<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 September 30, 1996 Commission File Number 0-8415
------------------ ------
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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 255-2121
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NOT APPLICABLE
- --------------------------------------------------------------------------------
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 October 31, 1996
- -------------------------- -------------------------------
Common Stock, $5 Par Value 30,648,851 Shares
<PAGE>
DAUPHIN DEPOSIT CORPORATION
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FORM 10-Q
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For the Quarter Ended September 30, 1996
Contents
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and 1995 and
December 31, 1995
Consolidated Statements of Income for the Three Month and Nine Month
Periods Ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
<PAGE>
Part I
------
For the Quarter Ended September 30, 1996
Item 1. Financial Statements
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31, September 30,
1996 1995 1995
(Unaudited) (Audited) (Unaudited)
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $178,669 $218,785 $187,486
--------------- -------------- ---------------
Short-term investments
Interest bearing deposits 2,195 8,523 6,521
Federal funds sold (including term federal
funds sold of $0, $0, and $50,000,
respectively) and securities purchased
under agreements to resell 27,300 3,050 55,650
Other short-term investments 685 75,102
--------------- -------------- ---------------
Total short-term investments 30,180 11,573 137,273
--------------- -------------- ---------------
Investment securities available-for-sale, at fair value 2,168,620 1,860,869 1,623,704
Assets held for sale, primarily loans held for sale 210,858 87,782 88,266
Loans (net of unearned income) 3,236,742 2,981,338 2,939,677
Allowance for loan losses (43,449) (41,737) (41,671)
--------------- -------------- ---------------
Total net loans 3,193,293 2,939,601 2,898,006
--------------- -------------- ---------------
Premises and equipment 74,346 71,562 69,373
Other assets 115,311 107,177 100,585
--------------- -------------- ---------------
Total assets $5,971,277 $5,297,349 $5,104,693
=============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $499,399 $518,004 $453,114
Interest bearing 3,579,645 3,431,532 3,380,642
--------------- -------------- ---------------
Total deposits 4,079,044 3,949,536 3,833,756
Short-term borrowings 1,208,815 678,161 622,642
Long-term debt 40,035 40,599 40,621
Accrued expenses and taxes 93,722 82,450 76,729
--------------- -------------- ---------------
Total liabilities 5,421,616 4,750,746 4,573,748
--------------- -------------- ---------------
Stockholders' equity
Preferred stock, $25 par value; 10,000,000
shares authorized but unissued
Common stock, $5 par value; 200,000,000 shares
authorized, 32,641,614 shares issued of
which 2,035,699, 2,013,771, and 1,929,664
shares are held as treasury stock,
respectively 163,208 163,208 163,208
Additional paid-in capital 11,006 11,103 10,994
Retained earning 434,396 408,274 399,002
Unrealized gains (losses) on securities
available-for-sale, net of deferred taxes (7,662) 13,650 4,609
--------------- -------------- ---------------
600,948 596,235 577,813
Less: Treasury stock - at cost (51,287) (49,632) (46,868)
--------------- -------------- ---------------
Total stockholders' equity 549,661 546,603 530,945
--------------- -------------- ---------------
Total liabilities and stockholders'
equity $5,971,277 $5,297,349 $5,104,693
=============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $64,219 $62,195 $186,952 $183,128
Interest and dividends on investment securities
Taxable 29,348 22,333 84,383 69,483
Exempt from federal income taxes 4,559 4,349 13,356 14,059
Interest on deposits 25 91 165 264
Interest on assets held for sale 3,541 1,118 7,639 4,061
Interest on federal funds sold and other
short-term investments 278 186 373 551
----------- ----------- ----------- -----------
Total interest income 101,970 90,272 292,868 271,546
----------- ----------- ----------- -----------
Interest expense
Interest on deposits
Savings deposits 6,901 7,905 21,268 25,416
Time deposits 24,357 24,040 71,883 64,100
Time deposits in denominations of
$100,000 or more 9,960 7,306 25,680 19,191
----------- ----------- ----------- -----------
41,218 39,251 118,831 108,707
Interest on short-term borrowings 14,147 6,414 36,251 28,266
Interest on long-term debt 880 893 2,648 3,656
----------- ----------- ----------- -----------
Total interest expense 56,245 46,558 157,730 140,629
----------- ----------- ----------- -----------
Net interest income 45,725 43,714 135,138 130,917
Provision for loan losses 1,200 1,246 4,800 4,362
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 44,525 42,468 130,338 126,555
----------- ----------- ----------- -----------
Non-interest income
Fiduciary activities 4,700 4,060 13,815 12,809
Service charges on deposit accounts 3,247 2,671 9,549 8,137
Other service charges and fees 3,848 3,396 10,404 9,222
Broker/dealer commissions and fees 2,315 1,423 6,725 4,571
Mortgage banking 8,331 4,764 23,161 12,114
Securities gains, net 16 624 1,102 2,094
Other 1,283 1,296 2,864 2,876
----------- ----------- ----------- -----------
Total non-interest income 23,740 18,234 67,620 51,823
----------- ----------- ----------- -----------
Non-interest expense
Salaries and employee benefits 23,548 21,361 70,065 59,823
Net occupancy expense 2,707 2,089 7,992 7,056
Furniture and equipment expense 3,446 2,721 9,935 8,111
Deposit insurance 1 (194) 2 3,721
Other 14,262 11,589 39,787 34,780
----------- ----------- ----------- -----------
Total non-interest expense 43,964 37,566 127,781 113,491
----------- ----------- ----------- -----------
Income before income taxes 24,301 23,136 70,177 64,887
Provision for income taxes 6,354 6,261 18,524 16,716
----------- ----------- ----------- -----------
Net income $17,947 $16,875 $51,653 $48,171
=========== =========== =========== ===========
Net income per share $0.58 $0.55 $1.68 $1.56
Cash dividends declared per share $0.28 1/2 $0.25 $0.83 1/2 $0.75
Weighted average number of shares outstanding 30,793,784 30,893,446 30,777,499 30,968,881
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended
September 30,
-------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Operating activities
Net income $51,653 $48,171
Adjustments:
Provision for loan losses 4,800 4,362
Provision for depreciation, amortization and accretion 2,779 5,592
Amortization of goodwill 1,392 1,218
Deferred income taxes 1,531 52
Securities gains, net (1,102) (2,094)
(Increase) decrease in interest receivable (854) 3,104
Increase in accrued expenses and taxes 11,272 20,641
Amortization of mortgage servicing rights 1,152 1,252
Gain on sale of loans held for sale (971) (1,592)
Sale of loans held for sale 934,160 503,063
Loans originated for sale (1,004,807) (520,799)
Purchase of mortgage loans held for sale (30,441) (17,488)
Other, net (7,899) (3,135)
------------- -----------
Net cash provided (used) by operating activities (37,335) 42,347
------------- -----------
Investing activities
Proceeds from sales of investment securities available-for-sale 94,360 196,163
Proceeds from maturities of investment securities available-for-sale 562,107 267,924
Purchases of investment securities available-for-sale (969,499) (322,262)
Net increase in assets held for sale, other than loans held for sale (21,017) (5,228)
Net increase in loans (267,054) (150,123)
