<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 3, 1997
FIRST MARYLAND BANCORP
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
1-7273 52-0981378
(Commission File Number) (I.R.S. Employer Identification No.)
25 S. Charles Street
Baltimore, Maryland 21201
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 244-4000
Not Applicable
(Former name or former address, if changed since last report)
--------------------------------
<PAGE>
Item 5. Other Events
As set forth in its Current Report on Form 8-K dated January 21, 1997, on
January 21, 1997, First Maryland Bancorp (the "Company"), its parent, Allied
Irish Banks, p.l.c. ("AIB"), and Dauphin Deposit Corporation ("Dauphin") entered
into a definitive Agreement and Plan of Merger (the "Merger Agreement"). Filed
as a part of this Current Report on Form 8-K are certain financial statements of
Dauphin. Dauphin is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (Commission file no. 0-8415).
Item 7. Exhibits
(c) Exhibits
99.1 Dauphin Deposit Corporation consolidated financial statements as of
and for the year ended December 31, 1995; notes to consolidated
financial statements; and independent auditor's report on the
consolidated financial statements.
99.2 Dauphin Deposit Corporation unaudited consolidated financial
statements as of and for the three and nine months ended September
30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 3, 1997 FIRST MARYLAND BANCORP
By: /s/ DAVID M. CRONIN
----------------------------------
David M. Cronin, Executive
Vice President and Treasurer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description Page
- ------- ----------- ----
99.1 Dauphin Deposit Corporation consolidated financial
statements as of and for the year ended December 31,
1995; notes to consolidated financial statements;
and independent auditor's report on the consolidated
financial statements.
99.2 Dauphin Deposit Corporation unaudited consolidated
financial statements as of and for the three and
nine months ended September 30, 1996.
<PAGE>
Exhibit 99.1
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 218,785 $ 202,911
----------- -----------
Short-term investments
Interest bearing deposits.......................... 8,523 3,738
Federal funds sold and securities purchased under
agreements to resell.............................. 3,050 11,302
----------- -----------
Total short-term investments..................... 11,573 15,040
----------- -----------
Investment securities available-for-sale, at fair
value............................................... 1,860,869 1,783,803
Assets held for sale, primarily mortgage loans....... 87,782 46,222
Loans (net of unearned income)....................... 2,981,338 2,861,133
Allowance for loan losses............................ (41,737) (40,216)
----------- -----------
Total net loans.................................. 2,939,601 2,820,917
----------- -----------
Premises and equipment............................... 71,562 67,088
Other assets......................................... 107,177 134,371
----------- -----------
Total assets..................................... $5,297,349 $5,070,352
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing............................... $ 518,004 $ 464,919
Interest bearing................................... 3,431,532 3,049,965
----------- -----------
Total deposits................................... 3,949,536 3,514,884
Short-term borrowings................................ 678,161 940,777
Long-term debt....................................... 40,599 91,954
Accrued expenses and taxes........................... 82,450 56,088
----------- -----------
Total liabilities................................ 4,750,746 4,603,703
----------- -----------
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 2,013,771
and 1,696,447 shares are held as treasury stock,
respectively...................................... 163,208 163,208
Additional paid-in capital......................... 11,103 11,770
Retained earnings.................................. 408,274 373,921
Unrealized gains (losses) on securities available-
for-sale, net of deferred taxes................... 13,650 (41,036)
----------- -----------
596,235 507,863
Less: Treasury stock--at cost...................... (49,632) (41,214)
----------- -----------
Total stockholders' equity....................... 546,603 466,649
----------- -----------
Total liabilities and stockholders' equity....... $5,297,349 $5,070,352
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans
and leases............... $245,440 $207,648 $192,042
Interest and dividends on
investment securities
Taxable................. 93,498 96,797 107,195
Exempt from federal
income taxes........... 17,997 23,602 23,373
Interest on deposits...... 365 337 218
Interest on assets held
for sale................. 5,589 2,120 1,829
Interest on federal funds
sold and other short-term
investments.............. 755 603 388
--------------- --------------- ---------------
Total interest income... 363,644 331,107 325,045
--------------- --------------- ---------------
Interest expense
Interest on deposits
Savings deposits........ 32,218 36,675 42,836
Time deposits........... 87,949 62,072 65,536
Time deposits in
denominations of
$100,000 or more....... 27,335 15,140 14,226
--------------- --------------- ---------------
147,502 113,887 122,598
Interest on short-term
borrowings............... 35,880 32,056 19,436
Interest on long-term
debt..................... 4,549 6,698 6,738
--------------- --------------- ---------------
Total interest expense.. 187,931 152,641 148,772
--------------- --------------- ---------------
Net interest income..... 175,713 178,466 176,273
Provision for loan losses... 5,608 7,494 10,141
--------------- --------------- ---------------
Net interest income
after provision for
loan losses............ 170,105 170,972 166,132
--------------- --------------- ---------------
Non-interest income
Fiduciary activities...... 16,807 16,363 15,237
Service charges on deposit
accounts................. 11,019 11,598 12,626
Other service charges and
fees..................... 12,554 11,272 9,138
Broker/dealer commissions
and fees................. 6,034 7,783 10,634
Mortgage banking.......... 18,730 7,462 2,331
Securities gains, net..... 2,261 3,304 3,226
Other..................... 4,384 3,165 6,859
--------------- --------------- ---------------
Total non-interest
income................. 71,789 60,947 60,051
--------------- --------------- ---------------
Non-interest expense
Salaries and employee
benefits................. 81,268 72,556 68,569
Net occupancy expense..... 9,396 8,990 8,472
Furniture and equipment
expense.................. 11,075 9,567 9,219
Deposit insurance......... 4,095 7,909 8,103
Other..................... 47,285 40,096 41,918
--------------- --------------- ---------------
Total non-interest
expense................ 153,119 139,118 136,281
--------------- --------------- ---------------
Income before income taxes.. 88,775 92,801 89,902
Provision for income taxes.. 23,210 22,762 21,985
--------------- --------------- ---------------
Net income.................. $ 65,565 $ 70,039 $ 67,917
=============== =============== ===============
Net income per share........ $ 2.12 $ 2.18 $ 2.08
Cash dividends declared per
share...................... $ 1.01 1/2 $ .94 $ .83
Weighted average number of
shares outstanding......... 30,966,258 32,169,734 32,636,150
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<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,
1992................... 32,623,869 $163,119 $10,620 $292,193 (267,310) $ (3,821) $ $462,111
Net income.............. 67,917 67,917
Cash dividends declared
By Dauphin............. (24,802) (24,802)
By pooled bank prior to
acquisition........... (1,534) (1,534)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... 314 76,579 1,122 1,436
Sale of treasury stock
under the Stock Option
Plan of 1986........... (4) 53,418 536 532
Debentures converted to
common stock........... 17,745 89 203 3,113 43 335
Tax benefit of stock
option transactions.... 80 80
---------- -------- ------- -------- ---------- -------- ------- --------
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
investments 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
investments 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
