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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X]For the fiscal year ended December 31, 1996 Commission file number 0-8415
OR
[_] For the transition period from to
DAUPHIN DEPOSIT CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
23-1938831
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(I.R.S. Employer Identification No.)
213 Market Street Harrisburg, 17101
Pennsylvania -------------------------------------
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(Address of principal executive
offices)
Registrant's telephone number, including area code: (717) 255-2121
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $5.00 par value
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(Title of class)
Common Stock Repurchase Rights
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing sale price on January 31, 1997 was
approximately $1,161,951,120.
The number of shares of Common Stock outstanding as of January 31, 1997 was
30,721,059.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the 1997 Annual Meeting of Shareholders,
portions of which are incorporated by reference in Part III of this Report.
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DAUPHIN DEPOSIT CORPORATION
TABLE OF CONTENTS
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PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 10
Item 3. Legal Proceedings...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.... 11
Item 4A. Executive Officers of the Registrant................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................... 12
Item 6. Selected Financial Data................................ 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 14
Item 8. Financial Statements and Supplementary Data............ 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 69
PART III
Item 10. Directors and Executive Officers of the Registrant..... 70
Item 11. Executive Compensation................................. 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 70
Item 13. Certain Relationships and Related Transactions......... 70
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................. 71
SIGNATURES
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DAUPHIN DEPOSIT CORPORATION
PART I
ITEM 1. BUSINESS
Dauphin Deposit Corporation (Dauphin or Registrant) is a diversified
financial services company, incorporated under the laws of the Commonwealth of
Pennsylvania in 1974. Dauphin's wholly-owned bank subsidiary is Dauphin Deposit
Bank and Trust Company (Dauphin Bank), which includes the Bank of Pennsylvania,
Valleybank and Farmers Bank Divisions, through which Dauphin provides banking
services. Dauphin Bank is engaged in the commercial and retail banking and
trust business including the taking of time and regular savings and demand
deposits, the making of commercial and consumer loans and mortgage loans, the
providing of credit cards, safe deposit services and the performance of
personal, corporate and pension trust services. Auxiliary services such as cash
management are provided to commercial customers. Dauphin Bank is a Pennsylvania
chartered bank and trust company and a member of the Federal Reserve System.
Dauphin Bank's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) to the extent provided by law.
Commercial lending services provided by Dauphin Bank include short and medium
term loans, revolving credit loans, lines of credit, asset-based lending, real
estate construction loans, agricultural loans, and equipment leasing financial
arrangements. Consumer lending services include various types of secured and
unsecured loans, including installment loans, home equity loans and automobile
leasing. Dauphin Bank had no foreign loans in its portfolio at December 31,
1996. Residential mortgage loans are offered by Eastern Mortgage Services, Inc.
(Eastern Mortgage), a Pennsylvania mortgage banking company acquired as a
wholly-owned subsidiary of Dauphin Bank in July 1994. Eastern Mortgage offers
the following types of residential mortgage loans: conventional first and
second mortgage loans; FHA/VA loans; State housing bond loans; residential
construction/permanent financing; special programs for low and moderate income
borrowers. All conforming conventional residential mortgage loans originated
for sale in the secondary mortgage market under a FNMA or FHLMC product are
generally underwritten to the standards as specified in the Fannie Mae Selling
Guide. All non-conforming loans are underwritten to private investor standards.
FHA and VA loans are processed and underwritten in accordance with the relevant
handbooks and supplementary circular letters issued respectively by the
Department of Housing and Urban Development and by the Veterans Administration.
Dauphin is registered with and is subject to regulatory supervision by the
Board of Governors of the Federal Reserve System (Federal Reserve Board) under
the Bank Holding Company Act of 1956, as amended. Dauphin is restricted to
activities which are found by the Federal Reserve Board to be bank-related and
which are expected to produce benefits for the public that will outweigh any
potentially adverse effects.
DAUPHIN DEPOSIT BANK AND TRUST COMPANY
Dauphin Bank maintains 96 offices with 92 automated teller machines located
in Adams, Berks, Chester, Cumberland, Dauphin, Franklin, Lancaster, Lebanon,
Lehigh, Montgomery, Northampton and York Counties, Pennsylvania. In addition to
its main office in Harrisburg, Dauphin County, Dauphin Bank owns an office
building in Harrisburg which is used as an administrative center. Dauphin Bank
maintains multiple offices in nine south central Pennsylvania counties. Single
offices are located in each of Chester, Montgomery and Northampton County, in
near proximity to the boundary lines with Berks and Lehigh Counties. The
amounts of deposits attributable to zip code areas within Chester, Montgomery
and Northampton Counties are insignificant in terms of the amounts of deposits
attributable to zip code areas in the other nine counties. Accordingly, the
Adams, Berks, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Lehigh and
York nine county region constitutes the principal geographic area for Dauphin
Bank.
At December 31, 1996, Dauphin Bank had total deposits of $4,028,765,000,
total loans of $3,200,034,000 and total assets of $5,791,484,000.
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DAUPHIN DEPOSIT CORPORATION
OTHER FINANCIAL SERVICES SUBSIDIARIES
Eastern Mortgage Services, Inc. (Eastern Mortgage) is a Pennsylvania mortgage
banking corporation which was acquired by Dauphin Bank on July 1, 1994. Eastern
Mortgage is a full service mortgage banking company which originates, services,
securitizes and sells first and second residential mortgage loans of varying
types primarily to the eastern Pennsylvania and New Jersey mortgage markets.
Dauphin Life Insurance Company (Dauphin Life) is an Arizona corporation which
was formed in 1979 as a wholly-owned subsidiary of Dauphin. Dauphin Life
reinsures credit life, health and accident insurance directly related to
extensions of credit by Dauphin Bank and is presently limited to those
activities by regulations of the Federal Reserve Board.
Dauphin Investment Company (Dauphin Investment) is a Delaware corporation
which was formed in 1982 as a wholly-owned subsidiary of Dauphin. Dauphin
Investment manages equity investments for Dauphin.
Hopper Soliday & Co., Inc. (Hopper Soliday) is a wholly-owned subsidiary of
Dauphin acquired effective July 1, 1991. Hopper Soliday is a Delaware
corporation which engages in municipal finance, institutional sales, financial
advisory and other general securities businesses permitted for bank holding
companies and their non-bank subsidiaries.
COMPETITION
The banking industry in Dauphin Bank's service area continues to be extremely
competitive, both among commercial banks and with other financial service
providers such as consumer finance companies, thrifts, investment firms, mutual
funds and credit unions. The increased competition has resulted from a changing
legal and regulatory climate, as well as from the economic climate. Mortgage
banking firms, real estate investment trusts, insurance companies, leasing
companies, financial affiliates of industrial companies, brokerage and
factoring companies and government agencies also provide additional competition
for loans and for many other financial services. Some of the financial services
providers operating in Dauphin's market area operate on a regional and, in some
cases, national scale, and possess resources greater than those of Dauphin.
SUPERVISION AND REGULATION
General.
Dauphin is subject to regulation by the Pennsylvania Department of Banking,
the Federal Reserve Board and the Securities and Exchange Commission. The
deposits of Dauphin Bank are insured by the FDIC and Dauphin Bank is a member
of the Bank Insurance Fund which is administered by the FDIC. In addition,
Dauphin Bank is a Pennsylvania bank and trust company and member of the Federal
Reserve System subject to regulation and supervision by the Pennsylvania
Department of Banking and the Federal Reserve Board. The operations of Dauphin
Bank are subject to requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits, restrictions on
the types and amounts of loans that may be made and limits upon the types of
services which may be offered. Various consumer laws and regulations also
affect the operations of Dauphin Bank and Eastern Mortgage, its wholly-owned
mortgage banking company subsidiary. Regulatory approvals also are required for
branching and for bank mergers.
Dauphin is required to file with the Federal Reserve Board an annual report
and such additional information as the Federal Reserve Board may require
pursuant to the Bank Holding Company Act of 1956, as amended (BHC Act). The
Federal Reserve Board may also make examinations of Dauphin and each of its
non-bank subsidiaries. The BHC Act requires each bank holding company to obtain
the approval of the Federal Reserve Board before it may acquire substantially
all the assets of any bank, or before it may acquire ownership or
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DAUPHIN DEPOSIT CORPORATION
control of any voting shares of any bank if, after such acquisition, it would
own or control, directly or indirectly, more than five percent of the voting
shares of such bank.
Dauphin may only engage in or own companies that engage in activities deemed
by the Federal Reserve Board to be so closely related to the business of
banking or managing or controlling banks as to be a proper incident thereto,
and Dauphin must gain permission from the Federal Reserve Board prior to
engaging in most new business activities.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the BHC Act on any extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock or
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Such transfers by Dauphin Bank to Dauphin or any
nonbanking subsidiary are limited in amount to 10% of Dauphin Bank's capital
and surplus and, with respect to Dauphin and all nonbanking subsidiaries, to an
aggregate of 20% of Dauphin Bank's capital and surplus. Such loans and
extensions of credit also are required to be secured in specified amounts, and
all such transactions are required to be on an arm's length basis. A bank
holding company and its subsidiaries are also prevented from engaging in
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services.
Dividends.
Dividend payments by Dauphin Bank to Dauphin are subject to the Pennsylvania
Banking Code of 1965 (Banking Code) and the Federal Deposit Insurance Act
(FDIA). Under the Banking Code, dividends may be paid from "accumulated net
earnings" (generally, undivided profits) without prior regulatory approval.
Under the FDIA, no dividends may be paid by an insured bank if the bank is in
arrears in the payment of any insurance assessment due to the FDIC. State and
federal regulatory authorities have adopted standards for the maintenance of
adequate levels of capital by banks. Adherence to such standards further limits
the ability of banks to pay dividends.
Under these policies and subject to the restrictions applicable to Dauphin
Bank, Dauphin Bank could declare in 1997 without prior regulatory approval,
aggregate dividends of $2.0 million, plus net profits for the remainder of
1997.
The payment of dividends by Dauphin Bank may also be affected by other
regulatory requirements and policies, such as the maintenance of adequate
capital. If, in the opinion of the applicable regulatory authority a bank under
its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound
practice (which, depending on the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice and
hearing, that such bank cease and desist from such practice. The Federal
Reserve Board and the FDIC have formal and informal policies which provide that
insured banks and bank holding companies should generally pay dividends only
out of current operating earnings, with some exceptions.
Capital Adequacy.
The Federal Reserve Board adopted risk-based capital guidelines for bank
holding companies, such as Dauphin. Currently, the required minimum ratio of
total capital to risk-weighted assets (including off-balance sheet activities,
such as standby letters of credit) is 8%. At least half of the total capital is
required to be Tier 1 capital, consisting principally of common shareholders'
equity, noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill. The remainder (Tier 2 capital) may
consist of a limited amount of subordinated debt and intermediate-term
preferred stock, certain hybrid capital instruments and other debt securities,
perpetual preferred stock and a limited amount of the general loan loss
allowance.
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DAUPHIN DEPOSIT CORPORATION
In addition to the risk-based capital guidelines, the Federal Reserve Board
established minimum leverage ratio (Tier 1 capital to total assets) guidelines
for bank holding companies. These guidelines provide for a minimum leverage
ratio of 3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant
growth or expansion. All other bank holding companies are required to maintain
a leverage ratio of at least 1% to 2% above the 3% stated minimum. Dauphin Bank
is subject to the same capital requirements since its primary federal regulator
is the Federal Reserve Board. Dauphin and Dauphin Bank exceed all applicable
capital requirements.
FDICIA.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required the federal banking agencies to promulgate regulations specifying the
levels at which an insured institution would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under these regulations, a bank is
considered "well capitalized" if it has (i) a total risk-based capital ratio of
10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii)
a leverage ratio of 5% or greater and (iv) is not subject to any order or
written directive to meet and maintain a specific capital level. An "adequately
capitalized" bank is defined under the regulations as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with the highest composite regulatory examination
rating) and (iv) does not meet the definition of a well capitalized bank. A
bank will be considered (A) "undercapitalized" if it has (i) a total risk-based
capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less
than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank
with the highest regulatory examination rating of 1); (B) "significantly
undercapitalized" if the bank has (i) a total risk-based capital ratio of less
than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a
leverage ratio of less than 3%; and (C) "critically undercapitalized" if the
bank has a ratio of tangible equity to total assets of equal to or less than
2%. Notwithstanding the foregoing, the applicable federal bank regulator for a
depository institution could, under certain circumstances, reclassify a "well
capitalized" institution as "adequately capitalized" or require an "adequately
capitalized" or "undercapitalized" institution to comply with supervisory
actions as if it were in the next lower category. Such a reclassification could
be made if the regulatory agency determines that the institution is in an
unsafe or unsound condition (which could include unsatisfactory examination
ratings).
Undercapitalized institutions, including significantly and critically
undercapitalized institutions, are required to submit capital restoration plans
to the appropriate federal banking regulator and are subject to restrictions on
operations, including prohibitions on branching, engaging in new activities,
paying management fees, making capital distributions such as dividends, and
growing without regulatory approval. On December 31, 1996, Dauphin and Dauphin
Bank exceeded the minimum capital levels of the "well capitalized" category.
Other Provisions of FDICIA.
Each depository institution must submit audited financial statements to its
primary regulator and the FDIC, which reports are made publicly available. In
addition, the audit committee of each depository institution must consist of
outside directors and the audit committee at "large institutions" (as defined
by FDIC regulation) must include members with banking or financial management
expertise. The audit committee at "large institutions" must also have access to
independent outside counsel. In addition, an institution must notify the FDIC
and the institution's primary regulator of any change in the institution's
independent auditor, and annual management letters must be provided to the FDIC
and the depository institution's primary regulator. The regulations define a
"large institution" as one with over $3 billion in assets, which would include
Dauphin Bank. Also, under the rule, an institution's independent auditor must
examine the institution's internal controls over financial reporting and
perform agreed-upon procedures to test compliance with laws and regulations
concerning safety and soundness.
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DAUPHIN DEPOSIT CORPORATION
Under FDICIA, each federal banking agency must prescribe certain safety and
soundness standards for depository institutions and their holding companies.
Three types of standards must be prescribed: Asset quality and earnings,
operational and managerial, and compensation. Such standards would include a
ratio of classified assets to capital, minimum earnings, and, to the extent
feasible, a minimum ratio of market value to book value for publicly traded
securities of such institutions and holding companies. Operational and
managerial standards must relate to: (i) internal controls, information systems
and internal audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) interest rate exposure, (v) asset growth, and (vi) compensation, fees and
benefits. In November, 1993, the federal banking agencies released proposed
rules setting forth some of the required safety and soundness standards. Under
such proposed rules, if the primary federal regulator determines that any
standard has not been met, the regulator can require the institution to submit
a compliance plan that describes the steps the institution will take to
eradicate the deficiency. Failure to adopt or implement a compliance plan could
lead to further sanctions by the responsible regulator. Pursuant to the Riegle
Community Development and Regulatory Improvement Act of 1994, federal banking
agencies have been given the discretion to adopt safety and soundness
guidelines rather than regulations.
Provisions of FDICIA relax certain requirements for mergers and acquisitions
among financial institutions, including authorization of mergers of insured
institutions that are not members of the same insurance fund, and provide
specific authorization for a federally chartered savings association or
national bank to be acquired by an insured depository institution.
FDICIA also includes a provision that generally restricts federally insured
state banks, such as Dauphin Bank, to activities permitted to national banks.
Under final FDIC rules, state chartered banks must obtain the FDIC's prior
consent before engaging as a principal in any activity not permissible for a
national bank, unless one of the exceptions contained in the rule applies.
Among the exceptions are activities that the Federal Reserve Board, by
regulation (Regulation Y) or order, has found to be closely related to banking
for purposes of the BHC Act. Compliance with the rule is not expected to have a
material adverse effect on Dauphin Bank's operations.
Under FDICIA, all depository institutions must provide 90 days notice to
their primary federal regulator of branch closings, and penalties are imposed
for false reports by financial institutions. Depository institutions with
assets in excess of $250 million must be examined on-site annually by their
primary federal or state regulator or the FDIC.
FDIC Insurance Assessments.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) created two deposit insurance funds to be administered by the FDIC:
the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund
(BIF). Dauphin Bank's deposits are insured under BIF. The FDIC has implemented
a risk-related premium schedule for all insured depository institutions that
results in the assessment of premiums based on capital and supervisory
measures.
Under the risk-related premium schedule, the FDIC assigns, on a semiannual
basis, each institution to one of three capital groups (well capitalized,
adequately capitalized or undercapitalized) and further assigns such
institution to one of three subgroups within a capital group. The institution's
subgroup assignment is based upon the FDIC's judgment of the institution's
strength in light of supervisory evaluations, including examination reports,
statistical analyses and other information relevant to gauging the risk posed
by the institution. Only institutions with a total capital to risk-adjusted
assets ratio of 10% or greater, a Tier 1 capital to risk-adjusted assets ratio
of 6% or greater and a Tier 1 leverage ratio of 5% or greater, are assigned to
the well capitalized group. Dauphin Bank is assigned to the well capitalized
group.
In the second quarter of 1995, the BIF reached its statutory reserve ratio
requirement. Consequently, the FDIC has significantly reduced the assessment
rates applicable to BIF members and refunded to BIF members
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DAUPHIN DEPOSIT CORPORATION
that portion of the assessment for the second and third quarters of 1995 which
represented an overpayment once the BIF had achieved full funding in accordance
with the statutory reserve ratio requirement. Dauphin Bank received a refund
from the FDIC in September 1995 in the amount of $2,215,000, which amount also
includes interest on the refund from June 1 to September 14, 1995. In the case
of Dauphin Bank, for the second half of 1995, it was assessed at the rate of
$.04 for every $100 of deposits. During 1996, Dauphin Bank was assessed a flat
charge of $500 per quarter by the FDIC in lieu of any deposit based assessment.
At the same time, because the SAIF had not reached full funding under its
statutory reserve ratio requirement, the FDIC has continued the SAIF assessment
rate for thrift institutions in even the lowest risk-based category at the rate
of $.23 for every $100 of deposits.
SAIF Recapitalization Plan.
On September 30, 1996, Congress enacted a SAIF Recapitalization Plan and a
plan for banks insured by the fully capitalized BIF to share the burden of
repaying outstanding Finance Corporation (FICO) bonds issued to fund SAIF's
predecessor (FSLIC) in the late 1980s. The legislation enacted by Congress
containing the Recapitalization Plan is entitled the Deposit Insurance Funds
Act of 1996.
Under the Recapitalization Plan, SAIF insured institutions were required to
pay a one time special assessment in the fourth quarter of 1996 equivalent to
65.7 cents for every $100 of insured deposits as of March 31, 1995. The one
time special assessment on SAIF insured deposits has recapitalized the SAIF and
resulted in a major decrease in annual insurance premiums paid by SAIF insured
institutions. At the end of 1996, SAIF insured institutions generally paid 23
cents for each $100 of deposit insurance coverage while BIF insured banks
insured by the fully capitalized BIF paid virtually zero assessments. Deposit
assessment for both BIF and SAIF for the first semiannual period of 1997 have
been set at zero to 23 cents, respectively, for each $100 of deposits.
As part of the legislation, a new formula was adopted whereby BIF insured
institutions, such as Dauphin Bank, will be required to share in the burden of
repayment of the FICO bonds issued to finance the FSLIC in the 1980s.
Commencing in calendar year 1997, the only FDIC assessment for most well
capitalized, well-managed BIF insured and SAIF insured institutions will be
FICO bond payments. For years 1997 through 1999, SAIF insured deposits are
expected to be assessed at a rate of approximately 6.5 cents per $100 in
deposits toward the FICO bond payments while BIF insured deposits, such as
Dauphin Bank, are expected to be paid at approximately 1.3 cents per $100 in
deposits. From the year 2000 to 2017, both SAIF insured deposits and BIF
insured deposits are expected to be assessed at approximately 2.43 cents per
$100 in deposits toward retirement of the FICO obligations.
The legislation also contains certain restrictions on the ability of SAIF
insured institutions to transfer deposits to BIF insured affiliates over the
next three years and a requirement that Congress must eliminate the thrift
charter before merging SAIF into BIF. Finally, the legislation also contained a
prohibition against the FDIC assessing any deposit insurance premiums against
well-managed, well capitalized banks when BIF reserves are at or above the
statutory reserve requirement of 1.25% of total insured deposits.
Interstate Banking.
Prior to the passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (Riegle- Neal Act) in September 1994, interstate banking
was restricted under the terms of the Douglas Amendment to the BHC Act which
prohibited the Federal Reserve Board from approving an application by a bank
holding company located in one state to acquire a bank or all of its assets
located in another state unless the acquisition was specifically authorized by
a reciprocal interstate banking statute, such as the statute adopted in
Pennsylvania in 1990, specifically permitting interstate acquisitions.
Similarly, interstate branching was prohibited for national banks and state-
chartered member banks by the McFadden Act, although some states, not including
Pennsylvania, had passed laws permitting limited interstate branching by non-
Federal Reserve
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DAUPHIN DEPOSIT CORPORATION
member state banks. The Riegle-Neal Act permits an adequately capitalized,
adequately managed bank holding company to acquire a bank in another state as
of September 29, 1994, whether or not the state permits the acquisition,
subject to certain deposit concentration caps and the Federal Reserve Board's
approval. A state may not impose discriminatory requirements on acquisitions by
out-of-state holding companies. In addition, beginning on June 1, 1997, under
the Riegle-Neal Act, a bank can expand interstate by merging with a bank in
another state and also may consolidate the acquired bank into new branch
offices of the acquiring bank, unless the other state affirmatively opts out of
the legislation before that date. A state may also opt into the legislation
earlier than June 1, 1997 if it wishes to do so. The Riegle-Neal Act also
permits de novo interstate branching as of June 1, 1997 but only if a state
affirmatively opts in by appropriate legislation. Once a state opts in to
interstate branching, it may not opt out at a later date. The Riegle-Neal Act
also allows foreign banks to branch by merger or de novo branch to the same
extent as banks from the foreign bank's home state. The Riegle-Neal Act also
subjects foreign banks to some additional requirements, including extending
obligations under the Community Reinvestment Act to certain foreign bank
acquisitions and regulating the types of activities off-shore branches of
foreign banks may conduct. The Pennsylvania Legislature amended the
Pennsylvania Banking Code of 1965 in July 1995, to opt in to all of the
provisions of the Riegle-Neal Act, including interstate bank mergers and de
novo interstate branching.
Regulatory Developments.
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In 1996 the Federal Reserve Board revised a number of its policies limiting
the activities of so-called section 20 subsidiaries, such as Hopper Soliday, to
allow them to operate more efficiently and to serve their customers more
effectively. The most significant of these developments is the increase,
effective March 6, 1997, from 10 percent to 25 percent in the amount of total
revenues that a section 20 subsidiary may derive from underwriting and dealing
in securities that a member bank may not underwrite or deal in ("bank
ineligible securities"). Other changes, effective January 7, 1997, include the
elimination of the prohibition on a bank or thrift acting as agent for, or
engaging in marketing activities on behalf of an affiliated section 20
subsidiary and a modification of the restriction on officer director and
employee interlocks between a bank or thrift and an affiliated section 20
subsidiary to permit employee interlocks and certain interlocks at officer and
director levels. In addition, on January 17, 1997, the Federal Reserve Board
requested comment on a proposal to comprehensively revise its remaining
policies limiting the activities of section 20 subsidiaries. The most
significant of the proposed modifications would allow a bank or thrift to
credit enhance bank ineligible securities underwritten or privately placed by
an affiliated section 20 subsidiary.
In 1996, automatic teller machine (ATM) networks began allowing bank members
to levy surcharge fees on ATM transactions by non-customers. Legislative
proposals were introduced in Congress and discussed by members of the
Pennsylvania legislature that would have required disclosure of the surcharge
fee at the terminal or would have prohibited assessment of the fees. These
legislative proposals were not adopted. Consumer interest groups, however,
continue to oppose surcharge fees and it is possible that Congress and the
Pennsylvania legislature again could consider such legislation in 1997. Dauphin
Bank did not levy surcharge fees in 1996. Enactment of such legislation,
however, could adversely affect Dauphin Bank's ability to levy surcharge fees
in the future.
It is anticipated that Congress will consider again in 1997 financial
modernization legislation that, if enacted, would have a significant impact on
the financial services industry. House Banking Committee Chairman Leach
introduced the Financial Services Competitiveness Act of 1997 on January 7,
1997, which would allow bank affiliations with insurance companies and
securities firms. Senate Banking Committee Chairman D'Amato has introduced
competing legislation that would allow bank affiliations with industrial
companies, in addition to insurance company and securities firm affiliations.
Similar legislation already has been introduced in the House by Banking
Subcommittee on Financial Institutions Chairwoman Roukema.
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DAUPHIN DEPOSIT CORPORATION
EMPLOYEES
At December 31, 1996, Dauphin and its subsidiaries employed approximately
2,864 persons on a full-time equivalent basis.
ITEM 2. PROPERTIES
Dauphin's principal office is located in Dauphin Bank's main banking offices
at 213 Market Street, Harrisburg, Pennsylvania. Dauphin owns 18 of the branch
banking offices which are leased to Dauphin Bank.
Dauphin Bank owns 58 of its branch banking offices and leases 24 other
offices including two leases which are treated as capitalized leases for
financial reporting purposes. Hopper Soliday & Co., Inc. leases three of its
sales offices. Eastern Mortgage leases 24 of its sales offices. Leases expire
intermittently through 2010 and most contain options to renew.
Aggregate annual rentals for real estate and equipment paid during Dauphin's
last fiscal year did not exceed five percent of its operating expenses.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions and proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
will not be material to Dauphin's financial condition or results of operations.
Included among outstanding litigation is a class action law suit instituted by
Dauphin Bank 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 interest rate deposit
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 $198.0 million at December 31, 1996.
Dauphin's right to terminate the variable interest rate deposit 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 the 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. The Appeal seeks 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. 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. The Superior Court heard the oral
arguments of counsel on the Appeal on March 5, 1997. Neither management nor
counsel can predict with any reasonable
10
<PAGE>
DAUPHIN DEPOSIT CORPORATION
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 interest rate deposit 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 interest rate deposit product.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of Dauphin as
of February 18, 1997 are listed below along with their business experience
during the past five years. Executive officers are appointed by the Board of
Directors. There are no family relationships among these executive officers,
nor any arrangement or understanding between any executive officer and any
other person pursuant to which the executive officer was selected.
<TABLE>
<CAPTION>
POSITION AND
BUSINESS EXPERIENCE
NAME AGE DURING PAST 5 YEARS
---- --- -------------------
<S> <C> <C>
Christopher R.
Jennings............... 53 Chairman of the Board, Chief Executive Officer and
Chairman of the Executive Committee (1995 to date)
of Dauphin, President (1987 to 1995), Chief
Operating Officer (1992 to 1995) of Dauphin.
Robert L. Fryer, Jr..... 48 President and Chief Operating Officer (1995 to
date) of Dauphin, Chairman of the Board, President
and Chief Executive Officer (1991 to date) of
Hopper Soliday & Co., Inc.
William T. Burke........ 50 Vice Chairman, Financial Services Group (1996 to
date) of Dauphin. President and Chief Operating
Officer (1992 to 1996) of Meridian Capital
Markets.
Lawrence J. LaMaina, 62
Jr..................... Vice Chairman (1992 to date) of Dauphin.
Henry K. Long, Jr....... 60 Vice Chairman, Corporate Banking Group (1996 to
date) of Dauphin. Executive Vice President and
Senior Credit Officer (1992 to 1995) of CoreStates
Hamilton Bank.
Paul B. Shannon......... 49 Vice Chairman (1994 to date), Senior Executive
Vice President (1990 to 1994), Chief Credit
Officer (1990 to date) of Dauphin.
Dennis L. Dinger........ 46 Senior Executive Vice President, Chief Fiscal and
Administrative Officer (1994 to date), Executive
Vice President and Chief Financial Officer (1989
to 1994) of Dauphin.
David L. Brewin......... 56 Executive Vice President and Chief Human Resources
Officer of Dauphin.
Richard B. Brokenshire.. 55 Executive Vice President and Chief Operations
Support Officer of Dauphin.
John G. Coulson......... 45 Executive Vice President and Chief Information
Systems Officer (1996 to date) of Dauphin. Senior
Vice President, Information Systems (1992 to 1995)
of Dauphin Bank.
Kenneth H. Sallade...... 45 Executive Vice President and Chief Investment
Officer (1994 to date) of Dauphin, Senior Vice
President (1988 to 1994) of Dauphin Bank.
</TABLE>
11
<PAGE>
DAUPHIN DEPOSIT CORPORATION
<TABLE>
<CAPTION>
POSITION AND
BUSINESS EXPERIENCE
NAME AGE DURING PAST 5 YEARS
---- --- -------------------
<S> <C> <C>
George W. King.......... 55 Executive Vice President, General Counsel and
Secretary (1995 to date) of Dauphin. Senior Vice
President and Counsel (1993 to 1995) to CoreStates
Hamilton Bank, Division of CoreStates Bank, N.A.,
Senior Vice President, Corporate Counsel and
Secretary (1991 to 1993) of CoreStates Hamilton
Bank.
Stewart P. McEntee...... 50 Executive Vice President and Chief Marketing
Officer (1995 to date) of Dauphin. Senior Vice
President, Marketing Division (1993 to 1994) of
The Bank of Baltimore, Senior Vice President of
Marketing Services (1992 to 1993) of Signet
Banking Corporation.
Robert J. Unruh......... 50 Executive Vice President, Municipal Services Group
(1996 to date) of Dauphin. Chairman and Chief
Executive Officer (1992 to 1995) of Meridian
Securities.
Joseph T. Lysczek, Jr... 48 Senior Vice President and Treasurer (1992 to date)
of Dauphin.
Michael B. Johnson...... 50 Senior Vice President and Chief Planning and
Implementation Officer (1994 to date) of Dauphin.
Senior Vice President and Chief Planning Officer
(1992 to 1994) of First American Bankshares.
James J. Trupp, Jr. .... 50 Senior Vice President and General Auditor (1992 to
date) of Dauphin.
Linda R. Schroeder...... 40 Senior Vice President and Acting Chief Financial
Officer (March 1997 to date) of Dauphin. Vice
President and Chief Financial Officer (1996 to
date), Corporate Controller (1995 to date), Vice
President--Financial Reporting (1992 to 1995) of
Dauphin Bank.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF DAUPHIN DEPOSIT CORPORATION STOCK AND DIVIDENDS PAID
The price information provided below reflects actual sales prices of high,
low and closing trades as quoted on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
CASH
LAST DIVIDENDS
TRADE DAY DECLARED
HIGH LOW CLOSING PER SHARE
------- ------- --------- ---------
<S> <C> <C> <C> <C>
1995
First Quarter............................... $25 1/2 $23 $23 1/4 $.25
Second Quarter.............................. 25 1/2 23 24 1/4 .25
Third Quarter............................... 28 1/2 24 1/4 26 11/16 .25
Fourth Quarter.............................. 31 3/4 26 1/4 28 3/4 .26 1/2
1996
First Quarter............................... $30 1/2 $26 3/4 $30 $.26 1/2
Second Quarter.............................. 30 1/2 27 28 1/2 .28 1/2
Third Quarter............................... 33 1/8 26 7/8 31 .28 1/2
Fourth Quarter.............................. 33 3/4 30 1/2 33 .30
</TABLE>
The approximate number of holders of common stock is 11,342 as of December
31, 1996.
12
<PAGE>
DAUPHIN DEPOSIT CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Interest income......... $ 398,604 $ 363,644 $ 331,107 $ 325,045 $ 346,981
Interest expense........ 216,120 187,931 152,641 148,772 180,222
Net interest income..... 182,484 175,713 178,466 176,273 166,759
Provision for loan loss-
es..................... 6,000 5,608 7,494 10,141 11,627
Non-interest income..... 93,903 71,789 60,947 60,051 55,683
Non-interest expense.... 174,438 153,119 139,118 136,281 131,308
Provision for income
taxes.................. 25,177 23,210 22,762 21,985 18,476
Net income.............. 70,772 65,565 70,039 67,917 61,031
Per share:
Net income............ 2.30 2.12 2.18 2.08 1.89
Cash dividends de-
clared............... 1.13 1/2 1.01 1/2 .94 .83 .77
Weighted average number
of shares outstanding.. 30,820,019 30,966,258 32,169,734 32,636,150 32,240,583
AT YEAR-END
Total assets............ $5,947,686 $5,297,349 $5,070,352 $4,916,855 $4,905,702
Earning assets.......... 5,595,418 4,941,562 4,706,198 4,653,015 4,568,334
Short-term investments.. 17,379 11,573 15,040 16,523 91,950
Investment securities
available-for-sale..... 2,170,207 1,860,869 1,783,803 2,041,204 2,056,109
Assets held for sale.... 207,798 87,782 46,222 9,203 8,503
Loans................... 3,200,034 2,981,338 2,861,133 2,586,085 2,411,772
Deposits................ 4,028,570 3,949,536 3,514,884 3,586,135 3,692,209
Short-term borrowings... 1,111,630 678,161 940,777 680,386 608,326
Long-term debt.......... 154,771 40,599 91,954 92,454 92,863
Stockholders' equity.... 570,445 546,603 466,649 506,075 462,111
Book value per share.... 18.60 17.85 15.08 15.57 14.28
Number of shares out-
standing............... 30,666,729 30,627,843 30,945,167 32,507,414 32,356,559
RATIOS
Return on average as-
sets................... 1.26% 1.31% 1.42% 1.40% 1.31%
Return on average stock-
holders' equity........ 13.10 12.81 13.81 14.06 13.93
Dividend payout......... 49.35 47.88 43.12 39.90 40.74
Average equity to aver-
age assets............. 9.62 10.23 10.27 9.99 9.37
</TABLE>
13
<PAGE>
DAUPHIN DEPOSIT CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section presents management's discussion and analysis of the financial
condition and results of operations of Dauphin Deposit Corporation and
subsidiaries (Dauphin), including Dauphin Deposit Bank and Trust Company, which
includes the Bank of Pennsylvania, 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.
RESULTS OF OPERATIONS
SUMMARY
Dauphin Deposit Corporation recorded net income of $70.8 million for 1996,
compared with $65.6 million recorded in 1995, an increase of 7.9%. On a per
common share basis, net income was $2.30 in 1996 compared with $2.12 in 1995
and $2.18 in 1994. As the core bank results increased 7.9%, the mortgage
banking subsidiary had a loss of $.8 million and the broker/dealer subsidiary
had income of $.4 million.
Return on average total assets was 1.26% for 1996, compared with 1.31% for
1995 and 1.42% for 1994. Return on average equity, excluding the investment
securities available-for-sale market value adjustment, was 13.04% for 1996
compared with 12.64% for 1995 and 13.72% for 1994. Return on average
stockholders' equity, including the investment securities available-for-sale
market value adjustment, was 13.10% for 1996 compared with 12.81% for 1995 and
13.81% for 1994.
During 1996 average earning assets increased 13.2% to $5.3 billion and the
interest rate spread decreased to 2.97% from 3.29%. The decrease in the
interest rate spread was the result of a shifting of deposits from transaction
oriented deposits to time deposits and reduction of the average yield on
earning assets. The net result was an increase of $7.0 million or 3.7% in fully
taxable equivalent net interest income.
Dauphin continues to maintain a high quality loan portfolio. The percentage
of non-performing assets, comprised of non-accrual loans, loans past due 90 or
more days as to principal or interest payments, restructured loans and other
real estate owned, represented .77% of year-end loans and other real estate
owned, up from .69% at December 31, 1995. The allowance for loan losses was
1.34% of year-end loans at December 31, 1996 compared with 1.40% at December
31, 1995. Non-performing loans were covered 1.98 times by the allowance for
loan losses.
Non-interest income, other than securities gains, increased $22.7 million, or
32.7%. Non-interest income growth was the result of significant increases in
mortgage banking activities and increased volume of fiduciary activities,
merchant credit card processing and broker/dealer activities.
Non-interest expense items increased $21.3 million, or 13.9%. Contributing to
this increase were mortgage banking activities, normal salary adjustments and
additions to staffing levels. Offsetting these increases was the industry-wide
reduction in the cost of deposit insurance.
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.
14
<PAGE>
DAUPHIN DEPOSIT CORPORATION
Table 1 presents average balances, taxable equivalent interest income and
expense and average rates earned and paid for Dauphin's assets and liabilities.
TABLE 1--AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
(TAXABLE EQUIVALENT BASIS)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments
Interest bearing
deposits.............. $ 3,215 $ 211 6.56% $ 6,367 $ 365 5.73% $ 5,481 $ 338 6.17%
Federal funds sold and
securities purchased
under agreements to
resell................ 12,645 723 5.72 9,362 714 7.63 11,325 603 5.32
Other short-term
investments........... 446 22 4.93 615 41 6.67
---------- -------- ---------- -------- ---------- --------
Total short-term
investments........... 16,306 956 5.86 16,344 1,120 6.85 16,806 941 5.60
---------- -------- ---------- -------- ---------- --------
Investment securities
available-for-sale
U.S. government
obligations........... 57,178 3,668 6.42 183,866 10,618 5.77 251,030 14,267 5.68
U.S. government
agencies.............. 1,591,775 104,795 6.58 1,127,537 75,203 6.67 1,185,694 73,553 6.20
State and municipals... 336,426 28,189 8.38 327,617 30,468 9.30 407,287 38,826 9.53
Other securities....... 77,344 5,611 7.25 73,527 5,011 6.82 98,965 6,537 6.61
---------- -------- ---------- -------- ---------- --------
Total investment
securities available-
for-sale.............. 2,062,723 142,263 6.90 1,712,547 121,300 7.08 1,942,976 133,183 6.85
---------- -------- ---------- -------- ---------- --------
Assets held for sale,
primarily mortgage
loans.................. 167,808 12,112 7.22 79,306 5,626 7.09 29,586 2,136 7.22
---------- -------- ---------- -------- ---------- --------
Loans (1)
Commercial............. 1,087,405 90,031 8.28 964,883 84,644 8.77 899,376 68,705 7.64
Commercial mortgages... 607,130 51,722 8.52 542,059 49,547 9.14 545,508 45,479 8.34
Residential mortgages
(2)................... 724,621 59,964 8.28 777,247 64,123 8.25 700,886 55,343 7.90
Consumer (3)........... 659,467 54,115 8.21 611,137 49,572 8.11 504,780 40,463 8.02
---------- -------- ---------- -------- ---------- --------
Total loans............ 3,078,623 255,832 8.31 2,895,326 247,886 8.56 2,650,550 209,990 7.92
---------- -------- ---------- -------- ---------- --------
Total earning assets
(4)................... 5,325,460 411,163 7.72 4,703,523 375,932 7.99 4,639,918 346,250 7.46
-------- -------- --------
Other assets............ 294,281 301,502 301,091
---------- ---------- ----------
Total assets........... $5,619,741 7.32% $5,005,025 7.51% $4,941,009 7.01%
========== ==== ========== ==== ========== ====
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
deposits
Demand deposits........ $ 494,494 6,343 1.28% $ 507,101 7,493 1.48% $ 564,592 9,579 1.70%
Savings deposits....... 825,496 21,850 2.65 906,945 24,725 2.73 1,050,580 27,096 2.58
Time deposits of
$100,000 or more...... 573,968 36,240 6.31 402,085 27,335 6.80 286,612 15,140 5.28
Other time deposits.... 1,618,600 96,481 5.96 1,482,112 87,949 5.93 1,196,905 62,072 5.19
---------- -------- ---------- -------- ---------- --------
Total interest bearing
deposits.............. 3,512,558 160,914 4.58 3,298,243 147,502 4.47 3,098,689 113,887 3.68
Short-term borrowings... 998,730 51,937 5.20 646,537 35,880 5.55 778,906 32,056 4.12
Long-term debt.......... 38,902 3,269 8.40 56,742 4,549 8.02 92,048 6,698 7.28
---------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities........... 4,550,190 216,120 4.75 4,001,522 187,931 4.70 3,969,643 152,641 3.85
-------- -------- --------
Non-interest bearing
demand deposits........ 457,626 431,567 407,556
Other liabilities....... 71,489 60,036 56,598
Stockholders' equity.... 540,436 511,900 507,212
---------- ---------- ----------
Total liabilities and
stockholders' equity.. $5,619,741 3.85% $5,005,025 3.75% $4,941,009 3.09%
========== ==== ========== ==== ========== ====
Interest rate spread.... 2.97% 3.29% 3.61%
Effect of non-interest
bearing funds.......... .69 .71 .56
---- ---- ----
Net interest
income/margin.......... $195,043 3.66% $188,001 4.00% $193,609 4.17%
======== ==== ======== ==== ======== ====
</TABLE>
- --------
(1) Includes fees on loans. Average loan balances include non-accruing loans.
(2) Includes home equity loans.
(3) Loans outstanding net of unearned income.
(4) Includes tax equivalent adjustment of $12,559, $12,288, and $15,143 for
years 1996, 1995, and 1994, respectively.
15
<PAGE>
DAUPHIN DEPOSIT CORPORATION
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 federal statutory rate of 35%.
Net interest income on a fully taxable equivalent basis totaled $195.0
million in 1996, an increase of $7.0 million or 3.7% from $188.0 million in
1995. Net interest income in 1995 was down 2.9% from $193.6 million in 1994.
Table 2 analyzes the changes attributable to the volume and rate components of
net interest income.
TABLE 2--RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996/1995 1995/1994
-------------------------- ---------------------------
CHANGE DUE TO CHANGE DUE TO
----------------- TOTAL ----------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(Taxable equivalent)
Interest income
Short-term
investments.......... $ 3 $ (167) $ (164) $ (51) $ 230 $ 179
Investment securities
available-for-sale... 23,644 (2,681) 20,963 (16,807) 4,924 (11,883)
Assets held for sale.. 6,387 99 6,486 3,528 (38) 3,490
Loans................. 15,676 (7,730) 7,946 19,843 18,053 37,896
------- -------- ------- -------- ------- --------
Total interest
income............. 45,710 (10,479) 35,231 6,513 23,169 29,682
------- -------- ------- -------- ------- --------
Interest expense
Interest bearing
deposits............. 16,755 (3,343) 13,412 18,496 15,119 33,615
Short-term
borrowings........... 18,454 (2,397) 16,057 (6,064) 9,888 3,824
Long-term debt........ (1,490) 210 (1,280) (2,774) 625 (2,149)
------- -------- ------- -------- ------- --------
Total interest
expense............ 33,719 (5,530) 28,189 9,658 25,632 35,290
------- -------- ------- -------- ------- --------
Net interest income..... $11,991 $ (4,949) $ 7,042 $ (3,145) $(2,463) $ (5,608)
======= ======== ======= ======== ======= ========
</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.
During 1996 there was an increase in net interest income of $12.0 million due
to changes in volume and a decrease of $4.9 million due to changes in rate. In
1995 there was an decrease of $3.1 million due to changes in volume and a
decrease of $2.5 million due to changes in rate.
The change in the net interest margin attributable to interest rates can be
understood by analyzing the interest rate spread and the net interest margin on
earning assets. While the interest rate spread considers only the difference
between the average rate earned on earning assets and the average rate 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 $5.3 billion in 1996, $4.7 billion in 1995 and
$4.6 billion in 1994. The interest rate spread for 1996 was 2.97% compared with
3.29% for 1995 and 3.61% for 1994. The net interest margin for 1996 was 3.66%
compared with 4.00% for 1995 and 4.17% for 1994.
Short-term interest rates (prime, federal funds, etc.) were lower throughout
1996 compared with 1995. Long-term interest rates, in general, trended upward
for the year. The average prime rate in 1996 was 8.27% compared with 8.83% in
1995. The average federal funds rate decreased to 5.30% for 1996 compared with
5.84% for 1995. During 1996, compared with 1995, the average yield on earning
assets decreased 27 basis points while
16
<PAGE>
DAUPHIN DEPOSIT CORPORATION
the average cost of funds increased 5 basis points resulting in a decrease in
the interest rate spread of 32 basis points. The yield on the investment
portfolio decreased 18 basis points due to the reinvestment of maturities at
lower rates, when compared with the yield of the security maturing or paying
down. Average loans, which represent the highest yielding earning assets,
increased $183.3 million or 6.3% and produced a yield of 8.31% in 1996 compared
with 8.56% in 1995. While average loans grew at 6.3%, total average earning
assets grew at a rate of 13.2%, therefore decreasing the percent of average
loans to average earning assets from 61.6% in 1995 to 57.8% in 1996. The cost
of interest bearing deposits increased to 4.58% in 1996 compared with 4.47% in
1995. The average rate in 1996 on interest bearing transaction accounts
averaged 20 basis points less than the 1995 level. The average interest rates
offered on time deposits increased 49 basis points from 1995 to 1996.
Depositors have been shifting from transaction accounts to higher yielding time
deposits, therefore causing an increase in the overall cost of interest bearing
deposits. The decrease in the cost of short-term borrowings (35 basis points)
was caused primarily by the lower federal funds rate.
Short-term interest rates (prime, federal funds, etc.) continued to rise
during the first half of 1995 followed by a decline in the second half of 1995.
Long-term interest rates, in general, declined steadily for the entire year.
