SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
Securities registered pursuant to Section 12(g) of the act:
COMMON STOCK $5.00 PAR OVER-THE-COUNTER
(Title of each class) (Name of exchange on which registered)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to the
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 29, 1996 was $44,092,350. The number of shares of
Drovers Bancshares Corporation Common Stock, $5.00 par value, outstanding at
February 29, 1996 was 2,243,529.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1995 are
incorporated by reference into Parts I, II and IV. Portions of the Proxy
Statement for the annual shareholders meeting to be held May 24, 1996
incorporated by reference in Part III.
<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I
Item 1. Business ......................................................... 4
Item 2. Properties ....................................................... 9
Item 3. Legal Proceedings
The information required by this item is contained on page 19 of the
Corporation's 1995 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders
This item is omitted since it is not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information required by this item is contained on page 1 and 19 of the
Corporation's 1995 Annual Report.
Item 6. Selected Financial Data
The information required by this item is contained on pages 10-11 of the
Corporation's 1995 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The information required by this item is contained on pages 30-37 of the
Corporation's 1995 Annual Report.
Item 8. Financial Statements and Supplementary Data ...................... 11
Additional information required by this item is contained on pages 13-28
and page 38 of the Corporation's 1995 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This item is omitted since it is not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 20
Additional information required by this item is contained on pages 3-8
of the Definitive Proxy Statement dated April 19, 1996.
Item 11. Executive Compensation
The information required by this item is contained on pages 9-16
of the Definitive Proxy Statement dated April 19, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained on pages 3-9
of the Definitive Proxy Statement dated April 19, 1996.
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained on pages 17-18
of the Definitive Proxy Statement dated April 19, 1996.
<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
A. Financial statements are incorporated by reference to pages 1-38 of the
Corporation's 1995 Annual Report.
B. There were no filings on Form 8-K for the year ended December 31, 1995
C. Listing of Exhibits.
Exhibit 3 - Articles of Incorporation and By-laws. Filed December 31, 1991
with the Securities and Exchange Commission
Exhibit 4 - Instruments Defining the Rights of Security Holders
(incorporated by reference to Exhibit B to the Holding Company's
Registration Statement on Form S-14, No. 2-77871 filed June 29, 1982,
with the Securities and Exchange Commission)
Exhibit 13 - Annual Report to Security Holders.
Exhibit 21 - Subsidiaries of the Registrant. (incorporated by reference
to page 30 of the Corporation's 1995 Annual Report)
Exhibit 23 - Consents of experts and Counsel.
Exhibit 27 - Financial Data Schedule.
SIGNATURES ................................................................ 21
Page numbers of Annual Report to shareholders and Definitive Proxy Statement
referenced in this document refer to hard copy only. See electronic copy of
documents for corresponding page numbers.
<PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
GENERAL
Drovers Bancshares Corporation was organized on October 27, 1982, under
Pennsylvania Business Corporation Law and held all the stock of Drovers Interim
Bank, a Pennsylvania state-chartered bank established to effect the
reorganization. The Interim Bank was then merged into The Drovers & Mechanics
Bank and the Common Stock of the Interim Bank was converted into and exchanged
on a share-for-share basis for Common Stock of Drovers Bancshares Corporation.
The Management of The Drovers & Mechanics Bank formed Drovers Bancshares
Corporation for greater flexibility in providing a wider variety of banking
services and in engaging in nonbanking activities permitted under the Bank
Holding Company Act of 1956, as amended.
The Drovers & Mechanics Bank is a wholly-owned subsidiary of Drovers Bancshares
Corporation. The Bank is chartered pursuant to the laws of the Commonwealth of
Pennsylvania and is subject to the supervision of the Banking Department of the
Commonwealth and the Federal Deposit Insurance Corporation. The Drovers &
Mechanics Bank was organized in 1883 as a national bank and became a state-
chartered non-member of the Federal Reserve System on February 14, 1979.
The Bank offers a wide variety of banking and trust services to individuals and
commercial customers in its service area. Personal banking services include
checking accounts, savings and time accounts, certificates of deposit, personal
and mortgage loans, home improvement loans, safe deposit services, estate
planning and administration, personal trust management and discount brokerage
services. Commercial banking services are provided to businesses, nonprofit
organizations and local municipalities. These services include checking
accounts, savings and time accounts, financing activities and corporate trust
services in the areas of pension, profit sharing and employee benefit plans.
On December 31, 1995, the Bank employed 186 full-time equivalents throughout its
offices. The Main Office of the Bank is located at 30 South George Street, York,
Pennsylvania. A Research and Administrative Services Center and eight branches
are located in the surrounding suburbs of York city. In addition, there are
four out-of-town offices located in Emigsville, York Haven, Windsor and Red
Lion, Pennsylvania. The Bank also has four remote service facilities located at
the York Fairgrounds, Harley Davidson, Inc., York College of Pennsylvania, and
Shipley Stores, Inc.-Dallastown Exxon.
In December 1993, the Bank purchased the office building attached to the Bank's
main office and corporate headquarters. The five-story complex, known as 96
South George, provides for future growth and enables the Corporation to maintain
its headquarters in downtown York. In January of 1996, the executive offices of
the Bank were relocated to the fifth floor of 96 South George
The Bank is the sole limited partner in two ventures to renovate and operate
apartment buildings. The first building opened in 1994. The second will open
in March 1996. Both buildings provide low income housing to qualified families.
The investments are accounted for under the equity method of accounting. The
combined carrying values of the investments at December 31, 1995 and 1994 were
$2,527,000 and $1,016,000, respectively.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
COMPETITION
The principal competition with the service area of the Corporation is provided
by other financial institutions, including commercial banks, savings and loan
associations, credit unions, brokerage firms and mortgage and insurance
companies. The competition within the banking industry has increased
significantly due to the elimination of many distinctions between various types
of financial institutions.
SUPERVISION AND REGULATION OF THE HOLDING COMPANY
Drovers Bancshares Corporation is a bank holding company as defined by the Bank
Holding Company Act of 1956, as amended, "the Act". As a bank holding company,
we are required to file with the Federal Reserve Bank an annual report and such
additional information as the Board may require pursuant to the Act. The
Federal Reserve Board also makes examinations of the Holding Company and its
subsidiaries. The Federal Reserve Board has the authority to issue cease-and-
desist orders against a bank holding company and its nonbank subsidiaries if it
determines their actions represent unsafe or unsound practice or violation of
law.
Under Pennsylvania law, a holding company is permitted to control one or more
banks in Pennsylvania. However, a holding company is required under the Act to
obtain prior approval from the Federal Reserve Board to acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if after such acquisition, it
would own or control more than five percent of the voting shares of such bank.
The Act does not permit the Federal Reserve Board to approve the acquisition by
the holding company or any subsidiary of any voting shares of, or interest in,
all or substantially all of the assets of any bank located outside the
Commonwealth of Pennsylvania, unless the acquisition is specifically authorized
by laws of the state in which that bank is located.
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
and Branch Act"). The legislation permits interstate banking twelve months
after its enactment into law. Bank holding companies, pursuant to an amendment
to the Bank Holding Company Act, can acquire a bank located in any state, as
long as the acquisition does not result in the bank holding company controlling
more than 10% of the deposits in the United States, or 30% of the deposits in
the target bank's state. The legislation permits states to waive the
concentration limits and require that the target institution be in existence for
up to five years before it can be acquired by an out-of-state bank or bank
holding company. Interstate branching and merging of existing banks is
permitted after three years from the enactment of the Interstate Banking and
Branching Act, if the bank is adequately capitalized and demonstrates good
management. Branch merging will be permitted earlier if a state undertakes to
enact a law which allows it. States may also enact a law to permit banks to
branch de novo.
The Act limits the activities which may be engaged in by the Holding Company and
its subsidiaries to certain specified activities, including those activities
which the Federal Reserve Board may find, by order of regulation, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Federal Reserve Board approval may be required before a holding company or its
non-bank subsidiary, if any, may begin to engage in any such activity and before
any such business may be acquired. The Federal Reserve Board is empowered to
differentiate between activities commenced by acquisition of a going concern.
The Holding Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
SUPERVISION AND REGULATION OF THE BANK
The Drovers & Mechanics Bank is a state chartered, FDIC insured bank which makes
it subject to the regulations of the Pennsylvania Department of Banking and the
FDIC. Although the Bank is not a member of the Federal Reserve System, it can
access Federal Reserve Bank services, including the discount window.
The Pennsylvania Department of Banking and the FDIC regularly examine such areas
as reserves, loans, investments, management practices and other aspects of
operation. These examinations are designed primarily for the protection of the
Bank's depositors rather than its shareholders. The Bank is also required to
furnish annual and quarterly reports to the FDIC. The FDIC has the authority
under the Financial Institutions Supervisory Act to prevent a bank under its
regulation from engaging in any unsafe or unsound practices in the conduct of
business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the types of investments a bank makes, the reserves
a bank maintains, loans a bank makes and collateral it accepts and the
activities of a bank with respect to mergers, consolidations and the
establishment of branches. Under Pennsylvania law, the amount of funds which
the Bank may lend to a single borrower may not exceed fifteen percent of the
Bank's capital, surplus, undivided profits, loan loss reserve and capital
securities. The amount of indebtedness which the Bank is permitted to incur is
also limited, with certain exceptions, to the aggregate of its capital and one-
half of the amount of its surplus.
A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, on investments in the stock or other
securities of the bank holding company or its subsidiaries and on taking such
stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interest of such principal
shareholders. In addition, such legislation and regulations may affect the
terms upon which any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Federal law also prohibits acquisition or control of a bank or bank holding
company without prior notice to certain Federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank or bank holding company. From
time to time, various types of federal and state legislation have been proposed
that would result in additional regulations of, and restrictions on, the
business of the Bank. The Corporation and the Bank are affected by the credit
policies of the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit. Among the
instruments of monetary policy which have been used by the Federal Reserve
System are open market operations in U.S. Government securities, changes in the
discount rate on bank borrowings and changes in reserve requirements on bank
deposits.
These instruments are used in varying combinations to influence overall growth
and distribution of Bank loans, investments, and deposits. Their use may also
affect interest rates charged on loans or paid for deposits.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
became law. The Act addresses recapitalization of the insurance fund. The Act
contains provisions concerning the utilization of risk-based assessments in
generating deposit insurance funds, a nominal charge to insurance coverage,
assessment reductions for banks involved in community related activities and
miscellaneous regulatory procedures and standards to ensure bank safety and
limit systemic risk. Implementation has not had and is not expected to have a
material adverse impact on the Corporation. Under FDICIA, institutions must be
classified in one of five defined categories as illustrated below.
Under a
Tier 1 Capital
Total Risk- Tier 1 Risk- Leverage Order or
Based Ratio Based Ratio Ratio Directive
CAPITAL CATEGORY
Well capitalized .............. > or = 10.0 > or = 6.0 > or = 5.0 No
Adequately capitalized ........ > or = 8.0 > or = 4.0 > or = 4.0*
Undercapitalized .............. < 8.0 < 4.0 < 4.0*
Significantly undercapitalized. < 6.0 < 3.0 < 3.0
Critically undercapitalized ... < or = 2.0
* 3.0 for those banks having the highest available regulatory rating.
In the event an institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of regulatory
intervention. For well capitalized institutions, FDICIA provides authority for
regulatory intervention where the institution is deemed to be engaging in unsafe
or unsound practices or receives a less than satisfactory examination report
rating for asset quality, management, earnings or liquidity. All but well
capitalized institutions are prohibited from accepting brokered deposits without
prior regulatory approval.
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Under FDICIA, financial institutions are subject to increased regulatory
scrutiny and must comply with certain operational, managerial and compensation
standards to be developed by Federal Reserve Board regulations. FDICIA also
requires the regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including standards requiring a
minimum ratio of classified assets to capital, minimum earnings necessary to
absorb losses and minimum ratio of market value to book value for publicly held
institutions. Additional regulations are required to be developed relating to
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and excessive compensation, fees and benefits.
FDICIA also requires that banking agencies reintroduce loan-to-value ("LTV")
ratio regulations which were previously repealed by the 1982 Act. LTV's limit
the amount of money a financial institution may lend to a borrower, when the
loan is secured by real estate, to no more than a percentage to be set by
regulation of the value of the real estate.
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES
The Holding Company and Subsidiaries own in fee simple unencumbered the
following land and buildings:
Main Office Northwest Office - closed July 29, 1994
30 S George Street 1120 Roosevelt Avenue
York, PA 17401 York, PA 17404
Research & Administrative Westgate Office
Services Center 1500 Kenneth Road
915 Indian Rock Dam Road York, PA 17404
York, PA 17403
Richland Avenue Office Memory Lane Office
905 Indian Rock Dam Road 200 Memory Lane
York, PA 17403 York, PA 17402
Windsor Office Emigsville Office
2 E Main Street 2123 N George Street
Windsor, PA 17366 Emigsville, PA 17318
York Haven Office
Pennsylvania Avenue at
Landvale Street
York Haven, PA 17370
The Drovers & Mechanics Bank is the sole occupant of all land and buildings
listed above.
The following property is pledged as collateral for a mortgage loan secured
to purchase the property:
96 South George Office Building
96 South George Street
York, PA 17401
The five-story office building adjacent to the Main Office provides for
future growth and enables the Corporation to maintain headquarters in
downtown York. In January of 1996, the executive offices of The Drovers &
Mechanics Bank relocated to the fifth floor of the office building.
The following branch offices are leased:
Queensgate Office
Queensgate Shopping Center
York, PA 17403
$1,750.00 per month rental; lease expires October 1, 2000.
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES
South York Plaza Office
275 Pauline Drive
in the Giant Food Store
York, PA 17402
$2,916.67 per month rental; lease expires August 22, 2000, and is renewable for
one five-year option.
