<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 June 30, 1996 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
- --------------------------------------------------------------------------------
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 July 31, 1996
- -------------------------- ----------------------------
Common Stock, $5 Par Value 30,586,874 Shares
<PAGE>
DAUPHIN DEPOSIT CORPORATION
---------------------------
FORM 10-Q
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For the Quarter Ended June 30, 1996
Contents
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and 1995 and
December 31, 1995
Consolidated Statements of Income for the Three Month
and Six Month Periods Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
<PAGE>
Part I
------
For the Quarter Ended June 30, 1996
Item 1. Financial Statements
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31, June 30,
1996 1995 1995
(Unaudited) (Audited) (Unaudited)
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $203,485 $218,785 $192,354
------------- ------------ -------------
Short-term investments
Interest bearing deposits 1,319 8,523 6,045
Federal funds sold and securities purchased under agreements to resell 2,500 3,050 9,000
Other short-term investments 685
------------- ------------ -------------
Total short-term investments 4,504 11,573 15,045
------------- ------------ -------------
Investment securities available-for-sale, at fair value 2,041,488 1,860,869 1,666,022
Assets held for sale, primarily mortgage loans held for sale 186,430 87,782 100,617
Loans (net of unearned income) 3,020,509 2,981,338 2,904,652
Allowance for loan losses (42,669) (41,737) (41,350)
------------- ------------ -------------
Total net loans 2,977,840 2,939,601 2,863,302
------------- ------------ -------------
Premises and equipment 73,574 71,562 68,210
Other assets 118,033 107,177 102,339
------------- ------------ -------------
Total assets $5,605,354 $5,297,349 $5,007,889
============= ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $469,855 $518,004 $478,893
Interest bearing 3,482,248 3,431,532 3,339,699
------------- ------------ -------------
Total deposits 3,952,103 3,949,536 3,818,592
Short-term borrowings 1,009,885 678,161 553,972
Long-term debt 40,125 40,599 40,809
Accrued expenses and taxes 67,667 82,450 73,943
------------- ------------ -------------
Total liabilities 5,069,780 4,750,746 4,487,316
------------- ------------ -------------
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 2,092,127, 2,013,771,
and 1,853,172 shares are held as treasury stock, respectively 163,208 163,208 163,208
Additional paid-in capital 10,835 11,103 10,832
Retained earning 425,171 408,274 389,806
Unrealized gains (losses) on securities available-for-sale, net of deferred
taxes (11,020) 13,650 1,723
------------- ------------ -------------
588,194 596,235 565,569
Less: Treasury stock - at cost (52,620) (49,632) (44,996)
------------- ------------ -------------
Total stockholders' equity 535,574 546,603 520,573
------------- ------------ -------------
Total liabilities and stockholders' equity $5,605,354 $5,297,349 $5,007,889
============= ============ =============
</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 Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $61,493 $61,173 $122,733 $120,933
Interest and dividends on investment securities
Taxable 28,902 23,058 55,035 47,150
Exempt from federal income taxes 4,757 4,599 8,797 9,710
Interest on deposits 40 65 140 173
Interest on assets held for sale 2,447 1,589 4,098 2,943
Interest on federal funds sold and other
short-term investments 46 178 95 365
---------- ---------- ---------- ----------
Total interest income 97,685 90,662 190,898 181,274
---------- ---------- ---------- ----------
Interest expense
Interest on deposits
Savings deposits 7,075 8,694 14,367 17,511
Time deposits 23,893 21,984 47,526 40,060
Time deposits in denominations of
$100,000 or more 8,354 6,894 15,720 11,885
---------- ---------- ---------- ----------
39,322 37,572 77,613 69,456
Interest on short-term borrowings 12,524 9,043 22,104 21,852
Interest on long-term debt 882 1,104 1,768 2,763
---------- ---------- ---------- ----------
Total interest expense 52,728 47,719 101,485 94,071
---------- ---------- ---------- ----------
Net interest income 44,957 42,943 89,413 87,203
Provision for loan losses 1,800 1,246 3,600 3,116
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 43,157 41,697 85,813 84,087
---------- ---------- ---------- ----------
Non-interest income
Fiduciary activities 4,674 4,358 9,115 8,749
Service charges on deposit accounts 3,344 2,800 6,302 5,466
Other service charges and fees 3,695 3,097 6,556 5,826
Broker/dealer commissions and fees 1,874 1,472 4,410 3,148
Mortgage banking 8,010 4,638 14,830 7,350
Securities gains, net 14 1,464 1,086 1,470
Other 891 597 1,581 1,580
---------- ---------- ---------- ----------
Total non-interest income 22,502 18,426 43,880 33,589
---------- ---------- ---------- ----------
Non-interest expense
Salaries and employee benefits 23,741 18,992 46,517 38,462
Net occupancy expense 2,512 2,469 5,285 4,967
Furniture and equipment expense 3,329 2,624 6,489 5,390
Deposit insurance 1,957 1 3,915
Other 12,994 12,385 25,525 23,191
---------- ---------- ---------- ----------
Total non-interest expense 42,576 38,427 83,817 75,925
---------- ---------- ---------- ----------
Income before income taxes 23,083 21,696 45,876 41,751
Provision for income taxes 5,986 5,619 12,170 10,455
---------- ---------- ---------- ----------
Net income $17,097 $16,077 $33,706 $31,296
========== ========== ========== ==========
Net income per share $0.56 $0.52 $1.10 $1.01
Cash dividends declared per share $0.28 1/2 $0.25 $0.55 $0.50
Weighted average number of shares outstanding 30,741,012 30,955,397 30,769,268 31,007,223
</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)
Six Months Ended
June 30,
