SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-10958
DROVERS BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2209390
(State or other jurisdiction of incorporation or organization) (IRS employer ID)
96 SOUTH GEORGE STREET, YORK, PA 17401
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (717) 843-1586
NONE
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1998
Common Stock 4,456,547 Shares
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Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition ..................................... 3
June 30, 1998 and December 31, 1997
Consolidated Statements of Income ........................................ 4
Three Months Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Comprehensive Income .......................... 5
Three Months Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows .................................... 6
Six Months Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements ............................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 11
PART II OTHER INFORMATION
SIGNATURES ................................................................ 16
2 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
JUNE 30, DEC 31,
ASSETS 1998 1997
Cash and due from banks .................................. $ 16,730 $ 14,549
Money market investments ................................. 1,296 379
Investment securities (fair value $167,125 and $180,245).. 166,249 179,299
Loans (net of unearned income of $3,404 and $3,320) ...... 355,381 313,673
Reserve for loan losses .................................. 3,665 3,304
Net loans ................................................ 351,716 310,369
Bank premises and equipment .............................. 14,480 13,864
Other assets ............................................. 8,712 6,432
TOTAL ASSETS ............................................. $559,183 $524,892
LIABILITIES
Deposits:
Noninterest-bearing ...................................... $ 41,046 $ 41,973
Interest-bearing ......................................... 384,638 360,113
Total deposits ........................................... 425,684 402,086
Federal funds purchased and securities sold under
agreements to repurchase ................................ 38,699 31,360
Other borrowings ......................................... 40,446 43,558
Other liabilities ........................................ 8,558 4,418
TOTAL LIABILITIES ........................................ 513,387 481,422
SHAREHOLDERS' EQUITY
Common stock($3.33 par value), 10,000,000 shares
authorized; issued and outstanding-4,456,547 shares in
1998 and 2,961,127 shares in 1997 ...................... 14,840 14,806
Additional paid-in capital ............................... 18,790 18,664
Retained earnings ........................................ 10,683 8,407
Accumulated other comprehensive income ................... 1,483 1,593
TOTAL SHAREHOLDERS' EQUITY ............................... 45,796 43,470
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $559,183 $524,892
See notes to consolidated financial statements.
3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
INTEREST INCOME
Interest and fees on loans ............. $7,531 $6,253 $14,700 $12,354
Interest on deposits with banks ........ 27 7 32 11
Interest and dividends on
investment securities ................. 2,604 2,617 5,410 4,941
Total interest income .................. 10,162 8,877 20,142 17,306
INTEREST EXPENSE
Interest on deposits ................... 4,308 3,795 8,503 7,333
Federal funds purchased and securities
sold under agreements to repurchase ... 425 389 790 707
Interest on borrowed funds ............. 694 512 1,425 978
Total interest expense ................. 5,427 4,696 10,718 9,018
Net interest income .................... 4,735 4,181 9,424 8,288
Provision for loan losses .............. 229 66 468 186
Net interest income after
provision for loan losses ............. 4,506 4,115 8,956 8,102
OTHER INCOME
Trust income ........................... 317 282 588 544
Service charges on deposit accounts .... 417 320 792 625
Securities gains ....................... 9 101 231 102
Net gains on residential
mortgage loan sales ................... 337 73 584 230
Equity in losses of real estate ventures -18 -28 -55 -41
Other .................................. 325 263 578 456
Total other income ..................... 1,387 1,011 2,718 1,916
OTHER EXPENSES
Salaries and employee benefits ......... 1,996 1,850 4,013 3,669
Occupancy and premises ................. 295 212 545 393
Furniture and equipment ................ 300 271 595 531
Marketing .............................. 151 120 302 241
Net (gain) cost of operation
of other real estate .................. 12 62 18 73
Supplies ............................... 124 113 243 174
Other taxes ............................ 97 88 193 178
Other................................... 738 597 1,501 1,118
Total other expenses ................... 3,713 3,313 7,410 6,377
