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, 1998
[ ] 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 $3.33 PAR NASDAQ
(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, 1999 was $88,960,000. The number of shares of
Drovers Bancshares Corporation Common Stock, $3.33 par value, outstanding at
February 28, 1999 was 4,468,461.
1<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1998 are
incorporated by reference into Parts I, II and IV. Portions of the Proxy
Statement for the annual shareholders meeting to be held May 27, 1999
incorporated by reference in Part III.
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
PART I
Item 1. Business ......................................................... 5
Item 2. Properties ....................................................... 12
Item 3. Legal Proceedings
The information required by this item is contained on page 21 of the
Corporation's 1998 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 1998 Annual Report.
Item 6. Selected Financial Data
The information required by this item is contained on pages 12-13 of the
Corporation's 1998 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 34-42 of the
Corporation's 1998 Annual Report.
Item 7a. Quantitative and qualitative disclosures about market risk
The information required by this item is contained on pages 34-42 of the
Corporation's 1998 Annual Report.
Item 8. Financial Statements and Supplementary Data ...................... 14
Additional information required by this item is contained on pages 15-32
and page 43 of the Corporation's 1998 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 ............... 25
Additional information required by this item is contained on pages 4-9
of the Definitive Proxy Statement dated April 23, 1999.
Item 11. Executive Compensation
The information required by this item is contained on pages 7-12
of the Definitive Proxy Statement dated April 23, 1999.
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 23, 1999.
2<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained on pages 17
of the Definitive Proxy Statement dated April 23, 1999.
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 1998 Annual Report.
B. There were no filings on Form 8-K for the year ended December 31, 1998.
C. Listing of Exhibits.
Exhibit 3.1 - Articles of Incorporation and Bylaws. (incorporated by
reference from Exhibit 3.1 of the Drovers Bancshares Corporation
Form 10-K for the year ended December 31, 1997)
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 10(a) - Amended and Restated Supplemental Pension Plan, dated
September 28, 1994, between the Bank and A. Richard Pugh and First
Amendment thereto, dated November 14, 1995 ...........................27
Exhibit 10(b) - Amended and restated Change of Control Agreement, dated
November 14, 1995, among the Corporation, the Bank and
A. Richard Pugh ......................................................39
Exhibit 10(c) - Form of Change of Control Agreement among the Corporation
the Bank and each of the following Executive Vice Presidents of the
Company: Debra A. Goodling, Michael J. Groft and Shawn A. Stine .....44
Exhibit 10(d) - The Corporation's 1995 Stock Option Plan. (incorporated
herein by reference to Exhibit 99.1 to the Corporation's Registration
Statement on Form S-8, as filed with the Securities and Exchange
Commision on December 31, 1998)
Exhibit 10(e) - The Corporation's Incentive Stock Option Plan.
(incorporated herein by reference to Exhibit 99.1 to the Corporation's
Registration Statement on Form S-8 as filed with the Securities and
Exchange Commission on May 24, 1995)
Exhibit 11 - Statements Regarding Computation of Per Share Earnings.
(incorporated by reference to Note 15 on page 28 of the Corporation's
1998 Annual Report)
Exhibit 13 - Annual Report to Security Holders.
3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
C. Listing of Exhibits, Continued
Exhibit 21 - Subsidiaries of the Registrant. (incorporated by reference
to page 34 of the Corporation's 1998 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.
4<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, 1998, the Bank employed 215 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 six out-of-town offices located in Shrewsbury, Emigsville,
Hellam, York Haven, Dover and Red Lion, Pennsylvania. On January 4, 1999, a
full-service bank office opened in Hellam Township, Pennsylvania. The Bank
purchased land near Dillsburg, Pennsylvania in late 1998 with construction of
a new branch office at the location to begin in early 1999. The Bank expects
to open its first loan production office (LPO) in the first quarter of 1999.
The office will be located in Cumberland County, near Harrisburg. This will
be the Bank's first facility outside York County. The staff at the LPO will
initially focus on commercial lending. Negotiations continue to purchase land
in Newberrytown, Pennsylvania to establish a new branch office. The Bank also
has ten remote service facilities located at the York Fairgrounds, York
College of Pennsylvania and eight inside Shipley Stores, Inc. convenience
stores.
In December 1993, the Bank purchased the office building attached to the
Bank's main office. 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 accounting, corporate banking,
and executive offices of the Bank are located on the fifth floor of
96 South George.
The Bank is the sole limited partner in four ventures to renovate and operate
apartment buildings. The first building opened in 1994 with the second
building opening in 1996. The third building opened in December 1998. The
fourth building is scheduled to open in 1999. All four partnerships 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, 1998 and 1997 were $5,385,000 and $2,292,000,
respectively.
5 <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.
Federal Reserve approval may be required before the Company or its nonbank
subsidiaries may begin to engage in any new activity and before acquiring a
business.
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 assets or earnings of any subsidiary through the payment of such
dividends or otherwise is necessarily subject to the prior claims of creditors
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Dividend Restrictions, Continued
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, 1998, 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
FDIC Insurance, Continued
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
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Regulation of the Bank, Continued
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.
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. In addition, the Securities and
Exchange Commission (the "SEC") adopted, effective August 4, 1998, an
interpretive release providing guidance to public companies, such as the
Company, with respect to making meaningful disclosure in it Management's
Discussion and Analysis of Financial Condition under the heading "Year
2000 Disclosure".
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
COMPETITION
The financial services industry in the Company's service area is extremely
competitive. The Company's competitors within 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.
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.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
INTERSTATE BANKING LEGISLATION, Continued
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.
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 Land in Dillsburg
Landvale Street Tristan Drive
York Haven, PA 17370 Dillsburg, PA 17019
The Drovers & Mechanics Bank is the sole occupant of all land and buildings
listed above.
The following property is pledged as collateral for a mortgage loan secured
to purchase the property:
96 South George Office Building
96 South George Street
York, PA 17401
The five-story office building adjacent to the Main Office provides for
future growth and enables the Corporation to maintain headquarters in
downtown York. The accouting, corporate banking, and 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, and is renewable
for three five-year options.
South York Plaza Office
275 Pauline Drive
in the Giant Food Store
York, PA 17402
$2,917.00 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
3140 Cape Horn Road
Red Lion, PA 17356
$2,625.00 per month land rental; lease expires March 1, 2012, and is renewable
for 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
$4,167.00 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.
Hellam Office
599 W. Market Street
Hellam, PA 17406
$3,500.00 per month land rental; lease expires October 10, 2007. The lease is
renewable for three five-year options and contains a purchase option.
Building owned by the Corporation.
Mt. Rose Avenue Office
1095 Mt. Rose Avenue
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.
Construction of a new office in Dillsburg, Pennsylvania will begin
in early 1999. The Corporation expects to open its first loan production
office (LPO) near Harrisburg in the first quarter of 1999. The staff at the
LPO will initially focus on commercial lending. This will be the
Corporation's first facility outside York County. All construction costs
related to these projects will be funded from operations.
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:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
U.S. Government ............. $ 6,559 $ 10,519 $ 10,538
U.S. Agencies ............... 106,927 126,769 90,348
Municipal ................... 24,686 24,414 18,465
Corporate ................... 4,666 486 500
Total debt securities ....... 142,838 162,188 119,851
Equity securities ........... 18,781 17,111 8,231
Total investment securities . $161,619 $179,299 $128,082
</TABLE>
The following table sets forth the contractual maturities of debt securities
classified as held-to-maturity at December 31, 1998:
<TABLE>
<CAPTION>
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
<S> <C> <C> <C> <C> <C>
U.S. Government .. $1,000 $1,485 $ 0 $ 0 $ 2,485
U.S. Agencies .... 0 1,678 6,292 6,878 14,848
Municipal ........ 303 3,288 8,743 4,592 16,926
Total ............ $1,303 $6,451 $15,035 $11,470 $34,259
</TABLE>
The following table depicts the average weighted yields of the held-to-
maturity investments by maturity at December 31, 1998:
<TABLE>
<CAPTION>
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
<S> <C> <C> <C> <C> <C>
U.S. Government .. 7.00% 6.65% 0.00% 0.00% 6.79%
U.S. Agencies .... 0.00% 5.93% 7.34% 6.54% 6.81%
Municipal ........ 7.93% 7.55% 5.40% 5.18% 5.80%
Total ............ 7.22% 6.92% 6.21% 5.99% 6.31%
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
<S> <C> <C> <C> <C> <C>
U.S. Government .. $2,513 $1,561 $ 0 $ 0 $ 4,074
U.S. Agencies .... 0 4,310 8,781 78,988 92,079
Municipal ........ 0 0 3,352 4,408 7,760
Other ............ 0 0 480 4,186 4,666
Total ............ $2,513 $5,871 $12,613 $87,582 $108,579
</TABLE>
The following table depicts the average weighted yields of the available-for-
sale investments by maturity at December 31, 1998:
<TABLE>
<CAPTION>
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
<S> <C> <C> <C> <C> <C>
U.S. Government .. 6.47% 5.53% 0.00% 0.00% 6.11%
U.S. Agencies .... 0.00% 6.58% 7.04% 6.85% 6.86%
Municipal ........ 0.00% 0.00% 5.17% 4.83% 4.98%
Other ............ 0.00% 0.00% 6.22% 6.90% 6.83%
Total ............ 6.47% 6.30% 6.51% 6.75% 6.69%
</TABLE>
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, 1998. 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 1998
Annual Report.
15 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LOAN DATA
Loans are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial, financial and
industrial ................ $117,620 $ 80,588 $ 72,776 $ 66,798 $ 59,943
Real estate:
Construction ............. 13,523 12,105 8,908 5,910 7,163
Mortgage ................. 227,914 188,775 167,751 141,565 120,392
Consumer ................... 34,132 35,280 37,150 45,548 46,168
Leasing and other (net) .... 173 245 26 9 6
Total domestic loans ......... 393,362 316,993 286,611 259,830 233,672
Foreign loans ................ 0 0 0 0 0
Total domestic and
Foreign loans ............... 393,362 316,993 286,611 259,830 233,672
Unearned income .............. -3,253 -3,320 -3,494 -4,425 -4,297
Loans net of unearned ........ 390,109 313,673 283,117 255,405 229,375
Reserve for loan losses ...... -3,912 -3,304 -3,130 -2,937 -2,638
Net loans .................... $386,197 $310,369 $279,987 $252,468 $226,737
</TABLE>
For additional information see Note 7 on page 23-24 of the Corporation's
1998 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, 1998
which, based on remaining scheduled repayments of principal, are due in the
periods indicated:
<TABLE>
<CAPTION>
AFTER
REMAINING MATURITIES ONE YR ONE TO OVER
(In thousands) OR LESS FIVE YRS FIVE YRS TOTAL
<S> <C> <C> <C> <C>
Domestic loans:
Commercial, financial and industrial . $85,617 $ 22,579 $ 9,424 $117,620
Real estate construction ............. 8,486 3,971 1,066 13,523
Foreign loans .......................... 0 0 0 0
Total .................................. $94,103 $ 26,550 $ 10,490 $131,143
Rate sensitivity:
Predetermined rate ................... $3,127 $ 20,380 $ 9,542 $ 33,049
Floating or adjustable rate .......... 90,976 6,170 948 98,094
Total .................................. $94,103 $ 26,550 $ 10,490 $131,143
</TABLE>
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:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AT YEAR END DECEMBER 31,
(In thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Domestic:
Nonaccrual loans ................. $1,435 $ 740 $ 615 $ 934 $ 416
90 days past due still accruing .. 7 33 0 9 6
Restructured loans ............... 1,203 0 1,139 791 818
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 .............................. $2,645 $ 773 $1,754 $1,734 $1,240
</TABLE>
Nonaccrual loans as a percentage of net loans at December 31, 1998 and 1997
were 0.37% and 0.24%, respectively. Restructured loans continued to consist of
commercial loans to one party. Interest is recognized under the accrual
method of accounting.
The Corporation held $1,748,000 of impaired loans at December 31, 1998. The
recorded allowance in impaired loans was $150,000.
The following table presents the changes in the balance of other real estate
over the past five years:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ....... $ 154 $ 803 $ 195 $ 0 $ 141
Assets acquired by foreclosure
or repossession ................... 277 211 822 300 0
Dispositions ....................... -252 -827 -203 -106 -152
Other (net) ........................ -31 -33 -11 1 11
Balance at end of year ............. $ 148 $ 154 $ 803 $ 195 $ 0
</TABLE>
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 1998 Annual Report.
18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
ANALYSIS OF RESERVE FOR LOAN LOSSES
<CAPTION>
YEARS ENDED DECEMBER 31,
(In thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance, January 1, ................ $ 3,304 $ 3,130 $ 2,937 $ 2,638 $ 2,332
Provision for loan losses .......... 1,266 386 645 501 382
Charge-offs:
Commercial, financial
and industrial .................. 522 0 25 31 19
Real estate - construction ....... 0 0 0 0 0
Real estate - mortgage ........... 0 0 215 45 0
Consumer ......................... 235 327 369 257 157
Total charge-offs .................. 757 327 609 333 176
Recoveries:
Commercial, financial
and industrial .................. 0 32 6 11 0
Real estate - construction ....... 0 0 0 0 0
Real estate - mortgage ........... 0 15 36 0 6
Consumer ......................... 99 68 115 120 94
Total recoveries ................... 99 115 157 131 100
Net charge-offs .................... 658 212 452 202 76
Balance, December 31, .............. $ 3,912 $ 3,304 $ 3,130 $ 2,937 $ 2,638
Ratio of net charge-offs to average
loans outstanding ................. 0.19% 0.07% 0.17% 0.08% 0.04%
</TABLE>
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 1998 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
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
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and industrial ...... $2,644 30.2% $ 977 25.6% $ 657 25.7%
Real Estate:
Construction ........ 62 3.5% 44 3.9% 46 3.1%
Mortgage ............ 401 58.4% 338 60.1% 321 59.1%
Consumer .............. 128 7.9% 131 10.3% 123 12.1%
Leasing and other ..... 0 0.0% 0 0.1% 0 0.0%
Unallocated ........... 677 n/a 1,814 n/a 1,983 n/a
Total ................. $3,912 100.0% $3,304 100.0% $3,130 100.0%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994
Percent Percent
Of Loans of Loans
Reserve To Total Reserve to Total
(In thousands) Amount Loans Amount Loans
<S> <C> <C> <C> <C>
Commercial, financial
and industrial ...... $ 515 26.2% $ 630 26.2%
Real Estate:
Construction ........ 16 2.3% 29 3.1%
Mortgage ............ 327 55.3% 204 52.3%
Consumer .............. 140 16.2% 120 18.4%
Leasing and other ..... 0 0.0% 0 0.0%
Unallocated ........... 1,939 n/a 1,655 n/a
Total ................. $2,937 100.0% $2,638 100.0%
</TABLE>
For additional information see Note 1 and Note 7 on pages 19-20 and 23-24,
respectively, of the Corporation's 1998 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:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Three months or less ............... $ 5,983 $ 4,675 $ 3,674
Over three months to six months .... 4,423 1,598 927
Over six months to twelve months ... 9,175 5,811 7,047
Over twelve months ................. 7,456 8,340 6,354
Total .............................. $27,037 $20,424 $18,002
</TABLE>
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.
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Federal funds purchased and securities sold under repurchase agreements
Balance at year-end $23,325 $31,360 $15,254
Average amount outstanding 23,820 24,548 12,210
Maximum amount outstanding at any month-end 40,586 44,342 18,843
Average interest rate for the year 5.17% 5.25% 4.75%
Average interest rate on year-end balance 4.63% 6.16% 5.24%
Other short-term borrowings
Balance at year-end $ 0 $ 0 $ 0
Average amount outstanding 4,597 1,112 77
Maximum amount outstanding at any month-end 13,000 6,000 4,000
Average interest rate for the year 5.65% 5.71% 5.47%
Average interest rate on year-end balance 0.00% 0.00% 0.00%
</TABLE>
21 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA
<TABLE>
Unaudited 1998
<CAPTION>
(In thousands, FIRST SECOND THIRD FOURTH
Except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
<S> <C> <C> <C> <C> <C>
Net interest income ...... $4,690 $4,735 $4,888 $4,942 $19,255
Provision for loan losses 239 229 179 619 1,266
Total noninterest income . 1,330 1,387 1,289 1,402 5,408
Total noninterest expense
and income taxes ....... 4,173 4,253 4,308 3,853 16,587
Net income ............... $1,608 $1,640 $1,690 $1,872 $6,810
PER SHARE DATA
Net income ............... $0.36 $0.37 $0.38 $0.42 $ 1.53
Net income,
assuming dilution ...... $0.36 $0.36 $0.37 $0.41 $ 1.51
</TABLE>
<TABLE>
1997
<CAPTION>
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
<S> <C> <C> <C> <C> <C>
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 ............... $0.31 $0.32 $0.33 $0.31 $ 1.27
Net income,
assuming dilution ...... $0.31 $0.32 $0.33 $0.31 $ 1.26
</TABLE>
Data adjusted to reflect a 3 for 2 stock split issued in 1998 and a 5% stock
dividend issued in 1997.