Sale of residential mortgage and other consumer loans 39,507
Net purchases of premises and equipment (9,512) (7,918)
------------- -----------
Net cash provided (used) by investing activities (610,615) 18,063
------------- -----------
Financing activities
Net increase in deposit accounts 129,508 318,872
Net increase (decrease) in short-term borrowings 530,654 (318,135)
Decrease in long-term debt (278) (51,075)
Issuance of common stock and treasury stock 5,590 5,088
Acquisition of treasury stock (8,455) (12,277)
Cash dividends paid (24,935) (23,158)
------------- -----------
Net cash provided (used) by financing activities 632,084 (80,685)
------------- -----------
Decrease in cash and cash equivalents (15,866) (20,275)
Cash and cash equivalents at beginning of period 219,335 210,911
------------- -----------
Cash and cash equivalents at end of period $203,469 $190,636
============= ===========
Total interest paid $154,288 $129,707
Total income taxes paid 17,804 9,947
Schedule of non-cash investing and financing activities:
Loans charged off 6,745 6,193
Net loan transfers to other real estate owned 2,565 929
Conversion of convertible subordinated debentures 286 258
Securitization of mortgage loans 16,033 36,991
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Note 1 - Accounting Policies
The consolidated financial statements include the accounts of Dauphin Deposit
Corporation and subsidiaries (Dauphin), including its banking subsidiary,
Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania,
Farmers Bank and Valleybank Divisions. 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 nine month period ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
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 the impairment of long lived assets and
stock-based compensation which are discussed in Dauphin's Form 10-Q for the
quarter ended March 31, 1996. These policies are presented on pages 36 through
40 of the 1995 Securities and Exchange Commission Form 10-K included in the
Annual Report to Stockholders.
Note 2 - Investment Securities
A summary of the amortized cost and fair value of investment securities at
September 30, 1996, December 31, 1995 and September 30, 1995 is as follows:
<TABLE>
(Dollars in thousands)
September 30, 1996 December 31, 1995 September 30, 1995
----------------------- -------------------------- ------------------------
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.
government agencies and corporations $824,102 $813,212 $804,086 $810,363 $605,153 $607,544
Obligations of states and political
subdivisions 335,742 344,072 287,697 302,702 301,689 312,417
Debt securities issued by foreign governments 1,250 1,250 800 800 900 897
Corporate securities 23,907 24,005 22,736 23,087 48,102 48,367
Mortgage-backed securities 940,238 930,854 705,279 704,612 641,496 635,210
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities 2,125,239 2,113,393 1,820,598 1,841,564 1,597,340 1,604,435
Equity securities 55,169 55,227 19,272 19,305 19,272 19,269
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities $2,180,408 $2,168,620 $1,839,870 $1,860,869 $1,616,612 $1,623,704
========== ========== ========== ========== ========== ==========
</TABLE>
6
<PAGE>
Note 3 - 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 Nine months
ended September 30, ended September 30,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0% 35.0%
Tax exempt income (8.8) (8.3) (8.6) (9.4)
Other, net (0.1) 0.4 0.2
-------- -------- -------- --------
Effective income tax rate 26.1% 27.1% 26.4% 25.8%
======== ======== ======== ========
</TABLE>
Note 4 - 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. The contingent liability at
September 30, 1996 represented by letters of credit issued to customers amounted
to approximately $246.1 million.
Note 5 - Litigation
Various legal actions and proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
resulting from such legal actions and proceedings will not be material to
Dauphin's financial condition or results of operations. Included among the
outstanding litigation is a class action law suit instituted by Dauphin in the
Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994,
seeking a declaratory judgement from the Court specifically permitting Dauphin
to discontinue an 18 month variable rate investment product carrying a minimum
interest rate of 10% for the 18 month term, which is held in certain individual
retirement accounts (IRA). The aggregate balance of the IRA accounts was
approximately $195.4 million at September 30, 1996. Dauphin's right to terminate
the variable rate investment product is in dispute and is being challenged by
the holders of the IRA accounts in question. Several days after the commencement
of trial in April, 1996, Dauphin and representatives of the class reached an
agreement in principle to settle the litigation and the trial was continued
pending negotiation of a settlement agreement. Dauphin and representatives of
the class filed a settlement agreement with the Court on May 13, 1996 which
would permit Dauphin to terminate the 18 month variable rate product as to all
class members on the effective date of the settlement and, in consideration, the
balances of those accounts would be automatically deposited in one of two new
certificates of deposit established by Dauphin for purposes of the settlement.
All class members were given the opportunity to file objections to the proposed
settlement or elect to be excluded from the class and the proposed settlement.
Approximately 89 of the 4,315 class members filed formal objections to the
settlement with the Court and 12 of the class members elected to opt out of the
settlement. A hearing was held before the Court on June 21, 1996 for the purpose
of obtaining the Court's approval of the settlement agreement. At the
7
<PAGE>
Note 5 - Litigation (continued)
hearing, counsel for Dauphin and counsel for the representatives of all class
members jointly moved for the Court's adoption of the settlement agreement and
made argument in favor thereof. The Court, by Order issued July 11, 1996, denied
the joint motion of Dauphin and the representatives of the class for settlement
of the class action in accordance with the terms and conditions of the
settlement agreement. Dauphin filed its Notice of Appeal from the trial Court's
Order denying the settlement to the Superior Court of Pennsylvania on August 9,
1996. It currently is anticipated that the Appeal will seek an Order of the
Superior Court reversing the trial Court's disapproval of the settlement
agreement or, in the alternative, otherwise providing the trial Court with
guidance which would result in the trial Court's approval of the settlement
agreement on remand or, directing decertification of the class. The Superior
Court must determine whether or not the trial Court abused its discretion in
rejecting the settlement agreement. The class representatives and counsel for
the class have informed Dauphin's counsel that they are withdrawing their
previous support for the joint settlement agreement and will vigorously oppose
Dauphin's Appeal to the Superior Court. Neither management nor counsel can
predict with any reasonable degree of certainty the outcome of the Appeal or
time frame within which the Superior Court will rule on the Appeal. If the
Appeal to the Superior Court is unsuccessful, management intends to vigorously
assert its right to terminate the 18 month variable rate investment product on
further appeal and at the trial court level. Dauphin has continued to date to
pay a 10% interest rate with regard to the 18 month variable rate investment
product.
