<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1994 Commission File Number 0-8415
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DAUPHIN DEPOSIT CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1938831
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
213 Market Street, Harrisburg, Pennsylvania 17105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 255-2121
-----------------
NOT APPLICABLE
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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 at April 27, 1994
- -------------------------- -----------------------------
Common Stock, $5 Par Value 32,215,703 Shares
<PAGE>
DAUPHIN DEPOSIT CORPORATION
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FORM 10-Q
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For the Quarter Ended March 31, 1994
Contents
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1994,
December 31, 1993 and March 31, 1993
Consolidated Statements of Income for the Three Month
Periods Ended March 31, 1994 and 1993
Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 1994 and 1993
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
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Part I
For the Quarter Ended March 31, 1994
Item 1. Financial Statements
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, December 31, March 31,
1994 1993 1993
----------- ----------- -----------
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $203,041 $151,845 $178,653
----------- ----------- -----------
Short-term investments
Interest bearing deposits 6,219 13,573 3,012
Federal funds sold and securities purchased under agreements to resell 0 2,950 2,500
----------- ----------- -----------
Total short-term investments 6,219 16,523 5,512
----------- ----------- -----------
Investment securities
(Approximate fair value $2,081,001, $2,105,942 and $2,149,675, respectively) 2,081,001 2,041,204 2,073,531
Assets held for sale 8,121 9,203 56,023
Loans (net of unearned income) 2,556,766 2,586,085 2,389,280
Allowance for loan losses (39,046) (39,182) (36,724)
----------- ----------- -----------
Total net loans 2,517,720 2,546,903 2,352,556
----------- ----------- -----------
Bank premises and equipment 63,708 64,348 67,500
Other assets 89,228 86,829 90,182
----------- ----------- -----------
Total assets $4,969,038 $4,916,855 $4,823,957
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $418,283 $423,641 $359,448
Interest bearing 3,062,440 3,162,494 3,165,455
----------- ----------- -----------
Total deposits 3,480,723 3,586,135 3,524,903
----------- ----------- -----------
Short-term borrowings
Federal funds purchased and securities sold under agreements to repurchase 765,679 628,100 642,908
U.S. Treasury tax and loan notes 51,042 52,286 36,129
----------- ----------- -----------
Total short-term borrowings 816,721 680,386 679,037
----------- ----------- -----------
Long-term debt 92,034 92,454 92,558
Accrued expenses and taxes 57,913 51,805 53,294
----------- ----------- -----------
Total liabilities 4,447,391 4,410,780 4,349,792
----------- ----------- -----------
Stockholders' equity
Preferred stock, $25 par value; 10,000,000 shares authorized unissued
Common stock, $5 par value; 200,000,000 shares authorized,
32,641,614 shares issued, of which 233,911, 134,200
and 228,904 shares are held as treasury stock, respectively 163,208 163,208 163,208
Surplus 11,275 11,213 10,839
Retained earnings 344,222 333,774 303,613
Unrealized gains on securities available-for-sale, net of deferred taxes 7,852
----------- ----------- -----------
526,557 508,195 477,660
Less: Treasury stock - at cost (4,910) (2,120) (3,495)
----------- ----------- -----------
Total stockholders' equity 521,647 506,075 474,165
----------- ----------- -----------
Total liabilities and stockholders' equity $4,969,038 $4,916,855 $4,823,957
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share data)
Three Months
Ended March 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Interest income
Interest and fees on loans $46,941 $47,791
Interest and dividends on investment securities
Taxable 25,107 27,797
Exempt from federal income taxes 6,165 5,849
Interest on deposits 92 53
Interest on assets held for sale 182 448
Interest on federal funds sold and other
short-term investments 8 66
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Total interest income 78,495 82,004
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Interest expense
Interest on deposits
Savings deposits 9,211 11,409
Time deposits 14,845 17,537
Time deposits in denominations of
$100,000 or more 3,001 3,581
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27,057 32,527
Interest on short-term borrowings 5,835 4,288
Interest on long-term borrowings 1,663 1,674
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Total interest expense 34,555 38,489
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Net interest income 43,940 43,515
Provision for loan losses 1,884 2,446
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Net interest income after provision for loan losses 42,056 41,069
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Non-interest income
Fiduciary activities 4,068 3,945
Service charges on deposit accounts 2,831 3,078
Other service charges and fees 2,426 2,079
Broker/dealer commissions and fees 1,900 2,298
Securities gains, net 1,538 1,448
Other 911 1,550
