-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, POFyum8V8A8VlqBKtb1M4ZCBrSLy+w+f2UfORaqBB4WWdJsY3zjr9JjNApLetiBe YWiuSb+j/aRMSSDp5xekSg== 0000713094-99-000014.txt : 19990817 0000713094-99-000014.hdr.sgml : 19990817 ACCESSION NUMBER: 0000713094-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER BANCORP INC CENTRAL INDEX KEY: 0000713094 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232219814 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12524 FILM NUMBER: 99692214 BUSINESS ADDRESS: STREET 1: 33 CARLISLE STREET CITY: HANOVER STATE: PA ZIP: 17331 BUSINESS PHONE: 7176372201 MAIL ADDRESS: STREET 1: 33 CARLISLE STREET CITY: HANOVER STATE: PA ZIP: 17331 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ( X )QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-12524 Hanover Bancorp, Inc. (Exact name of registrant as specified in its charter) Pennsylvania 23-2219814 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 33 Carlisle Street, Hanover, Pennsylvania 17331 (address of principal executive office and zip code) (717) 637-2201 Registrant's Telephone Number, including area code (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING June 30, 1999 Common Stock, 3,918,105 shares par value $.83 per share 1 INDEX HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Page # Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30,1999 and December 31, 1998 . . . . . . . . . . 3 Consolidated Statements of Income - Three Months Ended June 30, 1999 and 1998 . . . . . . 4 Consolidated Statements of Income - Six Months Ended June 30, 1999 and 1998 . . . . . . . . 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . .7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . .9 Part II. Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 22 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . 22 Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 22 Item 4. Submission of Matters to a Vote of Security Holders. . 22 Item 5. Other Information. . . . . . . . . . . . . . . . . . . 23 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 23 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2 Part I. Financial Information HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Consolidated Balance Sheets (unaudited in thousands, except per share data)
June 30, December 31, 1999 1998 ASSETS Cash and due from banks $ 19,044 $ 17,539 Federal funds sold 26,836 8,635 Cash and cash equivalents 45,880 26,174 Interest bearing deposits with other banks 22 59 Short-term investments - - Investment securities: Available-for-sale 146,259 143,202 Held-to-maturity (market value - $1,696 and $1,794, respectively) 1,694 1,759 147,953 144,961 Loans: Commercial, financial and agricultural 46,766 43,803 Real estate-construction 4,115 5,429 Real estate-commercial mortgage 46,576 44,750 Real estate-residential mortgage 131,313 130,196 Consumer 66,789 65,162 295,559 289,340 Less: Allowance for loan losses (3,622) (3,405) Net loans 291,937 285,935 Premises and equipment 7,194 7,236 Accrued interest receivable 3,171 2,938 Other assets 5,168 2,790 TOTAL ASSETS $501,325 $ 470,093 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits: Non-interest bearing $ 37,883 $ 33,827 Interest bearing 362,137 330,181 400,020 364,008 Borrowed Funds: Short-term 12,792 15,651 Long-term 48,968 49,136 61,760 64,787 Accrued interest payable 3,633 2,453 Other liabilities 1,395 1,468 Dividends payable 433 433 TOTAL LIABILITIES 467,241 433,149 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: 1999-3,918,105 shares; 1998-3,935,537 shares 3,252 3,270 Surplus 18,786 19,144 Accumulated other comprehensive income (2,622) 1,204 Retained earnings 14,668 13,326 TOTAL SHAREHOLDERS' EQUITY 34,084 36,944 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $501,325 $ 470,093 Book value per share $ 8.70 $ 9.38 See accompanying notes.
