<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): May 21, 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
23.1 Consent of KPMG Peat Marwick, LLP.
99.1 Dauphin Deposit Corporation consolidated financial statements as of
and for the year ended December 31, 1996; 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 months ended March 31, 1997.
99.3 Unaudited pro forma consolidated statement of condition as of March
31, 1997, and unaudited statements of income for the year ended
December 31, 1996 and the three Month ended March 31, 1997; and
notes to unaudited consolidated pro forma financial statements.
<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: May 21, 1997 FIRST MARYLAND BANCORP
By: /s/ DAVID M. CRONIN
----------------------------------
David M. Cronin, Executive
Vice President and Treasurer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
23.1 Consent of KPMG Peat Marwick, LLP
99.1 Dauphin Deposit Corporation consolidated financial statements as
of and for the year ended December 31, 1996; 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 months ended March 31, 1997.
99.3 Unaudited pro forma consolidated statement of condition as of
March 31, 1997, and unaudited statements of income for the year
ended December 31, 1996 and the three months ended March 31,
1997; and notes to unaudited consolidated pro forma financial
statements.
<PAGE>
Exhibit 23.1
The Board of Directors
Dauphin Deposit Corporation
We consent to the incorporation by reference in the Registration Statement
(No. 333-22871) on Form S-4 of First Maryland Bancorp of our report dated
January 21, 1997, with respect to the consolidated balance sheets of Dauphin
Deposit Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996, which
report appears in the Form 8-K of First Maryland Bancorp dated May 21, 1997. Our
report dated January 21, 1997 contains an explanatory paragraph that states that
the Company changed its method of accounting for mortgage servicing rights and
long-lived assets 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 and No. 121, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of, on January 1, 1996.
KPMG PEAT MARWICK LLP
Harrisburg, Pennsylvania
May 21, 1997
<PAGE>
Exhibit 99.1
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 176,024 $ 218,785
----------- -----------
Short-term investments
Interest bearing deposits.......................... 1,494 8,523
Federal funds sold and securities purchased under
agreements to resell.............................. 15,200 3,050
Other short-term investments....................... 685
----------- -----------
Total short-term investments..................... 17,379 11,573
----------- -----------
Investment securities available-for-sale, at fair
value............................................... 2,170,207 1,860,869
Assets held for sale, primarily mortgage loans....... 207,798 87,782
Loans (net of unearned income)....................... 3,200,034 2,981,338
Allowance for loan losses............................ (42,885) (41,737)
----------- -----------
Total net loans.................................. 3,157,149 2,939,601
----------- -----------
Premises and equipment............................... 73,826 71,562
Other assets......................................... 145,303 107,177
----------- -----------
Total assets..................................... $ 5,947,686 $ 5,297,349
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing............................... $ 521,387 $ 518,004
Interest bearing................................... 3,507,183 3,431,532
----------- -----------
Total deposits................................... 4,028,570 3,949,536
Short-term borrowings................................ 1,111,630 678,161
Long-term debt....................................... 154,771 40,599
Accrued expenses and taxes........................... 82,270 82,450
----------- -----------
Total liabilities................................ 5,377,241 4,750,746
----------- -----------
Stockholders' equity
Preferred stock, $25 par value; 10,000,000 shares
authorized but unissued
Common stock, $5 par value; 200,000,000 shares
authorized, 32,641,614 issued of which 1,974,885
and 2,013,771 shares are held as treasury stock,
respectively...................................... 163,208 163,208
Additional paid-in capital......................... 11,084 11,103
Retained earnings.................................. 444,316 408,274
Unrealized gains on securities available-for-sale,
net of deferred taxes............................. 1,577 13,650
----------- -----------
620,185 596,235
Less: Treasury stock--at cost...................... (49,740) (49,632)
----------- -----------
Total stockholders' equity....................... 570,445 546,603
----------- -----------
Total liabilities and stockholders' equity....... $ 5,947,686 $ 5,297,349
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest income
Interest and fees on
loans and leases...... $252,975 $245,440 $207,648
Interest and dividends
on investment
securities
Taxable.............. 114,837 93,498 96,797
Exempt from federal
income taxes........ 17,786 17,997 23,602
Interest on deposits... 211 365 337
Interest on assets held
for sale.............. 12,050 5,589 2,120
Interest on federal
funds sold and other
short-term
investments........... 745 755 603
--------------- --------------- ---------------
Total interest
income.............. 398,604 363,644 331,107
--------------- --------------- ---------------
Interest expense
Interest on deposits
Savings deposits..... 28,193 32,218 36,675
Time deposits........ 96,481 87,949 62,072
Time deposits in
denominations of
$100,000 or more.... 36,240 27,335 15,140
--------------- --------------- ---------------
160,914 147,502 113,887
Interest on short-term
borrowings............ 51,937 35,880 32,056
Interest on long-term
debt.................. 3,269 4,549 6,698
--------------- --------------- ---------------
Total interest
expense............. 216,120 187,931 152,641
--------------- --------------- ---------------
Net interest income.. 182,484 175,713 178,466
Provision for loan
losses.................. 6,000 5,608 7,494
--------------- --------------- ---------------
Net interest income
after provision for
loan losses......... 176,484 170,105 170,972
--------------- --------------- ---------------
Non-interest income
Fiduciary activities... 19,426 16,807 16,363
Service charges on
deposit accounts...... 12,819 11,019 11,598
Other service charges
and fees.............. 14,472 12,554 11,272
Broker/dealer
commissions and fees.. 9,098 6,034 7,783
Mortgage banking....... 32,394 18,730 7,462
Securities gains, net.. 1,634 2,261 3,304
Other.................. 4,060 4,384 3,165
--------------- --------------- ---------------
Total non-interest
income.............. 93,903 71,789 60,947
--------------- --------------- ---------------
Non-interest expense
Salaries and employee
benefits.............. 95,680 81,268 72,556
Net occupancy expense.. 10,793 9,396 8,990
Furniture and equipment
expense............... 13,878 11,075 9,567
Deposit insurance...... 2 4,095 7,909
Other.................. 54,085 47,285 40,096
--------------- --------------- ---------------
Total non-interest
expense............. 174,438 153,119 139,118
--------------- --------------- ---------------
Income before income
taxes................... 95,949 88,775 92,801
Provision for income
taxes................... 25,177 23,210 22,762
--------------- --------------- ---------------
Net income............... $ 70,772 $ 65,565 $ 70,039
=============== =============== ===============
Net income per share..... $ 2.30 $ 2.12 $ 2.18
Cash dividends declared
per share............... $ 1.13 1/2 $ 1.01 1/2 $ .94
Weighted average number
of shares outstanding... 30,820,019 30,966,258 32,169,734
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
NET UNREALIZED
COMMON STOCK ADDITIONAL TREASURY STOCK GAIN (LOSS) ON TOTAL
------------------- PAID-IN RETAINED -------------------- SECURITIES STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT AVAILABLE-FOR-SALE EQUITY
---------- -------- ---------- -------- ---------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993................... 32,641,614 $163,208 $11,213 $333,774 (134,200) ($2,120) $ $506,075
Cumulative effect of
adoption of SFAS 115,
net of taxes........... 42,080 42,080
Net income.............. 70,039 70,039
Cash dividends
declared............... (29,892) (29,892)
Acquisition of treasury
stock.................. (1,744,500) (42,413) (42,413)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... 419 70,340 1,068 1,487
Sale of treasury stock
under the Stock Option
Plan of 1986........... (21) 24,409 317 296
Sale of treasury stock
under the Dividend
Reinvestment and Stock
Purchase Plan.......... (26) 60,606 1,539 1,513
Debentures converted to
common stock........... 37 26,898 395 432
Change in net unrealized
gain (loss) on
securities available-
for-sale, net of
taxes.................. (83,116) (83,116)
Tax benefit of stock
option transactions.... 148 148
---------- -------- ------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31,
1994................... 32,641,614 163,208 11,770 373,921 (1,696,447) (41,214) (41,036) 466,649
Net income.............. 65,565 65,565
Cash dividends
declared............... (31,212) (31,212)
Acquisition of treasury
stock.................. (630,000) (16,063) (16,063)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... (239) 68,429 1,664 1,425
Sale of treasury stock
under the Stock Option
Plan of 1986........... (998) 101,742 2,476 1,478
Sale of treasury stock
under the Dividend
Reinvestment and Stock
Purchase Plan.......... 115 126,446 3,110 3,225
Debentures converted to
common stock........... (137) 16,059 395 258
Change in net unrealized
gain (loss) on
securities available-
for-sale, net of
taxes.................. 54,686 54,686
Tax benefit of stock
option transactions.... 386 386
Impact of Performance
Share Agreements....... 206 206
---------- -------- ------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31,
1995................... 32,641,614 163,208 11,103 408,274 (2,013,771) (49,632) 13,650 546,603
Net income.............. 70,772 70,772
Cash dividends
declared............... (34,730) (34,730)
Acquisition of treasury
stock.................. (297,000) (8,455) (8,455)
Sale of treasury stock
to Employee Stock
Purchase Plan.......... (348) 85,920 2,137 1,789
Sale of treasury stock
under the Stock Option
Plan of 1986 and the
Stock Incentive Plan of
1995................... (766) 99,649 2,442 1,676
Sale of treasury stock
under the Dividend
Reinvestment and Stock
Purchase Plan.......... 494 117,009 2,930 3,424
Debentures converted to
common stock........... (303) 33,308 838 535
Change in net unrealized
gain (loss) on
securities available-
for-sale, net of
taxes.................. (12,073) (12,073)
Tax benefit of stock
option transactions.... 437 437
Impact of Performance
Share Agreements....... 467 467
---------- -------- ------- -------- ---------- -------- -------- --------
BALANCE, DECEMBER 31,
1996................... 32,641,614 $163,208 $11,084 $444,316 (1,974,885) $(49,740) $ 1,577 $570,445
========== ======== ======= ======== ========== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income................................ $ 70,772 $ 65,565 $ 70,039
Adjustments:
Provision for loan losses............... 6,000 5,608 7,494
Provision for depreciation, amortization
and accretion.......................... 6,633 11,316 11,867
Provision for deferred income taxes..... 3,165 4,133 3,994
Securities gains, net................... (1,634) (2,261) (3,304)
(Increase) decrease in interest
receivable............................. (4,445) 1,325 (2,222)
Increase (decrease) in accrued expenses
and taxes.............................. 880 19,013 (3,064)
Gain on sale of loans held for sale..... (2,427) (5,961) (1,473)
Net increase in assets held for sale.... (117,589) (35,599) (294)
Other, net.............................. (46,803) (13,918) (14,339)
----------- --------- ---------
Net cash provided (used) by operating
activities........................... (85,448) 49,221 68,698
----------- --------- ---------
Investing activities
Proceeds from sales of investment
securities available-for-sale............ 96,879 252,613 201,395
Proceeds from maturities of investment
securities available-for-sale............ 657,471 356,977 480,030
Purchases of investment securities
available-for-sale....................... (1,043,171) (526,811) (481,357)
Net increase in loans..................... (236,734) (231,067) (330,366)
Sale of residential mortgage and other
consumer loans........................... 39,507 52,544
Net purchases of premises and equipment... (11,546) (12,139) (8,268)
Net proceeds from sale of subsidiary,
Farmers Savings Bank, FSB................ 797
Purchase of Eastern Mortgage Services,
Inc...................................... (21,038)
----------- --------- ---------
Net cash used for investing
activities........................... (537,101) (120,920) (106,263)
----------- --------- ---------
Financing activities
Net increase (decrease) in deposit
accounts................................. 79,034 434,652 (60,410)
Net increase (decrease) in short-term
borrowings............................... 433,469 (262,616) 224,869
Issuance of long-term debt................ 150,000
Repayments of long-term debt.............. (35,293) (51,097) (122)
Issuance of treasury stock................ 6,837 6,083 3,281
Acquisition of treasury stock............. (8,455) (16,063) (42,413)
Cash dividends paid....................... (33,654) (30,836) (29,024)
----------- --------- ---------
Net cash provided by financing
activities........................... 591,938 80,123 96,181
----------- --------- ---------
Increase (decrease) in cash and cash
equivalents.......................... (30,611) 8,424 58,616
Cash and cash equivalents at beginning of
period..................................... 219,335 210,911 152,295
----------- --------- ---------
Cash and cash equivalents at end of period.. $ 188,724 $ 219,335 $ 210,911
=========== ========= =========
Cash........................................ $ 176,024 $ 218,785 $ 202,911
Overnight federal funds sold................ 12,700 550
----------- --------- ---------
Total cash and cash equivalents at end of
period..................................... $ 188,724 $ 219,335 $ 202,911
=========== ========= =========
Total interest paid......................... $ 214,016 $ 182,478 $ 153,527
Total income taxes paid..................... 17,951 12,715 20,495
Schedule of non-cash investing and financing
activities:
Loans charged off......................... 9,485 8,176 9,400
Net loan transfers to other real estate
owned.................................... 3,073 2,508 4,563
Conversion of convertible subordinated
debentures............................... 535 258 432
Securitization of mortgage loans.......... 23,865 77,085
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies of
Dauphin Deposit Corporation and subsidiaries.