Income before income taxes ............. 2,180 1,813 4,264 3,641
Applicable income taxes ................ 540 403 1,016 841
NET INCOME ............................. $ 1,640 $ 1,410 $ 3,248 $ 2,800
PER SHARE DATA
Net income ............................. $ 0.37 $ 0.32 $ 0.73 $ 0.63
Net income, assuming dilution .......... $ 0.36 $ 0.32 $ 0.72 $ 0.63
Dividends .............................. $ 0.12 $ 0.10 $ 0.22 $ 0.19
See notes to consolidated financial statements.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
Net income .............................. $ 1,640 $ 1,410 $ 3,248 $ 2,800
Other comprehensive income:
Unrealized gains (losses) on securities
arising during period ................. -223 1,063 65 336
Reclassification adjustment for gains
Included in net income ................ -9 -101 -231 -102
Other comprehensive income (loss) before
tax ................................... -232 962 -166 234
Income taxes (benefits) related to other
Comprehensive income ................. -79 327 -56 80
Other comprehensive income (loss) ....... -153 635 -110 154
COMPREHENSIVE INCOME ................... $ 1,487 $ 2,045 $ 3,138 $ 2,954
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) SIX MONTHS
ENDED JUNE 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 3,248 $ 2,800
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation ........................................ 741 650
Net amortization of investment security premiums .... 169 -89
Provision for loan losses ........................... 468 186
Provision for losses on other real estate owned ..... 0 54
Gain on sale of securities held-to-maturity ......... 0 -1
Gain on sale of securities available-for-sale ....... -231 -102
Loans originated for sale ........................... -33,628 -13,140
Proceeds from sales of loans ........................ 35,041 13,518
Gain on sale of loans ............................... -583 -230
Other (gains) losses ................................ 1 -42
Net deferred loan fees .............................. -657 -287
Equity in loss of real estate venture................ 55 41
Increase in interest/dividends receivable ........... -28 -447
Increase in interest payable ........................ 717 705
Other ............................................... 1,721 186
Net cash provided by operating activities ........... 7,034 3,802
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities
held-to-maturity ................................... 3,540 3,146
Proceeds from sales and maturities of securities
available-for-sale ................................. 22,264 14,317
Purchases of securities held-to-maturity ............ 0 -9,827
Purchases of securities available-for-sale .......... -12,859 -40,529
Increase in net loans ............................... -41,909 -9,499
Capital expenditures ................................ -1,265 -522
Proceeds from sale of fixed assets .................. 2 75
Purchase of investment in real estate venture ....... -847 9
Proceeds from sale of other real estate ............. 134 99
Net cash used in investing activities ............... -30,940 -42,731
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits
and savings accounts ............................... 16,634 18,534
Net increase in certificates of deposit ............. 6,953 12,803
Net increase in federal funds purchased
and repurchase agreements .......................... 7,339 4,354
Net increase (decrease) in other borrowings ......... -3,092 4,916
Payments made for capital leases .................... -19 -17
Dividends paid ...................................... -978 -843
Proceeds from issuance of common stock .............. 167 0
Net cash provided by financing activities ........... 27,004 39,747
NET INCREASE IN CASH & CASH EQUIVALENTS ............. 3,098 818
CASH & CASH EQUIVALENTS AT JANUARY 1, ............... 14,928 17,783
CASH & CASH EQUIVALENTS AT JUNE 30, ................. $ 18,026 $ 18,601
See notes to consolidated financial statements.
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments (including normal recurring accruals) considered
necessary to present fairly Drovers Bancshares' financial position as of
June 30, 1998 and December 31, 1997. Operating results and changes in cash
flows for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. For
further information, refer to the consolidated financial statements
and footnotes included in the Annual Report for the year ended December 31,
1997.
NOTE B - CALCULATION OF EARNINGS PER SHARE
On May 29, 1998, the Corporation issued a 3-for-2 stock split. Par value was
adjusted from $5.00 per share to $3.33 per share. Net income per share is
computed based on the weighted average number of shares outstanding each period,
giving retroactive effect to the 3-for-2 stock split issued in 1998, a 5% stock
dividend issued in 1997 and a 25% stock dividend issued in 1996. Earnings per
common share, assuming dilution gives effect to all dilutive potential common
shares during each period.
