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 (NO FEE REQUIRED)
For the Fiscal year ended December 31, 1997
[ ] 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 28, 1998 was $92,925,424. The number of shares of
Drovers Bancshares Corporation Common Stock, $5.00 par value, outstanding at
February 28, 1998 was 2,964,506.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1997 are
incorporated by reference into Parts I, II and IV. Portions of the Proxy
Statement for the annual shareholders meeting to be held May 22, 1998
incorporated by reference in Part III.
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Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I
Item 1. Business ......................................................... 4
Item 2. Properties ....................................................... 12
Item 3. Legal Proceedings
The information required by this item is contained on page 21 of the
Corporation's 1997 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 21 of the
Corporation's 1997 Annual Report.
Item 6. Selected Financial Data
The information required by this item is contained on pages 12-13 of the
Corporation's 1997 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 33-42 of the
Corporation's 1997 Annual Report.
Item 7a. Quantitative and qualitative disclosures about market risk
The information required by this item is contained on pages 33-42 of the
Corporation's 1997 Annual Report.
Item 8. Financial Statements and Supplementary Data ...................... 14
Additional information required by this item is contained on pages 15-31
and page 43 of the Corporation's 1997 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 ............... 24
Additional information required by this item is contained on pages 4-9
of the Definitive Proxy Statement dated April 20, 1998.
Item 11. Executive Compensation
The information required by this item is contained on pages 8-14
of the Definitive Proxy Statement dated April 20, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained on pages 3-6
of the Definitive Proxy Statement dated April 20, 1998.
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained on pages 16
of the Definitive Proxy Statement dated April 20, 1998.
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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 1-43 of the
Corporation's 1997 Annual Report.
B. There were no filings on Form 8-K for the year ended December 31, 1997.
C. Listing of Exhibits.
Exhibit 3.1 - Articles of Incorporation and Bylaws. Filed herein.
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 11 - Statements Regarding Computation of Per Share Earnings.
(incorporated by reference to note 15 on page 28 of the Corporation's
1997 Annual Report.
Exhibit 13 - Annual Report to Security Holders.
Exhibit 21 - Subsidiaries of the Registrant. (incorporated by reference
to page 33 of the Corporation's 1997 Annual Report)
Exhibit 23 - Consents of experts and Counsel.
Exhibit 27 - Financial Data Schedule.
SIGNATURES ................................................................ 25
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, 1997, the Bank employed 209 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 nine branches
are located in the surrounding suburbs of York City. In addition, there are
five out-of-town offices located in Shrewsbury, Emigsville, York Haven, Dover
and Red Lion, Pennsylvania. On March 13, 1997, our second full-service
bank/convenience store office opened in Manchester Township, Pennsylvania. A
temporary branch facility opened on Wednesday, November 5, 1997, while our
Shrewsbury office, scheduled to open April 1998, is under construction. The
Bank also has ten remote service facilities located at the York Fairgrounds,
Harley Davidson, Inc., York College of Pennsylvania and seven inside Shipley
Stores, Inc. convenience stores.
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. The executive offices of the Bank are
located on 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 opened 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, 1997 and 1996 were
$2,292,000 and $2,391,000, respectively.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
SUPERVISION AND REGULATION
Bank Holding Company Regulation
Drovers Bancshares Corporation ("the Company") is registered as a bank holding
company and is subject to the regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve") under the Bank Holding Company
Act of 1956, as amended ("BHCA"). Bank holding companies are required to file
periodic reports with and are subject to examination by the Federal Reserve.
The Federal Reserve has issued regulations under the BHCA that require a bank
holding company to serve as a source of financial and managerial strength to its
subsidiary banks. As a result, the Federal Reserve, pursuant to such
regulations, may require the Company to stand ready to use its resources to
provide adequate capital funds to the Bank during periods of financial stress or
adversity.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined by regulations) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency, up to specified
limits.
Under the BHCA, the Federal Reserve has the authority to require a bank holding
company to terminate any activity or relinquish control of a nonbank subsidiary
(other than a nonbank subsidiary of a bank) upon the Federal Reserve's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding shares of any class of voting stock or substantially
all of the assets of any bank or merging or consolidating with another bank
holding company without prior approval of the Federal Reserve. Such a
transaction would also require approval of the Pennsylvania Department of
Banking. Pennsylvania law permits Pennsylvania bank holding companies to
control an unlimited number of banks.
Additionally, the BHCA prohibits the Company from engaging in or from acquiring
ownership or control of more than 5% of the outstanding shares of any class of
voting stock of any company engaged in a nonbanking business unless such
business is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto. The Federal Reserve can
differentiate between nonbanking activities that are initiated by a bank holding
company or subsidiary and activities that are acquired as a going concern. The
BHCA does not place territorial restrictions on the activities of such
nonbanking-related activities. The 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.
The activities that the Federal Reserve has determined by regulation to be
permissible are:
(1) making, acquiring, or servicing loans or other extensions of credit for its
own account or for the account of others;
(2) operating an industrial bank, Morris Plan bank, or industrial loan company,
in the manner authorized by state law, so long as the institution is not a
bank;
(3) operating as a trust company in the manner authorized by federal or state
law so long as the institution is not a bank and does not make loans or
investments or accept deposits, except as may be permitted by the Federal
Reserve;
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
(4) subject to limitations, acting as an investment or financial advisor (i) to
a mortgage or real estate investment trust, (ii) to certain registered
investment companies, (iii) by providing portfolio investment advice to
other persons, (iv) by furnishing general economic information and advice,
general economic statistical forecasting services, and industry studies,
(v) by providing financial and transaction advice to corporations,
institutions, and certain persons in connection with mergers, acquisitions,
and other financial transactions;
(5) subject to limitations, leasing real or personal property or acting as
agent, broker, or advisor in leasing such property in accordance with
prescribed conditions;
(6) investing in corporations or projects designed primarily to promote
community welfare;
(7) providing to others data processing services and data transmission
services, data bases, and facilities, within certain limitations;
(8) subject to limitations, engaging in certain agency and underwriting
activities with respect to credit insurance, and certain other insurance
activities as permitted by the Federal Reserve.
(9) owning, controlling, or operating a savings association, if the savings
association engages only in deposit-taking activities and lending and other
activities that are permissible for bank holding companies under federal
Reserve regulations;
(10) providing courier services for certain financial documents;
(11) subject to limitations, providing management consulting advice to
nonaffiliated bank and nonbank depository institutions;
(12) retail selling of money orders and similar consumer-type payment
instruments having a face value of $1,000 or less, selling U.S. Savings
Bonds, and issuing and selling traveler's checks;
(13) performing appraisals of real estate and personal property;
(14) subject to limitations, acting as intermediary for the financing of
commercial or industrial income-producing real estate by arranging for the
transfer of the title, control, and risk of such a real estate project to
one or more investors;
(15) providing certain securities brokerage services;
(16) subject to limitations, underwriting and dealing in government obligations
and certain other instruments;
(17) subject to limitations, providing foreign exchange and transactional
services;
(18) subject to limitations, acting as a futures commission merchant for
nonaffiliated persons;
(19) subject to limitations, providing investment advice on financial futures
and options to futures;
(20) subject to limitations, providing consumer financial counseling;
(21) subject to limitations, tax planning and preparation;
(22) providing check guaranty services;
(23) subject to limitations, operating a collection agency; and
(24) operating a credit bureau.
Federal Reserve approval may be required before the Company or its nonbank
subsidiaries may begin to engage in any such activity and before any such
business may be acquired.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Bank and the
Company's nonbank subsidiaries. The Company's revenues (on a parent company
only basis) result almost entirely from dividends paid to the Company by its
subsidiaries. The right of the Company and consequently the right of creditors
and shareholders of the Company, to participate in any distribution of the
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
assets or earnings of any subsidiary through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors of the
subsidiary (including depositors, in the case of the Bank), except to the extent
that claims of the Company in its capacity as a creditor may be recognized.
Federal and state laws regulate the payment of dividends by the Company's
subsidiaries. See "Supervision and Regulation - Regulation of the Bank" herein.
Further, it is the policy of the Federal Reserve that bank holding companies
should pay dividends only out of current earnings. Federal banking regulators
also have the authority to prohibit banks and bank holding companies from paying
a dividend if they should deem such payment to be an unsafe or unsound practice.
Capital Adequacy
Bank holding companies are required to comply with the Federal Reserve's risk-
based capital guidelines. The required minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half (4%) of the total capital is required
to be "Tier 1 Capital," consisting principally of common shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, less certain intangible assets. The remainder ("Tier
2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance. In addition to the risk-based capital guidelines, the
Federal Reserve requires a bank holding company to maintain a minimum "leverage
ratio." This requires a minimum level of Tier 1 capital (as determined under
the risk-based capital rules) to average total consolidated assets of 3% for
those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are expected to maintain a ratio
of at least 1% to 2% above the stated minimum. Further, the Federal Reserve has
indicated that it will consider a "tangible Tier 1 capital leverage ratio"
(deducting all intangibles) and other indications of capital strength in
evaluating proposals for expansion or new activities. The Federal Reserve has
not advised the Company of any specific minimum leverage ratio applicable to the
Company.
Pursuant to FDICIA, the federal banking agencies have specified, by regulation,
the levels at which an insured institution is considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
or "critically undercapitalized." Under these regulations, an institution is
considered "well capitalized" if it has a total risk-based capital ratio of 10%
or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio
of 5% or greater, and is not subject to any order or written directive to meet
and maintain a specific capital level. The Company and the Bank, at December
31, 1997, qualify as "well capitalized" under these regulatory standards.
FDIC Insurance
The Bank is subject to FDIC deposit insurance assessments. The FDIC has adopted
a risk-related premium assessment system for both the Bank Insurance Fund
("BIF") for banks and the Savings Association Insurance fund ("SAIF") for
savings associations. Under this system, FDIC insurance premiums are assessed
based on capital and supervisory measures.
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Under the risk-related premium assessment system, the FDIC, on a semiannual
basis, assigns each institution to one of three capital groups (well
capitalized, adequately capitalized, or undercapitalized) and further assigns
such institution to one of three subgroups within a capital group corresponding
to the FDIC's judgment of its strength based on supervisory evaluations,
including examination reports, statistical analysis, and other information
relevant to gauging the risk posed by the institution. Only institutions with a
total risk-based capital to risk-adjusted assets ratio of 10% or greater, a Tier
1 capital to risk-adjusted assets ratio of 6% or greater, and a Tier 1 leverage
ratio of 5% or greater, are assigned to the well-capitalized group.
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 to recapitalize the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") and to
provide for repayment of the FICO (Financial Institution Collateral Obligation)
bonds issued by the United States Treasury Department. The FDIC levied a one-
time special assessment of SAIF deposits equal to 65.7 cents per $100 of the
SAIF-accessible deposit base as of March 31, 1995. During 1997, 1998 and 1999,
the Bank Insurance Fund ("BIF") will pay $322 million of FICO debt service, and
SAIF will pay $458 million. During 1997, 1998 and 1999, the average regular
annual deposit insurance assessment is estimated to be about 1.29 cents per $100
of deposits for BIF deposits and 6.44 cents per $100 of deposits for SAIF
deposits. Individual institution's assessments will continue to vary according
to their capital and management ratings. As always, the FDIC will be able to
raise the assessments as necessary to maintain the funds at their target capital
ratios provided by law. After 1999, BIF and SAIF will share the FICO cost
equally. Under current estimates, BIF and SAIF assessment bases would each be
assessed at the rate of approximately 2.43 cents per $100 of deposits. The FICO
bonds will mature in 2018-2019, ending the interest payment obligation.
Regulation of the Bank
The operations of the Bank are subject to federal and state statues applicable
to banks chartered under the banking laws of the Commonwealth of Pennsylvania
that are not members of the Federal Reserve System and to banks whose deposits
are insured by the FDIC.
The FDIC, which has primary supervisory authority over the Bank, regularly
examines banks in such areas as reserves, loans, investments, management
practices, and other aspects of operations. These examinations are designed for
the protection of the Bank's depositors rather than the Company's shareholders.
The Bank must furnish annual and quarterly reports to the FDIC, which has the
authority under the Financial Institutions Supervisory Act to prevent a state
non-member bank from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the investments a bank may take, the reserves
against deposits a bank must maintain, the types and terms of loans a bank may
make and the collateral it may take, the activities of a bank with respect to
mergers and consolidations, and the establishment of branches. Pennsylvania law
permits statewide branching.
Recently, Pennsylvania enacted a law to permit State chartered financial
institutions to sell insurance. This follows a United States Supreme Court
decision in favor of nationwide insurance sales by banks and which also bars
states from blocking insurance sales by national banks in towns with populations
of no more than 5,000. Consequently, banks are allowed to sell insurance in
Pennsylvania. The Office of the Comptroller of the Currency has issued
guidelines for national banks to sell insurance. The Bank has been licensed as
an insurance agency within the State of Pennsylvania. The Bank presently sells
fixed and variable rate annuity products and is evaluating its options regarding
the sale of additional insurance products.
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Under the Federal Deposit Insurance Act, as amended, the Bank is required to
obtain the prior approval of the FDIC for the payment of dividends if the total
of all dividends declared by the Bank in one year would exceed the Bank's net
profits (as defined and interpreted by regulation) for the current year plus its
retained net profits (as defined and interpreted by regulation) for the two
preceding years, less any required transfers to surplus. In addition, the Bank
may only pay dividends to the extent that its retained net profits (including
the portion transferred to surplus) exceed statutory bad debts (as defined by
regulation). Under FDICIA, any depository institution, including the Bank, is
prohibited from paying any dividends, making other distributions or paying any
management fees if, after such payment, it would fail to satisfy its minimum
capital requirements.
A subsidiary bank of a bank holding company, such as the Bank, 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 regulations also place certain limitations and
reporting requirements on extensions of credit by a bank to the principal
shareholders of its parent holding company, among others, and to related
interests 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.
The Bank, and the banking industry in general, are affected by the monetary and
fiscal policies of government agencies, including the Federal Reserve. Through
open market securities transactions and changes in its discount rate and reserve
requirements, the Board of Governors of the Federal Reserve exerts considerable
influence over the cost and unavailability of funds for lending and investment.
As the Year 2000 approaches, regulation of both the Company and the Bank
with respect to completing Year 2000 modifications is likely to increase. A
brief discussion of the most recent federal banking agency pronouncements that
affect the Company and/or the Bank follows.
In December 1997, the Federal Financial Institutions Examination Council
("FFIEC") issued an interagency statement. The statement indicates that senior
management and the board of directors should be actively involved in managing
the Company's and the Bank's Year 2000 compliance efforts. The statement
also recommended that institutions obtain Year 2000 compliance certification
from vendors followed by comprehensive internal testing. In addition,
contingency plans should be developed for all vendors that service "mission
critical" applications which are applications vital to the successful
continuance of a core business activity.
COMPETITION
The financial services industry in the Company's service area is extremely
competitive. The Company's competitors with its service area include multi-bank
holding companies, with resources substantially greater than those of the
Company. Many competitor financial institutions have legal lending limits
substantially higher than the Bank's legal lending limit. In addition, the Bank
competes with savings banks, savings and loan associations, credit unions, money
market and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies that offer products and
services similar to those offered by the Bank on competitive terms.
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
In September 1994, federal legislation was enacted that is expected to have a
significant effect in restructuring the banking industry in the United States.
See "Interstate Banking Legislation" herein. As a result, the company expects
the operating environment for Pennsylvania-based financial institutions to
become increasingly competitive.
Additionally, the manner in which banking institutions conduct their operations
may change materially as the activities increase in which bank holding companies
and their banking and nonbanking subsidiaries are permitted to engage, and
funding and investment alternatives continue to broaden, although the long-range
effects of these changes cannot be predicted, with reasonable certainty, at this
time. These changes most probably will further narrow the differences and
intensify competition between and among commercial banks, thrift institutions,
and other financial service companies. See "proposed Legislation and
Regulations" herein.
INTERSTATE BANKING LEGISLATION
In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act (the "Interstate Banking Act") was enacted. The Interstate Banking Act
facilitates the interstate expansion and consolidation of banking organizations
(i) by permitting bank holding companies that are adequately capitalized and
adequately managed, beginning September 29, 1995, to acquire banks located in
states outside their home states regardless of whether such acquisitions are
authorized under the law of the host state; (ii) by permitting the interstate
merger of banks after June 1, 1997, subject to the right of individual states to
"opt in" or "opt out" of this authority before that date; (iii) by permitting
banks to establish new branches on an interstate basis provided that such action
is specifically authorized by the law of the host state; (iv) by permitting,
beginning September 29, 1995, a bank to engage in certain agency relationships
(i.e., to receive deposits, renew time deposits, close loans (but not including
loan approvals or disbursements), service loans, and receive payments on loans
and other obligations) as agent for any bank or thrift affiliate, whether the
affiliate is located in the same state or a different state then the agent bank;
and (v) by permitting foreign banks to establish, with approval of the
regulators in the United States, branches outside their "home" states to the
same extent that national or state banks located in the home state would be
authorized to do so. One effect of this legislation will be to permit the
Company to acquire banks and bank holding companies located in any state and to
permit qualified banking organizations located in any state to acquire banks and
bank holding companies located in Pennsylvania, irrespective of state law.