BUSINESS
Dauphin Deposit Corporation (Dauphin) is a bank holding company, incorporated
under the laws of the Commonwealth of Pennsylvania in 1974. Dauphin's wholly-
owned bank subsidiary is Dauphin Deposit Bank and Trust Company (the Bank),
through which Dauphin provides banking services. The Bank is engaged in the
commercial and retail banking and trust business. The Bank's mortgage banking
subsidiary, Eastern Mortgage Services, Inc. (Eastern Mortgage) is a full
service mortgage banking company which originates, services and sells first and
second residential mortgage loans of varying types primarily to the eastern
Pennsylvania and New Jersey mortgage markets. Dauphin's wholly-owned subsidiary
Hopper Soliday & Co., Inc. (Hopper Soliday) is a Delaware corporation which
engages in municipal finance, institutional sales, financial advisory and other
general securities businesses permitted for bank holding companies and their
non-bank subsidiaries.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. The material estimates that are
particularly susceptible to significant change in the near-term relate to the
valuation of assets held for sale, the determination of the allowance for loan
losses, and the valuation of mortgage servicing rights.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dauphin and
subsidiaries, including its principal subsidiary, the Bank, which includes the
Bank of Pennsylvania, Farmers Bank and Valleybank Divisions. All material
intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investments are to be classified in one of three categories and accounted for
as follows: 1) debt securities Dauphin has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at
amortized cost; 2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings; and 3) debt and equity securities not classified as
either held-to-maturity or trading securities are classified as available-for-
sale securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of deferred taxes. Management has determined that the entire
investment securities portfolio is classified as available-for-sale.
Premiums and discounts are amortized and accreted over the term of the
related securities using a method that approximates the interest method,
adjusted for prepayments. Realized gains or losses on the sale of investment
securities (determined by the specific identification method) are shown
separately in the
5
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
consolidated statements of income. A decline in the fair value of any
investment below cost that is deemed other than temporary results in a
reduction of the carrying amount to fair value through a charge to income.
Dividend and interest income are recognized when earned.
ASSETS HELD FOR SALE
Assets held for sale consist of the securities inventory of Hopper Soliday
and the loans held for sale inventory of Eastern Mortgage. The securities
inventory is recorded at current quoted fair value. The loans held for sale are
carried at the lower of aggregate cost or estimated fair value with unrealized
losses, if any, recognized through a provision included in non-interest income
from mortgage banking. Gains and losses on the sale of loans held for sale are
determined using the specific identification method.
LOANS
Loans are carried at the principal amount outstanding, net of unearned
income. Interest income is accounted for on an accrual basis. Interest income
is not accrued when, in the opinion of management, its collectibility is
doubtful. When a loan is designated as non-accrual, any accrued interest
receivable is generally charged against current earnings. Non-accruing loans
are returned to accruing status after at least six consecutive months of
current performance. Lease income is recorded using the finance method which
provides for a level rate of return on the investment outstanding.
Generally, all non-accrual loans are deemed to be impaired. In addition,
management, considering current information and events regarding the borrowers
ability to repay their obligations, considers a loan to be impaired when it is
probable that Dauphin will be unable to collect all amounts due according to
the contractual terms of the loan agreement. In evaluating whether a loan is
impaired, management considers not only the amount that Dauphin expects to
collect but also the timing of collection. Generally, if a delay in payment is
insignificant (for example, less than 90 days), a loan is not deemed to be
impaired.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. Dauphin excludes smaller balance,
homogeneous loans (for example, primarily consumer and residential mortgages)
from the evaluation for impairment. Impairment losses are included in the
allowance for loan losses. Impaired loans are charged off when management
believes that the ultimate collectibility of a loan is not likely.
Income for impaired loans that are on non-accrual status is recognized using
the cash basis, while interest on impaired loans that are still accruing is
recognized using the accrual method.
Loan fees and costs of loan origination are deferred and recognized over the
life of the loan as a component of interest income, adjusted for prepayments.
The amortization of deferred fees and costs is discontinued on non-accrual
loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve to absorb losses on
loans which may become uncollectible. The provision for loan losses is
management's estimate of the amount required to establish a reserve adequate to
reflect risks in the loan portfolio of the Bank. Loan losses are charged
directly against the allowance for loan losses, and recoveries on previously
charged off loans are added to the allowance.
6
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Premises and equipment under capitalized leases are recorded at
the lower of the present value of minimum lease payments or the fair value of
the leased assets determined at the inception of the lease term. Depreciation
charged to operating expense, including amounts applicable to capitalized
leases, is computed on the straight-line method for financial reporting and the
straight-line and accelerated methods for income tax purposes. Leasehold
improvements are capitalized and amortized over the lives of the respective
leases or the estimated useful life of the leasehold improvement, whichever is
shorter. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in income for the period. Maintenance, repairs and minor
improvements are charged to expense as incurred; significant renewals and
betterments are capitalized.
OTHER ASSETS
Goodwill is the excess of the purchase price over the fair value of net
assets of entities acquired through business combinations that are recorded
using the purchase method of accounting. Included in other assets is $13.7
million and $15.5 million of goodwill at December 31, 1996 and 1995,
respectively. Goodwill is being amortized using the straight-line method over
periods not exceeding 15 years.
On January 1, 1996, Dauphin adopted the provisions of Statement of Financial
Accountings Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption did not have a material effect on Dauphin's
consolidated financial position or results of operations.
Excess servicing fees are computed as the present value of the difference
between the estimated future net revenues and normal servicing revenues as
established by the federally sponsored secondary market makers. Upon the sale
of mortgage loans, excess servicing fees are deferred and amortized over the
estimated life of the related mortgages.
Effective January 1, 1995, Dauphin adopted the provisions of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amended
Statement 65 to require an institution to recognize as separate assets the
rights to service mortgage loans for others when a mortgage loan is sold or
securitized and servicing rights retained. When capitalizing mortgage servicing
rights, Dauphin allocates the total cost of the mortgage loans (the recorded
investment in the mortgage loans including net deferred fees or costs and any
purchase premium or discount) to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Such fair value is primarily based on observable market prices. Mortgage
servicing rights (including purchased mortgage servicing) are amortized in
proportion to, and over the period of, estimated net servicing revenue based on
management's best estimate of remaining loan lives.
7
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin measures the impairment of servicing rights based on the difference
between the carrying amount of the servicing rights and their current fair
value. Impairment of servicing rights is recognized through a valuation
allowance. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value. For the purpose
of evaluating and measuring impairment of capitalized mortgage servicing
rights, Dauphin stratifies those rights based on the predominant risk
characteristics of the underlying loans. Dauphin primarily stratifies mortgage
servicing rights by loan type (for example, conventional or government
guaranteed and adjustable-rate or fixed-rate mortgage loans) and interest rate.
Valuation techniques for measuring fair value incorporate assumptions that
market participants use in estimating future servicing income and expense,
including assumptions about prepayment, default and interest rates.
DERIVATIVES
Dauphin's mortgage subsidiary, Eastern Mortgage, has limited involvement with
derivative financial instruments. Derivatives are primarily used to manage
well-defined interest rate risks, as described in Note 17.
TRUST ASSETS
Assets held by the Bank in a fiduciary or agency capacity are not included in
the consolidated financial statements since such assets are not assets of the
Bank. Income from fiduciary activities is recorded on an accrual basis.
BENEFIT PLANS
Pension plan costs for Dauphin's defined benefit plans are accounted for
using the projected unit credit method for measuring net periodic pension cost
over the employees' service lives.
Dauphin's cost of retiree health care and other postretirement benefits are
accounted for in accordance with the provisions of Statement of Financial
Acccounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions".
Dauphin provides benefits to former or inactive employees after employment
but before retirement. These costs are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits".
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE
Net income per share is computed based upon the weighted average number of
common shares outstanding and dilutive common equivalent shares from stock
options and performance shares using the treasury stock method. The difference
between primary and fully diluted earnings per share is not significant in any
year.
8
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, Dauphin considers
cash and due from banks and overnight federal funds sold to be cash and cash
equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
with current year classifications.
2--MERGERS AND ACQUISITIONS
ALLIED IRISH BANKS, P.L.C.
On January 21, 1997, the Board of Directors of Dauphin approved, and Dauphin
entered into, an Agreement and Plan of Merger (Merger Agreement) with Allied
Irish Banks, p.l.c. (AIB) and its United States banking subsidiary, First
Maryland Bancorp (FMB). The Merger Agreement provides for the merger of Dauphin
into FMB, with FMB as the surviving corporation (Merger).
In the Merger, shareholders of Dauphin will receive, in exchange for their
shares of Common Stock, either (i) $43 in cash (Per Share Cash Consideration)
or (ii) that number (Exchange Ratio) of AIB American Depository Shares (AIB
ADS) having a Closing Market Price (as defined below) equal to $43, provided,
that if the Closing Market Price of an AIB ADS is less than $37 per AIB ADS
then the Exchange Ratio will be fixed at 1.162 and if the Closing Price of an
AIB ADS is greater than $43 per AIB ADS then the Exchange Ratio will be fixed
at 1.000 (Per Share Stock Consideration). If the market price of an AIB ADS as
of a determination date shortly prior to closing is less than $32
(corresponding to a value of the Per Share Stock Consideration of $37.19), then
Dauphin has the right to terminate the Merger Agreement unless AIB adjusts the
Exchange Ratio such that the value of the Per Share Stock Consideration is not
less than $37.19.
AIB ADS are traded on the New York Stock Exchange under the symbol AIB. Each
AIB ADS represents six ordinary shares of AIB (AIB Ordinary Shares), which are
traded on the London and Irish stock exchanges, and may be converted into AIB
Ordinary Shares at any time.
The Closing Market Price means the average closing price on the New York
Stock Exchange for the ten New York Stock Exchange trading days ending on the
fifth business day prior to the closing date of the Merger.
