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 June 30, 1996
[ ] 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 June 30, 1996
Common Stock 2,809,093 Shares
<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition ..................................... 3
June 30, 1996 and December 31, 1995
Consolidated Statements of Income ........................................ 4
Three Months Ended June 30, 1996 and 1995
Six Months Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows .................................... 5
Six Months Ended June 30, 1996 and 1995
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
2 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
JUNE 30, DEC 31,
ASSETS 1996 1995
Cash and due from banks .................................. $ 17,550 $ 17,418
Money market investments ................................. 170 1,353
Investment securities (fair value $110,501 and $92,554) .. 110,243 91,823
Loans (net of unearned income of $3,762 and $4,425) ...... 265,172 255,405
Reserve for loan losses .................................. 3,093 2,937
Net loans ................................................ 262,079 252,468
Bank premises and equipment .............................. 13,980 13,880
Other assets ............................................. 6,381 5,849
TOTAL ASSETS ............................................. $410,403 $382,791
LIABILITIES
Deposits:
Noninterest-bearing ...................................... $ 38,289 $ 34,154
Interest-bearing ......................................... 275,556 272,499
Total deposits ........................................... 313,845 306,653
Federal funds purchased and securities sold under
agreements to repurchase ................................ 18,843 7,302
Other borrowings ......................................... 38,480 30,172
Other liabilities ........................................ 3,462 3,743
TOTAL LIABILITIES ........................................ 374,630 347,870
SHAREHOLDERS' EQUITY
Common stock($5 par value), 10,000,000 shares authorized;
issued and outstanding--2,809,093 shares in 1996 and
2,240,775 shares in 1995 ................................ 14,046 11,204
Additional paid-in capital ............................... 14,708 14,657
Retained earnings ........................................ 7,322 8,536
Unrealized holding gains (losses) on available-for-sale
securities .............................................. -303 524
TOTAL SHAREHOLDERS' EQUITY ............................... 35,773 34,921
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $410,403 $382,791
See notes to consolidated financial statements.
3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
INTEREST INCOME
Interest and fees on loans ................ $5,649 $5,417 $11,218 $10,469
Interest on deposits with banks ........... 21 9 89 31
Interest on federal funds sold ............ 0 0 0 0
Interest and dividends on
investment securities .................... 1,602 1,600 3,044 3,162
Total interest income ..................... 7,272 7,026 14,351 13,662
INTEREST EXPENSE
Interest on deposits ...................... 2,846 2,824 5,719 5,349
Federal funds purchased and securities
sold under agreements to repurchase ...... 180 148 279 312
Interest on borrowed funds ................ 500 401 961 785
Total interest expense .................... 3,526 3,373 6,959 6,446
Net interest income ....................... 3,746 3,653 7,392 7,216
Provision for loan losses ................. 180 155 285 260
Net interest income after
provision for loan losses ................ 3,566 3,498 7,107 6,956
OTHER INCOME
Trust department income ................... 268 234 502 474
Service charges on deposit accounts ....... 294 252 546 484
Securities gains .......................... 66 9 266 56
Net gains on residential
mortgage loan sales ...................... 97 53 189 78
Equity in losses of real estate venture ... -40 -9 -78 -32
Other ..................................... 178 144 340 282
Total other income ........................ 863 683 1,765 1,342
OTHER EXPENSES
Salaries and employee benefits ............ 1,666 1,548 3,428 3,127
Occupancy and premises .................... 208 184 401 358
Furniture and equipment ................... 210 170 412 336
FDIC insurance ............................ 1 160 2 320
Marketing ................................. 136 88 272 176
Net (gain) cost of operation
of other real estate ..................... 2 1 15 1
Office supplies ........................... 94 78 189 145
Other taxes ............................... 81 73 167 145