Since 1995, the Pennsylvania Banking Code has authorized full interstate banking
and branching under Pennsylvania law. Specifically, the legislation (i)
eliminates the "reciprocity" requirement previously applicable to interstate
commercial bank acquisitions by bank holding companies, (ii) authorized
interstate bank mergers and reciprocal interstate branching into Pennsylvania by
interstate banks, and (iii) permits Pennsylvania institutions to branch into
other states with the prior approval of the Pennsylvania Department of Banking.
Overall, this federal and state legislation has, as was predicted, had the
effect of increasing consolidation and competition and promoting geographic
diversification in the banking industry.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
PROPOSED LEGISLATION AND REGULATIONS
From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restriction on, the business of the
Company and the Bank, or otherwise change the business environment.
Management cannot predict whether any of this legislation, if enacted, will have
a material effect on the business of the Company.
11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES
The Corporation and Subsidiaries own in fee simple unencumbered the following
land and buildings:
Main Office Emigsville Office
30 S George Street 2123 N George Street
York, PA 17401 Emigsville, PA 17318
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
York Haven Office
Landvale Street
York Haven, PA 17370
The Drovers & Mechanics Bank is the sole occupant of all land and buildings
listed above. The Northwest Office, located at 1120 Roosevelt Avenue York, PA
17404, was closed on July 29, 1994 and sold on January 6, 1997.
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. The executive offices of The Drovers & Mechanics Bank
are located on 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.
Dover Office
Dover Square, adjacent to Shipley Stores, Inc.
1 South Main Street
Dover, PA 17315
$4,800.00 per month rental; lease expires November 10, 2006.
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.
12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES
Cape Horn Office
Cape Horn Square
RD#2 Lombard Street
Red Lion, PA 17356
$2,625.00 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.
Penvale Office
3183 Susquehanna Trail North
York, PA 17402
$7,000.00 per month rental; lease expires November 3, 2007, with a rent increase
of $500.00 to $7,500.00 per month in the sixth year. The lease is renewable for
three five-year options.
Shrewsbury Office
611 Shrewsbury Commons Avenue
Shrewsbury, PA 17361
$4,166.67 per month land rental; lease expires December 1, 2017, with rent
increases each year. The land lease is renewable for four five-year options.
Building owned by the Corporation.
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,
leased equipment with an annual lease amount of $45,840.00 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 expects to complete construction of the Shrewsbury office by
April, 1998. Construction of a new office in Hellam, Pennsylvania will begin
soon, with completion expected in September 1998. The new sites target high
growth areas in the immediate market. Construction will be funded out of
operations. The expanded branch network provides for continued deposit growth.
13 <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) 1997 1996 1995
U.S. Government ............. $10,519 $10,538 $6,562
U.S. Agencies ............... 126,769 90,348 66,188
Municipal ................... 24,414 18,465 14,488
Corporate ................... 486 500 1,782
Total debt securities ....... 162,188 119,851 89,020
Equity securities ........... 17,111 8,231 2,803
Total investment securities . $179,299 $128,082 $91,823
The following table sets forth the contractual maturities of debt securities
classified as held-to-maturity at December 31, 1997:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $ 0 $2,480 $ 0 $ 0 $2,480
U.S. Agencies .... 0 2,499 8,352 11,103 21,954
Municipal ........ 927 3,704 4,678 9,009 18,318
Total ............ $ 927 $8,683 $13,030 $20,112 $42,752
The following table depicts the average weighted yields of the held-to-maturity
investments by maturity at December 31, 1997:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 0.00% 6.79% 0.00% 0.00% 6.79%
U.S. Agencies .... 0.00% 5.70% 7.29% 6.75% 6.84%
Municipal ........ 6.77% 7.51% 5.63% 5.16% 5.83%
Total ............ 6.77% 6.78% 6.69% 6.04% 6.41%
14 <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, 1997:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $4,508 $3,531 $ 0 $ 0 $8,039
U.S. Agencies .... 0 5,250 11,870 87,695 104,815
Municipal ........ 251 254 1,901 3,690 6,096
Other ............ 0 0 486 0 486
Total ............ $4,759 $9,035 $14,257 $91,385 $119,436
The following table depicts the average weighted yields of the available-for-
sale investments by maturity at December 31, 1997:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 5.89% 6.33% 0.00% 0.00% 6.08%
U.S. Agencies .... 0.00% 6.97% 6.93% 7.09% 7.07%
Municipal ........ 4.50% 4.50% 5.15% 5.19% 5.12%
Other ............ 0.00% 0.00% 6.22% 0.00% 6.22%
Total ............ 5.81% 6.65% 6.67% 7.02% 6.90%
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, 1997. The yield on Municipal investments has not
been restated on a fully tax equivalent basis.
For additional information see Note 6 on pages 22-23 of the Corporation's 1997
Annual Report.
15 <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) 1997 1996 1995 1994 1993
Domestic loans:
Commercial, financial and
industrial ................ $80,588 $72,776 $66,798 $59,943 $54,714
Real estate:
Construction ............. 12,105 8,908 5,910 7,163 5,831
Mortgage ................. 188,775 167,751 141,565 120,392 114,320
Consumer ................... 35,280 37,150 45,548 46,168 37,802
Leasing and other (net) .... 245 26 9 6 15
Total domestic loans ......... 316,993 286,611 259,830 233,672 212,682
Foreign loans ................ 0 0 0 0 0
Total domestic and
foreign loans ............... 316,993 286,611 259,830 233,672 212,682
Unearned income .............. -3,320 -3,494 -4,425 -4,297 -3,736
Loans net of unearned ........ 313,673 283,117 255,405 229,375 208,946
Reserve for loan losses ...... -3,304 -3,130 -2,937 -2,638 -2,332
Net loans .................... $310,369 $279,987 $252,468 $226,737 $206,614
For additional information see Note 7 on page 23-24 of the Corporation's 1997
Annual Report.
16 <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, 1997 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 . $61,844 $14,073 $4,671 $ 80,588
Real estate construction ............. 4,032 7,596 477 12,105
Foreign loans .......................... 0 0 0 0
Total .................................. $65,876 $ 21,669 $ 5,148 $ 92,693
Rate sensitivity:
Predetermined rate ................... $3,275 $13,595 $5,148 $ 22,018
Floating or adjustable rate .......... 62,601 8,074 0 70,675
Total .................................. $65,876 $ 21,669 $ 5,148 $ 92,693
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.
17 <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 YEAR END DECEMBER 31,
(In thousands) 1997 1996 1995 1994 1993
Domestic:
Nonaccrual loans ................. $ 740 $ 615 $ 934 $ 416 $ 385
90 days past due still accruing .. 33 0 9 6 2
Restructured loans ............... 0 1,139 791 818 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 .............................. $ 773 $1,754 $1,734 $1,240 $ 387
Nonaccrual loans as a percentage of net loans remained consistent from 1996 to
1997 at 0.22% and 0.24%, respectively. Restructured loans in prior years
consist of commercial loans to one party. Interest is recognized under the
accrual method of accounting.
Additionally, the Corporation held $1,314,000 of impaired loans at December 31,
1997 under court-ordered restructuring due to bankruptcy. All loans are fully
collateralized.
The following table presents the changes in the balance of other real estate
over the past five years:
(In thousands) 1997 1996 1995 1994 1993
Balance at beginning of year ....... $ 803 $ 195 $ 0 $ 141 $ 25
Assets acquired by foreclosure
or repossession ................... 211 822 300 0 161
Dispositions ....................... -827 -203 -106 -152 -32
Other (net) ........................ -33 -11 1 11 -13
Balance at end of year ............. $ 154 $ 803 $ 195 $ 0 $ 141
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 19-20 and 23-24, respectively, of the Corporation's 1997 Annual Report.
18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANALYSIS OF RESERVE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
(In thousands) 1997 1996 1995 1994 1993
Balance, January 1, ................ $ 3,130 $ 2,937 $ 2,638 $ 2,332 $ 2,022
Provision for loan losses .......... 386 645 501 382 447
Charge-offs:
Commercial, financial
and industrial .................. 0 25 31 19 0
Real estate - construction ....... 0 0 0 0 0
Real estate - mortgage ........... 0 215 45 0 0
Consumer ......................... 327 369 257 157 179
Total charge-offs .................. 327 609 333 176 179
Recoveries:
Commercial, financial
and industrial .................. 32 6 11 0 0
Real estate - construction ....... 0 0 0 0 0
Real estate - mortgage ........... 15 36 0 6 0
Consumer ......................... 68 115 120 94 42
Total recoveries ................... 115 157 131 100 42
Net charge-offs .................... 212 452 202 76 137
Balance, December 31, .............. $ 3,304 $ 3,130 $ 2,937 $ 2,638 $ 2,332
Ratio of net charge-offs to average
loans outstanding ................. 0.07% 0.17% 0.08% 0.04% 0.07%
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 Loan Losses is sufficient to
meet any present or potential risks.
For additional information see Note 1 and Note 7 on pages 19-20 and 23-24,
respectively, of the Corporation's 1997 Annual Report.
19 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALLOCATION OF RESERVE FOR LOAN LOSSES
The following table presents the amount of the reserve allocated to each of
the loan categories and the percentage of total loans for the past five years:
YEARS ENDED DECEMBER 31,
1997 1996 1995
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 ...... $977 25.6% $657 25.7% $515 26.2%
Real Estate:
Construction ........ 44 3.9% 46 3.1% 16 2.3%
Mortgage ............ 338 60.1% 321 59.1% 327 55.3%
Consumer .............. 131 10.3% 123 12.1% 140 16.2%
Leasing and other ..... 0 0.1% 0 0.0% 0 0.0%
Unallocated ........... 1,814 n/a 1,983 n/a 1,939 n/a
Total ................. $3,304 100.0% $3,130 100.0% $2,937 100.0%
YEARS ENDED DECEMBER 31,
1994 1993
Percent Percent
of Loans of Loans
Reserve to Total Reserve to Total
(In thousands) Amount Loans Amount Loans
Commercial, financial
and industrial ...... $630 26.2% $723 26.2%
Real Estate:
Construction ........ 29 3.1% 48 2.8%
Mortgage ............ 204 52.3% 328 54.4%
Consumer .............. 120 18.4% 110 16.6%
Leasing and other ..... 0 0.0% 0 0.0%
Unallocated ........... 1,655 n/a 1,123 n/a
Total ................. $2,638 100.0% $2,332 100.0%
For additional information see Note 1 and Note 7 on pages 19-20 and 23-24,
respectively, of the Corporation's 1997 Annual Report.
20 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DEPOSIT STRUCTURE
Maturities of time deposits of $100,000 or more outstanding at December 31, are
summarized as follows:
(In thousands) 1997 1996 1995
Three months or less ............... $4,675 $3,674 $3,996
Over three months to six months .... 1,598 927 2,336
Over six months to twelve months ... 5,811 7,047 3,061
Over twelve months ................. 8,340 6,354 6,798
Total .............................. $20,424 $18,002 $16,191
SHORT-TERM BORROWINGS
Short-term borrowings are borrowed funds generally with an original maturity of
one year or less. Securities sold under repurchase agreements and federal funds
purchased mature in one day. Other short-term borrowings have a maturity of
greater than one day.
(In thousands) 1997 1996 1995
Federal funds purchased and securities sold under repurchase agreements
Balance at year-end $31,360 $15,254 $7,302
Average amount outstanding 24,548 12,210 7,530
Maximum amount outstanding at any month-end 44,342 18,843 14,707
Average interest rate for the year 5.25% 4.75% 5.60%
Average interest rate on year-end balance 6.16% 5.24% 5.31%
Other short-term borrowings
Balance at year-end $ 0 $ 0 $ 0
Average amount outstanding 1,112 77 0
Maximum amount outstanding at any month-end 6,000 4,000 0
Average interest rate for the year 5.71% 5.47% 0.00%
Average interest rate on year-end balance 0.00% 0.00% 0.00%
21 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA
Unaudited
1997
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $4,107 $4,181 $4,301 $4,424 $17,013
Provision for loan losses 120 66 120 80 386
Total noninterest income . 905 1,011 980 1,057 3,953
Total noninterest expense
and income taxes ....... 3,502 3,716 3,707 4,024 14,949
Net income ............... $1,390 $1,410 $1,454 $1,377 $5,631
PER SHARE DATA
Net income ............... $0.47 $0.48 $0.49 $0.47 $ 1.91
Net income,
assuming dilution ...... $0.47 $0.47 $0.49 $0.46 $ 1.89
1996
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $3,646 $3,746 $3,889 $3,983 $15,264
Provision for loan losses 105 180 105 255 645
Total noninterest income . 902 863 727 872 3,364
Total noninterest expense
and income taxes ....... 3,295 3,218 3,306 3,315 13,134
Net income ............... $1,148 $1,211 $1,205 $1,285 $4,849
PER SHARE DATA
Net income ............... $0.39 $0.41 $0.41 $0.44 $ 1.65
Net income,
assuming dilution ...... $0.39 $0.41 $0.41 $0.43 $ 1.64
Data adjusted for a 5% stock dividend issued in 1997 and a 5 for 4 split in the
form of a 25% stock dividend issued in 1996.
22 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEREST DIFFERENTIAL
December 31,
1997 1996
(In thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
INTEREST INCOME
Increase (decrease) in:
Money market investments and
Interest-bearing deposits
with banks ...................... $-90 $ 5 $-85 $ 73 $-12 $61
Federal funds sold ............... 0 0 0 0 0 0
Total money market investments ... -90 5 -85 73 -12 61
Investment securities
Taxable investment securities ... 3,035 185 3,220 519 -31 488
Equity securities ............... 445 -14 431 157 3 160
Tax-exempt investment securities 414 -56 358 -68 -116 -184
Total investment securities ...... 3,894 115 4,009 608 -144 464
Total loans ...................... 2,394 -106 2,288 1,819 -342 1,477
Total interest income ............ 6,198 14 6,212 2,500 -498 2,002
INTEREST EXPENSE
Increase (decrease) in:
Interest-bearing deposits
Demand .......................... 12 -8 4 58 -210 -152
Savings ......................... 964 520 1,484 136 90 226
Time ............................ 1,662 172 1,834 801 189 990
Total interest-bearing deposits .. 2,638 684 3,322 995 69 1,064
Borrowed funds
Short-term borrowings ........... 705 64 769 226 -64 162
Long-term borrowings ............ 406 -34 372 120 -84 36
Total borrowed funds ............. 1,111 30 1,141 346 -148 198
Total interest expense ........... 3,749 714 4,463 1,341 -79 1,262
Increase in interest differential $2,449 $-700 $1,749 $1,159 $-419 $ 740
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.
For additional information see Note 1 and Average Balances and Rates on pages
19-20 and 43, respectively, of the Corporation's 1997 Annual Report.
23 <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, 1998, are
as follows:
Name: A. Richard Pugh Age: 57
Position and Office: Chairman of the Board, 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.
Name: George L.F. Guyer, Jr. Age: 64
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: 42
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: 39
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: 46
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. Lorie Runion resigned her position effective January 2,
1998.
Name: Kerry McLaughlin Age: 43
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: 42
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.
Additional information required for this item is contained on pages 4-9 of the
Definitive Proxy Statement dated April 20, 1998.
24 <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 25, 1998_____
(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_____________ _/s/_Robert_L._Myers,_Jr.________
L. Doyle Ankrum, Director Robert L. Myers, Jr., Director
_/s/_J._Samuel_Gregory___________ _/s/_Harlowe_R._Prindle__________
J. Samuel Gregory, Director Harlowe R. Prindle, Director
_________________________________ _/s/_Basil_A._Shorb,_III_________
Daniel E. Hess, Director Basil A. Shorb, III, Director
_/s/_Goerge_W._Hodges____________ _/s/_D._John_Sparler,_Jr.________
George W. Hodges, Director D. John Sparler, Jr., Director
_________________________________ _/s/_Gary_A._Stewart_____________
Herbert D. Lavetan, Director Gary A. Stewart, Director
_________________________________ _/s/_Robert_H._Stewart,_Jr.______
Richard M. Linder, Director Robert H. Stewart, Jr., Director
_/s/_David_C._McIntosh___________ _/s/_Delaine_A._Toerper__________
David C. McIntosh, Director Delaine A. Toerper, Director
_________________________________ _/s/_James_S._Wisotzkey__________
Frank Motter, Director James S. Wisotzkey, 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
25 <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 16, 1998,
included in the 1997 Annual Report to Shareholders of Drovers Bancshares
Corporation and Subsidiaries.