Shareholders of Dauphin will be entitled to elect whether to receive the Per
Share Cash Consideration or the Per Share Stock Consideration for their shares,
provided that not less than 51% of the outstanding shares of Dauphin's Common
Stock will be exchanged for the Per Share Stock Consideration. If elections to
receive the Per Share Stock Consideration, combined with shares as to which no
election is made, constitute less than 51% of the outstanding shares of
Dauphin's Common Stock, then shares as to which an election has been made to
receive the Per Share Cash Consideration will be selected at random to be
exchanged for the Per Share Stock Consideration notwithstanding such election.
In connection with the Merger Agreement, Dauphin has entered into a Stock
Option Agreement in favor of AIB, granting AIB an option to acquire 6,112,088
shares of Dauphin's Common Stock (19.9% of the outstanding shares) at an
exercise price of $33 3/16 per share.
9
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The Merger is subject to regulatory approvals in the United States and
Ireland, and will require the approval of the shareholders of Dauphin and AIB.
It is anticipated that the Merger will be consummated in the third quarter of
1997. The merger is not expected to have a material impact on the realizability
of Dauphin's assets and liabilities.
EASTERN MORTGAGE
On July 1, 1994, Dauphin acquired Eastern Mortgage, a mortgage banking
company headquartered in Trevose, Pennsylvania, for approximately $21.0 million
in cash pursuant to a definitive agreement signed in May 1994. The acquisition
was accounted for using the purchase method of accounting. Therefore, the
results of operations of Eastern Mortgage from the date of acquisition are
included with the results of Dauphin. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $12.5 million has been
recorded as goodwill and is being amortized on a straight-line basis over 15
years.
3--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS AND INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these required reserve balances at December
31, 1996 and 1995 was approximately $41,306,000 and $80,353,000, respectively.
The Bank is required to maintain an investment in Federal Home Bank of
Pittsburgh stock of $15,559,200 which is carried at original cost and included
with equity securities.
4--INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of investment securities available-for-sale
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and other
U.S. government agencies and
corporations..................... $ 799,155 $ 1,154 $ (7,151) $ 793,158
Obligations of states and
political subdivisions........... 345,020 12,026 (1,517) 355,529
Debt securities issued by foreign
governments...................... 1,000 1,000
Corporate securities.............. 11,515 82 (1) 11,596
Mortgage-backed securities........ 955,421 6,556 (9,700) 952,277
---------- ------- -------- ----------
Total debt securities........... 2,112,111 19,818 (18,369) 2,113,560
Equity securities................. 55,669 978 56,647
---------- ------- -------- ----------
Total investment securities
available-for-sale............. $2,167,780 $20,796 $(18,369) $2,170,207
========== ======= ======== ==========
</TABLE>
10
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1995
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and other
U.S. government agencies and
corporations..................... $ 804,086 $ 6,413 $ (136) $ 810,363
Obligations of states and
political subdivisions........... 287,697 15,639 (634) 302,702
Debt securities issued by foreign
governments...................... 800 800
Corporate securities.............. 22,736 351 23,087
Mortgage-backed securities........ 705,279 7,215 (7,882) 704,612
---------- ------- ------- ----------
Total debt securities........... 1,820,598 29,618 (8,652) 1,841,564
Equity securities................. 19,272 33 19,305
---------- ------- ------- ----------
Total investment securities
available-for-sale............. $1,839,870 $29,651 $(8,652) $1,860,869
========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
---------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................. $ 194,540 $ 195,716
Due after one year through five years............... 670,439 667,467
Due after five years through ten years.............. 168,253 171,740
Due after ten years................................. 123,458 126,360
---------- ----------
1,156,690 1,161,283
Mortgage-backed securities.......................... 955,421 952,277
---------- ----------
Total debt securities............................. $2,112,111 $2,113,560
========== ==========
</TABLE>
Gains and losses from sales of investment securities available-for-sale are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Debt securities
Gross gains....................................... $1,670 $3,496 $3,366
Gross losses...................................... (43) (1,235) (1,007)
------ ------ ------
Total debt securities........................... 1,627 2,261 2,359
Equity securities, net.............................. 7 945
------ ------ ------
Total securities gains.......................... $1,634 $2,261 $3,304
====== ====== ======
</TABLE>
11
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Proceeds from sales of investment securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Debt securities.................................... $96,481 $252,613 $199,083
Equity securities.................................. 398 2,312
------- -------- --------
Total proceeds................................... $96,879 $252,613 $201,395
======= ======== ========
</TABLE>
Securities with a carrying value of $1,526,658,000 at December 31, 1996 and
$1,053,541,000 at December 31, 1995 are pledged to secure public deposits and
for other purposes as provided by law.
5--LOANS
The loan portfolio, net of unearned income, at December 31, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------- ----------
<S> <C> <C>
Commercial, financial and agricultural:
Commercial secured by real estate................ $ 732,953 $ 640,670
Agricultural..................................... 36,290 36,415
Other............................................ 795,202 719,137
Real estate, construction.......................... 114,234 97,444
Real estate, residential........................... 391,105 446,059
Consumer:
Home equity...................................... 451,742 385,194
Installment and credit card...................... 481,073 507,425
Lease financing.................................... 198,850 150,943
Unearned income.................................... (1,415) (1,949)
---------- ----------
Total loans.................................... $3,200,034 $2,981,338
========== ==========
</TABLE>
Included within the loan portfolio are loans on which the Bank has ceased the
accrual of interest and restructured loans. Such loans amounted to $16,154,000
and $12,103,000 at December 31, 1996 and 1995, respectively. If interest income
had been recorded on all such loans outstanding during the years 1996, 1995 and
1994, interest income would have been increased as shown in the following
table:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
---- ---- ------
<S> <C> <C> <C>
Interest income which would have been recorded under
original terms........................................ $759 $743 $1,187
Interest income recorded during the period............. 326 395 477
---- ---- ------
Net impact on interest income.......................... $433 $348 $ 710
==== ==== ======
</TABLE>
On December 31, 1996 and 1995 the balance of impaired loans was $12.1 million
and $11.7 million, respectively. In 1996, impaired loans of $10.5 million have
a related allowance for loan losses of $4.7 million and the remaining impaired
loans of $1.6 million have no related allowance for loan losses. In 1995,
impaired loans of $8.2 million have a related allowance for loan losses of $3.8
million and the remaining impaired loans of $3.5 million have no related
allowance for loan losses. The average balance of impaired loans for 1996 and
1995 was $13.3 million and $8.4 million and the interest recognized for the
year was $1.3 million and $.7 million,
12
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
respectively. The interest income includes $1.0 million and $.4 million,
respectively, that was recorded on the cash basis.
The Bank does not have any significant commitments to lend additional funds
on non-accrual, restructured or impaired loans at December 31, 1996.
The Bank has granted loans to officers, directors and their associates.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans, which excludes
aggregate loans totaling less than $60,000 to any one related party, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance--January 1, 1996.................................... $ 119,393
New loans................................................... 219,352
Repayments.................................................. (217,461)
---------
Balance--December 31, 1996.................................. $ 121,284
=========
</TABLE>
6--ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year........................ $41,737 $40,216 $39,182
Allowance of subsidiary sold.................... (101)
Provision charged to operations................. 6,000 5,608 7,494
Recoveries on loans charged off................. 4,633 4,089 3,041
------- ------- -------
52,370 49,913 49,616
Loans charged off............................... 9,485 8,176 9,400
------- ------- -------
Balance, end of year.............................. $42,885 $41,737 $40,216
======= ======= =======
</TABLE>
7--PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
ESTIMATED ------------------
USEFUL LIFE 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Land................................... $ 10,200 $ 10,352
Premises............................... 5 to 40 years 77,171 75,659
Leasehold improvements................. 2 to 40 years 4,080 2,476
Equipment.............................. 3 to 10 years 55,607 55,753
-------- --------
147,058 144,240
Accumulated depreciation and
amortization.......................... (73,232) (72,678)
-------- --------
Total.............................. $ 73,826 $ 71,562
======== ========
</TABLE>
Depreciation and amortization amounted to $9,205,000 for 1996, $7,665,000 for
1995 and $6,834,000 for 1994.
13
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
8--MORTGAGE BANKING
Mortgage loans serviced for others are not included in the consolidated
balance sheets. The outstanding balance of these loans at year-end and a
breakdown of mortgage banking income during the year are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Total loans serviced for others at
year-end.............................. $1,400,722 $1,283,435 $1,015,745
========== ========== ==========
Gain on sale of loans.................. $ 2,116 $ 1,946 $ 1,757
Other origination income............... 7,029 5,989 2,841
Mortgage servicing fees, net........... 21,993 9,749 1,241
Gain on sale of servicing.............. 1,256 1,046 1,623
---------- ---------- ----------
Total mortgage banking income........ $ 32,394 $ 18,730 $ 7,462
========== ========== ==========
</TABLE>
An analysis of the activity of excess, purchased, and originated mortgage
servicing rights for the years ended December 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
EXCESS PURCHASED ORIGINATED
------ --------- ----------
<S> <C> <C> <C>
Balance--January 1, 1994...................... $1,607 $ $
Additions..................................... 1,434 8,547
Amortization.................................. (588) (503)
------ ------ -------
Balance--December 31, 1994.................... 2,453 8,044
Additions..................................... 546 7,169
Amortization.................................. (911) (1,641) (495)
------ ------ -------
Balance--December 31, 1995.................... 2,088 6,403 6,674
Additions..................................... 435 18,233
Sales......................................... (3,822) (12,169)
Amortization.................................. (599) (630) (899)
------ ------ -------
Balance--December 31, 1996.................... $1,489 $2,386 $11,839
====== ====== =======
</TABLE>
The fair value of purchased and originated servicing rights was $14.7 million
at December 31, 1996. As of and for the year ended December 31, 1996, there was
no valuation allowance for purchased and originated servicing rights.
9--DEPOSITS
A summary of deposits at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------- ----------
<S> <C> <C>
Non-interest bearing deposits......................... $ 521,387 $ 518,004
Interest bearing demand deposits...................... 504,506 492,079
Savings deposits...................................... 399,008 412,185
Money market deposit accounts......................... 378,286 475,815
Time deposits......................................... 1,656,098 1,592,379
Time deposits of $100,000 or more..................... 569,285 459,074
---------- ----------
Total............................................... $4,028,570 $3,949,536
========== ==========
</TABLE>
14
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Maturities of time deposits for each of the next five years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997.......................................................... $1,450,510
1998.......................................................... 481,482
1999.......................................................... 109,658
2000.......................................................... 45,401
2001.......................................................... 95,613
</TABLE>
10--SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings generally mature within one to ninety days from the
transaction date.
A summary of aggregate short-term borrowings is as follows for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Overnight federal funds purchased.......... $ 522,650 $266,370 $438,490
Term federal funds purchased............... 75,000 260,000
Eurodollars purchased...................... 1,672
Federal Home Loan Bank borrowings.......... 149,000
Securities sold under agreements to
repurchase................................ 447,581 233,830 196,021
U.S. Treasury tax and loan notes........... 66,399 27,289 46,266
---------- -------- --------
Total short-term borrowings.............. $1,111,630 $678,161 $940,777
========== ======== ========
Average interest rate at year-end.......... 5.86% 5.33% 5.88%
Maximum amount outstanding at any month-
end....................................... $1,219,758 $958,804 $940,777
Average amount outstanding................. $ 998,730 $646,537 $778,906
Weighted average interest rate............. 5.20% 5.55% 4.12%
</TABLE>
The securities that serve as collateral for the securities sold under
agreements to repurchase are under Dauphin's control.
The Bank has approved federal funds lines of credit that amounted to
approximately $1,852,000,000 at December 31, 1996.