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Total non-interest income 13,674 14,398
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Non-interest expense
Salaries and employee benefits 16,629 16,518
Net occupancy expense 2,339 2,130
Furniture and equipment expense 2,330 2,324
Deposit insurance 1,991 2,065
Other 8,717 8,918
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Total non-interest expense 32,006 31,955
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Income before income taxes 23,724 23,512
Provision for income taxes 5,823 5,759
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Net income $17,901 $17,753
============ ============
Net income per share $0.55 $0.54
Cash dividends declared per share $0.23 $0.20
Weighted average number of shares outstanding 32,644,863 32,590,474
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
March 31,
1994 1993
-------------- --------------
<S> <C> <C>
Operating activities
Net income $17,901 $17,753
Adjustments:
Provision for loan losses 1,884 2,446
Provision for depreciation, amortization and accretion 2,444 3,033
Deferred income taxes 89 (72)
Securities gains, net (1,538) (1,448)
Increase in interest receivable (5,249) (3,379)
Increase in accrued expenses and taxes 1,304 3,101
Capitalized interest on deposits 11,419 12,151
Other, net 941 (1,610)
--------------- --------------
Net cash provided by operating activities 29,195 31,975
--------------- --------------
Investing activities
Proceeds from investment securities (including
proceeds from sales of $40,426 and $11,623, respectively) 191,038 192,385
Purchases of investment securities (211,457) (188,319)
Net (increase) decrease in assets held for sale 1,082 (47,520)
Net decrease in loans 20,925 21,542
Net proceeds from sale of subsidiary, Farmers Savings Bank, FSB 797
Net purchases of bank premises and equipment (1,152) (731)
-------------- --------------
Net cash provided (used) by investing activities 1,233 (22,643)
-------------- --------------
Financing activities
Net increase (decrease) in demand deposits and savings accounts 52,881 (100,895)
Net decrease in time deposits (158,871) (78,023)
Net increase in short-term borrowings 136,335 70,711
Net decrease in long-term debt (20) (20)
Issuance of common stock and treasury stock 83 328
Acquisition of treasury stock (3,212)
Cash dividends paid (6,878) (6,322)
-------------- --------------
Net cash provided (used) by financing activities 20,318 (114,221)
-------------- --------------
Decrease in cash and cash equivalents 50,746 (104,889)
Cash and cash equivalents at beginning of period 152,295 283,542
--------------- --------------
Cash and cash equivalents at end of period $203,041 $178,653
============== ==============
</TABLE>
Total interest paid amounted to $23,426 and $25,809, respectively.
Total income taxes paid amounted to $72 and $2,597, respectively.
Total loan sales amounted to $25,941 and $21,399, respectively.
See accompanying notes to consolidated financial statements.
5
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Note 1 - Accounting Policies
The consolidated financial statements include the accounts of Dauphin
Deposit Corporation and subsidiaries (Dauphin), including its banking
subsidiaries, Dauphin Deposit Bank and Trust Company, which includes the
Bank of Pennsylvania and Valleybank Divisions, and Farmers Bank and Trust
Company of Hanover. All material intercompany balances and transactions
have been eliminated in consolidation.
The information contained in the financial statements is unaudited.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results of
interim periods have been made. Operating results for the three month
period ended March 31, 1994 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1994.
The accounting policies followed in the presentation of interim
financial results are the same as those followed on an annual basis, with
the exception of the accounting policies related to investment securities
which are discussed further in Note 3. These policies are presented on
pages 33 through 35 of the 1993 Securities and Exchange Commission Form
10-K included in the Annual Report to Stockholders.
Note 2 - Pooling-of-Interests
On January 1, 1994, Dauphin acquired all the outstanding stock of
Valley Bancorp., Inc. (Valley) in exchange for 2,600,643 shares of
Dauphin's common stock, along with cash of $16,000 in lieu of fractional
shares, consummating the merger announced in June 1993. Valley's
principal subsidary was Valley Bank and Trust Company. The acquisition
was accounted for as a pooling-of-interests. Accordingly, financial data
presented for prior periods has been restated to reflect this acquisition
as if it had occurred at the beginning of the periods presented.
6
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Note 3 - Investment Securities
Dauphin adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities" on
January 1, 1994. SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values
and for all investments in debt securities. These investments are to be
classified in one of three categories and accounted for as follows: 1) debt
securities that a company has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported at
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and
losses included in earnings; and 3) debt and equity securities not classified
as either held-to-maturity or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity.
