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 March 31, 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)
30 SOUTH GEORGE STREET, YORK, PA 17401
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (717) 843-1586
NONE
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
Common Stock 2,965,641 Shares
1 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition ................................... 3
March 31, 1998 and December 31, 1997
Consolidated Statements of Income ...................................... 4
Three Months Ended March 31, 1998 and 1997
Consolidated Statements of Comprehensive Income ........................ 5
Three Months Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows .................................. 6
Three Months Ended March 31, 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)
MARCH 31, DEC 31,
ASSETS 1998 1997
Cash and due from banks ................................ $ 19,030 $ 14,549
Money market investments ............................... 3,341 379
Investment securities (fair value $171,217 and $180,245) 170,298 179,299
Loans (net of unearned income of $3,307 and $3,320) .... 340,980 313,673
Reserve for loan losses ................................ 3,511 3,304
____________________
Net loans .............................................. 337,469 310,369
Bank premises and equipment ............................ 13,650 13,864
Other assets ........................................... 9,450 6,432
____________________
TOTAL ASSETS ........................................... $553,238 $524,892
====================
LIABILITIES
Deposits:
Noninterest-bearing .................................... $ 45,527 $ 41,973
Interest-bearing ....................................... 381,381 360,113
____________________
Total deposits ......................................... 426,908 402,086
Federal funds purchased and securities sold under
agreements to repurchase .............................. 19,586 31,360
Other borrowings ....................................... 53,503 43,558
Other liabilities ...................................... 8,509 4,418
____________________
TOTAL LIABILITIES ...................................... 508,506 481,422
SHAREHOLDERS' EQUITY
Common stock($5 par value), 10,000,000 shares authorized;
issued and outstanding--2,965,641 shares in 1998 and
2,961,127 shares in 1997 .............................. 14,828 14,806
Additional paid-in capital ............................. 18,697 18,664
Retained earnings ...................................... 9,571 8,407
Accumulated other comprehensive income.................. 1,636 1,593
____________________
TOTAL SHAREHOLDERS' EQUITY ............................. 44,732 43,470
____________________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $553,238 $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
ENDED MARCH 31,
1998 1997
INTEREST INCOME
Interest and fees on loans ................ $7,170 $6,101
Interest on deposits with banks ........... 5 4
Interest and dividends on
investment securities .................... 2,806 2,324
________________
Total interest income ..................... 9,981 8,429
INTEREST EXPENSE
Interest on deposits ...................... 4,195 3,538
Federal funds purchased and securities
sold under agreements to repurchase ...... 365 318
Interest on borrowed funds ................ 731 466
_________________
Total interest expense .................... 5,291 4,322
_________________
Net interest income ....................... 4,690 4,107
Provision for loan losses ................. 239 120
_________________
Net interest income after
provision for loan losses ................ 4,451 3,987
OTHER INCOME
Trust income .............................. 270 262
Service charges on deposit accounts ....... 375 305
Securities gains .......................... 222 1
Net gains on residential
mortgage loan sales ..................... 247 157
Equity in losses of real estate ventures... -37 -13
Other ..................................... 253 193
_________________
Total other income ........................ 1,330 905
OTHER EXPENSES
Salaries and employee benefits ............ 2,016 1,819
Occupancy and premises .................... 251 181
Furniture and equipment ................... 295 260
Marketing ................................. 151 121
Net cost of operation
of other real estate ..................... 6 11
Supplies .................................. 119 61
Other taxes ............................... 96 90
Other ..................................... 763 521
_________________
Total other expenses ...................... 3,697 3,064
_________________
Income before income taxes ................ 2,084 1,828
Applicable income taxes ................... 476 438
_________________
NET INCOME ................................ $ 1,608 $ 1,390
=================
PER SHARE DATA
Net income ................................ $ 0.36 $ 0.31
=================
Net income, assuming dilution.............. $ 0.36 $ 0.31
=================
Dividends ................................. $ 0.10 $ 0.09
=================
See notes to consolidated financial statements.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS
ENDED MARCH 31,
(In thousands) 1998 1997
______________________________________________________________________________
Net income ............................................ $1,608 $1,390
Other comprehensive income:
Unrealized gains (losses) on securities arising during
period .............................................. 288 -729
Reclassification adjustment for gains included in net
income .............................................. -222 1
_____________________
Other comprehensive income (loss) before tax .......... 66 -728
Income taxes (benefits) related to other comprehensive
income .............................................. 23 -247
_____________________
Other comprehensive income (loss) ..................... 43 -481
_____________________
COMPREHENSIVE INCOME .................................. $1,651 $ 909
See notes to consolidated financial statements. =====================
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) THREE MONTHS
ENDED MARCH 31,
1998 1997