-----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Operating activities
Net income $33,706 $31,296
Adjustments:
Provision for loan losses 3,600 3,116
Provision for depreciation, amortization and accretion 2,287 3,774
Amortization of goodwill 929 813
Deferred income taxes 1,561 76
Securities gains, net (1,086) (1,470)
(Increase) decrease in interest receivable (7,026) 2,554
Increase (decrease) in accrued expenses and taxes (14,783) 17,855
Capitalized interest on deposits 41,201 26,538
Amortization of mortgage servicing rights 727 1,386
Gain on sale of mortgage loans held for sale (828) (2,273)
Sale of mortgages loans held for sale 539,250 266,498
Loans originated for sale (612,582) (303,189)
Purchase of mortgage loans held for sale (18,115) (12,969)
Other, net (65) (1,045)
----------- ----------
Net cash provided (used) by operating activities (31,224) 32,960
----------- ----------
Investing activities
Proceeds from sales of investment securities 94,001 93,545
Proceeds from maturities of investment securities 482,190 177,209
Purchases of investment securities (777,730) (87,569)
Net increase in assets held for sale, other than loans held for sale (6,373) (2,462)
Net increase in loans (42,901) (79,399)
Sale of residential mortgage and other consumer loans 39,507
Net purchases of premises and equipment (6,445) (4,863)
----------- ----------
Net cash provided (used) by investing activities (257,258) 135,968
----------- ----------
Financing activities
Net increase (decrease) in deposit accounts (38,634) 277,170
Net increase (decrease) in short-term borrowings 331,724 (386,805)
Net decrease in long-term debt (264) (51,145)
Issuance of common stock and treasury stock 4,349 4,177
Acquisition of treasury stock (8,318) (8,921)
Cash dividends paid (16,225) (15,461)
----------- ----------
Net cash provided (used) by financing activities 272,632 (180,985)
----------- ----------
Decrease in cash and cash equivalents (15,850) (12,057)
Cash and cash equivalents at beginning of period 219,335 210,911
----------- ----------
Cash and cash equivalents at end of period $203,485 $198,854
=========== ==========
Total interest paid $60,205 $62,827
Total income taxes paid 14,454 9,950
Schedule of non-cash investing and financing activities:
Loans charged off 4,483 4,090
Net loan transfers to other real estate owned 2,492 800
Conversion of convertible subordinated debentures 210 90
Securitization of mortgage loans 6,720
</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 six month
period ended June 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 June 30, 1996, December 31, 1995 and June 30, 1995 is as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1996 December 31, 1995 June 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. $872,139 $858,081 $804,086 $810,363 $620,059 $621,073
government agencies and corporations
Obligations of states and political subdivision 337,479 343,978 287,697 302,702 315,744 326,383
Debt securities issued by foreign governments 750 750 800 800 900 895
Corporate securities 34,952 35,058 22,736 23,087 59,577 59,898
Mortgage-backed securities 757,555 748,226 705,279 704,612 647,798 638,516
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities 2,002,875 1,986,093 1,820,598 1,841,564 1,644,078 1,646,765
Equity securities 55,567 55,395 19,272 19,305 19,292 19,257
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities $2,058,442 $2,041,488 $1,839,870 $1,860,869 $1,663,370 $1,666,022
========== ========== ========== ========== ========== ==========
</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 Six months
ended June 30, ended June 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 (8.9) (9.2) (8.4) (10.0)
Other, net (0.2) 0.1 (0.1)
--------- --------- --------- ---------
Effective income tax rate 25.9% 25.9% 26.5% 25.0%
========= ========= ========= =========
</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
June 30, 1996 represented by letters of credit issued to customers amounted to
approximately $138.0 million.
NOTE 5 - NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings.
Under the financial-components approach, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-components
approach focuses on the assets and liabilities that exist after the transfer.
Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral.
SFAS 125 extends the "available-for-sale" or "trading" approach in
Statement No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities", to non-security financial assets that can contractually be
prepaid or otherwise settled in such a way that the holder of the asset would
not recover substantially all of its recorded investment. Thus, non-security
financial assets (no matter how acquired) that are subject to prepayment risk
that could prevent recovery of substantially all of the recorded amount are to
be reported at fair value with the change in fair value accounted for depending
on the asset's classification as "available-for-sale" or "trading." SFAS 125
also amends SFAS 115 to prevent a security from being classified as "held-to-
maturity" if the security can be prepaid or otherwise settled in such a way that
the holder of the security would not recover substantially all of its recorded
investment.
7
<PAGE>
Note 5 - New Accounting Standards (continued)
SFAS 125 requires that a liability be derecognized if and only if either
(a) the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor.
SFAS 125 is effective for transfers of financial assets and extinguishments
of liabilities occuring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. Also, the
extension of the SFAS 115 approach to certain non-security financial assets and
the amendment to SFAS 115 is effective for financial assets held on or acquired
after January 1, 1997. Currently, management has not determined the impact on
Dauphin's financial condition or results of operations upon adoption of the
provisions of SFAS 125.