We also consent to the incorporation by reference in the Registration Statement
on Form S-3 pertaining to the shelf registration of the Dividend Reinvestment
and Stock Purchase Plan of Drovers Bancshares Corporation and Subsidiaries and
the Registration Statement on Form S-8 pertaining to the Drovers Bancshares
Corporation Incentive Stock Option Plan of our report dated January 16, 1998,
with respect to the consolidated financial statements incorporated herein by
reference.
/S/ Stambaugh Ness P.C.
York, Pennsylvania
March 20, 1998
<PAGE>
Exhibit 3
BY-LAWS
OF
DROVERS BANCSHARES CORPORATION
ARTICLE 1. MEETINGS OF SHAREHOLDERS
Section 1.01. Place of Meeting. Meetings of shareholders of the
Corporation shall be held at such place, within the Commonwealth of
Pennsylvania or elsewhere, as may be fixed by the Board of Directors.
If no place is so fixed, they shall be held at the office of the
Corporation at 30 South George Street, York, Pennsylvania.
Section 1.02. Annual Meeting. The annual meeting of shareholders
for the election of directors whose terms are expiring and the
transaction of any other business which may be brought properly before
the meeting shall be held on such date and at such time as the Board of
Directors shall determine from time to time. If for any reason such
meeting is not held at the time fixed therefore, such election may be
held at a subsequent meeting called for that purpose.
Section 1.03. Special Meetings. Special meetings of the
shareholders may be called at any time by the Chairman of the Board, the
President, by the Board of Directors, or by any other person or persons
authorized by statute. Such meetings shall be held on such date and
time as may be fixed by the Board of Directors or the Secretary or, in
the absence of such designation, as fixed by the person or persons
calling the meeting.
Section 1.04. Notice of Meetings. Notice of all annual meetings
of shareholders shall be given by the Secretary. Written notice of the
date, place and time of all meetings of shareholders, and of the general
nature of the business to be transacted at special meetings, shall be
mailed by first class mail to each shareholder of record entitled to
vote at the meeting at least 20 days prior to the day named for the
meeting, unless a greater period of notice is by law required in a
particular case.
Section 1.05. Organization. At every meeting of the shareholders,
the Chairman of the Board or, if there is no such Chairman of the Board
or if he is absent, the senior present Vice Chairman, or if there is no
such Vice Chairman or if he is absent, the President or, in his absence,
the senior present Vice President or, in his absence, a chairman chosen
by the shareholders, shall act as chairman; and the Secretary or, in his
absence, a person appointed by the Chairman, shall act as Secretary.
Section 1.06. Quorum; Action by Shareholders. The presence, in
person or by proxy, of the shareholders entitled to cast a majority of
the votes which all shareholders are entitled to cast on a particular
matter shall constitute a quorum for the purpose of considering such
matter. Unless otherwise required herein, or in the Articles of
Incorporation or by law, all matters shall be decided by the action of
the shareholders present, in person or by proxy, entitled to cast at
least a majority of the votes which all shareholders present are
entitled to cast, although such action be by the holders of less than a
majority of the votes which all the shareholders entitled to vote
thereon would be entitled to cast.
1 <PAGE>
Section 1.07. Record of Meeting. A record shall be made of the
shareholders present and of those represented by proxy. The tabulation
of votes cast in person and by proxy for each candidate for Director,
and the final tabulation of votes on each resolution presented, shall be
certified by the judges of election to the Secretary, shall be made a
part of the minutes of the meeting and shall be entered in the minute
book of the Corporation.
Section 1.08. Procedure for Nomination of Candidates for Director.
Nominations for election to the Board of Directors may be made by the
Board of Directors and by any holder of any outstanding shares of the
Corporation entitled to vote for the election of Directors.
Nominations, other than those made by the Board of Directors, shall be
made in writing and shall be delivered or mailed to the Corporation at
its principal office not less than 14 days prior to any meeting of
shareholders called for the election of directors whose terms expire at
such meeting and shall contain the same information about each candidate
as is required to be contained in the corporation's proxy statement
about management's candidates, including by way of illustration and not
limitation the following:
a) the name and address of each proposed nominee;
b) the age of each proposed nominee;
c) the principal occupation of each proposed nominee;
d) the number of shares of the Corporation beneficially owned by
each proposed nominee;
e) the name and address of the notifying shareholder;
f) the number of shares of the Corporation owned by the notifying
shareholder.
If more than 20 days' notice of the meeting is given to
shareholders, such notice of nomination shall be mailed or delivered to
the Corporation not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed.
Nominations not made in accordance with this Section may, in his
discretion, be disregarded by the chairman of the meeting, and upon his
instructions, the vote tellers may disregard all votes cast for each
such nominee.
Section 1.09. Record Date. The Board of Directors may fix a date
for the determination of the shareholders entitled to receive notice of
and to vote at any meeting or to receive any dividend, distribution or
allotment of rights or a date for any change, conversion or exchange of
shares by fixing a record date not more than fifty days prior thereto.
Section 1.10. Financial Statements. Financial statements shall
be sent to shareholders annually as prescribed by law, but unless
required by law need not be examined by a certified public accountant or
by a firm thereof.
ARTICLE 2. DIRECTORS
Section 2.01. Number. The Board of Directors of this Corporation
shall consist of such number of its shareholders, not less than five (5)
nor more than twenty-five (25) as shall be determined from time to time,
by resolution of the Board of Directors as then constituted.
In the event of any increase or decrease in the authorized number
of Directors, (i) each Director then serving as such shall nevertheless
continue as a Director of the class of which he is a member until the
expiration of his current term and (ii) the newly created or eliminated
2 <PAGE>
Directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors among the four classes of
Directors so as to maintain such classes as nearly equal in number as
possible. Except as provided in Section 405 (B) and 405 (C) of the
Pennsylvania Business Corporation Law, any director may be removed with
or without cause only upon the affirmative vote of the holders of at
least 85% of all of the securities of the Corporation entitled to vote
for the election of Directors.
Section 2.02. Classification of Directors. Directors shall be
classified according to the time for which they shall severally hold
office as provided in the Articles of Incorporation.
Section 2.03. Qualifications. Each Director (other than Directors
named in the Articles to serve until the First Annual Meeting of
Shareholders) during their full term of office shall own a minimum of
One Thousand ($1,000.00) Dollars par value of the Common Stock of the
Corporation. A Director shall retire from the Board on their 72nd
birthday unless the Director initiates a written request to remain on
the said Board an additional year and the request is accepted by the
Nominating Committee and the appropriate Board of Directors. This
process may be repeated each year until the Director attains age 75, at
which time the Director shall retire. The written request should be
sent to the Directors' Nominating Committee, c/o Secretary of The
Drovers & Mechanics Bank and/or Drovers Bancshares Corporation, sixty
days prior to their 72nd, 73rd or 74th birthday, whichever is
applicable. The request shall be considered by the Nominating Committee
and forwarded to the appropriate Board for final action.
Section 2.04. Vacancies. Vacancies on the Board of Directors,
regardless of how created, shall be filled by election of a majority of
the remaining Directors in office, though less than a quorum. Each
person elected by the remaining Directors to fill a vacancy shall hold
office for the full remaining term of the vacancy being filled,
according to its classification, and until his successor is elected and
shall have qualified.
Section 2.05. Resignations. Any Director may resign at any time
by giving written notice to the Board of Directors, the President or the
Secretary. Any such resignation shall take effect at the time of the
receipt of such notice or at any later time specified therein. Unless
otherwise specified therein, the acceptance of a resignation shall not
be necessary to make it effective.
Section 2.06. Organizational Meeting. On a business day following
the Annual Meeting of the Shareholders but prior to the next regularly
scheduled meeting of the Board of Directors, the Board of Directors
shall meet for the purpose of organization, election of officers and the
transaction of other business at the place where such election of
directors was held. Notice of such meeting need not be given. In the
absence of a quorum at said meeting, the same may be held at any other
time and place which shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors.
Section 2.07. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such time and place as shall be designated
from time to time by resolution of the Board. Notice of such meetings
need not be given.
3 <PAGE>
Section 2.08. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, if
any, a Vice Chairman of the Board, if any, the President or one-third or
more of the Directors in office. Notice of the date, time, place and
general nature of the business to be transacted at each special meeting
shall be given by telephone, telegram, letter or in person, unless such
notice is waived, by or at the direction of the person or persons
authorized to call such meeting, to each director, at least forty-eight
hours in advance of the meeting.
Section 2.09. Conduct of Meetings. Every meeting of the Board of
Directors shall be presided over by the Chairman of the Board, or if
there is no such Chairman or if he is absent, the senior present Vice
Chairman of the Board or, if there is no such Vice Chairman or if he is
absent, the President or, in his absence, a Chairman chosen by a
majority of the Directors present. The Secretary, or in his absence, a
person appointed by the Chairman, shall act as Secretary.
Section 2.10. Quorum; Action by Board. Except to the extent that
a greater number is required by law, the Articles of Incorporation or
these By-laws: (i) a majority of all of the Directors in office shall
constitute a quorum for the transaction of business at any meeting; and
(ii) the acts of a majority of the Directors present at a meeting at
which a quorum is present shall be the acts of the Board of Directors.
Section 2.11. Participation in Meetings. One or more Directors
shall be deemed present and may participate and vote in a meeting of the
Board of Directors or a committee of the Board of Directors by means of
conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other.
Section 2.12. Compensation. Fees and expenses payable for
services as a director or member of a committee of the Board of
Directors shall be in such amounts as shall be determined by the Board
of Directors.
Section 2.13. Committees. The Board of Directors may , at any
time and from time to time, appoint such standing or special committees
to perform such duties and make such investigations and reports as the
Board of Directors shall by resolution determine. Such committees shall
determine their own organization and times and places of meeting, unless
otherwise directed by such resolution.
Section 2.14. Directors and Emergency Officers Succession. In the
event of an emergency resulting from warlike damage or an attack on the
United States or any nuclear disaster of sufficient severity to prevent
the conduct and management of the affairs and business of the
Corporation under the direction of its directors and officers as
contemplated by these By-laws, the officers and employees of the
Corporation shall continue to conduct the affairs of the Corporation
under such guidance from the Directors as may be available, subject to
conformance with any governmental directives during the emergency.
The officers shall have authority to execute and carry into effect
any and all of the actions, duties and powers which may be authorized by
governmental directives for operations during emergencies, including the
power to curtail, limit, suspend or resume any operation of the
Corporation and change the location of any office of the Corporation.
4 <PAGE>
The officers at the time of such emergency shall have the broadest
powers to perform any and all acts which may be necessary for the
purposes set forth in the preceding paragraphs, including power to
employ additional officers and employees, to purchase and acquire or
contract for the use of any services, real estate, equipment and other
supplies, materials and resources as they may deem necessary or
appropriate for the continued conduct of the operations of the
Corporation on such terms and conditions as to them shall seem
desirable, and to obligate the Corporation to pay the expenses thereof.
In order to provide for automatic succession of authority among the
officer personnel of the Corporation in such an emergency, the
priorities of seniority and succession of authority may be established
and delegated to and among the officers of the Corporation by resolution
of the Board of Directors. The officer in authority under the terms of
the resolution shall have the power to assign and reassign functions and
duties among any of the other officers of the Corporation.
Any authority granted to such officers herein shall be subject to
the authority otherwise vested in the Board of Directors, but shall not
be deemed to be restricted in any way by the inability on the part of
the Board of Directors to act.
ARTICLE 3. OFFICERS
Section 3.01. Officers. The officers of the Corporation shall be
a President, a Secretary, a Treasurer, and may include a Chairman of the
Board, one or more Vice Chairmen of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers, and such other officers as the Board of Directors may from
time to time determine.
Section 3.02. Qualifications. The officers shall be natural
persons of full age.
Section 3.03. Election and Term of Office. The officers of the
Corporation shall be elected by the Board of Directors and shall serve
at the pleasure of the Board of Directors.
Section 3.04. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors, the President or the
Secretary. Any such resignation shall take effect at the time of the
receipt of such notice or at any later time specified therein. Unless
otherwise specified therein, the acceptance of a resignation shall not
be necessary to make it effective.
Section 3.05. Chairman of the Board. The Board of Directors may
elect one of its members to be Chairman of the Board. He shall preside
at all meetings of the Board of Directors. He shall also have such
other powers and duties as may be conferred upon or assigned to him by
the Board of Directors, as well as any other powers specifically
conferred upon him by these By-laws.
Section 3.06. Vice Chairman of the Board. The Board of Directors
may elect one or more of its members to be a Vice Chairman of the Board.
In the absence of the Chairman, the senior present Vice Chairman shall
preside at meetings of the shareholders and of the Board of Directors.
Each Vice Chairman shall have such other powers and duties as may be
conferred or assigned to him by the Board of Directors.
5 <PAGE>
Section 3.07. President. The President shall, in the absence of
the Chairman and Vice Chairman, or if no Chairman or Vice Chairman has
been elected, preside at any meeting of the shareholders and of the
Board of Directors. The President shall have and may exercise any and
all other powers and duties pertaining by law, regulation or practice to
the office of President, or imposed by these By-laws. He, or such
persons as shall be designated by him, shall sign, execute, acknowledge,
verify, deliver and accept, in the name of the Corporation, deeds,
mortgages, bonds, contracts and other instruments authorized by the
Board of Directors, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation. In general, he shall be the
chief executive officer and shall have general executive powers and
supervision over the business and operations of the Corporation,
subject, however, to the control of the Board of Directors, as well as
such other powers and duties as may be conferred upon or assigned to him
by the Board of Directors.
Section 3.08. Vice Presidents. The Board of Directors may appoint
one or more Vice Presidents. Each such person shall have such powers
and duties as may be conferred upon or assigned to him by the Board of
Directors or the President.
Section 3.09. Secretary. The Secretary shall attend to the giving
of all notices required by these By-laws to be given. He shall keep
accurate minutes of meetings of the Board of Directors and shall serve
as Secretary at all shareholders' meetings. He shall be custodian of
the corporate seal, records, documents and papers of the Corporation
including election returns and proceedings of shareholders' meetings.
He shall provide for the keeping of proper records of all transactions
of the Corporation assigned to him, from time to time, by the Board of
Directors or the President and he shall have all other powers and duties
pertaining by law, regulation or practice, to the office of Secretary,
or imposed by these By-laws, or as may from time to time be conferred
upon or assigned to him by the Board of Directors or the President.
Section 3.10. The Treasurer. The Treasurer shall have charge of
all receipts and disbursements of the Corporation and shall have or
provide for the custody of its funds and securities; he shall have full
authority to receive and give receipts for all money due and payable to
the Corporation, to endorse checks, drafts and warrants in its name and
on its behalf and to give full discharge for the same; he shall deposit
all funds of the Corporation, except such as may be required for current
use, in such banks or other places of deposit as the Board of Directors
may from time to time designate; and, in general, he shall perform all
duties incident to the office of Treasurer and such other duties as may
from time to time be conferred upon or assigned to him by the Board of
Directors or the President.
Section 3.11. Assistant Officers. Each assistant officer shall
assist in the performance of the duties of the officer to whom he is
assistant and shall perform such duties in the absence of the officer.
He shall perform such additional duties as the Board of Directors, the
President, or the officer to whom he is assistant may from time to time
assign him.
Section 3.12. Compensation of Officers and Others. The
compensation of all officers shall be fixed from time to time by the
Board of Directors, or any committee or officer authorized by the Board
of Directors so to do.
6 <PAGE>
ARTICLE 4. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 4.01. Indemnification. To the full extent permitted by
the laws of the Commonwealth of Pennsylvania, as they exist on the date
hereof or as they may hereafter be amended, the Corporation shall
indemnify any person (an "Indemnitee") who was or is involved in any
manner (including, without limitation, as a party or witness) in any
threatened, pending or completed investigation, claim, action, suit or
proceeding, (whether civil, criminal, administrative, arbitrative,
legislative or investigative (including, without limitation, any action,
suit or proceeding by or in the right of the Corporation to procure a
judgment in its favor) (a "Proceeding"), or who is threatened with being
so involved, by reason of the fact that he or she is or was a director,
officer or employee of the Corporation or, while serving as a director,
officer or employee of the Corporation, is or was at the request of the
Corporation also serving as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against all expenses (including attorney's fees), judgments,
fines, penalties, excise taxes and amounts paid in settlement actually
and reasonably incurred by the Indemnitee in connection with such
Proceeding, provided that there shall be no indemnification hereunder
with respect to any settlement or other non-adjudicated disposition of
any threatened or pending Proceeding unless the Corporation has given
its prior consent to such settlement or disposition. The right of
indemnification created by this Article shall be a contract right
enforceable by an Indemnitee against the Corporation, and it shall not
be exclusive of any other rights to which an Indemnitee may otherwise be
entitled. The provisions of this Article shall inure to the benefit of
the heirs and legal representatives of an Indemnitee and shall be
applicable to Proceedings commenced or continued after the adoption of
this Article, whether arising from acts or omission occurring before or
after such adoption. No amendment, alternation, change, addition or
repeal of or to these By-laws shall deprive any Indemnitee of any rights
under this Article with respect to any act or omission of such Indenture
occurring prior to such amendment, alteration, change, addition or
repeal.