3 HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Consolidated Statements of Income (Unaudited: in thousands of dollars, except per share data)
Three months ended June 30, 1999 1998 INTEREST INCOME Interest and fees on loans $ 6,016 $ 6,074 Interest on federal funds sold 188 73 Interest on short-term investments 35 - Interest on investment securities: Taxable 1,538 1,311 Tax-exempt 569 346 2,107 1,657 TOTAL INTEREST INCOME 8,346 7,804 INTEREST EXPENSE Interest on deposits 3,493 3,356 Interest on borrowed funds 827 577 TOTAL INTEREST EXPENSE 4,320 3,933 NET INTEREST INCOME 4,026 3,871 PROVISION FOR LOAN LOSSES 195 210 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,831 3,661 NET SECURITIES GAINS 85 384 OTHER INCOME Trust and investment services income 290 229 Services charges on deposit accounts 407 313 Other operating income 263 272 TOTAL OTHER INCOME 960 814 OTHER EXPENSE Salaries 1,408 1,406 Employee benefits 307 292 Occupancy expense 238 242 Equipment expense 305 268 Marketing and advertising 112 131 Professional and service fees 352 230 Other operating expense 701 886 TOTAL OTHER EXPENSE 3,423 3,455 INCOME BEFORE INCOME TAXES 1,453 1,404 INCOME TAXES 309 371 NET INCOME $ 1,144 $ 1,033 PER SHARE DATA Net income - basic and diluted $ 0.29 $ 0.26 Cash dividends declared $ 0.11 $ 0.10 See notes to consolidated financial statements.
4 HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Consolidated Statements of Income (unaudited in thousands, except per share data)
Six months ended June 30, 1999 1998 INTEREST INCOME Interest and fees on loans $11,888 $11,971 Interest on federal funds sold 358 94 Interest on short-term investments 67 6 Interest on investment securities: Taxable 3,037 2,556 Tax-exempt 1,054 654 4,091 3,210 TOTAL INTEREST INCOME 16,404 15,281 INTEREST EXPENSE Interest on deposits 6,862 6,545 Interest on borrowed funds 1,657 1,120 TOTAL INTEREST EXPENSE 8,519 7,665 NET INTEREST INCOME 7,885 7,616 PROVISION FOR LOAN LOSSES 390 655 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,495 6,961 NET SECURITIES GAINS 161 732 OTHER INCOME Trust and investment services income 576 464 Service charges on deposit accounts 786 609 Other operating income 613 469 TOTAL OTHER INCOME 1,975 1,542 OTHER EXPENSE Salaries 2,793 2,788 Employee benefits 605 572 Occupancy expense 464 472 Equipment expense 603 540 Marketing and advertising 223 262 Professional and service fees 711 418 Other operating expense 1,412 1,497 TOTAL OTHER EXPENSE 6,811 6,549 Income before income taxes 2,820 2,686 INCOME TAXES 612 712 NET INCOME $ 2,208 $ 1,974 PER SHARE DATA Net income - basic and diluted $ 0.56 $ 0.50 Cash dividends declared 0.22 0.20 See accompanying notes.
5 HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Consolidated Statements of Cash Flows (unaudited in thousands)
Six months ended June 30, 1999 1998 OPERATING ACTIVITIES Net income $ 2,208 $ 1,974 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 390 655 Provision for depreciation and amortization 543 489 Securities gains (161) (732) (Increase) decrease in net deferred tax assets 147 (32) Decrease in interest receivable (233) (82) Increase in interest payable 1,180 781 Increase in other assets (554) 141 Increase (decrease) in other liabilities (408) 321 Increase in accrued taxes 335 (281) Loans originated for sale (7,159) (8,262) Proceeds from sale of loans originated for sale 8,442 8,170 NET CASH PROVIDED BY OPERATING ACTIVITIES 4,730 3,142 INVESTING ACTIVITIES Net increase in loans (7,675) (10,255) Proceeds from sale of loans - 4,981 Proceeds from sale of avaliable-for-sale investment securities 27,369 10,322 Proceeds from maturities of investment securities 9,775 7,773 Purchases of investment securities (45,772) (33,798) Proceeds from maturities of short-term investments 8,000 1,600 Purchases of short-term investments (7,963) (3) Purchases of premises and equipment (501) (931) NET CASH USED IN INVESTING ACTIVITIES (16,767) (20,311) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, money market accounts, and savings accounts 16,959 14,052 Net increase (decrease) in certificates of deposit and other time deposits 19,053 8,418 Net increase (decrease) in borrowed funds (3,027) 4,661 Cash dividends paid (866) (765) Cash paid in lieu of fractional shares - (9) Proceeds from issuance of common stock 56 405 Repurchase and retirement of common stock (432) - NET CASH PROVIDED BY FINANCING ACTIVITIES 31,743 26,762 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,706 9,593 Cash and cash equivalents at beginning of year 26,174 19,718 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 45,880 $ 29,311 See accompanying notes.
