SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-10958
DROVERS BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2209390
(State or other jurisdiction of incorporation or organization)(IRS employer ID)
30 SOUTH GEORGE STREET, YORK, PA 17401
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (717) 843-1586
NONE
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1999
Common Stock 4,695,606 Shares
1 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition ................................... 3
March 31, 1999 and December 31, 1998
Consolidated Statements of Income ...................................... 4
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income ........................ 5
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows .................................. 6
Three Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements ............................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................ 11
PART II OTHER INFORMATION
SIGNATURES .............................................................. 17
2 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
MARCH 31, DEC 31,
ASSETS 1999 1998
Cash and due from banks ................................ $ 15,914 $ 24,145
Money market investments ............................... 516 479
Investment securities (fair value $172,804 and $162,556) 171,998 161,619
Loans (net of unearned income of $3,210 and $3,253) .... 408,064 390,109
Reserve for loan losses ................................ 4,114 3,912
___________________
Net loans .............................................. 403,950 386,197
Bank premises and equipment ............................ 15,916 15,901
Other assets ........................................... 10,321 9,452
___________________
TOTAL ASSETS ........................................... $618,615 $597,793
===================
LIABILITIES
Deposits:
Noninterest-bearing .................................... $ 48,273 $ 55,339
Interest-bearing ....................................... 421,840 402,333
___________________
Total deposits ......................................... 470,113 457,672
Federal funds purchased and securities sold under
agreements to repurchase .............................. 22,413 23,325
Other borrowings ....................................... 69,769 62,830
Other liabilities ...................................... 7,021 5,773
___________________
TOTAL LIABILITIES ...................................... 569,316 549,600
SHAREHOLDERS' EQUITY
Common stock($3.33 par value), 15,000,000 shares
authorized; issued and outstanding--4,695,606 shares
in 1999 and 4,468,461 shares in 1998 ................... 14,892 14,881
Additional paid-in capital ............................. 18,902 18,891
Retained earnings ...................................... 14,448 13,173
Accumulated other comprehensive income.................. 1,057 1,248
___________________
TOTAL SHAREHOLDERS' EQUITY ............................. 49,299 48,193
___________________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $618,615 $597,793
===================
See notes to consolidated financial statements.
3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) THREE MONTHS
ENDED MARCH 31,
1999 1998
INTEREST INCOME
Interest and fees on loans ................ $8,113 $7,170
Interest on deposits with banks ........... 7 5
Interest and dividends on
investment securities .................... 2,528 2,806
________________
Total interest income ..................... 10,648 9,981
INTEREST EXPENSE
Interest on deposits ...................... 4,348 4,195
Federal funds purchased and securities
sold under agreements to repurchase ...... 220 365
Interest on borrowed funds ................ 895 731
________________
Total interest expense .................... 5,463 5,291
________________
Net interest income ....................... 5,185 4,690
Provision for loan losses ................. 363 239
________________
Net interest income after
provision for loan losses ................ 4,822 4,451
OTHER INCOME
Trust income .............................. 338 270
Service charges on deposit accounts ....... 434 375
Securities gains .......................... 63 222
Net gains on loan sales ................... 349 247
Equity in losses of real estate ventures... -54 -37
Other ..................................... 302 253
________________
Total other income ........................ 1,432 1,330
OTHER EXPENSES
Salaries and employee benefits ............ 2,219 2,016
Occupancy and premises .................... 304 251
Furniture and equipment ................... 341 295
Marketing ................................. 174 151
Net cost of operation
of other real estate ..................... -1 6
Supplies .................................. 155 119
Other taxes ............................... 109 96
Other ..................................... 754 763
________________
Total other expenses ...................... 4,055 3,697
________________
Income before income taxes ................ 2,199 2,084
Applicable income taxes ................... 387 476
________________
NET INCOME ................................ $1,812 $ 1,608
================
PER SHARE DATA
Net income ................................ $ 0.39 $ 0.34
================
Net income, assuming dilution.............. $ 0.38 $ 0.34
================
Dividends ................................. $ 0.11 $ 0.10
=================
See notes to consolidated financial statements.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) THREE MONTHS
ENDED MARCH 31,
1999 1998
_____________________________________________________________________________
Net income ............................................ $1,812 $1,608
Other comprehensive income:
Unrealized gains (losses) on securities arising during
period .............................................. -265 288
Reclassification adjustment for gains included in net
income .............................................. -25 -222
____________________
Other comprehensive income (loss) before tax .......... -290 66
Income taxes (benefits) related to other comprehensive
income .............................................. -99 23
____________________
Other comprehensive income (loss) ..................... -191 43
____________________
COMPREHENSIVE INCOME .................................. $1,621 $1,651
====================
See notes to consolidated financial statements.