22 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
INTEREST DIFFERENTIAL
<CAPTION>
December 31,
1998 1997
(In thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Increase (decrease) in:
Money market investments and
interest-bearing deposits
with banks ...................... $ -38 $ 9 $ -29 $ -90 $ 5 $ -85
Federal funds sold ............... 0 0 0 0 0 0
Total money market investments ... -38 9 -29 -90 5 -85
Investment securities
Taxable investment securities ... -130 -426 -556 3,035 185 3,220
Equity securities ............... 290 -24 266 445 -14 431
Tax-exempt investment securities 71 -24 47 414 -56 358
Total investment securities ...... 231 -474 -243 3,894 115 4,009
Total loans ...................... 5,318 -322 4,996 2,394 -106 2,288
Total interest income ............ 5,511 -787 4,724 6,198 14 6,212
INTEREST EXPENSE
Increase (decrease) in:
Interest-bearing deposits
Demand .......................... 41 -21 20 12 -8 4
Savings ......................... 668 111 779 964 520 1,484
Time ............................ 1,031 -100 931 1,662 172 1,834
Total interest-bearing deposits .. 1,740 -10 1,730 2,638 684 3,322
Borrowed funds
Short-term borrowings ........... 143 -5 138 705 64 769
Long-term borrowings ............ 731 -117 614 406 -34 372
Total borrowed funds ............. 874 -122 752 1,111 30 1,141
Total interest expense ........... 2,614 -132 2,482 3,749 714 4,463
Increase in interest differential $2,897 $-655 $2,242 $2,449 $-700 $1,749
</TABLE>
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 1998 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, 1999, are
as follows:
Name: A. Richard Pugh Age: 58
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: 65
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.
Mr. Guyer retired from his position effective January 1, 1999.
Name: Michael J. Groft Age: 43
Position and Office: Executive Vice President of Drovers Bancshares
Corporation and Executive Vice President and Senior Lending 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: 40
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: Shawn A. Stine Age: 43
Position and Office: Executive 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.
Name: John D. Blecher Age: 37
Position and Office: Senior Vice President, Secretary and Assistant
Treasurer of Drovers Bancshares Corporation and Senior Vice President,
Secretary and Controller of The Drovers & Mechanics Bank. Mr. Blecher joined
the organization in February 1987. He has served as Controller since 1989.
Additional information required for this item is contained on pages 4-8 of the
Definitive Proxy Statement dated April 23, 1999.
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 24, 1999
(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____________
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/ Daniel E. Hess______________ _________________________________
Daniel E. Hess, Director Basil A. Shorb, III, Director
_/S/ Geroge W. Hodges____________ __/S/ D. John Sparler, Jr._______
George W. Hodges, Director D. John Sparler, Jr., Director
_/S/ Herbert D. Lavetan__________ _________________________________
Herbert D. Lavetan, Director Gary A. Stewart, Director
_________________________________ _________________________________
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, Senior Vice President,
President and Treasurer Secretary and Assistant Treasurer
Principal Financial Officer Principal Accounting Officer
25 <PAGE>
EXHIBIT 23
DROVERS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT AUDITORS'
We consent to the incorporation by reference in this Form 10-K of Drovers
Bancshares Corporation and Subsidiaries of our report dated January 15, 1999,
included in the 1998 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 15, 1999,
with respect to the consolidated financial statements incorporated herein by
reference.
/S/ Stambaugh Ness P.C.
York, Pennsylvania
March 24, 1999
26<PAGE>
Exhibit 10(a)
AMENDED AND RESTATED
CHANGE OF CONTROL AGREEMENT
AGREEMENT made this 14th day of November, 1995, by and between DROVERS
BANCSHARES CORPORATION and THE DROVERS & MECHANICS BANK, a Pennsylvania
corporation and a Pennsylvania state chartered bank, respectively, each with
offices in York, Pennsylvania, hereinafter collectively called "Company", and
A. RICHARD PUGH, hereinafter called "Executive."
BACKGROUND
Executive is employed by Company as President and Chief Executive
Officer. In consideration of Executive's past and future services, Company
entered into a Change of Control Agreement with Executive on September 28,
1994 ("Prior Agreement") to provide Executive compensation and other benefits
upon his termination of employment after a corporate change of control.
In consideration of the mutual covenants and agreements herein, and
intending to be legally bound hereby, the parties agree to amend and restate
the Prior Agreement as follows:
1. TERM - The term of this Agreement shall commence on the date
hereof and end on the earliest to occur of the following:
(a) Executive's death;
(b) Executive's permanent disability resulting
in his inability to fully perform or complete his duties
as President and Chief Executive Officer for a period
anticipated to exceed one hundred eighty 180) consecutive
days, provided, however, that in the event Company
maintains a long-term disability insurance plan on
the date Executive becomes disabled, Executive's
permanent disability shall be determined under the criteria
of the insurance policy;
(c) Retirement at or after age sixty-five (65);
(d) The date five (5) years after a Change of
Control as defined in Section 2;
(e) The date thirty-six (36) months after a Change of
Control Termination as defined in Section 2.
(f) The date eighteen (18) months after the termination
of Executive's employment if there is no Change of Control as
defined in Section 2 in the interim.
However, if Executive's death, permanent disability or retirement, as
defined above, occurs after a Change of Control Termination, this Agreement
shall terminate on thirty-six (36) months after such Change of Control
Termination.
27 <PAGE>
2. CHANGE OF CONTROL TERMINATION - Change of Control Termination
shall be deemed to have occurred if there is a Change of Control regarding
either or both corporations constituting Company and, during the Employment
Security Period, either of the following occurs: (i) Company terminates the
employment of Executive other than for Good Cause; or (ii) Executive
terminates his employment with Company following a Change in Control and for
Good Reason.
(a) "Change of Control" with respect to the Drovers
Bancshares Corporation or the Drovers & Mechanics Bank ("Target
Company") shall mean the occurrence of any of the following:
(i) the change in the Board of Directors
of Target Company, during any twenty-four (24) month
period endingon or after the date of this Agreement,
if the individuals whowere directors of Target Company
at the beginning of the period cease during such period
to constitute at least a majority of the Board of
Directors;
(ii) the commencement of a tender offer or
exchange offer by any entity, person or group (including
any affiliates of such entity, person or group, by other
than an affiliate of Company) for twenty-five percent
(25%) or more of the outstanding voting power of all
capital stock of Target Company;
(iii) the acquisition by any entity, person
or group (including any affiliates of such entity,
person or group) of beneficial ownership, as that term
is defined in Rule 13d-3 under the Securities Exchange
Act of 1934, of Target Company capital stock entitled
to twenty-five percent (25%) or more of the outstanding
voting power of all capital stock of Target Company;
(iv) the effective time of the merger,
consolidation, division, share exchange, or any other
transaction or a series of transactions outside the
ordinary course of business ("Business Combination"),
as a result of which the holders of the outstanding
voting capital stock of Target Company immediately prior
to such Business Combination, excluding any shareholder
who is a party to the Business Combination (other than
Company) or is such party' affiliate as defined in the
Securities Exchange Act of 1934, hold less than seventy-
five percent 75%) of the voting capital stock of the
surviving or resulting corporation;
(v) the transfer of substantially all of
the Target Company's assets other than to a wholly
owned subsidiary of Target Company.
(b) "Employment Security Period" shall mean the period
commencing eighteen (18) months prior to the Change of Control and
ending five (5) years after the Change of Control.
(c) "Good Cause" shall mean the occurrence of one or
more of the following events:
28 <PAGE>
(i) Executive's willful engagement in gross
misconduct that is materially injurious to Company;
(ii) excessive alcohol or drug abuse by
Executive which continually and materially
interferes with Executive's ability to perform
his duties as President and Chief Executive
Officer;
(iii) Executive's conviction or plea of nolo
contendere of a crime involving fraud, misappro-
priation, embezzlement or other violation of the
law of like nature or severity;
(iv) The voluntary filing or application by
Executive for relief in bankruptcy or other moratorium
law, or for the appointment of a receiver, trustee or
liquidator, or the making by Executive of a general
assignment of all his assets for the benefit of
creditors, which is not dismissed within sixty days,
unless any such action or event is attributable to a
judgment rendered against the Executive arising out
of his charitable or civic activities.
(v) Executive's willful failure to perform
his duties as President and Chief Executive
Officer in a manner generally consistent with
his past service;
(d) "Good Reason" shall mean the occurrence of one
or more of the following without Executive's prior written consent:
(i) an assignment to Executive of any
duties materially inconsistent with his
position as President and Chief Executive
Officer;
(ii) a reduction in Executive's fixed
salary or elimination of, or material adverse
modification to any incentive or other
supplemental currently taxable compensation
plan, except any such reduction, elimination
or modification that is applied generally to
senior executive officers of Company;
(iii) a relocation of Executive's principal
executive office outside of York County,
Pennsylvania, or any requirement that
Executive be based other than at Company's
principal executive offices in York,
Pennsylvania, except on a temporary basis in
the ordinary course of business;
(v) termination or material adverse
modification to any nonqualified deferred
compensation plan in which Executive
participates without substitution of
comparable benefits, except any such
29 <PAGE>
termination or modification that is
applied generally to senior executive officers
who had such benefits.
3. COMPENSATION AND BENEFITS - Upon a Change of Control Termination,
Company shall provide Executive, in addition to any other rights or benefits
to which Executive may be entitled by contract or under any policy or custom
of Company, the following:
(a) For a term commencing with such termination and
extending for three (3) years thereafter, Company shall pay
Executive an annual compensation equal to Executive's highest
compensation received in that calendar year included with the
period commencing with the calendar year in which this Agreement
is executed initially and extending to the calendar year in which
termination occurs (annualized as necessary). For purposes of the
foregoing, "compensation" shall be (i) salary without reduction for
any contribution to (aa) cash or (ii) deferred arrangements under
Section 401(k) of the Internal Revenue Code of 1986, as amended [or
successor provision] and (bb) any nonqualified deferred
compensation plan, plus (ii) non-deferred incentive compensation
(collectively "Compensation"), and shall be payable in equal
installments with such frequency as Company customarily pays its
payroll. For purposes of this paragraph (a), Executive's
Compensation will be reduced, beginning with the first month
following his re-employment with another employer, by fifty percent
(50%) of the Form W-2 income, with the new employer. Executive
shall have no obligation to mitigate his damages by seeking
employment following his termination of employment with Company.
(b) An amount equal to forty percent (40%) of his
Compensation, payable in one lump sum at the time of termination,
to compensate Executive for all expenses incurred by him in
connection with any search for a new job and/or any relocation.
Executive shall have no duty to demonstrate his need for, or to
account for the use of, the disbursement of same.
(c) Company shall provide, at its expense, for the
continuation in full force and effect for a period ending upon the
earlier to occur of Executive's death or three (3) years following
the Change of Control Termination, all health, dental, life
insurance and disability plans, programs and arrangements in which
Executive was entitled to participate immediately prior to such
termination, provided that his continued participation is possible
under the terms and provisions of such plans, programs and
arrangements, and under the laws and regulations applicable
thereto. If Executive's participation in any plan, program or
arrangement is barred, Company shall use its best efforts to obtain
and pay for, on Executive's behalf, individual insurance policies,
plans, programs or arrangements which provide benefits equivalent
to those which Executive is entitled to receive prior to the date
of termination. However, Company may, at any time, deny Executive
coverage under a health, dental, life insurance or disability plan,
program or arrangement, to the extent such coverage is duplicate of
coverage provided Executive by any subsequent employer. At the end
of the period of coverage, to the extent permitted by the plans and
programs, Executive shall have the option to have assigned to him,
any assignable insurance policy owned by Company and relating
specifically to him, including, without limitation, CNA-Continental
30 <PAGE>
Assurance Company policy #3348167, #3363137 and #3393056 if then in
force and owned by Company. Executive's right to continuation of
health and medical coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, shall commence at the end
of the three (3) year period following the Change of Control
Termination.
(d) Company shall provide, at its expense, for the
continuation in full force and effect for a period ending upon
the earlier to occur of Executive's death, retirement, or three (3)
years following the Change of Control Termination, all pension,
profit-sharing, savings, and nonqualified deferred compensation
plan including the supplemental retirement income plan in which
Executive was entitled to participate immediately prior to such
termination, provided that his continued participation is possible
under the terms and provisions of such plans, programs and
arrangements, and under the laws and regulations applicable
thereto. If Executive's participation in any plan, program or
arrangement is barred, Executive shall be entitled to receive, upon
a Change of Control Termination, a lump sum payable annually equal
to the annual contribution, payments, credits or allocations
Company would have provided him, to his account or on his behalf
under such plan, program or arrangement had his participation and
eligibility continued for the three (3) year period following
termination.
(e) Executive may exercise stock options issued to him
pursuant to (i) the Drovers Bancshares Incentive Stock Option Plan as
adopted by the Board of Directors on August 28, 1985 and as herein
modified ("Stock Option Plan"), and (ii) Drovers Bancshares
Corporation 1995 Stock Option Plan ("1995 Plan"). Such stock options
shall be exercisable fully, and closing shall occur, within ninety
(90) days of the Change of Control Termination whether or not:
(i) A period of one (1) year has elapsed
from the date of grant to the date of exercise, as
required by Section 5, paragraph (c) of the Stock
Option Plan, or any similar provision under the 1995
Plan.
(ii) Any installment exercise terms as
stipulated by the Stock Option Plan's administrative
committee ("Committee") and any agreement issued under
Section 5, paragraph (c) of the plan has been
satisfied, or any similar stipulation under the 1995
Plan.
(iii) The Committee has extended the option
period upon Executive's termination pursuant to
Section 5, paragraph (f) of the Stock Option Plan, or
any similar Provision in the 1995 Plan. However, in
no event shall Executive Exercise any stock option
after the earlier of (i) ten (10) years from the date
of grant, or (ii) the expiration of the option period
as stipulated in an agreement issued under Section 5,
paragraph (c) of the Stock Option Plan, or any similar
provision in the 1995 Plan, as applicable to said
option(s).
31<PAGE>
The Committee shall authorize this acceleration of Executive's
stock options under the Stock Option Plan by executing on the date
of this Agreement the Stock Option Acceleration Authorization
attached hereto as Exhibit A. A similar acceleration occurs under
Section 8 of the 1995 Plan.
4. RIGHT TO HEARING. In the event Company believes that a
Good Cause for termination of Executive's employment may exist, Company
shall provide Executive with written notice of its intention to terminate
for Good Cause and the facts upon which Company bases such belief, which
notice shall be given at least sixty (60) days prior to the proposed
effective date for the termination. For such termination to be effective,
Executive shall be provided with an opportunity within the said sixty (60)
day period to be heard by the Board of Directors of Company. Thereafter,
the Board may at its discretion elect to terminate Executive's employment
by majority vote.
5. CONTINUANCE OF BENEFITS. If Executive has commenced receiving
benefits hereunder, such benefits shall continue (subject however, to the
specific terms and conditions applicable to each benefit as set forth herein),
for the full term as provided in Section 3, above, notwithstanding that
Executive subsequently dies, becomes permanently disabled, or retires at or
after age sixty-five (65). Executive may, at any time and by written notice
to Company in the form attached hereto as Exhibit B, name one or more
beneficiaries of any such benefits in the event of his death; provided,
however, that upon Executive's death, the distribution of Executive's benefits
under a qualified pension plan shall be made in accordance with the terms,
including any beneficiary designation provision, of such plan. A designation
of beneficiary under this Agreement shall be effective on the date actually
received by Company. If Executive fails to designate a beneficiary, or if no
beneficiary survives Executive, the benefits provided herein shall be paid:
(a) to his surviving spouse;
(b) if there is no surviving spouse,
to his living descendants per stirpes; or
(c) if there is neither a surviving spouse
nor descendants, to his duly appointed and
qualified
executor or personal representative.
6. NO LIMITATION UPON PAYMENTS - The parties believe that the
benefits payable under Section 3, above, represent reasonable compensation for
personal services and as such no portion thereof constitutes an "excess
parachute payment" as defined in Section 280G of the Internal Revenue Code of
1986, as amended (or successor provision). The parties acknowledge that,
should any portion be so characterized, substantial adverse tax consequences
would result to both the payor (no tax deduction) and to the payee (excise
tax). Nonetheless, the parties intend that the amounts be paid in full as
provided herein, notwithstanding any such characterization and
tax consequence.
7. WITHHOLDING - Company may withhold from any benefits payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
8. SOURCE OF PAYMENT - All payments provided under this Agreement
may be paid in cash from the general funds of the Company and no special or
separate fund shall be required to be established. Executive shall have no
right, title or interest whatever in or to any investment which Company may
32 <PAGE>
make to fund its obligations hereunder. Nothing contained in this Agreement,
and no action taken pursuant to its provisions, shall create or be construed
to create a trust of any kind or a fiduciary relationship between Company and
Executive or any other person.
9. RABBI TRUST - The Company is establishing contemporaneously
herewith that rabbi trust attached hereto as Exhibit "C" ("Trust"), to
which it is contributing an initial corpus of $100. In the event of a
change of control as defined herein, the Company shall, in accordance with the
terms of the Trust, contribute thereto the amount described in Section 1(e)
thereof. Thereafter, amounts payable hereunder shall be paid first from the
assets of such Trust and the income thereon. To the extent that the assets of
the Trust and the income thereon are insufficient, Company shall pay Executive
the amount due hereunder.