Management has determined that the entire investment securities portfolio
will be classified as available-for-sale. The impact of this change will
result in an increase in investment securities of $63,243,000 and an increase
in stockholders' equity of $41,108,000, representing the after tax impact.
A summary of investment securities at March 31, 1994, December 31, 1993
and March 31, 1993 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, 1994 December 31, 1993 March 31, 1993
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- --------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. $749,191 $748,326 $732,722 $750,997 $740,006 $770,141
government agencies and corporations
Obligations of states and political subdivision 408,811 418,661 406,241 434,581 366,833 390,810
Debt securities issued by foreign governments 2,412 2,419 1,899 1,920 5,852 5,947
Corporate securities 81,075 82,469 83,336 85,992 130,075 133,684
Mortgage-backed securities 814,060 815,482 803,252 818,020 817,067 834,606
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities 2,055,549 2,067,357 2,027,450 2,019,510 2,059,833 2,135,188
Equity securities 13,372 13,644 13,754 14,432 13,698 14,487
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities $2,068,921 $2,081,001 $2,041,204 $2,105,942 $2,073,531 $2,149,675
========== ========== ========== ========== ========== ==========
</TABLE>
7
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Note 4 - Income Taxes
Income tax expense includes a provision for deferred taxes which are
related to income and expense items being recognized in one accounting period
for financial reporting purposes and another period for income tax reporting
purposes.
A reconciliation between the effective income tax rate and the statutory
rate follows:
<TABLE>
<CAPTION>
Percentage of
pre-tax income
--------------
Three months
ended March 31,
---------------
1994 1993
---- ----
<S> <C> <C>
Statutory federal income tax rate 35.0% 34.0%
Tax exempt income (10.7) (10.1)
Other, net 0.2 0.6
-------- --------
Effective income tax rate 24.5% 24.5%
======== ========
</TABLE>
Note 5 - Commitments and Contingent Liabilities
In the normal course of business, there are commitments and contingent
liabilities which are not presented in the accompanying financial statements.
The commitments and contingent liabilities include various guarantees,
commitments to extend credit and letters of credit. Dauphin does not
anticipate any material losses as a result of the commitments.
Various legal actions or proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if
any, will not be material.
The contingent liability at March 31, 1994 represented by letters of
credit issued to customers amounted to approximately $101.5 million.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section presents management's discussion and analysis of the financial
condition and results of operations of Dauphin Deposit Corporation and
subsidiaries (Dauphin), including Dauphin Deposit Bank and Trust Company, which
includes the Bank of Pennsylvania and Valleybank Divisions, and Farmers Bank and
Trust Company of Hanover. This discussion and analysis should be read in
conjunction with the financial statements which appear elsewhere in this report.
On January 1, 1994, Dauphin acquired all the outstanding stock of Valley
Bancorp., Inc. (Valley) in exchange for 2,600,643 shares of Dauphin's common
stock, along with cash of $16,000 in lieu of fractional shares, consummating the
merger announced in June 1993. At December 31, 1993 Valley had total assets,
deposits and equity of $324,164,000, $285,310,000 and $33,948,000, respectively.
Valley's principal subsidiary was Valley Bank and Trust Company. The
acquisition was accounted for as a pooling-of-interests.
On August 23, 1993 Dauphin entered into an agreement to sell 100% of the
stock of Farmers Savings Bank, a Federal Savings Bank (FSB) for $797,000. The
sale was consummated on February 1, 1994. FSB had total assets of $11,674,000
at January 31, 1994. The sale of FSB will not have a material impact on the
financial condition or results of operations for Dauphin in 1994.
On January 1, 1994, Dauphin adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities". SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in one of three categories and accounted for as follows: 1) debt securities
that a company has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost; 2)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and 3) debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.
Management has determined that the entire investment securities portfolio
will be classified as available-for-sale.
9
<PAGE>
On January 1, 1994 this change resulted in an increase in investment
securities of $63.2 million and an increase in stockholders' equity of $41.1
million, representing the after tax impact.
SUMMARY
Dauphin recorded net income for the first quarter of 1994 of $17.9 million,
compared with $17.8 million recorded for the same quarter of 1993. Net income
per share for the first quarter of 1994 rose to $.55, compared with $.54 for the
same period in 1993, an increase of 1.9%.