Cape Horn Office
Cape Horn Square
RD#2 Lombard Street
Red Lion, PA 17356
$2,500.00 per month land rental; lease expires March 1, 2012, and is renewable
six five-year options. Building owned by the Corporation.
West Manchester Office
1750 Loucks Road
in the Giant Food Store
York, PA 17404
$2,500.00 per month rental; lease expires March 1, 1999, and is renewable for
two five-year options.
York Marketplace Office
2415 East Market Street
in the Giant Food Store
York, PA 17402
$2,500.00 per month rental; lease expires May 1, 1999, and is renewable for
two five-year options.
Mt. Rose Avenue Office
Mt. Rose Avenue at
Albemarle Street
York, PA 17403
$20,000.00 per year land rental; lease expires January 1, 2001. Additionally,
and leased equipment of $45,840.00 per year is required to be paid by the Bank.
This transaction has been classified as a capitalized lease.
Although the facilities currently owned or leased by the Corporation are
sufficient for its operations, the Corporation may obtain additional space as
required.
The Corporation is evaluating a plan to increase its branch office network in
York County by as many as three newly constructed offices in 1996. The new
sites would target high growth areas in the immediate market. Construction
would be funded out of operations. The expanded branch network would provide
for continued deposit growth.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
the dates indicated:
(In thousands) 1995 1994 1993
U.S. Government ............. $6,562 $5,937 $5,302
U.S. Agencies ............... 66,188 65,260 57,070
Municipal ................... 14,488 16,430 16,796
Corporate ................... 1,782 3,566 4,300
Total debt securities ....... 89,020 91,193 83,468
Equity securities ........... 2,803 3,166 2,368
Total investment securities . $91,823 $94,359 $85,836
The following table sets forth the contractual maturities of debt securities
classified as held-to-maturity at December 31, 1995:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $ 0 $1,000 $ 0 $ 0 $1,000
U.S. Agencies .... 0 3,683 1,411 11,407 16,501
Municipal ........ 856 5,965 1,930 2,670 11,421
Total ............ $ 856 $10,648 $3,341 $14,077 $28,922
The following table depicts the average weighted yields of the held-to-maturity
investments by maturity at December 31, 1995:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 0.00% 7.00% 0.00% 0.00% 7.00%
U.S. Agencies .... 0.00% 5.21% 9.18% 6.44% 6.40%
Municipal ........ 5.84% 7.28% 7.21% 5.53% 6.75%
Total ............ 5.84% 6.54% 8.04% 6.26% 6.56%
11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INVESTMENT PORTFOLIO (continued)
The following table sets forth the contractual maturities of debt securities
classified as available-for-sale at December 31, 1995:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $3,033 $2,529 $ 0 $ 0 $5,562
U.S. Agencies .... 0 6,422 2,790 40,475 49,687
Municipal ........ 140 1,795 221 911 3,067
Corporate ........ 807 463 0 512 1,782
Total ............ $3,980 $11,209 $3,011 $41,898 $60,098
The following table depicts the average weighted yields of the available-for-
sale investments by maturity at December 31, 1995:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 5.20% 5.96% 0.00% 0.00% 5.54%
U.S. Agencies .... 0.00% 6.32% 7.30% 6.73% 6.71%
Municipal ........ 4.10% 4.40% 4.97% 5.23% 4.67%
Corporate ........ 6.32% 7.39% 0.00% 7.86% 7.04%
Total ............ 5.39% 5.97% 7.13% 6.71% 6.51%
The average yields are computed by dividing annual interest income, including
the accretion of discounts and amortization of premiums, by the amortized cost
of securities at December 31, 1995. The yield on Municipal investments has not
been restated on a fully tax equivalent basis.
For additional information see Note 6 on pages 20-21 of the Corporation's 1995
Annual Report.
12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LOAN DATA
Loans are comprised of the following:
YEAR ENDED DECEMBER 31,
(In thousands) 1995 1994 1993 1992 1991
Domestic loans:
Commercial, financial and
industrial................. $66,798 $59,943 $54,714 $52,415 $48,311
Real estate:
Construction ............. 5,910 7,163 5,831 1,927 1,191
Mortgage ................. 141,565 120,392 114,320 100,259 89,068
Consumer ................... 45,548 46,168 37,802 31,809 33,867
Leasing and other (net) .... 9 6 15 10 2
Total domestic loans ......... 259,830 233,672 212,682 186,420 172,439
Foreign loans ................ 0 0 0 0 0
Total domestic and
foreign loans ............... 259,830 233,672 212,682 186,420 172,439
Unearned income .............. -4,425 -4,297 -3,736 -3,342 -4,118
Loans net of unearned ........ 255,405 229,375 208,946 183,078 168,321
Reserve for loan losses ...... -2,937 -2,638 -2,332 -2,022 -1,630
Net loans .................... $252,468 $226,737 $206,614 $181,056 $166,691
For additional information see Note 7 on page 21-22 of the Corporation's 1995
Annual Report.
13 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MATURITIES AND RATE SENSITIVITY OF THE LOAN PORTFOLIO
(EXCLUDING CONSUMER AND RESIDENTIAL REAL ESTATE LOANS)
The following table shows the amounts of loans (excluding consumer, residential
real estate and other loans) outstanding as of December 31, 1995 which, based on
remaining scheduled repayments of principal, are due in the periods indicated:
AFTER
REMAINING MATURITIES ONE YR ONE TO OVER
(In thousands) OR LESS FIVE YRS FIVE YRS TOTAL
Domestic loans:
Commercial, financial and industrial . $54,597 $10,284 $1,917 $ 66,798
Real estate construction ............. 4,150 808 952 5,910
Foreign loans .......................... 0 0 0 0
Total .................................. $58,747 $ 11,092 $ 2,869 $ 72,708
Rate sensitivity:
Predetermined rate ................... $3,278 $8,273 $2,818 $ 14,369
Floating or adjustable rate .......... 55,469 2,819 51 58,339
Total .................................. $58,747 $ 11,092 $ 2,869 $ 72,708
Drovers Bancshares Corporation has no set rollover policy. Many of our loans
are made on a short-term basis with full intention of renewal at time of
maturity. All loans, however, are reviewed on a continual basis for
creditworthiness. Should a loan become questionable or approach problem loan
status, it then undergoes a formal review process by all appropriate levels of
authority.
14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NONACCRUAL, RESTRUCTURED LOANS AND NONPERFORMING ASSETS
The following table shows loans on nonaccrual status or loans which have been
restructured for the past five years:
PRINCIPAL AMOUNT AT YEARS END DECEMBER 31,
(In thousands) 1995 1994 1993 1992 1991
Domestic:
Nonaccrual loans ................. $ 934 $ 416 $ 385 $ 237 $ 551
90 days past due still accruing .. 9 6 2 3 0
Restructured loans ............... 791 818 0 0 0
Foreign:
Nonaccrual loans ................. 0 0 0 0 0
90 days past due still accruing .. 0 0 0 0 0
Restructured loans ............... 0 0 0 0 0
Total .............................. $1,734 $1,240 $ 387 $ 240 $ 551
Nonaccrual loans as a percentage of net loans increased from 0.18% in 1994 to
0.37% at December 31, 1995. An increase in nonaccrual loans secured by 1-4
family residential mortgages accounted for most of the change, increasing from
$246,000 at December 31, 1994 to $651,000 at the end of 1995. These loans are
typically well secured. Charge-offs in this category have been low, as can be
seen on the Analysis of Reserve for Possible Loan Losses on the following page.
Nonaccrual loans as a percentage of loans continues to be well below the
Corporation's peer group average of 0.81% as reported September 30, 1995.
Restructured loans consists mainly of a single commercial loan, well
collateralized by real estate, and performing in compliance with the modified
terms.
The following table presents the changes in the balance of other real estate
over the past five years:
(In thousands) 1995 1994 1993 1992 1991
Balance at beginning of year ....... $ 0 $ 141 $ 25 $ 131 $ 378
Assets acquired by foreclosure
or repossession ................... 300 0 161 199 131
Dispositions ....................... -106 -152 -32 -281 -296
Other (net) ........................ 1 11 -13 -24 -82
Balance at end of year ............. $ 195 $ 0 $ 141 $ 25 $ 131
Other real estate consists of assets which have been repossessed or acquired
through workout situations on defaulted loans.
For additional information on nonperforming assets see Note 1 and Note 7 on
pages 17-18 and 21-22, respectively, of the Corporation's 1995 Annual Report.
15 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANALYSIS OF RESERVE FOR POSSIBLE LOAN LOSSES
YEARS ENDED DECEMBER 31,
(In thousands) 1995 1994 1993 1992 1991
Balance, January 1, ................ $ 2,638 $ 2,332 $ 2,022 $ 1,630 $1,251
Provision for loan losses .......... 501 382 447 552 568
Charge-offs:
Commercial, financial
and industrial .................. 31 19 0 48 116
Real estate - construction ....... 0 0 0 0 0
Real estate - mortgage ........... 45 0 0 15 0
Consumer ......................... 257 157 179 155 125
Total charge-offs .................. 333 176 179 218 241
Recoveries:
Commercial, financial
and industrial .................. 11 0 0 5 8
Real estate - construction ....... 0 0 0 0 0
Real estate - mortgage ........... 0 6 0 0 0
Consumer ......................... 120 94 42 53 44
Total recoveries ................... 131 100 42 58 52
Net charge-offs .................... 202 76 137 160 189
Balance, December 31, .............. $ 2,937 $ 2,638 $ 2,332 $ 2,022 $ 1,630
Ratio of net charge-offs to average
loans outstanding ................. 0.08% 0.04% 0.07% 0.09% 0.12%
Drovers Bancshares Corporation manages the risk characteristics of its loan
portfolio through various control processes. Risk is further controlled through
the application of lending procedures such as the holding of adequate
collateral, contractual guarantees, and compensating balances.
Management also considers the amount of recent and expected charge-offs, the
loan portfolio mix and changes in the economy when determining the provision for
loan losses. Management believes these procedures provide adequate assurance
against losses and the level of the Reserve for Possible Loan Losses is
sufficient to meet any present or potential risks.
For additional information see Note 1 and Note 7 on pages 17-18 and 21-22,
respectively, of the Corporation's 1995 Annual Report.
16 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALLOCATION OF RESERVE FOR POSSIBLE LOAN LOSSES
The following table presents the amount of the allowance allocated to each of
the loan categories and the percentage of total loans for the past five years:
YEARS ENDED DECEMBER 31,
1995 1994 1993
Percent Percent Percent
of Loans of Loans of Loans
Reserve to Total Reserve to Total Reserve to Total
(In thousands) Amount Loans Amount Loans Amount Loans
Commercial, financial
and industrial ...... $515 26.2% $630 26.2% $723 26.2%
Real Estate:
Construction ........ 16 2.3% 29 3.1% 48 2.8%
Mortgage ............ 327 55.3% 204 52.3% 328 54.4%
Consumer .............. 140 16.2% 120 18.4% 110 16.6%
Leasing and other ..... 0 0.0% 0 0.0% 0 0.0%
Unallocated ........... 1,939 n/a 1,655 n/a 1,123 n/a
Total ................. $2,937 100.0% $2,638 100.0% $2,332 100.0%
YEARS ENDED DECEMBER 31,
1992 1991
Percent Percent
of Loans of Loans
Reserve to Total Reserve to Total
(In thousands) Amount Loans Amount Loans
Commercial, financial
and industrial ...... $964 28.6% $616 28.8%
Real Estate:
Construction ........ 45 1.1% 12 0.7%
Mortgage ............ 419 54.4% 440 52.5%
Consumer .............. 86 15.9% 338 18.0%
Leasing and other ..... 0 0.0% 0 0.0%
Unallocated ........... 508 n/a 224 n/a
Total ................. $2,022 100.0% $1,630 100.0%
For additional information see Note 1 and Note 7 on pages 17-18 and 21-22,
respectively, of the Corporation's 1995 Annual Report.
17 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DEPOSIT STRUCTURE
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, are summarized as follows:
(In thousands) 1995 1994 1993
Three months or less .............. $3,996 $1,149 $1,378
Over three months to six months ... 2,336 2,213 1,658
Over six months to twelve months .. 3,061 1,289 1,985
Over twelve months ................ 6,798 6,935 4,456
Total ............................. $16,191 $11,586 $9,477
QUARTERLY FINANCIAL DATA
Unaudited
1995
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $3,563 $3,653 $3,667 $3,641 $14,524
Provision for loan losses 105 155 105 136 501
Total noninterest income . 659 683 763 732 2,837
Total noninterest expense
and income taxes ....... 3,085 3,093 3,120 3,281 12,579
Net income ............... $1,032 $1,088 $1,205 $ 956 $4,281
PER SHARE DATA
Net income ............... $0.46 $0.49 $0.54 $0.42 $1.91
1994
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $2,947 $3,147 $3,316 $3,484 $12,894
Provision for loan losses 111 111 84 76 382
Total noninterest income . 711 687 579 480 2,457
Total noninterest expense
and income taxes ....... 2,600 2,754 2,859 2,987 11,200
Net income ............... $ 947 $ 969 $ 952 $ 901 $3,769
PER SHARE DATA
Net income ............... $0.42 $0.43 $0.43 $0.41 $1.69
Data adjusted for 7% stock dividend issued in 1995 and the 5 for 4 stock split
in the form of a 25% stock dividend issued in 1994.
