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, 1999
[ ] 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 NO 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 January 31, 2000 was $61,728,835. The number of shares of
Drovers Bancshares Corporation Common Stock outstanding at January 31, 2000
was 4,805,977.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report for the year ended December 31, 1999 are
incorporated by reference into Parts I, II and IV. Portions of the Proxy
Statement for the annual shareholders meeting to be held May 18, 2000
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 23 of the
Drovers Bancshares Corporation 1999 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 23 of the
Drovers Bancshares Corporation 1999 Annual Report.
Item 6. Selected Financial Data
The information required by this item is contained on pages 14-15 of the
Drovers Bancshares Corporation 1999 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 38-46 of the
Drovers Bancshares Corporation 1999 Annual Report.
Item 7a. Quantitative and qualitative disclosures about market risk
The information required by this item is contained on pages 38-46 of the
Drovers Bancshares Corporation 1999 Annual Report.
Item 8. Financial Statements and Supplementary Data ...................... 15
Additional information required by this item is contained on pages 17-36
and page 46 of the Drovers Bancshares Corporation 1999 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 5-17
of the Definitive Proxy Statement dated March 27, 2000.
Item 11. Executive Compensation
The information required by this item is contained on pages 11-17
of the Definitive Proxy Statement dated March 27, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained on pages 5-8
of the Definitive Proxy Statement dated March 27, 2000.
2<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained on page 4
of the Definitive Proxy Statement dated March 27, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
A. Financial statements are incorporated by reference to pages 1-46 of the
Drovers Bancshares Corporation 1999 Annual Report.
B. Drovers Bancshares Corporation filed the following report on Form 8-K:
(i) On December 21, 1999, a Form 8-K was filed to announce the issuance
of 103,087 shares of Drovers Bancshares Corporation's common stock, no
par value, on December 6, 1999. The stock was issued through a
previously announced "best efforts" offering, which was terminated
on December 21, 1999. The aggregate proceeds to Drovers Bancshares
Corporation, before expenses of the offering and selling agent's
Commissions were $2,216,370.50.
C. Listing of Exhibits.
Exhibit 3(i) - Articles of Incorporation. (incorporated by reference
to Exhibit 3(i) of the Drovers Bancshares Corporation Form 10-Q for
the period ended June 30, 1999).
Exhibit 3(ii) - By-laws. (incorporated by reference to Exhibit 3(ii)
of the Drovers Bancshares Corporation Form 10-Q for the period
ended June 30, 1999).
Exhibit 4 - Instruments Defining the Rights of Holders of Long-term
Debt of Drovers Bancshares Corporation and its subsidiaries are not
filed as Exhibits because the amount of debt under each instrument is
less than 10 percent of the consolidated assets of the Corporation.
The Corporation undertakes to file these instruments with the
Commission on request.
Exhibit 10(a) - Amended and Restated Supplemental Pension Plan, dated
September 28, 1994, between The Drovers & Mechanics Bank and A.
Richard Pugh and First Amendment thereto, dated November 14, 1995.
(incorporated by reference to Exhibit 10(a) of the Drovers Bancshares
Corporation Form 10-K for the year ended December 31, 1998).
Exhibit 10(b) - Amended and restated Change of Control Agreement, dated
September 30, 1999, among Drovers Bancshares Corporation, The Drovers
& Mechanics Bank and A. Richard Pugh. (incorporated by reference to
Exhibit 10(b) of the Drovers Bancshares Corporation Form 10-Q for the
period ended September 30, 1999).
Exhibit 10(c) - Form of Change of Control Agreement among Drovers
Bancshares Corporation, The Drovers & Mechanics Bank and each of
the following Executive Vice Presidents of the Company: Debra A.
Goodling, Michael J. Groft, and Shawn A. Stine. (incorporated by
reference to Exhibit 10(c) of the Drovers Bancshares Corporation
Form 10-K for the year ended December 31, 1998).
3<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONTENTS
Exhibit 10(d) - The Drovers Bancshares Corporation 1995 Stock Option
Plan. (incorporated by reference to Exhibit 99.1 of the Drovers
Bancshares Corporation Registration Statement on Form S-8, as filed
with the Securities and Exchange Commission on December 31, 1998).
Exhibit 10(e) - The Drovers Bancshares Corporation Incentive Stock
Option Plan. (incorporated herein by reference to Exhibit 99.1 to
the Drovers Bancshares Corporation Registration Statement on Form S-8
as filed with the Securities and Exchange Commission on May 24, 1995).
Exhibit 10(f) - The Drovers Bancshares Corporation 1999 Non-Employee
Directors Stock Option Plan. (incorporated by reference to Exhibit 99.1
to the Drovers Bancshares Corporation Registration on Form S-8 as filed
with the Securities and Exchange Commission on July 8, 1999.
Exhibit 11 - Statements Regarding Computation of Per Share Earnings.
(incorporated by reference to Note 16 on page 32 of the Drovers
Bancshares Corporation 1999 Annual Report).
Exhibit 13 - Annual Report to Security Holders.
C. Listing of Exhibits, Continued
Exhibit 21 - Subsidiaries of the Registrant............................ 27
Exhibit 23 - Consents of experts and Counsel........................... 28
Exhibit 27 - Financial Data Schedule.
SIGNATURES ................................................................ 26
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 ("Drovers") was organized on October 27, 1982,
under the Pennsylvania Business Corporation Law and holds all the stock of The
Drovers & Mechanics Bank ("Drovers Bank"). 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.
Drovers 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. Drovers Bank was
organized in 1883 as a national bank and became a state-chartered non-member
bank of the Federal Reserve System on February 14, 1979. Drovers Bank has two
wholly-owned subsidiaries: 96 South George Street, Inc. and Drovers
Investment Company. 96 South's primary asset is an office building attached
to Drovers Bank's Main Office which houses our corporate headquarters.
Drovers Investment Company's assets consist of investment securities,
primarily municipal bonds.
Drovers also wholly owns two other subsidiaries: Drovers Realty Company
and Drovers Capital Trust I. Drovers Realty Company has various real estate
holdings, including ground and building leases. It rents the real estate to
Drovers Bank for use as branch offices. Drovers Capital Trust I owns junior
subordinated deferrable debentures due from Drovers. The debentures are the
sole asset of the Trust. The Trust issued $7,500,000 of preferred securities
to investors secured by the debentures. For additional information on the
Trust, see Note 13 on page 29 of the Drovers Corporation 1999 Annual Report.
Drovers 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. Investment services and trust recently launched the Oak Tree
Investment Group which provides enhanced investment management, financial
planning and brokerage services.
On December 31, 1999, Drovers Bank employed 231 full-time equivalents
throughout its branch offices. The Main Office 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 seven out-of-town offices located in Dillsburg, Shrewsbury,
Emigsville, Hellam, York Haven, Dover and Red Lion, Pennsylvania. On
November 8, 1999, a full-service bank office opened in Dillsburg, Pennsylvania.
Drovers Bank opened its first loan production office in the first quarter
of 1999 in Mechanicsburg, Pennsylvania. We opened an office in Frederick,
Maryland in August 1999. The Frederick Office was initially a loan production
office. On February 21, 2000, the Frederick Office began accepting deposits
from business customers. Negotiations continue to purchase land in
Newberrytown, Pennsylvania to establish a new branch office. During 2000, we
plan to relocate the Memory Lane Branch and to expand the Research and
Administrative Services Center. Drovers Bank also has eleven remote automated
teller machines. Locations include the York Fairgrounds, York College of
Pennsylvania, and nine inside convenience stores.
5<PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
GENERAL, CONTINUED
In December 1993, Drovers Bank purchased the office building attached to our
Main Office. The five-story complex, known as 96 South George, provides for
future growth and enables Drovers to maintain its headquarters in downtown
York. The accounting, corporate banking, and executive offices are located on
the fifth floor of 96 South George.
Drovers Bank is a limited partner in five ventures that own and operate
apartment buildings. The apartments 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, 1999 and 1998 were $5,554,000 and $5,385,000, respectively.
SUPERVISION AND REGULATION
Bank Holding Company Regulation
Drovers 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
Drovers to stand ready to use its resources to provide adequate capital funds
to Drovers 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 Drovers 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 Drovers 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. Drovers 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 Drovers or its nonbank
subsidiaries may begin to engage in any new activity and before acquiring a
business.
6<PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Dividend Restrictions
Drovers is a legal entity separate and distinct from Drovers Bank and the
Drovers' nonbank subsidiaries. Drovers' revenues (on a parent company
only basis) result almost entirely from dividends received from its
subsidiaries. The right of Drovers and consequently the right of creditors and
shareholders of Drovers, 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 of the subsidiary
(including depositors, in the case of Drovers Bank), except to the extent that
claims of Drovers in its capacity as a creditor may be recognized.
Federal and state laws regulate the payment of dividends by Drovers'
subsidiaries. See "Supervision and Regulation - Regulation of Drovers 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 us that we
should apply any specific minimum leverage ratio.
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. Drovers and
the Drovers Bank, at December 31, 1999, qualify as "well capitalized" under
these regulatory standards.
7 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
FDIC Insurance
Drovers 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.
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 of the United States 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 Drovers Bank
The operations of Drovers 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 Drovers 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 Drovers Bank's depositors rather than Drovers'
shareholders. Drovers 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.
8 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
Regulation of Drovers Bank, Continued
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, state-chartered banks, such
as Drovers Bank, are allowed to sell insurance in Pennsylvania and are not
limited by the town of 5,000 restriction applicable to national banks. The
Office of the Comptroller of the Currency has issued guidelines for national
banks to sell insurance. Drovers Bank has been licensed as an insurance agency
within the State of Pennsylvania. We presently sell fixed and variable rate
annuity products and are evaluating our options regarding the sale of
additional insurance products.
Under the Federal Deposit Insurance Act, as amended, Drovers 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
Drovers 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, Drovers 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 Drovers 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 Drovers 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.
Drovers 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.
In regards to the Year 2000 issue, we did not have any disruptions of our
business as a result of the date change to January 1, 2000. For additional
information see Management's Discussion and Analysis of Financial Condition
and Results of Operations, Year 2000 Issue, on page 43 of the Corporation's
1999 Annual Report.
9 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
COMPETITION
The financial services industry in Drovers Bank's service area is extremely
competitive. Competitors within its service area include multi-bank holding
companies, with resources substantially greater than ours. Many competitor
financial institutions have legal lending limits substantially higher than
Drovers Bank's legal lending limit. In addition, we compete 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 Drovers Bank on competitive terms.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999, federal legislation intended to modernize the financial services
industry by establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
services providers. As a result of the legislation, bank holding companies
will be permitted to engage in a wider variety of financial activities than
permitted under prior law, particularly with regard to insurance and securities
activities. Moreover, to the extent that it permits banks, securities firms
and insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than we currently offer and that can aggressively compete in the markets we
serve. This could adversely impact our profitability.
In addition, a bank holding company, which does not qualify or does not elect
to become a financial holding company under the Gramm-Leach-Bliley Act, is
generally prohibited from engaging in, or acquiring direct or indirect control
of any company engaged in non-banking activities, except for activities found
by the Federal Reserve Board to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The principal
activities that the Federal Reserve Board has determined by regulation to be
so closely related to banking as to be a proper incident thereto are set forth
in Federal Reserve Board regulation Y.
Bank holding companies that do qualify as a financial holding company may
engage in activities that are of a financial nature or incidental thereto.
This will include activities such as securities and insurance underwriting
which are not permitted non-banking activities under Regulation Y. A bank
holding company may qualify to become a financial holding company if each of
its depository institution subsidiaries is "well capitalized", "well managed,"
has at least a "satisfactory" CRA rating in its most recent examination and the
bank holding company has filed a certification with the Federal Reserve Bank
that it elects to become a financial holding company.
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
10 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 1. BUSINESS
INTERSTATE BANKING LEGISLATION, Continued
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 Drovers to acquire
banks and bank holding companies located in any state and to permit
qualified banking organizations located in any state to acquire banks and bank
holding companies located in Pennsylvania, irrespective of state law.
Since 1995, the Pennsylvania Banking Code has authorized full interstate
banking and branching under Pennsylvania law. Specifically, the legislation
(i) eliminates the "reciprocity" requirement previously applicable to
interstate commercial bank acquisitions by bank holding companies, (ii)
authorized interstate bank mergers and reciprocal interstate branching into
Pennsylvania by interstate banks, and (iii) permits Pennsylvania institutions
to branch into other states with the prior approval of the Pennsylvania
Department of Banking.
Overall, this federal and state legislation has, as was predicted, had the
effect of increasing consolidation and competition and promoting geographic
diversification in the banking industry.
Under the Community Reinvestment Act of 1977 ("CRA"), the FDIC is required to
assess the records of all financial institutions regulated by it to determine
if these institutions are meeting the credit needs of the communities
(including low and moderate income neighborhoods) which they serve. The FDIC
also takes this record into account in its evaluation of any application made
by any of such institutions for, among other things, approval of branch banking
or other deposit facilities, office relocation, or merger and acquisitions of
financial institutions.
The CRA requires the FDIC to provide written evaluation of an institution's
CRA performance and requires public disclosure of an institution's CRA rating.
Drovers Bank received a "satisfactory" rating in its last CRA examination
conducted by the FDIC.
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
Drovers and Drovers Bank, or otherwise change the business environment.
We cannot predict whether any of this legislation, if enacted, will have a
material effect on the business of Drovers.
11 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES
Drovers and its 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 Dillsburg Office
Landvale Street 3 Tristan Drive
York Haven, PA 17370 Dillsburg, PA 17019
Drovers 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 Drovers to maintain headquarters in downtown York.
The accounting, corporate banking, and executive offices 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 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 per month rental; lease expires November 9, 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 per month rental; lease expires August 31, 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 per month land rental; lease expires February 29, 2012, and is
renewable for six five-year options. The building is owned by Drovers.
West Manchester Office
1750 Loucks Road
in the Giant Food Store
York, PA 17404
$2,917 per month rental; lease expires February 29, 2004, and is renewable
for one five-year option.
York Marketplace Office
2415 East Market Street
in the Giant Food Store
York, PA 17402
$2,917 per month rental; lease expires April 30, 2004, and is renewable for
one five-year option.
Penvale Office
3183 Susquehanna Trail North
York, PA 17402
$7,000 per month rental; lease expires November 2, 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 per month land rental; lease expires November 30, 2017, with rent
increases each year. The land lease is renewable for four five-year options.
The building is owned by Drovers.
