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                                   FORM 10-K
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
(Mark One)
 
[X]For the fiscal year ended December 31, 1996    Commission file number 0-8415
 
                   OR
 
[_] For the transition period from     to
 
                          DAUPHIN DEPOSIT CORPORATION
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            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                                       23-1938831
                                          -------------------------------------
                                          (I.R.S. Employer Identification No.)
 
    213 Market Street Harrisburg,                         17101
            Pennsylvania                  -------------------------------------
-------------------------------------                  (Zip Code)
   (Address of principal executive
              offices)
 
Registrant's telephone number, including area code: (717) 255-2121
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
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                                                      NAME OF EACH EXCHANGE ON
     TITLE OF EACH CLASS                                  WHICH REGISTERED
            NONE                                                NONE
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     <S>                                              <C>
 
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                         Common Stock, $5.00 par value
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                               (Title of class)
 
                        Common Stock Repurchase Rights
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                               (Title of class)
 
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X  No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
 
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing sale price on January 31, 1997 was
approximately $1,161,951,120.
 
The number of shares of Common Stock outstanding as of January 31, 1997 was
30,721,059.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
Definitive Proxy Statement for the 1997 Annual Meeting of Shareholders,
portions of which are incorporated by reference in Part III of this Report.
 
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                          DAUPHIN DEPOSIT CORPORATION
 
                               TABLE OF CONTENTS
 
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                                                                       PAGE
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 <C>         <S>                                                       <C>  
 PART I
    Item 1.  Business...............................................     3
    Item 2.  Properties.............................................    10
    Item 3.  Legal Proceedings......................................    10
    Item 4.  Submission of Matters to a Vote of Security Holders....    11
    Item 4A. Executive Officers of the Registrant...................    11
 PART II
    Item 5.  Market for the Registrant's Common Equity and Related
              Stockholder Matters...................................    12
    Item 6.  Selected Financial Data................................    13
    Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations...................    14
    Item 8.  Financial Statements and Supplementary Data............    34
    Item 9.  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure...................    69
 PART III
    Item 10. Directors and Executive Officers of the Registrant.....    70
    Item 11. Executive Compensation.................................    70
    Item 12. Security Ownership of Certain Beneficial Owners and
              Management............................................    70
    Item 13. Certain Relationships and Related Transactions.........    70
 PART IV
    Item 14. Exhibits, Financial Statement Schedules and Reports on
              Form 8-K..............................................    71
 SIGNATURES
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                                       2
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
                                     PART I
 
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.
 
                                       3
<PAGE>
 
                          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
 
                                       4
<PAGE>
 
                          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.
 
                                       5
<PAGE>
 
                          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.
 
                                       6
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                          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
 
                                       7
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                          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
 
                                       8
<PAGE>
 
                          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.
 
                                       9
<PAGE>
 
                          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. 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. 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
 
                                       10
<PAGE>
 
                          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. 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.
 
<TABLE>
<CAPTION>
                                                    POSITION AND
                                                BUSINESS EXPERIENCE
             NAME            AGE                DURING PAST 5 YEARS
             ----            ---                -------------------
   <S>                       <C> <C>
   Christopher R.             
    Jennings...............   53 Chairman of the Board, Chief Executive Officer and
                                 Chairman of the Executive Committee (1995 to date)
                                 of Dauphin, President (1987 to 1995), Chief        
                                 Operating Officer (1992 to 1995) of Dauphin.
   Robert L. Fryer, Jr.....   48 President and Chief Operating Officer (1995 to
                                 date) of Dauphin, Chairman of the Board, President
                                 and Chief Executive Officer (1991 to date) of
                                 Hopper Soliday & Co., Inc.
   William T. Burke........   50 Vice Chairman, Financial Services Group (1996 to
                                 date) of Dauphin. President and Chief Operating
                                 Officer (1992 to 1996) of Meridian Capital
                                 Markets.
   Lawrence J. LaMaina,       62
    Jr.....................      Vice Chairman (1992 to date) of Dauphin.
   Henry K. Long, Jr.......   60 Vice Chairman, Corporate Banking Group (1996 to
                                 date) of Dauphin. Executive Vice President and
                                 Senior Credit Officer (1992 to 1995) of CoreStates
                                 Hamilton Bank.
   Paul B. Shannon.........   49 Vice Chairman (1994 to date), Senior Executive
                                 Vice President (1990 to 1994), Chief Credit
                                 Officer (1990 to date) of Dauphin.
   Dennis L. Dinger........   46 Senior Executive Vice President, Chief Fiscal and
                                 Administrative Officer (1994 to date), Executive
                                 Vice President and Chief Financial Officer (1989
                                 to 1994) of Dauphin.
   David L. Brewin.........   56 Executive Vice President and Chief Human Resources
                                 Officer of Dauphin.
   Richard B. Brokenshire..   55 Executive Vice President and Chief Operations
                                 Support Officer of Dauphin.
   John G. Coulson.........   45 Executive Vice President and Chief Information
                                 Systems Officer (1996 to date) of Dauphin. Senior
                                 Vice President, Information Systems (1992 to 1995)
                                 of Dauphin Bank.
   Kenneth H. Sallade......   45 Executive Vice President and Chief Investment
                                 Officer (1994 to date) of Dauphin, Senior Vice
                                 President (1988 to 1994) of Dauphin Bank.
</TABLE>
 