18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEREST DIFFERENTIAL
December 31,
1995 1994
(In thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
INTEREST INCOME
Increase (decrease) in:
Money market investments and
Interest-bearing deposits
with banks ...................... $-26 $52 $26 $34 $3 $37
Federal funds sold ............... 0 -2 -2 -24 3 -21
Total money market investments ... -26 50 24 10 6 16
Investment securities
Taxable investment securities ... -129 594 465 -42 -142 -184
Equity securities ............... 41 15 56 -11 -38 -49
Tax-exempt investment securities -9 -58 -67 -103 -42 -145
Total investment securities ...... -97 551 454 -156 -222 -378
Total loans ...................... 2,736 1,539 4,275 1,472 -255 1,217
Total interest income ............ 2,613 2,140 4,753 1,326 -471 855
INTEREST EXPENSE
Increase (decrease) in:
Interest-bearing deposits
Demand .......................... -12 15 3 63 -216 -153
Savings ......................... -326 130 -196 39 -248 -209
Time ............................ 1,587 1,043 2,630 358 -327 31
Total interest-bearing deposits .. 1,249 1,188 2,437 460 -791 -331
Borrowed funds
Short-term borrowings ........... 174 21 195 -39 105 66
Long-term borrowings ............ 380 111 491 321 104 425
Total borrowed funds ............. 554 132 686 282 209 491
Total interest expense ........... 1,803 1,320 3,123 742 -582 160
Increase in interest differential $810 $820 $1,630 $584 $111 $695
The change in interest due to both rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in cash.
19 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The principal executive officers of Drovers Bancshares Corporation and its
principal subsidiary, The Drovers & Mechanics Bank, as of January 1, 1996, are
as follows:
Name: Richard M. Linder Age: 64
Position and Office: Chairman of the Board of Drovers Bancshares Corporation
and The Drovers & Mechanics Bank. Mr. Linder joined the organization in 1974.
He was appointed President and Chief Executive Officer in 1977, and has served
as Chairman of the Board since 1979. Mr. Linder will be retiring from Drovers
Bank on March 1, 1996.
Name: A. Richard Pugh Age: 55
Position and Office: President and Chief Executive Officer of Drovers
Bancshares Corporation and The Drovers & Mechanics Bank. Mr. Pugh joined the
organization in 1988, he was appointed President in 1990 and C.E.O. in 1994. He
has extensive and diversified experience in bank management. Mr. Pugh will
succeed Mr. Linder as Chairman of the Board effective March 1, 1996.
Name: George L.F. Guyer, Jr. Age: 62
Position and Office: Senior Vice President and Secretary of Drovers Bancshares
Corporation and The Drovers & Mechanics Bank. Mr. Guyer joined the organization
in 1964. He served as Marketing Coordinator from 1972 to 1990.
Name: Michael J. Groft Age: 40
Position and Office: Executive Vice President of Drovers Bancshares Corporation
and Executive Vice President and Senior Loan Officer of The Drovers & Mechanics
Bank. Mr. Groft joined the organization in March 1978. He has served in
various loan officer positions since 1978.
Name: Debra A. Goodling Age: 37
Position and Office: Executive Vice President and Treasurer of Drovers
Bancshares Corporation and Executive Vice President, Treasurer and Chief
Financial Officer of The Drovers & Mechanics Bank. Ms. Goodling joined the
organization in February 1977. She has served in various financial officer
positions since 1981.
Name: Lorie Y. Runion Age: 44
Position and Office: Senior Vice President-Marketing and Human Resources of The
Drovers & Mechanics Bank. Ms. Runion joined the organization in 1983. She has
served in various Human Resource positions since 1983 and assumed responsibility
for Marketing in 1990.
Name: Kerry McLaughlin Age: 41
Position and Office: Senior Vice President and Senior Trust Officer of The
Drovers & Mechanics Bank. Mr. McLaughlin joined the organization in April 1992.
He has extensive experience in the banking industry, specializing in the Trust
function. Prior to joining Drovers Bank, Mr. McLaughlin was employed with the
Trust Group of United Carolina Bank of South Carolina in the position of Vice
President and Trust Officer.
Name: Shawn A. Stine Age: 40
Position and Office: Senior Vice President and Senior Corporate Banking Officer
of The Drovers & Mechanics Bank. Mr. Stine joined the organization in August
1991 in the position of Vice President and Senior Corporate Banking Officer.
Prior to joining Drovers Bank, Mr. Stine was employed with Hamilton Bank of York
Pennsylvania in the position of Vice President and Relationship Manager.
Additional information required for this item is contained on pages 3-8 of the
Definitive Proxy Statement dated April 19, 1996. 20 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART IV. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DROVERS BANCSHARES CORPORATION Date ___March 27, 1996__________
(Registrant)
By___/s/__A. Richard Pugh ______________
A. Richard Pugh, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
__/s/__L. Doyle Ankrum___________ _________________________________
L. Doyle Ankrum, Director Frank Motter, Director
__/s/__Josephine D. Appell_______ __/s/__Robert L. Myers, Jr.______
Josephine D. Appell, Director Robert L. Myers, Jr., Director
__/s/__J. Samuel Gregory_________ __/s/__Harlowe R. Prindle________
J. Samuel Gregory, Director Harlowe R. Prindle, Director
__/s/__Daniel E. Hess____________ _________________________________
Daniel E. Hess, Director Basil A. Shorb, III, Director
__/s/__George W. Hodges__________ __/s/__D. John Sparler, Jr.______
George W. Hodges, Director D. John Sparler, Jr., Director
__/s/__Herbert D. Lavetan________ __/s/__Robert H. Stewart, Jr.____
Herbert D. Lavetan, Director Robert H. Stewart, Jr., Director
__/s/__Richard M. Linder_________ __/s/__John U. Wisotzkey_________
Richard M. Linder, Director John U. Wisotzkey, Director
__/s/__David C. McIntosh_________ _________________________________
David C. McIntosh, Director Delaine A. Zimmer, Director
__/s/__Debra A. Goodling_________ __/s/__John D. Blecher___________
Debra A. Goodling, Executive Vice John D. Blecher, Vice President
President and Treasurer and Assistant Treasurer
Principal Financial Officer Principal Accounting Officer
21 <PAGE>
EXHIBIT 23
DROVERS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Form 10-K of Drovers
Bancshares Corporation and Subsidiaries of our report dated January 18, 1996,
included in the 1995 Annual Report to Shareholders of Drovers Bancshares
Corporation and Subsidiaries.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3) pertaining to the shelf registration of the Dividend Reinvestment and
Stock Purchase Plan of Drovers Bancshares Corporation and Subsidiaries of our
report dated January 18, 1996, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedules included
in this Form 10-K of Drovers Bancshares Corporation and Subsidiaries.
/S/ Harry Ness & Company
York, Pennsylvania
March 20, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 17,418
<INT-BEARING-DEPOSITS> 1,353
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,901
<INVESTMENTS-CARRYING> 28,922
<INVESTMENTS-MARKET> 29,653
<LOANS> 255,405
<ALLOWANCE> 2,937
<TOTAL-ASSETS> 382,791
<DEPOSITS> 306,653
<SHORT-TERM> 7,302
<LIABILITIES-OTHER> 3,743
<LONG-TERM> 30,172
0
0
<COMMON> 11,204
<OTHER-SE> 23,717
<TOTAL-LIABILITIES-AND-EQUITY> 382,791
<INTEREST-LOAN> 21,722
<INTEREST-INVEST> 6,237
<INTEREST-OTHER> 94
<INTEREST-TOTAL> 28,053
<INTEREST-DEPOSIT> 11,258
<INTEREST-EXPENSE> 13,529
<INTEREST-INCOME-NET> 14,524
<LOAN-LOSSES> 501
<SECURITIES-GAINS> 106
<EXPENSE-OTHER> 11,058
<INCOME-PRETAX> 5,802
<INCOME-PRE-EXTRAORDINARY> 5,802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,281
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
<YIELD-ACTUAL> 8.22
<LOANS-NON> 934
<LOANS-PAST> 9
<LOANS-TROUBLED> 791
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,638
<CHARGE-OFFS> 333
<RECOVERIES> 131
<ALLOWANCE-CLOSE> 2,937
<ALLOWANCE-DOMESTIC> 998
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,939
</TABLE>
EXHIBIT 13. ANNUAL REPORT TO SHAREHOLDERS - ELECTRONIC COPY
Drovers Bancshares Corporation and Subsidiaries
This document contains excerpts of the annual report referenced in Form 10-K.
CONTENTS
Cross Reference for Electronic Filing/Hard Copy
Electronic Hard
Filing Copy
Consolidated Financial Highlights ................................ 2 1
Common Stock Market Prices and Dividends ......................... 3 1
Eleven-Year Summary of Selected Financial Information ............ 41 10
Consolidated Statements of Condition ............................. 4 13
Consolidated Statements of Income ................................ 5 14
Consolidated Statements of Changes in Shareholders' Equity ....... 6 15
Consolidated Statements of Cash Flows ............................ 7 16
Notes to Consolidated Financial Statements ....................... 8 17
Report of Independent Certified Public Accountants ............... 28 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 29 30
Supplemental Financial Data ...................................... 40 38
<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
1995 1994 % Change
FINANCIAL POSITION AT DECEMBER 31,
Assets .................................. $382,791,000 $352,287,000 8.66%
Net loans ............................... 252,468,000 226,737,000 11.35%
Deposits ................................ 306,653,000 283,173,000 8.29%
Shareholders' equity .................... 34,921,000 29,724,000 17.48%
INCOME FOR THE YEAR
Interest income ......................... $28,053,000 $23,300,000 20.40%
Interest expense ........................ 13,529,000 10,406,000 30.01%
Net interest income ..................... 14,524,000 12,894,000 12.64%
Net income .............................. 4,281,000 3,769,000 13.58%
FINANCIAL RATIOS
Return on average assets ................ 1.16% 1.11% 4.50%
Return on average shareholders' equity .. 13.04% 12.76% 2.19%
PER SHARE DATA*
Net income .............................. $1.91 $1.69 13.02%
Cash dividends .......................... $0.63 $0.52 21.15%
Book value (year-end) ................... $15.58 $13.36 16.62%
Weighted average shares outstanding ..... 2,240,702 2,224,260 0.74%
Number of shareholders .................. 1,373 1,329 3.31%
TRUST DEPARTMENT
Book value of trust assets administered . $124,994,000 $113,463,000 10.16%
* Data adjusted for 7% stock dividend issued in 1995 and the 5 for 4 stock split
in the form of a 25% stock dividend issued in 1994.
2<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
COMMON STOCK MARKET PRICES AND DIVIDENDS
The common stock of Drovers Bancshares Corporation is traded in the over-the-
counter local market by several brokers. Quotations as to bid and asked prices
are published in the local newspaper. The quarterly year-to-date average
shares outstanding and quarterly bid and asked prices were as follows:
Cash
1995 Bid** Asked** Shares* Dividends Paid*
March 31 .................. $21.00 $21.75 2,240,572 $0.14
June 30 ................... 21.25 22.00 2,240,658 0.16
September 29 .............. 22.00 23.25 2,240,687 0.16
December 29 ............... 23.75 23.75 2,240,702 0.17
1994
March 31 .................. $21.10 $22.20 2,216,648 $0.12
June 30 ................... 22.00 23.60 2,218,451 0.12
September 30 .............. 23.00 24.50 2,220,208 0.14
December 30 ............... 22.75 23.50 2,224,260 0.14
* Data adjusted for 7% stock dividend issued in 1995 and the 5 for 4 stock split
in the form of a 25% stock dividend issued in 1994.
**Data adjusted to reflect 5 for 4 stock split in the form of a 25% stock
dividend issued in 1994.
3<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
(in thousands) 1995 1994
ASSETS
Cash and due from banks ............................... $17,418 $12,310
Money market investments .............................. 1,353 198
Investment securities (fair value $92,554 and $93,884) 91,823 94,359
Loans (net of unearned income of $4,425 and $4,297) ... 255,405 229,375
Reserve for loan losses ............................... 2,937 2,638
Net loans ........................................... 252,468 226,737
Bank premises and equipment ........................... 13,880 13,439
Other assets .......................................... 5,849 5,244
TOTAL ASSETS .......................................... $382,791 $352,287
LIABILITIES
Deposits:
Noninterest-bearing ................................. $34,154 $33,019
Interest-bearing .................................... 272,499 250,154
Total deposits .................................... 306,653 283,173
Federal funds purchased and securities sold
under agreements to repurchase ...................... 7,302 14,592
Other borrowings....................................... 30,172 22,246
Other liabilities ..................................... 3,743 2,552
TOTAL LIABILITIES ..................................... 347,870 322,563
SHAREHOLDERS' EQUITY
Common stock ($5 par value)10,000,000 shares authorized;
issued and outstanding--2,240,775 shares in 1995
and 2,090,565 in 1994 ............................... 11,204 10,453
Additional paid-in capital ............................ 14,657 11,989
Retained earnings ..................................... 8,536 8,997
Unrealized holding gains (losses) on available-
for-sale securities ................................. 524 -1,715
TOTAL SHAREHOLDERS' EQUITY ............................ 34,921 29,724
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $382,791 $352,287
See notes to consolidated financial statements.