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) THREE MONTHS
ENDED MARCH 31,
1999 1998
______________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 1,812 $ 1,608
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization........................ 314 330
Net amortization of investment security premiums .... 58 49
Provision for loan losses ........................... 363 239
Gain on sale of securities held-to-maturity ......... -38 0
Gain on sale of securities available-for-sale ....... -25 -222
Gain on sale of fixed assets ........................ 0 0
Loans originated for sale ........................... -20,317 -14,450
Proceeds from sales of loans ........................ 20,773 15,045
Gain on sale of loans ............................... -349 -247
(Gain) loss on sale of other real estate ............ -5 0
Net deferred loan fees .............................. -297 -282
Equity in losses of real estate ventures............. 55 37
Increase in interest/dividends receivable ........... -86 -2
Increase in interest payable ........................ 278 279
Increase in other assets ............................ -384 -820
Increase in other liabilities ....................... 788 2,201
___________________
Net cash provided by operating activities ........... 2,940 3,765
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities
held-to-maturity ................................... 8,316 1,457
Proceeds from sales and maturities of securities
available-for-sale ................................. 11,487 12,877
Purchases of securities held-to-maturity ............ 0 0
Purchases of securities available-for-sale .......... -30,467 -5,095
(Increase)decrease in net loans ..................... -18,056 -27,479
Capital expenditures ................................ -322 -103
Proceeds from sale of fixed assets .................. 0 1
Net (purchase) return of investment in real estate
ventures ........................................... -205 -721
Proceeds from sale of other real estate ............. 153 134
____________________
Net cash used in investing activities ............... -29,094 -18,929
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease)in demand deposits
and savings accounts ............................... 3,137 22,845
Net increase in certificates of deposit ............. 9,310 1,982
Net increase in federal funds purchased
and repurchase agreements .......................... -912 -11,774
Net increase (decrease) in other borrowings ......... 6,951 9,954
Payments made for capital leases .................... -11 -10
Dividends paid ...................................... -536 -445
Proceeds from issuance of common stock .............. 21 55
____________________
Net cash provided by financing activities ........... 17,960 22,607
____________________
NET DECREASE IN CASH & CASH EQUIVALENTS ............. -8,194 7,443
CASH & CASH EQUIVALENTS AT JANUARY 1, ............... 24,624 14,928
____________________
CASH & CASH EQUIVALENTS AT MARCH 31, ................ $16,430 $22,371
====================
See notes to consolidated financial statements.
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments (including normal recurring accruals)
considered necessary to present fairly Drovers Bancshares' financial position
as of March 31, 1999 and December 31, 1998. Operating results and changes in
cash flows for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. For further information, refer to the consolidated financial
statements and footnotes included in the Annual Report for the year ended
December 31, 1998.
NOTE B - CALCULATION OF EARNINGS PER SHARE
On April 28, 1999, the Corporation declared a 5% stock split to shareholders
of record on May 7, 1999 and payable May 28, 1999. Net income per share is
computed based on the weighted average number of shares outstanding each
period, giving retroactive effect to the 5% dividend declared in 1999, the
3-for-2 stock split paid in 1998 and a 5% dividend paid in 1997. Earnings per
common share, assuming dilution gives effect to all dilutive potential common
shares during each period.