NOTE C - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of June 30, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies ... $10,472 $ 148 $ 0 $10,620
Obligations of states and political
subdivisions ......................... 17,520 633 0 18,153
Mortgage-backed securities and
collateralized mortgage obligations .. 11,207 148 53 11,302
Total investment securities ........... $39,199 $ 929 $ 53 $40,075
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C - INVESTMENT SECURITIES, continued
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of June 30, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 9,999 $ 76 $ 1 $ 10,074
Obligations of states and political
Subdivisions ........................ 5,395 185 0 5,580
Corporate obligations ................ 500 0 17 483
Mortgage-backed securities and
Collateralized mortgage obligations . 91,884 1,074 40 92,918
Total debt securities ................ 107,778 1,335 58 109,055
Equity securities .................... 17,024 976 5 17,995
Total investment securities .......... $ 124,802 $ 2,311 $ 63 $ 127,050
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of December 31, 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 10,469 $ 153 $ 0 $ 10,622
Obligations of states and political
subdivisions ........................ 18,318 707 0 19,025
Mortgage-backed securities and
collateralized mortgage obligations . 13,965 165 79 14,051
Total investment securities .......... $ 42,752 $ 1,025 $ 79 $ 43,698
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 18,003 $ 109 $ 5 $ 18,107
Obligations of states and political
subdivisions ........................ 5,898 198 0 6,096
Corporate obligations................. 500 0 14 486
Mortgage-backed securities and
collateralized mortgage obligations . 93,729 1,047 29 94,747
Total debt securities ................ 118,130 1,354 48 119,436
Equity securities .................... 16,004 1,107 0 17,111
Total investment securities .......... $134,134 $ 2,461 $ 48 $136,547
For additional information, see pages 22-23 of the Corporation's 1997 Annual
Report.
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D - LOANS
Loans are comprised of the following as of June 30, 1998 and December 31, 1997:
JUNE 30, DEC 31,
(In thousands) 1998 1997
Commercial, financial and industrial loans ............. $104,990 $ 80,636
Real estate mortgage loans:
Real estate construction-related ..................... 11,942 12,105
Real estate mortgage loans secured by
1-4 family residential properties ................. 111,222 107,797
Other real estate .................................... 94,607 80,462
Total real estate mortgage loans ....................... 217,771 200,364
Consumer loans:
Monthly payment ...................................... 31,086 30,952
Other revolving credit ............................... 1,451 1,476
Total consumer loans ................................... 32,537 32,428
Leasing and other ...................................... 83 245
Total loans ............................................ $355,381 $313,673
Changes in the reserve for loan losses for the periods ended June 30, were
as follows:
(In thousands) 1998 1997
Balance, beginning of year ............................. $ 3,304 $ 3,130
Provision for loan losses .............................. 468 186
LESS: Loans charged-off ................................ 165 136
Recoveries ............................................. 58 80
Balance, June 30 ....................................... $ 3,665 $ 3,260
As of June 30, 1998, the total recorded investment in impaired loans was
$1,232,000. Nonaccrual loans at June 30, 1998 were $695,000 compared to $740,000
at December 31, 1997.
Residential mortgage loans with a book value of $3,312,000 were held for sale at
June 30, 1998. The cumulative fair value exceeded the book value of these
loans. Loans held for sale are included in total loans. During the first six
months of 1998, the Corporation capitalized $222,000 in mortgage servicing
rights and amortized $69,000.
For additional information, see pages 23-24 of the Corporation's 1997 annual
report.