Hellam Office
599 W. Market Street
Hellam, PA 17406
$3,500 per month land rental; lease expires August 31, 2008. The lease is
renewable for three five-year options and contains a purchase option.
The building is owned by Drovers.
Mt. Rose Avenue Office
1095 Mt. Rose Avenue
York, PA 17403
$20,000 per year land rental; lease expires December 31, 2000. Additionally,
leased equipment with an annual lease amount of $44,921 is required to be
paid by Drovers Bank. This transaction has been classified as a capitalized
lease.
Loan Production Office
Rossmoyne Business Center
4930 Ritter Road, Suite 103
Mechanicsburg, PA 17055
$1,075 per month rental; lease expires February 29, 2004, with rent
increases each year.
13<PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 2. PROPERTIES
Frederick Office
The Patrick Center
30 W. Patrick Street
Suite 430
Frederick, MD 21701
$2,202 per month rental; lease expires August 14, 2002, with rent
increases each year, and is renewable for three one-year options.
Memory Lane Land Lease
York Marketplace
Memory Lane
York, PA 17402
$1,000 per month land rental increasing during the buildout period to a maximum
of $3,000 per month. After the branch office opens, the lease will start at
$3,750 per month. The ease expires February 28, 2028, with rent increases each
year, and is renewable for two five-year options.
Although the facilities currently owned or leased by Drovers are
sufficient for its operations, Drovers may obtain additional space as
required.
Upon successful negotiation to purchase land, construction of a new office in
Newberrytown, Pennsylvania will begin. We are planning to relocate the Memory
Lane branch during 2000. Simultaneously with the opening of the new Memory
Lane branch, we plan to sell the existing branch and to close the Mt. Rose
branch. The Mt. Rose branch's existing customer base will be consolidated with
one of the three existing branches which are located within one mile of the
existing Mt. Rose branch. Additionally, we expect to expand the Research and
Administrative Service Center and to exercise the purchase option on the Hellam
lease. All construction costs related to these projects will be funded from
operations.
14<PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
the dates indicated:
(In thousands) 1999 1998 1997
U.S. Government ............. $ 2,996 $ 6,559 $ 10,519
U.S. Agencies ............... 133,351 106,927 126,769
Municipal ................... 36,757 24,686 24,414
Corporate ................... 16,250 4,666 486
Total debt securities ....... 189,354 142,838 162,188
Equity securities ........... 23,583 18,781 17,111
Total investment securities . $212,937 $161,619 $179,299
The following table sets forth the contractual maturities of debt securities
classified as held-to-maturity at December 31, 1999:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $ 0 $1,491 $ 0 $ 0 $ 1,491
U.S. Agencies .... 499 155 400 4,244 5,298
Municipal ........ 1,266 1,438 11,863 0 14,567
Total ............ $1,765 $3,084 $12,263 $4,244 $21,356
The following table depicts the average weighted yields of the held-to-
maturity investments by maturity at December 31, 1999:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 0.00% 6.65% 0.00% 0.00% 6.65%
U.S. Agencies .... 4.93% 9.57% 9.07% 6.86% 6.92%
Municipal ........ 8.41% 8.33% 5.19% 0.00% 5.78%
Total ............ 7.42% 7.58% 5.32% 6.86% 6.12%
15 <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, 1999:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
(In thousands) OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. $ 505 $1,001 $ 0 $ 0 $ 1,506
U.S. Agencies .... 0 8,777 14,325 104,950 128,052
Municipal ........ 0 0 4,566 17,624 22,190
Other ............ 0 0 495 15,755 16,250
Total ............ $ 505 $9,778 $19,386 $138,329 $167,998
The following table depicts the average weighted yields of the available-for-
sale investments by maturity at December 31, 1999:
AFTER AFTER
ONE YR ONE TO FIVE TO OVER
OR LESS FIVE YRS TEN YRS TEN YRS TOTAL
U.S. Government .. 4.61% 6.00% 0.00% 0.00% 5.54%
U.S. Agencies .... 0.00% 6.80% 6.86% 6.71% 6.73%
Municipal ........ 0.00% 0.00% 5.20% 5.03% 5.06%
Other ............ 0.00% 0.00% 6.22% 7.85% 7.80%
Total ............ 4.61% 6.72% 6.45% 6.63% 6.61%
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, 1999. The yield on Municipal investments has
not been restated on a fully tax equivalent basis.
For additional information see Note 6 on pages 24-25 of the Drovers Bancshares
Corporation 1999 Annual Report.
16 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LOAN DATA
Loans are comprised of the following:
YEAR ENDED DECEMBER 31,
(In thousands) 1999 1998 1997 1996 1995
Domestic loans:
Commercial, financial and
industrial ................ $119,942 $117,620 $ 80,588 $ 72,776 $ 66,798
Real estate:
Construction ............. 18,846 13,523 12,105 8,908 5,910
Mortgage ................. 291,084 227,914 188,775 167,751 141,565
Consumer ................... 32,555 34,132 35,280 37,150 45,548
Leasing and other (net) .... 816 173 245 26 9
Total domestic loans ......... 463,243 393,362 316,993 286,611 259,830
Foreign loans ................ 0 0 0 0 0
Total domestic and
foreign loans ............... 463,243 393,362 316,993 286,611 259,830
Unearned income .............. -3,042 -3,253 -3,320 -3,494 -4,425
Loans net of unearned ........ 460,201 390,109 313,673 283,117 255,405
Reserve for loan losses ...... -3,908 -3,912 -3,304 -3,130 -2,937
Net loans .................... $456,293 $386,197 $310,369 $279,987 $252,468
For additional information see Note 7 on page 26-27 of the Drovers Bancshares
Corporation 1999 Annual Report.
17 <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, 1999
which, based on remaining scheduled repayments of principal, are due in the
periods indicated:
AFTER
REMAINING MATURITIES ONE YR ONE TO OVER
(In thousands) OR LESS FIVE YRS FIVE YRS TOTAL
Domestic loans:
Commercial, financial and industrial . $81,279 $26,847 $11,816 $119,942
Real estate construction ............. 12,014 4,068 2,764 18,846
Foreign loans .......................... 0 0 0 0
Total .................................. $93,293 $30,915 $14,580 $138,788
Rate sensitivity:
Predetermined rate ................... $ 3,666 $25,068 $ 12,508 $ 41,242
Floating or adjustable rate .......... 89,627 5,847 2,072 97,546
Total .................................. $93,293 $30,915 $ 14,580 $138,788
Drovers Bank 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. For
additional information on the loan review process, see Provision for Loan
Losses on pages 39-40 of the Drovers Corporation 1999 Annual Report.
18 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NONACCRUAL, RESTRUCTURED LOANS AND NONPERFORMING ASSETS
The following table shows loans on nonaccrual status or loans which have been
restructured for the past five years:
PRINCIPAL AMOUNT AT YEAR END DECEMBER 31,
(In thousands) 1999 1998 1997 1996 1995
Domestic:
Nonaccrual loans ................. $5,336 $1,435 $740 $ 615 $ 934
90 days past due still accruing .. 33 7 33 0 9
Restructured loans ............... 1,283 1,203 0 1,139 791
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 .............................. $6,652 $2,645 $773 $1,754 $1,734
Nonaccrual loans as a percentage of loans at December 31, 1999 and 1998 were
1.16% and 0.37%, respectively. Nonaccrual loans at December 31, 1999 include
$4,185,000 of loans secured by trade receivables. Interest on restructured
loans in compliance with modified terms is recognized under the accrual
method of accounting.
Drovers held $5,468,000 of impaired loans at December 31, 1999. The
recorded allowance for impaired loans was $754,000. Two loans secured by trade
receivables were classified as impaired during September when possible credit
problems became known. The same two loans were classified as nonaccrual during
the fourth quarter after they became 90 days past due on payments. During the
fourth quarter, a charge-off of $1,000,000 was taken on one of these loans when
updated loss estimates were received.
The following table presents the changes in the balance of other real estate
over the past five years:
(In thousands) 1999 1998 1997 1996 1995
Balance at beginning of year ....... $ 148 $ 154 $ 803 $ 195 $ 0
Assets acquired by foreclosure
or repossession ................... 318 277 211 822 300
Dispositions ....................... -368 -252 -827 -203 -106
Other (net) ........................ -13 -31 -33 -11 1
Balance at end of year ............. $ 85 $ 148 $ 154 $ 803 $ 195
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 on pages 21-22,
and Note 7 on pages 26-27 and the Provision for Loan Losses on pages 39-40 of
the Drovers Bancshares Corporation 1999 Annual Report.
19 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANALYSIS OF RESERVE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997 1996 1995
Balance, January 1, ............... $3,912 $3,304 $3,130 $2,937 $2,638
Provision for loan losses ......... 1,727 1,266 386 645 501
Charge-offs:
Commercial, financial
and industrial ................. 1,536 522 0 25 31
Real estate - construction ...... 0 0 0 0 0
Real estate - mortgage .......... 14 0 0 215 45
Consumer ........................ 311 235 327 369 257
Total charge-offs ................. 1,861 757 327 609 333
Recoveries:
Commercial, financial
and industrial ................. 48 0 32 6 11
Real estate - construction ...... 0 0 0 0 0
Real estate - mortgage .......... 0 0 15 36 0
Consumer ........................ 82 99 68 115 120
Total recoveries .................. 130 99 115 157 131
Net charge-offs ................... 1,731 658 212 452 202
Balance, December 31, ............. $3,908 $3,912 $3,304 $3,130 $2,937
Ratio of net charge-offs to average
loans outstanding ................ 0.41% 0.19% 0.07% 0.17% 0.08%
We manage the risk characteristics of our 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.
We also consider the amount of recent and expected charge-offs, the
loan portfolio mix and changes in the economy when determining the provision
for loan losses. We believe 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 on pages 21-22, Note 7 on pages 26-27
and the Provision for Loan Losses on pages 39-40 of the Drovers Bancshares
Corporation 1999 Annual Report.
20 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALLOCATION OF RESERVE FOR LOAN LOSSES
The following table presents the amount of the reserve allocated to each of
the loan categories and the percentage of total loans for the past five years:
YEARS ENDED DECEMBER 31,
1999 1998 1997
Percent Percent Percent
Of Loans Of Loans of Loans
Reserve To Total Reserve To Total Reserve to Total
(In thousands) Amount Loans Amount Loans Amount Loans
Commercial, financial
and industrial ...... $2,248 26.1% $2,644 30.2% $ 977 25.7%
Real Estate:
Construction ........ 24 4.1% 19 3.5% 44 3.9%
Mortgage ............ 584 63.1% 382 58.3% 338 60.0%
Consumer .............. 154 6.5% 128 8.0% 131 10.3%
Leasing and other ..... 0 0.2% 0 0.0% 0 0.1%
Unallocated ........... 898 n/a 739 n/a 1,814 n/a
Total ................. $3,908 100.0% $3,912 100.0% $3,304 100.0%
YEARS ENDED DECEMBER 31,
1996 1995
Percent Percent
Of Loans of Loans
Reserve To Total Reserve to Total
(In thousands) Amount Loans Amount Loans
Commercial, financial
and industrial ...... $ 657 25.7% $ 515 26.2%
Real Estate:
Construction ........ 46 3.1% 16 2.3%
Mortgage ............ 321 59.1% 327 55.3%
Consumer .............. 123 12.1% 140 16.2%
Leasing and other ..... 0 0.0% 0 0.0%
Unallocated ........... 1,983 n/a 1,939 n/a
Total ................. $3,130 100.0% $2,937 100.0%
For additional information see Note 1 on pages 21-22, Note 7 on pages
26-27 and the Provision for Loan Losses on pages 39-40 of the Drovers
Bancshares Corporation 1999 Annual Report.
21 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DEPOSIT STRUCTURE
Maturities of time deposits of $100,000 or more outstanding at December 31,
are summarized as follows:
(In thousands) 1999 1998 1997
Three months or less ............... $ 5,870 $ 5,983 $ 4,675
Over three months to six months .... 6,101 4,423 1,598
Over six months to twelve months ... 8,985 9,175 5,811
Over twelve months ................. 11,128 7,456 8,340
Total .............................. $32,084 $27,037 $20,424
SHORT-TERM BORROWINGS
Short-term borrowings are borrowed funds generally with an original maturity
of one year or less. Securities sold under repurchase agreements and federal
funds purchased mature in one day. Other short-term borrowings have a
maturity of greater than one day.
(In thousands) 1999 1998 1997
Federal funds purchased and securities sold under repurchase agreements
Balance at year-end $25,238 $23,325 $31,360
Average amount outstanding $30,837 $23,820 $24,548
Maximum amount outstanding at any month-end $58,413 $36,831 $44,342
Average interest rate for the year 5.18% 5.17% 5.25%
Average interest rate on year-end balance 5.18% 4.63% 6.16%
Other short-term borrowings
Balance at year-end $30,000 $ 0 $ 0
Average amount outstanding $ 82 $ 4,597 $ 1,112
Maximum amount outstanding at any month-end $30,000 $13,000 $ 6,000
Average interest rate for the year 4.59% 5.65% 5.71%
Average interest rate on year-end balance 4.53% 0.00% 0.00%
22 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA
Unaudited
1999
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
Net interest income ...... $5,185 $5,462 $5,666 $5,963 $22,276
Provision for loan losses 363 488 213 663 1,727
Total noninterest income . 1,432 1,292 1,230 1,395 5,349
Total noninterest expense
and income taxes ....... 4,442 4,390 4,758 4,707 18,297
Net income ............... $1,812 $1,876 $1,925 $1,988 $ 7,601
PER SHARE DATA
Net income ............... $ 0.39 $ 0.40 $ 0.41 $ 0.42 $ 1.62
Net income,
assuming dilution ...... $ 0.38 $ 0.40 $ 0.41 $ 0.41 $ 1.60
1998
(In thousands, FIRST SECOND THIRD FOURTH
except per share data) QUARTER QUARTER QUARTER QUARTER TOTAL
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 ............... $ 0.34 $ 0.35 $ 0.36 $ 0.41 $ 1.46
Net income,
assuming dilution ...... $ 0.34 $ 0.35 $ 0.36 $ 0.38 $ 1.43
Data adjusted to reflect a 5% stock dividend issued in 1999 and a three-for-two
stock split issued in 1998.