Dauphin's return on average total assets was 1.46% for the first quarter of
1994, compared with 1.51% for the first quarter of 1993. Return on average
stockholders' equity was 14.33% for the first quarter of 1994 compared with
15.45% for the same period of 1993. Return on average stockholders' equity,
including the SFAS 115 adjustment, was 13.35% for the first quarter of 1994.
NET INTEREST INCOME
Net interest income is the product of the volume of average earning assets
and the average rates earned on them, less the volume of average interest
bearing liabilities and the average rates paid thereon. The amount of net
interest income is affected by changes in interest rates, account balances, or
volume, and the mix of earning assets and interest bearing liabilities.
For analytical purposes, net interest income is adjusted to a taxable
equivalent basis. This adjustment facilitates performance comparisons among
taxable and tax exempt assets by increasing tax exempt income by an amount
equivalent to the federal income taxes which would have been paid if this income
were taxable at the statutory rate of 35%.
Table 1 presents the net interest income on a fully taxable equivalent
basis for the first quarter of 1994 and 1993. Net interest income on a fully
taxable equivalent basis totaled $47.9 million for the first quarter of 1994, an
increase of $.6 million or 1.2% from $47.3 million for the same period of 1993.
Table 2 analyzes the changes attributable to the volume and rate components
of net interest income. Table 3 presents average balances, taxable equivalent
interest income and expense and average yields earned and rates paid for
Dauphin's assets and liabilities.
During the first quarter of 1994, as compared with the first quarter of
1993, as shown in Table 2, there was an increase in
10
<PAGE>
net interest income of $3.9 million due to changes in volume and a decrease of
$3.3 due to changes in rates.
The change in the net interest margin attributable to interest rates can be
understood by analyzing the interest rate spread and the net interest margin on
earnings assets. While the interest rate spread considers only the difference
between the average rates earned on earning assets and the average rates paid on
interest bearing liabilities, the net interest margin takes into account the
contribution of assets funded by interest free sources.
Average earning assets increased to $4.7 billion for the first quarter of
1994 from $4.5 billion for the first quarter of 1993, an increase of 4.2%. The
interest rate spread for the first quarter of 1994 was 3.55% compared with 3.68%
for the first quarter of 1993. The net interest margin amounted to 4.11% for
the first quarter of 1994 compared with 4.22% for the same period of 1993. The
net interest margin, excluding the SFAS 115 market value adjustment, amounted to
4.16% for the first quarter of 1994.
Interest rates during the first quarter of 1994 were slightly higher than
the rates experienced in the first quarter of 1993. The average prime rate in
1994 was 6.02% compared with 6.00% in 1993. The average federal funds rate
increased to 3.21% for 1994 compared with 3.04% in 1993. During the first
quarter of 1994, compared with the same period of 1993 the average yield on
earning assets decreased 60 basis points while the average cost of interest
bearing liabilities decreased 47 basis points resulting in a decrease in the
interest rate spread of 13 basis points. The yield on the investment securities
portfolio decreased 62 basis points primarily due to the reinvestment of
maturities at significantly lower rates. Average loans, which represent the
highest yielding earning assets, increased $160.0 million or 6.7% for the first
quarter of 1994 compared with the first quarter of 1993 due to the increased
loan demand in 1994. The declining rates in 1993, with new loans issued at the
then current market levels, was the primary reason for the 66 basis point
decrease in the overall average loan yield. The cost of interest bearing
deposits decreased to 3.54% in 1994 compared with 4.11% in 1993. The overall
interest rates offered for these deposits continued to decline during 1994.
Additionally, the mix of these deposits changed as depositors allowed longer
term certificates of deposit to mature and decided to reinvest these proceeds
into shorter term instruments. The increase in the cost of short-term
borrowings (16 basis points) was caused primarily by the rise in the federal
funds rate. While the interest rate spread decreased 13 basis points, the net
interest margin decreased 11 basis points. The net interest margin was
negatively impacted (5 basis points) by the adoption of SFAS 115.
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INTEREST RATE SENSITIVITY
Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.
Rates on different assets and liabilities within a single maturity category
adjust to changes in interest rates to varying degrees and over varying periods
of time. The relationships between prime rates and rates paid on purchased
funds are not constant over time. The rate of growth in interest free sources
of funds will influence the level of interest sensitive funding sources. In
addition, the absolute level of interest rates will affect the volume of earning
assets and funding sources. As a result of these limitations, the interest
sensitivity gap is only one factor to be considered in estimating the net
interest margin.