6 HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Notes to Consolidated Financial Statements (1) In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments which are of a normal recurring nature necessary to present fairly Hanover Bancorp, Inc's. financial position as of June 30, 1999, and December 31, 1998, the results of its operations for the three months and six months ended June 30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998. (2) The information contained in this report is unaudited and is subject to year-end adjustment and audit. (3) These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998. (4) Net income (basic and diluted) and cash dividends per share are based on the weighted average number of shares outstanding which were 3,937,375 during the quarter ended June 30, 1999 and 3,934,807 during the quarter ended June 30, 1998; 3,939,344 during the six months ended June 30, 1999; and 3,928,313 during the six months ended June 30, 1998. The effect of dilutive securities for these periods was immaterial. (5) The results of operations for the six months ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. (6) Management maintains the allowance for loan losses at a level believed adequate to absorb potential future losses in the portfolio. Factors considered in evaluating the adequacy of the allowance include potential specific losses, past loan loss experience, the volume, growth and composition of the loan portfolio and the current economic conditions and trends. (7) Comprehensive income and its components for the quarter and six months ended June 30, are as follows:
Quarter Six months Ended Ended 1999 1998 1999 1998 Net income $ 1,144 $1,033 $ 2,208 $1,974 Adjustment to net unrealized gains and losses on securities available-for-sale, net of tax effects and reclassification adjustment for gains included in net income (3,388) 75 (3,826) (104) Comprehensive Income $(2,244) $1,108 $(1,618)$1,870 Accumulated other comprehensive income consists of the net unrealized gain/loss on securities available-for-sale, net of tax effects.
7 (8) 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. The Corporation is not currently involved in any transactions which fall under the definitions of this standard, therefore it 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. *********** 8 HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations: The consolidated operations of Hanover Bancorp Inc., (the "Corporation") are derived primarily from the operations of its wholly-owned subsidiary, the Bank of Hanover and Trust Company (the "Bank"). The following discussion and analysis sets forth results of operations through the Second quarter of 1999, including basic performance trends. There are no known trends, events or uncertainties that will have or are likely to have a material effect on the Corporation's liquidity, capital resources or operations. All forward looking information contained in this discussion and analysis is based on management's current knowledge of factors affecting the Corporation's business. Actual results may differ due to unforeseen events such as, but not limited to, a significant downturn in the economic environment, changes in interest rates, legislative changes or additional requirements mandated by the numerous regulatory authorities. All such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Second Quarter of 1999 Compared to Second Quarter of 1998: Net income for the three months ended June 30, 1999, increased $111,000 or 10.7% from 1998 while earnings per share (EPS) increased $.03 or 11.5% during the same period. Return on average core equity (all equity accounts except accumulated other comprehensive income) improved from 12.05% in 1998 to 12.36% in 1999. Net interest income on a fully taxable equivalent basis was $4.4 million for the quarter ended June 30, 1999, an increase of $264,000 or 6.4% from 1998's level of $4.1 million. This increase was due to higher earning asset levels of $59.2 million, which was driven by deposit and loan growth and increased investment security activity. Net interest margin decreased 30 basis points from 4.11% in 1998 to 3.81% in 1999. Since deposit growth outpaced loan growth during this period, much of the excess funding was deployed in the investment portfolio. The Corporation also utilized Federal Home Loan Bank of Pittsburgh (FHLB) borrowings to fund additional investment security activity. As a result, this growth generated narrower spreads which lowered the margin. The provision for loan losses during the second quarter of 1999 was $195,000 compared to $210,000 for 1998. The Corporation makes provisions as necessary to maintain the allowance at a level adequate to absorb potential future losses within the portfolio. 