The net result of these interest rate movements was a flattening of the overall
yield curve. The average prime rate in 1995 was 8.83% compared with 7.17% in
1994. The average federal funds rate increased to 5.84% for 1995 compared with
4.23% for 1994. During 1995, compared with 1994, the average yield on earning
assets increased 53 basis points while the average cost of funds increased 85
basis points resulting in a decrease in the interest rate spread of 32 basis
points. The yield on the investment portfolio increased 23 basis points due to
the reinvestment of maturities at higher rates, when compared with the yield of
the security maturing. Average loans, which represent the highest yielding
earning assets, increased $244.8 million or 9.2% and produced a yield of 8.56%
in 1995 compared with 7.92% in 1994. Average loans represented 61.6% of the
average earning assets for 1995. The cost of interest bearing deposits
increased to 4.47% in 1995 compared with 3.68% in 1994. Rates paid on interest
bearing transaction accounts decreased throughout 1995. Interest rates offered
on time deposits have been rising. Consequently, depositors have been shifting
from transaction accounts to higher yielding time deposits. The increase in the
cost of short-term borrowings (143 basis points) was caused primarily by the
rise in the federal funds rate. 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 net 17 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 eighteen (18)
month variable interest rate products with a minimum interest rate of 10% for
the 18 month term as discussed herein under "Deposits". 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, 21 basis points and
24 basis points for 1996, 1995 and 1994, respectively.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged against earnings was $6.0 million in
1996 compared with $5.6 million in 1995, an increase of 7.0%. While asset
quality remains high, the increase was due to the growth in the loan portfolio.
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.
Dauphin continues to maintain a high quality loan portfolio. As reflected in
Tables 8 through 10, the ratio of net charge-offs to average loans increased to
.16% in 1996 from .14% in 1995 and the level of non-accruing loans, loans past
due 90 or more days as to principal and interest payments, and restructured
loans increased to
17
<PAGE>
DAUPHIN DEPOSIT CORPORATION
$21.6 million (.68% of year-end loans) at December 31, 1996 from $17.9 million
(.60% of year-end loans) at December 31, 1995.
NON-INTEREST INCOME
Table 3 reflects Dauphin's total non-interest income which increased $22.1
million or 30.8% in 1996 compared with an increase of $10.8 million or 17.8% in
1995.
TABLE 3--NON-INTEREST INCOME
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996/1995 1995/1994
-------------------------------- -----------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------- --------------
1996 AMOUNT % 1995 AMOUNT % 1994
------- ------- ----- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Banking
Fiduciary activities.. $19,426 $ 2,619 15.6% $16,807 $ 444 2.7% $16,363
Service charges on
deposit accounts..... 12,819 1,800 16.3 11,019 (579) (5.0) 11,598
Other service charges
and fees............. 14,472 1,918 15.3 12,554 1,282 11.4 11,272
Securities gains,
net.................. 1,634 (627) (27.7) 2,261 (1,043) (31.6) 3,304
Other................. 4,060 (324) (7.4) 4,384 1,219 38.5 3,165
------- ------- ------- ------- -------
52,411 5,386 11.5 47,025 1,323 2.9 45,702
Broker/dealer........... 9,868 3,488 54.7 6,380 (1,391) (17.9) 7,771
Mortgage banking........
Gain on sale of
loans................ 2,428 (399) (14.1) 2,827 (1,212) (30.0) 4,039
Other origination
income............... 7,029 1,040 17.4 5,989 3,148 110.8 2,841
Mortgage servicing
fees, net............ 23,013 11,298 96.4 11,715 10,117 633.1 1,598
Gain on sale of
servicing............ 1,256 210 20.1 1,046 (577) (35.6) 1,623
------- ------- ------- ------- -------
33,726 12,149 56.3 21,577 11,476 113.6 10,101
Intercompany
eliminations........... (2,102) 1,091 (3,193) (566) (2,627)
------- ------- ------- ------- -------
Total............... $93,903 $22,114 30.8% $71,789 $10,842 17.8% $60,947
======= ======= ===== ======= ======= ===== =======
</TABLE>
In the banking segment of Dauphin, income from fiduciary activities increased
$2.6 million or 15.6% in 1996 and $.4 million or 2.7% in 1995. Revenue
increased in the areas of employee benefits and personal trust.
Service charges on deposit accounts increased $1.8 million or 16.3% during
1996. In 1995, a decrease of $.6 million or 5.0% was realized. Management
continuously monitors the fee structure and makes changes where appropriate.
The 1996 increase was due to new fees implemented in March. The 1995 decrease
was primarily due to a lower number of fees assessed for services.
Other service charges and fees increased $1.9 million or 15.3% in 1996
compared with an increase of $1.3 million or 11.4% in 1995. The increase for
1996 and 1995 was due to the volume of merchant credit card processing and
other fees relating to increased volume in consumer lending.
Other non-interest income decreased $.3 million for 1996 compared with 1995.
In 1995, compared with 1994, other non-interest income increased $1.2 million.
The increase for 1995 was primarily the result of gains realized on the
disposition of certain branches (including deposits) and the realignment of the
proceeds to new branch locations.
18
<PAGE>
DAUPHIN DEPOSIT CORPORATION
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 $3.5 million or 54.7% in 1996 and decreased $1.4
million or 17.9% in 1995. These fluctuations are due to changes in volume of
business in 1996 and 1995, due primarily to a varying interest rate
environment.
The mortgage banking segment of Dauphin reflects the mortgage banking
subsidiary, Eastern Mortgage. The mortgage banking income increased $12.1
million or 56.3% in 1996 compared with 1995, and increased $11.5 million or
113.6% in 1995 compared with 1994. The increase in 1996 represents the
significant increase in volume due to addition of home equity product and the
opening of new branches. Because Eastern Mortgage was acquired July 1, 1994,
the income in 1994 represents a full service mortgage banking operation for
only six months.
In addition, effective January 1, 1995, Dauphin adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amended
Statement 65 to require an institution to recognize as separate assets the
rights to service mortgage loans for others when a mortgage loan is sold or
securitized and servicing rights retained. Mortgage servicing rights are
amortized in proportion to, and over the period of, estimated net servicing
income.
NON-INTEREST EXPENSE
Table 4 reflects Dauphin's non-interest expense which increased $21.3 million
or 13.9% in 1996 compared with an increase of $14.0 million or 10.1% in 1995.
TABLE 4--NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996/1995 1995/1994
----------------------------------- ------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
--------------- --------------
1996 AMOUNT % 1995 AMOUNT % 1994
-------- ------- ------ -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Banking
Salaries and employee
benefits............. $ 64,759 $ 3,384 5.5% $ 61,375 $ 276 .5% $ 61,099
Net occupancy
expense.............. 8,711 992 12.9 7,719 (368) (4.6) 8,087
Furniture and
equipment expense.... 12,106 2,239 22.7 9,867 947 10.6 8,920
Deposit insurance..... 2 (4,093) (100.0) 4,095 (3,814) (48.2) 7,909
Other................. 44,415 1,329 3.1 43,086 7,113 19.8 35,973
-------- ------- -------- ------- --------
129,993 3,851 3.1 126,142 4,154 3.4 121,988
Broker/dealer........... 9,609 1,803 23.1 7,806 228 3.0 7,578
Mortgage banking
Salaries and employee
benefits............. 24,996 10,148 68.3 14,848 8,514 134.4 6,334
Net occupancy
expense.............. 1,694 395 30.4 1,299 729 127.9 570
Furniture and
equipment expense.... 1,527 533 53.6 994 521 110.1 473
Other................. 9,138 4,329 90.0 4,809 2,198 84.2 2,611
-------- ------- -------- ------- --------
37,355 15,405 70.2 21,950 11,962 119.8 9,988
Intercompany
eliminations........... (2,519) 260 (2,779) (2,343) (436)
-------- ------- -------- ------- --------
Total............... $174,438 $21,319 13.9% $153,119 $14,001 10.1% $139,118
======== ======= ====== ======== ======= ===== ========
</TABLE>
Dauphin's banking segment non-interest expense increased $3.9 million or 3.1%
in 1996 compared with an increase of $4.2 million or 3.4% for 1995.
19
<PAGE>
DAUPHIN DEPOSIT CORPORATION
In Dauphin's banking segment, salaries and employee benefits increased 5.5%
in 1996 and increased .5% in 1995. Full-time equivalent employees increased
10.5% to 2,236 at December 31, 1996 compared with 2,024 at year-end 1995.
Salaries expense, excluding benefits expense, increased 3.0% in 1996 compared
with 1995.
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 and
refunded to BIF members that portion of the assessment for the second and third
quarters of 1995 which represented an overpayment once BIF had achieved full
funding in accordance with the statutory reserve ratio requirement. Dauphin
received a refund from the FDIC in September 1995 in the amount of $2.2 million
which included interest from June 1, 1995, the date the BIF was fully funded.
In addition, Dauphin's assessment rate was dropped from 23 basis points to 4
basis points effective from the date of BIF reaching its statutory reserve
ratio requirement. This reduced Dauphin's deposit insurance expense by $3.8
million when compared to 1994. In 1996, Dauphin recorded $2,000 for deposit
insurance.
All other non-interest expense from the banking segment increased $4.6
million or 7.5% in 1996 compared with 1995. The increase for 1996 was primarily
the result of increased expenses to reflect numerous strategic initiatives
implemented in 1995 for technological investments, upgrades to branch
facilities, legal, and consulting fees.
The broker/dealer segment had increased non-interest expense of $1.8 million
or 23.1% in 1996 and an increase of $ .2 million or 3.0% in 1995.
The mortgage banking segment had increased non-interest expense of $15.4
million or 70.2% in 1996 compared with an increase of $12.0 million or 119.8%
in 1995. This significant increase reflects twelve months of results in 1996
and 1995 and six months of results in 1994. In addition, the mortgage banking
segment experienced significant volume increases in 1996 and 1995.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $25.2 million in 1996 as compared with $23.2
million in 1995 and $22.8 million in 1994. Dauphin's effective tax rate for
1996 was 26.2% compared with 26.1% in 1995 and 24.5% in 1994. The primary
increase in the effective tax rate was due to the continued decreased level of
tax exempt income from 1994. For a more comprehensive analysis of income tax
expense, refer to Note 13 of the Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Dauphin's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The comparison of average balances in Table 1
indicates how Dauphin has managed these elements.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE AND SHORT-TERM INVESTMENTS
Average short-term investments and investment securities available-for-sale,
in the aggregate, increased $350.1 million or 20.3% during 1996 compared with a
decrease of $230.9 million or 11.8% during 1995. During 1996, funds in excess
of those required for loan growth were invested in the securities portfolio.
During 1995, investment securities maturing were used to fund loan growth since
loan growth exceeded the growth of traditional funding sources of deposits and
short-term borrowings.
The balances maintained for short-term investments and investment securities
available-for-sale are, for the most part, supported by short-term deposits
such as money market and interest bearing demand accounts,
20
<PAGE>
DAUPHIN DEPOSIT CORPORATION
short-term borrowings and time deposits. As reflected in Table 5, the average
maturity of the investment portfolio was 6.6 years at year-end 1996. Included
in the portfolio are state and municipal securities and mortgage-backed
securities that have a longer-term maturity but are sometimes either called
before maturity or have repricing characteristics that occur before final
maturity. The average life to call or repricing of the portfolio was 2.7 years
at December 31, 1996.
TABLE 5--ANALYSIS OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
TAXABLE
U.S. FEDERAL STATE & OTHER EQUITY EQUIVALENT
TREASURY AGENCIES MUNICIPAL BONDS SECURITIES TOTAL YIELD
-------- ---------- --------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
MATURITY-AMORTIZED COST
BASIS
Within one year....... $ 25,753 $ 140,150 $ 17,992 $10,645 $ $ 194,540 6.83%
One to five years..... 11,261 568,839 89,079 1,260 670,439 6.52%
Five to ten years..... 53,152 114,491 610 168,253 7.21%
Over ten years........ 123,458 123,458 8.60%
Mortgage-backed
securities........... 955,421 955,421 6.80%
No set maturity....... 55,669 55,669 7.72%
-------- ---------- -------- ------- ------- ----------
Amortized cost.......... $ 37,014 $1,717,562 $345,020 $12,515 $55,669 $2,167,780
======== ========== ======== ======= ======= ==========
Fair value.............. $ 37,014 $1,708,421 $355,529 $12,596 $56,647 $2,170,207
======== ========== ======== ======= ======= ==========
Taxable equivalent
yield.................. 5.84% 6.57% 8.35% 7.04%
Average maturity........ 6.6 years
DECEMBER 31, 1995
Amortized cost.......... $ 99,492 $1,409,873 $287,697 $23,536 $19,272 $1,839,870
DECEMBER 31, 1994
Amortized cost.......... $251,793 $1,133,247 $369,061 $79,932 $12,903 $1,846,936
</TABLE>
Dauphin had no investments in any foreign country that aggregated more than
1% of assets at December 31, 1996, 1995 or 1994.
At December 31, 1996, net unrealized gains in the portfolio were $2.4 million
consisting of gross unrealized gains of $ 20.8 million and gross unrealized
losses of $18.4 million.
LOANS
Average loans increased $183.3 million or 6.3% during 1996 compared with an
increase of $244.8 million or 9.2% in 1995. Average loan growth continued to
increase in 1996, primarily in the area of commercial loans and commercial
mortgages.
The economy in our market area is diversified and has been relatively stable.
This affords Dauphin the opportunity to select quality commercial credits and
stabilizes our consumer business.
21
<PAGE>
DAUPHIN DEPOSIT CORPORATION
TABLE 6--LOANS OUTSTANDING, NET OF UNEARNED INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural:
Commercial secured by
real estate.......... $ 732,953 $ 640,670 $ 466,657 $ 433,055 $ 435,899
Agricultural.......... 36,290 36,415 34,960 40,748 38,306
Other................. 795,202 719,137 680,113 665,514 641,161
Real estate,
construction........... 114,234 97,444 183,673 184,523 138,023
Real estate,
residential............ 391,105 446,059 578,122 461,030 477,833
Consumer:
Home equity........... 451,742 385,194 335,323 343,175 308,563
Installment and credit
card................. 481,073 507,425 483,889 431,420 360,893
Lease financing......... 198,850 150,943 101,919 30,488 15,409
Unearned income......... (1,415) (1,949) (3,523) (3,868) (4,315)
---------- ---------- ---------- ---------- ----------
Total............... $3,200,034 $2,981,338 $2,861,133 $2,586,085 $2,411,772
========== ========== ========== ========== ==========
</TABLE>
Loan balances during 1996 were influenced by the improving economy and, as a
result, balances in both the commercial and consumer areas increased. Dauphin
continues to sell residential mortgages in the secondary market in order to
minimize credit and interest rate risk.
Dauphin's policy is to make the vast majority of its loans and commitments in
the market area it serves. This gives Dauphin the opportunity to deliver its
many products to the same customer base. Dauphin had no foreign loans in its
portfolio at December 31, 1996.
TABLE 7--LOAN MATURITIES AND INTEREST SENSITIVITY (1)
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural...................... $484,321 $359,791 $720,333 $1,564,445
Real estate, construction.......... 36,223 8,484 69,527 114,234
-------- -------- -------- ----------
Total............................ $520,544 $368,275 $789,860 $1,678,679
======== ======== ======== ==========
Loans with predetermined interest
rate.............................. $101,118 $182,888 $25,027 $309,033
Loans with variable interest rate.. 419,426 185,387 764,833 1,369,646
-------- -------- -------- ----------
Total............................ $520,544 $368,275 $789,860 $1,678,679
======== ======== ======== ==========
</TABLE>
- --------
(1)Excludes residential mortgages, home equity, consumer loans and lease
financing.
NON-PERFORMING ASSETS
Table 8 reflects Dauphin's non-performing assets for the five years ended
December 31, 1996. Dauphin's policy is to discontinue the accrual of interest
on commercial loans and commercial mortgages on which principal or interest is
past due 90 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
22
<PAGE>
DAUPHIN DEPOSIT CORPORATION
will insure that the historically high quality of the loan portfolio will be
maintained. Other real estate owned represents property acquired through
foreclosure.
TABLE 8--NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans................ $11,621 $ 7,031 $ 9,569 $17,450 $18,945
Loans past due 90 or more days as
to principal or interest
payments........................ 5,469 5,805 5,149 2,823 5,409
Restructured loans............... 4,533 5,072 5,599 7,352 6,327
------- ------- ------- ------- -------
Total non-performing loans... 21,623 17,908 20,317 27,625 30,681
Other real estate owned.......... 3,035 2,709 3,056 2,981 3,981
------- ------- ------- ------- -------
Total non-performing assets.. $24,658 $20,617 $23,373 $30,606 $34,662
======= ======= ======= ======= =======
Ratios:
Non-performing loans to total
loans......................... .68% .60% .71% 1.07% 1.27%
Non-performing assets to total
loans and other real estate
owned......................... .77 .69 .82 1.18 1.43
</TABLE>
Loan quality is maintained through diversification of risk, strict
enforcement of credit control practices and continued monitoring of the loan
portfolio.
At December 31, 1996, Dauphin had no loan concentrations exceeding 10% of
total loans. Loan concentrations are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities which
would cause them to be similarly affected by economic or other industry
specific conditions.
Non-accrual loans, loans past due 90 or more days as to principal or interest
payments, and restructured loans amounted to $21.6 million at December 31,
1996. Interest income on these loans of $.3 million was recorded on a cash
basis. If such loans were on the accrual basis, an additional $.4 million of
interest income would have been recognized.
Loans which are not included in non-performing and are current as to payments
of principal and interest but have a somewhat higher than normal risk of
becoming non-accrual, impaired or reduced rate in the future are estimated to
total approximately $19.7 million at December 31, 1996 compared with $8.1
million at December 31, 1995.
At December 31, 1996 and 1995 the balance of impaired loans was $12.1 million
and $11.7 million, respectively. In 1996, impaired loans of $10.5 million have
a related allowance for loan losses of $4.7 million and the remaining impaired
loans of $1.6 million have no related allowance for loan losses. In 1995,
impaired loans of $8.2 million have a related allowance for loan losses of $3.8
million and the remaining impaired loans of $3.5 million have no related
allowance for loan losses. The average balance of impaired loans for 1996 and
1995 was $13.3 million and $8.4 million and the interest recognized for the
year was $1.3 million and $.7 million, respectively. The interest income
includes $1.0 million and $.4 million, respectively, that was recorded on the
cash basis.
Federal regulatory authorities have defined "highly leveraged transactions"
(HLT's) as a credit of $20 million or more which is extended in connection with
an acquisition by, or a restructuring of, an organization, and the extension of
credit results in "high leverage" or is made to an already highly leveraged
organization. It
23
<PAGE>
DAUPHIN DEPOSIT CORPORATION
is the policy of Dauphin to consider financing HLT's for its customers or for
potential customers in its market area which usually involves the change of
ownership from one generation of a family to the next, or from present owners
to the existing management team. The amount of HLT's, as defined by the Federal
regulatory authorities, was $9.6 million at December 31, 1996 and $7.3 million
at December 31, 1995 and represents Dauphin's portion of a shared national
credit within its market area.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's continuing evaluation
of the loan portfolio, assessment of economic conditions, the diversification
and size of the portfolio, adequacy of collateral, past and anticipated loss
experience and the amount and quality of non-performing loans. Table 9 presents
the allocation of the allowance for loan losses by major loan category for the
past five years. The specific allocations in any particular category may prove
excessive or inadequate and consequently may be re-allocated in the future to
reflect then current conditions. Accordingly, the entire allowance is
considered available to absorb losses in any category. In 1996, the unallocated
category increased primarily as a result of increases in non-performing loans,
higher amounts of HLTs, and general concern about the continued ability of the
economy to sustain the current level of growth.
TABLE 9--ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (1)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
% GROSS % GROSS % GROSS % GROSS % GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural....... $20,125 48.9% $24,016 46.8% $27,469 41.3% $28,147 44.0% $18,596 46.2%
Real estate,
construction........... 477 3.6 1,412 3.3 1,973 6.4 1,383 7.1 1,322 5.7
Real estate,
residential (2)........ 992 26.3 4,607 27.9 3,711 31.9 1,286 31.1 956 32.5
Consumer................ 3,976 15.0 4,123 17.0 4,800 16.9 4,314 16.7 2,595 14.9
Lease financing......... 514 6.2 859 5.0 581 3.5 457 1.1 154 .7
Unallocated............. 16,801 6,720 1,682 3,595 12,604
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total................. $42,885 100.0% $41,737 100.0% $40,216 100.0% $39,182 100.0% $36,227 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- --------
Gross loans represent loans before unamortized net loan fees.
(1) The allocation of the allowance for loan losses to the respective
classifications is not necessarily indicative of future losses or future
allocations.
(2) Includes home equity loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
Table 10 reflects an analysis of the allowance for loan losses for the past
five years.
24
<PAGE>
DAUPHIN DEPOSIT CORPORATION
TABLE 10--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $ 41,737 $ 40,216 $ 39,182 $ 36,227 $ 31,959
Provision charged to
operating expenses..... 6,000 5,608 7,494 10,141 11,627
Allowance of subsidiary
sold................... (101)
Loans charged off:
Commercial, financial
and agricultural..... 3,820 4,737 5,971 7,406 6,217
Real estate,
residential (1)...... 1,262 422 933 480 464
Consumer.............. 3,829 2,696 2,428 2,547 3,445
Lease financing....... 574 321 68 88 129
---------- ---------- ---------- ---------- ----------
Total loans charged
off................ 9,485 8,176 9,400 10,521 10,255
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial
and agricultural..... 3,133 2,357 1,368 2,132 1,330
Real estate,
residential (1)...... 426 444 533 26 245
Consumer.............. 954 1,228 1,121 1,152 1,303
Lease financing....... 120 60 19 25 18
---------- ---------- ---------- ---------- ----------
Total recoveries.... 4,633 4,089 3,041 3,335 2,896
---------- ---------- ---------- ---------- ----------
Net charge-offs......... 4,852 4,087 6,359 7,186 7,359
---------- ---------- ---------- ---------- ----------
Balance, end of period.. $ 42,885 $ 41,737 $ 40,216 $ 39,182 $ 36,227
========== ========== ========== ========== ==========
Total loans:
Average............... $3,078,623 $2,895,326 $2,650,550 $2,459,537 $2,399,974
Year-end.............. 3,200,034 2,981,338 2,861,133 2,586,085 2,411,772
Ratios:
Net charge-offs to:
Average loans......... 0.16% 0.14% 0.24% 0.29% 0.31%
Loans at year-end..... 0.15 0.14 0.22 0.28 0.31
Allowance for loan
losses............... 11.31 9.79 15.81 18.34 20.31
Provision for loan
losses............... 80.87 72.88 84.85 70.86 63.29
Allowance for loan
losses to:
Average loans......... 1.39 1.44 1.52 1.59 1.51
Loans at year-end..... 1.34 1.40 1.41 1.52 1.50
Non-performing loans.. 198.33 233.06 197.94 141.84 118.08
</TABLE>
- --------
(1) Includes home equity loans.
The provision for loan losses of $6.0 million exceeded the net charge-offs of
$4.8 million, thereby increasing the allowance for loan losses from $41.7
million in 1995 to $42.9 million in 1996. The allowance for loan losses as a
percentage of year-end loans was 1.34% at December 31, 1996 and 1.40% at
December 31, 1995.
DEPOSITS
Average deposits, including non-interest bearing demand deposits, increased
$240.4 million or 6.4% during 1996 compared with an increase of $223.6 million
or 6.4% during 1995. Dauphin, like many other commercial banks, has experienced
deposit growth even as the competition for depositors' funds has become more
intense. Competition for deposits has come from other commercial banks, thrift
institutions, credit unions, brokerage houses and mutual funds. Deposit growth
was primarily due to the increase in average interest rates and the
introduction of new deposit products during 1996. While rates paid on interest
bearing transaction accounts
25
<PAGE>
DAUPHIN DEPOSIT CORPORATION
decreased throughout 1996, rates paid on time deposits have been increasing due
to rising interest rates. Depositors appear to be shifting from transaction
accounts to time deposits. Included in interest bearing deposits are certain
individual retirement accounts (IRA) totaling $198.0 million which are invested
in an 18 month variable interest rate deposit product with a minimum interest
rate of 10% for the 18 month term. During 1994, Dauphin initiated the process
to discontinue the product in accordance with the terms of the IRA contracts.
In furtherance of its right to terminate this deposit product, Dauphin
commenced a legal action for a declaratory judgment in 1994 seeking a judicial
determination from the Court permitting Dauphin to discontinue the 18 month
variable rate deposit product at issue. Dauphin's right to terminate the
variable interest rate deposit product is in dispute and is being challenged by
the holders of the IRA accounts in question. It is management's opinion that
continuation of the 18 month variable interest rate deposit product is not in
the best interest of Dauphin. 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. The Appeal seeks 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. 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. The Superior Court heard the oral
arguments of counsel on the Appeal on March 5, 1997. 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 interest rate
deposit product on further appeal and at the trial court level. Dauphin has
continued to pay a 10% interest rate with regard to the 18 month variable
interest rate deposit product.
Also during 1996 average time deposits increased $308.4 million compared with
an increase of $400.7 million during 1995. This funding source was used to
replace volatile liabilities such as overnight federal funds. Additionally, the
growth of non-interest bearing deposits has been slow in recent years. The
percentage of average non-interest bearing demand deposits to average total
deposits amounted to 11.5% in 1996 and 11.6% in 1995 and 1994. Dauphin's
banking subsidiary has remained interest rate competitive and has introduced
new deposit products to maintain and attract deposits.
SHORT-TERM BORROWINGS
Average short-term borrowings increased $352.2 million or 54.5% during 1996
compared with a decrease of $132.4 million or 17.0% in 1995. Short-term
borrowings are primarily represented by federal funds purchased and securities
sold under agreements to repurchase. The level of short-term borrowings is
dependent upon many
26
<PAGE>
DAUPHIN DEPOSIT CORPORATION
items such as loan growth, deposit growth and the interest rates paid for these
funds. The average cost of short-term borrowings has fluctuated from 4.12% in
1994 to 5.55% in 1995 and to 5.20% in 1996.
LIQUIDITY
Liquidity management involves meeting the funds flow requirements of
customers who may be either depositors wanting to withdraw funds, or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs.
Liquidity from asset categories is provided primarily through investment
securities with maturities of less than one year and short-term investments,
such as deposits with other banks, federal funds sold and other short-term
investments. Dauphin's asset liquidity position is strong because of the
investment portfolio's maturity structure (Table 5), the amount of short-term
investments, the funds provided by loan maturities (Table 7) and the funds
available to Dauphin by established federal funds lines of credit.
Additionally, Dauphin Deposit Bank and Trust Company is a member of the Federal
Home Loan Bank of Pittsburgh. This established credit arrangement provides the
Bank with increased liquidity.
The generation of deposit balances is the primary source of liquidity from
liability categories. Total deposits increased by $79.0 million or 2.0% from
year-end 1995 to year-end 1996. Table 11 reflects the change in the major
classifications of deposits by comparing the year-end balances for the past
three years and Table 12 reflects the maturity of large dollar deposits for the
same periods. As shown in Table 13, federal funds purchased and other forms of
short-term borrowings are also significant sources of liquidity. Dauphin
continues to maintain diverse liability funding sources.
TABLE 11--DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Non-interest bearing deposits................. $ 521,387 $ 518,004 $ 464,919
Interest bearing demand deposits.............. 504,506 492,079 527,892
Savings deposits.............................. 399,008 412,185 481,982
Money market deposit accounts................. 378,286 475,815 529,852
Time deposits................................. 1,656,098 1,592,379 1,239,462
Time deposits of $100,000 or more............. 569,285 459,074 270,777
---------- ---------- ----------
Total....................................... $4,028,570 $3,949,536 $3,514,884
========== ========== ==========
</TABLE>
TABLE 12--MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Three months or less................................ $210,160 $197,691 $162,820
Over three months through six months................ 42,147 33,117 26,882
Over six months through twelve months............... 64,169 63,866 27,526
Over twelve months.................................. 252,809 164,400 53,549
-------- -------- --------
Total............................................. $569,285 $459,074 $270,777
======== ======== ========
</TABLE>
27
<PAGE>
DAUPHIN DEPOSIT CORPORATION
TABLE 13--SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Overnight federal funds purchased............. $ 522,650 $266,370 $438,490
Term federal funds purchased.................. 75,000 260,000
Eurodollars purchased......................... 1,672
Federal Home Loan Bank borrowings............. 149,000
Securities sold under agreements to repur-
chase........................................ 447,581 233,830 196,021
U.S. Treasury tax and loan notes.............. 66,399 27,289 46,266
---------- -------- --------
Total short-term borrowings................. $1,111,630 $678,161 $940,777
========== ======== ========
Average interest rate at year-end............. 5.86% 5.33% 5.88%
Maximum amount outstanding at any month-end... $1,219,758 $958,804 $940,777
Average amount outstanding.................... $ 998,730 $646,537 $778,906
Weighted average interest rate................ 5.20% 5.55% 4.12%
</TABLE>
CAPITAL RESOURCES
During 1994, Dauphin announced that the Board of Directors authorized the
repurchase of up to 2,000,000 shares of the outstanding common stock. In
February 1995, an additional 1,500,000 shares were authorized for repurchase.
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 1996 and 1995, Dauphin
repurchased 297,000 shares for $8.5 million and 630,000 shares for $16.1
million, respectively.
Total stockholders' equity increased $23.8 million or 4.4% in 1996 compared
with an increase of $80.0 million or 17.1% in 1995. The increase for 1996 was
due to net income of $70.8 million less dividends declared of $34.7 million,
offset by the reduction in net unrealized gains on investments available-for-
sale of $12.1 million. The increase for 1995 was due to net income of $65.6
million less dividends declared of $31.2 million and was positively impacted by
the change in net unrealized gains on investments available-for-sale of $54.7
million, somewhat offset by the repurchase of outstanding common stock
throughout the year of $16.1 million. The ratio of average equity to average
assets amounted to 9.62% for 1996, compared with 10.23% for 1995 and 10.27% for
1994. Internal capital generation is measured as the percent of return on
average equity multiplied by the percent of earnings retained. The resulting
internal capital generation percentage amounted to 6.6% for 1996 compared with
6.7% for 1995 and 7.9% for 1994.
Common measures of adequate capitalization for banking institutions are
ratios of capital to assets. These ratios indicate the proportion of
permanently committed funds to the total asset base. Guidelines issued by
federal regulatory authorities require both banks and bank holding companies to
meet minimum risk-based capital ratios in an effort to make regulatory capital
more responsive to the risk exposure related to a bank's on- and off-balance
sheet items. Risk-based capital guidelines redefine the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of capital requirements. The components of risk-
based capital are segregated as Tier 1 and Tier 2 capital. Tier 1 capital is
composed of total stockholders' equity reduced by goodwill and other intangible
assets. Tier 2 capital is the allowance for loan losses (with certain
limitations) and qualifying debt obligations. Regulators have also adopted
minimum Tier 1 leverage ratio standards. Tier 1 capital for the leverage ratio
is the same as the Tier 1 capital definition in the risk-based capital
guidelines. Table 14 presents the capital ratios for Dauphin for the past three
years calculated at year-end in accordance with these guidelines. At December
31, 1996, Dauphin and its banking subsidiary exceeded all capital requirements
and is considered to be "well capitalized".
28
<PAGE>
DAUPHIN DEPOSIT CORPORATION
TABLE 14--CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Risk-based capital
Tier 1 ratio............................................. 13.25% 13.99% 13.82%
Total capital ratio (tier 1 and tier 2).................. 14.03 14.87 14.92
Leverage ratio............................................. 9.47 10.00 9.65
</TABLE>
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 rate of growth in interest free sources of funds will influence
the level of interest sensitive funding sources. In addition, the 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 changes in net interest margin.
Table 15 presents an interest sensitivity analysis of Dauphin's assets and
liabilities at December 31, 1996 for several time intervals. This table
reflects the interest sensitivity gap in two formats. The detailed presentation
represents management's assumption on certain interest bearing deposits, such
as passbook savings accounts, as not being subject to immediate repricing.
Management is of the opinion that historical interest rate movements indicate
that these products do not reprice in direct relation to the change in the
interest rate environment. Additionally, these products have provided Dauphin
with a stable core deposit base. Therefore, the detailed presentation within
Table 15 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 15 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 December 31, 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 2. 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.
29
<PAGE>
DAUPHIN DEPOSIT CORPORATION
TABLE 15--INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
--------------------------------------------------------------
INTEREST SENSITIVITY PERIOD
--------------------------------------------------------------
MONTH QUARTER SIX MONTHS ANNUAL 5 YEARS
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Earning assets:
Short-term invest-
ments................ $ 17,379 $ 17,379 $ 17,379 $ 17,379 $ 17,379
Investment securities
available-for-sale... 532,316 551,974 636,241 820,999 1,846,389
Assets held for sale.. 207,798 207,798 207,798 207,798 207,798
Loans................. 1,201,838 1,421,149 1,669,075 2,102,192 3,073,525
---------- ---------- ---------- ---------- ----------
Total............... $1,959,331 $2,198,300 $2,530,493 $3,148,368 $5,145,091
========== ========== ========== ========== ==========
Interest bearing liabil-
ities:
Deposits.............. $ 997,029 $1,243,748 $1,510,702 $1,966,199 $2,581,528
Short-term
borrowings........... 1,111,630 1,111,630 1,111,630 1,111,630 1,111,630
Long-term debt........ 6 150,017 150,034 150,068 154,664
---------- ---------- ---------- ---------- ----------
Total............... $2,108,665 $2,505,395 $2,772,366 $3,227,897 $3,847,822
========== ========== ========== ========== ==========
Interest sensitivity
gap.................. $ (149,334) $ (307,095) $ (241,873) $ (79,529) $1,297,269
Interest sensitive as-
sets to interest sen-
sitive liabilities
ratio................ .93 .88 .91 .98 1.34
Interest sensitivity
gap as a percent of
total assets......... (2.51)% (5.16)% (4.07)% (1.34)% 21.81%
Regulatory presentation:
Interest sensitivity
gap.................. $ (602,912) $ (760,674) $ (695,453) $ (533,111) $ 843,683
Interest sensitive as-
sets to interest sen-
sitive liabilities
ratio................ .76 .74 .78 .86 1.20
Interest sensitivity
gap as a percent of
total assets......... (10.14)% (12.79)% (11.69)% (8.96)% 14.19%
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1996, Dauphin adopted the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing this review, if the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss (based on the fair value of the asset)
is recognized. Otherwise, an impairment loss is not recognized. The adoption
did not have a material effect on Dauphin's consolidated financial position or
results of operations.
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation", became effective for Dauphin on January 1, 1996.
SFAS 123 establishes a new method of accounting for stock-based compensation
arrangements with employees. The new method is a fair value based method rather
than the intrinsic value based method that is currently utilized. As permitted
by SFAS 123, Dauphin has continued to measure compensation expense for its
stock-based employee compensation plans, using the methods as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees". Note 15 provides
pro forma disclosures of net income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
30
<PAGE>
DAUPHIN DEPOSIT CORPORATION
In June 1996, the Financial Standards 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". Principally, SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on the consistent application of a financial components
approach (for example, focus on assets and liabilities that remain after the
transfer takes place) that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
In addition, SFAS 125 extends the "available-for-sale" or "trading" approach
of SFAS 115 to all financial assets that contractually can be prepaid or
otherwise settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. Such financial assets can no
longer be classified as held to maturity.
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 application is not permitted. The
extension of SFAS 125 to all financial assets subject to prepayment risk is
effective for financial assets held on or after January 1, 1997. Management
does not believe that this statement will have a material effect on Dauphin's
consolidated financial position or results of operations.
31
<PAGE>
GLOSSARY OF FINANCIAL TERMS
ALLOWANCE FOR LOAN LOSSES--A reduction in the value of total loans appearing on
the company's balance sheet. This allowance represents the amount considered by
management to be adequate to cover losses known and inherent in the loan
portfolio.
BASIS POINT--A unit of measure for interest yields and rates equivalent to one-
hundredth of 1%. One hundred basis points equal one percent.
BOOK VALUE PER SHARE--The value of one share of stock calculated by dividing
total stockholders' equity at the end of the period by the total number of
shares outstanding at the end of the same period.
DIVIDEND PAYOUT RATIO--The percentage of net income that is paid out as
dividends to common stockholders. Dividends reduce stockholders' equity when
they are declared by the board of directors.
EARNINGS PER SHARE--Net income divided by the average number of common shares
and common stock equivalents outstanding in the period.
FULL-TIME EQUIVALENT EMPLOYMENT--The combination of full-time employees and
part-time employees converted to a full-time basis.
GAP--The amount by which interest rate-sensitive assets exceed interest rate-
sensitive liabilities for a designated time period is referred to as a positive
gap. An excess of liabilities would represent a negative gap.
INTEREST-BEARING LIABILITIES--Liabilities upon which interest is paid, such as
savings and time deposits, short-term borrowings, and long-term debt.
INTEREST-EARNING ASSETS--Assets that generate interest income and yield-related
fee income, such as loans, short-term investments, and investment securities.
INTEREST RATE SPREAD--The difference between the yield on interest-earning
assets (taxable equivalent basis) and the rate paid on interest-bearing
liabilities.
INTEREST-SENSITIVE ASSETS/LIABILITIES--Assets and liabilities whose yields or
rates can change within a designated time period due either to their maturity
during this period or to the contractual ability of a bank to change the
yield/rate during this period.
LEVERAGE RATIO--A regulatory measure of capital adequacy (Tier 1 capital as a
percent of assets). The asset base used in the calculation of this ratio
represents average assets (less goodwill) reported in the company's regulatory
reports. This is a key regulatory capital requirement with the minimum amount
allowed of 3% capital as a percent of assets. Regulations define a well
capitalized institution as having a ratio of 5% or more.
LIQUIDITY--The ability of an institution to meet its cash flow requirements,
whether from depositors wanting to withdraw funds and borrowers wanting to be
assured that their credit needs will be met.
MORTGAGE SERVICING RIGHTS--The cost of acquiring from third parties the right
to service mortgage loans (purchased mortgage servicing rights) or the fair
value of those servicing rights on loans originated and sold (originated
mortgage servicing rights).
NET INTEREST INCOME--The difference between interest income collected from
earning assets and interest paid on deposits and borrowed funds.
NET INTEREST MARGIN--A measurement of how much interest income the company
collects on its interest-earning assets in excess of the interest cost of
funding them. It is computed by dividing taxable equivalent net interest income
by average interest-earning assets.
NON-ACCRUAL LOANS--Loans on which accruals of interest have been discontinued
due to the borrower's financial difficulties.
NON-PERFORMING ASSETS--The sum of loans on which interest income is not being
accrued, loans past due 90 or more days as to principal or interest payments,
restructured loans on which the interest rates or terms of repayment have been
materially revised and real estate which has been acquired through foreclosure.
32
<PAGE>
GLOSSARY OF FINANCIAL TERMS
NON-PERFORMING LOANS--The total of non-accrual loans, loans past due 90 or more
days as to principal or interest payments, and restructured loans. This amount
is usually expressed as a percentage of total loans.
POOLING-OF-INTERESTS METHOD--An accounting method for a business combination
whereby the assets, liabilities, income and expense of the separate companies
are combined. Prior period financial information is restated, as if the
separate companies had always been united as a single company.
PROVISION FOR LOAN LOSSES--A charge to earnings which appears on the company's
income statement. This charge is made to adjust the allowance for loan losses
to a level deemed by management to be adequate.
PURCHASE METHOD--An accounting method for a business combination by recording
at their current market value the assets acquired and liabilities assumed.
Goodwill and other intangible assets may be created by this accounting method.
RESTRUCTURED LOANS--A loan is considered restructured when a bank for economic
or legal reasons related to the debtor's financial difficulties grants a
concession to the debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS--A measure of profitability that is calculated by
dividing net income by total average assets.
RETURN ON AVERAGE STOCKHOLDERS' EQUITY--A measure of profitability that
indicates the rate of return earned on stockholders' investment. It is
calculated by dividing net income by total average common stockholders' equity.
RISK-BASED CAPITAL RATIO--A regulatory measure of capital adequacy that relates
capital to the risk characteristics of the company's activities, regardless of
whether those activities are accounted for on or off its balance sheet. The
numerator of this ratio is qualifying regulatory capital (Tier 1 and Tier 2, as
defined below). The denominator is period-end assets and off-balance sheet
items, risk-weighted by applying one of four risk factors in accordance with
the regulators' perceived credit risks.
SECURITIES AVAILABLE-FOR-SALE--Securities that will be held for indefinite
periods of time and which may be sold as part of the bank's asset/liability
strategy. These securities are recorded at their current market value rather
than at their historical amortized cost.
TAXABLE EQUIVALENT INCOME--Tax-exempt interest income which, for comparative
purposes, has been increased by an amount equivalent to the federal income
taxes that would have been paid if income on tax-exempt investments and loans
were taxable at the statutory rate of 35%.
TIER 1 CAPITAL--Common stock, certain preferred stock, surplus and retained
earnings, less goodwill. Regulations require a minimum Tier 1 capital ratio of
4%. Regulations define a well capitalized institution as having a ratio of 6%
or more.
TOTAL CAPITAL (TIER 1 PLUS TIER 2)--The sum of Tier 1 capital and all or a
portion of the allowance for loan losses, certain preferred stock and
subordinated debt. Regulations require a minimum total capital ratio of 8%.
Regulations define a well capitalized institution as having a ratio of 10% or
more.
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE--The amount by which
the fair value of the investment portfolio exceeds (or is less than) its book
value.