4<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(in thousands, except per share data) 1995 1994 1993
INTEREST INCOME
Interest and fees on loans ...................... $21,722 $17,447 $16,230
Interest on deposits with banks ................. 94 68 31
Interest on federal funds sold .................. 0 2 23
Interest and dividends on investment securities:
Taxable investment securities ................. 5,004 4,539 4,723
Equity securities ............................. 176 120 169
Tax-exempt investment securities .............. 1,057 1,124 1,269
Total interest income ....................... 28,053 23,300 22,445
INTEREST EXPENSE
Interest on deposits ............................ 11,258 8,821 9,152
Federal funds purchased and securities sold
under agreements to repurchase................. 422 227 161
Interest on borrowed funds ...................... 1,849 1,358 933
Total interest expense ...................... 13,529 10,406 10,246
Net interest income ......................... 14,524 12,894 12,199
Provision for loan losses ....................... 501 382 447
Net interest income after provision for loan
losses ........................................ 14,023 12,512 11,752
OTHER INCOME
Trust department income ......................... 924 834 808
Service charges on deposit accounts ............. 982 917 812
Securities gains ................................ 106 30 140
Net gains on loan sales ......................... 278 253 471
Equity in earnings (losses) of real estate
venture........................................ -64 -35 1
Other ........................................... 611 458 419
Total other income .......................... 2,837 2,457 2,651
OTHER EXPENSES
Salaries and employee benefits .................. 6,426 6,031 5,385
Occupancy and premises .......................... 798 564 728
Furniture and equipment ......................... 734 703 640
Marketing ....................................... 389 323 336
FDIC insurance assessment ....................... 331 610 581
Net (gain) cost of operation of
other real estate ............................. 3 -11 21
Office supplies ................................. 346 316 291
Other taxes ..................................... 294 266 244
Other operating expense ......................... 1,737 1,553 1,640
Total other expenses ........................ 11,058 10,355 9,866
Income before income taxes and cumulative effect
of change in accounting for income taxes ...... 5,802 4,614 4,537
Applicable income taxes ......................... 1,521 845 1,026
Income before cumulative effect of change
in accounting for income taxes ................ 4,281 3,769 3,511
Cumulative effect of change in accounting
for income taxes .............................. 0 0 352
NET INCOME ...................................... $4,281 $3,769 $3,863
PER SHARE DATA
Income before cumulative effect of change
in accounting for income taxes................. $1.91 $1.69 $1.59
Cumulative effect of change in accounting
for income taxes .............................. 0.00 0.00 0.16
NET INCOME ...................................... $ 1.91 $ 1.69 $ 1.75
See notes to consolidated financial statements.
5<PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Unrealized
Gains
(Losses)
Additional Available- Minimum
(in thousands, except Common Paid-in Retained for-Sale Pension
number of shares) Shares Stock Capital Earnings Securities Liability
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 .. 1,568,170 $7,841 $10,186 $7,527 $0 $0
Net income................ 3,863
Cash dividends ........... -1,080
5% stock dividend issued . 78,627 393 1,455 -1,848
Shares issued ............. 7,230 36 140
Change in unrealized
holding gains on
available-for-sale
securities .............. 769
Change in minimum pension
liability .......... .... -33
Other .................... -14
BALANCE, DECEMBER 31, 1993. 1,654,013 $8,270 $11,781 $8,462 $ 769 - $33
Net income ............... 3,769
Cash dividends ........... -1,156
25% stock dividend issued. 415,639 2,078 -2,078
Shares issued ............. 20,913 105 208
Change in unrealized
holding losses on
available-for-sale
securities............... -2,484
Change in minimum pension
liability ............... 33
BALANCE, DECEMBER 31, 1994 2,090,565 $10,453 $11,989 $8,997 $-1,715 $0
Net income ............... 4,281
Cash dividends ........... -1,407
7% stock dividend issued.. 146,590 733 2,602 -3,335
Shares issued ............. 3,620 18 66
Change in unrealized
holding gains on
available-for-sale
securities............... 2,239
BALANCE, DECEMBER 31, 1995. 2,240,775 $11,204 $14,657 $8,536 $ 524 $ 0
</TABLE>
See notes to consolidated financial statements.
6<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands) 1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $4,281 $3,769 $3,863
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization .................. 972 925 650
Net amortization of investment
security premiums ............................ 105 187 114
Provision for loan losses ...................... 501 382 447
Gain on sale of investment securities
held-to-maturity ............................. -59 -70 -140
(Gain) loss on sale of investment securities
available-for-sale ........................... -47 40 0
Loss on sale of fixed assets ................... 6 1 6
Gain on sale of loans .......................... -278 -253 -471
(Gain) loss on sale of other real estate ....... -1 -11 3
Net deferred loan fees ......................... -2 -178 -39
Equity in (earnings) losses of real
estate venture ............................... 64 35 -1
(Increase) decrease in interest/dividend
receivable ................................... -224 -243 204
Increase in other assets ....................... -340 -186 -134
Increase (decrease) in interest payable ........ 788 415 -197
Increase (decrease) in other liabilities ....... 116 -67 -4
Cumulative effect of change in accounting
for income taxes .............................. 0 0 -352
Decrease in other noncash items ................ -6 -5 -7
Net cash provided by operating activities ......... 5,876 4,741 3,942
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities held-to-maturity ..................... 9,612 5,107 40,250
Proceeds from sales and maturities of investment
securities available-for-sale ................... 7,795 20,159 0
Purchases of investment securities
held-to-maturity ................................ -2,223 -17,791 -25,884
Purchases of investment securities available-
for-sale ........................................ -9,030 -19,919 0
Net increase in loans ............................. -25,952 -20,074 -25,496
Capital expenditures .............................. -1,416 -1,375 -7,402
Proceeds from sale of fixed assets ................ 8 1 2
Purchase of investment in real estate venture ..... -1,285 -600 -450
Proceeds from sale of other real estate ........... 106 153 32
Net cash used in investing activities ............. -22,385 -34,339 -18,948
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and
savings ......................................... -3,441 -2,000 10,680
Net increase (decrease) in certificates of deposit. 26,901 19,256 -1,600
Net increase (decrease) in federal funds purchased
and repurchase agreements ....................... -10,825 14,592 -7,264
Payments made for capital leases .................. -26 -23 -20
Net increase (decrease) in other borrowings ....... 11,486 -1,138 7,101
Proceeds from issuance of common stock ............ 84 313 176
Dividends paid .................................... -1,407 -1,156 -1,080
Net cash provided by financing activities ......... 22,772 29,844 7,993
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS. 6,263 246 -7,013
CASH & CASH EQUIVALENTS AT JANUARY 1, ............. 12,508 12,262 19,275
CASH & CASH EQUIVALENTS AT DECEMBER 31, ........... $18,771 $12,508 $12,262
See notes to consolidated financial statements.
7<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Drovers Bancshares Corporation is a one bank holding company with a principal
subsidiary, The Drovers & Mechanics Bank. The Bank offers a wide variety of
banking and trust services to individuals and commercial customers.
The accounting and reporting policies followed by Drovers Bancshares Corporation
and its subsidiaries conform with generally accepted accounting principles
(GAAP) and general practice within the banking industry. Preparing financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosure of contingencies.
Actual results could differ from those estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of all subsidiaries,
including The Drovers & Mechanics Bank, 96 South George Street and Drovers
Realty Company. All significant intercompany accounts and transactions have
been eliminated in consolidation. Income and expenses are recorded on the
accrual basis of accounting except for trust and certain other fees which are
recorded principally on the cash basis, which does not differ materially from
the accrual basis. Production costs of advertising are expensed when
advertising begins.
STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold. Generally, federal funds are sold for
one-day periods.
SECURITIES:
On December 31, 1993, the Corporation adopted Statement of Financial Accounting
Standard No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Statement requires each debt and equity security to be
classified into one of three categories: held-to-maturity, available-for-sale
or trading. Investments in debt securities which the Corporation has the
positive intent and ability to hold to maturity are classified as held-to-
maturity. These securities are accounted for at amortized cost. Other
securities are classified as available-for-sale. Differences between the
amortized cost and fair value are considered an unrealized holding gain or loss
and are shown net of taxes in Shareholders' Equity. The Corporation classified
no securities as trading at December 31, 1995 or 1994. Such securities
would be bought principally for the purpose of selling them in the near term.
Management reassesses the appropriateness of the classifications each
quarter. The Corporation did not reclassify any securities from held-to-
maturity to available-for-sale as permitted by the Financial Accounting
Standards Board in December 1995. The Corporation calculates amortization and
accretion using the straight-line method which does not differ materially from
the interest method. Security gains and losses are determined using the
specific identification method.
8<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION:
Interest on commercial and real estate mortgage loans is accrued and credited to
operations based upon the principal amount outstanding. Interest on consumer
loans is recognized on the accrual basis using the actuarial method or simple
interest method. Origination fees and costs are deferred and recognized as an
adjustment to yield.
NONPERFORMING ASSETS:
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued due to a serious weakening of the borrower's financial
condition. In addition, nonperforming assets include other real estate received
in foreclosure and loans modified in troubled debt restructurings.
Loans are generally placed on a nonaccrual basis when principal or interest is
past due 90 days or more and when, in the opinion of management, full collection
of principal or interest is unlikely. At the time a loan is placed on
nonaccrual status, the accrual of interest is discontinued. Income on such
loans is then recognized only to the extent of cash received. When prospects of
recovery of the loan principal have significantly diminished, the loan is
charged against the reserve for loan losses and any subsequent recoveries are
credited to the reserve account.
The basis in other real estate is carried at the lower of fair market value less
costs to liquidate or the carrying value of the related loan at the time of
acquisition.
RESERVE FOR LOAN LOSSES:
The reserve for loan losses is based on management's evaluation of the loan
portfolio and reflects an amount which, in management's opinion, is adequate to
absorb losses in the existing portfolio. Management evaluates the adequacy of
its loan loss reserve each quarter. Provided that the quarterly review does not
reflect a significant disparity from estimates in loan growth, quality and
charge-offs, the quarterly provision remains constant. A significant change in
estimate could result in a material change to net income.
Beginning January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118. Statement No. 114 excludes large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment.
9<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RESERVE FOR LOAN LOSSES, continued:
Under the new standard, the 1995 allowance for credit losses related to loans
that are identified for evaluation in accordance with Statement No. 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. The fair value
of collateral is used whenever the collateral value is substantial in comparison
to the loan balance. Loans are deemed impaired when it is probable that the
Corporation will be unable to collect all amounts due in accordance with the
terms of the loan agreement. Loans are identified as impaired through various
means including a formal loan review process, quarterly review of loan loss
reserve adequacy, past due listings and watch lists.
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.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation, computed on the straight-line method, is charged to
operations based on the following range of lives: buildings - 20 to 60 years and
equipment - 3 to 20 years. Leasehold improvements are amortized over the terms
of the respective leases or the estimated useful lives of the improvements,
whichever is shorter. Maintenance, repairs and minor replacements are expensed
as incurred. Gains and losses on dispositions are reflected in current
operations.
TRUST ASSETS:
Assets held by the Corporation's subsidiary in fiduciary or agency capacity for
customers are not included in the consolidated financial statements as such
items are not assets of the Corporation or its subsidiaries.
INCOME TAXES:
Under Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," 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. 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.
Under SFAS No. 109, the effect on deferred tax assets and liabilities due to
changes in tax rates is recognized in income in the period that includes the
enactment date.
10<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effective January 1, 1993 the Corporation adopted SFAS No. 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of income.
PER SHARE DATA:
Primary earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during each
period.
NOTE 2 - CASH AND DUE FROM BANKS
The subsidiary Bank of the Corporation maintains average reserve balances to
comply with Federal Reserve Bank guidelines. Reserve balances are based on
outstanding deposits and consist primarily of vault cash. These reserves
were $5,286,000 and $5,862,000 at December 31, 1995 and 1994, respectively.
Average required reserves during 1995 and 1994 were $5,225,000 and $5,734,000,
respectively.
NOTE 3 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial condition. The amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
11<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees is represented by the amount
of those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
1995 1994
Commitments to extend credit (legally binding) ............ $64,912 $47,988
Standby letters of credit and financial guarantees ........ $5,823 $6,708
Commitments to extend 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. The Corporation evaluates each customer's
creditworthiness on a case by case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counter party. Collateral held varies but
may include accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party. Most guarantees extend for one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Corporation holds
collateral supporting those commitments for which collateral is deemed
necessary.
NOTE 4 - CONTINGENT LIABILITIES AND RESTRICTIONS ON DIVIDENDS
In the normal course of business, there are various legal proceedings pending
against the Corporation. Management considers that the aggregate liabilities, if
any, arising from such actions would not have a material adverse effect on the
consolidated financial position of the Corporation.
The Drovers & Mechanics Bank is a Pennsylvania state-chartered bank and must
comply with the State's banking code. Under the code, cash dividends may be
declared and paid only out of accumulated net earnings. In addition, surplus
(additional paid-in capital) cannot be reduced by the payment of a dividend.
12<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Corporation maintains thirteen branch offices, all of which are located in
York County, Pennsylvania. The Corporation grants credit to customers,
substantially all of whom are local residents. The Corporation emphasizes
diversification of credit risk among industries and borrowers. Concentrations
of credit risk can exist in relation to certain groups. A group concentration
arises when a number of customers have economic characteristics that could
similarly affect their ability to repay obligations due to changes in economic
or other conditions. The Corporation has a diversified loan portfolio and does
not have any loan concentrations exceeding ten percent of total loans.
NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES
Money market investments are stated at cost, which approximates fair value.
Money market investments as of December 31, 1995 and 1994 were $1,353,000 and
$198,000, respectively. All money market investments were in the form of
interest-bearing deposits with other financial institutions.
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
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations 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
13<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, continued
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
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations 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
The amortized cost and estimated fair value of debt securities at December 31,
1995, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay obligations with or without call or prepayment penalties.
Held-to-maturity Available-for-sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less ............. $856 $863 $3,978 $3,980
Due after one year through five years 6,965 7,383 11,145 11,209
Due after five years through ten years 1,930 2,139 221 221
Due after ten years ................. 2,670 2,746 6,353 6,489
12,421 13,131 21,697 21,899
Mortgage-backed securities and
collateralized mortgage
obligations ...................... 16,501 16,522 37,682 38,199
Total debt securities ............... $28,922 $29,653 $59,379 $60,098
14<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, continued
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
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations 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
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations 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
Proceeds from sales of investment securities classified as available-for-sale
during 1995 were $109,000. Gross gains were $47,000. There were no losses on
sales. The proceeds from sales of available-for-sale securities during 1994
were $7,190,000. The gross realized gains and gross realized losses on those
sales were $52,000 and $92,000, respectively.
No held-to-maturity investment securities were sold during 1995 or 1994,
however, gains were recognized on securities with call options exercised by the
issuer. Realized gains were $59,000 in 1995 and $70,000 in 1994.
