SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-10958
DROVERS BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2209390
(State or other jurisdiction of incorporation or organization) (IRS employer ID)
30 SOUTH GEORGE STREET, YORK, PA 17401
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (717) 843-1586
NONE
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1995
Common Stock 2,240,743 Shares
<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition ..................................... 3
September 30, 1995 and December 31, 1994
Consolidated Statements of Income ........................................ 4
Three Months Ended September 30, 1995 and 1994
Nine Months Ended September 30, 1995 and 1994
Consolidated Statements of Cash Flows .................................... 5
Nine Months Ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements ............................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 9
PART II OTHER INFORMATION
SIGNATURES ................................................................ 13
<PAGE> 2
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
SEPT 30, DEC 31,
ASSETS 1995 1994
Cash and due from banks .................................. $ 15,343 $ 12,310
Money market investments ................................. 202 198
Investment securities (fair value $96,079 and $93,884) ... 95,540 94,359
Loans (net of unearned income of $4,534 and $4,297) ...... 251,667 229,375
Reserve for loan losses .................................. 2,914 2,638
Net loans ................................................ 248,753 226,737
Bank premises and equipment .............................. 13,365 13,439
Other assets ............................................. 6,402 5,244
TOTAL ASSETS ............................................. $379,605 $352,287
LIABILITIES
Deposits:
Noninterest-bearing ...................................... $ 34,382 $ 33,019
Interest-bearing ......................................... 268,880 250,154
Total deposits ........................................... 303,262 283,173
Federal funds purchased and securities sold under
agreements to repurchase ................................ 9,140 14,592
Other borrowings ......................................... 27,717 22,246
Other liabilities ........................................ 5,508 2,552
TOTAL LIABILITIES ........................................ 345,627 322,563
SHAREHOLDERS' EQUITY
Common stock($5 par value), 10,000,000 shares authorized;
issued and outstanding--2,240,743 shares in 1995 and
2,090,565 shares in 1994 ................................ 11,204 10,453
Additional paid-in capital ............................... 14,657 11,989
Retained earnings ........................................ 7,960 8,997
Unrealized holding gains (losses) on available-for-sale
securities .............................................. 157 -1,715
TOTAL SHAREHOLDERS' EQUITY ............................... 33,978 29,724
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $379,605 $352,287
See notes to consolidated financial statements.
<PAGE> 3
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
1995 1994 1995 1994
INTEREST INCOME
Interest and fees on loans ................ $5,614 $4,478 $16,083 $12,632
Interest on deposits with banks ........... 7 16 38 66
Interest on federal funds sold ............ 0 0 0 2
Interest and dividends on
investment securities .................... 1,581 1,472 4,743 4,250
Total interest income ..................... 7,202 5,966 20,864 16,950
INTEREST EXPENSE
Interest on deposits ...................... 2,947 2,284 8,296 6,459
Federal funds purchased and securities
sold under agreements to repurchase ...... 162 18 474 72
Interest on borrowed funds ................ 426 348 1,211 1,009
Total interest expense .................... 3,535 2,650 9,981 7,540
Net interest income ....................... 3,667 3,316 10,883 9,410
Provision for loan losses ................. 105 84 365 306
Net interest income after
provision for loan losses ................ 3,562 3,232 10,518 9,104
OTHER INCOME
Trust department income ................... 234 198 708 631
Service charges on deposit accounts ....... 253 241 737 672
Securities gains .......................... 10 1 66 122
Net gains on residential
mortgage loan sales ...................... 123 34 201 248
Equity in losses of real estate venture ... -9 -10 -41 -30
Other ..................................... 152 115 434 334
Total other income ........................ 763 579 2,105 1,977
OTHER EXPENSES
Salaries and employee benefits ............ 1,592 1,564 4,719 4,385
Occupancy and premises .................... 221 169 579 402
Furniture and equipment ................... 181 185 517 516
FDIC insurance ............................ -18 155 302 452
Marketing ................................. 87 87 263 261
Net (gain) cost of operation
of other real estate ..................... 1 0 2 -11
Office supplies ........................... 83 72 228 225
Other taxes ............................... 72 66 217 200
Other operating expense ................... 459 341 1,279 1,103
Total other expenses ...................... 2,678 2,639 8,106 7,533
Income before income taxes ................ 1,647 1,172 4,517 3,548
Applicable income taxes ................... 442 220 1,192 680
NET INCOME ................................ $1,205 $ 952 $ 3,325 $ 2,868
PER SHARE DATA
Net income ................................ $ 0.54 $ 0.43 $ 1.48 $ 1.29
Dividends ................................. $ 0.16 $ 0.14 $ 0.46 $ 0.38
See notes to consolidated financial statements.