 
                                       11
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
<TABLE>
<CAPTION>
                                                    POSITION AND
                                                BUSINESS EXPERIENCE
             NAME            AGE                DURING PAST 5 YEARS
             ----            ---                -------------------
   <S>                       <C> <C>
   George W. King..........   55 Executive Vice President, General Counsel and
                                 Secretary (1995 to date) of Dauphin. Senior Vice
                                 President and Counsel (1993 to 1995) to CoreStates
                                 Hamilton Bank, Division of CoreStates Bank, N.A.,
                                 Senior Vice President, Corporate Counsel and
                                 Secretary (1991 to 1993) of CoreStates Hamilton
                                 Bank.
   Stewart P. McEntee......   50 Executive Vice President and Chief Marketing
                                 Officer (1995 to date) of Dauphin. Senior Vice
                                 President, Marketing Division (1993 to 1994) of
                                 The Bank of Baltimore, Senior Vice President of
                                 Marketing Services (1992 to 1993) of Signet
                                 Banking Corporation.
   Robert J. Unruh.........   50 Executive Vice President, Municipal Services Group
                                 (1996 to date) of Dauphin. Chairman and Chief
                                 Executive Officer (1992 to 1995) of Meridian
                                 Securities.
   Joseph T. Lysczek, Jr...   48 Senior Vice President and Treasurer (1992 to date)
                                 of Dauphin.
   Michael B. Johnson......   50 Senior Vice President and Chief Planning and
                                 Implementation Officer (1994 to date) of Dauphin.
                                 Senior Vice President and Chief Planning Officer
                                 (1992 to 1994) of First American Bankshares.
   James J. Trupp, Jr. ....   50 Senior Vice President and General Auditor (1992 to
                                 date) of Dauphin.
   Linda R. Schroeder......   40 Senior Vice President and Acting Chief Financial
                                 Officer (March 1997 to date) of Dauphin. Vice
                                 President and Chief Financial Officer (1996 to
                                 date), Corporate Controller (1995 to date), Vice
                                 President--Financial Reporting (1992 to 1995) of
                                 Dauphin Bank.
</TABLE>
 
                                    PART II
 
 
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.
 
<TABLE>
<CAPTION>
                                                                         CASH
                                                               LAST    DIVIDENDS
                                                             TRADE DAY DECLARED
                                              HIGH     LOW    CLOSING  PER SHARE
                                             ------- ------- --------- ---------
<S>                                          <C>     <C>     <C>       <C>
1995
First Quarter............................... $25 1/2 $23     $23 1/4   $.25
Second Quarter..............................  25 1/2  23      24 1/4    .25
Third Quarter...............................  28 1/2  24 1/4  26 11/16  .25
Fourth Quarter..............................  31 3/4  26 1/4  28 3/4    .26 1/2
1996
First Quarter............................... $30 1/2 $26 3/4 $30       $.26 1/2
Second Quarter..............................  30 1/2  27      28 1/2    .28 1/2
Third Quarter...............................  33 1/8  26 7/8  31        .28 1/2
Fourth Quarter..............................  33 3/4  30 1/2  33        .30
</TABLE>
 
  The approximate number of holders of common stock is 11,342 as of December
31, 1996.
 
                                       12

<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                             1996          1995          1994        1993        1992
                          ----------    ----------    ----------  ----------  ----------
<S>                       <C>           <C>           <C>         <C>         <C>
FOR THE YEAR
Interest income.........  $  398,604    $  363,644    $  331,107  $  325,045  $  346,981
Interest expense........     216,120       187,931       152,641     148,772     180,222
Net interest income.....     182,484       175,713       178,466     176,273     166,759
Provision for loan loss-
 es.....................       6,000         5,608         7,494      10,141      11,627
Non-interest income.....      93,903        71,789        60,947      60,051      55,683
Non-interest expense....     174,438       153,119       139,118     136,281     131,308
Provision for income
 taxes..................      25,177        23,210        22,762      21,985      18,476
Net income..............      70,772        65,565        70,039      67,917      61,031
Per share:
  Net income............        2.30          2.12          2.18        2.08        1.89
  Cash dividends de-
   clared...............       1.13 1/2      1.01 1/2        .94         .83         .77
Weighted average number
 of shares outstanding..  30,820,019    30,966,258    32,169,734  32,636,150  32,240,583
AT YEAR-END
Total assets............  $5,947,686    $5,297,349    $5,070,352  $4,916,855  $4,905,702
Earning assets..........   5,595,418     4,941,562     4,706,198   4,653,015   4,568,334
Short-term investments..      17,379        11,573        15,040      16,523      91,950
Investment securities
 available-for-sale.....   2,170,207     1,860,869     1,783,803   2,041,204   2,056,109
Assets held for sale....     207,798        87,782        46,222       9,203       8,503
Loans...................   3,200,034     2,981,338     2,861,133   2,586,085   2,411,772
Deposits................   4,028,570     3,949,536     3,514,884   3,586,135   3,692,209
Short-term borrowings...   1,111,630       678,161       940,777     680,386     608,326
Long-term debt..........     154,771        40,599        91,954      92,454      92,863
Stockholders' equity....     570,445       546,603       466,649     506,075     462,111
Book value per share....       18.60         17.85         15.08       15.57       14.28
Number of shares out-
 standing...............  30,666,729    30,627,843    30,945,167  32,507,414  32,356,559
RATIOS
Return on average as-
 sets...................        1.26%         1.31%         1.42%       1.40%       1.31%
Return on average stock-
 holders' equity........       13.10         12.81         13.81       14.06       13.93
Dividend payout.........       49.35         47.88         43.12       39.90       40.74
Average equity to aver-
 age assets.............        9.62         10.23         10.27        9.99        9.37
</TABLE>
 
                                       13
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
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.
 