Note 6 - 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 $192.9 million at June 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
the 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 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 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 financial statements which appear elsewhere in this
report.
SUMMARY
Dauphin recorded net income for the three months ended June 30, 1996 of
$17.1 million compared with $16.1 million recorded for the same period of 1995.
Net income per share for the three months ended June 30, 1996 was $.56 compared
with $.52 for the same period in 1995, an increase of 7.7%. Net income for the
six months ended June 30, 1996 amounted to $33.7 million compared with $31.3
million recorded for the same period of 1995. Net income per share for the six
months ended June 30, 1996 was $1.10 compared with $1.01 for the same period of
1995, an increase of 8.9%.
Dauphin's return on average total assets was 1.24% for the three months
ended June 30, 1996 compared with 1.30% for the three months ended June 30,
1995. For the six months of 1996, the return on average assets was 1.25%
compared with 1.26% for the same period of 1995. Return on average stockholders'
equity, excluding the SFAS 115 adjustment, was 12.81% for the three months ended
June 30, 1996 compared with 12.41% for the same period of 1995. Return on
average stockholders' equity, excluding the SFAS 115 adjustment, was 12.70% for
the six months of 1996 compared with 12.28% for the same period of 1995. Return
on average stockholders' equity, including the SFAS 115 adjustment, was 13.03%
for the three months ended June 30, 1996 compared with 12.60% for the same
period of 1995. Return on average stockholders' equity, including the SFAS 115
adjustment, amounted to 12.67% for the six months of 1996 compared with 12.74%
for the six 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 six months ended June 30, 1996 and 1995. Net
interest income on a fully taxable equivalent basis totaled $48.1 million for
the three months ended June 30, 1996, an increase of $2.1 million or 4.6% from
$46.0 million for the same period of 1995. For the six months of 1996, net
interest income amounted to $95.4 million, an increase of $1.7 million or 1.8%
from $93.7 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 June 30, 1996 compared with the three months
ended June 30, 1995, as shown in Table 2, there was an increase in net interest
income of $3.8 million due to changes in volume and a decrease of $1.7 million
due to changes in rates. During the six months ended June 30, 1996 compared
with the same period of 1995, there was an increase of $5.8 million due to
changes in volume and a decrease of $4.1 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 $5.2 billion for the three months ended June
30, 1996 and $4.7 billion for the three months ended June 30, 1995. For the six
months of 1996, average earning assets were $5.1 billion compared with $4.7
billion for the six months of 1995. The interest rate spread for the three
months ended June 30, 1996 was 3.03% compared with 3.23% for the three months
ended June 30, 1995. The net interest margin amounted to 3.68% for the three
months ended June 30, 1996 compared with 3.94% for the same period of 1995. For
the six months, the interest rate spread decreased to 3.05% from 3.33% while the
net interest margin decreased to 3.74% from 3.99%.
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 8.29% for the six months ended June 30, 1996
compared with 9.00% and 8.91% for the same periods of 1995. The average federal
funds rate decreased to 5.24% for the three months ended June 30, 1996 compared
with 6.02% in 1995. For the six months of 1996, the average federal funds rate
was 5.30% compared with 5.91% for 1995. During the three months ended June 30,
1996 compared with the same period of 1995, the average yield on earning assets
decreased 30 basis points while the average cost of interest bearing liabilities
decreased 10 basis points resulting in a decrease in the interest rate spread of
20 basis points. For the six months of 1996 compared with 1995, the yield on
earning assets decreased 28 basis points while the average cost of interest
bearing liabilities was unchanged, resulting in a decrease in the interest rate
spread of 28 basis points. The yield on the investment securities portfolio
decreased 7 basis points for the three months ended June 30, 1996 and 25 basis
points for the six months ended
10
<PAGE>
June 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 $121.3 million or 4.2% for the three
months ended June 30, 1996 compared with the three months ended June 30, 1995.
For the six months of 1996, the increase was $106.3 million or 3.7% 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 29 basis point decrease
for the three months and the 21 basis point decrease for the six months in the
overall average loan yield. The cost of interest bearing deposits decreased 4
basis points for the three months ended June 30, 1996 compared with 1995. For
the six months of 1996, the cost of interest bearing deposits increased 13 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 (56 basis points) and the six
month period (49 basis points) was caused primarily by the fall in the federal
funds rate. The interest rate spread decreased 20 basis points for the three
months, and a decrease in the value of non-interest bearing funds resulted in a
net 26 basis point decline in the net interest margin. For the six months, the
interest rate spread decreased 28 basis points, which was partially offset by an
increase in the value of non-interest bearing funds, resulting in a 25 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 6 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 June 30, 1996 compared
with a decrease of 21 basis points for the three months ended June 30, 1995 and
a decrease of 21 basis points for the six months ended June 30, 1996 compared
with a decrease of 22 basis points for the six months ended June 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
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 June 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.
11
<PAGE>
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 June 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 $1.8 million for the
three months ended June 30, 1996 compared to $1.2 million for the three months
ended June 30, 1995. The provision for the six months of 1996 was $3.6 million
compared with $3.1 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 six months ended June 30,
1996 and 1995.