33
<PAGE>
DAUPHIN DEPOSIT CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and documents are set
forth in this Annual Report on Form 10-K on the following pages:
<TABLE>
<S> <C>
Dauphin Deposit Corporation and Subsidiaries
Consolidated Balance Sheets............................................... 35
Consolidated Statements of Income......................................... 36
Consolidated Statements of Stockholders' Equity........................... 37
Consolidated Statements of Cash Flows..................................... 38
Notes to Consolidated Financial Statements................................ 39
Independent Auditors' Report................................................ 68
</TABLE>
34
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 176,024 $ 218,785
----------- -----------
Short-term investments
Interest bearing deposits.......................... 1,494 8,523
Federal funds sold and securities purchased under
agreements to resell.............................. 15,200 3,050
Other short-term investments....................... 685
----------- -----------
Total short-term investments..................... 17,379 11,573
----------- -----------
Investment securities available-for-sale, at fair
value............................................... 2,170,207 1,860,869
Assets held for sale, primarily mortgage loans....... 207,798 87,782
Loans (net of unearned income)....................... 3,200,034 2,981,338
Allowance for loan losses............................ (42,885) (41,737)
----------- -----------
Total net loans.................................. 3,157,149 2,939,601
----------- -----------
Premises and equipment............................... 73,826 71,562
Other assets......................................... 145,303 107,177
----------- -----------
Total assets..................................... $ 5,947,686 $ 5,297,349
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing............................... $ 521,387 $ 518,004
Interest bearing................................... 3,507,183 3,431,532
----------- -----------
Total deposits................................... 4,028,570 3,949,536
Short-term borrowings................................ 1,111,630 678,161
Long-term debt....................................... 154,771 40,599
Accrued expenses and taxes........................... 82,270 82,450
----------- -----------
Total liabilities................................ 5,377,241 4,750,746
----------- -----------
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 issued of which 1,974,885
and 2,013,771 shares are held as treasury stock,
respectively...................................... 163,208 163,208
Additional paid-in capital......................... 11,084 11,103
Retained earnings.................................. 444,316 408,274
Unrealized gains on securities available-for-sale,
net of deferred taxes............................. 1,577 13,650
----------- -----------
620,185 596,235
Less: Treasury stock--at cost...................... (49,740) (49,632)
----------- -----------
Total stockholders' equity....................... 570,445 546,603
----------- -----------
Total liabilities and stockholders' equity....... $ 5,947,686 $ 5,297,349
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest income
Interest and fees on
loans and leases...... $252,975 $245,440 $207,648
Interest and dividends
on investment
securities
Taxable.............. 114,837 93,498 96,797
Exempt from federal
income taxes........ 17,786 17,997 23,602
Interest on deposits... 211 365 337
Interest on assets held
for sale.............. 12,050 5,589 2,120
Interest on federal
funds sold and other
short-term
investments........... 745 755 603
--------------- --------------- ---------------
Total interest
income.............. 398,604 363,644 331,107
--------------- --------------- ---------------
Interest expense
Interest on deposits
Savings deposits..... 28,193 32,218 36,675
Time deposits........ 96,481 87,949 62,072
Time deposits in
denominations of
$100,000 or more.... 36,240 27,335 15,140
--------------- --------------- ---------------
160,914 147,502 113,887
Interest on short-term
borrowings............ 51,937 35,880 32,056
Interest on long-term
debt.................. 3,269 4,549 6,698
--------------- --------------- ---------------
Total interest
expense............. 216,120 187,931 152,641
--------------- --------------- ---------------
Net interest income.. 182,484 175,713 178,466
Provision for loan
losses.................. 6,000 5,608 7,494
--------------- --------------- ---------------
Net interest income
after provision for
loan losses......... 176,484 170,105 170,972
--------------- --------------- ---------------
Non-interest income
Fiduciary activities... 19,426 16,807 16,363
Service charges on
deposit accounts...... 12,819 11,019 11,598
Other service charges
and fees.............. 14,472 12,554 11,272
Broker/dealer
commissions and fees.. 9,098 6,034 7,783
Mortgage banking....... 32,394 18,730 7,462
Securities gains, net.. 1,634 2,261 3,304
Other.................. 4,060 4,384 3,165
--------------- --------------- ---------------
Total non-interest
income.............. 93,903 71,789 60,947
--------------- --------------- ---------------
Non-interest expense
Salaries and employee
benefits.............. 95,680 81,268 72,556
Net occupancy expense.. 10,793 9,396 8,990
Furniture and equipment
expense............... 13,878 11,075 9,567
Deposit insurance...... 2 4,095 7,909
Other.................. 54,085 47,285 40,096
--------------- --------------- ---------------
Total non-interest
expense............. 174,438 153,119 139,118
--------------- --------------- ---------------
Income before income
taxes................... 95,949 88,775 92,801
Provision for income
taxes................... 25,177 23,210 22,762
--------------- --------------- ---------------
Net income............... $ 70,772 $ 65,565 $ 70,039
=============== =============== ===============
Net income per share..... $ 2.30 $ 2.12 $ 2.18
Cash dividends declared
per share............... $ 1.13 1/2 $ 1.01 1/2 $ .94
Weighted average number
of shares outstanding... 30,820,019 30,966,258 32,169,734
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
NET UNREALIZED
COMMON STOCK ADDITIONAL TREASURY STOCK GAIN (LOSS) ON TOTAL
------------------- PAID-IN RETAINED -------------------- SECURITIES STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT AVAILABLE-FOR-SALE EQUITY
---------- -------- ---------- -------- ---------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993................... 32,641,614 $163,208 $11,213 $333,774 (134,200) ($2,120) $ $506,075
Cumulative effect of
adoption of SFAS 115,
net of taxes........... 42,080 42,080
Net income.............. 70,039 70,039
Cash dividends
declared............... (29,892) (29,892)
Acquisition of treasury
stock.................. (1,744,500) (42,413) (42,413)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... 419 70,340 1,068 1,487
Sale of treasury stock
under the Stock Option
Plan of 1986........... (21) 24,409 317 296
Sale of treasury stock
under the Dividend
Reinvestment and Stock
Purchase Plan.......... (26) 60,606 1,539 1,513
Debentures converted to
common stock........... 37 26,898 395 432
Change in net unrealized
gain (loss) on
securities available-
for-sale, net of
taxes.................. (83,116) (83,116)
Tax benefit of stock
option transactions.... 148 148
---------- -------- ------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31,
1994................... 32,641,614 163,208 11,770 373,921 (1,696,447) (41,214) (41,036) 466,649
Net income.............. 65,565 65,565
Cash dividends
declared............... (31,212) (31,212)
Acquisition of treasury
stock.................. (630,000) (16,063) (16,063)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... (239) 68,429 1,664 1,425
Sale of treasury stock
under the Stock Option
Plan of 1986........... (998) 101,742 2,476 1,478
Sale of treasury stock
under the Dividend
Reinvestment and Stock
Purchase Plan.......... 115 126,446 3,110 3,225
Debentures converted to
common stock........... (137) 16,059 395 258
Change in net unrealized
gain (loss) on
securities available-
for-sale, net of
taxes.................. 54,686 54,686
Tax benefit of stock
option transactions.... 386 386
Impact of Performance
Share Agreements....... 206 206
---------- -------- ------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31,
1995................... 32,641,614 163,208 11,103 408,274 (2,013,771) (49,632) 13,650 546,603
Net income.............. 70,772 70,772
Cash dividends
declared............... (34,730) (34,730)
Acquisition of treasury
stock.................. (297,000) (8,455) (8,455)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... (348) 85,920 2,137 1,789
Sale of treasury stock
under the Stock Option
Plan of 1986 and the
Stock Incentive Plan of
1995................... (766) 99,649 2,442 1,676
Sale of treasury stock
under the Dividend
Reinvestment and Stock
Purchase Plan.......... 494 117,009 2,930 3,424
Debentures converted to
common stock........... (303) 33,308 838 535
Change in net unrealized
gain (loss) on
securities available-
for-sale, net of
taxes.................. (12,073) (12,073)
Tax benefit of stock
option transactions.... 437 437
Impact of Performance
Share Agreements....... 467 467
---------- -------- ------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31,
1996................... 32,641,614 $163,208 $11,084 $444,316 (1,974,885) $(49,740) $ 1,577 $570,445
========== ======== ======= ======== ========== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income................................ $ 70,772 $ 65,565 $ 70,039
Adjustments:
Provision for loan losses............... 6,000 5,608 7,494
Provision for depreciation, amortization
and accretion.......................... 6,633 11,316 11,867
Provision for deferred income taxes..... 3,165 4,133 3,994
Securities gains, net................... (1,634) (2,261) (3,304)
(Increase) decrease in interest
receivable............................. (4,445) 1,325 (2,222)
Increase (decrease) in accrued expenses
and taxes.............................. 880 19,013 (3,064)
Gain on sale of loans held for sale..... (2,427) (5,961) (1,473)
Net increase in assets held for sale.... (117,589) (35,599) (294)
Other, net.............................. (46,803) (13,918) (14,339)
----------- --------- ---------
Net cash provided (used) by operating
activities........................... (85,448) 49,221 68,698
----------- --------- ---------
Investing activities
Proceeds from sales of investment
securities available-for-sale............ 96,879 252,613 201,395
Proceeds from maturities of investment
securities available-for-sale............ 657,471 356,977 480,030
Purchases of investment securities
available-for-sale....................... (1,043,171) (526,811) (481,357)
Net increase in loans..................... (236,734) (231,067) (330,366)
Sale of residential mortgage and other
consumer loans........................... 39,507 52,544
Net purchases of premises and equipment... (11,546) (12,139) (8,268)
Net proceeds from sale of subsidiary,
Farmers Savings Bank, FSB................ 797
Purchase of Eastern Mortgage Services,
Inc...................................... (21,038)
----------- --------- ---------
Net cash used for investing
activities........................... (537,101) (120,920) (106,263)
----------- --------- ---------
Financing activities
Net increase (decrease) in deposit
accounts................................. 79,034 434,652 (60,410)
Net increase (decrease) in short-term
borrowings............................... 433,469 (262,616) 224,869
Issuance of long-term debt................ 150,000
Repayments of long-term debt.............. (35,293) (51,097) (122)
Issuance of treasury stock................ 6,837 6,083 3,281
Acquisition of treasury stock............. (8,455) (16,063) (42,413)
Cash dividends paid....................... (33,654) (30,836) (29,024)
----------- --------- ---------
Net cash provided by financing
activities........................... 591,938 80,123 96,181
----------- --------- ---------
Increase (decrease) in cash and cash
equivalents.......................... (30,611) 8,424 58,616
Cash and cash equivalents at beginning of
period..................................... 219,335 210,911 152,295
----------- --------- ---------
Cash and cash equivalents at end of period.. $ 188,724 $ 219,335 $ 210,911
=========== ========= =========
Cash........................................ $ 176,024 $ 218,785 $ 202,911
Overnight federal funds sold................ 12,700 550
----------- --------- ---------
Total cash and cash equivalents at end of
period..................................... $ 188,724 $ 219,335 $ 202,911
=========== ========= =========
Total interest paid......................... $ 214,016 $ 182,478 $ 153,527
Total income taxes paid..................... 17,951 12,715 20,495
Schedule of non-cash investing and financing
activities:
Loans charged off......................... 9,485 8,176 9,400
Net loan transfers to other real estate
owned.................................... 3,073 2,508 4,563
Conversion of convertible subordinated
debentures............................... 535 258 432
Securitization of mortgage loans.......... 23,865 77,085
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies of
Dauphin Deposit Corporation and subsidiaries.
BUSINESS
Dauphin Deposit Corporation (Dauphin) is a bank holding company, incorporated
under the laws of the Commonwealth of Pennsylvania in 1974. Dauphin's wholly-
owned bank subsidiary is Dauphin Deposit Bank and Trust Company (the Bank),
through which Dauphin provides banking services. The Bank is engaged in the
commercial and retail banking and trust business. The Bank's mortgage banking
subsidiary, Eastern Mortgage Services, Inc. (Eastern Mortgage) is a full
service mortgage banking company which originates, services and sells first and
second residential mortgage loans of varying types primarily to the eastern
Pennsylvania and New Jersey mortgage markets. Dauphin's wholly-owned subsidiary
Hopper Soliday & Co., Inc. (Hopper Soliday) is a Delaware corporation which
engages in municipal finance, institutional sales, financial advisory and other
general securities businesses permitted for bank holding companies and their
non-bank subsidiaries.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. The material estimates that are
particularly susceptible to significant change in the near-term relate to the
valuation of assets held for sale, the determination of the allowance for loan
losses, and the valuation of mortgage servicing rights.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dauphin and
subsidiaries, including its principal subsidiary, the Bank, which includes the
Bank of Pennsylvania, Farmers Bank and Valleybank Divisions. All material
intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investments are to be classified in one of three categories and accounted for
as follows: 1) debt securities Dauphin has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings; and 3) debt and equity securities not classified as
either held-to-maturity or trading securities are classified as available-for-
sale securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of deferred taxes. Management has determined that the entire
investment securities portfolio is classified as available-for-sale.
Premiums and discounts are amortized and accreted over the term of the
related securities using a method that approximates the interest method,
adjusted for prepayments. Realized gains or losses on the sale of investment
securities (determined by the specific identification method) are shown
separately in the
39
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
consolidated statements of income. A decline in the fair value of any
investment below cost that is deemed other than temporary results in a
reduction of the carrying amount to fair value through a charge to income.
Dividend and interest income are recognized when earned.
ASSETS HELD FOR SALE
Assets held for sale consist of the securities inventory of Hopper Soliday
and the loans held for sale inventory of Eastern Mortgage. The securities
inventory is recorded at current quoted fair value. The loans held for sale are
carried at the lower of aggregate cost or estimated fair value with unrealized
losses, if any, recognized through a provision included in non-interest income
from mortgage banking. Gains and losses on the sale of loans held for sale are
determined using the specific identification method.
LOANS
Loans are carried at the principal amount outstanding, net of unearned
income. Interest income is accounted for on an accrual basis. Interest income
is not accrued when, in the opinion of management, its collectibility is
doubtful. When a loan is designated as non-accrual, any accrued interest
receivable is generally charged against current earnings. Non-accruing loans
are returned to accruing status after at least six consecutive months of
current performance. Lease income is recorded using the finance method which
provides for a level rate of return on the investment outstanding.
Generally, all non-accrual loans are deemed to be impaired. In addition,
management, considering current information and events regarding the borrowers
ability to repay their obligations, considers a loan to be impaired when it is
probable that Dauphin will be unable to collect all amounts due according to
the contractual terms of the loan agreement. In evaluating whether a loan is
impaired, management considers not only the amount that Dauphin expects to
collect but also the timing of collection. Generally, if a delay in payment is
insignificant (for example, less than 90 days), a loan is not deemed to be
impaired.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. Dauphin excludes smaller balance,
homogeneous loans (for example, primarily consumer and residential mortgages)
from the evaluation for impairment. Impairment losses are included in the
allowance for loan losses. Impaired loans are charged off when management
believes that the ultimate collectibility of a loan is not likely.
Income for impaired loans that are on non-accrual status is recognized using
the cash basis, while interest on impaired loans that are still accruing is
recognized using the accrual method.
Loan fees and costs of loan origination are deferred and recognized over the
life of the loan as a component of interest income, adjusted for prepayments.
The amortization of deferred fees and costs is discontinued on non-accrual
loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve to absorb losses on
loans which may become uncollectible. The provision for loan losses is
management's estimate of the amount required to establish a reserve adequate to
reflect risks in the loan portfolio of the Bank. Loan losses are charged
directly against the allowance for loan losses, and recoveries on previously
charged off loans are added to the allowance.
40
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Premises and equipment under capitalized leases are recorded at
the lower of the present value of minimum lease payments or the fair value of
the leased assets determined at the inception of the lease term. Depreciation
charged to operating expense, including amounts applicable to capitalized
leases, is computed on the straight-line method for financial reporting and the
straight-line and accelerated methods for income tax purposes. Leasehold
improvements are capitalized and amortized over the lives of the respective
leases or the estimated useful life of the leasehold improvement, whichever is
shorter. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in income for the period. Maintenance, repairs and minor
improvements are charged to expense as incurred; significant renewals and
betterments are capitalized.
OTHER ASSETS
Goodwill is the excess of the purchase price over the fair value of net
assets of entities acquired through business combinations that are recorded
using the purchase method of accounting. Included in other assets is $13.7
million and $15.5 million of goodwill at December 31, 1996 and 1995,
respectively. Goodwill is being amortized using the straight-line method over
periods not exceeding 15 years.
On January 1, 1996, Dauphin adopted the provisions of Statement of Financial
Accountings Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption did not have a material effect on Dauphin's
consolidated financial position or results of operations.
Excess servicing fees are computed as the present value of the difference
between the estimated future net revenues and normal servicing revenues as
established by the federally sponsored secondary market makers. Upon the sale
of mortgage loans, excess servicing fees are deferred and amortized over the
estimated life of the related mortgages.
Effective January 1, 1995, Dauphin adopted the provisions of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amended
Statement 65 to require an institution to recognize as separate assets the
rights to service mortgage loans for others when a mortgage loan is sold or
securitized and servicing rights retained. When capitalizing mortgage servicing
rights, Dauphin allocates the total cost of the mortgage loans (the recorded
investment in the mortgage loans including net deferred fees or costs and any
purchase premium or discount) to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Such fair value is primarily based on observable market prices. Mortgage
servicing rights (including purchased mortgage servicing) are amortized in
proportion to, and over the period of, estimated net servicing revenue based on
management's best estimate of remaining loan lives.
41
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin measures the impairment of servicing rights based on the difference
between the carrying amount of the servicing rights and their current fair
value. Impairment of servicing rights is recognized through a valuation
allowance. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value. For the purpose
of evaluating and measuring impairment of capitalized mortgage servicing
rights, Dauphin stratifies those rights based on the predominant risk
characteristics of the underlying loans. Dauphin primarily stratifies mortgage
servicing rights by loan type (for example, conventional or government
guaranteed and adjustable-rate or fixed-rate mortgage loans) and interest rate.
Valuation techniques for measuring fair value incorporate assumptions that
market participants use in estimating future servicing income and expense,
including assumptions about prepayment, default and interest rates.
DERIVATIVES
Dauphin's mortgage subsidiary, Eastern Mortgage, has limited involvement with
derivative financial instruments. Derivatives are primarily used to manage
well-defined interest rate risks, as described in Note 17.
TRUST ASSETS
Assets held by the Bank in a fiduciary or agency capacity are not included in
the consolidated financial statements since such assets are not assets of the
Bank. Income from fiduciary activities is recorded on an accrual basis.
BENEFIT PLANS
Pension plan costs for Dauphin's defined benefit plans are accounted for
using the projected unit credit method for measuring net periodic pension cost
over the employees' service lives.
Dauphin's cost of retiree health care and other postretirement benefits are
accounted for in accordance with the provisions of Statement of Financial
Acccounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions".
Dauphin provides benefits to former or inactive employees after employment
but before retirement. These costs are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits".
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE
Net income per share is computed based upon the weighted average number of
common shares outstanding and dilutive common equivalent shares from stock
options and performance shares using the treasury stock method. The difference
between primary and fully diluted earnings per share is not significant in any
year.
42
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, Dauphin considers
cash and due from banks and overnight federal funds sold to be cash and cash
equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
with current year classifications.
2--MERGERS AND ACQUISITIONS
ALLIED IRISH BANKS, P.L.C.
On January 21, 1997, the Board of Directors of Dauphin approved, and Dauphin
entered into, an Agreement and Plan of Merger (Merger Agreement) with Allied
Irish Banks, p.l.c. (AIB) and its United States banking subsidiary, First
Maryland Bancorp (FMB). The Merger Agreement provides for the merger of Dauphin
into FMB, with FMB as the surviving corporation (Merger).
In the Merger, shareholders of Dauphin will receive, in exchange for their
shares of Common Stock, either (i) $43 in cash (Per Share Cash Consideration)
or (ii) that number (Exchange Ratio) of AIB American Depository Shares (AIB
ADS) having a Closing Market Price (as defined below) equal to $43, provided,
that if the Closing Market Price of an AIB ADS is less than $37 per AIB ADS
then the Exchange Ratio will be fixed at 1.162 and if the Closing Price of an
AIB ADS is greater than $43 per AIB ADS then the Exchange Ratio will be fixed
at 1.000 (Per Share Stock Consideration). If the market price of an AIB ADS as
of a determination date shortly prior to closing is less than $32
(corresponding to a value of the Per Share Stock Consideration of $37.19), then
Dauphin has the right to terminate the Merger Agreement unless AIB adjusts the
Exchange Ratio such that the value of the Per Share Stock Consideration is not
less than $37.19.
AIB ADS are traded on the New York Stock Exchange under the symbol AIB. Each
AIB ADS represents six ordinary shares of AIB (AIB Ordinary Shares), which are
traded on the London and Irish stock exchanges, and may be converted into AIB
Ordinary Shares at any time.
The Closing Market Price means the average closing price on the New York
Stock Exchange for the ten New York Stock Exchange trading days ending on the
fifth business day prior to the closing date of the Merger.
Shareholders of Dauphin will be entitled to elect whether to receive the Per
Share Cash Consideration or the Per Share Stock Consideration for their shares,
provided that not less than 51% of the outstanding shares of Dauphin's Common
Stock will be exchanged for the Per Share Stock Consideration. If elections to
receive the Per Share Stock Consideration, combined with shares as to which no
election is made, constitute less than 51% of the outstanding shares of
Dauphin's Common Stock, then shares as to which an election has been made to
receive the Per Share Cash Consideration will be selected at random to be
exchanged for the Per Share Stock Consideration notwithstanding such election.
In connection with the Merger Agreement, Dauphin has entered into a Stock
Option Agreement in favor of AIB, granting AIB an option to acquire 6,112,088
shares of Dauphin's Common Stock (19.9% of the outstanding shares) at an
exercise price of $33 3/16 per share.
43
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The Merger is subject to regulatory approvals in the United States and
Ireland, and will require the approval of the shareholders of Dauphin and AIB.
It is anticipated that the Merger will be consummated in the third quarter of
1997. The merger is not expected to have a material impact on the realizability
of Dauphin's assets and liabilities.
EASTERN MORTGAGE
On July 1, 1994, Dauphin acquired Eastern Mortgage, a mortgage banking
company headquartered in Trevose, Pennsylvania, for approximately $21.0 million
in cash pursuant to a definitive agreement signed in May 1994. The acquisition
was accounted for using the purchase method of accounting. Therefore, the
results of operations of Eastern Mortgage from the date of acquisition are
included with the results of Dauphin. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $12.5 million has been
recorded as goodwill and is being amortized on a straight-line basis over 15
years.
3--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS AND INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these required reserve balances at December
31, 1996 and 1995 was approximately $41,306,000 and $80,353,000, respectively.
The Bank is required to maintain an investment in Federal Home Bank of
Pittsburgh stock of $15,559,200 which is carried at original cost and included
with equity securities.
4--INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of investment securities available-for-sale
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and other
U.S. government agencies and
corporations..................... $ 799,155 $ 1,154 $ (7,151) $ 793,158
Obligations of states and
political subdivisions........... 345,020 12,026 (1,517) 355,529
Debt securities issued by foreign
governments...................... 1,000 1,000
Corporate securities.............. 11,515 82 (1) 11,596
Mortgage-backed securities........ 955,421 6,556 (9,700) 952,277
---------- ------- -------- ----------
Total debt securities........... 2,112,111 19,818 (18,369) 2,113,560
Equity securities................. 55,669 978 56,647
---------- ------- -------- ----------
Total investment securities
available-for-sale............. $2,167,780 $20,796 $(18,369) $2,170,207
========== ======= ======== ==========
</TABLE>
44
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1995
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and other
U.S. government agencies and
corporations..................... $ 804,086 $ 6,413 $ (136) $ 810,363
Obligations of states and
political subdivisions........... 287,697 15,639 (634) 302,702
Debt securities issued by foreign
governments...................... 800 800
Corporate securities.............. 22,736 351 23,087
Mortgage-backed securities........ 705,279 7,215 (7,882) 704,612
---------- ------- ------- ----------
Total debt securities........... 1,820,598 29,618 (8,652) 1,841,564
Equity securities................. 19,272 33 19,305
---------- ------- ------- ----------
Total investment securities
available-for-sale............. $1,839,870 $29,651 $(8,652) $1,860,869
========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
---------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................. $ 194,540 $ 195,716
Due after one year through five years............... 670,439 667,467
Due after five years through ten years.............. 168,253 171,740
Due after ten years................................. 123,458 126,360
---------- ----------
1,156,690 1,161,283
Mortgage-backed securities.......................... 955,421 952,277
---------- ----------
Total debt securities............................. $2,112,111 $2,113,560
========== ==========
</TABLE>
Gains and losses from sales of investment securities available-for-sale are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Debt securities
Gross gains....................................... $1,670 $3,496 $3,366
Gross losses...................................... (43) (1,235) (1,007)
------ ------ ------
Total debt securities........................... 1,627 2,261 2,359
Equity securities, net.............................. 7 945
------ ------ ------
Total securities gains.......................... $1,634 $2,261 $3,304
====== ====== ======
</TABLE>
45
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Proceeds from sales of investment securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Debt securities.................................... $96,481 $252,613 $199,083
Equity securities.................................. 398 2,312
------- -------- --------
Total proceeds................................... $96,879 $252,613 $201,395
======= ======== ========
</TABLE>
Securities with a carrying value of $1,526,658,000 at December 31, 1996 and
$1,053,541,000 at December 31, 1995 are pledged to secure public deposits and
for other purposes as provided by law.
5--LOANS
The loan portfolio, net of unearned income, at December 31, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------- ----------
<S> <C> <C>
Commercial, financial and agricultural:
Commercial secured by real estate................ $ 732,953 $ 640,670
Agricultural..................................... 36,290 36,415
Other............................................ 795,202 719,137
Real estate, construction.......................... 114,234 97,444
Real estate, residential........................... 391,105 446,059
Consumer:
Home equity...................................... 451,742 385,194
Installment and credit card...................... 481,073 507,425
Lease financing.................................... 198,850 150,943
Unearned income.................................... (1,415) (1,949)
---------- ----------
Total loans.................................... $3,200,034 $2,981,338
========== ==========
</TABLE>
Included within the loan portfolio are loans on which the Bank has ceased the
accrual of interest and restructured loans. Such loans amounted to $16,154,000
and $12,103,000 at December 31, 1996 and 1995, respectively. If interest income
had been recorded on all such loans outstanding during the years 1996, 1995 and
1994, interest income would have been increased as shown in the following
table:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
---- ---- ------
<S> <C> <C> <C>
Interest income which would have been recorded under
original terms........................................ $759 $743 $1,187
Interest income recorded during the period............. 326 395 477
---- ---- ------
Net impact on interest income.......................... $433 $348 $ 710
==== ==== ======
</TABLE>
On December 31, 1996 and 1995 the balance of impaired loans was $12.1 million
and $11.7 million, respectively. In 1996, impaired loans of $10.5 million have
a related allowance for loan losses of $4.7 million and the remaining impaired
loans of $1.6 million have no related allowance for loan losses. In 1995,
impaired loans of $8.2 million have a related allowance for loan losses of $3.8
million and the remaining impaired loans of $3.5 million have no related
allowance for loan losses. The average balance of impaired loans for 1996 and
1995 was $13.3 million and $8.4 million and the interest recognized for the
year was $1.3 million and $.7 million,
46
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
respectively. The interest income includes $1.0 million and $.4 million,
respectively, that was recorded on the cash basis.
The Bank does not have any significant commitments to lend additional funds
on non-accrual, restructured or impaired loans at December 31, 1996.
The Bank has granted loans to officers, directors and their associates.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans, which excludes
aggregate loans totaling less than $60,000 to any one related party, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance--January 1, 1996.................................... $ 119,393
New loans................................................... 219,352
Repayments.................................................. (217,461)
---------
Balance--December 31, 1996.................................. $ 121,284
=========
</TABLE>
6--ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year........................ $41,737 $40,216 $39,182
Allowance of subsidiary sold.................... (101)
Provision charged to operations................. 6,000 5,608 7,494
Recoveries on loans charged off................. 4,633 4,089 3,041
------- ------- -------
52,370 49,913 49,616
Loans charged off............................... 9,485 8,176 9,400
------- ------- -------
Balance, end of year.............................. $42,885 $41,737 $40,216
======= ======= =======
</TABLE>
7--PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
ESTIMATED ------------------
USEFUL LIFE 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Land................................... $ 10,200 $ 10,352
Premises............................... 5 to 40 years 77,171 75,659
Leasehold improvements................. 2 to 40 years 4,080 2,476
Equipment.............................. 3 to 10 years 55,607 55,753
-------- --------
147,058 144,240
Accumulated depreciation and
amortization.......................... (73,232) (72,678)
-------- --------
Total.............................. $ 73,826 $ 71,562
======== ========
</TABLE>
Depreciation and amortization amounted to $9,205,000 for 1996, $7,665,000 for
1995 and $6,834,000 for 1994.
47
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
8--MORTGAGE BANKING
Mortgage loans serviced for others are not included in the consolidated
balance sheets. The outstanding balance of these loans at year-end and a
breakdown of mortgage banking income during the year are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Total loans serviced for others at
year-end.............................. $1,400,722 $1,283,435 $1,015,745
========== ========== ==========
Gain on sale of loans.................. $ 2,116 $ 1,946 $ 1,757
Other origination income............... 7,029 5,989 2,841
Mortgage servicing fees, net........... 21,993 9,749 1,241
Gain on sale of servicing.............. 1,256 1,046 1,623
---------- ---------- ----------
Total mortgage banking income........ $ 32,394 $ 18,730 $ 7,462
========== ========== ==========
</TABLE>
An analysis of the activity of excess, purchased, and originated mortgage
servicing rights for the years ended December 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
EXCESS PURCHASED ORIGINATED
------ --------- ----------
<S> <C> <C> <C>
Balance--January 1, 1994...................... $1,607 $ $
Additions..................................... 1,434 8,547
Amortization.................................. (588) (503)
------ ------ -------
Balance--December 31, 1994.................... 2,453 8,044
Additions..................................... 546 7,169
Amortization.................................. (911) (1,641) (495)
------ ------ -------
Balance--December 31, 1995.................... 2,088 6,403 6,674
Additions..................................... 435 18,233
Sales......................................... (3,822) (12,169)
Amortization.................................. (599) (630) (899)
------ ------ -------
Balance--December 31, 1996.................... $1,489 $2,386 $11,839
====== ====== =======
</TABLE>
The fair value of purchased and originated servicing rights was $14.7 million
at December 31, 1996. As of and for the year ended December 31, 1996, there was
no valuation allowance for purchased and originated servicing rights.
9--DEPOSITS
A summary of deposits at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------- ----------
<S> <C> <C>
Non-interest bearing deposits......................... $ 521,387 $ 518,004
Interest bearing demand deposits...................... 504,506 492,079
Savings deposits...................................... 399,008 412,185
Money market deposit accounts......................... 378,286 475,815
Time deposits......................................... 1,656,098 1,592,379
Time deposits of $100,000 or more..................... 569,285 459,074
---------- ----------
Total............................................... $4,028,570 $3,949,536
========== ==========
</TABLE>
48
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Maturities of time deposits for each of the next five years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997.......................................................... $1,450,510
1998.......................................................... 481,482
1999.......................................................... 109,658
2000.......................................................... 45,401
2001.......................................................... 95,613
</TABLE>
10--SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings generally mature within one to ninety days from the
transaction date.
A summary of aggregate short-term borrowings is as follows for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Overnight federal funds purchased.......... $ 522,650 $266,370 $438,490
Term federal funds purchased............... 75,000 260,000
Eurodollars purchased...................... 1,672
Federal Home Loan Bank borrowings.......... 149,000
Securities sold under agreements to
repurchase................................ 447,581 233,830 196,021
U.S. Treasury tax and loan notes........... 66,399 27,289 46,266
---------- -------- --------
Total short-term borrowings.............. $1,111,630 $678,161 $940,777
========== ======== ========
Average interest rate at year-end.......... 5.86% 5.33% 5.88%
Maximum amount outstanding at any month-
end....................................... $1,219,758 $958,804 $940,777
Average amount outstanding................. $ 998,730 $646,537 $778,906
Weighted average interest rate............. 5.20% 5.55% 4.12%
</TABLE>
The securities that serve as collateral for the securities sold under
agreements to repurchase are under Dauphin's control.
The Bank has approved federal funds lines of credit that amounted to
approximately $1,852,000,000 at December 31, 1996.
49
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
11--LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
-------- -------
<S> <C> <C>
Dauphin Deposit Corporation
8.70% Senior Notes due 1996.............................. $ $35,000
9% Convertible Subordinated Debentures due June 1999,
convertible into common stock at $16.06 per share....... 4,420 4,955
Variable rate mortgage (collateralized by premises)...... 235
Dauphin Deposit Bank and Trust Company
Advance from The Federal Home Loan Bank of Pittsburgh.... 150,000
-------- -------
154,420 40,190
Obligations under capitalized lease....................... 351 409
-------- -------
Total................................................... $154,771 $40,599
======== =======
</TABLE>
The borrowing of $150,000,000 is a five-year, 4.92% fixed-rate advance in
which the Federal Home Loan Bank of Pittsburgh has the option to convert to a
LIBOR adjustable-rate advance at three-month LIBOR plus three basis points
after the first three months, or quarterly thereafter. The Bank has the option
to accept the LIBOR funding or put the funds back to the Federal Home Loan Bank
of Pittsburgh without penalty.
Aggregate long-term debt maturities, for each of the next five years are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997.......................................................... $ 68
1998.......................................................... 44
1999.......................................................... 4,458
2000.......................................................... 44
2001.......................................................... 150,050
</TABLE>
12--REGULATORY MATTERS
Dauphin and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on Dauphin's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Dauphin and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. Dauphin's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Dauphin and the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes, as of December 31, 1996,
that Dauphin and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent notifications from the Federal
Reserve categorized Dauphin and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
50
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
well capitalized Dauphin and the Bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since those notifications that management believes
have changed Dauphin's or the Bank's category.
Dauphin's and the Bank's actual capital amounts and ratios are also presented
below. There was no deduction from capital for interest rate risk for Dauphin
or the Bank.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ---------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Dauphin............... $599,811 14.03% $ 328,424 ^8.0% $ 410,530 ^10.0%
The Bank.............. 518,925 12.82% 323,945 ^8.0% 404,931 ^10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Dauphin............... 555,158 13.25% 164,212 ^4.0% 246,318 ^6.0%
The Bank.............. 476,040 11.76% 161,972 ^4.0% 242,958 ^6.0%
Tier 1 Capital (to Av-
erage Assets):
Dauphin............... 555,158 9.47% 234,460 ^4.0% 293,075 ^5.0%
The Bank.............. 476,040 8.20% 232,213 ^4.0% 290,267 ^5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets):
Dauphin............... $537,012 14.87% $ 288,881 ^8.0% $ 361,101 ^10.0%
The Bank.............. 515,440 14.40% 286,443 ^8.0% 358,054 ^10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Dauphin............... 505,033 13.99% 144,440 ^4.0% 216,661 ^6.0%
The Bank.............. 473,703 13.23% 143,221 ^4.0% 214,832 ^6.0%
Tier 1 Capital (to Av-
erage Assets):
Dauphin............... 505,033 10.00% 202,004 ^4.0% 252,505 ^5.0%
The Bank.............. 473,703 9.49% 199,653 ^4.0% 249,566 ^5.0%
</TABLE>
Certain restrictions exist regarding the ability of the subsidiaries to
transfer funds to Dauphin in the form of cash dividends. The Bank may not pay
dividends to Dauphin, which would allow these risk-based capital ratios to fall
below the minimum capital requirements. Under these policies and subject to the
restrictions applicable to the Bank, the Bank could declare, without prior
regulatory approval, aggregate dividends of $2.0 million, plus net profits for
1997.
13--INCOME TAXES
The provision for income taxes, consisting primarily of Federal income taxes,
for the years 1996, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current taxes........................................ $22,012 $19,077 $18,768
Deferred taxes....................................... 3,165 4,133 3,994
------- ------- -------
Total.............................................. $25,177 $23,210 $22,762
======= ======= =======
</TABLE>
51
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation between the effective income tax rate and the statutory rate
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory Federal income tax rate......................... 35.0% 35.0% 35.0%
Tax exempt income......................................... (8.5) (8.9) (10.5)
Other, net................................................ (.3)
---- ---- -----
Effective income tax rate................................. 26.2% 26.1% 24.5%
==== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Gross unrealized losses on investment securities
available-for-sale.............................. $ 6,429 $ 3,029
Allowance for loan losses........................ 14,882 15,322
Employee benefit programs........................ 3,365 2,443
Other............................................ 972 1,031
-------- --------
Total gross deferred tax assets................ 25,648 21,825
-------- --------
Deferred tax liabilities:
Gross unrealized gains on investment securities
available-for-sale.............................. (7,279) (10,378)
Depreciation..................................... (3,144) (3,070)
Lease financing transactions..................... (20,669) (14,610)
Prepaid pension.................................. (1,255) (1,126)
Mortgage servicing rights........................ (6,068) (2,959)
Prepaid expenses................................. (1,262) (894)
Other............................................ (1,812) (1,464)
-------- --------
Total gross deferred tax liabilities........... (41,489) (34,501)
-------- --------
Net deferred tax asset (liability)............. $(15,841) $(12,676)
======== ========
</TABLE>
Included in the table above is the recognition of certain temporary
differences for which no deferred tax expense or benefit was recognized in the
consolidated statements of income. Such items include unrealized gains and
losses on certain investments in debt and equity securities and book and tax
basis differences relating to business combinations accounted for under the
purchase method of accounting.
Management is of the opinion that it is more likely than not that the
deferred tax asset of $25,648,000 will be realized since Dauphin has had a long
history of earnings and has carryback potential greater than the deferred tax
asset. Management is not aware of any evidence that would preclude Dauphin from
ultimately realizing this asset.
52
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
14--BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. The Plan's benefit formulas generally base
payments to retired employees upon their length of service and a percentage of
qualifying compensation during the final years of employment. Dauphin's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future.
The following table sets forth the pension plan's funded status and amounts
recognized in Dauphin's consolidated financial statements at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................. $37,573 $43,235
Non-vested............................................. 7,337 1,811
------- -------
Accumulated benefit obligation....................... 44,910 45,046
Effects of future compensation levels.................... 7,622 9,164
------- -------
Projected benefit obligation............................. 52,532 54,210
Plan assets at fair value................................ 69,219 63,532
------- -------
Excess of plan assets over the projected benefit
obligation.............................................. 16,687 9,322
Unrecognized net asset being amortized over 15 years..... (2,954) (3,664)
Unrecognized prior service cost.......................... 100 275
Unrecognized gain........................................ (9,065) (1,620)
------- -------
Prepaid pension cost included in the consolidated
financial statements.................................... $ 4,768 $ 4,313
======= =======
</TABLE>
The assumptions used in determining the actuarial present value of the
projected benefit obligation and the expected rate of return on plan assets are
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected return on plan assets................................... 8.50% 8.50%
Discount rate.................................................... 7.50 7.00
Rate of increase in future compensation levels................... 5.00 4.50
</TABLE>
Net pension expense (credit) for 1996, 1995 and 1994 was comprised of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Service cost.................................... $ 1,920 $ 1,568 $ 1,812
Interest cost on projected benefit obligation... 3,815 3,648 3,312
Return on plan assets........................... (8,369) (10,989) (402)
Net amortization and deferral................... 2,529 5,791 (4,623)
------- -------- -------
Net pension expense (credit).................. $ (105) $ 18 $ 99
======= ======== =======
</TABLE>
Plan assets are primarily invested in listed stocks (including 107,000 shares
of Dauphin at December 31, 1996 and 1995) and U.S. Treasury and federal agency
securities.
53
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin provides substantially all employees with postretirement benefits
other than pensions, which include health and life insurance. These
postretirement benefits other than pensions are currently not funded. The
status of the plan at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees.............................................. $ 9,381 $ 9,975
Fully eligible active plan participants............... 440 633
Other active plan participants........................ 4,761 3,991
------- -------
14,582 14,599
Unrecognized transition liability being amortized over
20 years............................................... (8,477) (9,042)
Unrecognized prior service cost......................... (650) (757)
Unrecognized net loss................................... 1,851 1,093
------- -------
Accrued postretirement obligation....................... $ 7,306 $ 5,893
======= =======
</TABLE>
The assumptions used in determining the actuarial present value of the
accumulated postretirement benefit obligation are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rate.................................................... 7.50% 7.00%
Rate of increase in future compensation levels................... 5.00 4.50
</TABLE>
The cost for postretirement benefits other than pensions for 1996, 1995 and
1994 consisted of the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost......................................... $ 504 $ 348 $ 506
Interest cost on accumulated postretirement benefit
obligation.......................................... 1,035 989 1,313
Amortization of transition obligation................ 565 565 565
Amortization of past service cost.................... 65 65 65
Net amortization and deferral........................ (89) 174
------ ------ ------
Net postretirement benefit cost..................... $2,169 $1,878 $2,623
====== ====== ======
</TABLE>
The assumed postretirement health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 16 1/2% in 1992, the year of
adoption, decreasing to an ultimate rate of 5 1/2% in 2005 (10% at December 31,
1996) and thereafter over the projected payout period of benefits.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a one-percentage-point increase in the assumed
health care cost trend would increase the accumulated postretirement benefit
obligation by $1,615,000 at December 31, 1996 and increase the aggregate of the
service and interest cost components by $209,000 for the year ended December
31, 1996.
Dauphin offers a savings plan for all eligible employees. Under the plan,
Dauphin contributes 25% of the participants' contribution which cannot exceed
10% of their salaries. Participants' contributions are at all times fully
vested, and Dauphin's contributions become fully vested with two years of
service. Contributions to the plan amounted to $670,000, $581,000 and $563,000
during 1996, 1995 and 1994, respectively.
54
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
15--STOCK-BASED COMPENSATION PLANS
At December 31, 1996 Dauphin had four stock-based compensation plans, which
are described below. Dauphin applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for the stock option plans or the employee stock
purchase plan. The compensation cost that has been charged against income for
the Performance Share Agreements was $.9 million for 1996 and $.4 million for
1995. Had compensation cost for Dauphin's stock-based compensation plans been
determined in accordance with the fair value method of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", Dauphin's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
------------------ ------------------
<S> <C> <C>
Net income:
As reported......................... $ 70,772 $ 65,565
Pro forma........................... $ 70,257 $ 65,406
Primary earnings per share:
As reported......................... $ 2.30 $ 2.12
Pro forma........................... $ 2.28 $ 2.11
</TABLE>
The effects of applying SFAS 123 for 1996 and 1995 are not indicative of
future amounts, until SFAS 123 has been applied to all outstanding non-vested
awards.
Employee Stock Purchase Plan
Under the employee stock purchase plan, all eligible employees may purchase
shares of Dauphin's common stock through payroll deductions (limited to an
amount aggregating 10% of annual base pay). The purchase price, established 30
days prior to the offering date, is not less than 85% or more than 100% of the
average market price on the offering date or exercise date, whichever is lower.
2,500,000 shares of common stock have been authorized to be offered under the
plan, of which 812,894 shares have been issued. Because of a difference between
the plan offering date, and Dauphin's year-end, no shares were under option at
December 31, 1996.
Under SFAS 123, compensation cost is recognized for the fair value of the
employees' purchase rights, which was estimated using the Black-Scholes model
with the following assumptions for 1996 and 1995, respectively: dividend yield
of 3.96% and 4.08%; an expected life of one year for both years; expected
volatility of 23.01% and 17.79%; and risk free interest rates of 5.74% and
5.61%. The fair value of those purchase rights granted in 1996 and 1995 were
$6.64 and $5.23, respectively.
Stock Option Plans
During 1987, the shareholders approved the adoption of the Stock Option Plan
of 1986 (1986 Plan). Under the 1986 Plan, Dauphin may grant either qualified or
non-qualified stock options to key employees for the purchase of up to
1,193,000 shares of common stock. During 1995, the shareholders approved the
adoption of the 1995 Stock Incentive Plan (1995 Plan). Under the 1995 Plan,
Dauphin may grant incentive stock options, non-qualified stock options,
restricted stock awards, performance share awards and other awards that provide
a participant with the right to purchase or otherwise acquire Dauphin common
stock or that are valued by reference to the market value of Dauphin common
stock. Under the 1995 Plan, Dauphin may grant up to 2,000,000 shares of common
stock. The exercise price of options granted may not be less than 85% of the
fair
55
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
market value of Dauphin's common stock at the date of grant. Options become
exercisable over periods of one to five years and expire ten years from the
date of grant, and become fully vested upon a change in control.
The fair value of each option granted under the 1986 and 1995 plans was
estimated using the Black-Scholes option-pricing model with the following
assumptions for 1996 and 1995, respectively: dividend yield of 3.91% and 4.17%;
an expected life of six years for both years; expected volatility of 21.23% and
20.85%; and risk free interest rates of 6.46% and 6.12%. The fair value of
those options granted in 1996 and 1995 were $6.32 and $4.82, respectively.
During 1996, the shareholders approved the adoption of the Non-Employee
Directors' Stock Plan of 1996 (the Directors' Plan). Under the Directors' Plan,
Dauphin may grant non-qualified stock options to non-employee directors for the
purchase of up to 150,000 shares of common stock. In addition, non-employee
Directors are permitted to defer cash fees in the form of deferred stock. The
exercise price of options granted must be 100% of the fair market value of
Dauphin's common stock at the date of grant. Options become exercisable after
one year and expire ten years from the date of grant.
The fair value of each option granted under the 1996 director's plan was
estimated using the Black-Scholes option-pricing model with the following
assumptions for 1996: dividend yield of 4.00%; an expected life of three years;
expected volatility of 19.82%; and a risk free interest rate of 6.19%. The fair
value of those options granted in 1996 was $4.19.
Stock option transactions during 1996, 1995, and 1994 are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance, December 31, 1993......................... 702,396 $18.52
Granted.......................................... 160,500 $25.63
Exercised........................................ (31,057) $14.44
Terminated....................................... (2,400) $21.10
---------
Balance, December 31, 1994......................... 829,439 $20.04
Granted.......................................... 179,000 $24.00
Exercised........................................ (109,584) $15.06
Terminated....................................... (5,000) $25.63
---------
Balance, December 31, 1995......................... 893,855 $21.41
Granted.......................................... 302,000 $29.10
Exercised........................................ (109,183) $17.46
Terminated....................................... (2,914) $12.77
---------
Balance, December 31, 1996......................... 1,083,758 $23.97
=========
</TABLE>
56
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The following table summarizes information on the stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$9.48 to $16.57................ 207,098 3.6 years $14.78
$23.72 to $25.63............... 575,660 7.2 years $24.59
$28.50 to $29.13............... 301,000 9.4 years $29.10
---------
$9.48 to $29.13................ 1,083,758 7.1 years $23.97
=========
</TABLE>
The following table summarizes information on the exercisable stock options
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE
EXERCISE PRICES AT 12/31/96 EXERCISE PRICE
--------------- ----------- --------------
<S> <C> <C>
$9.48 to $16.57................................. 207,098 $14.78
$23.72 to $25.63................................ 308,200 $24.63
-------
$9.48 to $25.63................................. 515,298 $20.67
=======
</TABLE>
Performance Share Agreements
In 1996 and 1995, Dauphin entered into Performance Share Agreements with
certain key employees under the 1995 Plan, as described above. This long-term
incentive plan grants these employees Dauphin common stock after a three year
period if specific corporate goals are realized. This incentive plan becomes
fully vested upon a change in control. There were 48,602 and 45,606 shares
granted during 1996 and 1995, respectively.
The fair value of each share granted was estimated using the Black-Scholes
option-pricing model with the following assumptions for 1996 and 1995,
respectively: dividend yield of 3.69% and 4.23%; an expected life of three
years for both years; expected volatility of 20.32% and 20.07%; and risk free
interest rates of 5.26% and 7.84%. The fair value of those options granted in
1996 and 1995 were $25.74 and $20.82, respectively.
16--STOCKHOLDERS' EQUITY
Dauphin has a shareholders' rights plan that declared a dividend distribution
of one Common Stock Purchase Right (a Right) for each outstanding share of
Common Stock of Dauphin. The Rights are exercisable only if a person or group
of affiliated persons acquires or announces an intention to acquire 18% of the
Common Stock of Dauphin and Dauphin's Board of Directors does not redeem the
Rights during the specified redemption period. Initially, each Right, upon
becoming exercisable, would entitle the holder to purchase from Dauphin one
share of Common Stock at the specified exercise price which is subject to
adjustment (currently $50 per share). Once the Rights become exercisable, if
any person or group acquires 18% of the Common Stock of Dauphin, the holder of
a Right, other than the acquiring person or group, will be entitled, among
other things, to purchase shares of Common Stock having a value equal to two
times the exercise price of the Right. The Board of Directors is entitled to
redeem the Rights for $.001 per Right at any time before expiration of the
redemption period. The Board of Directors may, at any time after the Rights
become exercisable and prior to the time any person becomes a 50% beneficial
owner of Dauphin's shares of Common Stock, exchange each of the outstanding
Rights (except Rights of the acquiring person or group which are voided) for
one share of Common Stock, subject to adjustment. The Rights will expire on
January 22, 2000, unless earlier redeemed by Dauphin.
57
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
On January 21, 1997, the Dauphin Board of Directors approved an Amendment to
Rights Agreement (Amendment), amending the Rights Agreement dated January 22,
1990 (Rights Agreement) by and between Dauphin and Dauphin Deposit Bank and
Trust Company, as Rights Agent. The purpose of the Amendment is to provide that
the entering into of the Merger Agreement with AIB and FMB and the Stock Option
Agreement described in Note 2 and the completion of the transactions
contemplated thereby (including without limitation the Merger and the exercise
of the Option (as defined in the Stock Option Agreement)) do not and will not
result in the ability of any person to exercise any Rights under the Rights
Agreement, or enable or require the Rights (as defined in the Rights Agreement)
to separate from the shares of Common Stock to which they are attached or to be
triggered or become exercisable. The Amendment was entered into by Dauphin and
the Rights Agent as of January 21, 1997, immediately prior to execution of the
Merger Agreement.
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 1996 and 1995, Dauphin repurchased 297,000
shares for $8.5 million and 630,000 shares for $16.1 million, respectively.
17--FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk and Concentrations of Credit Risk
In the normal course of business, Dauphin is a party to financial instruments
with off-balance-sheet risk which meet the financing needs of its customers
and/or which reduce Dauphin's exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, financial
guarantees and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet.