Other operating expense ................... 493 404 1,011 820
Total other expenses ...................... 2,891 2,706 5,897 5,428
Income before income taxes ................ 1,538 1,475 2,975 2,870
Applicable income taxes ................... 327 387 616 750
NET INCOME ................................ $ 1,211 $ 1,088 $ 2,359 $ 2,120
PER SHARE DATA
Net income ................................ $ 0.43 $ 0.39 $ 0.84 $ 0.76
Dividends ................................. $ 0.14 $ 0.13 $ 0.27 $ 0.24
See notes to consolidated financial statements.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) SIX MONTHS
ENDED JUNE 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 2,359 $ 2,120
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation ........................................ 560 451
Net amortization of investment security premiums .... 34 55
Provision for loan losses ........................... 285 260
Gain on sale of securities held-to-maturity ......... -11 -9
Gain on sale of securities available-for-sale ....... -255 -47
Loans originated for sale ........................... -9,557 0
Proceeds from sales of loans ........................ 9,879 0
Gain on sale of loans ............................... -189 -78
Net deferred loan fees .............................. -119 -62
Equity in loss of real estate venture................ 78 32
Increase in interest/dividends receivable ........... -159 -323
Increase (decrease) in interest payable ............. -181 314
Increase in other assets ............................ -139 -500
Increase (decrease) in other liabilities ............ -122 183
Other non-cash items ................................ 9 0
Net cash provided by operating activities ........... 2,472 2,396
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities
held-to-maturity ................................... 3,438 3,029
Proceeds from sales and maturities of securities
available-for-sale ................................. 12,137 3,188
Purchases of securities held-to-maturity ............ -943 -1,371
Purchases of securities available-for-sale .......... -34,074 -4,492
Increase in net loans ............................... -9,990 -18,539
Capital expenditures ................................ -633 -195
Proceeds from sale of fixed assets .................. 1 1
Purchase of investment in real estate venture ....... 0 -450
Proceeds from sale of other real estate ............. 156 95
Net cash used in investing activities ............... -29,908 -18,734
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
and savings accounts ............................... 3,706 -2,745
Net increase in certificates of deposit ............. 3,509 21,716
Net increase (decrease) in federal funds purchased
and repurchase agreements .......................... 11,541 -7,005
Net increase in other borrowings .................... 8,323 7,889
Payments made for capital leases .................... -14 -13
Dividends paid ...................................... -763 -670
Proceeds from issuance of common stock .............. 83 83
Net cash provided by financing activities ........... 26,385 19,255
NET INCREASE IN CASH & CASH EQUIVALENTS ............. -1,051 2,917
CASH & CASH EQUIVALENTS AT JANUARY 1, ............... 18,771 12,508
CASH & CASH EQUIVALENTS AT JUNE 30, ................. $ 17,720 $ 15,425
See notes to consolidated financial statements.
5 <PAGE>
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
June 30, 1996 and December 31, 1995. Operating results and changes in cash
flows for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1996. For
further information, refer to the consolidated financial statements
and footnotes included in the Annual Report for the year ended December 31,
1995.
NOTE B - ACCOUNTING POLICIES - MORTGAGE SERVICING RIGHTS
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing
Rights." The Standard was issued in May 1995 and was effective for any mortgage
banking enterprise beginning for fiscal years after December 15, 1995.
Statement No. 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 mortgage servicing rights are amortized over
the expected life of the serviced loans. The Corporation evaluates the fair
value of the rights each quarter and recognizes impairment immediately if it
occurs. This Standard only affects loans sold after December 31, 1995. In
addition, any mortgages designated as held for sale are valued at the lower of
cost or fair value. Mortgage loans that the Corporation has both the ability
and intent to hold for the foreseeable future or until maturity are classified
as a long-term investment.