______________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 1,608 $ 1,390
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization........................ 330 311
Net (accretion) amortization of investment security
(discounts) premiums ............................... 49 -29
Provision for loan losses ........................... 239 120
Gain on sale of securities held-to-maturity ......... 0 -1
Gain on sale of securities available-for-sale ....... -222 0
Gain on sale of fixed assets ........................ 0 -53
Loans originated for sale ........................... -14,450 -8,364
Proceeds from sales of loans ........................ 15,045 8,630
Gain on sale of loans ............................... -247 -157
(Gain) loss on sale of other real estate ............ 0 1
Net deferred loan fees .............................. -282 -229
Equity in losses of real estate ventures............. 37 13
Increase in interest/dividends receivable ........... -2 -289
Increase (decrease) in interest payable ............. 279 354
Increase in other assets ............................ -820 -48
Increase in other liabilities ....................... 2,201 676
_____________________
Net cash provided by operating activities ........... 3,765 2,325
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities
held-to-maturity ................................... 1,457 872
Proceeds from sales and maturities of securities
available-for-sale ................................. 12,877 2,605
Purchases of securities held-to-maturity ............ 0 -5,528
Purchases of securities available-for-sale .......... -5,095 -28,382
(Increase)decrease in net loans ..................... -27,479 1,111
Capital expenditures ................................ -103 -432
Proceeds from sale of fixed assets .................. 1 73
Net (purchase) return of investment in real estate
ventures ........................................... -721 5
Proceeds from sale of other real estate ............. 134 73
______________________
Net cash used in investing activities ............... -18,929 -29,603
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease)in demand deposits
and savings accounts ............................... 22,845 3,633
Net increase in certificates of deposit ............. 1,982 4,629
Net increase in federal funds purchased
and repurchase agreements .......................... -11,774 13,528
Net increase (decrease) in other borrowings ......... 9,954 4,957
Payments made for capital leases .................... -10 -8
Dividends paid ...................................... -445 -421
Proceeds from issuance of common stock .............. 55 0
______________________
Net cash provided by financing activities ........... 22,607 26,318
______________________
NET DECREASE IN CASH & CASH EQUIVALENTS ............. 7,443 -960
CASH & CASH EQUIVALENTS AT JANUARY 1, ............... 14,928 17,783
______________________
CASH & CASH EQUIVALENTS AT MARCH 31, ................ $22,371 $16,823
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 March 31, 1998 and December 31, 1997. Operating results and changes in
cash flows for the three months ended March 31, 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 April 22, 1998, the Corporation declared a 3-for-2 stock split to
shareholders of record on May 8, 1998 and payable May 29, 1998. 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 declared in
1998, a 5% dividend paid in 1997 and a 25% dividend paid 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 March 31, 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 ... $10,471 $ 149 $ 0 $10,620
Obligations of states and political
subdivisions ......................... 18,117 654 0 18,771
Mortgage-backed securities and
collateralized mortgage obligations .. 12,706 173 57 12,822
________________________________________
Total investment securities ........... $41,294 $ 976 $ 57 $42,213
========================================
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 March 31, 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 .. $ 11,002 $ 80 $ 4 11,078
Obligations of states and political
subdivisions ........................ 5,896 174 0 6,070
Corporate obligations ................ 500 0 15 485
Mortgage-backed securities and
collateralized mortgage obligations . 92,388 1,230 16 93,602
________________________________________
Total debt securities ................ 109,786 1,484 35 111,235
Equity securities .................... 16,739 1,030 0 17,769
________________________________________
Total investment securities .......... $126,525 $2,514 $ 35 $129,004
========================================
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 March 31, 1998 and December 31, 1997:
MARCH 31, DEC 31,
(In thousands) 1998 1997
Commercial, financial and industrial loans .......... $ 95,357 $ 80,636
Real estate mortgage loans:
Real estate construction-related ................... 8,890 12,105
Real estate mortgage loans secured by
1-4 family residential properties ................ 112,855 107,797
Other real estate .................................. 91,691 80,462
_____________________
Total real estate mortgage loans ..................... 213,436 200,364
Consumer loans:
Monthly payment .................................... 30,489 30,952
Other revolving credit ............................. 1,527 1,476
_____________________
Total consumer loans ................................. 32,016 32,428
Leasing and other .................................... 171 245
_____________________
Total loans .......................................... $340,980 $313,673
=====================
Changes in the reserve for loan losses for the periods ended March 31, were
as follows:
(In thousands) 1998 1997
Balance, beginning of year ........................... $ 3,304 $ 3,130
Provision for loan losses ............................ 239 120
LESS: Loans charged-off .............................. 62 48
Recoveries ........................................... 30 34
_____________________
Balance, March 31 .................................... $ 3,511 $ 3,236
=====================
As of March 31, 1998, the total recorded investment in impaired loans was
$1,367,000. Nonaccrual loans at March 31, 1998 were $459,000 compared to
$740,000 at December 31, 1997.