15<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, continued
At December 31, 1995 and 1994, assets with a carrying value of $27,078,000 and
$17,803,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits and repurchase agreements. The
aggregate book value of debt securities from a single issuer did not exceed 10%
of stockholders' equity at December 31, 1995 or 1994.
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES
Loans are comprised of the following as of December 31:
1995 1994
Commercial, financial and industrial loans..... $66,840 $ 59,973
Real estate mortgage loans:
Real estate construction-related ............. 5,910 7,163
Real estate mortgage loans secured by 1-4
family residential properties ............... 91,262 87,676
Other real estate ............................ 49,903 32,325
Total real estate mortgage loans ............... 147,075 127,164
Consumer loans:
Monthly payment .............................. 39,987 40,836
Other revolving credit ....................... 1,494 1,396
Total consumer loans ........................... 41,481 42,232
Other .......................................... 9 6
Total loans .................................... $255,405 $229,375
Changes in the reserve for loan losses for the years ended December 31, were as
follows:
1995 1994 1993
Balance, beginning of year ............ $2,638 $2,332 $2,022
Provision for loan losses ............. 501 382 447
Loans charged-off:
Commercial, financial and industrial. 31 19 0
Real estate ......................... 45 0 0
Consumer ............................ 257 157 179
Total loans charged-off ............... 333 176 179
Recoveries:
Commercial, financial and industrial. 11 0 0
Real estate ......................... 0 6 0
Consumer ............................ 120 94 42
Total recoveries ...................... 131 100 42
Balance, end of year .................. $ 2,937 $ 2,638 $ 2,332
16<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES, continued
Nonaccrual loans were $934,000, $416,000 and $385,000 at December 31, 1995, 1994
and 1993, respectively. If interest due on all nonaccrual loans had been
accrued at the original contract rates, it is estimated that income before taxes
would have been greater by $34,000, $14,000 and $15,000 at December 31, 1995,
1994 and 1993, respectively. Accruing loans which were contractually past due
90 days or more were $9,000, $6,000 and $0 at December 31, 1995, 1994 and 1993,
respectively.
The total recorded investment in impaired loans under Statement of Financial
Accounting Standards No. 114 was $851,000 at December 31, 1995. The amount of
that recorded investment for which there is a related allowance for loan losses
in accordance with this statement is $0. Loans classified as impaired under this
statement as a result of troubled debt restructurings which 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 average
recorded investment in impaired loans during the period was $880,000. The
Corporation recognized interest income on those impaired loans of $70,000.
Interest income recognized on a cash basis would have been $70,000.
Loans modified in troubled debt restructurings and in compliance with modified
terms were $818,000 and $0 at December 31, 1994 and 1993, respectively. All
restructured loans were secured by real estate. Gross interest income that
would have been recorded in 1994 had all loans been in accordance with original
terms was $92,000 compared to actual gross interest income of $70,000.
The Corporation's banking subsidiary has granted loans to officers, directors
and their associates. Related party loans are made on substantially the same
terms, including rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties and do not represent more than a
normal risk of collection. The aggregate dollar amounts of the loans were
$14,155,000 and $17,016,000 at December 31, 1995 and 1994, respectively. During
1995, $46,869,000 of new loans were made to related parties and repayments
totaled $49,730,000.
Residential mortgage loans with a book value of $2,499,000 were committed for
sale and awaiting settlement at December 31, 1995. The cumulative market value
exceeded the book value of these loans.
17<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31:
1995 1994
Land and land improvements ............................. $1,149 $1,149
Buildings .............................................. 11,884 11,796
Capitalized leased premises and equipment .............. 442 441
Furniture and equipment ................................ 7,638 6,428
21,113 19,814
Less accumulated depreciation .......................... 7,233 6,375
Total bank premises and equipment ...................... $13,880 $13,439
Provisions for depreciation charged to operating expenses were $972,000,
$925,000 and $650,000 for 1995, 1994 and 1993, respectively.
NOTE 9 - INVESTMENT IN REAL ESTATE VENTURE
The Drovers & Mechanics Bank, a wholly-owned subsidiary of Drovers Bancshares
Corporation, is the sole limited partner in two ventures to renovate and operate
apartment buildings. The first building opened in 1994. The second will open in
March 1996. Both buildings provide low-income housing to qualified families.
The investments are accounted for under the equity method of accounting. The
combined carrying values of the investments at December 31, 1995 and 1994 were
$2,527,000 and $1,016,000, respectively.
NOTE 10 - CERTIFICATES OF DEPOSIT
At December 31, 1995 and 1994, certificates of deposit of $100,000 or more
aggregated $16,191,000 and $11,586,000, respectively. Interest expense on these
certificates of deposit amounted to approximately $902,000 in 1995, $582,000 in
1994 and $512,000 in 1993.
18<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - OTHER BORROWINGS AND LEASE COMMITMENTS
1995 1994
Notes payable to FHLB Pittsburgh:
Due 1995, 5.48% - 5.89% .................................. $0 $6,000
Due 1996, 5.97% - 6.10% .................................. 2,100 500
Due 1996, variable ....................................... 13,500 5,000
Due 1997, 6.50% .......................................... 1,000 1,000
Due 1998, 6.72% .......................................... 500 500
Due 1998, 5.43% - 5.73% .................................. 3,000 3,000
Due 2000, 6.01% .......................................... 100 100
Due 2000, variable ....................................... 4,000 0
Due 2003, 6.40% .......................................... 400 400
Note payable to Meridian Bank:
Due 2003, 6.95% .......................................... 5,314 5,462
29,914 21,962
Capital lease obligations .................................. 258 284
$30,172 $22,246
The Federal Home Loan Bank of Pittsburgh (FHLB) notes payable are secured by
FHLB stock, deposits held by the FHLB and other mortgage collateral. The
interest rates on the variable notes reprices quarterly or more frequently and
are based on LIBOR or prime. The Corporation also maintains a credit line with
the FHLB secured by the same collateral. Under the agreement, the Corporation
may borrow up to 10% of its total assets and advances mature the last day of the
calendar year. The amounts of notes payable and capital leases maturing in the
years ended December 31, 1996 through 2000 are as follows: $15,789,000;
$1,205,000, $722,000; $3,242,000 and $4,363,000, respectively.
The Meridian Bank note payable is secured by a mortgage on the 96 South George
Street office building. The note is payable in monthly installments based on a
twenty-year amortization. The interest rate is fixed until 1998.
At December 31, 1995 and 1994, the Corporation and its subsidiaries were
obligated under noncancelable leases for premises and equipment. The terms
include various renewal options and provide for rental increases based upon
predetermined factors. The rental expense under such leases amounted to
$143,000 in 1995, $128,000 in 1994 and $91,000 in 1993.
19<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - OTHER BORROWINGS AND LEASE COMMITMENTS (continued)
Future minimum rental payments under capital leases and noncancelable operating
leases with terms of one year or more at December 31, 1995 were:
Capital Operating
Leases Leases
1996 ..................................................... $ 66 $ 146
1997 ..................................................... 66 147
1998 ..................................................... 66 148
1999 ..................................................... 66 103
2000 ..................................................... 66 70
Thereafter ............................................... 57 383
Total future minimum rental payments ..................... 387 $ 997
Less interest ............................................ 129
Present value of minimum rental payments ................. $ 258
NOTE 12 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments.
The estimated fair value amounts have been determined by the Corporation using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Corporation could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The information presented is based on pertinent information available to
management as of December 31, 1995 and 1994. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued since that time and current
estimated fair value of these financial instruments may have changed
significantly.
20<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and short-term investments $18,771 $18,771 $12,508 $12,508
Investment securities ......... 91,823 92,554 94,359 93,884
Net loans ..................... 252,468 255,513 226,737 227,310
Interest receivable ........... 2,015 2,015 1,791 1,791
FINANCIAL LIABILITIES:
Demand and savings deposits ... 142,328 142,328 145,911 145,911
Time deposits ................. 164,325 164,663 137,262 135,319
Federal funds purchased and
securities sold under
agreement to repurchase ..... 7,302 7,302 14,592 14,592
Notes payable ................. 29,914 30,005 21,962 20,874
Interest payable .............. 2,333 2,333 1,547 1,547
The following methods and assumptions were used to estimate fair value of each
class of financial instruments for which it is practicable to estimate that
value: For short-term instruments, the carrying amount is a reasonable
estimate of fair value. The fair value of investment securities is based on
quoted market prices, dealer quotes and prices obtained from independent
pricing services. For floating rate loans which experienced no significant
change in credit risk and for deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the carrying
amount. The fair value of fixed rate loans and time deposits is estimated
based on present values using applicable risk-adjusted spreads to the U.S.
Treasury curve to approximate current rates offered for loans and deposits of
similar maturities. Management believes that the risk factor embedded in the
currently offered rates results in a fair valuation of the loan portfolio.
The primary risks included in the risk factor are credit risk and prepayment
risk. Rates currently available to the Corporation for debt with similar
terms and remaining maturities are used to estimate fair value of other
borrowings.
There is no material difference between the notional amount and the estimated
fair value of off-balance sheet items which total $70,735,000. Off-balance
sheet items are primarily comprised of unfunded loan commitments, which are
generally priced at market at the time of funding.
21<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - INCOME TAXES
As discussed in NOTE 1, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 109 as of January 1, 1993. The cumulative
effect of this change in accounting for income taxes of $352,000, or $0.15 per
share, is determined as of January 1, 1993 and is reported separately in the
consolidated statement of income for 1993.
Total income tax expense for the year ended December 31, 1995, 1994 and 1993
were allocated as follows:
1995 1994 1993
Income from continuing operations ................... $1,521 $845 $1,026
Stockholders' equity, for minimum pension
liability adjustment ............................. 0 17 -17
Stockholders' equity, for unrealized holding
gains (losses) for available-for-sale securities .. 1,154 -1,280 396
Total income tax expense ............................ $2,675 $- 418 $1,405
Income tax expense attributable to income from continuing operations consists of
the following at December 31,
1995 1994 1993
Currently payable ........................... $1,485 $ 912 $1,159
Deferred expense (benefit)................... 36 -67 -133
Income tax expense ......................... $1,521 $ 845 $ 1,026
For the years ended December 31, the income tax expense attributable to income
from continuing operations differed from the tax expense which would be computed
by applying the Federal statutory rate to pretax earnings. The reasons for the
differences are as follows:
1995 1994 1993
Income before income tax ............ $5,802 $4,614 $4,537
Tax at federal income tax rate ...... $1,973 $1,569 $1,543
Differences resulting from:
Effect of tax-exempt income ........ -322 -357 -410
Historic and low income tax credits. -103 -353 0
Other items, net ................... -27 -14 -107
Applicable income tax ............... $1,521 $ 845 $1,026
22<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - INCOME TAXES, continued
The significant components of deferred income tax expense attributable to income
from continuing operations for the years ended December 31, 1995, 1994 and 1993
were as follows:
1995 1994 1993
Excess provision for loan losses ... $ -102 $ -104 $ -106
Deferred loan income ............... 111 61 -13
Other items, net ................... 27 -24 -14
$ 36 $- 67 $ - 133
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 are presented below:
1995 1994
Deferred tax assets:
Allowance for loan losses .................... 706 $604
Deferred loan fees and costs ................. 0 105
Pension ...................................... 224 188
Capital lease ................................ 41 42
Alternative minimum tax credit carryforward .. 0 38
Unrealized holding losses on available-for-
sale securities ............................ 0 884
Other ........................................ 23 12
Total gross deferred tax assets ............ 994 1,873
Deferred tax liabilities:
Bank premises and equipment .................. 414 379
Unrealized holding gains on available-
for-sale securities ........................ 270 0
Other ........................................ 26 18
Total gross deferred tax assets ............ 710 397
Net deferred tax assets ........................ $ 284 $1,476
Federal income taxes on security gains were $36,000, $10,000 and $48,000 in
1995, 1994 and 1993, respectively.
Management believes the deferred tax asset is realizable since the Corporation
has had a long history of strong earnings and has a carryback potential
exceeding the deferred tax asset. Management is not aware of any evidence that
would preclude the Corporation from ultimately realizing this asset.
23<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
shares of stock outstanding during each year, giving retroactive effect to a 7%
and a 25% stock dividend issued in 1995 and 1994, respectively. The weighted
average shares outstanding for the years ended December 31, were 2,240,702 in
1995; 2,224,260 in 1994; and 2,206,881 in 1993.
NOTE 15 - COMMON STOCK
The Board of Directors of the Corporation declared the following stock
dividends:
1995 1994
Percentage ................................... 7% 25%
Record date .................................. 10-20-95 8-12-94
Payable date ................................. 11-10-95 9-02-94
NOTE 16 - CASH FLOW DISCLOSURES
The Corporation paid interest and income taxes of $12,741,000 and $1,425,000 in
1995; $9,991,000 and $985,000 in 1994 and $10,443,000 and $1,013,000 in 1993,
respectively. Transfers from loans to other real estate as a result of
foreclosure were $300,000, $0 and $161,000 in 1995, 1994 and 1993, respectively.
NOTE 17 - RETIREMENT PLAN
The Corporation and its subsidiaries have a noncontributory pension plan
covering all eligible employees. The plan provides retirement benefits which are
a function of both the years of service and the highest level of compensation
during any consecutive five-year period of the last ten years before retirement.
It is the Corporation's policy to fund the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act,
plus such additional amounts as the Corporation determines to be appropriate
from time to time. Pension expense was $95,000 in 1995, $140,000 in 1994 and
$172,000 in 1993, respectively. The Corporation also has two nonqualified
pension plans covering the chairman of the board and the chief executive
officer. The plans are based on a targeted wage replacement percentage and are
unfunded.