NOTE C - CALCULATION OF EARNINGS PER SHARE
On June 27, 1996, the Board of Directors declared a 5 for 4 stock split in the
form of a 25% stock dividend payable August 16, 1996 to shareholders of record
July 19, 1996. The Corporation also paid a 7% stock dividend on November 10,
1995. 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 June 30, 1996 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 ... $ 1,000 $ 13 $ 0 $ 1,013
Obligations of states and political
subdivisions ......................... 10,879 448 50 11,277
Mortgage-backed securities and
collateralized mortgage obligations .. 14,587 130 283 14,434
Total investment securities ........... $26,466 $ 591 $ 333 $26,724
6 <PAGE>
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 June 30, 1996 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 .. $ 21,898 $ 40 $ 210 $ 21,728
Obligations of states and political
subdivisions ........................ 3,838 1 48 3,791
Corporate obligations ................ 1,259 6 1 1,264
Mortgage-backed securities and
collateralized mortgage obligations . 49,771 295 635 49,431
Total debt securities ................ 76,766 342 894 76,214
Equity securities .................... 7,471 106 14 7,563
Total investment securities .......... $ 84,237 $ 448 $ 908 $ 83,777
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of December 31, 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 .. $ 1,000 $ 50 $ 0 $ 1,050
Obligations of states and political
subdivisions ........................ 11,421 667 8 12,080
Mortgage-backed securities and
collateralized mortgage obligations . 16,501 217 195 16,523
Total investment securities .......... $ 28,922 $ 934 $ 203 $ 29,653
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 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 .. $ 16,882 $ 220 $ 53 $ 17,049
Obligations of states and political
subdivisions ........................ 3,047 23 2 3,068
Corporate obligations................. 1,768 16 2 1,782
Mortgage-backed securities and
collateralized mortgage obligations . 37,682 678 161 38,199
Total debt securities ................ 59,379 937 218 60,098
Equity securities .................... 2,727 78 2 2,803
Total investment securities .......... $ 62,106 $ 1,015 $ 220 $ 62,901
For additional information, see pages 20-21 of the Corporation's 1995 Annual
Report.
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - LOANS
Loans are comprised of the following as of June 30, 1996 and December 31, 1995:
JUNE 30, DEC 31,
(In thousands) 1996 1995
Commercial, financial and industrial loans ............. $ 68,062 $ 66,840
Real estate mortgage loans:
Real estate construction-related ....................... 5,961 5,910
Real estate mortgage loans secured by
1-4 family residential properties ..................... 99,670 91,262
Other real estate ...................................... 55,044 49,903
Total real estate mortgage loans ....................... 160,675 147,075
Consumer loans:
Monthly payment ........................................ 34,922 39,987
Other revolving credit ................................. 1,505 1,494
Total consumer loans ................................... 36,427 41,481
Leasing and other ...................................... 8 9
Total loans ............................................ $265,172 $255,405
Changes in the reserve for loan losses for the periods ended June 30, were
as follows:
(In thousands) 1996 1995
Balance, beginning of year ............................. $ 2,937 $ 2,638
Provision for loan losses .............................. 285 260
LESS: Loans charged-off ................................ 259 125
Recoveries ............................................. 130 66
Balance, June 30 ....................................... $ 3,093 $ 2,839
As of June 30, 1996, the total recorded investment in impaired loans was
$2,568,000. 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 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 was $1,396,000.
The Corporation recognized interest income on those impaired loans of $67,000.
Interest income recognized on a cash basis would have been $77,000. Nonaccrual
loans at June 30, 1996 were $2,507,000 compared to $934,000 at December 31, 1995
and $427,000 at June 30, 1995.
For additional information, see pages 21-22 of the Corporation's 1995 annual
report.
8 <PAGE>
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 six months ending June 30, 1996:
BALANCE BALANCE
JUNE 30, INCREASE DEC 31,
1996 (DECREASE) % 1995
FUNDING USES: (In thousands)
Money market investments ............ $ 170 -1,183 -87.4% $ 1,353
Investment securities ............... 110,243 18,420 20.1% 91,823
Loans (net) ......................... 262,079 9,611 3.8% 252,468
Total interest-bearing assets ....... 372,492 26,848 7.8% 345,644
Noninterest-bearing assets .......... 37,911 764 2.1% 37,147
TOTAL USES .......................... $410,403 $ 27,612 7.2% $382,791
FUNDING SOURCES:
Interest-bearing demand deposits .... $ 41,466 $ 1,488 3.7% $ 39,978
Savings deposits .................... 64,770 -3,426 -5.0% 68,196
Time deposits ....................... 169,320 4,995 3.0% 164,325
Short-term borrowings ............... 18,843 11,541 158.1% 7,302
Long-term borrowings ................ 38,480 8,308 27.5% 30,172
Total interest-bearing liabilities .. 332,879 22,906 7.4% 309,973
Noninterest-bearing demand deposits . 38,289 4,135 12.1% 34,154
Other liabilities ................... 3,462 ( 281) -7.5% 3,743
Shareholders' equity ................ 35,773 852 2.4% 34,921
TOTAL SOURCES ....................... $410,403 $ 27,612 7.2% $382,791
Total assets increased $27,612,000, or 7.2%, since December 31, 1995.