10. NONASSIGNABILITY - Neither this Agreement nor any right
or interest hereunder shall, without Company's prior written consent, be
subject to any sale, transfer, assignment, pledge, attachment, garnishment, or
other alienation or encumbrance of any kind.
11. ATTACHMENT - Except as required by law, the right to receive
payments under this Agreement shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation of
law.
12. SUCCESSORS AND ASSIGNS - This Agreement shall inure to the benefit
of and be binding upon any corporate or other successor of the Company which
shall acquire, directly or indirectly, by merger, acquisition, consolidation,
purchase, or otherwise, all or substantially all of the assets of the Company,
and shall otherwise inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns. Nothing in the Agreement shall preclude Company from consolidating
or merging into or with or transferring all or substantially all of its assets
to another person, provided such other person shall assume this Agreement and
all obligations of Company hereunder. Upon such a consolidation, merger, or
transfer of assets and assumption, the term "Company" as used herein, shall
mean such other person and this Agreement shall continue in full force and
effect.
13. WAIVERS NOT TO BE CONTINUED - Any waiver by a party or any
breach of this Agreement by another party shall not be construed as
a continuing waiver or as a consent to any subsequent breach by the
other party.
14. NOTICES - All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or mailed by certified or
registered mail, return receipt requested, with postage prepaid,
to the following addresses or to such other address as either
party may designate by like notice:
A. If to Executive, to: A. Richard Pugh
70 Walden Court
York, PA 17404-9730
B. If to Company, to: Drovers Bancshares Corporation
30 South George Street
York, PA 17401
33 <PAGE>
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
15. ARBITRATION - Any claim or controversy arising out of or relating
to this Agreement or any breach thereof shall be settled by arbitration. Any
such arbitration shall take place in York, Pennsylvania, in accordance with
the rules of the American Arbitration Association. Judgment upon the written
award rendered by a majority of the arbitrators may be entered in the Court
having jurisdiction thereof. The written decision of a majority of the
arbitrators shall be valid, binding, final, and nonappealable.
16. MISCELLANEOUS -
(a) In the event that a party hereto wrongfully fails to
perform its obligations hereunder as determined and evidenced by a
final and nonappealable determination of a board of arbitration
or court, as the case may be, such party shall thereupon be
obligated to promptly pay and reimburse the other party hereto
for its costs and expenses incurred (including attorney, accounting,
actuary and other professional consultants) in enforcing its or his
entitlements hereunder.
(b) Executive shall be under no obligation to execute
a covenant against competition as a condition to receive any
benefit otherwise payable hereunder.
(c) Upon request, Executive shall promptly provide
Company with information regarding his subsequent employment as
contemplated herein, including that described in Section 3 hereof.
(d) This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, and
supersedes and replaces all prior agreements between the parties. No
amendment, waiver or termination of any of the provisions hereof
shall be effective unless in writing and signed by the party against
whom it is sought to be enforced. Any written amendment, waiver or
termination hereof executed by Company and Executive shall be binding
upon them and upon all other persons, without the necessity of
securing the consent of any other person, and no person shall be
deemed to be third-party beneficiary under this Agreement.
(e) This Agreement shall not limit or infringe upon the
right of Company to terminate the employment of Executive
at any time, nor upon the right of Executive to terminate
his employment with Company, each subject however to the specific
provisions hereof.
(f) "Person" as used in this Agreement means a natural
person, joint venture, corporation, sole proprietorship, trust,
estate, partnership, cooperative, association, non-profit
organization or any other legal, cognizable entity.
(g) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but
all of which taken together shall constitute one and the same
Agreement.
(h) Except as otherwise expressly set forth herein,
no failure on the part of any party hereto to exercise and no
delay in exercising any right, power or remedy hereunder shall
34 <PAGE>
operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or remedy hereunder preclude any
other or further exercise thereof or the exercise of any other
right, power or remedy.
(i) The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall in no
way restrict or modify any of the terms or provisions hereof.
(j) This Agreement shall be governed and construed and
the legal relationships of the parties determined in accordance
with the laws of the Commonwealth of Pennsylvania applicable to
be performed in the Commonwealth of Pennsylvania.
(k) The obligation of Company hereunder shall be joint
and several.
(l) In the event that a party hereto wrongfully fails to
perform its obligations hereunder as determined by a final and
nonappealable determination of a board of arbitrator or court,
such party shall thereupon be obligated to promptly pay and
reimburse the other party hereto for its costs and expenses
incurred (including attorney, accounting, actuary and other
profesional consultants) in enforcing its or his entitlements
hereunder.
35 <PAGE>
ATTEST: COMPANY:
DROVERS BANCSHARES CORPORATION
______________________________ By____________________________________
ATTEST: THE DROVERS & MECHANICS BANK
______________________________ By____________________________________
WITNESS: EXECUTIVE
______________________________ ________________________________(SEAL)
A. Richard Pugh
36 <PAGE>
EXHIBIT A
STOCK OPTION ACCELERATION AUTHORIZATION
Pursuant to Section 5(c) of the Drovers Bancshares Incentive Stock
Option Plan ("Plan"), dated August 28, 1985, the Committee under said Plan
hereby authorizes the acceleration of A. Richard Pugh's stock options under
the Plan to the extent described in Section 3(e) of the Amended and Restated
Change of Control Agreement by and between Drovers Bancshares Corporation,
Drovers & Mechanics Bank, and A. Richard Pugh, dated ______________, 1995.
__________________________________ __________________________________
__________________________________ __________________________________
Dated: ___________________________
37 <PAGE>
EXHIBIT B
BENEFICIARY DESIGNATION FORM
I hereby designate the person(s) named below as beneficiary (or
beneficiaries) to receive all amounts payable under the Amended and
Restated Change of Control Agreement by and between Drovers Bancshares
Corporation and Drovers & Mechanics Bank ("Company"), and
A. Richard Pugh, dated ______________, 1995, which have not
been paid at the date of my death.
Name of Beneficiary: Address:
I acknowledge that this Beneficiary Designation shall become effective on
the date actually received by Company and shall render all prior Beneficiary
Designations, if any, void.
WITNESS
__________________________________ _____________________________(SEAL)
A. Richard Pugh
Date received by Company:
__________________________________
COMPANY
__________________________________
38 <PAGE>
Exhibit 10(b)
AMENDED AND RESTATED
THE DROVERS & MECHANICS BANK SUPPLEMENTAL PENSION PLAN
FOR A. RICHARD PUGH
In consideration of your services with The Drovers & Mechanics
Bank ("Employer"), Employer adopted The Drovers & Mechanics Bank Supplemental
Pension Plan for A. Richard Pugh dated September 28,1994 ("Prior Plan") for
the purpose of providing you and/or your beneficiary pension benefits
("Supplemental Pension") and death benefits ("Supplemental Death Benefit") in
addition to the annual salary and the pension and welfare benefits to which
you and/or your beneficiary may be entitled under pension and welfare benefit
plans, programs or arrangements of Employer or its affiliate(s). Employer
hereby amends and restates said Prior Plan as follows:
1. DEFINITIONS. As used herein, the following words and phrases shall have
the meanings described below:
1.1 "Actual Retirement Date" means the first day of the month
following your retirement.
1.2 "Annual Salary" means your average annual compensation,
including non-deferred incentive pay, without reduction for
(i) any contribution to cash or deferred arrangements under
Section 401(k) of the Internal Revenue Code of 1986, as amended
(or successor provision) or (ii) any nonqualified deferred
compensation plan, as reported for those three (3) full
calendar years included within the five (5) full calendar years
immediately preceding the calendar year of your Actual Retirement
Date, in which your annual compensation was the greatest.
1.3 "Early Retirement Date" means the first day of the month
following your sixty-second (62nd) birthday.
1.4 "Normal Retirement Date" means the first day of the month
following your sixty-fifth (65th) birthday.
1.5 "Pension Plan" means The Drovers & Mechanics Pension Plan, as in
effect from time to time.
1.6 "Supplemental Pension" means the projected pension hereunder at
your Normal Retirement Date which when added to your then primary
social security amount and your then projected pension from the
Pension Plan will yield an annual benefit equal to the "Target
Percentage" of your Annual Salary. The Target Percentage at
Normal Retirement Date is 65% and at any other time is adjusted
from 65% by use of the actuarial assumptions, methods and
computational techniques then utilized by the Pension Plan
("Adjusted Target Percentage").
1.7 "Supplemental Death Benefit" means the death benefit as defined
in Section 3.
39 <PAGE>
2. SUPPLEMENTAL PENSION
2.1 Normal Retirement. If you retire on your Normal Retirement Date,
Employer shall pay to you a Supplemental Pension in the form of a
ten year term certain and life payout, or as otherwise selected
by you under Section 4 hereof.
2.2 Early or Late Retirement. Except as provided to the contrary in
Section 5.2 below, if you retire or otherwise terminate
Employment prior to attaining age 62, no benefits shall be
payable under this Plan. If you retire after having attained age
62 and other than on your Normal Retirement Date, Employer shall
pay you, commencing at your Actual Retirement Date, a
Supplemental Pension calculated using your Adjusted Target
Percentage.
2.3 Notice. In the event of an early retirement, you shall provide
Employer at least six months advance written notice of your
Actual Retirement Date.
3. SUPPLEMENTAL DEATH BENEFIT. If, upon your death prior to Actual
Retirement Date, your surviving spouse is entitled to receive a
death benefit under the Pension Plan, your spouse shall receive a
Supplemental Death Benefit hereunder, which shall be calculated in
accordance with the provisions of the Pension Plan substituting,
however, the Adjusted Target Percentage for the percentage specified
in the Pension Plan, with the result then reduced by the Pension Plan
death benefit and the social security benefit, and payable in the
same manner as the Pension Plan benefit.
4. PAYMENT OPTIONS. Insofar as the Pension Plan permits the making of
elections as to the mode of payment of benefits, such election by you
will likewise apply with respect to the manner of payment and the amount
of the Supplemental Pension, using the actuarial equivalency rules
specified in the Pension Plan for optional forms of benefits.
5. TRUST. The Employer is establishing contemporaneously herewith that
trust attached hereto as Exhibit "A" ("Trust"), to which it is
contributing an initial corpus of $100. In the event of a change of
control as defined in that Amended and Restated Change of Control
Agreement dated , 1995, by and between the parties hereto, the
Employer shall, in accordance with the terms of the Trust, contribute
thereto the amount described in Section 1(e) thereof. Thereafter,
amounts payable hereunder shall be paid first from the assets of such
Trust and the income thereon. To the extent that the assets of the Trust
and the income thereon are insufficient, Employer shall pay Executive the
amount due hereunder.
6. AMENDMENT AND TERMINATION. This Plan may be terminated, amended or
modified by Employer, provided however:
6.1 No such amendment shall reduce the Supplemental Pension and/or
the Supplemental Death Benefit which (a) has commenced prior to
the effective date of such amendment, modification or termination
or (b) would be payable if you had attained age 62 and had
retired on the day immediately prior to such effective date,
provided however, the benefit so determined shall not commence
until you actually attain age 62 and if you die in the interim,
the benefit shall be the death benefit determined in accordance
with the provisions hereof.
40 <PAGE>
6.2 In the event of a Change of Control, this Plan may not be
amended to reduce the Supplemental Pension and/or the Supplemental
Death Benefit and may not be terminated during the Employment
Security Period and the benefits shall continue to accrue
thereunder in accordance with the provisions of the Change of
Control Agreement and hereof. The terms "Change of Control",
"Employment Security Period" and "Change of Control Termination"
shall have the meaning provided under the Amended and Restated
Change of Control Agreement by and between Drovers Bancshares
Corporation, Drovers & Mechanics Bank, and A. Richard Pugh,
dated,______________, 1995. If you suffer a Change of Control
Termination prior to attaining Early Retirement Date, you shall
receive a Supplemental Pension commencing at Early Retirement
Date based on your Adjusted Target Percentage and your Annual
Salary as defined in Section 1.2 above determined as of the
date of your Change of Control Termination rather than Actual
Retirement Date. Benefits so calculated shall commence on your
Early Retirement Date rather than your Actual Retirement Date.
7. MISCELLANEOUS
7.1 In the event that a party hereto wrongfully fails to perform its
obligations hereunder as determined by a final and nonappealable
determination of a board of arbitrator or court, such party shall
thereupon be obligated to promptly pay and reimburse the other
party hereto for its costs and expenses incurred (including
attorney, accounting, actuary and other professional consultants)
in enforcing its or his entitlements hereunder.
7.2 Nothing herein (a) shall be deemed to exclude you from any
compensation, pension, stock option, incentive pay or other
benefits to which you otherwise are or might become entitled to
as an employee of Employer, or (b) shall be construed as
conferring on you the right to continue in the employ of Employer.
7.3 Any amounts payable hereunder shall not be deemed salary or other
compensation to you for the purposes of computing benefits to
which you may be entitled under the Pension Plan or any other
plan, program or arrangement of Employer for the benefit of its
employees.
7.4 The rights and obligations hereunder shall be binding on you
and your beneficiary and on the successor and assigns of Employer.
7.5 Employer shall be responsible for the general operation and
administration of this Plan.
7.6 This Plan shall be unfunded and no provision shall at any time be
made with respect to segregating any assets of Employer for
payment of any benefits hereunder. No person will have any
interest in any assets of Employer by reason of the right to
receive a benefit hereunder. You, your surviving spouse, and any
other beneficiary, will have only the rights of a general
unsecured creditor of Employer with respect to any rights
hereunder.
41<PAGE>
7.7 The rights and interests hereunder shall not, unless with
Employer's prior written consent, be subject to any sale,
transfer, assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of any kind.
7.8 Except as required by law, the right to receive payments
hereunder shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by
operation of law.
7.9 The headings of the sections of this Plan have been inserted for
convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
7.10 This Plan shall be administered and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, Employer has caused this Plan to be executed
this_____________day of __________________, 1995.
ATTEST: EMPLOYER:
THE DROVERS & MECHANICS BANK
______________________________ By____________________________________
42 <PAGE>
FIRST AMENDMENT TO
THE DROVERS AND MECHANICS BANK
SUPPLEMENTAL PENSION PLAN FOR
A. RICHARD PUGH (AMENDED AND RESTATED)
By this Agreement, the undersigned hereby amend that Amended
and Restated Supplemental Pension Plan dated November 14, 1995
("Plan"), effective as of January 1, 1996.
1. Section 4 of the Plan is hereby amended and restated in
its entirety to read as follows:
"4. Payment Options. Insofar as the Pension Plan permits the
making of elections as to the mode of payment of benefits, such election
by you will likewise apply with respect to the manner of payment and the
amount of the Supplemental Pension, using the actuarial equivalency rules
specified in the Pension Plan for optional forms of benefits, provided
however and the foregoing to the contrary notwithstanding, there shall
be no option hereunder for payment of benefits in a lump sum."
2. In all other respects, the Agreement as herein modified shall
remain in full force and effect.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
have set their hands and seals this 19th day of January, 1996, effective for
all purposes as of January 1, 1996.
EMPLOYER:
ATTEST: THE DROVERS & MECHANICS BANK
By____________________________
George L. F. Guyer, Jr. Richard M. Linder
Senior Vice President and Chairman of the Board
Secretary
WITNESS: EMPLOYEE:
______________________________ (SEAL)
A. Richard Pugh
43 <PAGE>
Exhibit 10(c)
CHANGE OF CONTROL AGREEMENT
AGREEMENT made this ____ day of December, 1998, by and between
DROVERS BANCSHARES CORPORATION and THE DROVERS & MECHANICS BANK, a
Pennsylvania corporation and a Pennsylvania state chartered bank,
respectively, each with offices in York, Pennsylvania, hereinafter
collectively called "Company", and "Named Executive Vice President",
hereinafter called "Executive."
BACKGROUND
Executive is employed by Company as an Executive Vice President. In
consideration of Executive's past and future services, Company wishes to enter
into a Change of Control Agreement with Executive to provide Executive
compensation and other benefits in the event of his or her termination of
employment after a corporate change of control.
In consideration of the mutual covenants and agreements herein, and
Intending to be legally bound hereby, the parties agree as follows:
1. TERM - The term of this Agreement shall commence on the date
hereof and end on the earliest to occur of the following:
(a) Executive's death;
(b) Executive's permanent disability resulting in his
inability to fully perform or complete his or her duties as Executive
Vice President for a period anticipated to exceed one hundred eighty
(180) consecutive days, provided, however, that in the event Company
maintains a long-term disability insurance plan on the date Executive
becomes disabled, Executive's permanent disability shall be determined
under the criteria of the insurance policy;
(c) Retirement at or after age sixty-five (65);
(d) The date two (2) years after a Change of Control as
defined in Section 2;
(e) The date eighteen (18) months after a Change of Control
Termination as defined in Section 2.
(f) The date twelve (12) months after the termination of
Executive's employment if there is no Change of Control as defined in
Section 2 in the interim.
However, if Executive's death, permanent disability or retirement, as
defined above, occurs after a Change of Control Termination, this Agreement
shall terminate on eighteen (18) months after such Change of Control
Termination.