23 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEREST DIFFERENTIAL
December 31,
1999 1998
(In thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
INTEREST INCOME
Increase (decrease) in:
Money market investments and
Interest-bearing deposits
with banks ...................... $ -11 $ -1 $ -12 $ -38 $ 9 $ -29
Federal funds sold ............... 0 0 0 0 0 0
Total money market investments ... -11 -1 -12 -38 9 -29
Investment securities
Taxable investment securities ... 529 115 644 -130 -426 -556
Equity securities ............... 155 47 202 290 -24 266
Tax-exempt investment securities 272 -35 237 71 -24 47
Total investment securities ...... 956 127 1,083 231 -474 -243
Total loans ...................... 5,459 -959 4,500 5,318 -322 4,996
Total interest income ............ 6,404 -833 5,571 5,511 -787 4,724
INTEREST EXPENSE
Increase (decrease) in:
Interest-bearing deposits
Demand .......................... 64 -92 -28 41 -21 20
Savings ......................... 447 -215 232 668 111 779
Time ............................ 1,481 -766 715 1,031 -100 931
Total interest-bearing deposits .. 1,992 -1,073 919 1,740 -10 1,730
Borrowed funds
Short-term borrowings ........... 132 -23 109 143 -5 138
Long-term borrowings ............ 1,419 -97 1,322 731 -117 614
Total borrowed funds ............. 1,551 -120 1,431 874 -122 752
Corporation-obligated mandatory
redeemable capital securities of
subsidiary trust 200 0 200 0 0 0
Total interest expense ........... 3,743 -1,193 2,550 2,614 -132 2,482
Increase in interest differential $2,661 $ 360 $3,021 $2,897 $-655 $2,242
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 on pages 21-22 and Average Balances and
Rates on page 46 of the Drovers Bancshares Corporation 1999 Annual Report.
24 <PAGE>
Drovers Bancshares Corporation and Subsidiaries
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The principal executive officers of Drovers and its principal subsidiary,
Drovers Bank, as of January 1, 2000, are as follows:
Name: A. Richard Pugh Age: 59
Position and Office: Chairman of the Board, President, and Chief Executive
Officer of Drovers and Drovers 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: Michael J. Groft Age: 44
Position and Office: Executive Vice President of Drovers and Executive Vice
President and Senior Lending Officer of Drovers Bank. Mr. Groft joined the
organization in March 1978. He has served in various executive management
positions since 1988.
Name: Debra A. Goodling Age: 41
Position and Office: Executive Vice President and Treasurer of Drovers
and Executive Vice President, Treasurer and Chief Financial Officer of Drovers
Bank. Ms. Goodling joined the organization in February 1977. She has served
in various executive management positions since 1989.
Name: Michael E. Kochenour Age: 47
Position and Office: Executive Vice President and Senior Investment
Services and Trust Officer of Drovers and Drovers Bank. Mr. Kochenour
joined the organization in August 1999 as Senior Vice President and
Senior Trust Officer. Prior to joining the organization, Mr. Kochenour
served in numerous management and senior leadership roles in the Banking
industry for over 28 years.
Name: Shawn A. Stine Age: 44
Position and Office: Executive Vice President and Senior Corporate
Banking Officer of Drovers 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: 38
Position and Office: Senior Vice President, Secretary and Assistant
Treasurer of Drovers and Senior Vice President, Secretary and Controller of
Drovers 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 5-17 of the
Definitive Proxy Statement dated March 27, 2000.
25<PAGE>
Drovers Bancshares Corporation and Subsidiaries
PART IV. SIGNATURES
Pursuant to the requirements of Section 13 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 22, 2000_____
(Registrant)
By /s/ A. Richard Pugh___________________
A. Richard Pugh, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ L. Doyle Ankrum______________ /s/ Robert L. Myers, Jr._________
L. Doyle Ankrum, Director Robert L. Myers, Jr., Director
/s/ J. Samuel Gregory ___________ /s/ Harlowe R. Prindle___________
J. Samuel Gregory, Director Harlowe R. Prindle, Director
/s/ Daniel E. Hess_______________ /s/ Basil A. Shorb, III__________
Daniel E. Hess, Director Basil A. Shorb, III, Director
/s/ George W. Hodges_____________ /s/ Gary A. Stewart______________
George W. Hodges, Director Gary A. Stewart, Director
/s/ Herbert D. Lavetan __________ _________________________________
Herbert D. Lavetan, Director Robert H. Stewart, Jr., Director
_________________________________ /s/ Delaine A. Toerper___________
Richard M. Linder, Director Delaine A. Toerper, Director
/s/ David C. McIntosh ___________ /s/ James S. Wisotzkey __________
David C. McIntosh, Director James S. Wisotzkey, Director
_________________________________
Frank Motter, 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
26<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following are the subsidiaries of the Drovers Bancshares
Corporation:
Subsidiary State of Incorporation or
Organization
The Drovers & Mechanics Bank Pennsylvania
30 South George Street
York, PA 17401
Drovers Realty Corporation Pennsylvania
30 South George Street
York, PA 17401
Drovers Capital Trust I Delaware
103 Foulk Road, Suite 202
Wilmington, Delaware 19803
The following are the subsidiaries of The Drovers & Mechanics Bank:
Subsidiary State of Incorporation or
Organization
96 South George Street, Inc. Pennsylvania
96 South George Street
York, PA 17401
Drovers Investment Company Delaware
103 Foulk Road, Suite 202
Wilmington, Delaware 19803
27<PAGE>
EXHIBIT 23
DROVERS BANCSHARES CORPORATION AND SUBSIDIARIES
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statements on
Form S-3 File Number 333-69963 and Form S-8 File Numbers 333-30023, 033-92682,
333-8249 and 033-92672 of Drovers Bancshares Corporation and Subsidiaries of
our report dated January 20, 2000, relating to the consolidated statements of
condition of Drovers Bancshares Corporation and Subsidiaries as of December 31,
1999 and 1998 and the related consolidated statements of income, comprehensive
income, changes in shareholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999 which report appears in the
December 31, 1999 annual report on Form 10-K of Drovers Bancshares Corporation
and Subsidiaries.
/S/ Stambaugh Ness P.C.
York, Pennsylvania
March 23, 2000
28<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,571
<INT-BEARING-DEPOSITS> 767
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 191,581
<INVESTMENTS-CARRYING> 21,356
<INVESTMENTS-MARKET> 21,571
<LOANS> 460,201
<ALLOWANCE> 3,908
<TOTAL-ASSETS> 720,108
<DEPOSITS> 505,134
<SHORT-TERM> 55,238
<LIABILITIES-OTHER> 5,799
<LONG-TERM> 102,737
0
0
<COMMON> 40,852
<OTHER-SE> 10,348
<TOTAL-LIABILITIES-AND-EQUITY> 720,108
<INTEREST-LOAN> 34,983
<INTEREST-INVEST> 11,550
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 46,562
<INTEREST-DEPOSIT> 18,293
<INTEREST-EXPENSE> 24,286
<INTEREST-INCOME-NET> 22,276
<LOAN-LOSSES> 1,727
<SECURITIES-GAINS> 182
<EXPENSE-OTHER> 16,751
<INCOME-PRETAX> 9,147
<INCOME-PRE-EXTRAORDINARY> 9,147
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,601
<EPS-BASIC> 1.62
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 7.69
<LOANS-NON> 5,336
<LOANS-PAST> 33
<LOANS-TROUBLED> 1,283
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,912
<CHARGE-OFFS> 1,861
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 3,908
<ALLOWANCE-DOMESTIC> 3,010
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 898
</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........... 39 14
Consolidated Statements of Condition............................ 4 17
Consolidated Statements of Income............................... 5 18
Consolidated Statements of Comprehensive Income................. 6 19
Consolidated Statements of Changes in Shareholders' Equity...... 6 19
Consolidated Statements of Cash Flows........................... 7 20
Notes to Consolidated Financial Statements ..................... 8 21
Independent Auditors' Report ................................... 27 37
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 28 38
Supplemental Financial Data .................................... 41 46
1<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
(All dollar amounts presented in thousands, except per share data)
1999 1998 % Change
FINANCIAL POSITION AT DECEMBER 31,
Assets .................................. $720,108 $597,793 20.46%
Net loans ............................... 456,293 386,197 18.15%
Deposits ................................ 505,134 457,672 10.37%
Shareholders' equity .................... 51,200 48,193 6.24%
RESULTS FOR THE YEAR
Interest income ......................... $ 46,562 $ 40,991 13.59%
Interest expense ........................ 24,286 21,736 11.73%
Net interest income ..................... 22,276 19,255 15.69%
Net income .............................. 7,601 6,810 11.62%
FINANCIAL RATIOS
Return on average assets ................ 1.18% 1.22% -3.28%
Return on average shareholders' equity .. 15.15% 14.69% 3.13%
PER SHARE DATA*
Net income .............................. $ 1.62 $ 1.46 10.96%
Net income, assuming dilution ........... $ 1.60 $ 1.43 11.89%
Cash dividends .......................... $ 0.49 $ 0.44 11.36%
Book value (year-end) ................... $10.65 $10.27 3.70%
Weighted average shares outstanding ..... 4,703,378 4,678,154 0.54%
Number of shareholders .................. 1,681 1,476 13.89%
INVESTMENT SERVICES AND TRUST DIVISION
Fair value of trust assets administered . $274,917 $252,121 9.04%
* Per share data adjusted to reflect a 5% stock dividend issued in 1999 and a
three-for-two stock split issued in 1998.
2<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED FINANCIAL HIGHLIGHTS
COMMON STOCK MARKET PRICES AND DIVIDENDS
Our common stock trades on The NASDAQ Stock Market under the symbol DROV.
Before June 2, 1998, the stock was 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:
Cash
1999 High** Low** Shares* Dividends Paid*
March 31 .................. $24.05 $21.48 4,692,270 $0.12
June 30 ................... 23.50 22.00 4,693,337 0.12
September 30 .............. 23.25 20.75 4,694,841 0.12
December 31 ............... 24.25 20.38 4,703,378 0.13
1998
March 31... ............... $24.92 $21.43 4,667,985 $0.10
June 30 ................... 30.95 23.97 4,669,025 0.11
September 30 .............. 30.48 24.65 4,673,939 0.11
December 31 ............... 25.71 23.22 4,678,154 0.12
* Per share data adjusted to reflect a 5% stock dividend issued in 1999 and a
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
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
(in thousands) 1999 1998
ASSETS
Cash and due from banks ................................. $ 20,571 $ 24,145
Money market investments ................................ 767 479
Investment securities (fair value $213,152 and $162,556). 212,937 161,619
Loans (net of unearned income of $3,042 and $3,253) ..... 460,201 390,109
Reserve for loan losses ................................. 3,908 3,912
Net loans ............................................. 456,293 386,197
Bank premises and equipment ............................. 16,790 15,901
Other assets ............................................ 12,750 9,452
TOTAL ASSETS ............................................ $720,108 $597,793
LIABILITIES
Deposits:
Noninterest-bearing ................................... $ 47,986 $ 55,339
Interest-bearing ...................................... 457,148 402,333
Total deposits ...................................... 505,134 457,672
Federal funds purchased and securities sold
under agreements to repurchase ........................ 55,238 23,325
Other borrowings ........................................ 95,237 62,830
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust ........................ 7,500 0
Other liabilities ....................................... 5,799 5,773
TOTAL LIABILITIES ....................................... 668,908 549,600
SHAREHOLDERS' EQUITY
Common stock - no par, 15,000,000 shares
authorized; issued and outstanding-4,805,977
shares in 1999 and 4,468,461 in 1998 .................. 40,852 33,772
Retained earnings ....................................... 13,478 13,173
Accumulated other comprehensive income .................. -3,130 1,248
TOTAL SHAREHOLDERS' EQUITY .............................. 51,200 48,193
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $720,108 $597,793
See notes to consolidated financial statements.
4<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(in thousands, except per share data) 1999 1998 1997
INTEREST INCOME
Interest and fees on loans ...................... $34,983 $30,483 $25,487
Interest on deposits with banks ................. 29 41 70
Interest and dividends on investment securities:
Taxable investment securities ................. 8,800 8,156 8,712
Equity securities ............................. 1,235 1,033 767
Tax-exempt investment securities .............. 1,515 1,278 1,231
Total interest income ....................... 46,562 40,991 36,267
INTEREST EXPENSE
Interest on deposits ............................ 18,293 17,374 15,644
Federal funds purchased and securities sold
under agreements to repurchase................. 1,600 1,491 1,353
Interest on borrowed funds ...................... 4,393 2,871 2,257
Total interest expense ...................... 24,286 21,736 19,254
Net interest income ......................... 22,276 19,255 17,013
Provision for loan losses ....................... 1,727 1,266 386
Net interest income after provision for loan
losses ........................................ 20,549 17,989 16,627
OTHER INCOME
Investment services and trust income ............ 1,399 1,295 1,105
Service charges on deposit accounts ............. 1,920 1,692 1,293
Securities gains ................................ 182 262 197
Net gains on loan sales ......................... 741 1,044 491
Equity in losses of real estate ventures......... -251 -104 -81
Other ........................................... 1,358 1,219 948
Total other income .......................... 5,349 5,408 3,953
OTHER EXPENSES
Salaries and employee benefits .................. 9,042 8,006 7,597
Occupancy and premises .......................... 1,468 1,246 917
Furniture and equipment ......................... 1,413 1,365 1,111
Marketing ....................................... 533 645 441
Net (income) cost from operation of other
real estate .................................... -5 56 53
Supplies ........................................ 594 535 443
Other taxes ..................................... 426 375 331
Other............................................ 3,280 3,003 2,341
Total other expenses ........................ 16,751 15,231 13,234
Income before income taxes....................... 9,147 8,166 7,346
Applicable income taxes ......................... 1,546 1,356 1,715
NET INCOME ...................................... $ 7,601 $ 6,810 $ 5,631
PER SHARE DATA
NET INCOME ...................................... $ 1.62 $ 1.46 $ 1.21
NET INCOME, assuming dilution ................... $ 1.60 $ 1.43 $ 1.20
See notes to consolidated financial statements.