NOTE E - COMPREHENSIVE INCOME
Effective beginning with March 31, 1998 interim reports, Financial Accounting
Standard No. 130, "Reporting Comprehensive Income," (FAS 130) requires the
reporting of comprehensive income. Accordingly, the Consolidated Statements
of Comprehensive Income was added to our interim financial statements. The
income tax expense or benefit allocated to each component of other comprehensive
income for the periods ended June 30, were as follows:
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - COMPREHENSIVE INCOME, continued
(In thousands) THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
Unrealized gains (losses) on securities
arising during period ................... $ -76 $ 361 $ 22 $ 114
Reclassification adjustment for gains
included in net income .................. -3 -34 -78 -34
Income taxes (benefits) related to other
Comprehensive income .................... $ -79 $ 327 $ -56 $ 80
Accumulated other comprehensive income as of June 30, was as follows:
(in thousands) 1998 1997
Balance, January 1, ...................................... $ 1,593 $ 370
Current-period change .................................... -110 154
Balance, June 30, ........................................ $ 1,483 $ 524
All components of accumulated other comprehensive income were as a result of
unrealized gains (losses) on investment securities available-for-sale.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The following comparison of actual balances indicates how the Corporation has
generated and employed its funds for the six months ending June 30, 1998:
BALANCE BALANCE
JUNE 30, INCREASE DEC 31,
(In thousands) 1998 (DECREASE) % 1997
FUNDING USES:
Money market investments ........... $ 1,296 $ 917 242.0% $ 379
Investment securities .............. 166,249 -13,050 -7.3% 179,299
Loans (net) ........................ 351,716 41,347 13.3% 310,369
Total interest-bearing assets ...... 519,261 29,214 6.0% 490,047
Noninterest-bearing assets ......... 39,922 5,077 14.6% 34,845
TOTAL USES ......................... $559,183 $ 34,291 6.5% $524,892
FUNDING SOURCES:
Interest-bearing demand deposits .... $ 47,026 $ 4,267 10.0% $ 42,759
Savings deposits .................... 120,064 11,476 10.6% 108,588
Time deposits ....................... 217,548 8,782 4.2% 208,766
Short-term borrowings ............... 38,699 7,339 23.4% 31,360
Long-term borrowings ................ 40,446 -3,112 -7.1% 43,558
Total interest-bearing liabilities .. 463,783 28,752 6.6% 435,031
Noninterest-bearing demand deposits . 41,046 -927 -2.2% 41,973
Other liabilities ................... 8,558 4,140 93.7% 4,418
Shareholders' equity ................ 45,796 2,326 5.4% 43,470
TOTAL SOURCES ....................... $559,183 $ 34,291 6.5% $524,892
Total assets increased $34,291,000, or 6.5% since December 31, 1997. Loans grew
$41,347,000 while investments securities declined $13,050,000. Commercial loan
demand remained strong in the second quarter. Commercial loans and other real
estate loans have grown $24,354,000 and $14,145,000, respectively, since the end
of 1997. Low interest rates and a strong economy continued to fuel demand for
residential mortgages. Loans secured by 1-4 family residential properties
increased $3,425,000 in the last six months.
Last year, management increased holdings in investment securities to leverage
the Corporation's strong capital base. Maturities and accelerating prepayments
from mortgage-backed securities caused investment securities holdings to fall
$13,050,000 since the end of 1997. These holdings were reinvested into higher
yielding loans. During the first quarter, the Corporation invested $2,200,000
in a low-income housing partnership. The investment will provide historic and
low-income tax credits beginning as early as the fourth quarter of 1998. The
investment is shown as a noninterest-bearing asset.
Deposits continued to fund most of the asset growth. Deposits have grown
$23,598,000, or 5.9%, in the last six months. The Corporation's Indexed Money
Fund, a savings product that pays a money market interest rate, grew
$10,287,000. Certificates of deposits grew $6,952,000.
11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LOAN QUALITY
Impaired loans at June 30, 1998 were $1,232,000 compared to $1,314,000 at
December 31, 1997. Nonaccrual loans at June 30, 1998 were $695,000 compared to
$740,000 at December 31, 1997. Overall loan quality remains very good.
Loan charge-offs and recoveries for the first half of 1998 were $165,000 and
$58,000, respectively. Second quarter net charge-offs were $75,000.
RESULTS OF OPERATION
Drovers Bancshares recorded net income of $3,248,000 and $2,800,000 for the six
months ended June 30, 1998 and 1997, respectively.
The return on assets (ROA) and return on equity (ROE) for the six months ended
June 30, 1998 were 1.20% and 14.51%, respectively. This compares to an ROA
and ROE for the same period last year of 1.20% and 14.47%, respectively. Net
income for the quarter was $1,640,000 compared to $1,410,000 for the second
quarter last year and $1,608,000 for the first quarter of 1998. The ROA and ROE
for the second quarter of 1998 were 1.19% and 14.35%, respectively.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on loans and
investments and the interest paid on deposits and other sources of funds. The
following table presents the trends in net interest income:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands) 1998 1997 98/97 1998 1997 98/97
Interest income ............ $10,162 $ 8,877 14.5% $20,142 $17,306 16.4%
Interest expense ........... 5,427 4,696 15.6% 10,718 9,018 18.9%
Net interest income ........ 4,735 4,181 13.3% 9,424 8,288 13.7%
Provision for loan losses .. 229 66 247.0% 468 186 151.6%
Net interest income after
provision for loan losses . $ 4,506 $ 4,115 9.5% $ 8,956 $ 8,102 10.5%
The corporation's largest category of earning assets consists of loans to
businesses and individuals. The majority of earning assets are supported by
commercial and consumer deposits and shareholders' equity. Changes in net
interest income are determined by variations in the volume and mix of assets and
liabilities as well as their sensitivity to interest rate movements.