2. CHANGE OF CONTROL TERMINATION - Change of Control Termination shall
be deemed to have occurred if there is a Change of Control regarding either or
both corporations constituting Company and, during the Employment Security
Period, either of the following occurs: (i) Company terminates the employment
of Executive other than for Good Cause; or (ii) Executive terminates his or
her employment with Company following a Change in Control and for Good Reason.
44 <PAGE>
(a) "Change of Control" with respect to the Drovers Bancshares
Corporation or the Drovers & Mechanics Bank ("Target Company") shall mean the
occurrence of any of the following:
(i) the change in the Board of Directors of
Target Company, during any twenty-four (24) month period
ending on or after the date of this Agreement, if the
individuals who were directors of Target Company at the
beginning of the period cease during such period to
constitute at least a majority of the Board of Directors;
(ii) the commencement of a tender offer or
exchange offer by any entity, person or group (including
any affiliates of such entity, person or group, by other
than an affiliate of Company) for twenty-five percent (25%)
or more of the outstanding voting power of all capital stock
of Target Company;
(iii) the acquisition by any entity, person
or group (including any affiliates of such entity, person
or group) of beneficial ownership, as that term is defined
in Rule 13d-3 under the Securities Exchange Act of 1934, of
Target Company capital stock entitled to twenty-five percent
(25%) or more of the outstanding voting power of all capital
stock of Target Company;
(iv) the effective time of the merger,
consolidation, division, share exchange, or any other
transaction or a series of transactions outside the
ordinary course of business ("Business Combination"), as
a result of which the holders of the outstanding voting
capital stock of Target Company immediately prior to such
Business Combination, excluding any shareholder who is a
party to the Business Combination (other than Company) or is
such party' affiliate as defined in the Securities Exchange
Act of 1934, hold less than seventy-five percent (75%) of
the voting capital stock of the surviving or resulting
corporation;
(v) the transfer of substantially all of
the Target Company's assets other than to a wholly owned
subsidiary of Target Company.
(b) "Employment Security Period" shall mean the period
commencing twelve (12) months prior to the Change of Control and ending
two (2) years after the Change of Control.
(c) "Good Cause" shall mean the occurrence of one
or more of the following events:
(i) Executive's willful engagement in gross
misconduct that is materially injurious to Company;
(ii) excessive alcohol or drug abuse by Executive
which continually and materially interferes with Executive's
ability to perform his duties as Executive Vice President;
(iii) Executive's conviction or plea of nolo
contendere of a crime involving fraud, misappropriation,
45 <PAGE>
embezzlement or other violation of the law of like nature
or severity;
(iv) The voluntary filing or application by
Executive for relief in bankruptcy or other moratorium
law, or for the appointment of a receiver, trustee or
liquidator, or the making by Executive of a general
assignment of all his or her assets for the benefit of
creditors, which is not dismissed within sixty days, unless
any such action or event is attributable to a judgment
rendered against the Executive arising out of his or her
charitable or civic activities.
(v) Executive's willful failure to perform his
or her duties as Executive Vice President in a manner
generally consistent with his or her past service;
(d) "Good Reason" shall mean the occurrence of one or more
of the following without Executive's prior written consent:
(i) an assignment to Executive of any duties
materially inconsistent with his or her position as
Executive Vice President;
(ii) a reduction in Executive's fixed salary or
elimination of, or material adverse modification to any
incentive or other supplemental currently taxable
compensation plan, except any such reduction, elimination
or modification that is applied generally to senior
executive officers of Company;
(iii) a relocation of Executive's principal
executive office outside of York County, Pennsylvania,
or any requirement that Executive be based other than
at Company's principal executive offices in York,
Pennsylvania, except on a temporary basis in the ordinary
course of business;
(iv) a termination or material adverse
modification to any nonqualified deferred compensation
plan in which Executive participates without substitution
of comparable benefits, except any such termination or
modification that is applied generally to senior executive
officers who had such benefits.
3. COMPENSATION AND BENEFITS - Upon a Change of Control Termination,
Company shall provide Executive, in addition to any other rights or benefits
to which Executive may be entitled by contract or under any policy or custom
of Company, the following:
(a) For a term commencing with such termination and
extending for eighteen (18) months thereafter, Company shall pay
Executive an annual compensation equal to Executive's highest
compensation received in that calendar year included with the period
commencing with the calendar year in which this Agreement is executed
initially and extending to the calendar year in which termination occurs
(annualized as necessary). For purposes of the foregoing, "compensation"
shall be (i) salary without reduction for any contribution to (aa) cash
or deferred arrangements under Section 401(k) of the Internal Revenue
Code of 1986, as amended [or successor provision] and (bb) any
46 <PAGE>
nonqualified deferred compensation plan, plus (ii) non-deferred incentive
compensation (collectively "Compensation"), and shall be payable in equal
installments with such frequency as Company customarily pays its payroll.
For purposes of this paragraph (a), Executive's Compensation will be
reduced, beginning with the first month following his re-employment with
another employer, by fifty percent (50%) of the Form W-2 income, with the
new employer. Executive shall have no obligation to mitigate his or her
damages by seeking employment following his or her termination of
employment with Company.
(b) Company shall provide, at its expense, for the
continuation in full force and effect for a period ending upon the
earlier to occur of Executive's death or eighteen (18) months following
the Change of Control Termination, all health, dental, life insurance and
disability plans, programs and arrangements in which Executive was
entitled to participate immediately prior to such termination, provided
that his or her continued participation is possible under the terms and
provisions of such plans, programs and arrangements, and under the laws
and regulations applicable thereto. If Executive's participation in any
plan, program or arrangement is barred, Company shall use its reasonable
best efforts to obtain and pay for, on Executive's behalf, individual
insurance policies, plans, programs or arrangements which provide
benefits equivalent to those which Executive is entitled to receive prior
to the date of termination. However, Company may, at any time, deny
Executive coverage under a health, dental, life insurance or disability
plan, program or arrangement, to the extent such coverage is duplicate of
coverage provided Executive by any subsequent employer. At the end of
the period of coverage, to the extent permitted by the plans and
programs, Executive shall have the option to have assigned to him or her,
any assignable insurance policy owned by Company and relating
specifically to him or her. Executive's right to continuation of health
and medical coverage under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, shall commence at the end of the eighteen (18)
month period following the Change of Control Termination.
(c) Company shall provide, at its expense, for the
continuation in full force and effect for a period ending upon the
earlier to occur of Executive's death, retirement, or eighteen (18)
months following the Change of Control Termination, all pension, profit-
sharing, savings, and nonqualified deferred compensation plan including
the supplemental retirement income plan in which Executive was entitled
to participate immediately prior to such termination, provided that his
or her continued participation is possible under the terms and provisions
of such plans, programs and arrangements, and under the laws and
regulations applicable thereto. If Executive's participation in any
plan, program or arrangement is barred, Executive shall be entitled to
receive, upon a Change of Control Termination, a lump sum payable
annually equal to the annual contribution, payments, credits or
allocations Company would have provided him or her, to his or her account
or on his or her behalf under such plan, program or arrangement had his
or her participation and eligibility continued for the eighteen (18)
month period following termination.
(d) Executive may exercise stock options issued to him or
her pursuant to (i) the Drovers Bancshares Incentive Stock Option Plan
as adopted by the Board of Directors on August 28, 1985 and as herein
modified ("Stock Option Plan"), and (ii) Drovers Bancshares Corporation
1995 Stock Option Plan ("1995 Plan"). Such stock options shall be
exercisable fully, and closing shall occur, within ninety (90) days of
the Change of Control Termination whether or not:
47 <PAGE>
(i) A period of one (1) year has elapsed from
the date of grant to the date of exercise, as required by
Section 5, paragraph (c) of the Stock Option Plan, or any
similar provision under the 1995 Plan.
(ii) Any installment exercise terms as stipulated
by the Stock Option Plan's administrative committee
("Committee") and any agreement issued under Section 5,
paragraph (c) of the plan has been satisfied, or any similar
stipulation under the 1995 Plan.
(iii) The Committee has extended the option
period upon Executive's termination pursuant to Section 5,
paragraph (f) of the Stock Option Plan, or any similar
provision in the 1995 Plan. However, in no event shall
Executive exercise any stock option after the earlier of
(i) ten (10) years from the date of grant, or (ii) the
expiration of the option period as stipulated in an
agreement issued under Section 5, paragraph (c) of the
Stock Option Plan, or any similar provision in the 1995
Plan, as applicable to said option(s).
The Committee shall authorize this acceleration of Executive's stock
options under the Stock Option Plan by executing on the date of this
Agreement the Stock Option Acceleration Authorization attached hereto
as Exhibit A. A similar acceleration occurs under Section 8 of the
1995 Plan.
4. RIGHT TO HEARING - In the event Company believes that a Good Cause
for termination of Executive's employment may exist, Company shall provide
Executive with written notice of its intention to terminate for Good Cause and
the facts upon which Company bases such belief, which notice shall be given at
least sixty (60) days prior to the proposed effective date for the termination.
For such termination to be effective, Executive shall be provided with an
opportunity within the said sixty (60) day period to be heard by the Board of
Directors of Company. Thereafter, the Board may at its discretion elect to
terminate Executive's employment by majority vote.
5. CONTINUANCE OF BENEFITS - If Executive has commenced receiving
benefits hereunder, such benefits shall continue (subject however, to the
specific terms and conditions applicable to each benefit as set forth
herein), for the full term as provided in Section 3, above, notwithstanding
that Executive subsequently dies, becomes permanently disabled, or retires
at or after age sixty-five (65). Executive may, at any time and by written
notice to Company in the form attached hereto as Exhibit B, name one or more
beneficiaries of any such benefits in the event of his or her death; provided,
however, that upon Executive's death, the distribution of Executive's benefits
under a qualified pension plan shall be made in accordance with the terms,
including any beneficiary designation provision, of such plan. A designation
of beneficiary under this Agreement shall be effective on the date actually
received by Company. If Executive fails to designate a beneficiary, or if
no beneficiary survives Executive, the benefits provided herein shall be paid:
(a) to his or her surviving spouse;
(b) if there is no surviving spouse, to his
or her living descendants per stirpes; or
(c) if there is neither a surviving spouse nor
descendants, to his or her duly appointed and qualified
executor or personal representative.
48 <PAGE>
6. NO LIMITATION UPON PAYMENTS - The parties believe that the
benefits payable under Section 3, above, represent reasonable compensation for
personal services and as such no portion thereof constitutes an "excess
parachute payment" as defined in Section 280G of the Internal Revenue Code of
1986, as amended (or successor provision). The parties acknowledge that,
should any portion be so characterized, substantial adverse tax consequences
would result to both the payor (no tax deduction) and to the payee (excise
tax). Nonetheless, the parties intend that the amounts be paid in full as
provided herein, notwithstanding any such characterization and tax consequence.
7. WITHHOLDING - Company may withhold from any benefits payable under
this Agreement all federal, state, city or other taxes as shall be required
pursuant to any law or governmental regulation or ruling.
8. SOURCE OF PAYMENT - All payments provided under this Agreement may
be paid in cash from the general funds of the Company and no special or
separate fund shall be required to be established. Executive shall have no
right, title or interest whatever in or to any investment which Company may
make to fund its obligations hereunder. Nothing contained in this Agreement,
and no action taken pursuant to its provisions, shall create or be construed
to create a trust of any kind or a fiduciary relationship between Company and
Executive or any other person.
9. RABBI TRUST - The Company has established a rabbi trust at Hershey
Trust Company. In the event of a change of control as defined herein, the
Company shall, in accordance with the terms of the Trust, contribute thereto
the amount described in Section 1(e) thereof. Thereafter, amounts payable
hereunder shall be paid first from the assets of such Trust and the income
thereon. To the extent that the assets of the Trust and the income thereon
are insufficient, Company shall pay Executive the amount due hereunder.
10. NONASSIGNABILITY - Neither this Agreement nor any right or
interest hereunder shall, without Company's prior written consent, be subject
to any sale, transfer, assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of any kind.
11. ATTACHMENT - Except as required by law, the right to receive
payments under this Agreement shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation
of law.
12. SUCCESSORS AND ASSIGNS - This Agreement shall inure to the benefit
of and be binding upon any corporate or other successor of the Company which
shall acquire, directly or indirectly, by merger, acquisition, consolidation,
purchase, or otherwise, all or substantially all of the assets of the Company,
and shall otherwise inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
assigns. Nothing in the Agreement shall preclude Company from consolidating
or merging into or with or transferring all or substantially all of its assets
to another person, provided such other person shall assume this Agreement and
all obligations of Company hereunder. Upon such a consolidation, merger, or
transfer of assets and assumption, the term "Company" as used herein, shall
mean such other person and this Agreement shall continue in full force and
effect.
13. WAIVERS NOT TO BE CONTINUED - Any waiver by a party or any breach
of this Agreement by another party shall not be construed as a continuing
waiver or as a consent to any subsequent breach by the other party.
49 <PAGE>
14. NOTICES - All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
A. If to Executive, to: "Named Executive Vice President"
B. If to Company, to: Drovers Bancshares Corporation
30 South George Street
York, PA 17401
and to such other or additional person or persons as either party shall
have designated to the other party in writing by like notice.
15. ARBITRATION - Any claim or controversy arising out of or relating
to this Agreement or any breach thereof shall be settled by arbitration. Any
such arbitration shall take place in York, Pennsylvania, in accordance with
the rules of the American Arbitration Association. Judgment upon the written
award rendered by a majority of the arbitrators may be entered in the Court
having jurisdiction thereof. The written decision of a majority of the
arbitrators shall be valid, binding, final, and nonappealable.
16. MISCELLANEOUS -
(a) In the event that a party hereto
wrongfully fails to perform its obligations hereunder as
determined and evidenced by a final and nonappealable
determination of a board of arbitration or court, as the
case may be, such party shall thereupon be obligated to
promptly pay and reimburse the other party hereto for its
costs and expenses incurred (including attorney, accounting,
actuary and other professional consultants) in enforcing its
or his entitlements hereunder.
(b) Executive shall be under no obligation to execute
a covenant against competition as a condition to receive any benefit
otherwise payable hereunder.
(c) Upon request, Executive shall promptly provide Company
with information regarding his subsequent employment as contemplated
herein, including that described in Section 3 hereof.
(d) This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof, and supersedes
and replaces all prior agreements between the parties. No amendment,
waiver or termination of any of the provisions hereof shall be
effective unless in writing and signed by the party against whom it
is sought to be enforced. Any written amendment, waiver or
termination hereof executed by Company and Executive shall be
binding upon them and upon all other persons, without the
necessity of securing the consent of any other person, and no
person shall be deemed to be third-party beneficiary under this
Agreement.
(e) This Agreement shall not limit or infringe upon the right
of Company to terminate the employment of Executive at any time, nor
upon the right of Executive to terminate his or her employment with
Company, each subject however to the specific provisions hereof.
50 <PAGE>
(f) "Person" as used in this Agreement means a natural person,
joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or
any other legal, cognizable entity.
(g) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but
all of which taken together shall constitute one and the same
Agreement.
(h) Except as otherwise expressly set forth herein, no
failure on the part of any party hereto to exercise and no delay
in exercising any right, power or remedy hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of
any right, power or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or
remedy.
(i) The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall in no
way restrict or modify any of the terms or provisions hereof.
(j) This Agreement shall be governed and construed and the
legal relationships of the parties determined in accordance with
the laws of the Commonwealth of Pennsylvania applicable to
contracts executed and to be performed in the Commonwealth of
Pennsylvania.
(k) The obligation of Company hereunder shall be joint and
several.
(l) In the event that a party hereto wrongfully
fails to perform its obligations hereunder as determined by
a final and nonappealable determination of a board of arbitrator
or court, such party shall thereupon be obligated to promptly
pay and reimburse the other party hereto for its costs and
expenses incurred (including attorney, accounting, actuary and
other professional consultants) in enforcing its or his
entitlements hereunder.
This Agreement replaces that Change of Control Agreement entered
into by and among them on August 31, 1998; therefore, that Agreement is
hereby revoked.
ATTEST: COMPANY:
DROVERS BANCSHARES CORPORATION
______________________________ By____________________________________
ATTEST: THE DROVERS & MECHANICS BANK
______________________________ By____________________________________
WITNESS: EXECUTIVE
______________________________ ________________________________(SEAL)
"Named Executive Vice President"
51 <PAGE>
EXHIBIT A
STOCK OPTION ACCELERATION AUTHORIZATION
Pursuant to Section 5(c) of the Drovers Bancshares Incentive Stock
Option Plan ("Plan"), dated August 28, 1985, the Committee under said Plan
hereby authorizes the acceleration of "Named Executive Vice President"'s
stock options under the Plan to the extent described in Section 3(e) of the
Change of Control Agreement by and between Drovers Bancshares Corporation,
Drovers & Mechanics Bank, and "Named Executive Vice President", dated
December __, 1998.
__________________________________ __________________________________
Robert L. Myers, Jr. Frank Motter
__________________________________ __________________________________
Harlowe R. Prindle George W. Hodges
Dated: ___________________________
52 <PAGE>
EXHIBIT B
BENEFICIARY DESIGNATION FORM
I hereby designate the person(s) named below as beneficiary (or
beneficiaries) to receive all amounts payable under the Change of Control
Agreement by and between Drovers Bancshares Corporation and Drovers & Mechanics
Bank ("Company"), and "Named Executive Vice President", dated
December ___, 1998, which have not been paid at the date of my death.