5<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(in thousands) 1999 1998 1997
Net income ..................................... $7,601 $6,810 $5,631
Other comprehensive income:
Unrealized gains (losses) on securities
arising during period ........................ -6,492 -260 2,049
Reclassification adjustment for gains
included in net income ....................... -141 -262 -196
Other comprehensive income (loss) before taxes . -6,633 -522 1,853
Income taxes (benefits) related to other
comprehensive income (loss) .................. -2,255 -177 630
Other comprehensive income (loss)................. -4,378 -345 1,223
COMPREHENSIVE INCOME ........................... $3,223 $6,465 $6,854
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
(in thousands, except Common Retained Comprehensive
number of shares) Shares Stock Earnings Income
BALANCE, JANUARY 1, 1997 ...... 2,809,180 $28,753 $ 8,969 $ 370
Net income ................... 5,631
Cash dividends ............... -1,707
5% stock dividend issued ..... 140,710 4,486 -4,486
Shares issued ................ 11,237 231
Change in unrealized holding
gains on securities,
net of reclassification
adjustment .................. 1,223
BALANCE, DECEMBER 31, 1997 .... 2,961,127 $33,470 $ 8,407 $1,593
Net income ................... 6,810
Cash dividends ............... -2,050
Three-for-two stock split .... 1,482,821 -17 6
Shares issued ................ 24,513 319
Change in unrealized holding
losses on securities,
net of reclassification
adjustment .................. -345
BALANCE, DECEMBER 31, 1998 .... 4,468,461 $33,772 $13,173 $ 1,248
Net income ................... 7,601
Cash dividends ............... -2,288
5% stock dividend issued ..... 222,584 4,998 -5,008
Shares issued ................ 114,932 2,082
Change in unrealized holding
losses on securities,
net of reclassification
adjustment .................. -4,378
BALANCE, DECEMBER 31, 1999 .... 4,805,977 $40,852 $13,478 $-3,130
See notes to consolidated financial statements.
6<PAGE>
Drovers Bancshares Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands) 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $7,601 $6,810 $5,631
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization .................. 1,770 1,638 1,342
Net (accretion) amortization of investment
security (discounts) premiums ................ 231 363 -178
Provision for loan losses ...................... 1,727 1,266 386
Gain on sale and call of investment securities
held-to-maturity ............................. -41 0 -1
Gain on sale of investment securities
available-for-sale ........................... -141 -262 -196
(Gain) loss on sale of fixed assets ............ 11 11 -50
Gain on sale of loans .......................... -741 -1,044 -491
(Gain) loss on sale of other real estate ....... -23 -14 33
Net deferred loan fees ......................... -376 -814 -559
Equity in losses of real estate ventures........ 251 104 81
(Increase) decrease in interest/dividends
receivable ................................... -446 30 -703
(Increase) decrease in other assets ............ -464 318 -338
Increase in interest payable ................... 809 525 589
Increase (decrease) in other liabilities ....... -917 -109 140
Loans originated for sale ...................... -54,147 -63,734 -29,794
Proceeds from sale of loans .................... 55,146 65,179 30,673
Increase in other noncash items ................ 13 45 1
Net cash provided by operating activities ......... 10,263 10,312 6,566
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities held-to-maturity ..................... 13,009 8,488 5,584
Proceeds from sales and maturities of investment
securities available-for-sale ................... 33,888 41,377 31,619
Purchases of investment securities
held-to-maturity ................................ 0 0 -19,763
Purchases of investment securities available-
for-sale ........................................ -104,898 -32,810 -66,429
Net increase in loans ............................. -72,252 -77,321 -30,946
Capital expenditures .............................. -2,453 -3,477 -1,111
Proceeds from sale of fixed assets ................ 0 6 78
Net (purchase) return of investment in real estate
ventures......................................... -289 -2,209 18
Proceeds from sale of other real estate ........... 392 252 827
Net cash used in investing activities ............. -132,603 -65,694 -80,123
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits and savings ....... 11,699 35,074 18,827
Net increase in certificates of deposit ........... 35,751 20,508 23,072
Net increase (decrease) in federal funds purchased
and repurchase agreements ....................... 31,913 -8,035 16,106
Payments made for capital leases .................. -47 -40 -35
Net increase in other borrowings .................. 39,954 19,312 14,208
Proceeds from issuance of common stock ............ 2,072 309 231
Dividends paid .................................... -2,288 -2,050 -1,707
Net cash provided by financing activities ......... 119,054 65,078 70,702
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS. -3,286 9,696 -2,855
CASH & CASH EQUIVALENTS AT JANUARY 1, ............. 24,624 14,928 17,783
CASH & CASH EQUIVALENTS AT DECEMBER 31, ........... $21,338 $24,624 $14,928
See notes to consolidated financial statements.
7<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts presented in the tables are in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Drovers Bancshares Corporation ("Drovers") is a one bank holding company with
a principal subsidiary, The Drovers & Mechanics Bank ("Drovers Bank"). Drovers
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., Drovers
Realty Company, Drovers Investment Company, and Drovers Capital Trust I. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Income and expenses are recorded on the accrual basis of
accounting except for investment services and trust fees and certain other
fees, which are recorded principally on the cash basis. Fees recorded on the
cash basis do not differ materially from the accrual basis. Production costs
of advertising are expensed when advertising begins. Certain reclassifications
have been made to prior information to conform to current year's presentation.
USE OF ESTIMATES:
In preparing the consolidated financial statements, we 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:
Drovers classifies debt securities which we have the positive intent and
ability to hold until maturity 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 on available-
for-sale securities are considered other comprehensive income or loss and are
shown net of deferred taxes in Shareholders' Equity. Drovers classified no
securities as trading at December 31, 1999 or 1998. We reassess the
appropriateness of the classifications each quarter.
We calculate amortization and accretion using the straight-line method on most
of the investments and the effective interest method on the other 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.
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. We estimate fair value on an
individual loan basis using quoted market prices. Gains and losses on
residential mortgages sold 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.
8<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NONPERFORMING ASSETS:
Nonperforming assets include 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.
We generally place loans on a nonaccrual basis when principal or interest is
past due 90 days or more and when, in our opinion, full collection of
principal or interest is unlikely. At the time a loan is placed on nonaccrual
status, we discontinue the accrual of interest. Income on nonaccrual loans is
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 our evaluation of the loan portfolio
and reflects an amount which, in our opinion, is adequate to absorb losses in
the existing portfolio. Additions are made to the reserve through periodic
provisions, which are charged to expense. We evaluate the adequacy of our
loan loss reserve on a quarterly basis and consider the following in our
evaluation:
- the impact of economic conditions on the creditworthiness of borrowers,
- 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. A significant change in the estimate could result in a material
change to net income.
Loans are classified as impaired when it is probable that Drovers will be
unable to collect all amounts due in accordance with the terms of the loan
agreement. We identify loans as impaired through various means including the
following:
- a formal loan review process,
- quarterly review of loan loss reserve adequacy,
- past due listings and
- watch lists.
The allowance for credit losses related to impaired loans is calculated either
by discounting cash flows using the loan's initial effective interest rate or
by determining the fair value of collateral for certain collateral-dependent
loans. Large groups of smaller-balance homogeneous loans are collectively
evaluated for impairment.
LOAN SERVICING RIGHTS:
We allocate 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, Drovers stratifies the loan servicing rights based on original
term and date of origination and uses quoted market prices to estimate fair
value. We did not have a valuation allowance associated with the loan
servicing rights as of December 31, 1999 or 1998.
9<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method and is
charged to operations based on the following range of lives:
- Buildings - 20 to 60 years
- Equipment - 3 to 20 years.
- Leasehold improvements are amortized over the shorter of the lease terms
or the estimated useful lives of the improvements.
Maintenance, repairs and minor replacements are expensed as incurred. Gains
and losses on dispositions are reflected in current operations.
INVESTMENT SERVICES AND TRUST ASSETS:
Assets held by our subsidiary in fiduciary or agency capacity for customers
are not considered assets of Drovers or its subsidiaries and are not included
in the consolidated financial statements.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the future tax
consequences related to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. We
measure deferred tax assets and liabilities 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:
We calculate earnings per common share 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 potentially
dilutive common shares outstanding during each period.
NOTE 2 - CASH AND DUE FROM BANKS
Drovers 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 $5,787,000 at December 31, 1999
and $4,521,000 at December 31, 1998. Average required reserves were
$5,287,000 during 1999 and $3,948,000 during 1998.
NOTE 3 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Drovers 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. These 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 the
instruments reflect the extent of involvement we have in particular classes of
financial instruments.
Our 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. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance-sheet instruments.
1999 1998
Commitments to extend credit (legally binding) ............ $110,228 $112,495
Standby letters of credit and financial guarantees ........ 9,274 8,712
10<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 3 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
Commitments to extend credit are agreements to lend to a customer as long as
the conditions established in the contract are not violated. 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. Drovers evaluates each
customer's creditworthiness on a case by case basis. The amount of collateral
obtained, if deemed necessary for extension of credit, is based on our credit
evaluation of the counter party. The type of 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 Drovers to guarantee the performance of our customers to third
parties. 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. We hold collateral supporting those commitments
when it is deemed necessary.
NOTE 4 - CONTINGENT LIABILITIES AND RESTRICTIONS ON DIVIDENDS
In the normal course of business, there are various legal proceedings pending
against Drovers. We believe that the aggregate liabilities, if any, arising
from such actions would not have a material adverse effect on our consolidated
financial position.
In order to pay dividends to our shareholders, Drovers is dependent on the
upstreaming of dividends from Drovers Bank. Drovers 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
We emphasize diversification of credit risk among industries and borrowers.
However, 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. Drovers grants loans to
customers, substantially all of whom are residents of York County,
Pennsylvania.
Although Drovers has a diversified loan portfolio, we grant 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 their closely-held real estate companies are
used primarily to fund land leases to the auto dealers. We generally retain
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:
1999 1998
Principal balance ........................................ $31,678 $35,835
Available credit ......................................... 9,916 14,628
Total credit exposure .................................... $41,594 $50,463
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, 1999 were $767,000 and were
$479,000 as of December 31, 1998. All money market investments were in the
form of interest-bearing deposits with other financial institutions.
11<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 6 - MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES (continued)
The amortized cost and estimated fair value of investment securities classified
as held-to-maturity as of December 31, 1999 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $ 1,491 $ 10 $ 0 $ 1,501
Obligations of states and political
subdivisions ................... 14,567 202 22 14,747
Mortgage-backed securities and
collateralized mortgage
obligations .................... 5,298 42 17 5,323
Total investment securities ....... $21,356 $254 $39 $21,571
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 1999 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $ 16,472 $ 1 $ 438 $16,035
Obligations of states and political
subdivisions ................... 23,004 32 846 22,190
Corporate obligations ............. 16,709 3 462 16,250
Mortgage-backed securities and
collateralized mortgage
obligations .................... 116,105 202 2,784 113,523
Total debt securities ............. 172,290 238 4,530 167,998
Equity securities ................. 24,035 190 642 23,583
Total investment securities ....... $196,325 $428 $5,172 $191,581
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay obligations with or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less .............. $ 1,266 $ 1,296 $ 503 $ 505
Due after one year through five years. 2,929 3,012 7,981 7,843
Due after five years through ten years 11,863 11,940 13,031 12,748
Due after ten years .................. 0 0 34,670 33,379
16,058 16,248 56,185 54,475
Mortgage-backed securities and
collateralized mortgage
obligations ....................... 5,298 5,323 116,105 113,523
Total debt securities ................ $21,356 $21,571 $172,290 $167,998
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 investment securities
classified as held-to-maturity as of December 31, 1998 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $ 8,476 $139 $ 0 $ 8,615
Obligations of states and political
subdivisions ................... 16,926 697 0 17,623
Mortgage-backed securities and
collateralized mortgage
obligations .................... 8,857 124 23 8,958
Total investment securities ....... $34,259 $960 $23 $35,196
The amortized cost and estimated fair value of investment securities classified
as available-for-sale as of December 31, 1998 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...... $ 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
During 1999, 1998 and 1997 we sold investment securities classified as
available-for-sale. There were no gross realized losses on these sales. The
proceeds from sales and the gross realized gains were as follows:
1999 1998 1997
Proceeds from sales ............... $367 $471 $6,818
Gross realized gains .............. 141 262 196
Drovers sold $5,991,000 of U.S. government agency bonds, classified as held-to-
maturity during 1999. These bonds were within three months of a probable call
date. The sales resulted in gains of $26,000. We also recognized gains on
held-to-maturity investment securities with call options exercised by the
issuer. Realized gains were $15,000 in 1999 and $1,000 in 1997. There were no
realized gains in 1998.
We pledge securities as required or permitted by law to secure certain public
and trust deposits and repurchase agreements. Assets with a carrying value of
$104,483,000 were pledged at December 31, 1999 and $40,686,000 were pledged at
December 31, 1998. Of the pledged securities, the amount pledged for
repurchase agreements was $33,385,000 for 1999 and $17,944,000 for 1998. The
aggregate book value of debt securities from a single issuer did not exceed 10%
of stockholders' equity at December 31, 1999 or 1998.
13<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES
Loans were comprised of the following as of December 31:
1999 1998
Commercial, financial and industrial loans..... $120,041 $117,997
Real estate mortgage loans:
Real estate construction-related ............. 18,846 13,523
Real estate mortgage loans secured by 1 to 4
family residential properties ............... 140,139 126,542
Other real estate ............................ 150,341 100,585
Total real estate mortgage loans ............... 309,326 240,650
Consumer loans:
Monthly payment .............................. 29,181 30,498
Other revolving credit ....................... 837 791
Total consumer loans ........................... 30,018 31,289
Other .......................................... 816 173
Total loans .................................... $460,201 $390,109
Drovers Bank 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 $28,872,000 at
December 31, 1999 and $18,119,000 at December 31, 1998. During 1999,
$88,261,000 of new loans were made to related parties and repayments totaled
$77,508,000.
Residential mortgage loans with a book value of $882,000 in 1999 and $3,179,000
in 1998 were committed for sale and awaiting settlement at year-end. The
cumulative market value exceeded the book value of these loans. Total loans
serviced at year-end were $108,849,000 in 1999, $106,647,000 in 1998 and
$100,355,000 in 1997.
Nonperforming assets are detailed below:
1999 1998 1997
Nonaccrual loans ............................... $5,336 $1,435 $740
90 days past due and still accruing ............ 33 7 33
Restructured loans ............................. 1,283 1,203 0
Non-performing loans ........................... 6,652 2,645 773
Assets acquired by foreclosure or repossession . 85 148 154
Non-performing assets .......................... $6,737 $2,793 $927
Non-performing loans as a percentage of total
loans, net of unearned income ................. 1.5% 0.7% 0.3%
Non-performing assets as a percentage of total
assets ........................................ 0.9% 0.5% 0.2%
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 $58,000 in 1999, $60,000 in 1998 and $56,000 in 1997. Nonaccrual
loans at December 31, 1999 include $4,185,000 of loans secured by trade
receivables. These loans were purchased at a discount; therefore, no
additional interest would have been accrued.