Section 4.02. Payment of Expenses. Expenses incurred by an
Indemnitee in defending a Proceeding may be paid by the Corporation in
advance of the final disposition of such Proceeding upon receipt of an
undertaking by or on behalf of such Indemnitee to repay such amount if
it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation.
Section 4.03. When Indemnification is Not to be Made.
Indemnification pursuant to Section 4.01 shall not be made in any case
where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.
ARTICLE 5. SHARE CERTIFICATES; TRANSFER
Section 5.01. Share Certificates. Share certificates shall be
signed by the manual, facsimile, printed or engraved signatures of the
President or a Vice President and the Secretary or Treasurer, or an
Assistant Secretary or Assistant Treasurer. One of such signatures
shall be a manual signature unless the certificates are signed by a
transfer agent or a registrar, and shall be sealed with the corporate
seal, which may be a facsimile, engraved or printed seal.
7 <PAGE>
Section 5.02. Transfer of Shares. Transfer of shares of the
Corporation shall be made only on the books of the Corporation by the
owner thereof or by his attorney thereunto authorized, upon surrender of
the share certificates to the Secretary or a transfer agent of the
Corporation accompanied by a duly executed power of attorney.
Section 5.03. Transfer Agent and Registrar; Regulations. The
Corporation may, if and whenever the Board of Directors so determines,
maintain one or more transfer offices or designate one or more transfer
agents, where or by which the shares of the Corporation shall be
transferable, and also maintain one or more registry offices or
designate one or more registrars where or by which the shares shall be
registered; and no certificates for shares of the Corporation in respect
of which a registrar shall have been designated shall be valid unless
countersigned and registered by such registrar. The Board of Directors
may also make such additional rules and regulations as it may deem
expedient concerning the issue, transfer and registration of share
certificates.
Section 5.04 Lost, Destroyed and Mutilated Certificates. The
Board of Directors, by standing resolution or by resolutions with
respect to particular cases, may authorize the issue of new share
certificates in lieu of share certificates lost, destroyed or mutilated,
upon such terms and conditions, including the posting of an open-penalty
bond, as the Board of Directors may direct.
ARTICLE 6. LIMITATION OF THE LIABILITY OF DIRECTORS
Section 6.01. Limitation of Director Liability. To the full
extend permitted by the Corporate Directors' Liability Act as enacted in
the Commonwealth of Pennsylvania (Act of November 28, 1986, P.L. 1458,
No. 145) as the same exists or may hereafter be amended, a director of
this Corporation shall not be personally liable for monetary damages
for any action taken or any failure to take any action unless such
action or inaction constitutes both:
a) A breach of or failure to perform his duties in compliance with
the standards of fiduciary care prescribed in the Directors'
Liability Act; and
b) Self-dealing, willful misconduct or recklessness.
Section 6.02. Exceptions. The aforementioned limitation of
liability will not apply to:
a) The responsibility or liability of a director pursuant to any
criminal statute; or
b) The liability of a director for the payment of taxes pursuant to
local, State or Federal law.
ARTICLE 7. MISCELLANEOUS PROVISIONS
Section 7.01. Notice of Meetings. Any notice required to be given
by the corporation to any shareholder, director or committee member may
be (i) delivered personally, (ii) mailed by first class United States
mail, postage prepaid, addressed to the shareholders', directors', or
committee members' address appearing on the books of the Corporation, or
supplied by him to the Corporation for the purpose of notice or (iii)
telegraphed or transmitted by a similar mode of communication to the
address identified in clause (ii) above. Notice of any shareholders',
directors', or committee meeting shall be deemed to have been given to
8 <PAGE>
the person entitled thereto when deposited in the United States mail or
when deposited with a telegraph or other transmitting office for
transmission to such person. Any shareholder, director or committee
member may waive notice of any meeting before or after the meeting, and
his attendance at a meeting shall constitute a waiver of notice of such
meeting, unless he announces at the commencement of the meeting that he
is attending solely for the purpose of objecting to the transaction of
any business because the meeting is not lawfully called or convened.
Section 7.02. Amendments. By-laws may be adopted, amended or
repealed by the Board of Directors in the manner provided in Section
2.10 or by the shareholders in the manner provided in Section 1.06;
provided; however, that Sections 2.01, 2.02 and 2.04 and this Section of
these By-laws may be amended only by affirmative vote of at least
eighty-five (85%) percent of all of the securities of the Corporation
entitled to vote.
I hereby certify that at a meeting of the Directors of Drovers
Bancshares Corporation duly convened on the 26th day of May, 1982, the
original By-laws were unanimously adopted.
I hereby further certify that the above listed By-laws contain
amendments unanimously adopted by the Board of Directors at their
meetings noted below:
October 22, 1986 Article 2. Directors - Section 2.03.
Qualifications
May 17, 1988 Article 4. Indemnification of Directors
and Officers;
New Article 6. Limitation of the Liability
of Directors;
Present Article 6. renumbered to be Article 7.
Miscellaneous Provisions
July 26, 1989 Article 2. Directors - Section 2.03.
Qualifications
February 28, 1990 Article 2. Directors - Section 2.06.
Organizational Meeting
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
seal of Drovers Bancshares Corporation this _6th_ day of _March_, 1998.
__/s/_George_L.F._Guyer_______
Secretary
9 <PAGE>
Exhibit 3
ARTICLES OF INCORPORATION
OF
DROVERS BANCSHARES CORPORATION
In compliance with the requirements of Section 204 of the Business Corporation
Law, Act of May 5, 1933 (P.L. 364) (15 P.S. s1204) the undersigned, desiring to
be incorporated as a business corporation, hereby certify that:
FIRST: The name of the Corporation is Drovers Bancshares Corporation.
SECOND: The location and post office address of the initial registered
office of the Corporation in this Commonwealth is 30 South George Street, York,
Pennsylvania, 17401.
THIRD: The Corporation is incorporated under the Business Corporation Law
of Pennsylvania and shall have unlimited power to engage in and do any lawful
act concerning any or all lawful business for which corporations may be
incorporated under such law.
FOURTH: The Corporation shall have perpetual existence.
FIFTH: The total number of shares of stock that the Corporation shall have
the authority to issue shall be Three Million (3,000,000) shares, all of one
class called Common Shares, each of which shall have the par value of Five
($5.00) Dollars.
SIXTH: The names and post office addresses of each incorporator and the
number and class of shares subscribed by such incorporators are:
Name Address No. and Class
of Shares
Richard M. Linder 1185 Woodland Drive 1 Common
Farquhar Estates
York, PA 17403
W. K. Malehorn 4 Circle Drive 1 Common
North View
York, PA 17402
Frank Motter 272 Edgehill Drive 1 Common
York, PA 17402
J. Samuel Gregory 33 West Locust Lane 1 Common
York, PA 17402
L. Doyle Ankrum 2060 North Brook Circle 1 Common
York, PA 17403
SEVENTH: The names and residence addresses of the first Board of Directors
of the Corporation are:
Richard M. Linder 1185 Woodland Drive
Farquhar Estates
York, PA 17403
L. Doyle Ankrum 2060 North Brook Circle
York, PA 17403
1 <PAGE>
J. Samuel Gregory 33 West Locust Lane
York, PA 17402
Frank Motter 272 Edgehill Road
York, PA 17403
W. K. Malehorn 4 Circle Drive
Northview
York, PA 17402
EIGHTH: The members of the first Board of Directors, named above, shall
serve only until the first annual meeting of shareholders for the election of
directors after the filing of these Articles. Thereafter, the number,
qualifications, classification, nomination and election of members of the Board
of Directors shall be in accordance with Article Ninth herein and with the
provision of the Corporation's By-laws.
NINTH: The number of Directors which shall constitute the whole Board of
Directors shall be determined from time to time, in accordance with the
Corporation's By-laws. The Directors shall be classified according to the time
for which they shall severally hold office.
At the first annual meeting of the shareholders after the filing of these
Articles, Directors shall be elected in four classes, each of which shall be as
nearly equal in size as possible. The term of one such class shall be one year,
the term of one such class shall be two years, the term of one such class shall
be three years, and the term of one such class shall be four years; and in each
case until their respective successors shall have been elected and qualified.
At the second annual meeting of the shareholders after the filing of these
Articles, and at each subsequent annual meeting, Directors shall be elected to
fill the vacancies created by the class whose term then expires. The term of
all Directors so elected shall be for four years and until their respective
successors shall have been elected and qualified.
Shareholders shall not be entitled to cumulative voting in the election of
Directors.
TENTH: (A) The affirmative vote of the holders of at least eighty-five
(85%) percent of all of the securities of the Corporation entitled to vote
shall, except as provided in paragraph (B) of this Article Tenth, be required
in order for any of the following actions or transactions to be effected by the
Corporation, or approved by the Corporation as stockholders of any subsidiary of
the Corporation.
(i) Any merger or consolidation of the Corporation or any of its
subsidiaries with or into a Related Person (as hereinafter defined),
or any affiliate or associate (as each of said terms is defined in the
Securities Exchange Act of 1934 and the rules and regulations
promulgated thereunder) of a Related Person, or
(ii) Any sale, lease, exchange or other disposition of all or any
substantial part (as determined with respect to any transaction by
the Continuing Directors as hereinafter defined) of the assets of the
Corporation or any of its subsidiaries to or with a Related Person or
any affiliate or associate of a Related Person, or
2 <PAGE>
(iii) Any issuance or delivery by the Corporation of any voting securities
(or any securities or other instruments convertible into voting
securities) of the Corporation or any of its subsidiaries (other
than securities issued or delivered by the Corporation pursuant to
(a) any present or future stock option plan or other stock plan
created for the benefit of the officers and employees of the
Corporation or any of its subsidiaries; (b) any dividend
reinvestment plan; or (c) any underwritten public offering) to a
Related Person or any affiliate or associate of a Related Person in
exchange for cash, other assets or securities, or any combination
thereof, or
(iv) Any dissolution of the Corporation.
(B) The vote of the securityholders specified in paragraph (A) of this Article
Tenth shall not be required for any action or transaction specified in such
paragraph if:
(i) Such action or transaction is approved in advance by a majority of the
"Continuing Directors" (said term to mean all directors of the
Corporation then in office who were duly elected prior to the time the
person, corporation or entity involved in such action or transaction
(either directly or with or through any affiliates or associates)
became a Related Person); or
(ii) Such action or transaction involves solely the Corporation and one or
more subsidiaries of the Corporation, or involves solely two or more
subsidiaries of the Corporation (provided that none of the stock of
any such subsidiary involved is directly or indirectly beneficially
owned by a Related Person (other than such ownership arising solely
because of ownership interests in the Corporation)), and, in the case
of a merger, the Corporation is a surviving corporation or a
subsidiary of the Corporation is a surviving corporation and
following such merger the certificate or articles of incorporation of
such subsidiary contain provisions substantially the same as those in
Articles Ninth, Tenth, Eleventh and Twelfth of these Articles of
Incorporation.
(C) The term "Related Person" as used in these Articles of Incorporation shall
mean any individual, corporation, partnership or other person or entity
which, together with its affiliates and associates and any other person or
entity with which it or its affiliates or associates has any agreement,
arrangement or understanding, directly or indirectly, for the purpose of
acquiring, holding, voting or disposing of voting securities of the
Corporation, directly or indirectly beneficially owns or controls ten (10%)
percent or more in the aggregate of the outstanding voting securities of
the Corporation. A majority of the Continuing Directors then in office
shall have the power and the duty to determine for purposes of these
Articles of Incorporation, on the basis of information then known to them,
who shall constitute a Related Person and its affiliates and associates.
Any such determination by the Continuing Directors shall be conclusive and
binding for all purposes.
ELEVENTH: (A) The Board of Directors or the Continuing Directors may, in
deciding whether to approve, recommend or oppose a tender or other offer for the
Corporation's securities, or any transaction of the type enumerated in (i),
(ii), or (iii) of Paragraph (A) of Article Tenth of these Articles, or any other
transaction having a similar major effect on the properties, operations, or
control of the Corporation, whether or not such offer or transaction involves
Related Persons, consider any pertinent issue, including buy not limited to the
following:
3 <PAGE>
(i) The character, integrity, business philosophy and financial
status of the other party or parties to the offer or transaction;
(ii) The consideration to be received by the Corporation or its
securityholders in connection with such offer or transaction, as
compared to:
(a) The current market price or value of the Corporation's properties
or securities;
(b) The value of the Corporation, its properties or securities in a
freely negotiated transaction;
(c) The estimated future value of the Corporation, its
properties or securities;
(d) Such other measures of the value of the Corporation, its
properties or securities as the Directors may deem appropriate;
(iii) The projected social, legal and economic effects of the proposed
offer, action or transaction upon employees, suppliers, and
customers of the Corporation and its subsidiaries and the
communities where the Corporation and its subsidiaries do business;
(iv) The general desirability of the Corporation's continuing as an
independent entity; and
(v) Such other factors as they may deem relevant, including but not
limited to anti-trust or other legal or regulatory issues that are
raised by the offer or transaction.
(B) If the Board of Directors determines that such an offer or transaction
should, in light of all relevant factors, be approved, recommended, or
rejected, it may take any lawful action to accomplish its purpose
including, but not limited to, any or all of the following: advising
shareholders to accept or to reject the offer or transaction; acquiring
the Corporation's securities; selling or otherwise issuing authorized
but unissued securities or treasury stock or granting options with
respect to any of its stock or securities; selling or granting options
with respect to any of its property; acquiring other property or entities;
soliciting or rejecting offers from other individuals or entities;
and such other actions as may be appropriate,
including but not limited to initiation of litigation and regulatory
proceedings.
TWELFTH: No amendment or repeal of Items Ninth, Tenth, Eleventh or Twelfth
of these Articles shall be made unless and until such amendment or repeal shall
have been approved by: (i) a majority of the members of the Board of Directors;
and (ii) the affirmative vote of at least eighty-five (85%) percent of the votes
which all shareholders are entitled to cast.
4 <PAGE>
IN WITNESS WHEREOF, the incorporators have signed and sealed these Articles
of Incorporation this 14th day of May, 1982.
/s/ L. Doyle Ankrum
/s/ Frank Motter
/s/ W. K. Malehorn
/s/ Richard M. Linder
/s/ J. Samuel Gregory
At a meeting of the Board of Directors on February 22, 1995, the following
resolution was offered:
RESOLVED: That the Articles of Incorporation of the Corporation be
amended such that Article Five be deleted in its entirety and the following
sentence be substituted therefor:
The total number of shares of stock that the Corporation shall
have the authority to issue shall be ten million (10,000,000) shares, all of one
class called Common Shares, each of which shall have the par value of five
($5.00) dollars.
I hereby certify that, at a meeting of the Directors of Drovers Bancshares
Corporation duly convened on the 22nd Day of February, 1995 the preceding
amendment to the Articles of Incorporation was unanimously adopted.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of Drovers
Bancshares Corporation this 22nd Day of February, 1995.
