ITEM 1. BUSINESS
Dauphin Deposit Corporation (Dauphin or Registrant) is a diversified financial services company, incorporated under the laws of the Commonwealth of Pennsylvania in 1974. Dauphin's wholly-owned bank subsidiary is Dauphin Deposit Bank and Trust Company (Dauphin Bank), which includes the Bank of Pennsylvania, Valleybank and Farmers Bank Divisions, through which Dauphin provides banking services. Dauphin Bank is engaged in the commercial and retail banking and trust business including the taking of time and regular savings and demand deposits, the making of commercial and consumer loans and mortgage loans, the providing of credit cards, safe deposit services and the performance of personal, corporate and pension trust services. Auxiliary services such as cash management are provided to commercial customers. Dauphin Bank is a Pennsylvania chartered bank and trust company and a member of the Federal Reserve System. Dauphin Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law.
Commercial lending services provided by Dauphin Bank include short and medium term loans, revolving credit loans, lines of credit, asset-based lending, real estate construction loans, agricultural loans, and equipment leasing financial arrangements. Consumer lending services include various types of secured and unsecured loans, including installment loans, home equity loans and automobile leasing. Dauphin Bank had no foreign loans in its portfolio at December 31, 1996. Residential mortgage loans are offered by Eastern Mortgage Services, Inc. (Eastern Mortgage), a Pennsylvania mortgage banking company acquired as a wholly-owned subsidiary of Dauphin Bank in July 1994. Eastern Mortgage offers the following types of residential mortgage loans: conventional first and second mortgage loans; FHA/VA loans; State housing bond loans; residential construction/permanent financing; special programs for low and moderate income borrowers. All conforming conventional residential mortgage loans originated for sale in the secondary mortgage market under a FNMA or FHLMC product are generally underwritten to the standards as specified in the Fannie Mae Selling Guide. All non-conforming loans are underwritten to private investor standards. FHA and VA loans are processed and underwritten in accordance with the relevant handbooks and supplementary circular letters issued respectively by the Department of Housing and Urban Development and by the Veterans Administration.
Dauphin is registered with and is subject to regulatory supervision by the Board of Governors of the Federal Reserve System (Federal Reserve Board) under the Bank Holding Company Act of 1956, as amended. Dauphin is restricted to activities which are found by the Federal Reserve Board to be bank-related and which are expected to produce benefits for the public that will outweigh any potentially adverse effects.
DAUPHIN DEPOSIT BANK AND TRUST COMPANY
Dauphin Bank maintains 96 offices with 92 automated teller machines located in Adams, Berks, Chester, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Lehigh, Montgomery, Northampton and York Counties, Pennsylvania. In addition to its main office in Harrisburg, Dauphin County, Dauphin Bank owns an office building in Harrisburg which is used as an administrative center. Dauphin Bank maintains multiple offices in nine south central Pennsylvania counties. Single offices are located in each of Chester, Montgomery and Northampton County, in near proximity to the boundary lines with Berks and Lehigh Counties. The amounts of deposits attributable to zip code areas within Chester, Montgomery and Northampton Counties are insignificant in terms of the amounts of deposits attributable to zip code areas in the other nine counties. Accordingly, the Adams, Berks, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Lehigh and York nine county region constitutes the principal geographic area for Dauphin Bank.
At December 31, 1996, Dauphin Bank had total deposits of $4,028,765,000, total loans of $3,200,034,000 and total assets of $5,791,484,000.
DAUPHIN DEPOSIT CORPORATION
OTHER FINANCIAL SERVICES SUBSIDIARIES
Eastern Mortgage Services, Inc. (Eastern Mortgage) is a Pennsylvania mortgage banking corporation which was acquired by Dauphin Bank on July 1, 1994. Eastern Mortgage is a full service mortgage banking company which originates, services, securitizes and sells first and second residential mortgage loans of varying types primarily to the eastern Pennsylvania and New Jersey mortgage markets.
Dauphin Life Insurance Company (Dauphin Life) is an Arizona corporation which was formed in 1979 as a wholly-owned subsidiary of Dauphin. Dauphin Life reinsures credit life, health and accident insurance directly related to extensions of credit by Dauphin Bank and is presently limited to those activities by regulations of the Federal Reserve Board.
Dauphin Investment Company (Dauphin Investment) is a Delaware corporation which was formed in 1982 as a wholly-owned subsidiary of Dauphin. Dauphin Investment manages equity investments for Dauphin.
Hopper Soliday & Co., Inc. (Hopper Soliday) is a wholly-owned subsidiary of Dauphin acquired effective July 1, 1991. Hopper Soliday is a Delaware corporation which engages in municipal finance, institutional sales, financial advisory and other general securities businesses permitted for bank holding companies and their non-bank subsidiaries.
COMPETITION
The banking industry in Dauphin Bank's service area continues to be extremely competitive, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds and credit unions. The increased competition has resulted from a changing legal and regulatory climate, as well as from the economic climate. Mortgage banking firms, real estate investment trusts, insurance companies, leasing companies, financial affiliates of industrial companies, brokerage and factoring companies and government agencies also provide additional competition for loans and for many other financial services. Some of the financial services providers operating in Dauphin's market area operate on a regional and, in some cases, national scale, and possess resources greater than those of Dauphin.
SUPERVISION AND REGULATION
General.
Dauphin is subject to regulation by the Pennsylvania Department of Banking, the Federal Reserve Board and the Securities and Exchange Commission. The deposits of Dauphin Bank are insured by the FDIC and Dauphin Bank is a member of the Bank Insurance Fund which is administered by the FDIC. In addition, Dauphin Bank is a Pennsylvania bank and trust company and member of the Federal Reserve System subject to regulation and supervision by the Pennsylvania Department of Banking and the Federal Reserve Board. The operations of Dauphin Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and limits upon the types of services which may be offered. Various consumer laws and regulations also affect the operations of Dauphin Bank and Eastern Mortgage, its wholly-owned mortgage banking company subsidiary. Regulatory approvals also are required for branching and for bank mergers.
Dauphin is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (BHC Act). The Federal Reserve Board may also make examinations of Dauphin and each of its non-bank subsidiaries. The BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or
DAUPHIN DEPOSIT CORPORATION control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank.
Dauphin may only engage in or own companies that engage in activities deemed by the Federal Reserve Board to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto, and Dauphin must gain permission from the Federal Reserve Board prior to engaging in most new business activities.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the BHC Act on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Such transfers by Dauphin Bank to Dauphin or any nonbanking subsidiary are limited in amount to 10% of Dauphin Bank's capital and surplus and, with respect to Dauphin and all nonbanking subsidiaries, to an aggregate of 20% of Dauphin Bank's capital and surplus. Such loans and extensions of credit also are required to be secured in specified amounts, and all such transactions are required to be on an arm's length basis. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
Dividends.
Dividend payments by Dauphin Bank to Dauphin are subject to the Pennsylvania Banking Code of 1965 (Banking Code) and the Federal Deposit Insurance Act (FDIA). Under the Banking Code, dividends may be paid from "accumulated net earnings" (generally, undivided profits) without prior regulatory approval. Under the FDIA, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC. State and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Adherence to such standards further limits the ability of banks to pay dividends.
Under these policies and subject to the restrictions applicable to Dauphin Bank, Dauphin Bank could declare in 1997 without prior regulatory approval, aggregate dividends of $2.0 million, plus net profits for the remainder of 1997.
The payment of dividends by Dauphin Bank may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions.
Capital Adequacy.
The Federal Reserve Board adopted risk-based capital guidelines for bank holding companies, such as Dauphin. Currently, the required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8%. At least half 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 goodwill. 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.
DAUPHIN DEPOSIT CORPORATION
In addition to the risk-based capital guidelines, the Federal Reserve Board established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. Dauphin Bank is subject to the same capital requirements since its primary federal regulator is the Federal Reserve Board. Dauphin and Dauphin Bank exceed all applicable capital requirements.
FDICIA.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required the federal banking agencies to promulgate regulations specifying the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under these regulations, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level. An "adequately capitalized" bank is defined under the regulations as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with the highest composite regulatory examination rating) and (iv) does not meet the definition of a well capitalized bank. A bank will be considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with the highest regulatory examination rating of 1); (B) "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (C) "critically undercapitalized" if the bank has a ratio of tangible equity to total assets of equal to or less than 2%. Notwithstanding the foregoing, the applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a "well capitalized" institution as "adequately capitalized" or require an "adequately capitalized" or "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings).
Undercapitalized institutions, including significantly and critically undercapitalized institutions, are required to submit capital restoration plans to the appropriate federal banking regulator and are subject to restrictions on operations, including prohibitions on branching, engaging in new activities, paying management fees, making capital distributions such as dividends, and growing without regulatory approval. On December 31, 1996, Dauphin and Dauphin Bank exceeded the minimum capital levels of the "well capitalized" category.
Other Provisions of FDICIA.
Each depository institution must submit audited financial statements to its primary regulator and the FDIC, which reports are made publicly available. In addition, the audit committee of each depository institution must consist of outside directors and the audit committee at "large institutions" (as defined by FDIC regulation) must include members with banking or financial management expertise. The audit committee at "large institutions" must also have access to independent outside counsel. In addition, an institution must notify the FDIC and the institution's primary regulator of any change in the institution's independent auditor, and annual management letters must be provided to the FDIC and the depository institution's primary regulator. The regulations define a "large institution" as one with over $3 billion in assets, which would include Dauphin Bank. Also, under the rule, an institution's independent auditor must examine the institution's internal controls over financial reporting and perform agreed-upon procedures to test compliance with laws and regulations concerning safety and soundness.
DAUPHIN DEPOSIT CORPORATION
Under FDICIA, each federal banking agency must prescribe certain safety and soundness standards for depository institutions and their holding companies. Three types of standards must be prescribed: Asset quality and earnings, operational and managerial, and compensation. Such standards would include a ratio of classified assets to capital, minimum earnings, and, to the extent feasible, a minimum ratio of market value to book value for publicly traded securities of such institutions and holding companies. Operational and managerial standards must relate to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) interest rate exposure, (v) asset growth, and (vi) compensation, fees and benefits. In November, 1993, the federal banking agencies released proposed rules setting forth some of the required safety and soundness standards. Under such proposed rules, if the primary federal regulator determines that any standard has not been met, the regulator can require the institution to submit a compliance plan that describes the steps the institution will take to eradicate the deficiency. Failure to adopt or implement a compliance plan could lead to further sanctions by the responsible regulator. Pursuant to the Riegle Community Development and Regulatory Improvement Act of 1994, federal banking agencies have been given the discretion to adopt safety and soundness guidelines rather than regulations.
Provisions of FDICIA relax certain requirements for mergers and acquisitions among financial institutions, including authorization of mergers of insured institutions that are not members of the same insurance fund, and provide specific authorization for a federally chartered savings association or national bank to be acquired by an insured depository institution.
FDICIA also includes a provision that generally restricts federally insured state banks, such as Dauphin Bank, to activities permitted to national banks. Under final FDIC rules, state chartered banks must obtain the FDIC's prior consent before engaging as a principal in any activity not permissible for a national bank, unless one of the exceptions contained in the rule applies. Among the exceptions are activities that the Federal Reserve Board, by regulation (Regulation Y) or order, has found to be closely related to banking for purposes of the BHC Act. Compliance with the rule is not expected to have a material adverse effect on Dauphin Bank's operations.
Under FDICIA, all depository institutions must provide 90 days notice to their primary federal regulator of branch closings, and penalties are imposed for false reports by financial institutions. Depository institutions with assets in excess of $250 million must be examined on-site annually by their primary federal or state regulator or the FDIC.
FDIC Insurance Assessments.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created two deposit insurance funds to be administered by the FDIC: the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF). Dauphin Bank's deposits are insured under BIF. The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, 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. The institution's subgroup assignment is based upon the FDIC's judgment of the institution's strength in light of supervisory evaluations, including examination reports, statistical analyses and other information relevant to gauging the risk posed by the institution. Only institutions with a total 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. Dauphin Bank is assigned to the well capitalized group.
In the second quarter of 1995, the BIF reached its statutory reserve ratio requirement. Consequently, the FDIC has significantly reduced the assessment rates applicable to BIF members and refunded to BIF members
DAUPHIN DEPOSIT CORPORATION that portion of the assessment for the second and third quarters of 1995 which represented an overpayment once the BIF had achieved full funding in accordance with the statutory reserve ratio requirement. Dauphin Bank received a refund from the FDIC in September 1995 in the amount of $2,215,000, which amount also includes interest on the refund from June 1 to September 14, 1995. In the case of Dauphin Bank, for the second half of 1995, it was assessed at the rate of $.04 for every $100 of deposits. During 1996, Dauphin Bank was assessed a flat charge of $500 per quarter by the FDIC in lieu of any deposit based assessment. At the same time, because the SAIF had not reached full funding under its statutory reserve ratio requirement, the FDIC has continued the SAIF assessment rate for thrift institutions in even the lowest risk-based category at the rate of $.23 for every $100 of deposits.