========== ======== ======= ======== ========== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income.................................. $ 65,565 $ 70,039 $ 67,917
Adjustments:
Provision for loan losses................. 5,608 7,494 10,141
Provision for depreciation, amortization
and accretion............................ 6,564 9,441 11,050
Amortization of goodwill.................. 1,705 1,335 938
Deferred income taxes..................... 4,133 3,994 (813)
Securities gains, net..................... (2,261) (3,304) (3,226)
(Increase) decrease in interest
receivable............................... 1,325 (2,222) 4,023
Increase (decrease) in accrued expenses
and taxes................................ 19,013 (3,064) 1,612
Capitalized interest on deposits.......... 65,534 44,108 45,770
Amortization of mortgage servicing
rights................................... 3,047 1,091 629
Gain on sale of mortgages and loans held
for sale................................. (5,961) (1,473) (1,325)
Sale of mortgage loans held for sale...... 741,618 247,445 107,746
Loans originated for sale................. (751,403) (224,445) (114,054)
Purchase of mortgage loans held for sale.. (22,645) (22,995)
Other, net................................ (13,918) (14,339) (21,656)
--------- --------- ---------
Net cash provided by operating
activities............................. 117,924 113,105 108,752
--------- --------- ---------
Investing activities
Proceeds from sales of investment
securities................................. 252,613 201,395 48,978
Proceeds from maturities of investment
securities................................. 356,977 480,030 733,822
Purchases of investment securities.......... (526,811) (481,357) (758,783)
Net (increase) decrease in assets held for
sale, other than loans held for sale....... (3,169) (299) 732
Net increase in loans....................... (231,067) (330,366) (165,771)
Sale of residential mortgage and other
consumer loans............................. 39,507 52,544 4,876
Net purchases of premises and equipment..... (12,139) (8,268) (2,646)
Net proceeds from sale of subsidiary,
Farmers Savings Bank, FSB.................. 797
Purchase of Eastern Mortgage Services,
Inc........................................ (21,038)
--------- --------- ---------
Net cash used by investing activities... (124,089) (106,562) (138,792)
--------- --------- ---------
Financing activities
Net increase (decrease) in deposit
accounts................................... 369,118 (104,518) (149,755)
Net increase (decrease) in short-term
borrowings................................. (262,616) 224,869 72,060
Net decrease in long-term debt.............. (51,097) (122) (74)
Issuance of common stock and treasury
stock...................................... 6,083 3,281 1,968
Acquisition of treasury stock............... (16,063) (42,413)
Cash dividends paid......................... (30,836) (29,024) (25,406)
--------- --------- ---------
Net cash provided (used) by financing
activities............................. 14,589 52,073 (101,207)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................ 8,424 58,616 (131,247)
Cash and cash equivalents at beginning of
period....................................... 210,911 152,295 283,542
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 219,335 $ 210,911 $ 152,295
========= ========= =========
Total interest paid........................... $ 116,944 $ 109,419 $ 107,225
Total income taxes paid....................... 12,715 20,495 24,061
Schedule of non-cash investing and financing
activities:
Loans charged off........................... 8,176 9,400 10,521
Net loan transfers to other real estate
owned...................................... 2,508 4,563 1,574
Conversion of convertible subordinated
debentures................................. 258 432 335
Securitization of mortgage loans............ 77,085
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
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 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 estimate that is particularly
susceptible to significant change in the near term relates to the determination
of the allowance for loan losses.
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
Dauphin adopted the provisions of Statement of Financial Accounting Standards
No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity
Securities" on January 1, 1994. Under SFAS 115 investments are classified in
one of three categories and accounted for as follows: 1) debt securities that a
company has the positive intent and ability to hold to maturity are classified
as held-to-maturity securities and reported at amortized cost; 2) debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings; and 3)
debt and equity securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of stockholders' equity. Management has determined that
the entire investment securities portfolio will be classified as available-for-
sale.
Premiums and discounts are amortized and accreted over the term of the
related securities using a method that approximates the interest method.
Realized gains or losses on the sale of investment securities (determined by
the specific identification method) are shown separately in the statements of
income. A decline in the fair
5
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 mortages held for sale, primarily the inventory of Eastern Mortgage. The
securities inventory is recorded at current quoted market value. The mortgages
held for sale are carried at the lower of aggregate cost or estimated market
value with unrealized losses recognized through a provision included in other
income. Gains and losses on the sale of mortgages 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.
Loan fees and costs of loan origination are deferred and recognized over the
life of the loan as a component of interest income. 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.
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.
Dauphin adopted the provisions of Statement of Financial Accounting Standard
No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118 (SFAS 118), "Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosure" on January 1, 1995. 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 (e.g. less than 90 days), a loan is not deemed to be impaired.
6
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 (e.g. primarily consumer and residential mortgages) from the
evaluation for impairment. Impairment losses are included in the allowance 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, including capitalized interest
during construction, 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 $15.5
million of goodwill at December 31, 1995 and 1994. Goodwill is being amortized
using the straight-line method over periods not exceeding 15 years.
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 (SFAS 122), "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65". 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.
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
7
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 (e.g. conventional or government guaranteed and
adjustable-rate or fixed-rate mortgage loans). 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 and does not use them for trading purposes.
Derivatives are primarily used to manage well-defined interest rate risks, as
described in Note 16.
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 in
accordance with the provisions of Statement of Financial Accounting Standards
No. 87 "Employers' Accounting for Pensions". The projected unit credit method
is utilized 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
8
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
treasury stock method. The difference between primary and fully diluted
earnings per share is not significant in any year.
STATEMENT OF CASH FLOWS
For purposes of the 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--ACQUISITIONS
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
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, 1995 and 1994 was approximately $80,353,000 and $78,522,000, respectively.
The Bank is required to maintain an investment in Federal Home Loan Bank of
Pittsburgh stock of $14,987,200 which is included with equity securities.