<PAGE> 4
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) NINE MONTHS
ENDED SEPT 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 3,325 $ 2,868
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation ........................................ 696 680
Net amortization of investment security premiums .... 79 144
Provision for loan losses ........................... 365 306
Gain on sale of securities held-to-maturity ......... -19 -70
Gain on sale of securities available-for-sale ....... -47 -52
Gain on sale of loans ............................... -201 -248
Gain on sale of other real estate ................... -1 -11
Net deferred loan fees .............................. -25 -189
Equity in loss of real estate venture................ 41 30
Increase in interest/dividends receivable ........... -392 -272
Increase (decrease) in interest payable ............. 702 121
Increase in other assets ............................ -466 -722
Increase in other liabilities ....................... 1,356 487
Loss on sale of fixed assets ........................ -1 1
Net cash provided by operating activities ........... 5,412 3,073
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities
held-to-maturity ................................... 5,240 4,413
Proceeds from sales and maturities of securities
available-for-sale ................................. 5,150 14,940
Purchases of securities held-to-maturity ............ -1,916 -14,144
Purchases of securities available-for-sale .......... -6,608 -19,314
(Increase) decrease in net loans .................... -22,154 -13,930
Capital expenditures ................................ -622 -1,292
Proceeds from sale of fixed assets .................. 1 1
Purchase of investment in real estate venture........ -749 -600
Proceeds from sale of other real estate ............. 106 153
Net cash used in investing activities ............... -21,552 -29,773
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
and savings accounts ............................... -6,117 4,686
Net increase in certificates of deposit ............. 26,218 14,877
Net increase (decrease) in federal funds purchased
and repurchase agreements .......................... -7,425 9,935
Net increase (decrease) in other borrowings ......... 7,463 -103
Payments made for capital leases .................... -19 -17
Dividends paid ...................................... -1,026 -843
Proceeds from issuance of common stock .............. 83 234
Net cash provided by financing activities ........... 19,177 28,769
NET INCREASE IN CASH & CASH EQUIVALENTS ............. 3,037 2,069
CASH & CASH EQUIVALENTS AT JANUARY 1, ............... 12,508 12,262
CASH & CASH EQUIVALENTS AT SEPT 30, ................. $ 15,545 $ 14,331
See notes to consolidated financial statements.
<PAGE> 5
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments (including normal recurring accruals) considered
necessary to present fairly Drovers Bancshares' financial position as of
September 30, 1995 and December 31, 1994. Operating results and changes in cash
flows for the nine months ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1995. For further information, refer to the consolidated financial statements
and footnotes included in the Annual Report for the year ended December 31,
1994.
NOTE B - ACCOUNTING POLICIES - RESERVE FOR LOAN LOSSES
Beginning January 1, 1995, the Corporation adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan." Under the new standard, the 1995 allowance for credit losses related to
loans that are identified for evaluation in accordance with Statement 114 is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of collateral for certain collateral dependent loans. Prior
to 1995, the allowance for credit losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans.
NOTE C - CALCULATION OF EARNINGS PER SHARE
On September 27, 1995, the Board of Directors declared a seven percent stock
dividend payable November 10, 1995. The Corporation issued a 5 for 4 stock
split in the form of a 25% stock dividend on September 2, 1994. Earnings per
share are based on the weighted average shares of stock outstanding during each
period, giving retroactive effect to the stock dividends.
NOTE D - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of September 30, 1995 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies ... $ 2,223 $ 36 $ 0 $ 2,259
Obligations of states and political
subdivisions ......................... 13,419 674 10 14,083
Mortgage-backed securities and
collateralized mortgage obligations .. 17,292 180 341 17,131
Total investment securities ........... $32,934 $ 890 $ 351 $33,473
<PAGE> 6
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D - INVESTMENT SECURITIES, continued
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of September 30, 1995 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 15,055 $ 157 $ 96 $ 15,116
Obligations of states and political
subdivisions ........................ 2,798 12 6 2,804
Corporate obligations ................ 3,029 18 3 3,044
Mortgage-backed securities and
collateralized mortgage obligations . 38,669 422 316 38,775
Total debt securities ................ 59,551 609 421 59,739
Equity securities .................... 2,818 52 3 2,867
Total investment securities .......... $ 62,369 $ 661 $ 424 $ 62,606
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of December 31, 1994 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 1,998 $ 0 $ 42 $ 1,956
Obligations of states and political
subdivisions ........................ 14,579 589 69 15,099
Mortgage-backed securities and
collateralized mortgage obligations . 19,394 63 1,016 18,441
Total investment securities .......... $ 35,971 $ 652 $ 1,127 $ 35,496
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 1994 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 13,042 $ 11 $ 470 $ 12,583
Obligations of states and political
subdivisions ........................ 1,930 0 79 1,851
Corporate obligations................. 3,592 6 32 3,566
Mortgage-backed securities and
collateralized mortgage obligations . 39,313 17 2,108 37,222
Total debt securities ................ 57,877 34 2,689 55,222
Equity securities .................... 3,110 83 27 3,166
Total investment securities .......... $ 60,987 $ 117 $ 2,716 $ 58,388
For additional information, see pages 21-22 of the Corporation's 1994 Annual
Report.