SAIF Recapitalization Plan.
On September 30, 1996, Congress enacted a SAIF Recapitalization Plan and a plan for banks insured by the fully capitalized BIF to share the burden of repaying outstanding Finance Corporation (FICO) bonds issued to fund SAIF's predecessor (FSLIC) in the late 1980s. The legislation enacted by Congress containing the Recapitalization Plan is entitled the Deposit Insurance Funds Act of 1996.
Under the Recapitalization Plan, SAIF insured institutions were required to pay a one time special assessment in the fourth quarter of 1996 equivalent to 65.7 cents for every $100 of insured deposits as of March 31, 1995. The one time special assessment on SAIF insured deposits has recapitalized the SAIF and resulted in a major decrease in annual insurance premiums paid by SAIF insured institutions. At the end of 1996, SAIF insured institutions generally paid 23 cents for each $100 of deposit insurance coverage while BIF insured banks insured by the fully capitalized BIF paid virtually zero assessments. Deposit assessment for both BIF and SAIF for the first semiannual period of 1997 have been set at zero to 23 cents, respectively, for each $100 of deposits.
As part of the legislation, a new formula was adopted whereby BIF insured institutions, such as Dauphin Bank, will be required to share in the burden of repayment of the FICO bonds issued to finance the FSLIC in the 1980s. Commencing in calendar year 1997, the only FDIC assessment for most well capitalized, well-managed BIF insured and SAIF insured institutions will be FICO bond payments. For years 1997 through 1999, SAIF insured deposits are expected to be assessed at a rate of approximately 6.5 cents per $100 in deposits toward the FICO bond payments while BIF insured deposits, such as Dauphin Bank, are expected to be paid at approximately 1.3 cents per $100 in deposits. From the year 2000 to 2017, both SAIF insured deposits and BIF insured deposits are expected to be assessed at approximately 2.43 cents per $100 in deposits toward retirement of the FICO obligations.
The legislation also contains certain restrictions on the ability of SAIF insured institutions to transfer deposits to BIF insured affiliates over the next three years and a requirement that Congress must eliminate the thrift charter before merging SAIF into BIF. Finally, the legislation also contained a prohibition against the FDIC assessing any deposit insurance premiums against well-managed, well capitalized banks when BIF reserves are at or above the statutory reserve requirement of 1.25% of total insured deposits.
Interstate Banking.
Prior to the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle- Neal Act) in September 1994, interstate banking was restricted under the terms of the Douglas Amendment to the BHC Act which prohibited the Federal Reserve Board from approving an application by a bank holding company located in one state to acquire a bank or all of its assets located in another state unless the acquisition was specifically authorized by a reciprocal interstate banking statute, such as the statute adopted in Pennsylvania in 1990, specifically permitting interstate acquisitions. Similarly, interstate branching was prohibited for national banks and state- chartered member banks by the McFadden Act, although some states, not including Pennsylvania, had passed laws permitting limited interstate branching by non- Federal Reserve
DAUPHIN DEPOSIT CORPORATION member state banks. The Riegle-Neal Act permits an adequately capitalized, adequately managed bank holding company to acquire a bank in another state as of September 29, 1994, whether or not the state permits the acquisition, subject to certain deposit concentration caps and the Federal Reserve Board's approval. A state may not impose discriminatory requirements on acquisitions by out-of-state holding companies. In addition, beginning on June 1, 1997, under the Riegle-Neal Act, a bank can expand interstate by merging with a bank in another state and also may consolidate the acquired bank into new branch offices of the acquiring bank, unless the other state affirmatively opts out of the legislation before that date. A state may also opt into the legislation earlier than June 1, 1997 if it wishes to do so. The Riegle-Neal Act also permits de novo interstate branching as of June 1, 1997 but only if a state affirmatively opts in by appropriate legislation. Once a state opts in to interstate branching, it may not opt out at a later date. The Riegle-Neal Act also allows foreign banks to branch by merger or de novo branch to the same extent as banks from the foreign bank's home state. The Riegle-Neal Act also subjects foreign banks to some additional requirements, including extending obligations under the Community Reinvestment Act to certain foreign bank acquisitions and regulating the types of activities off-shore branches of foreign banks may conduct. The Pennsylvania Legislature amended the Pennsylvania Banking Code of 1965 in July 1995, to opt in to all of the provisions of the Riegle-Neal Act, including interstate bank mergers and de novo interstate branching.
Regulatory Developments. -----------------------
In 1996 the Federal Reserve Board revised a number of its policies limiting the activities of so-called section 20 subsidiaries, such as Hopper Soliday, to allow them to operate more efficiently and to serve their customers more effectively. The most significant of these developments is the increase, effective March 6, 1997, from 10 percent to 25 percent in the amount of total revenues that a section 20 subsidiary may derive from underwriting and dealing in securities that a member bank may not underwrite or deal in ("bank ineligible securities"). Other changes, effective January 7, 1997, include the elimination of the prohibition on a bank or thrift acting as agent for, or engaging in marketing activities on behalf of an affiliated section 20 subsidiary and a modification of the restriction on officer director and employee interlocks between a bank or thrift and an affiliated section 20 subsidiary to permit employee interlocks and certain interlocks at officer and director levels. In addition, on January 17, 1997, the Federal Reserve Board requested comment on a proposal to comprehensively revise its remaining policies limiting the activities of section 20 subsidiaries. The most significant of the proposed modifications would allow a bank or thrift to credit enhance bank ineligible securities underwritten or privately placed by an affiliated section 20 subsidiary.
In 1996, automatic teller machine (ATM) networks began allowing bank members to levy surcharge fees on ATM transactions by non-customers. Legislative proposals were introduced in Congress and discussed by members of the Pennsylvania legislature that would have required disclosure of the surcharge fee at the terminal or would have prohibited assessment of the fees. These legislative proposals were not adopted. Consumer interest groups, however, continue to oppose surcharge fees and it is possible that Congress and the Pennsylvania legislature again could consider such legislation in 1997. Dauphin Bank did not levy surcharge fees in 1996. Enactment of such legislation, however, could adversely affect Dauphin Bank's ability to levy surcharge fees in the future.
It is anticipated that Congress will consider again in 1997 financial modernization legislation that, if enacted, would have a significant impact on the financial services industry. House Banking Committee Chairman Leach introduced the Financial Services Competitiveness Act of 1997 on January 7, 1997, which would allow bank affiliations with insurance companies and securities firms. Senate Banking Committee Chairman D'Amato has introduced competing legislation that would allow bank affiliations with industrial companies, in addition to insurance company and securities firm affiliations. Similar legislation already has been introduced in the House by Banking Subcommittee on Financial Institutions Chairwoman Roukema.
DAUPHIN DEPOSIT CORPORATION
EMPLOYEES
At December 31, 1996, Dauphin and its subsidiaries employed approximately 2,864 persons on a full-time equivalent basis.
ITEM 2.
ITEM 2. PROPERTIES
Dauphin's principal office is located in Dauphin Bank's main banking offices at 213 Market Street, Harrisburg, Pennsylvania. Dauphin owns 18 of the branch banking offices which are leased to Dauphin Bank.
Dauphin Bank owns 58 of its branch banking offices and leases 24 other offices including two leases which are treated as capitalized leases for financial reporting purposes. Hopper Soliday & Co., Inc. leases three of its sales offices. Eastern Mortgage leases 24 of its sales offices. Leases expire intermittently through 2010 and most contain options to renew.
Aggregate annual rentals for real estate and equipment paid during Dauphin's last fiscal year did not exceed five percent of its operating expenses.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions and proceedings are pending involving Dauphin or its subsidiaries. Management believes that the aggregate liability or loss, if any, will not be material to Dauphin's financial condition or results of operations. Included among outstanding litigation is a class action law suit instituted by Dauphin Bank in the Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994, seeking a declaratory judgment from the Court specifically permitting Dauphin to discontinue an 18 month variable interest rate deposit product carrying a minimum interest rate of 10% for the 18 month term, which is held in certain individual retirement accounts (IRA). The aggregate balance of the IRA accounts was approximately $198.0 million at December 31, 1996. Dauphin's right to terminate the variable interest rate deposit product is in dispute and is being challenged by the holders of the IRA accounts in question. Several days after commencement of trial in April 1996, Dauphin and representatives of the class reached an agreement in principle to settle the litigation and the trial was continued pending negotiation of a settlement agreement. Dauphin and the representatives of the class filed a settlement agreement with the Court on May 13, 1996 which would permit Dauphin to terminate the 18 month variable rate product as to all class members on the effective date of the settlement and, in consideration, the balances of those accounts would be automatically deposited in one of two new certificates of deposit established by Dauphin for purposes of the settlement. All class members were given the opportunity to file objections to the proposed settlement or elect to be excluded from the class and the proposed settlement. Approximately 89 of the 4,315 class members filed formal objections to the settlement with the Court and 12 of the class members elected to opt out of the settlement. A hearing was held before the Court on June 21, 1996 for the purpose of obtaining the Court's approval of the settlement agreement. At the hearing, counsel for Dauphin and counsel for the representatives of all class members jointly moved for the Court's adoption of the settlement agreement and made argument in favor thereof. The Court, by Order issued July 11, 1996, denied the joint motion of Dauphin and the representatives of the class for settlement of the class action in accordance with the terms and conditions of the settlement agreement. Dauphin filed its Notice of Appeal from the trial Court's Order denying the settlement to the Superior Court of Pennsylvania on August 9, 1996. The Appeal seeks an Order of the Superior Court reversing the trial Court's disapproval of the settlement agreement, or, in the alternative, otherwise providing the trial Court with guidance which would result in the trial Court's approval of the settlement agreement on remand. The Superior Court must determine whether or not the trial Court abused its discretion in rejecting the settlement agreement. The class representatives and counsel for the class have informed Dauphin's counsel that they are withdrawing their previous support for the joint settlement agreement and will vigorously oppose Dauphin's Appeal to the Superior Court. The Superior Court heard the oral arguments of counsel on the Appeal on March 5, 1997. Neither management nor counsel can predict with any reasonable
DAUPHIN DEPOSIT CORPORATION degree of certainty the outcome of the Appeal or time frame within which the Superior Court will rule on the Appeal. If the Appeal to the Superior Court is unsuccessful, management intends to vigorously assert its right to terminate the 18 month variable interest rate deposit product on further appeal and at the trial court level. Dauphin has continued to date to pay a 10% interest rate with regard to the 18 month variable interest rate deposit product.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of Dauphin as of February 18, 1997 are listed below along with their business experience during the past five years. Executive officers are appointed by the Board of Directors. There are no family relationships among these executive officers, nor any arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.
DAUPHIN DEPOSIT CORPORATION
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF DAUPHIN DEPOSIT CORPORATION STOCK AND DIVIDENDS PAID
The price information provided below reflects actual sales prices of high, low and closing trades as quoted on The Nasdaq Stock Market.
The approximate number of holders of common stock is 11,342 as of December 31, 1996.
DAUPHIN DEPOSIT CORPORATION ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
DAUPHIN DEPOSIT CORPORATION ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the financial condition and results of operations of Dauphin Deposit Corporation and subsidiaries (Dauphin), including Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania, Farmers Bank and Valleybank Divisions. The other primary subsidiaries include Hopper Soliday & Co., Inc. (Hopper Soliday), a broker/dealer, and Eastern Mortgage Services, Inc. (Eastern Mortgage), a mortgage banking company. This discussion and analysis should be read in conjunction with the financial statements which appear elsewhere in this report.
RESULTS OF OPERATIONS
SUMMARY
Dauphin Deposit Corporation recorded net income of $70.8 million for 1996, compared with $65.6 million recorded in 1995, an increase of 7.9%. On a per common share basis, net income was $2.30 in 1996 compared with $2.12 in 1995 and $2.18 in 1994. As the core bank results increased 7.9%, the mortgage banking subsidiary had a loss of $.8 million and the broker/dealer subsidiary had income of $.4 million.
Return on average total assets was 1.26% for 1996, compared with 1.31% for 1995 and 1.42% for 1994. Return on average equity, excluding the investment securities available-for-sale market value adjustment, was 13.04% for 1996 compared with 12.64% for 1995 and 13.72% for 1994. Return on average stockholders' equity, including the investment securities available-for-sale market value adjustment, was 13.10% for 1996 compared with 12.81% for 1995 and 13.81% for 1994.
During 1996 average earning assets increased 13.2% to $5.3 billion and the interest rate spread decreased to 2.97% from 3.29%. The decrease in the interest rate spread was the result of a shifting of deposits from transaction oriented deposits to time deposits and reduction of the average yield on earning assets. The net result was an increase of $7.0 million or 3.7% in fully taxable equivalent net interest income.