4--INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are as follows:
<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..... $1,839,870 $29,651 $(8,652) $1,860,869
========== ======= ======= ==========
</TABLE>
9
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1994
-------------------------------------------
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..................... $ 687,005 $ 642 $(22,127) $ 665,520
Obligations of states and
political subdivisions........... 369,061 9,351 (11,700) 366,712
Debt securities issued by foreign
governments...................... 900 (4) 896
Corporate securities.............. 79,032 79 (828) 78,283
Mortgage-backed securities........ 698,035 1,098 (39,640) 659,493
---------- ------- -------- ----------
Total debt securities........... 1,834,033 11,170 (74,299) 1,770,904
Equity securities................. 12,903 (4) 12,899
---------- ------- -------- ----------
Total investment securities..... $1,846,936 $11,170 $(74,303) $1,783,803
========== ======= ======== ==========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1995, 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, 1995
---------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................. $ 274,681 $ 276,502
Due after one year through five years............... 526,872 535,459
Due after five years through ten years.............. 177,963 183,991
Due after ten years................................. 135,803 141,000
---------- ----------
1,115,319 1,136,952
Mortgage-backed securities.......................... 705,279 704,612
---------- ----------
Total debt securities............................. $1,820,598 $1,841,564
========== ==========
</TABLE>
Gains and losses from sales of investment securities are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Debt securities
Gross gains..................................... $ 3,496 $ 3,366 $1,540
Gross losses.................................... (1,235) (1,007) (6)
------- ------- ------
Total debt securities......................... 2,261 2,359 1,534
Equity securities, net............................ 945 1,692
------- ------- ------
Total securities gains........................ $ 2,261 $ 3,304 $3,226
======= ======= ======
</TABLE>
Proceeds from sales of investment securities are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Debt securities.................................... $252,613 $199,083 $43,742
Equity securities.................................. 2,312 5,236
-------- -------- -------
Total proceeds................................... $252,613 $201,395 $48,978
======== ======== =======
</TABLE>
10
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Securities with a carrying value of $1,053,541,000 at December 31, 1995 and
$816,290,000 at December 31, 1994 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, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994
---------- ----------
<S> <C> <C>
Commercial, financial and agricultural:
Commercial secured by real estate................ $ 640,670 $ 466,657
Agricultural..................................... 36,415 34,960
Other............................................ 719,137 680,113
Real estate, construction.......................... 97,444 183,673
Real estate, residential........................... 446,059 578,122
Consumer:
Home equity...................................... 385,194 335,323
Installment and credit card...................... 507,425 483,889
Lease financing.................................... 150,943 101,919
Unamortized net loan fees.......................... (1,949) (3,523)
---------- ----------
Total loans.................................... $2,981,338 $2,861,133
========== ==========
</TABLE>
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, 1995.................................... $ 56,032
New loans................................................... 138,782
Repayments.................................................. (103,176)
---------
Balance--December 31, 1995.................................. $ 91,638
=========
</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 $12,103,000
and $15,168,000 at December 31, 1995 and 1994, respectively. If interest income
had been recorded on all such loans outstanding during the years 1995, 1994 and
1993, interest income would have been increased as shown in the following
table:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
---- ------ ------
<S> <C> <C> <C>
Interest income which would have been recorded under
original terms...................................... $743 $1,187 $1,560
Interest income recorded during the period........... 395 477 700
---- ------ ------
Net impact on interest income........................ $348 $ 710 $ 860
==== ====== ======
</TABLE>
The Bank does not have any significant commitments to lend additional funds
on non-accrual or restructured loans at December 31, 1995.
11
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
As previously discussed in Note 1, on January 1, 1995, Dauphin adopted the
provisions of Statement of Financial Accounting Standards No. 114 (SFAS 114),
"Accounting by Creditors for Impairment of a Loan" as amended by Statement of
Financial Accounting Standards No. 118 (SFAS 118), "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures".
On December 31, 1995 the balance of impaired loans was $11.7 million.
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 1995 was
$8.4 million and the interest recognized for the year was $.7 million. The
interest income includes $.2 million that was recorded on the cash basis.
6--ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year....................... $40,216 $39,182 $36,227
Allowance of subsidiary sold................... (101)
Provision charged to operations................ 5,608 7,494 10,141
Recoveries on loans charged off................ 4,089 3,041 3,335
------- ------- -------
49,913 49,616 49,703
Loans charged off.............................. 8,176 9,400 10,521
------- ------- -------
Balance, end of year............................. $41,737 $40,216 $39,182
======= ======= =======
</TABLE>
7--PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
ESTIMATED ------------------
USEFUL LIFE 1995 1994
------------- -------- --------
<S> <C> <C> <C>
Land................................... $ 10,352 $ 10,522
Premises............................... 5 to 40 years 75,659 72,862
Leasehold improvements................. 2 to 40 years 2,476 2,649
Equipment.............................. 3 to 10 years 55,753 48,530
-------- --------
144,240 134,563
Accumulated depreciation and
amortization.......................... (72,678) (67,475)
-------- --------
Total.............................. $ 71,562 $ 67,088
======== ========
</TABLE>
Depreciation and amortization amounted to $7,665,000 for 1995, $6,834,000 for
1994 and $6,495,000 for 1993.
8--MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the consolidated
balance sheet. The outstanding balance of these loans at year-end and gains on
the sale of servicing during the year are presented below:
<TABLE>
<CAPTION>
(IN THOUSASNDS)
------------------------------
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Total loans serviced for others at year-
end..................................... $1,283,435 $1,015,745 $219,572
Gains on sale of servicing............... 1,046 1,623 26
</TABLE>
12
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
As previously discussed in Note 1, 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". An analysis of the activity of excess, purchased, and originated mortgage
servicing rights for the years ended December 31, 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
====== ======= ======
</TABLE>
The fair value of purchased and originated servicing rights was $13.7 million
at December 31, 1995. As of and for the year ended December 31, 1995, there was
no valuation allowance for purchased and originated servicing rights.
The balances and activities of excess and purchased mortgage servicing rights
were not significant to the consolidated balance sheets or results of
operations of Dauphin during 1993.
9--TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 or more at December 31, 1995 and
1994 amounted to $459,074,000 and $270,777,000, respectively.
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, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Overnight federal funds purchased............ $266,370 $438,490 $187,210
Term federal funds purchased................. 260,000 225,000
Eurodollars purchased........................ 1,672
Federal Home Loan Bank borrowings............ 149,000
Securities sold under agreements to
repurchase.................................. 233,830 196,021 215,890
U.S. Treasury tax and loan notes............. 27,289 46,266 52,286
-------- -------- --------
Total short-term borrowings................ $678,161 $940,777 $680,386
======== ======== ========
Average interest rate at year-end............ 5.33% 5.88% 3.03%
Maximum amount outstanding at any month-end.. $958,804 $940,777 $765,169
Average amount outstanding................... $646,537 $778,906 $646,187
Weighted average interest rate............... 5.55% 4.12% 3.01%
</TABLE>
13
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 $2,338,000,000 at December 31, 1995.