Table 4 presents an interest sensitivity analysis of Dauphin's assets and
liabilities at March 31, 1994 for several time intervals. This table reflects
the interest sensitivity gap in two formats. The detailed presentation
represents management's position on certain interest bearing deposits, such as
passbook savings accounts, as not being subject to immediate repricing.
Management is of the opinion that historical interest rate movements indicate
that these products do not reprice in direct relation to the change in the
interest rate environment. Additionally, these products have provided Dauphin
with a stable core deposit base. Therefore, the detailed presentation within
Table 4 attempts to reflect these products in the appropriate interest
sensitivity time interval based on their interest sensitivity to the movement of
other interest rates. Also included in Table 4 is a summary of the gap, as
viewed by certain regulatory authorities, which presents these interest bearing
deposits as being subject to immediate repricing.
An interest sensitivity analysis is measured as of a specified date and,
therefore, is subject to almost immediate change as the maturities of assets are
reinvested and liabilities, such as deposits and short-term borrowings, are
received or mature. The mismatch of assets and liabilities in a specific time
frame is referred to as a sensitivity gap. An asset sensitive gap will benefit
Dauphin during periods of rising interest rates, while a liability sensitive gap
will benefit Dauphin during declining rates. The gap reflects Dauphin's
sensitivity to rate changes over a period of time. Dauphin continuously
monitors and adjusts the gap position, taking into consideration current
interest rate projections, and maintaining flexibility if rates move contrary to
expectations.
12
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PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $1.9 million for the
first quarter of 1994 compared with $2.4 million for the same period of 1993.
The provision is based on management's estimate of the amount needed to maintain
an adequate allowance for loan losses. This estimate is based on the review of
the loan portfolio, the level of net credit losses, past loan loss experience,
the general economic outlook and other factors that management feels are
appropriate. Table 5 reflects an analysis of the allowance for loan losses for
the first quarter of 1994 and 1993.
NON-PERFORMING ASSETS
Table 6 reflects Dauphin's non-performing assets at March 31, 1994,
December 31, 1993 and March 31, 1993. Dauphin's policy is to discontinue the
accrual of interest on commercial loans on which principal or interest is past
due 90 days or more and on commercial mortgages on which principal or interest
is past due 120 days or more. Consumer loans, excluding residential mortgages,
which are 150 days past due are charged off. Residential mortgages are placed
on non-accrual status after becoming 180 days past due. When a loan is placed
on non-accrual status, any unpaid interest is generally charged against income.
Other real estate owned represents property acquired through foreclosure or
considered to be in an in-substance foreclosure status.
NON-INTEREST INCOME
Non-interest income decreased $.7 million or 5.0% for the first quarter of
1994 when compared with the first quarter of 1993. Exclusive of securities
gains, the decrease was $.8 million or 6.3%. Service charges on deposit
accounts decreased $.2 million or 8.0%, primarily as a result of severe winter
weather in the Northeast which negatively impacted transaction activity. Other
service charges and fees increased $.3 million as a result of credit card
related activities. The results of operations of Hopper Soliday & Co., Inc.
(Hopper Soliday) decreased non-interest income by $.4 million for 1994. Other
non-interest income decreased $.5 million as a result of decreased gains on the
sale of fixed rate residential mortgages.
NON-INTEREST EXPENSE
Non-interest expense was $32.0 million for the first quarter of 1993 and
the first quarter of 1994. The results of operations of Hopper Soliday resulted
in a $.3 million decrease in non-interest expense for the first quarter of 1994
compared with 1993.
Salaries and employee benefits increased $.1 million or .7%. Not including
Hopper Soliday, salaries and employee benefits remained level in 1994 compared
with 1993 primarily due to cost
13
<PAGE>
savings from the operations consolidation of Farmers Bank and Trust Company of
Hanover in the second half of 1993. The number of full-time equivalent employees
was 2,086 at March 31, 1994 and March 31, 1993.
INCOME TAXES
Dauphin's effective tax rate for the first quarter of 1994 and 1993 was
24.5%. For a reconciliation of reported income tax expense to the amount
computed by applying the federal statutory rate to income before income taxes,
refer to Note 4 of the Notes to Consolidated Financial Statements.
CAPITAL MANAGEMENT
In January 1994, Dauphin announced that the Board of Directors authorized
the repurchase of up to 1,000,000 shares of the outstanding common stock.