24<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 17 - RETIREMENT PLAN, continued
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated financial statements at December 31:
1995 1994
Actuarial present value of benefit obligations:
Vested benefit obligation ............................... $-2,209 $-1,719
Accumulated benefit obligation .......................... $-2,277 $-1,753
Projected benefit obligation ............................... $-3,249 $-2,485
Plan assets at fair value .................................. 3,400 2,662
Projected plan assets in excess of benefit obligation ...... 151 177
Recognized net asset existing at December 31 ............... -166 -180
Unrecognized prior service cost ............................ 12 117
Unrecognized net gain ...................................... -79 -383
Contribution during period October 1 to December 31 ........ 60 50
Accrued pension cost ....................................... $ -22 $ -219
The net pension expense included the following:
1995 1994
Service costs - benefits earned during the period .. $174 $194
Interest costs on projected benefit obligation ..... 189 181
Net amortization and deferral ...................... 294 -5
657 370
Less return on plan assets ......................... 562 230
Net pension expense included in salaries and
employee benefits ................................. $ 95 $ 140
The following weighted average assumptions were used for the Plan:
1995 1994
Discount rate .............................................. 7.0% 8.0%
Rate of increase in salary levels .......................... 5.0% 5.0%
Long-term rate of return on plan assets .................... 9.0% 9.0%
Plan assets consist of corporate and government bonds and domestic and foreign
equity securities.
The Corporation has established a 401(k) Salary Deferral Plan. This plan covers
all eligible employees who elect to contribute to the plan. An eligible
employee is anyone over the age of 21 who has completed one year of service.
The Corporation's contribution will equal 25% of the employee's contribution up
to a maximum of 6% of annual salary. The annual expense included in salaries
and employee benefits amounted to $40,000, $32,000 and $29,000 in 1995, 1994
and 1993, respectively.
25<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 18 - STOCK OPTION PLAN
The Corporation has adopted an Incentive Stock Option Plan. A committee of
the Company's Board of Directors administers the plan and, at its discretion,
may grant options to eligible key employees. The option price is the fair
market value of shares on the day granted. No options may be exercised after
ten years. The following shares and options prices have been adjusted for
subsequent stock dividends. No options were granted, exercised or canceled in
1993.
Stock Option Price
Option Range per share
Balance at January 1, 1995 ................. 22,452 $12.64-$21.96
Granted .................................... 26,429 $20.21-$20.21
Exercised .................................. 0 -
Canceled ................................... 0 -
Balance at December 31, 1995 ............... 48,881 $12.64-$21.96
Stock Option Price
Option Range per share
Balance at January 1, 1994 ................. 26,374 $ 7.09-$17.33
Granted .................................... 10,165 $21.96-$21.96
Exercised .................................. -14,087 $ 7.09-$ 7.09
Canceled ................................... 0 -
Balance at December 31, 1994 ............... 22,452 $12.64-$21.96
NOTE 19 - PARENT CORPORATION FINANCIAL STATEMENTS
December 31,
STATEMENTS OF CONDITION 1995 1994
ASSETS
Cash ................................................ $ 2 $ 16
Investments in and advances to subsidiaries:
The Drovers & Mechanics Bank ...................... 33,694 28,550
Drovers Realty Company ............................ 745 745
Other assets ........................................ 507 432
TOTAL ASSETS .......................................... $ 34,948 $29,743
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ................................... $ 27 $19
Total shareholders' equity .......................... 34,921 29,724
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 34,948 $29,743
26<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 19 - PARENT CORPORATION FINANCIAL STATEMENTS (continued)
Years Ended December 31,
STATEMENTS OF INCOME 1995 1994 1993
INCOME
Dividends from subsidiaries ............ $1,407 $1,335 $1,112
Other income ........................... 59 8 7
Total income ....................... 1,466 1,343 1,119
OPERATING EXPENSES
Other .................................. 153 153 114
Total operating expenses ........... 153 153 114
Income before income taxes ............. 1,313 1,190 1,005
Applicable income taxes (benefit) ...... -35 -51 -38
Income before undistributed earnings of
subsidiaries ......................... 1,348 1,241 1,043
Undistributed earnings of subsidiaries:
The Drovers & Mechanics Bank ......... 2,933 2,529 2,821
Drovers Realty Company ............... 0 -1 -1
NET INCOME .............................. $4,281 $3,769 $3,863
YEARS ENDED DECEMBER 31,
STATEMENTS OF CASH FLOWS 1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................... $4,281 $3,769 $3,863
Undistributed earnings of subsidiaries ... -2,933 -2,528 -2,820
Gain on sale of investment securities
available-for-sale ..................... -47 0 0
(Increase) decrease in other assets ...... 0 7 -8
Net cash provided by operating activities 1,301 1,248 1,035
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments (receipts) from
intercompany account ................... 16 -13 -28
Purchases of investment securities
available-for-sale ...................... -116 -156 0
Proceeds from sales of investment
securities available-for-sale ........... 109 0 0
Investment in subsidiary ................. 0 -330 0
Net cash provided used by (used in)
investing activities ................... 9 -499 -28
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock ........................ 83 313 176
Dividends paid ........................... -1,407 -1,156 -1,080
Net cash used in financing activities .... -1,324 -843 -904
NET INCREASE (DECREASE) IN CASH ........... -14 -94 103
CASH AT JANUARY 1, ........................ 16 110 7
CASH AT DECEMBER 31, ...................... $ 2 $ 16 $ 110
27<PAGE>
Drovers Bancshares Corporation and Subsidiaries
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Drovers Bancshares Corporation
We have audited the accompanying consolidated statements of condition of Drovers
Bancshares Corporation and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Drovers Bancshares
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in the Notes to Consolidated Financial Statements, the Corporation
changed its method of accounting for income taxes.
S/Harry Ness & Company
York, Pennsylvania
January 18, 1996
28<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this discussion is to focus on information about Drovers
Bancshares Corporation, its financial condition and results of operations not
otherwise apparent in the consolidated financial statements of this Annual
Report. The reader of this Annual Report should make reference to those
statements and other selected financial data presented elsewhere in the report
to fully understand the following discussion and analysis.
RESULTS OF OPERATIONS
The consolidated earnings of Drovers Bancshares Corporation are derived
primarily from the operations of its wholly-owned subsidiaries: The Drovers &
Mechanics Bank and Drovers Realty Company. Drovers Bancshares Corporation is a
bank holding company. The Drovers & Mechanics Bank is a Pennsylvania state-
chartered FDIC insured bank. The Bank has one wholly-owned subsidiary, 96 South
George Street, Inc. The Bank subsidiary's primary asset is an office building
attached to the Bank's main office and corporate headquarters. Drovers Realty
Company has various real estate holdings, including ground and building leases.
It rents the real estate to the Bank for use as branch offices.
FINANCIAL SUMMARY
The Corporation recorded net income of $4,281,000 in 1995 and $3,769,000 in
1994. The return on average assets (ROA) and return on equity (ROE) in 1995 were
1.16% and 13.04%, respectively. This compares to an ROA and ROE in 1994 of
1.11% and 12.76%, respectively.
NET INTEREST INCOME
Net interest income represents the difference between interest income and
interest expense. Net interest income is a measurement of how well management
balances the Corporation's interest rate sensitive assets and liabilities while
maintaining adequate interest margins. Net interest income rose 12.6% or
$1,630,000 in 1995, after advancing 5.7% or $695,000 in 1994.
Increase(Decrease)
(in thousands) 1995 1994 1993 95/94 94/93 93/92
Total interest income .. $ 28,053 $23,300 $22,445 20.4% 3.8% -0.2%
Total interest expense . 13,529 10,406 10,246 30.0% 1.6% -9.8%
Net interest income .... $ 14,524 $12,894 $12,199 12.6% 5.7% 9.6%
The Corporation's largest category of earning assets consists of loans to
businesses and individuals. The majority of earning assets is supported by
interest-bearing commercial and consumer deposits and other borrowings. In
addition to interest-bearing funds, assets are also supported by interest-free
funds including demand 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 relative sensitivity to interest rate movements.
Increased volume and rates together drove the increase in 1995 net interest
income. Increased volume was the primary component for the increase in 1994 net
interest income.
29<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
NET INTEREST INCOME (continued)
The following table depicts the changes in rate and volume components of net
interest income:
1995 over 1994 1994 over 1993
Total Change due to Total Change due to
(in thousands) Change Rate Volume Change Rate Volume
Total interest income . $4,753 $2,140 $2,613 $855 $-471 $1,326
Total interest expense 3,123 1,320 1,803 160 -582 742
Net interest income ... $1,630 $ 820 $ 810 $ 695 $ 111 $ 584
There are two performance measures that indicate how successful a bank is in
managing its asset and liability structure. The first, net interest spread, is
the average rate earned on earning assets less the average rate paid on
interest-bearing funds. The second, net interest income margin, incorporates
both the net interest spread and the profit margin on earning assets financed by
interest-free funds. The following table illustrates the net interest spread
and the net interest income margin:
1995 Average 1994 Average
(in thousands) Balance Rate Balance Rate
Earning assets .................... $341,121 8.22% $312,163 7.46%
Financed by:
Interest-bearing funds .......... $300,524 4.50% $275,145 3.78%
Interest-free funds ............. 40,597 - 37,018 -
Total ........................ $341,121 3.97% $312,163 3.33%
Net interest income ............... $ 14,524 $ 12,894
Net interest spread ............... 3.72% 3.68%
Net interest income margin ........ 4.26% 4.13%
The reliance upon interest-bearing liabilities as a funding source is reflected
by the ratio of average interest-bearing liabilities to average earning assets,
which remained constant at 88.1% in 1995 and 1994. Interest rates rose
throughout 1994. Interest rates peaked in early 1995, leveled off until mid-
year and then began to decline. The Federal Reserve effects short-term interest
rates through its control of the money supply. In an effort to control
inflation without causing a recession, the Federal Reserve slowly lowered short-
term rates in 1995. It appears likely short-term rates will continue to decline
in early 1996.
There is a direct correlation in the movement in short-term interest rates and
the Corporation's net interest spread and margin. Over the past few years, the
Corporation has increased its holdings of higher yielding loans as a percentage
of earning assets. Many of these loans reprice within three months of changes
in short-term rates. The Corporation benefited from higher short-term rates as a
result. The average spread and margin in 1993 was 3.59% and 4.11%,
respectively. By 1995, the average spread and margin increased to 3.72% and
4.26%. The spread peaked in the second quarter of 1995 and has slowly fallen.
30<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
NET INTEREST INCOME (continued)
The average spread and margin in the fourth quarter of 1995 was 3.57% and 4.13%,
respectively. The margin is effected both by changes in the spread and the
amount of interest-bearing funds needed to fund both earning and nonearning
assets. In 1994, the spread increased 9 basis points, while the margin
increased only 2 basis points due to the financing of the 96 South George Street
office building, a noninterest-earning asset. In 1995, the spread and margin
increased 4 basis points and 13 basis points, respectively. The Corporation
grew average earning assets $28,958,000, while average interest-bearing funds
increased $25,379,000. In the fourth quarter, capital expenditures needed for
building renovations and new computer equipment caused the margin to fall to
4.13%.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $501,000, $382,000 and $447,000 for 1995, 1994 and
1993, respectively. As described in the summary of significant accounting
policies, management analyzes the loan portfolio and the reserve for loan losses
each quarter. The analysis estimates loan losses and helps determine the
required provision. The analysis considers many factors including charge-off
history, loan quality and loan growth. Net charge-offs for 1995, 1994 and 1993
were $202,000, $76,000 and $137,000, respectively. As a percentage of average
loans, net charge-offs were .08%, .04% and .07% in 1995, 1994 and 1993,
respectively. Nonaccrual loans as a percentage of total loans at December 31,
1995, 1994 and 1993 were .37%, .18% and .18%, respectively. Loans grew
$26,030,000, $20,429,000 and $25,868,000 in 1995, 1994 and 1993, respectively.
The reserve for loan losses as a percentage of loans at December 31, 1995, 1994
and 1993 was 1.15%, 1.15% and 1.12%, respectively. Strong loan growth and an
increase in charge-offs and in delinquent loans caused management to increase
the 1995 provision. Management believes the present reserve is adequate to
absorb losses in the existing portfolio. A significant degradation of loan
quality, however, could require a significant change in estimated losses and
cause a material change in net income.
OTHER INCOME
Years Ended December 31, Increase(Decrease)
(in thousands) 1995 1994 1993 95/94 94/93 93/92
Trust department income .... $924 $834 $ 808 10.8% 3.2% 20.6%
Service charges on deposit
accounts .................. 982 917 812 7.1% 12.9% 6.1%
Securities gains ........... 106 30 140 253.3% -78.6% 225.6%
Net gains on loan sales .... 278 253 471 9.9% -46.3% 18.6%
Equity in earnings (losses)
of real estate venture .... -64 -35 1 82.9% -999.9% 999.9%
Other ...................... 611 458 419 33.4% 9.3% 22.9%
Total other income ......... $2,837 $2,457 $2,651 15.5% -7.3% 19.6%
Noninterest income was $2,837,000 in 1995, an increase of $380,000 from 1994.
The 1994 noninterest income decreased $194,000 over the 1993 level of
$2,651,000.
31<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER INCOME (continued)
Trust department income increased $90,000, or 10.8%, in 1995. The book value of
investments managed by the department was $124,994,000 at the end of 1995
compared to $113,463,000 at year-end 1994. The department experienced strong
new business growth in 1995. Many of the fees derived from the department are
based on the market value of managed assets. Overall increases in the equity
markets throughout 1995 helped increase assets managed and the related fee
income. The 20.6% increase in trust income during 1993 was primarily a result
of fees related to estate settlements which are non-recurring.
Service charges on deposit accounts increased $65,000, or 7.1%, in 1995.
Increases in collected overdraft and returned check charges along with automatic
teller machine (ATM) transaction fees caused most of the increase in 1995. The
overall deposit fee schedule has remained nearly unchanged the last three years.