For commitments to extend credit and standby letters of credit, Dauphin's
exposure to credit loss in the event of non-performance by the other party is
represented by the contractual amount of those instruments. Dauphin uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Dauphin had the following off-balance-sheet financial instruments at December
31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------- ----------
<S> <C> <C>
Amounts representing credit risk:
Commitments to extend credit....................... $1,735,583 $1,343,251
Financial and performance standby letters of
credit............................................ 248,227 134,242
Commercial and similar letters of credit........... 718 900
Commitments to purchase securities................. 12,365
Notional or contract amounts of off-balance-sheet
financial instruments not constituting credit risk:
Forward commitments to sell in the secondary
market............................................ 133,907 62,455
Forward commitments to sell to permanent
investors......................................... 65,244 31,939
Purchased call and put options..................... 88,500
</TABLE>
58
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Commitments to extend credit, which include loans and lines of credit, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Dauphin evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained if deemed necessary by Dauphin
upon extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by Dauphin to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The terms
of the letters of credit vary from one month to 24 months and may have renewal
features. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. Dauphin holds
collateral supporting those commitments, as deemed necessary.
Most of the Bank's business activity is with customers located within the
Bank's defined market area, principally Central Pennsylvania. The Eastern
Pennsylvania and New Jersey mortgage markets, as well as numerous other states
to a lesser degree, are served by Eastern Mortgage, the Bank's mortgage
subsidiary. However, the Bank will grant commercial, residential and consumer
loans throughout the state. The loan portfolio is well diversified and the Bank
does not have any significant industry concentrations of credit risk. However,
since a significant share of the Bank's loans are within the geographic area
previously defined, a substantial portion of the Bank's debtors' ability to
honor their contracts may be significantly affected by the level of economic
activity in this area.
Derivative Financial Instruments
Dauphin's mortgage subsidiary, Eastern Mortgage and Eastern's Capital Market
division have limited involvement with derivative financial instruments.
Derivatives are used to manage interest rate risks related to the mortgage
banking business. Eastern Mortgage is exposed to interest rate risk when it
extends a commitment to a borrower for future settlement. As interest rates
increase, the valuation of the commitment to Eastern Mortgage declines. As
interest rates decrease, a borrower is more likely to abandon the commitment,
which could cause a financial loss to Eastern Mortgage if they have committed
to sell that loan for future delivery in the secondary market.
Eastern Mortgage mitigates exposures to interest rate risk through the use of
certain hedging techniques. This is accomplished by using a combination of
charging non-refundable commitment fees when the borrower elects to lock in
their interest rate; selling loans in the secondary market for future delivery
on a mandatory basis (via forward and future delivery commitments with third-
party investors); and purchasing options.
Forward commitments are contracts wherein Eastern Mortgage agrees to make
delivery of a specified type of loan at a specified future date and price. As
loans close and are pooled for delivery, forward commitments are filled and the
primary objective of hedging is achieved. As market conditions change and
impact the volume and timing of loans closing, forward commitments may be
paired-off. Any gains or losses arising from these paired-off transactions are
deferred on the date of the pair-off, and are recognized as an adjustment to
gains (losses) on sale of mortgage loans when the underlying pool of mortgage
loans is sold. When forward commitments are paired-off due to a lack of loans
to fulfill the commitment, the gain or loss is recognized on the date of the
pair-off as an adjustment to gains (losses) on sale of mortgage loans.
59
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Certain future delivery contracts to third parties stipulate the duration of
the commitment and the amount of loans deliverable under the commitment and may
require the payment of a fee. Commitment fees are capitalized when paid and
expensed as a component of gains (losses) on sale of mortgage loans when the
commitment expires or the loan is delivered.
Purchased call or put options are contracts that allow the holder of the
option to purchase or sell a financial instrument at a specified price and
within a specified period of time from the seller, or "writer", of the option.
Eastern Mortgage purchases call and put options on mortgage-backed securities
as part of its interest rate risk management strategy. The risk of loss is
limited to the price paid for the option. The cost of all such options is
amortized over the life of the option as an adjustment to gains (losses) on
sale of mortgage loans. Any gain realized at the time an option is exercised is
deferred and subsequently recognized when the underlying pool of loans is sold.
In the ordinary course of business, Eastern Mortgage may have a portion of
its mortgage loan portfolio (warehouse and pipeline, net of estimated fall-out)
exposed to interest rate risk, as volume and market conditions warrant. This
exposure represents those loans which have closed or are expected to close
which are not hedged at a given point in time. A daily exposure report
summarizing the exposure position is reviewed and adjustments are made to the
extent considered necessary. Eastern Mortgage policy limits margin changes to
50 basis points given a similar change in rates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS 107) requires disclosure of the fair
value of financial instruments. The majority of Dauphin's assets and
liabilities are considered financial instruments. Significant assumptions and
estimates were used in calculation of fair market values.
The following methods and assumptions were used to estimate the fair value of
each class of Dauphin's financial instruments for which it is practicable to
estimate that value:
Cash and short-term investments
The fair value for cash and short-term instruments is estimated to be book
value, due to the short maturity of, and negligible credit concerns within,
those instruments.
Investment securities available-for-sale
The fair value for debt and marketable equity securities is based on quoted
market prices, if available. If quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Assets held for sale
The fair value for mortgage loans held for sale is estimated using the
current secondary market rates. For the securities inventory held for sale, the
securities are recorded at the current quoted market value.
Loans
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings. The residential mortgages and certain consumer loans
include prepayment assumptions.
60
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Other financial assets
The fair value for accrued interest receivable is estimated to be the current
book value. The fair value for originated mortgage servicing rights is based on
observable market prices and the fair value of excess servicing fees is the
estimated present value of the difference between the anticipated future
servicing fees and normal servicing fees using discount rates that approximate
market rates and management's estimate of future prepayment rates.
Deposits
The fair value of deposits with no stated maturity, such as demand deposits,
savings accounts, interest bearing demand and money market deposits, is the
amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit, including certain 18 month variable rate
certificates of deposit carrying a minimum interest rate of 10% for the 18
month term which are held in certain individual retirement accounts (as
discussed herein under Note 20--Litigation), is based on the discounted value
of contractual cash flows, using the rates currently offered for deposits of
similar remaining maturities.
Short-term borrowings
The fair value of short-term borrowings is estimated using the current rates
for similar terms and maturities.
Long-term debt
The fair value of long-term debt is estimated using current rates for debt
with similar terms and remaining maturities.
Accrued interest payable
The fair value of accrued interest payable is estimated to be the current
book value.
Off-balance-sheet financial instruments
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms and
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of guarantees and
letters of credit is based on fees currently charged for similar agreements.
The fair value of options is estimated based on quoted market prices.
Limitations
The fair values estimated are dependent upon subjective assumptions and
involve significant uncertainties resulting in estimates that vary with changes
in assumptions. Any sales of financial instruments may incur potential tax and
other expenses that would not be reflected in the fair values. Any changes in
assumptions or estimation methodologies may have a material effect on the
estimated fair values disclosed. The reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques. Also, the estimates do not reflect any additional premium or
discount that could result from the sale of Dauphin's entire holdings of a
particular instrument.
61
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996 and 1995, Dauphin's estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.......... $ 176,024 $ 176,024 $ 218,785 $ 218,785
Short-term investments........... 17,379 17,379 11,573 11,573
Investment securities............ 2,170,207 2,170,207 1,860,869 1,860,869
Assets held for sale............. 207,798 207,798 87,782 87,782
Loans
Commercial..................... 1,678,679 1,670,204 1,493,666 1,485,988
Residential mortgages.......... 391,105 389,452 446,059 447,172
Consumer....................... 1,130,250 1,132,030 1,041,613 1,044,935
Allowance for loan losses...... (42,885) (41,737)
---------- ---------- ---------- ----------
Net loans.................... 3,157,149 3,191,686 2,939,601 2,978,095
Other financial assets........... 13,328 13,378 42,973 43,048
Financial liabilities:
Deposits
Non-interest bearing demand.... 521,387 521,387 518,004 518,004
Interest bearing demand and
savings....................... 1,281,800 1,281,800 1,380,079 1,380,079
Time deposits.................. 2,225,383 2,257,846 2,051,453 2,094,764
---------- ---------- ---------- ----------
Total deposits............... 4,028,570 4,061,033 3,949,536 3,992,847
Short-term borrowings............ 1,111,630 1,111,630 678,161 678,161
Long-term debt................... 154,771 159,374 40,599 44,459
Accrued interest payable......... 28,225 28,225 25,250 25,250
</TABLE>
<TABLE>
<CAPTION>
1996 1995
--------------------------- -----------------------------
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT(1) VALUE AMOUNT AMOUNT (1) VALUE
---------- --------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Off-balance-sheet
financial instruments:
Commitments to extend
credit............... $1,735,583 $ 523 $ 523 $1,343,251 $ 643 $ 758
Financial and
performance standby
letters of credit.... 248,227 2,482 134,242 1,342
Commercial and similar
letter of credit..... 718 7 900 9
Commitments to
purchase securities.. 12,365 12,365
Forward commitments to
sell in the secondary
market............... 133,907 (109) (109) 62,455 (663) (663)
Forward commitments to
sell to permanent
investors............ 65,244 31,939
Purchased call and put
options.............. 88,500 (192) (196)
</TABLE>
- --------
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from those unrecognized financial instruments.
62
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
18--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Dauphin Deposit Corporation (Parent Company Only) Condensed Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Assets:
Due from Bank (subsidiary)............................... $ 143 $ 22
Investment securities available-for-sale................. 66,081 63,815
Investment in subsidiaries
Banking subsidiary..................................... 491,413 502,964
Non-banking subsidiaries............................... 21,234 22,159
-------- --------
Total investment in subsidiaries..................... 512,647 525,123
Other assets............................................. 6,945 7,379
-------- --------
Total assets......................................... $585,816 $596,339
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accrued expenses and taxes............................. $ 10,951 $ 9,546
Long-term debt......................................... 4,420 40,190
-------- --------
Total liabilities.................................... 15,371 49,736
-------- --------
Stockholders' Equity:
Common stock........................................... 163,208 163,208
Additional paid-in capital............................. 11,084 11,103
Retained earnings...................................... 445,888 421,875
Unrealized gain on securities available-for-sale, net
of deferred taxes..................................... 5 49
-------- --------
620,185 596,235
Less: Treasury stock--at cost.......................... (49,740) (49,632)
-------- --------
Total stockholders' equity........................... 570,445 546,603
-------- --------
Total liabilities and stockholders' equity........... $585,816 $596,339
======== ========
</TABLE>
63
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of
Income
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue
Dividend income:
Banking subsidiary........................... $ 69,964 $ 66,890 $ 44,130
Non-banking subsidiaries..................... 2,400 3,450
Interest on investment securities.............. 1,331 1,409 2,155
Interest on time deposits with Bank............ 1,929 691 191
Other income................................... 866 696 460
Gains on sales of investment securities........ 56 5 345
-------- -------- --------
Total revenue.............................. 76,546 73,141 47,281
-------- -------- --------
Expenses
Interest on long-term debt..................... 3,072 3,501 3,516
Other expenses................................. 2,829 1,865 1,243
-------- -------- --------
Total expenses............................. 5,901 5,366 4,759
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries........ 70,645 67,775 42,522
Income tax benefit............................... 573 873 602
-------- -------- --------
Income before equity in undistributed net income
(loss) of subsidiaries.......................... 71,218 68,648 43,124
Equity in undistributed net income (loss):
Banking subsidiary............................. 397 276 25,389
Non-banking subsidiaries....................... (843) (3,359) 1,526
-------- -------- --------
Net income................................. $ 70,772 $ 65,565 $ 70,039
======== ======== ========
</TABLE>
64
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Cash
Flows
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income.................................... $ 70,772 $ 65,565 $ 70,039
Adjustments
Equity in undistributed net income of
subsidiaries............................... 446 3,083 (26,915)
Other, net.................................. 1,452 (2,112) 4,736
-------- -------- --------
Net cash provided by operating
activities............................... 72,670 66,536 47,860
-------- -------- --------
Investing activities
Proceeds from investment securities........... 84,858 37,477 43,484
Purchase of investment securities............. (86,900) (63,469) (24,488)
Sale of subsidiary............................ 797
-------- -------- --------
Net cash provided (used) by investing
activities............................... (2,042) (25,992) 19,793
-------- -------- --------
Financing activities
Repayment of long-term debt................... (35,235)
Issuance of treasury stock.................... 6,837 6,341 3,713
Repurchase of treasury stock.................. (8,455) (16,063) (42,413)
Cash dividends paid........................... (33,654) (30,836) (29,024)
-------- -------- --------
Net cash used by financing activities..... (70,507) (40,558) (67,724)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.............................. 121 (14) (71)
Cash and cash equivalents at beginning of year.. 22 36 107
-------- -------- --------
Cash and cash equivalents at end of year........ $ 143 $ 22 $ 36
======== ======== ========
Schedule of non-cash investing and financing
activities:
Conversion of convertible subordinated
debentures................................... $ 535 $ 258 $ 432
Net assets of subsidiaries merged............. 2,799
</TABLE>
Dauphin Deposit Corporation merged three subsidiaries (FARMCO Realty, Inc.,
Financial Realty, Inc. and Farmers Mortgage Corporation) with and into itself
in 1995. The 1994 condensed statements of income and cash flows have not been
restated.
65
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
19--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
--------------------------------- -------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $105,736 $101,970 $97,685 $93,213 $92,098 $90,272 $90,662 $90,612
Interest expense........ 58,390 56,245 52,728 48,757 47,302 46,558 47,719 46,352
-------- -------- ------- ------- ------- ------- ------- -------
Net interest income..... 47,346 45,725 44,957 44,456 44,796 43,714 42,943 44,260
Provision for loan
losses................. 1,200 1,200 1,800 1,800 1,246 1,246 1,246 1,870
Non-interest income..... 26,283 23,740 22,502 21,378 19,966 18,234 18,426 15,163
Non-interest expense.... 46,657 43,964 42,576 41,241 39,628 37,566 38,427 37,498
-------- -------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 25,772 24,301 23,083 22,793 23,888 23,136 21,696 20,055
Provision for income
taxes.................. 6,653 6,354 5,986 6,184 6,494 6,261 5,619 4,836
-------- -------- ------- ------- ------- ------- ------- -------
Net income.............. $ 19,119 $ 17,947 $17,097 $16,609 $17,394 $16,875 $16,077 $15,219
======== ======== ======= ======= ======= ======= ======= =======
Net income per share.... $ .62 $ .58 $ .56 $ .54 $ .56 $ .55 $ .52 $ .49
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
20--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 interest rate deposit 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 $198.0 million at December 31, 1996. Dauphin's right to
terminate the variable interest rate deposit 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 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. The Appeal seeks 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
66
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1996, 1995 AND 1994
remand. 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. The Superior Court
heard the oral arguments of counsel on the Appeal on March 5, 1997. 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
interest rate deposit 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 interest rate deposit product.
67
<PAGE>
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dauphin Deposit Corporation:
We have audited the accompanying consolidated balance sheets of Dauphin
Deposit Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dauphin
Deposit Corporation and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 122, Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65 on January 1, 1995. As discussed in Note
1, the Company adopted the provisions of the Financial Accounting Standards
Board's SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of on January 1, 1996.
/s/ KPMG Peat Marwick LLP
January 21, 1997
LOGO
68
<PAGE>
DAUPHIN DEPOSIT CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
69
<PAGE>
DAUPHIN DEPOSIT CORPORATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relative to directors of Dauphin is incorporated herein by
reference to Election of Directors in Dauphin's 1997 Proxy Statement.
Information relative to executive officers of Dauphin is set forth herein in
Part I under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to Executive Compensation in the 1997
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference to Record Date and Voting Rights,
Certain Beneficial Owners of Dauphin Common Stock and Security Ownership of
Dauphin Management in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to Transactions with Management in the
1997 Proxy Statement.
70
<PAGE>
DAUPHIN DEPOSIT CORPORATION
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) 1. Financial Statements
The consolidated financial statements listed on the index to Item 8 of
this Annual Report on Form 10-K are filled as a part of this Annual
Report.
(a) 2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
financial statements or in the notes thereto included in this Annual
Report.
(a) 3. Exhibits
(2) Agreement and Plan of Merger dated January 21, 1997, by and between
Allied Irish Banks, p.l.c., First Maryland Bancorp and Dauphin.
(3)(a) Articles of Incorporation, as amended, of Dauphin, are incorporated
herein by reference to Exhibit 3(b) to Dauphin's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1992 (Commission
File Number 0-8415).
(3)(b) By-Laws, as amended, of Dauphin are incorporated herein by
reference to Exhibit 3(b) to Dauphin's Annual Report on Form 10-K
for the year ended December 31, 1995 (Commission File Number 0-
8415).
(10)(a) Dauphin Stock Option Plan of 1986, as amended, is incorporated
herein by reference to Exhibit 4.1 to Amendment No. 1 to Dauphin's
Registration Statement on Form S-8, as filed with the Commission
on April 28, 1993 (Commission File Number 33-17401).
(10)(b) Dauphin Annual Management Performance Incentive Plan, as amended,
is incorporated herein by reference to Exhibit 10(b) to Dauphin's
Annual Report on Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(c) Dauphin 1995 Stock Incentive Plan is incorporated herein by
reference to Exhibit 4.1 to Dauphin's Registration Statement on
Form S-8, as filed with the Commission on June 5, 1995 (Commission
File Number 33-59941).
(10)(d) Form of Performance Share Agreement entered into in 1995 between
Dauphin and the following officers of Dauphin, Dauphin Bank and
other wholly-owned subsidiaries of Dauphin or Dauphin Bank: David
L. Brewin, Richard B. Brokenshire, Dennis L. Dinger, Robert L.
Fryer, Jr., Rick A. Gold, Christopher R. Jennings, Michael B.
Johnson, George W. King, Lawrence J. LaMaina, Jr., Stewart P.
McEntee, Richard W. Payne, III, Donald H. Ross, Robert A. Rupel,
Kenneth H. Sallade, Paul B. Shannon and Michael D. Zarcone--is
incorporated herein by reference to Exhibit 10(d) to Dauphin's
Annual Report on Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(e) Dauphin 1996 Non-Employee Directors' Stock Plan is incorporated
hereby by reference to Exhibit 10(e) to Dauphin's Annual Report on
Form 10-K for the year ended December 31, 1995 (Commission File
Number 0-8415).
(10)(f) Supplemental Executive Benefit and Change in Control Agreement,
dated as of January 23, 1984, between Dauphin Bank and William J.
King (King Agreement) is incorporated herein by reference to
Exhibit 10(c) to Dauphin's Annual Report on Form 10-K for the year
ended December 31, 1992 (Commission File Number 0-8415).
</TABLE>
71
<PAGE>
DAUPHIN DEPOSIT CORPORATION
<TABLE>
<S> <C>
(10)(g) Corrective Amendment, dated as of July 18, 1989, to the King
Agreement is incorporated herein by reference to Exhibit 10(d) to
Dauphin's Annual Report on Form 10-K for the year ended December
31, 1992 (Commission File Number 0- 8415).
(10)(h) Amendment, dated as of November 8, 1991, to the King Agreement is
incorporated herein by reference to Exhibit 10(e) to Dauphin's
Annual Report on Form 10-K for the year ended December 31, 1992
(Commission File Number 0- 8415).
(10)(i) Second Amended and Restated Supplemental Executive Benefit and
Change in Control Agreement, dated as of June 17, 1996, between
Dauphin and Christopher R. Jennings.
(10)(j) Form of Change in Control Agreement between Dauphin and the
following officers of Dauphin, Dauphin Bank and other wholly-owned
subsidiaries of Dauphin or Dauphin Bank: David L. Brewin, Richard
B. Brokenshire, Dennis L. Dinger, Rick A. Gold, Michael B.
Johnson, George W. King, Stewart P. McEntee, Richard W. Payne,
III, Donald H. Ross, Jacqueline E. Rothschild, Robert A. Rupel,
Kenneth H. Sallade, Paul B. Shannon, James J. Trupp, Jr., Michael
D. Zarcone, William T. Burke, John G. Coulson, Robert S. Jones,
Joseph T. Lysczek, Jr., Craig A. Obeck and Robert J. Unruh--is
incorporated herein by reference to Exhibit 10(j) to Dauphin's
Annual Report on Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(k) Employment and Consulting Agreement, dated as of January 27, 1992,
between FB&T Corporation, Dauphin and Lawrence J. LaMaina, Jr.
(LaMaina Agreement) is incorporated herein by reference to Exhibit
10(k) to Dauphin's Annual Report on Form 10-K for the year ended
December 31, 1992 (Commission File Number 0-8415).
(10)(l) First Amendment, dated as of April 2, 1993, to the LaMaina
Agreement is incorporated herein by reference to Exhibit 10(l) to
Dauphin's Annual Report on Form 10-K for the year ended December
31, 1993.
(10)(m) Form of Director and Executive Officer Indemnification Agreements
is incorporated herein by reference to Exhibit 10(m) to Dauphin's
Annual Report on Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(n) Amendment dated January 21, 1997, to the Form of Change in Control
Agreement listed above as Exhibit (10)(j).
(10)(o) Change in Control Agreement, dated June 17, 1996, between Dauphin
and Robert L. Fryer, Jr.
(10)(p) Form of Performance Share Agreement entered into in 1996 between
Dauphin and the following officers of Dauphin, Dauphin Bank and
other wholly-owned subsidiaries of Dauphin or Dauphin Bank--David
L. Brewin, Richard B. Brokenshire, William T. Burke, John G.
Coulson, Dennis L. Dinger, Robert L. Fryer, Jr., Rick A. Gold,
Christopher R. Jennings, Michael B. Johnson, George W. King,
Lawrence J. LaMaina, Jr., Henry K. Long, Jr., Stewart P. McEntee,
Craig A. Obeck, Richard W. Payne, III, Donald H. Ross, Jacqueline
E. Rothschild, Robert A. Rupel, Kenneth H. Sallade, Paul B.
Shannon and Michael D. Zarcone.
(11) Statement regarding computation of per share earnings.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Auditors.
(27) Financial Data Schedule.
</TABLE>
72
<PAGE>
DAUPHIN DEPOSIT CORPORATION
<TABLE>
<S> <C>
(99)(a) The Rights Agreement, dated as of January 22, 1990, between
Dauphin and Dauphin Bank, as Rights Agent, is incorporated herein
by reference to Exhibit 1 to Dauphin's Current Report on Form 8-K,
dated January 22, 1990, and filed with the Securities and Exchange
Commission on February 9, 1990.
(99)(b) Amendment to Rights Agreement, dated as of January 21, 1997,
between Dauphin and Dauphin Bank, as Rights Agent, is incorporated
herein by reference to Exhibit 1 to Dauphin's Current Report on
Form 8-K dated January 21, 1997 (Commission File Number 0-8415).
(99)(c) Stock Option Agreement, dated January 21, 1997, between Dauphin
and Allied Irish Banks, p.l.c.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1996.
</TABLE>
73
<PAGE>
DAUPHIN DEPOSIT CORPORATION
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Dauphin Deposit Corporation
February 18, 1997 /s/ Christopher R. Jennings
By: _________________________________
CHRISTOPHER R. JENNINGS
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT IS SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
DATE
/s/ Christopher R. Jennings Chairman of the February 18,
- ------------------------------------- Board, Chief 1997
CHRISTOPHER R. JENNINGS Executive Officer
and Director
/s/ Robert L. Fryer, Jr. President, Chief February 18,
- ------------------------------------- Operating Officer 1997
ROBERT L. FRYER, JR. and Director
/s/ Paul B. Shannon Vice Chairman and February 18,
- ------------------------------------- Chief Credit Policy 1997
PAUL B. SHANNON Officer
/s/ Lawrence J. LaMaina, Jr. Vice Chairman and February 18,
- ------------------------------------- Director 1997
LAWRENCE J. LAMAINA, JR.
/s/ Dennis L. Dinger Senior Executive February 18,
- ------------------------------------- Vice President, 1997
DENNIS L. DINGER Chief Fiscal and
Administrative
Officer (Principal
Financial Officer)
/s/ Joseph T. Lysczek, Jr. Senior Vice February 18,
- ------------------------------------- President and 1997
JOSEPH T. LYSCZEK, JR. Treasurer
74
<PAGE>
DAUPHIN DEPOSIT CORPORATION
DATE
/s/ J. Edward Beck, Jr. Director February 18,
- ------------------------------------- 1997
J. EDWARD BECK, JR.
/s/ John R. Buchart Director February 18,
- ------------------------------------- 1997
JOHN R. BUCHART
Director
- -------------------------------------
DEREK C. HATHAWAY
Director
- -------------------------------------
ALFRED G. HEMMERICH
/s/ Lee H. Javitch Director February 18,
- ------------------------------------- 1997
LEE H. JAVITCH
/s/ Richard E. Jordan, II Director February 18,
- ------------------------------------- 1997
RICHARD E. JORDAN, II
Director
- -------------------------------------
WILLIAM J. KING
/s/ William T. Kirchhoff Director February 18,
- ------------------------------------- 1997
WILLIAM T. KIRCHHOFF
/s/ Andrew Maier, II Director February 18,
- ------------------------------------- 1997
ANDREW MAIER, II
/s/ Robert F. Nation Director February 18,
- ------------------------------------- 1997
ROBERT F. NATION
75
<PAGE>
DAUPHIN DEPOSIT CORPORATION
DATE
/s/ Jean D. Seibert Director February 18,
- ------------------------------------- 1997
JEAN D. SEIBERT
/s/ R. Champlin Sheridan, Jr. Director February 18,
- ------------------------------------- 1997
R. CHAMPLIN SHERIDAN, JR.
Director
- -------------------------------------
L. ANDREW ZAUSNER, ESQ.
76
<PAGE>
DAUPHIN DEPOSIT CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER PAGE NUMBER
------- -----------
<C> <S> <C>
(2) Agreement and Plan of Merger dated January 21, 1997, by
and between Allied Irish Banks, p.l.c., First Maryland
Bancorp and Dauphin.
(3)(a) Articles of Incorporation, as amended, of Dauphin, are
incorporated herein by reference to Exhibit 3(b) to
Dauphin's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992 (Commission File Number 0-
8415).
(3)(b) By-Laws, as amended, of Dauphin are incorporated herein
by reference to Exhibit 3(b) to Dauphin's Annual Report
on Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(a) Dauphin Stock Option Plan of 1986, as amended, is
incorporated herein by reference to Exhibit 4.1 to
Amendment No. 1 to Dauphin's Registration Statement on
Form S-8, as filed with the Commission on April 28, 1993
(Commission File Number 33-17401).
(10)(b) Dauphin Annual Management Performance Incentive Plan, as
amended, is incorporated herein by reference to Exhibit
10(b) to Dauphin's Annual Report on Form 10-K for the
year ended December 31, 1995 (Commission File Number 0-
8415).
(10)(c) Dauphin 1995 Stock Incentive Plan is incorporated herein
by reference to Exhibit 4.1 to Dauphin's Registration
Statement on Form S-8, as filed with the Commission on
June 5, 1995 (Commission File Number 33-59941).
(10)(d) Form of Performance Share Agreement entered into in 1995
between Dauphin and the following officers of Dauphin,
Dauphin Bank and other wholly-owned subsidiaries of
Dauphin or Dauphin Bank: David L. Brewin, Richard B.
Brokenshire, Dennis L. Dinger, Robert L. Fryer, Jr.,
Rick A. Gold, Christopher R. Jennings, Michael B.
Johnson, George W. King, Lawrence J. LaMaina, Jr.,
Stewart P. McEntee, Richard W. Payne, III, Donald H.
Ross, Robert A. Rupel, Kenneth H. Sallade, Paul B.
Shannon and Michael D. Zarcone--is incorporated herein
by reference to Exhibit 10(d) to Dauphin's Annual Report
on Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(e) Dauphin 1996 Non-Employee Directors' Stock Plan is
incorporated hereby by reference to Exhibit 10(e) to
Dauphin's Annual Report on Form 10-K for the year ended
December 31, 1995 (Commission File Number 0-8415).
(10)(f) Supplemental Executive Benefit and Change in Control
Agreement, dated as of January 23, 1984, between Dauphin
Bank and William J. King (King Agreement) is
incorporated herein by reference to Exhibit 10(c) to
Dauphin's Annual Report on Form 10-K for the year ended
December 31, 1992 (Commission File Number 0-8415).
(10)(g) Corrective Amendment, dated as of July 18, 1989, to the
King Agreement is incorporated herein by reference to
Exhibit 10(d) to Dauphin's Annual Report on Form 10-K
for the year ended December 31, 1992 (Commission File
Number 0-8415).
(10)(h) Amendment, dated as of November 8, 1991, to the King
Agreement is incorporated herein by reference to Exhibit
10(e) to Dauphin's Annual Report on Form 10-K for the
year ended December 31, 1992 (Commission File Number 0-
8415).
(10)(i) Second Amended and Restated Supplemental Executive
Benefit and Change in Control Agreement, dated as of
June 17, 1996, between Dauphin and Christopher R.
Jennings.
</TABLE>
77
<PAGE>
DAUPHIN DEPOSIT CORPORATION
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER PAGE NUMBER
------- -----------
<C> <S> <C>
(10)(j) Form of Change in Control Agreement between Dauphin and
the following officers of Dauphin, Dauphin Bank and
other wholly-owned subsidiaries of Dauphin or Dauphin
Bank: David L. Brewin, Richard B. Brokenshire, Dennis L.
Dinger, Rick A. Gold, Michael B. Johnson, George W.
King, Stewart P. McEntee, Richard W. Payne, III, Donald
H. Ross, Jacqueline E. Rothschild, Robert A. Rupel,
Kenneth H. Sallade, Paul B. Shannon, James J. Trupp,
Jr., Michael D. Zarcone, William T. Burke, John G.
Coulson, Robert S. Jones, Joseph T. Lysczek, Jr., Craig
A. Obeck and Robert J. Unruh--is incorporated herein by
reference to Exhibit 10(j) to Dauphin's Annual Report on
Form 10-K for the year ended December 31, 1995
(Commission File Number 0-8415).
(10)(k) Employment and Consulting Agreement, dated as of January
27, 1992, between FB&T Corporation, Dauphin and Lawrence
J. LaMaina, Jr. (LaMaina Agreement) is incorporated
herein by reference to Exhibit 10(k) to Dauphin's Annual
Report on Form 10-K for the year ended December 31, 1992
(Commission File Number 0-8415).
(10)(l) First Amendment, dated as of April 2, 1993, to the
LaMaina Agreement is incorporated herein by reference to
Exhibit 10(l) to Dauphin's Annual Report on Form 10-K
for the year ended December 31, 1993.
(10)(m) Form of Director and Executive Officer Indemnification
Agreements is incorporated herein by reference to
Exhibit 10(m) to Dauphin's Annual Report on Form 10-K
for the year ended December 31, 1995 (Commission File
Number 0-8415).
(10)(n) Amendment dated January 21, 1997, to the Form of Change in
Control Agreement listed above as Exhibit (10)(j).
(10)(o) Change in Control Agreement, dated June 17, 1996,
between Dauphin and Robert L. Fryer, Jr.
(10)(p) Form of Performance Share Agreement entered into in 1996
between Dauphin and the following officers of Dauphin,
Dauphin Bank and other wholly-owned subsidiaries of
Dauphin or Dauphin Bank--David L. Brewin, Richard B.
Brokenshire, William T. Burke, John G. Coulson, Dennis L.
Dinger, Robert L. Fryer, Jr., Rick A. Gold, Christopher R.
Jennings, Michael B. Johnson, George W. King, Lawrence J.
LaMaina, Jr., Henry K. Long, Stewart P. McEntee, Craig A.
Obeck Richard W. Payne, III, Donald H. Ross, Jacqueline E.
Rothschild, Robert A. Rupel, Kenneth H. Sallade, Paul B.
Shannon and Michael D. Zarcone.
(11) Statement regarding computation of per share earnings.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors.
(27) Financial Data Schedule.
(99)(a) The Rights Agreement, dated as of January 22, 1990,
between Dauphin and Dauphin Bank, as Rights Agent, is
incorporated herein by reference to Exhibit 1 to
Dauphin's Current Report on Form 8-K, dated January 22,
1990, and filed with the Securities and Exchange
Commission on February 9, 1990.
(99)(b) Amendment to Rights Agreement, dated as of January 21,
1997, between Dauphin and Dauphin Bank, as Rights Agent,
is incorporated herein by reference to Exhibit 1 to
Dauphin's Current Report on Form 8-K dated January 21,
1997 (Commission File Number 0-8415).
(99)(c) Stock Option Agreement, dated January 21, 1997, between
Dauphin and Allied Irish Banks, p.l.c.
</TABLE>
78
<PAGE>
Exhibit 2
AGREEMENT AND PLAN OF MERGER
by and between
ALLIED IRISH BANKS, plc
("Acquiror")
FIRST MARYLAND BANCORP
("Acquiror Sub")
and
DAUPHIN DEPOSIT CORPORATION
("the "Company")
January 21, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I - THE MERGER 1
1.1. Structure of the Merger 1
1.2. Conversion of Stock 1
1.3. Exchange Procedures 6
1.4. Options 9
1.5. Other Rights 10
1.6. Convertible Debentures 10
1.7. Closing 11
ARTICLE II - REPRESENTATIONS AND WARRANTIES 11
2.1. Organization and Capitalization of Acquiror
and Acquiror Sub 12
2.2. Organization and Capitalization of the Company 12
2.3. Rights, etc 12
2.4. Capital Stock 13
2.5. Authority 13
2.6. Subsidiaries 13
2.7. Authorization and Validity of Agreement 13
2.8. No Violations 14
2.9. Securities Exchange Act Reports 14
2.10. Absence of Certain Changes or Events 15
2.11. Taxes 15
2.12. Absence of Claims 16
2.13. Absence of Regulatory Actions 16
2.14. Labor Matters 16
2.15. Employee Benefit Plans 16
2.16. Material Contracts 18
2.17. Title to Assets 18
2.18. Knowledge as to Conditions 19
2.19. Compliance With Laws 19
2.20. Acquiror Common Stock 19
2.21. Fees 19
2.22. Registration Statement; Proxy Statement 19
2.23. Environmental Matters 20
2.24. Takeover Laws; Rights Plans 21
2.25. Vote Required 22
ARTICLE III - CONDUCT PRIOR TO CLOSING 22
3.1. Access to Information; Notice of Changes;
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Confidentiality 22
3.2. Conduct of the Business of the Company Pending
the Closing Date 23
3.3. Conduct of the Business of Acquiror Pending
the Closing Date 25
3.4. Dividends 26
3.5. No Solicitation of Other offers 26
3.6. Certain Filings, Consents and Arrangements 27
3.7. Best Efforts 27
3.8. Publicity 27
3.9. Shareholder Approvals 27
3.10. Registration Statement 28
3.11. The Company Rights Agreement 29
3.12. Securities Act 29
3.13. Additional Agreements 30
3.14. Listing 30
ARTICLE IV - CONDITIONS PRECEDENT TO MERGER 30
4.1. Conditions Precedent to Obligations of
All Parties 30
4.2. Conditions Precedent to Obligations of
Acquiror 32
4.3. Conditions Precedent to Obligation of
the Company 33
ARTICLE V - COVENANTS 34
5.1. Tax-Free Reorganization Treatment 34
5.2. Certain Contracts 34
5.3. Employee Benefits 34
5.4. Indemnification; Directors' and Officers'
Insurance 35
5.5. Certain Director and Officer Positions 37
ARTICLE VI - TERMINATION 38
6.1. Termination 38
6.2. Effect of Termination 39
ARTICLE VII - MISCELLANEOUS 39
7.1. Certain Definitions; Interpretation 40
7.2. Fees and Expenses 41
7.3. Survival 41
7.4. Public Announcements 41
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
7.5. Notices 41
7.6. Entire Agreement 42
7.7. Binding Effect; Benefit; Assignment 42
7.8. Waiver 43
7.9. Further Actions 43
7.10. Counterparts 43
7.11. Applicable Law 43
7.12. Severability 43
EXHIBITS
Exhibit A: Stock Option Agreement [see Exhibit(99)(c)]
Exhibit B: Employment Agreement
and Change in Control Retention
Payments
Exhibit C: Additional Benefits Provisions
</TABLE>
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<PAGE>
INDEX TO DEFINITIONS
--------------------
<TABLE>
<CAPTION>
Term Location of Definition
- ---- ----------------------
<S> <C>
Acquiror Preamble
Acquiror ADS 1.2(a)
Acquiror Meeting 2.22
Acquiror Ordinary Shares 1.2(a)
Acquiror Sub Preamble
Acquiror Sub Common Stock 2.1
Acquiror Sub Meeting 2.22
Acquiror Sub Preferred Stock 2.1
Acquisition Proposal 3.5
ADR 1.3
Affiliate 3.12(a)
Agreement Preamble
Bank Regulators 2.13
Benefit Plans 2.15
Blue Sky 2.8
Business Day 7.1
Cash Election Shares 1.2(b)
Cash Out 1.4(a)
Closing Date 1.7
Closing Market Price 1.2(a)
Company Preamble
Company Common Stock 1.2(a)
Company Meeting 2.22
Company Right 1.2(a)
Company Rights Agreement 1.2(a)
Contractual Consents 2.16
Control 7.1
Converted Cash Election Shares 1.2(c)
Costs 5.4(a)
Debentures 1.6
Deposit Agreement 1.2(a)
Depositary 1.2(a)
Dissenters' Shares 1.2(a)
Dollar 7.1
Effective Date 1.7
Effective Time 1.7
Election 1.2(b)
Election Deadline 1.2(d)
Election Form 1.2(b)
Environmental Law 2.23
ERISA 2.15
Exchange Agent 1.2(b)
Exchange Fund 1.3(a)
Exchange Option 1.4(a)
Exchange Ratio 1.2(a)
Federal Reserve Board 4.1(b)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Indemnified Parties 5.4(a)
IRS 2.15
Mailing Date 1.2(d)
Market Price 7.1
Material 7.1
Material Adverse Effect 7.1
Maximum Amount 5.4(c)
Merger 1.1
MGCL 1.1
No-Election Shares 1.2(b)
Old Certificates 1.2(d)
Option Plans 1.4(a)
Outstanding Option 1.4(a)
Outstanding Rights 1.5
Outstanding Shares 1.2(a)
PBCL 1.1
Pension Plan 2.15
Per Share Cash Consideration 1.2(a)
Per Share Stock Consideration 1.2(a)
Person 7.1
Previously Disclosed Art. 2
Proxy Statement 2.22
Proxy Statement/Prospectus 2.22
Registration Statement 2.22
Reports 2.9
Rights 2.3
SEC 2.9
SEC Documents Art. 2
Securities Exchange Act Art. 2
Securities Act Art. 2
Shareholder Meeting 3.9
Stock Election Shares 1.2(b)
Stock Number 1.2(a)
Stock Option Agreement Preamble
Stock-Selected No-Election Shares 1.2(c)
Subsidiary 7.1
Surviving Institution 1.1
Takeover Laws 2.24
Termination Right Determination Date 6.1(f)
$ 7.1
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made this 21st day
of January, 1997, by and among ALLIED IRISH BANKS, plc, an Irish company
("Acquiror"), FIRST MARYLAND BANCORP, a Maryland corporation and a subsidiary of
Acquiror ("Acquiror Sub"), and DAUPHIN DEPOSIT CORPORATION, a Pennsylvania
corporation (the "Company").
WHEREAS, the respective Boards of Directors of Acquiror, Acquiror Sub
and the Company have approved the acquisition of the Company by Acquiror and
Acquiror Sub, subject to the terms and conditions of this Agreement;
WHEREAS, as a condition and inducement to Acquiror's willingness to
enter into this Agreement, concurrently with the execution and delivery of this
Agreement, the Company has executed and delivered a Stock Option Agreement with
Acquiror (the "Stock Option Agreement") in substantially the form attached
hereto as Exhibit A, pursuant to which the Company is granting to Acquiror an
option to purchase, under certain circumstances, shares of Company Common Stock.
NOW THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, representations, warranties and agreements herein contained,
the parties, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
----------
1.1. Structure of the Merger. Subject to the terms and conditions
-----------------------
of this Agreement, at the Effective Time (as defined in Section 1.7 hereof), the
Company will merge with and into Acquiror Sub (the "Merger"), with Acquiror Sub
being the surviving institution (the "Surviving Institution") pursuant to the
provisions of, and with the effects provided in, the Pennsylvania Business
Corporation Law ("PBCL") and the Maryland General Corporation Law (the "MGCL").
At the Effective Time, the separate corporate existence of the Company shall
cease, and Acquiror Sub shall continue as the Surviving Institution. The
Articles of Incorporation of Acquiror Sub, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation of the Surviving
Institution until thereafter amended as provided by law.
1.2. Conversion of Stock.
-------------------
(a) (i) At the Effective Time, each share of common stock of
the Company, par value $5.00 per share (the "Company Common Stock"), including
each attached right (a
<PAGE>
"Company Right") issued pursuant to the Rights Agreement dated as of January 22,
1990 between the Company and Dauphin Deposit Bank and Trust Company as Rights
Agent (the "Company Rights Agreement"), then issued and outstanding (other than
(i) shares which have not been voted in favor of the approval of the Merger and
with respect to which dissenter's rights shall have been perfected in accordance
with applicable provisions of the PBCL (the "Dissenters' Shares") and (ii)
shares held directly or indirectly by Acquiror, excluding shares held in a
fiduciary or custodial capacity or in satisfaction of a debt previously
contracted) (the "Outstanding Shares") shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
represent the right to receive, at the election of each record holder thereof as
provided herein, but subject to the election and allocation procedures set forth
herein:
(A) cash in the amount of Forty-Three Dollars ($43)
(the "Per Share Cash Consideration"); or
(B) that number (the "Exchange Ratio") of Acquiror
ADSs (as defined below) having a Closing Market Price (as defined below) as of
the Election Deadline (as defined below) equal to Forty-Three Dollars ($43);
provided, however, that (A) if the Closing Market Price of an Acquiror ADS is
- -------- -------
less than Thirty-Seven Dollars ($37) per Acquiror ADS then the Exchange Ratio
shall be 1.1620, and (B) if the Closing Market Price of an Acquiror ADS is
greater than Forty-Three Dollars ($43) per Acquiror ADS then the Exchange Ratio
shall be 1.0000 (the "Per Share Stock Consideration");
provided, that not less than fifty-one percent (51%) of the shares of the
- --------
Company Common Stock issued as of the Effective Time (such number, the "Stock
Number") shall be converted into the right to receive the Per Share Stock
Consideration.
(ii) References herein to "Acquiror ADSs" shall mean
American Depository Shares each representing six (6) ordinary shares of
Acquiror, IR 25p each ("Acquiror Ordinary Shares") deposited with The Bank of
New York, as Depositary (the "Depositary"), pursuant to the Deposit Agreement
dated as of November 8, 1990 (the "Deposit Agreement"). The "Closing Market
Price" shall mean the Market Price (as defined in Section 7.1 hereof) of an
Acquiror ADS as of the second Business Day immediately preceding the Election
Deadline. Acquiror will promptly calculate and make public disclosure of the
Closing Market Price.
(iii) If the Acquiror effects a stock dividend (which
shall not include the issuance of shares pursuant
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to a dividend reinvestment plan), reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction, after the date hereof
and prior to the Effective Time, the references in clause (B) of Section
1.2(a)(i) to the figures $37 and $43, and the references in Section 6.1(f) to
the figure $32, shall be appropriately adjusted.
(iv) No fractional Acquiror ADSs will be issued pursuant
hereto, and Acquiror shall pay cash in lieu of any fractional Acquiror ADS which
otherwise would be issuable. Any such cash payments shall be made on the basis
of the Market Price of Acquiror ADSs as of the Effective Time.
(v) As of the Effective Time, each share of the Company
Common Stock held directly or indirectly by Acquiror, excluding shares held in a
fiduciary or custodial capacity or in satisfaction of a debt previously
contracted, and each share held as treasury stock of the Company, shall be
canceled, retired and cease to exist, and no exchange or payment shall be made
with respect thereto. Each issued and outstanding share of common stock of
Acquiror Sub shall continue to be an issued and outstanding share of common
stock of the Surviving Institution.
(vi) Dissenters' Shares shall be paid for in accordance
with applicable provisions of the PBCL and thereupon shall be canceled, retired
and cease to exist.
(vii) The exchange of Company Common Stock and attached
Company Rights for the merger consideration as provided herein shall constitute
a redemption of such Company Rights pursuant to Section 23 of the Rights
Agreement. To the extent that any shares of Company Common Stock are
Dissenters' Shares or are otherwise not so exchanged, then the Company shall
redeem or otherwise extinguish the Company Rights attached to such unexchanged
shares of Company Common Stock as of the Effective Time.
(b) Subject to the allocation procedures set forth in Section
1.2(c), each record holder of outstanding Shares will be entitled (i) to elect
to receive Acquiror ADSs for all or some of the shares of Company Common Stock
("Stock Election Shares") held by such record holder, (ii) to elect to receive
cash for all or some of the shares of Company Common Stock ("Cash Election
Shares") held by such record holder or (iii) to indicate that such holder makes
no such election for all or some of the shares of Company Common Stock ("No-
Election Shares") held by such record holder. All such elections (each, an
"Election") shall be made on a form designed for that purpose by Acquiror and
reasonably
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<PAGE>
acceptable to the Company (an "Election Form"). Any Outstanding Shares with
respect to which the record holder thereof shall not, as of the Election
Deadline (as defined in Section 1.2(d)), have properly submitted to the Exchange
Agent (as hereinafter defined) a properly completed Election Form shall be
deemed to be No-Election Shares. A record holder acting in different capacities
shall be entitled to submit an Election Form for each capacity in which such
record holder so acts with respect to each Person for which it so acts. The
Exchange agent (the "Exchange Agent") shall be a United States financial
institution selected by Acquiror and reasonably acceptable to the Company.
(c) Not later than the Effective Date, Acquiror shall cause the
Exchange Agent to effect the allocation among the holders of Company Common
Stock of rights to receive the Per Share Stock Consideration or the Per Share
Cash Consideration in the Merger as follows:
(i) Number of Stock Elections Less Than Stock Number.