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
consolidated financial condition and results of operations of Dauphin Deposit
Corporation and subsidiaries (Dauphin), including Dauphin Deposit Bank and Trust
Company (Bank), which includes the Bank of Pennsylvania, Farmers Bank and
Valleybank Divisions. The other primary subsidiaries include Hopper Soliday &
Co., Inc. (Hopper Soliday), a broker/dealer, and Eastern Mortgage Services, Inc.
(Eastern Mortgage), a mortgage banking company. This discussion and analysis
should be read in conjunction with the consolidated financial statements which
appear elsewhere in this report.
SUMMARY
Dauphin recorded net income for the three months ended September 30, 1996
of $17.9 million compared with $16.9 million recorded for the same period of
1995. Net income per share for the three months ended September 30, 1996 was
$.58 compared with $.55 for the same period in 1995, an increase of 5.5%. Net
income for the nine months ended September 30, 1996 amounted to $51.7 million
compared with $48.2 million recorded for the same period of 1995. Net income
per share for the nine months ended September 30, 1996 was $1.68 compared with
$1.56 for the same period of 1995, an increase of 7.7%.
Dauphin's return on average total assets was 1.24% for the three months
ended September 30, 1996 compared with 1.36% for the three months ended
September 30, 1995. For the nine months of 1996, the return on average assets
was 1.25% compared with 1.29% for the same period of 1995. Return on average
stockholders' equity, excluding the SFAS 115 adjustment, was 13.07% for the
three months ended September 30, 1996 compared with 12.90% for the same period
of 1995. Return on average stockholders' equity, excluding the SFAS 115
adjustment, was 12.83% for the nine months of 1996 compared with 12.49% for the
same period of 1995. Return on average stockholders' equity, including the SFAS
115 adjustment, was 13.37% for the three months ended September 30, 1996
compared with 12.84% for the same period of 1995. Return on average
stockholders' equity, including the SFAS 115 adjustment, amounted to 12.91% for
the nine months of 1996 compared with 12.78% for the nine months of 1995.
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%.
9
<PAGE>
Table 1 presents the net interest income on a fully taxable equivalent
basis for the three months and nine months ended September 30, 1996 and 1995.
Net interest income on a fully taxable equivalent basis totaled $49.0 million
for the three months ended September 30, 1996, an increase of $2.3 million or
4.9% from $46.7 million for the same period of 1995. For the nine months of
1996, net interest income amounted to $144.4 million, an increase of $4.0
million or 2.9% from $140.4 million for 1995.
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 three months ended September 30, 1996 compared with the three
months ended September 30, 1995, as shown in Table 2, there was an increase in
net interest income of $4.5 million due to changes in volume and a decrease of
$2.2 million due to changes in rates. During the nine months ended September 30,
1996 compared with the same period of 1995, there was an increase of $8.4
million due to changes in volume and a decrease of $4.4 million due to changes
in rates.
The change in net interest income 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 were $5.5 billion for the three months ended
September 30, 1996 and $4.6 billion for the three months ended September 30,
1995. For the nine months of 1996, average earning assets were $5.2 billion
compared with $4.7 billion for the nine months of 1995. The interest rate spread
for the three months ended September 30, 1996 was 2.92% compared with 3.29% for
the three months ended September 30, 1995. The net interest margin amounted to
3.59% for the three months ended September 30, 1996 compared with 4.03% for the
same period of 1995. For the nine months, the interest rate spread decreased to
3.00% from 3.32% while the net interest margin decreased to 3.69% from 4.00%.
Interest rates during 1996 were lower than the rates experienced in 1995,
although rates recently have been trending upward. The average prime rate was
8.25% for the three months and 8.28% for the nine months ended September 30,
1996 compared with 8.77% and 8.86% for the same periods of 1995. The average
federal funds rate decreased to 5.31% for the three months ended September 30,
1996 compared with 5.80% in 1995. For the nine months of 1996, the average
federal funds rate was 5.31% compared with 5.87% for 1995. During the three
months ended September 30, 1996 compared with the same period of 1995, the
average yield on earning assets decreased 33 basis points while the average cost
of interest bearing liabilities increased 4 basis points resulting in a decrease
in the interest rate spread of 37 basis points. For the nine months of 1996
compared with 1995, the yield on earning assets decreased 31 basis points while
the average cost of interest bearing liabilities increased 1 basis point,
resulting in a decrease in
10
<PAGE>
the interest rate spread of 32 basis points. The yield on the investment
securities portfolio decreased 4 basis points for the three months ended
September 30, 1996 and 22 basis points for the nine months ended September 30,
1996 compared to the same periods of 1995, primarily due to the reinvestment of
maturities at lower rates. Average loans, which represent the highest yielding
earning assets, increased $257.1 million or 8.9% for the three months ended
September 30, 1996 compared with the three months ended September 30, 1995. For
the nine months of 1996, the increase was $156.9 million or 5.5% compared with
the same period of 1995 as stronger marketing efforts were used to increase
loans in 1996. The lower rates in 1996, with new loans issued at the then
current market levels, were the primary reason for the 41 basis point decrease
for the three months and the 27 basis point decrease for the nine months in the
overall average loan yield. The cost of interest bearing deposits was unchanged
for the three months ended September 30, 1996 compared with 1995. For the nine
months of 1996, the cost of interest bearing deposits increased 9 basis points
compared with 1995. The primary reason for the increase in the cost of interest
bearing deposits was due to the change in the mix of these deposits as
depositors shifted to longer term certificates of deposit, moving from shorter
term instruments throughout 1995 as rates increased. The decrease in the cost
of short-term borrowings for the three month period (24 basis points) and the
nine month period (42 basis points) was caused primarily by the fall in the
federal funds rate. The interest rate spread decreased 37 basis points for the
three months, and a decrease in the value of non-interest bearing funds resulted
in a net 44 basis point decline in the net interest margin. For the nine
months, the interest rate spread decreased 32 basis points, which was partially
offset by an increase in the value of non-interest bearing funds, resulting in a
31 basis point decline in the net interest margin.