Name of Beneficiary: Address:
I acknowledge that this Beneficiary Designation shall become
effective on the date actually received by Company and shall render
all prior Beneficiary Designations, if any, void.
WITNESS
__________________________________ _____________________________(SEAL)
"Named Executive Vice President"
Date received by Company:
__________________________________
COMPANY
__________________________________
53 <PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,145
<INT-BEARING-DEPOSITS> 479
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,360
<INVESTMENTS-CARRYING> 34,259
<INVESTMENTS-MARKET> 35,196
<LOANS> 390,109
<ALLOWANCE> 3,912
<TOTAL-ASSETS> 597,793
<DEPOSITS> 457,672
<SHORT-TERM> 23,325
<LIABILITIES-OTHER> 5,773
<LONG-TERM> 62,830
0
0
<COMMON> 14,881
<OTHER-SE> 33,312
<TOTAL-LIABILITIES-AND-EQUITY> 597,793
<INTEREST-LOAN> 30,483
<INTEREST-INVEST> 10,467
<INTEREST-OTHER> 41
<INTEREST-TOTAL> 40,991
<INTEREST-DEPOSIT> 17,374
<INTEREST-EXPENSE> 21,736
<INTEREST-INCOME-NET> 19,255
<LOAN-LOSSES> 1,266
<SECURITIES-GAINS> 262
<EXPENSE-OTHER> 15,231
<INCOME-PRETAX> 8,166
<INCOME-PRE-EXTRAORDINARY> 8,166
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,810
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 7.81
<LOANS-NON> 1,435
<LOANS-PAST> 7
<LOANS-TROUBLED> 1,203
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,304
<CHARGE-OFFS> 757
<RECOVERIES> 99
<ALLOWANCE-CLOSE> 3,912
<ALLOWANCE-DOMESTIC> 3,235
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 677
</TABLE>
EXHIBIT 13
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
Cross Reference for electronic filing/hard copy
Electronic Hard
Copy Copy
Cross Reference for electronic file/hard copy
Consolidated Financial Highlights............................... 2 1
Common Stock Market Prices and Dividends........................ 3 1
Eleven-Year Summary of Selected Financial Information........... 38 12
Consolidated Statements of Condition............................ 4 15
Consolidated Statements of Income............................... 5 16
Consolidated Statements of Comprehensive Income................. 6 17
Consolidated Statements of Changes in Shareholders' Equity...... 6 17
Consolidated Statements of Cash Flows........................... 7 18
Notes to Consolidated Financial Statements ..................... 8 19
Independent Auditors' Report ................................... 26 33
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 27 34
Supplemental Financial Data .................................... 40 43
1 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
(All dollar amounts presented in thousands, except per share data)
1998 1997 % Change
FINANCIAL POSITION AT DECEMBER 31,
<S> <C> <C> <C>
Assets .................................. $597,793 $524,892 13.89%
Net loans ............................... 386,197 310,369 24.43%
Deposits ................................ 457,672 402,086 13.82%
Shareholders' equity .................... 48,193 43,470 10.86%
RESULTS FOR THE YEAR
Interest income ......................... $ 40,991 $ 36,267 13.03%
Interest expense ........................ 21,736 19,254 12.89%
Net interest income ..................... 19,255 17,013 13.18%
Net income .............................. 6,810 5,631 20.94%
FINANCIAL RATIOS
Return on average assets ................ 1.22% 1.15% 6.09%
Return on average shareholders' equity .. 14.69% 13.88% 5.84%
PER SHARE DATA*
Net income .............................. $ 1.53 $ 1.27 20.47%
Net income, assuming dilution ........... $ 1.51 $ 1.26 19.84%
Cash dividends .......................... $ 0.46 $ 0.39 17.95%
Book value (year-end) ................... $ 10.79 $ 9.79 10.21%
Weighted average shares outstanding ..... 4,455,385 4,426,635 0.65%
Number of shareholders .................. 1,476 1,420 3.94%
INVESTMENT SERVICES AND TRUST DIVISION
Fair value of trust assets administered . $252,121 $217,005 16.18%
</TABLE>
* Per share data adjusted to reflect a three-for-two stock split issued in 1998
and a 5% stock dividend issued in 1997.
2<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Corporation's common stock trades on The NASDAQ Stock Market under the
symbol DROV. Before June 2, 1998, the stock traded on the over-the-counter
market by several brokers. The quarterly year-to-date average shares
outstanding and quarterly high and low prices were as follows:
<TABLE>
<CAPTION>
Cash
1998 High** Low** Shares* Dividends Paid*
<S> <C> <C> <C> <C>
March 31 .................. $26.17 $22.50 4,445,700 $0.10
June 30 ................... 32.50 25.17 4,446,690 0.12
September 30 .............. 32.00 25.88 4,451,370 0.12
December 31 ............... 27.00 24.38 4,455,385 0.12
1997
March 31... ............... $15.56 $13.17 4,424,459 $0.10
June 30 ................... 15.23 13.81 4,424,459 0.10
September 30 .............. 18.58 15.08 4,424,462 0.10
December 31 ............... 23.83 18.48 4,426,635 0.10
</TABLE>
* Per share data adjusted to reflect a three-for-two stock split issued in 1998
and a 5% stock dividend issued in 1997.
**Per share data adjusted for the three-for-two stock split issued in 1998.
High and low sales prices before July 1, 1998, provided by Bloomberg
Business News.
3 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CONDITION
<CAPTION>
December 31,
(in thousands) 1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $ 24,145 $ 14,549
Money market investments ................................ 479 379
Investment securities (fair value $162,556 and $180,245). 161,619 179,299
Loans (net of unearned income of $3,253 and $3,320) ..... 390,109 313,673
Reserve for loan losses ................................. 3,912 3,304
Net loans ............................................. 386,197 310,369
Bank premises and equipment ............................. 15,901 13,864
Other assets ............................................ 9,452 6,432
TOTAL ASSETS ............................................ $597,793 $524,892
LIABILITIES
Deposits:
Noninterest-bearing ................................... $ 55,339 $ 41,973
Interest-bearing ...................................... 402,333 360,113
Total deposits ...................................... 457,672 402,086
Federal funds purchased and securities sold
Under agreements to repurchase ........................ 23,325 31,360
Other borrowings ........................................ 62,830 43,558
Other liabilities ....................................... 5,773 4,418
TOTAL LIABILITIES ....................................... 549,600 481,422
SHAREHOLDERS' EQUITY
Common stock ($3.33 par value)15,000,000 shares
Authorized; issued and outstanding-4,468,461
Shares in 1998 and 2,961,127 in 1997 .................. 14,881 14,806
Additional paid-in capital .............................. 18,891 18,664
Retained earnings ....................................... 13,173 8,407
Accumulated other comprehensive income .................. 1,248 1,593
TOTAL SHAREHOLDERS' EQUITY .............................. 48,193 43,470
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $597,793 $524,892
</TABLE>
See notes to consolidated financial statements.
4 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
(in thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans ...................... $30,483 $25,487 $23,199
Interest on deposits with banks ................. 41 70 155
Interest and dividends on investment securities:
Taxable investment securities ................. 8,156 8,712 5,492
Equity securities ............................. 1,033 767 336
Tax-exempt investment securities .............. 1,278 1,231 873
Total interest income ....................... 40,991 36,267 30,055
INTEREST EXPENSE
Interest on deposits ............................ 17,374 15,644 12,322
Federal funds purchased and securities sold
under agreements to repurchase................. 1,491 1,353 584
Interest on borrowed funds ...................... 2,871 2,257 1,885
Total interest expense ...................... 21,736 19,254 14,791
Net interest income ......................... 19,255 17,013 15,264
Provision for loan losses ....................... 1,266 386 645
Net interest income after provision for loan
losses ........................................ 17,989 16,627 14,619
OTHER INCOME
Investment services and trust income ............ 1,295 1,105 1,020
Service charges on deposit accounts ............. 1,692 1,293 1,199
Securities gains ................................ 262 197 196
Net gains on loan sales ......................... 1,044 491 390
Equity in losses of real estate ventures......... -104 -81 -137
Other ........................................... 1,219 948 696
Total other income .......................... 5,408 3,953 3,364
OTHER EXPENSES
Salaries and employee benefits .................. 8,006 7,597 6,818
Occupancy and premises .......................... 1,246 917 827
Furniture and equipment ......................... 1,365 1,111 896
Marketing ....................................... 645 441 627
Net cost of operation of other real estate ...... 56 53 26
Supplies ........................................ 535 443 442
Other taxes ..................................... 375 331 325
Other............................................ 3,003 2,341 2,089
Total other expenses ........................ 15,231 13,234 12,050
Income before income taxes....................... 8,166 7,346 5,933
Applicable income taxes ......................... 1,356 1,715 1,084
NET INCOME ...................................... $ 6,810 $ 5,631 $ 4,849
PER SHARE DATA
NET INCOME ...................................... $ 1.53 $ 1.27 $ 1.10
NET INCOME, assuming dilution ................... $ 1.51 $ 1.26 $ 1.09
</TABLE>
See notes to consolidated financial statements.
5 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
Years Ended December 31,
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Net income ..................................... $6,810 $5,631 $4,849
Other comprehensive income:
Unrealized gains (losses) on securities
arising during period ........................ -260 2,049 -48
Reclassification adjustment for gains
included in net income ....................... -262 -196 -185
Other comprehensive income (loss) before taxes . -522 1,853 -233
Income taxes (benefits) related to other
Comprehensive income (loss) .................. -177 630 -79
Other comprehensive income (loss)............... -345 1,223 -154
COMPREHENSIVE INCOME ......................... $6,465 $6,854 $4,695
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Accumulated
Additional Other
(in thousands, except Common Paid-in Retained Comprehensive
number of shares) Shares Stock Capital Earnings Income
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 ...... 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 (losses) on securities,
net of reclassification
adjustment .................. -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 (losses) on securities,
net of reclassification
adjustment ................. 1,223
BALANCE, DECEMBER 31, 1997 .... 2,961,127 $14,806 $18,664 $ 8,407 $1,593
Net income ................... 6,810
Cash dividends ............... -2,050
Three-for-two stock split .... 1,482,821 -17 6
Shares issued ................ 24,513 92 227
Change in unrealized holding
gains (losses) on securities,
net of reclassification
adjustment .................. -345
BALANCE, DECEMBER 31, 1998 .... 4,468,461 $14,881 $18,891 $13,173 $1,248
</TABLE>
See notes to consolidated financial statements.
6 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $6,810 $5,631 $4,849
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization ..................... 1,638 1,342 1,179
Net (accretion) amortization of investment
security (discounts) premiums ................ 363 -178 3
Provision for loan losses ...................... 1,266 386 645
Gain on calls of investment securities
held-to-maturity ............................. 0 -1 -11
Gain on sale of investment securities
available-for-sale ........................... -262 -196 -185
(Gain) loss on sale of fixed assets ............ 11 -50 -46
Gain on sale of loans .......................... -1,044 -491 -390
(Gain) loss on sale of other real estate ....... -14 33 2
Net deferred loan fees ......................... -814 -559 -290
Equity in losses of real estate ventures........ 104 81 137
(Increase) decrease in interest/dividend
receivable ................................... 30 -703 -142
(Increase) decrease in other assets ............ 318 -338 -1,007
Increase in interest payable ................... 525 589 101
Increase (decrease) in other liabilities ....... -109 140 -83
Loans originated for sale ...................... -63,734 -29,794 -23,370
Proceeds from sale of loans .................... 65,179 30,673 24,028
Increase in other noncash items ................ 45 1 9
Net cash provided by operating activities ......... 10,312 6,566 5,429
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities held-to-maturity ..................... 8,488 5,584 5,756
Proceeds from sales and maturities of investment
securities available-for-sale ................... 41,377 31,619 26,931
Purchases of investment securities
held-to-maturity ................................ 0 -19,763 -5,292
Purchases of investment securities available-
for-sale ........................................ -32,810 -66,429 -63,694
Net increase in loans ............................. -77,321 -30,946 -28,316
Capital expenditures .............................. -3,477 -1,111 -1,300
Proceeds from sale of fixed assets ................ 6 78 108
Net (purchase) return of investment in real estate
ventures......................................... -2,209 18 0
Proceeds from sale of other real estate ........... 252 827 203
Net cash used in investing activities ............. -65,694 -80,123 -65,604
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits and savings ....... 35,074 18,827 32,648
Net increase in certificates of deposit ........... 20,508 23,072 20,898
Net increase (decrease) in federal funds purchased
and repurchase agreements ....................... -8,035 16,106 7,952
Payments made for capital leases .................. -40 -35 -30
Net increase (decrease) in other borrowings ....... 19,312 14,208 -758
Proceeds from issuance of common stock ............ 309 231 83
Dividends paid .................................... -2,050 -1,707 -1,606
Net cash provided by financing activities ......... 65,078 70,702 59,187
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS. 9,696 -2,855 -988
CASH & CASH EQUIVALENTS AT JANUARY 1, ............. 14,928 17,783 18,771
CASH & CASH EQUIVALENTS AT DECEMBER 31, ........... $24,624 $14,928 $17,783
</TABLE>
See notes to consolidated financial statements.
(All amounts presented in the tables are in thousands, except per share data)
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
USE OF ESTIMATES:
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from such estimates.
STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents include cash
and money market investments.
INVESTMENT SECURITIES:
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, 1998 or 1997. Such securities would be
bought principally for the purpose of selling them in the near term.
Management reassesses the appropriateness of the classifications each quarter.
The Corporation calculates amortization and accretion using the straight-line
method on most of the investments and the effective interest method on some of
the investments. The amortization and accretion recognized on the straight-
line method does not differ materially from the interest method. Security
gains and losses are determined using the specific identification method.
COMPREHENSIVE INCOME:
The Corporation adopted Statement of Financial Accounting Standards No. 131,
"Reporting Comprehensive Income," as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance sheet.
Such items, along with net income, are also components of comprehensive
income. The adoption of this Statement had no effect on the Corporation's net
income or shareholders' equity.
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
LOANS:
Loans are stated at the principal amount outstanding, net of deferred loan
fees and costs. Loan origination and commitment fees and related direct costs
are deferred and amortized to income over the term of the respective loan and
loan commitment period as a yield adjustment.
Loans held-for-sale primarily consist of residential mortgages and are carried
at the lower of aggregate cost or fair value. Fair value is estimated on an
individual loan basis using quoted market prices. Gains and losses on
residential mortgages held-for-sale are included in other income.
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.
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. Additions are made to the reserve
through periodic provisions, which are charged to expense. Management
evaluates the adequacy of its loan loss reserve on a quarterly basis. The
impact of economic conditions on the creditworthiness of borrowers is
considered, as well as loan loss experience and changes in the composition and
volume of the loan portfolio. These and other factors are considered in
assessing the overall adequacy of the reserve. Significant change in the
estimate could result in a material change to net income.
Impaired loans are accounted for in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118. Under this Statement, the allowance for
credit losses related to loans that are identified for evaluation 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. 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.
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
LOAN SERVICING RIGHTS:
The Corporation uses Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" to account for purchased and originated loan
servicing rights. This Statement is effective for transactions entered into
after December 31, 1996 and is required to be applied prospectively. This
Statement superseded Statement No. 122, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."
The Corporation allocates the total cost of loans originated or purchased
between loans and servicing rights based on the relative fair value of each.
The loan servicing rights are amortized, using the straight-line method, over
the period of estimated servicing income. For purposes of evaluating and
measuring impairment, the Corporation stratifies the loan servicing rights
based on original term and date of origination and uses quoted market prices
to estimate fair value. The Corporation did not have a valuation allowance
associated with the loan servicing rights as of December 31, 1998 or 1997.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation, computed on the straight-line method, is charged
to operations based on the following range of lives: buildings - 20 to 60
years and equipment - 3 to 20 years. Leasehold improvements are amortized
over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Maintenance, repairs and minor
replacements are expensed as incurred. Gains and losses on dispositions are
reflected in current operations.
TRUST ASSETS:
Assets held by the Corporation's subsidiary in fiduciary or agency capacity
for customers are not included in the consolidated financial statements, as
such items are not assets of the Corporation or its subsidiaries.
INCOME TAXES:
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
$4,521,000 and $3,167,000 at December 31, 1998 and 1997, respectively.
Average required reserves during 1998 and 1997 were $3,948,000 and $5,567,000,
respectively.
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
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.
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.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commitments to extend credit (legally binding) ............ $112,495 $80,762
Standby letters of credit and financial guarantees ........ $ 8,712 $ 7,252
</TABLE>
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 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.
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 sixteen 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.
11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 5 - CONCENTRATION OF CREDIT RISK, (continued)
Although the Corporation has a diversified loan portfolio, it grants loans to
a number of local auto dealers and to their closely-held real estate companies.
Loans to the auto dealers are used mainly to fund new and used car inventories
and leasing receivables. Loans to the closely-held real estate companies are
used primarily to fund land leases to the auto dealers. The Corporation
generally retains auto titles or first mortgages as collateral. Other
collateral may be obtained based on the loan purpose or management's credit
evaluation.