------------------------------------------------
If the number of Stock Election Shares is less than the Stock Number, then
(A) all Stock Election Shares shall be converted
into the right to receive the Per Share Stock Consideration,
(B) the Exchange Agent shall select (by random
selection) from among the No-Election Shares a sufficient number of No-Election
Shares such that the sum of such number and the number of Stock Election Shares
shall equal as closely as practicable but be not less than the Stock Number, and
all such selected shares ("Stock-Selected No-Election Shares") shall be
converted into the right to receive the Per Share Stock Consideration, provided
that if the sum of all No-Election Shares and Stock Election Shares is less than
the Stock Number, all No-Election Shares shall be converted into the right to
receive the Per Share Stock Consideration, and thereby become Stock-Selected No-
Election Shares,
(C) if the sum of Stock Election Shares and No-
Election Shares is less than the Stock Number, the Exchange Agent shall convert
(by random selection) a sufficient number of Cash Election Shares into Stock
Election Shares ("Converted Cash Election Shares") such that the sum of Stock
Election Shares, No-Election Shares and Converted Cash Election Shares equals as
closely as practicable but be not less than the Stock Number, and all Converted
Cash Election Shares shall be converted into the right to receive the Per Share
Stock Consideration,
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<PAGE>
(D) any Cash Election Shares that are not Converted
Cash Election Shares shall be converted into the right to receive the Per Share
Cash Consideration, and
(E) if there are No-Election Shares that are not
Stock-Selected No-Election Shares, Acquiror shall instruct the Exchange Agent
what number of such shares shall be converted into the right to receive the Per
Share Cash Consideration and what number of such shares shall be converted into
the right to receive the Per Share Stock Consideration, and if Acquiror shall
instruct the Exchange Agent that certain of such shares shall be converted into
the right to receive the Per Share Cash Consideration and that the remainder of
such shares shall be converted into the right to receive the Per Share Stock
Consideration, the Exchange Agent shall select among such shares by random
selection; or
(ii) Number of Stock Elections Greater Than or Equal to
--------------------------------------------------
Stock Number. If the number of Stock Election Shares is greater than or equal
- ------------
to the Stock Number, then
(A) all Stock Election Shares shall be converted
into the right to receive the Per Share Stock Consideration,
(B) all Cash Election Shares shall be converted
into the right to receive the Per Share Cash Consideration, and
(C) Acquiror shall instruct the Exchange Agent what
number of No-Election Shares shall be converted into the right to receive the
Per Share Cash Consideration and what number of No-Election Shares shall be
converted into the right to receive the Per Share Stock Consideration, and if
Acquiror shall instruct the Exchange Agent that certain of such shares shall be
converted into the right to receive the Per Share Cash Consideration and that
the remainder of such shares shall be converted into the right to receive the
Per Share Stock Consideration, the Exchange Agent shall select among such shares
by random selection.
(iii) Notwithstanding the foregoing, a Person who
immediately prior to the Effective Time owned (for purposes of the Internal
Revenue Code) 5% or more of the outstanding shares of Company Common Stock and
who does not elect to receive Per Share Cash Consideration for all his shares,
shall deliver a written agreement, in a form reasonably acceptable to Acquiror,
containing customary
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<PAGE>
representations to the effect that such holder has no present intention to sell,
exchange or otherwise dispose of such shares of Acquiror Common Stock to be
received in exchange for such shares of Company Common Stock, and if such holder
shall not deliver such a written agreement, in a form reasonably acceptable to
Acquiror, at the election of Acquiror such Person shall instead receive the Per
Share Cash Consideration with respect to such shares, regardless of the election
(or lack thereof) made by such Person in its Election Form.
(d) Not later than the 25th Business Day prior to the
anticipated Effective Date or such other date as the parties may agree in
writing (the "Mailing Date"), Acquiror shall mail an Election Form and a letter
of transmittal to each Person that was a holder of record of Company Common
Stock immediately prior to the Mailing Date. To be effective, an Election Form
must be properly completed, signed and actually received by the Exchange Agent
not later than 5:00 p.m., Eastern Time, on the second Business Day preceding the
Effective Date (which will be not earlier than the 20th day after the Mailing
Date) (the "Election Deadline") and accompanied by the certificates formerly
representing all of the Outstanding Shares ("Old Certificates") as to which the
Election is being made (or an appropriate guarantee of delivery by an eligible
organization). Acquiror shall have reasonable discretion, which it may delegate
in whole or in part to the Exchange Agent, to determine whether Election Forms
have been properly completed, signed and timely submitted or to disregard
defects in Election Forms; such decisions of Acquiror (or of the Exchange Agent)
shall be conclusive and binding. Neither Acquiror nor the Exchange Agent shall
be under any obligation to notify any Person of any defect in an Election Form
submitted to the Exchange Agent. The Exchange Agent and Acquiror shall also make
all computations contemplated by Section 1.2 hereof. For purposes hereof, all
calculations of the Acquiror Market Price and the Exchange Ratio shall be
rounded to the nearest one thousandth.
1.3. Exchange Procedures. Old Certificates previously representing
-------------------
shares of Company Common Stock shall be exchanged for cash and/or receipts
("ADRs") representing whole Acquiror ADSs (and cash in lieu of fractional
Acquiror ADSs) issued in consideration therefor in accordance with this Section
1.3.
(a) As of the Effective Time, Acquiror or Acquiror Sub shall
deposit, or shall cause to be deposited, with the Exchange Agent for the benefit
of the holders of shares of Company Common Stock for exchange in accordance with
this Section 1.3, ADRs representing the Acquiror ADSs (and the cash
-6-
<PAGE>
in lieu of fractional Acquiror ADSs) in the amount of the merger consideration
(such cash, and ADRs, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund") to be issued and
paid pursuant to Section 1.2 in exchange for Outstanding Shares.
(b) Promptly after the Effective Time, Acquiror shall cause the
Exchange Agent to mail to each holder of record of Company Common Stock who has
not previously delivered such holders Old Certificates pursuant to the election
procedures set forth in Section 1.2: (i) a letter of transmittal specifying
that delivery shall be effected, and risk of loss and title to the Old
Certificates shall pass, only upon delivery of the Old Certificates to the
Exchange Agent, which shall be in a form and contain any other provisions as
Acquiror and Company may reasonably agree; and (ii) instructions for use in
effecting the surrender of the Old Certificates in exchange for the merger
consideration. Upon the proper surrender of an Old Certificate to the Exchange
Agent, together with a properly completed and duly executed letter of
transmittal, the holder of such Old Certificate shall be entitled to receive in
exchange therefor (x) a check in the amount of that amount of cash, (y) an ADR
representing that number of whole Acquiror ADSs, and (z) a check representing
the amount of cash in lieu of any fractional Acquiror ADSs and unpaid dividends
and distributions, if any, which such holder has the right to receive in respect
of the old Certificate surrendered pursuant to the provisions of Section 1.2,
and the Old Certificate so surrendered shall forthwith be canceled. No interest
will be paid or accrued on the cash payable pursuant to Section 1.2, or the cash
in lieu of fractional Acquiror ADSs and unpaid dividends and distributions, if
any, payable to holders of Old Certificates. If, after the Effective Time, Old
Certificates are presented to Acquiror or Acquiror Sub, they shall be canceled
and exchanged for the cash Acquiror ADSs and cash in lieu of fractional shares,
if any, deliverable in respect thereof pursuant to this Agreement in accordance
with the procedures set forth in this Section 1.3.
(c) Whenever a dividend or other distribution is declared by
Acquiror on the Acquiror Ordinary Shares, the record date for which is at or
after the Effective Time, the declaration shall include dividends or other
distributions on all Acquiror ADSs issuable pursuant to this Agreement; provided
that after the 90th day following the Effective Date no dividend or other
distribution declared or made on the Acquiror Ordinary Shares shall be paid to
the holder of any unsurrendered Old Certificate with respect to the Acquiror
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<PAGE>
ADSs represented thereby until the holder of such Old Certificate shall have
duly surrendered such Old Certificate in accordance with Section 1.2 or this
Section 1.3.
(d) From and after the Effective Time, there shall be no
transfers on the stock transfer records of the Company of any shares of Company
Common Stock that were outstanding immediately prior to the Effective Time. In
the event of a transfer of ownership of any Company Common Stock not registered
in the transfer records of Company, a certificate representing the proper number
of Acquiror ADSs, together with a check for the cash to be paid in lieu of
fractional Acquiror ADSs and the proper amount of Per Share Cash Consideration,
may be issued to the transferee if the Old Certificate representing such Company
Common Stock is presented to the Exchange Agent, accompanied by documents
sufficient (1) to evidence and effect such transfer and (2) to evidence that all
applicable stock transfer taxes have been paid.
(e) Any portion of the Exchange Fund (including the proceeds of
any investments thereof and any Acquiror ADSs) that remains unclaimed by the
shareholders of the Company six months after the Effective Time shall, at the
Acquiror's request, be repaid to Acquiror or to the Depositary, as applicable.
Any shareholders of the Company who have not theretofore surrendered their old
Certificates in accordance with Section 1.2 or this Section 1.3 shall thereafter
look only to Acquiror for payment of the cash, Acquiror ADSs, and cash in lieu
of fractional Acquiror ADSs deliverable in respect thereof, and any unpaid
dividends and distributions on the Acquiror ADSs deliverable in respect of each
share of Company Common Stock such stockholder holds as determined pursuant to
this Agreement, in each case, without any interest thereon. None of Acquiror,
the Exchange Agent or any other Person shall be liable to any former holder of
Company Common Stock for any amount delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(f) In the event any Old Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Old Certificate to be lost, stolen or destroyed and, if required
by Acquiror, the posting by such Person of a bond in such amount as Acquiror may
direct as indemnity against any claim that may be made against it with respect
to such Old Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Old Certificate the cash, Acquiror ADSs and cash in
lieu of fractional shares
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<PAGE>
deliverable (and unpaid dividends and distributions) in respect thereof pursuant
to this Agreement.
(g) Former shareholders of the Company shall be entitled to
direct the voting at any meeting of Acquiror shareholders the number of Acquiror
Ordinary Shares represented by the number of Acquiror ADSs into which their
shares of Company Common Stock are converted in accordance with Section 1.2 (to
the extent provided in and subject to the conditions of the Deposit Agreement),
regardless of whether such holders have exchanged their Old Certificate
representing Company Common Stock for ADRs representing Acquiror ADSs in
accordance with the provisions of this Agreement.
1.4. Options.
-------
(a) Each option to purchase shares of Company Common Stock
pursuant to the Company's 1986 Option Plan, 1995 Stock Incentive Plan, 1996 Non-
Officer Directors' Stock Plan and [AB&C] Option Plan (collectively, the "Option
Plans"), which is outstanding and unexercised immediately prior thereto (each,
an "Outstanding Option"), shall be converted as to each whole share subject to
such Outstanding Option at the holder's election (made at least 5 days prior to
the Closing Date) into:
(i) at the Effective Time, an option (each, an "Exchange
Option") to purchase such number of Acquiror ADSs at such exercise price as is
determined as provided below (and otherwise having the same duration and other
terms as the original option):
(A) the number of Acquiror ADSs to be subject to
the Exchange Option shall be equal to the product of (A) the number of shares of
the Company Common Stock subject to the original option as to which the holder
thereof has elected to receive an Exchange Option, multiplied by (B) the
Exchange Ratio (as may be adjusted pursuant to Section 1.2(b) above), the
product being rounded, if necessary, up or down, to the nearest whole share;
(B) the exercise price per Acquiror ADS under the
new option shall be equal to (I) the aggregate exercise price for the shares of
Company Common Stock subject to the Outstanding Option as to which the holder
has elected to receive an Exchange Option, divided by (II) the number of
Acquiror ADSs for which the Exchange Option is exercisable as determined
pursuant to clause (A) above, the result being rounded, if necessary, up or
down, to the nearest cent.
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<PAGE>
OR:
(ii) immediately prior to the Effective Time, cash (the
"Cash Out") in an amount equal to the Per Share Cash Consideration multiplied by
the number of shares subject to such Outstanding Options as to which the holder
thereof has elected to receive the Cash Out, less the amount which would have
been required to exercise such Outstanding Options as to such shares.
(b) Holders of Outstanding Options shall have no rights to
receive the "Cash Out", and no other modification of such Outstanding Options
hereunder shall be effective, unless and until the Closing Date occurs. The
adjustments provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consistent with Section 424(a) of the Code.
(c) The Exchange Options with respect to Outstanding Options
shall be delivered by Acquiror at the Effective Time, and checks in the amounts
of the respective Cash Outs shall be delivered by the Company immediately prior
to the Effective Time with all amount paid to be reimbursed by Acquiror or
Acquiror Sub. As of the Effective Time, Acquiror shall have reserved for
issuance a sufficient number of Acquiror Ordinary Shares to cover the issuance
of the Acquiror ADSs subject to such Exchange Options.
1.5. Other Rights. Rights to receive shares of the Company's Common
------------
Stock pursuant to (i) Performance Share Agreements under the Company's 1995
Stock Incentive Plan, (ii) a deferral account pursuant to the Company's 1996
Non-Officer Directors' Stock Plan, and (iii) accrued rights under the Company's
Employee Stock Purchase Plan, which are outstanding as of the Effective Time
(collectively, the "Outstanding Rights") shall be converted into rights to
receive or purchase, as applicable, that number of Acquiror ADSs equal to the
number of shares to which such Outstanding Rights relate multiplied by the
Exchange Ratio.
1.6. Convertible Debentures. The Company's 9% Convertible
----------------------
Subordinated Debentures Due June 1999 (the "Debentures") outstanding at the
Effective Time shall be assumed by Acquiror or Acquiror Sub and remain
outstanding thereafter as an obligation of the Acquiror or Acquiror Sub, as the
case may be, and, from and after the Effective Time, the holders of the
Debentures shall have the right to convert such Debentures into the Per Share
Stock Consideration receivable upon the Merger by a holder of the number of
shares of Company Common
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<PAGE>
Stock into which such Debentures could have been converted immediately prior to
the Merger. Acquiror or Acquiror Sub, as the case may be, shall enter into a
supplemental indenture with respect to such obligations in accordance with the
terms of the indenture pursuant to which the Debentures were issued.
1.7. Closing. On the first Business Day to occur which is at least
-------
three (3) Business Days after the expiration of all applicable waiting periods
in connection with approvals of governmental authorities occurs and all
conditions to the consummation of this Agreement are satisfied or waived and
which is the last Business Day of a month, or on such earlier or later date as
may be agreed by the parties (the "Closing Date"), articles of merger shall be
executed in accordance with all appropriate legal requirements and shall be
filed as required by law, and the Merger provided for herein shall become
effective upon such filing or on such date and at such time as may be specified
in such articles of merger by agreement of the parties hereto. The date and
time of such filing or such later effective date and time are herein called the
"Effective Time." The date on which the Effective Time occurs is herein referred
to as the "Effective Date."
ARTICLE II
REPRESENTATIONS AND WARRANTIES
------------------------------
Acquiror represents and warrants to the Company, and the Company
represents and warrants to Acquiror, to the extent applicable as indicated
below, that except as Previously Disclosed, the following representations and
warranties are true and correct in all Material respects. For purposes of this
Agreement, "Previously Disclosed" means disclosed prior to the execution hereof
in (i) an SEC Document filed with the SEC prior to the date hereof, (ii) this
Agreement, (iii) written materials provided to the other party prior to or as of
the date hereof as specified in a letter dated of even date herewith from the
party making such disclosure and delivered to the other party prior to the
execution hereof (its "Disclosure Letter"). Any information disclosed by one
party to the other for any purpose hereunder shall be deemed to be disclosed for
all purposes hereunder, except for purposes of Section 2.10 hereof. The
inclusion of any matter in information Previously Disclosed shall not be deemed
an admission or otherwise to imply that any such matter is Material for purposes
of this Agreement. "SEC Documents" means all publicly available documents filed
by the Company or its predecessors with the SEC, including all such documents
filed under the Securities Act of 1933, as amended (the "Securities Act") or the
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<PAGE>
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act").
2.1. Organization and Capitalization of Acquiror and Acquiror Sub.
------------------------------------------------------------
In the case of Acquiror, it is a corporation duly organized, validly existing
and in good standing under the laws of Ireland and it is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended; and its
authorized capital stock as of the date hereof consists of (a)
IR(Pounds)450,000,000 of authorized capital divided into 1,000,000,000 Acquiror
Ordinary Shares (of which 680,172,595 shares were issued and outstanding as of
December 31, 1996) and 250,000,000 noncumulative preference shares of
IR(Pounds)1 each (of which no shares are issued and outstanding as of the date
hereof), (b) US$400,000,000 of authorized capital divided into 16,000,000 non-
cumulative preference shares of US$25 each (of which 7,200,000 shares were
issued and outstanding as of December 31, 1996), and (c) Stg(Pounds)125,000,000
of authorized capital divided into 125,000,000 non-cumulative preference shares
of Stg(Pounds)1 each (of which no shares are issued and outstanding as of the
date hereof). Approximately 10,800,000 of the issued and outstanding Acquiror
Ordinary Shares are represented by outstanding Acquiror ADSs as of the date
hereof. Acquiror Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland; and its authorized
capital consists of 600,000,000 shares of common stock, par value $1/7 per
share, (the "Acquiror Sub Common Stock") of which 594,480,215 shares are issued
and outstanding as of the date hereof (all of which are held by Acquiror), and
9,000,000 shares of preferred stock par value $5.00 per share, (the "Acquiror
Sub Preferred Stock") of which 6,090,000 shares are issued and outstanding as of
the date hereof.
2.2. Organization and Capitalization of the Company. In the case of
----------------------------------------------
the Company it is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania; and its authorized
capital stock as of the date hereof consists of 200,000,000 authorized shares of
the Company Common Stock, of which 30,666,729 shares were issued and outstanding
as of December 31, 1996, and 10,000,000 authorized shares of preferred stock,
par value $25.00 per share, of which no shares are issued and outstanding.
2.3. Rights, etc. In the case of Acquiror, as of the date hereof,
------------
and in the case of the Company in each case, except as Previously Disclosed,
there are not any shares of its capital stock reserved for issuance, or any
outstanding or authorized options, warrants, rights, subscriptions, claims of
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any character, agreements, obligations, convertible or exchangeable securities,
or other commitments, contingent or otherwise, relating to its capital stock,
pursuant to which it is or may become obligated to issue shares of capital stock
or any securities convertible into, exchangeable for, or evidencing the issued
and outstanding right to subscribe for, any shares of its capital stock
(collectively, "Rights").
2.4. Capital Stock. In the case of Acquiror, all outstanding shares
-------------
of capital stock of it and its Significant Subsidiaries (as defined in Rule 1-02
of Regulation S-X) and in the case of the Company, all outstanding shares of
capital stock of it and its Subsidiaries, are duly authorized, validly issued
and outstanding, fully paid and nonassessable, and subject to no preemptive
rights; and the shares of capital stock of such Subsidiaries are owned by it
(except for director's qualifying shares) free and clear of all liens, claims,
encumbrances and restrictions on transfer and there are no Rights with respect
to such capital stock.
2.5. Authority. In the case of Acquiror, each of it and its
---------
Significant Subsidiaries and in the case of the Company each of it and its
Subsidiaries, has the power and authority, and is duly qualified in all
jurisdictions where such qualification is required, to carry on its business as
it is now being conducted and to own all its Material properties and assets
(except for such qualifications the absence of which, individually or in the
aggregate, would not have a Material Adverse Effect (as defined in Section
7.1)), and it has all federal, state, local, and foreign governmental
authorizations necessary for it to own or lease its properties and assets and to
carry on its business as it is now being conducted, except for such powers and
authorizations the absence of which, either individually or in the aggregate,
would not have a Material Adverse Effect.
2.6. Subsidiaries. In the case of Acquiror, a list of its
------------
Significant Subsidiaries has been Previously Disclosed and in the case of the
Company a list of its Subsidiaries has been Previously Disclosed.
2.7. Authorization and Validity of Agreement. In the case of
---------------------------------------
Acquiror, it and Acquiror Sub each has, and in the case of the Company, it has,
full power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby. In
the case of Acquiror and Acquiror Sub and in the case of the Company,
respectively, subject in each case to the receipt of the required shareholder
approvals referred to in Section 4.1(a), this Agreement has been authorized by
all
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<PAGE>
necessary corporate action of it. In the case of Acquiror and Acquiror Sub and
in the case of the Company, respectively, this Agreement is a valid and binding
agreement of it enforceable against it in accordance with its terms, subject as
to enforcement to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
2.8. No Violations. In the case of Acquiror and Acquiror Sub and in
-------------
the case of the Company, respectively, the execution, delivery and performance
of this Agreement by it does not, and the consummation of the transactions
contemplated hereby by it will not, constitute (i) a breach or violation of, or
a default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of it or
its Subsidiaries or to which it or its Subsidiaries (or any of their respective
properties) is subject, which breach, violation or default would have a Material
Adverse Effect, or enable any Person to enjoin the Merger or (ii) a breach or
violation of, or a default under, the articles of incorporation or by-laws (or
similar corporate documents) of it or any of its Subsidiaries; and the
consummation of the transactions contemplated hereby will not require any
approval, consent or waiver under any such law, rule, regulation, judgment,
decree, order, governmental permit or license or the approval, consent or waiver
of any other party to any such agreement, indenture or instrument, other than
(w) the required approvals, consents and waivers of governmental authorities
referred to in Section 4.1(b), (x) the approval of the shareholders of the
Company referred to in Section 4.1(a), (y) such approvals, consents or waivers
as are required under the federal and state securities or "Blue Sky" laws in
connection with the transactions contemplated by this Agreement, and (z) any
other approvals, consents or waivers the absence of which, individually or in
the aggregate, would not result in a Material Adverse Effect or enable any
Person to enjoin the Merger.
2.9. Securities Exchange Act Reports. In the case of Acquiror and
-------------------------------
the Company, respectively, it has filed with the Securities and Exchange
Commission ("SEC") all required forms, reports and documents required under the
Securities Exchange Act. In the case of Acquiror and the Company, respectively,
as of their respective dates, neither its Annual Report on Form 20-F and 10-K,
respectively, for the fiscal year ended December 31, 1995, nor any other
document filed subsequent to December 31, 1995 under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act, each in the form
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<PAGE>
(including exhibits) filed with the SEC (collectively, its "Reports"),
contained, as of the date thereof, any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading. In the case of Acquiror and the Company,
respectively, each of the balance sheets contained or incorporated by reference
in its Reports (including any related notes and schedules) fairly present the
financial position of the entity or entities to which it relates as of its date
and each of the statements of income, cash flows or equivalent statements
contained or incorporated by reference in its Reports (including any related
notes and schedules) fairly present the cash flows of the entity or entities to
which it relates for the periods set forth therein (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments that are not
Material in amount or effect), in each case in accordance with generally
accepted accounting principles applicable to bank holding companies consistently
applied during the periods involved, except as may be noted in the Reports.
2.10. Absence of Certain Changes or Events. Except as Previously
------------------------------------
Disclosed in Section 2.10 of its Disclosure Letter, in the case of Acquiror and
its Subsidiaries and the Company and its Subsidiaries, respectively, since
December 31, 1995, it has not incurred any Material liability except in the
ordinary course of its business consistent with past practice, and there has not
been any change in the financial condition, business or results of operations of
it or any of its Subsidiaries which, individually or in the aggregate, has had a
Material Adverse Effect (other than as a result of changes in banking laws or
regulations of general applicability or interpretations thereof).
2.11. Taxes. In the case of the Company, except as Previously
-----
Disclosed, or as otherwise would not have a Material Adverse Effect, all
federal, state, local and foreign tax returns required to be filed by or on
behalf of it or any of its Subsidiaries have been timely filed or requests for
extensions have been timely filed and any such extensions have been granted and
not expired. In the case of the Company, all taxes shown on returns filed by or
on behalf of it or any of its Subsidiaries have been paid in full or adequate
provision has been made for any such taxes on its balance sheet (in accordance
with generally accepted accounting principles). In the case of the Company, as
of the date of this Agreement, there are no assessments or notices of deficiency
or proposed assessments with respect to any taxes of it or any of its
Subsidiaries that, if resolved in a manner adverse to it,
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<PAGE>
would have a Material Adverse Effect. In the case of the Company, except as
otherwise would not have a Material Adverse Effect, it has not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect.
2.12. Absence of Claims. In the case of Acquiror and the Company,
-----------------
respectively, except as Previously Disclosed no Material litigation, proceeding
or controversy before any court or governmental agency is pending, and there is
no pending claim, action or proceeding against it or any of its Subsidiaries,
which is reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect or to materially hinder or delay consummation of the transactions
contemplated hereby.
2.13. Absence of Regulatory Actions. In the case of Acquiror and the
-----------------------------
Company, respectively, except for matters arising in the ordinary course of
business, neither it nor any of its Subsidiaries is a party to any cease and
desist order, written agreement or memorandum of understanding with, or a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or is a recipient of any extraordinary supervisory letter from,
or has adopted any board resolutions at the request of, federal or state
governmental authorities charged with the supervision or regulation of banks,
savings associations, or bank or savings association holding companies, or
engaged in the insurance of bank or savings association deposits ("Bank
Regulators"), nor has it been advised by any Bank Regulator that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, directive, written agreement, memorandum
of understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
2.14. Labor Matters. In the case of the Company, except as Previously
-------------
Disclosed neither it nor any of its Subsidiaries is a party to, or is bound by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is it or any of its
Subsidiaries the subject of any proceeding asserting that it or any such
Subsidiary has committed an unfair labor practice or seeking to compel it or
such Subsidiary to bargain with any labor organization as to wages and
conditions of employment, nor is there any strike or other labor dispute
involving it or any of its Subsidiaries pending or threatened.
2.15. Employee Benefit Plans. Except as Previously
----------------------
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<PAGE>
Disclosed, in the case of Acquiror and the Company, respectively, all "employee
benefit plans", as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), that cover any of its or its
Subsidiaries' employees, comply in all Material respects with all applicable
requirements of ERISA, the Code and other applicable laws; neither it nor any of
its Subsidiaries has engaged in a "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Code) with respect to any such plan
which is likely to result in any Material penalties or taxes under Section
502(i) of ERISA or Section 4975 of the Code; no Material liability to the
Pension Benefit Guaranty Corporation has been or is expected by it or them to be
incurred with respect to any such plan which is subject to Title IV of ERISA
("Pension Plan"), or with respect to any "single-employer plan" (as defined in
Section 4001(a)(15) of ERISA) currently or formerly maintained by it, them or
any entity which is considered one employer with it under Section 4001 of ERISA
or Section 414 of the Code; no Pension Plan had an "accumulated funding
deficiency" (as defined in Section 302 of ERISA (whether or not waived) as of
the last day of the end of the most recent plan year ending prior to the date
hereof; the fair market value of the assets of each Pension Plan exceeds the
present value of the "benefit liabilities" (as defined in Section 4001(a)(16) of
ERISA) under such Pension Plan as of the end of the most recent plan year with
respect to the respective Pension Plan ending prior to the date hereof,
calculated on the basis of the actuarial assumptions used in the most recent
actuarial valuation for such Pension Plan as of the date hereof; no notice of a
"reportable event" (as defined in Section 4043 of ERISA) for which the 30-day
reporting requirement has not been waived has been required to be filed for any
Pension Plan within the 12-month period ending on the date hereof; neither it
nor any of its Subsidiaries has provided, or is required to provide, security to
any Pension Plan pursuant to Section 401(a)(29) of the Code; it and its
Subsidiaries have not contributed to any "multiemployer plan", as defined in
Section 3(37) of ERISA, on or after September 26, 1980. In the case of the
Company, with respect to each benefit plan for employees that is maintained or
contributed to by the Company or any of its Subsidiaries, including, but not
limited to, "employee benefit plans" within the meaning of Section 3(3) of ERISA
(the "Benefit Plans"), it has made available to Acquiror a true and correct copy
of (i) the most recent annual report on Form 5500 filed with the Internal
Revenue Service (the IRS), (ii) such Benefit Plan, (iii) each trust agreement
and insurance contract relating to such Benefit Plan, (iv) the most recent
summary plan description for such Benefit Plan, (v) the most recent actuarial
report or valuation if such Benefit Plan is subject
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<PAGE>
to Title IV of ERISA, (vi) the most recent determination letter issued by the
IRS if such Benefit Plan is intended to be qualified under Section 401(a) of the
Code, and (vii) all outstanding employment contracts or agreements. With respect
to Acquiror and the Company, a list of its Benefit Plans, and, in the case of
the Company, all outstanding employment contracts or agreements, has been
Previously Disclosed.
2.16. Material Contracts. In the case of the Company, all Material
------------------
contracts have been Previously Disclosed, including: (i) all Material written
employment or consulting agreements, contracts or commitments with, between or
among the Company or any of its Subsidiaries and any Person; (ii) all Material
agreements of guaranty or indemnification, other than by-laws provisions and
bank items presented for collection in the ordinary course of business, running
from the Company or any Subsidiary to any Person; (iii) all Material agreements,
contracts or commitments relating to the acquisition of assets or capital stock
of any Person other than assets acquired in the ordinary course of business by
the Company; (iv) all Material agreements, except for employment agreements and
other agreements listed pursuant to clause (i) above, for loans or the
provision, purchase or sale of goods, services or property between the Company
or any of its Subsidiaries and any director, officer, employee, agent or
representative of the Company or any Subsidiary, or any relative or affiliate of
any of the foregoing; (v) all Material agreements, contracts or commitments to
which the Company is a party or by which the Company is bound and which require
consent ("Contractual Consents") by any other Person in connection with the
consummation of the transactions contemplated hereby, either to prevent a breach
or to continue the effectiveness thereof; and (vi) all other Material agreements
(other than this Agreement, agreements to be executed with respect to this
Agreement and agreements with respect to deposits received and loans granted) of
the Company or any of its Subsidiaries. The Company is not in default in any
respect Material to the Company under any of the contracts, agreements or other
instruments described above. No event has occurred which, with notice or lapse
of time or both, would constitute a default by the Company under any of such
contracts, agreements or instruments, and all such contracts, agreements and
instruments are in full force and effect, except for such defaults or failures
to be in full force and effect as would not have a Material Adverse Effect.
2.17. Title to Assets. In the case of the Company, a list of all
---------------
Material real estate owned or leased by the Company or any of its Subsidiaries
(other than OREO) has been Previously Disclosed. In the case of the Company,
each of it
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<PAGE>
and its Subsidiaries has good and marketable title to its properties and assets
(other than (i) property as to which it is lessee and (ii) real estate owned as
a result of foreclosure, transfer in lieu of foreclosure or other transfer in
satisfaction of a debtor's obligation previously contracted), except for such
defects in title which would not, individually or in the aggregate, have a
Material Adverse Effect.
2.18. Knowledge as to Conditions. In the case of Acquiror and the
--------------------------
Company, respectively, it knows of no reason why the approvals, consents and
waivers of governmental authorities referred to in Section 4.1(b) should not be
obtained without the imposition of any condition of the type referred to in the
provisos to such Section.
2.19. Compliance With Laws. Except as Previously Disclosed, in the
--------------------
case of Acquiror and the Company, respectively, it and each of its Significant
Subsidiaries has all permits, licenses, certificates of authority, orders and
approvals of, and has made all filings, applications and registrations with,
federal, state, local and foreign governmental or regulatory bodies that are
required in order to permit it to carry on its business as it is presently
conducted and the absence of which could, individually or in the aggregate, have
a Material Adverse Effect.
2.20. Acquiror Common Stock. In the case of Acquiror, the Acquiror
---------------------
ADSs and underlying Acquiror Ordinary Shares to be issued pursuant to this
Agreement, when issued in accordance with the terms of this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and subject to no
preemptive rights.
2.21. Fees. In the case of Acquiror and the Company, respectively,
----
other than financial advisory services performed for Acquiror by Merrill Lynch &
Co. and for the Company by Morgan Stanley & Co. and FMCG Capital Strategies (on
terms disclosed to Acquiror), neither it nor any of its Subsidiaries, nor any of
their respective officers, directors, employees or agents has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for it or any of its Subsidiaries, in connection with
this Agreement or the transactions contemplated hereby.
2.22. Registration Statement; Proxy Statement. In the case of
---------------------------------------
Acquiror and the Company, respectively, the information to be supplied by it for
inclusion in (i) the Registra-
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<PAGE>
tion Statement on Form F-4 and/or such other form(s) as may be appropriate to be
filed under the Securities Act with the SEC by Acquiror for the purpose of,
among other things, registering the Acquiror ADSs and underlying Acquiror
Ordinary Shares to be issued to the shareholders of the Company in the Merger
(the "Registration Statement") will not, at the time such Registration Statement
becomes effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, or (ii) the proxy statement or proxy
statements and other materials (as amended or supplemented from time to time,
collectively the "Proxy Statement", and together with the prospectus included in
the Registration Statement, as amended or supplemented from time to time, the
"Proxy Statement/Prospectus") to be filed with the SEC by the Company under the
Securities Exchange Act and distributed in connection with the Company's meeting
of its shareholders to vote upon this Agreement (the "Company Meeting") and to
be distributed by Acquiror Sub in connection with Acquiror Sub's meeting of its
Shareholders to vote upon this Agreement (the "Acquiror Sub Meeting"), and the
offering circular required under the rules and regulation of the London and
Irish stock exchanges (the "Offering Circular") to be distributed by Acquiror in
connection with Acquiror's meeting of the Shareholders to vote upon this
Agreement (the "Acquiror Meeting") will not, at the time the Proxy
Statement/Prospectus and the Offering Circular, respectively, are mailed and at
the time of the Company Meeting, the Acquiror Sub Meeting, or the Acquiror
Meeting, respectively, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
2.23. Environmental Matters. Except as Previously Disclosed, in the
---------------------
case of Acquiror and the Company, respectively, except for such matters that,
alone or in the aggregate, are not reasonably likely to have a Material Adverse
Effect, to the best of its knowledge, (i) it and its Subsidiaries have complied
with all applicable Environmental Laws (as hereinafter defined) and (ii) neither
it nor any of its Subsidiaries has received any notices, demand letters or
requests for information from any governmental entity or any third party
indicating that it or any of its Subsidiaries may be in violation of, or liable
under, any Environmental Law and none of it, its Subsidiaries or the properties
owned or leased by any of them are subject to any court order, administrative
order or decree arising under any Environmental Law.
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<PAGE>
"Environmental Law" means any Federal, state, foreign or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, common law, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity, relating to
(x) the protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, surface land, subsurface land, plant and animal life or any other
natural resource), or to human health or safety, or (y) the exposure to, or the
use, storage, recycling, treatment, generation, transformation, processing,
handling, labeling, production, release or disposal of any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive or
dangerous, including any substance containing any such substance as a component,
in each case as amended and as now in effect.
2.24. Takeover Laws; Rights Plans.
---------------------------
(a) In the case of the Company, it has taken all action
required to be taken by it in order to opt out or exempt this Agreement and the
Stock Option Agreement, and the transactions contemplated hereby and thereby,
from, and this Agreement and the Stock Option Agreement and the transactions
contemplated hereby and thereby are exempt from, the requirements of any
"business combination," "moratorium," "disgorgement," "control share," or other
applicable antitakeover laws and regulations (collectively, "Takeover Laws") of
the Commonwealth of Pennsylvania, including Chapter 25 of the PBCL.
(b) In the case of the Company, it has duly entered into an
amendment to the Company Rights Agreement in form and substance satisfactory to
Acquiror and the Company, and taken all other action necessary or appropriate,
so that the entering into of this Agreement and the Stock Option Agreement and
the completion of the transactions contemplated hereby and thereby (including
without limitation the Merger and the exercise of the option (as defined in the
Stock Option Agreement) do not and will not result in the ability of any Person
to exercise any rights under the Company Rights Agreement, or enable or require
the Company Rights to separate from the shares of common stock to which they are
attached or to be triggered or become exercisable.
(c) In the case of the Company, no "Distribution Date," "Stock
Acquisition Date" "Section 11(a)(ii) Trigger Date" or "Triggering Event" (as
such terms are defined in the Company Rights Agreement) has occurred.
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<PAGE>
(d) In the case of the Acquiror, Acquiror has not entered
into any agreement of similar effect as the Company Rights Agreement.
2.25. Vote Required. In the case of the Company, the affirmative
-------------
vote of the holders of a majority of the shares of its Common Stock present and
voting at the Company Meeting is the only vote of the holders of any class or
series of its capital stock necessary to approve this Agreement and the
transactions contemplated hereby; in the case of Acquiror, the affirmative vote
of holders of a majority of the outstanding Acquiror Ordinary Shares present and
voting at the Acquiror Meeting is the only vote of the holders of any class or
series of its capital stock necessary to approve this Agreement and the
transactions contemplated hereby; and in the case of Acquiror Sub, the
affirmative vote of holders of a majority of the outstanding voting power of the
Acquiror Sub Common Stock and Acquiror Sub Preferred Stock, voting as a single
class, is the only vote of the holders of any class or series of its capital
stock necessary to approve this Agreement and the transactions contemplated
hereby. The Acquiror Sub Common Stock and Acquiror Sub Preferred Stock each are
entitled to one vote per share with respect to approval of this Agreement and
the transactions contemplated hereby.
ARTICLE III
CONDUCT PRIOR TO CLOSING
------------------------
3.1. Access to Information; Notice of Changes; Confidentiality.
---------------------------------------------------------
(a) During the period commencing on the date hereof and
ending on the Closing Date, each of the parties shall (and shall cause each of
its Subsidiaries to) upon reasonable notice, afford the other parties, and their
respective counsel, accountants and other authorized representatives, reasonable
access during normal business hours to the properties, books and records of such
party and its Subsidiaries in order that they may have the opportunity to make
such investigations as they shall desire of the affairs of such party and its
Subsidiaries; such investigation shall not, however, affect or be deemed to
modify the representations and warranties made by such party in this Agreement.
(b) During the period commencing on the date hereof and
ending on the Closing Date, each party shall
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<PAGE>
promptly notify the other parties hereto in writing of any and all occurrences
which, if they had occurred prior to execution of this Agreement, would have
caused the representations and warranties of such party contained in Article 2
and the disclosures delivered in conjunction therewith to be incorrect in any
Material respect.
(c) Each party will not, and will cause its representatives
not to, use any information obtained pursuant to this Section 3.1 for any
purpose unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, each party will keep
confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to this Section 3.1 unless such
information (i) was already known to such party, (ii) becomes available to such
party from other sources not known by such party to be bound by a
confidentiality obligation, (iii) is disclosed with the prior written approval
of the party to which such information pertains, or (iv) is or becomes readily
ascertainable from published information or trade sources. In the event that
this Agreement is terminated or the transactions contemplated by this Agreement
shall otherwise fail to be consummated each party shall promptly cause all
copies of documents or extracts thereof containing information and data as to
another party hereto to be returned to the party which furnished the same.
3.2. Conduct of the Business of the Company Pending the Closing
----------------------------------------------------------
Date. The Company agrees that, except as express permitted by this Agreement or
- ----
otherwise consented to or approved in writing by Acquiror, during the period
from the date hereof to the Effective Time:
(a) The Company will and will cause each of its Subsidiaries
to conduct their respective operations only in the ordinary course of business
consistent with past practice (subject, in any event, to the provisions of
paragraph (c) below) and will use its best efforts to preserve intact their
respective business organizations, keep available the services of their officers
and employees and maintain satisfactory relationships with licensors, suppliers,
distributors, customers, clients and others having business relationships with
them.
(b) The Company shall not, and shall not permit any of its
Subsidiaries to, take any action, engage in any transactions or enter into any
agreement which would adversely affect or delay in any Material respect the
ability of Acquiror or the Company to obtain any necessary approvals, consents
or waivers of any governmental authority required for
-23-
<PAGE>
the transactions contemplated hereby or to perform its covenants and agreements
on a timely basis under this Agreement.
(c) The Company will not and will not permit any of its
Subsidiaries to:
(i) other than in the ordinary course of business
consistent with past practice, incur any indebtedness for borrowed money,
assume, guarantee, endorse or otherwise as an accommodation become responsible
for the obligations of any other Person, or make any loan or advance;
(ii) (A) adjust, split, combine or reclassify any capital
stock; (B) subject to Section 3.4 hereof, make, declare or pay any dividend
(other than (x) regular quarterly cash dividends not exceeding $0.30 per share
on the Company Common Stock and (y) dividends paid by any of the wholly-owned
Subsidiaries of the Company to the Company or any of its wholly-owned
Subsidiaries), or make any other distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital stock or any
securities or obligations convertible into or exchangeable for any shares of its
capital stock, (C) grant any stock appreciation rights or grant any Person any
right to acquire any shares of its capital stock, except for options issued to
employees and directors (not to exceed 315,000 shares) and rights arising under
the Company's Employee Stock Purchase Plan in the ordinary course of business
consistent with past practice; or (D) issue any additional shares of capital
stock except pursuant to (x) Rights outstanding as of the date hereof, (y)
Rights issued or arising after the date hereof as permitted by clause (C) above
(z) the Company's Dividend Reinvestment Plan;
(iii) other than in the ordinary course of business
consistent with past practice, sell, transfer, mortgage, encumber or otherwise
dispose of any of its Material properties or assets to any Person other than a
direct or indirect wholly-owned Subsidiary of the Company, or cancel, release or
assign any indebtedness of any such Person or any claims held by any such
Person, except in the ordinary course of business consistent with past practice
or pursuant to contracts or agreements in force at the date of this Agreement as
Previously Disclosed;
(iv) other than in the ordinary course of business
consistent with past practice, make any Material investment either by purchase
of stock or securities, contributions to capital, property transfers, or
purchase of any prop-
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<PAGE>
erty or assets of any other individual, corporation or other entity other than a
wholly-owned Subsidiary of the Company;
(v) other than in the ordinary course of business
consistent with past practice, enter into or terminate any Material contract or
agreement, or make any change in any of its Material leases or contracts, other
than renewals of contracts and leases without Material adverse changes of terms;
(vi) increase in any manner the compensation or fringe
benefits of any of its employees or pay any pension or retirement allowance not
required by any existing plan or agreement to any such employees, or except as
Previously Disclosed become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee, in each case other than in
the ordinary course of business consistent with past practice, or voluntarily
accelerate the vesting of any stock options or other stock-based compensation,
provided that extensions of employment contracts in existence on the date hereof
pursuant to the terms thereof shall be deemed to be made in the ordinary course
of business consistent with past practice; provided, however, that nothing
-------- -------
herein shall prevent the Company from establishing a bonus pool in the aggregate
amount of Three Million Dollars ($3,000,000) to be paid to certain officers and
employees upon Closing. The Chief Executive Officer of the Company will consult
with the senior executives of Acquiror and Acquiror Sub in connection with the
bonus pool.
(vii) other than in the ordinary course of business
consistent with past practice, settle any claim, action or proceeding involving
any liability of the Company or any of its Subsidiaries for Material money
damages or restrictions upon the operations of the Company or any of its
Subsidiaries;
(viii) modify in any Material respect the manner in which
it and its Subsidiaries have heretofore conducted or accounted for their
business;
(ix) except as contemplated by this Agreement, amend its
articles of incorporation or its by-laws; or
(x) agree to, or make any commitment to, take any of the
actions prohibited by this Section 3.2.
3.3. Conduct of the Business of Acquiror Pending
-------------------------------------------
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<PAGE>
the Closing Date. Acquiror agrees that, except as expressly permitted by this
- ----------------
Agreement or otherwise consented to or approved in writing by the Company,
during the period from the date of this Agreement to the Effective Time,
Acquiror will not (a) subject to Section 3.4 hereof, declare or pay any
extraordinary or special dividend on the Acquiror Ordinary Shares, or (b) take
any action that would adversely affect or delay in any material respect the
ability of the Company or Acquiror to obtain any necessary approvals, consents
or waivers of any governmental authority required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely basis
under this Agreement.
3.4. Dividends. Notwithstanding Sections 3.2 and 3.3 hereof, in all
---------
events Acquiror and the Company agree to coordinate (on a mutually agreeable
basis) the declaration of dividends (and the record and payment dates therefor)
payable during the period preceding and including the quarter in which the
Effective Time occurs so that stockholders of the Company and Acquiror will
receive fair dividends and in no event shall stockholders of the Company and
Acquiror fail to receive a fair dividend during any quarter or semi-annual
period up to and including the quarter or semi-annual period, as the case may
be, immediately following the Effective Time.
3.5. No Solicitation of Other Offers. The Company agrees that
-------------------------------
neither it nor any of its Subsidiaries nor any of their respective officers and
directors shall, and the Company shall direct and use its best efforts to cause
its employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, take any action to solicit or
initiate any inquiries or the making of any offer or proposal with respect to a
merger, consolidation, business combination, liquidation, reorganization, sale
or other disposition of any significant portion of assets, sale of shares of
capital stock, or similar transactions involving the Company or any Subsidiary
of the Company (any such inquiry, offer or proposal, an "Acquisition Proposal"),
or, except as may be legally required for the discharge by the board of
directors of its fiduciary duties, engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions with,
any Person relating to an Acquisition Proposal. The Company will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any other parties conducted heretofore with respect to any of
the foregoing. The Company will promptly notify Acquiror of its receipt of any
Acquisition Proposal.
-26-
<PAGE>
3.6. Certain Filings, Consents and Arrangements. Acquiror and the
------------------------------------------
Company shall (a) as soon as practicable make any filings and applications
required to be filed in order to obtain all approvals, consents and waivers of
governmental authorities necessary or appropriate for the consummation of the
transactions contemplated hereby (including without limitation all applications
for required approvals as set forth in Section 4.1(b) hereof), (b) cooperate
with one another (i) in promptly determining what filings are required to be
made and what approvals, consents or waivers are required to be obtained under
any relevant federal, state or foreign law or regulation and (ii) in promptly
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such approvals, consents or waivers, and (c)
deliver to the other copies of the publicly available portions of all such
filings and applications promptly after they are filed.