Dauphin's cost of interest bearing funds is generally higher, and its net
interest margin is generally lower, when compared with banking companies of
Dauphin's asset size. An important factor in these comparative differences is
certain individual retirement accounts which are invested in 18 month variable
interest rate products with a minimum interest rate of 10% for the 18 month term
as discussed in Note 5 to the consolidated financial statements and in Part II,
Item 1 - Legal Proceedings. If these interest rate products had paid interest
at Dauphin's weighted average cost of funds for all other retail certificates of
deposit, Dauphin's cost of interest bearing liabilities would have been
decreased by 20 basis points for the three months ended September 30, 1996
compared with a decrease of 22 basis points for the three months ended September
30, 1995 and a decrease of 20 basis points for the nine months ended September
30, 1996 compared with a decrease of 21 basis points for the nine months ended
September 30, 1995.
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
11
<PAGE>
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 September 30, 1996 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
statement and 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. The gap at September 30, 1996
reflects Dauphin's sensitivity at a point in time to rate changes over future
periods of time. Generally, an asset sensitive gap will increase an
institution's net interest income during periods of rising interest rates and
the liability sensitive gap will increase an institution's net interest income
during declining rates. The lower the amount of this gap, the less sensitive an
institution's earnings are to interest rate changes. However, Dauphin's assets
and liabilities with similar maturities or repricing will, at times, react
differently in varying interest rate environments. Therefore, the interest
sensitivity gap does not accurately predict the actual impact of market rate
changes. The volume and mix of future assets and liabilities changes will also
impact Dauphin's net interest income as indicated on Table 3. Dauphin
continuously monitors and adjusts the gap position, taking into consideration
current interest rate projections, and maintaining flexibility if rates move
contrary to expectations. Dauphin uses on-balance sheet financial instruments,
such as investments classified as available-for-sale, to provide flexibility in
managing the interest sensitivity gap.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to earnings was $1.2 million for the
three months ended September 30, 1996 and the three months ended September 30,
1995. The provision for the nine months of 1996 was $4.8 million compared with
$4.4 million for 1995. 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 three months and nine months ended September 30, 1996
and 1995.
12
<PAGE>
NON-PERFORMING ASSETS
Table 6 reflects Dauphin's non-performing assets at September 30, 1996,
December 31, 1995 and September 30, 1995. 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. Management believes that strict adherence to this policy with
regard to non-accruals and charge-offs will insure that the historically high
quality of the loan portfolio will be maintained. Dauphin continues to
experience net charge-offs on consumer loan products at a level below the
national peer group averages. Other real estate owned represents property
acquired through foreclosure.
NON-INTEREST INCOME
Table 7 reflects the non-interest income increase of $5.5 million or 30.2%
for the three months ended September 30, 1996 compared to the three months ended
September 30, 1995. Exclusive of securities gains, the increase was $6.1 million
or 34.7%. Non-interest income increased $15.8 million or 30.5% for the nine
months of 1996 compared with the same period of 1995. Exclusive of securities
gains, the increase for the nine months was $16.8 million or 33.8%. In the
banking segment of Dauphin, non-interest income increased $1.0 million or 8.7%
for the three months and $2.6 million or 7.4% for the nine months of 1996
compared with the same period of 1995. Total service charges and fees increased
$1.0 million or 16.9% for the three months and $2.6 million or 14.9% for the
nine months of 1996 compared with the same period of 1995. Certain service
charges on deposits were increased during the first nine months of 1996.
Management continuously monitors the fee structure and makes changes where
appropriate.
The broker/dealer segment of Dauphin represents broker/dealer commissions
and fees generated by Hopper Soliday. This income is generated from
underwriting securities which are predominantly general obligations of Central
Pennsylvania municipalities, providing financial advisory services, selling
securities to individual and institutional investors and other related
activities. The broker/dealer income increased $ .9 million or 58.6% for the
three month period and $2.6 million or 55.7% for the nine months. These
increases were due to additional volume of business in 1996, due primarily to a
more favorable interest rate environment.
The mortgage banking segment of Dauphin reflects the mortgage banking
subsidiary, Eastern Mortgage. The mortgage banking income increased $3.1
million or 54.7% in the three months ended September 30, 1996 and increased $9.7
million or 66.9% in the nine months of 1996 compared with the same periods of
1995. The mortgage closings in 1996 were 86% greater than the volume of 1995,
due to refinancing activities and an expanded branch network.
13
<PAGE>
NON-INTEREST EXPENSE
Table 8 reflects that non-interest expense amounted to $44.0 million for
the three months ended September 30, 1996 and $37.6 for the three months ended
September 30, 1995, an increase of $6.4 million or 17.0%. For the nine months
of 1996 non-interest expense was $127.8 million compared to $113.5 million for
the same period of 1995, an increase of $14.3 million or 12.6%.
Dauphin's banking segment non-interest expense increased $3.0 million or
9.6% for the three months ended September 30, 1996 compared with the three
months ended September 30, 1995. For the first nine months of 1996, non-
interest expense increased $3.4 million or 3.6%. Salaries and employee benefits
increased 4.0% for the three month period and 7.9% for the nine month period.
Full-time equivalent employees increased 9.8% to 2,209 at September 30, 1996
compared with 2,012 at September 30, 1995. Salaries expense, excluding benefits
expense, increased 1.5% for the three month period and 4.8% for the nine month
period of 1996 compared with the same period of 1995.
On June 1, 1995, the Bank Insurance Fund (BIF) reached its statutory
reserve ratio requirement of 1.25%. Consequently, in the third quarter of 1995,
Dauphin received a $2.2 million refund of FDIC insurance premium, reflecting the
change in assessment rate. Dauphin's deposit insurance expense increased by
$.2 million for the three months ended September 30, 1996 compared to 1995 due
to the 1995 refund, and decreased by $3.7 million for the nine months of 1996
when compared to 1995. Dauphin's FDIC deposit insurance expense for the last
three months of 1996 will continue at the same level as the first nine months
of 1996. From January 1, 1997 until December 31, 1999, Dauphin will be
impacted by the new law, Deposit Insurance Fund Act of 1996 (DIFA), signed
September 30, 1996. This law requires BIF members to pay, in addition to their
deposit insurance, an assessment to fund the Financial Corp. (FICO) bond
payments. However, management does not expect that the DIFA assessment will
have a material impact on the financial results of Dauphin.