__/s/_George_L.F._Guyer,_Jr.__
Secretary
5 <PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14549
<INT-BEARING-DEPOSITS> 379
<FED-FUNDS-SOLD> 0
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<INVESTMENTS-HELD-FOR-SALE> 136547
<INVESTMENTS-CARRYING> 42752
<INVESTMENTS-MARKET> 43698
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0
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<EPS-PRIMARY> 1.91
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Drovers Bancshares Corporation and Subsidiaries
CONTENTS
Cross Reference for electronic filing/hard copy
Electronic Hard
Copy Copy
Consolidated Financial Highlights.............................. 2 ..... 1
Common Stock Market Prices and Dividends....................... 3 ..... 1
Eleven-Year Summary of Selected Financial Information.......... 44 ..... 12
Consolidated Statements of Condition........................... 4 ..... 15
Consolidated Statements of Income.............................. 5 ..... 16
Consolidated Statements of Changes in Shareholders' Equity..... 6 ..... 17
Consolidated Statements of Cash Flows.......................... 7 ..... 18
Notes to Consolidated Financial Statements .................... 8 ..... 19
Report of Independent Certified Public Accountants ............ 30 ..... 32
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 31 ..... 33
Supplemental Financial Data ................................... 45 ..... 43
1 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
(All dollar amounts presented in thousands, except per share data)
1997 1996 % Change
FINANCIAL POSITION AT DECEMBER 31,
Assets .................................. $524,892 $446,713 17.50%
Net loans ............................... 310,369 279,987 10.85%
Deposits ................................ 402,086 360,204 11.63%
Shareholders' equity .................... 43,470 38,092 14.12%
RESULTS FOR THE YEAR
Interest income ......................... $36,267 $30,055 20.67%
Interest expense ........................ 19,254 14,791 30.17%
Net interest income ..................... 17,013 15,264 11.46%
Net income .............................. 5,631 4,849 16.13%
FINANCIAL RATIOS
Return on average assets ................ 1.15% 1.20% -4.17%
Return on average shareholders' equity .. 13.88% 13.31% 4.28%
PER SHARE DATA*
Net income .............................. $1.91 $1.65 15.76%
Net income, assuming dilution ........... $1.89 $1.64 15.24%
Cash dividends .......................... $0.58 $0.54 7.41%
Book value (year-end) ................... $14.68 $12.91 13.71%
Weighted average shares outstanding ..... 2,951,090 2,947,266 0.13%
Number of shareholders .................. 1,420 1,417 0.21%
INVESTMENT SERVICES AND TRUST DIVISION
Fair value of trust assets administered . $205,062 $159,972 28.19%
* Data adjusted for the 5% stock dividend issued in 1997 and a 5 for 4 split in
the form of a 25% stock dividend issued in 1996.
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 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
1997 Bid** Asked** Shares* Dividends Paid*
March 31 .................. $21.75 $23.25 2,949,639 $0.14
June 30 ................... 23.25 24.25 2,949,639 0.14
September 30 .............. 26.50 28.00 2,949,641 0.14
December 31 ............... 33.50 35.75 2,951,090 0.15
1996
March 29 .................. $20.00 $21.20 2,943,082 $0.13
June 28 ................... 21.10 21.60 2,944,749 0.13
September 30 .............. 22.25 24.25 2,946,465 0.14
December 31 ............... 20.75 21.50 2,947,266 0.14
* Data adjusted for a 5% stock dividend issued in 1997 and a 5 for 4 stock split
in the form of a 25% stock dividend issued in 1996.
**Data adjusted for the 5 for 4 stock split in the form of a 25% stock dividend
issued in 1996.
3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
(in thousands) 1997 1996
ASSETS
Cash and due from banks ............................... $14,549 $17,512
Money market investments .............................. 379 271
Investment securities (fair value $180,245 and $128,605) 179,299 128,082
Loans (net of unearned income of $3,320 and $3,494) ... 313,673 283,117
Reserve for loan losses ............................... 3,304 3,130
Net loans ........................................... 310,369 279,987
Bank premises and equipment ........................... 13,864 14,007
Other assets .......................................... 6,432 6,854
TOTAL ASSETS .......................................... $524,892 $446,713
LIABILITIES
Deposits:
Noninterest-bearing ................................. $41,973 $34,702
Interest-bearing .................................... 360,113 325,502
Total deposits .................................... 402,086 360,204
Federal funds purchased and securities sold
under agreements to repurchase ...................... 31,360 15,254
Other borrowings....................................... 43,558 29,385
Other liabilities ..................................... 4,418 3,778
TOTAL LIABILITIES ..................................... 481,422 408,621
SHAREHOLDERS' EQUITY
Common stock ($5 par value)10,000,000 shares authorized;
issued and outstanding--2,961,127 shares in 1997
and 2,809,180 in 1996 ............................... 14,806 14,046
Additional paid-in capital ............................ 18,664 14,707
Retained earnings...................................... 8,407 8,969
Unrealized holding gains on available-for-sale
securities .......................................... 1,593 370
TOTAL SHAREHOLDERS' EQUITY ............................ 43,470 38,092
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $524,892 $446,713
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) 1997 1996 1995
INTEREST INCOME
Interest and fees on loans ...................... $25,487 $23,199 $ 21,722
Interest on deposits with banks ................. 70 155 94
Interest and dividends on investment securities:
Taxable investment securities ................. 8,712 5,492 5,004
Equity securities ............................. 767 336 176
Tax-exempt investment securities .............. 1,231 873 1,057
Total interest income ....................... 36,267 30,055 28,053
INTEREST EXPENSE
Interest on deposits ............................ 15,644 12,322 11,258
Federal funds purchased and securities sold
under agreements to repurchase................. 1,353 584 422
Interest on borrowed funds ...................... 2,257 1,885 1,849
Total interest expense ...................... 19,254 14,791 13,529
Net interest income ......................... 17,013 15,264 14,524
Provision for loan losses ....................... 386 645 501
Net interest income after provision for loan
losses ........................................ 16,627 14,619 14,023
OTHER INCOME
Investment services and trust income ............ 1,105 1,020 924
Service charges on deposit accounts ............. 1,293 1,199 982
Securities gains ................................ 197 196 106
Net gains on loan sales ......................... 491 390 278
Equity in losses of real estate ventures......... -81 -137 -64
Other ........................................... 948 696 611
Total other income .......................... 3,953 3,364 2,837
OTHER EXPENSES
Salaries and employee benefits .................. 7,597 6,818 6,426
Occupancy and premises .......................... 917 827 798
Furniture and equipment ......................... 1,111 896 734
Marketing ....................................... 441 627 389
FDIC insurance assessment ....................... 45 2 331
Net cost of operation of other real estate ...... 53 26 3
Supplies ........................................ 443 442 346
Other taxes ..................................... 331 325 294
Other............................................ 2,296 2,087 1,737
Total other expenses ........................ 13,234 12,050 11,058
Income before income taxes....................... 7,346 5,933 5,802
Applicable income taxes ......................... 1,715 1,084 1,521
NET INCOME ...................................... $5,631 $4,849 $4,281
PER SHARE DATA
NET INCOME ...................................... $1.91 $1.65 $1.46
NET INCOME, assuming dilution ................... $1.89 $1.64 $1.45
See notes to consolidated financial statements.
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized
(in thousands, except Additional Gains(Losses)
Common Paid-in RetainedAvail-for-Sale
number of shares) Shares Stock Capital Earnings Securities
BALANCE, JANUARY 1, 1995 .. 2,090,565 $10,453 $11,989 $8,997 $-1,715
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
Net income ............... 4,849
Cash dividends ........... -1,606
25% stock dividend issued. 561,919 2,810 -2,810
Shares issued ............ 6,486 32 50
Change in unrealized
holding gains on
available-for-sale
securities............... -154
BALANCE, DECEMBER 31, 1996 2,809,180 $14,046 $14,707 $8,969 $ 370
Net income ............... 5,631
Cash dividends ........... -1,707
5% stock dividend issued.. 140,710 704 3,782 -4,486
Shares issued ............ 11,237 56 175
Change in unrealized
holding gains on
available-for-sale
securities............... 1,223
BALANCE, DECEMBER 31, 1997. 2,961,127 $14,806 $18,664 $8,407 $ 1,593
See notes to consolidated financial statements.
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands) 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $5,631 $4,849 $4,281
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization .................. 1,342 1,179 972
Net (accretion) amortization of investment
security (discounts) premiums ................ -178 3 105
Provision for loan losses ...................... 386 645 501
Gain on sale of investment securities
held-to-maturity ............................. -1 -11 -59
Gain on sale of investment securities
available-for-sale ........................... -196 -185 -47
(Gain) loss on sale of fixed assets ............ -50 -46 6
Gain on sale of loans .......................... -491 -390 -278
(Gain) loss on sale of other real estate ....... 33 2 -1
Net deferred loan fees ......................... -559 -290 -2
Equity in losses of real estate ventures........ 81 137 64
Increase in interest/dividend receivable ....... -703 -142 -224
Increase in other assets ....................... -338 -1,007 -340
Increase in interest payable ................... 589 101 788
Increase (decrease) in other liabilities ....... 140 -83 116
Loans originated for sale ...................... -29,794 -23,370 0
Proceeds from sale of loans .................... 30,673 24,028 0
(Increase) decrease in other noncash items ..... 1 9 -6
Net cash provided by operating activities ......... 6,566 5,429 5,876
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities held-to-maturity ..................... 5,584 5,756 9,612
Proceeds from sales and maturities of investment
securities available-for-sale ................... 31,619 26,931 7,795
Purchases of investment securities
held-to-maturity ................................ -19,763 -5,292 -2,223
Purchases of investment securities available-
for-sale ........................................ -66,429 -63,694 -9,030
Net increase in loans ............................. -30,946 -28,316 -25,952
Capital expenditures .............................. -1,111 -1,300 -1,416
Proceeds from sale of fixed assets ................ 78 108 8
Net (purchase) return of investment in real estate
ventures......................................... 18 0 -1,285
Proceeds from sale of other real estate ........... 827 203 106
Net cash used in investing activities ............. -80,123 -65,604 -22,385
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and
savings ......................................... 18,827 32,648 -3,441
Net increase in certificates of deposit ........... 23,072 20,898 26,901
Net increase (decrease) in federal funds purchased
and repurchase agreements ....................... 16,106 7,952 -10,825
Payments made for capital leases .................. -35 -30 -26
Net increase (decrease) in other borrowings ....... 14,208 -758 11,486
Proceeds from issuance of common stock ............ 231 83 84
Dividends paid .................................... -1,707 -1,606 -1,407
Net cash provided by financing activities ......... 70,702 59,187 22,772
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS. -2,855 -988 6,263
CASH & CASH EQUIVALENTS AT JANUARY 1, ............. 17,783 18,771 12,508
CASH & CASH EQUIVALENTS AT DECEMBER 31, ........... $14,928 $17,783 $18,771
See notes to consolidated financial statements.
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All 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, Inc. 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, due from banks and federal funds sold. Generally, federal funds are
sold for one-day periods.
INVESTMENT SECURITIES:
The Corporation accounts for investment securities in accordance with
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, 1997 or 1996. Such securities would be bought
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
principally for the purpose of selling them in the near term. Management
reassesses the appropriateness of the classifications each quarter. 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.
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. Impaired loans are accounted for in accordance with
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under the
Standard, the 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. Statement No. 114 excludes large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment.
MORTGAGE SERVICING RIGHTS:
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage
Servicing Rights." Statement No. 122 requires mortgage servicers that sell
loans and retain servicing rights to allocate the total cost of the loans
between the servicing rights and loans based on fair value. The mortgage
servicing rights are amortized, using the straight-line method, over the
expected life of the serviced loans. The Corporation evaluates the fair
value of the rights each quarter and recognizes impairment immediately if it
occurs. The Corporation uses quoted market prices to determine fair value.
Mortgage servicing rights are stratified based on original term and date of
origination. This Standard only affects loans sold after December 31, 1995.
In addition, any mortgages designated as held-for-sale are valued at
the lower of cost or fair value. The Corporation uses quoted market
prices and evaluates the loans on an individual loan basis. Mortgage
loans the Corporation has both the ability and intent to hold for the
foreseeable future or until maturity are classified as a long-term
investments.
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.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:
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. 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.
PER SHARE DATA:
Earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. Earnings per common share, assuming dilution gives effect to all
dilutive potential common shares 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 $3,167,000 and $7,025,000 at December 31, 1997 and 1996, respectively.
Average required reserves during 1997 and 1996 were $5,567,000 and
$6,366,000, 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.
1997 1996
Commitments to extend credit (legally binding) ........... $80,762 $72,119
Standby letters of credit and financial guarantees ....... $7,252 $4,619
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 when collateral is deemed necessary.
12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
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.
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Corporation maintains fifteen branch offices. All 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, 1997 and 1996 were $379,000 and
$271,000, 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, 1997 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations 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
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, 1997 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations 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
The amortized cost and estimated fair value of debt securities at December 31,
1997, 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 Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due in one year or less ............. $928 $939 $4,758 $4,758
Due after one year through five years 6,185 6,493 8,745 8,803
Due after five years through ten years 12,666 12,953 7,356 7,437
Due after ten years ................. 9,008 9,262 3,542 3,691
28,787 29,647 24,401 24,689
Mortgage-backed securities and
collateralized mortgage
obligations ...................... 13,965 14,051 93,729 94,747
Total debt securities ............... $42,752 $43,698 $118,130 $119,436
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, 1996 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $1,000 $23 $0 $1,023
Obligations of states and political
subdivisions ................... 14,748 496 22 15,222
Mortgage-backed securities and
collateralized mortgage
obligations .................... 12,780 175 149 12,806
Total investment securities ....... $28,528 $ 694 $ 171 $29,051
The amortized cost and estimated fair value of investment securities
classified as available-for-sale as of December 31, 1996 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $24,338 $108 $58 $24,388
Obligations of states and political
subdivisions ................... 3,697 22 2 3,717
Corporate obligations.............. 500 0 0 500
Mortgage-backed securities and
collateralized mortgage
obligations .................... 62,482 465 229 62,718
Total debt securities ............. 91,017 595 289 91,323
Equity securities ................. 7,976 255 0 8,231
Total investment securities ....... $ 98,993 $ 850 $ 289 $99,554
Proceeds from sales of investment securities classified as available-for-sale
during 1997, 1996 and 1995 were $6,818,000, $14,560,000 and $109,000,
respectively. Gross realized gains during 1997, 1996, and 1995 were $196,000,
$293,000 and $47,000, respectively. Gross realized losses during 1997, 1996
and 1995 were $0, $108,000 and $0, respectively.
No held-to-maturity investment securities were sold during 1997, 1996 or 1995,
however, gains were recognized on securities with call options exercised by
the issuer. Realized gains were $1,000, $11,000 and $59,000 in 1997, 1996 and
1995, respectively.
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, 1997 and 1996, assets with a carrying value of $42,895,000 and
$46,347,000, 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, 1997 or 1996.
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES
Loans were comprised of the following as of December 31:
1997 1996
Commercial, financial and industrial loans..... $80,636 $72,828
Real estate mortgage loans:
Real estate construction-related ............. 12,105 8,908
Real estate mortgage loans secured by 1-4
family residential properties ............... 107,797 98,559
Other real estate ............................ 80,462 68,637
Total real estate mortgage loans ............... 200,364 176,104
Consumer loans:
Monthly payment .............................. 30,952 32,616
Other revolving credit ....................... 1,476 1,543
Total consumer loans ........................... 32,428 34,159
Other .......................................... 245 26
Total loans .................................... $313,673 $283,117
Changes in the reserve for loan losses for the years ended December 31,
were as follows:
1997 1996 1995
Balance, beginning of year ............ $3,130 $2,937 $2,638
Provision for loan losses ............. 386 645 501
Loans charged-off:
Commercial, financial and industrial. 0 25 31
Real estate ......................... 0 215 45
Consumer ............................ 327 369 257
Total loans charged-off ............... 327 609 333
Recoveries:
Commercial, financial and industrial. 32 6 11
Real estate ......................... 15 36 0
Consumer ............................ 68 115 120
Total recoveries ...................... 115 157 131
Balance, end of year .................. $3,304 $3,130 $2,937
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 $740,000, $615,000 and $934,000 at December 31, 1997,
1996 and 1995, 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 $56,000, $37,000 and $34,000 at
December 31, 1997, 1996 and 1995, respectively. Accruing loans which were
contractually past due 90 days or more were $33,000, $0 and $9,000 at
December 31, 1997, 1996 and 1995, respectively.
The total recorded investment in impaired loans was $1,314,000 and
$2,682,000 at December 31, 1997 and 1996, respectively. The amount of the
recorded investments for which there is a related allowance is $0. Loans
classified as impaired 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 the accrual method of accounting until principal or interest is past due
90 days or more and when full principal or interest is unlikely. At that
time the loans are placed on nonaccrual status. The average recorded
investment in impaired loans during 1997 and 1996 was $2,456,000 and
$1,764,000, respectively. The Corporation recognized interest income on
impaired loans of $233,000 in 1997 and $193,000 in 1996. Interest income
recognized on a cash basis would have been $206,000 in 1997 and $214,000 in
1996.
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 $9,192,000 and $13,017,000 at December 31,
1997 and 1996, respectively. During 1997, $19,923,000 of new loans were
made to related parties and repayments totaled $23,748,000.
Residential mortgage loans with a book value of $2,940,000 and $4,194,000
were committed for sale and awaiting settlement at December 31, 1997 and
1996, respectively. 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 were comprised of the following as of December 31:
1997 1996
Land and land improvements ............................. $1,109 $1,111
Buildings .............................................. 10,894 10,934
Capitalized leased premises and equipment .............. 442 442
Furniture and equipment ................................ 10,503 9,552
22,948 22,039
Less accumulated depreciation .......................... 9,084 8,032
Total bank premises and equipment ...................... $13,864 $14,007
Provisions for depreciation and amortization charged to operating expenses
were $1,226,000, $1,110,000 and $972,000 for 1997, 1996 and 1995,
respectively. As of December 31, 1997, the Corporation had commitments
totaling $1,050,000 to construct and furnish a two-story regional branch
office in Shrewsbury, Pennsylvania.