                                       14
<PAGE>
 
                          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)
 
<TABLE>
<CAPTION>
                                                        (DOLLARS IN THOUSANDS)
                                     1996                        1995                        1994
                          --------------------------- --------------------------- ---------------------------
                           AVERAGE            AVERAGE  AVERAGE            AVERAGE  AVERAGE            AVERAGE
                           BALANCE   INTEREST  RATE    BALANCE   INTEREST  RATE    BALANCE   INTEREST  RATE
                          ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
<S>                       <C>        <C>      <C>     <C>        <C>      <C>     <C>        <C>      <C>
ASSETS
Short-term investments
 Interest bearing
  deposits..............  $    3,215 $    211  6.56%  $    6,367 $    365  5.73%  $    5,481 $    338  6.17%
 Federal funds sold and
  securities purchased
  under agreements to
  resell................      12,645      723  5.72        9,362      714  7.63       11,325      603  5.32
 Other short-term
  investments...........         446       22  4.93          615       41  6.67
                          ---------- --------         ---------- --------         ---------- --------
 Total short-term
  investments...........      16,306      956  5.86       16,344    1,120  6.85       16,806      941  5.60
                          ---------- --------         ---------- --------         ---------- --------
Investment securities
 available-for-sale
 U.S. government
  obligations...........      57,178    3,668  6.42      183,866   10,618  5.77      251,030   14,267  5.68
 U.S. government
  agencies..............   1,591,775  104,795  6.58    1,127,537   75,203  6.67    1,185,694   73,553  6.20
 State and municipals...     336,426   28,189  8.38      327,617   30,468  9.30      407,287   38,826  9.53
 Other securities.......      77,344    5,611  7.25       73,527    5,011  6.82       98,965    6,537  6.61
                          ---------- --------         ---------- --------         ---------- --------
 Total investment
  securities available-
  for-sale..............   2,062,723  142,263  6.90    1,712,547  121,300  7.08    1,942,976  133,183  6.85
                          ---------- --------         ---------- --------         ---------- --------
Assets held for sale,
 primarily mortgage
 loans..................     167,808   12,112  7.22       79,306    5,626  7.09       29,586    2,136  7.22
                          ---------- --------         ---------- --------         ---------- --------
Loans (1)
 Commercial.............   1,087,405   90,031  8.28      964,883   84,644  8.77      899,376   68,705  7.64
 Commercial mortgages...     607,130   51,722  8.52      542,059   49,547  9.14      545,508   45,479  8.34
 Residential mortgages
  (2)...................     724,621   59,964  8.28      777,247   64,123  8.25      700,886   55,343  7.90
 Consumer (3)...........     659,467   54,115  8.21      611,137   49,572  8.11      504,780   40,463  8.02
                          ---------- --------         ---------- --------         ---------- --------
 Total loans............   3,078,623  255,832  8.31    2,895,326  247,886  8.56    2,650,550  209,990  7.92
                          ---------- --------         ---------- --------         ---------- --------
 Total earning assets
  (4)...................   5,325,460  411,163  7.72    4,703,523  375,932  7.99    4,639,918  346,250  7.46
                                     --------                    --------                    --------
Other assets............     294,281                     301,502                     301,091
                          ----------                  ----------                  ----------
 Total assets...........  $5,619,741           7.32%  $5,005,025           7.51%  $4,941,009           7.01%
                          ==========           ====   ==========           ====   ==========           ====
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Interest bearing
 deposits
 Demand deposits........  $  494,494    6,343  1.28%  $  507,101    7,493  1.48%  $  564,592    9,579  1.70%
 Savings deposits.......     825,496   21,850  2.65      906,945   24,725  2.73    1,050,580   27,096  2.58
 Time deposits of
  $100,000 or more......     573,968   36,240  6.31      402,085   27,335  6.80      286,612   15,140  5.28
 Other time deposits....   1,618,600   96,481  5.96    1,482,112   87,949  5.93    1,196,905   62,072  5.19
                          ---------- --------         ---------- --------         ---------- --------
 Total interest bearing
  deposits..............   3,512,558  160,914  4.58    3,298,243  147,502  4.47    3,098,689  113,887  3.68
Short-term borrowings...     998,730   51,937  5.20      646,537   35,880  5.55      778,906   32,056  4.12
Long-term debt..........      38,902    3,269  8.40       56,742    4,549  8.02       92,048    6,698  7.28
                          ---------- --------         ---------- --------         ---------- --------
 Total interest bearing
  liabilities...........   4,550,190  216,120  4.75    4,001,522  187,931  4.70    3,969,643  152,641  3.85
                                     --------                    --------                    --------
Non-interest bearing
 demand deposits........     457,626                     431,567                     407,556
Other liabilities.......      71,489                      60,036                      56,598
Stockholders' equity....     540,436                     511,900                     507,212
                          ----------                  ----------                  ----------
 Total liabilities and
  stockholders' equity..  $5,619,741           3.85%  $5,005,025           3.75%  $4,941,009           3.09%
                          ==========           ====   ==========           ====   ==========           ====
Interest rate spread....                       2.97%                       3.29%                       3.61%
Effect of non-interest
 bearing funds..........                        .69                         .71                         .56
                                               ----                        ----                        ----
Net interest
 income/margin..........             $195,043  3.66%             $188,001  4.00%             $193,609  4.17%
                                     ========  ====              ========  ====              ========  ====
</TABLE>
--------
(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.
 
                                       15
<PAGE>
 
                          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
 
<TABLE>
<CAPTION>
                                           (IN THOUSANDS)
                                1996/1995                    1995/1994
                         --------------------------  ---------------------------
                          CHANGE DUE TO               CHANGE DUE TO
                         -----------------   TOTAL   -----------------   TOTAL
                         VOLUME     RATE    CHANGE    VOLUME    RATE     CHANGE
                         -------  --------  -------  --------  -------  --------
<S>                      <C>      <C>       <C>      <C>       <C>      <C>
(Taxable equivalent)
Interest income
  Short-term
   investments.......... $     3  $   (167) $  (164) $    (51) $   230  $    179
  Investment securities
   available-for-sale...  23,644    (2,681)  20,963   (16,807)   4,924   (11,883)
  Assets held for sale..   6,387        99    6,486     3,528      (38)    3,490
  Loans.................  15,676    (7,730)   7,946    19,843   18,053    37,896
                         -------  --------  -------  --------  -------  --------
    Total interest
     income.............  45,710   (10,479)  35,231     6,513   23,169    29,682
                         -------  --------  -------  --------  -------  --------
Interest expense
  Interest bearing
   deposits.............  16,755    (3,343)  13,412    18,496   15,119    33,615
  Short-term
   borrowings...........  18,454    (2,397)  16,057    (6,064)   9,888     3,824
  Long-term debt........  (1,490)      210   (1,280)   (2,774)     625    (2,149)
                         -------  --------  -------  --------  -------  --------
    Total interest
     expense............  33,719    (5,530)  28,189     9,658   25,632    35,290
                         -------  --------  -------  --------  -------  --------
Net interest income..... $11,991  $ (4,949) $ 7,042  $ (3,145) $(2,463) $ (5,608)
                         =======  ========  =======  ========  =======  ========
</TABLE>
 