NON-PERFORMING ASSETS
Table 6 reflects Dauphin's non-performing assets at June 30, 1996, December
31, 1995 and June 30, 1995. The increase in non-accrual loans at June 30, 1996
was primarily due to the addition of one commercial credit. 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. Other real estate owned
represents property acquired through foreclosure.
12
<PAGE>
NON-INTEREST INCOME
Table 7 reflects the non-interest income increase of $4.1 million or 22.1%
for the three months ended June 30, 1996 compared to the three months ended June
30, 1995. Exclusive of securities gains, the increase was $5.5 million or
32.6%. Non-interest income increased $10.3 million or 30.6% for the six months
of 1996 compared with the same period of 1995. Exclusive of securities gains,
the increase for the six months was $10.7 million or 33.2%. In the banking
segment of Dauphin, income increased $.3 million or 2.5% for the three months
and $1.5 million or 6.7% for the six months. Total service charges and fees
increased $1.1 million or 19.4% for the three months and $1.6 million or 13.9%
for the six months. Certain service charges on deposits were increased during
the first six 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 $.5 million or 30.0% for the
three month period and $1.7 million or 54.4% for the six 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 59.4% in the three months ended June 30, 1996 and increased $6.6
million or 74.5% in the six months of 1996 compared with the same periods of
1995. The mortgage closings in 1996 were twice the volume of 1995, due to
refinancing activities and an expanded branch network.
NON-INTEREST EXPENSE
Table 8 reflects that non-interest expense amounted to $42.6 million for
the three months ended June 30, 1996 and $38.4 for the three months ended June
30, 1995, an increase of $4.1 million or 10.8%. For the six months of 1996 non-
interest expense was $83.8 million compared to $75.9 million for the same period
of 1995, an increase of $7.9 million or 10.4%.
Dauphin's banking segment non-interest expense decreased $.2 million or .7%
for the three months ended June 30, 1996 compared with the three months ended
June 30, 1995. For the first six months of 1996, non-interest expense
increased $.5 million or .8%. Salaries and employee benefits increased 11.0%
for the three month period and 10.0% for the six month period. Full-time
equivalent employees increased 2.3% to 1,997 at June 30, 1996 compared with
1,952 at June 30, 1995. Salaries expense, excluding benefits expense, increased
5.1% for the three month period and 6.5% for the six month period. Dauphin goes
through a continual review to control benefit costs.
In the second quarter of 1995, the Bank Insurance Fund (BIF) reached its
statutory reserve ratio requirement of 1.25%. Consequently, the FDIC
significantly reduced the assessment rates applicable to BIF members. This
reduced Dauphin's deposit insurance expense by $2.0 million for the three months
ended June 30, 1996 compared to 1995, and by $3.9 million
13
<PAGE>
for the six months of 1996 when compared to 1995. Dauphin's FDIC deposit
insurance expense for the last six months of 1996 will continue at the same
level as the first six months of 1996.
All other non-interest expense items increased $.1 million or .9% in the
three months ended June 30, 1996 and $1.4 million or 4.8% for the six months.
The increase was primarily the result of increased expenses to reflect numerous
strategic initiatives implemented. The other non-interest expense items that
increased include costs associated with technological investments, snow removal,
legal, and consulting fees.
The broker/dealer segment had increased non-interest expense of $.2 million
or 10.2% for the three month period and $1.0 million or 25.6% for the six 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 $4.1
million or 81.0% for the three months ended June 30, 1996 when compared with
the three months ended June 30, 1995. For the six months of 1996, non-interest
expense increased $6.6 million or 67.3% 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 25.9% for the three months ended June 30,
1996 and 1995. The effective tax rate for the six months of 1996 was 26.5%
compared with 25.0% 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 six months of 1996 and 1995, Dauphin
repurchased 292,000 shares for $8.3 million and 368,000 shares for $8.9 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
14
<PAGE>
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 June 30, 1996,
Dauphin and its banking subsidiary exceeded all capital requirements and is
considered to be "well-capitalized".
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings.
Under the financial-components approach, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-components
approach focuses on the assets and liabilities that exist after the transfer.
Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral.
SFAS 125 extends the "available-for-sale" or "trading" approach in
Statement No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities", to non-security financial assets that can contractually be
prepaid or otherwise settled in such a way that the holder of the asset would
not recover substantially all of its recorded investment. Thus, non-security
financial assets (no matter how acquired) that are subject to prepayment risk
that could prevent recovery of substantially all of the recorded amount are to
be reported at fair value with the change in fair value accounted for depending
on the asset's classification as "available-for-sale" or "trading." SFAS 125
also amends SFAS 115 to prevent a security from being classified as "held-to-
maturity" if the security can be prepaid or otherwise settled in such a way that
the holder of the security would not recover substantially all of its recorded
investment.
SFAS 125 requires that a liability be derecognized if and only if either
(a) the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor.
SFAS 125 is effective for transfers of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive
15
<PAGE>
application is not permitted. Also, the extension of the SFAS 115 approach to
certain non-security financial assets and the amendment to SFAS 115 is effective
for financial assets held on or acquired after January 1, 1997. Currently,
management has not determined the impact on Dauphin's financial condition or
results of operations upon adoption of the provisions of SFAS 125.