Dauphin continues to maintain a high quality loan portfolio. The percentage of non-performing assets, comprised of non-accrual loans, loans past due 90 or more days as to principal or interest payments, restructured loans and other real estate owned, represented .77% of year-end loans and other real estate owned, up from .69% at December 31, 1995. The allowance for loan losses was 1.34% of year-end loans at December 31, 1996 compared with 1.40% at December 31, 1995. Non-performing loans were covered 1.98 times by the allowance for loan losses.
Non-interest income, other than securities gains, increased $22.7 million, or 32.7%. Non-interest income growth was the result of significant increases in mortgage banking activities and increased volume of fiduciary activities, merchant credit card processing and broker/dealer activities.
Non-interest expense items increased $21.3 million, or 13.9%. Contributing to this increase were mortgage banking activities, normal salary adjustments and additions to staffing levels. Offsetting these increases was the industry-wide reduction in the cost of deposit insurance.
NET INTEREST INCOME
Net interest income is the product of the volume of average earning assets and the average rates earned on them, less the volume of average interest bearing liabilities and the average rates paid thereon. The amount of net interest income is affected by changes in interest rates, account balances, or volume, and the mix of earning assets and interest bearing liabilities.
DAUPHIN DEPOSIT CORPORATION
Table 1 presents average balances, taxable equivalent interest income and expense and average rates earned and paid for Dauphin's assets and liabilities.
TABLE 1--AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY (TAXABLE EQUIVALENT BASIS)
- -------- (1) Includes fees on loans. Average loan balances include non-accruing loans. (2) Includes home equity loans. (3) Loans outstanding net of unearned income. (4) Includes tax equivalent adjustment of $12,559, $12,288, and $15,143 for years 1996, 1995, and 1994, respectively.
DAUPHIN DEPOSIT CORPORATION
For analytical purposes, net interest income is adjusted to a taxable equivalent basis. This adjustment facilitates performance comparisons among taxable and tax exempt assets by increasing tax exempt income by an amount equivalent to the federal income taxes which would have been paid if this income were taxable at the federal statutory rate of 35%.
Net interest income on a fully taxable equivalent basis totaled $195.0 million in 1996, an increase of $7.0 million or 3.7% from $188.0 million in 1995. Net interest income in 1995 was down 2.9% from $193.6 million in 1994. Table 2 analyzes the changes attributable to the volume and rate components of net interest income.
TABLE 2--RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
Note: The changes not due solely to change in volume or solely to change in rate are allocated proportionally to both change in volume and rate.
During 1996 there was an increase in net interest income of $12.0 million due to changes in volume and a decrease of $4.9 million due to changes in rate. In 1995 there was an decrease of $3.1 million due to changes in volume and a decrease of $2.5 million due to changes in rate.
The change in the net interest margin attributable to interest rates can be understood by analyzing the interest rate spread and the net interest margin on earning assets. While the interest rate spread considers only the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities, the net interest margin takes into account the contribution of assets funded by interest free sources.
Average earning assets were $5.3 billion in 1996, $4.7 billion in 1995 and $4.6 billion in 1994. The interest rate spread for 1996 was 2.97% compared with 3.29% for 1995 and 3.61% for 1994. The net interest margin for 1996 was 3.66% compared with 4.00% for 1995 and 4.17% for 1994.
Short-term interest rates (prime, federal funds, etc.) were lower throughout 1996 compared with 1995. Long-term interest rates, in general, trended upward for the year. The average prime rate in 1996 was 8.27% compared with 8.83% in 1995. The average federal funds rate decreased to 5.30% for 1996 compared with 5.84% for 1995. During 1996, compared with 1995, the average yield on earning assets decreased 27 basis points while
DAUPHIN DEPOSIT CORPORATION the average cost of funds increased 5 basis points resulting in a decrease in the interest rate spread of 32 basis points. The yield on the investment portfolio decreased 18 basis points due to the reinvestment of maturities at lower rates, when compared with the yield of the security maturing or paying down. Average loans, which represent the highest yielding earning assets, increased $183.3 million or 6.3% and produced a yield of 8.31% in 1996 compared with 8.56% in 1995. While average loans grew at 6.3%, total average earning assets grew at a rate of 13.2%, therefore decreasing the percent of average loans to average earning assets from 61.6% in 1995 to 57.8% in 1996. The cost of interest bearing deposits increased to 4.58% in 1996 compared with 4.47% in 1995. The average rate in 1996 on interest bearing transaction accounts averaged 20 basis points less than the 1995 level. The average interest rates offered on time deposits increased 49 basis points from 1995 to 1996. Depositors have been shifting from transaction accounts to higher yielding time deposits, therefore causing an increase in the overall cost of interest bearing deposits. The decrease in the cost of short-term borrowings (35 basis points) was caused primarily by the lower federal funds rate.
Short-term interest rates (prime, federal funds, etc.) continued to rise during the first half of 1995 followed by a decline in the second half of 1995. Long-term interest rates, in general, declined steadily for the entire year. The net result of these interest rate movements was a flattening of the overall yield curve. The average prime rate in 1995 was 8.83% compared with 7.17% in 1994. The average federal funds rate increased to 5.84% for 1995 compared with 4.23% for 1994. During 1995, compared with 1994, the average yield on earning assets increased 53 basis points while the average cost of funds increased 85 basis points resulting in a decrease in the interest rate spread of 32 basis points. The yield on the investment portfolio increased 23 basis points due to the reinvestment of maturities at higher rates, when compared with the yield of the security maturing. Average loans, which represent the highest yielding earning assets, increased $244.8 million or 9.2% and produced a yield of 8.56% in 1995 compared with 7.92% in 1994. Average loans represented 61.6% of the average earning assets for 1995. The cost of interest bearing deposits increased to 4.47% in 1995 compared with 3.68% in 1994. Rates paid on interest bearing transaction accounts decreased throughout 1995. Interest rates offered on time deposits have been rising. Consequently, depositors have been shifting from transaction accounts to higher yielding time deposits. The increase in the cost of short-term borrowings (143 basis points) was caused primarily by the rise in the federal funds rate. The interest rate spread decreased 32 basis points which was partially offset by an increase in the value of non-interest bearing funds resulting in a net 17 basis point decline in the net interest margin.
Dauphin's cost of interest bearing funds is generally higher, and its net interest margin is generally lower, when compared with banking companies of Dauphin's asset size. An important factor in these comparative differences is certain individual retirement accounts which are invested in eighteen (18) month variable interest rate products with a minimum interest rate of 10% for the 18 month term as discussed herein under "Deposits". If these interest rate products had paid interest at Dauphin's weighted average cost of funds for all other retail certificates of deposit, Dauphin's cost of interest bearing liabilities would have been decreased by 20 basis points, 21 basis points and 24 basis points for 1996, 1995 and 1994, respectively.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged against earnings was $6.0 million in 1996 compared with $5.6 million in 1995, an increase of 7.0%. While asset quality remains high, the increase was due to the growth in the loan portfolio. The provision is based on management's estimate of the amount needed to maintain an adequate allowance for loan losses. This estimate is based on the review of the loan portfolio, the level of net credit losses, past loan loss experience, the general economic outlook and other factors that management feels are appropriate.
Dauphin continues to maintain a high quality loan portfolio. As reflected in Tables 8 through 10, the ratio of net charge-offs to average loans increased to .16% in 1996 from .14% in 1995 and the level of non-accruing loans, loans past due 90 or more days as to principal and interest payments, and restructured loans increased to
DAUPHIN DEPOSIT CORPORATION $21.6 million (.68% of year-end loans) at December 31, 1996 from $17.9 million (.60% of year-end loans) at December 31, 1995.
NON-INTEREST INCOME
Table 3 reflects Dauphin's total non-interest income which increased $22.1 million or 30.8% in 1996 compared with an increase of $10.8 million or 17.8% in 1995.
TABLE 3--NON-INTEREST INCOME
In the banking segment of Dauphin, income from fiduciary activities increased $2.6 million or 15.6% in 1996 and $.4 million or 2.7% in 1995. Revenue increased in the areas of employee benefits and personal trust.
Service charges on deposit accounts increased $1.8 million or 16.3% during 1996. In 1995, a decrease of $.6 million or 5.0% was realized. Management continuously monitors the fee structure and makes changes where appropriate. The 1996 increase was due to new fees implemented in March. The 1995 decrease was primarily due to a lower number of fees assessed for services.
Other service charges and fees increased $1.9 million or 15.3% in 1996 compared with an increase of $1.3 million or 11.4% in 1995. The increase for 1996 and 1995 was due to the volume of merchant credit card processing and other fees relating to increased volume in consumer lending.
Other non-interest income decreased $.3 million for 1996 compared with 1995. In 1995, compared with 1994, other non-interest income increased $1.2 million. The increase for 1995 was primarily the result of gains realized on the disposition of certain branches (including deposits) and the realignment of the proceeds to new branch locations.
DAUPHIN DEPOSIT CORPORATION
The broker/dealer segment of Dauphin represents broker/dealer commissions and fees generated by Hopper Soliday. This income is generated from underwriting securities which are predominantly general obligations of Central Pennsylvania municipalities, providing financial advisory services, selling securities to individual and institutional investors and other related activities. The broker/dealer income increased $3.5 million or 54.7% in 1996 and decreased $1.4 million or 17.9% in 1995. These fluctuations are due to changes in volume of business in 1996 and 1995, due primarily to a varying interest rate environment.
The mortgage banking segment of Dauphin reflects the mortgage banking subsidiary, Eastern Mortgage. The mortgage banking income increased $12.1 million or 56.3% in 1996 compared with 1995, and increased $11.5 million or 113.6% in 1995 compared with 1994. The increase in 1996 represents the significant increase in volume due to addition of home equity product and the opening of new branches. Because Eastern Mortgage was acquired July 1, 1994, the income in 1994 represents a full service mortgage banking operation for only six months.
In addition, effective January 1, 1995, Dauphin adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amended Statement 65 to require an institution to recognize as separate assets the rights to service mortgage loans for others when a mortgage loan is sold or securitized and servicing rights retained. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income.
NON-INTEREST EXPENSE
Table 4 reflects Dauphin's non-interest expense which increased $21.3 million or 13.9% in 1996 compared with an increase of $14.0 million or 10.1% in 1995.
TABLE 4--NON-INTEREST EXPENSE
Dauphin's banking segment non-interest expense increased $3.9 million or 3.1% in 1996 compared with an increase of $4.2 million or 3.4% for 1995.
DAUPHIN DEPOSIT CORPORATION
In Dauphin's banking segment, salaries and employee benefits increased 5.5% in 1996 and increased .5% in 1995. Full-time equivalent employees increased 10.5% to 2,236 at December 31, 1996 compared with 2,024 at year-end 1995. Salaries expense, excluding benefits expense, increased 3.0% in 1996 compared with 1995.
In the second quarter of 1995, the Bank Insurance Fund (BIF) reached its statutory reserve ratio requirement of 1.25%. Consequently, the FDIC significantly reduced the assessment rates applicable to BIF members and refunded to BIF members that portion of the assessment for the second and third quarters of 1995 which represented an overpayment once BIF had achieved full funding in accordance with the statutory reserve ratio requirement. Dauphin received a refund from the FDIC in September 1995 in the amount of $2.2 million which included interest from June 1, 1995, the date the BIF was fully funded. In addition, Dauphin's assessment rate was dropped from 23 basis points to 4 basis points effective from the date of BIF reaching its statutory reserve ratio requirement. This reduced Dauphin's deposit insurance expense by $3.8 million when compared to 1994. In 1996, Dauphin recorded $2,000 for deposit insurance.
All other non-interest expense from the banking segment increased $4.6 million or 7.5% in 1996 compared with 1995. The increase for 1996 was primarily the result of increased expenses to reflect numerous strategic initiatives implemented in 1995 for technological investments, upgrades to branch facilities, legal, and consulting fees.
The broker/dealer segment had increased non-interest expense of $1.8 million or 23.1% in 1996 and an increase of $ .2 million or 3.0% in 1995.
The mortgage banking segment had increased non-interest expense of $15.4 million or 70.2% in 1996 compared with an increase of $12.0 million or 119.8% in 1995. This significant increase reflects twelve months of results in 1996 and 1995 and six months of results in 1994. In addition, the mortgage banking segment experienced significant volume increases in 1996 and 1995.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $25.2 million in 1996 as compared with $23.2 million in 1995 and $22.8 million in 1994. Dauphin's effective tax rate for 1996 was 26.2% compared with 26.1% in 1995 and 24.5% in 1994. The primary increase in the effective tax rate was due to the continued decreased level of tax exempt income from 1994. For a more comprehensive analysis of income tax expense, refer to Note 13 of the Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS
Dauphin's financial condition can be evaluated in terms of trends in its sources and uses of funds. The comparison of average balances in Table 1 indicates how Dauphin has managed these elements.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE AND SHORT-TERM INVESTMENTS
Average short-term investments and investment securities available-for-sale, in the aggregate, increased $350.1 million or 20.3% during 1996 compared with a decrease of $230.9 million or 11.8% during 1995. During 1996, funds in excess of those required for loan growth were invested in the securities portfolio. During 1995, investment securities maturing were used to fund loan growth since loan growth exceeded the growth of traditional funding sources of deposits and short-term borrowings.