9 Securities gains decreased from $384,000 during the three months ended June 30, 1998 to $85,000 for the same period in 1999. This decrease was due to lower equity gains realized from the Corporation's bank stock portfolio. Other income for the three months ended June 30, 1999 increased $146,000 or 17.9% over the same period in 1998. The increase in trust and investment services income is reflective of growth in assets under management. Service charges on deposit accounts increased primarily as a result of higher overdraft fees related to fee increases in the second half of 1998 and operational changes. Total other expense during the second quarter of 1999 was $32,000 or 0.9% lower than in 1998. The prior year included the recognition of a $252,000 loss related to the termination of the Bank's pension plan. Excluding this non-recurring item, other expense increased $220,000 or 6.9%. This increase was principally due to professional and service fees resulting from the contracting of PC help desk and network administration functions, costs related to technology consulting, and the contracting of certain investment services record keeping. Salary expense was affected by a lower level of FTEs within the technology group due to the contracting of the functions mentioned above. The resulting efficiency ratio (the cost to generate one dollar of revenue) for the three months ended June 30, 1999 was 64.43% compared to 65.33% a year ago. 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 21.3% for the quarter ended June 30, 1999 compared to 26.4% rate in 1998. The decrease from period to period was a result of a higher level of tax free income during 1999. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30 1998: Earnings for the six months ended June 30, 1999 increased $234,000 or 11.9% and earnings per share (EPS) increased $.06 or 12.0% over the same period in 1998. The return on average core equity (all equity accounts except accumulated other comprehensive income) was 12.05% in 1999 versus 11.68% in 1998. Net interest income on a fully taxable equivalent basis for the six months ended June 30, 1999 increased $469,000 or 5.8% from the same period in 1998. This increase was due to higher earning asset levels, driven by loan and deposit growth and increased investment security activity. Net interest margin decreased 35 basis points from 4.14% in 1998 to 3.78% in 1999. As discussed previously, this decrease was due primarily to the deployment of excess funding in the investment portfolio at relatively narrow spreads. The provision for loan losses during the first half of 1999 decreased $265,000 over the same period in 1998. The Corporation makes provisions as necessary to maintain the allowance at a level adequate to absorb potential future losses within the portfolio. Securities gains decreased $571,000 during the period ended June 30, 1999 from the same period in 1998. This decrease was due to a decreased level of gains realized from the Corporation's bank stock portfolio. 10 Other income for the six months ended June 30, 1999 increased $433,000 or 28.1% over 1998. The increase in trust and investment services income is reflective of growth in assets under management. Service charges on deposit accounts increased primarily due to higher overdraft fees, as discussed previously. The increase in other operating income was largely related to higher income realized through mortgage origination activity. Total other expense during the first half of 1999 was $6.8 million, an increase of $262,000 or 4.0% from 1998. The previous year included the recognition of a $252,000 loss related to the termination of the Bank's pension plan. Excluding this non-recurring item, other expense increased $514,000 or 8.2%. This increase was principally due to professional and service fees resulting from the contracting of PC help desk and network administration functions, costs related to technology consulting, the contracting of certain investment services record keeping and increased recruiting expenses. The nominal increase in salary expense was reflective of a lower level of FTE's within the technology group due to the contracting of the functions noted above. The resulting efficiency ratio (the cost to generate one dollar of revenue) for the six months ended June 30, 1999 was 65.04% compared to 65.80% in 1998. The Corporation recognized an income tax provision which resulted in an effective tax rate of 21.7% for the period ended June 30, 1999 down from the 26.5% rate in 1998. The decrease was the result of a greater proportion of tax free assets to earning assets in 1999 relative to 1998 as well as additional state corporate income taxes incurred at the parent company in the prior year. Financial Condition Continued strong growth in the Bank's deposit base enabled the Corporation to surpass the milestone of $500 million during the second quarter of 1999. Deposits are the most important funding source and the primary support for the Corporation's growth. During the first six months of 1999, total deposits increased $36.0 million or 9.9%. This growth came in nearly all categories of deposits but particularly