14<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - LOANS AND RESERVE FOR LOAN LOSSES, (continued)
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 collection of full principal or interest is
unlikely. At that time, the loans are placed on nonaccrual status.
The average recorded investment in impaired loans was $2,961,000 in 1999,
$1,672,000 in 1998, and $2,456,000 in 1997. We recognized interest income on
impaired loans of $159,000 in 1999, $123,000 in 1998, and $233,000 in 1997.
Interest income recognized on a cash basis would have been $155,000 in 1999,
$122,000 in 1998, and $206,000 in 1997.
The carrying value of our investment in impaired loans and the portion of the
reserve for loan losses allocated to impaired loans as of December 31, are
summarized below:
1999 1998
Impairment calculated based on:
Present value of expected cash flows .......... $4,475 $ 545
Fair value of collateral ...................... 993 1,203
Impaired loans 5,468 1,748
Reserve for loan losses allocated to impaired
loans ......................................... $ 754 $ 150
Two loans secured by trade receivables were classified as impaired during
September when possible credit problems became known. The same two loans were
classified as nonaccrual during the fourth quarter after they became 90 days
past due on payments. During the fourth quarter, a charge-off of $1,000,000
was taken on one of these loans when updated loss estimates were received.
Changes in the reserve for loan losses for the years ended December 31, were
as follows:
1999 1998 1997
Balance, beginning of year ............ $3,912 $3,304 $3,130
Provision for loan losses ............. 1,727 1,266 386
Loans charged-off:
Commercial, financial and industrial. 1,536 521 0
Real estate ......................... 14 1 0
Consumer ............................ 311 235 327
Total loans charged-off ............... 1,861 757 327
Recoveries:
Commercial, financial and industrial. 48 0 32
Real estate ......................... 0 0 15
Consumer ............................ 82 99 68
Total recoveries ...................... 130 99 115
Balance, end of year .................. $3,908 $3,912 $3,304
15<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following as of December 31:
1999 1998
Land and land improvements ............................. $ 1,464 $ 1,464
Buildings .............................................. 11,799 11,423
Capitalized leased premises and equipment .............. 442 442
Furniture and equipment ................................ 14,600 12,288
Construction in process ................................ 271 704
28,576 26,321
Less accumulated depreciation .......................... 11,786 10,420
Total bank premises and equipment ...................... $16,790 $15,901
Provisions for depreciation charged to operating expenses were $1,553,000 for
1999, $1,423,000 for 1998 and $1,226,000 for 1997. As of December 31, 1999,
construction in process was primarily related to two new branch offices under
construction.
NOTE 9 - LOAN SERVICING RIGHTS
Changes in loan servicing rights for the years ended December 31, were as
follows:
1999 1998
Balance, beginning of year.............................. $ 532 $297
Servicing rights recognized ............................ 229 389
Servicing rights amortized ............................. 189 154
Balance, end of year.................................... $ 572 $532
Fair value, end of year................................. $1,028 $812
NOTE 10 - INVESTMENT IN REAL ESTATE VENTURES
Drovers is a limited partner in five real estate ventures that own and operate
apartment buildings. The apartments 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 year-end were
$5,554,000 in 1999 and $5,385,000 in 1998.
NOTE 11 - TIME DEPOSITS
Time deposits of $100,000 or more aggregated $32,084,000 at December 31, 1999
and $27,037,000 at December 31, 1998. Interest expense on these time deposits
amounted to approximately $1,563,000 in 1999, $1,390,000 in 1998 and $1,258,000
in 1997. The amount of total time deposits and maturities are as follows:
$171,892,000 in 2000; $54,412,000 in 2001; $19,370,000 in 2002; $3,539,000 in
2003 and $6,961,000 in 2004.
16<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS
1999 1998
Notes payable to FHLB Pittsburgh:
Due 2008, 4.86% - 4.94%, convertible quarterly after 1999 . $ 0 $15,000
Due 2000, 6.01% ........................................... 100 100
Due 2000, variable ........................................ 4,000 4,000
Due 2002, 5.52% - 5.60%, convertible quarterly after 1998 . 15,000 20,000
Due 2002, variable ........................................ 10,000 0
Due 2003, 6.40% ........................................... 400 400
Due 2003, 5.13%, convertible quarterly after 2000 ......... 8,000 8,000
Due 2004, variable ........................................ 5,000 0
Due 2005, 5.24%, convertible quarterly after 2001 ......... 5,000 5,000
Due 2006, 5.71%, convertible quarterly after 2000 ......... 5,000 0
Due 2008, 5.15%, convertible in 2005 ...................... 5,000 5,000
Due 2009, 5.52%, convertible quarterly after 2000 ......... 5,000 0
Due 2009, 5.94% - 6.04%, convertible quarterly after 2002 . 10,000 0
Due 2009, 4.93% - 5.94%, convertible quarterly after 2004 . 12,000 0
Due 2014, 5.60%, convertible quarterly after 2004 ......... 5,000 0
Due 2015, 3.75%, amortizing ............................... 365 372
Due 2016, 4.00%, amortizing ............................... 652 0
Note payable to First Union:
Due 2003, 6.53% ........................................... 4,614 4,805
95,131 62,677
Capital lease obligations ................................... 106 153
$95,237 $62,830
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, 1999 is $12,086,000 and $6,716,000
as of December 31, 1998. The interest rates on the variable notes reprice
quarterly or more frequently and are based on LIBOR or prime. The convertible
borrowings have an option for the FHLB to convert the rate to a floating rate
after expiration of the fixed period. The subsequent floating rate is subject
to quarterly adjustments until maturity. These borrowings include a put option
if the FHLB elects to convert the debt to a variable interest rate. Drovers
also maintains a credit line with the FHLB secured by the same collateral. The
unused credit line totalled $39,145,000 at December 31, 1999. 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 are as
follows: $4,377,000 in 2000; $278,000 in 2001; $25,265,000 in 2002; $12,383,000
in 2003 and $5,023,000 in 2004.
At December 31, 1999 and 1998, Drovers was obligated under noncancellable
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, which is expected to be exercised in
2000. The rental expense under such leases amounted to $447,000 in 1999,
$390,000 in 1998 and $270,000 in 1997.
17<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - OTHER BORROWINGS AND LEASE COMMITMENTS (continued)
Future minimum rental payments under capital leases and noncancellable
operating leases with terms of one year or more at December 31, 1999 were:
Capital Operating
Leases Leases
2000 ..................................................... $ 65 $ 442
2001 ..................................................... 45 423
2002 ..................................................... 11 419
2003 ..................................................... 0 408
2004 ..................................................... 0 342
Thereafter................................................ 0 2,068
Total future minimum rental payments ..................... 121 $4,102
Less interest ............................................ 15
Present value of minimum rental payments ................. $106
NOTE 13 - CAPITAL SECURITIES OF SUBSIDIARY TRUST
On September 17, 1999, Drovers set up Drovers Capital Trust I, a Delaware
business trust, in which Drovers owns all of the common equity. The Trust
issued $7,500,000 of 9.25% preferred securities to investors in conjunction
with Drovers issuing $7,735,000 of junior subordinated deferrable interest
debentures to the Trust. The debentures are the sole asset of the Trust. The
terms of the junior subordinated deferrable interest debentures are the same
as the terms on the preferred securities. Our obligations under the debentures
and related documents, taken together, constitute a full and unconditional
guarantee by us of the Trust's obligations under the preferred securities.
The preferred securities are redeemable by us on or after September 30, 2004,
or earlier if the deduction of related interest for federal income taxes is
prohibited, treatment as Tier 1 capital is no longer permitted, or certain
other contingencies arise. The preferred securities must be redeemed upon
maturity of the debentures on September 30, 2027.
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate fair value amounts by 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 we 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 us as
of December 31, 1999 and 1998. Although we are 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.
18<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
1999 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and short-term investments.... $ 21,338 $ 21,338 $ 24,624 $ 24,624
Investment securities ............. 212,937 213,152 161,619 162,556
Net loans ......................... 456,293 454,998 386,197 389,433
Interest receivable ............... 3,482 3,482 2,830 2,830
FINANCIAL LIABILITIES:
Demand and savings deposits ....... 239,526 239,526 228,029 228,029
Time deposits ..................... 265,608 265,247 229,643 230,673
Federal funds purchased and
securities sold under
agreement to repurchase ......... 55,238 55,238 23,325 23,325
Notes payable ..................... 95,130 92,787 62,677 60,286
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust ................ 7,500 7,365 0 0
Interest payable .................. 4,355 4,355 3,548 3,548
The following methods and assumptions were used to estimate fair value for
each class of financial instrument:
- For short-term instruments, the carrying amount was used as a reasonable
estimate of fair value.
- The fair value of investment securities was 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 and borrowings with floating interest rates,
we presumed that estimated fair values approximated the carrying amount.
- The fair value of fixed rate loans and time deposits was 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. We believe that the risk factor embedded in the
currently offered rates result in a fair valuation of the loan portfolio.
The primary risks are credit risk and prepayment risk.
- For convertible borrowings, the fair value was provided by an independent
source and based on the likelihood the instrument would be converted on
its next possible conversion date given the current rates offered by the
Federal Home Loan Bank of Pittsburgh.
- The fair value of fixed rate borrowings and the capital securities was
estimated based on present values using currently offered rates for
similar instruments.
There was no material difference between the notional amount and the estimated
fair value of off-balance sheet items, which totalled $119,502,000 at December
31, 1999. Off-balance sheet items are primarily comprised of unfunded loan
commitments, which are generally priced at market at the time of funding.
NOTE 15 - INCOME TAXES
Total income tax (benefit) expense for the years ended December 31, was
allocated as follows:
1999 1998 1997
Income from continuing operations ................... $ 1,546 $1,356 $1,715
Shareholders' equity, for other comprehensive
income ............................................ -2,255 -177 630
Total income tax (benefit) expense .................. $ -709 $1,179 $2,345
19<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 15 - INCOME TAXES (continued)
Income tax (benefit) expense attributable to other comprehensive income
consists of the following at December 31:
1999 1998 1997
Unrealized gains (losses) on securities
arising during the period ............... $-2,207 $ -88 $697
Reclassification adjustment for (gains)
losses included in net income ........... -48 -89 -67
Income taxes (benefits) related to other
comprehensive income .................... $-2,255 $-177 $630
Income tax expense attributable to income from continuing operations consists
of the following at December 31:
1999 1998 1997
Currently payable .......................... $1,686 $1,447 $1,656
Deferred expense (benefit).................. -140 -91 59
Income tax expense ......................... $1,546 $1,356 $1,715
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:
1999 1998 1997
Income before income tax ............ $9,147 $8,166 $7,346
Tax at federal income tax rate ...... $3,110 $2,776 $2,498
Differences resulting from:
Effect of tax-exempt income ........ -474 -391 -343
Historic and low income tax credits. -817 -808 -279
Effect of dividend income .......... -294 -246 -183
Provision for loan losses .......... -40 236 59
Other items, net ................... 61 -211 -37
Applicable income tax ............... $1,546 $1,356 $1,715
The significant components of deferred income tax (benefit) expense
attributable to income from continuing operations for the years ended
December 31, were as follows:
1999 1998 1997
Provision for loan losses .................. $ 40 $-236 $-59
Alternative minimum tax credit carryforward. -219 0 0
Other items, net ........................... 39 145 118
Deferred tax expense (benefit) ............. $-140 $ -91 $ 59
20<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 15 - 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, 1999 and
1998 are presented below:
1999 1998
Deferred tax assets:
Allowance for loan losses .................... $1,026 $1,067
Pension ...................................... 159 155
Unrealized holding losses on available-
for-sale securities ........................ 1,612 0
Other ........................................ 83 70
Total gross deferred tax assets ............ 2,880 1,292
Deferred tax liabilities:
Bank premises and equipment .................. 385 381
Unrealized holding gains on available-
for-sale securities ........................ 0 643
Other ........................................ 449 388
Total gross deferred tax liabilities ....... 834 1,412
Net deferred tax assets (liabilities) .......... $2,046 $ -120
Federal income taxes on security gains were $62,000 in 1999, $89,000 in 1998
and $67,000 in 1997.
We believe the deferred tax assets are realizable since we have had a long
history of strong earnings and a carryback potential exceeding the deferred
tax asset. We are not aware of any evidence that would preclude us from
ultimately realizing these assets.
NOTE 16 - NET INCOME PER SHARE
Per share information is computed based on the weighted average number of
shares of stock outstanding during each year, giving retroactive effect to a
5% stock dividend issued in 1999, a three-for-two stock split in 1998 and a 5%
stock dividend issued 1997. Net income per share and net income per share,
assuming dilution, were calculated as follows:
1999 1998 1997
Net income .............................. $7,601 $6,810 $5,631
Average shares outstanding .............. 4,703 4,678 4,648
Effect of dilutive securities:
Stock options .......................... 52 71 42
Average shares outstanding,
assuming dilution ...................... 4,755 4,749 4,690
Net income per share .................... $1.62 $1.46 $1.21
Net income per share, assuming dilution . $1.60 $1.43 $1.20
NOTE 17 - COMMON STOCK
Drovers issued the following stock dividends and stock splits:
1999 1998
Percentage ................................... 5% 50%
Record date .................................. 5-07-99 5-08-98
Payable date ................................. 5-28-99 5-29-98
21<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 18 - CASH FLOW DISCLOSURES
Drovers paid interest of $23,479,000 in 1999, $21,211,000 in 1998 and
$18,667,000 in 1997. We paid income taxes of $1,850,000 in 1999, $1,670,000
in 1998 and $1,570,000 in 1997. Transfers from loans to other real estate as
a result of foreclosure were $318,000 in 1999, $277,000 in 1998 and $211,000
in 1997.
NOTE 19 - RETIREMENT PLAN
Drovers has 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 our 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 we determine to be appropriate from time to time. Pension expense was
$192,000 in 1999, $161,000 in 1998 and $139,000 in 1997. Drovers 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 amount included in other liabilities on these
plans was $978,000 at December 31, 1999 and $849,000 at December 31, 1998.