16
<PAGE>
TABLE 1 - Net Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total interest income $97,685 $90,662 $190,898 $181,274
Total interest expense 52,728 47,719 101,485 94,071
------------ ------------ ------------ ------------
Net interest income 44,957 42,943 89,413 87,203
Tax equivalent adjustment 3,188 3,096 5,991 6,478
------------ ------------ ------------ ------------
Net interest income (fully taxable equivalent) $48,145 $46,039 $95,404 $93,681
============ ============ ============ ============
</TABLE>
TABLE 2 - Rate-Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 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 ($174) $16 ($158) ($312) $9 ($303)
Investment securities 6,359 (268) 6,091 8,609 (2,153) 6,456
Assets held for sale 1,602 (730) 872 1,992 (821) 1,171
Loans 3,200 (2,890) 310 5,578 (3,765) 1,813
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 10,987 (3,872) 7,115 15,867 (6,730) 9,137
---------- ---------- ---------- ---------- ---------- ----------
Interest expense
Interest bearing deposits 3,164 (1,414) 1,750 9,470 (1,313) 8,157
Short-term borrowings 4,439 (958) 3,481 2,200 (1,948) 252
Long-term debt (376) 154 (222) (1,589) 594 (995)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 7,227 (2,218) 5,009 10,081 (2,667) 7,414
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $3,760 ($1,654) $2,106 $5,786 ($4,063) $1,723
========== ========== ========== ========== ========== ==========
</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.
17
<PAGE>
TABLE 3- Average Balances, Rates and Interest Income and Expense Summary
(Taxable Equivalent Basis) (Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 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 $2,587 $39 6.06% $5,130 $65 5.08%
Federal funds sold and securities
purchased under agreements to resell 2,295 42 7.36 10,017 178 7.13
Other short-term investments 407 4 3.96
----------- ------------ ----------- ------------
Total short-term investments 5,289 85 6.46 15,147 243 6.43
Investment securities ----------- ------------ ----------- ------------
U.S. government obligations 58,519 923 6.34 214,789 3,019 5.64
U.S. government agencies 1,592,919 26,283 6.60 1,095,687 18,102 6.61
State and municipals 346,289 7,282 8.41 330,720 7,710 9.33
Other securities 88,891 1,735 7.82 77,304 1,301 6.73
----------- ------------ ----------- ------------
Total investment securities 2,086,618 36,223 6.95 1,718,500 30,132 7.02
----------- ------------ ----------- ------------
Assets held for sale 148,302 2,471 6.67 71,072 1,599 9.00
----------- ------------ ----------- ------------
Loans (1)
Commercial 1,008,542 20,816 8.30 966,579 21,648 8.98
Commercial mortgage 616,732 13,021 8.49 522,553 12,082 9.27
Residential mortgages (2) 715,202 14,834 8.32 797,220 16,194 8.14
Consumer (3) 656,201 13,423 8.22 589,039 11,860 8.08
----------- ------------ ----------- ------------
Total loans 2,996,677 62,094 8.33 2,875,391 61,784 8.62
----------- ------------ ----------- ------------
Total earning assets 5,236,886 100,873 7.73 4,680,110 93,758 8.03
------------ ------------
Other assets 313,096 296,736
----------- -----------
Total assets $5,549,982 7.29% $4,976,846 7.55%
=========== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits
Demand deposits and savings deposits $1,338,983 7,075 2.13% $1,421,308 8,694 2.45%
Time deposits of $100,000 or more 538,327 8,354 6.23 396,398 6,894 6.98
Other time deposits 1,615,376 23,893 5.95 1,478,946 21,984 5.96
----------- ------------ ----------- ------------
Total interest bearing deposits 3,492,686 39,322 4.53 3,296,652 37,572 4.57
Short-term borrowings 975,283 12,524 5.16 634,633 9,043 5.72
Long-term debt 40,141 882 8.79 54,491 1,104 8.11
----------- ------------ ----------- ------------
Total interest bearing liabilities 4,508,110 52,728 4.70 3,985,776 47,719 4.80
------------ ------------
Non-interest bearing demand deposits 448,447 427,834
Other liabilities 65,577 51,616
Stockholders' equity 527,848 511,620
----------- -----------
Total liabilities and
stockholders' equity $5,549,982 3.82% $4,976,846 2.96%
=========== ======== =========== ========
Interest rate spread 3.03% 3.23%
Effect of non-interest bearing funds 0.65 0.71
-------- --------
Net interest income/margin $48,145 3.68% $46,039 3.94%
============ ======== ============ ========
<CAPTION>
Six Months Ended June 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 $4,357 $140 6.46% $5,142 $173 6.78%
Federal funds sold and securities
purchased under agreements to resell 2,605 91 7.02 10,978 365 6.70
Other short-term investments 203 4 3.96
----------- ------------ ----------- ------------
Total short-term investments 7,165 235 6.60 16,120 538 6.73
Investment securities ----------- ------------ ----------- ------------
U.S. government obligations 69,714 2,236 6.45 224,113 6,297 5.67
U.S. government agencies 1,523,637 49,666 6.52 1,093,724 36,608 6.69
State and municipals 329,604 14,026 8.51 343,879 16,356 9.51
Other securities 74,509 2,656 7.14 84,363 2,867 6.80