in the demand and money market categories and certificates of deposit (CDs). Overall, deposit growth was positively impacted by the continued consolidation within the local marketplace. Borrowed funds, the other primary funding source, decreased due to a decrease in repurchase agreements during the first half of 1999. The Corporation uses these funding sources to support its lending and investing activities. Net loans outstanding increased by $6.0 or 2.1% from December 31, 1998 to June 30, 1999. The growth was principally the result of increases in the commercial and consumer categories. Investment securities increased $3.0 million or 2.1% through the first six months of 1999 while federal funds sold and other short-term investments increased by $18.2 million during this period. The increase federal funds sold and other short-term investments reflects the mismatch between deposit and loan growth and management's expectation that loan growth will utilize a portion of these funds over time. 11 Trends in Sources and Uses of Funds (in thousands, except percentages)
June 30, December 31 Change 1999 1998 $ % Funding Sources Deposits $400,020 $ 364,008 $36,012 9.9% Borrowed funds 61,760 64,787 (3,027) (4.7%) Other liabilities 5,461 4,354 1,107 25.4% Shareholders' equity 34,084 36,944 (2,860) (7.7%) TOTAL SOURCES $501,325 $ 470,093 $31,232 6.6% Funding Uses Loans $291,937 $ 285,935 $ 6,002 2.1% Investment securities 147,953 144,961 2,992 2.1% Federal funds sold and short-term investments 26,858 8,694 18,164 208.9% Other assets 34,577 30,503 4,074 13.4% TOTAL USES $501,325 $ 470,093 $31,232 6.6%
12 Capital Resources and Dividends The Corporation has an ongoing strategic objective of maintaining a capital base which supports the pursuit of profitable business opportunities, provides resources to absorb the risks inherent in its activities and meets or exceeds all regulatory requirements. At June 30, 1999, total shareholders' equity was $34.1 million, a decrease of $2.9 million from December 31, 1998. This change consisted of an increase of $966,000 in capital stock, surplus and undivided profits (core equity) and a decrease of $3.8 million in accumulated other comprehensive income (unrealized gains on AFS securities). The increase in the core equity was primarily the result of earnings retained. This was partially offset by the repurchase of the Corporation's common stock, as discussed below. The decrease in accumulated other comprehensive income resulted from the higher level of market interest rates which negatively effects the market value of debt securities and lower valuations within the bank stock portfolio. On April 17, 1998, the Board of Directors declared a 4-for-3 stock split which was paid June 1, 1998 to shareholders of record May 1, 1998. The primary objective of this split was to enhance liquidity and improve marketability by increasing the number of shares outstanding, while maintaining the strong market climate for Hanover Bancorp stock. Another tool available to management for capital management and supporting the market for the Corporation's stock is the repurchase program approved April 18, 1997 by the Board of Directors. During the second quarter of 1999, 25,733 shares were repurchased at a total cost of $432,000. As of June 30, 1999, 132,194 shares were still available for purchase under the program which originally authorized 186,667 shares (adjusted for the stock split). This program and a prior program have benefited the Corporation in terms of improved EPS and ROE, two performance factors key to driving shareholder value. During the quarter ended June 30, 1999, the Board of Directors declared a cash dividend of $.11 per share payable August 1, 1999, an increase of $.01 or 10.0% per share from a year ago. The Corporation relies on net income rather than retained earnings for the payment of dividends to shareholders. The dividend rate is determined by the Board of Directors after considering the level of internal capital growth necessary to maintain an appropriate ratio of equity to assets and the projected level of earnings. Management anticipates that the internal growth rate of equity is more than adequate to support the Corporation's asset growth. As can be seen by the following tables, the Corporation and the Bank remain well capitalized as defined by the regulatory authorities.
June 30, December 31, 1999 1998 Hanover Bancorp, Inc. Tier 1 capital to risk-adjusted assets 11.74% 12.02% Total capital to risk-adjusted assets 12.94% 13.16% Leverage ratio 7.59% 8.04% Bank of Hanover and Trust Company Tier 1 capital to risk-adjusted assets 9.82% 10.43% Total capital to risk-adjusted assets 11.02% 11.60% Leverage ratio 6.31% 6.93%
13 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". 14 Asset Quality and Allowance for Loan Losses: The following table illustrates the Corporation's nonperforming asset position as of June 30, 1999 compared to its position at December 31, 1998.