NOTE 9 - MORTGAGE SERVICING RIGHTS
1997 1996
Balance, beginning of year.............................. $ 158 $ 0
Servicing rights recognized ............................ 197 176
Servicing rights amortized ............................. 58 18
Balance, end of year.................................... $ 297 $ 158
Fair value, end of year................................. $ 443 $ 213
NOTE 10 - INVESTMENT IN REAL ESTATE VENTURES
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
opened 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,
1997 and 1996 were $2,292,000 and $2,391,000, respectively.
NOTE 11 - TIME DEPOSITS
At December 31, 1997 and 1996, time deposits of $100,000 or more aggregated
$20,424,000 and $18,002,000, respectively. Interest expense on these time
deposits amounted to approximately $1,258,000 in 1997, $1,010,000 in 1996
and $902,000 in 1995.
18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS
1997 1996
Notes payable to FHLB Pittsburgh:
Due 1997, 6.50% .......................................... $0 $1,000
Due 1997, variable ....................................... 0 5,000
Due 1998, 5.43% - 6.72% .................................. 3,500 3,500
Due 1998, variable ....................................... 10,000 10,000
Due 2000, 6.01% .......................................... 100 100
Due 2000, variable ....................................... 4,000 4,000
Due 2002, 5.48% - 5.60% .................................. 10,000 0
Due 2002, variable ....................................... 10,000 0
Due 2003, 6.40% .......................................... 400 400
Due 2015, 3.75%, amortizing .............................. 378 0
Note payable to CoreStates Financial Corp:
Due 2003, 6.95% .......................................... 4,987 5,157
43,365 29,157
Capital lease obligations .................................. 193 228
$43,558 $29,385
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 reprice quarterly or more frequently and
are based on LIBOR or prime. The $10,000,000 in fixed rate borrowings due in
2002 includes a put option if the FHLB elects to convert the debt to a
variable interest rate beginning in 1998. The Corporation also maintains a
credit line with the FHLB secured by the same collateral. The unused credit
line totaled $101,945,000 at December 31, 1997. The CoreStates 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. The amounts of notes payable and
capital leases maturing in the years ended December 31, 1998 through 2002 are
as follows: $13,729,000; $249,000; $4,371,000; $273,000 and $20,260,000,
respectively.
At December 31, 1997 and 1996, 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
$270,000 in 1997, $164,000 in 1996 and $143,000 in 1995.
19 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):
NOTE 12 - 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, 1997 were:
Capital Operating
Leases Leases
1998 ..................................................... $ 66 $ 376
1999 ..................................................... 66 328
2000 ..................................................... 66 264
2001 ..................................................... 46 226
2002 ..................................................... 11 231
Thereafter................................................ 0 1,783
Total future minimum rental payments ..................... 255 $3,208
Less interest ............................................ 193
Present value of minimum rental payments ................. $ 62
NOTE 13 - 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, 1997 and 1996. 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 13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued)
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and short-term investments $14,928 $14,928 $17,783 $17,783
Investment securities ......... 179,299 180,245 128,082 128,605
Net loans ..................... 310,369 312,637 279,987 280,855
Interest receivable ........... 2,860 2,860 2,157 2,157
FINANCIAL LIABILITIES:
Demand and savings deposits ... 193,319 193,319 174,752 174,752
Time deposits ................. 208,767 208,125 185,452 185,005
Federal funds purchased and
securities sold under
agreement to repurchase ..... 31,360 31,360 15,254 15,254
Notes payable ................. 43,365 42,916 29,157 29,157
Interest payable .............. 3,023 3,023 2,414 2,414
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 stimate 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 $88,014,000.
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 14 - INCOME TAXES
Total income tax expense for the years ended December 31, 1997, 1996 and 1995
was allocated as follows:
1997 1996 1995
Income from continuing operations ................... $1,715 $1,084 $1,521
Shareholders' equity, for unrealized holding
gains (losses) for available-for-sale securities .. 630 -79 1,154
Total income tax expense ............................ $2,345 $1,005 $2,675
Income tax expense attributable to income from continuing operations
consists of the following at December 31,
1997 1996 1995
Currently payable .......................... $1,656 $1,145 $1,485
Deferred expense (benefit).................. 59 -61 36
Income tax expense ......................... $1,715 $1,084 $1,521
For the years ended December 31, the income tax expense attributable to
income from continuing operations differed from the tax expense computed
by applying the Federal statutory rate to pretax earnings. The reasons
for the differences were as follows:
1997 1996 1995
Income before income tax ............ $7,346 $5,933 $5,802
Tax at federal income tax rate ...... $2,498 $2,017 $1,973
Differences resulting from:
Effect of tax-exempt income ........ -343 -256 -322
Historic and low income tax credits. -279 -633 -103
Effect of dividend income .......... -183 -80 -42
Other items, net ................... 22 36 15
Applicable income tax ............... $1,715 $1,084 $1,521
22 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 14 - INCOME TAXES, (continued)
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations for the years ended
December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995
Excess provision for loan losses ........... $-59 $-65 $-102
Deferred loan income ....................... 44 57 111
Alternative minimum tax credit carryforward. 0 -133 0
Other items, net ........................... 74 80 27
$ 59 $-61 $ 36
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below:
1997 1996
Deferred tax assets:
Allowance for loan losses .................... $ 831 $ 772
Pension ...................................... 183 214
Alternative minimum tax credit carryforward .. 0 133
Other ........................................ 70 71
Total gross deferred tax assets ............ 1,084 1,190
Deferred tax liabilities:
Bank premises and equipment .................. 427 437
Unrealized holding gains on available-
for-sale securities ........................ 821 191
Other ........................................ 229 137
Total gross deferred tax liabilities ....... 1,477 765
Net deferred tax assets (liabilities) .......... $ -393 $ 425
Federal income taxes on security gains were $67,000, $67,000 and $36,000
in 1997, 1996 and 1995, respectively.
Management believes the deferred tax assets are 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 these assets.
23 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 15 - NET INCOME PER SHARE
Per share information is computed based on the weighted average number of
shares of stock outstanding during each year, giving retroactive effect to
a 5%, 25% and a 7% stock dividend issued in 1997, 1996 and 1995, respectively.
Net income per share and net income per share, assuming dilution were
calculated as follows:
1997 1996 1995
Net income .............................. $5,631 $4,849 $4,281
Average shares outstanding .............. 2,951 2,947 2,941
Effect of dilutive securities:
Stock options .......................... 27 14 6
Average shares outstanding,
assuming dilution ...................... 2,978 2,961 2,947
Net income per share .................... $1.91 $1.65 $1.46
Net income per share, assuming dilution . $1.89 $1.64 $1.45
NOTE 16 - COMMON STOCK
The Board of Directors of the Corporation declared the following stock
dividends which includes a 5 for 4 stock split in the form of a stock
dividend during 1996:
1997 1996
Percentage ................................... 5% 25%
Record date .................................. 11-14-97 07-19-96
Payable date ................................. 11-28-97 08-16-96
NOTE 17 - CASH FLOW DISCLOSURES
The Corporation paid interest and income taxes of $18,667,000 and
$1,570,000 in 1997, $14,689,000 and $1,250,000 in 1996 and $12,741,000
and $1,425,000 in 1995, respectively. Transfers from loans to other real
estate as a result of foreclosure were $211,000, $822,000 and $300,000 in
1997, 1996 and 1995, respectively.
NOTE 18 - 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 $139,000 in 1997, $164,000 in 1996 and $95,000 in 1995. The
Corporation also has two nonqualified supplemental retirement plans
covering the present and former chairmen of the board. 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 18 - 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:
1997 1996
Actuarial present value of benefit obligations:
Vested benefit obligation ............................... $-1,722 $-1,420
Accumulated benefit obligation .......................... $-1,832 $-1,492
Projected benefit obligation ............................... $-3,026 $-2,365
Plan assets at fair value .................................. 3,370 2,554
Projected plan assets in excess of benefit obligation ...... 344 189
Recognized net asset existing at December 31 ............... -141 -154
Unrecognized prior service cost ............................ 10 11
Unrecognized net gain ...................................... -297 -232
Accrued pension cost ....................................... $- 84 $- 186
The net pension expense included the following:
1997 1996
Service costs - benefits earned during the period .......... $208 $258
Interest costs on projected benefit obligation ............. 183 227
Net amortization and deferral .............................. 406 -93
797 392
Less return on plan assets ................................. 658 228
Net pension expense included in
salaries and employee benefits ............................ $ 139 $ 164
The following weighted average assumptions were used for the plan:
1997 1996
Discount rate .............................................. 7.3% 7.8%
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 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 equals 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 $47,000, $42,000 and $40,000 in 1997, 1996 and 1995, respectively.
25 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 19 - STOCK OPTION PLANS
The Corporation has an incentive Stock Option Plan (option plan) and an
employee stock purchase plan (ESPP). A committee of the Corporation's
Board of Directors administers the option plan and, at its discretion,
grants options to eligible key employees. The option price is the fair
value of shares on the day granted. No options may be exercised after ten
years. The options vest as follows: 50% on day of grant; 50% one year
following grant date. Under the current option plan, 90,090 options have
been authorized and not yet granted. The following shares and options
prices have been adjusted for subsequent stock dividends:
1997 1996 1995
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
Balance at January 1, ....... 70 $16.30 64 $14.61 29 $13.68
Granted ..................... 25 21.43 25 19.62 35 15.40
Exercised ................... 5 17.97 19 14.94 0 --
Canceled .................... 0 -- 0 -- 0 --
Balance at December 31, ..... 90 $17.64 70 $16.30 64 $14.61
Exercisable at December, 31 . 78 $17.02 58 $15.58 47 $14.32
The following options were outstanding at December 31, 1997:
Stock Exercise Remaining Options
Options Price Life Exercisable
Issued 1990 .......... 9 $ 9.63 2.9 years 9
Issued 1994 .......... 8 16.73 6.9 8
Issued 1995 .......... 26 15.40 7.3 26
Issued 1996 .......... 23 19.62 8.3 23
Issued 1997 .......... 24 21.43 9.3 12
90 $17.64 7.6 years 78
The weighted average grant-date fair value of options granted during
1997, 1996 and 1995 was $5.28, $6.21 and $7.41, respectively. The
Corporation uses the Black-Scholes Option Pricing Model to calculate the
grant-date fair value. The following significant assumptions were used:
1997 1996 1995
Risk free interest rate ................. 6.9% 6.5% 6.6%
Expected life ........................... 9.0 years 9.5 years 10.0 years
Expected volatility ..................... 12.7% 14.0% 14.0%
Expected dividends ...................... 2.4% 2.7% 2.7%
26 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):
NOTE 19 - STOCK OPTION PLAN, (continued)
The Corporation adopted the ESPP in 1997. The ESPP allows eligible
employees to purchase stock in the Corporation at 85% of the lesser of
the fair value of the stock on the date of grant or on the date of
exercise. Under the terms of the ESPP, 1,366 options were granted and
exercised in 1997. As of December 31, 1997, 156,134 options have been
reserved for future issuances under the ESPP.
The Corporation applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value
at the grant dates for awards consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation," the Corporation's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1997 1996 1995
Net Income............................ As reported. $5,631 $4,849 $4,281
Pro forma... $5,489 $4,731 $4,098
Earnings per share.................... As reported. $1.91 $1.65 $1.46
Pro forma... $1.86 $1.61 $1.39
Earnings per share, assuming dilution. As reported. $1.89 $1.64 $1.45
Pro forma... $1.84 $1.60 $1.39
27 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):
NOTE 20 - PARENT CORPORATION FINANCIAL STATEMENTS
December 31,
STATEMENTS OF CONDITION 1997 1996
ASSETS
Cash ................................................ $ 410 $ 20
Investments in and advances to subsidiaries:
The Drovers & Mechanics Bank ...................... 41,055 36,808
Drovers Realty Company ............................ 745 748
Other assets ........................................ 1,490 556
TOTAL ASSETS .......................................... $ 43,700 $ 38,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ................................... $ 230 $ 40
Total shareholders' equity .......................... 43,470 38,092
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 43,700 $ 38,132
Years Ended December 31,
STATEMENTS OF INCOME 1997 1996 1995
INCOME
Dividends from subsidiaries ............ $2,227 $1,644 $1,407
Other income ........................... 95 21 59
Total income ....................... 2,322 1,665 1,466
OPERATING EXPENSES
Other .................................. 148 147 153
Total operating expenses ........... 148 147 153
Income before income taxes ............. 2,174 1,518 1,313
Applicable income taxes (benefit) ...... -23 -47 -35
Income before undistributed earnings of
subsidiaries ......................... 2,197 1,565 1,348
Undistributed earnings of subsidiaries:
The Drovers & Mechanics Bank ......... 3,437 3,282 2,933
Drovers Realty Company ............... -3 2 0
NET INCOME .............................. $5,631 $4,849 $4,281
28 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):
NOTE 20 - PARENT CORPORATION FINANCIAL STATEMENTS, (continued)
Years Ended December 31,
STATEMENTS OF CASH FLOWS 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $5,631 $4,849 $4,281
Undistributed earnings of subsidiaries ........ -3,434 -3,285 -2,933
Gain on sale of investment securities
available-for-sale .......................... -74 -5 -47
Increase in other assets ...................... -78 0 0
Net cash provided by operating activities ..... 2,045 1,559 1,301
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments (receipts) from intercompany account . 42 -12 16
Purchases of investment securities
available-for-sale ........................... -401 -55 -116
Proceeds from sales of investment securities
available-for-sale ........................... 180 49 109
Net cash provided by (used in) investing
activities .................................. -179 -18 9
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock ............................. 231 83 83
Dividends paid ................................ -1,707 -1,606 -1,407
Net cash used in financing activities ......... -1,476 -1,523 -1,324
NET INCREASE (DECREASE) IN CASH ................ 390 18 -14
CASH AT JANUARY 1, ............................. 20 2 16
CASH AT DECEMBER 31, ........................... $410 $ 20 $ 2
29 <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 statement of condition of
Drovers Bancshares Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. 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 audit. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Drovers
Bancshares Corporation and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years ended December 31, 1997, in conformity with generally accepted
accounting principles.
Stambaugh . Ness & Company
York, Pennsylvania
January 16, 1998
30 <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 which houses its 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 $5,631,000 in 1997 and $4,849,000 in
1996. The return on average assets (ROA) and return on average equity (ROE) in
1997 were 1.15% and 13.88%, respectively. This compares to an ROA and ROE
in 1996 of 1.20% and 13.31%, 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 11.5% or
$1,749,000 in 1997, after advancing 5.1% or $740,000 in 1996.
Years Ended December 31, Increase(Decrease)
(in thousands) 1997 1996 1995 97/96 96/95 95/94
Total interest income .. $36,267 $30,055 $28,053 20.7% 7.1% 20.4%
Total interest expense . 19,254 14,791 13,529 30.2% 9.3% 30.0%
Net interest income .... $17,013 $15,264 $14,524 11.5% 5.1% 12.6%
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 other borrowings. In
addition to interest-bearing funds, assets are also supported by noninterest-
bearing 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 drove the increases in net interest income for 1997
and 1996.
31 <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:
1997 over 1996 1996 over 1995
Total Change due to Total Change due to
(in thousands) Change Rate Volume Change Rate Volume
Total interest income . $6,212 $ 14 $6,198 $2,002 $ -498 $2,500
Total interest expense. 4,463 714 3,749 1,262 -79 1,341
Net interest income ... $1,749 $-700 $2,449 $ 740 $ -419 $1,159
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 margin on earning assets financed by
noninterest-bearing funds. The following table illustrates the net interest
spread and the net interest income margin:
1997 Average 1996 Average
(in thousands) Balance Rate Balance Rate
Earning assets .................... $458,752 7.91% $372,889 8.06%
Financed by:
Interest-bearing funds .......... $408,069 4.72% $330,697 4.47%
Noninterest-bearing funds ....... 50,683 - 42,192 -
Total ........................ $458,752 4.20% $372,889 3.97%
Net interest income ............... $ 17,013 $ 15,264
Net interest spread ............... 3.19% 3.59%
Net interest income margin ........ 3.71% 4.09%
An aggressive expansion plan began in 1996 with the opening of the Dover office.
Two new offices opened in 1997 and two more are expected to open by 1999. The
new offices will provide the Corporation a presence in the fastest growing areas
of its market.