All other non-interest expense items increased $2.1 million or 14.3% in the
three months ended September 30, 1996 and $3.6 million or 7.9% for the nine
months of 1996 compared with the same period of 1995. The increase was
primarily the result of increased expenses to reflect numerous strategic
initiatives implemented. The increase in other non-interest expenses primarily
include costs associated with technological investments, branch maintenance,
legal, and consulting fees.
The broker/dealer segment had increased non-interest expense of $.3
million or 15.1% for the three month period and $1.3 million or 21.9% for the
nine month period when compared with 1995. The increased volume of business in
1996 generated additional revenues and, therefore, greater salary expense.
The mortgage banking segment had increased non-interest expense of $2.7
million or 47.0% for the three months ended September 30, 1996 when compared
with the three months ended September 30, 1995. For the nine months of 1996,
non-interest expense increased $9.3
14
<PAGE>
million or 59.9% when compared to the same period of 1995. The mortgage banking
segment experienced significant volume increases in 1996, including large
refinancing activities and additional branch locations, resulting in
significantly higher salary expense.
PROVISION FOR INCOME TAXES
Dauphin's effective tax rate was 26.1% for the three months ended September
30, 1996 compared with 27.1% for the three months ended September 30, 1995.
The effective tax rate for the nine months of 1996 was 26.4% compared with 25.8%
for the same period of 1995. 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 3 of the Notes to Consolidated Financial
Statements.
CAPITAL RESOURCES
During 1994, Dauphin announced that the Board of Directors authorized the
repurchase of up to 2,000,000 shares of the outstanding stock. In February
1995, an additional 1,500,000 shares were authorized for repurchase. Available
investments are being used to fund the share repurchases. Dauphin will use the
shares for general corporate purposes, including the Employee Stock Purchase
Plan, Stock Option Plan, the Dividend Reinvestment and Stock Purchase Plan and
other appropriate uses. During the nine months of 1996 and 1995, Dauphin
repurchased 297,000 shares for $8.5 million and 505,000 shares for $12.3
million, respectively.
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 includes 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 September 30, 1996, Dauphin and its banking subsidiary exceeded
all capital requirements and is considered to be "well-capitalized".
15
<PAGE>
TABLE 1 - Net Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1996 1995 1996 1995
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Total interest income $101,970 $90,272 $292,868 $271,546
Total interest expense 56,245 46,558 157,730 140,629
----------- --------- ----------- -----------
Net interest income 45,725 43,714 135,138 130,917
Tax equivalent adjustment 3,302 3,002 9,293 9,480
----------- --------- ----------- -----------
Net interest income (fully taxable equivalent) $49,027 $46,716 $144,431 $140,397
=========== ========= =========== ===========
</TABLE>
TABLE 2 - Rate-Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1996/1995 1996/1995
----------------------------------------- -----------------------------------------
Change due to Total Change due to Total
--------------------------- --------------------------
Volume Rate Change Volume Rate Change
-------- ----------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
(Taxable equivalent)
Interest income
Short-term investments $100 ($90) $10 ($201) ($76) ($277)
Investment securities 8,021 (245) 7,776 16,353 (2,575) 13,778
Assets held for sale 2,036 (63) 1,973 3,720 (122) 3,598
Loans 5,799 (3,560) 2,239 10,735 (6,699) 4,036
-------- ----------- --------- ----------- ----------- --------
Total interest income 15,956 (3,958) 11,998 30,607 (9,472) 21,135
-------- ----------- --------- ----------- ----------- --------
Interest expense
Interest bearing deposits 3,390 (1,423) 1,967 13,421 (3,297) 10,124
Short-term borrowings 8,032 (299) 7,733 10,237 (2,252) 7,985
Long-term debt (14) 1 (13) (1,499) 491 (1,008)
-------- ----------- --------- ----------- ----------- --------
Total interest expense 11,408 (1,721) 9,687 22,159 (5,058) 17,101
-------- ----------- --------- ----------- ----------- --------
Net interest income $4,548 ($2,237) $2,311 $8,448 ($4,414) $4,034
======== =========== ========= =========== =========== ========
</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) (Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------
1996 1995
------------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- --------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments
Interest bearing deposits $1,857 $25 5.36% $7,805 $107 5.44%
Federal funds sold and securities
purchased under agreements to resell 18,517 269 5.78 6,436 159 9.80
Other short-term investments 685 9 5.21 1,627 27 6.59
---------- --------- --------- --------
Total short-term investments 21,059 303 5.72 15,868 293 7.33
---------- --------- --------- --------
Investment securities
U.S. government obligations 48,913 790 6.43 178,928 2,579 5.72
U.S. government agencies 1,618,317 26,948 6.66 1,057,521 17,401 6.58
State and municipals 344,283 7,138 8.29 321,929 7,367 9.15
Other securities 80,085 1,508 7.51 74,160 1,261 6.80
---------- --------- --------- --------
Total investment securities 2,091,598 36,384 6.96 1,632,538 28,608 7.00
---------- --------- --------- --------
Assets held for sale 194,080 3,553 7.32 84,363 1,580 7.49
---------- --------- --------- --------
Loans (1)
Commercial 1,136,916 23,294 8.15 969,039 21,550 8.82
Commercial mortgages 628,990 13,499 8.54 547,673 12,496 9.05
Residential mortgages (2) 729,526 15,035 8.22 760,795 16,101 8.43
Consumer (3) 652,354 13,204 8.06 613,193 12,646 8.20
---------- --------- --------- --------
Total loans 3,147,786 65,032 8.22 2,890,700 62,793 8.63
---------- --------- --------- --------
Total earning assets 5,454,523 105,272 7.70 4,623,469 93,274 8.03
---------- ---------
Other assets 288,609 296,486
Total assets ---------- ----------
$5,743,132 7.31% $4,919,955 7.55%
=========== ====== ========== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits
Demand deposits and savings deposits $1,296,429 6,901 2.12% $1,389,604 7,905 2.26%
Time deposits of $100,000 or more 634,714 9,960 6.25 421,797 7,306 6.87
Other time deposits 1,635,374 24,357 5.93 1,575,621 24,040 6.05
---------- --------- --------- --------
Total interest bearing deposits 3,566,517 41,218 4.60 3,387,022 39,251 4.60