The total credit exposure related to loans to auto dealers and
their closely-held real estate companies was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Principal balance ........................................ $35,835 $19,620
Available credit ......................................... 14,628 5,518
Total credit exposure .................................... $50,463 $25,138
</TABLE>
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, 1998 and 1997 were
$479,000 and $379,000, 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, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations 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
</TABLE>
The amortized cost and estimated fair value of investment securities
classified as available-for-sale as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
Obligations of U.S. government
Corporations 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
</TABLE>
12 <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 debt securities at December
31, 1998, 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.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less ............... $ 1,303 $ 1,311 $ 2,500 $ 2,513
Due after one year through five years.. 4,773 5,016 2,514 2,568
Due after five years through ten years. 14,734 15,142 5,726 5,870
Due after ten years ................... 4,592 4,769 8,541 8,594
25,402 26,238 19,281 19,545
Mortgage-backed securities and
collateralized mortgage
obligations ........................ 8,857 8,958 88,304 89,034
Total debt securities ................. $34,259 $35,196 $107,585 $108,579
</TABLE>
The amortized cost and estimated fair value of investment securities
classified as held-to-maturity as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
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
</TABLE>
The amortized cost and estimated fair value of investment securities
classified as available-for-sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
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
</TABLE>
13<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES, (continued)
Proceeds from sales of investment securities classified as available-for-sale
during 1998, 1997 and 1996 were $471,000, $6,818,000 and $14,560,000,
respectively. Gross realized gains during 1998, 1997 and 1996 were $262,000
$196,000 and $293,000, respectively. Gross realized losses during 1998, 1997
and 1996 were $0, $0 and $108,000, respectively.
No held-to-maturity investment securities were sold during 1998, 1997 or 1996,
however, gains were recognized on securities with call options exercised by
the issuer. Realized gains were $0, $1,000 and $11,000 in 1998, 1997 and
1996, respectively.
At December 31, 1998 and 1997, assets with a carrying value of $40,686,000 and
$42,895,000, 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, 1998 or 1997.
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES
Loans were comprised of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial, financial and industrial loans..... $117,997 $ 80,636
Real estate mortgage loans:
Real estate construction-related ............ 13,523 12,105
Real estate mortgage loans secured by 1 to 4
family residential properties .............. 126,542 107,797
Other real estate ........................... 100,585 80,462
Total real estate mortgage loans .............. 240,650 200,364
Consumer loans:
Monthly payment ............................. 30,498 30,952
Other revolving credit ...................... 791 1,476
Total consumer loans .......................... 31,289 32,428
Other ......................................... 173 245
Total loans ................................... $390,109 $313,673
</TABLE>
Changes in the reserve for loan losses for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year ............ $3,304 $3,130 $2,937
Provision for loan losses ............. 1,266 386 645
Loans charged-off:
Commercial, financial and industrial. 522 0 25
Real estate ......................... 0 0 215
Consumer ............................ 235 327 369
Total loans charged-off ............... 757 327 609
Recoveries:
Commercial, financial and industrial. 0 32 6
Real estate ......................... 0 15 36
Consumer ............................ 99 68 115
Total recoveries ...................... 99 115 157
Balance, end of year .................. $3,912 $3,304 $3,130
</TABLE>
14 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES, (continued)
Nonaccrual loans were $1,435,000, $740,000 and $615,000 at December 31,
1998, 1997 and 1996, 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 $60,000, $56,000 and $37,000
at December 31, 1998, 1997 and 1996, respectively. Accruing loans which were
contractually past due 90 days or more were $7,000, $33,000 and $0 at
December 31, 1998, 1997 and 1996, respectively.
The total recorded investment in impaired loans was $1,748,000 and $1,314,000
at December 31, 1998 and 1997, respectively. 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
1998, 1997 and 1996 was $1,672,000, $2,456,000, and $1,764,000, respectively.
The Corporation recognized interest income on impaired loans of $123,000 in
1998, $233,000 in 1997, and $193,000 in 1996. Interest income recognized on a
cash basis would have been $122,000 in 1998, $206,000 in 1997, and $214,000 in
1996. The recorded reserve for impaired loans as of December 31, 1998 and
1997 was $150,000 and $0, respectively.
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
$18,119,000 and $9,192,000 at December 31, 1998 and 1997, respectively.
During 1998, $31,475,000 of new loans were made to related parties and
repayments totaled $22,548,000.
Residential mortgage loans with a book value of $3,179,000 and $2,940,000 were
committed for sale and awaiting settlement at December 31, 1998 and 1997,
respectively. The cumulative market value exceeded the book value of these
loans. Total loans serviced were $106,647,000, $100,355,000 and $93,327,000
at December 31, 1998, 1997 and 1996, respectively.
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land and land improvements ............................. $1,464 $1,109
Buildings .............................................. 11,423 10,894
Capitalized leased premises and equipment .............. 442 442
Furniture and equipment ................................ 12,288 10,503
Construction in process ................................ 704 0
26,321 22,948
Less accumulated depreciation .......................... 10,420 9,084
Total bank premises and equipment ...................... $15,901 $13,864
</TABLE>
Provisions for depreciation charged to operating expenses were $1,423,000,
$1,226,000 and $1,110,000 for 1998, 1997 and 1996, respectively. As of
December 31, 1998, construction in process was primarily related to the Hellam
branch, which opened in January, 1999.
15<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 9 - LOAN SERVICING RIGHTS
Changes in loan servicing rights for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning of year.............................. $297 $158
Servicing rights recognized ............................ 389 197
Servicing rights amortized ............................. 154 58
Balance, end of year.................................... $532 $297
Fair value, end of year................................. $812 $443
</TABLE>
NOTE 10 - INVESTMENT IN REAL ESTATE VENTURES
The Drovers & Mechanics Bank, a wholly-owned subsidiary of Drovers Bancshares
Corporation, is a limited partner in four ventures to renovate and operate
apartment buildings. The first building opened in 1994. The second opened in
March, 1996. The third opened in December, 1998. The fourth is scheduled to
be opened in 1999. All four partnerships 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, 1998 and 1997 were $5,385,000 and $2,292,000, respectively.
NOTE 11 - TIME DEPOSITS
At December 31, 1998 and 1997, time deposits of $100,000 or more aggregated
$27,037,000 and $20,424,000, respectively. Interest expense on these time
deposits amounted to approximately $1,390,000 in 1998, $1,258,000 in 1997 and
$1,010,000 in 1996. The amount of total time deposits maturing in the years
ended December 31, 1999 through 2003 are as follows: $157,431,000;
$44,756,000; $8,699,000; $6,334,000 and $3,510,000, respectively.
NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Notes payable to FHLB Pittsburgh:
Due 1998, 5.43% - 6.72% .................................. $ 0 $ 3,500
Due 1998, variable ....................................... 0 10,000
Due 2000, 6.01% .......................................... 100 100
Due 2000, variable ....................................... 4,000 4,000
Due 2002, 5.48% - 5.60%, convertible quarterly after 1998. 20,000 20,000
Due 2003, 6.40% .......................................... 400 400
Due 2003, 5.13%, convertible quarterly after 2000 ........ 8,000 0
Due 2005, 5.24%, convertible quarterly after 2001 ........ 5,000 0
Due 2008, 4.86% - 4.94%, convertible quarterly after 1999. 15,000 0
Due 2008, 5.15%, convertible in 2005 ..................... 5,000 0
Due 2015, 3.75%, amortizing .............................. 372 378
Note payable to First Union:
Due 2003, 6.53% .......................................... 4,805 4,987
62,677 43,365
Capital lease obligations .................................. 153 193
$62,830 $43,558
</TABLE>
16<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS, (continued)
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 fair
value of the FHLB stock as of December 31, 1998 and 1997 was $6,716,000 and
$5,533,000, respectively. The interest rates on the variable notes reprice
quarterly or more frequently and are based on LIBOR or prime. Borrowings at a
fixed rate until after a specified date are Convertible Select borrowings.
These borrowings include a put option if the FHLB elects to convert the debt
to a variable interest rate. The Corporation also maintains a credit line
with the FHLB secured by the same collateral. The unused credit line totaled
$92,056,000 at December 31, 1998. The First Union 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 amounts of
notes payable and capital leases maturing in the years ended December 31, 1999
through 2003 are as follows: $246,000; $4,365,000; $266,000; $20,252,000 and
$12,369,000, respectively.
At December 31, 1998 and 1997, 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 Hellam land lease contains a purchase option.
The rental expense under such leases amounted to $390,000 in 1998, $270,000 in
1997 and $164,000 in 1996.
Future minimum rental payments under capital leases and noncancelable
operating leases with terms of one year or more at December 31, 1998 were:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
1999 ..................................................... $ 65 $ 422
2000 ..................................................... 65 376
2001 ..................................................... 45 338
2002 ..................................................... 11 342
2003 ..................................................... 0 348
Thereafter................................................ 0 1,766
Total future minimum rental payments ..................... 186 $3,592
Less interest ............................................ 33
Present value of minimum rental payments ................. $153
</TABLE>
NOTE 13 - ESTIMATED 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, 1998 and 1997. 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.
17<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS, (continued)
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments. $ 24,624 $ 24,624 $ 14,928 $ 14,928
Investment securities .......... 161,619 162,556 179,299 180,245
Net loans ...................... 386,197 389,433 310,369 312,637
Interest receivable ............ 2,830 2,830 2,860 2,860
FINANCIAL LIABILITIES:
Demand and savings deposits .... 228,029 228,029 193,319 193,319
Time deposits .................. 229,643 230,673 208,767 208,125
Federal funds purchased and
securities sold under
agreement to repurchase ...... 23,325 23,325 31,360 31,360
Notes payable .................. 62,677 60,286 43,365 42,916
Interest payable ............... 3,548 3,548 3,023 3,023
</TABLE>
The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate
that value: For short-term instruments, the carrying amount is a reasonable
estimate of fair value. The fair value of investment securities is based on
quoted market prices, dealer quotes and prices obtained from independent
pricing services. For floating rate loans which experienced no significant
change in credit risk and for deposits with floating interest rates it is
presumed that estimated fair values generally approximate the carrying amount.
The fair value of fixed rate loans and time deposits is estimated based on
present values using applicable risk-adjusted spreads to the U.S. Treasury
curve to approximate current rates offered for loans and deposits of similar
maturities. Management believes that the risk factor embedded in the
currently offered rates results in a fair valuation of the loan portfolio.
The primary risks 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 $121,207,000. Off-balance
sheet items are primarily comprised of unfunded loan commitments, which are
generally priced at market at the time of funding.
NOTE 14 - INCOME TAXES
Total income tax expense for the years ended December 31, was allocated as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income from continuing operations ................... $1,356 $1,715 $1,084
Shareholders' equity, for other comprehensive
income ............................................ -177 630 -79
Total income tax expense ............................ $1,179 $2,345 $1,005
</TABLE>
18<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 14 - INCOME TAXES, (continued)
Income tax expense attributable to other comprehensive income consists of the
following at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Unrealized gains (losses) on securities
arising during the period ............... $ -88 $697 $-13
Reclassification adjustment for gains
(losses) included in net income ......... -89 -67 -66
Income taxes (benefits) related to other
Comprehensive income .................... $-177 $630 $-79
</TABLE>
Income tax expense attributable to income from continuing operations consists of
the following at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Currently payable .......................... $1,447 $1,656 $1,145
Deferred expense (benefit).................. -91 59 -61
Income tax expense ......................... $1,356 $1,715 $1,084
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income before income tax ............ $8,166 $7,346 $5,933
Tax at federal income tax rate ...... $2,776 $2,498 $2,017
Differences resulting from:
Effect of tax-exempt income ........ -391 -343 -256
Historic and low income tax credits. -808 -279 -633
Effect of dividend income .......... -246 -183 -80
Excess provision for loan losses ... 236 59 66
Other items, net ................... -211 -37 -30
Applicable income tax ............... $1,356 $1,715 $1,084
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations for the years ended
December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Excess provision for loan losses ........... $-236 $-59 $-66
Alternative minimum tax credit carryforward. 0 0 -133
Other items, net ........................... 145 118 138
$ -91 $ 59 $-61
</TABLE>
19<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 14 - INCOME TAXES, (continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses .................... $1,067 $ 831
Pension ...................................... 155 183
Other ........................................ 70 70
Total gross deferred tax assets ............ 1,292 1,084
Deferred tax liabilities:
Bank premises and equipment .................. 381 427
Unrealized holding gains on available-
for-sale securities .......................... 643 821
Other ........................................ 388 229
Total gross deferred tax liabilities ....... 1,412 1,477
Net deferred tax liabilities ................... $ -120 $ -393
</TABLE>
Federal income taxes on security gains were $89,000, $67,000 and $66,000 in
1998, 1997 and 1996, 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.
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
three-for-two stock split in 1998, a 5% stock dividend issued in 1997 and a
25% stock dividend issued 1996. Net income per share and net income per
share, assuming dilution, were calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income .............................. $6,810 $5,631 $4,849
Average shares outstanding .............. 4,455 4,427 4,421
Effect of dilutive securities:
Stock options .......................... 67 40 21
Average shares outstanding,
assuming dilution ...................... 4,522 4,467 4,442
Net income per share .................... $ 1.53 $ 1.27 $ 1.10
Net income per share, assuming dilution . $ 1.51 $ 1.26 $ 1.09
</TABLE>
20 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 16 - COMMON STOCK
The Corporation issued the following stock dividends including a three-for-two
stock split during 1998:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Percentage ................................... 50% 5%
Record date .................................. 5-08-98 11-14-97
Payable date ................................. 5-29-98 11-28-97
</TABLE>
NOTE 17 - CASH FLOW DISCLOSURES
The Corporation paid interest and income taxes of $21,211,000 and $1,670,000
in 1998, $18,667,000 and $1,570,000 in 1997 and $14,689,000 and $1,250,000 in
1996, respectively. Transfers from loans to other real estate as a result of
foreclosure were $277,000, $211,000 and $822,000 in 1998, 1997 and 1996,
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
sufficiently 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 $161,000 in 1998, $139,000 in 1997 and $164,000 in 1996. 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.
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated financial statements at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1, ......................... $-3,026 $-2,365
Service cost .............................................. -257 -208
Interest cost ............................................. -219 -183
Benefits paid ............................................. 176 84
Actuarial loss ............................................ -177 -354
Benefit obligation at December 31, ........................ $-3,503 $-3,026
Change in plan assets:
Fair value of plan assets at January 1, ................... $ 3,370 $ 2,554
Employer contributions .................................... 312 242
Actual return on assets ................................... 199 658
Benefits paid ............................................. -176 -84
Fair value of plan assets at December 31, ................. $ 3,705 $ 3,370
Funded status .............................................. $ 202 $ 344
Unrecognized net transition asset .......................... -128 -141
Unrecognized prior service cost ............................ 9 10
Unrecognized net gain ...................................... -17 -297
Prepaid (accrued) pension cost ............................. $ 66 $ -84
</TABLE>
21 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 18 - RETIREMENT PLAN, (continued)
The net periodic benefit cost included the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost .................................... $257 $208 $258
Interest cost ................................... 219 183 227
Expected return on plan assets .................. -303 -240 -309
Amortization of net transition asset ............ -13 -13 -13
Amortization of prior service cost .............. 1 1 1
Net periodic benefit cost ....................... $161 $139 $164
</TABLE>
The following weighted average assumptions were used for the plan:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Discount rate ....................................... 7.0% 7.3% 7.8%
Rate of increase in salary levels ................... 4.0% 5.0% 5.0%
Long-term rate of return on plan assets ............. 9.0% 9.0% 9.0%
</TABLE>
Plan assets are invested in mutual funds which 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. Effective
January 1, 1998, the Corporation's contribution equals 50% of the employee's
contribution up to a maximum of 6% of annual salary. In 1997 and 1996, the
Corporation's contribution equalled 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 $112,000, $47,000 and $42,000 in 1998, 1997 and
1996, respectively.
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, 111,440 options have been authorized and
not yet granted. The following shares and average options prices have been
adjusted for subsequent stock splits and dividends:
<TABLE>
<CAPTION>
1998 1997 1996
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, ....... 135 $11.77 105 $10.87 96 $ 9.74
Granted ..................... 24 25.00 38 14.29 37 13.08
Exercised ................... 26 10.02 8 11.98 28 9.96
Forfeited ................... 2 18.80 0 -- 0 --
Balance at December 31, ..... 131 $14.38 135 $11.77 105 $10.87
Exercisable at December, 31 . 120 $13.41 116 $11.36 87 $10.39
</TABLE>
22 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 19 - STOCK OPTION PLANS, (continued)
The following options were outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Exercise Remaining Options
Outstanding Price Life Exercisable
<S> <C> <C> <C> <C>
Issued 1990 .......... 4 $ 6.42 1.9 years 4
Issued 1994 .......... 9 11.16 5.9 9
Issued 1995 .......... 31 10.27 6.3 31
Issued 1996 .......... 32 13.08 7.3 32
Issued 1997 .......... 33 14.29 8.3 33
Issued 1998 .......... 22 25.00 9.1 11
131 $14.38 7.4 years 120
</TABLE>
The weighted average grant-date fair value of options granted during 1998,
1997 and 1996 was $9.98, $5.28 and $6.21, respectively. The Corporation uses
the Black-Scholes Option Pricing Model to calculate the grant-date fair value.