The balances maintained for short-term investments and investment securities available-for-sale are, for the most part, supported by short-term deposits such as money market and interest bearing demand accounts,
DAUPHIN DEPOSIT CORPORATION short-term borrowings and time deposits. As reflected in Table 5, the average maturity of the investment portfolio was 6.6 years at year-end 1996. Included in the portfolio are state and municipal securities and mortgage-backed securities that have a longer-term maturity but are sometimes either called before maturity or have repricing characteristics that occur before final maturity. The average life to call or repricing of the portfolio was 2.7 years at December 31, 1996.
TABLE 5--ANALYSIS OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Dauphin had no investments in any foreign country that aggregated more than 1% of assets at December 31, 1996, 1995 or 1994.
At December 31, 1996, net unrealized gains in the portfolio were $2.4 million consisting of gross unrealized gains of $ 20.8 million and gross unrealized losses of $18.4 million.
LOANS
Average loans increased $183.3 million or 6.3% during 1996 compared with an increase of $244.8 million or 9.2% in 1995. Average loan growth continued to increase in 1996, primarily in the area of commercial loans and commercial mortgages.
The economy in our market area is diversified and has been relatively stable. This affords Dauphin the opportunity to select quality commercial credits and stabilizes our consumer business.
DAUPHIN DEPOSIT CORPORATION
TABLE 6--LOANS OUTSTANDING, NET OF UNEARNED INCOME
Loan balances during 1996 were influenced by the improving economy and, as a result, balances in both the commercial and consumer areas increased. Dauphin continues to sell residential mortgages in the secondary market in order to minimize credit and interest rate risk.
Dauphin's policy is to make the vast majority of its loans and commitments in the market area it serves. This gives Dauphin the opportunity to deliver its many products to the same customer base. Dauphin had no foreign loans in its portfolio at December 31, 1996.
TABLE 7--LOAN MATURITIES AND INTEREST SENSITIVITY (1)
- -------- (1)Excludes residential mortgages, home equity, consumer loans and lease financing.
NON-PERFORMING ASSETS
Table 8 reflects Dauphin's non-performing assets for the five years ended December 31, 1996. Dauphin's policy is to discontinue the accrual of interest on commercial loans and commercial mortgages on which principal or interest is past due 90 days or more. Consumer loans, excluding residential mortgages, which are 150 days past due are charged off. Residential mortgages are placed on non-accrual status after becoming 180 days past due. When a loan is placed on non-accrual status, any unpaid interest is generally charged against income. Management believes that strict adherence to this policy with regard to non- accruals and charge-offs
DAUPHIN DEPOSIT CORPORATION will insure that the historically high quality of the loan portfolio will be maintained. Other real estate owned represents property acquired through foreclosure.
TABLE 8--NON-PERFORMING ASSETS
Loan quality is maintained through diversification of risk, strict enforcement of credit control practices and continued monitoring of the loan portfolio.
At December 31, 1996, Dauphin had no loan concentrations exceeding 10% of total loans. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly affected by economic or other industry specific conditions.
Non-accrual loans, loans past due 90 or more days as to principal or interest payments, and restructured loans amounted to $21.6 million at December 31, 1996. Interest income on these loans of $.3 million was recorded on a cash basis. If such loans were on the accrual basis, an additional $.4 million of interest income would have been recognized.
Loans which are not included in non-performing and are current as to payments of principal and interest but have a somewhat higher than normal risk of becoming non-accrual, impaired or reduced rate in the future are estimated to total approximately $19.7 million at December 31, 1996 compared with $8.1 million at December 31, 1995.
At December 31, 1996 and 1995 the balance of impaired loans was $12.1 million and $11.7 million, respectively. In 1996, impaired loans of $10.5 million have a related allowance for loan losses of $4.7 million and the remaining impaired loans of $1.6 million have no related allowance for loan losses. In 1995, impaired loans of $8.2 million have a related allowance for loan losses of $3.8 million and the remaining impaired loans of $3.5 million have no related allowance for loan losses. The average balance of impaired loans for 1996 and 1995 was $13.3 million and $8.4 million and the interest recognized for the year was $1.3 million and $.7 million, respectively. The interest income includes $1.0 million and $.4 million, respectively, that was recorded on the cash basis.
Federal regulatory authorities have defined "highly leveraged transactions" (HLT's) as a credit of $20 million or more which is extended in connection with an acquisition by, or a restructuring of, an organization, and the extension of credit results in "high leverage" or is made to an already highly leveraged organization. It
DAUPHIN DEPOSIT CORPORATION is the policy of Dauphin to consider financing HLT's for its customers or for potential customers in its market area which usually involves the change of ownership from one generation of a family to the next, or from present owners to the existing management team. The amount of HLT's, as defined by the Federal regulatory authorities, was $9.6 million at December 31, 1996 and $7.3 million at December 31, 1995 and represents Dauphin's portion of a shared national credit within its market area.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's continuing evaluation of the loan portfolio, assessment of economic conditions, the diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount and quality of non-performing loans. Table 9 presents the allocation of the allowance for loan losses by major loan category for the past five years. The specific allocations in any particular category may prove excessive or inadequate and consequently may be re-allocated in the future to reflect then current conditions. Accordingly, the entire allowance is considered available to absorb losses in any category. In 1996, the unallocated category increased primarily as a result of increases in non-performing loans, higher amounts of HLTs, and general concern about the continued ability of the economy to sustain the current level of growth.
TABLE 9--ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (1)
- -------- Gross loans represent loans before unamortized net loan fees. (1) The allocation of the allowance for loan losses to the respective classifications is not necessarily indicative of future losses or future allocations. (2) Includes home equity loans.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Table 10 reflects an analysis of the allowance for loan losses for the past five years.
DAUPHIN DEPOSIT CORPORATION
TABLE 10--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
- -------- (1) Includes home equity loans.
The provision for loan losses of $6.0 million exceeded the net charge-offs of $4.8 million, thereby increasing the allowance for loan losses from $41.7 million in 1995 to $42.9 million in 1996. The allowance for loan losses as a percentage of year-end loans was 1.34% at December 31, 1996 and 1.40% at December 31, 1995.
DEPOSITS
Average deposits, including non-interest bearing demand deposits, increased $240.4 million or 6.4% during 1996 compared with an increase of $223.6 million or 6.4% during 1995. Dauphin, like many other commercial banks, has experienced deposit growth even as the competition for depositors' funds has become more intense. Competition for deposits has come from other commercial banks, thrift institutions, credit unions, brokerage houses and mutual funds. Deposit growth was primarily due to the increase in average interest rates and the introduction of new deposit products during 1996. While rates paid on interest bearing transaction accounts
DAUPHIN DEPOSIT CORPORATION decreased throughout 1996, rates paid on time deposits have been increasing due to rising interest rates. Depositors appear to be shifting from transaction accounts to time deposits. Included in interest bearing deposits are certain individual retirement accounts (IRA) totaling $198.0 million which are invested in an 18 month variable interest rate deposit product with a minimum interest rate of 10% for the 18 month term. During 1994, Dauphin initiated the process to discontinue the product in accordance with the terms of the IRA contracts. In furtherance of its right to terminate this deposit product, Dauphin commenced a legal action for a declaratory judgment in 1994 seeking a judicial determination from the Court permitting Dauphin to discontinue the 18 month variable rate deposit product at issue. Dauphin's right to terminate the variable interest rate deposit product is in dispute and is being challenged by the holders of the IRA accounts in question. It is management's opinion that continuation of the 18 month variable interest rate deposit product is not in the best interest of Dauphin. Several days after commencement of trial in April 1996, Dauphin and representatives of the class reached an agreement in principle to settle the litigation and the trial was continued pending negotiation of a settlement agreement. Dauphin and representatives of the class filed a settlement agreement with the Court on May 13, 1996 which would permit Dauphin to terminate the 18 month variable rate product as to all class members on the effective date of the settlement and, in consideration, the balances of those accounts would be automatically deposited in one of two new certificates of deposit established by Dauphin for purposes of the settlement. All class members were given the opportunity to file objections to the proposed settlement or elect to be excluded from the class and the proposed settlement. Approximately 89 of the 4,315 class members filed formal objections to the settlement with the Court and 12 of the class members elected to opt out of the settlement. A hearing was held before the Court on June 21, 1996 for the purpose of obtaining the Court's approval of the settlement agreement. At the hearing, counsel for Dauphin and counsel for the representatives of all class members jointly moved for the Court's adoption of the settlement agreement and made argument in favor thereof. The Court, by Order issued July 11, 1996, denied the joint motion of Dauphin and the representatives of the class for settlement of the class action in accordance with the terms and conditions of the settlement agreement. Dauphin filed its Notice of Appeal from the trial Court's Order denying the settlement to the Superior Court of Pennsylvania on August 9, 1996. The Appeal seeks an Order of the Superior Court reversing the trial Court's disapproval of the settlement agreement or, in the alternative, otherwise providing the trial Court with guidance which would result in the trial Court's approval of the settlement agreement on remand. The Superior Court must determine whether or not the trial Court abused its discretion in rejecting the settlement agreement. The class representatives and counsel for the class have informed Dauphin's counsel that they are withdrawing their previous support for the joint settlement agreement and will vigorously oppose Dauphin's Appeal to the Superior Court. The Superior Court heard the oral arguments of counsel on the Appeal on March 5, 1997. Neither management nor counsel can predict with any reasonable degree of certainty the outcome of the Appeal or time frame within which the Superior Court will rule on the Appeal. If the Appeal to the Superior Court is unsuccessful, management intends to vigorously assert its right to terminate the 18 month variable interest rate deposit product on further appeal and at the trial court level. Dauphin has continued to pay a 10% interest rate with regard to the 18 month variable interest rate deposit product.
Also during 1996 average time deposits increased $308.4 million compared with an increase of $400.7 million during 1995. This funding source was used to replace volatile liabilities such as overnight federal funds. Additionally, the growth of non-interest bearing deposits has been slow in recent years. The percentage of average non-interest bearing demand deposits to average total deposits amounted to 11.5% in 1996 and 11.6% in 1995 and 1994. Dauphin's banking subsidiary has remained interest rate competitive and has introduced new deposit products to maintain and attract deposits.
SHORT-TERM BORROWINGS
Average short-term borrowings increased $352.2 million or 54.5% during 1996 compared with a decrease of $132.4 million or 17.0% in 1995. Short-term borrowings are primarily represented by federal funds purchased and securities sold under agreements to repurchase. The level of short-term borrowings is dependent upon many
DAUPHIN DEPOSIT CORPORATION items such as loan growth, deposit growth and the interest rates paid for these funds. The average cost of short-term borrowings has fluctuated from 4.12% in 1994 to 5.55% in 1995 and to 5.20% in 1996.
LIQUIDITY
Liquidity management involves meeting the funds flow requirements of customers who may be either depositors wanting to withdraw funds, or borrowers needing assurance that sufficient funds will be available to meet their credit needs.
Liquidity from asset categories is provided primarily through investment securities with maturities of less than one year and short-term investments, such as deposits with other banks, federal funds sold and other short-term investments. Dauphin's asset liquidity position is strong because of the investment portfolio's maturity structure (Table 5), the amount of short-term investments, the funds provided by loan maturities (Table 7) and the funds available to Dauphin by established federal funds lines of credit. Additionally, Dauphin Deposit Bank and Trust Company is a member of the Federal Home Loan Bank of Pittsburgh. This established credit arrangement provides the Bank with increased liquidity.
The generation of deposit balances is the primary source of liquidity from liability categories. Total deposits increased by $79.0 million or 2.0% from year-end 1995 to year-end 1996. Table 11 reflects the change in the major classifications of deposits by comparing the year-end balances for the past three years and Table 12 reflects the maturity of large dollar deposits for the same periods. As shown in Table 13, federal funds purchased and other forms of short-term borrowings are also significant sources of liquidity. Dauphin continues to maintain diverse liability funding sources.