June 30, December 31, 1999 1998 Non-accrual loans $ 270 $ 517 Accruing loans past due 90 days or more 288 425 Restructured loans - - Other real estate and other repossessed assets 121 81 Total non-performing assets $ 679 $ 1,023 Non-accrual loans by category Commercial, financial and agricultural $ - $ 81 Real estate-construction 80 - Real estate-mortgage 184 426 Consumer 6 10 $ 270 $ 517 Past due loans by category Commercial, financial and agricultural $ 79 $ 153 Real estate-construction - - Real estate-mortgage 204 204 Consumer 5 68 $ 288 $ 425 Restructured loans by category Commercial, financial and agricultural $ - $ - Real estate-construction - - Real estate-mortgage - - Consumer - - $ - $ -
15 Nonperforming assets were .23% of total loans at June 30, 1999 compared to .35% at December 31, 1998. In addition, potential problem loans at June 30, 1999, as determined by the Corporation's internal review process, were $1..2 million, the same level for December 31, 1998. Of these amounts, $327,000 and $379,000 were considered impaired under FASB 114 for June 30, 1999 and December 31, 1998, respectively. Loans considered impaired under FASB 114 represent those potential problem loans which management feels are probable (as opposed to possible) to result in future noncompliance in addition to the Corporation's applicable nonaccrual loans and restructured loans. Transactions in the allowance for loan losses were as follows:
Period ended June 30, 1999 1998 Balance at beginning of period $3,405 $2,908 Recoveries on loans 229 108 Provision charged to operations 390 655 Loans charged-off (402) (388) Balance at end of period $3,622 $3,283
The Corporation remains committed to making provisions in order to maintain a strong allowance relative to its level of specific potential losses and to its growing overall loan portfolio. A total provision of $390,000 was made during the first six months of 1999 compared to $655,000 during the prior year. Net charge-offs for the period ended June 30, 1999 were $173,000 compared to net charge-offs of $280,000 for the same period in 1998. The resulting allowance for loan losses at June 30, 1999 was $3.6 million in comparison to $3.3 million at June 30, 1998. This allowance approximated 1.23% of total loans and 533% of nonperforming assets at June 30, 1999 versus 1.16% and 279% at June 30 1998. Management feels that the allowance for loan losses is adequate to cover potential future losses within the overall portfolio. Liquidity Liquidity is the ability to meet funding requirements of customers' deposit withdrawals or credit needs at a reasonable cost. The Corporation's Asset/Liability Management Committee (ALCO) has established policies and procedures to control its liquidity position and to provide for potential future needs. The Corporation's liquidity position is enhanced by a relatively stable funding base. The ratio of deposits (excluding CDs over $100,000) to total assets was 74.1% at June 30, 1999, while CDs over $100,000 and other borrowed funds to total assets was 18.1%. To manage its liquidity needs, the Corporation looks to a number of sources on both sides of its balance sheet. 16 On the asset side of the balance sheet, the Corporation relies on federal funds sold, short-term investments, maturities in the investment portfolio, principal repayments on outstanding loans and amortizing investment securities and sales of loans in the secondary markets. At June 30, 1999, the balance of the federal funds sold was $26.8 million while a total of $16.2 million of the Corporation's investment portfolio was scheduled to mature in one year or less. Additionally, an average of $9.3 million in loan principal repayments and $1.0 million in mortgage-backed and asset- backed securities repayments were received by the Corporation during each month of the first six months of 1999. The Corporation maintains borrowing agreements with several correspondent banks and the Discount Window at the Federal Reserve Bank of Philadelphia. In addition, it has access to the FHLB for permanent funding needs. Through these relationships, the Corporation has available short-term credit of approximately $10.0 million and permanent funding of approximately $51.8 million. Market Risk In January 1997, the Securities and Exchange Commission (SEC) issued new disclosure rules related to derivatives and exposures to market risk from derivative financial instruments, other financial instruments and certain derivative commodity instruments. These rules became effective for the Corporation's December 31, 1997 financial statements. Market risk includes interest rate risk, foreign currency exchange rate risk, commodity price risk and equity price risk. The new disclosure rules have two parts: quantitative and qualitative market risk disclosures outside the financial statements, and accounting policy disclosures about derivatives in the notes to the financial statements. As further discussed within, the Corporation's primary market risk is interest rate risk from its financial assets and liabilities. Derivatives are not presently utilized and thus the expanded policy disclosures are not applicable Interest rate risk is the exposure to fluctuations in the Corporation's current and future net interest income from movements in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specified time period. The primary objective of the Corporation's asset/liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate yet is not essential to the Corporation's profitability. Thus the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at a tolerable level. 