<PAGE> 7
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - LOANS
Loans are comprised of the following as of September 30, 1995 and December 31,
1994:
SEPT 30, DEC 31,
(In thousands) 1995 1994
Commercial, financial and industrial loans ............. $ 66,212 $ 59,973
Real estate mortgage loans:
Real estate construction-related ....................... 5,956 7,163
Real estate mortgage loans secured by
1-4 family residential properties ..................... 92,039 87,676
Other real estate ...................................... 45,128 32,325
Total real estate mortgage loans ....................... 143,123 127,164
Consumer loans:
Monthly payment ........................................ 40,888 40,836
Other revolving credit ................................. 1,433 1,396
Total consumer loans ................................... 42,321 42,232
Leasing and other ...................................... 11 6
Total loans ............................................ $251,667 $229,375
Changes in the reserve for loan losses for the periods ended September 30, were
as follows:
(In thousands) 1995 1994
Balance, beginning of year ............................. $ 2,638 $ 2,332
Provision for loan losses .............................. 365 306
LESS: Loans charged-off ................................ 191 95
Recoveries ............................................. 102 64
Balance, September 30 .................................. $ 2,914 $ 2,607
As of September 30, 1995, the total recorded investment in impaired loans under
Statement 114 was $798,000. The amount of that recorded investment for which
there is a related reserve for loan losses in accordance with this Statement is
$0. Loans classified as impaired under this Statement as a result of troubled
debt restructurings that are in compliance with modified terms recognize
interest under the accrual method of accounting. Interest on all other impaired
loans is recognized on a cash basis. The year-to-date average recorded
investment in impaired loans, as defined by Statement 114, was $807,000. The
Corporation recognized interest income on those impaired loans of $48,000.
Interest income recognized on a cash basis would have been $48,000.
For additional information, see pages 23-24 of the Corporation's 1994 annual
report.
<PAGE> 8
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The following comparison of actual balances indicates how the Corporation has
generated and employed its funds for the nine months ending September 30, 1995:
BALANCE BALANCE
SEPT 30, INCREASE DEC 31,
1995 (DECREASE) % 1994
FUNDING USES: (In thousands)
Money market investments ............ $ 202 4 2.0% $ 198
Investment securities ............... 95,540 1,181 1.3% 94,359
Loans (net) ......................... 248,753 22,016 9.7% 226,737
Total interest-bearing assets ....... 344,495 23,201 7.2% 321,294
Noninterest-bearing assets .......... 35,110 4,117 13.3% 30,993
TOTAL USES .......................... $379,605 $ 27,318 7.8% $352,287
FUNDING SOURCES:
Interest-bearing demand deposits .... $ 36,597 $ 535 1.5% $ 36,062
Savings deposits .................... 66,744 -10,086 -13.1% 76,830
Time deposits ....................... 165,539 28,277 20.6% 137,262
Short-term borrowings ............... 9,140 -5,452 -37.4% 14,592
Long-term borrowings ................ 27,717 5,471 24.6% 22,246
Total interest-bearing liabilities .. 305,737 18,745 6.5% 286,992
Noninterest-bearing demand deposits . 34,382 1,363 4.1% 33,019
Other liabilities ................... 5,508 2,956 115.8% 2,552
Shareholders' equity ................ 33,978 4,254 14.3% 29,724
TOTAL SOURCES ....................... $379,605 $ 27,318 7.8% $352,287
Total assets grew $27,318,000, or 7.8%, since December 31, 1994. Loans
accounted for most of the increase growing $22,016,000, or 9.7%. Strong
commercial loan demand caused commercial loans and other real estate to increase
$6,239,000 and $12,803,000, respectively. Lower interest rates helped maintain
demand for loans secured by 1-4 family residential properties. These loans grew
$4,363,000 since year-end.
Asset growth was funded mostly from deposits which grew $20,089,000 since
December 31, 1994. Higher interest rates offered on certificates of deposit
continued to cause some customers to move savings deposits into higher yielding
time deposits. An increase of $1,872,000 in the value of available-for-sale
investment securities, caused by lower interest rates, helped increase
shareholders' equity which is up $4,254,000 since year-end.
