reason within one year following a change of control of Hanover and/or the bank,
as defined in the agreement, he will receive, monthly, an amount equal to one-
twelfth of his base annual salary that is being paid to him on January 1st of
the year in which the change of control occurs. These monthly payments will
continue for a period of 18 months from the date of his discharge, for reasons
other than for cause, or resignation, for good reason. This 18 month period is
the severance benefit period. In addition, Mr. Scovill will receive, during the
severance benefit period, medical, health, accident and disability insurance and
a survivor's income benefit. These benefits will be equivalent in form,
substance and amount to that provided to him before the commencement of the
severance benefit period.
Under the terms of the agreement, Mr. Scovill will be required to
mitigate the amount of any payment or benefit provided him as described above by
seeking employment in a substantially similar position, and the successor to
Hanover and the bank will be entitled to setoff against the amount of any
payment or benefit provided to Mr. Scovill, under the terms of the agreement, by
any amounts earned by Mr. Scovill in other employment during the severance
benefit period.
Shareholder Return Performance Graph
Set forth below is a line graph comparing the yearly change in the
cumulative total shareholder return on the Hanover's common stock against the
cumulative total return of representative indices and a selected peer group for
the period of five (5) years commencing on January 1, 1995, and ended December
31, 1999. Shareholder return shown on the graph is not necessarily indicative
of future performance.
Comparison of Five Year Cumulative Total Return
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C>
Hanover Bancorp, Inc. 100.00 99.53 101.99 127.51 132.60 118.30
Peer Group Index(1) 100.00 111.93 126.26 183.80 235.55 192.17
NASDAQ Bank Index 100.00 149.00 196.73 329.39 327.11 314.42
Russell 2000 Index 100.00 126.39 145.04 174.81 168.78 201.90
S&P 500 Index 100.00 137.58 169.03 225.44 289.79 350.78
<FN>
(1) Peer group information includes the following companies: ACNB Corp., CNB Financial Corp.,
Citizens and Northern Corp., Drovers Bancshares Corp., First West Chester Corp., Franklin
Financial Services Corp., Penn Security Bank and Trust Company, Pennrock Financial Services,
Penns Woods Bancorp, Inc., and Sterling Financial Corp. These Bank holding companies were
originally selected based on four criteria: total assets between $200 million and $750 million;
market capitalization greater than $25 million; headquarters located in Pennsylvania; and not
listed on NASDAQ national market.
</FN>
</TABLE>
70
<PAGE>
Principal Owners of the Corporation's Stock
As of March 31, 2000, the following shareholder of record is known by
the Board of Directors to be the beneficial owner of more than five percent (5%)
of the Corporation's outstanding common stock:
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial Ownership of Class
<S> <C> <C>
Bank of Hanover and Trust Co. 364,059 9.37%
25 Carlisle Street
Hanover, PA 17331
</TABLE>
Stock Ownership by the Corporation's
Directors, Nominees and Principal Officers
The following table sets forth information as of March 31, 2000,
regarding the amount and nature of ownership of common stock of the Corporation
by each director, each nominee and by all of the directors, nominees and
principal officers of the Corporation as a group. Each such individual has sole
voting and investment power with respect to the shares listed except as
otherwise indicated in the footnotes to the table.
<TABLE>
<CAPTION>
Amount and Nature of
Name of Individual Beneficial Percent
or Identity of Group Ownership(1)(2)(3) of Class(1)
<S> <C> <C>
Thomas M. Bross, Jr. 150,990 3.89%
Michael D. Bross 11,104 (4) 0.29%
S. Forry Eisenhart, Jr. 18,426 (5) 0.47%
Bertram F. Elsner 9,999 (6) 0.26%
J. Daniel Frock 23,642 (7) 0.61%
Gordon A. Haaland, PhD 1,776 (8) 0.05%
Stewart E. Hartman, Jr. 680 0.02%
Terrence L. Hormel 25,360 (9) 0.65%
Earl F. Noel, Jr. 10,431 (10) 0.27%
J. Bradley Scovill 15,536 (11) 0.40%
Charles W. Test 16,387 (12) 0.42%
All directors and principal officers
of the Corporation as a group (18 persons) 288,874 7.44%
<FN>
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission and may include securities owned by or for the individual's
spouse and minor children and any other relative who has the same home,
as well as securities to which the individual has or shares voting or
investment power or has the right to acquire ownership within 60 days
after March 31, 2000.
(2) Information furnished by the directors and the Corporation.
(3) Unless otherwise indicated, shared voting power results from joint
ownership with the referenced persons.
(4) Includes 5,754 shares of which Mr. Bross shares voting power with his
wife, Nancy J. Bross.
(5) Includes 6,419 shares for which Mr. Eisenhart is trustee of accounts
for: his father, S. Forry Eisenhart, Sr. (4,091 shares), and for each
of his three children (776 shares each).
(6) Includes 471 shares of which Mr. Elsner shares voting power with his
wife, Joyce C. Elsner.
(7) Includes 22,276 shares of which Mr. Frock shares voting power with his
wife, Joanne K. Frock.
(8) Dr. Haaland shares voting power with his wife, Carol E. Haaland.
(9) Includes 3,596 shares held by Mr. Hormel's wife, Monna B. Hormel.
(10) Includes 8,661 shares of which Mr. Noel shares voting power with his
wife, Charmian E. Noel.
(11) Includes 4,836 shares of which Mr. Scovill shares voting power with his
wife, Joanne M. Scovill.
(12) Includes 438 shares held by Mr. Test's wife, Ingeborg G. Test.
</FN>
</TABLE>
Certain Transactions
It is not within the policies or practices of Hanover or of Bank of
Hanover to provide personal benefits to principal officers or directors, except
as a measure of reasonable compensation for services. There are no "fringe
benefits" paid or payable to any such person that are not available generally to
all other salaried employees. To facilitate the performance of his duties, the
President and Chief Executive Officer of the bank has been furnished with a
company automobile and a membership to a local country club. This officer pays
all charges attributed to his personal use of these items.
71
<PAGE>
The corporation and the bank have engaged in, and expect to continue to
engage in, transactions in the ordinary course of business with its directors
and officers and their associates on the same terms, including interest rates
and collateral on loans, as those prevailing at the time for comparable
transactions with others. These transactions do not involve more than the normal
risk of collection, nor do they present other unfavorable features.
The largest aggregate amount of indebtedness outstanding at any time
during fiscal year 1999 to officers and directors of the corporation and the
bank was $4,656,325. The aggregate amount of indebtedness outstanding as of
the latest practicable date, February 29, 2000, to the above described group
was $4,437,332, approximately 13.86% of the total equity capital of the
corporation.
72