17 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 June 30, 1999 of negative $13.7 million or 2.74% 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 fairly neutral gap from December 31, 1998 to June 30, 1999 was largely the result of extending maturities in the investment portfolio and a block of certificates of deposit falling within the one year time frame. 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 June 30, 1999, the Corporation would expect net interest income to decrease over the next twelve months by 2.9% assuming an immediate upward shift in market interest rates of 200 basis points, and to increase by 0.3% if rates shifted downward in the same manner. At December 31, 1998, net interest income was expected to decrease by .9% in the upward scenario and to decrease by 1.5% in the downward scenario. The simulation results are largely affected by the Corporation's holdings of approximately $43 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. This explains why 18 both the up and down scenarios are showing similar results (i.e. in the up scenario, the additional income realized due to the asset sensitivity is offset by the repricing advances). Consistent with the gap analysis, the change to a more negative position from December 31, 1998 to June 30, 1999 is due to extended maturities in the investment portfolio and increased certificate of deposit maturities within one year. YEAR 2000 Many older computer programs were designed using two digits rather than four to define the year. This date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. This situation, known by many as the Year 2000 (Y2K) issue, applies not only to the systems utilized by the Corporation, but also to the systems utilized by customers, creditors, vendors and suppliers of the Corporation. To address Year 2000 issues, the Corporation adopted a policy and strategic project plan using guidelines established by the Federal Financial Institutions Examination Council (FFIEC). The Corporation completed all mission-critical aspects of the Year 2000 project plan and had substantially all necessary system changes implemented in advance of the regulatory deadline of June 30, 1999. A corporate-wide Year 2000 task force continues to meet to discuss upcoming projects and assess progress. Senior Management and the Board of Directors closely monitor the Year 2000 project using a progress report and internal audits. On a regular basis, bank examiners from the Federal Deposit Insurance Corporation (FDIC) have evaluated readiness for the Year 2000 to confirm that guidelines are met. The Corporation has inventoried and assessed all software, hardware and systems 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. The rigorous testing procedures encompassed the ATM network, telephone banking system, core processing system, internal PC network, internal and external interfaces and mission-critical software. The vendor of the core processing system tested all 13 critical dates outlined in FFIEC guidance. The Corporation tested each critical date based upon assessed exposure to date sensitivities. Doing so ensured that vendor test results were repeatable within the Corporation's specific system parameters. The Corporation's internal auditor reviewed test results from all hardware, software and systems. The Corporation completed mission- critical testing by June 30, 1999. To minimize customer inconvenience and facilitate a "business as usual" environment, the Corporation developed contingency plans 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 19 recovery and Year 2000 contingency plans will be reassessed for thoroughness and validity on a quarterly basis. Utilizing information from written vendor surveys, Internet sites and internal testing, the Corporation has assessed the year 2000 readiness of vendors and service providers. Those assessed include application software vendors, automated clearinghouses, electronic payment systems (Federal Reserve), equipment, telecommunication and utility companies. The FDIC is also monitoring the readiness of the Corporation's ATM and core processing system providers. The Corporation has determined that all infrastructure components are Year 2000 compliant, including ATM machines, safe deposit boxes, vaults, security systems, office equipment, lighting and heating and cooling systems. Using a written survey and contacts with loan officers, the Corporation has assessed the Year 2000 readiness of customers holding significant commercial loans. The Corporation has established Year 2000 compliance as a factor in its credit decisions and loan documentation. A central component of the Year 2000 project is customer and shareholder awareness of the issue and the steps taken by the Corporation. All branches and