Investments increased $18,420,000, or 20.1%, and net loans increased $9,611,000,
or 3.8%. The Corporation leveraged the balance sheet $8,000,000 to provide
additional net interest income and help manage interest rate risk. Beginning in
July 1996, about $11,000,000 in overnight investments managed by our trust
department will be deposited into the Bank. The Corporation purchased about
$7,000,000 of investments late in the second quarter in order to meet pledging
requirements for these deposits. Commercial and mortgage loan demand increased
sharply in the second quarter accounting for most of the growth in loans. Note
E shows the various loan types and the balances at June 30, 1996 compared to the
end of 1995. Monthly payment consumer loans, mainly automobile loans, decreased
$5,065,000. The Corporation traditionally generates most of its auto loans
through local auto dealers. Competition among lenders for these loans has
increased in the last nine months and driven down interest rates. These loans
have historically suffered higher credit losses than other segments of the
portfolio. The Corporation has maintained above market rates throughout this
period which has caused balances to slowly fall.
A combination of deposit growth and borrowings from the Federal Home Loan Bank
of Pittsburgh funded the increase in assets. The Corporation introduced a new
interest-bearing demand account late in 1995. The product helped increase these
balances $1,488,000 since year-end. Savings deposits show a decrease of
$3,426,000 since December 31, 1995. In March, the Corporation eliminated its
cash management savings product switching customers to repurchase agreements.
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION, continued
which are shown as short-term borrowings. The change allows the Corporation
more flexibility in providing sweep arrangements to corporate customers. The
Corporation successfully promoted certificates of deposits in the first six
months increasing time deposit balances $4,995,000. Noninterest-bearing
deposits, mainly business accounts, increased $4,135,000 since year-end. These
balances tend to fluctuate based on the cash needs of the business customers.
Long-term borrowings increased $8,308,000 due mainly to the leveraging strategy.
LOAN QUALITY
Impaired loans at June 30, 1996 were $2,568,000 compared to $851,000 at December
31, 1995. A single customer with loans of $1,745,000 caused the increase. The
loans are fully collateralized and the Corporation expects to collect all
principle and interest. The loans are currently on nonaccrual status and
account for the large increase in nonaccrual loans since year-end.
Loan charge-offs and recoveries for the first half of 1996 were $259,000 and
$130,000, respectively. All loans charged-off in 1996 were either consumer or
loans secured by residential real estate. Total 1995 charge-offs and recoveries
were $333,000 and $131,000, respectively. Real estate loan charge-offs have
increased in 1996. Year-to-date charge-offs were $61,000 compared to $45,000
for all of 1995 and $0 the two preceding years. Total second quarter charge-
offs remained nearly unchanged at $129,000. Consumer and residential real
estate loan charge-offs are expected to remain at current levels or decline in
the third quarter.
RESULTS OF OPERATION
Drovers Bancshares recorded net income of $2,359,000 and $2,120,000 for the six
months ended June 30, 1996 and 1995, respectively.
The return on assets (ROA) and return on equity (ROE) for the six months ended
June 30, 1996 was 1.22% and 13.30%, respectively. This compares to an ROA
and ROE for the same period last year of 1.19% and 13.58%, respectively.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands) 1996 1995 96/95 1996 1995 96/95
Interest income ............ $ 7,272 $ 7,026 3.5% $14,351 $13,662 5.0%
Interest expense ........... 3,526 3,373 4.5% 6,959 6,446 8.0%
Net interest income ........ 3,746 3,653 2.5% 7,392 7,216 2.4%
Provision for loan losses .. 180 155 16.1% 285 260 9.6%
Net interest income after
provision for loan losses . $ 3,566 $ 3,498 1.9% $ 7,107 $ 6,956 2.2%
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 $93,000, or 2.5%, for the second quarter and
$176,000, or 2.4% for the first half of 1996. The Corporation's deposits are not
as sensitive to interest rate movements as the repriceable assets that they help
fund. Falling interest rates throughout the last half of 1995 and early 1996
squeezed the Corporation's net interest spread and margin. The second quarter
spread and margin remained nearly unchanged from the first quarter at 3.64% and
4.14%, respectively. The spread and margin for the first six months of 1995
were 3.85% and 4.37%, respectively. Growth in interest-earning assets has helped
offset the narrower spread and margin.