The following significant assumptions were used:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Risk free interest rate ................. 5.6% 6.9% 6.5%
Expected life ........................... 8.2 years 9.0 years 9.5 years
Expected volatility ..................... 15.4% 12.7% 14.0%
Expected dividends ...................... 1.6% 2.4% 2.7%
</TABLE>
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, 3,718 and 2,049 shares were purchased in 1998 and 1997, respectively.
As of December 31, 1998, 236,250 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:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net Income
As reported..................................... $6,810 $5,631 $4,849
Pro forma....................................... $6,630 $5,489 $4,731
Earnings per share
As reported..................................... $ 1.53 $ 1.27 $ 1.10
Pro forma....................................... $ 1.49 $ 1.24 $ 1.07
Earnings per share, assuming dilution
As reported..................................... $ 1.51 $ 1.26 $ 1.09
Pro forma....................................... $ 1.47 $ 1.23 $ 1.07
</TABLE>
NOTE 20 - BUSINESS SEGMENTS
The Corporation conducts business in the Banking industry and offers a wide
variety of banking and trust services to individuals and commercial customers.
As of December 31, 1998 and 1997, the Corporation does use discreet financial
information on any segments that meet the reporting requirements of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." All revenues for the years ended
December 31, 1998, 1997, and 1996 were derived from sources within the United
States and no revenues from a single customer amounted to 10% or more of the
Corporation's annual revenues.
23 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 21 - PARENT CORPORATION FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
STATEMENTS OF CONDITION 1998 1997
<S> <C> <C>
ASSETS
Cash ................................................ $ 101 $ 410
Investments in and advances to subsidiaries:
The Drovers & Mechanics Bank ...................... 45,642 41,055
Drovers Realty Company ............................ 733 745
Other assets ........................................ 1,851 1,490
TOTAL ASSETS .......................................... $48,327 $43,700
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ................................... $ 134 $ 230
Total shareholders' equity .......................... 48,193 43,470
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $48,327 $43,700
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
STATEMENTS OF INCOME 1998 1997 1996
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries ........... $2,050 $2,227 $1,644
Other income .......................... 302 95 21
Total income ...................... 2,352 2,322 1,665
OPERATING EXPENSES
Other ................................. 246 148 147
Total operating expenses .......... 246 148 147
Income before income taxes ............ 2,106 2,174 1,518
Applicable income taxes (benefit) ..... 9 -23 -47
Income before undistributed earnings of
subsidiaries ........................ 2,097 2,197 1,565
Undistributed earnings of subsidiaries:
The Drovers & Mechanics Bank ........ 4,725 3,437 3,282
Drovers Realty Company ............... -12 -3 2
NET INCOME .............................. $6,810 $5,631 $4,849
</TABLE>
24 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued):
NOTE 21 - PARENT CORPORATION FINANCIAL STATEMENTS, (continued)
<TABLE>
<CAPTION>
Years Ended December 31,
STATEMENTS OF CASH FLOWS 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $6,810 $5,631 $4,849
Undistributed earnings of subsidiaries ........ -4,713 -3,434 -3,284
Gain on sale of investment securities
available-for-sale .......................... -262 -74 -5
Increase in other assets ...................... 61 -78 -1
Net cash provided by operating activities ..... 1,896 2,045 1,559
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments (receipts) from intercompany account . -19 42 -12
Purchases of investment securities
available-for-sale ........................... -916 -401 -55
Proceeds from sales of investment securities
available-for-sale ........................... 471 180 49
Net cash provided by (used in) investing
activities .................................. -464 -179 -18
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock ............................. 309 231 83
Dividends paid ................................ -2,050 -1,707 -1,606
Net cash used in financing activities ......... -1,741 -1,476 -1,523
NET INCREASE (DECREASE) IN CASH ................ -309 390 18
CASH AT JANUARY 1, ............................. 410 20 2
CASH AT DECEMBER 31, ........................... $ 101 $ 410 $ 20
</TABLE>
25 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
Independent Auditors' Report
Board of Directors and Shareholders
Drovers Bancshares Corporation
We have audited the accompanying consolidated statements of condition of
Drovers Bancshares Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years ended December 31, 1998, in conformity with generally accepted
accounting principles.
Stambaugh . Ness, P.C.
York, Pennsylvania
January 15, 1999
26 <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 $6,810,000 in 1998 and $5,631,000 in
1997. The return on average assets (ROA) and return on average equity (ROE) in
1998 were 1.22% and 14.69%, respectively. This compares to an ROA and ROE in
1997 of 1.15% and 13.88%, 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 13.2%
or $2,242,000 in 1998, after advancing 11.5% or $1,749,000 in 1997.
<TABLE>
<CAPTION>
Years Ended December 31, Increase(Decrease)
(in thousands) 1998 1997 1996 98/97 97/96 96/95
<S> <C> <C> <C> <C> <C> <C>
Total interest income .. $40,991 $36,267 $30,055 13.0% 20.7% 7.1%
Total interest expense . 21,736 19,254 14,791 12.9% 30.2% 9.3%
Net interest income .... $19,255 $17,013 $15,264 13.2% 11.5% 5.1%
</TABLE>
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
1998 and 1997.
The following table depicts the changes in rate and volume components of net
interest income:
<TABLE>
<CAPTION>
1998 over 1997 1997 over 1996
Total Change due to Total Change due to
(in thousands) Change Rate Volume Change Rate Volume
<S> <C> <C> <C> <C> <C> <C>
Total interest income .. $4,724 $-787 $5,511 $6,212 $ 14 $6,198
Total interest expense . 2,482 -132 2,614 4,463 714 3,749
Net interest income .... $2,242 $-655 $2,897 $1,749 $-700 2,449
</TABLE>
27 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
NET INTEREST INCOME,(continued)
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 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 margin:
<TABLE>
<CAPTION>
1998 Average 1997 Average
(in thousands) Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Earning assets .................... $524,729 7.81% $458,752 7.91%
Financed by:
Interest-bearing funds .......... $463,520 4.69% $408,069 4.72%
Noninterest-bearing funds ....... 61,209 -- 50,683 --
Total ........................ $524,729 4.14% $458,752 4.20%
Net interest income ............... $ 19,255 $ 17,013
Net interest spread ............... 3.12% 3.19%
Net interest income margin ........ 3.67% 3.71%
</TABLE>
The average spread and margin declined 0.07% and 0.04%, respectively, in 1998.
The average yield on earning assets fell 0.10%. This was partially offset by
a 0.03% decline in the yield on interest-bearing funds.
The Corporation increased holdings in investment securities throughout 1997.
This strategy generated net interest income used to offset the costs of an
expanding branch office network. The increased holdings in lesser yielding
investment securities, however, resulted in a narrower spread and margin,
which bottomed out in the fourth quarter of 1997. The fourth quarter margin
was 3.56%.
The Corporation experienced extraordinary loan demand in 1998. The
combination of a strong local economy, low interest rates and customer
dissatisfaction with large bank mergers caused the demand. This resulted in
strong loan growth accounting for nearly all of the increase in interest-
bearing assets. This change in mix of higher yielding loans compared to
investment securities caused the margin to increase throughout most of 1998.
In the fourth quarter of 1998, the Federal Reserve reduced short-term interest
rates by lowering the "discount rate." The Corporation is asset sensitive,
with more interest-earning assets that reprice when short-term interest rates
change than interest-bearing liabilities. The decrease in short-term interest
rates caused the margin to decline to 3.61% in the fourth quarter of 1998.
28 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS,(continued)
PROVISION FOR LOAN LOSSES
The provision for loan losses was $1,266,000, $386,000 and $645,000 for 1998,
1997 and 1996, 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
determines the required provision. The analysis considers many factors
including charge-off history, loan quality and loan growth. Net charge-offs
for 1998, 1997 and 1996 were $658,000, $212,000 and $452,000, respectively.
As a percentage of average loans, net charge-offs were 0.18%, 0.07% and 0.17%
in 1998, 1997 and 1996, respectively. Nonaccrual loans as a percentage of
total loans at December 31, 1998, 1997 and 1996 were 0.37%, 0.24% and 0.22%,
respectively. Loans grew $76,436,000, $30,556,000 and $27,712,000 in 1998,
1997 and 1996, respectively. The reserve for loan losses as a percentage of
loans at December 31, 1998, 1997 and 1996 was 1.00%, 1.05% and 1.11%,
respectively. An increase in net charge-offs, nonaccrual loans and total loans
caused management to increase the 1998 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.
<TABLE>
OTHER INCOME
<CAPTION>
Years Ended December 31, Increase(Decrease)
(in thousands) 1998 1997 1996 98/97 97/96 96/95
<S> <C> <C> <C> <C> <C> <C>
Investment services and
trust income ............. $1,295 $1,105 $1,020 17.2% 8.3% 10.4%
Service charges on deposit
accounts ................. 1,692 1,293 1,199 30.9% 7.8% 22.1%
Securities gains ........... 262 197 196 33.0% 0.5% 84.9%
Net gains on loan sales .... 1,044 491 390 112.6% 25.9% 40.3%
Equity in losses
of real estate ventures... -104 -81 -137 28.4% -40.9% 114.1%
Other ...................... 1,219 948 696 28.6% 36.2% 13.9%
Total other income ......... $5,408 $3,953 $3,364 36.8% 17.5% 18.6%
</TABLE>
Noninterest income was $5,408,000 in 1998, an increase of $1,455,000 from 1997
The 1997 noninterest income was $3,953,000, an increase of $589,000 over the
1996 level of $3,364,000.
Income from the financial services and trust division increased $190,000, or
17.2%, in 1998. The fair value of investments managed by the division was
$252,121,000 at the end of 1998, an increase of 16.2% over the prior year.
The division experienced strong growth in the trust services area, including
employee benefits, personal trust and in 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 $399,000, or 30.9%, in 1998. The
Corporation engaged a consulting group in the fourth quarter of 1997. They
completed an analysis of various products and processes that sought ways to
enhance productivity by reducing expenses and improving noninterest income.
Most of the increase in deposit service charges was a direct result of
implementing their recommendations. Fees from business checking accounts grew
in 1997 due to growth in business deposits. In April 1996, the Corporation
raised automatic teller machine (ATM) transaction fees, which helped, increase
deposit service charges throughout 1998 and 1997.
Net gains from investment securities sales were $262,000 in 1998. The
Corporation liquidated some of its community bank stock portfolio accounting
for most of the gains. A similar liquidation in late 1997 accounted for
$74,000 in gains. The other gains in 1997 and in 1996 came from investment
portfolio restructuring used to increase interest income and decrease overall
asset sensitivity.
29 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
OTHER INCOME, (continued)
Net gains on loan sales result mostly from the sale of residential mortgages.
Low interest rates, a strong economy and a mild winter pushed gains to record
levels in 1998. Mortgage loans sold were $60,817,000, $30,321,000 and
$23,814,000 in 1998, 1997 and 1996, respectively. When the Corporation sells
loans and retains servicing, it recognizes a servicing asset. This
recognition increases the loan sale gains. Mortgage servicing rights
recognized and included in loan sale gains were $361,000, $197,000 and
$176,000 in 1998, 1997 and 1996, respectively. The Corporation sold a small
credit card portfolio in 1998 for a gain of $43,000. The sale of commercial
loan participations in 1998 totaled $3,682,000. This generated a $28,000 gain
from capitalizing the loan servicing rights.
The Corporation recognized a $104,000 loss during 1998 from its equity
investments in four real estate limited partnerships. The partnerships were
formed to renovate properties for lease as low-income housing apartments. The
first two partnerships opened in 1994 and 1996. Both remain fully occupied.
The third partnership opened its first of two buildings in late 1998.
Apartment rent-up has exceeded projections. Construction has begun on the
building owned by the fourth partnership and is expected to open in 1999. The
Corporation receives substantial financial benefits from these investments in
the form of historic and low-income tax credits.
Other income increased $271,000, or 28.6%, in 1998. 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 various electronic transactions have steadily
increased. In 1998, these fees increased $157,000 and provided most of the
growth in other income. The ATM surcharge generated $180,000 in fees in 1997,
its first year of implementation. Loan servicing income continues to provide
a steady source of other income. Total mortgage loans serviced were
$106,647,000, $100,355,000 and $93,327,000 at the end of 1998, 1997 and 1996,
respectively.
<TABLE>
OTHER EXPENSES
<CAPTION>
Years Ended December 31, Increase(Decrease)
(in thousands) 1998 1997 1996 98/97 97/96 96/95
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits . $ 8,006 $ 7,597 $ 6,818 5.4% 11.4% 6.1%
Occupancy and premises ......... 1,246 917 827 35.9% 10.9% 3.6%
Furniture and equipment ........ 1,365 1,111 896 22.9% 24.0% 22.1%
Marketing ...................... 645 441 627 46.3% -29.7% 61.2%
Net cost of operation
of other real estate .......... 56 53 26 5.7% 103.8% 766.7%
Supplies........................ 535 443 442 20.8% 0.2% 27.7%
Other taxes .................... 375 331 325 13.3% 1.8% 10.5%
Other .......................... 3,003 2,341 2,089 28.3% 12.1% 1.0%
Total other expenses ........... $15,231 $13,234 $12,050 15.1% 9.8% 9.0%
</TABLE>
Other expenses include all expenses except interest, provision for loan losses
and income taxes. In 1998, total other expenses increased $1,997,000,
or 15.1%.
Salaries and employee benefits are the most significant noninterest expense
category, representing 52.6% of total other expenses for 1998. In 1998,
salaries and employee benefits increased $409,000, or 5.4%. Enhancing
productivity was a focal point of the recent consulting engagement. Full-time
equivalent staffing levels were 215 at the end of 1998 compared to 209 in 1997
and 193 in 1996. The Corporation maintains two incentive compensation plans.
Both plans require minimum earnings targets before incentives are paid. The
Corporation paid incentives of $511,000, $391,000 and $234,000 in 1998, 1997
and 1996, respectively.
30 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
OTHER EXPENSES, (continued)
Occupancy and premises expense increased $329,000, or 35.9%, during 1998. Two
branch offices opened in late 1997 caused most of this year's increase. Lease
payments for the new Hellam office, opened in January 1999, began in the
fourth quarter. The Corporation accelerated the depreciation expense on a
branch office scheduled for relocation within a grocery store. This resulted
in an additional $56,000 in expense. Occupancy and premises expense 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 $17,000,
$111,000 and $134,000 in 1998, 1997 and 1996, respectively. The positive
impact to occupancy and premises expense has declined due to an increase in
space occupied by the Corporation and its subsidiaries.
Furniture and equipment expense increased $254,000, or 22.9%, in 1998.
Personal computer and Year 2000 software upgrades contributed to the increase.
Depreciation expense rose due to the equipment purchased for the new branch
offices. 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 occurred in
1996.
Marketing expense grew $204,000, or 46.3%, during 1998. The Corporation
conducted an extensive image and branding campaign. The campaign focused on
the Corporation's community bank image and commitment to the markets it serves.
A subsidiary of the Corporation, The Drovers & Mechanics Bank, celebrated its
115th anniversary in June.
The net cost of operating other real estate was $56,000 in 1998 compared to
$53,000 in 1997 and $26,000 in 1996. Other real estate held was $148,000,
$154,000 and $803,000 in 1998, 1997 and 1996, respectively.
Other expenses increased $662,000, or 28.3%, in 1998. Professional services
increased $146,000 mainly due to consulting services discussed previously.
Total costs for consulting services were about $270,000, well below the
savings received from implementing their recommendations. In addition, the
Corporation commissioned an organizational sales assessment. As a result,
extensive sales and sales management training will begin in 1999. The
training will help sustain growth and high performance. Amortization of loan
servicing rights increased $96,000 in 1998 due to an increase in residential
mortgage loan refinancings. Data processing expenses increased $106,000
caused by the expansion of our ATM network. Higher consulting and data
processing expenses contributed to the 1997 increase. Legal fees and checking
account benefits purchased from a third party caused the increase in 1996.
TAXATION
The Corporation seeks to minimize its tax liability by investing in low-income
housing partnerships that provide tax credits, purchasing tax-free municipal
bonds and purchasing equity investments eligible for partially tax-free
dividends. The effective tax rate was 16.6% in 1998, 23.3% in 1997 and 18.3%
in 1996. Tax credits received were $807,000, $279,000 and $633,000 in 1998,
1997 and 1996, respectively. Average municipal bonds were $23,546,000,
$22,207,000 and $14,746,000 in 1998, 1997 and 1996, respectively. Average
equity securities were $18,212,000 in 1998, $13,114,000 in 1997 and $5,503,000
in 1996. The effective tax rate fluctuates mainly from the level of tax
credits received. The Corporation increased its holdings in tax advantaged
investments to help offset increasing taxable income. Projected tax credits
are $789,000 in 1999, $595,000 per year in 2000 through 2003 and $2,168,000
thereafter.
31 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
FORWARD OUTLOOK
The Financial Accounting Standards Board issued Statement of 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.
The Corporation purchased land near Dillsburg, Pennsylvania in late 1998.