----------- ------------ ----------- ------------
Total investment securities 1,997,464 68,584 6.87 1,746,079 62,128 7.12
----------- ------------ ----------- ------------
Assets held for sale 124,314 4,129 6.65 72,876 2,958 8.13
----------- ------------ ----------- ------------
Loans (1)
Commercial 996,502 41,530 8.37 946,666 41,896 8.92
Commercial mortgage 604,835 25,778 8.57 522,765 23,960 9.24
Residential mortgages (2) 715,789 29,653 8.31 809,149 32,641 8.10
Consumer (3) 657,623 26,980 8.24 589,878 23,631 8.08
----------- ------------ ----------- ------------
Total loans 2,974,749 123,941 8.37 2,868,458 122,128 8.58
----------- ------------ ----------- ------------
Total earning assets 5,103,692 196,889 7.74 4,703,533 187,752 8.02
------------ ------------
Other assets 308,305 302,640
----------- -----------
Total assets $5,411,997 7.30% $5,006,173 7.54%
=========== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits
Demand deposits and savings deposits $1,350,048 14,367 2.14% $1,451,930 17,511 2.43%
Time deposits of $100,000 or more 505,421 15,720 6.25 352,262 11,885 6.80
Other time deposits 1,596,410 47,526 5.99 1,384,992 40,060 5.83
----------- ------------ ----------- ------------
Total interest bearing deposits 3,451,879 77,613 4.52 3,189,184 69,456 4.39
Short-term borrowings 859,342 22,104 5.17 779,113 21,852 5.66
Long-term debt 40,295 1,768 8.78 73,093 2,763 7.58
----------- ------------ ----------- ------------
Total interest bearing liabilities 4,351,516 101,485 4.69 4,041,390 94,071 4.69
------------ ------------
Non-interest bearing demand deposits 451,994 420,914
Other liabilities 73,677 48,615
Stockholders' equity 534,810 495,254
----------- -----------
Total liabilities and
stockholders' equity $5,411,997 3.77% $5,006,173 3.79%
=========== ======== =========== ========
Interest rate spread 3.05% 3.33%
Effect of non-interest bearing funds 0.69 0.66
-------- --------
Net interest income/margin $95,404 3.74% $93,681 3.99%
============ ======== ============ ========
</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.
18
<PAGE>
TABLE 4 - Interest Sensitivity Analysis
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1996
------------------------------------------------------------
Interest Sensitivity Period
------------------------------------------------------------
Month Quarter Six Months Annual 5 Years
------------ --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $4,504 $4,504 $4,504 $4,504 $4,504
Investment securities 410,415 461,390 520,407 645,807 1,369,662
Assets held for sale 186,430 186,430 186,430 186,430 186,430
Loans 1,141,089 1,334,469 1,601,433 1,994,718 2,923,064
------------ ---------- ---------- ---------- ----------
Total $1,742,438 $1,986,793 $2,312,774 $2,831,459 $4,483,660
============ ========== ========== ========== ==========
Interest bearing liabilities:
Deposits $1,075,511 $1,302,141 $1,508,735 $1,861,905 $2,523,630
Short-term borrowings 1,009,885 1,009,885 1,009,885 1,009,885 1,009,885
Long-term debt 4 12 35,024 35,048 39,985
------------ ---------- ---------- ---------- ----------
Total $2,085,400 $2,312,038 $2,553,644 $2,906,838 $3,573,500
============ ========== ========== ========== ==========
Interest sensitivity gap ($342,962) ($325,245) ($240,870) ($75,379) $910,160
Interest sensitive assets to interest
sensitive liabilities ratio 0.84 0.86 0.91 0.97 1.25
Interest sensitivity gap as a
percent of total assets (6.12) (5.80) (4.30) (1.34) 16.24
Regulatory presentation:
Interest sensitivity gap ($830,154) ($812,437) ($728,062) ($562,571) $422,968
Interest sensitive assets to interest
sensitive liabilities ratio 0.68 0.71 0.76 0.83 1.10
Interest sensitivity gap as a
percent of total assets (14.81) (14.49) (12.99) (10.04) 7.55
</TABLE>
19
<PAGE>
TABLE 5 - Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $41,980 $40,936 $41,737 $40,216
Provision charged to operating expenses 1,800 1,246 3,600 3,116
Total loans charged off 2,246 1,897 4,483 4,090
Total recoveries 1,135 1,065 1,815 2,108
------------ ------------ ------------ ------------
Net charge-offs 1,111 832 2,668 1,982
------------ ------------ ------------ ------------
Balance, end of period $42,669 $41,350 $42,669 $41,350
============ ============ ============ ============
Total loans:
Average $2,996,677 $2,875,391 $2,974,749 $2,868,458
Period-end 3,020,509 2,904,652 3,020,509 2,904,652
Ratios:
Net charge-offs to average loans (annualized) 0.15% 0.12% 0.18% 0.14%
Allowance for loan losses to period-end loans 1.41 1.42 1.41 1.42
</TABLE>
TABLE 6 - Non-Performing Assets
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31, June 30,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Non-accrual loans $12,023 $7,031 $8,400
Loans past due 90 or more days as to
interest or principal 3,949 5,805 1,856
Restructured loans 3,853 5,072 5,607
------------ ------------ ------------
Total non-performing loans 19,825 17,908 15,863
Other real estate owned 3,242 2,709 1,798
------------ ------------ ------------
Total non-performing assets $23,067 $20,617 $17,661