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
 
                                       16
<PAGE>
 
                          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
 
                                       17
<PAGE>
 
                          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
 
<TABLE>
<CAPTION>
                                       (DOLLARS IN THOUSANDS)
                                1996/1995                     1995/1994
                         --------------------------------  -----------------------
                                    INCREASE                 INCREASE
                                   (DECREASE)               (DECREASE)
                                  --------------           --------------
                          1996    AMOUNT     %     1995    AMOUNT     %     1994
                         -------  -------  -----  -------  -------  -----  -------
<S>                      <C>      <C>      <C>    <C>      <C>      <C>    <C>
Banking
  Fiduciary activities.. $19,426  $ 2,619   15.6% $16,807  $   444    2.7% $16,363
  Service charges on
   deposit accounts.....  12,819    1,800   16.3   11,019     (579)  (5.0)  11,598
  Other service charges
   and fees.............  14,472    1,918   15.3   12,554    1,282   11.4   11,272
  Securities gains,
   net..................   1,634     (627) (27.7)   2,261   (1,043) (31.6)   3,304
  Other.................   4,060     (324)  (7.4)   4,384    1,219   38.5    3,165
                         -------  -------         -------  -------         -------
                          52,411    5,386   11.5   47,025    1,323    2.9   45,702
Broker/dealer...........   9,868    3,488   54.7    6,380   (1,391) (17.9)   7,771
Mortgage banking........
  Gain on sale of
   loans................   2,428     (399) (14.1)   2,827   (1,212) (30.0)   4,039
  Other origination
   income...............   7,029    1,040   17.4    5,989    3,148  110.8    2,841
  Mortgage servicing
   fees, net............  23,013   11,298   96.4   11,715   10,117  633.1    1,598
  Gain on sale of
   servicing............   1,256      210   20.1    1,046     (577) (35.6)   1,623
                         -------  -------         -------  -------         -------
                          33,726   12,149   56.3   21,577   11,476  113.6   10,101
Intercompany
 eliminations...........  (2,102)   1,091          (3,193)    (566)         (2,627)
                         -------  -------         -------  -------         -------
    Total............... $93,903  $22,114   30.8% $71,789  $10,842   17.8% $60,947
                         =======  =======  =====  =======  =======  =====  =======
</TABLE>
 
  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.
 
                                       18
<PAGE>
 
                          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
 
<TABLE>
<CAPTION>
                                         (DOLLARS IN THOUSANDS)
                                 1996/1995                        1995/1994
                         -----------------------------------  ------------------------
                                     INCREASE                   INCREASE
                                     (DECREASE)                (DECREASE)
                                   ---------------            --------------
                           1996    AMOUNT     %       1995    AMOUNT     %      1994
                         --------  -------  ------  --------  -------  -----  --------
<S>                      <C>       <C>      <C>     <C>       <C>      <C>    <C>
Banking
  Salaries and employee
   benefits............. $ 64,759  $ 3,384     5.5% $ 61,375  $   276     .5% $ 61,099
  Net occupancy
   expense..............    8,711      992    12.9     7,719     (368)  (4.6)    8,087
  Furniture and
   equipment expense....   12,106    2,239    22.7     9,867      947   10.6     8,920
  Deposit insurance.....        2   (4,093) (100.0)    4,095   (3,814) (48.2)    7,909
  Other.................   44,415    1,329     3.1    43,086    7,113   19.8    35,973
                         --------  -------          --------  -------         --------
                          129,993    3,851     3.1   126,142    4,154    3.4   121,988
Broker/dealer...........    9,609    1,803    23.1     7,806      228    3.0     7,578
Mortgage banking
  Salaries and employee
   benefits.............   24,996   10,148    68.3    14,848    8,514  134.4     6,334
  Net occupancy
   expense..............    1,694      395    30.4     1,299      729  127.9       570
  Furniture and
   equipment expense....    1,527      533    53.6       994      521  110.1       473
  Other.................    9,138    4,329    90.0     4,809    2,198   84.2     2,611
                         --------  -------          --------  -------         --------
                           37,355   15,405    70.2    21,950   11,962  119.8     9,988
Intercompany
 eliminations...........   (2,519)     260            (2,779)  (2,343)            (436)
                         --------  -------          --------  -------         --------
    Total............... $174,438  $21,319    13.9% $153,119  $14,001   10.1% $139,118
                         ========  =======  ======  ========  =======  =====  ========
</TABLE>
 
  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.
 
                                       19
<PAGE>
 
                          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,
 
                                       20
<PAGE>
 
                          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
 
<TABLE>
<CAPTION>
                                                 (DOLLARS IN THOUSANDS)
                                                                                          TAXABLE
                           U.S.     FEDERAL     STATE &    OTHER     EQUITY              EQUIVALENT
                         TREASURY   AGENCIES   MUNICIPAL   BONDS   SECURITIES   TOTAL      YIELD
                         --------  ----------  ---------  -------  ---------- ---------- ----------
<S>                      <C>       <C>         <C>        <C>      <C>        <C>        <C>
DECEMBER 31, 1996
MATURITY-AMORTIZED COST
 BASIS
  Within one year....... $ 25,753  $  140,150  $ 17,992   $10,645   $         $  194,540    6.83%
  One to five years.....   11,261     568,839    89,079     1,260                670,439    6.52%
  Five to ten years.....               53,152   114,491       610                168,253    7.21%
  Over ten years........                        123,458                          123,458    8.60%
  Mortgage-backed
   securities...........              955,421                                    955,421    6.80%
  No set maturity.......                                             55,669       55,669    7.72%
                         --------  ----------  --------   -------   -------   ----------
Amortized cost.......... $ 37,014  $1,717,562  $345,020   $12,515   $55,669   $2,167,780
                         ========  ==========  ========   =======   =======   ==========
Fair value.............. $ 37,014  $1,708,421  $355,529   $12,596   $56,647   $2,170,207
                         ========  ==========  ========   =======   =======   ==========
Taxable equivalent
 yield..................     5.84%       6.57%     8.35%     7.04%
Average maturity........                                                       6.6 years
DECEMBER 31, 1995
Amortized cost.......... $ 99,492  $1,409,873  $287,697   $23,536   $19,272   $1,839,870
DECEMBER 31, 1994
Amortized cost.......... $251,793  $1,133,247  $369,061   $79,932   $12,903   $1,846,936
</TABLE>
 
  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.
 