Dauphin expects to use available cash to fund the share repurchases which will
be made from time to time on the open market or in privately negotiated
transactions. Dauphin will use the shares for general corporate purposes,
including the Employee Stock Purchase Plan, Stock Option Plan and other
appropriate uses. During the first quarter of 1994 Dauphin repurchased 130,000
shares for $3.2 million.
Common measures of adequate capitalization for banking institutions are
ratios of capital to assets. These ratios indicate the proportion of
permanently committed funds to the total asset base. Guidelines issued by
federal regulatory authorities require both banks and bank holding companies to
meet minimum risk-based capital ratios in an effort to make regulatory capital
more responsive to the risk exposure related to a bank's on- and off-balance
sheet items. Risk-based capital guidelines redefine the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of capital requirements. The components of risk-
based capital are segregated as Tier 1 and Tier 2 capital. Tier 1 capital is
composed of total stockholders' equity reduced by goodwill and other intangible
assets. Tier 2 capital is the allowance for loan losses (with certain
limitations) and qualifying debt obligations. Regulators have also adopted
minimum Tier 1 leverage ratio standards. Tier 1 capital for the leverage ratio
is the same as the Tier 1 capital definition in the risk-based capital
guidelines. At March 31, 1994, Dauphin and its banking subsidiaries exceeded
all capital requirements.
NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114).
SFAS 114 addresses the accounting by creditors for impairment of certain
loans. SFAS 114 requires that impaired
14
<PAGE>
loans that are within the scope of the Statement be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent. Management presently does not know and
cannot reasonably estimate the impact of SFAS 114 on its financial statements.
SFAS 114 is effective for fiscal years beginning after December 15, 1994 and
earlier adoption is permitted. Dauphin expects to adopt SFAS 114 in January
1995.
15
<PAGE>
TABLE 1 - Net Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
March 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Total interest income $78,495 $82,004
Total interest expense 34,555 38,489
------------ ------------
Net interest income 43,940 43,515
Tax equivalent adjustment 3,951 3,806
------------ ------------
Net interest income (fully taxable equivalent) $47,891 $47,321
============ ============
</TABLE>
TABLE 2 - Rate-Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
March 31,
1994/1993
-----------------------------------
Change due to
--------------------- Total
Volume Rate Change
--------- --------- ----------
<S> <C> <C> <C>
(Taxable equivalent)
Interest income
Short-term investments ($55) $36 ($19)
Investment securities 1,423 (3,587) (2,164)
Assets held for sale (467) 203 (264)
Loans 3,304 (4,221) (917)
--------- --------- ----------
Total interest income 4,205 (7,569) (3,364)
--------- --------- ----------
Interest expense
Interest bearing deposits (967) (4,503) (5,470)
Short-term borrowings 1,306 241 1,547
Long-term borrowings (10) (1) (11)
--------- --------- ----------
Total interest expense 329 (4,263) (3,934)
--------- --------- ----------
Net interest income $3,876 ($3,306) $570
========= ========= ==========
</TABLE>
Note: The changes not due solely to change in volume or solely to change
in rate are allocated proportionally to both change in volume and
rate.
16
<PAGE>
TABLE 3 - Average Balances, Rates and Interest Income and Expense Summary
(Taxable Equivalent Basis)
<TABLE>
<CAPTION>
(Dollars in thousands)
First Quarter 1994 First Quarter 1993
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- ---------- --------- --------- ---------- ---------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Short-term investments
Interest bearing deposits $5,906 $92 6.32% $6,618 $53 3.25%
Federal funds sold and securities
purchased under agreements to resell 1,061 8 3.06 7,254 66 3.69
---------- ------- ---------- -------
Total short-term investments 6,967 100 5.82 13,872 119 3.48
---------- ------- ---------- -------
Investment securities
U.S. government and agency obligations 1,571,929 22,745 5.80 1,509,077 24,136 6.42
State and municipals 433,715 10,084 9.30 367,691 9,496 10.33
Other securities 108,317 1,789 6.61 175,559 3,150 7.18
---------- ------- ---------- -------
Total investment securities 2,113,961 34,618 6.56 2,052,327 36,782 7.18
---------- ------- ---------- -------
Assets held for sale 11,673 186 6.38 36,328 450 4.99
---------- ------- ---------- -------
Loans (1)
Commercial 1,416,387 25,065 7.18 1,378,186 25,783 7.59
Residential mortgages (2) 674,733 13,206 7.88 620,294 13,207 8.57