11--LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994
------- -------
<S> <C> <C>
Dauphin Deposit Corporation
8.70% Senior Notes due 1996............................... $35,000 $35,000
9% Convertible Subordinated Debentures due June 1999,
convertible into common stock at $16.06 per share........ 4,955 5,213
Variable rate mortgage (6 3/8% at December 31, 1995)
(collateralized by premises)............................. 235 270
Dauphin Deposit Bank and Trust Company
Advances from The Federal Home Loan Bank of Pittsburgh.... 51,000
------- -------
40,190 91,483
Obligations under capitalized lease........................ 409 471
------- -------
Total.................................................... $40,599 $91,954
======= =======
</TABLE>
In November 1986, Dauphin issued $35,000,000, 8.70% Senior Notes due 1996 at
par. These Senior Notes are not subordinated in right of payment to any other
unsecured indebtedness of Dauphin.
Aggregate long-term debt maturities, for each of the next five years are as
follows:
1996--$35,095,000; 1997--$107,000; 1998--$86,000; 1999--$5,038,000; 2000--
$92,000
At December 31, 1995, Dauphin and its subsidiaries had unused lines of credit
totaling approximately $3,000,000 with a non-affiliated bank.
12--RESTRICTION ON PAYMENT OF DIVIDENDS
Certain restrictions exist regarding the ability of the subsidiaries to
transfer funds to Dauphin in the form of cash dividends. Dauphin and the Bank
are required to maintain minimum amounts of capital to total risk weighted
assets as defined by the banking regulators. The requirement is to have a
minimum Tier 1 and total capital ratios of 4.00% and 8.00%, respectively. 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 $26.0
million, plus net profits for 1996.
14
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
13--INCOME TAXES
The provision for income taxes, consisting primarily of Federal income taxes,
for the years 1995, 1994 and 1993, consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current taxes...................................... $19,077 $18,768 $22,798
Deferred taxes (credits)........................... 4,133 3,994 (813)
------- ------- -------
Total............................................ $23,210 $22,762 $21,985
======= ======= =======
</TABLE>
A reconciliation between the effective income tax rate and the statutory rate
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
---- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate........................ 35.0% 35.0% 35.0%
Tax exempt income........................................ (8.9) (10.5) (10.8)
Other, net............................................... .3
---- ----- -----
Effective income tax rate................................ 26.1% 24.5% 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, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Deferred tax assets:
Gross unrealized losses on investment
securities................................. $ 3,029 $ 26,005 $
Allowance for loan losses................... 15,322 13,904 13,298
Deferred loan fees and costs................ 123 468 1,409
Purchase accounting adjustments to loans.... 492 975
Employee benefit programs................... 2,443 1,861 1,180
Other....................................... 908 1,473 1,691
-------- -------- -------
Total gross deferred tax assets........... 21,825 44,203 18,553
-------- -------- -------
Deferred tax liabilities:
Gross unrealized gains on investment
securities................................. (10,378) (3,909)
Depreciation................................ (3,070) (3,007) (3,194)
Investment securities discount.............. (636) (376) (283)
Lease financing transactions................ (14,610) (6,338) (3,074)
Prepaid pension............................. (1,126) (978) (914)
Mortgage servicing rights................... (2,959) (3,608) (428)
Prepaid expenses............................ (894) (2,118) (823)
Other....................................... (828) (681) (575)
-------- -------- -------
Total gross deferred tax liabilities...... (34,501) (21,015) (9,291)
-------- -------- -------
Net deferred tax asset (liability)........ $(12,676) $ 23,188 $ 9,262
======== ======== =======
</TABLE>
15
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 accounted for under
SFAS 115 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 $21,825,000 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.
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, 1995
and 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................. $43,235 $35,057
Non-vested............................................. 1,811 1,312
------- -------
Accumulated benefit obligation....................... 45,046 36,369
Effects of future compensation levels.................... 9,164 7,031
------- -------
Projected benefit obligation............................. 54,210 43,400
Plan assets at fair value................................ 63,532 55,249
------- -------
Excess of plan assets over the projected benefit
obligation.............................................. 9,322 11,849
Unrecognized net asset being amortized over 15 years..... (3,664) (4,412)
Unrecognized prior service cost.......................... 275 372
Unrecognized gain........................................ (1,620) (3,784)
------- -------
Prepaid pension cost included in the consolidated
financial statements.................................... $ 4,313 $ 4,025
======= =======
</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>
1995 1994
---- ----
<S> <C> <C>
Expected rate of return on plan assets........................... 8.50% 8.00%
Discount rate.................................................... 7.00 8.00
Rate of increase in future compensation levels................... 4.50 5.00
</TABLE>
16
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Net pension expense (credit) for 1995, 1994 and 1993 was comprised of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Service cost.................................... $ 1,568 $ 1,812 $ 1,791
Interest cost on projected benefit obligation... 3,648 3,312 2,980
Return on plan assets........................... (10,989) (402) (4,198)
Net amortization and deferral................... 5,791 (4,623) (646)
-------- ------- -------
Net pension expense (credit)................... $ 18 $ 99 $ (73)
======== ======= =======
</TABLE>
Plan assets are primarily invested in listed stocks (including 107,000 and
100,000 shares of Dauphin at December 31, 1995 and 1994) and U.S. Treasury and
federal agency securities.
Dauphin's postretirement benefits other than pensions are currently not
funded. The status of the plan at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees.............................................. $ 9,975 $11,651
Fully eligible active plan participants............... 633 635
Other active plan participants........................ 3,991 5,266
------- -------
14,599 17,552
Unrecognized transition liability being amortized over
20 years............................................... (9,042) (9,607)
Unrecognized prior service cost......................... (757) (739)
Unrecognized net loss................................... 1,093 (2,514)
------- -------
Accrued postretirement obligation....................... $ 5,893 $ 4,692
======= =======
</TABLE>
The assumptions used in determining the actuarial present value of the
accumulated postretirement benefit obligation are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Discount rate.................................................... 7.00% 8.00%
Rate of increase in future compensation levels................... 4.50 5.00
</TABLE>
The cost for postretirement benefits other than pensions for 1995, 1994 and
1993 consisted of the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost......................................... $ 348 $ 506 $ 359
Interest cost on accumulated postretirement benefit
obligation.......................................... 989 1,313 1,064
Amortization of transition obligation................ 565 565 565
Amortization of past service cost.................... 65 65
Net amortization and deferral........................ (89) 174 45
------ ------ ------
Net postretirement benefit cost..................... $1,878 $2,623 $2,033
====== ====== ======
</TABLE>
17
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 per year to an ultimate rate of 5 1/2% in 2005 (10% at
December 31, 1995) 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 $1,760,000 at December 31, 1995 and increase the aggregate of the
service and interest cost components by $190,000 for the year ended December
31, 1995.