                                       21
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
TABLE 6--LOANS OUTSTANDING, NET OF UNEARNED INCOME
 
<TABLE>
<CAPTION>
                                             (IN THOUSANDS)
                                              DECEMBER 31,
                         ----------------------------------------------------------
                            1996        1995        1994        1993        1992
                         ----------  ----------  ----------  ----------  ----------
<S>                      <C>         <C>         <C>         <C>         <C>
Commercial, financial
 and agricultural:
  Commercial secured by
   real estate.......... $  732,953  $  640,670  $  466,657  $  433,055  $  435,899
  Agricultural..........     36,290      36,415      34,960      40,748      38,306
  Other.................    795,202     719,137     680,113     665,514     641,161
Real estate,
 construction...........    114,234      97,444     183,673     184,523     138,023
Real estate,
 residential............    391,105     446,059     578,122     461,030     477,833
Consumer:
  Home equity...........    451,742     385,194     335,323     343,175     308,563
  Installment and credit
   card.................    481,073     507,425     483,889     431,420     360,893
Lease financing.........    198,850     150,943     101,919      30,488      15,409
Unearned income.........     (1,415)     (1,949)     (3,523)     (3,868)     (4,315)
                         ----------  ----------  ----------  ----------  ----------
    Total............... $3,200,034  $2,981,338  $2,861,133  $2,586,085  $2,411,772
                         ==========  ==========  ==========  ==========  ==========
</TABLE>
 
  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)
 
<TABLE>
<CAPTION>
                                                   (IN THOUSANDS)
                                                 DECEMBER 31, 1996
                                     ------------------------------------------
                                     ONE YEAR ONE THROUGH    OVER
                                     OR LESS  FIVE YEARS  FIVE YEARS   TOTAL
                                     -------- ----------- ---------- ----------
<S>                                  <C>      <C>         <C>        <C>
Commercial, financial and
 agricultural......................  $484,321  $359,791    $720,333  $1,564,445
Real estate, construction..........    36,223     8,484      69,527     114,234
                                     --------  --------    --------  ----------
  Total............................  $520,544  $368,275    $789,860  $1,678,679
                                     ========  ========    ========  ==========
Loans with predetermined interest
 rate..............................  $101,118  $182,888     $25,027    $309,033
Loans with variable interest rate..   419,426   185,387     764,833   1,369,646
                                     --------  --------    --------  ----------
  Total............................  $520,544  $368,275    $789,860  $1,678,679
                                     ========  ========    ========  ==========
</TABLE>
--------
(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
 
                                       22
<PAGE>
 
                          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
 
<TABLE>
<CAPTION>
                                           (DOLLARS IN THOUSANDS)
                                                DECEMBER 31,
                                   -------------------------------------------
                                    1996     1995     1994     1993     1992
                                   -------  -------  -------  -------  -------
<S>                                <C>      <C>      <C>      <C>      <C>
Non-accrual loans................  $11,621  $ 7,031  $ 9,569  $17,450  $18,945
Loans past due 90 or more days as
 to principal or interest
 payments........................    5,469    5,805    5,149    2,823    5,409
Restructured loans...............    4,533    5,072    5,599    7,352    6,327
                                   -------  -------  -------  -------  -------
    Total non-performing loans...   21,623   17,908   20,317   27,625   30,681
Other real estate owned..........    3,035    2,709    3,056    2,981    3,981
                                   -------  -------  -------  -------  -------
    Total non-performing assets..  $24,658  $20,617  $23,373  $30,606  $34,662
                                   =======  =======  =======  =======  =======
Ratios:
  Non-performing loans to total
   loans.........................      .68%     .60%     .71%    1.07%    1.27%
  Non-performing assets to total
   loans and other real estate
   owned.........................      .77      .69      .82     1.18     1.43
</TABLE>
 
  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
 
                                       23
<PAGE>
 
                          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)
 
<TABLE>
<CAPTION>
                                                     (DOLLARS IN THOUSANDS)
                                                          DECEMBER 31,
                         -------------------------------------------------------------------------------
                              1996            1995            1994            1993            1992
                         --------------- --------------- --------------- --------------- ---------------
                                 % GROSS         % GROSS         % GROSS         % GROSS         % GROSS
                         AMOUNT   LOANS  AMOUNT   LOANS  AMOUNT   LOANS  AMOUNT   LOANS  AMOUNT   LOANS
                         ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S>                      <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Commercial, financial
 and agricultural....... $20,125   48.9% $24,016   46.8% $27,469   41.3% $28,147   44.0% $18,596   46.2%
Real estate,
 construction...........     477    3.6    1,412    3.3    1,973    6.4    1,383    7.1    1,322    5.7
Real estate,
 residential (2)........     992   26.3    4,607   27.9    3,711   31.9    1,286   31.1      956   32.5
Consumer................   3,976   15.0    4,123   17.0    4,800   16.9    4,314   16.7    2,595   14.9
Lease financing.........     514    6.2      859    5.0      581    3.5      457    1.1      154     .7
Unallocated.............  16,801           6,720           1,682           3,595          12,604
                         -------  -----  -------  -----  -------  -----  -------  -----  -------  -----
  Total................. $42,885  100.0% $41,737  100.0% $40,216  100.0% $39,182  100.0% $36,227  100.0%
                         =======  =====  =======  =====  =======  =====  =======  =====  =======  =====
</TABLE>
--------
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.
 