NOTE C - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
Classified as held-to-maturity as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government corp and agencies ... $ 2,486 $ 55 $0 $ 2,541
Obligations of states and political
subdivisions ......................... 15,853 634 0 16,487
Mortgage-backed securities and
collateralized mortgage obligations .. 7,681 126 9 7,798
_______________________________________
Total investment securities ........... $26,020 $815 $9 $26,826
=======================================
</TABLE>
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C - INVESTMENT SECURITIES, continued
The amortized cost and estimated fair value of investment securities
classified as available-for-sale as of March 31, 1999 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 7,510 $ 63 $ 5 $ 7,568
Obligations of states and political
subdivisions ........................ 7,539 206 57 7,688
Corporate obligations ................ 10,153 71 54 10,170
Mortgage-backed securities and
collateralized mortgage obligations . 100,683 1,010 368 101,325
_______________________________________
Total debt securities ................ 125,885 1,350 484 126,751
Equity securities .................... 18,491 821 85 19,227
_______________________________________
Total investment securities .......... $144,376 $2,171 $569 $145,978
=======================================
The amortized cost and estimated fair value of investment securities
Classified as held-to-maturity as of December 31, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 8,476 $ 139 $ 0 $ 8,615
Obligations of states and political
subdivisions ........................ 16,926 697 0 17,623
Mortgage-backed securities and
collateralized mortgage obligations . 8,857 124 23 8,958
_______________________________________
Total investment securities .......... $34,259 $ 960 $ 23 $ 35,196
=======================================
The amortized cost and estimated fair value of investment securities
Classified as available-for-sale as of December 31, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
US Treasury securities and obligations
of US government corp and agencies .. $ 7,014 $ 105 $ 0 $ 7,119
Obligations of states and political
subdivisions ........................ 7,541 243 24 7,760
Corporate obligations................. 4,726 21 81 4,666
Mortgage-backed securities and
collateralized mortgage obligations . 88,304 973 243 89,034
______________________________________
Total debt securities ................ 107,585 1,342 348 108,579
Equity securities .................... 17,884 930 33 18,781
______________________________________
Total investment securities .......... $125,469 $2,272 $381 $127,360
======================================
For additional information, see pages 22-23 of the Corporation's 1998 Annual
Report.
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D - LOANS
Loans are comprised of the following as of March 31, 1999 and
December 31, 1998:
MARCH 31, DEC 31,
(In thousands) 1999 1998
Commercial, financial and industrial loans ........... $121,685 $117,997
Real estate mortgage loans:
Real estate construction-related ................... 14,981 13,523
Real estate mortgage loans secured by
1-4 family residential properties ................ 127,968 126,542
Other real estate .................................. 111,431 100,585
____________________
Total real estate mortgage loans ..................... 254,380 240,650
Consumer loans:
Monthly payment .................................... 31,062 30,498
Other revolving credit ............................. 848 791
____________________
Total consumer loans ................................. 31,910 31,289
Leasing and other .................................... 89 173
____________________
Total loans .......................................... $408,064 $390,109
====================
Changes in the reserve for loan losses for the periods ended March 31, were
as follows:
(In thousands) 1999 1998
Balance, beginning of year ........................... $3,912 $3,304
Provision for loan losses ............................ 363 239
LESS: Loans charged-off .............................. 167 62
Recoveries ........................................... 6 30
____________________
Balance, March 31 .................................... $4,114 $3,511
====================
As of March 31, 1998, the total recorded investment in impaired loans was
$2,611,000. Nonaccrual loans at March 31, 1999 were $1,110,000 compared to
$1,435,000 at December 31, 1998.
Residential mortgage loans with a book value of $5,085,000 were held for sale
at March 31, 1999. The cumulative fair value exceeded the book value of these
loans. Loans held for sale are included in total loans. During the first
quarter of 1999, the Corporation capitalized $130,000 in loan servicing
rights and amortized $50,000.
For additional information, see pages 23-24 of the Corporation's 1999 annual
report.