The Corporation sold about $7,600,000 in variable rate investment securities so
far this year. The proceeds were invested primarily in fixed rate securities at
interest rates at or above the current rates on the variable securities. The
increased holdings in fixed rate assets should help protect the Corporation from
further interest rate declines. The new trust department deposits and deposits
from a new product introduced late in the second quarter, the Indexed Money
Fund, have interest rates tied to short-term interest rates. These deposits
will lessen the Corporation's asset sensitivity and make net interest income
less sensitive to swings in short-term interest rates.
The provision for loan losses was $180,000 for the quarter and $285,000 for the
first half of 1996. An additional $75,000 was accrued in the second quarter due
to continued above average charge-offs and loan growth. The reserve for loan
losses to loan ratio was 1.17% at June 30, 1996.
11 <PAGE>
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands) 1996 1995 96/95 1996 1995 96/95
<S> <C> <C> <C> <C> <C> <C>
Trust department income ............. $ 268 $234 14.5% $ 502 $ 474 5.9%
Service charges on deposit accounts . 294 252 16.7% 546 484 12.8%
Securities gains .................... 66 9 633.3% 266 56 375.0%
Net gains on residential
mortgage loan sales ................ 97 53 83.0% 189 78 142.3%
Equity in losses of real
estate venture ..................... -40 -9 344.4% -78 -32 143.8%
Other ............................... 178 144 23.6% 340 282 20.6%
Total ............................... $ 863 $ 683 26.4% $1,765 $1,342 31.5%
</TABLE>
Noninterest income increased $423,000, or 31.5%, compared to the first six
months last year. Lower interest rates provided the Corporation an opportunity
to restructure part of its investment portfolio resulting in securities gains of
$266,000. The lower interest rates also increased demand for residential
mortgage loans and increased the net gains on residential mortgage loan sales.
The gains were also boosted by the adoption of SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The Standard causes gains to increase for sales of
mortgages where servicing is retained. Gains increased $80,000 due to
implementing the Standard. Service charges on deposit accounts increased
$142,000 in the first six months. Checking account service charges increased as
a result of fees on the new "Winner" products. NSF and returned check fees
along with ATM service charges have also increased. Higher cash management and
loan servicing fees drove the increase in other income.
NONINTEREST EXPENSE
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands) 1996 1995 96/95 1996 1995 96/95
Salaries and employee benefits . $1,666 $1,548 7.6% $3,428 $3,127 9.6%
Occupancy and premises ......... 208 184 13.0% 401 358 12.0%
Furniture and equipment ........ 210 170 23.5% 412 336 22.6%
FDIC insurance ................. 1 160 -99.4% 2 320 -99.4%
Marketing expense .............. 136 88 54.5% 272 176 54.5%
Net cost of operation
of other real estate .......... 2 1 100.0% 15 1 999.9%
Office supplies ................ 94 78 20.5% 189 145 30.3%
Other taxes .................... 81 73 11.0% 167 145 15.2%
Other operating expense ........ 493 404 22.0% 1,011 820 23.3%
Total .......................... $2,891 $2,706 6.8% $5,897 $5,428 8.6%
Noninterest expense increased $469,000, or 8.6%, compared to the first half of
1995. Salaries and employee benefits increased $301,000, or 9.6%. Salaries
alone increased $232,000, or 9.4%, due to increased staffing levels and annual
salary increases. Full-time equivalents were 198 at June 30, 1996 compared to
183 one year ago. Health insurance benefits were up $44,000, or 21.0%, for the
first six months of 1996.
12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NONINTEREST EXPENSE, continued
Occupancy and premises increased $43,000, or 12.0%, mainly due to higher snow
removal and utility costs caused by an unusually harsh winter. Furniture and
equipment expense increased $76,000 due to higher equipment depreciation for
renovation costs and installation of a wide-area network in the fourth quarter
of 1995.