3.7. Best Efforts. Acquiror and the Company each will (i) use its
------------
best efforts to take all action necessary to render accurate as of the Closing
Date the representations and warranties of it contained herein, and (ii) use its
best efforts to perform or cause to be satisfied each covenant or condition to
be performed or satisfied by it as contemplated by this Agreement.
3.8. Publicity. The initial press release announcing this Agreement
---------
shall be a joint press release and thereafter the Company and Acquiror shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and in making
any filings with any governmental entity or with any national securities
exchange with respect thereto.
3.9. Shareholder Approvals. Each of Acquiror, Acquiror Sub and the
---------------------
Company shall take, in accordance with applicable law, the rules of any
applicable securities exchange or quotation system, and its respective articles
of incorporation and by-laws (or similar corporate documents), all action
necessary to convene an appropriate meeting of its shareholders to consider and
vote upon the approval of this Agreement (the Company Meeting, Acquiror Meeting
and Acquiror Sub Meeting each referenced to herein as a "Shareholder Meeting"),
as promptly as practicable after the Registration Statement is declared
effective. The Board of Directors of each such party will recommend approval of
such matters, and each such party will take all reasonable lawful action to
solicit such approval by its shareholders, except, in the case of the Company,
as may be legally required for the discharge by the board of directors of its
fiduciary duties. Acquiror
-27-
<PAGE>
will vote all of the shares of the capital stock of Acquiror Sub held by it in
favor of such matters.
3.10. Registration Statement.
----------------------
(a) Each of Acquiror and the Company agrees to cooperate in
the preparation of the Registration Statement to be filed by Acquiror with the
SEC in connection with the issuance of Acquiror ADSs and the underlying Acquiror
Ordinary Shares in the Merger, including the Proxy Statement/Prospectus and the
Offering Circular. Each of Acquiror and the Company agrees to use all reasonable
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as reasonably practicable after filing thereof.
Acquiror also agrees to use all reasonable efforts to obtain all necessary state
securities law or "Blue Sky" permits and approvals required to carry out the
transactions contemplated by this Agreement. The Company and Acquiror each agree
to furnish all information concerning themselves and their Subsidiaries,
officers, directors and shareholders as may be reasonably requested in
connection with the foregoing.
(b) Each of Acquiror and the Company agrees, as to itself and
its Subsidiaries, that none of the information supplied or to be supplied by it
for inclusion or incorporation by reference in (i) the Registration Statement
will, at the time the Registration Statement and each amendment thereto, if any,
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (ii) the Proxy
Statement/Prospectus and any amendment or supplement thereto, and (iii) the
Offering Circular, will, at the date of mailing to shareholders and at the times
of each of the Shareholder Meetings, contain any statement which, in the light
of the circumstances under which such statement is made, is false or misleading
with respect to any material fact, or which will omit to state any material fact
necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the same meeting. Each of the Company and
Acquiror agrees that the Proxy Statement (except, in the case of the Company,
with respect to portions thereof prepared by Acquiror, and except, in the case
of Acquiror, with respect to portions thereof prepared by the Company) will
comply as to form in all material respects with the requirements of the Exchange
Act and the rules and regulations of the SEC thereunder, and the Registration
Statement (except, in the case of the Company, with respect to portions thereof
prepared
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<PAGE>
by Acquiror, and except, in the case of Acquiror, with respect to portions
thereof prepared by the Company) will comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations of the
SEC thereunder.
(c) In the case of Acquiror, Acquiror will advise the
Company, promptly after Acquiror receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or amendment has
been filed, of the issuance of any stop order or the suspension of the
qualification of the Acquiror ADSs and the underlying Acquiror Ordinary Shares
for offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information.
3.11. The Company Rights Agreement. The Board of Directors of the
----------------------------
Company shall take all further action (in addition to that referred to in
Section 2.24) reasonably requested in writing by Acquiror (including redeeming
the Company Rights immediately prior to the Effective Time or amending the
Company Rights Agreement) in order to render the Company Rights inapplicable to
the Merger and the other transactions contemplated by this Agreement and the
Stock Option Agreement. Except as provided above with respect to the Merger and
the other transactions contemplated by this Agreement and the Stock Option
Agreement and except as may be legally required for the discharge by the Board
of Directors of the Company of its fiduciary duties, the Board of Directors of
the Company shall not (a) amend the Company Rights Agreement or (b) take any
action with respect to, or make any determination under, the Company Rights
Agreement, including a redemption of the Company Rights or any action to
facilitate an Acquisition Proposal in respect of the Company.
3.12. Securities Act.
--------------
(a) Not later than the 15th day prior to mailing of the Proxy
Statement/Prospectus, Acquiror shall deliver to the Company, and the Company
shall deliver to Acquiror, a schedule of each Person that, to the best of its
knowledge, is or is reasonably likely to be, as of the date of the Company
Meeting, deemed to be an "affiliate" of it (each, an "Affiliate") as that term
is used in Rule 145 under the Securities Act.
(b) The Company shall use its reasonable best efforts to
cause each Person who may be deemed to be an
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<PAGE>
Affiliate of the Company to execute and deliver to the Acquiror prior to the
Effective Time an agreement relating to the above-referenced Rule 145 in form
and substance satisfactory to Acquiror.
3.13. Additional Agreements. Subject to the terms and conditions
---------------------
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take promptly, or cause to be taken promptly, all actions and to do promptly,
or cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as promptly as practicable,
including using efforts to obtain all necessary actions or non-actions,
extensions, waivers, consents and approvals from all applicable governmental
entities, effecting all necessary registrations, applications and filings
(including, without limitation, filings under any applicable state securities
laws) and obtaining any required contractual consents and regulatory approvals.
3.14. Listing. Acquiror shall use its best efforts to list on the
-------
New York Stock Exchange upon official notice of issuance the Acquiror ADSs to be
issued in the Merger.
ARTICLE IV
CONDITIONS PRECEDENT TO MERGER
------------------------------
4.1. Conditions Precedent to Obligations of All Parties. The
--------------------------------------------------
respective obligations of Acquiror and the Company to effect the Merger are
subject to the satisfaction or waiver (subject to applicable law) at or prior to
the Effective Time of each of the following conditions:
(a) Shareholder Approvals. This Agreement and the
---------------------
transactions contemplated hereby shall have been approved by the requisite vote
of the shareholders of the Company, Acquiror and Acquiror Sub in accordance with
applicable law.
(b) Regulatory Approval. Acquiror shall have procured the
-------------------
required approval, consent, waiver or other administrative action with respect
to this Agreement and the transactions contemplated hereby (i) by the
Pennsylvania Department of Banking pursuant to Pennsylvania law, and (ii) by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
under the Bank Holding Company Act of 1956, (iii) by the Minister for Employment
and Enterprise for Ireland, and (iv) by the Central Bank of Ireland, and all
-30-
<PAGE>
applicable statutory waiting periods shall have expired; and the parties shall
have procured all other regulatory approvals, consents, waivers or
administrative actions of governmental authorities or other Person that are
necessary or appropriate to the consummation of the transactions contemplated by
this Agreement; provided, however, that no approval, consent, waiver or
administrative action referred to in this Section 4.1(b) shall be deemed to have
been received if it shall include any condition or requirement (other than a
condition or requirement requiring divestitures or other actions in order to
comply with or avoid challenge under the antitrust laws) that would so
materially and adversely affect the economic or business benefits of the Merger
that the Acquiror would not have entered into this Agreement had such conditions
or requirements been known at the date hereof;
(c) Other Legal Requirements. All other requirements
------------------------
prescribed by law which are necessary to the consummation of the transactions
contemplated by this Agreement shall have been satisfied.
(d) Injunction. No preliminary or permanent injunction or
----------
other order shall have been issued by any court or by any governmental or
regulatory agency, body or authority which prohibits the consummation of the
Merger and the transactions contemplated by this Agreement and which is in
effect at the Effective Time.
(e) Statutes. No statute, rule, regulation, executive
--------
order, decree or order of any kind shall have been enacted, entered, promulgated
or enforced by any court or governmental authority which prohibits the
consummation of the Merger.
(f) Registration Statement. The Registration Statement
----------------------
shall have become effective and no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
(g) Tax Opinion. Acquiror and the Company each shall have
-----------
received the opinion of counsel to Acquiror acceptable to the Company,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code and that, accordingly: (i) no gain or loss will be recognized by
Acquiror or the Company as a result of the Merger; (ii) no
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<PAGE>
gain or loss will be recognized by the shareholders of the Company who exchange
their shares of Company Common Stock solely for Acquiror ADSs pursuant to the
Merger (except with respect to cash received in lieu of fractional Acquiror
ADSs); (iii) the tax basis of the shares of Acquiror ADSs received by
shareholders who exchange all of their shares of the Company Common Stock solely
for shares of Acquiror ADSs in the merger will be the same as the tax basis of
the shares of the Company Common Stock surrendered in exchange therefor (reduced
by any amount allocable to a fractional interest for which cash is received);
and (iv) the holding period of the Acquiror ADSs received in the Merger will
include the period during which the shares of the Company Common Stock
surrendered in exchange therefor were held, provided such shares of the Company
Common Stock were held as capital assets at the Effective Time. In rendering
their opinion, such counsel may require and rely upon representations contained
in certificates of officers of Acquiror, the Company and others.
(h) Rights Agreements. There shall exist no "Acquiring
-----------------
Person" and no "Stock Acquisition Date" or "Triggering Event" (as each of such
terms are defined in the Company Rights Agreement) shall have occurred.
4.2. Conditions Precedent to Obligations of Acquiror. The
-----------------------------------------------
obligations of Acquiror to effect the Merger are also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions unless waived by Acquiror:
(a) Accuracy of Representations and Warranties. All
------------------------------------------
representations and warranties of the Company contained herein shall be true and
correct in all Material respects as of the date hereof and at and as of the
Closing Date, with the same force and effect as though made on and as of the
Closing Date.
(b) The Company's Performance. The Company shall have
-------------------------
performed in all material respects all obligations and agreements, and complied
in all material respects with all covenants and conditions, contained in this
Agreement to be performed or complied with by it prior to the Closing Date.
(c) Officer's Certificate. Acquiror shall have received a
---------------------
certificate signed by the Chief Executive Officer and the Chief Financial
Officer of the Company, dated the Closing Date, certifying as to the matters set
forth in subparagraphs 4.2(a) and (b).
(d) Opinion of Counsel. Acquiror shall have
------------------
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<PAGE>
received an opinion, dated the Closing Date, of counsel for the Company, in form
and substance satisfactory to Acquiror and its counsel.
(e) Blue Sky. Acquiror shall have received all state
--------
securities laws and "Blue Sky" permits and other authorizations necessary to
consummate the transactions contemplated hereby.
(f) Accountants' Comfort Letters. Acquiror and its
----------------------------
directors and officers who sign the Registration Statement shall have received
letters from the Company's independent certified public accountants, dated (i)
the date of the mailing of the Proxy Statement/Prospectus to the Company's
shareholders and (ii) shortly prior to the Closing Date, with respect to certain
financial information regarding the Company in the form customarily issued by
such accountants at such time in transactions of this type.
4.3. Conditions Precedent to Obligation of the Company. The
-------------------------------------------------
obligation of the Company to effect the Merger is also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions unless waived by the Company:
(a) Accuracy of Representations and Warranties. All
------------------------------------------
representations and warranties of Acquiror contained herein shall be true and
correct in all Material respects as of the date hereof and at and as of the
Closing, with the same force and effect as though made on and as of the Closing
Date.
(b) Acquiror's Performance. Acquiror shall have performed
----------------------
in all material respects all obligations and agreements, and complied in all
material respects with all covenants and conditions, contained in this Agreement
to be performed or complied with by it prior to the Closing Date.
(c) Officer's Certificate. The Company shall have received
---------------------
a certificate signed by the Chief Executive Officer and the Chief Financial
Officer of Acquiror and Acquiror Sub, dated the Closing Date, certifying as to
the matters set forth in subparagraphs 4.3(a) and (b).
(d) Opinion of Counsel. The Company shall have received an
------------------
opinion, dated the Closing Date, of counsel for Acquiror and Acquiror Sub, in
form and substance satisfactory to the Company and its counsel.
(e) Stock Listing. The Acquiror ADSs to be
-------------
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<PAGE>
issued in the Merger have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance.
(f) Accountants' Comfort Letters. The Company and its
----------------------------
directors shall have received letters from Acquiror's independent certified
public accountants, dated (i) the date of the mailing of the Proxy
Statement/Prospectus to the Company's shareholders and (ii) shortly prior to the
Closing Date, with respect to certain financial information regarding Acquiror
in the form customarily issued by such accountants at such time in transactions
of this type.
(g) Employment Agreements. Acquiror Sub shall have entered
---------------------
into an agreement with Christopher R. Jennings in the form attached hereto as
part of Exhibit B attached hereto, effective as of the Effective Time, and shall
have made the Change of Control Retention Payments specified on Exhibit B.
ARTICLE V
COVENANTS
---------
5.1. Tax-Free Reorganization Treatment. Neither Acquiror nor the
---------------------------------
Company shall take or cause to be taken any action, whether before or after the
Effective Time, which would disqualify the Merger as a "reorganization" within
the meaning of Section 368 of the Code.
5.2. Certain Contracts. Acquiror Sub hereby unconditionally
-----------------
agrees to, and agrees to cause its Subsidiaries to, honor, without modification,
offset or counterclaim, all Previously Disclosed contracts, agreements and
commitments of the Company or any of its Subsidiaries authorized by the Company
or any of its Subsidiaries prior to the date of this Agreement which apply to
any current or former employee or current or former director of the Company or
any of its Subsidiaries, including without limitation the Change in Control
Agreements and Indemnification Agreements with certain directors, officers and
employees as Previously Disclosed in accordance with Section 2.16 hereof. In
accordance with the terms of such contracts, agreements and commitments,
Acquiror Sub hereby assumes, subject to the consummation of the Merger, all of
the Company's and its Subsidiaries' obligations under such contracts, agreements
and commitments.
5.3. Employee Benefits. Acquiror Sub hereby unconditionally
-----------------
agrees to, and to cause its Subsidiaries to, provide to officers and employees
of the Company and its Subsidiaries who become or remain regular (full time)
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<PAGE>
employees of Acquiror Sub or any of its Subsidiaries employee benefits,
including, without limitations pension benefits, health and welfare benefits,
life insurance and vacation, which are no less favorable in the aggregate than
those provided from time to time by the Acquiror Sub and its Subsidiaries to
their similarly situated officers and employees. Any employee of the Company or
any of its Subsidiaries who becomes a participant in any employee benefit plan,
program, policy, or arrangement of the Acquiror Sub or any of its Subsidiaries
shall be given credit under such plan, program, policy, or arrangement for all
service with the Company or any of its Subsidiaries prior to becoming such a
participant for purposes of eligibility and vesting. Employees of the Company or
any of its Subsidiaries who are terminated within two years after the Effective
Time shall be entitled to severance benefits equal to the greater of those
provided by the Company on the date hereof or those provided by the Acquiror Sub
as of the Effective Time, and shall be provided outplacement assistance and
counselling by Acquiror Sub. In addition, (i) employees of the Company or its
Subsidiaries who continue as employees of Acquiror Sub or its Subsidiaries after
the Effective Time ("Affected Employees") shall be provided with the greater of
the weeks of annual vacation to which they were entitled on the day before the
Effective Date or the weeks of annual vacation to which similarly situated
employees of Acquiror Sub and its Subsidiaries are then entitled, (ii) Affected
Employees shall be entitled to preserve days of vacation that have been carried
over from 1996 to 1997, and Affected Employees who are not able to take all the
vacation days to which they are entitled for calendar year 1997 shall be
permitted to carry over unused days into calendar 1998; (ii) Affected Employees
shall be entitled to preserve occasional days that have been carried over from
1996 into 1997 in addition to any occasional days to which they may otherwise be
entitled, and Affected Employees who are not able to take all the occasional
days to which they are entitled for calendar year 1997 shall be permitted to
carry over unused days into calendar 1998; and (iii) Acquiror Sub shall
coordinate any transition of Affected Employees to benefit plans of Acquiror Sub
such that credit is given as to deductibles, co-payments and other similar
items, and the flexible spending accounts maintained for employees of the
Company and its Subsidiaries shall be maintained through the end of calendar
year 1997. Additional provisions regarding benefits of Affected Employees are
set forth on Exhibit C attached hereto.
5.4. Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
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<PAGE>
(a) From and after the Effective Time, Acquiror Sub agrees to
indemnify and hold harmless each present and former director and officer of the
Company or its Subsidiaries and each officer or employee of the Company or its
Subsidiaries that is serving or has served as a director or trustee of another
entity expressly at the Company's request or direction (the "Indemnified
Parties"), against any and all costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any and all claims, actions,
suits, proceedings or investigations, whether civil, criminal, administrative or
investigative, arising out of or pertaining to matters arising out of or in
connection with such party's position as, or actions taken as, a director or
officer of the Company or a Subsidiary or director or trustee of another entity
at the request or direction of the Company, at or prior to the Effective Time,
whether asserted or claimed prior to, at or after the Effective Time, to the
fullest extent permitted by applicable law (and also advance expenses incurred
to the fullest extent permitted by applicable law); provided, however, that
Acquiror Sub shall not have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction shall ultimately determine, and
such determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. If such indemnity is determined not to be
available as a matter of law with respect to any Indemnified Party, then the
Acquiror Sub and the Indemnified Party shall contribute to the amount payable in
such proportion as is appropriate to reflect relative faults and benefits and
other relevant equitable considerations.
(b) Any Indemnified Party wishing to claim indemnification
under Section 5.4(a), upon learning of any such claim, action, suit, proceeding
or investigation, shall promptly notify Acquiror Sub thereof, but the failure to
so notify shall not relieve Acquiror Sub of any liability it may have to such
Indemnified Party if such failure does not materially prejudice Acquiror. In the
event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time): (i) Acquiror Sub shall have the
right to assume the defense thereof and Acquiror Sub shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if Acquiror elects not to assume such defense,
or counsel for the Indemnified Parties advises that there are issues which raise
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<PAGE>
conflicts of interest between Acquiror Sub and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and Acquiror Sub
shall pay the reasonable fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received; (ii) the Indemnified
Parties will cooperate in the defense of any such matter; and (iii) Acquiror Sub
shall not be liable for any settlement effected without its prior written
consent which shall not be unreasonably withheld.
(c) For a period of six years after the Effective Time,
Acquiror Sub shall use all reasonable efforts to cause to be maintained in
effect the current policies of directors' and officers' liability insurance
maintained by the Company (provided that Acquiror Sub may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are substantially no less advantageous to such directors and
officers) with respect to claims arising from facts or events which occurred
before the Effective Time; provided, however, that in no event shall Acquiror
-------- -------
Sub be obligated to expend, in order to maintain or provide insurance coverage
pursuant to this Subsection 5.4(c), any amount per annum in excess of 200% of
the amount of the annual premiums paid as of the date hereof by the Company for
such insurance (the "Maximum Amount"). If the amount of the annual premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, Acquiror shall use all reasonable efforts to maintain the most
advantageous policies of directors' and officers' insurance obtainable for an
annual premium equal to the Maximum Amount.
5.5. Certain Director and Officer Positions.
--------------------------------------
(a) As of the Effective Date, Acquiror and Acquiror Sub shall
fix the size of the Board of Directors of Acquiror Sub at 21 members and shall
cause five members of the Company's Board of Directors (consisting of
Christopher R. Jennings and four other current directors selected by the Company
and willing to so serve) to be appointed or elected to the Board of Directors of
Acquiror Sub. As of the Effective Time Acquiror and Acquiror Sub agree to cause
Christopher R. Jennings to be named as Vice Chairman of the Board of Directors
of Acquiror Sub, and Vice Chairman of the Steering Committee of Acquiror Sub.
(b) As of the Effective Time, Acquiror Sub shall enter into
the employment agreements referred to in Section 4.3(g) hereof.
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<PAGE>
ARTICLE VI
TERMINATION
-----------
6.1. Termination. This Agreement may be terminated, and the Merger
-----------
abandoned, prior to the Effective Time, either before or after its approval by
the shareholders of the Company:
(a) by the mutual consent of the Acquiror and the Company, if
the board of directors of each so determines by vote of a majority of the
members of its entire board;
(b) by Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event of the failure of the shareholders of the Company or Acquiror to approve
this Agreement at its meeting called to consider such approval;
(c) by Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event of a Material breach by the other party hereto of any representation,
warranty, covenant or agreement contained herein which is not cured or not
curable within 60 days after written notice of such breach is given to the party
committing such breach by the other party;
(d) by Acquiror or the Company by written notice to the other
party if either (i) any approval, consent or waiver of a governmental authority
required to permit consummation of the transactions contemplated hereby shall
have been denied or (ii) any governmental authority of competent jurisdiction
shall have issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the transactions contemplated by this Agreement;
(e) by Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event that the Merger is not consummated by December 31, 1997, unless the
failure to so consummate by such time is due to the breach of any
representation, warranty or covenant contained in this Agreement by the party
seeking to terminate; or
(f) by the Company, if its board of directors so determines
by a majority vote of the members of its entire board, at any time during the
ten-day period commencing with the Termination Right Determination Date (as
defined below) if the Market Price on the Termination Right Determination Date
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<PAGE>
of an Acquiror ADS is less than Thirty-Two Dollars ($32); subject, however, to
------- -------
the following three sentences. If the Company elects to exercise its termination
right pursuant to the immediately preceding sentence, it shall give prompt
written notice to Acquiror, provided that such notice of election to terminate
--------
may be withdrawn at any time within the aforementioned ten-day period. During
the five-day period commencing with its receipt of such notice, Acquiror shall
have the option of adjusting the Per Share Stock Consideration to the value
thereof that would have resulted if the Market Price of an Acquiror ADS as of
the Termination Right Determination Date were equal to Thirty-Two Dollars ($32).
If Acquiror makes an election contemplated by the preceding sentence, within
such five-day period, it shall give prompt written notice to the Company of such
election and the revised Exchange Ratio and Per Share Stock Consideration,
whereupon no termination shall have occurred pursuant to this Section 6.1(f) and
this Agreement shall remain in effect in accordance with its terms (except as to
the Exchange Ratio and Per Share Stock Consideration), and any references in
this Agreement to the "Exchange Ratio" and "Per Share Stock Consideration" shall
thereinafter be deemed to refer to such numbers as adjusted pursuant to this
Section 6.1(f). The figure $32 appearing in the foregoing paragraph shall be
adjusted as provided in Section 1.2(a)(iii) hereof, in the circumstances
indicated therein.
For purposes of this Section 6.1(f), the "Termination Right
Determination Date" shall mean the sixteenth (16th) day preceding the Closing
Date (determined, upon receipt of approval of the Merger from the Federal
Reserve Board, as provided in Section 1.7 hereof assuming all other conditions
to closing are satisfied or waived and without regard to any possible agreement
of the parties to change such Closing Date).
6.2. Effect of Termination. In the event of the termination of this
---------------------
Agreement by either Acquiror or the Company, as provided above, except as
otherwise provided in Section 8.3 hereof, this Agreement shall thereafter become
void and there shall be no liability on the part of any party hereto or their
respective officers or directors, except that any such termination shall be
without prejudice to the rights of any party hereto arising out of the willful
breach of any covenant or willful misrepresentation by any other party under
this Agreement.
ARTICLE VII
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<PAGE>
MISCELLANEOUS
-------------
7.1. Certain Definitions; Interpretation. As used in this
-----------------------------------
Agreement, the following terms shall have the meanings indicated:
"Business Day" shall mean any day on which depository institutions
are generally open for business in the Commonwealth of Pennsylvania and the New
York Stock Exchange is generally open for trading.
"Control" shall have the meaning ascribed thereto in the Bank Holding
Company Act of 1956, as amended.
"Dollar" and "$" shall mean United States Dollars.
"Market Price" as of any date of determination means the average
closing price of one Acquiror ADS on the New York Stock Exchange (as reported by
The Wall Street Journal, or, if not reported thereby, another authoritative
- -----------------------
source), for the ten (10) New York Stock Exchange trading days ending on the
Business Day immediately preceding the date of determination.
"Material" means material to Acquiror or the Company (as the case may
be) and its respective Subsidiaries, taken as a whole.
"Material Adverse Effect," with respect to a Person, means any
condition, event, change or occurrence that is reasonably likely to have a
material adverse effect upon (A) the financial condition, business or results of
operations of such Person and its Subsidiaries, taken as a whole, or (B) the
ability of such Person to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement.
"Person" includes an individual, corporation, partnership,
association, trust, limited liability company, unincorporated organization or
other legal entity.
"Subsidiary," with respect to a Person, means any other Person
controlled by such Person.
When a reference is made in this Agreement to Articles, Sections, or Schedules,
such reference shall be to a Section or Article of, or Schedule to, this
Agreement unless otherwise indicated. The table of contents, tie sheet and
headings contained in this Agreement are for ease of reference only and shall
not affect the meaning or interpretation of this Agreement. Whenever the words
"include," "includes," or
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<PAGE>
"including" are used in this Agreement, they shall be deemed followed by the
words "without limitation." Any singular term in this Agreement shall be deemed
to include the plural, and any plural term the singular.
7.2. Fees and Expenses. All costs and expenses incurred in
-----------------
connection with this Agreement and the consummation of the transactions
contemplated hereby shall, if incurred by Acquiror, be paid by Acquiror and
shall, if incurred by the Company, be paid by the Company.
7.3. Survival. Only those agreements and covenants of the parties
--------
that are applicable in whole or in part after the Effective Time shall survive
the Effective Time. All other representations, warranties, agreements and
covenants shall be deemed to be conditions of this Agreement and shall not
survive the Effective Time. If this Agreement shall be terminated, the
agreements of the parties in Sections 3.1(c) and 7.2 shall survive such
termination.
7.4. Public Announcements. Unless required by applicable law, the
--------------------
Company and Acquiror will not issue any press release or otherwise make any
public statement with respect to the transactions contemplated hereby without
the prior written consent of the other party.
7.5. Notices. All notices, requests, demands, waivers and other
-------
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered in Person or
mailed, certified or registered mail with postage prepaid, or sent by telex,
telegram or telecopier, as follows:
(a) if to the Company, to it at:
Dauphin Deposit Corporation
213 Market Street
Philadelphia, PA 17105
Attention: George W. King, Esq.
Telecopier: (717) 231-2632
with a copy to:
Pepper, Hamilton & Scheetz
3000 Two Logan Square
Eighteenth & Arch Streets
Philadelphia, PA 19103-2799
Attention: L. Garrett Dutton, Esq.
Telecopier: (215) 981-4750
-41-
<PAGE>
(b) if to Acquiror, to it at:
Allied Irish Banks, plc
Bankcentre, Ballsbridge
Dublin 4, Ireland
Attention:
Telecopier:
and if to Acquiror Sub, to it at:
First Maryland Bancorp
25 South Charles Street
Baltimore, MD 21201
Attention:
Telecopier:
in each case, with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Attention: Craig M. Wasserman, Esq.
Telecopier: (212) 403-2000
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties. All such notices, requests, demands,
waivers and communications shall be deemed to have been received on the date of
delivery unless if mailed in which case on the third business day after the
mailing thereof except for a notice of a change of address, which shall be
effective only upon receipt thereof.
7.6. Entire Agreement. This Agreement and the Schedules, Exhibits
----------------
and other documents referred to herein or delivered pursuant hereto collectively
contain the entire understanding of the parties hereto with respect to the
subject matter contained herein and supersede all prior and contemporaneous
agreements and understandings, oral and written, with respect thereto.
7.7. Binding Effect; Benefit; Assignment. This Agreement shall
-----------------------------------
inure to the benefit of and be binding upon the parties hereto and their
respective successors, heirs and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties. Nothing in this Agreement, expressed or implied, is intended to confer
on any Person, other than the parties hereto or their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities
-42-
<PAGE>
under or by reason of this Agreement.
7.8. Waiver. Prior to the Effective Time, any provision of this
------
Agreement may be (i) waived by the party benefitted by the provision or by both
parties, by a writing executed by an executive officer or officers, or (ii)
amended or modified at any time (including the structure of the transaction) by
an agreement in writing between the parties hereto approved by their respective
boards of directors, except that, after the vote by the shareholders of the
Company no such amendment or modification may be made which reduces or changes
the form and amount of consideration payable pursuant to this Agreement without
further shareholder approval.
7.9. Further Actions. Each of the parties hereto agrees that,
---------------
subject to its legal obligations, it will use its best efforts to fulfill all
conditions precedent specified herein, to the extent that such conditions are
within its control, and to do all things reasonably necessary to consummate the
transactions contemplated hereby.
7.10. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
7.11. Applicable Law. This Agreement and the legal relations between
--------------
the parties hereto shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania, without regard to the conflict of laws
rules thereof.
7.12. Severability. If any term, provision, covenant or restriction
------------
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
-43-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
ALLIED IRISH BANKS, p.l.c.
By: /s/ Thomas P. Mulcahy
----------------------------------
Name: Thomas P. Mulcahy
Title: Group Chief Executive
FIRST MARYLAND BANCORP
By: /s/ J. E. Casey
----------------------------------
Name:
Title:
DAUPHIN DEPOSIT CORPORATION
By: /s/ C. R. Jennings
----------------------------------
Name:
Title:
-44-
<PAGE>
Exhibit B
Employment Agreement and
Change in Control Retention Payments
------------------------------------
Employment Agreement:
The Executive Employment and Benefit Agreement to be entered into
with Christopher R. Jennings is attached hereto.
Change in Control Retention Payments:
As provided in the Executive Employment and Benefit Agreement
attached hereto, Christopher R. Jennings will receive at closing the retention
payment provided for therein.
Robert L. Fryer will receive at closing the change in control payment
provided for in his Change in Control Agreement, which has been Previously
Disclosed.
<PAGE>
EXECUTIVE EMPLOYMENT AND BENEFIT AGREEMENT
THIS AGREEMENT, made this ___________ day of ____________________, 1997
(the "Effective Date"), by and between FIRST MARYLAND BANCORP, a Maryland
corporation (the "Employer"), and CHRISTOPHER R. JENNINGS (the "Executive").
WHEREAS, the Executive has served Dauphin Deposit Corporation (the
"Corporation") as its Chief Executive Officer for several years and has rendered
valuable services to the Corporation; and
WHEREAS, the Corporation has entered into an agreement dated January 21,
1997 to merge itself with and into the Employer; and
WHEREAS, the Employer desires to employ the Executive and thereby retain
the benefit of Executive's knowledge and experience, and believes that such
employment and the continuity thereof is a vital element in protecting and
enhancing the interests of the Employer and its stockholders, and that the
Executive desires to accept such employment pursuant to the terms of this
Agreement; and
NOW THEREFORE, in consideration of these premises and the mutual promises
contained herein, and intending to be legally bound hereby, the parties agree as
follows:
SECTION I: Employment.
----------
A. Position and Duties. The Executive shall be employed as the Vice
-------------------
Chairman of the Employer. In addition, until such time as the operations of the
Corporation are consolidated with and into the operations of the Employer's
other principal subsidiary bank (the "Bank Consolidation"), the Executive shall
continue to serve as the Chairman and Chief Executive Officer of the
Corporation. After the Bank Consolidation, the Executive shall serve as the
Employer's Director of Strategic Planning and Mergers, Acquisitions &
Consolidations. In addition, both before and after the Bank Consolidation, the
Executive shall serve as member of the Employer's Board of Directors, as a
member of the Employer's Management Committee, and as the sole Vice Chairman of
the Steering Committee responsible for the Bank Consolidation. Executive shall
have such authority and duties as are commensurate with the positions described
in this Section I(A).
B. Duration. The Executive's term of employment under the terms of this
--------
Agreement shall begin on the Effective Date and end on the second anniversary of
the Effective Date, unless renewed, extended or sooner terminated as hereinafter
provided. The Executive's term of employment under the terms of this Agreement
shall be automatically extended for one (1) additional year unless written
notice is provided by either party at least six (6) months prior to
<PAGE>
the end of the term of employment, and shall be extended on each anniversary of
the initial term unless such written notice is provided at least six (6) months
prior to such anniversary.
C. Termination
-----------
(1) Early Termination by the Executive. Notwithstanding the
----------------------------------
foregoing, the Executive may terminate his employment under this Agreement prior
to the expiration of the term specified herein upon 30-days prior written
notice. However, in the event of such early termination by the Executive during
the initial two year term of his employment, the Executive shall not accept
employment or perform services for another bank, bank holding company or other
financial institution located within 200 miles of the main offices of the
Corporation and which competes with Employer during the one (1) year period
immediately following the termination of his employment under this Agreement.
(2) Early Termination by the Employer. Notwithstanding the
---------------------------------
foregoing, the Executive's employment under this Agreement may be terminated by
the Employer prior to the expiration of the term specified herein and with at
least 90-days prior written notice if and only if such termination is for Cause.
As it is used in this Paragraph, "Cause" means that (i) the Executive has been
convicted of a felony, or has committed and been convicted or otherwise found
guilty in a court of law of committing a fraudulent act that, in either case, in
the reasonable judgment of a majority of the Employer's Board of Directors,
adversely affects the Employer's interests in a material respect, or (ii) in the
reasonable judgment of a majority of the Employer's Board of Directors, the
Executive, in carrying out his duties and responsibilities, has been willfully
and grossly negligent or has committed willful and gross misconduct resulting,
in either case, in material harm to the Employer.
(3) Severance Payment Upon Early Termination. If the Executive's
----------------------------------------
employment by the Employer terminates for any reason other than Cause, the
Executive shall receive on the date of such termination the greater of the
amount of base compensation the Executive would have received under Section I(E)
during the remainder of the term specified in this Section I(B), or eighteen
months' pay at the rate of base compensation in effect on the date of
termination.
(4) Any Termination. If the Executive's employment by the Employer
---------------
terminates for any reason, the following provisions shall apply to the extent
that the amounts to be paid and the rights and privileges provided thereunder
exceed those that would be provided under the similar arrangements of the
Employer, its subsidiaries or affiliates that would otherwise cover the
Executive:
(i) Insurance. The Employer shall provide the Executive until
---------
the date of his death with life and accident and health insurance coverages
comparable to the employer-sponsored coverages in effect for the Executive
immediately preceding the Executive's termination of employment with the
Employer. Comparable life and accident and health insurance coverages may be
provided to the Executive: (1) under existing plans or programs in
-2-
<PAGE>
which the Executive participates; (2) through conversion of group coverage
pursuant to any group policy in effect; (3) through other available commercial
insurance arrangements; or (4) through an arrangement funded by the general
assets of the Employer. The Employer shall also provide the Executive's spouse
with health insurance coverage until the date of her death comparable to the
employer-sponsored coverages in effect for the Executive immediately preceding
the Executive's termination of employment with the Employer. Neither the
Executive nor his spouse shall be obligated to contribute toward the cost of
such coverages.
(ii) Supplemental Retirement Income. The Executive shall
------------------------------
be entitled to the supplemental retirement income benefit described in Section
II of this Agreement.
(iii) Consulting. The Executive shall provide consulting
----------
and advisory services to the Employer for a period of one year following the
date of termination of his employment. The Executive shall be available for
advice and counsel to the officers and directors of the Employer and said
advisory and consulting services shall be performed in Harrisburg, Pennsylvania
and its environs and in such other locations as are agreeable to the Executive.
As full compensation for such consulting and advisory services, the Employer
shall pay the Executive an amount equal to his highest annual compensation, plus
reimbursement for all expenses reasonably incurred by him in the performance of
his consulting services. The Executive's compensation for consulting and
advisory services set forth above shall be paid in approximately equal monthly
installments over the one year term. For purposes of this Paragraph, "highest
annual compensation" for shall mean the highest base salary ever earned by the
Executive from either the Employer or the Corporation (or, for the first
calendar year this Agreement is in effect, from both the Corporation and the
Employer) in any year, plus the largest amount of bonuses or incentive cash
compensation ever received by the Executive from either the Employer or the
Corporation (or, for the first calendar year this Agreement is in effect, from
both the Corporation and the Employer) in any year. Payments made under this
Section I(C)(4)(iii) shall be in addition to any other amounts payable under
this Agreement, including, but not limited to, any severance payment made under
Section I(C)(3).
D. Retention Payment. Under the terms of the Second Amended and
-----------------
Restated Supplemental Executive Benefit and Change in Control Agreement, dated
June 17, 1996, by and between the Executive and the Corporation (the "Prior
Agreement"), the Executive is entitled to certain payments upon any Change in
Control of the Corporation (as defined in the Prior Agreement). In consideration
of the Executive's execution of this Agreement and in lieu any such payment, the
Employer shall pay to the Executive on the Effective Date an amount equal to
2.99 multiplied by the average annual compensation which was paid by the
Corporation to the Executive and includible in the gross income of the Executive
for the years 1992 - 1996, inclusive.
E. Base Compensation. As compensation for the services contemplated
-----------------
herein, the Employer shall pay the Executive an annual salary of $400,000 (four
hundred thousand dollars), to be paid in installments not less frequently than
monthly. The Executive 's annual base salary shall be reviewed and increased in
accordance with the procedures of the
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<PAGE>
Employer generally in effect with respect to the adjustment of base salaries of
senior management employees.
F. Executive Benefits. The Executive shall be entitled to
------------------
participate in such executive incentive compensation plans of the Employer as
may from time to time be in effect, on such terms and conditions as may be in
effect generally with respect to such participation from time to time during the
term of his employment. The Executive shall be entitled to participate, and
shall be entitled to all benefits and service credits under, all employee
benefit, fringe benefit and perquisite plans, programs and arrangements of the
Employer which are made generally available from time to time by the Employer to
their executive management employees, including any stock option and stock
appreciation rights and stock purchase plans, bonus, incentive and deferred
compensation plans, and disability, medical and insurance plans. Such
participation shall be on terms comparable to those applicable to senior
executive management employees of the Employer.
G. Additional Benefits.
-------------------
(1) Professional Dues. The Employer shall pay any dues or fees
-----------------
that are related to the Executive's employment and are associated with the
Executive's membership in any business or professional organization and the cost
of any continuing professional education and licensing fees required for the
Executive to maintain his qualification and licensing as a Certified Public
Accountant during the term of his employment by the Employer.
(2) Club Dues. The Employer shall pay any fees or dues
---------
associated with the membership of the Executive and his spouse in the Hershey
Country Club during the term of his employment under this Agreement.
(3) Support Staff. Unless the Executive requests otherwise,
-------------
Gloria Hoffman shall be employed by the Employer as the Executive's secretary
and personal assistant during the term of the Executive's employment by the
Employer. The terms of Ms. Hoffman's employment shall be such fair and
reasonable terms as are consistent with those applicable to other senior
executive secretaries employed by the Employer. Other support staff shall be
provided to the Executive as the Executive reasonably deems to be necessary for
him to best perform his duties.
(4) Transportation. The Executive shall be provided with a car
--------------
for his exclusive use. Such car shall be comparable to cars provided to other
senior executive management employees of the Employer. Unless the Executive
requests otherwise, Harold F. Hartman shall be employed by the Employer as the
Executive's driver for at least the first six months of the term of this
Agreement, and as further required by the Executive.
H. Assumption of Existing Obligations. The Employer shall fully
----------------------------------
assume and fulfill the obligations of the Corporation, its subsidiaries and
affiliates with respect to (1) the transfer or redemption of any shares under
any stock option plan, stock purchase or stock bonus
-4-
<PAGE>
plan, and the satisfaction of any rights held by the Executive under any such
arrangement, (2) the redemption of units under any long term incentive plan, (3)
the payment of any bonuses, (4) the payment of premiums on any insurance policy
covering the life of the Executive and owned by the Corporation, its
subsidiaries or affiliates, and (5) the payment of any other amount owing and
the satisfaction of any rights held by the Executive under any other plan or
arrangement of incentive or deferred compensation.
I. Preservation of Existing Benefits Arrangements. Sections I and
----------------------------------------------
IV shall apply to the extent that the amounts to be paid and the rights and
privileges provided thereunder exceed those provided under the similar
arrangements of the Employer, its subsidiaries or affiliates that would, in the
event of the inapplicability of those sections, otherwise cover the Executive.
SECTION II: Supplemental Retirement Income.
------------------------------
A. Amount of Benefit.
-----------------
(1) Retirement Prior to Age 65. The Executive may retire as of
--------------------------
any date. If the Executive retires prior to age 65, then commencing upon the
date of such retirement or such other later date selected by the Executive, the
Employer shall pay to the Executive a supplemental benefit for his services
prior to retirement. The annual amount of such supplemental retirement income
shall be equal to the greater of the following two alternatives, reduced,
however, by the early retirement factors in effect at that time under the
Corporation's Pension Plan, or by the early retirement factors in effect at that
time under the Employer's Pension Plan if such factors would produce a larger
benefit under this Section II(A) than the application of the factors from the
Corporation's Pension Plan, or if there are no such plans, by reasonable early
retirement factors that would be permissible under a qualified, defined benefit
pension plan:
(i) (a) 55% of the Executive's average annual compensation
for the five (5) calendar years included in the Executive's period of
service with the Employer and the Corporation which yield the highest
average. The calendar years used for purposes of computing benefits
under this Paragraph shall include, if applicable, the calendar years
in which the Executive was first employed by the Employer or the
Corporation and the calendar year in which the Executive retires. For
purposes of this Paragraph, compensation shall mean the Executive's
base salary in effect as of January 1 of a calendar year plus any
bonuses or annual incentive cash compensation earned by the Executive
for the immediately preceding calendar year, less
(b) the sum of the benefits that would be payable
annually under the Employer's Pension Plan and the
-5-
<PAGE>
Corporation's Pension Plan, assuming that benefits from both plans are
paid at the same time in the form of a single life annuity (whether or
not the executive actually elects such form of payment) and assuming
that the Executive remained employed by the Employer until age 65 at
the rate of compensation in effect on the date he ceases to be an
employee, and less
(c) the Primary Social Security Benefit which the
Executive would be entitled to receive upon retirement at age 65 under
Title II of the Social Security Act in effect on the date an Executive
ceases to be an employee assuming he remained employed at a rate of
compensation in effect on the date he ceases to be an employee.
(ii) (a) the Pension Benefit, but assuming that the number
of years of benefit service used to calculate the Pension Benefit is
increased by ten. For purposes of this Paragraph, the benefit
calculation shall be calculated by: (1) utilizing the definition of
compensation as contained in Section II(A)(1)(i)(a); and (2)
disregarding the compensation limitation of Section 401(a)(17) of the
Internal Revenue Code of 1986, as amended, or any other subsequent
amendment to the Internal Revenue Code of 1986, as amended, which
serves to limit compensation under qualified retirement plans, less
(b) the sum of the benefits actually payable annually
under the Employer's Pension Plan and the Corporation's Pension Plan,
assuming that benefits from both plans are paid at the same time in
the form of a single life annuity (whether or not the executive
actually elects such form of payment).
No benefit shall be payable hereunder while the Executive is receiving
disability benefits under Section IV of this Agreement.
(2) Retirement At or After Age 65. If the Executive retires
-----------------------------
from Continuous Employment after the date on which the Executive attains age
sixty-five (65), then commencing upon the date of such retirement or such other
later date selected by the Executive, the Employer shall pay the Executive a
supplemental benefit for his services prior to retirement. The amount of such
supplemental retirement income shall be equal to the greater of the following
two alternatives:
(i) (a) 55% of the Executive's average annual compensation
for the five (5) calendar years included in the
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<PAGE>
Executive's period of service with the Employer and the Corporation
which yield the highest average. The calendar years used for purposes
of computing benefits under this Paragraph shall include, if
applicable, the calendar years in which the Executive was first
employed by the Employer or the Corporation and the calendar year in
which the Executive retires. For purposes of this Paragraph,
compensation shall mean the Executive's base salary in effect as of
January 1 of a calendar year plus any bonuses or annual incentive cash
compensation earned by the Executive for the immediately preceding
calendar year, less
(b) the sum of the benefits actually payable annually
under the Employer's Pension Plan and the Corporation's Pension Plan,
assuming that benefits from both plans are paid at the same time in
the form of a single life annuity (whether or not the executive
actually elects such form of payment), and less
(c) Primary Social Security Benefit.
(ii) (a) the Pension Benefit, but assuming that the number
of years of benefit service used to calculate the Pension Benefit is
increased by ten. For purposes of this Paragraph, the benefit
calculation shall be calculated by: (1) utilizing the definition of
compensation as contained in Section II(A)(2)(i)(a); and (2)
disregarding the compensation limitation of Section 401(a)(17) of the
Internal Revenue Code of 1986, as amended, or any other subsequent
amendment to the Internal Revenue Code of 1986, as amended, which
serves to limit compensation under qualified retirement plans, less
(b) the sum of the benefits actually payable annually
under the Employer's Pension Plan and the Corporation's Pension Plan,
assuming that benefits from both plans are paid at the same time in
the form of a single life annuity (whether or not the executive
actually elects such form of payment).
For purposes of this Section II(A), the maximum annual supplemental
benefit, calculated as a single life annuity, shall not exceed 70% of the
Executive's compensation for the last full calendar year before retirement, less
the Pension Benefit and less the Primary Social Security Benefit. For purposes
of this paragraph, "compensation" shall mean compensation from the Corporation
and the Employer includible in the gross income of the Executive for the last
full calendar year before retirement.
-7-
<PAGE>
(3) Definitions.
-----------
(i) For the purposes of this Section, "Primary Social
Security Benefit" shall mean the monthly Primary Insurance Amount payable at age
65 under Social Security multiplied by twelve. The Primary Insurance Amount will
be calculated as of the date of retirement or termination or as of age 65, if
earlier, based upon provisions of the Social Security Act in effect at that
date. In determining this amount, all earnings subject to Social Security taxes
prior to the date of termination will be used.
(ii) For purposes of this Agreement, the phrase "Continuous
Employment" shall include periods when the Executive qualifies for disability
payments under Section IV of this Agreement and Leaves of Absences of up to two
years. A "Leave of Absence" shall mean any temporary absence from active
employment authorized by the Employer for disability, education, family
sickness, military purposes or other similar reasons.