Construction of the new branch office will begin in early 1999. The
Corporation expects to open its first loan production office (LPO) in the
first quarter of 1999. The office will be located in Cumberland County, near
Harrisburg. This will be the Corporation's first facility outside York
County. The staff at the LPO will initially focus on commercial lending.
Negotiations continue to purchase land in Newberrytown, Pennsylvania to
establish a new branch office. Total capital expenditures are projected to be
$4,000,000 during 1999. All capital expenditures will be funded from
operations.
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 computer programs being written
using two digits rather than four to define the applicable year. It is
anticipated that some systems may recognize a date using "00" as the year
"1900" rather than "2000". This could result in system failures,
miscalculations and disruptions of normal business operations including, among
other things, a temporary inability to process transactions, send statements
or engage in similar day-to-day business activities.
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. In order
to prepare for the Year 2000 issue, the Corporation adopted the Federal
Financial Institutions Examination Council's (FFIEC) five step plan, which
includes awareness, assessment, remediation, testing and implementation. As
part of the assessment step, the Corporation identified all IT and Non-IT
systems, as well as all significant third party relationships. The
Corporation tested all IT and Non-IT systems identified as critical. A small
number of systems were found to be noncompliant. As of December 31, 1998,
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.
The Corporation implemented a vigorous vendor management program. As part of
the program, Year 2000 certification information was requested from all
material third parties. 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. The
Corporation is also addressing the impact, if any, the century date change may
have on its credit risk.
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. The Corporation does not expect the
amounts required to be expensed over the next 12 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 customer,
the Y2K issue could possibly have a material effect on the Corporation's
operations and financial position.
32 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
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
recognizes the need to develop 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
has been completed and a thorough business impact analysis is under way.
Contingency plans are being developed 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.
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, 1998, this segment totaled $127,360,000, or 78.8% 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, 1998 were $161,128,000, of which
$69,072,000, or 42.9%, 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.
33 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
LIQUIDITY, (continued)
Liquidity can be further analyzed by using the Statement of Cash Flows. Cash
and cash equivalents increased $9,696,000 during 1998. Cash used in investing
activities was $65,694,000 primarily as a result of a $77,321,000 increase in
net loans offset by a $17,055,000 decline in investment securities. Funds
were also required for $3,477,000 of capital expenditures and $2,209,000 for
investments in real estate partnerships. Cash provided by financing
activities was $65,078,000. Deposits provided most of the cash. Demand and
Savings deposits increased $35,074,000 and certificates of deposit increased
$20,508,000. A net increase in short-term and long-term borrowings provided
an additional $11,237,000. Operating activities provided the remaining cash
flows of $10,312,000. The significant components of operating activities are
net income, the add-back of noncash expenses like depreciation and provision
for loan losses and the net cash provided from 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 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 income would decline. This is mainly due to the relative
insensitivity in a downward rate environment 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.
34 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
INTEREST RATE SENSITIVITY MANAGEMENT, (continued)
The 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, 1998.
<TABLE>
<CAPTION>
Fair Over 5
(in thousands) Value Balance 1999 2000 2001 2002 2003 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash............. $ 24,145 $ 24,145 $ 24,145 $ 0 $ 0 $ 0 $ 0 $ 0
Average rate. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments:
Fixed rate..... 132,823 130,097 40,359 23,566 14,664 7,024 2,891 41,593
Average rate. 6.16% 6.64% 6.67% 6.21% 5.95% 6.93% 5.39%
Variable rate.. 30,212 30,110 12,939 8,500 2,901 579 712 4,479
Average rate. 6.25% 6.27% 6.19% 6.09% 6.31% 7.38% 6.26%
Loans:
Fixed rate..... 180,787 181,078 38,033 23,843 24,103 16,426 11,723 66,950
Average rate. 7.68% 6.69% 8.36% 8.35% 8.16% 8.15% 7.54%
Variable rate.. 208,646 209,031 48,024 17,390 10,929 13,463 10,078 109,147
Average rate. 8.31% 8.01% 8.34% 8.33% 8.48% 8.27% 7.99%
Deposits:
Fixed rate..... 280,872 282,420 161,500 51,393 15,230 12,977 10,146 31,174
Average rate. 4.45% 5.24% 4.89% 3.13% 3.00% 1.88% 1.73%
Variable rate.. 175,252 175,252 20,644 19,638 18,856 18,856 18,856 78,402
Average rate. 2.71% 2.86% 2.78% 2.71% 2.71% 2.71% 2.66%
Other borrowings:
Fixed rate..... 56,286 58,677 199 311 225 20,241 12,369 25,332
Average rate. 5.34% 6.43% 6.29% 6.43% 5.54% 5.62% 5.01%
Variable rate.. 27,325 27,325 23,325 4,000 0 0 0 0
Average rate. 4.92% 4.78% 5.70% 0.00% 0.00% 0.00% 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%, 19% and 19% 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.
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.
35 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
CAPITAL
Total shareholders' equity increased $4,723,000, or 10.9%, in 1998. Equity,
before the impact of accumulated other comprehensive income, increased
$5,068,000, or 12.1%. 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 14.7% for 1998 and 13.9% for 1997. Total cash
dividends declared in 1998 represented 30.1% of net income, as compared to
30.3% in 1997. The resulting internal capital growth percentage was 10.3% in
1998 and 9.7% in 1997. The percentage of average shareholders' equity to
average total assets was 8.3% in 1998 and in 1997, 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 $1,641,000 in
1998 and $558,000 in 1997.
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 1
capital includes common stock, additional paid-in capital and retained earnings.
Tier 2 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 1 capital by
total assets.
The following table shows the Corporation exceeds all minimum capital adequacy
standards:
<TABLE>
<CAPTION>
December 31,
(in thousands) 1998 1997
<S> <C> <C>
Tier 1 Capital ................................. $ 46,891 $ 41,877
Tier 2 Capital ................................. 4,315 3,304
Total risk-based capital ..................... $ 51,206 $ 45,181
Risk-adjusted on-balance sheet assets .......... $400,895 $332,434
Risk-adjusted off-balance sheet exposure ....... 14,180 12,491
Total risk-adjusted assets ................... $415,075 $344,925
Ratios:
Tier 1 risk-based capital ratio .............. 11.3% 12.1%
Minimum required for December 31, ............ 4.0% 4.0%
Total risk-based capital ratio ............... 12.3% 13.1%
Minimum required for December 31, ............ 8.0% 8.0%
Tier 1 leverage ratio ........................ 8.1% 8.0%
Minimum required for December 31, ............ 4.0% 4.0%
</TABLE>
36 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, (continued)
FINANCIAL CONDITION
The Corporation functions as a financial intermediary and, therefore, its
financial condition and progress may be examined in terms of trends in its
sources and uses of funds. The following comparison of average daily balances
indicates how the Corporation has generated and employed its funds:
<TABLE>
<CAPTION>
1998 1997 1996
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 .......... $ 653 $ -601 -47.9% $ 1,254 $-1,621 -56.4% $ 2,875
Investment securities . 169,069 4,578 2.8% 164,491 60,010 57.4% 104,481
Loans ................. 355,007 62,000 21.2% 293,007 27,474 10.3% 265,533
Total interest-
earning assets ..... 524,729 65,977 14.4% 458,752 85,863 23.0% 372,889
Noninterest-earning
assets ............... 34,443 1,958 6.0% 32,485 753 2.4% 31,732
Total uses .............. $559,172 $67,935 13.8% $491,237 $86,616 21.4% $404,621
Funding sources:
Demand deposits ....... $ 45,935 $ 3,349 7.9% $ 42,586 $1,140 2.8% $ 41,446
Savings deposits ...... 119,555 18,243 18.0% 101,312 27,010 36.4% 74,302
Time deposits ......... 218,759 18,136 9.0% 200,623 28,997 16.9% 171,626
Short-term borrowings . 28,418 2,758 10.7% 25,660 13,373 108.8% 12,287
Long-term borrowings .. 50,853 12,965 34.2% 37,888 6,852 22.1% 31,036
Total interest-
bearing liabilities. 463,520 55,451 13.6% 408,069 77,372 23.4% 330,697
Demand deposits ....... 41,752 4,677 12.6% 37,075 3,821 11.5% 33,254
Other liabilities ..... 7,550 2,013 36.4% 5,537 1,296 30.6% 4,241
Shareholders' equity .. 46,350 5,794 14.3% 40,556 4,127 11.3% 36,429
Total sources ........... $559,172 $67,935 13.8% $491,237 $86,616 21.4% $404,621
</TABLE>
Total average assets were $559,172,000, representing a $67,935,000, or 13.8%,
increase from 1997. Loans accounted for nearly all the growth, increasing
$62,000,000, or 21.2%. Commercial and residential mortgage lending provided
most of the growth in loans.
Total deposits grew $44,405,000, or 11.6%, in 1998. This funded 65.4% of the
asset growth. The popular Indexed Money Fund provided most of the growth in
savings deposits, which grew $18,243,000. Certificate of deposit balances
continued to grow, increasing time deposits $18,136,000. Average short- and
long-term borrowings increased $15,723,000. Additional borrowings at the
Federal Home Loan Bank accounted for most of the increase.
37 <PAGE>
Drovers Bancshares Corporation
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<CAPTION>
(dollar amounts in thousands, except per
share data) 1998 1997 1996 1995 1994
BALANCE SHEET DATA AT DECEMBER 31,
<S> <C> <C> <C> <C> <C>
Assets .................................. $597,793 $524,892 $446,713 $382,791 $352,287
Investment securities ................... 161,619 179,299 128,082 91,823 94,359
Net loans ............................... 386,197 310,369 279,987 252,468 226,737
Deposits ................................ 457,672 402,086 360,204 306,653 283,173
Shareholders' equity .................... 48,193 43,470 38,092 34,921 29,724
Total average assets .................... 559,172 491,237 404,621 369,785 339,649
Total average shareholders' equity ...... 46,350 40,556 36,429 32,823 29,538
INCOME DATA
Interest income ......................... $ 40,991 $ 36,267 $ 30,055 $ 28,053 $ 23,300
Interest expense ........................ 21,736 19,254 14,791 13,529 10,406
Net interest income ................... 19,255 17,013 15,264 14,524 12,894
Provision for loan losses ............... 1,266 386 645 501 382
Net interest income after
provision for loan losses ............. 17,989 16,627 14,619 14,023 12,512
Other income ............................ 5,408 3,953 3,364 2,837 2,457
Other expenses .......................... 15,231 13,234 12,050 11,058 10,355
Income taxes ............................ 1,356 1,715 1,084 1,521 845
Income before cumulative effect of change
in accounting for income taxes ........ 6,810 5,631 4,849 4,281 3,769
Cumulative effect of change in accounting
for income taxes ...................... 0 0 0 0 0
Net income .............................. 6,810 5,631 4,849 4,281 3,769
Dividends paid .......................... 2,050 1,707 1,606 1,407 1,156
RATIOS
Return on average assets ................ 1.22% 1.15% 1.20% 1.16% 1.11%
Return on average equity ................ 14.69% 13.88% 13.31% 13.04% 12.76%
Equity to assets (year-end) ............. 8.06% 8.28% 8.53% 9.12% 8.44%
Net loans to deposits (year-end) ........ 84.38% 77.19% 77.73% 82.33% 80.07%
Dividend payout ......................... 30.10% 30.31% 33.12% 32.87% 30.67%
PER SHARE DATA*
Net income .............................. $ 1.53 $ 1.27 $ 1.10 $ 0.97 $ 0.86
Net income, assuming dilution ........... 1.51 1.26 1.09 0.97 0.86
Cash dividends .......................... 0.46 0.39 0.36 0.32 0.26
Book value (year-end) ................... 10.79 9.79 8.61 7.92 6.75
Weighted average number of
shares outstanding .................... 4,455,385 4,426,635 4,420,899 4,411,382 4,379,013
Stock dividends and stock splits paid ... 50% 5% 25% 7% 25%
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends.
38<PAGE>
Drovers Bancshares Corporation
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION, (Continued)
<CAPTION>
(dollar amounts in thousands, except per
share data) 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31,
Assets .................................. $320,851 $308,319 $276,537 $253,324 $240,886 $236,007
Investment securities ................... 85,836 99,011 86,054 66,222 63,682 68,556
Net loans ............................... 206,614 181,056 166,691 164,063 150,880 137,094
Deposits ................................ 265,917 256,806 243,717 227,916 216,532 213,249
Shareholders' equity .................... 29,249 25,554 23,377 21,715 20,321 19,042
Total average assets .................... 315,138 288,792 266,000 247,502 234,210 223,991
Total average shareholders' equity ...... 27,379 24,570 22,507 21,085 20,152 18,641
INCOME DATA
Interest income ......................... $ 22,445 $ 22,490 $ 23,651 $ 23,290 $ 21,829 $ 19,608
Interest expense ........................ 10,246 11,363 13,561 14,106 13,334 11,814
Net interest income ................... 12,199 11,127 10,090 9,184 8,495 7,794
Provision for loan losses ............... 447 552 568 416 365 0
Net interest income after provision for
loan losses ........................... 11,752 10,575 9,522 8,768 8,130 7,794
Other income ............................ 2,651 2,216 1,715 1,381 1,243 1,115
Other expenses .......................... 9,866 8,877 7,966 7,366 6,895 6,632
Income taxes ............................ 1,026 717 608 487 326 275
Income before cumulative effect of change
in accounting for income taxes ........ 3,511 3,197 2,663 2,296 2,152 2,002
Cumulative effect of change in accounting
for income taxes ...................... 352 0 0 0 0 0
Net income .............................. 3,863 3,197 2,663 2,296 2,152 2,002
Dividends paid .......................... 1,080 1,019 1,003 930 875 776
RATIOS
Return on average assets ................ 1.23% 1.11% 1.00% 0.93% 0.92% 0.89%
Return on average equity ................ 14.11% 13.01% 11.83% 10.89% 10.68% 10.74%
Equity to assets (year-end) ............. 9.12% 8.29% 8.45% 8.57% 8.44% 8.07%
Net loans to deposits (year-end) ........ 77.70% 70.50% 68.40% 71.98% 69.68% 64.29%
Dividend payout ......................... 27.96% 31.87% 37.66% 40.51% 40.66% 38.76%
PER SHARE DATA*
Net income .............................. $ 0.89 $ 0.74 $ 0.61 $ 0.53 $ 0.50 $ 0.46
Net income, assuming dilution............ 0.88 0.73 0.61 0.53 0.49 0.46
Cash dividends .......................... 0.25 0.24 0.23 0.21 0.20 0.18
Book value (year-end) ................... 6.72 5.89 5.39 5.01 4.69 4.40
Weighted average number of shares
outstanding ........................... 4,344,798 4,335,777 4,333,854 4,332,925 4,331,122 4,329,810
Stock dividends declared ................ 5% 0% 0% 50% 5% 5%
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends. 39 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
AVERAGE BALANCES AND RATES
<CAPTION>
1998 1997 1996
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 ................. $ 653 $ 41 6.28% $ 1,254 $ 70 5.58% $ 2,875 $ 155 5.39%
Taxable investment
securities ................. 127,311 8,156 6.41% 129,170 8,712 6.74% 84,232 5,492 6.52%
Equity securities ............ 18,212 1,033 5.67% 13,114 767 5.85% 5,503 336 6.11%
Tax-exempt investment
securities ................. 23,546 1,278 5.43% 22,207 1,231 5.54% 14,746 873 5.92%
Loans ........................ 355,007 30,483 8.59% 293,007 25,487 8.70% 265,533 23,199 8.74%
TOTAL .................. 524,729 $40,991 7.81% 458,752 $36,267 7.91% 372,889 $30,055 8.06%
Noninterest-earning assets ..... 34,443 32,485 31,732
TOTAL ASSETS ................... $559,172 $491,237 $404,621
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits .............. $ 45,935 $ 534 1.16% $ 42,586 $ 514 1.21% $ 41,446 $510 1.23%
Savings deposits ............. 119,555 4,379 3.66% 101,312 3,600 3.55% 74,302 2,116 2.85%
Time deposits ................ 218,759 12,461 5.70% 200,623 11,530 5.75% 171,626 9,696 5.65%
Short-term borrowings ........ 28,418 1,491 5.25% 25,660 1,353 5.27% 12,287 584 4.75%
Long-term borrowings ......... 50,853 2,871 5.65% 37,888 2,257 5.96% 31,036 1,885 6.07%
TOTAL .................. 463,520 $21,736 4.69% 408,069 $19,254 4.72% 330,697 $14,791 4.47%
Noninterest-bearing liabilities:
Demand deposits .............. 41,752 37,075 33,254
Other liabilities ............ 7,550 5,537 4,241
Shareholders' equity ......... 46,350 40,556 36,429
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ......... $559,172 $491,237 $404,621
NET INTEREST SPREAD ............ 3.12% 3.19% 3.59%
INTEREST EXPENSE AS A
PERCENT OF EARNING ASSETS .... 4.14% 4.20% 3.97%
NET INTEREST INCOME MARGIN ..... $19,255 3.67% $17,013 3.71% $15,264 4.09%
</TABLE>
Average nonaccrual loans included in average loans for 1998, 1997 and 1996
were $797,000, $680,000 and $2,167,000, respectively. Loan fees included
in interest income were $1,202,000, $483,000 and $356,000 in 1998, 1997 and
1996, respectively.
40 <PAGE>