                                       24
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
TABLE 10--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
 
<TABLE>
<CAPTION>
                                          (DOLLARS IN THOUSANDS)
                                         YEARS ENDED DECEMBER 31,
                          ----------------------------------------------------------
                             1996        1995        1994        1993        1992
                          ----------  ----------  ----------  ----------  ----------
<S>                       <C>         <C>         <C>         <C>         <C>
Balance, beginning of
 period.................  $   41,737  $   40,216  $   39,182  $   36,227  $   31,959
Provision charged to
 operating expenses.....       6,000       5,608       7,494      10,141      11,627
Allowance of subsidiary
 sold...................                                (101)
Loans charged off:
  Commercial, financial
   and agricultural.....       3,820       4,737       5,971       7,406       6,217
  Real estate,
   residential (1)......       1,262         422         933         480         464
  Consumer..............       3,829       2,696       2,428       2,547       3,445
  Lease financing.......         574         321          68          88         129
                          ----------  ----------  ----------  ----------  ----------
    Total loans charged
     off................       9,485       8,176       9,400      10,521      10,255
                          ----------  ----------  ----------  ----------  ----------
Recoveries:
  Commercial, financial
   and agricultural.....       3,133       2,357       1,368       2,132       1,330
  Real estate,
   residential (1)......         426         444         533          26         245
  Consumer..............         954       1,228       1,121       1,152       1,303
  Lease financing.......         120          60          19          25          18
                          ----------  ----------  ----------  ----------  ----------
    Total recoveries....       4,633       4,089       3,041       3,335       2,896
                          ----------  ----------  ----------  ----------  ----------
Net charge-offs.........       4,852       4,087       6,359       7,186       7,359
                          ----------  ----------  ----------  ----------  ----------
Balance, end of period..  $   42,885  $   41,737  $   40,216  $   39,182  $   36,227
                          ==========  ==========  ==========  ==========  ==========
Total loans:
  Average...............  $3,078,623  $2,895,326  $2,650,550  $2,459,537  $2,399,974
  Year-end..............   3,200,034   2,981,338   2,861,133   2,586,085   2,411,772
Ratios:
 Net charge-offs to:
  Average loans.........        0.16%       0.14%       0.24%       0.29%       0.31%
  Loans at year-end.....        0.15        0.14        0.22        0.28        0.31
  Allowance for loan
   losses...............       11.31        9.79       15.81       18.34       20.31
  Provision for loan
   losses...............       80.87       72.88       84.85       70.86       63.29
 Allowance for loan
  losses to:
  Average loans.........        1.39        1.44        1.52        1.59        1.51
  Loans at year-end.....        1.34        1.40        1.41        1.52        1.50
  Non-performing loans..      198.33      233.06      197.94      141.84      118.08
</TABLE>
--------
(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
 
                                       25
<PAGE>
 
                          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
 
                                       26
<PAGE>
 
                          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>
<CAPTION>
                                                        (IN THOUSANDS)
                                                         DECEMBER 31,
                                               --------------------------------
                                                  1996       1995       1994
                                               ---------- ---------- ----------
<S>                                            <C>        <C>        <C>
Non-interest bearing deposits................. $  521,387 $  518,004 $  464,919
Interest bearing demand deposits..............    504,506    492,079    527,892
Savings deposits..............................    399,008    412,185    481,982
Money market deposit accounts.................    378,286    475,815    529,852
Time deposits.................................  1,656,098  1,592,379  1,239,462
Time deposits of $100,000 or more.............    569,285    459,074    270,777
                                               ---------- ---------- ----------
  Total....................................... $4,028,570 $3,949,536 $3,514,884
                                               ========== ========== ==========
</TABLE>
 
TABLE 12--MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
 
<TABLE>
<CAPTION>
                                                           (IN THOUSANDS)
                                                            DECEMBER 31,
                                                     --------------------------
                                                       1996     1995     1994
                                                     -------- -------- --------
<S>                                                  <C>      <C>      <C>
Three months or less................................ $210,160 $197,691 $162,820
Over three months through six months................   42,147   33,117   26,882
Over six months through twelve months...............   64,169   63,866   27,526
Over twelve months..................................  252,809  164,400   53,549
                                                     -------- -------- --------
  Total............................................. $569,285 $459,074 $270,777
                                                     ======== ======== ========
</TABLE>
 
 
                                       27
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
TABLE 13--SHORT-TERM BORROWINGS
 
<TABLE>
<CAPTION>
                                                  (DOLLARS IN THOUSANDS)
                                                  1996       1995      1994
                                               ----------  --------  --------
<S>                                            <C>         <C>       <C>
Overnight federal funds purchased............. $  522,650  $266,370  $438,490
Term federal funds purchased..................     75,000             260,000
Eurodollars purchased.........................                1,672
Federal Home Loan Bank borrowings.............              149,000
Securities sold under agreements to repur-
 chase........................................    447,581   233,830   196,021
U.S. Treasury tax and loan notes..............     66,399    27,289    46,266
                                               ----------  --------  --------
  Total short-term borrowings................. $1,111,630  $678,161  $940,777
                                               ==========  ========  ========
Average interest rate at year-end.............       5.86%     5.33%     5.88%
Maximum amount outstanding at any month-end... $1,219,758  $958,804  $940,777
Average amount outstanding.................... $  998,730  $646,537  $778,906
Weighted average interest rate................       5.20%     5.55%     4.12%
</TABLE>
 
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".
 
 
                                       28
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
TABLE 14--CAPITAL RATIOS
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                            -------------------
                                                            1996   1995   1994
                                                            -----  -----  -----
<S>                                                         <C>    <C>    <C>
Risk-based capital
  Tier 1 ratio............................................. 13.25% 13.99% 13.82%
  Total capital ratio (tier 1 and tier 2).................. 14.03  14.87  14.92
Leverage ratio.............................................  9.47  10.00   9.65
</TABLE>
 
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.
 