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 $581,000, $563,000 and $468,000
during 1995, 1994 and 1993, respectively.
In 1993, Dauphin adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits". The adoption resulted in
an incremental cost of $26,500, $30,000 and $500,000 to salaries and benefits
expense in 1995, 1994 and 1993, respectively. This accrual was established to
record the liability for benefits to former or inactive employees after
employment but before retirement. The balance at December 31, 1995 is $556,500.
15--EMPLOYEE STOCK PURCHASE PLAN, STOCK OPTION PLAN AND STOCKHOLDERS' EQUITY
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.
840,000 shares of common stock have been authorized to be offered under the
plan, of which 726,974 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, 1995.
During 1987, the shareholders approved the adoption of the Stock Option Plan
of 1986 (the Plan). Under the 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. The exercise price of options granted may not be less
than 85% of the fair 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.
18
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Stock option transactions during 1995, 1994 and 1993 are summarized below:
<TABLE>
<CAPTION>
PRICE
SHARES RANGE PER SHARE
-------- ---------------
<S> <C> <C>
Balance, December 31, 1992......................... 630,501 $ 9.48--$23.72
Granted.......................................... 152,500 $24.88
Exercised........................................ (77,605) $ 9.48--$16.57
Terminated....................................... (3,000) $24.88
--------
Balance, December 31, 1993......................... 702,396 $ 9.48--$24.88
Granted.......................................... 160,500 $25.63
Exercised........................................ (31,057) $11.36--$24.88
Terminated....................................... (2,400) $14.28--$24.88
--------
Balance, December 31, 1994......................... 829,439 $ 9.48--$25.63
Granted.......................................... 179,000 $24.00
Exercised........................................ (109,584) $11.36--$23.72
Terminated....................................... (5,000) $25.63
--------
Balance, December 31, 1995......................... 893,855 $ 9.48--$25.63
========
Exercisable, December 31, 1995..................... 512,694
========
</TABLE>
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. In 1995, Dauphin
entered into Performance Share Agreements with certain key employees as
permitted under the 1995 Plan. The Performance Share Agreements entitle these
employees to a grant of Dauphin common stock after a three year period if
specific corporate goals are realized. During 1995, Dauphin recognized $.4
million of expense related to Performance Share Agreements.
In connection with the adoption of a shareholder rights plan on January 22,
1990, Dauphin 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.
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
19
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 Plans, the Dividend Reinvestment and
Stock Purchase Plan, and other appropriate uses. During 1995 and 1994, Dauphin
repurchased 630,000 shares for $16.1 million and 1,744,500 shares for $42.4
million, respectively.
16--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/or meet the financing needs of its customers
and which reduces 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 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)
1995 1994
---------- ----------
<S> <C> <C>
Amounts representing credit risk:
Commitments to extend credit....................... $1,343,251 $1,264,539
Financial and performance standby letters of
credit............................................ 134,242 122,568
Commercial and similar letters of credit........... 900 842
Commitments to purchase securities................. 12,365 4,650
Notional or contract amounts of off-balance-sheet
financial instruments not constituting credit risk:
Forward commitments to sell in the secondary
market............................................ 62,455 33,137
Forward commitments to sell to permanent
investors......................................... 31,939 16,197
Purchased call and put options..................... 2,500
</TABLE>
Commitments to extend credit, which includes 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
20
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 are served by Eastern Mortgage,
the Bank's mortgage subsidiary. However, the Bank will grant commercial,
residential and consumer loans throughout Pennsylvania. The loan portfolio is
well diversified and the Bank does not have any significant 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, has limited involvement with
derivative financial instruments and does not use them for trading purposes.
Derivatives are primarily used to manage well-defined interest rate risks.
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.
The secondary marketing department at Eastern Mortgage is primarily
responsible for mitigating the exposure 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
executed, and the primary objective of hedging is achieved. However, in the
normal course of business, to the extent that management believes that market
conditions may change favorably, or fewer loans are closed than previously
anticipated, certain forward commitments may be paired-off. In instances where
management paired-off forward commitments on the basis of certain expectations
of market conditions, any gains or losses arising from 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.
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 is delivered into.
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 options on treasury securities 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
21
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
option. The cost of all such options is expensed as an adjustment to gains
(losses) on sale of mortgage loans when the options expire. 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 deliberately exposes a
portion of its mortgage loan portfolio (warehouse and pipeline, net of
estimated fall-out) 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. At December 31, 1995,
the maximum exposure position authorized by management is $20 million. The
secondary marketing department produces a daily exposure report summarizing the
exposure position. This report is reviewed and adjustments to the exposure
position, to the extent considered necessary by management, are made daily.
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
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.
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.
22
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 19--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.
23
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
At December 31, 1995 and 1994, Dauphin's estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.......... $ 218,785 $ 218,785 $ 202,911 $ 202,911
Short-term investments........... 11,573 11,573 15,040 15,040
Investment securities............ 1,860,869 1,860,869 1,783,803 1,783,803
Assets held for sale............. 87,782 87,782 46,222 46,222
Loans
Commercial..................... 1,619,257 1,618,610 1,489,879 1,461,530
Residential mortgages.......... 499,724 500,837 622,003 611,984
Consumer....................... 855,325 858,648 739,682 728,104
Non-accrual.................... 7,031 9,569
Allowance for loan losses...... (41,737) (40,216)
---------- ---------- ---------- ----------
Net loans.................... 2,939,600 2,978,095 2,820,917 2,801,618
Other financial assets........... 42,973 43,048 37,990 40,935
Financial liabilities:
Deposits
Non-interest bearing demand.... 518,004 518,004 464,919 464,919
Interest bearing demand and
savings....................... 1,400,012 1,400,012 1,539,726 1,539,726
Time deposits.................. 2,031,520 2,074,831 1,510,239 1,527,245
---------- ---------- ---------- ----------
Total deposits............... 3,949,536 3,992,847 3,514,884 3,531,890
Short-term borrowings............ 678,161 678,161 940,777 940,897
Long-term debt................... 40,599 44,459 91,954 94,183
Accrued interest payable......... 25,250 25,250 20,668 20,668
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------------------------- ----------------------------
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............... $1,343,251 $643 $ 758 $1,264,539 $791 $ 854
Financial and
performance standby
letters of credit.... 134,242 1,342 122,568 1,226
Commercial and similar
letters of credit.... 900 9 842 8
Commitments to
purchase securities.. 12,365 12,365 4,650 4,650
Forward commitments to
sell in the secondary
market............... 62,455 (663) (663) 33,137 68 68
Forward commitments to
sell to permanent
investors............ 31,939 16,197
Purchased call and put
options.............. 2,500 11 11
</TABLE>
- --------
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from those unrecognized financial instruments.