Short-term borrowings 1,078,167 14,147 5.22 465,715 6,414 5.46
Long-term debt 40,071 880 8.78 40,702 893 8.77
---------- --------- --------- --------
Total interest bearing liabilities 4,684,755 56,245 4.78 3,893,439 46,558 4.74
---------- ---------
Non-interest bearing demand deposits 462,566 441,889
Other liabilities 61,993 63,025
Stockholders' equity 533,818 521,602
---------- ---------
Total liabilities and
stockholders' equity $5,743,132 3.90% $4,919,955 3.75%
=========== ====== ========== ======
Interest rate spread 2.92% 3.29%
Effect of non-interest bearing funds 0.67 0.74
------- -------
Net interest income/margin $49,027 3.59% $46,716 4.03%
========= ======= ======= =======
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------
1996 1995
------------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- --------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments
Interest bearing deposits $3,521 $165 6.26% $6,039 $264 5.84%
Federal funds sold and securities
purchased under agreements to resell 7,948 360 6.05 9,448 524 7.42
Other short-term investments 365 13 4.76 548 27 6.59
---------- --------- --------- --------
Total short-term investments 11,834 538 6.07 16,035 815 6.80
---------- --------- --------- --------
Investment securities
U.S. government obligations 62,730 3,026 6.44 208,886 8,876 5.68
U.S. government agencies 1,555,426 76,614 6.57 1,081,523 54,463 6.71
State and municipals 334,534 21,164 8.44 336,482 23,723 9.40
Other securities 76,373 4,164 7.27 80,924 4,128 6.80
---------- --------- --------- --------
Total investment securities 2,029,063 104,968 6.90 1,707,815 91,190 7.12
---------- --------- --------- --------
Assets held for sale 147,738 7,682 6.93 76,748 4,084 7.10
---------- --------- --------- --------
Loans (1)
Commercial 1,043,648 64,824 8.29 953,705 63,446 8.89
Commercial mortgages 612,945 39,277 8.56 531,545 36,456 9.17
Residential mortgages (2) 720,402 44,688 8.28 792,856 48,758 8.21
Consumer (3) 655,854 40,184 8.18 597,848 36,277 8.11
---------- --------- --------- --------
Total loans 3,032,849 188,973 8.32 2,875,954 184,937 8.59
---------- --------- --------- --------
Total earning assets 5,221,484 302,161 7.72 4,676,552 281,026 8.03
--------- --------
Other assets 301,693 300,564
---------- ---------
Total assets $5,523,177 7.30% $4,977,116 7.54%
========== ===== ========== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits
Demand deposits and savings deposits $1,332,045 21,268 2.13% $1,430,926 25,416 2.37%
Time deposits of $100,000 or more 548,797 25,680 6.25 375,689 19,191 6.83
Other time deposits 1,609,529 71,883 5.97 1,449,240 64,100 5.91
---------- --------- --------- --------
Total interest bearing deposits 3,490,371 118,831 4.55 3,255,855 108,707 4.46
Short-term borrowings 932,817 36,251 5.19 673,500 28,266 5.61
Long-term debt 40,219 2,648 8.78 62,177 3,656 7.85
---------- --------- --------- --------
Total interest bearing liabilities 4,463,407 157,730 4.72 3,991,532 140,629 4.71
--------- --------
Non-interest bearing demand deposits 455,544 427,983
Other liabilities 69,749 53,468
Stockholders' equity 534,477 504,133
---------- ---------
Total liabilities and
stockholders' equity $5,523,177 3.81% $4,977,116 3.78%
========== ===== ========== =====
Interest rate spread 3.00% 3.32%
Effect of non-interest bearing funds 0.69 0.68
----- -----
Net interest income/margin $144,431 3.69% $140,397 4.00%
========= ===== ========= =====
</TABLE>
The tax-equivalent adjustment was computed based on federal income tax rate of
35% for all periods presented.
(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)
September 30, 1996
---------------------------------------------------------------------------------------------
Interest Sensitivity Period
---------------------------------------------------------------------------------------------
Month Quarter Six Months Annual 5 Years
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $30,180 $30,180 $30,180 $30,180 $30,180
Investment securities 405,693 453,966 514,561 655,866 1,494,383
Assets held for sale 210,858 210,858 210,858 210,858 210,858
Loans 1,155,724 1,508,363 1,742,756 2,153,680 3,111,684
------------- ------------- ------------- ------------- -------------
Total $1,802,455 $2,203,367 $2,498,355 $3,050,584 $4,847,105
============= ============= ============= ============= =============
Interest bearing liabilities:
Deposits $963,499 $1,280,637 $1,576,782 $1,955,590 $2,664,118
Short-term borrowings 1,208,815 1,208,815 1,208,815 1,208,815 1,208,815
Long-term debt 4 35,012 35,024 35,048 39,909
------------- ------------- ------------- ------------- -------------
Total $2,172,318 $2,524,464 $2,820,621 $3,199,453 $3,912,842
============= ============= ============= ============= =============
Interest sensitivity gap ($369,863) ($321,097) ($322,266) ($148,869) $934,263
Interest sensitive assets to
interest sensitive
liabilities ratio 0.83 0.87 0.89 0.95 1.24
Interest sensitivity gap as
a percent of total assets (6.19) (5.38) (5.40) (2.49) 15.65
Regulatory presentation:
Interest sensitivity gap ($833,049) ($784,283) ($785,452) ($612,055) $471,077
Interest sensitive assets to
interest sensitive
liabilities ratio 0.68 0.74 0.76 0.83 1.11
Interest sensitivity gap as
a percent of total assets (13.95) (13.13) (13.15) (10.25) 7.89
</TABLE>
18
<PAGE>
TABLE 5 - Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $42,669 $41,350 $41,737 $40,216
Provision charged to operating expenses 1,200 1,246 4,800 4,362
Total loans charged off 2,262 2,103 6,745 6,193
Total recoveries 1,842 1,178 3,657 3,286
------------- ------------ ------------- ------------
Net charge-offs 420 925 3,088 2,907
------------- ------------ ------------- ------------
Balance, end of period $43,449 $41,671 $43,449 $41,671
============= ============ ============= ============
Total loans:
Average $3,147,786 $2,890,700 $3,032,849 $2,875,954
Period-end 3,236,742 2,939,677 3,236,742 2,939,677
Ratios:
Net charge-offs to average loans (annualized) 0.05% 0.13% 0.14% 0.14%
Allowance for loan losses to period-end loans 1.34 1.42 1.34 1.42
TABLE 6 - Non-Performing Assets
<CAPTION>
(Dollars in thousands)
September 30, December 31, September 30,
1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C>
Non-accrual loans $8,360 $7,031 $9,415
Loans past due 90 or more days as to
interest or principal 4,807 5,805 5,915
Restructured loans 4,029 5,072 5,436
------------- ------------ -------------
Total non-performing loans 17,196 17,908 20,766
Other real estate owned 2,636 2,709 1,600
------------- ------------ -------------