============ ============ ============
Ratios:
Non-performing loans to total loans 0.66% 0.60% 0.55%
Non-performing assets to total loans and
other real estate owned 0.76 0.69 0.61
Allowance for loan losses to non-performing
loans 215.23 233.06 260.67
</TABLE>
20
<PAGE>
TABLE 7 - Non-Interest Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 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 $4,674 $316 7.3 % $4,358 $9,115 $366 4.2 % $8,749
Service charges on deposit accounts 3,344 544 19.4 2,800 6,302 836 15.3 5,466
Other service charges and fees 3,695 598 19.3 3,097 6,556 730 12.5 5,826
Securities gains, net 14 (1,450) (99.0) 1,464 1,086 (384) (26.1) 1,470
Other 891 294 49.2 597 1,581 1 0.1 1,580
--------- --------- --------- --------- --------- ---------
12,618 302 2.5 12,316 24,640 1,549 6.7 23,091
Broker/dealer 1,956 451 30.0 1,505 4,941 1,741 54.4 3,200
Mortgage banking 8,350 3,113 59.4 5,237 15,514 6,622 74.5 8,892
Intercompany eliminations (422) 210 (632) (1,215) 379 (1,594)
--------- --------- --------- --------- --------- ---------
Total $22,502 $4,076 22.1 % $18,426 $43,880 $10,291 30.6 % $33,589
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
TABLE 8 - Non-Interest Expense
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended June 30, Six Months Ended June 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 $16,161 $1,598 11.0 % $14,563 $32,448 $2,942 10.0 % $29,506
Net occupancy expense 2,032 (22) (1.1) 2,054 4,383 230 5.5 4,153
Furniture and equipment expense 2,943 590 25.1 2,353 5,735 926 19.3 4,809
Deposit insurance (1,957) (100.0) 1,957 1 (3,914) (100.0) 3,915
Other 10,932 (422) (3.7) 11,354 21,611 299 1.4 21,312
--------- --------- --------- --------- --------- ---------
32,068 (213) (0.7) 32,281 64,178 483 0.8 63,695
Broker/dealer 1,981 183 10.2 1,798 4,657 950 25.6 3,707
Mortgage banking 9,077 4,061 81.0 5,016 16,385 6,592 67.3 9,793
Intercompany eliminations (550) 118 (668) (1,403) (133) (1,270)
--------- --------- --------- --------- --------- ---------
Total $42,576 $4,149 10.8 % $38,427 $83,817 $7,892 10.4 % $75,925
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
21
<PAGE>
PART II - OTHER INFORMATION
---------------------------
For the Quarter Ended June 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 $192.9 million at June 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 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 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.
22
<PAGE>
PART II - OTHER INFORMATION
---------------------------
For the Quarter Ended June 30, 1996
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Dauphin was held on April 15,
1996. At the Annual Meeting, the shareholders elected as directors of Dauphin
the 19 nominees set forth in Dauphin's Proxy Statement dated as of March 8,
1996.
The number of votes cast for or withheld in the election of directors
is as follows:
<TABLE>
<CAPTION>
Election of Directors:
VOTES
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
J. Edward Beck, Jr. 23,432,349 936,606
---------- -------
John R. Buchart 23,434,613 466,039
---------- -------
Robert L. Fryer, Jr. 23,408,046 492,606
---------- -------
James O. Green 23,385,299 515,353
---------- -------
Derek C. Hathaway 23,413,976 486,676
---------- -------
Alfred G. Hemmerich 23,381,676 518,976
---------- -------
Lee H. Javitch 23,412,882 487,770
---------- -------
Christopher R. Jennings 23,398,454 502,198
---------- -------
Richard E. Jordan, II 23,428,199 472,453
---------- -------
William J. King 23,405,199 495,453
---------- -------
William T. Kirchhoff 23,434,347 466,305
---------- -------
Lawrence J. LaMaina, Jr. 23,414,790 485,862
---------- -------
Andrew Maier, II 23,432,379 486,273
---------- -------
Robert F. Nation 23,411,352 489,300
---------- -------
Elmer E. Naugle 23,390,174 510,478
---------- -------
Walter F. Raab 23,236,292 664,360
---------- -------
Jean D. Seibert 23,427,146 473,506
---------- -------
R. Champlin Sheridan, Jr. 23,406,833 493,819
---------- -------
L. Andrew Zausner 23,429,881 470,771
---------- -------
</TABLE>
23
<PAGE>
The shareholders also approved an amendment to the Dauphin Deposit
Corporation Employee Stock Purchase Plan increasing the number of shares of
common stock which may be issued under the Plan by 1,660,000 shares by the
following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
19,888,676 1,354,047 538,285 2,119,644
---------- ---------- ------- ---------
The shareholders also approved the Dauphin Deposit Corporation 1996
Non-Employee Directors' Stock Plan by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
19,288,280 2,128,171 738,534 1,745,667
------------ --------- --------- ---------
24
<PAGE>
PART II - OTHER INFORMATION
---------------------------
For the Quarter Ended June 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 June 30, 1996.
15(b) Letter of KPMG Peat Marwick LLP regarding unaudited
interim financial information of Dauphin for the
quarter ended June 30, 1996.