the Teleservices area have been educated on the Year 2000 issue. Customer concerns are being addressed using statement brochures, lobby brochures, posters and informational handouts. To facilitate shareholder awareness, a brochure describing the Corporation's Year 2000 effort was included in the fourth quarter 1998 report. As a public service, the Corporation informed business customers about the Small Business Administration Year 2000 hot line in commercial statements from December 1998 through January 1999. The cost of becoming Year 2000 compliant has been insignificant to date and management believes that the 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. The costs of the project and the date on which the Corporation believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 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 20 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 Bank of Hanover communications regarding Year 2000 readiness efforts are designated as Year 2000 Readiness Disclosures. REGULATORY ISSUES From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of and restrictions on the business of the Corporation and the Bank. Congress has proposed "modernization" of the financial services industry. This proposed modernization will have the effect of deregulating and expanding the business activities of financial institutions. These additional activities may include broader insurance powers, securities underwriting activities and equity investments by commercial banks. It cannot be predicted whether such legislation will be adopted or, if adopted, how such legislation would affect the business of the Corporation and the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Corporation's and the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the cost of doing business. Management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and results of operations of the Corporation will not be material. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation, which if they were implemented, would have a material adverse effect upon the liquidity, capital resources or results of operations. However, the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations. Further, the business of the Corporation is also affected by the state of the financial services industry in general. As a result of legal and industry changes, management believes that the industry will continue to experience consolidations and mergers as the financial services industry strives for greater cost efficiencies and market share. Management believes that such consolidations and mergers may enhance its competitive position as a community bank. Congress is currently considering legislative reform centered on repealing the Glass-Steagall Act which prohibits commercial banks from engaging in the securities industry. The holding company structure would be regulated by the Federal Reserve Board, and its subsidiaries would be supervised by the applicable regulator based on their respective functions. 21 PART II. OTHER INFORMATION HANOVER BANCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY Item 1. Legal Proceedings In the opinion of the management of the Corporation and the Bank, there are no proceedings pending to which the Corporation and/or Bank is a party or to which their property is subject, which, if determined adversely to the Corporation or Bank, would be material in relation to the Corporation's and the Bank's undivided profits or financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation or the Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or the Bank by government authorities. Item 2. Changes in Securities - None. Item 3. Defaults Upon Senior Securities - None. Item 4. Submission of Matters to a Vote of Security Holders (a) An annual meeting of shareholders was held April 27, 1999. (b)-(c) One matter was voted upon, as follows: Four directors were elected, as below: Votes Votes Term Cast Cast Votes Expires "For" "Against" "Abstained" Re-elected Michael D. Bross 2002 3,934,334 882 6,159 Thomas M. Bross, Jr. 2002 3,933,246 1,970 6,159 Earl F. Noel, Jr. 2002 3,935,216 0 6,159 J. Bradley Scovill 2002 3,930,654 4,562 6,159 Directors whose term continued after meeting Term Expires Terrence L. Hormel 2000 Charles W. Test 2000 S. Eisenhart, Jr. 2000 Bertram F. Elsner 2001 J. Daniel Frock 2001 Gordon A Haaland, Ph.D. 2001 Stewart E. Hartman, Jr. 2001 22 Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - Exhibit 27. Financial Data Schedule (b) Reports on Form 8-K - None 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANOVER BANCORP, INC. Date: August 13, 1999 /s/ Bradley Scovill J. Bradley Scovill President and Chief Executive Officer (Principal Executive Officer) Date: August 13, 1999 /s/ Thomas J. Paholsky Thomas J. Paholsky Treasurer (Principal Accounting and Financial Officer) 24 EX-27 2
9 1000 6-MOS Dec-31-1999 Jun-30-1999 19,044 22 26,836 0 146,259 1,694 1,696 295,559 3,622 501,325 400,020 12,792 5,461 48,968 0 0 3,252 30,832 501,325 11,888 4,091 425 16,404 6,862 8,519 7,885 390 161 6,811 2,820 2,208 0 0 2,208 0.56 0.56 3.78 270 288 0 1,500 3,405 402 229 3,622 3,622 0 0
-----END PRIVACY-ENHANCED MESSAGE-----