15
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
11--LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
-------- -------
<S> <C> <C>
Dauphin Deposit Corporation
8.70% Senior Notes due 1996.............................. $ $35,000
9% Convertible Subordinated Debentures due June 1999,
convertible into common stock at $16.06 per share....... 4,420 4,955
Variable rate mortgage (collateralized by premises)...... 235
Dauphin Deposit Bank and Trust Company
Advance from The Federal Home Loan Bank of Pittsburgh.... 150,000
-------- -------
154,420 40,190
Obligations under capitalized lease....................... 351 409
-------- -------
Total................................................... $154,771 $40,599
======== =======
</TABLE>
The borrowing of $150,000,000 is a five-year, 4.92% fixed-rate advance in
which the Federal Home Loan Bank of Pittsburgh has the option to convert to a
LIBOR adjustable-rate advance at three-month LIBOR plus three basis points
after the first three months, or quarterly thereafter. The Bank has the option
to accept the LIBOR funding or put the funds back to the Federal Home Loan Bank
of Pittsburgh without penalty.
Aggregate long-term debt maturities, for each of the next five years are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997.......................................................... $ 68
1998.......................................................... 44
1999.......................................................... 4,458
2000.......................................................... 44
2001.......................................................... 150,050
</TABLE>
12--REGULATORY MATTERS
Dauphin and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on Dauphin's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Dauphin and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. Dauphin's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Dauphin and the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes, as of December 31, 1996,
that Dauphin and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent notifications from the Federal
Reserve categorized Dauphin and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
16
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
well capitalized Dauphin and the Bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since those notifications that management believes
have changed Dauphin's or the Bank's category.
Dauphin's and the Bank's actual capital amounts and ratios are also presented
below. There was no deduction from capital for interest rate risk for Dauphin
or the Bank.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ---------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Dauphin............... $599,811 14.03% $ 328,424 greater than $ 410,530 greater than
or equal to 8.0% or equal to 10.0%
The Bank.............. 518,925 12.82% 323,945 greater than 404,931 greater than
or equal to 8.0% or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Dauphin............... 555,158 13.25% 164,212 greater than 246,318 greater than
or equal to 4.0% or equal to 6.0%
The Bank.............. 476,040 11.76% 161,972 greater than 242,958 greater than
or equal to 4.0% or equal to 6.0%
Tier 1 Capital (to Av-
erage Assets):
Dauphin............... 555,158 9.47% 234,460 greater than 293,075 greater than
or equal to 4.0% or equal to 5.0%
The Bank.............. 476,040 8.20% 232,213 greater than 290,267 greater than
or equal to 4.0% or equal to 5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets):
Dauphin............... $537,012 14.87% $ 288,881 greater than $ 361,101 greater than
or equal to 8.0% or equal to 10.0%
The Bank.............. 515,440 14.40% 286,443 greater than 358,054 greater than
or equal to 8.0% or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Dauphin............... 505,033 13.99% 144,440 greater than 216,661 greater than
or equal to 4.0% or equal to 6.0%
The Bank.............. 473,703 13.23% 143,221 greater than 214,832 greater than
or equal to 4.0% or equal to 6.0%
Tier 1 Capital (to Av-
erage Assets):
Dauphin............... 505,033 10.00% 202,004 greater than 252,505 greater than
or equal to 4.0% or equal to 5.0%
The Bank.............. 473,703 9.49% 199,653 greater than 249,566 greater than
or equal to 4.0% or equal to 5.0%
</TABLE>
Certain restrictions exist regarding the ability of the subsidiaries to
transfer funds to Dauphin in the form of cash dividends. The Bank may not pay
dividends to Dauphin, which would allow these risk-based capital ratios to fall
below the minimum capital requirements. Under these policies and subject to the
restrictions applicable to the Bank, the Bank could declare, without prior
regulatory approval, aggregate dividends of $2.0 million, plus net profits for
1997.
13--INCOME TAXES
The provision for income taxes, consisting primarily of Federal income taxes,
for the years 1996, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current taxes........................................ $22,012 $19,077 $18,768
Deferred taxes....................................... 3,165 4,133 3,994
------- ------- -------
Total.............................................. $25,177 $23,210 $22,762
======= ======= =======
</TABLE>
17
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation between the effective income tax rate and the statutory rate
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory Federal income tax rate......................... 35.0% 35.0% 35.0%
Tax exempt income......................................... (8.5) (8.9) (10.5)
Other, net................................................ (.3)
---- ---- -----
Effective income tax rate................................. 26.2% 26.1% 24.5%
==== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Gross unrealized losses on investment securities
available-for-sale.............................. $ 6,429 $ 3,029
Allowance for loan losses........................ 14,882 15,322
Employee benefit programs........................ 3,365 2,443
Other............................................ 972 1,031
-------- --------
Total gross deferred tax assets................ 25,648 21,825
-------- --------
Deferred tax liabilities:
Gross unrealized gains on investment securities
available-for-sale.............................. (7,279) (10,378)
Depreciation..................................... (3,144) (3,070)
Lease financing transactions..................... (20,669) (14,610)
Prepaid pension.................................. (1,255) (1,126)
Mortgage servicing rights........................ (6,068) (2,959)
Prepaid expenses................................. (1,262) (894)
Other............................................ (1,812) (1,464)
-------- --------
Total gross deferred tax liabilities........... (41,489) (34,501)
-------- --------
Net deferred tax asset (liability)............. $(15,841) $(12,676)
======== ========
</TABLE>
Included in the table above is the recognition of certain temporary
differences for which no deferred tax expense or benefit was recognized in the
consolidated statements of income. Such items include unrealized gains and
losses on certain investments in debt and equity securities and book and tax
basis differences relating to business combinations accounted for under the
purchase method of accounting.
Management is of the opinion that it is more likely than not that the
deferred tax asset of $25,648,000 will be realized since Dauphin has had a long
history of earnings and has carryback potential greater than the deferred tax
asset. Management is not aware of any evidence that would preclude Dauphin from
ultimately realizing this asset.
18
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
14--BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. The Plan's benefit formulas generally base
payments to retired employees upon their length of service and a percentage of
qualifying compensation during the final years of employment. Dauphin's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future.
The following table sets forth the pension plan's funded status and amounts
recognized in Dauphin's consolidated financial statements at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................. $37,573 $43,235
Non-vested............................................. 7,337 1,811
------- -------
Accumulated benefit obligation....................... 44,910 45,046
Effects of future compensation levels.................... 7,622 9,164
------- -------
Projected benefit obligation............................. 52,532 54,210
Plan assets at fair value................................ 69,219 63,532
------- -------
Excess of plan assets over the projected benefit
obligation.............................................. 16,687 9,322
Unrecognized net asset being amortized over 15 years..... (2,954) (3,664)
Unrecognized prior service cost.......................... 100 275
Unrecognized gain........................................ (9,065) (1,620)
------- -------
Prepaid pension cost included in the consolidated
financial statements.................................... $ 4,768 $ 4,313
======= =======
</TABLE>
The assumptions used in determining the actuarial present value of the
projected benefit obligation and the expected rate of return on plan assets are
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected return on plan assets................................... 8.50% 8.50%
Discount rate.................................................... 7.50 7.00
Rate of increase in future compensation levels................... 5.00 4.50
</TABLE>
Net pension expense (credit) for 1996, 1995 and 1994 was comprised of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Service cost.................................... $ 1,920 $ 1,568 $ 1,812
Interest cost on projected benefit obligation... 3,815 3,648 3,312
Return on plan assets........................... (8,369) (10,989) (402)
Net amortization and deferral................... 2,529 5,791 (4,623)
------- -------- -------
Net pension expense (credit).................. $ (105) $ 18 $ 99
======= ======== =======
</TABLE>
Plan assets are primarily invested in listed stocks (including 107,000 shares
of Dauphin at December 31, 1996 and 1995) and U.S. Treasury and federal agency
securities.
19
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin provides substantially all employees with postretirement benefits
other than pensions, which include health and life insurance. These
postretirement benefits other than pensions are currently not funded. The
status of the plan at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees.............................................. $ 9,381 $ 9,975
Fully eligible active plan participants............... 440 633
Other active plan participants........................ 4,761 3,991
------- -------
14,582 14,599
Unrecognized transition liability being amortized over
20 years............................................... (8,477) (9,042)
Unrecognized prior service cost......................... (650) (757)
Unrecognized net loss................................... 1,851 1,093
------- -------
Accrued postretirement obligation....................... $ 7,306 $ 5,893
======= =======
</TABLE>
The assumptions used in determining the actuarial present value of the
accumulated postretirement benefit obligation are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rate.................................................... 7.50% 7.00%
Rate of increase in future compensation levels................... 5.00 4.50
</TABLE>
The cost for postretirement benefits other than pensions for 1996, 1995 and
1994 consisted of the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost......................................... $ 504 $ 348 $ 506
Interest cost on accumulated postretirement benefit
obligation.......................................... 1,035 989 1,313
Amortization of transition obligation................ 565 565 565
Amortization of past service cost.................... 65 65 65
Net amortization and deferral........................ (89) 174
------ ------ ------
Net postretirement benefit cost..................... $2,169 $1,878 $2,623
====== ====== ======
</TABLE>
The assumed postretirement health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 16 1/2% in 1992, the year of
adoption, decreasing to an ultimate rate of 5 1/2% in 2005 (10% at December 31,
1996) and thereafter over the projected payout period of benefits.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a one-percentage-point increase in the assumed
health care cost trend would increase the accumulated postretirement benefit
obligation by $1,615,000 at December 31, 1996 and increase the aggregate of the
service and interest cost components by $209,000 for the year ended December
31, 1996.
Dauphin offers a savings plan for all eligible employees. Under the plan,
Dauphin contributes 25% of the participants' contribution which cannot exceed
10% of their salaries. Participants' contributions are at all times fully
vested, and Dauphin's contributions become fully vested with two years of
service. Contributions to the plan amounted to $670,000, $581,000 and $563,000
during 1996, 1995 and 1994, respectively.
20
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
15--STOCK-BASED COMPENSATION PLANS
At December 31, 1996 Dauphin had four stock-based compensation plans, which
are described below. Dauphin applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for the stock option plans or the employee stock
purchase plan. The compensation cost that has been charged against income for
the Performance Share Agreements was $.9 million for 1996 and $.4 million for
1995. Had compensation cost for Dauphin's stock-based compensation plans been
determined in accordance with the fair value method of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", Dauphin's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
------------------ ------------------
<S> <C> <C>
Net income:
As reported......................... $ 70,772 $ 65,565
Pro forma........................... $ 70,257 $ 65,406
Primary earnings per share:
As reported......................... $ 2.30 $ 2.12
Pro forma........................... $ 2.28 $ 2.11
</TABLE>
The effects of applying SFAS 123 for 1996 and 1995 are not indicative of
future amounts, until SFAS 123 has been applied to all outstanding non-vested
awards.
Employee Stock Purchase Plan
Under the employee stock purchase plan, all eligible employees may purchase
shares of Dauphin's common stock through payroll deductions (limited to an
amount aggregating 10% of annual base pay). The purchase price, established 30
days prior to the offering date, is not less than 85% or more than 100% of the
average market price on the offering date or exercise date, whichever is lower.
2,500,000 shares of common stock have been authorized to be offered under the
plan, of which 812,894 shares have been issued. Because of a difference between
the plan offering date, and Dauphin's year-end, no shares were under option at
December 31, 1996.