27 Financial Data Schedule regarding unaudited interim
financial information of Dauphin for the quarter ended
June 30, 1996.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended June 30, 1996.
25
<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: August 9, 1996 /s/Christopher R. Jennings
- ------------------------- ----------------------------------
Christopher R. Jennings
Chairman of the Board and
Chief Executive Officer
Date: August 9, 1996 /s/Dennis L. Dinger
- ------------------------- ----------------------------------
Dennis L. Dinger, Senior Executive
Vice President and Chief Fiscal
and Administrative Officer
26
<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 June 30, 1996
15(b) Letter of KPMG Peat Marwick LLP regarding unaudited interim financial
information of Dauphin for the quarter ended June 30, 1996
27 Financial Data Schedule regarding unaudited interim financial
information of Dauphin for the quarter ended June 30, 1996
<PAGE>
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
1996 1995
PRIMARY EARNINGS PER COMMON SHARE ---- ----
- ---------------------------------
<S> <C> <C>
Earnings
Net income $17,097,000 $16,077,000
=========== ===========
Shares
Weighted average common shares outstanding 30,535,960 30,819,440
Stock options and other stock incentive plans
considered to be common stock equivalents 205,052 135,957
----------- -----------
Weighted average common stock and common stock equivalents outstanding 30,741,012 30,955,397
=========== ===========
Primary earnings per common share $0.56 $0.52
=========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE
- ---------------------------------------
Earnings
Net income $17,097,000 $16,077,000
After tax interest expense applicable to convertible debentures 69,103 74,942
----------- -----------
$17,166,103 $16,151,942
=========== ===========
Shares
Weighted average common shares outstanding 30,535,960 30,819,440
Assumed conversion of 9.00% convertible debentures issued June 30, 1989 296,029 320,411
Stock options and other stock incentive plans
considered to be common stock equivalents 210,498 135,957
----------- -----------
Weighted average common stock and common stock equivalents outstanding 31,042,487 31,275,808
=========== ===========
Fully diluted earnings per common share $0.55 $0.51
=========== ===========
<CAPTION>
Six Months Ended June 30,
---------------------------------
1996 1995
PRIMARY EARNINGS PER COMMON SHARE ---- ----
- ---------------------------------
<S> <C> <C>
Earnings
Net income $33,706,000 $31,296,000
=========== ===========
Shares
Weighted average common shares outstanding 30,560,999 30,868,401
Stock options and other stock incentive plans
considered to be common stock equivalents 208,269 138,822
----------- -----------
Weighted average common stock and common stock equivalents outstanding 30,769,268 31,007,223
=========== ===========
Primary earnings per common share $1.10 $1.01
=========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE
- ---------------------------------------
Earnings
Net income $33,706,000 $31,296,000
After tax interest expense applicable to convertible debentures 138,791 150,378
----------- -----------
$33,844,791 $31,446,378
=========== ===========
Shares
Weighted average common shares outstanding 30,560,999 30,868,401
Assumed conversion of 9.00% convertible debentures issued June 30, 1989 299,273 321,251
Stock options and other stock incentive plans
considered to be common stock equivalents 212,198 186,839
----------- -----------
Weighted average common stock and common stock equivalents outstanding 31,072,470 31,376,491
=========== ===========
Fully diluted earnings per common share $1.09 $1.00
=========== ===========
</TABLE>
Exhibit 11
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP 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 June 30, 1996 and 1995, and the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1996 and 1995, and the consolidated statements of cash flows for the six-month
periods ended June 30, 1996 and 1995. 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 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
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
July 15, 1996, except as to note 6,
which is as of August 9, 1996.
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, related to our reviews of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such reports are 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 LLP
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
August 13, 1996
Exhibit 15(b)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 203,485
<INT-BEARING-DEPOSITS> 1,319
<FED-FUNDS-SOLD> 685
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,041,488
<INVESTMENTS-CARRYING> 2,058,442
<INVESTMENTS-MARKET> 2,041,488
<LOANS> 3,020,509
<ALLOWANCE> 42,669
<TOTAL-ASSETS> 5,605,354
<DEPOSITS> 3,952,103
<SHORT-TERM> 1,009,885
<LIABILITIES-OTHER> 67,667
<LONG-TERM> 40,125
0
0
<COMMON> 163,208
<OTHER-SE> 372,366
<TOTAL-LIABILITIES-AND-EQUITY> 5,605,354
<INTEREST-LOAN> 122,733
<INTEREST-INVEST> 63,832
<INTEREST-OTHER> 4,333
<INTEREST-TOTAL> 190,898
<INTEREST-DEPOSIT> 77,613
<INTEREST-EXPENSE> 101,485
<INTEREST-INCOME-NET> 89,413
<LOAN-LOSSES> 3,600
<SECURITIES-GAINS> 1,086
<EXPENSE-OTHER> 83,817
<INCOME-PRETAX> 45,876
<INCOME-PRE-EXTRAORDINARY> 33,706
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,706
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 7.74
<LOANS-NON> 12,023
<LOANS-PAST> 3,949
<LOANS-TROUBLED> 3,853
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 41,737
<CHARGE-OFFS> 4,483
<RECOVERIES> 1,815
<ALLOWANCE-CLOSE> 42,669
<ALLOWANCE-DOMESTIC> 42,669
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