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E - COMPREHENSIVE INCOME
The income tax expense or benefit allocated to each component of other
comprehensive income for the periods ended March 31, were as follows:
(In thousands) 1999 1998
Unrealized gains (losses) on securities arising during
period ............................................... $-90 $98
Reclassification adjustment for gains included in
net income ........................................... -9 -75
_________________
Income taxes (benefits) related to other comprehensive
income ............................................... $-99 $23
=================
Accumulated other comprehensive income as of March 31, was as follows:
(In thousands) 1999 1998
Balance, January 1,..................................... $1,248 $1,593
Current-period change .................................. -191 43
_________________
Balance, March 31, ..................................... $1,057 $1,636
=================
All components of accumulated other comprehensive income were as a result of
unrealized gains (losses) on investment securities available-for-sale.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The following comparison of actual balances indicates how the Corporation has
generated and employed its funds for the three months ending March 31, 1999:
BALANCE BALANCE
MARCH 31, INCREASE DEC 31,
1999 (DECREASE) % 1998
FUNDING USES: (In thousands)
Money market investments ............ $ 516 $ 37 7.7% $ 479
Investment securities ............... 171,998 10,379 6.4% 161,619
Loans (net) ......................... 403,950 17,753 4.6% 386,197
_______________________________________
Total interest-bearing assets ....... 576,464 28,169 5.1% 548,295
Noninterest-bearing assets .......... 42,151 -7,347 -14.8% 49,498
_______________________________________
TOTAL USES .......................... $618,615 $20,822 3.5% $597,793
=======================================
FUNDING SOURCES:
Interest-bearing demand deposits .... $ 51,635 $ 424 8.3% $ 51,211
Savings deposits .................... 130,237 8,758 7.2% 121,479
Time deposits ....................... 239,968 10,325 4.5% 229,643
Short-term borrowings ............... 22,413 -912 -3.9% 23,325
Long-term borrowings ................ 69,769 6,939 1.1% 62,830
_______________________________________
Total interest-bearing liabilities .. 514,022 25,534 5.2% 488,488
Noninterest-bearing demand deposits . 48,273 -7,066 -12.8% 55,339
Other liabilities ................... 7,021 1,248 21.6% 5,773
Shareholders' equity ................ 49,299 1,106 2.3% 48,193
_______________________________________
TOTAL SOURCES ....................... $618,615 $20,822 3.5% $597,793
=======================================
Total assets increased $20,822,000 from December 31, 1998. Loans grew
$17,753,000, or 4.6%, and investments grew $10,379,000, or 6.4%. The growth
in loans and investments was partially offset by an $8,231,000 decrease in
cash and due from banks. Commercial loan demand was strong, accounting for
$14,514,000 of the loan growth. The growth in commercial loans includes a
$10,846,000, or 10.8%, increase in commercial loans secured by real estate.
Consumer loan and residential mortgage growth remained flat.
During the first quarter of 1999, management increased holdings in investment
securities $10,379,000 to leverage the Corporation's strong capital base.
Total investment purchases were $30,467,000. The purchases were mostly fixed
rate mortgage-backed and collateralized mortgage obligations and variable rate
corporate obligations. The Corporation also sold $5,991,000 of U.S.
government corporate and agency bonds, classified as held-to-maturity. These
bonds were within three months of a probable call date. The sales resulted in
gains of $26,000.
Deposits funded most of the asset growth during the quarter. Total deposits
grew $12,441,000. Most of the total deposit growth was in certificates of
deposit and other time deposits which increased $10,325,000, or 4.5%, and
savings deposits which increased $8,758,000, or 7.2%. The savings growth
includes the Corporation's Indexed Money Fund, a savings product that pays a
money market interest rate. The Indexed Money Fund increased $3,989,000. The
growth in time deposits and savings deposits was partially offset by a
$7,066,000 decrease in noninterest-bearing deposits.
11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LOAN QUALITY
Loans totaling $2,611,000 were classified as impaired at March 31, 1999. This
compares to $1,748,000 at December 31, 1998. Loans to one borrower for
$1,000,000 were recently classified as impaired when possible credit problems
became known. The loans are secured by real estate and investment securities.
Nonaccrual loans were $1,110,000 compared to $1,435,000 at the end of 1998.
Loan charge-offs were $167,000 in the first quarter, of which $100,000 were
commercial loans and $67,000 were consumer loans. Recoveries were $6,000. At
March 31, 1999, the reserve for loan losses stood at 1.01% of total loans.
RESULTS OF OPERATION
Drovers Bancshares recorded net income of $1,812,000 and $1,608,000 for the
three months ended March 31, 1999 and 1998, respectively.
The return on assets (ROA) and return on equity (ROE) for the three months
ended March 31, 1999 was 1.22% and 14.87%, respectively. This compares to an
ROA and ROE for the same period last year of 1.21% and 14.67%, respectively.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on loans and
investments and the interest paid on deposits and other sources of funds. The
following table presents the trends in net interest income:
THREE MONTHS
ENDED MARCH 31,
(In thousands) 1999 1998 99/98
Interest income ............ $10,648 $9,981 6.7%
Interest expense ........... 5,463 5,291 3.3%
__________________________
Net interest income ........ 5,185 4,690 10.6%
Provision for loan losses .. 363 239 51.9%
__________________________
Net interest income after
provision for loan losses . $ 4,822 $4,451 8.3%
==========================
The Corporation's largest category of earning assets consists of loans to
businesses and individuals. The majority of earning assets are supported by
interest-bearing commercial and consumer deposits and shareholders' equity.