Under SFAS 123, compensation cost is recognized for the fair value of the
employees' purchase rights, which was estimated using the Black-Scholes model
with the following assumptions for 1996 and 1995, respectively: dividend yield
of 3.96% and 4.08%; an expected life of one year for both years; expected
volatility of 23.01% and 17.79%; and risk free interest rates of 5.74% and
5.61%. The fair value of those purchase rights granted in 1996 and 1995 were
$6.64 and $5.23, respectively.
Stock Option Plans
During 1987, the shareholders approved the adoption of the Stock Option Plan
of 1986 (1986 Plan). Under the 1986 Plan, Dauphin may grant either qualified or
non-qualified stock options to key employees for the purchase of up to
1,193,000 shares of common stock. During 1995, the shareholders approved the
adoption of the 1995 Stock Incentive Plan (1995 Plan). Under the 1995 Plan,
Dauphin may grant incentive stock options, non-qualified stock options,
restricted stock awards, performance share awards and other awards that provide
a participant with the right to purchase or otherwise acquire Dauphin common
stock or that are valued by reference to the market value of Dauphin common
stock. Under the 1995 Plan, Dauphin may grant up to 2,000,000 shares of common
stock. The exercise price of options granted may not be less than 85% of the
fair
21
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
market value of Dauphin's common stock at the date of grant. Options become
exercisable over periods of one to five years and expire ten years from the
date of grant, and become fully vested upon a change in control.
The fair value of each option granted under the 1986 and 1995 plans was
estimated using the Black-Scholes option-pricing model with the following
assumptions for 1996 and 1995, respectively: dividend yield of 3.91% and 4.17%;
an expected life of six years for both years; expected volatility of 21.23% and
20.85%; and risk free interest rates of 6.46% and 6.12%. The fair value of
those options granted in 1996 and 1995 were $6.32 and $4.82, respectively.
During 1996, the shareholders approved the adoption of the Non-Employee
Directors' Stock Plan of 1996 (the Directors' Plan). Under the Directors' Plan,
Dauphin may grant non-qualified stock options to non-employee directors for the
purchase of up to 150,000 shares of common stock. In addition, non-employee
Directors are permitted to defer cash fees in the form of deferred stock. The
exercise price of options granted must be 100% of the fair market value of
Dauphin's common stock at the date of grant. Options become exercisable after
one year and expire ten years from the date of grant.
The fair value of each option granted under the 1996 director's plan was
estimated using the Black-Scholes option-pricing model with the following
assumptions for 1996: dividend yield of 4.00%; an expected life of three years;
expected volatility of 19.82%; and a risk free interest rate of 6.19%. The fair
value of those options granted in 1996 was $4.19.
Stock option transactions during 1996, 1995, and 1994 are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance, December 31, 1993......................... 702,396 $18.52
Granted.......................................... 160,500 $25.63
Exercised........................................ (31,057) $14.44
Terminated....................................... (2,400) $21.10
---------
Balance, December 31, 1994......................... 829,439 $20.04
Granted.......................................... 179,000 $24.00
Exercised........................................ (109,584) $15.06
Terminated....................................... (5,000) $25.63
---------
Balance, December 31, 1995......................... 893,855 $21.41
Granted.......................................... 302,000 $29.10
Exercised........................................ (109,183) $17.46
Terminated....................................... (2,914) $12.77
---------
Balance, December 31, 1996......................... 1,083,758 $23.97
=========
</TABLE>
22
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The following table summarizes information on the stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$9.48 to $16.57................ 207,098 3.6 years $14.78
$23.72 to $25.63............... 575,660 7.2 years $24.59
$28.50 to $29.13............... 301,000 9.4 years $29.10
---------
$9.48 to $29.13................ 1,083,758 7.1 years $23.97
=========
</TABLE>
The following table summarizes information on the exercisable stock options
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE
EXERCISE PRICES AT 12/31/96 EXERCISE PRICE
--------------- ----------- --------------
<S> <C> <C>
$9.48 to $16.57................................. 207,098 $14.78
$23.72 to $25.63................................ 308,200 $24.63
-------
$9.48 to $25.63................................. 515,298 $20.67
=======
</TABLE>
Performance Share Agreements
In 1996 and 1995, Dauphin entered into Performance Share Agreements with
certain key employees under the 1995 Plan, as described above. This long-term
incentive plan grants these employees Dauphin common stock after a three year
period if specific corporate goals are realized. This incentive plan becomes
fully vested upon a change in control. There were 48,602 and 45,606 shares
granted during 1996 and 1995, respectively.
The fair value of each share granted was estimated using the Black-Scholes
option-pricing model with the following assumptions for 1996 and 1995,
respectively: dividend yield of 3.69% and 4.23%; an expected life of three
years for both years; expected volatility of 20.32% and 20.07%; and risk free
interest rates of 5.26% and 7.84%. The fair value of those options granted in
1996 and 1995 were $25.74 and $20.82, respectively.
16--STOCKHOLDERS' EQUITY
Dauphin has a shareholders' rights plan that declared a dividend distribution
of one Common Stock Purchase Right (a Right) for each outstanding share of
Common Stock of Dauphin. The Rights are exercisable only if a person or group
of affiliated persons acquires or announces an intention to acquire 18% of the
Common Stock of Dauphin and Dauphin's Board of Directors does not redeem the
Rights during the specified redemption period. Initially, each Right, upon
becoming exercisable, would entitle the holder to purchase from Dauphin one
share of Common Stock at the specified exercise price which is subject to
adjustment (currently $50 per share). Once the Rights become exercisable, if
any person or group acquires 18% of the Common Stock of Dauphin, the holder of
a Right, other than the acquiring person or group, will be entitled, among
other things, to purchase shares of Common Stock having a value equal to two
times the exercise price of the Right. The Board of Directors is entitled to
redeem the Rights for $.001 per Right at any time before expiration of the
redemption period. The Board of Directors may, at any time after the Rights
become exercisable and prior to the time any person becomes a 50% beneficial
owner of Dauphin's shares of Common Stock, exchange each of the outstanding
Rights (except Rights of the acquiring person or group which are voided) for
one share of Common Stock, subject to adjustment. The Rights will expire on
January 22, 2000, unless earlier redeemed by Dauphin.
23
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
On January 21, 1997, the Dauphin Board of Directors approved an Amendment to
Rights Agreement (Amendment), amending the Rights Agreement dated January 22,
1990 (Rights Agreement) by and between Dauphin and Dauphin Deposit Bank and
Trust Company, as Rights Agent. The purpose of the Amendment is to provide that
the entering into of the Merger Agreement with AIB and FMB and the Stock Option
Agreement described in Note 2 and the completion of the transactions
contemplated thereby (including without limitation the Merger and the exercise
of the Option (as defined in the Stock Option Agreement)) do not and will not
result in the ability of any person to exercise any Rights under the Rights
Agreement, or enable or require the Rights (as defined in the Rights Agreement)
to separate from the shares of Common Stock to which they are attached or to be
triggered or become exercisable. The Amendment was entered into by Dauphin and
the Rights Agent as of January 21, 1997, immediately prior to execution of the
Merger Agreement.
During 1994, Dauphin announced that the Board of Directors authorized the
repurchase of up to 2,000,000 shares of the outstanding stock. In February
1995, an additional 1,500,000 shares were authorized for repurchase. Available
investments are being used to fund the share repurchases. Dauphin will use the
shares for general corporate purposes, including the Employee Stock Purchase
Plan, Stock Option Plan, the Dividend Reinvestment and Stock Purchase Plan, and
other appropriate uses. During 1996 and 1995, Dauphin repurchased 297,000
shares for $8.5 million and 630,000 shares for $16.1 million, respectively.
17--FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk and Concentrations of Credit Risk
In the normal course of business, Dauphin is a party to financial instruments
with off-balance-sheet risk which meet the financing needs of its customers
and/or which reduce Dauphin's exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, financial
guarantees and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet.
For commitments to extend credit and standby letters of credit, Dauphin's
exposure to credit loss in the event of non-performance by the other party is
represented by the contractual amount of those instruments. Dauphin uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Dauphin had the following off-balance-sheet financial instruments at December
31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------- ----------
<S> <C> <C>
Amounts representing credit risk:
Commitments to extend credit....................... $1,735,583 $1,343,251
Financial and performance standby letters of
credit............................................ 248,227 134,242
Commercial and similar letters of credit........... 718 900
Commitments to purchase securities................. 12,365
Notional or contract amounts of off-balance-sheet
financial instruments not constituting credit risk:
Forward commitments to sell in the secondary
market............................................ 133,907 62,455
Forward commitments to sell to permanent
investors......................................... 65,244 31,939
Purchased call and put options..................... 88,500
</TABLE>
24
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Commitments to extend credit, which include loans and lines of credit, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Dauphin evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained if deemed necessary by Dauphin
upon extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by Dauphin to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The terms
of the letters of credit vary from one month to 24 months and may have renewal
features. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. Dauphin holds
collateral supporting those commitments, as deemed necessary.
Most of the Bank's business activity is with customers located within the
Bank's defined market area, principally Central Pennsylvania. The Eastern
Pennsylvania and New Jersey mortgage markets, as well as numerous other states
to a lesser degree, are served by Eastern Mortgage, the Bank's mortgage
subsidiary. However, the Bank will grant commercial, residential and consumer
loans throughout the state. The loan portfolio is well diversified and the Bank
does not have any significant industry concentrations of credit risk. However,
since a significant share of the Bank's loans are within the geographic area
previously defined, a substantial portion of the Bank's debtors' ability to
honor their contracts may be significantly affected by the level of economic
activity in this area.
Derivative Financial Instruments
Dauphin's mortgage subsidiary, Eastern Mortgage and Eastern's Capital Market
division have limited involvement with derivative financial instruments.
Derivatives are used to manage interest rate risks related to the mortgage
banking business. Eastern Mortgage is exposed to interest rate risk when it
extends a commitment to a borrower for future settlement. As interest rates
increase, the valuation of the commitment to Eastern Mortgage declines. As
interest rates decrease, a borrower is more likely to abandon the commitment,
which could cause a financial loss to Eastern Mortgage if they have committed
to sell that loan for future delivery in the secondary market.
Eastern Mortgage mitigates exposures to interest rate risk through the use of
certain hedging techniques. This is accomplished by using a combination of
charging non-refundable commitment fees when the borrower elects to lock in
their interest rate; selling loans in the secondary market for future delivery
on a mandatory basis (via forward and future delivery commitments with third-
party investors); and purchasing options.
Forward commitments are contracts wherein Eastern Mortgage agrees to make
delivery of a specified type of loan at a specified future date and price. As
loans close and are pooled for delivery, forward commitments are filled and the
primary objective of hedging is achieved. As market conditions change and
impact the volume and timing of loans closing, forward commitments may be
paired-off. Any gains or losses arising from these paired-off transactions are
deferred on the date of the pair-off, and are recognized as an adjustment to
gains (losses) on sale of mortgage loans when the underlying pool of mortgage
loans is sold. When forward commitments are paired-off due to a lack of loans
to fulfill the commitment, the gain or loss is recognized on the date of the
pair-off as an adjustment to gains (losses) on sale of mortgage loans.
25
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Certain future delivery contracts to third parties stipulate the duration of
the commitment and the amount of loans deliverable under the commitment and may
require the payment of a fee. Commitment fees are capitalized when paid and
expensed as a component of gains (losses) on sale of mortgage loans when the
commitment expires or the loan is delivered.
Purchased call or put options are contracts that allow the holder of the
option to purchase or sell a financial instrument at a specified price and
within a specified period of time from the seller, or "writer", of the option.