                                       29

<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
TABLE 15--INTEREST SENSITIVITY ANALYSIS
 
<TABLE>
<CAPTION>
                                          (DOLLARS IN THOUSANDS)
                                            DECEMBER 31, 1996
                          --------------------------------------------------------------
                                       INTEREST SENSITIVITY PERIOD
                          --------------------------------------------------------------
                            MONTH       QUARTER     SIX MONTHS     ANNUAL      5 YEARS
                          ----------   ----------   ----------   ----------   ----------
<S>                       <C>          <C>          <C>          <C>          <C>
Earning assets:
  Short-term invest-
   ments................  $   17,379   $   17,379   $   17,379   $   17,379   $   17,379
  Investment securities
   available-for-sale...     532,316      551,974      636,241      820,999    1,846,389
  Assets held for sale..     207,798      207,798      207,798      207,798      207,798
  Loans.................   1,201,838    1,421,149    1,669,075    2,102,192    3,073,525
                          ----------   ----------   ----------   ----------   ----------
    Total...............  $1,959,331   $2,198,300   $2,530,493   $3,148,368   $5,145,091
                          ==========   ==========   ==========   ==========   ==========
Interest bearing liabil-
 ities:
  Deposits..............  $  997,029   $1,243,748   $1,510,702   $1,966,199   $2,581,528
  Short-term
   borrowings...........   1,111,630    1,111,630    1,111,630    1,111,630    1,111,630
  Long-term debt........           6      150,017      150,034      150,068      154,664
                          ----------   ----------   ----------   ----------   ----------
    Total...............  $2,108,665   $2,505,395   $2,772,366   $3,227,897   $3,847,822
                          ==========   ==========   ==========   ==========   ==========
  Interest sensitivity
   gap..................  $ (149,334)  $ (307,095)  $ (241,873)  $  (79,529)  $1,297,269
  Interest sensitive as-
   sets to interest sen-
   sitive liabilities
   ratio................         .93          .88          .91          .98         1.34
  Interest sensitivity
   gap as a percent of
   total assets.........       (2.51)%      (5.16)%      (4.07)%      (1.34)%      21.81%
Regulatory presentation:
  Interest sensitivity
   gap..................  $ (602,912)  $ (760,674)  $ (695,453)  $ (533,111)  $  843,683
  Interest sensitive as-
   sets to interest sen-
   sitive liabilities
   ratio................         .76          .74          .78          .86         1.20
  Interest sensitivity
   gap as a percent of
   total assets.........      (10.14)%     (12.79)%     (11.69)%      (8.96)%      14.19%
</TABLE>
 
 
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.
 
 

                                       30
<PAGE>
 
                          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.
 
                                       31

<PAGE>
 
                          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.
 
                                       32
<PAGE>
 
                          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.
 
                                       33
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
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:
 
<TABLE>
<S>                                                                          <C>
Dauphin Deposit Corporation and Subsidiaries
  Consolidated Balance Sheets...............................................  35
  Consolidated Statements of Income.........................................  36
  Consolidated Statements of Stockholders' Equity...........................  37
  Consolidated Statements of Cash Flows.....................................  38
  Notes to Consolidated Financial Statements................................  39
Independent Auditors' Report................................................  68
</TABLE>
 
                                       34
<PAGE>
 
                  Dauphin Deposit Corporation and Subsidiaries
                          CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995
 
<TABLE>
<CAPTION>
                                                      (DOLLARS IN THOUSANDS)
                                                         1996         1995
                                                      -----------  -----------
<S>                                                   <C>          <C>
ASSETS
Cash and due from banks.............................. $   176,024  $   218,785
                                                      -----------  -----------
Short-term investments
  Interest bearing deposits..........................       1,494        8,523
  Federal funds sold and securities purchased under
   agreements to resell..............................      15,200        3,050
  Other short-term investments.......................         685
                                                      -----------  -----------
    Total short-term investments.....................      17,379       11,573
                                                      -----------  -----------
Investment securities available-for-sale, at fair
 value...............................................   2,170,207    1,860,869
Assets held for sale, primarily mortgage loans.......     207,798       87,782
Loans (net of unearned income).......................   3,200,034    2,981,338
Allowance for loan losses............................     (42,885)     (41,737)
                                                      -----------  -----------
    Total net loans..................................   3,157,149    2,939,601
                                                      -----------  -----------
Premises and equipment...............................      73,826       71,562
Other assets.........................................     145,303      107,177
                                                      -----------  -----------
    Total assets..................................... $ 5,947,686  $ 5,297,349
                                                      ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
  Non-interest bearing............................... $   521,387  $   518,004
  Interest bearing...................................   3,507,183    3,431,532
                                                      -----------  -----------
    Total deposits...................................   4,028,570    3,949,536
Short-term borrowings................................   1,111,630      678,161
Long-term debt.......................................     154,771       40,599
Accrued expenses and taxes...........................      82,270       82,450
                                                      -----------  -----------
    Total liabilities................................   5,377,241    4,750,746
                                                      -----------  -----------
Stockholders' equity
  Preferred stock, $25 par value; 10,000,000 shares
  authorized but unissued
   Common stock, $5 par value; 200,000,000 shares
   authorized, 32,641,614 issued of which 1,974,885
   and 2,013,771 shares are held as treasury stock,
   respectively......................................     163,208      163,208
  Additional paid-in capital.........................      11,084       11,103
  Retained earnings..................................     444,316      408,274
  Unrealized gains on securities available-for-sale,
   net of deferred taxes.............................       1,577       13,650
                                                      -----------  -----------
                                                          620,185      596,235
  Less: Treasury stock--at cost......................     (49,740)     (49,632)
                                                      -----------  -----------
    Total stockholders' equity.......................     570,445      546,603
                                                      -----------  -----------
    Total liabilities and stockholders' equity....... $ 5,947,686  $ 5,297,349
                                                      ===========  ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       35
<PAGE>
 
                  Dauphin Deposit Corporation and Subsidiaries
                       CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 1996, 1995 and 1994
 