The following table sets forth the plan's funded status and amounts recognized
in the Drovers consolidated financial statements at December 31:
1999 1998
Change in benefit obligation:
Benefit obligation at January 1, ......................... $-3,503 $-3,026
Service cost .............................................. -292 -257
Interest cost ............................................. -245 -219
Benefits paid ............................................. 555 176
Actuarial loss ............................................ -209 -177
Benefit obligation at December 31, ........................ $-3,694 $-3,503
Change in plan assets:
Fair value of plan assets at January 1, ................... $ 3,705 $ 3,370
Employer contributions .................................... 325 312
Actual return on assets ................................... 502 199
Benefits paid ............................................. -555 -176
Fair value of plan assets at December 31, ................. $ 3,977 $ 3,705
Funded status .............................................. $ 283 $ 202
Unrecognized net transition asset .......................... -115 -128
Unrecognized prior service cost ............................ 8 9
Unrecognized net gain ...................................... 23 -17
Prepaid pension cost ....................................... $ 199 $ 66
The net periodic benefit cost included the following:
1999 1998 1997
Service cost .................................... $292 $257 $208
Interest cost ................................... 245 219 183
Expected return on plan assets .................. -333 -303 -240
Amortization of net transition asset ............ -13 -13 -13
Amortization of prior service cost .............. 1 1 1
Net periodic benefit cost ....................... $192 $161 $139
22<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 19 - RETIREMENT PLAN, (continued)
The following weighted average assumptions were used for the plan:
1999 1998 1997
Discount rate ....................................... 7.0% 7.0% 7.3%
Rate of increase in salary levels ................... 4.0% 4.0% 5.0%
Long-term rate of return on plan assets ............. 9.0% 9.0% 9.0%
Plan assets are invested in mutual funds, which consist of corporate and U.S.
government bonds and domestic and foreign equity securities.
Drovers 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, our contribution equals 50% of the employee's contribution up
to a maximum of 6% of annual salary. In 1997, our 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 $123,000
in 1999, $112,000 in 1998 and $47,000 in 1997.
NOTE 20 - STOCK OPTION PLANS
Drovers has an incentive stock option plan, a non-employee directors plan and
an employee stock purchase plan. A committee of the Board of Directors
administers the incentive stock option plan and the non-employee directors
plan. Under the incentive stock option plan, the committee, 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 incentive stock option plan, 76,935 options have been
authorized and not yet granted. The non-employee directors plan allows non-
mployee directors to elect to take stock options in lieu of directors' fees
and to receive option grants if certain performance targets are achieved. The
option price is the fair value of shares on the day granted. Options are
immediately vested and must be exercised within ten years. Under the non-
employee directors plan, 147,408 options have been authorized and not yet
granted. The following shares and average option prices have been adjusted for
subsequent stock splits and dividends:
1999 1998 1997
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
Balance at January 1, ...... 138 $13.69 142 $11.20 111 $10.35
Granted .................... 42 22.67 25 23.81 40 13.61
Exercised .................. 9 12.39 27 9.54 9 11.41
Forfeited .................. 1 23.81 2 17.91 0 --
Balance at December 31, .... 170 $15.92 138 $13.69 142 $11.20
Exercisable at December 31,. 150 $15.01 126 $12.77 122 $10.81
The following options were outstanding at December 31, 1999:
Range of Options Exercise Remaining Options
Exercise Prices Outstanding Price Life Exercisable
$ 6.0001 - $ 9.0000 4 $ 6.11 1.0 years 4
$ 9.0001 - $12.0000 40 9.98 5.3 40
$12.0001 - $15.0000 62 13.04 6.8 62
$18.0001 - $21.0000 1 20.50 10.0 1
$21.0001 - $24.0000 63 23.11 8.8 43
170 $15.92 7.1 years 150
23<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 20 - STOCK OPTION PLANS, (continued)
The weighted average grant-date fair value of options granted was $5.28 in
1999, $9.98 in 1998 and $5.28 in 1997. We use the Black-Scholes Option
Pricing Model to calculate the grant-date fair value. The following
significant assumptions were used:
1999 1998 1997
Risk free interest rate ................. 5.0% 5.6% 6.9%
Expected life ........................... 6.2 years 8.2 years 9.0 years
Expected volatility ..................... 19.1% 15.4% 12.7%
Expected dividends ...................... 2.0% 1.6% 2.4%
The employee stock purchase plan allows eligible employees to purchase Drovers
stock at 85% of the lesser of the fair value of the stock on the date of grant
or on the date of exercise. Shares purchased under the terms of the plan were
4,502 in 1999, 3,904 in 1998 and 2,151 in 1997. As of December 31, 1999,
237,506 options have been reserved for future issuances under the plan.
Drovers applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized. Had
compensation cost been determined consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," our net income and earnings per
share would have been reduced to the proforma amounts indicated below:
1999 1998 1997
Net Income............................ As reported. $7,601 $6,810 $5,631
Pro forma... $7,436 $6,630 $5,489
Earnings per share.................... As reported. $1.62 $1.46 $1.21
Pro forma... $1.58 $1.42 $1.18
Earnings per share, assuming dilution. As reported. $1.60 $1.43 $1.20
Pro forma... $1.56 $1.40 $1.17
NOTE 21 - BUSINESS SEGMENTS
Drovers 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, 1999 and 1998, we did not 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, 1999,
1998, and 1997 were derived from sources within the United States and no
revenues from a single customer amounted to 10% or more of our annual revenues.
24<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 22 - PARENT CORPORATION FINANCIAL STATEMENTS
December 31,
STATEMENTS OF CONDITION 1999 1998
ASSETS
Cash .................................................... $ 102 $ 101
Investments in and advances to banking subsidiary ...... 56,214 45,642
Investments in and advances to non-banking subsidiaries . 940 733
Other assets ............................................ 1,971 1,851
TOTAL ASSETS .............................................. $59,227 $48,327
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ....................................... $ 292 $ 134
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust ........................ 7,735 0
Total shareholders' equity .............................. 51,200 48,193
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $59,227 $48,327
Years Ended December 31,
STATEMENTS OF INCOME 1999 1998 1997
INCOME
Dividends from subsidiaries ............ $2,288 $2,050 $2,227
Other income ........................... 198 302 95
Total income ....................... 2,486 2,352 2,322
OPERATING EXPENSES
Interest expense on capital securities . 206 0 0
Other .................................. 248 246 148
Total operating expenses ........... 454 246 148
Income before income taxes ............. 2,032 2,106 2,174
Applicable income taxes (benefit) ...... -99 9 -23
Income before undistributed earnings of
subsidiaries ......................... 2,131 2,097 2,197
Undistributed earnings of banking
subsidiary ........................... 5,503 4,725 3,437
Undistributed loss of non-banking
subsidiaries ........................... -33 -12 -3
NET INCOME .............................. $7,601 $6,810 $5,631
25<PAGE>
Drovers Bancshares Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 22 - PARENT CORPORATION FINANCIAL STATEMENTS, (continued)
Years Ended December 31,
STATEMENTS OF CASH FLOWS 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $7,601 $6,810 $5,631
Undistributed net earnings of subsidiaries .... -5,470 -4,713 -3,434
Gain on sale of investment securities
available-for-sale .......................... -140 -262 -74
(Increase) decrease in other items............. -184 61 -78
Net cash provided by operating activities ..... 1,807 1,896 2,045
CASH FLOWS FROM INVESTING ACTIVITIES:
(Payments for) repayments of investments in and
advances to subsidiaries ..................... -9,378 -4 42
Purchases of investment securities
available-for-sale ........................... -459 -916 -401
Proceeds from sales of investment securities
available-for-sale ........................... 309 471 180
Net cash used in investing activities ......... -9,528 -449 -179
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) borrowings and
advances from subsidiaries ................... 7,938 -15 0
Issuance of stock ............................. 2,072 309 231
Dividends paid ................................ -2,288 -2,050 -1,707
Net cash (provided by) used in financing
activities ................................... 7,722 -1,756 -1,476
NET INCREASE (DECREASE) IN CASH ................ 1 -309 390
CASH AT JANUARY 1, ............................. 101 410 20
CASH AT DECEMBER 31, ........................... $ 102 $ 101 $ 410
26<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, 1999 and
1998, 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, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years ended December 31, 1999, in conformity with generally accepted
accounting principles.
Stambaugh . Ness, P.C.
York, Pennsylvania
January 20, 2000
27<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion focuses on information about Drovers Bancshares Corporation
("Drovers"), its financial condition and results of operations not otherwise
apparent in the consolidated financial statements of this Annual Report. You
should refer to those statements and other selected financial data presented
elsewhere in the report to fully understand the following discussion and
analysis.
RESULTS OF OPERATIONS
Drovers Bancshares Corporation derives its consolidated earnings primarily
from its wholly-owned subsidiary, The Drovers & Mechanics Bank ("Drovers
Bank"). Drovers Bank is a Pennsylvania state-chartered, FDIC insured bank and
has two wholly-owned subsidiaries: 96 South George Street, Inc and Drovers
Investment Company. 96 South's primary asset is an office building attached to
Drovers Bank's main office, which houses our corporate headquarters. Drovers
Investment Company's assets consist of investment securities, primarily
municipal bonds.
Drovers Bancshares Corporation also wholly owns two other subsidiaries: Drovers
Realty Company and Drovers Capital Trust I. Drovers Realty Company has various
real estate holdings, including ground and building leases. It rents the real
estate to Drovers Bank for use as branch offices. Drovers Capital Trust I owns
junior subordinated deferrable interest debentures due from Drovers Bancshares
Corporation. The debentures are the sole asset of the Trust. The Trust issued
$7,500,000 of preferred securities to investors secured by the debentures. For
additional information on the Trust, see footnote 13 of the consolidated
financial statements.
FINANCIAL SUMMARY
Drovers recorded net income of $7,601,000 in 1999 and $6,810,000 in 1998. The
return on average equity increased to 15.15% for 1999 compared to 14.69% for
The return on average assets was 1.18% for 1999, a slight decrease
from 1.22% in 1998.
NET INTEREST INCOME
Net interest income represents the difference between interest income and
interest expense. Net interest income is a measurement of how well we balance
our interest rate sensitive assets and liabilities while maintaining adequate
interest margins. Net interest income rose 15.7% or $3,021,000 in 1999, after
growing 13.2% or $2,242,000 in 1998.
Years Ended December 31, Increase(Decrease)
(in thousands) 1999 1998 1997 99/98 98/97 97/96
Total interest income .. $46,562 $40,991 $36,267 13.6% 13.0% 20.7%
Total interest expense . 24,286 21,736 19,254 11.7% 12.9% 30.2%
Net interest income .... $22,276 $19,255 $17,013 15.7% 13.2% 11.5%
Loans to businesses and individuals are our largest category of earning assets
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 sensitivity to interest rate movements. Increased volume drove
the increases in net interest income during 1999 and 1998.
28<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
NET INTEREST INCOME (continued)
The following table depicts the changes in the rate and volume components of
net interest income:
1999 over 1998 1998 over 1997
Total Change due to Total Change due to
(in thousands) Change Rate Volume Change Rate Volume
Total interest income .. $5,571 $ -833 $6,404 $4,724 $-787 $5,511
Total interest expense . 2,550 -1,193 3,743 2,482 -132 2,614
Net interest income .... $3,021 $ 360 $2,661 $2,242 $-655 $2,897
There are two performance measures that indicate how successful a bank is in
managing its asset and liability structure. The first is net interest spread,
which is the average rate earned on earning assets less the average rate paid
on interest-bearing funds. The second is net interest margin, which
incorporates the margin on earning assets financed by noninterest-bearing
funds with the net interest spread. The following table summarizes the net
interest spread and the net interest margin during 1999 and 1998:
1999 Average 1998 Average
(in thousands) Balance Rate Balance Rate
Earning assets .................... $605,764 7.69% $524,729 7.81%
Financed by:
Interest-bearing funds .......... $541,322 4.49% $463,520 4.69%
Noninterest-bearing funds ....... 64,442 - 61,209 -
Total ........................ $605,764 4.01% $524,729 4.14%
Net interest income ............... $ 22,276 $ 19,255
Net interest spread ............... 3.20% 3.12%
Net interest income margin ........ 3.68% 3.67%
The net interest spread increased 0.08% from 1998. The average yield on
Earning assets fell 0.12%, which was more than offset by a 0.20% decline
in the yield on interest-bearing funds. The decline in yield on interest-
bearing funds was primarily due to the decrease in yield on time deposits.
The net interest margin increased 0.01% due primarily to a decline in the cost
of earning assets of 0.13%. The yield on interest-bearing funds declined by
more than the cost of earning assets primarily because of a change in mix from
non-interest bearing to interest-bearing liabilities.
Drovers experienced strong loan growth again in 1999. Much of the growth was
in fixed rate loans as customers continued to take advantage of low interest
rates. We also expanded our holdings of investment securities, particularly
fixed rate municipal bonds, mortgage backed securities and corporate
obligations, primarily other financial institutions' trust preferred
securities. Much of the asset growth was funded with time deposits, borrowings
and capital securities of the subsidiary trust. These liabilities have a
shorter maturity than the assets they fund. The growth and funding strategy
has changed our interest rate sensitivity from a relatively neutral position
to slightly liability sensitive, which was particularly evident in the fourth
quarter of 1999. Beginning in July 1999, the Federal Reserve raised
short-term interest rates three times. The yield on earning assets during the
fourth quarter was 7.84%, which was 0.15% higher than the entire year and
included a prepayment penalty of $279,000. The yield on interest-bearing
liabilities was 4.69%, or 0.20% higher than the entire year. Contributing to
the increase in the yield on interest-bearing liabilities was the issuance of
$7,500,000 of 9.25% capital securities on September 17, 1999. As a result of
a higher increase in the yield on interest-bearing liabilities than on
interest-earning assets, the net interest margin declined to 3.61% in the
fourth quarter of 1999.
29<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
PROVISION FOR LOAN LOSSES
The allowance for loan losses is based on our quarterly assessment of the
losses inherent in the loan portfolio. This assessment results in an
allowance consisting of two components, allocated and unallocated.
The allocated portion includes provisions for specific impaired loans and
pools of problem loans over a fixed dollar amount where the internal
credit rating is at or below a predetermined classification. Allocations
for impaired loans are calculated based on discounted cash flow analyses
or collateral valuations. Allocations for pools of classified loans are
developed by loan type and risk rating and are based on historical loss
trends and our judgement concerning those trends and other relevant
actors. These factors may include, but are not limited to, the following:
- actual versus estimated losses,
- general and local economic conditions,
- portfolio concentrations,
- changes in mix and volume,
- industry competition and consolidation and
- impact of government regulations.
Consumer and residential mortgage loan allocations are made at a total
portfolio level based on historical loss experience adjusted for portfolio
activity and current economic conditions.