24
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
17--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Dauphin Deposit Corporation (Parent Company Only) Condensed Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Assets:
Due from Bank (subsidiary)............................... $ 22 $ 36
Investment securities.................................... 63,815 37,243
Investment in subsidiaries
Banking subsidiary..................................... 502,964 448,582
Non-banking subsidiaries............................... 22,159 29,185
-------- --------
Total investment in subsidiaries..................... 525,123 477,767
Other assets............................................. 7,379 1,255
-------- --------
Total assets......................................... $596,339 $516,301
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accrued expenses and taxes............................. $ 9,546 $ 9,439
Long-term debt......................................... 40,190 40,213
-------- --------
Total liabilities.................................... 49,736 49,652
-------- --------
Stockholders' Equity:
Common stock........................................... 163,208 163,208
Additional paid-in capital............................. 11,103 11,770
Retained earnings...................................... 421,875 333,040
Unrealized gain (loss) on securities available-for-
sale.................................................. 49 (155)
-------- --------
596,235 507,863
Less: Treasury stock--at cost.......................... (49,632) (41,214)
-------- --------
Total stockholders' equity........................... 546,603 466,649
-------- --------
Total liabilities and stockholders' equity........... $596,339 $516,301
======== ========
</TABLE>
25
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of
Income
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue
Dividend income:
Banking subsidiary............................ $ 66,890 $ 44,130 $ 28,347
Non-banking subsidiaries...................... 3,450
Interest on investment securities............... 1,409 2,155 2,841
Interest on time deposits with Bank............. 691 191 89
Gains on sales of investment securities......... 5 345 2
-------- -------- --------
Total revenue............................... 72,445 46,821 31,279
-------- -------- --------
Expenses
Interest on long-term debt...................... 3,501 3,516 3,555
Other expenses.................................. 1,169 783 1,242
-------- -------- --------
Total expenses.............................. 4,670 4,299 4,797
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries......... 67,775 42,522 26,482
Income tax benefit................................ 873 602 618
-------- -------- --------
Income before equity in undistributed net income
(loss) of subsidiaries........................... 68,648 43,124 27,100
Equity in undistributed net income (loss):
Banking subsidiary.............................. 276 25,389 39,351
Non-banking subsidiaries........................ (3,359) 1,526 1,466
-------- -------- --------
Net income.................................. $ 65,565 $ 70,039 $ 67,917
======== ======== ========
</TABLE>
26
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Cash
Flows
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income..................................... $ 65,565 $ 70,039 $ 67,917
Adjustments
Equity in undistributed net (income) loss of
subsidiaries................................ 3,083 (26,915) (40,817)
Other, net................................... (2,112) 4,736 (1,602)
-------- -------- --------
Net cash provided by operating activities...... 66,536 47,860 25,498
-------- -------- --------
Investing activities
Proceeds from investment securities............ 37,477 43,484 11,955
Purchase of investment securities.............. (63,469) (24,488) (14,627)
Sale of subsidiary............................. 797
-------- -------- --------
Net cash provided (used) by investing
activities................................ (25,992) 19,793 (2,672)
-------- -------- --------
Financing activities
Issuance of treasury stock..................... 6,341 3,713 1,968
Repurchase of treasury stock................... (16,063) (42,413)
Cash dividends paid............................ (30,836) (29,024) (25,406)
-------- -------- --------
Net cash used by financing activities...... (40,558) (67,724) (23,438)
-------- -------- --------
Decrease in cash and cash equivalents...... (14) (71) (612)
Cash and cash equivalents at beginning of year... 36 107 719
-------- -------- --------
Cash and cash equivalents at end of year......... $ 22 $ 36 $ 107
======== ======== ========
Schedule of non-cash investing and financing
activities:
Conversion of convertible subordinated
debentures.................................... $ 258 $ 432 $ 335
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 1995 balance sheet reflects the assets held by the subsidiaries,
primarily premises that are leased to the Bank. Previous periods presented have
not been restated.
27
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1995, 1994 AND 1993
18--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994
------------------------------- -------------------------------
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......... $92,098 $90,272 $90,662 $90,612 $87,789 $83,608 $81,215 $78,495
Interest expense........ 47,302 46,558 47,719 46,352 42,573 39,077 36,436 34,555
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 44,796 43,714 42,943 44,260 45,216 44,531 44,779 43,940
Provision for loan
losses................. 1,246 1,246 1,246 1,870 1,870 1,870 1,870 1,884
Non-interest income..... 19,966 18,234 18,426 15,163 16,998 16,569 13,706 13,674
Non-interest expense.... 39,628 37,566 38,427 37,498 37,969 36,336 32,807 32,006
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 23,888 23,136 21,696 20,055 22,375 22,894 23,808 23,724
Provision for income
taxes.................. 6,494 6,261 5,619 4,836 5,542 5,556 5,841 5,823
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $17,394 $16,875 $16,077 $15,219 $16,833 $17,338 $17,967 $17,901
======= ======= ======= ======= ======= ======= ======= =======
Net income per share.... $ .56 $ .55 $ .52 $ .49 $ .53 $ .54 $ .56 $ .55
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
19--LITIGATION
Various legal actions or proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
will not be material to Dauphin's financial condition or results of operation.
Included among outstanding litigation is a class action law suit instituted by
Dauphin seeking a declaratory judgement from the Court specifically permitting
Dauphin to discontinue offering an 18 month variable rate investment product
carrying a minimum interest rate of 10% for the 18 month term held in certain
individual retirement accounts (IRA) and/or to charge an annual maintenance fee
and fee on rollovers or transfers into the investment product. Dauphin's rights
to terminate the variable rate interest product and to charge a service fee are
in dispute and are being challenged by the holders of the IRA accounts in
question. Management intends to vigorously assert its right to terminate the 18
month variable rate investment product in accordance with its terms. Pending
the outcome of the litigation, Dauphin has continued to date to pay a 10%
interest rate with regard to the product. Counsel expects the case to go to
trial in the second quarter of 1996 and for a decision to be rendered by the
Court promptly thereafter.
28
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Dauphin Deposit Corporation
We have audited the accompanying consolidated balance sheets of Dauphin
Deposit Corporation and subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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 as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 8 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 No. 122, "Accounting for Mortgage Servicing
Rights an amendment of FASB Statement No. 65" on January 1, 1995.