TABLE 11--DEPOSITS BY MAJOR CLASSIFICATION
TABLE 12--MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DAUPHIN DEPOSIT CORPORATION TABLE 13--SHORT-TERM BORROWINGS
CAPITAL RESOURCES
During 1994, Dauphin announced that the Board of Directors authorized the repurchase of up to 2,000,000 shares of the outstanding common stock. In February 1995, an additional 1,500,000 shares were authorized for repurchase. Dauphin will use the shares for general corporate purposes, including the Employee Stock Purchase Plan, Stock Option Plan, the Dividend Reinvestment and Stock Purchase Plan, and other appropriate uses. During 1996 and 1995, Dauphin repurchased 297,000 shares for $8.5 million and 630,000 shares for $16.1 million, respectively.
Total stockholders' equity increased $23.8 million or 4.4% in 1996 compared with an increase of $80.0 million or 17.1% in 1995. The increase for 1996 was due to net income of $70.8 million less dividends declared of $34.7 million, offset by the reduction in net unrealized gains on investments available-for- sale of $12.1 million. The increase for 1995 was due to net income of $65.6 million less dividends declared of $31.2 million and was positively impacted by the change in net unrealized gains on investments available-for-sale of $54.7 million, somewhat offset by the repurchase of outstanding common stock throughout the year of $16.1 million. The ratio of average equity to average assets amounted to 9.62% for 1996, compared with 10.23% for 1995 and 10.27% for 1994. Internal capital generation is measured as the percent of return on average equity multiplied by the percent of earnings retained. The resulting internal capital generation percentage amounted to 6.6% for 1996 compared with 6.7% for 1995 and 7.9% for 1994.
Common measures of adequate capitalization for banking institutions are ratios of capital to assets. These ratios indicate the proportion of permanently committed funds to the total asset base. Guidelines issued by federal regulatory authorities require both banks and bank holding companies to meet minimum risk-based capital ratios in an effort to make regulatory capital more responsive to the risk exposure related to a bank's on- and off-balance sheet items. Risk-based capital guidelines redefine the components of capital, categorize assets into different risk classes and include certain off-balance sheet items in the calculation of capital requirements. The components of risk- based capital are segregated as Tier 1 and Tier 2 capital. Tier 1 capital is composed of total stockholders' equity reduced by goodwill and other intangible assets. Tier 2 capital is the allowance for loan losses (with certain limitations) and qualifying debt obligations. Regulators have also adopted minimum Tier 1 leverage ratio standards. Tier 1 capital for the leverage ratio is the same as the Tier 1 capital definition in the risk-based capital guidelines. Table 14 presents the capital ratios for Dauphin for the past three years calculated at year-end in accordance with these guidelines. At December 31, 1996, Dauphin and its banking subsidiary exceeded all capital requirements and is considered to be "well capitalized".
DAUPHIN DEPOSIT CORPORATION TABLE 14--CAPITAL RATIOS
INTEREST RATE SENSITIVITY
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The rate of growth in interest free sources of funds will influence the level of interest sensitive funding sources. In addition, the interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest sensitivity gap is only one factor to be considered in estimating the changes in net interest margin.
Table 15 presents an interest sensitivity analysis of Dauphin's assets and liabilities at December 31, 1996 for several time intervals. This table reflects the interest sensitivity gap in two formats. The detailed presentation represents management's assumption on certain interest bearing deposits, such as passbook savings accounts, as not being subject to immediate repricing. Management is of the opinion that historical interest rate movements indicate that these products do not reprice in direct relation to the change in the interest rate environment. Additionally, these products have provided Dauphin with a stable core deposit base. Therefore, the detailed presentation within Table 15 attempts to reflect these products in the appropriate interest sensitivity time interval based on their interest sensitivity to the movement of other interest rates. Also included in Table 15 is a summary of the gap, as viewed by certain regulatory authorities, which presents these interest bearing deposits as being subject to immediate repricing.
An interest sensitivity analysis is measured as of a specified date and, therefore, is subject to almost immediate change as the maturities of assets are reinvested and liabilities, such as deposits and short-term borrowings, are received or mature. The mismatch of assets and liabilities in a specific time frame is referred to as a sensitivity gap. The gap at December 31, 1996 reflects Dauphin's sensitivity at a point in time to rate changes over future periods of time. Generally, an asset sensitive gap will increase an institution's net interest income during periods of rising interest rates and the liability sensitive gap will increase an institution's net interest income during declining rates. The lower the amount of this gap, the less sensitive an institution's earnings are to interest rate changes. However, Dauphin's assets and liabilities with similar maturities or repricing will, at times, react differently in varying interest rate environments. Therefore, the interest sensitivity gap does not accurately predict the actual impact of market rate changes. The volume and mix of future assets and liabilities changes will also impact Dauphin's net interest income as indicated on Table 2. Dauphin continuously monitors and adjusts the gap position, taking into consideration current interest rate projections, and maintaining flexibility if rates move contrary to expectations. Dauphin uses on-balance sheet financial instruments, such as investments classified as available-for-sale, to provide flexibility in managing the interest sensitivity gap.
DAUPHIN DEPOSIT CORPORATION
TABLE 15--INTEREST SENSITIVITY ANALYSIS
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1996, Dauphin adopted the provisions of Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing this review, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss (based on the fair value of the asset) is recognized. Otherwise, an impairment loss is not recognized. The adoption did not have a material effect on Dauphin's consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", became effective for Dauphin on January 1, 1996. SFAS 123 establishes a new method of accounting for stock-based compensation arrangements with employees. The new method is a fair value based method rather than the intrinsic value based method that is currently utilized. As permitted by SFAS 123, Dauphin has continued to measure compensation expense for its stock-based employee compensation plans, using the methods as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Note 15 provides pro forma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS 123 had been applied in measuring compensation expense.
DAUPHIN DEPOSIT CORPORATION In June 1996, the Financial Standards Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Principally, SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on the consistent application of a financial components approach (for example, focus on assets and liabilities that remain after the transfer takes place) that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings.
In addition, SFAS 125 extends the "available-for-sale" or "trading" approach of SFAS 115 to all financial assets that contractually can be prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. Such financial assets can no longer be classified as held to maturity.
SFAS 125 is effective for transfers of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. The extension of SFAS 125 to all financial assets subject to prepayment risk is effective for financial assets held on or after January 1, 1997. Management does not believe that this statement will have a material effect on Dauphin's consolidated financial position or results of operations.
GLOSSARY OF FINANCIAL TERMS
ALLOWANCE FOR LOAN LOSSES--A reduction in the value of total loans appearing on the company's balance sheet. This allowance represents the amount considered by management to be adequate to cover losses known and inherent in the loan portfolio.
BASIS POINT--A unit of measure for interest yields and rates equivalent to one- hundredth of 1%. One hundred basis points equal one percent.
BOOK VALUE PER SHARE--The value of one share of stock calculated by dividing total stockholders' equity at the end of the period by the total number of shares outstanding at the end of the same period.
DIVIDEND PAYOUT RATIO--The percentage of net income that is paid out as dividends to common stockholders. Dividends reduce stockholders' equity when they are declared by the board of directors.
EARNINGS PER SHARE--Net income divided by the average number of common shares and common stock equivalents outstanding in the period.
FULL-TIME EQUIVALENT EMPLOYMENT--The combination of full-time employees and part-time employees converted to a full-time basis.
GAP--The amount by which interest rate-sensitive assets exceed interest rate- sensitive liabilities for a designated time period is referred to as a positive gap. An excess of liabilities would represent a negative gap.
INTEREST-BEARING LIABILITIES--Liabilities upon which interest is paid, such as savings and time deposits, short-term borrowings, and long-term debt.
INTEREST-EARNING ASSETS--Assets that generate interest income and yield-related fee income, such as loans, short-term investments, and investment securities.
INTEREST RATE SPREAD--The difference between the yield on interest-earning assets (taxable equivalent basis) and the rate paid on interest-bearing liabilities.
INTEREST-SENSITIVE ASSETS/LIABILITIES--Assets and liabilities whose yields or rates can change within a designated time period due either to their maturity during this period or to the contractual ability of a bank to change the yield/rate during this period.
LEVERAGE RATIO--A regulatory measure of capital adequacy (Tier 1 capital as a percent of assets). The asset base used in the calculation of this ratio represents average assets (less goodwill) reported in the company's regulatory reports. This is a key regulatory capital requirement with the minimum amount allowed of 3% capital as a percent of assets. Regulations define a well capitalized institution as having a ratio of 5% or more.
LIQUIDITY--The ability of an institution to meet its cash flow requirements, whether from depositors wanting to withdraw funds and borrowers wanting to be assured that their credit needs will be met.
MORTGAGE SERVICING RIGHTS--The cost of acquiring from third parties the right to service mortgage loans (purchased mortgage servicing rights) or the fair value of those servicing rights on loans originated and sold (originated mortgage servicing rights).
NET INTEREST INCOME--The difference between interest income collected from earning assets and interest paid on deposits and borrowed funds.
NET INTEREST MARGIN--A measurement of how much interest income the company collects on its interest-earning assets in excess of the interest cost of funding them. It is computed by dividing taxable equivalent net interest income by average interest-earning assets.
NON-ACCRUAL LOANS--Loans on which accruals of interest have been discontinued due to the borrower's financial difficulties.
NON-PERFORMING ASSETS--The sum of loans on which interest income is not being accrued, loans past due 90 or more days as to principal or interest payments, restructured loans on which the interest rates or terms of repayment have been materially revised and real estate which has been acquired through foreclosure.
GLOSSARY OF FINANCIAL TERMS
NON-PERFORMING LOANS--The total of non-accrual loans, loans past due 90 or more days as to principal or interest payments, and restructured loans. This amount is usually expressed as a percentage of total loans.
POOLING-OF-INTERESTS METHOD--An accounting method for a business combination whereby the assets, liabilities, income and expense of the separate companies are combined. Prior period financial information is restated, as if the separate companies had always been united as a single company.
PROVISION FOR LOAN LOSSES--A charge to earnings which appears on the company's income statement. This charge is made to adjust the allowance for loan losses to a level deemed by management to be adequate.
PURCHASE METHOD--An accounting method for a business combination by recording at their current market value the assets acquired and liabilities assumed. Goodwill and other intangible assets may be created by this accounting method.
RESTRUCTURED LOANS--A loan is considered restructured when a bank for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS--A measure of profitability that is calculated by dividing net income by total average assets.
RETURN ON AVERAGE STOCKHOLDERS' EQUITY--A measure of profitability that indicates the rate of return earned on stockholders' investment. It is calculated by dividing net income by total average common stockholders' equity.
RISK-BASED CAPITAL RATIO--A regulatory measure of capital adequacy that relates capital to the risk characteristics of the company's activities, regardless of whether those activities are accounted for on or off its balance sheet. The numerator of this ratio is qualifying regulatory capital (Tier 1 and Tier 2, as defined below). The denominator is period-end assets and off-balance sheet items, risk-weighted by applying one of four risk factors in accordance with the regulators' perceived credit risks.
SECURITIES AVAILABLE-FOR-SALE--Securities that will be held for indefinite periods of time and which may be sold as part of the bank's asset/liability strategy. These securities are recorded at their current market value rather than at their historical amortized cost.
TAXABLE EQUIVALENT INCOME--Tax-exempt interest income which, for comparative purposes, has been increased by an amount equivalent to the federal income taxes that would have been paid if income on tax-exempt investments and loans were taxable at the statutory rate of 35%.
TIER 1 CAPITAL--Common stock, certain preferred stock, surplus and retained earnings, less goodwill. Regulations require a minimum Tier 1 capital ratio of 4%. Regulations define a well capitalized institution as having a ratio of 6% or more.
TOTAL CAPITAL (TIER 1 PLUS TIER 2)--The sum of Tier 1 capital and all or a portion of the allowance for loan losses, certain preferred stock and subordinated debt. Regulations require a minimum total capital ratio of 8%. Regulations define a well capitalized institution as having a ratio of 10% or more.
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE--The amount by which the fair value of the investment portfolio exceeds (or is less than) its book value.
DAUPHIN DEPOSIT CORPORATION
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and documents are set forth in this Annual Report on Form 10-K on the following pages:
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
See accompanying notes to consolidated financial statements.
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements.
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements.
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies of Dauphin Deposit Corporation and subsidiaries.
BUSINESS
Dauphin Deposit Corporation (Dauphin) is a bank holding company, incorporated under the laws of the Commonwealth of Pennsylvania in 1974. Dauphin's wholly- owned bank subsidiary is Dauphin Deposit Bank and Trust Company (the Bank), through which Dauphin provides banking services. The Bank is engaged in the commercial and retail banking and trust business. The Bank's mortgage banking subsidiary, Eastern Mortgage Services, Inc. (Eastern Mortgage) is a full service mortgage banking company which originates, services and sells first and second residential mortgage loans of varying types primarily to the eastern Pennsylvania and New Jersey mortgage markets. Dauphin's wholly-owned subsidiary Hopper Soliday & Co., Inc. (Hopper Soliday) is a Delaware corporation which engages in municipal finance, institutional sales, financial advisory and other general securities businesses permitted for bank holding companies and their non-bank subsidiaries.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The material estimates that are particularly susceptible to significant change in the near-term relate to the valuation of assets held for sale, the determination of the allowance for loan losses, and the valuation of mortgage servicing rights.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dauphin and subsidiaries, including its principal subsidiary, the Bank, which includes the Bank of Pennsylvania, Farmers Bank and Valleybank Divisions. All material intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investments are to be classified in one of three categories and accounted for as follows: 1) debt securities Dauphin has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and 3) debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for- sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of deferred taxes. Management has determined that the entire investment securities portfolio is classified as available-for-sale.