Residential mortgage loans with a book value of $6,609,000 were held for sale
at March 31, 1998. The cumulative fair value exceeded the book value of these
loans. Loans held for sale are included in total loans. During the first
quarter of 1998, the Corporation capitalized $98,000 in mortgage servicing
rights and amortized $27,000.
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 March 31, 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) 1998 1997
Unrealized gains (losses) on securities arising during
period ............................................... $98 $-247
Reclassification adjustment for gains included in
net income ........................................... -75 0
__________________
Income taxes (benefits) related to other comprehensive
income ............................................... $23 $-247
==================
Accumulated other comprehensive income as of March 31, was as follows:
(In thousands) 1998 1997
Balance, January 1,..................................... $1,593 $-481
Current-period change .................................. 43 370
__________________
Balance, March 31, ..................................... $1,636 $-111
==================
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 three months ending March 31, 1998:
BALANCE BALANCE
MARCH 31, INCREASE DEC 31,
1998 (DECREASE) % 1997
FUNDING USES: (In thousands)
Money market investments ............ $ 3,341 $ 2,962 781.5% $ 379
Investment securities ............... 170,298 -9,001 -5.0% 179,299
Loans (net) ......................... 337,469 27,100 8.7% 310,369
_______________________________________
Total interest-bearing assets ....... 511,108 21,061 4.3% 490,047
Noninterest-bearing assets .......... 42,130 7,285 20.9% 34,845
_______________________________________
TOTAL USES .......................... $553,238 $28,346 5.4% $524,892
=======================================
FUNDING SOURCES:
Interest-bearing demand deposits .... $ 46,195 $ 3,436 8.1% $ 42,759
Savings deposits .................... 123,458 14,870 13.8% 108,588
Time deposits ....................... 211,728 2,962 1.4% 208,766
Short-term borrowings ............... 19,586 -11,774 -37.5% 31,360
Long-term borrowings ................ 53,503 9,945 22.8% 43,558
_______________________________________
Total interest-bearing liabilities .. 454,470 19,439 4.5% 435,031
Noninterest-bearing demand deposits . 45,527 3,554 8.5% 41,973
Other liabilities ................... 8,509 4,091 92.6% 4,418
Shareholders' equity ................ 44,732 1,262 2.9% 43,470
_______________________________________
TOTAL SOURCES ....................... $553,238 $28,346 5.4% $524,892
=======================================
Total assets increased $28,346,000 since December 31, 1997. Loans grew
$27,100,000, or 8.7%, accounting for nearly all the asset growth. Commercial
loan demand was strong. Commercial loans grew $14,721,000, including auto
dealer floorplan loans which grew $7,707,000. Commercial real estate loans
increased $11,229,000. Low interest rates and mild weather fueled demand for
residential mortgage loans. Loans secured by residential real estate grew
$5,058,000. Consumer loan growth remained flat.
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 balances to fall
$9,001,000. Many of these funds were reinvested in higher yielding loans.
During the first quarter, the Corporation made a $2,200,000 equity investment
in a low-income housing partnership. The investment will provide historic and
low-income housing tax credits beginning as early as the fourth quarter of 1998.
The investment is shown as a noninterest-bearing asset.
Deposits funded most of the asset growth during the quarter. Total deposits
grew $24,822,000, or 6.2%. Nearly every deposit category increased. The
Corporation's Indexed Money Fund, a savings product which pays a money market
interest rate, grew $13,979,000. Some of the increase in overall deposits was
due to seasonal fluctuations in account balances.
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 March 31, 1998 were $1,367,000 compared to $1,314,000 at
December 31, 1997. Nonaccrual loans were $459,000 compared to $740,000 at the
end of 1997. Overall loan quality remains very good.
Loan charge-offs were $62,000 in the first quarter. All were consumer loans.
Recoveries were $30,000.
RESULTS OF OPERATION
Drovers Bancshares recorded net income of $1,608,000 and $1,390,000 for the
three months ended March 31, 1998 and 1997, respectively.
The return on assets (ROA) and return on equity (ROE) for the three months
ended March 31, 1998 was 1.21% and 14.67%, respectively. This compares to an
ROA and ROE for the same period last year of 1.23% and 14.53%, 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
ENDED MARCH 31,
(In thousands) 1998 1997 98/97
Interest income ............ $ 9,981 $ 8,429 18.4%
Interest expense ........... 5,291 4,322 22.4%
__________________________
Net interest income ........ 4,690 4,107 14.2%
Provision for loan losses .. 239 120 99.2%
__________________________
Net interest income after
provision for loan losses . $ 4,451 $ 3,987 11.6%
==========================
The Corporation's largest category of earning assets consists of loans to
businesses and individuals. The majority of earning assets are supported by
interest-bearing commercial and consumer deposits and shareholders' equity.