Changes in net interest income are determined by variations in the volume and
mix of assets and liabilities as well as their sensitivity to interest rate
movements.
Net interest income increased $495,000, or 10.6%, compared to the first
quarter of 1998. The net interest margin remained steady at 3.73% in the
first quarter of this year compared to 3.75% last year. An increase in
earning assets offset any decline in yields. Average earning assets were
$562,943,000 and $507,029,000 during the first quarter of 1999 and 1998,
respectively. The first quarter of 1998 margin included about $100,000 in
non-recurring loan service charges. The fourth quarter 1998 margin was 3.61%
and averaged 3.67% for the year. The first quarter average yield on time
deposits declined 0.18% boosting the margin from the fourth quarter 1998.
12 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NET INTEREST INCOME, continued
The provision for loan losses increased from $239,000 last year to $363,000 in
the first quarter of 1998. First quarter net charge-offs were $161,000
compared to $32,000 for the same period last year. Loans have increased
$67,084,000, or 19.7%, over the past twelve months. The reserve for loan
losses as a percentage of loans was 1.01% at March 31, 1999. This compares to
1.00% at the end of 1998.
NONINTEREST INCOME
THREE MONTHS
ENDED MARCH 31,
(In thousands) 1999 1998 98/97
Trust income ........................ $ 338 $ 270 25.2%
Service charges on deposit accounts . 434 375 15.7%
Securities gains .................... 63 222 -71.6%
Net gains on loan sales ............. 349 247 41.3%
Equity in losses of
real estate ventures................ -54 -37 45.9%
Other ............................... 302 253 19.4%
_______________________
Total ............................... $1,432 $1,330 7.7%
=======================
Noninterest income increased $102,000, or 7.7%, during the first quarter.
Net gains on residential mortgage loan sales were $349,000 in the first
quarter, a 41.3% increase over the same period last year. Mortgage loan sales
totaled about $20,317,000 in the first quarter. Securities gains declined
$159,000. The Corporation liquidated a portion of its community bank stock
portfolio in the first quarter of 1998.
Income from the Investment Services and Trust Division increased $68,000
during the first quarter. The fair value of investments managed by the
division was $258,849,000 at March 31, 1999, an increase of $29,866,000, or
13.0%, over the prior year. The division has experienced growth in employee
benefits, personal trust and investment management accounts. Overall
increases in the equity markets the past three years helped boost the value of
assets managed and the related fee income.
Service charges on deposit accounts increased $59,000 during the first quarter.
An increase of $34,000 in collection of insufficient fund and return check
charges caused most of the growth.
Other income increased $49,000, or 19.4%. The Corporation offers ATM and
debit cards, charges surcharges for non-customers using our ATM machines and
provides electronic interchange services for various merchants. The fees
associated with these electronic transactions have steadily increased and
account for $39,000 of the increase in other income.
13 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
NONINTEREST EXPENSE
THREE MONTHS
ENDED MARCH 31,
(In thousands) 1999 1998 99/98
Salaries and employee benefits . $2,219 $2,016 10.1%
Occupancy and premises ......... 304 251 21.1%
Furniture and equipment ........ 341 295 15.6%
Marketing ...................... 174 151 15.2%
Net cost of operation
of other real estate .......... -1 6 -116.7%
Supplies ....................... 155 119 30.3%
Other taxes .................... 109 96 13.5%
Other .......................... 754 763 -1.2%
________________________
Total .......................... $4,055 $3,697 9.7%
========================
Noninterest expense increased $358,000, or 9.7%, compared to the first
quarter of 1998. Salaries and benefits are the largest component of
noninterest expense and increased $203,000 for the quarter. Staffing at the
new Hellam office, which opened in January 1999, contributed to the increase.
Average full-time equivalent staffing levels were 219 during the quarter ended
March 31, 1999 compared to 215 a year ago.
Occupancy and premises expense increased $53,000. The opening of the Hellam
office contributed to this increase. Furniture and equipment expense increased
$46,000 due to increases in equipment depreciation and maintenance contracts.
Other expenses declined $9,000 as increases in data processing, legal and loan
servicing rights amortization were offset by a decrease in consulting services.
TAXATION
The Corporation recognized a provision for income taxes of $387,000 for the
three months ending March 31, 1999. The average tax rate, applicable income
taxes divided by income before taxes, was 17.6%. This compares to an average
tax rate of 16.6% for all of 1998. The Corporation manages its tax rate
through the purchase of tax exempt investment securities and investments in
low-income housing partnerships that provide historic and low-income tax
credits.