Increases have occurred through account growth and an emphasis on collecting
fees.
Net gains on loan sales are comprised mostly of gains from the sale of
residential mortgages. When long-term interest rates are low, consumers tend to
purchase more new homes or refinance existing mortgages. Low rates in 1993
caused a boom in this market. Higher rates in 1994 and early 1995 stifled
refinancings and lowered new mortgage demand. Mortgage loan sales were
$22,510,000, $26,542,000 and $31,624,000 in 1995, 1994 and 1993, respectively.
Sales in 1995 included $4,500,000 in adjustable rate mortgages. The loans were
sold to help lessen the Corporation's overall sensitivity to interest rate
movements. About $12,198,000 of the loans sold in 1994 had been originated and
sold in 1993 and were awaiting settlement at December 31, 1993.
The Corporation recognized a $64,000 loss during 1995 from its equity investment
in a real estate limited partnership. The newly renovated 35-unit low-income
housing apartment building opened in August 1994. The building was fully
occupied at the end of 1995. The Corporation receives substantial financial
benefits from these investments in the form of historic and low-income tax
credits.
Other income increased $153,000, or 33.4%, in 1995. Increases in ATM processing
income, cash management fees, insurance commissions and mortgage servicing
income drove the increase in 1995. Mortgage servicing provided most of the
increase in 1994. Total loans serviced were $88,711,000, $74,976,000 and
$54,988,000 at the end of 1995, 1994 and 1993, respectively.
32<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
<TABLE>
OTHER EXPENSES
<CAPTION>
Years Ended December 31, Increase(Decrease)
(in thousands) 1995 1994 1993 95/94 94/93 93/92
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits . $ 6,426 $6,031 $5,385 6.5% 12.0% 13.0%
Occupancy and premises ......... 798 564 728 41.5% -22.5% -4.6%
Furniture and equipment ........ 734 703 640 4.4% 9.8% 10.7%
Marketing ...................... 389 323 336 20.4% -3.9% 48.7%
FDIC insurance assessment ...... 331 610 581 -45.7% 5.0% 4.7%
Net (gain) cost of operation
of other real estate .......... 3 -11 21 -127.3% -152.4% -38.2%
Office supplies ................ 346 316 291 9.5% 8.6% 10.6%
Other taxes .................... 294 266 244 10.5% 9.0% 7.0%
Other .......................... 1,737 1,553 1,640 11.8% -5.3% 12.1%
Total other expenses ........... $11,058 $10,355 $9,866 6.8% 5.0% 11.1%
</TABLE>
Other expenses includes all expenses except interest, provision for loan losses
and income taxes. In 1995, total other expenses increased $703,000, or 6.8%, as
compared to increases of 5.0% and 11.1% in 1994 and 1993, respectively.
Salaries and employee benefits are the most significant noninterest expense
category, representing 58.1%, 58.2% and 54.6% of total other expenses for 1995,
1994 and 1993, respectively. In 1995, salaries and employee benefits increased
$395,000, or 6.5%. Salaries increased $308,000, or 6.5%. This compares to a
salary increase of $417,000, or 9.7%, in 1994. The Corporation has two
incentive compensation plans. Both plans require a minimum return on assets of
1.00% before incentives are paid. The Corporation paid incentives of $224,000,
$202,000 and $216,000 in 1995, 1994 and 1993, respectively. The Corporation
employed 186 full-time equivalents at December 31, 1995 compared to 184 and 176
in 1994 and 1993, respectively. The Corporation opened two new branch offices
in 1994 causing most of the increase in staffing levels. Employee benefits
increased $87,000, or 9.8%, during 1995 compared to $181,000, or 25.6% in 1994.
Pension expense, including supplemental pensions, increased $24,000 and $87,000
in 1995 and 1994, respectively. Medical insurance costs increased $54,000, or
13.0%, in 1995 compared to $79,000, or 23.6%, in 1994.
Occupancy and premises expense increased $234,000, or 41.5%, during 1995.
Occupancy and premises includes the lease revenues less operating expenses of
the 96 South George Street office building for office space not occupied by the
Corporation. This resulted in a reduction of total occupancy and premises
expense during 1995 and 1994 of $161,000 and $304,000, respectively. The
positive impact to occupancy and premises expense was reduced $183,000 in 1995
due to a decline in lease revenues caused by higher vacancy and an increase in
space taken by the Corporation for its corporate headquarters. The remaining
increase in 1995 occupancy and premises expense was caused by a full year of
lease expense for the two new branch offices opened in 1994.
Furniture and equipment expense increased $31,000, or 4.4% in 1995 compared to
$63,000, or 9.8%, in 1994. The Corporation upgraded its data processing
equipment in March 1994, causing increases in depreciation and software
maintenance. Purchases of furniture and equipment for two new branch offices in
1994 also increased depreciation expense. The Corporation installed a wide area
computer network and renovated office space in two buildings in the fourth
quarter of 1995. The full impact of the depreciation from these capital
expenditures will occur in 1996. Fourth quarter 1995 premises and equipment
expenses were $217,000 compared to $181,000 in the third quarter.
33<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER EXPENSES (continued)
Marketing expense was $389,000 in 1995 compared to $323,000 and $336,000 in 1994
and 1993, respectively. The Corporation began an extensive fourth quarter
advertising campaign introducing its new "Winner" checking account product. The
campaign will run into the beginning of 1996. The product provides value added
benefits not typically included in most checking products. The Corporation
expects to attract new core checking customers and other related deposits.
FDIC insurance assessments declined $279,000 during 1995. Effective June 1,
1995, the FDIC lowered the insurance assessment minimum from $0.23 per $100 of
deposits to $0.04. The Corporation has always paid the minimum assessment rate.
Effective January 1, 1995, the minimum assessment rate was eliminated and those
banks are now only required to pay a $2,000 annual fee. However, the savings
and loan "SAIF" insurance fund remains underfunded and it is expected banks will
be required to help replenish the fund. Such a requirement would need
Congressional approval and the estimated bank assessments range from $0.02 to
$0.04 per $100 in deposits.
Net cost of operating other real estate decreased $3,000 in 1995. This included
a $1,000 gain on disposal of other real estate acquired through foreclosure
during 1995. Other real estate held at December 31, 1995 was $195,000.
Other expenses increased $184,000, or 11.8%, in 1995 compared to an $87,000
decrease in 1994. Increases in third party data processing costs, legal and
professional fees caused the 1995 increase.
TAXATION
The Corporation has recognized provisions for income taxes of $1,521,000,
$845,000 and $1,026,000 in 1995, 1994 and 1993, respectively. The average tax
rate was 26.2% in 1995, 18.3% in 1994 and 22.6% in 1993. The changes in the
effective tax rates were caused by changes in historic and low-income tax
credits received from the Corporation's investment in a low-income housing
partnership. When the partnership opened its renovated apartment building in
1994, the Corporation received $353,000 in historic tax credits. Beginning in
1995, and for the next nine years, the Corporation will receive $103,000 in low-
income tax credits. In 1995, the Corporation invested in a second low-income
housing partnership. Its renovated apartment building will open in March 1996.
The Corporation expects to receive $400,000 in historic tax credits in 1996 and
an average of $169,000 in low income tax credits in each of the next ten years.
The amount of low-income tax credits received in 1996, if any, will depend on
how quickly the apartments are rented and certain elections made by the
partnership.
34<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
FORWARD OUTLOOK
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets To Be Disposed Of." The Standard is effective
for fiscal years beginning after December 15, 1995. The Standard requires that
when certain events or circumstances occur, a long-lived asset must be revalued
and a valuation allowance created if its carrying value exceeds fair value
estimates. The standard also applies to assets to be sold. The Corporation
does not anticipate any material impact to earnings from applying this Standard.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards 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 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 Corporation did not adopt Statement No. 65 because it did not
consider itself a mortgage banking enterprise as defined in the Statement and
its mortgage activity never generated a significant portion of total revenue.
As more accounting standards are promulgated in this area and the Corporation
continues its effort to grow mortgage loan volume, it is likely the Corporation
will adopt the Statements in 1996. The initial impact would cause the gain on
mortgage sales to increase due to allocating a portion of the loans' bases to
mortgage servicing rights. The mortgage servicing rights would then be
amortized over the expected life of the serviced loans, reducing net income in
subsequent years. In addition, the Corporation would evaluate the fair value of
the rights on a quarterly basis and recognize impairment immediately if it
occurred. Also, any mortgages designated as held for sale would be valued at
lower of cost or fair value.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation." The
Statement requires that compensation expense related to stock options be based
on the estimated fair value at the grant date. This differs from the current
method which measures compensation as the difference between the share price and
the exercise price of the option at the grant date. The Statement allows
compensation in the Statement of Income to be measured either using the new
method or the current method. If the current method is used, then a corporation
must disclose in a footnote what the pro forma net income and earnings per share
would have been if Statement No. 123 was implemented. The Statement is
effective for the 1996 annual report. The Corporation will likely choose to
disclose the impact in a footnote.
The Corporation is evaluating a plan to increase its branch office network in
York County by as many as three newly constructed offices in 1996. The new
sites would target high growth areas in the immediate market. Construction
would be funded out of operations. The expanded branch network would provide
for continued deposit growth.
35<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
LIQUIDITY
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. The
management of liquidity and interest rate sensitivity must be coordinated since
decisions involving one may influence the other.
Liquidity needs can be met by either reducing assets or increasing liabilities.
Sources of asset liquidity include short-term investments, maturing and repaying
loans and monthly cash flows from mortgage-backed securities and collateralized
mortgage obligations. The loan portfolio provides an additional source of
liquidity due to the Corporation's participation in the secondary mortgage
market. In addition to monthly cash flows from certain investment securities,
the Corporation designates a substantial portion of its investment portfolio as
available-for-sale. At December 31, 1995, this segment of the portfolio totaled
$62,901,000, or 68.5%.
Liquidity needs can be met by attracting deposits with competitive rates, using
repurchase agreements, buying federal funds or utilizing the facilities of the
Federal Reserve or the Federal Home Loan Bank of Pittsburgh. The Corporation
maintains informal borrowing arrangements with several correspondent banks to
purchase overnight federal funds. A formal arrangement with the Federal Home
Loan Bank allows the Corporation to borrow short and intermediate advances up to
approximately 80% of its investment in assets secured by one to four family
residential real estate. The maximum borrowings under this agreement at
December 31, 1995 were $114,302,000, of which $24,600,000, or 21.5% was
borrowed. The ability to renew funding sources depends on the financial
institution's strength, asset portfolio, diversity of depositors and types of
deposit instruments offered.
Liquidity can be further analyzed by using the Statement of Cash Flows. Cash
and cash equivalents increased $6,263,000 during 1995. Cash used in investing
activities was $22,385,000 primarily as a result of a $25,952,000 increase in
net loans. Funds were also required for $1,416,000 of capital expenditures and
a $1,285,000 investment in a low-income housing partnership. Investment
securities provided some of the required funding needed as proceeds from sales
and maturities exceeded purchases by $6,154,000. Cash provided by financing
activities was $22,772,000. Net deposits provided most of the cash by growing
$23,460,000. A decrease in overnight borrowings was offset by an increase in
other borrowings. Cash flows from operating activities provided the remainder
of the increase in cash and cash equivalents by growing $5,876,000. The
significant components of operating activities are net income and the add-back
of noncash expenses like depreciation and provision for loan losses.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity management focuses on minimizing interest rate risk.
Interest rate risk arises when earning assets and their supporting liabilities
are priced at different rates or in different pricing periods during changing
market conditions. An interest rate sensitivity "gap" is a measure of the net
dollar exposure at a given time for various repricing periods.
36<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
INTEREST RATE SENSITIVITY MANAGEMENT(continued)
The following table illustrates the Corporation's cumulative gap position within
one year of $41,494,000 or 10.8% liability sensitive at December 31, 1995:
0-1 1-5 Over
(in thousands) Year Years 5 Years Total
Money market investments ........ $1,353 $0 $0 $1,353
Investment securities ........... 45,834 31,564 13,630 91,028
Loans ........................... 136,717 81,687 37,001 255,405
Rate sensitive assets ........... $183,904 $113,251 $50,631 $347,786
Interesting-bearing deposits .... $198,307 $51,252 $22,940 $272,499
Short-term borrowings ........... 7,302 0 0 7,302
Long-term borrowings ............ 19,789 9,931 452 30,172
Rate sensitive liabilities ...... $225,398 $61,183 $23,392 $309,973
Interest sensitivity gaps:
Gap for period .................. $-41,494 $52,068 $27,239 $37,813
Cumulative gap .................. $-41,494 $10,574 $37,813
Cumulative gap as a percentage
of total assets ................ -10.84% 2.76% 9.88%
The cumulative gap position can be misleading since many repriceable interest-
bearing deposit liabilities are not as sensitive to interest rate movements as
the repriceable assets which they help fund. While these deposits provide
excellent liquidity, they present interest rate risk in a downward moving rate
environment. The Corporation mitigates some of this risk through variable rate
borrowings from the Federal Home Loan Bank. Management monitors interest rate
risk through quarterly computer simulations of net interest income in both
rising and falling interest rate cycles. These simulations consistently
demonstrate the Corporation's asset sensitivity which is further confirmed by
the widening of the net interest spread during the last two years while interest
rates rose. The interest rate risk is within the tolerance limits established
by management.
The table includes prepayment assumptions for mortgage-backed securities and
collateralized mortgage obligations based on recent prepayment experience. A
prepayment rate of 10.0% was used on fixed rate mortgages. Investment
securities are shown at amortized cost. Scheduled amortization is assumed for
all other loans. In addition, passbook savings accounts are considered core
deposits. A 4.25% annual decay rate was assumed based on historical experience
which allocated the majority of the balance in the over five year category.