Premiums and discounts are amortized and accreted over the term of the related securities using a method that approximates the interest method, adjusted for prepayments. Realized gains or losses on the sale of investment securities (determined by the specific identification method) are shown separately in the
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 consolidated statements of income. A decline in the fair value of any investment below cost that is deemed other than temporary results in a reduction of the carrying amount to fair value through a charge to income. Dividend and interest income are recognized when earned.
ASSETS HELD FOR SALE
Assets held for sale consist of the securities inventory of Hopper Soliday and the loans held for sale inventory of Eastern Mortgage. The securities inventory is recorded at current quoted fair value. The loans held for sale are carried at the lower of aggregate cost or estimated fair value with unrealized losses, if any, recognized through a provision included in non-interest income from mortgage banking. Gains and losses on the sale of loans held for sale are determined using the specific identification method.
LOANS
Loans are carried at the principal amount outstanding, net of unearned income. Interest income is accounted for on an accrual basis. Interest income is not accrued when, in the opinion of management, its collectibility is doubtful. When a loan is designated as non-accrual, any accrued interest receivable is generally charged against current earnings. Non-accruing loans are returned to accruing status after at least six consecutive months of current performance. Lease income is recorded using the finance method which provides for a level rate of return on the investment outstanding.
Generally, all non-accrual loans are deemed to be impaired. In addition, management, considering current information and events regarding the borrowers ability to repay their obligations, considers a loan to be impaired when it is probable that Dauphin will be unable to collect all amounts due according to the contractual terms of the loan agreement. In evaluating whether a loan is impaired, management considers not only the amount that Dauphin expects to collect but also the timing of collection. Generally, if a delay in payment is insignificant (for example, less than 90 days), a loan is not deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, at the loan's market price or fair value of the collateral if the loan is collateral dependent. The majority of loans deemed to be impaired by management are collateral dependent. Loans are evaluated individually for impairment. Dauphin excludes smaller balance, homogeneous loans (for example, primarily consumer and residential mortgages) from the evaluation for impairment. Impairment losses are included in the allowance for loan losses. Impaired loans are charged off when management believes that the ultimate collectibility of a loan is not likely.
Income for impaired loans that are on non-accrual status is recognized using the cash basis, while interest on impaired loans that are still accruing is recognized using the accrual method.
Loan fees and costs of loan origination are deferred and recognized over the life of the loan as a component of interest income, adjusted for prepayments. The amortization of deferred fees and costs is discontinued on non-accrual loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve to absorb losses on loans which may become uncollectible. The provision for loan losses is management's estimate of the amount required to establish a reserve adequate to reflect risks in the loan portfolio of the Bank. Loan losses are charged directly against the allowance for loan losses, and recoveries on previously charged off loans are added to the allowance.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment under capitalized leases are recorded at the lower of the present value of minimum lease payments or the fair value of the leased assets determined at the inception of the lease term. Depreciation charged to operating expense, including amounts applicable to capitalized leases, is computed on the straight-line method for financial reporting and the straight-line and accelerated methods for income tax purposes. Leasehold improvements are capitalized and amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. Maintenance, repairs and minor improvements are charged to expense as incurred; significant renewals and betterments are capitalized.
OTHER ASSETS
Goodwill is the excess of the purchase price over the fair value of net assets of entities acquired through business combinations that are recorded using the purchase method of accounting. Included in other assets is $13.7 million and $15.5 million of goodwill at December 31, 1996 and 1995, respectively. Goodwill is being amortized using the straight-line method over periods not exceeding 15 years.
On January 1, 1996, Dauphin adopted the provisions of Statement of Financial Accountings Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption did not have a material effect on Dauphin's consolidated financial position or results of operations.
Excess servicing fees are computed as the present value of the difference between the estimated future net revenues and normal servicing revenues as established by the federally sponsored secondary market makers. Upon the sale of mortgage loans, excess servicing fees are deferred and amortized over the estimated life of the related mortgages.
Effective January 1, 1995, Dauphin adopted the provisions of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amended Statement 65 to require an institution to recognize as separate assets the rights to service mortgage loans for others when a mortgage loan is sold or securitized and servicing rights retained. When capitalizing mortgage servicing rights, Dauphin allocates the total cost of the mortgage loans (the recorded investment in the mortgage loans including net deferred fees or costs and any purchase premium or discount) to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Such fair value is primarily based on observable market prices. Mortgage servicing rights (including purchased mortgage servicing) are amortized in proportion to, and over the period of, estimated net servicing revenue based on management's best estimate of remaining loan lives.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin measures the impairment of servicing rights based on the difference between the carrying amount of the servicing rights and their current fair value. Impairment of servicing rights is recognized through a valuation allowance. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights exceed their fair value. For the purpose of evaluating and measuring impairment of capitalized mortgage servicing rights, Dauphin stratifies those rights based on the predominant risk characteristics of the underlying loans. Dauphin primarily stratifies mortgage servicing rights by loan type (for example, conventional or government guaranteed and adjustable-rate or fixed-rate mortgage loans) and interest rate. Valuation techniques for measuring fair value incorporate assumptions that market participants use in estimating future servicing income and expense, including assumptions about prepayment, default and interest rates.
DERIVATIVES
Dauphin's mortgage subsidiary, Eastern Mortgage, has limited involvement with derivative financial instruments. Derivatives are primarily used to manage well-defined interest rate risks, as described in Note 17.
TRUST ASSETS
Assets held by the Bank in a fiduciary or agency capacity are not included in the consolidated financial statements since such assets are not assets of the Bank. Income from fiduciary activities is recorded on an accrual basis.
BENEFIT PLANS
Pension plan costs for Dauphin's defined benefit plans are accounted for using the projected unit credit method for measuring net periodic pension cost over the employees' service lives.
Dauphin's cost of retiree health care and other postretirement benefits are accounted for in accordance with the provisions of Statement of Financial Acccounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
Dauphin provides benefits to former or inactive employees after employment but before retirement. These costs are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits".
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE
Net income per share is computed based upon the weighted average number of common shares outstanding and dilutive common equivalent shares from stock options and performance shares using the treasury stock method. The difference between primary and fully diluted earnings per share is not significant in any year.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
CONSOLIDATED STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, Dauphin considers cash and due from banks and overnight federal funds sold to be cash and cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
2--MERGERS AND ACQUISITIONS
ALLIED IRISH BANKS, P.L.C.
On January 21, 1997, the Board of Directors of Dauphin approved, and Dauphin entered into, an Agreement and Plan of Merger (Merger Agreement) with Allied Irish Banks, p.l.c. (AIB) and its United States banking subsidiary, First Maryland Bancorp (FMB). The Merger Agreement provides for the merger of Dauphin into FMB, with FMB as the surviving corporation (Merger).
In the Merger, shareholders of Dauphin will receive, in exchange for their shares of Common Stock, either (i) $43 in cash (Per Share Cash Consideration) or (ii) that number (Exchange Ratio) of AIB American Depository Shares (AIB ADS) having a Closing Market Price (as defined below) equal to $43, provided, that if the Closing Market Price of an AIB ADS is less than $37 per AIB ADS then the Exchange Ratio will be fixed at 1.162 and if the Closing Price of an AIB ADS is greater than $43 per AIB ADS then the Exchange Ratio will be fixed at 1.000 (Per Share Stock Consideration). If the market price of an AIB ADS as of a determination date shortly prior to closing is less than $32 (corresponding to a value of the Per Share Stock Consideration of $37.19), then Dauphin has the right to terminate the Merger Agreement unless AIB adjusts the Exchange Ratio such that the value of the Per Share Stock Consideration is not less than $37.19.
AIB ADS are traded on the New York Stock Exchange under the symbol AIB. Each AIB ADS represents six ordinary shares of AIB (AIB Ordinary Shares), which are traded on the London and Irish stock exchanges, and may be converted into AIB Ordinary Shares at any time.
The Closing Market Price means the average closing price on the New York Stock Exchange for the ten New York Stock Exchange trading days ending on the fifth business day prior to the closing date of the Merger.
Shareholders of Dauphin will be entitled to elect whether to receive the Per Share Cash Consideration or the Per Share Stock Consideration for their shares, provided that not less than 51% of the outstanding shares of Dauphin's Common Stock will be exchanged for the Per Share Stock Consideration. If elections to receive the Per Share Stock Consideration, combined with shares as to which no election is made, constitute less than 51% of the outstanding shares of Dauphin's Common Stock, then shares as to which an election has been made to receive the Per Share Cash Consideration will be selected at random to be exchanged for the Per Share Stock Consideration notwithstanding such election.
In connection with the Merger Agreement, Dauphin has entered into a Stock Option Agreement in favor of AIB, granting AIB an option to acquire 6,112,088 shares of Dauphin's Common Stock (19.9% of the outstanding shares) at an exercise price of $33 3/16 per share.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The Merger is subject to regulatory approvals in the United States and Ireland, and will require the approval of the shareholders of Dauphin and AIB. It is anticipated that the Merger will be consummated in the third quarter of 1997. The merger is not expected to have a material impact on the realizability of Dauphin's assets and liabilities.
EASTERN MORTGAGE
On July 1, 1994, Dauphin acquired Eastern Mortgage, a mortgage banking company headquartered in Trevose, Pennsylvania, for approximately $21.0 million in cash pursuant to a definitive agreement signed in May 1994. The acquisition was accounted for using the purchase method of accounting. Therefore, the results of operations of Eastern Mortgage from the date of acquisition are included with the results of Dauphin. The excess of the purchase price over the fair value of the net identifiable assets acquired of $12.5 million has been recorded as goodwill and is being amortized on a straight-line basis over 15 years.
3--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS AND INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of these required reserve balances at December 31, 1996 and 1995 was approximately $41,306,000 and $80,353,000, respectively.
The Bank is required to maintain an investment in Federal Home Bank of Pittsburgh stock of $15,559,200 which is carried at original cost and included with equity securities.
4--INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of investment securities available-for-sale are as follows:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The amortized cost and fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Gains and losses from sales of investment securities available-for-sale are as follows:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 Proceeds from sales of investment securities available-for-sale are as follows:
Securities with a carrying value of $1,526,658,000 at December 31, 1996 and $1,053,541,000 at December 31, 1995 are pledged to secure public deposits and for other purposes as provided by law.
5--LOANS
The loan portfolio, net of unearned income, at December 31, 1996 and 1995 is as follows:
Included within the loan portfolio are loans on which the Bank has ceased the accrual of interest and restructured loans. Such loans amounted to $16,154,000 and $12,103,000 at December 31, 1996 and 1995, respectively. If interest income had been recorded on all such loans outstanding during the years 1996, 1995 and 1994, interest income would have been increased as shown in the following table:
On December 31, 1996 and 1995 the balance of impaired loans was $12.1 million and $11.7 million, respectively. In 1996, impaired loans of $10.5 million have a related allowance for loan losses of $4.7 million and the remaining impaired loans of $1.6 million have no related allowance for loan losses. In 1995, impaired loans of $8.2 million have a related allowance for loan losses of $3.8 million and the remaining impaired loans of $3.5 million have no related allowance for loan losses. The average balance of impaired loans for 1996 and 1995 was $13.3 million and $8.4 million and the interest recognized for the year was $1.3 million and $.7 million,
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 respectively. The interest income includes $1.0 million and $.4 million, respectively, that was recorded on the cash basis.
The Bank does not have any significant commitments to lend additional funds on non-accrual, restructured or impaired loans at December 31, 1996.
The Bank has granted loans to officers, directors and their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans, which excludes aggregate loans totaling less than $60,000 to any one related party, is as follows:
6--ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows:
7--PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995 is as follows:
Depreciation and amortization amounted to $9,205,000 for 1996, $7,665,000 for 1995 and $6,834,000 for 1994.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
8--MORTGAGE BANKING
Mortgage loans serviced for others are not included in the consolidated balance sheets. The outstanding balance of these loans at year-end and a breakdown of mortgage banking income during the year are presented below:
An analysis of the activity of excess, purchased, and originated mortgage servicing rights for the years ended December 31, 1996, 1995 and 1994 is as follows:
The fair value of purchased and originated servicing rights was $14.7 million at December 31, 1996. As of and for the year ended December 31, 1996, there was no valuation allowance for purchased and originated servicing rights.