While we try to reflect all risk factors in our reserve methodologies, there
continues to be a certain element of risk arising in part from, but not
limited to, the following:
- potential for estimation or judgmental errors,
- charge-off volatility and
- rapid declines in the credit quality of assets arising from factors such
as fraud, portfolio management risks or sudden economic shifts.
The unallocated portion of the allowance for loan losses provides coverage
for such risks. While allocations are made to specific loans and pools of
loans, the total reserve is available for all credit losses.
The following table presents the amount of the reserve allocated to each of
the loan categories and the percentage of total loans:
1999 1998
Percent of Percent of
Reserve Loans to Reserve Loans to
(in thousands) Amount Total Loans Amount Total Loans
Commercial, financial and industrial...$2,248 26.1% $2,644 30.2%
Real estate:
Construction ......................... 24 4.1% 19 3.5%
Mortgage ............................. 584 63.1% 382 58.3%
Consumer .............................. 154 6.5% 128 8.0%
Leasing and other ..................... 0 0.2% 0 0.0%
Unallocated ........................... 898 n/a 739 n/a
$3,908 100.0% $3,912 100.0%
Reserve for loan losses as a percentage
of total loans ....................... 0.85% 1.00%
30<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
PROVISION FOR LOAN LOSSES, continued
Total loans increased during 1999 while impaired and classified loans as a
percent of total loans declined from year-end 1998 to year-end 1999. The
impaired and classified loans are typically assigned a larger percentage of
the reserve. The unallocated portion of the reserve increased from $739,000
at December 31, 1998 to $898,000 at December 31, 1999. We believe 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.
The provision for loan losses was $1,727,000 for 1999, $1,266,000 for 1998
and $386,000 for 1997. Net charge-offs and loan quality ratios are summarized
below:
1999 1998 1997
Net charge-offs $1,731 $658 $212
Net charge-offs as a percent of average
loans ......................... 0.41% 0.19% 0.07%
Nonaccrual loans as a percent of total
loans ................................. 1.16% 0.37% 0.24%
Nonperforming loans as a percent of total
loans ................................. 1.45% 0.68% 0.25%
Most of the charge-offs in 1999 and 1998 were related to commercial loans. Net
charge-offs during 1999 include a fourth quarter charge of $1,000,000 on a
commercial loan secured by trade receivables. This loan and another commercial
loan also secured by trade receivables were classified as impaired during the
third quarter when possible credit problems became known. We classified the
same two loans as nonaccrual during the fourth quarter after they became 90
days past due on payments. The charge-off was based on future cash flow
estimates prepared during the fourth quarter.
OTHER INCOME
Years Ended December 31, Increase(Decrease)
(in thousands) 1999 1998 1997 99/98 98/97 97/96
Investment services and
trust income ............ $1,399 $1,295 $1,105 8.0% 17.2% 8.3%
Service charges on deposit
accounts ................ 1,920 1,692 1,293 13.5% 30.9% 7.8%
Securities gains .......... 182 262 197 -30.5% 33.0% 0.5%
Net gains on loan sales ... 741 1,044 491 -29.0% 112.6% 25.9%
Equity in losses
of real estate ventures... -251 -104 -81 141.4% 28.4% -40.9%
Other ..................... 1,358 1,219 948 11.4% 28.6% 36.2%
Total other income ........ $5,349 $5,408 $3,953 -1.1% 36.8% 17.5%
31<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER INCOME (continued)
Noninterest income decreased slightly by $59,000 to $5,349,000 in 1999 from
$5,408,000 in 1998. The 1998 noninterest income was up $1,455,000 over the
1997 noninterest income of $3,953,000.
Income from investment services and trust increased $104,000, or 8.0%, in
1999. The fair value of investments managed increased by $22,796,000 during
1999 to $274,917,000. We have experienced growth in all areas, including
trust services, employee benefits, personal trust and investment management
accounts. Additionally, investment services and trust recently launched a
new initiative, the Oak Tree Investment Group, which is expected to provide
enhanced investment management, financial planning and brokerage services.
Investment services and trust income was $190,000 greater during 1998 than
1997 and was $85,000 greater during 1997 than 1996. Overall increases in
the equity markets in the past few years helped boost the value of assets
managed and the related fee income.
Service charges on deposit accounts increased $228,000, or 13.5%, for 1999
over 1998 and $399,000, or 30.9%, for 1998 over 1997. We engaged a consulting
group at the end of 1997 to analyze various products and processes and to
suggest ways for us to enhance productivity by reducing expenses and
improving noninterest income. Most of the increase during 1998 and 1999 was a
direct result of implementing their recommendations. Service charge income
increased by $94,000 for 1997 over 1996, primarily due to an increase in fees
on business checking accounts.
Net gains from investment securities sales were $182,000 in 1999, $262,000 in
1998 and $197,000 in 1997. A majority of the gains recognized in 1999 and
1998 were due to liquidating a portion of our community bank stock portfolio.
The gains in 1997 were due to a similar liquidation and also to an investment
portfolio restructuring used to increase interest income and decrease overall
asset sensitivity.
Net gains on sales of residential mortgages are the primary component of net
gains on loan sales. Additionally, net gains include servicing assets
recognized during the year for servicing retained on mortgage and commercial
loans. The table below details the gains on sales of loans, the servicing
rights recognized and the proceeds on sales of loans:
Years Ended December 31,
(in thousands) 1999 1998 1997
Net gains on sale of loans ......... $ 741 $ 1,044 $ 491
Servicing rights recognized, included
in net gains on sale of loans:
Mortgage loans ...................... 213 361 197
Commercial loans .................... 16 28 0
Mortgage loans sold ................ $50,830 $60,817 $30,321
Commercial loans sold ................. 3,975 3,682 0
The gain on sale of loans in 1998 includes a $43,000 gain recognized on the
sale of a small credit card portfolio. The increase in gains in 1998 over
1997 was related to low interest rates, a strong economy and a mild winter.
The decline from 1998 to 1999 is a result of the refinancing boom ending.
Drovers recognized a $251,000 loss during 1999 from its equity investments
in five real estate limited partnerships. The partnerships own and operate
apartments that provide low-income housing to qualified families. We receive
substantial financial benefits from these investments in the form of historic
and low-income tax credits.
32<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER INCOME (continued)
Other income increased $139,000 to $1,358,000 in 1999 from $1,219,000 in 1998.
Drovers 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 1999 and in 1998, these fees 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 at year-end were
$108,849,000 in 1999, $106,647,000 in 1998 and $100,355,000 in 1997.
OTHER EXPENSES
Years Ended December 31, Increase(Decrease)
(in thousands) 1999 1998 1997 99/98 98/97 97/96
Salaries and employee benefits. $ 9,042 $ 8,006 $ 7,597 12.9% 5.4% 11.4%
Occupancy and premises ..... 1,468 1,246 917 17.8% 35.9% 10.9%
Furniture and equipment .... 1,413 1,365 1,111 3.5% 22.9% 24.0%
Marketing .................. 533 645 441 -17.4% 46.3% -29.7%
Net (income) cost from operation
of other real estate ..... -5 56 53 -108.9% 5.7% 103.8%
Supplies................... 594 535 443 11.0% 20.8% 0.2%
Other taxes ............... 426 375 331 13.6% 13.3% 1.8%
Other ..................... 3,280 3,003 2,341 9.2% 28.3% 12.1%
Total other expenses ...... $16,751 $15,231 $13,234 10.0% 15.1% 9.8%
Other expenses include all expenses except interest, provision for loan losses
and income taxes. In 1999, total other expenses increased $1,520,000, or
10.0%. The increase from 1997 to 1998 was $1,997,000 and from 1996 to 1997
was $1,184,000.
Salaries and employee benefits are the most significant noninterest expense
category, representing 54.0% of total other expenses for 1999. In 1999,
salaries and employee benefits increased $1,036,000, or 12.9%, compared to
an increase of $409,000 from 1997 to 1998. Full-time equivalent staffing
levels were 231 at the end of 1999 compared to 215 in 1998 and 209 in 1997.
Average full-time equivalents during the year were 225 in 1999 and 213 in
1998 and 1997. Drovers maintains two incentive compensation plans. Both
plans require minimum earnings targets before incentives are paid. We paid
incentives of $586,000 in 1999, $511,000 in 1998 and $391,000 in 1997. An
increase of $153,000 in health insurance and pension costs contributed to
the 1999 increase in salaries and employee benefits expense.
Occupancy and premises expense increased $222,000, or 17.8%, during 1999.
The increase from 1997 to 1998 was $329,000 and from 1996 to 1997 was $90,000
A majority of the increase in 1999 was related to the opening of the Hellam
and Dillsburg branch offices and the loan production offices in Mechanicsburg,
Pennsylvania and Frederick, Maryland. The Shrewsbury and Penvale branch
offices opened in late 1997 and contributed to most of the increase in 1998.
In addition, we accelerated the depreciation expense on a branch office
scheduled for relocation within a grocery store. This resulted in an
additional $56,000 in expense during 1998. 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 Drovers. This
resulted in a reduction of total occupancy and premises expense of $3,000
in 1999, $17,000 in 1998 and $111,000 in 1997. The decline in the benefit
recognized from the 96 South George Street operations is due to an increase
in the space occupied by Drovers.
33<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
OTHER EXPENSES (continued)
Furniture and equipment expense increased $48,000 in 1999, $254,000 in 1998 and
$215,000 in 1997. Personal computer software upgrades and upgrades needed for
Year 2000 software compliance contributed to the increase in 1998. This
expense, which was not repeated, was partially offset by increases in equipment
depreciation and maintenance contracts purchased for the new branch offices in
1999. Costs associated with a mainframe and the ATM network caused the
increase in 1997.
Marketing expense decreased $112,000, or 17.4%, during 1999 from $645,000 in
1998. During 1998, we conducted an extensive image and branding campaign.
The campaign focused on the Drovers community bank image and commitment to
the markets it serves. In addition, Drovers Bank celebrated its 115th
anniversary in June 1998, which contributed to the increase in marketing
expense.
The net cost of operating other real estate was a net gain of $5,000 in 1999
compared to a net cost of $56,000 in 1998 and $53,000 in 1997. Other real
estate held was $85,000 at December 31, 1999, $148,000 at December 31, 1998
and $154,000 at December 31, 1997.
Other expenses increased $277,000, or 9.2%, in 1999 as compared to $662,000 in
1998 and $252,000 in 1997. Affecting this increase were increases in data
processing, legal, loan servicing rights amortization and over and short
charges. The increase in expenses during the year were partially offset by a
decrease in consulting services, which were paid in the first quarter of 1998.
During 1997, higher consulting and data processing expenses contributed to the
increase.
TAXATION
Drovers 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 16.9% in 1999, 16.6% in 1998 and 23.3% in 1997. Tax
credits received were $817,000 in 1999, $808,000 in 1998 and $279,000 in 1997.
Average municipal bonds were $28,674,000, $23,546,000 and $22,207,000 in 1999,
1998 and 1997, respectively. Average equity securities were $20,815,000 in
1999, $18,212,000 in 1998 and $13,114,000 in 1997. The effective tax rate
fluctuates mainly from the level of tax credits received. Drovers increased
its holdings in tax advantaged investments to help offset increasing taxable
income. Projected tax credits are $649,000 per year in 2000 through 2004 and
$1,832,000 thereafter.
FORWARD OUTLOOK
Negotiations continue to purchase land in Newberrytown, Pennsylvania to
establish a new branch office. During 2000, we plan to relocate the Memory
Lane branch and to expand the Research and Administrative Services Center,
located on Richland Avenue. Total capital expenditures are projected to be
$6,300,000 during 2000. 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 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.
January 1, 2000 passed without any disruptions of our business. Neither third
party vendors nor commercial customers reported any significant system
failures. We increased cash inventories at the end of 1999 in anticipation of
customer deposit withdrawals and drawdowns on lines of credit. We experienced
34<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
YEAR 2000 ISSUE (continued)
no liquidity problems and reduced cash levels immediately in January. We
continue to monitor our systems, our third party vendors and our commercial
customers. Our contingency plans remain in place in the unlikely scenario
that a significant Year 2000 disruption occurs.
Total remediation costs were $95,000, including $30,000 spent in 1999. We do
not expect to spend any additional amounts for remediation in 2000. However,
failure in one of our systems, a third party system or system of a significant
customer relative to the Year 2000 issue could have a material impact on
Drovers ability to conduct business.
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 our participation in the secondary mortgage market.
In addition to monthly cash flows from certain investment securities, Drovers
designates a substantial portion of its investment portfolio as available-for-
sale. At December 31, 1999, this segment totaled $191,581,000, or 90.0% of the
investment portfolio.
Liquidity needs may also be met by:
- attracting deposits with competitive rates,
- buying federal funds and repurchase agreements or
- borrowing from the Federal Reserve or the Federal Home Loan Bank of
Pittsburgh.
Drovers maintains informal borrowing arrangements with several correspondent
banks to purchase overnight federal funds. A formal arrangement with the
Federal Home Loan Bank allows us to borrow short and intermediate advances up
to approximately 80% of our investment in assets secured by one to four family
residential real estate. The maximum borrowings under this agreement at
December 31, 1999 were $174,661,000, of which $135,516,000, or 77.6%, was
borrowed. The ability to renew funding sources depends on the financial
institution's strength, asset portfolio, diversity of depositors and types
of deposit instruments offered.
Liquidity can be further analyzed by using the Statement of Cash Flows. Cash
and cash equivalents decreased $3,286,000 during 1999. Cash used in investing
activities was $132,603,000 primarily as a result of a $72,252,000 increase in
net loans and a $58,001,000 increase in investment securities. Funds were also
required for $2,453,000 of capital expenditures. Cash provided by financing
activities was $119,054,000. Proceeds from issuance of common stock were
$2,072,000. Demand and savings deposits increased $11,699,000 and certificates
of deposit increased $35,751,000. A net increase in short-term and long-term
borrowings provided an additional $71,820,000, which included $7,500,000 of
capital securities issued in 1999. Operating activities provided the remaining
cash flows of $10,263,000. 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.