Effective asset/liability management also considers the effects of changing
market prices on investment values. As a financial institution, a large portion
of the Corporation's assets are monetary in nature and subject to an
increase/decrease in purchasing power during periods of deflation/inflation.
The gain/loss in purchasing power on these assets is primarily affected by the
degree of change in their interest rate spread relationships and, accordingly,
is a function of the level and magnitude of interest rate movements. Minimizing
the effects of inflation on investment values is necessary in the management
of interest rate risk.
37<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
CAPITAL
Total shareholders' equity increased $5,197,000, or 17.5%, in 1995. The
increase included a $2,239,000 increase in the fair value of investment
securities available-for-sale. In accordance with recently adopted accounting
standards, unrealized gains and losses are shown net of tax in shareholders'
equity. Not including the changes from fair value, equity increased $2,958,000,
or 10.0%.
Newly generated capital can result from both internal and external sources. The
majority of the Corporation's capital is generated internally. A measure of
internal capital generation is the percentage of return on average equity times
the percentage of earnings retained. The return on average equity was 13.0% for
1995 and 12.8% for 1994. Total cash dividends declared in 1995 represented
32.9% of net income, as compared to 30.7% in 1994. The resulting internal
capital growth percentage was 8.7% in 1995 and in 1994. The percentage of
average shareholders' equity to average total assets was 8.9% in 1995 and in
1994, indicative of a strong capital base. All of the above calculations
involving average equity included an average loss on available-for-sale
investment securities of $408,000 in 1995 and $554,000 in 1994.
The Federal Reserve Board implemented risk-based capital guidelines for bank
holding companies in 1989. The guidelines establish a systematic framework
making capital requirements more sensitive to differences in risk structure
among banking organizations. The regulations require banking organizations to
maintain capital equivalent to 8.0% of risk weighted assets, at least half of
which must be common equity. Capital is divided into two tiers. Tier I capital
includes common stock, additional paid-in capital and retained earnings. Tier
II includes the allowance for loan losses up to a maximum of 1.25% of risk
adjusted assets. In addition to the risk-based capital requirements,
regulations require a minimum leverage ratio of 3.0% to 5.0% depending on the
strength of the organization. The leverage ratio divides Tier I capital by
total assets.
The following table shows that the Corporation exceeds all minimum capital
standards:
December 31,
1995 1994
Tier I -- Total qualified shareholders' equity . $34,397 $31,439
Tier II -- Allowance for loan losses ........... 2,937 2,638
Total risk-based capital ..................... $37,334 $34,077
Risk-adjusted on-balance sheet assets .......... $254,899 $232,425
Risk-adjusted off-balance sheet exposure ....... 10,421 11,005
Total risk-adjusted assets ................... $265,320 $243,430
Ratios:
Tier I risk-based capital ratio .............. 13.0% 12.9%
Minimum required for December 31, ............ 4.0% 4.0%
Total risk-based capital ratio ............... 14.1% 14.0%
Minimum required for December 31, ............ 8.0% 8.0%
Tier I leverage ratio ........................ 9.0% 8.9%
Minimum required ............................. 4.0% 4.0%
38<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
FINANCIAL CONDITION
The Corporation functions as a financial intermediary and, therefore, its
financial condition and progress may be examined in terms of trends in its
sources and uses of funds. The following comparison of average daily balances
indicates how the Corporation has generated and employed its funds:
<TABLE>
<CAPTION>
1995 1994 1993
Average Increase Average Increase Average
(in thousands) Balance (Decrease) % Balance (Decrease) % Balance
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Money market
investments .......... $1,518 $-471 -23.7% $1,989 $ 261 15.1% $1,728
Investment securities . 95,083 -1,405 -1.5% 96,488 -2,443 -2.5% 98,931
Loans (net) ........... 244,520 30,834 14.4% 213,686 17,911 9.1% 195,775
Total interest-
earning assets ..... 341,121 28,958 9.3% 312,163 15,729 5.3% 296,434
Noninterest-earning
assets ............... 28,664 1,178 4.3% 27,486 8,782 47.0% 18,704
Total uses .............. $369,785 $ 30,136 8.9% $339,649 $24,511 7.8% $315,138
Funding sources:
Demand deposits ....... $36,768 $-669 -1.8% $37,437 $3,639 10.8% $33,798
Savings deposits ...... 69,604 -11,839 -14.5% 81,443 1,598 2.0% 79,845
Time deposits ......... 157,572 28,834 22.4% 128,738 7,706 6.4% 121,032
Short-term borrowings . 7,530 3,107 70.2% 4,423 -755 -14.6% 5,178
Long-term borrowings .. 29,050 5,946 25.7% 23,104 5,479 31.1% 17,625
Total interest-
bearing liabilities 300,524 25,379 9.2% 275,145 17,667 6.9% 257,478
Demand deposits ....... 32,248 252 0.8% 31,996 4,521 16.5% 27,475
Other liabilities ..... 4,190 1,220 41.1% 2,970 164 5.8% 2,806
Shareholders' equity .. 32,823 3,285 11.1% 29,538 2,159 7.9% 27,379
Total sources ........... $369,785 $ 30,136 8.9% $339,649 $ 24,511 7.8% $315,138
</TABLE>
Total average assets were $369,785,000, representing a $30,136,000, or 8.9%,
increase from 1994. Loans accounted for the growth in assets. The Corporation
continued to experience strong commercial and commercial mortgage demand causing
the combined average to increase $19,680,000. Despite consumer loan balances
remaining nearly unchanged in 1995, the growth experienced throughout 1994
caused the average to increase $7,412,000. Lower long-term interest rates in
the later half of 1995 fueled demand for residential mortgages and caused the
average to increase $3,707,000.
Average total deposits grew $16,578,000 during 1995, funding 55.0% of the
increase in assets. A successful first quarter certificate of deposit promotion
helped increase average time deposits. The Corporation continued to experience
a shifting of savings deposits into higher yielding time deposits. With the
introduction of a new checking account product late in 1995, the Corporation
expects to reverse the decline in average demand and savings deposits. The
remaining assets were funded with a combination of short and long-term
borrowings and an increase in shareholders' equity.
39<PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
AVERAGE BALANCES AND RATES
<CAPTION>
1995 1994 1993
Average Average Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing deposits
with banks ................. $1,518 $94 6.19% $1,930 $68 3.52% $ 962 $ 31 3.22%
Federal funds sold ........... 0 0 0.00% 59 2 3.39% 766 23 3.00%
Taxable investment
securities ................. 76,251 5,004 6.56% 78,218 4,539 5.80% 78,984 4,723 5.98%
Equity securities ............ 2,930 176 6.01% 2,242 120 5.35% 2,448 169 6.90%
Tax-exempt investment
securities ................. 15,902 1,057 6.65% 16,028 1,124 7.01% 17,499 1,269 7.25%
Loans ........................ 244,520 21,722 8.88% 213,686 17,447 8.16% 195,775 16,230 8.29%
TOTAL .................. 341,121 $ 28,053 8.22% 312,163 $ 23,300 7.46% 296,434 $22,445 7.57%
Noninterest-earning assets ..... 28,664 27,486 18,704
TOTAL ASSETS ................... $369,785 $339,649 $315,138
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits .............. $36,768 $662 1.80% $37,437 $659 1.76% $33,798 $812 2.40%
Savings deposits ............. 69,604 1,890 2.72% 81,443 2,086 2.56% 79,845 2,295 2.87%
Time deposits ................ 157,572 8,706 5.53% 128,738 6,076 4.72% 121,032 6,045 4.99%
Short-term borrowings ........ 7,530 422 5.60% 4,423 227 5.13% 5,178 161 3.11%
Long-term borrowings ......... 29,050 1,849 6.36% 23,104 1,358 5.88% 17,625 933 5.29%
TOTAL .................. 300,524 $ 13,529 4.50% 275,145 $ 10,406 3.78% 257,478 $10,246 3.98%
Noninterest-bearing liabilities:
Demand deposits .............. 32,248 31,996 27,475
Other liabilities ............ 4,190 2,970 2,806
Shareholders' equity ......... 32,823 29,538 27,379
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ......... $369,785 $339,649 $315,138
NET INTEREST SPREAD ............ 3.72% 3.68% 3.59%
INTEREST EXPENSE AS A
PERCENT OF EARNING ASSETS .... 3.97% 3.33% 3.46%
NET INTEREST INCOME MARGIN ..... $ 14,524 4.26% $ 12,894 4.13% $ 12,199 4.11%
</TABLE>
Average nonaccrual loans included in average loans for 1995, 1994 and 1993 were
$592,000, $507,000 and $393,000, respectively.
40<PAGE>
Drovers Bancshares Corporation
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<CAPTION>
(dollar amounts in thousands,
except per share data) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................... $382,791 $352,287 $320,851 $308,319 $276,537
Investment securities ..................... 91,823 94,359 85,836 99,011 86,054
Net loans ................................. 252,468 226,737 206,614 181,056 166,691
Deposits .................................. 306,653 283,173 265,917 256,806 243,717
Shareholders' equity ...................... 34,921 29,724 29,249 25,554 23,377
Total average assets ...................... 369,785 339,649 315,138 288,792 266,000
Total average shareholders' equity ........ 32,823 29,538 27,379 24,570 22,507
INCOME DATA
Interest income ........................... $28,053 $23,300 $22,445 $22,490 $23,651
Interest expense .......................... 13,529 10,406 10,246 11,363 13,561
Net interest income ..................... 14,524 12,894 12,199 11,127 10,090
Provision for loan losses ................. 501 382 447 552 568
Net interest income after
provision for loan losses ............. 14,023 12,512 11,752 10,575 9,522
Other income .............................. 2,731 2,427 2,511 2,173 1,648
Securities gains (losses) ................. 106 30 140 43 67
Other expenses and income taxes ........... 12,579 11,200 10,892 9,594 8,574
Income before cumulative effect of change
in accounting for income taxes ........ 4,281 3,769 3,511 3,197 2,663
Cumulative effect of change in accounting
for income taxes ...................... 0 0 352 0 0
Net income ................................ 4,281 3,769 3,863 3,197 2,663
Dividends paid ............................ 1,407 1,156 1,080 1,019 1,003
RATIOS
Return on average assets .................. 1.16% 1.11% 1.23% 1.11% 1.00%
Return on average equity .................. 13.04% 12.76% 14.11% 13.01% 11.83%
Equity to assets (year-end) ............... 9.12% 8.44% 9.12% 8.29% 8.45%
Net loans to deposits (year-end) .......... 82.33% 80.07% 77.70% 70.50% 68.40%
Dividend payout ........................... 32.87% 30.67% 27.96% 31.87% 37.66%
PER SHARE DATA*
Net income ................................ $1.91 $1.69 $1.75 $1.45 $1.21
Cash dividends ............................ 0.63 0.52 0.49 0.46 0.46
Book value (year-end) ..................... 15.58 13.29 13.22 11.60 10.61
Weighted average number of
shares outstanding ...................... 2,240,702 2,224,260 2,206,881 2,202,300 2,201,323
Stock dividends declared .................. 7% 25% 5% 0% 0%
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends. 41<PAGE>
Drovers Bancshares Corporation
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION (Continued)
(dollar amounts in thousands,
except per share data) 1990 1989 1988 1987 1986 1985
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................... $253,324 $240,886 $236,007 $221,224 $201,514 $191,920
Investment securities ..................... 66,222 63,682 68,556 56,434 62,313 73,206
Net loans ................................. 164,063 150,880 137,094 142,728 115,728 103,815
Deposits .................................. 227,916 216,532 213,249 196,888 180,421 172,425
Shareholders' equity ...................... 21,715 20,321 19,042 17,785 16,291 14,856
Total average assets ...................... 247,502 234,210 223,991 208,200 192,824 180,869
Total average shareholders' equity ........ 21,085 20,152 18,641 17,145 15,758 14,384
INCOME DATA
Interest income ........................... $23,290 $21,829 $19,608 18,687 18,929 18,865
Interest expense .......................... 14,106 13,334 11,814 10,893 11,429 11,933
Net interest income ..................... 9,184 8,495 7,794 7,794 7,500 6,932
Provision for loan losses ................. 416 365 0 34 495 210
Net interest income after
provision for loan losses ............. 8,768 8,130 7,794 7,760 7,005 6,722
Other income .............................. 1,280 1,167 1,065 962 861 862
Securities gains (losses) ................. 101 76 50 4 (40) (486)
Other expenses and income taxes ........... 7,853 7,221 6,907 6,701 5,818 5,346
Income before cumulative effect of change
in accounting for income taxes ........ 2,296 2,152 2,002 2,025 2,008 1,752
Cumulative effect of change in accounting
for income taxes ...................... 0 0 0 0 0 0
Net income ................................ 2,296 2,152 2,002 2,025 2,008 1,752
Dividends paid ............................ 930 875 776 687 640 597
RATIOS
Return on average assets .................. 0.93% 0.92% 0.89% 0.97% 1.04% 0.97%
Return on average equity .................. 10.89% 10.68% 10.74% 11.81% 12.74% 12.18%
Equity to assets (year-end) ............... 8.57% 8.44% 8.07% 8.04% 8.08% 7.74%
Net loans to deposits (year-end) .......... 71.98% 69.68% 64.29% 72.49% 64.14% 60.21%
Dividend payout ........................... 40.51% 40.66% 38.76% 33.93% 31.87% 34.08%
PER SHARE DATA*
Net income ................................ $1.04 $0.98 $0.91 $0.92 $0.92 $0.80
Cash dividends ............................ 0.42 0.40 0.35 0.31 0.29 0.27
Book value (year-end) ..................... 9.86 9.24 8.65 8.09 7.45 6.81
Weighted average number of
shares outstanding ...................... 2,200,851 2,199,935 2,199,268 2,193,954 2,183,703 2,179,998
Stock dividends declared .................. 50% 5% 5% 10% 7% 7%
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends. 42<PAGE>