(iii) For purposes of this Section, "Pension Benefit" shall
mean the greater of the benefit that would be payable annually under (i) the
Corporation's Pension Plan, or (ii) the Employer's Pension Plan, if (in either
case) all of the Executive's service to the Employer and to the Corporation were
credited as benefit service under each plan, and assuming that all benefits are
paid in the form of a single life annuity (whether or not the Executive actually
elects such form of payment).
B. Form of Payment. Any benefit under this Section II shall be
---------------
payable in equal monthly installments for the lifetime of the Executive, unless
he chooses one of the following alternative payment options:
(1) 50% Joint and Survivor Annuity Option. The Executive will
-------------------------------------
receive an actuarially reduced benefit for his lifetime. At his death, his
spouse will receive one-half of that amount until her subsequent death.
(2) 75% Joint and Survivor Annuity Option. The Executive will
-------------------------------------
receive an actuarially reduced benefit for his lifetime. At his death, his
spouse will receive three-fourths of that amount until her subsequent death.
(3) 100% Joint and Survivor Annuity Option. The Executive will
--------------------------------------
receive an actuarially reduced benefit for his lifetime and his spouse will
receive the same benefit amount until her subsequent death.
Alternate payment options may be determined utilizing actuarial and
present value assumptions set forth in the Corporation's Pension Plan, or by the
early retirement factors in effect at that time under the Employer's Pension
Plan if such factors would produce a larger benefit under this Section II than
the application of the factors from the Corporation's Pension
-8-
<PAGE>
Plan, or if there are no such plans, by reasonable early retirement factors that
would be permissible under a qualified, defined benefit pension plan.
SECTION III: Pre-Retirement Death Benefit.
----------------------------
A. Amount of Death Benefits.
------------------------
(1) Death Prior to Age 55.
---------------------
If the Executive's death occurs before the Executive attains the age
of fifty-five (55), the Employer shall pay the Executive's Beneficiary (as
defined herein) a sum equal to sixty percent (60%) of the Executive's
compensation payable in twelve (12) monthly installments commencing on the first
day of the first month following the date of the Executive's death, and one-half
of said 60% monthly amount per month commencing with the thirteenth month
following the date of the Executive's death and continuing through the one
hundred twentieth month following the date of the Executive's death. For
purposes of this Paragraph, "compensation" shall mean the Executive's base
salary in effect on the Executive's date of death, or date of disability, if
applicable, plus any bonuses or annual incentive cash compensation earned by the
Executive for the calendar year immediately preceding the Executive's date of
death, or date of disability, if applicable.
(2) Death At or After Age 55.
------------------------
If the Executive's death occurs after the Executive attains the age of
fifty-five (55), the Employer shall pay the Executive's Beneficiary a sum equal
to the greater of the following two alternatives:
(i) A sum equal to sixty percent (60%) of the Executive's
compensation payable in twelve (12) monthly installments commencing on
the first day of the first month following the date of the Executive's
death, plus, if the Executive dies before attaining the age of sixty-
five (65), one-half of said monthly amount per month commencing with
the thirteenth month following the date of the Executive's death and
continuing through the month in which the Executive would have
attained the age of sixty-five (65). For purposes of this Paragraph,
"compensation" shall mean the Executive's base salary in effect on the
Executive's date of death, or date of disability, if applicable, plus
any bonuses or annual incentive cash compensation earned by the
Executive for the calendar year immediately preceding the Executive's
date of death, or date of disability, if applicable.
(ii) The benefit that would have been payable to his
surviving spouse under Section II(A)(l) had the Executive
-9-
<PAGE>
retired early on the day prior to the date of his death and elected to
have the actual equivalent of such supplemental benefit paid over the
joint lives of himself and his spouse under a 100% joint and survivor
option. This alternative is only available if the Executive is
survived by his spouse. Such benefit shall be payable monthly for the
life of the surviving spouse.
The greater of the benefits under this Section III(A)(2) shall be
determined by applying the actuarial factors in effect at that time under the
Corporation's Pension Plan, or those in effect at that time under the Employer's
Pension Plan if such factors would produce a larger benefit than the application
of the factors contained in the Corporation's Pension Plan, or if there are no
such plans, by reasonable actuarial factors that would be permissible under a
qualified, defined benefit pension plan.
(3) As used in Paragraph A of this Section, the term "Beneficiary"
shall mean the person or persons designated in writing by the Executive to
receive benefits or, if no such written designation is made, the Executive's
spouse (if living at the date of the payment required hereunder), or otherwise
to the Executive's issue per stirpes. In the event that there is any doubt as
to the proper person or persons entitled to receive payments due hereunder,
payments under this Section III(A) may be withheld until the matter is decided
by a court of competent jurisdiction.
B. Termination. All rights under this Section III shall terminate
-----------
on the date that the Executive begins receipt of supplemental retirement income
benefits under Section II of this Agreement.
C. Notice. In the event that any benefit becomes payable under this
------
Section III, the Employer shall be obligated to immediately notify the
Executive's spouse and Beneficiary(ies) of their entitlement under this Section
III.
SECTION IV: Disability Income.
-----------------
A. Payment of Disability Benefits. If the Executive suffers a
------------------------------
Disability (as defined herein) before the Executive attains the age of 65 and
while the Executive is an active employee of the Employer, the Employer shall
pay the Executive a supplemental disability income, commencing on the first day
after the Executive has suffered such Disability for a period of thirty (30)
consecutive days and continuing to the earlier of that month in which the
Executive attains the age of sixty-five (65) years, the date of the Executive's
death or that date on which the Executive no longer meets the criteria for
Disability as described herein. The amount of such disability benefit shall be
equal to (a) 60% of the Executive's compensation, less (b) the total benefits
payable to the Executive under any group disability plan or plans which the
Employer may have in effect at the time of the payment of the benefit and, less
(c) social security disability payments received. For purposes of this
Paragraph, "compensation" shall mean the Executive's base salary in effect on
the date the Executive's disability payments are to commence plus any
-10-
<PAGE>
bonuses or annual incentive cash compensation earned by the Executive for the
calendar year immediately preceding the date the Executive's disability payments
are to commence.
B. Disability Defined. For the purposes of this Agreement, an
------------------
Executive shall be considered disabled if as a result of bodily injury sustained
or sickness, he is unable to engage in an occupation for compensation or profit,
totally and continuously for a period in excess of thirty (30) days. During the
first thirty-six (36) months of Disability, "occupation" shall mean the
Executive's current occupation. After that period, "occupation" means any
occupation for which the Executive is or becomes reasonably fitted by education,
training or experience.
C. Disability to Age 65. If the Executive attains age sixty-five
--------------------
(65) while disabled, disability benefits under this Section IV shall cease and
he shall instead be entitled to receive the retirement benefit specified in
Section II(A)(2).
D. Notice. In the event that any benefit becomes payable under this
------
Section IV and the Executive is sufficiently incapacitated such that he is
unable to manage his own affairs, the Employer shall be obligated to immediately
notify the Executive's spouse (if then living) or legal representative of the
Executive's entitlement under this Section IV.
SECTION V: Section 280G Gross-Up Payment. If the total of all payments
-----------------------------
made to the Executive pursuant to this Agreement, together with any other
payments which the Executive has a right to receive from the Employer, the
Corporation, or any Employers, affiliates or subsidiaries of the foregoing
result in the imposition of an excise tax under Internal Revenue Code Section
4999 (or any successor thereto), the Employer shall pay the Executive an
additional excise tax adjustment payment in an amount such that, after the
payment of all federal and state income and excise taxes, the Executive will be
in the same after-tax position as if no excise tax had been imposed. Any
payment or benefit which is required to be included under Internal Revenue Code
Sections 280G or 4999 (or any successor provisions thereto) for purposes of
determining whether an excise tax is payable shall be deemed a payment "made to
the Executive" or a payment "which the Executive has a right to receive" for
purposes of this provision. The Employer shall be responsible for the costs of
calculation of the excise tax by its independent certified accountant and tax
counsel and shall notify the Executive of the amount of excise tax due prior to
the time such excise tax is due. If at any time it is determined that the
additional excise tax adjustment payment previously made to the Executive was
insufficient to cover the effect of the excise tax, the excise tax gross-up
payment pursuant to this provision shall be increased to make the Executive
whole, including an amount to cover the payment of any penalties resulting from
incorrect or late payment of the excise tax resulting from the prior
calculation.
SECTION VI: Performance by Successor. The parties have entered into this
------------------------
Agreement in recognition of Executive's past service to the Corporation and in
anticipation of his continued service to the Employer. The Employer agrees that
it will not enter into any agreement under which the Employer will be merged or
otherwise combined with, or sold to any other entity
-11-
<PAGE>
unless that other entity expressly agrees in advance to assume and perform the
obligations of the Employer under this Agreement.
SECTION VII: Miscellaneous.
-------------
A. Arbitration. All claims, demands, disputes, controversies,
-----------
differences or misunderstandings arising out of or relating to this Agreement,
or the failure or refusal to perform the whole or any part hereof, shall be
settled by arbitration conducted in Pennsylvania by commercial law arbitrators
of the American Arbitration Association in accordance with the commercial rules
thereof then pertaining. The parties hereto, and each of them, hereby submit
themselves to the exclusive jurisdiction of the courts of the Commonwealth of
Pennsylvania in any proceeding for the enforcement of the award rendered by the
arbitrators, and agree that judgment upon such award may be entered in any
court, in or out of the Commonwealth of Pennsylvania, having jurisdiction
thereof.
B. Corporation's Pension Plan Defined. As used herein,
----------------------------------
"Corporation's Pension Plan" shall mean the Dauphin Deposit Corporation Pension
Plan and Trust Agreement, as amended, and any successor thereto.
C. Employer's Pension Plan Defined. As used herein, "Employer's
-------------------------------
Pension Plan" shall mean the tax-qualified defined benefit pension plan of the
Employer (or its subsidiary or affiliate) that covers the Executive, if any, and
any successor thereto.
D. Attachment. Neither this Agreement nor any benefit payable
----------
hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or change or to execution, attachment, levy or
similar process or assignment by operation of law, and any attempt, voluntarily
or involuntarily, to effect such action shall be void and of no effect.
E. Notice. Any notice which shall be or may be given hereunder
------
shall be in writing and shall be mailed by certified mail, postage prepaid,
addressed as follows:
If to the Executive:
Christopher R. Jennings
1051 Knoll Drive
Hummelstown, PA 17036
If to the Employer:
Director of Human Resources
First Maryland Bancorp
25 South Charles Street
Baltimore, Maryland 21201
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<PAGE>
Any party hereto may from time to time change the address to which notices to it
shall be mailed by giving notice thereof in the manner provided for herein.
F. Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of each of the Executive, the Corporation and the Employer, their
respective heirs, executors, administrators, successors and, to the extent
permitted hereunder, assigns.
G. Indulgences. Neither the failure nor any delay on the part of
-----------
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
H. Entire Agreement. This Agreement represents the entire
----------------
understanding with respect to the matters addressed herein and may be amended
only by an instrument in writing signed by the parties hereby bound. On the
Effective Date, this Agreement will supersede the Prior Agreement which will
hereby be terminated as of that date. Prior to the Effective Date, the Prior
Agreement will remain in full force and effect and will not be affected by this
Agreement.
I. Jurisdiction. The parties hereto consent to the exclusive
------------
jurisdiction of the courts of the Commonwealth of Pennsylvania in any and all
actions arising hereunder.
J. Governing Law. This Agreement shall be governed and construed
-------------
under the laws of the Commonwealth of Pennsylvania.
K. Headings. All headings preceding the text of the several
--------
paragraphs hereof are inserted solely for reference and shall not constitute a
part of this Agreement, nor affect its meaning, construction or effect.
L. Type of Arrangement and Status. It is the intention of the
------------------------------
parties that this Agreement constitutes an unfunded arrangement for Federal
Income Tax purposes and for purposes of Title I of ERISA and is an unfunded plan
maintained for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. The Executive's interest under
this Agreement is that of a general unsecured creditor of the Employer.
M. Enforcement. If the Executive determines in good faith that the
-----------
Employer has failed to comply with its obligations under this Agreement, or if
the Employer or any other person takes any action to declare this Agreement void
or unenforceable in whole or in part, or institutes any legal action or
arbitration proceeding with respect to this Agreement, the Employer hereby
irrevocably authorizes the Executive from time to time to retain counsel of the
Executive's
-13-
<PAGE>
choice, at the expense of the Employer, to represent the Executive in connection
with any and all actions and proceedings, whether by or against the Corporation,
the Employer, any acquiror or successor, or any director, officer, stockholder
or other person affiliated with any of the foregoing, which may adversely affect
the Executive's rights hereunder. In such event, the Employer shall be liable
to reimburse the Executive for all of the Executive's reasonable costs and
expenses (including reasonable attorney's fees) incurred and expended in
connection with enforcement.
N. Other Benefits Not Affected. Notwithstanding any other provision
---------------------------
of this Agreement, the payments provided by or as a result of this Agreement
shall not affect the Executive's rights to receive any payments or benefits to
which the Executive may be or become entitled under any other existing or future
agreement or arrangement of the Corporation or the Employer, or their
subsidiaries, affiliates or successors with the Executive, or under any existing
or future benefit plan or arrangement of the Corporation or the Employer, or
their subsidiaries, affiliates or successors in which the Executive is or
becomes a participant, or under which the Executive has or obtains rights,
including, without limitation, any qualified or nonqualified deferred
compensation or retirement plan or program. Any such rights of the Executive
shall be determined in accordance with the terms and conditions of the
applicable agreement, arrangement or plan.
O. Withholding for Taxes. All payments required to be made under
---------------------
this Agreement will be subject to withholding of such amounts relating to tax
and/or other payroll deductions as may be required by law.
P. Supplemental Benefit Trust. The Dauphin Deposit Corporation
--------------------------
Supplemental Benefit Trust (the "Trust") was established to assist the
Corporation in meeting its supplemental retirement income benefit, preretirement
death benefit or disability benefit obligations under the Prior Agreement and
other agreements. The Trust is a grantor trust which conforms in substantive
respect to the model trust set forth in Revenue Procedure 92-64.
(1) Obligations Under the Trust. The Employer shall agree to be
---------------------------
jointly and severally liable for any of the Corporation's obligations under the
Trust and shall agree to fulfill all the duties of the Corporation under the
Trust. Amounts held in the Trust or any other such trust or account may be
applied to satisfy obligations of the Employer under this Agreement. The
Employer shall remain obligated to pay benefits under this Agreement to the
extent the Trust does not pay benefits when due under this Agreement.
(2) Funding of the Trust. The Employer shall annually perform
--------------------
an actuarial analysis of the benefits payable from the Trust (as of December 31
of each year) and shall ensure that the Trust is fully funded based on such
anticipated payments, interest rates, mortality factors and other factors
customarily used in performing such an analysis by no later than March 31 of the
following calendar year.
-14-
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this Agreement to be
executed and attested to on its behalf by its duly authorized officers, and the
Executive hereunder has set his hand and seal as of the day and year first above
written.
ATTEST: FIRST MARYLAND BANCORP
By:
- ------------------------- -----------------------------
Secretary [Title]
(SEAL)
WITNESS: CHRISTOPHER R. JENNINGS
- ------------------------- -----------------------------
-15-
<PAGE>
EXHIBIT C
Additional Benefits Provisions
------------------------------
Acquiror Sub shall use reasonable efforts after the Effective Time to
coordinate the pension benefits of its employees and the Affected Employees,
including the use of excess assets in the Company's tax-qualified defined
benefit pension plan (the "Company's Pension Plan") for the benefit of Affected
Employees, and shall use reasonable efforts to coordinate accrued benefits under
the Company's Pension Plan and the tax-qualified defined benefit pension plan
covering employees of Acquiror Sub (the "Acquiror Sub's Pension Plan") so that
each Affected Employee's total accrued pension benefit under the two plans is
not less than the benefit he or she would have accrued with respect to his or
her total period of service with the Company and the Acquiror Sub, had he or she
remained covered by the Company's Pension Plan as in effect immediately prior to
the Effective Time. Acquiror and Acquiror Sub shall cause both the Acquiror
Sub's Pension Plan and the Company's Pension Plan to provide that each Affected
Employee shall accrue a benefit under such plan for the portion of the plan year
before the Closing Date (with respect to the Company's Pension Plan) or after
the Closing Date (with respect to the Acquiror Sub's Pension Plan) without
regard to whether such benefit would otherwise not have been accrued under the
terms of such plan to the extent that such Affected Employee was not an active
participants on the last day of the plan year or failed to be credited with a
minimum period of service under either or both plans as a result of the Merger.
Acquiror Sub shall cause to be contributed to the tax-qualified defined
contribution plan covering the employees of Acquiror Sub and to the Company's
tax-qualified defined contribution plan on behalf of all Affected Employees all
contributions due for the portion of the plan year during which those Affected
Employees were active participants in those plans without regard to whether
those Affected Employees would have otherwise been ineligible for such
contributions to the extent that they were not active participants on the last
day of the plan year or failed to be credited with a minimum period of service
under either or both plans as a result of the Merger.
<PAGE>
Exhibit 10(i)
SECOND AMENDED AND RESTATED SUPPLEMENTAL EXECUTIVE BENEFIT
AND CHANGE IN CONTROL AGREEMENT
-------------------------------
THIS SECOND AMENDED AND RESTATED AGREEMENT ("Agreement"),
made this 17th day of June, 1996, between DAUPHIN DEPOSIT CORPORATION, a
Pennsylvania corporation, having its principal office at 213 Market Street,
Harrisburg, Pennsylvania 17101 ("Corporation"), and CHRISTOPHER R. JENNINGS, an
individual, presently residing at 1051 Knoll Drive, Hummelstown, Pennsylvania
17036 who is employed by the Corporation as its Chief Executive Officer (the
"Executive").
WHEREAS, the Corporation and the Executive entered into an Amended and
Restated Supplemental Executive Benefit and Change in Control Agreement on
October 15, 1992 (the "First Amended and Restated Agreement"); and
WHEREAS, the Corporation and the Executive desire to make certain
changes to the First Amended and Restated Agreement and, in connection
therewith, to completely amend and restate the First Amended and Restated
Agreement.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the Executive and the Corporation agree that the Amended
and Restated Supplemental Executive Benefit and Change in Control Agreement
dated October 15, 1992 is hereby amended and restated to read in its entirety as
follows:
<PAGE>
SECTION I: Supplemental Retirement Income.
A. Amount of Benefit.
-----------------
(1) Retirement Prior to Age 65.
--------------------------
If the Executive is Continuously Employed by the Corporation from
April 16, 1987 to the date on which he attains age fifty-five (55) and has
completed five (5) years of "Dauphin vesting service," as defined in and
credited to the Executive under the Dauphin Deposit Corporation Pension Plan, he
may retire as of the first day of the month following the date he attains age
fifty-five (55) and has completed five (5) years of "Dauphin vesting service" or
upon such later date prior to attaining age sixty-five (65).
Commencing upon the date of such retirement, the Corporation will
pay the Executive a supplemental benefit for his services prior to retirement.
The annual amount of such supplemental retirement income shall be equal to the
greater of the following two alternatives, reduced, however, by the early
retirement factors in effect at that time under the Dauphin Pension Plan:
(i) (a) 55% of the Executive's average annual
compensation for the five (5) consecutive calendar years included
in the Executive's period of service with the Corporation which
yield the highest average. The calendar years used for purposes
of computing benefits under this Paragraph shall include, if
applicable, the calendar year in which the Executive was first
employed by the Corporation and the calendar year in which the
Executive retires. For purposes of this Paragraph, compensation
shall mean the Executive's base salary in effect as of January 1 of
a calendar year plus any bonuses or annual incentive cash
-2-
<PAGE>
compensation earned by the Executive for the immediately
preceding calendar year, less
(b) the total of the annual benefits payable to the
Executive under the Dauphin Pension Plan, assuming that he
remained employed until age 65 at the rate of compensation in
effect on the date he ceases to be an Employee, and less
(c) the Primary Social Security benefit which the
Executive would be entitled to receive upon retirement at age 65
under Title II of the Social Security Act in effect on the date an
Executive ceases to be an Employee assuming he remained
employed at a rate of compensation in effect on the date he ceases
to be an Employee, and less
(d) $12,145 .
----------
(ii) (a) the annual benefit calculated under the terms
of the Dauphin Pension Plan but based on benefit service as is
credited to the Executive under the Dauphin Pension Plan plus 10
years. For purposes of this Paragraph, the Dauphin Pension Plan
annual benefit calculation shall be calculated by: (1) utilizing the
definition of compensation as contained in Section I(A)(1)(i)(a);
and (2) disregarding the compensation limitation of Section
401(a)(17) of the Internal Revenue Code of 1986, as amended, or
any other subsequent amendment to the Internal Revenue Code of
1986, as amended, which serves to limit compensation under
qualified retirement plans, less
(b) $12,145 , and less
-----------
(c) the Dauphin Pension Benefit.
-3-
<PAGE>
For purposes of this Section I.A.(1), the maximum annual supplemental
benefit, calculated as a single life annuity, shall not exceed 70% of the
Executive's compensation for the last full calendar year before retirement less
$12,145.00, less the Dauphin Pension Benefit and less the Primary Social
Security Benefit. For purposes of this paragraph, compensation shall mean
compensation which was paid by the Corporation to the Executive and includable
in the gross income of the Executive for the last full calendar year before
retirement.
No benefit shall be payable hereunder while the Executive is
disabled as defined in Section III.B.
(2) Retirement At or After Age 65.
-----------------------------
If the Executive is Continuously Employed by the Corporation from
the date of this Agreement to the date on which the Executive attains age sixty-
five (65), the Executive may retire from active, daily employment as of the
first day of the month following his 65th birthday, or upon such later date as
may be mutually agreed upon by the Executive and the Corporation.
Commencing upon the date of such retirement, the Corporation will
pay the Executive supplemental retirement income for his services prior to his
retirement. The amount of such supplemental retirement income shall be equal to
the greater of the following two alternatives:
-4-
<PAGE>
(i) (a) 55% of the Executive's average annual
compensation for the five (5) consecutive calendar years included
in the Executive's period of service with the Corporation which
yield the highest average. The calendar years used for purposes
of computing benefits under this Paragraph shall include, if
applicable, the calendar year in which the Executive was first
employed by the Corporation and the calendar year in which the
Executive retires. For purposes of this Paragraph, compensation
shall mean the Executive's base salary in effect as of January 1 of
a calendar year plus any bonuses or annual incentive cash
compensation earned by the Executive for the immediately
preceding calendar year, less
(b) the total of the annual benefits payable to the
Executive under the Dauphin Pension Plan, less
(c) Primary Social Security, and less
(d) $12,145 .
----------
(ii) (a) The annual benefit calculated under the terms
of the Dauphin Pension Plan but based on benefit service as is
credited to the Executive under the Dauphin Pension Plan plus 10
years. For purposes of this Paragraph, the Dauphin Pension Plan
annual benefit calculation shall be calculated by: (1) utilizing the
definition of compensation as contained in Section I(A)2(i)(a); and
(2) disregarding the compensation limitation of Section 401(a)(17)
of the Internal Revenue Code of 1986, as amended, or any other
subsequent amendment to the Internal Revenue Code of 1986, as
amended, which serves to limit compensation under qualified
retirement plans, less
(b) $12,145 , and less
-----------
(c) the Dauphin Pension Benefit.
-5-
<PAGE>
For purposes of this Section I.A.(2), the maximum annual supplemental
benefit, calculated as a single life annuity, shall not exceed 70% of the
Executive's compensation for the last full calendar year before retirement less
$12,145.00, less the Dauphin Pension Benefit and less the Primary Social
Security Benefit. For purposes of this paragraph, compensation shall mean
compensation which was paid by the Corporation to the Executive and includable
in the gross income of the Executive for the last full calendar year before
retirement.
(3) Definitions.
-----------
(i) For the purposes of this Section "Primary Social Security"
shall mean the monthly Primary Insurance Amount payable at age 65 under Social
Security multiplied by twelve. The Primary Insurance Amount will be calculated
as of the date of retirement or termination or as of age 65, if earlier, based
upon provisions of the Social Security Act in effect at that date. In
determining this amount, all earnings subject to Social Security taxes prior to
the date of termination will be used.
(ii) For purposes of this Agreement, the phrase "Continuously
Employed" shall include periods when the Executive qualifies for disability
payments under Section III of this Agreement and Leaves of Absences of up to two
years. A "Leave of Absence" shall mean any temporary absence from active
employment authorized by the Corporation for disability, education, family
sickness, military purposes or other similar reasons.
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<PAGE>
(iii) For purposes of calculations under this Section, annual
benefits under the Dauphin Pension Plan shall be determined pursuant to the
Dauphin Pension Plan's single life annuity option.
B. Payment of Benefit.
------------------
The benefit shall be payable in equal monthly installments for the
lifetime of the Executive, unless he chooses one of the following alternative
payment options:
(1) 50% Joint and Survivor Annuity Option.
-------------------------------------
The Executive will receive an actuarially reduced benefit for his
lifetime. At his death, his spouse will receive one-half of that amount until
her subsequent death.
(2) 75% Joint and Survivor Annuity Option.
-------------------------------------
The Executive will receive an actuarially reduced benefit for his
lifetime. At his death, his spouse will receive three-fourths of that amount
until her subsequent death.
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<PAGE>
(3) 100% Joint and Survivor Annuity Option.
--------------------------------------
The Executive will receive an actuarially reduced benefit for his
lifetime and his spouse will receive the same benefit amount until her
subsequent death.
Alternate payment options shall be determined utilizing actuarial
and present value assumptions set forth in the Dauphin Pension Plan.
C. Executive Contribution.
----------------------
The Executive acknowledges that he will not be required to make any
monetary investment in the Corporation nor give any consideration, other than
employment, to the Corporation, in return for the benefit provided under this
Section I.
D. Corporation's Funding.
---------------------
The Corporation shall not be required to fund the potential
obligations under this Section I or to pledge assets as security for its
performance hereunder.
E. Certain Events.
--------------
Subject to the provisions of Section V.A., but notwithstanding the age
condition in Section I.A.(1), in the event (a) the Corporation terminates the
Executive's employment other than for Cause (as defined below); or (b) the
Executive terminates his employment for Good Reason (as defined below), in any
case at any time after the Executive has satisfied the five
-8-
<PAGE>
years of Dauphin vesting service requirement under Section I.A.(1), the
Executive shall be entitled to receive a supplemental retirement income benefit
under Section I.A.(1) of the Agreement upon his attainment of age fifty-five
(55). For purposes of this Section I.E., "Cause" shall mean that (i) the
Executive has been found guilty of a felony or has committed and been found
guilty of committing a fraudulent act that, in either case, in the reasonable
judgment of a majority of the Corporation's board of directors, adversely
affects the Corporation's interests in a material respect, or (ii) in the
reasonable judgment of a majority of the Corporation's board of directors, the
Executive, in carrying out his duties and responsibilities to the Corporation,
has been willfully and grossly negligent or has committed willful and gross
misconduct resulting, in either case in this clause (ii), in material harm to
the Corporation. For purposes of this Section I.E., "Good Reason" shall mean (x)
a material adverse change in the Executive's title or responsibilities or the
assignment to the Executive of any duties inconsistent with his position as
Chief Executive Officer of the Corporation (the top tier holding company in the
corporate structure); (y) a material reduction in the duties and
responsibilities of the Executive or a reduction in the salary of the Executive;
or (z) any relocation of the Executive's principal place of work with the
Corporation of more than thirty (30) miles.
In the event the Executive should qualify for a supplemental
retirement income benefit under Section I.A.(1) of this Agreement because of his
termination of employment for other than Cause or because he terminates his
employment for Good Reason under this Section I.E., the calendar years used for
purposes of computing benefits under Section I.A.(1)(i)(a) shall
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include, if applicable, the calendar year in which the Executive was first
employed by the Corporation and the calendar year in which the Executive's
employment terminates.
SECTION II: Pre-Retirement Death Benefit.
----------------------------
A. Amount of Death Benefits.
------------------------
(1) Death Prior to Age 55.
---------------------
If the Executive's death occurs before the Executive attains the
age of fifty-five (55), and while the Executive is either an active Employee of
the Corporation or a disabled employee of the Corporation, the Corporation will
pay to the Executive's Beneficiary (as defined herein) a sum equal to sixty
percent (60%) of the Executive's compensation payable in twelve (12) monthly
installments commencing on the first day of the first month following the date
of the Executive's death, and one-half of said 60% monthly amount per month
commencing with the thirteenth month following the date of the Executive's death
and continuing through the one hundred twentieth month following the date of the
Executive's death. For purposes of this Paragraph, compensation shall mean the
Executive's base salary in effect on the Executive's date of death, or date of
disability, if applicable, plus any bonuses or annual incentive cash
compensation earned by the Executive for the calendar year immediately preceding
the Executive's date of death, or date of disability, if applicable.
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<PAGE>
(2) Death At or After Age 55.
------------------------
(i) If the Executive's death occurs after the Executive has
attained the age of fifty-five (55) but before he attains the age of sixty-five
(65), and while the Executive is either an active employee of the Corporation or
a disabled employee of the Corporation, the Corporation shall pay a death
benefit equal to the greater of the following two alternatives:
(a) A sum equal to sixty percent (60%) of the
Executive's compensation payable in twelve (12) monthly
installments commencing on the first day of the first month
following the date of the Executive's death, and one-half of said
monthly amount per month commencing with the thirteenth month
following the date of the Executive's death and continuing in each
case only to the month in which the Executive would have attained
the age of sixty-five (65). Said amounts to be payable to the
Executive's Beneficiary. For purposes of this Paragraph,
compensation shall mean the Executive's base salary in effect on
the Executive's date of death, or date of disability, if applicable,
plus any bonuses or annual incentive cash compensation earned by
the Executive for the calendar year immediately preceding the
Executive's date of death, or date of disability, if applicable.
(b) The benefit that would have been payable to
his surviving spouse under Section I.A.(1) had the Executive
retired early on the day prior to the date of his death and elected
to have the actuarial equivalent of such supplemental benefit paid
over the joint lives of himself and his spouse under a 100% joint
and survivor option. This alternative is only available if the
Executive is survived by his spouse. Actuarial factors used in
making the foregoing calculation shall be those used in connection
with the Dauphin Pension Plan. Said benefit to be payable
monthly for the life of the surviving spouse.
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<PAGE>
The greater of the benefits shall be determined by the Dauphin
Deposit Corporation Compensation Committee and shall be calculated with respect
to actuarial and present value assumptions consistent with the Dauphin Pension
Plan. The determination of the Dauphin Deposit Corporation Compensation
Committee shall be based on reasonable objective standards and shall be final.
(ii) If a death benefit is paid to an Executive's Beneficiary
under Section II.A.(2)(i)(a) and the Executive was married on the date of his
death, then an additional monthly death benefit commencing on the first day of
the month following the month in which the Executive would have attained age 65
shall be payable to the Executive's spouse, if then living, for her life. The
amount of such additional monthly death benefit shall be the same monthly
amount, if any, as would have been paid to such spouse had the death benefit
originally been computed and paid to said spouse pursuant to Section
II.A(2)(i)(b).
(iii) As used in Paragraph A, Subparagraphs (1) and (2) (i) (a),
of this Section, the term "Executive's Beneficiary" shall mean the person or
persons designated in writing by the Executive to receive benefits or if no such
written designation is made, the Executive's spouse, if living at the date of
the payment required hereunder, otherwise to the Executive's issue per stirpes.
In the event the Corporation has any doubt as to the proper person or persons
entitled to receive payments due hereunder, the Corporation shall have the right
to withhold such payments until the matter is decided by a court of competent
jurisdiction.
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<PAGE>
B. Termination.
-----------
All rights of the Executive under this Section II shall terminate on
the date he attains age 65 or the date on which he retires or otherwise (except
by reason of death) ceases to be Continuously Employed by the Corporation
whichever occurs earlier. However, if the Executive suffers a Disability, all
rights of the Executive hereunder shall terminate if such Disability ceases and
the Executive fails to return to active employment or he suffers under such
Disability for more than fifteen years. For purposes of this paragraph, the term
"Disability" shall have the meaning set forth in Section III.B.
SECTION III: Disability Income.
-----------------
A. Payment of Disability Benefits.
------------------------------
If the Executive suffers a disability (as defined herein) before the
Executive attains the age of sixty-five (65), and while the Executive is an
active employee of the Corporation, the Corporation will pay the Executive
supplemental disability income, commencing on the first day after the Executive
has suffered such disability for a period of thirty (30) consecutive days and
continuing to the earlier of that month in which the Executive attains the age
of sixty-five (65) years, the date of the Executive's death or that date on
which the Executive no longer meets the criteria for disability as described
herein.
The amount of such disability benefit shall be equal to (a) 60% of the
Executive's compensation, less (b) the total benefits payable to the Executive
under any group disability plan
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<PAGE>
or plans which the Corporation may have in effect at the time of the payment of
the benefit and, less (c) social security disability payments received. For
purposes of this Paragraph, compensation shall mean the Executive's base salary
in effect on the date the Executive's disability payments are to commence plus
any bonuses or annual incentive cash compensation earned by the Executive for
the calendar year immediately preceding the date the Executive's disability
payments are to commence.
B. Disability Defined.
------------------
For the purposes of this Agreement, an Executive shall be considered
disabled if as a result of bodily injury sustained or sickness, he is unable to
engage in an occupation for compensation or profit, totally and continuously for
a period in excess of thirty (30) days.
During the first thirty-six (36) months of disability, "occupation"
shall mean the Executive's current occupation. After that period, "occupation"
means any occupation for which the Executive is or becomes reasonably fitted by
education, training or experience.
C. Disability to Age 65.
--------------------
If the Executive attains age sixty-five (65) while disabled, he shall
be entitled to receive a retirement benefit as specified in Section I.A.(2).
-14-
<PAGE>
SECTION IV: Termination Pursuant to a Change in Control.
-------------------------------------------
A. Definitions.
-----------
(1) For purposes of this Agreement, the term "Change in Control"
shall mean any of the following:
(i) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934 (the "Exchange Act")), other than the
Corporation, a subsidiary of the Corporation, an employee benefit plan (or
related trust) of the Corporation or a direct or indirect subsidiary of the
Corporation, or affiliates of the Corporation (as defined in Rule 12b-2
under the Exchange Act), becomes the beneficial owner (as determined
pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 20% or more of the combined
voting power of the Corporation's then outstanding securities, provided
--------
that for purposes of this determination, a person shall not be deemed the
beneficial owner of securities of which such person has the right to
acquire beneficial ownership if such right has not been exercised and such
right was acquired directly from the Corporation; or
(ii) the liquidation or dissolution of the Corporation or Dauphin
Deposit Bank and Trust Company (the "Bank") or the occurrence of a sale of
all or substantially all of the assets of the Corporation or the Bank to an
entity which is not a direct or indirect subsidiary of the Corporation; or
(iii) the occurrence of a reorganization, merger, consolidation or
other similar transaction or connected series of transactions of the
Corporation as a result of which either (a) the Corporation does not
survive or (b) pursuant to which shares of the Corporation common stock
("Common Stock") would be converted into cash, securities or other
property, unless, in case of either (a) or (b), the holders of Corporation
------
Common Stock immediately prior to such transaction will, following the
consummation of the transaction, beneficially own, directly or indirectly,
more than 50% of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of the
corporation surviving, continuing or resulting from such transaction; or
(iv) the occurrence of a reorganization, merger, consolidation, or
similar transaction of the Corporation, or before any connected series of
such transactions, if, upon consummation of such transaction or
transactions, the persons who are members of the Board of Directors of the
Corporation
-15-
<PAGE>
immediately before or at the time of execution of an agreement providing
for such transaction or transactions cease to constitute a majority of the
Board of Directors of the Corporation or, in a case where the Corporation
does not survive in such transaction, of the corporation surviving,
continuing or resulting from such transaction or transactions; or
(v) any other event which is at any time designated as a "Change in
Control" for purposes of this Agreement by a resolution adopted by the
Board of Directors of the Corporation with the affirmative vote of a
majority of the non-employee directors in office at the time the resolution
is adopted; in the event any such resolution is adopted, the Change in
Control event specified thereby shall be deemed incorporated herein by
reference and thereafter may not be amended, modified or revoked without
the written agreement of the Executive.
B. Compensation Upon Termination Pursuant to a Change in Control.
-------------------------------------------------------------
If a Change in Control should occur during the Executive's employment
with the Corporation, the Executive shall have the option, to be exercised
within one (1) year from the date of the Change in Control (as defined in
Section IV.A(1) hereof) to terminate his employment with the Corporation with or
without cause. In the event of the termination of the Executive's employment
with the Corporation within one (1) year after the date of such Change in
Control either by the Executive or the Corporation, the following provisions
shall apply:
(1) (i) If the Executive terminates his employment within ninety
(90) days after such Change in Control, or if the Corporation terminates his
employment within one (1) year from the date of the Change in Control, the
Corporation shall pay the Executive, within thirty (30) days after his
termination pursuant to a Change in Control, an amount of compensation equal to
2.99 multiplied by the average annual compensation which was paid by
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<PAGE>
the Corporation to the Executive and includable in the gross income of the
Executive during the five (5) taxable years of the Executive ending prior to the
termination; and
(ii) If the Executive terminates his employment more than
ninety (90) days after the date of such Change in Control but within one (1)
year after such Change in Control, the Corporation shall pay to the Executive an
amount equal to that specified in Subparagraph (i) above, reduced by the amount
of any salary or bonuses paid to him from the date of the Change in Control to
the date of the termination of employment.
(2) The Corporation shall provide the Executive up to the date on
which the Executive attains age 65 or dies, with life, disability and accident
and health insurance coverages comparable to employer sponsored plan coverages
in effect for the Executive immediately preceding the Executive's termination of
employment following a Change in Control. Comparable life, disability and
accident and health insurance coverages may be provided to the Executive under:
(a) existing plans or programs in which the Executive participates, or (b)
through conversion of group coverage pursuant to any group policy in effect, or
(c) through other available commercial insurance arrangements, if obtainable,
for the Executive; provided, however, that to the extent a specific coverage
-------- -------
cannot be continued or obtained under either (a), (b) or (c) above, the
Executive shall not be entitled to continuation of that specific coverage. The
Executive shall continue to be responsible for the cost of comparable insurance
coverages following his termination of employment following a Change in Control
to the same extent as
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<PAGE>
other similarly situated active employees of the Corporation or the Bank as of
the Executive's termination of employment following a Change in Control or, if
there are no similarly situated employees, then to the same extent, on a
percentage of total cost basis, that Executive was responsible for the cost of
available insurance coverages prior to his termination of employment. With
respect to health insurance coverage, the Executive's spouse shall also be
provided with health insurance coverage for the same period of time as set forth
above (regardless of the Executive's death prior to attainment of age 65) and
under the same cost sharing method as described above.
(3) The Corporation shall continue to provide the Executive with the
pre-retirement death benefit, described in Section II of this Agreement, until
the earlier of: (1) the date the Executive elects to have his supplemental
income retirement benefit commence under Section I or (ii) the date the
Executive shall attain the age of sixty-five (65) years, said pre-retirement
death benefit premised upon the Executive's compensation at the time of
termination and assuming that, for purposes of Section II A.(2)(i)(b), the
Executive retired on the date of his termination. For purposes of this
Paragraph, compensation shall mean the Executive's base salary in effect on the
date of the Executive's termination plus any bonuses or annual incentive cash
compensation earned by the Executive for the calendar year immediately preceding
the date of the Executive's termination; and
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<PAGE>
(4) The Executive shall be entitled to a supplemental retirement
income benefit under Section I, if he then meets the requirements specified
therein. Provided, however, that the Executive shall not be required to meet the
years of service requirement for a benefit under Section I.A.(1).
(5) The Executive shall provide consulting and advisory services to
the Corporation for a period of one (1) year following the date of termination
of his employment with the Corporation in order that the Corporation may have
the benefit of Executive's experience and knowledge of the business affairs and
activities of the Corporation and the benefit of the Executive's reputation and
contacts in the community. The Executive shall be available for advice and
counsel to the officers and directors of the Corporation and said advisory and
consulting services shall be performed in Harrisburg, Pennsylvania, and its
environs and in such other locations as shall be mutually agreeable to the
Executive and to the Corporation. As full compensation for such consulting and
advisory services, the Executive shall receive an amount equal to his annual
base compensation in effect on the date of termination of his employment plus
reimbursement for all expenses reasonably incurred by him, with the advance
concurrence of the Corporation, in the performance of his consulting services,
which expenses shall be accounted for in accordance with the Corporation's
standard procedures relating to reimbursement of expenses. The Executive's
compensation for consulting and advisory services set forth above shall be paid
by the Corporation to the Executive in approximately equal monthly installments
over the one (1) year term.
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<PAGE>
C. Section 280G Gross-Up Payment. Should the total of all payments made
-----------------------------
to the Executive pursuant to this Agreement, together with any other payments
which the Executive has a right to receive from the Corporation, the Bank, any
of the other subsidiaries of the Corporation, or any successors of any of the
foregoing, result in the imposition of an excise tax under Internal Revenue Code
Section 4999 (or any successor thereto), the Executive shall be entitled to an
additional "excise tax" adjustment payment in an amount such that, after the
payment of all federal and state income and excise taxes, the Executive will be
in the same after-tax position as if no excise tax had been imposed. Any payment
or benefit which is required to be included under Internal Revenue Code Sections
280G or 4999 (or any successor provisions thereto) for purposes of determining
whether an excise tax is payable shall be deemed a payment "made to the
Executive" or a payment "which the Executive has a right to receive" for
purposes of this provision. The Corporation (or its successor) shall be
responsible for the costs of calculation of the excise tax by the Corporation's
independent certified accountant and tax counsel and shall notify the Executive
of the amount of excise tax due prior to the time such excise tax is due. If at
any time it is determined that the additional "excise tax" adjustment payment
previously made to the Executive was insufficient to cover the effect of the
excise tax, the excise tax gross-up payment pursuant to this provision shall be
increased to make the Executive whole, including an amount to cover the payment
of any penalties resulting from incorrect or late payment of the excise tax
resulting from the prior calculation.
-20-
<PAGE>
SECTION V: Miscellaneous.
-------------
A. Early Retirement Income Limitation.
----------------------------------
Notwithstanding anything contained in this Agreement to the contrary,
supplemental retirement benefits which are being made or are to be made pursuant
to Section I.A.(1) shall cease and not be resumed or, if not commenced, shall
not be made if the Executive works for another bank holding company or bank
within 100 miles of the main offices of the Corporation during the two (2) year
period immediately following his termination of service with the Corporation.
This provision shall not be applicable if Executive becomes entitled to benefit
payments under Section IV.
B. Dauphin Pension Plan: Defined.
-----------------------------
As used herein, "Dauphin Pension Plan" shall mean the Dauphin Deposit
Corporation Pension Plan and Trust Agreement, as amended.
C. Termination of Employment.
-------------------------
This Agreement shall not in any way constitute an employment agreement
between the Executive and Corporation and shall in no way obligate the
Corporation to continue the employment of the Executive with the Corporation,
nor shall this Agreement limit the right of the Corporation to terminate the
Executive's employment with the Corporation for any reason.
-21-
<PAGE>
D. Attachment.
----------
Neither this Agreement nor any benefit payable hereunder shall be
subject to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or change or to execution, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntarily or involuntarily,
to effect such action shall be void and of no effect.
E. Notice.
------
Any notice which shall be or may be given hereunder shall be in
writing and shall be mailed by certified mail, postage prepaid, addressed as
follows:
If to the Executive:
Christopher R. Jennings
1051 Knoll Drive
Hummelstown, PA 17036
If to the Corporation:
Director of Human Resources
Dauphin Deposit Corporation
213 Market Street
Harrisburg, PA 17101
Any party hereto may from time to time change the address to which notices to it
shall be mailed by giving notice thereof in the manner provided for herein.
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<PAGE>
F. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, executors, administrators, successors
and, to the extent permitted hereunder, assigns.
G. Entire Agreement.
----------------
This Agreement represents the entire understanding between the parties
hereto and may be amended only by an instrument in writing signed by such
parties and supersedes the Amended and Restated Supplemental Executive Benefit
and Change in Control Agreement dated October 15, 1992.
H. Jurisdiction.
------------
The parties hereto consent to the exclusive jurisdiction of the courts
of the Commonwealth of Pennsylvania in any and all action arising hereunder.
I. Governing Law.
-------------
This Agreement shall be governed and construed under the laws of the
Commonwealth of Pennsylvania as in effect at the time of the execution of this
Agreement.
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<PAGE>
J. Headings.
--------
All headings preceding the text of the several paragraphs hereof are
inserted solely for reference and shall not constitute a part of this Agreement,
nor affect its meaning, construction or effect.
K. Type of Arrangement and Status.
------------------------------
It is the intention of the parties that this Agreement constitutes an
unfunded arrangement for Federal Income Tax purposes and for purposes of Title I
of ERISA and is an unfunded plan maintained for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees. The Executive's interest pursuant to the contractual obligation of
the Corporation under this Agreement is that of a general unsecured creditor of
the Corporation and constitutes merely a promise to make benefit payments in the
future.
L. Enforcement.
-----------
If the Executive determines in good faith that the Corporation or any
successor, has failed to comply with its obligations under this Agreement, or if
the Corporation or any successor or any other person takes any action to declare
this Agreement void or unenforceable in whole or in part, or institutes any
legal action or arbitration proceeding with respect to this Agreement, the
Corporation hereby irrevocably authorizes the Executive from time to time to
retain counsel of the Executive's choice, at the expense of the Corporation to
represent the
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Executive in connection with any and all actions and proceedings, whether by or
against the Corporation, any acquiror or successor, or any director, officer,
stockholder or other person affiliated with any of the foregoing, which may
adversely affect the Executive's rights hereunder. In such event, the
Corporation shall reimburse the Executive for all of the Executive's reasonable
costs and expenses (including reasonable attorney's fees) incurred and expended
in connection with enforcement.