MARKET RISK
The Corporation's primary market risk is the risk of changes in net interest
income caused by changes in interest rates. Management monitors ongoing
interest rate risk through monthly "gap" reports and quarterly computer
simulations of net interest income. Measurements continue to indicate the
Corporation is slightly asset sensitive but well within the tolerance limits
established by Management.
FUTURE OUTLOOK
The Corporation plans to construct two new branch offices in 1999. Land near
Dillsburg, Pennsylvania was purchased in 1998. Construction of the new branch
should begin in May 1999. A contract has been signed to purchase land at the
Newberrytown exit of I-83 in Newberry Township for a new branch office.
Construction of this branch should begin in July 1999. We plan to open both of
these branches in the fourth quarter of 1999.
The Corporation opened its first loan production office (LPO) in April 1999.
The office is located at the Rossmoyne Business Center in Cumberland County,
near Harrisburg. This is the Corporation's first facility outside York County.
The staff at the LPO will initially focus on commercial lending.
14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FUTURE OUTLOOK, continued
The Financial Accounting Standards Board issued Statement of Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
Standard becomes effective for fiscal years beginning after June 15,
1999. The Corporation has not completed its assessment of the impact, if
any, to earnings from applying this Standard.
YEAR 2000 ISSUE
The following contains forward-looking statements which involve risks and
uncertainties. The actual impact on the Corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
The Year 2000 issue ("Y2K") is the result of some computer systems' inability
to recognize and process a date in the year 2000. This could result in system
failures, miscalculations and disruptions of normal business operations.
Corporation's State of Readiness
The Corporation relies heavily on various internal information technology (IT)
and non-information technology (Non-IT) systems and third parties. The
Corporation has identified and tested all critical IT and Non-IT systems. A
small number of systems were found to be noncompliant. As of December 31,
1999, remediation, testing and implementation of all mission critical systems
was complete. The Corporation continues to assess all new systems and
significant upgrades to existing systems.
Year 2000 certification information was requested from all material third
parties, including loan customers. Based on the responses received and
information gathered, the Corporation has not identified any material third
parties with Year 2000 issues that would interrupt normal business operations.
Costs of Year 2000
The costs to remediate the Corporation's IT and Non-IT systems have been minor
and are expected to total less than $100,000. As of December 31, 1998, $65,000
has been expended on Year 2000 costs. An additional $4,000 was expensed
in the first quarter of 1999. The Corporation does not expect the amounts
required to be expensed over the next 9 months to have a material effect on the
financial position or results of operations. However, if compliance is not
achieved in a timely manner by the Corporation or any of its significant
related third parties, be it a supplier of services or a customer, the Y2K
issue could possibly have a material effect on the Corporation's operations
and financial position.
15 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 ISSUE, continued
Risks of Year 2000
At present, the Corporation believes its progress in remedying the critical
systems and monitoring its third parties' Y2K readiness is on target. The Y2K
computer problem creates risk for the Corporation from unforeseen problems in
its own computer systems and from third party vendors' computer systems, which
interface with the Corporation's computer applications. Failure of third
party systems relative to the Y2K issue could have a material impact on the
Corporation's ability to conduct business.
Contingency Plans
At the present time, the Corporation is not aware of any reasonably likely
scenarios that would materially disrupt business operations. The Corporation
is developing contingency plans to address situations that could arise despite
a low probability of occurrence. The Corporation has adopted the FFIEC four
step plan: organizational planning, business impact analysis, development of
plan and validation. The organizational planning phase and a business impact
analysis have been completed. Contingency plans are significantly complete
and will be tested throughout the process. The Corporation expects to
complete contingency planning by June 30, 1999, but will continue updating and
testing the plan throughout the year.
For additional information, see pages 38-39 of the Corporation's 1998 Annual
Report.
16 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART II OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DROVERS BANCSHARES CORPORATION
__/S/ A. Richard Pugh___________________
A. Richard Pugh, Chairman, President and
Chief Executive Officer
__/S/ Debra A Goodling__________________
Debra A. Goodling, Executive Vice President
and Treasurer
Principal Financial Officer
__/S/ John D. Blecher__________________
John D. Blecher, Senior Vice President,
Secretary and Assistant Treasurer
Principal Accounting Officer
Date: May 10, 1999
17 <PAGE>
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