Total non-performing assets $19,832 $20,617 $22,366
============= ============ =============
Ratios:
Non-performing loans to total loans 0.53% 0.60% 0.71%
Non-performing assets to total loans and
other real estate owned 0.61 0.69 0.76
Allowance for loan losses to non-performing
loans 252.67 233.06 200.67
</TABLE>
19
<PAGE>
<TABLE>
TABLE 7 - Non-Interest Income
(Dollars in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
1996/1995 1996/1995
------------------------------------ -------------------------------------
Increase (Decrease) Increase (Decrease)
------------------- -------------------
1996 Amount % 1995 1996 Amount % 1995
------- ------ ----- ------- ------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banking:
Fiduciary activities $4,700 $640 15.8 % $4,060 $13,815 $1,006 7.9 % $12,809
Service charges on deposit accounts 3,247 576 21.6 2,671 9,549 1,412 17.4 8,137
Other service charges and fees 3,848 452 13.3 3,396 10,404 1,182 12.8 9,222
Securities gains, net 16 (608) (97.4) 624 1,102 (992) (47.4) 2,094
Other 1,283 (13) (1.0) 1,296 2,864 (12) (0.4) 2,876
------- ------ ------- ------- ------- -------
13,094 1,047 8.7 12,047 37,734 2,596 7.4 35,138
Broker/dealer 2,396 885 58.6 1,511 7,337 2,626 55.7 4,711
Mortgage banking 8,646 3,058 54.7 5,588 24,160 9,680 66.9 14,480
Intercompany eliminations (396) 516 (912) (1,611) 895 (2,506)
------- ------ ------- ------- ------- -------
Total $23,740 $5,506 30.2 % $18,234 $67,620 $15,797 30.5 % $51,823
======= ====== ===== ======= ======= ======= ===== =======
</TABLE>
TABLE 8 - Non-Interest Expense
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
1996/1995 1996/1995
----------------------------------- --------------------------------------
Increase (Decrease) Increase (Decrease)
------------------- -------------------
1996 Amount % 1995 1996 Amount % 1995
------- ------ ----- ------- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banking:
Salaries and employee benefits $16,783 $642 4.0 % $16,141 $49,231 $3,584 7.9 % $45,647
Net occupancy expense 2,158 462 27.2 1,696 6,541 692 11.8 5,849
Furniture and equipment expense 3,006 597 24.8 2,409 8,741 1,523 21.1 7,218
Deposit insurance 1 195 (100.5) (194) 2 (3,719) (99.9) 3,721
Other 11,895 1,069 9.9 10,826 33,506 1,368 4.3 32,138
------- ------ ------- -------- ------- --------
33,843 2,965 9.6 30,878 98,021 3,448 3.6 94,573
Broker/dealer 2,355 309 15.1 2,046 7,012 1,259 21.9 5,753
Mortgage banking 8,322 2,659 47.0 5,663 24,707 9,251 59.9 15,456
Intercompany eliminations (556) 465 (1,021) (1,959) 332 (2,291)
------- ------ ------- -------- ------- --------
Total $43,964 $6,398 17.0 % $37,566 $127,781 $14,290 12.6 % $113,491
======= ====== ===== ======= ======== ======= ===== ========
</TABLE>
20
<PAGE>
PART II - OTHER INFORMATION
---------------------------
For the Quarter Ended September 30, 1996
Item 1. Legal Proceedings
Various legal actions and proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
resulting from such legal actions and proceedings will not be material to
Dauphin's financial condition or results of operations. Included among the
outstanding litigation is a class action law suit instituted by Dauphin in the
Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994,
seeking a declaratory judgment from the Court specifically permitting Dauphin to
discontinue an 18 month variable rate investment product carrying a minimum
interest rate of 10% for the 18 month term, which is held in certain individual
retirement accounts (IRA). The aggregate balance of the IRA accounts was
approximately $195.4 million at September 30, 1996. Dauphin's right to
terminate the variable rate investment product is in dispute and is being
challenged by the holders of the IRA accounts in question. Several days after
commencement of trial in April, 1996, Dauphin and representatives of the class
reached an agreement in principle to settle the litigation and the trial was
continued pending negotiation of a settlement agreement. Dauphin and
representatives of the class filed a settlement agreement with the Court on May
13, 1996 which would permit Dauphin to terminate the 18 month variable rate
product as to all class members on the effective date of the settlement and, in
consideration, the balances of those accounts would be automatically deposited
in one of two new certificates of deposit established by Dauphin for purposes of
the settlement. All class members were given the opportunity to file objections
to the proposed settlement or elect to be excluded from the class and the
proposed settlement. Approximately 89 of the 4,315 class members filed formal
objections to the settlement with the Court and 12 of the class members elected
to opt out of the settlement. A hearing was held before the Court on June 21,
1996 for the purpose of obtaining the Court's approval of the settlement
agreement. At the hearing, counsel for Dauphin and counsel for the
representatives of all class members jointly moved for the Court's adoption of
the settlement agreement and made argument in favor thereof. The Court, by
Order issued July 11, 1996, denied the joint motion of Dauphin and the
representatives of the class for settlement of the class action in accordance
with the terms and conditions of the settlement agreement. Dauphin filed its
Notice of Appeal from the trial Court's Order denying the settlement to the
Superior Court of Pennsylvania on August 9, 1996. It is anticipated that the
Appeal will seek an Order of the Superior Court reversing the trial Court's
disapproval of the settlement agreement or, in the alternative, otherwise
providing the trial Court with guidance which would result in the trial Court's
approval of the settlement agreement on remand or, directing decertification of
the class. The Superior Court must determine whether or not the trial Court
abused its discretion in rejecting the settlement agreement. The class
representatives and counsel for the class have informed Dauphin's counsel that
they are withdrawing their previous support for the joint settlement agreement
and will vigorously oppose Dauphin's Appeal to the Superior Court. Neither
management nor counsel can predict with any reasonable degree of certainty the
outcome of the Appeal or time frame within which the Superior Court will rule on
the Appeal. If the Appeal to the Superior Court is unsuccessful, management
intends to vigorously assert its right to terminate the 18 month variable rate
investment product on further appeal and at the trial court level. Dauphin has
continued to date to pay a 10% interest rate with regard to the 18 month
variable rate investment product.