Net interest income increased $554,000 in the second quarter and $1,136,000
during the first six months of 1998. An increase in earning assets more than
offset a decline in the net interest margin. Average earning assets increased
17.7% to $513,556,000 for the first half of 1998 compared to $436,440,000 for
the same period last year. The margin for the first six months was 3.70%
compared to 3.83% for the first half of 1997 and 3.71% for all of last year.
The strong
12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NET INTEREST INCOME, continued
loan demand has increased loans as a percentage of earning assets. This change
in mix of higher yielding loans compared to investment securities has caused the
margin to increase. The margin in the fourth quarter of 1997 was 3.56% compared
to 3.75% in the first quarter of 1998 and 3.65% in the second. In addition, the
Corporation collected about $100,000 in non-recurring loan service charges
during the first quarter of 1998.
The provision for loan losses was $229,000 for the quarter and $468,000 for the
first half of 1998. This compares to a second quarter provision last year of
$66,000 and a provision of $186,000 for the first six months. The increase in
the provision for loan losses is directly related to the increase in loan
balances. Net loans have increased $62,373,000, or 17.7%, during the last
twelve months. The loan loss provision as a percentage of loans was 1.03% at
June 30, 1998 compared to 1.05% at the end of 1997.
NONINTEREST INCOME
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands) 1998 1997 98/97 1998 1997 98/97
Trust income ...................... $ 317 $282 12.4% $ 588 $ 544 8.1%
Service charges on deposit accounts 417 320 30.3% 792 625 26.7%
Securities gains .................. 9 101 -91.1% 231 102 126.5%
Net gains on residential
mortgage loan sales .............. 337 73 361.6% 584 230 153.9%
Equity in losses of real
estate venture ................... -18 -28 -35.7% -55 -41 34.1%
Other ............................. 325 263 23.6% 578 456 26.8%
Total .............................$1,387 $1,011 37.2% $2,718 $1,916 41.9%
Noninterest income increased $376,000 for the second quarter and $802,000 for
the six months ended June 30, 1998. Low interest rates, a strong economy and a
mild winter have driven mortgage loan sale gains to record levels. Mortgage
loan sale gains increased $264,000 for the second quarter and $354,000 year-to-
date. Mortgage loan sales totaled $14,700,000 and $20,400,000 in the first and
second quarter, respectively. Gains from the sale of investment securities
increased $129,000 over the first half of 1997. In the first quarter of 1998,
the Corporation liquidated a portion of its community bank stock portfolio
accounting for most of the gains this year. In 1997, the Corporation
restructured a portion of its investment portfolio accounting for the $102,000
gain in the second quarter.
Service charges on deposit accounts increased $97,000 the second quarter and
$167,000 for the first half of 1998. The Corporation engaged a consulting group
in the fourth quarter of 1997. They have now completed their analyses of
various products and processes, that sought ways to enhance productivity by
reducing expenses and improving non-interest income. Most of the increase in
deposit service charges was a direct result of implementing their
recommendations.
13 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NONINTEREST INCOME, continued
Other income increased $122,000 for the first half of 1998. The Corporation
implemented a surcharge for non-customers using our ATM machines beginning in
the second quarter of 1997. Foreign ATM transaction fees increased $49,000 over
the first six months of last year.