/s/ KPMG Peat Marwick LLP
January 26, 1996
29
<PAGE>
Exhibit 99.2
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31, September 30,
1996 1995 1995
(Unaudited) (Audited) (Unaudited)
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $178,669 $218,785 $187,486
--------------- -------------- ---------------
Short-term investments
Interest bearing deposits 2,195 8,523 6,521
Federal funds sold (including term federal
funds sold of $0, $0, and $50,000,
respectively) and securities purchased
under agreements to resell 27,300 3,050 55,650
Other short-term investments 685 75,102
--------------- -------------- ---------------
Total short-term investments 30,180 11,573 137,273
--------------- -------------- ---------------
Investment securities available-for-sale, at fair value 2,168,620 1,860,869 1,623,704
Assets held for sale, primarily loans held for sale 210,858 87,782 88,266
Loans (net of unearned income) 3,236,742 2,981,338 2,939,677
Allowance for loan losses (43,449) (41,737) (41,671)
--------------- -------------- ---------------
Total net loans 3,193,293 2,939,601 2,898,006
--------------- -------------- ---------------
Premises and equipment 74,346 71,562 69,373
Other assets 115,311 107,177 100,585
--------------- -------------- ---------------
Total assets $5,971,277 $5,297,349 $5,104,693
=============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $499,399 $518,004 $453,114
Interest bearing 3,579,645 3,431,532 3,380,642
--------------- -------------- ---------------
Total deposits 4,079,044 3,949,536 3,833,756
Short-term borrowings 1,208,815 678,161 622,642
Long-term debt 40,035 40,599 40,621
Accrued expenses and taxes 93,722 82,450 76,729
--------------- -------------- ---------------
Total liabilities 5,421,616 4,750,746 4,573,748
--------------- -------------- ---------------
Stockholders' equity
Preferred stock, $25 par value; 10,000,000
shares authorized but unissued
Common stock, $5 par value; 200,000,000 shares
authorized, 32,641,614 shares issued of
which 2,035,699, 2,013,771, and 1,929,664
shares are held as treasury stock,
respectively 163,208 163,208 163,208
Additional paid-in capital 11,006 11,103 10,994
Retained earning 434,396 408,274 399,002
Unrealized gains (losses) on securities
available-for-sale, net of deferred taxes (7,662) 13,650 4,609
--------------- -------------- ---------------
600,948 596,235 577,813
Less: Treasury stock - at cost (51,287) (49,632) (46,868)
--------------- -------------- ---------------
Total stockholders' equity 549,661 546,603 530,945
--------------- -------------- ---------------
Total liabilities and stockholders'
equity $5,971,277 $5,297,349 $5,104,693
=============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $64,219 $62,195 $186,952 $183,128
Interest and dividends on investment securities
Taxable 29,348 22,333 84,383 69,483
Exempt from federal income taxes 4,559 4,349 13,356 14,059
Interest on deposits 25 91 165 264
Interest on assets held for sale 3,541 1,118 7,639 4,061
Interest on federal funds sold and other
short-term investments 278 186 373 551
----------- ----------- ----------- -----------
Total interest income 101,970 90,272 292,868 271,546
----------- ----------- ----------- -----------
Interest expense
Interest on deposits
Savings deposits 6,901 7,905 21,268 25,416
Time deposits 24,357 24,040 71,883 64,100
Time deposits in denominations of
$100,000 or more 9,960 7,306 25,680 19,191
----------- ----------- ----------- -----------
41,218 39,251 118,831 108,707
Interest on short-term borrowings 14,147 6,414 36,251 28,266
Interest on long-term debt 880 893 2,648 3,656
----------- ----------- ----------- -----------
Total interest expense 56,245 46,558 157,730 140,629
----------- ----------- ----------- -----------
Net interest income 45,725 43,714 135,138 130,917
Provision for loan losses 1,200 1,246 4,800 4,362
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 44,525 42,468 130,338 126,555
----------- ----------- ----------- -----------
Non-interest income
Fiduciary activities 4,700 4,060 13,815 12,809
Service charges on deposit accounts 3,247 2,671 9,549 8,137
Other service charges and fees 3,848 3,396 10,404 9,222
Broker/dealer commissions and fees 2,315 1,423 6,725 4,571
Mortgage banking 8,331 4,764 23,161 12,114
Securities gains, net 16 624 1,102 2,094
Other 1,283 1,296 2,864 2,876
----------- ----------- ----------- -----------
Total non-interest income 23,740 18,234 67,620 51,823
----------- ----------- ----------- -----------
Non-interest expense
Salaries and employee benefits 23,548 21,361 70,065 59,823
Net occupancy expense 2,707 2,089 7,992 7,056
Furniture and equipment expense 3,446 2,721 9,935 8,111
Deposit insurance 1 (194) 2 3,721
Other 14,262 11,589 39,787 34,780
----------- ----------- ----------- -----------
Total non-interest expense 43,964 37,566 127,781 113,491
----------- ----------- ----------- -----------
Income before income taxes 24,301 23,136 70,177 64,887
Provision for income taxes 6,354 6,261 18,524 16,716
----------- ----------- ----------- -----------
Net income $17,947 $16,875 $51,653 $48,171
=========== =========== =========== ===========
Net income per share $0.58 $0.55 $1.68 $1.56
Cash dividends declared per share $0.28 1/2 $0.25 $0.83 1/2 $0.75
Weighted average number of shares outstanding 30,793,784 30,893,446 30,777,499 30,968,881
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended
September 30,
-------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Operating activities
Net income $51,653 $48,171
Adjustments:
Provision for loan losses 4,800 4,362
Provision for depreciation, amortization and accretion 2,779 5,592
Amortization of goodwill 1,392 1,218
Deferred income taxes 1,531 52
Securities gains, net (1,102) (2,094)
(Increase) decrease in interest receivable (854) 3,104
Increase in accrued expenses and taxes 11,272 20,641
Amortization of mortgage servicing rights 1,152 1,252
Gain on sale of loans held for sale (971) (1,592)
Sale of loans held for sale 934,160 503,063
Loans originated for sale (1,004,807) (520,799)
Purchase of mortgage loans held for sale (30,441) (17,488)
Other, net (7,899) (3,135)
------------- -----------
Net cash provided (used) by operating activities (37,335) 42,347
------------- -----------
Investing activities
Proceeds from sales of investment securities available-for-sale 94,360 196,163
Proceeds from maturities of investment securities available-for-sale 562,107 267,924
Purchases of investment securities available-for-sale (969,499) (322,262)
Net increase in assets held for sale, other than loans held for sale (21,017) (5,228)
Net increase in loans (267,054) (150,123)
Sale of residential mortgage and other consumer loans 39,507
Net purchases of premises and equipment (9,512) (7,918)
------------- -----------
Net cash provided (used) by investing activities (610,615) 18,063
------------- -----------
Financing activities
Net increase in deposit accounts 129,508 318,872
Net increase (decrease) in short-term borrowings 530,654 (318,135)
Decrease in long-term debt (278) (51,075)
Issuance of common stock and treasury stock 5,590 5,088
Acquisition of treasury stock (8,455) (12,277)
Cash dividends paid (24,935) (23,158)
------------- -----------
Net cash provided (used) by financing activities 632,084 (80,685)
------------- -----------
Decrease in cash and cash equivalents (15,866) (20,275)
Cash and cash equivalents at beginning of period 219,335 210,911
------------- -----------
Cash and cash equivalents at end of period $203,469 $190,636
============= ===========
Total interest paid $154,288 $129,707
Total income taxes paid 17,804 9,947
Schedule of non-cash investing and financing activities:
Loans charged off 6,745 6,193
Net loan transfers to other real estate owned 2,565 929
Conversion of convertible subordinated debentures 286 258
Securitization of mortgage loans 16,033 36,991
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Note 1 - Accounting Policies
The consolidated financial statements include the accounts of Dauphin Deposit
Corporation and subsidiaries (Dauphin), including its banking subsidiary,
Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania,
Farmers Bank and Valleybank Divisions. All material intercompany balances and
transactions have been eliminated in consolidation.