21
<PAGE>
PART II - OTHER INFORMATION
---------------------------
For the Quarter Ended September 30, 1996
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 LLP regarding unaudited interim
financial information of Dauphin for the quarter ended
September 30, 1996.
15(b) Letter of KPMG Peat Marwick LLP regarding unaudited interim
financial information of Dauphin for the quarter ended
September 30, 1996.
27 Financial Data Schedule regarding unaudited interim financial
information of Dauphin for the quarter ended September 30,
1996.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 1996.
22
<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: November 12, 1996 /s/Christopher R. Jennings
- --------------------------- ---------------------------
Christopher R. Jennings
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1996 /s/Dennis L. Dinger
- --------------------------- ---------------------------
Dennis L. Dinger, Senior Executive
Vice President and Chief Fiscal
and Administrative Officer
23
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Page Number
- ------- -----------
11 Statement regarding Computation of Per Share Earnings
15(a) Report of KPMG Peat Marwick LLP regarding unaudited interim
financial information of Dauphin for the quarter ended
September 30, 1996
15(b) Letter of KPMG Peat Marwick LLP regarding unaudited interim
financial information of Dauphin for the quarter ended
September 30, 1996
27 Financial Data Schedule regarding unaudited interim
financial information of Dauphin for the quarter ended
September 30, 1996
<PAGE>
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------
1996 1995
---- ----
PRIMARY EARNINGS PER COMMON SHARE
---------------------------------
<S> <C> <C>
Earnings
Net income $17,947,000 $16,875,000
============== ==============
Shares
Weighted average common shares outstanding 30,584,386 30,708,288
Stock options and other stock incentive plans
considered to be common stock equivalents 209,398 185,158
-------------- --------------
Weighted average common stock and common stock equivalents outstanding 30,793,784 30,893,446
============== ==============
Primary earnings per common share $0.58 $0.55
============== ==============
FULLY DILUTED EARNINGS PER COMMON SHARE
---------------------------------------
Earnings
Net income $17,947,000 $16,875,000
After tax interest expense applicable to convertible debentures 68,284 72,467
-------------- --------------
$18,015,284 $16,947,467
============== ==============
Shares
Weighted average common shares outstanding 30,584,386 30,708,288
Assumed conversion of 9.00% convertible debentures issued June 30, 1989 292,537 313,001
Stock options and other stock incentive plans
considered to be common stock equivalents 274,174 187,936
-------------- --------------
Weighted average common stock and common stock equivalents outstanding 31,151,097 31,209,225
============== ==============
Fully diluted earnings per common share $0.58 $0.55
============== ==============
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1996 1995
---- ----
PRIMARY EARNINGS PER COMMON SHARE
---------------------------------
<S> <C> <C>
Earnings
Net income $51,653,000 $48,171,000
============== ==============
Shares
Weighted average common shares outstanding 30,568,852 30,814,443
Stock options and other stock incentive plans
considered to be common stock equivalents 208,647 154,438
-------------- --------------
Weighted average common stock and common stock equivalents outstanding 30,777,499 30,968,881
============== ==============
Primary earnings per common share $1.68 $1.56
============== ==============
FULLY DILUTED EARNINGS PER COMMON SHARE
---------------------------------------
<S> <C> <C>
Earnings
Net income $51,653,000 $48,171,000
After tax interest expense applicable to convertible debentures 207,076 222,845
-------------- --------------
$51,860,076 $48,393,845
Shares ============== ==============
Weighted average common shares outstanding 30,568,852 30,814,443
Assumed conversion of 9.00% convertible debentures issued June 30, 1989 297,011 318,471
Stock options and other stock incentive plans
considered to be common stock equivalents 259,085 187,429
Weighted average common stock and common stock equivalents outstanding 31,124,948 31,320,343
============== ==============
Fully diluted earnings per common share $1.67 $1.55
============== ==============
</TABLE>
Exhibit 11
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Independent Accountants' Review Report
- --------------------------------------
The Board of Directors
Dauphin Deposit Corporation
We have reviewed the consolidated balance sheets of Dauphin Deposit Corporation
and subsidiaries as of September 30, 1996 and 1995, and the related consolidated
statements of income for the three-month and nine-month periods ended September
30, 1996 and 1995, and the consolidated statements of cash flows for the nine-
month periods ended September 30, 1996 and 1995. These consolidated 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 referred to above
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, 1995, 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 26, 1996, 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, 1995, is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
October 18, 1996
Harrisburg, Pennsylvania
Exhibit 15(a)
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors
Dauphin Deposit Corporation
Re: Registration Statements No. 33-53793
33-17401
33-50172
33-61848
33-59941
33-02577
2-73258
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our reports dated April 15, 1996, except as to
note 6, which is as of May 13, 1996, and July 15, 1996, except as to note 6
which is as of August 9, 1996, and October 18, 1996, related to our reviews of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such reports are not
considered 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 LLP
November 11, 1996
Harrisburg, Pennsylvania
Exhibit 15(b)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 178,669
<INT-BEARING-DEPOSITS> 2,195
<FED-FUNDS-SOLD> 27,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,168,620
<INVESTMENTS-CARRYING> 2,180,408
<INVESTMENTS-MARKET> 2,168,620
<LOANS> 3,236,742
<ALLOWANCE> 43,449
<TOTAL-ASSETS> 5,971,277
<DEPOSITS> 4,079,044
<SHORT-TERM> 1,208,815
<LIABILITIES-OTHER> 93,722
<LONG-TERM> 40,035
0
0
<COMMON> 163,208
<OTHER-SE> 386,453
<TOTAL-LIABILITIES-AND-EQUITY> 5,971,277
<INTEREST-LOAN> 186,952
<INTEREST-INVEST> 97,739
<INTEREST-OTHER> 8,177
<INTEREST-TOTAL> 292,868
<INTEREST-DEPOSIT> 118,831
<INTEREST-EXPENSE> 157,730
<INTEREST-INCOME-NET> 135,138
<LOAN-LOSSES> 4,800
<SECURITIES-GAINS> 1,102
<EXPENSE-OTHER> 127,781
<INCOME-PRETAX> 70,177
<INCOME-PRE-EXTRAORDINARY> 51,653
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,653
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 7.72
<LOANS-NON> 8,360
<LOANS-PAST> 4,807
<LOANS-TROUBLED> 4,029
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 41,737
<CHARGE-OFFS> 6,745
<RECOVERIES> 3,657
<ALLOWANCE-CLOSE> 43,449
<ALLOWANCE-DOMESTIC> 43,449
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