In order to offset the expenses of expansion the Corporation sought to increase
net interest income through growth. The Corporation aggressively promoted
higher yielding savings and time deposits during 1997 and increased its holding
of other borrowings. This resulted in a drop in the spread and margin during
the year.
Savings deposits increased $27,010,000, mainly from the success of the Indexed
Money Fund (IMF) product. The IMF pays a rate of interest similar to rates on
money market mutual funds. The growth in the IMF caused the average rate on
savings deposits to increase 0.70% during 1997. Average time deposits, mainly
certificates of deposit, increased $28,997,000 while their average yields
increased 0.10%. Funding from short and long-term borrowings increased
$20,225,000. The average yield on borrowings was nearly stable falling 0.02%.
In all, average interest-bearing funds increased $77,372,000 and the yield
increased 0.25%.
The funds were partially invested in loans which grew $27,474,000. The average
loan yield remained relatively stable, falling only 0.04%. The remainder of the
funds were used to purchase investment securities and interest-bearing deposits
which increased $58,389,000. The overall yield on investments increased from
6.39% to 6.50%, or 0.11%. However, the mix between loans and lower yielding
investments offset the increase in yield. Investments as a percentage of loans
increased from 40.4% in 1996 to 56.6% in 1997. This change in mix caused the
overall yield on earning assets to decline 0.15%.
32 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
NET INTEREST INCOME (continued)
Despite the lower spread and margin, the strategy was successful. Net interest
income increased $1,749,000, or 11.5%. The Corporation better utilized its
strong capital base. Average capital to assets was 8.3% in 1997 compared to
9.0% in 1996. The increase in net interest income through leveraging the
capital base served to increase return on equity from 13.3% in 1996 to 13.9% in
1997. Future loan growth should return the mix in earning assets to a more
1998. traditional percentage, stabilizing the spread and margin.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $386,000, $645,000 and $501,000 for 1997, 1996
and 1995, 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 1997, 1996 and 1995
were $212,000, $452,000 and $202,000, respectively. As a percentage of average
loans, net charge-offs were 0.07%, 0.17% and 0.08% in 1997, 1996 and 1995,
respectively. Nonaccrual loans as a percentage of total loans at December 31,
1997, 1996 and 1995 were 0.24%, 0.22% and 0.37%, respectively. Loans grew
$30,556,000, $27,712,000 and $26,030,000 in 1997, 1996 and 1995, respectively.
The reserve for loan losses as a percentage of loans at December 31, 1997, 1996
and 1995 was 1.05%, 1.11% and 1.15%, respectively. Lower net charge-offs and a
continued strong loan portfolio caused management to lower the 1997 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 change in estimated losses and cause a material change in net income.
OTHER INCOME
Years Ended December 31, Increase(Decrease)
(in thousands) 1997 1996 1995 97/96 96/95 95/94
Investment services and
trust income ............. $1,105 $1,020 $924 8.3% 10.4% 10.8%
Service charges on deposit
accounts .................. 1,293 1,199 982 7.8% 22.1% 7.1%
Securities gains ........... 197 196 106 0.5% 84.9% 253.3%
Net gains on loan sales .... 491 390 278 25.9% 40.3% 9.9%
Equity in losses
of real estate ventures.... -81 -137 -64 -40.9% 114.1% 82.9%
Other ...................... 948 696 611 36.2% 13.9% 33.4%
Total other income ......... $3,953 $3,364 $2,837 17.5% 18.6% 15.5%
Noninterest income was $3,953,000 in 1997, an increase of $589,000 from 1996.
The 1996 noninterest income was $3,364,000, an increase of $527,000 over the
1995 level of $2,837,000.
Income from the financial services and trust division increased $85,000, or
8.3%, in 1997. The fair value of investments managed by the division was
$205,062,000 at the end of 1997, an increase of 28.2% over the prior year. The
division experienced strong growth in the trust services area, including
employee benefits and personal trust and in investment management accounts.
Employee benefit fees increased $51,000 in 1997. Nonrecurring estate fees
accounted for the 1996 increase. Many of the fees derived from the division are
based on the fair value of managed assets. Overall increases in the equity
markets the past three years helped increase the value of assets managed and the
related fee income.
Service charges on deposit accounts increased $94,000, or 7.8%, in 1997. This
compares to increases of 22.1% and 7.1% in 1996 and 1995, respectively. Service
charges are made up of three main items: fees on retail and business checking
accounts, overdraft and returned check charges and ATM transaction fees. All
33 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER INCOME (continued)
three items increased in 1997. The introduction in late 1995 of the "Winner"
checking account product increased fees from checking accounts the last two
years. Fees from business checking accounts grew in 1997 caused by growth in
business deposits. In April 1996, the Corporation raised automatic teller
machine (ATM) transaction fees which helped increase deposit service charges
throughout 1997 and 1996. Increases in collected overdraft and returned check
charges, along with ATM transaction fees, caused most of the increase in 1995.
Net gains from investment securities sales were $197,000 in 1997 compared to
$196,000 and $106,000 in 1996 and 1995, respectively. The Corporation sold
about $4,800,000 in mostly variable rate securities during the second quarter.
The proceeds were invested in fixed rate securities and variable rate securities
with rates fixed for the first one to five years. The new holdings increased
net income in 1997 and help protect the Corporation from interest rate
declines. The Corporation sold an additional $1,900,000 in debt securities
during the fourth quarter to fund commercial loan growth. The Corporation
maintains an equity portfolio of Pennsylvania bank stocks. In December 1997,
the Corporation reduced its position in certain stocks resulting in a gain of
$74,000. The 1996 gains were the result of restructuring the investment
portfolio to increase holdings in higher yielding fixed rate investments.
This helped increase net interest income and decrease the Corporation's
overall asset sensitivity.
Net gains on loan sales are comprised of gains from the sale of residential
mortgages. Mortgage loans sold were $30,321,000, $23,814,000 and $22,510,000 in
1997, 1996 and 1995, respectively. Total 1997 loan sales increased 27.3% over
1996, while net gains increased $101,000, or 25.9%. The 1997 and 1996 gains
increased $197,000 and $176,000, respectively, as the result of the adoption of
a new accounting standard, SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The Standard causes the measurement of gains to increase from sales of
mortgages where servicing is retained. The Corporation continued to emphasize
residential mortgage lending. Two mortgage originators were added in 1996 and
new products are continually introduced. The Corporation now offers a popular
servicing-released product which includes our lowest offered interest rates.
Sales in 1995 included $4,500,000 in adjustable rate mortgages sold to lessen
overall asset sensitivity.
The Corporation recognized an $81,000 loss during 1997 from its equity
investments in two real estate limited partnerships. Both partnerships were
formed to renovate properties for lease as low-income housing apartments. The
first opened in August 1994. The second opened in February 1996. Both
buildings were fully occupied at the end of 1996 and 1997. The Corporation
receives substantial financial benefits from these investments in the form of
historic and low-income tax credits.
Other income increased $252,000, or 36.2%, in 1997. In the second quarter of
1997, the Corporation implemented a $1.00 surcharge on non-customers using
our automated teller machines. The surcharge generated $180,000 in fees
during 1997 and helped offset the cost of the Corporation's expanding ATM
network. An increase in letter of credit and mortgage servicing fees also
contributed to this year's increase in other income. Total loans serviced were
$100,355,000, $93,327,000 and $88,711,000 at the end of 1997, 1996 and 1995,
respectively. Increases in cash management fees, mortgage servicing income
and lease rentals drove the increase in 1996. In late 1995, the Corporation
began a program allowing associates to lease new personal computers from the
Corporation at the Corporation's cost. Other income in 1996 includes a
$40,000 increase in computer lease revenue. An equal amount of depreciation
expense related to the computer equipment is included in other noninterest
expense. Higher cash management fees, insurance clerical fees and mortgage
servicing income drove the 1995 increase.
34 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER EXPENSES
Years Ended December 31, Increase(Decrease>
(in thousands) 1997 1996 1995 97/96 96/95 95/94
Salaries and employee benefits . $7,597 $6,818 $6,426 11.4% 6.1% 6.5%
Occupancy and premises ......... 917 827 798 10.9% 3.6% 41.5%
Furniture and equipment ........ 1,111 896 734 24.0% 22.1% 4.4%
Marketing ...................... 441 627 389 -29.7% 61.2% 20.4%
FDIC insurance assessment ...... 45 2 331 999.9% -99.4% -45.7%
Net cost of operation
of other real estate .......... 53 26 3 103.8% 766.7%-127.3%
Supplies........................ 443 442 346 0.2% 27.7% 9.5%
Other taxes .................... 331 325 294 1.8% 10.5% 10.5%
Other .......................... 2,296 2,087 1,737 10.0% 20.1% 11.8%
Total other expenses ........... $13,234 $12,050 $11,058 9.8% 9.0% 6.8%
Other expenses includes all expenses except interest, provision for loan losses
and income taxes. In 1997, total other expenses increased $1,184,000, or 9.8%,
as compared to increases of 9.0% and 6.8% in 1996 and 1995, respectively.
Salaries and employee benefits are the most significant noninterest expense
category, representing 57.4%, 56.6% and 58.1% of total other expenses for 1997,
1996 and 1995, respectively. In 1997, salaries and employee benefits increased
$779,000, or 11.4%. Salaries increased $655,000, or 12.0%. This compares to a
salary increase of $419,000, or 8.3%, in 1996. The growth in branch offices,
deposits and commercial loans has resulted in an increase in staffing. The
Corporation employed 209 full-time equivalents at December 31, 1997, compared to
193 and 186 in 1996 and 1995, respectively. The Corporation maintains two
incentive compensation plans. Both plans require minimum earnings targets before
incentives are paid. The Corporation paid incentives of $391,000, $234,000 and
$224,000 in 1997, 1996 and 1995, respectively. Employee benefits decreased
slightly for the second straight year. Overall pension costs and health
insurance benefits have declined.
Occupancy and premises expense increased $90,000, or 10.9%, during 1997. This
compares to increases of 3.6% and 41.5% in 1996 and 1995, respectively.
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 of $111,000, $134,000 and $121,000 in 1997, 1996 and 1995, respectively.
The positive impact to occupancy and premises expense has declined due to an
increase in space taken by the Corporation for its corporate headquarters and
rising vacancy late in 1997. The remaining increases in occupancy and premises
expense were caused by lease expenses for two new branch offices opened in 1994,
one in 1996, and two in late 1997.
Furniture and equipment expense increased $215,000, or 24.0%, in 1997 compared
to $162,000, or 22.1%, in 1996. Costs associated with a mainframe and ATM
network upgrade and the depreciation expense related to the Dover branch office
caused the 1997 increase. 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
1996. occurred in 1996.
35 <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 $441,000 in 1997 compared to $627,000 and $389,000 in 1996
and 1995, respectively. Marketing expenses declined $186,000 in 1997. Major
expenses in 1997 related to product advertising and a new branch office opening.
The Corporation conducted several extensive advertising campaigns beginning in
late 1995 and throughout 1996 which caused the increase in prior year expenses.
FDIC insurance assessments were $45,000, $2,000 and $331,000 during 1997, 1996
and 1995, respectively. Effective June 1, 1995, the FDIC lowered the insurance
assessment minimum from $0.23 to $0.04 per $100 of deposits. The Corporation
has always paid the minimum assessment rate. Effective January 1, 1996, the
minimum assessment rate was eliminated and qualifying banks were required to pay
a $2,000 annual fee. Beginning in January, 1997, the FDIC imposed a minimum
assessment rate of 0.13% of deposits.
The net cost of operating other real estate was $53,000 in 1997 compared to
$26,000 in 1996 and $3,000 in 1995. Other real estate held was $154,000,
$803,000 and $195,000 in 1997, 1996 and 1995, respectively. The increase in
other real estate in 1996 was related to an increase in residential mortgage
foreclosures. The properties were liquidated in 1997 and caused the increased
expense.
Other expenses increased $209,000, or 10.0%, in 1997 compared to a $350,000
increase in 1996. Expenses for other professional services increased $119,000
during 1997. In late 1997, the Corporation engaged a consulting group to
analyze various products and processes, seeking ways to enhance productivity,
reduce expenses and improve non-interest income. Total 1997 costs related to
the engagement totaled $94,000. The Corporation anticipates savings will cover
all costs associated with the engagement within eighteen months. Data
processing expenses increased $56,000 in 1997. The increase was caused by
expansion to the ATM network and third party costs for trust accounting.
Expenses to purchase checking account benefits from a third party for "Winner"
customers increased $74,000 in 1996. Legal expenses grew $68,000, in 1996.
Higher third party data processing costs, legal and professional fees caused the
1995 increase.
TAXATION
The Corporation recognized provisions for income taxes of $1,715,000, $1,084,000
and $1,521,000 in 1997, 1996 and 1995, respectively. The average tax rate was
23.3% in 1997, 18.3% in 1996 and 26.2% in 1995. The changes in the effective
tax rates were caused by changes in historic and low-income tax credits received
from the Corporation's investments in two low-income housing partnerships. The
Corporation received tax credits of $279,000, $633,000 and $103,000 in 1997,
1996 and 1995, respectively. Projected tax credits are $279,000 in each of the
next five years and $777,000, thereafter. The Corporation also minimizes its
tax liability through the purchase of tax-free municipal bonds and equity
investments eligible for partially tax-free dividends. Average municipal bonds
held were $22,207,000, $14,746,000 and $15,902,000 in 1997, 1996 and 1995,
respectively. Average equity securities held were $13,114,000, $5,503,000 and
$2,930,000 in 1997, 1996 and 1995, respectively. The Corporation increased its
holdings of tax advantaged investments in 1997 to offset the decline in
available tax credits. The equity investments at the end of 1997 included
$10,066,000 of preferred stock issued by government sponsored agencies.
36 <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 (FASB) issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. It also makes consistent the
accounting for all servicing assets and liabilities. The Standard became
effective January 1, 1997. The FASB has delayed certain provisions of the
Statement until January 1, 1998. The Corporation does not anticipate any
material impact to earnings from applying this Standard.
The FASB issued Statement No. 130, "Reporting Comprehensive Income." The
Statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Statement requires all items that are required to be recognized as
components of comprehensive income be reported in a financial statement
displayed with the same prominence as other financial statements. Statement No.
130 is effective for fiscal years beginning after December 15, 1997. The impact
of this Statement on the Corporation would be to require additional disclosures
in its financial statements.
The FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise
and Related Information." Statement No. 131 establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement No. 131
is effective for periods beginning after December 15, 1997. The impact, if any,
of this Statement on the Corporation would be to require additional disclosures
in its financial statements.
The permanent Shrewsbury office is under construction and is expected to open in
March, 1998. As of December 31, 1997, the Corporation had commitments totaling
$1,050,000 to construct and furnish the office. The Corporation received
approval from the Pennsylvania Department of Banking to open a branch office in
Hellam, Pennsylvania. Construction will begin around April, 1998 and the branch
will open in September. The Corporation is negotiating a land purchase near
Dillsburg, Pennsylvania. An application to the State has not yet been filed.
The Westgate and Memory Lane branch offices are both scheduled for major
renovations during 1998. All construction and renovation costs will be funded
from operations.
YEAR 2000 ISSUE
The Corporation is presently identifying, assessing and correcting internal
computer systems and systems used to exchange electronic data with third
parties. The Corporation is nearly complete with the identification and risk
assessment phase of the project. Our core banking software provider assured us
that its software is Year 2000 compliant. We will test the software, along with
all other mission critical systems by June 30, 1998. The Corporation has begun
a program to assess commercial loan customers' understanding and preparation for
dealing with Year 2000 issues as part of the annual loan review process. Based
on the assessment results, the Corporation will determine the necessary steps to
reduce credit risk related to the Year 2000 issue. The Corporation does not
anticipate any material expenditures related to the Year 2000. However, the
issue is unprecedented and its impact on the economy as a whole is still
undetermined.
37 <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 may 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, 1997, this segment totaled $136,547,000, or
76.2% of the investment portfolio.
Liquidity needs may 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, 1997 were $159,323,000, of which $57,378,000, or 36.0% 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 decreased $2,855,000 during 1997. Cash used in investing
activities was $80,123,000 primarily as a result of a $30,946,000 increase in
net loans and a $48,989,000 increase in investment securities. Funds were also
required for $1,111,000 of capital expenditures. Cash provided by financing
activities was $70,702,000. Deposits provided most of the cash. Demand and
savings deposits increased $18,827,000 and certificates of deposit increased
$23,072,000. An increase in borrowings provided an additional $30,314,000.
Operating activities provided the remaining cash flows of $6,566,000. The
significant components of operating activities are net income and the add-back
of noncash expenses like depreciation and provision for loan losses. Operating
activities also include the origination and sale of mortgage loans generated for
sale.