M. Excise Tax Matters.
------------------
It is the intention of the Corporation that the Executive not be
required to incur any expenses associated with determination of the amount of
any "excess parachute payment" under Internal Revenue Code Section 280G or the
amount of any excise tax imposed on the Executive pursuant to Internal Revenue
Code Section 4999 (or any successor provisions thereto). Therefore, the
Corporation agrees to pay all expenses, including the expenses of the
Corporation's independent certified accountant and tax counsel, related to the
determination of any excess parachute payment and excise tax, and to pay the
legal costs and expenses of any tax audit of the Executive to the extent such
expenses relate to the amount of the excise tax determined by the Corporation.
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N. Other Benefits Not Affected. Notwithstanding any provision to the
---------------------------
contrary, the payments provided by or as a result of this Agreement shall not
affect the Executive's rights to receive any payments or benefits to which the
Executive may be or become entitled under any other existing or future agreement
or arrangement of the Corporation, the Bank or any successor with the Executive,
or under any existing or future benefit plan or arrangement of the Corporation,
the Bank or any successor in which the Executive is or becomes a participant, or
under which the Executive has or obtains rights, including without limitation,
any qualified or nonqualified deferred compensation or retirement plans or
programs. Any such rights of the Executive shall be determined in accordance
with the terms and conditions of the applicable agreement, arrangement or plan.
O. Withholding for Taxes. All payments required to be made under this
---------------------
Agreement will be subject to withholding of such amounts relating to tax and/or
other payroll deductions as may be required by law.
SECTION VI: Alternate Method of Payment Following a Change in Control.
---------------------------------------------------------
The Dauphin Deposit Supplemental Benefit Trust ("Trust") established
by the Bank and the Corporation to assist the Bank and the Corporation in
meeting its supplemental retirement income benefit, pre-retirement death benefit
or disability benefit obligations under this Agreement following a change in
control, as defined in the Trust, or earlier as the case may be, conforms in
substantive respect to the model trust, as described in Revenue Procedure 92-64.
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Notwithstanding the establishment of the Trust, the Bank and the Corporation
shall remain obligated to pay benefits under this Agreement to the extent the
Trust does not, at any time, have adequate assets to pay benefits when due under
this Agreement.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed and attested to on its behalf by its duly authorized officers, and the
Executive hereunder has set his hand and seal as of the day and year first above
written.
ATTEST: DAUPHIN DEPOSIT CORPORATION
/s/ George W. King By: /s/ Dennis L. Dinger
- ----------------------------- --------------------------------------
Secretary Senior Executive Vice President
(SEAL)
WITNESS:
/s/ Gloria M. Hoffman /s/ Christopher R. Jennings (SEAL)
- ----------------------------- ----------------------------------
Christopher R. Jennings
By execution hereof, Dauphin Deposit Bank and Trust Company consents
to and agrees to be bound by the terms and conditions of this Agreement.
ATTEST: DAUPHIN DEPOSIT BANK AND TRUST COMPANY
/s/ George W. King By: /s/ Dennis L. Dinger
- ----------------------------- -------------------------------------
Secretary Senior Executive Vice President
(SEAL)
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<PAGE>
Exhibit 10(n)
FIRST AMENDMENT TO
CHANGE IN CONTROL AGREEMENT
THIS AMENDMENT made the 21st day of January, 1997, by and among DAUPHIN
DEPOSIT CORPORATION, a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania and having its principal place of business in
Harrisburg, Pennsylvania (the "Corporation"), DAUPHIN DEPOSIT BANK AND TRUST
COMPANY, a wholly-owned bank subsidiary of the Corporation organized and
existing under the laws of the Commonwealth of Pennsylvania and having its
principal place of business in Harrisburg, Pennsylvania (the "Bank") and
_________________________ (the "Executive").
WHEREAS, the Corporation, the Bank and the Executive (collectively, the
"Parties") entered into a Change in Control Agreement dated
____________________ (the "Agreement"); and
WHEREAS, the Parties desire to amend the Agreement; and
WHEREAS, Section 4.3 of the Agreement provides that the Agreement may be
amended by a written instrument signed by the Parties.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the Parties agree as follows:
1. Subsection 1.1 is amended by the addition of the following, immediately
to the end thereof:
If any of the events described in Section 1.1(B) occurs and the Executive does
not immediately thereafter terminate his employment, any subsequent
termination of the Executive's employment by the Executive following such
event or any other event described in Section 1.1(B) and within two years of
the date of any "Change in Control" shall constitute a "Termination Pursuant
to a Change in Control."
<PAGE>
2. The last sentence of Subsection 1.2(A) is amended to read: "Each
payment during the two (2) year payment period set forth in this Paragraph (A)
shall not be reduced by any income earned by the Executive from any source
during that two (2) year payment period, and the Executive shall have no duty to
mitigate damages by earning income during that period; and".
3. The Agreement, amended as set forth above, is hereby ratified and
confirmed in all respects.
IN WITNESS WHEREOF, the Parties have executed this Amendment as of the
day and year first above written.
ATTEST: DAUPHIN DEPOSIT CORPORATION
- -------------------------- ---------------------------------
[Seal]
ATTEST: DAUPHIN DEPOSIT BANK
AND TRUST COMPANY
- -------------------------- ---------------------------------
[Seal]
WITNESS: [EXECUTIVE]
- -------------------------- ---------------------------------
- 2 -
<PAGE>
Exhibit 10(o)
CHANGE IN CONTROL AGREEMENT
---------------------------
AGREEMENT made the 17th day of June, 1996, by and between DAUPHIN
DEPOSIT CORPORATION, a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania and having its principal place of business in
Harrisburg, Pennsylvania (hereinafter referred to as the "Corporation") and
ROBERT L. FRYER, JR. (hereinafter referred to as "Executive").
WHEREAS, Executive is a key management employee of the Corporation and
currently serves the Corporation as President and Chief Operations Officer.
WHEREAS, the Corporation and Executive desire to enter into an
Agreement whereby the Corporation will agree to make certain payments to
Executive upon termination under specific conditions in order to induce
Executive to continue in employment.
NOW, THEREFORE, in consideration of the employment of Executive and
intending to be legally bound hereby, Executive and the Corporation agree as
follows:
ARTICLE I
TERMINATION PURSUANT TO A CHANGE IN CONTROL
-------------------------------------------
1.1 Definition: Termination Pursuant to a Change in Control. For
--------------------------------------------------------
purposes of this Agreement the term "Change in Control" shall mean any of the
following:
(A) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934 (the "Exchange Act")), other than the
<PAGE>
Corporation, a subsidiary of the Corporation, an employee benefit plan (or
related trust) of the Corporation or a direct or indirect subsidiary of the
Corporation, or affiliates of the Corporation (as defined in Rule 12b-2
under the Exchange Act), becomes the beneficial owner (as determined
pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 20% or more of the combined
voting power of the Corporation's then outstanding securities, provided
that for purposes of this determination, a person shall not be deemed the
beneficial owner of securities of which such person has the right to
acquire beneficial ownership if such right has not been exercised and such
right was acquired directly from the Corporation; or
(B) the liquidation or dissolution of the Corporation or Dauphin
Deposit Bank and Trust Company (the "Bank") or the occurrence of a sale of
all or substantially all of the assets of the Corporation or the Bank to an
entity which is not a direct or indirect subsidiary of the Corporation; or
(C) the occurrence of a reorganization, merger, consolidation or
other similar transaction or connected series of transactions of the
Corporation as a result of which either (a) the Corporation does not
survive or (b) pursuant to which shares of the Corporation common stock
("Common Stock") would be
2
<PAGE>
converted into cash, securities or other property, unless, in case of
------
either (a) or (b), the holders of Corporation Common Stock immediately
prior to such transaction will, following the consummation of the
transaction, beneficially own, directly or indirectly, more than 50% of the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors of the corporation surviving,
continuing or resulting from such transaction; or
(D) the occurrence of a reorganization, merger, consolidation, or
similar transaction of the Corporation, or before any connected series of
such transactions, if, upon consummation of such transaction or
transactions, the persons who are members of the Board of Directors of the
Corporation immediately before such transaction or transactions cease to
constitute a majority of the Board of Directors of the Corporation or, in a
case where the Corporation does not survive in such transaction, of the
corporation surviving, continuing or resulting from such transaction or
transactions; or
(E) any other event which is at any time designated as a "Change in
Control" for purposes of this Agreement by a resolution adopted by the
Board of Directors of the Corporation with the affirmative vote of a
majority of the non-employee directors in office at the time the resolution
is adopted; in the event any
3
<PAGE>
such resolution is adopted, the Change in Control event specified thereby
shall be deemed incorporated herein by reference and thereafter may not be
amended, modified or revoked without the written agreement of Executive.
1.2 Compensation Upon Termination Pursuant to a Change in Control.
-------------------------------------------------------------
If a Change in Control should occur during the Executive's employment with the
Corporation, the Executive shall have the option, to be exercised within one (1)
year from the date of the Change in Control (as defined above) to terminate his
employment with the Corporation with or without cause. In the event of the
termination of the Executive's employment with the Corporation within one (1)
year after the date of such Change in Control either by the Executive or the
Corporation, the following provisions shall apply:
(1) (i) If the Executive terminates his employment within ninety
(90) days after such Change in Control, or if the Corporation terminates his
employment within one (1) year from the date of the Change in Control, the
Corporation shall pay the Executive, within thirty (30) days after his
termination pursuant to a Change in Control, an amount of compensation equal to
either: (A) 2.99 multiplied by the average annual compensation which was paid by
the Corporation to the Executive and includable in the gross income of the
Executive during the five (5) taxable years of the Executive ending prior to the
termination; or (B) if there are less than five (5) taxable years, an amount
equal to 2.99 multiplied by the
4
<PAGE>
average annual compensation which was paid by the Corporation to the Executive
and includable in gross income of the Executive during the taxable year(s) of
the Executive ending prior to the termination. For purposes of this Section
1.2(1)(i), only compensation paid to the Executive from and after January 1,
1996, shall be taken into consideration in calculating the average annual
compensation of the Executive. Further provided however, that if Executive's
termination pursuant to a Change in Control would occur before the end of 1996,
average annual compensation shall be determined by annualizing the Executive's
base compensation over the entire taxable year and shall include any bonus
compensation paid to the Executive for the taxable year.
(ii) If the Executive so terminates his employment more than
ninety (90) days after the date of such Change in Control but within one (1)
year after such Change in Control, the Corporation shall pay to the Executive an
amount equal to that specified in Subparagraph (i) above, reduced by the amount
of any salary or bonuses paid to him from the date of the Change in Control to
the date of the termination of employment.
(2) The Corporation shall provide the Executive up to the date on
which the Executive attains age 65 or dies, with life, disability and accident
and health insurance coverages comparable to employer sponsored plan coverages
in effect for the Executive immediately preceding the Executive's termination of
employment following a Change in Control.
5
<PAGE>
Comparable life, disability and accident and health insurance coverages may be
provided to the Executive under: (a) existing plans or programs in which the
Executive participates, or (b) through conversion of group coverage pursuant to
any group policy in effect, or (c) through other available commercial insurance
arrangements, if obtainable, for the Executive; provided, however, that to the
-------- -------
extent a specific coverage cannot be continued or obtained under either (a), (b)
or (c) above, the Executive shall not be entitled to continuation of that
specific coverage. The Executive shall continue to be responsible for the cost
of comparable insurance coverages following his termination of employment
following a Change in Control to the same extent as other similarly situated
active employees of the Corporation or the Bank as of the Executive's
termination of employment following a Change in Control or, if there are no
similarly situated employees, then to the same extent, on a percentage of total
cost basis, that Executive was responsible for the cost of available insurance
coverages prior to his termination of employment.
(3) The Executive shall provide consulting and advisory services to
the Corporation for a period of one (1) year following the date of termination
of his employment with the Corporation in order that the Corporation may have
the benefit of Executive's experience and knowledge of the business affairs and
activities of the Corporation and the benefit of the Executive's reputation and
contacts in the community. The Executive shall be available for advice and
counsel to the officers and directors of the Corporation and said advisory and
consulting services shall be performed in Harrisburg, Pennsylvania, and its
environs and in such
6
<PAGE>
other locations as shall be mutually agreeable to the Executive and to the
Corporation. As full compensation for such consulting and advisory services, the
Executive shall receive an amount equal to his annual base compensation in
effect on the date of termination of his employment plus reimbursement for all
expenses reasonably incurred by him, with the advance concurrence of the
Corporation, in the performance of his consulting services, which expenses shall
be accounted for in accordance with the Corporation's standard procedures
relating to reimbursement of expenses. The Executive's compensation for
consulting and advisory services set forth above shall be paid by the
Corporation to the Executive in approximately equal monthly installments over
the one (1) year term.
1.3 Section 280G Gross-Up Payment. Should the total of all payments
-----------------------------
made to the Executive pursuant to this Agreement, together with any other
payments which the Executive has a right to receive from the Corporation, the
Bank, any of the other subsidiaries of the Corporation, or any successors of any
of the foregoing, result in the imposition of an excise tax under Internal
Revenue Code Section 4999 (or any successor thereto), the Executive shall be
entitled to an additional "excise tax" adjustment payment in an amount such
that, after the payment of all federal and state income and excise taxes, the
Executive will be in the same after-tax position as if no excise tax had been
imposed. Any payment or benefit which is required to be included under Internal
Revenue Code Sections 280G or 4999 (or any successor provisions thereto) for
purposes of determining whether an excise tax is payable shall be deemed
7
<PAGE>
a payment "made to the Executive" or a payment "which the Executive has a right
to receive" for purposes of this provision. The Corporation (or its successor)
shall be responsible for the costs of calculation of the excise tax by the
Corporation's independent certified accountant and tax counsel and shall notify
the Executive of the amount of excise tax due prior to the time such excise tax
is due. If at any time it is determined that the additional "excise tax"
adjustment payment previously made to the Executive was insufficient to cover
the effect of the excise tax, the excise tax gross-up payment pursuant to this
provision shall be increased to make the Executive whole, including an amount to
cover the payment of any penalties resulting from incorrect or late payment of
the excise tax resulting from the prior calculation.
ARTICLE II
MISCELLANEOUS
-------------
2.1 Termination of Employment. This Agreement shall not in any way
-------------------------
constitute an employment agreement between the Executive and Corporation and
shall in no way obligate the Corporation to continue the employment of the
Executive with the Corporation, nor shall this Agreement limit the right of the
Corporation to terminate the Executive's employment with the Corporation for any
reason.
2.2. Attachment. Neither this Agreement nor any benefit payable
----------
hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or
8
<PAGE>
change or to execution, attachment, levy or similar process or assignment by
operation of law, and any attempt, voluntarily or involuntarily, to effect such
action shall be void and of no effect.
2.3 Notice. Any notice which shall be or may be given hereunder
------
shall be in writing and shall be mailed by certified mail, postage prepaid,
addressed as follows:
If to the Executive:
Robert L. Fryer, Jr.
30 Eshelman Road
Lancaster, PA 17601
If to the Corporation:
Director of Human Resources
Dauphin Deposit Corporation
213 Market Street
Harrisburg, PA 17101
Any party hereto may from time to time change the address to which notices to it
shall be mailed by giving notice thereof in the manner provided for herein.
2.4 Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of the parties hereto, their respective heirs, executors,
administrators, successors and, to the extent permitted hereunder, assigns.
9
<PAGE>
2.5 Jurisdiction. The parties hereto consent to the exclusive
------------
jurisdiction of the courts of the Commonwealth of Pennsylvania in any and all
action arising hereunder.
2.6 Governing Law. This Agreement shall be governed and construed
-------------
under the laws of the Commonwealth of Pennsylvania as in effect at the time of
the execution of this Agreement.
2.7 Headings. All headings preceding the text of the several
--------
paragraphs hereof are inserted solely for reference and shall not constitute a
part of this Agreement, nor affect its meaning, construction or effect.
2.8 Individual Agreement. This Agreement constitutes an agreement
--------------------
solely between the Corporation and Executive named herein. This Agreement is
intended to constitute a non-qualified arrangement for the benefit of a key
management employee and shall be construed and interpreted in a manner
consistent with such intention. The obligations to make payments hereunder shall
be unfunded and Executive's rights to receive any payments hereunder shall be
the same as those of any other unsecured general creditor.
2.9 Enforcement. If the Executive determines in good faith that the
-----------
Corporation or any successor, has failed to comply with its obligations under
this Agreement,
10
<PAGE>
or if the Corporation or any successor or any other person takes any action to
declare this Agreement void or unenforceable in whole or in part, or institutes
any legal action or arbitration proceeding with respect to this Agreement, the
Corporation hereby irrevocably authorizes the Executive from time to time to
retain counsel of the Executive's choice, at the expense of the Corporation to
represent the Executive in connection with any and all actions and proceedings,
whether by or against the Corporation, any acquiror or successor, or any
director, officer, stockholder or other person affiliated with any of the
foregoing, which may adversely affect the Executive's rights hereunder. In such
event, the Corporation shall reimburse the Executive for all of the Executive's
reasonable costs and expenses (including reasonable attorney's fees) incurred
and expended in connection with enforcement.
2.10 Excise Tax Matters. It is the intention of the Corporation that
------------------
the Executive not be required to incur any expenses associated with
determination of the amount of any "excess parachute payment" under Internal
Revenue Code Section 280G or the amount of any excise tax imposed on the
Executive pursuant to Internal Revenue Code Section 4999 (or any successor
provisions thereto). Therefore, the Corporation agrees to pay all expenses,
including the expenses of the Corporation's independent certified accountant and
tax counsel, related to the determination of any excess parachute payment and
excise tax, and to pay the legal costs and expenses of any tax audit of the
Executive to the extent such expenses relate to the amount of the excise tax
determined by the Corporation.
11
<PAGE>
2.11 Other Benefits Not Affected. Notwithstanding any provision to
---------------------------
the contrary, the payments provided by or as a result of this Agreement shall
not affect the Executive's rights to receive any payments or benefits to which
the Executive may be or become entitled under any other existing or future
agreement or arrangement of the Corporation, the Bank or any successor with the
Executive, or under any existing or future benefit plan or arrangement of the
Corporation, the Bank or any successor in which the Executive is or becomes a
participant, or under which the Executive has or obtains rights, including
without limitation, any qualified or nonqualified deferred compensation or
retirement plans or programs. Any such rights of the Executive shall be
determined in accordance with the terms and conditions of the applicable
agreement, arrangement or plan.
2.12 Withholding for Taxes. All payments required to be made under
---------------------
this Agreement will be subject to withholding of such amounts relating to tax
and/or other payroll deductions as may be required by law.
12
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed and attested to on its behalf by their duly authorized officers, and
Executive hereunto has set his hand and seal as of the day and year first above
written.
ATTEST: DAUPHIN DEPOSIT CORPORATION
/s/ Catherine M. Bush By: /s/ Dennis L. Dinger
- ----------------------- ----------------------------------
(Assistant) Secretary
(SEAL)
WITNESS: EXECUTIVE
/s/ George W. King /s/ Robert L. Fryer, Jr. (SEAL)
- ----------------------- --------------------------------
Robert L. Fryer, Jr.
By execution hereof, Dauphin Deposit Bank and Trust Company consents to
and agrees to be bound by the terms and conditions of this Agreement
ATTEST: DAUPHIN DEPOSIT BANK AND TRUST COMPANY
/s/ Catherine M. Bush By: /s/ Dennis L. Dinger
- ----------------------- -----------------------------------------
(Assistant) Secretary
(SEAL)
13
<PAGE>
Exhibit 10(p)
DAUPHIN DEPOSIT CORPORATION
1996 STOCK INCENTIVE PLAN
PERFORMANCE SHARE AGREEMENT
DATE OF GRANT: MAY 20, 1996
------------
1. Grant. Pursuant to the provisions of the 1996 Stock Incentive
-----
Plan (the "Plan"), Dauphin Deposit Corporation (the "Company") on the above date
has granted to
(the "Grantee").
--------------------
subject to the terms and conditions which follow and the terms and conditions of
the Plan, a target of
Performance Shares (the "Performance Shares").
----------
A copy of the Plan is attached and made a part of this Agreement with the same
effect as if set forth in the Agreement itself. The Fair Market Value of a
share of Company Common Stock on the date of the Grant was $29.13. Capitalized
terms not otherwise defined herein shall have the meaning set forth in the Plan,
unless the context requires a different meaning.
2. Performance Period. The Performance Shares shall be payable,
------------------
in the form provided in Paragraph 4 below, and to the extent provided in
Paragraph 3 below, as soon as practicable after the end of the Performance
Period, which shall commence as of January 1, 1996 and end on December 31, 1998.
3. Performance Goals. Up to 100% of the Performance Shares will be
-----------------
earned, depending upon if, and the extent to which, the Company achieves the
following Performance Goals:
(a) Share Price Appreciation. Sixty percent
------------------------
(60%) of the Performance Shares awarded in Paragraph 1 shall
be deemed to be earned if the average Fair Market Value of
Company Common Stock for the forty-five (45) consecutive
trading days ending on and including December 31, 1998
equals or exceeds $36.50 per share. If the average Fair
Market Value determined as above set
<PAGE>
forth is less than $32.25 per share, no shares will be
earned and all rights to earn up to 60% of the shares based
on Company Common Stock price appreciation will be
forfeited. If the average Fair Market Value determined as
above set forth is at least $32.25 per share, 30% of the
shares specified in Paragraph 1 will be deemed to be earned.
If the average Fair market Value determined as above set
forth exceeds $32.25 per share but is less than $36.50 per
share, a pro-rata portion between 30% and 60% of such shares
shall be deemed to be earned in accordance with Schedule 1
attached hereto.
(b) Corporate Performance Measures. Forty
------------------------------
percent (40%) of the Performance Shares awarded in Paragraph
1 shall be deemed to be earned if the Company attains
certain corporate performance goals in the last calendar
year of the performance period as set forth on Schedule 2
attached hereto.
4. Form of Payment. Any Performance Shares payable pursuant to
---------------
Paragraph 3 above shall be paid in shares of Company Common Stock, except that
the Management Development and Compensation Committee (the "Committee") of the
Company's Board of Directors may, in its discretion, permit the payment of cash
in lieu of up to 50% of the Fair Market Value of such shares of Common Stock,
upon a request in writing from the Grantee.
5. Change in Control. Upon the occurrence of a Change in Control,
-----------------
the Performance Shares specified in Paragraph 1 will be deemed to be fully
earned and payable at that time.
6. Forfeiture. Upon Grantee's termination of employment for any
----------
reason or under any circumstances prior to completion of the first 12 months of
the Performance Period, all Performance Shares granted hereunder will be
forfeited. In the event of Grantee's (a) death or permanent disability, (b)
normal retirement under the Company's Pension Plan, or (c) earlier termination
of employment with the consent of the Committee following completion of the
first 12 months of the Performance Period, Grantee, or in the case of death,
Grantee's beneficiary, will be deemed to earn a pro-rata number of shares at the
completion of the Performance Period in accordance with Paragraph 3 above based
on the number of full months of the performance Period which have elapsed prior
to the date of termination of employment. For example, if 100% of the
Performance Goals have been attained at the completion of the Performance
Period, Grantee or, in the case of death, Grantee's beneficiary, shall bedeemed
to have earned the number of shares set forth in Paragraph 1 multiplied by a
fraction the numerator of which shall be the number of full months of the
Performance Period (but not more than the actual number of full months of
employment during the
2
<PAGE>
performance period) prior to the date of termination of employment and the
denominator of which is 36.
In the event Grantee's employment is terminated for any other reason, all
Performance Shares granted hereunder will be forfeited.
7. No Right to Employment. Neither the execution and delivery of
----------------------
this Agreement nor the granting of the Performance Shares evidenced hereby shall
constitute or be evidence of any agreement or understanding, express or implied,
on the part of the Company or its subsidiaries to employ the Grantee for any
specific period or in any specific capacity or shall prevent the Company or its
subsidiaries from terminating the Grantee's employment at any time with or
without cause.
8. Rights. Nothing herein shall be deemed to entitle the Grantee to
------
any rights as a holder of Common Stock unless and until certificates for shares
of Common Stock are actually issued in the name of the Grantee as provided
herein.
9. Income Taxes. The Grantee is liable for any federal, state and
------------
local income taxes applicable upon payment of the Performance Shares. Upon
demand by the Company, Grantee shall promptly pay to the Company in cash, and/or
the Company may withhold from Grantee's compensation or from the shares of
Common Stock to be issued pursuant hereto or any cash payable in lieu of some or
all of such shares of Common Stock, an amount necessary to pay any income
withholding taxes required by the Company to be collected upon such payment.
10. Grantee. In consideration of the grant, the Grantee specifically
-------
agrees that the Committee shall have the exclusive power to interpret the Plan
and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan and Agreement as are consistent
therewith and to interpret or revoke any such rules. All actions taken and all
interpretation and determinations made by the Committee shall be final,
conclusive and binding upon the Grantee, the company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
the Agreement. The Committee may delegate its interpretive authority to an
officer or officers of the Company.
11. Miscellaneous. This Agreement (a) shall be binding upon and
-------------
inure to the benefit of any successor of the Company, (b) shall be governed by
the laws of the Commonwealth of Pennsylvania, and (c) may not be amended except
in writing.
12. Acknowledgment. This grant will not be effective until the
--------------
Grantee dates and signs the form of Acknowledgment below and returns to the
Company a
3
<PAGE>
signed copy of this Agreement. By signing the Acknowledgment, the Grantee
agrees to the terms and conditions referred to in Paragraph 1 above and
acknowledges receipt of a copy of the Prospectus related to the Plan.
DAUPHIN DEPOSIT CORPORATION
By:
-------------------------------
Authorized Signatory
ACKNOWLEDGMENT:
- --------------------------------
Grantee's Signature
- --------------------------------
Date
- --------------------------------
Social Security Number
4
<PAGE>
Exhibit 11
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Years Ended December31,
1996 1995 1994
---- ---- ----
PRIMARY EARNINGS PER COMMON SHARE
- ---------------------------------
<S> <C> <C> <C>
Earnings
Net income $70,772,000 $65,565,000 $70,039,000
============= ============= =============
Shares
Weighted average common shares outstanding 30,589,831 30,787,415 31,998,308
Stock options and other stock incentive plans
considered to be common stock equivalents 230,188 178,843 171,426
------------ ------------- --------------
Weighted average common stock and common stock
equivalents outstanding 30,820,019 30,966,258 32,169,734
============ ============= ==============
Primary earnings per common share $2.30 $2.12 $2.18
============ ============= ==============
FULLY DILUTED EARNINGS PER COMMON SHARE
- ---------------------------------------
Earnings
Net income $70,772,000 $65,565,000 $70,039,000
After tax interest expense applicable to convertible debentures 268,076 295,311 305,897
------------ ------------- --------------
$71,040,076 $65,860,311 $70,344,897
============ ============= ==============
Shares
Weighted average common shares outstanding 30,589,831 30,787,415 31,998,308
Assumed conversion of 9.00% convertible debentures issued
June 30, 1989 292,090 315,962 327,988
Stock options and other stock incentive plans
considered to be common stock equivalents 300,187 224,412 169,297
----------- ------------- --------------
Weighted average common stock and common stock equivalents
outstanding 31,182,108 31,327,789 32,495,593
============ ============= ==============
Fully diluted earnings per common share $2.28 $2.10 $2.16
============ ============= ==============
</TABLE>
<PAGE>
Exhibit 21
DAUPHIN DEPOSIT CORPORATION
Subsidiaries
The Registrant has four direct wholly-owned subsidiaries: Dauphin Deposit
Bank and Trust Company; Dauphin Life Insurance Company; Dauphin Investment
Company; and Hopper Soliday & Co., Inc.
Dauphin Bank and Trust Company, a bank and trust company chartered under
the Pennsylvania Banking Code of 1965, as amended, is engaged in the commercial
and retail banking and trust business.
Dauphin Life Insurance Company, incorporated under the laws of Arizona,
reinsurance credit life, health and accident insurance directly related to
extensions of credit by the Bank.
Dauphin Investment Company, incorporated under the laws of Delaware, is
engaged in investment of securities and the maintenance of said investments for
its own account.
Hopper Soliday & Co., Inc., incorporated under the laws of Delaware, is
engaged in municipal finance, institutional sales, financial advisory and other
general securities businesses permitted for bank holding companies and their
non-bank subsidiaries.
In addition to the above, Dauphin Bank has two subsidiaries, Financial Land
Corporation, which was incorporated under the laws of Pennsylvania for the
purpose of holding assets acquired in loan liquidations and Eastern Mortgage
Services, Inc., a Pennsylvania mortgage banking corporation acquired on July 1,
1994.
<PAGE>
Exhibit 23
[LOGO]
Consent of Independent Auditors
The Board of Directors
Dauphin Deposit Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-59941, 33-17401, and 2-73258) on Form S-8 of Dauphin Deposit Corporation of
our report dated January 21, 1997, relating to the consolidated balance sheets
of Dauphin Deposit Corporation and subsidiaries as of December 31, 1996, and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-K
of Dauphin Deposit Corporation.
Our report refers to a change in the Company's method of accounting for mortgage
servicing rights in 1995 and emphasizes that the Company adopted the provisions
of the Financial Accounting Standards Board's SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of in 1996.
/s/ KPMG Peat Marwick LLP
Harrisburg, PA
March 17, 1997
[LOGO]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 176,024
<INT-BEARING-DEPOSITS> 1,494
<FED-FUNDS-SOLD> 15,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,170,207
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,200,034
<ALLOWANCE> 42,885
<TOTAL-ASSETS> 5,947,686
<DEPOSITS> 4,028,570
<SHORT-TERM> 1,111,630
<LIABILITIES-OTHER> 82,270
<LONG-TERM> 154,771
0
0
<COMMON> 163,208
<OTHER-SE> 407,237
<TOTAL-LIABILITIES-AND-EQUITY> 5,947,686
<INTEREST-LOAN> 252,975
<INTEREST-INVEST> 132,623
<INTEREST-OTHER> 13,006
<INTEREST-TOTAL> 398,604
<INTEREST-DEPOSIT> 160,914
<INTEREST-EXPENSE> 216,120
<INTEREST-INCOME-NET> 182,484
<LOAN-LOSSES> 6,000
<SECURITIES-GAINS> 1,634
<EXPENSE-OTHER> 174,438
<INCOME-PRETAX> 95,949
<INCOME-PRE-EXTRAORDINARY> 70,772
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,772
<EPS-PRIMARY> 2.30
<EPS-DILUTED> 2.28
<YIELD-ACTUAL> 7.72
<LOANS-NON> 11,621
<LOANS-PAST> 5,469
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 41,737
<CHARGE-OFFS> 9,485
<RECOVERIES> 4,633
<ALLOWANCE-CLOSE> 42,885
<ALLOWANCE-DOMESTIC> 42,885
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,859
</TABLE>
<PAGE>
Exhibit 99(c)
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated January 21, 1997, between Dauphin
Deposit Corporation, a Pennsylvania corporation ("Issuer"), and Allied Irish
Banks, p.l.c., an Irish corporation ("Grantee").
W I T N E S S E T H:
-------------------
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(the "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 6,112,088
fully paid and nonassessable shares of Issuer's Common Stock, par value $5.00
per share (together with any associated preferred share purchase rights, "Common
Stock"), at a price of $33 3/16 per share (the "Option Price"); provided,
--------
however, that in no event shall the number of shares of Common Stock for which
- -------
this Option is exercisable exceed 19.9% of the Issuer's issued and outstanding
shares of Common Stock without giving effect to any shares subject to or issued
pursuant to the Option. The number of shares of Common Stock that may be
received upon the exercise of the Option and the Option Price are subject to
adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are
either (i) issued or otherwise become outstanding after the date of this
Agreement (other than pursu-
<PAGE>
ant to this Agreement) or (ii) redeemed, repurchased, retired or otherwise cease
to be outstanding after the date of the Agreement, the number of shares of
Common Stock subject to the Option shall be increased or decreased, as
appropriate, so that, after such issuance, such number equals 19.9% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing
contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to
authorize Issuer or Grantee to breach any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option,
in whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), provided that the Holder shall have
--------
sent the written notice of such exercise (as provided in subsection (e) of this
Section 2) within 90 days following such Subsequent Triggering Event. Each of
the following shall be an "Exercise Termination Event": (i) the Effective Time
(as defined in the Merger Agreement) of the Merger; (ii) termination of the
Merger Agreement in accordance with the provisions thereof if such termination
occurs prior to the occurrence of an Initial Triggering Event except a
termination by Grantee pursuant to Section 6.1(c) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is non-
volitional); or (iii) the passage of 12 months after termination of the Merger
Agreement if such termination follows the occurrence of an Initial Triggering
Event or is a termination by Grantee pursuant to Section 6.1(c) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of termination
is non-volitional) (provided that if an Initial Triggering Event continues or
--------
occurs beyond such termination and prior to the passage of such 12-month period,
the Exercise Termination Event shall be 12 months from the expiration of the
Last Triggering Event but in no event more than 18 months after such
termination). The "Last Triggering Event" shall mean the last Initial
Triggering Event to expire. The term "Holder" shall mean the holder or holders
of the Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring
-2-
<PAGE>
after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer Subsidiary"),
without having received Grantee's prior written consent, shall have entered
into an agreement to engage in an Acquisition Transaction (as hereinafter
defined) with any person (the term "person" for purposes of this Agreement
having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules
and regulations thereunder) other than Grantee or any of its Subsidiaries
(each a "Grantee Subsidiary") or the Board of Directors of Issuer shall
have recommended that the stockholders of Issuer approve or accept any
Acquisition Transaction. For purposes of this Agreement, "Acquisition
Transaction" shall mean (w) a merger or consolidation, or any similar
transaction, involving Issuer or any Significant Subsidiary (as defined in
Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission (the "SEC")) of Issuer, (x) a purchase, lease or other
acquisition or assumption of all or a substantial portion of the assets or
deposits of Issuer or any Significant Subsidiary of Issuer, (y) a purchase
or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of the voting
power of Issuer, or (z) any substantially similar transaction; provided,
--------
however, that in no event shall any merger, consolidation, purchase or
-------
similar transaction involving only the Issuer and one or more of its
Subsidiaries or involving only any two or more of such Subsidiaries, be
deemed to be an Acquisition Transaction, provided that any such transaction
is not entered into in violation of the terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, to engage in an Acquisition Transaction with any person other than
Grantee or a
-3-
<PAGE>
Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly
withdrawn or modified, or publicly announced its interest to withdraw or
modify, in any manner adverse to Grantee, its recommendation that the
stockholders of Issuer approve the transactions contemplated by the Merger
Agreement in anticipation of engaging in an Acquisition Transaction;
(iii) Any person other than Grantee, any Grantee Subsidiary or
any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course
of its business shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of
Common Stock (the term "beneficial ownership" for purposes of this
Agreement having the meaning assigned thereto in Section 13(d) of the 1934
Act, and the rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction;
(v) After an overture is made by a third party to Issuer or
its stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and
such breach (x) would entitle Grantee to terminate the Merger Agreement and
(y) shall not have been cured prior to the Notice Date (as defined below);
or
(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with the
Federal Reserve Board, or other federal or state bank regulatory authority,
which application or notice has been accepted for processing, for approval
to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
-4-
<PAGE>
(i) The acquisition by any person of beneficial ownership of 20%
or more of the then outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (y) shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Initial Triggering Event or Subsequent Triggering Event of which it has
notice (together, a "Triggering Event"), it being understood that the giving of
such notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
--------
notification to or approval of the Federal Reserve Board or any other regulatory
agency is required in connection with such purchase, the Holder shall promptly
file the required notice or application for approval and shall expeditiously
process the same and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to desig-
- --------
-5-
<PAGE>
nate such a bank account shall not preclude the Holder from exercising the
Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder, and the Holder
shall deliver to Issuer a copy of this Agreement and a letter agreeing that the
Holder will not offer to sell or otherwise dispose of such shares in violation
of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act; (ii) the reference to the provisions to this Agreement
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall be removed
in its entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates
-6-
<PAGE>
shall bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated
thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as
amended (the "BHCA"), or the Change in Bank Control Act of 1978, as amended, or
any state banking law, prior approval of or notice to the Federal Reserve Board
or to any state regulatory authority is necessary before the Option may be
exercised, cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board or such
state regulatory authority as they may require) in order to permit the Holder
-7-
<PAGE>
to exercise the Option and Issuer duly and effectively to issue shares of Common
Stock pursuant hereto; and (iv) promptly to take all action provided herein to
protect the rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Stock Option
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common
Stock that are purchasable upon exercise of the Option pursuant to Section 1 of
this Agreement, the number of shares of Common Stock purchasable upon the
exercise of the Option and the Option Price shall be subject to adjustment from
time to time as provided in this Section 5. In the event of any change in, or
distributions in respect of, the Common Stock by reason of stock dividends,
split-ups, mergers, recapitalizations, combinations, subdivisions, conversions,
exchanges of shares, distributions on or in respect of the Common Stock that
would be prohibited under the terms of the Merger Agreement, or the like, the
type and number of shares of Common Stock purchasable upon exercise hereof and
the Option Price shall be appropriately adjusted in such manner as shall fully
preserve the economic benefits provided hereunder and proper provision shall be
made in any agreement governing any such transaction to provide for such proper
adjustment and the full satisfaction of the Issuer's
-8-
<PAGE>
obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 90 days of such Subsequent Triggering Event (whether on its own
behalf or on behalf of any subsequent holder of this Option (or part thereof) or
any of the shares of Common Stock issued pursuant hereto), promptly prepare,
file and keep current a shelf registration statement under the 1933 Act covering
this Option and any shares issued and issuable pursuant to this Option and shall
use its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of the Option or Option
Shares as provided above, Issuer is in registration with respect to an
underwritten public offering of shares of Common Stock, and if in the good faith
judgment of the managing underwriter or managing underwriters, or, if none, the
sole underwriter or underwriters, of such offering the inclusion of the Holder's
Option or Option Shares would interfere with the successful marketing of the
shares of Common Stock offered by Issuer, the number of Option Shares otherwise
to be covered in the registration statement contemplated hereby may be reduced;
and provided, however, that after any such required reduction the number of
-------- -------
Option Shares to be included in such offering for the account of the Holder
shall constitute at least 25% of the total number of shares to be sold by the
Holder and Issuer in the aggregate; and provided further, however, that if such
-------- -------
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practical and no
-9-
<PAGE>
reduction shall thereafter occur. Each such Holder shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in secondary offering underwriting agreements for the
Issuer. Upon receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be entitled
to registration rights under this Section 6, in each case by promptly mailing
the same, postage prepaid, to the address of record of the persons entitled to
receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than two registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Grantee as a result of any assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event (as
defined below), (i) following a request of the Holder, delivered prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall repurchase
the Option from the Holder at a price (the "Option Repurchase Price") equal to
the amount by which (A) the Market/Offer Price (as defined below) exceeds (B)
the Option Price, multiplied by the number of shares for which this Option may
then be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence (or such
later period as provided in Section 10), Issuer shall repurchase such number of
the Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the Market/Offer Price multiplied by
the number of Option Shares so designated. The term "Market/Offer Price" shall
mean the highest of (i) the price per share of Common Stock at which a tender
offer or exchange offer therefor has been made, (ii) the price per share of
Common Stock to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the six-month
period immediately preceding the date the Holder gives notice of the required
repurchase of this Option or the Owner gives notice of the required repurchase
of Option Shares, as the case may be, or (iv) in the event of a sale of all or a
substantial
-10-
<PAGE>
portion of Issuer's assets, the sum of the price paid in such sale for such
assets and the current market value of the remaining assets of Issuer as
determined by a nationally recognized investment banking firm mutually selected
by the Holder or the Owner, as the case may be, on the one hand, and the Issuer,
on the other, divided by the number of shares of Common Stock of Issuer
outstanding at the time of such sale. In determining the Market/Offer Price, the
value of consideration other than cash shall be determined by a nationally
recognized investment banking firm mutually selected by the Holder or Owner, as
the case may be, on the one hand, and the Issuer, on the other.
(b) The Holder and the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option and any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. Within the latter to occur of (x) five business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver
or cause to be delivered to the Holder the Option Repurchase Price and/or to the
Owner the Option Share Repurchase Price therefor or the portion thereof that
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer
-------- -------
-11-
<PAGE>
at any time after delivery of a notice of repurchase pursuant to paragraph (b)
of this Section 7 is prohibited under applicable law or regulation from
delivering to the Holder and/or the Owner, as appropriate, the Option Repurchase
Price and the Option Share Repurchase Price, respectively, in full (and Issuer
hereby undertakes to use its best efforts to obtain all required regulatory and
legal approvals and to file any required notices as promptly as practicable in
order to accomplish such repurchase), the Holder or Owner may revoke its notice
of repurchase of the Option or the Option Shares either in whole or to the
extent of the prohibition, whereupon, in the latter case, Issuer shall promptly
(i) deliver to the Holder and/or the Owner, as appropriate, that portion of the
Option Repurchase Price or the Option Share Repurchase Price that Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Holder, a new Stock Option Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Stock Option
Agreement was exercisable at the time of delivery of the notice of repurchase by
a fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator of which
is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be
deemed to have occurred (i) upon the consummation of any merger, consolidation
or similar transaction involving Issuer or any purchase, lease or other
acquisition of all or a substantial portion of the assets of Issuer, other than
any such transaction which would not constitute an Acquisition Transaction
pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition
by any person of beneficial ownership of 50% or more of the then outstanding
shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event. The parties hereto agree that Issuer's
obligations to repurchase the Option or Option Shares under this Section 7 shall
not terminate upon the occurrence of an Exercise Termination Event unless no
Subsequent Triggering Event shall have occurred prior to the occurrence of an
Exercise Termination Event.
-12-
<PAGE>
8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or one of its Subsidiaries, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or one of its Subsidiaries, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding voting shares
and voting share equivalents of the merged company, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person, other
than Grantee or one of its Subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provision so that the
Option shall, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that controls
the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise of the Substitute
Option.
(3) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
-13-
<PAGE>
(4) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
--------
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person, as
the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
- --------
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The issuer of the Substitute Option
shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 19.9%
of the shares of Substitute Common Stock outstanding prior to exercise but for
this clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in this
clause (e) over
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(ii) the value of the Substitute Option after giving effect to the limitation in
this clause (e). This difference in value shall be determined by a nationally
recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to (x) the amount by which (i) the Highest
Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses (to the extent not previously reimbursed), and
at the request of the owner (the "Substitute Share Owner") of shares of
Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer
shall repurchase the Substitute Shares at a price (the "Substitute Share
Repurchase Price") equal to (x) the Highest Closing Price multiplied by the
number of Substitute Shares so designated plus (y) Grantee's reasonable Out-of-
Pocket Expenses (to the extent not previously reimbursed). The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as
the case may be, may exercise its respective right to require the Substitute
Option Issuer to
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repurchase the Substitute Option and the Substitute Shares pursuant to this
Section 9 by surrendering for such purpose to the Substitute Option Issuer, at
its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable, and in any event within five business
days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation from repurchasing the Substitute Option
and/or the Substitute Shares in part or in full, the Substitute Option Issuer
following a request for repurchase pursuant to this Section 9 shall immediately
so notify the Substitute Option Holder and/or the Substitute Share Owner and
thereafter deliver or cause to be delivered, from time to time, to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the
portion of the Substitute Share Repurchase Price, respectively, which it is no
longer prohibited from delivering, within five business days after the date on
which the Substitute Option Issuer is no longer so prohibited; provided,
--------
however, that if the Substitute Option Issuer is at any time after delivery of a
- -------
notice of repurchase pursuant to subsection (b) of this Section 9 prohibited
under applicable law or regulation from delivering to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option
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Holder or Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Shares either in whole or to the extent of
the prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or Substitute Share
Owner, as appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections
2, 6, 7 and 13 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights, and for the expiration of
all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly
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<PAGE>
executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including if required redeeming all
of the Rights or amending or terminating the Rights Agreement) so that the
entering into of this Option Agreement, the acquisition of shares of Common
Stock hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Rights Agreement
or enable or require the Rights to be exercised, distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other person, without
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the express written consent of the other party, except that in the event a
Subsequent Triggering Event shall have occurred prior to an Exercise Termination
Event, Grantee, subject to the express provisions hereof, may assign in whole or
in part its rights and obligations hereunder within 90 days following such
Subsequent Triggering Event (or such later period as provided in Section 10);
provided, however, that until the date 15 days following the date on which the
- -------- -------
Federal Reserve Board approves an application by Grantee under the BHCA to
acquire the shares of Common Stock subject to the Option, Grantee may not assign
its rights under the Option except in (i) a widely dispersed public
distribution, (ii) a private placement in which no one party acquires the right
to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment
to a single party (e.g., a broker or investment banker) for the purpose of
-----
conducting a widely dispersed public distribution on Grantee's behalf, or (iv)
any other manner approved by the Federal Reserve Board.
14. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the New York Stock Exchange upon
official notice of issuance and applying to the Federal Reserve Board under the
BHCA for approval to acquire the shares issuable hereunder, but Grantee shall
not be obligated to apply to state banking authorities for approval to acquire
the shares of Common Stock issuable hereunder until such time, if ever, as it
deems appropriate to do so.
15. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the
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terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
18. This Agreement shall be governed by and construed in accordance
with the laws of the State of Pennsylvania, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
19. This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original, but all of which shall constitute
one and the same agreement.
20. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
21. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied,
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<PAGE>
is intended to confer upon any party, other than the parties hereto, and their
respective successors except as assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
22. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
DAUPHIN DEPOSIT CORPORATION
By: /s/ C.R. Jennings
----------------------------------
Name: Christopher R. Jennings
Title: Chairman of the
Board and Chief Executive
Officer
ALLIED IRISH BANKS, P.L.C.
By: /s/ J.E. Casey
----------------------------------
Name: Jeremiah E. Casey
Title: Chief Executive, USA
Division
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