Eastern Mortgage purchases call and put options on mortgage-backed securities
as part of its interest rate risk management strategy. The risk of loss is
limited to the price paid for the option. The cost of all such options is
amortized over the life of the option as an adjustment to gains (losses) on
sale of mortgage loans. Any gain realized at the time an option is exercised is
deferred and subsequently recognized when the underlying pool of loans is sold.
In the ordinary course of business, Eastern Mortgage may have a portion of
its mortgage loan portfolio (warehouse and pipeline, net of estimated fall-out)
exposed to interest rate risk, as volume and market conditions warrant. This
exposure represents those loans which have closed or are expected to close
which are not hedged at a given point in time. A daily exposure report
summarizing the exposure position is reviewed and adjustments are made to the
extent considered necessary. Eastern Mortgage policy limits margin changes to
50 basis points given a similar change in rates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" (SFAS 107) requires disclosure of the fair
value of financial instruments. The majority of Dauphin's assets and
liabilities are considered financial instruments. Significant assumptions and
estimates were used in calculation of fair market values.
The following methods and assumptions were used to estimate the fair value of
each class of Dauphin's financial instruments for which it is practicable to
estimate that value:
Cash and short-term investments
The fair value for cash and short-term instruments is estimated to be book
value, due to the short maturity of, and negligible credit concerns within,
those instruments.
Investment securities available-for-sale
The fair value for debt and marketable equity securities is based on quoted
market prices, if available. If quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Assets held for sale
The fair value for mortgage loans held for sale is estimated using the
current secondary market rates. For the securities inventory held for sale, the
securities are recorded at the current quoted market value.
Loans
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings. The residential mortgages and certain consumer loans
include prepayment assumptions.
26
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Other financial assets
The fair value for accrued interest receivable is estimated to be the current
book value. The fair value for originated mortgage servicing rights is based on
observable market prices and the fair value of excess servicing fees is the
estimated present value of the difference between the anticipated future
servicing fees and normal servicing fees using discount rates that approximate
market rates and management's estimate of future prepayment rates.
Deposits
The fair value of deposits with no stated maturity, such as demand deposits,
savings accounts, interest bearing demand and money market deposits, is the
amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit, including certain 18 month variable rate
certificates of deposit carrying a minimum interest rate of 10% for the 18
month term which are held in certain individual retirement accounts (as
discussed herein under Note 20--Litigation), is based on the discounted value
of contractual cash flows, using the rates currently offered for deposits of
similar remaining maturities.
Short-term borrowings
The fair value of short-term borrowings is estimated using the current rates
for similar terms and maturities.
Long-term debt
The fair value of long-term debt is estimated using current rates for debt
with similar terms and remaining maturities.
Accrued interest payable
The fair value of accrued interest payable is estimated to be the current
book value.
Off-balance-sheet financial instruments
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms and
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of guarantees and
letters of credit is based on fees currently charged for similar agreements.
The fair value of options is estimated based on quoted market prices.
Limitations
The fair values estimated are dependent upon subjective assumptions and
involve significant uncertainties resulting in estimates that vary with changes
in assumptions. Any sales of financial instruments may incur potential tax and
other expenses that would not be reflected in the fair values. Any changes in
assumptions or estimation methodologies may have a material effect on the
estimated fair values disclosed. The reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques. Also, the estimates do not reflect any additional premium or
discount that could result from the sale of Dauphin's entire holdings of a
particular instrument.
27
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996 and 1995, Dauphin's estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.......... $ 176,024 $ 176,024 $ 218,785 $ 218,785
Short-term investments........... 17,379 17,379 11,573 11,573
Investment securities............ 2,170,207 2,170,207 1,860,869 1,860,869
Assets held for sale............. 207,798 207,798 87,782 87,782
Loans
Commercial..................... 1,678,679 1,670,204 1,493,666 1,485,988
Residential mortgages.......... 391,105 389,452 446,059 447,172
Consumer....................... 1,130,250 1,132,030 1,041,613 1,044,935
Allowance for loan losses...... (42,885) (41,737)
---------- ---------- ---------- ----------
Net loans.................... 3,157,149 3,191,686 2,939,601 2,978,095
Other financial assets........... 13,328 13,378 42,973 43,048
Financial liabilities:
Deposits
Non-interest bearing demand.... 521,387 521,387 518,004 518,004
Interest bearing demand and
savings....................... 1,281,800 1,281,800 1,380,079 1,380,079
Time deposits.................. 2,225,383 2,257,846 2,051,453 2,094,764
---------- ---------- ---------- ----------
Total deposits............... 4,028,570 4,061,033 3,949,536 3,992,847
Short-term borrowings............ 1,111,630 1,111,630 678,161 678,161
Long-term debt................... 154,771 159,374 40,599 44,459
Accrued interest payable......... 28,225 28,225 25,250 25,250
</TABLE>
<TABLE>
<CAPTION>
1996 1995
--------------------------- -----------------------------
CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR
AMOUNT AMOUNT(1) VALUE AMOUNT AMOUNT (1) VALUE
---------- --------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Off-balance-sheet
financial instruments:
Commitments to extend
credit............... $1,735,583 $ 523 $ 523 $1,343,251 $ 643 $ 758
Financial and
performance standby
letters of credit.... 248,227 2,482 134,242 1,342
Commercial and similar
letter of credit..... 718 7 900 9
Commitments to
purchase securities.. 12,365 12,365
Forward commitments to
sell in the secondary
market............... 133,907 (109) (109) 62,455 (663) (663)
Forward commitments to
sell to permanent
investors............ 65,244 31,939
Purchased call and put
options.............. 88,500 (192) (196)
</TABLE>
- --------
(1) The amounts shown under "carrying amount" represent accruals or deferred
income arising from those unrecognized financial instruments.
28
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
18--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Dauphin Deposit Corporation (Parent Company Only) Condensed Balance Sheets
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Assets:
Due from Bank (subsidiary)............................... $ 143 $ 22
Investment securities available-for-sale................. 66,081 63,815
Investment in subsidiaries
Banking subsidiary..................................... 491,413 502,964
Non-banking subsidiaries............................... 21,234 22,159
-------- --------
Total investment in subsidiaries..................... 512,647 525,123
Other assets............................................. 6,945 7,379
-------- --------
Total assets......................................... $585,816 $596,339
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accrued expenses and taxes............................. $ 10,951 $ 9,546
Long-term debt......................................... 4,420 40,190
-------- --------
Total liabilities.................................... 15,371 49,736
-------- --------
Stockholders' Equity:
Common stock........................................... 163,208 163,208
Additional paid-in capital............................. 11,084 11,103
Retained earnings...................................... 445,888 421,875
Unrealized gain on securities available-for-sale, net
of deferred taxes..................................... 5 49
-------- --------
620,185 596,235
Less: Treasury stock--at cost.......................... (49,740) (49,632)
-------- --------
Total stockholders' equity........................... 570,445 546,603
-------- --------
Total liabilities and stockholders' equity........... $585,816 $596,339
======== ========
</TABLE>
29
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of
Income
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue
Dividend income:
Banking subsidiary........................... $ 69,964 $ 66,890 $ 44,130
Non-banking subsidiaries..................... 2,400 3,450
Interest on investment securities.............. 1,331 1,409 2,155
Interest on time deposits with Bank............ 1,929 691 191
Other income................................... 866 696 460
Gains on sales of investment securities........ 56 5 345
-------- -------- --------
Total revenue.............................. 76,546 73,141 47,281
-------- -------- --------
Expenses
Interest on long-term debt..................... 3,072 3,501 3,516
Other expenses................................. 2,829 1,865 1,243
-------- -------- --------
Total expenses............................. 5,901 5,366 4,759
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries........ 70,645 67,775 42,522
Income tax benefit............................... 573 873 602
-------- -------- --------
Income before equity in undistributed net income
(loss) of subsidiaries.......................... 71,218 68,648 43,124
Equity in undistributed net income (loss):
Banking subsidiary............................. 397 276 25,389
Non-banking subsidiaries....................... (843) (3,359) 1,526
-------- -------- --------
Net income................................. $ 70,772 $ 65,565 $ 70,039
======== ======== ========
</TABLE>
30
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Cash
Flows
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income.................................... $ 70,772 $ 65,565 $ 70,039
Adjustments
Equity in undistributed net income of
subsidiaries............................... 446 3,083 (26,915)
Other, net.................................. 1,452 (2,112) 4,736
-------- -------- --------
Net cash provided by operating
activities............................... 72,670 66,536 47,860
-------- -------- --------
Investing activities
Proceeds from investment securities........... 84,858 37,477 43,484
Purchase of investment securities............. (86,900) (63,469) (24,488)
Sale of subsidiary............................ 797
-------- -------- --------
Net cash provided (used) by investing
activities............................... (2,042) (25,992) 19,793
-------- -------- --------
Financing activities
Repayment of long-term debt................... (35,235)
Issuance of treasury stock.................... 6,837 6,341 3,713
Repurchase of treasury stock.................. (8,455) (16,063) (42,413)
Cash dividends paid........................... (33,654) (30,836) (29,024)
-------- -------- --------
Net cash used by financing activities..... (70,507) (40,558) (67,724)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.............................. 121 (14) (71)
Cash and cash equivalents at beginning of year.. 22 36 107
-------- -------- --------
Cash and cash equivalents at end of year........ $ 143 $ 22 $ 36
======== ======== ========
Schedule of non-cash investing and financing
activities:
Conversion of convertible subordinated
debentures................................... $ 535 $ 258 $ 432
Net assets of subsidiaries merged............. 2,799
</TABLE>
Dauphin Deposit Corporation merged three subsidiaries (FARMCO Realty, Inc.,
Financial Realty, Inc. and Farmers Mortgage Corporation) with and into itself
in 1995. The 1994 condensed statements of income and cash flows have not been
restated.