The information contained in the financial statements is unaudited. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results of interim periods have been
made. Operating results for the nine month period ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
The accounting policies followed in the presentation of interim financial
results are the same as those followed on an annual basis, with the exception of
the accounting policies related to the impairment of long lived assets and
stock-based compensation which are discussed in Dauphin's Form 10-Q for the
quarter ended March 31, 1996. These policies are presented on pages 36 through
40 of the 1995 Securities and Exchange Commission Form 10-K included in the
Annual Report to Stockholders.
Note 2 - Investment Securities
A summary of the amortized cost and fair value of investment securities at
September 30, 1996, December 31, 1995 and September 30, 1995 is as follows:
<TABLE>
(Dollars in thousands)
September 30, 1996 December 31, 1995 September 30, 1995
----------------------- -------------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $824,102 $813,212 $804,086 $810,363 $605,153 $607,544
Obligations of states and political
subdivisions 335,742 344,072 287,697 302,702 301,689 312,417
Debt securities issued by foreign governments 1,250 1,250 800 800 900 897
Corporate securities 23,907 24,005 22,736 23,087 48,102 48,367
Mortgage-backed securities 940,238 930,854 705,279 704,612 641,496 635,210
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities 2,125,239 2,113,393 1,820,598 1,841,564 1,597,340 1,604,435
Equity securities 55,169 55,227 19,272 19,305 19,272 19,269
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities $2,180,408 $2,168,620 $1,839,870 $1,860,869 $1,616,612 $1,623,704
========== ========== ========== ========== ========== ==========
</TABLE>
4
<PAGE>
Note 3 - Income Taxes
Income tax expense includes a provision for deferred taxes which are
related to income and expense items being recognized in one accounting period
for financial reporting purposes and another period for income tax reporting
purposes.
A reconciliation between the effective income tax rate and the statutory
rate follows:
<TABLE>
<CAPTION>
Percentage of pre-tax income
--------------------------------------------------------
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0% 35.0%
Tax exempt income (8.8) (8.3) (8.6) (9.4)
Other, net (0.1) 0.4 0.2
-------- -------- -------- --------
Effective income tax rate 26.1% 27.1% 26.4% 25.8%
======== ======== ======== ========
</TABLE>
Note 4 - Commitments and Contingent Liabilities
In the normal course of business, there are commitments and contingent
liabilities which are not presented in the accompanying financial statements.
The commitments and contingent liabilities include various guarantees,
commitments to extend credit and letters of credit. Dauphin does not anticipate
any material losses as a result of the commitments. The contingent liability at
September 30, 1996 represented by letters of credit issued to customers amounted
to approximately $246.1 million.
Note 5 - Litigation
Various legal actions and proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
resulting from such legal actions and proceedings will not be material to
Dauphin's financial condition or results of operations. Included among the
outstanding litigation is a class action law suit instituted by Dauphin in the
Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994,
seeking a declaratory judgement from the Court specifically permitting Dauphin
to discontinue an 18 month variable rate investment product carrying a minimum
interest rate of 10% for the 18 month term, which is held in certain individual
retirement accounts (IRA). The aggregate balance of the IRA accounts was
approximately $195.4 million at September 30, 1996. Dauphin's right to terminate
the variable rate investment product is in dispute and is being challenged by
the holders of the IRA accounts in question. Several days after the commencement
of trial in April, 1996, Dauphin and representatives of the class reached an
agreement in principle to settle the litigation and the trial was continued
pending negotiation of a settlement agreement. Dauphin and representatives of
the class filed a settlement agreement with the Court on May 13, 1996 which
would permit Dauphin to terminate the 18 month variable rate product as to all
class members on the effective date of the settlement and, in consideration, the
balances of those accounts would be automatically deposited in one of two new
certificates of deposit established by Dauphin for purposes of the settlement.
All class members were given the opportunity to file objections to the proposed
settlement or elect to be excluded from the class and the proposed settlement.
Approximately 89 of the 4,315 class members filed formal objections to the
settlement with the Court and 12 of the class members elected to opt out of the
settlement. A hearing was held before the Court on June 21, 1996 for the purpose
of obtaining the Court's approval of the settlement agreement. At the
5
<PAGE>
Note 5 - Litigation (continued)
hearing, counsel for Dauphin and counsel for the representatives of all class
members jointly moved for the Court's adoption of the settlement agreement and
made argument in favor thereof. The Court, by Order issued July 11, 1996, denied
the joint motion of Dauphin and the representatives of the class for settlement
of the class action in accordance with the terms and conditions of the
settlement agreement. Dauphin filed its Notice of Appeal from the trial Court's
Order denying the settlement to the Superior Court of Pennsylvania on August 9,
1996. It currently is anticipated that the Appeal will seek an Order of the
Superior Court reversing the trial Court's disapproval of the settlement
agreement or, in the alternative, otherwise providing the trial Court with
guidance which would result in the trial Court's approval of the settlement
agreement on remand or, directing decertification of the class. The Superior
Court must determine whether or not the trial Court abused its discretion in
rejecting the settlement agreement. The class representatives and counsel for
the class have informed Dauphin's counsel that they are withdrawing their
previous support for the joint settlement agreement and will vigorously oppose
Dauphin's Appeal to the Superior Court. Neither management nor counsel can
predict with any reasonable degree of certainty the outcome of the Appeal or
time frame within which the Superior Court will rule on the Appeal. If the
Appeal to the Superior Court is unsuccessful, management intends to vigorously
assert its right to terminate the 18 month variable rate investment product on
further appeal and at the trial court level. Dauphin has continued to date to
pay a 10% interest rate with regard to the 18 month variable rate investment
product.
6