Consumer (3) 456,747 9,271 8.23 389,376 9,469 9.86
---------- ------- ---------- -------
Total loans 2,547,867 47,542 7.55 2,387,856 48,459 8.21
---------- ------- ---------- -------
Total earning assets 4,680,468 82,446 7.10 4,490,383 85,810 7.70
------- -------
Other assets 275,694 283,992
---------- ----------
Total assets $4,956,162 6.70% $4,774,375 7.24%
========== ===== ========== =====
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits
Demand deposits and savings deposits $1,663,222 9,211 2.25% $1,622,268 11,409 2.85%
Time deposits of $100,000 or more 268,592 3,001 4.53 311,966 3,581 4.66
Other time deposits 1,170,115 14,845 5.15 1,271,872 17,537 5.59
---------- ------- ---------- -------
Total interest bearing deposits 3,101,929 27,057 3.54 3,206,106 32,527 4.11
Short-term borrowings 753,403 5,835 3.14 583,002 4,288 2.98
Long-term borrowings 92,190 1,663 7.26 92,587 1,674 7.28
---------- ------- ---------- -------
Total interest bearing liabilities 3,947,522 34,555 3.55 3,881,695 38,489 4.02
------- -------
Non-interest bearing demand deposits 404,640 381,928
Other liabilities 60,310 44,771
Stockholders' equity 543,690 465,981
---------- ----------
Total liabilities and
stockholders' equity $4,956,162 2.83% $4,774,375 3.27%
========== ===== ========== =====
Interest rate spread 3.55% 3.68%
Effect of non-interest bearing funds 0.56 0.54
----- -----
Net interest income/margin $47,891 4.11% $47,321 4.22%
======= ===== ======= =====
</TABLE>
(1) Includes fees on loans. Average loan balances include non-accruing loans.
(2) Includes home equity loans.
(3) Loans outstanding net of unearned income.
17
<PAGE>
TABLE 4 - Interest Sensitivity Analysis
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, 1994
-----------------------------------------------------------------------
Interest Sensitivity Period
-----------------------------------------------------------------------
Month Quarter Six Months Annual 5 Years
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $6,219 $6,219 $6,219 $6,219 $6,219
Investment securities 478,962 555,336 682,585 1,022,549 1,876,585
Assets held for sale 8,121 8,121 8,121 8,121 8,121
Loans 1,175,907 1,246,533 1,373,441 1,579,187 2,268,450
---------- ---------- ---------- ---------- ----------
Total $1,669,209 $1,816,209 $2,070,366 $2,616,076 $4,159,375
========== ========== ========== ========== ==========
Interest bearing liabilities:
Deposits $1,315,191 $1,455,125 $1,661,875 $1,892,970 $2,327,078
Short-term borrowings 771,721 801,721 816,721 816,721 816,721
Long-term borrowings 301 309 321 345 86,570
---------- ---------- ---------- ---------- ----------
Total $2,087,213 $2,257,155 $2,478,917 $2,710,036 $3,230,369
========== ========== ========== ========== ==========
Interest sensitivity gap ($418,004) ($440,946) ($408,551) ($93,960) $929,006
Interest sensitive assets to interest
sensitive liabilities ratio 0.80 0.80 0.84 0.97 1.29
Regulatory presentation:
Interest sensitivity gap ($947,472) ($970,414) ($938,019) ($623,428) $399,538
Interest sensitive assets to interest
sensitive liabilities ratio 0.64 0.65 0.69 0.81 1.11
</TABLE>
TABLE 5 - Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
March 31,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
Balance, beginning of period $39,182 $36,227
Provision charged to operating expenses 1,884 2,446
Allowance of subsidiary sold (101)
Total loans charged off 2,442 2,561
Total recoveries 523 612
----------- -----------
Net charge-offs 1,919 1,949
----------- -----------
Balance, end of period $39,046 $36,724
=========== ===========
Total loans:
Average $2,547,867 $2,387,856
Period-end 2,556,766 2,389,280
Ratios:
Net charge-offs to average loans (annualized) 0.31% 0.33%
Allowance for loan losses to period-end loans 1.53 1.54
</TABLE>
18
<PAGE>
TABLE 6 - Non-Performing Assets
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, December 31, March 31,
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
Non-accrual loans $14,372 $17,450 $17,232
Restructured loans 7,252 7,352 6,495
------------ ------------ ------------
Total non-performing loans 21,624 24,802 23,727
Other real estate owned 2,576 2,981 3,880
------------ ------------ ------------
Total non-performing assets $24,200 $27,783 $27,607
============ ============ ============
Ratios:
Non-performing loans to total loans 0.85% 0.96% 0.99%
Non-performing assets to total loans and
other real estate owned 0.95 1.07 1.15
Allowance for loan losses to non-performing
loans 180.57 157.98 154.78
Loans past due 90 or more days as to
interest or principal $4,860 $2,823 $4,688
============ ============ ============
</TABLE>
19
<PAGE>
PART II
-------
For the Quarter Ended March 31, 1994
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement regarding Computation of Per Share Earnings.