9--DEPOSITS
A summary of deposits at December 31, 1996 and 1995 is as follows:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 Maturities of time deposits for each of the next five years are as follows:
10--SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings generally mature within one to ninety days from the transaction date.
A summary of aggregate short-term borrowings is as follows for the years ended December 31, 1996, 1995 and 1994:
The securities that serve as collateral for the securities sold under agreements to repurchase are under Dauphin's control.
The Bank has approved federal funds lines of credit that amounted to approximately $1,852,000,000 at December 31, 1996.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
11--LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1996 and 1995:
The borrowing of $150,000,000 is a five-year, 4.92% fixed-rate advance in which the Federal Home Loan Bank of Pittsburgh has the option to convert to a LIBOR adjustable-rate advance at three-month LIBOR plus three basis points after the first three months, or quarterly thereafter. The Bank has the option to accept the LIBOR funding or put the funds back to the Federal Home Loan Bank of Pittsburgh without penalty.
Aggregate long-term debt maturities, for each of the next five years are as follows:
12--REGULATORY MATTERS
Dauphin and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on Dauphin's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Dauphin and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance- sheet items as calculated under regulatory accounting practices. Dauphin's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Dauphin and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that Dauphin and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notifications from the Federal Reserve categorized Dauphin and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 well capitalized Dauphin and the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since those notifications that management believes have changed Dauphin's or the Bank's category.
Dauphin's and the Bank's actual capital amounts and ratios are also presented below. There was no deduction from capital for interest rate risk for Dauphin or the Bank.
Certain restrictions exist regarding the ability of the subsidiaries to transfer funds to Dauphin in the form of cash dividends. The Bank may not pay dividends to Dauphin, which would allow these risk-based capital ratios to fall below the minimum capital requirements. Under these policies and subject to the restrictions applicable to the Bank, the Bank could declare, without prior regulatory approval, aggregate dividends of $2.0 million, plus net profits for 1997.
13--INCOME TAXES
The provision for income taxes, consisting primarily of Federal income taxes, for the years 1996, 1995 and 1994, consists of the following:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation between the effective income tax rate and the statutory rate follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996, 1995 and 1994 are as follows:
Included in the table above is the recognition of certain temporary differences for which no deferred tax expense or benefit was recognized in the consolidated statements of income. Such items include unrealized gains and losses on certain investments in debt and equity securities and book and tax basis differences relating to business combinations accounted for under the purchase method of accounting.
Management is of the opinion that it is more likely than not that the deferred tax asset of $25,648,000 will be realized since Dauphin has had a long history of earnings and has carryback potential greater than the deferred tax asset. Management is not aware of any evidence that would preclude Dauphin from ultimately realizing this asset.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
14--BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan covering substantially all employees. The Plan's benefit formulas generally base payments to retired employees upon their length of service and a percentage of qualifying compensation during the final years of employment. Dauphin's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
The following table sets forth the pension plan's funded status and amounts recognized in Dauphin's consolidated financial statements at December 31, 1996 and 1995:
The assumptions used in determining the actuarial present value of the projected benefit obligation and the expected rate of return on plan assets are as follows:
Net pension expense (credit) for 1996, 1995 and 1994 was comprised of the following:
Plan assets are primarily invested in listed stocks (including 107,000 shares of Dauphin at December 31, 1996 and 1995) and U.S. Treasury and federal agency securities.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin provides substantially all employees with postretirement benefits other than pensions, which include health and life insurance. These postretirement benefits other than pensions are currently not funded. The status of the plan at December 31, 1996 and 1995 is as follows:
The assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligation are as follows:
The cost for postretirement benefits other than pensions for 1996, 1995 and 1994 consisted of the following components:
The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 16 1/2% in 1992, the year of adoption, decreasing to an ultimate rate of 5 1/2% in 2005 (10% at December 31, 1996) and thereafter over the projected payout period of benefits.
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage-point increase in the assumed health care cost trend would increase the accumulated postretirement benefit obligation by $1,615,000 at December 31, 1996 and increase the aggregate of the service and interest cost components by $209,000 for the year ended December 31, 1996.
Dauphin offers a savings plan for all eligible employees. Under the plan, Dauphin contributes 25% of the participants' contribution which cannot exceed 10% of their salaries. Participants' contributions are at all times fully vested, and Dauphin's contributions become fully vested with two years of service. Contributions to the plan amounted to $670,000, $581,000 and $563,000 during 1996, 1995 and 1994, respectively.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 15--STOCK-BASED COMPENSATION PLANS
At December 31, 1996 Dauphin had four stock-based compensation plans, which are described below. Dauphin applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for the stock option plans or the employee stock purchase plan. The compensation cost that has been charged against income for the Performance Share Agreements was $.9 million for 1996 and $.4 million for 1995. Had compensation cost for Dauphin's stock-based compensation plans been determined in accordance with the fair value method of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", Dauphin's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The effects of applying SFAS 123 for 1996 and 1995 are not indicative of future amounts, until SFAS 123 has been applied to all outstanding non-vested awards.
Employee Stock Purchase Plan
Under the employee stock purchase plan, all eligible employees may purchase shares of Dauphin's common stock through payroll deductions (limited to an amount aggregating 10% of annual base pay). The purchase price, established 30 days prior to the offering date, is not less than 85% or more than 100% of the average market price on the offering date or exercise date, whichever is lower. 2,500,000 shares of common stock have been authorized to be offered under the plan, of which 812,894 shares have been issued. Because of a difference between the plan offering date, and Dauphin's year-end, no shares were under option at December 31, 1996.
Under SFAS 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1996 and 1995, respectively: dividend yield of 3.96% and 4.08%; an expected life of one year for both years; expected volatility of 23.01% and 17.79%; and risk free interest rates of 5.74% and 5.61%. The fair value of those purchase rights granted in 1996 and 1995 were $6.64 and $5.23, respectively.
Stock Option Plans
During 1987, the shareholders approved the adoption of the Stock Option Plan of 1986 (1986 Plan). Under the 1986 Plan, Dauphin may grant either qualified or non-qualified stock options to key employees for the purchase of up to 1,193,000 shares of common stock. During 1995, the shareholders approved the adoption of the 1995 Stock Incentive Plan (1995 Plan). Under the 1995 Plan, Dauphin may grant incentive stock options, non-qualified stock options, restricted stock awards, performance share awards and other awards that provide a participant with the right to purchase or otherwise acquire Dauphin common stock or that are valued by reference to the market value of Dauphin common stock. Under the 1995 Plan, Dauphin may grant up to 2,000,000 shares of common stock. The exercise price of options granted may not be less than 85% of the fair
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994 market value of Dauphin's common stock at the date of grant. Options become exercisable over periods of one to five years and expire ten years from the date of grant, and become fully vested upon a change in control.
The fair value of each option granted under the 1986 and 1995 plans was estimated using the Black-Scholes option-pricing model with the following assumptions for 1996 and 1995, respectively: dividend yield of 3.91% and 4.17%; an expected life of six years for both years; expected volatility of 21.23% and 20.85%; and risk free interest rates of 6.46% and 6.12%. The fair value of those options granted in 1996 and 1995 were $6.32 and $4.82, respectively.
During 1996, the shareholders approved the adoption of the Non-Employee Directors' Stock Plan of 1996 (the Directors' Plan). Under the Directors' Plan, Dauphin may grant non-qualified stock options to non-employee directors for the purchase of up to 150,000 shares of common stock. In addition, non-employee Directors are permitted to defer cash fees in the form of deferred stock. The exercise price of options granted must be 100% of the fair market value of Dauphin's common stock at the date of grant. Options become exercisable after one year and expire ten years from the date of grant.
The fair value of each option granted under the 1996 director's plan was estimated using the Black-Scholes option-pricing model with the following assumptions for 1996: dividend yield of 4.00%; an expected life of three years; expected volatility of 19.82%; and a risk free interest rate of 6.19%. The fair value of those options granted in 1996 was $4.19.
Stock option transactions during 1996, 1995, and 1994 are summarized below:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The following table summarizes information on the stock options outstanding at December 31, 1996:
The following table summarizes information on the exercisable stock options at December 31, 1996:
Performance Share Agreements
In 1996 and 1995, Dauphin entered into Performance Share Agreements with certain key employees under the 1995 Plan, as described above. This long-term incentive plan grants these employees Dauphin common stock after a three year period if specific corporate goals are realized. This incentive plan becomes fully vested upon a change in control. There were 48,602 and 45,606 shares granted during 1996 and 1995, respectively.
The fair value of each share granted was estimated using the Black-Scholes option-pricing model with the following assumptions for 1996 and 1995, respectively: dividend yield of 3.69% and 4.23%; an expected life of three years for both years; expected volatility of 20.32% and 20.07%; and risk free interest rates of 5.26% and 7.84%. The fair value of those options granted in 1996 and 1995 were $25.74 and $20.82, respectively.
16--STOCKHOLDERS' EQUITY
Dauphin has a shareholders' rights plan that declared a dividend distribution of one Common Stock Purchase Right (a Right) for each outstanding share of Common Stock of Dauphin. The Rights are exercisable only if a person or group of affiliated persons acquires or announces an intention to acquire 18% of the Common Stock of Dauphin and Dauphin's Board of Directors does not redeem the Rights during the specified redemption period. Initially, each Right, upon becoming exercisable, would entitle the holder to purchase from Dauphin one share of Common Stock at the specified exercise price which is subject to adjustment (currently $50 per share). Once the Rights become exercisable, if any person or group acquires 18% of the Common Stock of Dauphin, the holder of a Right, other than the acquiring person or group, will be entitled, among other things, to purchase shares of Common Stock having a value equal to two times the exercise price of the Right. The Board of Directors is entitled to redeem the Rights for $.001 per Right at any time before expiration of the redemption period. The Board of Directors may, at any time after the Rights become exercisable and prior to the time any person becomes a 50% beneficial owner of Dauphin's shares of Common Stock, exchange each of the outstanding Rights (except Rights of the acquiring person or group which are voided) for one share of Common Stock, subject to adjustment. The Rights will expire on January 22, 2000, unless earlier redeemed by Dauphin.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
On January 21, 1997, the Dauphin Board of Directors approved an Amendment to Rights Agreement (Amendment), amending the Rights Agreement dated January 22, 1990 (Rights Agreement) by and between Dauphin and Dauphin Deposit Bank and Trust Company, as Rights Agent. The purpose of the Amendment is to provide that the entering into of the Merger Agreement with AIB and FMB and the Stock Option Agreement described in Note 2 and the completion of the transactions contemplated thereby (including without limitation the Merger and the exercise of the Option (as defined in the Stock Option Agreement)) do not and will not result in the ability of any person to exercise any Rights under the Rights Agreement, or enable or require the Rights (as defined in the Rights Agreement) to separate from the shares of Common Stock to which they are attached or to be triggered or become exercisable. The Amendment was entered into by Dauphin and the Rights Agent as of January 21, 1997, immediately prior to execution of the Merger Agreement.
During 1994, Dauphin announced that the Board of Directors authorized the repurchase of up to 2,000,000 shares of the outstanding stock. In February 1995, an additional 1,500,000 shares were authorized for repurchase. Available investments are being used to fund the share repurchases. Dauphin will use the shares for general corporate purposes, including the Employee Stock Purchase Plan, Stock Option Plan, the Dividend Reinvestment and Stock Purchase Plan, and other appropriate uses. During 1996 and 1995, Dauphin repurchased 297,000 shares for $8.5 million and 630,000 shares for $16.1 million, respectively.
17--FINANCIAL INSTRUMENTS
Off-Balance-Sheet Risk and Concentrations of Credit Risk
In the normal course of business, Dauphin is a party to financial instruments with off-balance-sheet risk which meet the financing needs of its customers and/or which reduce Dauphin's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, financial guarantees and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.
For commitments to extend credit and standby letters of credit, Dauphin's exposure to credit loss in the event of non-performance by the other party is represented by the contractual amount of those instruments. Dauphin uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Dauphin had the following off-balance-sheet financial instruments at December 31:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Commitments to extend credit, which include loans and lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Dauphin evaluates each customer's creditworthiness on a case-by- case basis. The amount of collateral obtained if deemed necessary by Dauphin upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by Dauphin to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The terms of the letters of credit vary from one month to 24 months and may have renewal features. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Dauphin holds collateral supporting those commitments, as deemed necessary.
Most of the Bank's business activity is with customers located within the Bank's defined market area, principally Central Pennsylvania. The Eastern Pennsylvania and New Jersey mortgage markets, as well as numerous other states to a lesser degree, are served by Eastern Mortgage, the Bank's mortgage subsidiary. However, the Bank will grant commercial, residential and consumer loans throughout the state. The loan portfolio is well diversified and the Bank does not have any significant industry concentrations of credit risk. However, since a significant share of the Bank's loans are within the geographic area previously defined, a substantial portion of the Bank's debtors' ability to honor their contracts may be significantly affected by the level of economic activity in this area.