35<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
INTEREST RATE SENSITIVITY MANAGEMENT
Drovers 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. We measure 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. Our
simulations project net interest income over a twelve-month period. We
assume that interest rates will either rise or fall 200 basis points (2.00%)
during the period. Our asset liability management policy limits the level
of interest rate risk to a15% decline in net interest income over a twelve-
month period. The projected changes in net interest income at December 31,
were as follows:
1999 1998
+200 basis points ...................... -4% 0%
Stable rates............................ -- --
- -200 basis points ...................... +3% -1%
Drovers interest rate risk profile changed from a relatively neutral position
at the end of 1998 to slightly liability sensitive at December 31, 1999. The
increase in holdings of fixed rate assets funded by shorter-term liabilities
caused the change in interest rate sensitivity. The projected changes in net
interest income remain well within our policy guidelines.
Considerable judgment is necessary to develop these estimates. Simulation
results are influenced by many assumptions with regard to prepayment speeds,
pricing strategies, embedded options, maturity and repricing characteristics
and nonmaturity deposit sensitivity. The use of different assumptions could
materially change the projected results.
We can mitigate our interest rate risk through the use of strategies such as
asset disposition, asset and liability pricing policies and borrowing funds
with desirable maturity and repricing attributes.
In our 1998 annual report, we provided a table showing expected cash flows
of our financial instruments. This year we changed to a sensitivity analysis
because it better reflects how we manage our interest rate risk.
Effective asset/liability management also considers the effects of changing
market prices on investment values. As a financial institution, a large
portion of Drovers' 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 interest rate spread relationships and, accordingly,
is a function of the level and magnitude of interest rate movements.
Minimizing the effects of inflation on investment values is necessary in the
management of interest rate risk.
CAPITAL
Total shareholders' equity increased $3,007,000, or 6.2%, in 1999. Equity,
before the impact of accumulated other comprehensive income, increased
$7,385,000, or 15.7%. A majority of our 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 15.2% for 1999 and 14.7% for 1998. Cash dividends paid in 1999 and 1998
36<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
CAPITAL (continued)
represented 30.1% of net income. The resulting internal capital growth
percentage was 10.6% in 1999 and 10.3% in 1998. We also generated capital
externally during the year. During the fourth quarter of 1999, we had a
community-based common stock offering, which resulted in net proceeds of
$1,788,000. The percentage of average shareholders' equity to average total
assets was 7.8% in 1999 and 8.3% in 1998, indicative of a strong capital base.
All of the above calculations involving average equity included an average loss
on available-for-sale investment securities of $223,000 in 1999 and an average
gain on available-for-sale investment securities of $1,641,000 in 1998.
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, retained earnings
and capital securities of the subsidiary trust. The capital securities can
be included up to a maximum of 25% of Tier I Capital. 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 Drovers exceeds all minimum capital adequacy
standards:
December 31,
(in thousands) 1999 1998
Tier 1 Capital ................................ $ 61,321 $ 46,891
Tier 2 Capital ................................ 3,908 4,315
Total risk-based capital .................... $ 65,229 $ 51,206
Risk-adjusted on-balance sheet assets ......... $491,347 $400,895
Risk-adjusted off-balance sheet exposure ...... 15,316 14,180
Total risk-adjusted assets .................. $506,663 $415,075
Ratios:
Tier 1 risk-based capital ratio ............. 12.1% 11.3%
Minimum required for December 31, ........... 4.0% 4.0%
Total risk-based capital ratio .............. 12.9% 12.3%
Minimum required for December 31, ........... 8.0% 8.0%
Tier 1 leverage ratio ....................... 8.5% 7.8%
Minimum required for December 31, ........... 4.0% 4.0%
37<PAGE>
Drovers Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
FINANCIAL CONDITION
Drovers 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 we have generated and employed our funds:
<TABLE>
<CAPTION>
1999 1998 1997
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 .......... $ 474 $ -179 -27.4% $ 653 $ -601 -47.9% $ 1,254
Investment securities . 184,836 15,767 9.3% 169,069 4,578 2.8% 164,491
Loans ................. 420,454 65,447 18.4% 355,007 62,000 21.2% 293,007
Total interest-
earning assets ..... 605,764 81,035 15.4% 524,729 65,977 14.4% 458,752
Noninterest-earning
assets ............... 39,570 5,127 14.9% 34,443 1,958 6.0% 32,485
Total uses .............. $645,334 $86,162 15.4% $559,172 $67,935 13.8% $491,237
Funding sources:
Demand deposits ....... $ 52,529 $ 6,594 14.4% $ 45,935 $ 3,349 7.9% $ 42,586
Savings deposits ...... 132,498 12,943 10.8% 119,555 18,243 18.0% 101,312
Time deposits ......... 246,352 27,593 12.6% 218,759 18,136 9.0% 200,623
Short-term borrowings . 30,920 2,502 8.8% 28,418 2,758 10.7% 25,660
Long-term borrowings .. 76,845 25,992 51.1% 50,853 12,965 34.2% 37,888
Corporation-obligated
redeemable capital
securities of
subsidiary trust ..... 2,178 2,178 999.9% 0 0 0.0% 0
Total interest-
bearing liabilities 541,322 77,802 16.8% 463,520 55,451 13.6% 408,069
Demand deposits ....... 46,750 4,998 12.0% 41,752 4,677 12.6% 37,075
Other liabilities ..... 7,104 -446 -5.9% 7,550 2,013 36.4% 5,537
Shareholders' equity .. 50,158 3,808 8.2% 46,350 5,794 14.3% 40,556
Total sources ........... $645,334 $86,162 15.4% $559,172 $67,935 13.8% $491,237
</TABLE>
Total average assets were $645,334,000, representing an $86,162,000, or 15.4%,
increase from 1998. Loans accounted for nearly all the growth, increasing
$65,447,000, or 18.4%. Commercial and residential mortgage lending provided
most of the growth in loans.
Deposits continued to fund a significant portion of the asset growth. Total
average deposits grew $52,128,000, or 12.2%, in 1999 and funded 60.5% of the
asset growth. A majority of the deposit growth was in certificates of deposit,
which increased $27,225,000, or 12.6% from a year ago. Our Indexed Money Fund
increased by $7,910,000 and Statement Savings increased by $5,561,000. The
remaining assets were funded with customer repos and short-term and long-term
borrowings, which increased $28,494,000. Additional borrowings at the Federal
Home Loan Bank accounted for most of the increase.
38<PAGE>
Drovers Bancshares Corporation
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
<CAPTION>
(dollar amounts in thousands, except per
share data) 1999 1998 1997 1996 1995
BALANCE SHEET DATA AT DECEMBER 31,
<S> <C> <C> <C> <C> <C>
Assets .................................. $720,108 $597,793 $524,892 $446,713 $382,791
Investment securities ................... 212,937 161,619 179,299 128,082 91,823
Net loans ............................... 456,293 386,197 310,369 279,987 252,468
Deposits ................................ 505,134 457,672 402,086 360,204 306,653
Shareholders' equity .................... 51,200 48,193 43,470 38,092 34,921
Total average assets .................... 645,334 559,172 491,237 404,621 369,785
Total average shareholders' equity ...... 50,158 46,350 40,556 36,429 32,823
INCOME DATA
Interest income ......................... $46,562 $40,991 $36,267 $30,055 $28,053
Interest expense ........................ 24,286 21,736 19,254 14,791 13,529
Net interest income ................... 22,276 19,255 17,013 15,264 14,524
Provision for loan losses ............... 1,727 1,266 386 645 501
Net interest income after
provision for loan losses .............. 20,549 17,989 16,627 14,619 14,023
Other income ............................ 5,349 5,408 3,953 3,364 2,837
Other expenses .......................... 16,751 15,231 13,234 12,050 11,058
Income taxes ............................ 1,546 1,356 1,715 1,084 1,521
Income before cumulative effect of change
in accounting for income taxes ........ 7,601 6,810 5,631 4,849 4,281
Cumulative effect of change in accounting
for income taxes ...................... 0 0 0 0 0
Net income .............................. 7,601 6,810 5,631 4,849 4,281
Dividends paid .......................... 2,288 2,050 1,707 1,606 1,407
RATIOS
Return on average assets ................ 1.18% 1.22% 1.15% 1.20% 1.16%
Return on average equity ................ 15.15% 14.69% 13.88% 13.31% 13.04%
Equity to assets (year-end) ............. 7.11% 8.06% 8.28% 8.53% 9.12%
Net loans to deposits (year-end) ........ 90.33% 84.38% 77.19% 77.73% 82.33%
Dividend payout ......................... 30.10% 30.10% 30.31% 33.12% 32.87%
PER SHARE DATA*
Net income .............................. $1.62 $1.46 $1.21 $1.04 $0.92
Net income, assuming dilution ........... 1.60 1.43 1.20 1.04 0.92
Cash dividends .......................... 0.49 0.44 0.37 0.35 0.30
Book value (year-end) ................... 10.65 10.27 9.32 8.20 7.54
Weighted average number of
shares outstanding .................... 4,703,378 4,678,154 4,647,967 4,641,944 4,631,951
Stock dividends and stock splits paid ... 5% 50% 5% 25% 7%
</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
<TABLE>
ELEVEN YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION (Continued)
<CAPTION>
(dollar amounts in thousands, except per
share data) 1994 1993 1992 1991 1990 1989
BALANCE SHEET DATA AT DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C>
Assets .................................. $352,287 $320,851 $308,319 $276,537 $253,324 $240,886
Investment securities ................... 94,359 85,836 99,011 86,054 66,222 63,682
Net loans ............................... 226,737 206,614 181,056 166,691 164,063 150,880
Deposits ................................ 283,173 265,917 256,806 243,717 227,916 216,532
Shareholders' equity .................... 29,724 29,249 25,554 23,377 21,715 20,321
Total average assets .................... 339,649 315,138 288,792 266,000 247,502 234,210
Total average shareholders' equity ...... 29,538 27,379 24,570 22,507 21,085 20,152
INCOME DATA
Interest income ......................... $23,300 $22,445 $22,490 $23,651 $23,290 $21,829
Interest expense ........................ 10,406 10,246 11,363 13,561 14,106 13,334
Net interest income ................... 12,894 12,199 11,127 10,090 9,184 8,495
Provision for loan losses ............... 382 447 552 568 416 365
Net interest income after provision for
loan losses ........................... 12,512 11,752 10,575 9,522 8,768 8,130
Other income ............................ 2,457 2,651 2,216 1,715 1,381 1,243
Other expenses .......................... 10,355 9,866 8,877 7,966 7,366 6,895
Income taxes ............................ 845 1,026 717 608 487 326
Income before cumulative effect of change
in accounting for income taxes ........ 3,769 3,511 3,197 2,663 2,296 2,152
Cumulative effect of change in accounting
for income taxes ...................... 0 352 0 0 0 0
Net income .............................. 3,769 3,863 3,197 2,663 2,296 2,152
Dividends paid .......................... 1,156 1,080 1,019 1,003 930 875
RATIOS
Return on average assets ................ 1.11% 1.23% 1.11% 1.00% 0.93% 0.92%
Return on average equity ................ 12.76% 14.11% 13.01% 11.83% 10.89% 10.68%
Equity to assets (year-end) ............. 8.44% 9.12% 8.29% 8.45% 8.57% 8.44%
Net loans to deposits (year-end) ........ 80.07% 77.70% 70.50% 68.40% 71.98% 69.68%
Dividend payout ......................... 30.67% 27.96% 31.87% 37.66% 40.51% 40.66%
PER SHARE DATA*
Net income .............................. $0.82 $0.85 $0.70 $0.59 $0.50 $0.47
Net income, assuming dilution............ 0.82 0.84 0.70 0.58 0.50 0.47
Cash dividends .......................... 0.25 0.24 0.22 0.22 0.20 0.19
Book value (year-end) ................... 6.43 6.40 5.61 5.13 4.77 4.47
Weighted average number of shares
outstanding ........................... 4,597,963 4,562,038 4,552,566 4,550,547 4,549,571 4,547,678
Stock dividends declared ................ 25% 5% 0% 0% 50% 5%
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends.
40<PAGE>
Drovers Bancshares Corporation and Subsidiaries
<TABLE>
AVERAGE BALANCES AND RATES
<CAPTION>
1999 1998 1997
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 ................. $ 474 $ 29 6.12% $ 653 $ 41 6.28% $ 1,254 $ 70 5.58%
Taxable investment
securities ................. 135,347 8,800 6.50% 127,311 8,156 6.41% 129,170 8,712 6.74%
Equity securities ............ 20,815 1,235 5.93% 18,212 1,033 5.67% 13,114 767 5.85%
Tax-exempt investment
securities ................. 28,674 1,515 5.28% 23,546 1,278 5.43% 22,207 1,231 5.54%
Loans ........................ 420,454 34,983 8.32% 355,007 30,483 8.59% 293,007 25,487 8.70%
TOTAL .................. 605,764 $46,562 7.69% 524,729 $40,991 7.81% 458,752 $36,267 7.91%
Noninterest-earning assets ..... 39,570 34,443 32,485
TOTAL ASSETS ................... $645,334 $559,172 $491,237
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits .............. $ 52,529 $ 506 0.96% $45,935 $ 534 1.16% $ 42,586 $ 514 1.21%
Savings deposits ............. 132,498 4,611 3.48% 119,555 4,379 3.66% 101,312 3,600 3.55%
Time deposits ................ 246,352 13,176 5.35% 218,759 12,461 5.70% 200,623 11,530 5.75%
Short-term borrowings ........ 30,920 1,600 5.17% 28,418 1,491 5.25% 25,660 1,353 5.27%
Long-term borrowings ......... 76,845 4,193 5.46% 50,853 2,871 5.65% 37,888 2,257 5.96%
Corporation-obligated
mandatorily redeemable
capital securities of
subsidiary trust ........... 2,178 200 9.18% 0 0 - 0 0 -
TOTAL .................. 541,322 $24,286 4.49% 463,520 $21,736 4.69% $408,069 $19,254 4.72%
Noninterest-bearing liabilities:
Demand deposits .............. 46,750 41,752 37,075
Other liabilities ............ 7,104 7,550 5,537
Shareholders' equity ......... 50,158 46,350 40,556
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ......... $645,334 $559,172 $491,237
NET INTEREST SPREAD ............ 3.20% 3.12% 3.19%
INTEREST EXPENSE AS A
PERCENT OF EARNING ASSETS .... 4.01% 4.14% 4.20%
NET INTEREST INCOME MARGIN ..... $22,276 3.68% $19,255 3.67% $17,013 3.71%
</TABLE>
Average nonaccrual loans included in average loans were $1,974,000 for 1999,
$797,000 for 1998 and $680,000 for 1997. Loan fees included in interest income
were $1,308,000 in 1999, $1,202,000 in 1998 and $483,000 in 1997.
41<PAGE>