15(a) Report of KPMG Peat Marwick regarding unaudited interim
financial information of the Corporation for the quarter
ended March 31, 1994.
15(b) Letter of KPMG Peat Marwick regarding unaudited interim
financial information of the Corporation for the quarter
ended March 31, 1994.
(b) Reports on Form 8-K
A current report on Form 8-K dated January 1, 1994 was filed
with the Securities and Exchange Commission on or about January
5, 1994. The report was filed under Item 5 - "Other Events" and
disclosed that the merger of Valley Bancorp., Inc. with and into
the Corporation had been consummated as of January 1, 1994.
A current report on Form 8-K dated January 24, 1994 was filed
with the Securities and Exchange Commission on or about February
4, 1994. The report was filed under Item 5 - "Other Events" and
disclosed that the Board of Directors of the Corporation had
authorized a treasury stock repurchase program.
A current report on Form 8-K dated January 31, 1994 was filed
with the Securities and Exchange Commission on or about February
25, 1994. The report was filed under Item 5 - "Other Events" and
contained as Exhibit 99(a) and 99(b) an unaudited consolidated
balance sheet and income statement of the Corporation for the
thirty day periods ended January 31, 1994 and January 31, 1993.
The current report and financial statements were filed in order
to satisfy the risk sharing criteria of pooling-of-interests
accounting, in accordance with Securities and Exchange
Commission Accounting Series Release 135, in connection with the
merger of Valley Bancorp., Inc. with and into the Corporation,
which merger was effective on January 1, 1994 and accounted for
as a pooling-of-interests merger.
There were no other reports on Form 8-K filed for the three
months ended March 31, 1994.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dauphin Deposit Corporation
---------------------------
(Registrant)
Date: May 3, 1994 /s/William J. King
- ------------------------ --------------------------------
William J. King, Chairman of
the Board and Chief Executive
Officer
Date: May 3, 1994 /s/Dennis L. Dinger
- ------------------------ --------------------------------
Dennis L. Dinger, Executive
Vice President and Chief
Financial Officer
21
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Page Number
- ------- -----------
11 Statement regarding Computation of
Per Share Earnings.
15(a) Report of KPMG Peat Marwick regarding
unaudited interim financial information
of the Corporation for the quarter
ended March 31, 1994.
15(b) Letter of KPMG Peat Marwick regarding
unaudited interim financial information
of the Corporation for the quarter
ended March 31, 1994.
<PAGE>
Statement regarding computation of per share earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1994 March 31, 1993
-------------- --------------
<S> <C> <C>
Net income $17,901,000 $17,753,000
Shares outstanding
Primary 32,644,863 32,590,474
Fully diluted 32,980,563 32,996,028
Earnings per share
Primary $0.55 $0.54
Fully diluted $0.54 $0.54
</TABLE>
Exhibit 11
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK APPEARS HERE]
Independent Accountants' Report
-------------------------------
The Board of Directors
Dauphin Deposit Corporation:
We have reviewed the consolidated balance sheets of Dauphin Deposit
Corporation and subsidiaries as of March 31, 1994 and 1993, and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 1994 and 1993. These financial statements are the
responsibility of Dauphin's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Dauphin Deposit Corporation and
subsidiaries as of December 31, 1993, and the related consolidated statements
of income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 28, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1993 is fairly presented, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick
KPMG PEAT MARWICK
April 13, 1994
Exhibit 15(a)
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK APPEARS HERE]
The Board of Directors
Dauphin Deposit Corporation
Re: Registration Statements No. 33-17401
33-50172
33-61848
2-73258
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 13, 1994 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
/s/ KPMG Peat Marwick
KPMG PEAT MARWICK
Harrisburg, Pennsylvania
May 5, 1994
Exhibit 15(b)