INTEREST RATE SENSITIVITY MANAGEMENT
The Corporation's primary market risk is the risk of changes in net interest
income caused by changes in interest rates. Interest rate sensitivity
management focuses on minimizing interest rate risk. Management measures
ongoing interest rate risk through monthly "gap" reports and quarterly computer
simulations of net interest income. A "gap" report measures the net dollar
exposure to changes in interest rates, at a given time, for various repricing
periods. Results can sometimes be misleading since many interest-bearing
liabilities are not as sensitive to interest rate movements as the repriceable
assets which they help fund. A better measure of interest rate risk is the
simulations which project net interest income in rising, falling and stable
interest rate cycles. The simulation results indicate the Corporation is asset
sensitive. If interest rates fell for a sustained time period, net interest
38 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
INTEREST RATE SENSITIVITY MANAGEMENT(continued)
income would decline. This is mainly due to the relative insensitivity of many
interest-bearing deposit liabilities. Management has taken steps to mitigate
this risk by increasing holdings of variable rate borrowings, restructuring the
investment portfolio to include more fixed rate securities and decreasing
holdings of adjustable rate mortgages. In addition, the Corporation
successfully introduced a new savings product in 1996 tied directly to short-
term money market rates. The present interest rate risk is within tolerance
limits established by management.
The table below provides information about the Corporation's financial
instruments sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. Weighted average variable rates are based on implied forward
rates in the yield curve at December 31, 1997.
<TABLE>
<CAPTION>
Fair Over 5
(in thousands) Value Balance 1998 1999 2000 2001 2002 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash............. $ 14,549 $ 14,549 $ 14,549 $ 0 $ 0 $ 0 $ 0 $ 0
Average rate. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments:
Fixed rate..... 144,459 141,532 28,533 25,214 16,755 17,832 10,960 42,238
Average rate. 6.54% 6.69% 6.74% 6.82% 6.40% 6.36% 6.35%
Variable rate.. 36,165 35,733 8,927 6,265 5,263 4,199 3,761 7,318
Average rate. 6.56% 6.58% 6.69% 6.65% 6.51% 6.48% 6.44%
Loans:
Fixed rate..... 133,036 133,672 43,282 29,680 23,483 13,780 8,929 14,518
Average rate. 8.05% 7.61% 8.46% 8.39% 8.21% 8.00% 7.63%
Variable rate.. 179,601 180,001 32,308 19,916 18,132 15,066 8,375 86,204
Average rate. 8.77% 8.62% 8.64% 8.60% 8.51% 8.71% 8.68%
Deposits:
Fixed rate..... 247,479 248,121 135,817 47,683 20,743 9,390 9,624 24,864
Average rate. 4.79% 5.38% 5.44% 4.49% 2.81% 2.96% 2.02%
Variable rate.. 153,965 153,965 18,078 17,221 16,337 16,337 16,337 69,655
Average rate. 3.04% 3.24% 3.16% 3.06% 3.06% 3.06% 2.95%
Other borrowings:
Fixed rate..... 18,916 19,362 3,689 202 317 232 10,249 4,673
Average rate. 5.90% 5.67% 6.84% 6.57% 6.84% 5.57% 6.67%
Variable rate.. 55,360 55,360 41,360 0 4,000 0 10,000 0
Average rate. 5.55% 5.49% 0.00% 5.73% 0.00% 5.73% 0.00%
</TABLE>
Investment securities are shown at amortized cost. The table includes
prepayment assumptions for asset backed investments based on current prepayment
estimates. Prepayment rates of 18%, 13% and 24% were used for fixed rate
consumer installment loans, fixed rate residential mortgages and adjustable rate
mortgages, respectively. Core deposit decay rates of 5%-12% were used based on
historical experience, which allocated substantial amounts into the over five
year category. Unfunded loan commitments comprise most of the Corporation's
off-balance sheet items. These commitments are either short-term or are priced
at market at the time of funding. Market risk is minimal and, therefore, these
items are not shown in the table.
Considerable judgment is necessary to develop these estimates. The use of
different assumptions could materially change the estimated cash flows. Changes
in prepayment speeds, market interest rates or rates offered by the Corporation
could materially change the actual cash flows received.
39 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
INTEREST RATE SENSITIVITY MANAGEMENT(continued)
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.
CAPITAL
Total shareholders' equity increased $5,378,000, or 14.1%, in 1997. The
increase included a $1,223,000 increase in the fair value of investment
securities available-for-sale which are shown net of deferred tax in
shareholders' equity. Not including the changes from fair value, equity
increased $4,155,000, or 11.0%. 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 13.9% for 1997 and 13.3% for 1996. Total cash
dividends declared in 1997 represented 30.3% of net income, as compared to 33.1%
in 1996. The resulting internal capital growth percentage was 9.7% in 1997 and
8.9% in 1996. The percentage of average shareholders' equity to average total
assets was 8.3% in 1997 and 9.0% in 1996, indicative of a strong capital base.
All of the above calculations involving average equity included an average gain
on available-for-sale investment securities of $558,000 in 1997 and $123,000 in
1996.
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.
40 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
CAPITAL(continued)
The following table shows the Corporation exceeds all minimum capital adequacy
standards:
December 31,
(in thousands) 1997 1996
Tier I - Total qualified shareholders' equity .. $41,877 $37,722
Tier II - Allowance for loan losses ............ 3,304 3,130
Total risk-based capital ..................... $45,181 $40,852
Risk-adjusted on-balance sheet assets .......... $332,434 $292,374
Risk-adjusted off-balance sheet exposure ....... 12,491 9,509
Total risk-adjusted assets ................... $344,925 $301,883
Ratios:
Tier I risk-based capital ratio .............. 12.1% 12.5%
Minimum required for December 31, ............ 4.0% 4.0%
Total risk-based capital ratio ............... 13.1% 13.5%
Minimum required for December 31, ............ 8.0% 8.0%
Tier I leverage ratio ........................ 8.0% 8.4%
Minimum required for December 31, ............ 4.0% 4.0%
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:
41 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
FINANCIAL CONDITION(continued)
<TABLE>
<CAPTION>
1997 1996 1995
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 .......... $1,254 -1,621 -56.4% $2,875 $ 1,357 89.4% $1,518
Investment securities . 164,491 60,010 57.4% 104,481 9,398 9.9% 95,083
Loans ................. 293,007 27,474 10.3% 265,533 21,013 8.6% 244,520
Total interest-
earning assets ..... 458,752 85,863 23.0% 372,889 31,768 9.3% 341,121
Noninterest-earning
assets ............... 32,485 753 2.4% 31,732 3,068 10.7% 28,664
Total uses .............. $491,237 $86,616 21.4% $404,621 34,836 9.4% $369,785
Funding sources:
Demand deposits ....... $42,586 1,140 2.8% $41,446 $4,678 12.7% $36,768
Savings deposits ...... 101,312 27,010 36.4% 74,302 4,698 6.7% 69,604
Time deposits ......... 200,623 28,997 16.9% 171,626 14,054 8.9% 157,572
Short-term borrowings . 25,660 13,373 108.8% 12,287 4,757 63.2% 7,530
Long-term borrowings .. 37,888 6,852 22.1% 31,036 1,986 6.8% 29,050
Total interest-
bearing liabilities 408,069 77,372 23.4% 330,697 30,173 10.0% 300,524
Demand deposits ....... 37,075 3,821 11.5% 33,254 1,006 3.1% 32,248
Other liabilities ..... 5,537 1,296 30.6% 4,241 51 1.2% 4,190
Shareholders' equity .. 40,556 4,127 11.3% 36,429 3,606 11.0% 32,823
Total sources ........... $491,237 $86,616 21.4% $404,621 $34,836 9.4% $369,785
</TABLE>
Total average assets were $491,237,000, representing an $86,616,000, or 21.4%,
increase from 1996. Much of the asset growth came from investments in 1997
as the Corporation sought to increase net interest income by growing interest-
earning assets. Total average investment securities increased $60,010,000, or
57.4%. Much of the investment growth was in fixed rate mortgage-backed
securities, municipal bonds and equity securities. Fixed rate securities help
reduce the Corporations' asset sensitivity, while investments in tax exempt
securities help minimize federal income taxes. Total loans increased
$27,474,000, or 10.3%. Real estate mortgage loans accounted for much
of the loan growth. Commercial loan demand was also strong. Consumer loans
fell slightly due to the continued run-off of auto loans. The Corporation
maintained tight credit standards on auto loans causing the balance to
slowly fall again in 1997.
Average total deposits grew $60,968,000 during 1997, funding 70.4% of the
increase in assets. Successful promotion of various certificate of deposit
products caused time deposits to increase $28,997,000. The Indexed Money Fund,
introduced in June, 1996, continued to attract funds, increasing average savings
deposits $27,010,000. Growth in commercial checking accounts caused non-
interest bearing demand deposits to grow $3,821,000, or 11.5%. Average short-
and long-term borrowings increased $20,225,000. Increased borrowings at the
Federal Home Loan Bank accounted for most of the increase.
42 <PAGE>
Drovers Bancshares Corporation
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<CAPTION>
(dollar amounts in thousands,
except per share data) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................. $524,892 $446,713 $382,791 $352,287 $320,851
Investment securities ................... 179,299 128,082 91,823 94,359 85,836
Net loans ............................... 310,369 279,987 252,468 226,737 206,614
Deposits ................................ 402,086 360,204 306,653 283,173 265,917
Shareholders' equity .................... 43,470 38,092 34,921 29,724 29,249
Total average assets .................... 491,237 404,621 369,785 339,649 315,138
Total average shareholders' equity ...... 40,556 36,429 32,823 29,538 27,379
INCOME DATA
Interest income ......................... $36,267 $30,055 $28,053 $23,300 $22,445
Interest expense ........................ 19,254 14,791 13,529 10,406 10,246
Net interest income ................... 17,013 15,264 14,524 12,894 12,199
Provision for loan losses ............... 386 645 501 382 447
Net interest income after
provision for loan losses .............. 16,627 14,619 14,023 12,512 11,752
Other income ............................ 3,953 3,364 2,837 2,457 2,651
Other expenses .......................... 13,234 12,050 11,058 10,355 9,866
Income taxes ............................ 1,715 1,084 1,521 845 1,026
Income before cumulative effect of change
in accounting for income taxes ........ 5,631 4,849 4,281 3,769 3,511
Cumulative effect of change in accounting
for income taxes ...................... 0 0 0 0 352
Net income .............................. 5,631 4,849 4,281 3,769 3,863
Dividends paid .......................... 1,707 1,606 1,407 1,156 1,080
RATIOS
Return on average assets ................ 1.15% 1.20% 1.16% 1.11% 1.23%
Return on average equity ................ 13.88% 13.31% 13.04% 12.76% 14.11%
Equity to assets (year-end) ............. 8.28% 8.53% 9.12% 8.44% 9.12%
Net loans to deposits (year-end) ........ 77.19% 77.73% 82.33% 80.07% 77.70%
Dividend payout ......................... 30.31% 33.12% 32.87% 30.67% 27.96%
PER SHARE DATA*
Net income .............................. $1.91 $1.65 $1.46 $1.29 $1.33
Net income, assuming dilution ........... 1.89 1.64 1.45 1.28 1.33
Cash dividends .......................... 0.58 0.54 0.48 0.40 0.37
Book value (year-end) ................... 14.68 12.91 11.87 10.12 10.07
Weighted average number of
shares outstanding .................... 2,951,090 2,947,266 2,940,921 2,919,342 2,896,532
Stock dividends declared ................ 5% 25% 7% 25% 5%
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends.
43 <PAGE>
Drovers Bancshares Corporation
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION (Continued)
<CAPTION>
(dollar amounts in thousands,
except per share data) 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................. $308,319 $276,537 $253,324 $240,886 $236,007 $221,224
Investment securities ................... 99,011 86,054 66,222 63,682 68,556 56,434
Net loans ............................... 181,056 166,691 164,063 150,880 137,094 142,728
Deposits ................................ 256,806 243,717 227,916 216,532 213,249 196,888
Shareholders' equity .................... 25,554 23,377 21,715 20,321 19,042 17,785
Total average assets .................... 288,792 266,000 247,502 234,210 223,991 208,200
Total average shareholders' equity ...... 24,570 22,507 21,085 20,152 18,641 17,145
INCOME DATA
Interest income ......................... $22,490 $23,651 $23,290 $21,829 $19,608 18,687
Interest expense ........................ 11,363 13,561 14,106 13,334 11,814 10,893
Net interest income ................... 11,127 10,090 9,184 8,495 7,794 7,794
Provision for loan losses ............... 552 568 416 365 0 34
Net interest income after provision for
loan losses ............................ 10,575 9,522 8,768 8,130 7,794 7,760
Other income ............................ 2,216 1,715 1,381 1,243 1,115 966
Other expenses .......................... 8,877 7,966 7,366 6,895 6,632 6,469
Income taxes ............................ 717 608 487 326 275 232
Income before cumulative effect of
change in accounting for income taxes .. 3,197 2,663 2,296 2,152 2,002 2,025
Cumulative effect of change in
accounting for income taxes ............ 0 0 0 0 0 0
Net income .............................. 3,197 2,663 2,296 2,152 2,002 2,025
Dividends paid .......................... 1,019 1,003 930 875 776 687
RATIOS
Return on average assets ................ 1.11% 1.00% 0.93% 0.92% 0.89% 0.97%
Return on average equity ................ 13.01% 11.83% 10.89% 10.68% 10.74% 11.81%
Equity to assets (year-end) ............. 8.29% 8.45% 8.57% 8.44% 8.07% 8.04%
Net loans to deposits (year-end) ........ 70.50% 68.40% 71.98% 69.68% 64.29% 72.49%
Dividend payout ......................... 31.87% 37.66% 40.51% 40.66% 38.76% 33.93%
PER SHARE DATA*
Net income .............................. $1.11 $0.92 $0.79 $0.75 $0.69 $0.70
Net income, assuming dilution............ 1.10 0.92 0.79 0.74 0.69 0.70
Cash dividends .......................... 0.35 0.35 0.32 0.30 0.27 0.24
Book value (year-end) ................... 8.84 8.09 7.51 7.04 6.59 6.16
Weighted average number of shares
outstanding ............................ 2,890,518 2,889,236 2,888,617 2,887,415 2,886,540 2,879,564
Stock dividends declared ................ 0% 0% 50% 5% 5% 10%
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends.
44 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
AVERAGE BALANCES AND RATES
<CAPTION>
1997 1996 1995
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 ................. $1,254 $70 5.58% $2,875 $155 5.39% $1,518 $94 6.19%
Taxable investment
securities ................. 129,170 8,712 6.74% 84,232 5,492 6.52% 76,251 5,004 6.56%
Equity securities ............ 13,114 767 5.85% 5,503 336 6.11% 2,930 176 6.01%
Tax-exempt investment
securities ................. 22,207 1,231 5.54% 14,746 873 5.92% 15,902 1,057 6.65%
Loans ........................ 293,007 25,487 8.70% 265,533 23,199 8.74% 244,520 21,722 8.88%
TOTAL .................. 458,752 $36,267 7.91% 372,889 $ 30,055 8.06% 341,121 $ 28,053 8.22%
Noninterest-earning assets ..... 32,485 31,732 28,664
TOTAL ASSETS ................... $491,237 $404,621 $369,785
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits .............. $42,586 $514 1.21% $41,446 $510 1.23% $36,768 $662 1.80%
Savings deposits ............. 101,312 3,600 3.55% 74,302 2,116 2.85% 69,604 1,890 2.72%
Time deposits ................ 200,623 11,530 5.75% 171,626 9,696 5.65% 157,572 8,706 5.53%
Short-term borrowings ........ 25,660 1,353 5.27% 12,287 584 4.75% 7,530 422 5.60%
Long-term borrowings ......... 37,888 2,257 5.96% 31,036 1,885 6.07% 29,050 1,849 6.36%
TOTAL .................. 408,069 $19,254 4.72% 330,697 $ 14,791 4.47% 300,524 $ 13,529 4.50%
Noninterest-bearing liabilities:
Demand deposits .............. 37,075 33,254 32,248
Other liabilities ............ 5,537 4,241 4,190
Shareholders' equity ......... 40,556 36,429 32,823
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ......... $491,237 $404,621 $369,785
NET INTEREST SPREAD ............ 3.19% 3.59% 3.72%
INTEREST EXPENSE AS A
PERCENT OF EARNING ASSETS .... 4.20% 3.97% 3.97%
NET INTEREST INCOME MARGIN ..... $17,013 3.71% $15,264 4.09% $14,524 4.25%
</TABLE>
Average nonaccrual loans included in average loans for 1997, 1996 and 1995
were $680,000, $2,167,000 and $592,000, respectively. Loan fees included
in interest income were $483,000, $356,000 and $275,000 in 1997, 1996 and
1995, respectively.
45 <PAGE>