FDIC insurance fell to $2,000 as the minimum assessment rate was eliminated.
Marketing expense increased $96,000, or 54.5%, due to the first quarter
promotion of a new "Winner" checking product and second quarter image campaign.
Office supplies increased $44,000, or 30.3%. Costs of free checks provided to
new "Winner" customers and timing of certain supply purchases caused the
increase.
Other operating expenses increased $191,000. About $60,000 of the change was
due to non-recurring expenses in the first quarter. Expenses to purchase
checking account benefits from a third party for "Winner" customers were
$35,000.
TAXATION
The Corporation recognized a provision for income taxes of $616,000 for the
six months ending June 30, 1996. The average tax rate, applicable income
taxes divided by income before taxes, was 20.7%. This compares to an average
tax rate of 26.1% for the same period in 1995. The lower tax rate is due to the
$400,000 in expected historic tax credits from the Elm View Limited Partnership.
The Partnership owns a 32-apartment low income housing development that opened
in the first quarter of 1996.
VOTING RESULTS
Shareholders' voted on the following items at the this year's Annual Meeting
held May 24, 1996:
1. Election of five Directors for a four-year term expiring 2000.
2. Ratification the selection of Harry Ness & Company to serve as independent
certified public accountant for 1996.
The voting results were as follows:
For Against/Withheld Abstain
J. Samuel Gregory (Director) ...... 1,778,185 15,703 --
Daniel E. Hess (Director) ......... 1,780,755 13,133 --
Herbert D. Lavetan (Director) ..... 1,780,755 13,133 --
L. Doyle Ankrum (Director) ........ 1,779,539 14,349 --
Robert H. Stewart, Jr. (Director) . 1,780,755 13,133 --
Harry Ness & Company .............. 1,780,809 6,954 6,125
13 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FUTURE OUTLOOK
The Corporation received regulatory approval to open three branch offices in the
greater York area. The first office, located on the square in Dover, is
expected to open in the fourth quarter and will share its location with a
convenience store. This new concept in banking enables consumers to access
food, fuel and financial services in one convenient location. The other two
offices will open in 1997.
The Corporation also received approval to close its branch office in Windsor at
the end of September. Since the opening of the Cape Horn Office in 1992,
activity at the Windsor office has declined. Many Windsor customers use the new
office for the convenient hours, drive-in lanes and ATM.
14 <PAGE>
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, Chairman, President
and Chief Executive Officer
_/s/_Debra_A._Goodling_________________
Debra A. Goodling, Executive Vice President
and Treasurer
Principal Financial Officer
_/s/_John_D._Blecher___________________
John D. Blecher, Vice President and
Assistant Treasurer
Principal Accounting Officer
Date: August 9, 1996
15 <PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 17550
<INT-BEARING-DEPOSITS> 170
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83777
<INVESTMENTS-CARRYING> 26466
<INVESTMENTS-MARKET> 26724
<LOANS> 265172
<ALLOWANCE> 3093
<TOTAL-ASSETS> 410403
<DEPOSITS> 313845
<SHORT-TERM> 18843
<LIABILITIES-OTHER> 3462
<LONG-TERM> 38480
0
0
<COMMON> 14046
<OTHER-SE> 21727
<TOTAL-LIABILITIES-AND-EQUITY> 410403
<INTEREST-LOAN> 11218
<INTEREST-INVEST> 3044
<INTEREST-OTHER> 89
<INTEREST-TOTAL> 14351
<INTEREST-DEPOSIT> 5719
<INTEREST-EXPENSE> 6959
<INTEREST-INCOME-NET> 7392
<LOAN-LOSSES> 285
<SECURITIES-GAINS> 266
<EXPENSE-OTHER> 5897
<INCOME-PRETAX> 2975
<INCOME-PRE-EXTRAORDINARY> 2975
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2359
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<YIELD-ACTUAL> 8.06
<LOANS-NON> 2507
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2937
<CHARGE-OFFS> 259
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 3093
<ALLOWANCE-DOMESTIC> 1209
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1884
</TABLE>