31
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
19--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
--------------------------------- -------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $105,736 $101,970 $97,685 $93,213 $92,098 $90,272 $90,662 $90,612
Interest expense........ 58,390 56,245 52,728 48,757 47,302 46,558 47,719 46,352
-------- -------- ------- ------- ------- ------- ------- -------
Net interest income..... 47,346 45,725 44,957 44,456 44,796 43,714 42,943 44,260
Provision for loan
losses................. 1,200 1,200 1,800 1,800 1,246 1,246 1,246 1,870
Non-interest income..... 26,283 23,740 22,502 21,378 19,966 18,234 18,426 15,163
Non-interest expense.... 46,657 43,964 42,576 41,241 39,628 37,566 38,427 37,498
-------- -------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 25,772 24,301 23,083 22,793 23,888 23,136 21,696 20,055
Provision for income
taxes.................. 6,653 6,354 5,986 6,184 6,494 6,261 5,619 4,836
-------- -------- ------- ------- ------- ------- ------- -------
Net income.............. $ 19,119 $ 17,947 $17,097 $16,609 $17,394 $16,875 $16,077 $15,219
======== ======== ======= ======= ======= ======= ======= =======
Net income per share.... $ .62 $ .58 $ .56 $ .54 $ .56 $ .55 $ .52 $ .49
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
20--LITIGATION
Various legal actions and proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
resulting from such legal actions and proceedings will not be material to
Dauphin's financial condition or results of operations. Included among the
outstanding litigation is a class action law suit instituted by Dauphin in the
Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994,
seeking a declaratory judgement from the Court specifically permitting Dauphin
to discontinue an 18 month variable interest rate deposit product carrying a
minimum interest rate of 10% for the 18 month term, which is held in certain
individual retirement accounts (IRA). The aggregate balance of the IRA accounts
was approximately $198.0 million at December 31, 1996. Dauphin's right to
terminate the variable interest rate deposit product is in dispute and is being
challenged by the holders of the IRA accounts in question. Several days after
the commencement of trial in April 1996, Dauphin and representatives of the
class reached an agreement in principle to settle the litigation and the trial
was continued pending negotiation of a settlement agreement. Dauphin and
representatives of the class filed a settlement agreement with the Court on May
13, 1996 which would permit Dauphin to terminate the 18 month variable rate
product as to all class members on the effective date of the settlement and, in
consideration, the balances of those accounts would be automatically deposited
in one of two new certificates of deposit established by Dauphin for purposes
of the settlement. All class members were given the opportunity to file
objections to the proposed settlement or elect to be excluded from the class
and the proposed settlement. Approximately 89 of the 4,315 class members filed
formal objections to the settlement with the Court and 12 of the class members
elected to opt out of the settlement. A hearing was held before the Court on
June 21, 1996 for the purpose of obtaining the Court's approval of the
settlement agreement. At the hearing, counsel for Dauphin and counsel for the
representatives of all class members jointly moved for the Court's adoption of
the settlement agreement and made argument in favor thereof. The Court, by
Order issued July 11, 1996, denied the joint motion of Dauphin and the
representatives of the class for settlement of the class action in accordance
with the terms and conditions of the settlement agreement. Dauphin filed its
Notice of Appeal from the trial Court's Order denying the settlement to the
Superior Court of Pennsylvania on August 9, 1996. The Appeal seeks an Order of
the Superior Court reversing the trial Court's disapproval of the settlement
agreement or, in the alternative, otherwise providing the trial Court with
guidance which would result in the trial Court's approval of the settlement
agreement on
32
<PAGE>
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1996, 1995 AND 1994
remand. The Superior Court must determine whether or not the trial Court abused
its discretion in rejecting the settlement agreement. The class representatives
and counsel for the class have informed Dauphin's counsel that they are
withdrawing their previous support for the joint settlement agreement and will
vigorously oppose Dauphin's Appeal to the Superior Court. The Superior Court
heard the oral arguments of counsel on the Appeal on March 5, 1997. Neither
management nor counsel can predict with any reasonable degree of certainty the
outcome of the Appeal or time frame within which the Superior Court will rule
on the Appeal. If the Appeal to the Superior Court is unsuccessful, management
intends to vigorously assert its right to terminate the 18 month variable
interest rate deposit product on further appeal and at the trial court level.
Dauphin has continued to date to pay a 10% interest rate with regard to the 18
month variable interest rate deposit product.
33
<PAGE>
[LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dauphin Deposit Corporation:
We have audited the accompanying consolidated balance sheets of Dauphin
Deposit Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dauphin
Deposit Corporation and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 122, Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65 on January 1, 1995. As discussed in Note
1, the Company adopted the provisions of the Financial Accounting Standards
Board's SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of on January 1, 1996.
/s/ KPMG Peat Marwick LLP
January 21, 1997
[LOGO OF MEMBER FIRM OF KPMG APPEARS HERE]
34
<PAGE>
EXHIBIT 99.2
Part I
------
For the Quarter Ended March 31, 1997
Item 1. Financial Statements
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Dollars in thousands)
March 31, December 31, March 31,
1997 1996 1996
(Unaudited) (Audited) (Unaudited)
---------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $164,523 $176,024 $212,962
---------------- ------------- ------------
Short-term investments
Interest bearing deposits 4,735 1,494 2,469
Federal funds sold and securities purchased under agreements to resell 50,650 15,200 2,500
Other short-term investments 923 685
---------------- ------------- ------------
Total short-term investments 56,308 17,379 4,969
---------------- ------------- ------------
Investment securities available-for-sale, at fair value 2,036,728 2,170,207 2,093,234
Assets held for sale, primarily loans held for sale 190,390 207,798 121,217
Loans (net of unearned income) 3,195,348 3,200,034 2,985,337
Allowance for loan losses (42,443) (42,885) (41,980)
---------------- ------------- ------------
Total net loans 3,152,905 3,157,149 2,943,357
---------------- ------------- ------------
Premises and equipment 73,509 73,826 72,513
Other assets 106,029 145,303 121,584
---------------- ------------- ------------
Total assets $5,780,392 $5,947,686 $5,569,836
================ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $488,742 $521,387 $494,219
Interest bearing 3,564,979 3,507,183 3,436,364
---------------- ------------- ------------
Total deposits 4,053,721 4,028,570 3,930,583
Short-term borrowings 1,065,922 1,111,630 979,015
Long-term debt 4,286 154,771 40,160
Accrued expenses and taxes 83,057 82,270 82,980
---------------- ------------- ------------
Total liabilities 5,206,986 5,377,241 5,032,738
---------------- ------------- ------------
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 1,881,419, 1,974,885
and 2,104,430 shares are held as treasury stock, respectively 163,208 163,208 163,208
Additional paid-in capital 11,359 11,084 11,056
Retained earnings 452,267 444,316 416,781
Unrealized gains (losses) on securities available-for-sale, net of deferred taxes (6,058) 1,577 (1,346)
---------------- ------------- ------------
620,776 620,185 589,699
Less: Treasury stock - at cost (47,370) (49,740) (52,601)
---------------- ------------- ------------
Total stockholders' equity 573,406 570,445 537,098
---------------- ------------- ------------
Total liabilities and stockholders' equity $5,780,392 $5,947,686 $5,569,836
================ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Dauphin Deposit Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended March 31,
---------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Interest income
Interest and fees on loans and leases $64,631 $61,240
Interest and dividends on investment securities
Taxable 28,693 26,133
Exempt from federal income taxes 4,451 4,040
Interest on deposits 27 100
Interest on assets held for sale 3,863 1,651
Interest on federal funds sold and other short-term investments 280 49
------------------- -------------------
Total interest income 101,945 93,213
------------------- -------------------
Interest expense
Interest on deposits
Savings deposits 7,143 7,292
Time deposits 24,445 23,633
Time deposits in denominations of $100,000 or more 9,152 7,366
------------------- -------------------
40,740 38,291
Interest on short-term borrowings 12,428 9,580
Interest on long-term debt 1,778 886
------------------- -------------------
Total interest expense 54,946 48,757
------------------- -------------------
Net interest income 46,999 44,456
Provision for loan losses 1,545 1,800
------------------- -------------------
Net interest income after provision for loan losses 45,454 42,656
------------------- -------------------
Non-interest income
Fiduciary activities 5,105 4,441
Service charges on deposit accounts 3,188 2,958
Other service charges and fees 3,658 2,861
Broker/dealer commissions and fees 3,151 2,536
Mortgage banking 9,261 6,820
Securities gains, net 39 1,072
Other 1,124 690
------------------- -------------------
Total non-interest income 25,526 21,378
------------------- -------------------
Non-interest expense
Salaries and employee benefits 26,650 22,776
Net occupancy expense 3,011 2,773
Furniture and equipment expense 3,699 3,160
Other 14,461 12,532
------------------- -------------------
Total non-interest expense 47,821 41,241
------------------- -------------------
Income before income taxes 23,159 22,793
Provision for income taxes 5,980 6,184
------------------- -------------------
Net income $17,179 $16,609
=================== ===================
Net income per share $0.55 $0.54
Cash dividends declared per share $0.30 $0.26 1/2
Weighted average number of shares outstanding 31,153,432 30,797,523
</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)
Three Months Ended March 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Operating activities
Net income $17,179 $16,609
Adjustments:
Provision for loan losses 1,545 1,800
Provision for depreciation, amortization and accretion 1,520 2,272
Provision for deferred income taxes (29) (149)
Securities gains, net (39) (1,072)
(Increase) decrease in interest receivable 8,476 (3,037)
Increase in accrued expenses and taxes 787 7,879
Gain on sale of mortgage loans held for sale (2,235) (3,601)
Net (increase) decrease in assets held for sale 19,643 (29,834)
Other, net 31,965 (14,388)
-------------- -------------
Net cash provided (used) by operating activities 78,812 (23,521)
-------------- -------------
Investing activities
Proceeds from sales of investment securities 78,206
Proceeds from maturities of investment securities 139,475 324,051
Purchases of investment securities (12,243) (649,389)
Net increase in loans (1,735) (2,570)
Net purchases of premises and equipment (2,239) (3,150)
-------------- -------------
Net cash provided (used) by investing activities 123,258 (252,852)
-------------- -------------
Financing activities
Net increase (decrease) in deposit accounts 25,151 (18,953)
Net increase (decrease) in short-term borrowings (45,708) 300,854
Repayments of long-term debt (150,017) (249)
Issuance of treasury stock 1,653 1,549
Acquisition of treasury stock (5,079)
Cash dividends paid (9,200) (8,122)
-------------- -------------
Net cash provided (used) by financing activities (178,121) 270,000
-------------- -------------
Increase (decrease) in cash and cash equivalents 23,949 (6,373)
Cash and cash equivalents at beginning of period 188,724 219,335
-------------- -------------
Cash and cash equivalents at end of period $212,673 $212,962
============== =============
Total interest paid $57,074 $47,156
Total income taxes paid (received) (173) 211
Schedule of non-cash investing and financing activities:
Loans charged off 2,747 2,237
Net loan transfers to other real estate owned 771 1,129
Conversion of convertible subordinated debentures 468 190
Securitization of mortgage loans 6,462
</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 three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
The accounting policies followed in the presentation of interim financial
results are the same as those followed on an annual basis. These policies are
presented on pages 39 through 43 of the 1996 Securities and Exchange Commission
Form 10-K included in the Annual Report to Stockholders.
Note 2 - New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per Share",
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock. It
replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS. Basic EPS, unlike primary EPS, excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS under APB 15. Dauphin will adopt
SFAS 128 as of December 31, 1997. Management does not expect SFAS 128 to have a
material effect on the EPS of Dauphin.
Note 3 - Litigation
Various legal actions and proceedings are pending involving Dauphin or its
subsidiaries. Management believes that the aggregate liability or loss, if any,
resulting from such legal actions and proceedings will not be material to
Dauphin's financial condition or results of operations. Included among the
outstanding litigation is a class action law suit instituted by Dauphin in the
Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994,
seeking a declaratory judgement from the Court specifically permitting Dauphin
to discontinue an 18 month variable interest rate deposit product carrying a
minimum interest rate of 10% for the 18 month term, which is held in certain
individual retirement accounts (IRA). The aggregate balance of the IRA accounts
was approximately $203.1 million at March 31, 1997. Dauphin's right to terminate
the variable interest rate deposit product is in dispute and is being challenged
by the holders of the IRA accounts in question. Several days after the
commencement of trial in April 1996, Dauphin and representatives of the class
reached an agreement in principle to settle the litigation and the trial
4
<PAGE>
Note 3 - Litigation (continued)
was continued pending negotiation of a settlement agreement. Dauphin and
representatives of the class filed a settlement agreement with the Court on
May 13, 1996 which would permit Dauphin to terminate the 18 month variable rate
product as to all class members on the effective date of the settlement and, in
consideration, the balances of those accounts would be automatically deposited
in one of two new certificates of deposit established by Dauphin for purposes of
the settlement. All class members were given the opportunity to file objections
to the proposed settlement or elect to be excluded from the class and the
proposed settlement. Approximately 89 of the 4,315 class members filed formal
objections to the settlement with the Court and 12 of the class members elected
to opt out of the settlement. A hearing was held before the Court on June 21,
1996 for the purpose of obtaining the Court's approval of the settlement
agreement. At the hearing, counsel for Dauphin and counsel for the
representatives of all class members jointly moved for the Court's adoption of
the settlement agreement and made argument in favor thereof. The Court, by Order
issued July 11, 1996, denied the joint motion of Dauphin and the representatives
of the class for settlement of the class action in accordance with the terms and
conditions of the settlement agreement. Dauphin filed its Notice of Appeal from
the trial Court's Order denying the settlement to the Superior Court of
Pennsylvania on August 9, 1996. The Appeal seeks an Order of the Superior Court
reversing the trial Court's disapproval of the settlement agreement or, in the
alternative, otherwise providing the trial Court with guidance which would
result in the trial Court's approval of the settlement agreement on remand. The
Superior Court must determine whether or not the trial Court abused its
discretion in rejecting the settlement agreement. The class representatives and
counsel for the class have informed Dauphin's counsel that they are withdrawing
their previous support for the joint settlement agreement and will vigorously
oppose Dauphin's Appeal to the Superior Court. The Superior Court heard the oral
arguments of counsel on the Appeal on March 5, 1997. Neither management nor
counsel can predict with any reasonable degree of certainty the outcome of the
Appeal or time frame within which the Superior Court will rule on the Appeal. If
the Appeal to the Superior Court is unsuccessful, management intends to
vigorously assert its right to terminate the 18 month variable interest rate
deposit product on further appeal and at the trial court level. Dauphin has
continued to date to pay a 10% interest rate with regard to the 18 month
variable interest rate deposit product.