Long-term borrowings increased $5,471,000 since December 31, 1994. Long-term
borrowings are mostly intermediate-term borrowings from the Federal Home Loan
Bank (FHLB) of Pittsburgh. The borrowings are used to fund certain loan
programs and investment purchases. This strategy is often used to leverage the
Corporation's capital or to provide funding when suitable deposits are
unavailable. The terms of the borrowings are carefully selected to control
interest rate risk. FHLB borrowings provide a valuable source of liquidity.
The Corporation's maximum allowed borrowings at the FHLB of Pittsburgh as of
September 30, 1995 were $113,000,000.
<PAGE> 9
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATION
Drovers Bancshares recorded net income of $3,325,000 and $2,868,000 for the nine
months ended September 30, 1995 and 1994, respectively.
The return on assets (ROA) and return on equity (ROE) for the nine months ended
September 30, 1995 was 1.21% and 13.79%, respectively. This compares to an ROA
and ROE for the same period last year of 1.14% and 13.03%, respectively.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on loans and
investments and the interest paid on deposits and other sources of funds. The
following table presents the trends in net interest income:
THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
(In thousands) 1995 1994 95/94 1995 1994 95/94
Interest income ............ $ 7,202 $ 5,966 20.7% $20,864 $16,950 23.1%
Interest expense ........... 3,535 2,650 33.4% 9,981 7,540 32.4%
Net interest income ........ 3,667 3,316 10.6% 10,883 9,410 15.7%
Provision for loan losses .. 105 84 25.0% 365 306 19.3%
Net interest income after
provision for loan losses . $ 3,562 $ 3,232 10.2% $10,518 $ 9,104 15.5%
The corporation's largest category of earning assets consists of loans to
businesses and individuals. The majority of earning assets are supported by
interest-bearing commercial and consumer deposits and shareholders' equity.
Changes in net interest income are determined by variations in the volume and
mix of assets and liabilities as well as their sensitivity to interest rate
movements.
Net interest income increased $351,000, or 10.6%, for the third quarter and
$1,473,000, or 15.7%, year-to-date. Growth in interest-earning assets and a
higher net interest spread and margin caused the increase in net interest
income. Average interest-earning assets grew $30,343,000 over the same period
last year while total average interest-bearing liabilities grew $25,998,000.
The net interest spread and margin for the first nine months of 1995 were 3.78%
and 4.30%, respectively. This compares to a spread and margin for the same
period last year of 3.66% and 4.08%, respectively. The mix of interest-earning
assets has changed since 1994. The Corporation now holds a greater percentage
of higher yielding loans. In addition, interest-earning assets have been more
sensitive to the higher average interest rates experienced in 1995. As a
result, the average yield on interest-earning assets increased 0.89% in 1995
while the yield on interest-bearing liabilities increased only 0.77%.
Loan quality remains strong. The ratio of reserve for loan losses to loans was
1.16% at September 30, 1995. Nonaccrual loans and loans 90 days or more past
due and still accruing interest totaled $838,000. Loans restructured and in
compliance with modified terms were $798,000 and other real estate was $70,000.
Year-to-date loan charge-offs and recoveries were $191,000 and $102,000,
respectively.
<PAGE> 10
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
<TABLE>
NONINTEREST INCOME
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
(In thousands) 1995 1994 95/94 1995 1994 95/94
<S> <C> <C> <C> <C> <C> <C>
Trust department income ............. $ 234 $198 18.2% $ 708 $ 631 12.2%
Service charges on deposit accounts . 253 241 5.0% 737 672 9.7%
Securities gains .................... 10 1 900.0% 66 122 -45.9%
Net gains on residential
mortgage loan sales ................ 123 34 261.8% 201 248 -19.0%
Equity in earnings (losses) of
real estate venture ................ -9 -10 -10.0% -41 -30 36.7%
Other ............................... 152 115 32.2% 434 334 29.9%
Total ............................... $ 763 $ 579 31.8% $2,105 $1,977 6.5%
</TABLE>
An $89,000 increase in third quarter net gains on residential mortgage loan
sales helped boost quarterly other income $184,000, or 31.8%, over the same
period last year. The Corporation sold about $7,400,000 in mortgage loans
during the quarter including $4,500,000 of one year adjustable rate mortgages
(ARMS). The ARMS were sold to fund fixed rate loan demand and make the
Corporation's assets less sensitive to falling interest rates. Trust department
income was up $36,000 for the quarter and $77,000 so far this year. New
personal trust and corporate business, along with an increase in asset market
values, caused the increases. An increase in collected returned check fees and
automated teller machine (ATM) service charges caused the increase in service
charges on deposit accounts. Other income increased $37,000 for the quarter an
$100,000 year-to-date due to higher ATM data processing income, insurance
commissions, cash management fees and mortgage servicing income.