Derivative Financial Instruments
Dauphin's mortgage subsidiary, Eastern Mortgage and Eastern's Capital Market division have limited involvement with derivative financial instruments. Derivatives are used to manage interest rate risks related to the mortgage banking business. Eastern Mortgage is exposed to interest rate risk when it extends a commitment to a borrower for future settlement. As interest rates increase, the valuation of the commitment to Eastern Mortgage declines. As interest rates decrease, a borrower is more likely to abandon the commitment, which could cause a financial loss to Eastern Mortgage if they have committed to sell that loan for future delivery in the secondary market.
Eastern Mortgage mitigates exposures to interest rate risk through the use of certain hedging techniques. This is accomplished by using a combination of charging non-refundable commitment fees when the borrower elects to lock in their interest rate; selling loans in the secondary market for future delivery on a mandatory basis (via forward and future delivery commitments with third- party investors); and purchasing options.
Forward commitments are contracts wherein Eastern Mortgage agrees to make delivery of a specified type of loan at a specified future date and price. As loans close and are pooled for delivery, forward commitments are filled and the primary objective of hedging is achieved. As market conditions change and impact the volume and timing of loans closing, forward commitments may be paired-off. Any gains or losses arising from these paired-off transactions are deferred on the date of the pair-off, and are recognized as an adjustment to gains (losses) on sale of mortgage loans when the underlying pool of mortgage loans is sold. When forward commitments are paired-off due to a lack of loans to fulfill the commitment, the gain or loss is recognized on the date of the pair-off as an adjustment to gains (losses) on sale of mortgage loans.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Certain future delivery contracts to third parties stipulate the duration of the commitment and the amount of loans deliverable under the commitment and may require the payment of a fee. Commitment fees are capitalized when paid and expensed as a component of gains (losses) on sale of mortgage loans when the commitment expires or the loan is delivered.
Purchased call or put options are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time from the seller, or "writer", of the option. Eastern Mortgage purchases call and put options on mortgage-backed securities as part of its interest rate risk management strategy. The risk of loss is limited to the price paid for the option. The cost of all such options is amortized over the life of the option as an adjustment to gains (losses) on sale of mortgage loans. Any gain realized at the time an option is exercised is deferred and subsequently recognized when the underlying pool of loans is sold.
In the ordinary course of business, Eastern Mortgage may have a portion of its mortgage loan portfolio (warehouse and pipeline, net of estimated fall-out) exposed to interest rate risk, as volume and market conditions warrant. This exposure represents those loans which have closed or are expected to close which are not hedged at a given point in time. A daily exposure report summarizing the exposure position is reviewed and adjustments are made to the extent considered necessary. Eastern Mortgage policy limits margin changes to 50 basis points given a similar change in rates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS 107) requires disclosure of the fair value of financial instruments. The majority of Dauphin's assets and liabilities are considered financial instruments. Significant assumptions and estimates were used in calculation of fair market values.
The following methods and assumptions were used to estimate the fair value of each class of Dauphin's financial instruments for which it is practicable to estimate that value:
Cash and short-term investments
The fair value for cash and short-term instruments is estimated to be book value, due to the short maturity of, and negligible credit concerns within, those instruments.
Investment securities available-for-sale
The fair value for debt and marketable equity securities is based on quoted market prices, if available. If quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Assets held for sale
The fair value for mortgage loans held for sale is estimated using the current secondary market rates. For the securities inventory held for sale, the securities are recorded at the current quoted market value.
Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The residential mortgages and certain consumer loans include prepayment assumptions.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Other financial assets
The fair value for accrued interest receivable is estimated to be the current book value. The fair value for originated mortgage servicing rights is based on observable market prices and the fair value of excess servicing fees is the estimated present value of the difference between the anticipated future servicing fees and normal servicing fees using discount rates that approximate market rates and management's estimate of future prepayment rates.
Deposits
The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, interest bearing demand and money market deposits, is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit, including certain 18 month variable rate certificates of deposit carrying a minimum interest rate of 10% for the 18 month term which are held in certain individual retirement accounts (as discussed herein under Note 20--Litigation), is based on the discounted value of contractual cash flows, using the rates currently offered for deposits of similar remaining maturities.
Short-term borrowings
The fair value of short-term borrowings is estimated using the current rates for similar terms and maturities.
Long-term debt
The fair value of long-term debt is estimated using current rates for debt with similar terms and remaining maturities.
Accrued interest payable
The fair value of accrued interest payable is estimated to be the current book value.
Off-balance-sheet financial instruments
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The fair value of options is estimated based on quoted market prices.
Limitations
The fair values estimated are dependent upon subjective assumptions and involve significant uncertainties resulting in estimates that vary with changes in assumptions. Any sales of financial instruments may incur potential tax and other expenses that would not be reflected in the fair values. Any changes in assumptions or estimation methodologies may have a material effect on the estimated fair values disclosed. The reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques. Also, the estimates do not reflect any additional premium or discount that could result from the sale of Dauphin's entire holdings of a particular instrument.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996 and 1995, Dauphin's estimated fair values of financial instruments based on disclosed assumptions are as follows:
- -------- (1) The amounts shown under "carrying amount" represent accruals or deferred income arising from those unrecognized financial instruments.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
18--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Dauphin Deposit Corporation (Parent Company Only) Condensed Balance Sheets
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Income
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Cash Flows
Dauphin Deposit Corporation merged three subsidiaries (FARMCO Realty, Inc., Financial Realty, Inc. and Farmers Mortgage Corporation) with and into itself in 1995. The 1994 condensed statements of income and cash flows have not been restated.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
19--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
20--LITIGATION
Various legal actions and proceedings are pending involving Dauphin or its subsidiaries. Management believes that the aggregate liability or loss, if any, resulting from such legal actions and proceedings will not be material to Dauphin's financial condition or results of operations. Included among the outstanding litigation is a class action law suit instituted by Dauphin in the Court of Common Pleas of Cumberland County, Pennsylvania on February 25, 1994, seeking a declaratory judgement from the Court specifically permitting Dauphin to discontinue an 18 month variable interest rate deposit product carrying a minimum interest rate of 10% for the 18 month term, which is held in certain individual retirement accounts (IRA). The aggregate balance of the IRA accounts was approximately $198.0 million at December 31, 1996. Dauphin's right to terminate the variable interest rate deposit product is in dispute and is being challenged by the holders of the IRA accounts in question. Several days after the commencement of trial in April 1996, Dauphin and representatives of the class reached an agreement in principle to settle the litigation and the trial was continued pending negotiation of a settlement agreement. Dauphin and representatives of the class filed a settlement agreement with the Court on May 13, 1996 which would permit Dauphin to terminate the 18 month variable rate product as to all class members on the effective date of the settlement and, in consideration, the balances of those accounts would be automatically deposited in one of two new certificates of deposit established by Dauphin for purposes of the settlement. All class members were given the opportunity to file objections to the proposed settlement or elect to be excluded from the class and the proposed settlement. Approximately 89 of the 4,315 class members filed formal objections to the settlement with the Court and 12 of the class members elected to opt out of the settlement. A hearing was held before the Court on June 21, 1996 for the purpose of obtaining the Court's approval of the settlement agreement. At the hearing, counsel for Dauphin and counsel for the representatives of all class members jointly moved for the Court's adoption of the settlement agreement and made argument in favor thereof. The Court, by Order issued July 11, 1996, denied the joint motion of Dauphin and the representatives of the class for settlement of the class action in accordance with the terms and conditions of the settlement agreement. Dauphin filed its Notice of Appeal from the trial Court's Order denying the settlement to the Superior Court of Pennsylvania on August 9, 1996. The Appeal seeks an Order of the Superior Court reversing the trial Court's disapproval of the settlement agreement or, in the alternative, otherwise providing the trial Court with guidance which would result in the trial Court's approval of the settlement agreement on
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1996, 1995 AND 1994 remand. The Superior Court must determine whether or not the trial Court abused its discretion in rejecting the settlement agreement. The class representatives and counsel for the class have informed Dauphin's counsel that they are withdrawing their previous support for the joint settlement agreement and will vigorously oppose Dauphin's Appeal to the Superior Court. The Superior Court heard the oral arguments of counsel on the Appeal on March 5, 1997. Neither management nor counsel can predict with any reasonable degree of certainty the outcome of the Appeal or time frame within which the Superior Court will rule on the Appeal. If the Appeal to the Superior Court is unsuccessful, management intends to vigorously assert its right to terminate the 18 month variable interest rate deposit product on further appeal and at the trial court level. Dauphin has continued to date to pay a 10% interest rate with regard to the 18 month variable interest rate deposit product.
LOGO
INDEPENDENT AUDITORS' REPORT
The Board of Directors Dauphin Deposit Corporation:
We have audited the accompanying consolidated balance sheets of Dauphin Deposit Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 that 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 Dauphin Deposit Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for mortgage servicing rights to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 122, Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65 on January 1, 1995. As discussed in Note 1, the Company adopted the provisions of the Financial Accounting Standards Board's SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of on January 1, 1996.
/s/ KPMG Peat Marwick LLP
January 21, 1997
LOGO
DAUPHIN DEPOSIT CORPORATION
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
DAUPHIN DEPOSIT CORPORATION PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relative to directors of Dauphin is incorporated herein by reference to Election of Directors in Dauphin's 1997 Proxy Statement. Information relative to executive officers of Dauphin is set forth herein in Part I under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to Executive Compensation in the 1997 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference to Record Date and Voting Rights, Certain Beneficial Owners of Dauphin Common Stock and Security Ownership of Dauphin Management in the 1997 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to Transactions with Management in the 1997 Proxy Statement.
DAUPHIN DEPOSIT CORPORATION PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
DAUPHIN DEPOSIT CORPORATION
DAUPHIN DEPOSIT CORPORATION
DAUPHIN DEPOSIT CORPORATION SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Dauphin Deposit Corporation
February 18, 1997 /s/ Christopher R. Jennings By: _________________________________ CHRISTOPHER R. JENNINGS CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT IS SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
DATE
/s/ Christopher R. Jennings Chairman of the February 18, - ------------------------------------- Board, Chief 1997 CHRISTOPHER R. JENNINGS Executive Officer and Director
/s/ Robert L. Fryer, Jr. President, Chief February 18, - ------------------------------------- Operating Officer 1997 ROBERT L. FRYER, JR. and Director
/s/ Paul B. Shannon Vice Chairman and February 18, - ------------------------------------- Chief Credit Policy 1997 PAUL B. SHANNON Officer
/s/ Lawrence J. LaMaina, Jr. Vice Chairman and February 18, - ------------------------------------- Director 1997 LAWRENCE J. LAMAINA, JR.
/s/ Dennis L. Dinger Senior Executive February 18, - ------------------------------------- Vice President, 1997 DENNIS L. DINGER Chief Fiscal and Administrative Officer (Principal Financial Officer)
/s/ Joseph T. Lysczek, Jr. Senior Vice February 18, - ------------------------------------- President and 1997 JOSEPH T. LYSCZEK, JR. Treasurer
DAUPHIN DEPOSIT CORPORATION DATE
/s/ J. Edward Beck, Jr. Director February 18, - ------------------------------------- 1997 J. EDWARD BECK, JR.
/s/ John R. Buchart Director February 18, - ------------------------------------- 1997 JOHN R. BUCHART
Director - ------------------------------------- DEREK C. HATHAWAY
Director - ------------------------------------- ALFRED G. HEMMERICH
/s/ Lee H. Javitch Director February 18, - ------------------------------------- 1997 LEE H. JAVITCH
/s/ Richard E. Jordan, II Director February 18, - ------------------------------------- 1997 RICHARD E. JORDAN, II
Director - ------------------------------------- WILLIAM J. KING
/s/ William T. Kirchhoff Director February 18, - ------------------------------------- 1997 WILLIAM T. KIRCHHOFF
/s/ Andrew Maier, II Director February 18, - ------------------------------------- 1997 ANDREW MAIER, II
/s/ Robert F. Nation Director February 18, - ------------------------------------- 1997 ROBERT F. NATION
DAUPHIN DEPOSIT CORPORATION DATE
/s/ Jean D. Seibert Director February 18, - ------------------------------------- 1997 JEAN D. SEIBERT
/s/ R. Champlin Sheridan, Jr. Director February 18, - ------------------------------------- 1997 R. CHAMPLIN SHERIDAN, JR.
Director - ------------------------------------- L. ANDREW ZAUSNER, ESQ.
DAUPHIN DEPOSIT CORPORATION
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DAUPHIN DEPOSIT CORPORATION