NONINTEREST EXPENSE
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands) 1998 1997 98/97 1998 1997 98/97
Salaries and employee benefits . $1,996 $1,850 7.9% $4,013 $3,669 9.4%
Occupancy and premises ......... 295 212 39.2% 545 393 38.7%
Furniture and equipment ........ 300 271 10.7% 595 531 12.1%
Marketing expense .............. 151 120 25.8% 302 241 25.3%
Net cost of operation
of other real estate .......... 12 62 -80.6% 18 73 -75.3%
Supplies ....................... 124 113 9.7% 243 174 39.7%
Other taxes .................... 97 88 10.2% 193 178 8.4%
Other........................... 738 597 23.6% 1,501 1,118 34.3%
Total .......................... $3,713 $3,313 12.1% $7,410 $6,377 16.2%
Noninterest expenses increased $400,000 for the second quarter and $1,033,000 so
far this year. Two new branch offices, opened late in 1997, added $180,000 to
second quarter noninterest expenses and $330,000 for the first six months of
1998. Other professional services increased $186,000 year-to-date, mainly due
to the consultants discussed above. All fees related to the engagement have now
been recognized. In the first quarter of 1997, the Corporation sold a branch
office that had been previously closed resulting in a gain of $50,000. This gain
was netted against other expense. A decline in tenant occupancy at the 96 South
George Street Office Building, owned by the Corporation, increased occupancy and
premises expense $61,000 during the first six months of 1998. On June 2, 1998,
the Corporation began trading on the Nasdaq National Market. Expenses related
to joining the stock exchange totaled $49,000 and were recognized in the second
quarter.
Enhancing productivity was a focal point of the recent consulting engagement.
Full-time equivalent (FTE's) staffing levels were 205 at June 30, 1998
compared to 209 at the end of 1997 and 208 a year ago. We have had some
success in increasing productivity, especially in the branch offices.
One full service branch office was recently reduced to drive-up
operations only.
14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
TAXATION
The Corporation recognized a provision for income taxes of $1,016,000 for the
six months ending June 30, 1998. The average tax rate, applicable income
taxes divided by income before taxes, was 23.8%. This compares to an average
tax rate of 23.3% for all of 1997. The Corporation manages its tax rate
through the purchase of tax-exempt investment securities and investments in
low-income housing partnerships that provide historic and low-income tax
credits.
MARKET RISK
The Corporation's primary market risk is the risk of changes in net interest
income caused by changes in interest rates. Management monitors ongoing
interest rate risk through monthly "gap" reports and quarterly computer
simulations of net interest income. Measurements indicate the
Corporation is slightly asset sensitive and well within the tolerance limits
established by Management.
VOTING RESULTS
Shareholders' voted on the election of four directors at this year's Annual
Meeting held May 22, 1998. The directors serve a four-year term expiring 2001.
The voting results were as follows:
For Against/Withheld
Harlowe R. Prindle (Director) ..... 2,664,768 9,056
Basil A. Shorb III (Director) ..... 2,666,764 7,060
Delaine A. Toerper (Director) ..... 2,667,318 6,506
James S. Wisotzkey (Director)...... 2,666,628 7,196
FUTURE OUTLOOK
In March 1998, the Corporation invested in its third low-income housing
partnership. The partnership will renovate two buildings in Red Lion,
Pennsylvania into fifty one-, two- and three-bedroom apartments for low-income
families. Construction begins in May and should conclude by yearend. In
addition to helping provide quality, affordable housing, the Corporation will
receive substantial tax credits beginning as soon as this year. When the
apartments open, the Corporation expects to immediately receive about $525,000
in historic tax credits. This will result in a direct reduction in applicable
income taxes and an increase in net income. The impact of these tax credits has
not been reflected in the Corporation's financial statements.
Construction of a new branch office in Hellam, Pennsylvania will begin in
August. The branch office is expected to open by the end of 1998. The
Corporation has signed a contract to purchase land near Dillsburg, Pennsylvania.
Construction of a new branch office will begin later this year and open in 1999.
15 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART II OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DROVERS BANCSHARES CORPORATION
_/s/_A._Richard_Pugh____________________
A. Richard Pugh, Chairman, President
and Chief Executive Officer
_/s/_Debra_A._Goodling__________________
Debra A. Goodling, Executive Vice President
and Treasurer
Principal Financial Officer
_/s/_John_D._Blecher____________________
John D. Blecher, Vice President and
Assistant Treasurer
Principal Accounting Officer
Date: August 10, 1998
16 <PAGE>
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