NONINTEREST EXPENSE
THREE MONTHS NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
(In thousands) 1995 1994 95/94 1995 1994 95/94
Salaries and employee benefits . $1,592 $1,564 1.8% $4,719 $4,385 7.6%
Occupancy and premises ......... 221 169 30.8% 579 402 44.0%
Furniture and equipment ........ 181 185 -2.2% 517 516 0.2%
FDIC insurance ................. -18 155 -111.6% 302 452 -33.2%
Marketing expense .............. 87 87 0.0% 263 261 0.8%
Net (gain) cost of operation
of other real estate .......... 1 0 999.9% 2 -11 -118.2%
Office supplies ................ 83 72 15.3% 228 225 1.3%
Other taxes .................... 72 66 9.1% 217 200 8.5%
Other operating expense ........ 459 341 34.6% 1,279 1,103 16.0%
Total .......................... $2,678 $2,639 1.5% $8,106 $7,533 7.6%
Noninterest expense remained nearly unchanged for the third quarter due to a
reduction in FDIC insurance assessments. The FDIC lowered the insurance rate
from $0.23 per $100 of deposits to $0.04. The change was effective June 1, 1995
and caused FDIC insurance to be a negative $18,000 for the quarter.
<PAGE> 11
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NONINTEREST EXPENSE (cont.)
Total noninterest expense was $8,106,000 for the first nine months of 1995, up
$573,000, or 7.6%. Salaries and employee benefits increased $334,000, or 7.6%.
Gross salary expense increased $209,000 year-to-date and $15,000 for the
quarter. Two new branch offices which opened in the first half of 1994
contributed to the salary increase in the first half of 1995. Increases in
pension and health insurance also contributed to the increase in salary and
employee benefits. The Corporation employed 182 full-time equivalents at
September 30, 1995.
Occupancy and premises expense increased $52,000 for the quarter and $177,000 so
far in 1995. A decline in occupancy at the 96 South George Street Office
Building accounted for most of the difference. During the third quarter, the
Corporation began renovations of the Research and Administrative Center. Total
fixed costs of the project are about $280,000. Building repairs related to the
project increased occupancy and premises expense $13,000 in the third quarter.
Higher data processing costs related to ATM processing and greater legal and
professional fees increased third quarter and year-to-date other operating
expenses.
TAXATION
The Corporation recognized a provision for income taxes of $1,192,000 for the
nine months ending September 30, 1995. The average tax rate, applicable income
taxes divided by income before taxes, was 26.4%. This compares to an average
tax rate of 19.2% for the same period in 1994. In 1994, the Corporation
received $353,000 of historic tax credits which lowered its effective tax rate.
The credits came from an investment in a limited partnership real estate
venture. In 1995, the Corporation expects to receive $100,000 in low income
housing tax credits from that investment.
FUTURE OUTLOOK
The Corporation invested $1,575,000 as the sole limited partner in a real estate
venture to rehabilitate and manage a low income housing development in Reading,
Pennsylvania. Renovation has begun on the four-story historic structure and
when complete the building will provide 32 apartments for low income families.
Renovations will conclude in January 1996. When finished, the Corporation
expects to receive about $400,000 in historic tax credits which will lower
applicable income taxes. Due to the uncertainty of the completion date and the
complexity of a historical building renovation, none of the anticipated tax
benefit will be recognized in 1995.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 122. The Statement, effective for calendar year 1996
financial statements, amends Statement No. 65 by eliminating its distinction in
accounting for mortgage servicing rights depending on whether a loan servicer
originated a loan or purchased it from a third party. Statement 122 requires
mortgage servicers that sell loans and retain servicing rights to allocate the
total cost of the loans to the servicing rights and loans based on fair value.
The Corporation has not yet fully measured the impact the Standard will have on
its financial position.
<PAGE> 12
Drovers Bancshares Corporation and Subsidiaries
OTHER INFORMATION
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.
DROVERS BANCSHARES CORPORATION
___S\ A. Richard Pugh__________________
A. Richard Pugh, President,
Chief Executive Officer and Director
___S\ Debra A. Goodling_________________
Debra A. Goodling, Senior Vice President
and Treasurer
Principal Financial Officer
___S\ John D. Blecher___________________
John D. Blecher, Vice President and
Assistant Treasurer
Principal Accounting Officer
Date: November 3, 1995
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