5
<PAGE>
Exhibit 99.3
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated, condensed financial
statements have been prepared to reflect the merger of Dauphin into the Company
on a purchase accounting basis. Under purchase accounting, the assets and
liabilities of Dauphin are adjusted to their estimated fair value at the date of
consummation of the merger.
The unaudited pro forma consolidated, condensed financial statements give
effect to the merger of Dauphin into the Company at the beginning of each period
presented, but do not reflect anticipated expenses and nonrecurring charges as a
result of, or estimated expense savings and revenue enhancements anticipated to
result from, the merger. The unaudited pro forma consolidated, condensed
financial statements reflect only the effect of the payment of the merger
consideration and estimates relating to the fair value of certain assets,
liabilities and other items as more fully described in the notes to the
unaudited pro forma consolidated, condensed financial statements, and do not
reflect any other purchase accounting adjustments. The actual adjustments to
Dauphin's financial statements will be made as of the consummation date of the
merger and may be materially different from the amounts presented in the
following pro forma consolidated, condensed financial statements.
The unaudited pro forma consolidated, condensed financial statements are
provided for informational purposes, and are not necessarily indicative of the
financial condition and results of future operations that would have been
achieved had the merger been consummated at the dates indicated. The unaudited
pro forma consolidated, condensed financial information should be read in
conjunction with the consolidated historical financial statements (and notes
thereto) of the Company and with the consolidated historical financial
statements (and notes thereto) of Dauphin.
<PAGE>
Pro Forma Consolidated Statement of Condition
March 31, 1997
<TABLE>
<CAPTION>
Historical
($ in thousands) ------------------------
First MD Dauphin Pro Forma Adjustments Pro Forma
Bancorp Deposit ---------------------------- Combined
3/31/97 3/31/97 (debit) (credit) 3/31/97
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 848,615 $ 164,523 $ 257,000 (b) $ 940,000 (a) $ 1,013,007
409,721 (c)
273,148 (d)
Money market investments 580,915 56,308 409,721 (c) 227,502
Investment securities available-for-sale 2,497,045 2,036,728 273,148 (d) 4,260,625
Assets held-for-sale 102,512 190,390 292,902
Loans, net of unearned income 6,782,130 3,195,348 17,736 (g) 9,995,214
Allowance for credit losses (154,806) (42,443) (197,249)
-----------------------------------------------------------------------
Loans, net 6,627,324 3,152,905 17,736 0 9,797,965
-----------------------------------------------------------------------
Premises and equipment 106,636 73,509 180,145
Due from customers on acceptances 8,876 8,876
Goodwill 77,114 13,208 782,308 (a) 475 (e) 826,178
32,463 (h) 11,919 (f)
7,276 (j) 17,736 (g)
25,013 (k) 81,074 (i)
Other intangible assets 18,005 915 81,074 (i) 99,994
Purchased and originated mortgage servicing rights 3,288 13,515 475 (e) 17,278
Other assets 347,450 78,391 11,919 (f) 437,760
-----------------------------------------------------------------------
TOTAL ASSETS $11,217,780 $5,780,392 $1,898,133 $1,734,073 $17,162,232
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Domestic deposits:
Non-interest bearing deposits $ 2,364,148 $ 488,742 $ 2,852,890
Interest bearing deposits 5,188,402 3,564,979 32,463 (h) 8,785,844
Interest bearing deposits in foreign
banking office 92,152 92,152
-----------------------------------------------------------------------
Total deposits 7,644,702 4,053,721 0 32,463 11,730,886
-----------------------------------------------------------------------
Federal funds purchased, securities sold under
repurchase agreements and other borrowed
funds, short-term 1,460,532 1,065,922 2,526,454
Bank acceptances outstanding 8,876 8,876
Accrued taxes and other liabilities 331,090 83,057 7,276 (j) 446,436
25,013 (k)
Long-term debt 209,756 4,286 4,286 (a) 257,000 (b) 466,756
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures 296,344 296,344
-----------------------------------------------------------------------
Total Liabilities 9,951,300 5,206,986 4,286 321,752 15,475,752
-----------------------------------------------------------------------
4.50% Cumulative Redeemable preferred stock 7,748 7,748
Stockholders' equity 1,258,732 573,406 573,406 (a) 420,000 (a) 1,678,732
TOTAL LIABILITIES, REDEEMABLE PREFERRED
-----------------------------------------------------------------------
STOCK AND STOCKHOLDERS' EQUITY $11,217,780 $5,780,392 $ 577,692 $ 741,752 $17,162,232
=======================================================================
</TABLE>
<PAGE>
NOTES TO
PRO FORMA CONSOLIDATED STATEMENT OF CONDITION
(a) Purchase of outstanding shares, settlement of stock options and conversion
of $4.3 million of convertible subordinated debentures of Dauphin for $43.00
per share. For purposes of these proformas, it was assumed that 70% of the
Dauphin Deposit Corporation shares would be exchanged for AIB ADR's. As a
result, FMB will issue to AIB $420 million in common stock and pay AIB $532
million in cash as consideration for AIB issuing shares to Dauphin Deposit
Corporation shareholders.
(b) Issuance of subordinated notes to fund the acquisition.
(c) Use of money market investments to fund the acquisition.
(d) Sale of investment securities to fund the acquisition.
(e) Adjustment of purchased and originated mortgage servicing rights to fair
value.
(f) Recordation of the value of pension plan assets in excess of the projected
benefit obligation.
(g) Adjustment of loans receivable to fair value.
(h) Adjustment of deposits to fair value.
(i) Recordation of a core deposit intangible.
(j) Adjustment of the liability for post-retirement benefits to the actuarial
present value of the postretirement benefit obligation.
(k) Recordation of the estimated tax liability associated with adjustments to
the carrying value of loans, pension assets, deposits, mortgage servicing
rights, post-retirement benefits and certain identifiable intangible assets.
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
MARCH 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------
FIRST MD DAUPHIN PRO FORMA ADJUSTMENTS COMBINED
------------------------
BANCORP DEPOSIT (debit) (credit) 3/31/97
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $136,038 $64,631 $ 900 (a) $199,769
Interest and dividends on investment
securities 40,736 33,144 3,900 (b) 69,980
Interest on assets held-for-sale 1,918 3,863 5,781
Interest on money market investments 5,923 307 1,600 (c) 4,630
------------------------------------------------------------
Total interest and dividend income 184,615 101,945 6,400 0 280,160
------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 50,476 40,740 2,700 (d) 88,516
Interest on Federal funds purchased and
other short-term borrowings 20,991 12,428 33,419
Interest on long-term debt 4,638 1,778 4,200 (e) 10,616
Interest on guaranteed preferred beneficial
interests in Company's junior subordinated
debentures 4,107 4,107
------------------------------------------------------------
Total interest expense 80,212 54,946 4,200 2,700 136,658
------------------------------------------------------------
Net interest income 104,403 46,999 10,600 2,700 143,502
Provision for credit losses 9,900 1,545 11,445
------------------------------------------------------------
Net interest income after provision for credit
losses 94,503 45,454 10,600 2,700 132,057
------------------------------------------------------------
Noninterest income 61,258 25,526 86,784
Noninterest expenses 102,465 47,821 7,400 (f) 159,686
2,000 (g)
------------------------------------------------------------
Income before income taxes 53,296 23,159 20,000 2,700 59,155
Income tax expense 19,193 5,980 3,800 (h) 21,373
------------------------------------------------------------
Net Income $ 34,103 $17,179 $20,000 $6,500 $ 37,782
============================================================
</TABLE>
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
DECEMBER 31, 1996
<TABLE>
<CAPTION>
($ in thousands)
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
HISTORICAL
------------------------- PRO FORMA ADJUSTMENTS PRO FORMA
FIRST MD DAUPHIN --------------------------- COMBINED
BANCORP DEPOSIT (DEBIT) (CREDIT) 12/31/96
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $521,643 $252,975 $ 3,500 (a) $ 771,118
Interest and dividends on investment
securities 174,141 132,623 15,500 (b) 291,264
Interest on assets held-for-sale 9,390 12,050 21,440
Interest on money market investments 13,855 956 6,500 (c) 8,311
----------------------------------------------------------------------
Total interest and dividend income 719,029 398,604 25,500 0 1,092,133
----------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 205,169 160,914 10,800 (d) 355,283
Interest on Federal funds purchased and
other short-term borrowings 76,428 51,937 128,365
Interest on long-term debt 33,721 3,269 16,700 (e) 53,690
Interest on guaranteed preferred beneficial
interests in Company's junior subordinated
debentures 55 19,500 (i) 19,555
----------------------------------------------------------------------
Total interest expense 315,373 216,120 36,200 10,800 556,893
----------------------------------------------------------------------
Net interest income 403,656 182,484 61,700 10,800 535,240
Provision for credit losses 6,500 6,000 12,500
----------------------------------------------------------------------
Net interest income after provision for
credit losses 397,156 176,484 61,700 10,800 522,740
----------------------------------------------------------------------
Noninterest income 216,892 93,903 310,795
Noninterest expenses 406,861 174,438 29,400 (f) 618,799
8,100 (g)
----------------------------------------------------------------------
Income before income taxes 207,187 95,949 99,200 10,800 214,736
Income tax expense 74,850 25,177 23,000 (h) 77,027
----------------------------------------------------------------------
Net Income $132,337 $70,772 $99,200 $33,800 $137,709
======================================================================
</TABLE>
<PAGE>
NOTES TO
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(a) Amortization of the fair value premium on loans associated with the
acquisition assuming an amortization period of 5 years.
(b) Reduction in interest income on investment securities due to the sale of
securities to fund the acquisition.
(c) Reduction in interest income on money market investments due to the use of
investments to fund the acquisition.
(d) Amortization of the fair value premium on deposits associated with the
acquisition assuming an amortization period of 3 years.
(e) Increase in interest expense resulting from issuance of subordinated notes
to fund the acquisition.
(f) Amortization of goodwill associated with the acquisition assuming an
amortization period of 25 years.
(g) Amortization of the core deposit intangible associated with the acquisition
assuming an amortization period of 10 years.
(h) Reduction in income tax expense related to certain other pro forma
adjustments.
(i) Interest expense resulting from the issuance of guaranteed preferred
beneficial interests in Company's junior subordinated debentures to fund the
acquisition (December 1996 Pro Form Consolidated Statement of Income only).