Changes in net interest income are determined by variations in the volume and
mix of assets and liabilities as well as their sensitivity to interest rate
movements.
Net interest income increased $583,000, or 14.2%, compared to the first quarter
last year. The net interest margin declined from 3.92% in the first quarter
last year to 3.75% this year. An increase in earning assets more than offset
the decline in margin. Average earning assets were $507,029,000 and
$425,056,000 during the first quarter of 1998 and 1997, respectively. The net
interest margin fell each quarter in 1997 as the Corporation leveraged its
balance sheet by purchasing investment securities. The fourth quarter 1997
margin was 3.56% and averaged 3.71% for the year. An increase in the mix of
higher yielding loans compared to investment securities boosted the margin from
the fourth quarter 1997. In addition, the Corporation collected about $100,000
in non-recurring loan service charges during the first quarter.
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
Strong loan growth caused management to increase the provision for loan losses
from $120,000 last year to $239,000 in the first quarter of 1998. Loan quality
remains very good. The reserve for loan losses as a percentage of loans was
1.03% at March 31, 1998. This compares to 1.05% at the end of 1997.
NONINTEREST INCOME
THREE MONTHS
ENDED MARCH 31,
(In thousands) 1998 1997 98/97
Trust income ........................ $ 270 $262 3.1%
Service charges on deposit accounts . 375 305 23.0%
Securities gains .................... 222 1 999.9%
Net gains on residential
mortgage loan sales ................ 247 157 57.3%
Equity in losses of
real estate ventures................ -37 -13 184.6%
Other ............................... 253 193 31.1%
_______________________
Total ............................... $1,330 $ 905 47.0%
=======================
Noninterest income increased $425,000, or 47.0%, during the first quarter.
Securities gains increased $221,000 as the Corporation liquidated a portion of
its community bank stock portfolio. The remaining portfolio had a cost basis
of $1,056,000 at March 31, 1998 and unrealized gains of $511,000. Low interest
rates and a mild winter boosted mortgage activity. Net gains on residential
mortgage loan sales were $247,000 in the first quarter, a 57.3% increase over
the same period last year. Mortgage loan sales totaled about $14,700,000 in
the first quarter. We expect strong mortgage activity to continue in the
second quarter.
Service charges on deposit accounts increased $70,000 the first quarter. 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, reduce expenses and improve non-interest
income. The increase in deposit service charges was a direct result of
implementing their recommendations.
Other income increased $60,000, or 31.1%. The Corporation implemented a
surcharge for non-customers using our ATM machines beginning in the second
quarter of 1997. Foreign ATM transaction fees increased $42,000 over the first
quarter last year.
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 EXPENSE
THREE MONTHS
ENDED MARCH 31,
(In thousands) 1998 1997 98/97
Salaries and employee benefits . $2,016 $1,819 10.8%
Occupancy and premises ......... 251 181 38.7%
Furniture and equipment ........ 295 260 13.5%
Marketing ...................... 151 121 24.8%
Net cost of operation
of other real estate .......... 6 11 -45.5%
Supplies ....................... 119 61 95.1%
Other taxes .................... 96 90 6.7%
Other .......................... 763 521 46.4%
________________________
Total .......................... $3,697 $3,064 20.7%
========================
Noninterest expense increased $633,000, or 20.7%, compared to the first
quarter of 1997. Two new branch offices, opened in late 1997, added about
$150,000 to noninterest expense. Other professional services increased
$150,000, mainly due to the consultants discussed above. Nearly 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 last
year. A decline in tenant occupancy at the 96 South George Street Office
Building, owned by the Corporation, increased occupancy and premises expense
$43,000 during the first quarter.
Enhancing productivity was a focal point of the recent consulting engagement
Full-time equivalent (FTE's) staffing levels were 210 at March 31, 1998
compared to 209 at the end of 1997 and 205 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.
TAXATION
The Corporation recognized a provision for income taxes of $476,000 for the
three months ending March 31, 1997. The average tax rate, applicable income
taxes divided by income before taxes, was 22.8%. 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 continue to indicate the
Corporation is asset sensitive but well within the tolerance limits
established by Management.
14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FUTURE OUTLOOK
The Corporation recently applied for listing on the Nasdaq National Market.
The Nasdaq trading symbol, DROV, has been reserved for us pending approval.
If approved, we will likely begin trading on Nasdaq sometime during the second
quarter. Listing on Nasdaq should make it easier for shareholders to buy and
sell our common stock. Prices listed in the newspaper will also more
accurately reflect prices from recent trades.
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 much needed 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 May.
The branch office is expected to open in October 1998. The Corporation
continues to negotiate a land purchase near Dillsburg, Pennsylvania. If
successful, we plan to open a branch on that site 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: May 1, 1998
16 <PAGE>
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