<TABLE>
<CAPTION>
                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                               1996               1995               1994
                          ---------------    ---------------    ---------------
<S>                       <C>                <C>                <C>
Interest income
  Interest and fees on
   loans and leases......        $252,975           $245,440           $207,648
  Interest and dividends
   on investment
   securities
    Taxable..............         114,837             93,498             96,797
    Exempt from federal
     income taxes........          17,786             17,997             23,602
  Interest on deposits...             211                365                337
  Interest on assets held
   for sale..............          12,050              5,589              2,120
  Interest on federal
   funds sold and other
   short-term
   investments...........             745                755                603
                          ---------------    ---------------    ---------------
    Total interest
     income..............         398,604            363,644            331,107
                          ---------------    ---------------    ---------------
Interest expense
  Interest on deposits
    Savings deposits.....          28,193             32,218             36,675
    Time deposits........          96,481             87,949             62,072
    Time deposits in
     denominations of
     $100,000 or more....          36,240             27,335             15,140
                          ---------------    ---------------    ---------------
                                  160,914            147,502            113,887
  Interest on short-term
   borrowings............          51,937             35,880             32,056
  Interest on long-term
   debt..................           3,269              4,549              6,698
                          ---------------    ---------------    ---------------
    Total interest
     expense.............         216,120            187,931            152,641
                          ---------------    ---------------    ---------------
    Net interest income..         182,484            175,713            178,466
Provision for loan
 losses..................           6,000              5,608              7,494
                          ---------------    ---------------    ---------------
    Net interest income
     after provision for
     loan losses.........         176,484            170,105            170,972
                          ---------------    ---------------    ---------------
Non-interest income
  Fiduciary activities...          19,426             16,807             16,363
  Service charges on
   deposit accounts......          12,819             11,019             11,598
  Other service charges
   and fees..............          14,472             12,554             11,272
  Broker/dealer
   commissions and fees..           9,098              6,034              7,783
  Mortgage banking.......          32,394             18,730              7,462
  Securities gains, net..           1,634              2,261              3,304
  Other..................           4,060              4,384              3,165
                          ---------------    ---------------    ---------------
    Total non-interest
     income..............          93,903             71,789             60,947
                          ---------------    ---------------    ---------------
Non-interest expense
  Salaries and employee
   benefits..............          95,680             81,268             72,556
  Net occupancy expense..          10,793              9,396              8,990
  Furniture and equipment
   expense...............          13,878             11,075              9,567
  Deposit insurance......               2              4,095              7,909
  Other..................          54,085             47,285             40,096
                          ---------------    ---------------    ---------------
    Total non-interest
     expense.............         174,438            153,119            139,118
                          ---------------    ---------------    ---------------
Income before income
 taxes...................          95,949             88,775             92,801
Provision for income
 taxes...................          25,177             23,210             22,762
                          ---------------    ---------------    ---------------
Net income...............        $ 70,772           $ 65,565           $ 70,039
                          ===============    ===============    ===============
Net income per share.....        $   2.30           $   2.12           $   2.18
Cash dividends declared
 per share...............       $   1.13 1/2       $   1.01 1/2        $    .94
Weighted average number
 of shares outstanding...      30,820,019         30,966,258         32,169,734
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       36
<PAGE>
 
                  Dauphin Deposit Corporation and Subsidiaries
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1996, 1995 and 1994
 
<TABLE>
<CAPTION>
                                                             (DOLLARS IN THOUSANDS)
                                                                                           NET UNREALIZED
                             COMMON STOCK     ADDITIONAL             TREASURY STOCK        GAIN (LOSS) ON       TOTAL
                          -------------------  PAID-IN   RETAINED  --------------------      SECURITIES     STOCKHOLDERS'
                            SHARES    AMOUNT   CAPITAL   EARNINGS    SHARES     AMOUNT   AVAILABLE-FOR-SALE    EQUITY
                          ---------- -------- ---------- --------  ----------  --------  ------------------ -------------
<S>                       <C>        <C>      <C>        <C>       <C>         <C>       <C>                <C>
BALANCE, DECEMBER 31,
 1993...................  32,641,614 $163,208  $11,213   $333,774    (134,200)  ($2,120)      $               $506,075
Cumulative effect of
 adoption of SFAS 115,
 net of taxes...........                                                                        42,080          42,080
Net income..............                                   70,039                                               70,039
Cash dividends
 declared...............                                  (29,892)                                             (29,892)
Acquisition of treasury
 stock..................                                           (1,744,500)  (42,413)                       (42,413)
Sale of treasury stock
 to Employee Stock
 Purchase Plan..........                           419                 70,340     1,068                          1,487
Sale of treasury stock
 under the Stock Option
 Plan of 1986...........                           (21)                24,409       317                            296
Sale of treasury stock
 under the Dividend
 Reinvestment and Stock
 Purchase Plan..........                           (26)                60,606     1,539                          1,513
Debentures converted to
 common stock...........                            37                 26,898       395                            432
Change in net unrealized
 gain (loss) on
 securities available-
 for-sale, net of
 taxes..................                                                                       (83,116)        (83,116)
Tax benefit of stock
 option transactions....                           148                                                             148
                          ---------- --------  -------   --------  ----------  --------       --------        --------
BALANCE, DECEMBER 31,
 1994...................  32,641,614  163,208   11,770    373,921  (1,696,447)  (41,214)       (41,036)        466,649
Net income..............                                   65,565                                               65,565
Cash dividends
 declared...............                                  (31,212)                                             (31,212)
Acquisition of treasury
 stock..................                                             (630,000)  (16,063)                       (16,063)
Sale of treasury stock
 to Employee Stock
 Purchase Plan..........                          (239)                68,429     1,664                          1,425
Sale of treasury stock
 under the Stock Option
 Plan of 1986...........                          (998)               101,742     2,476                          1,478
Sale of treasury stock
 under the Dividend
 Reinvestment and Stock
 Purchase Plan..........                           115                126,446     3,110                          3,225
Debentures converted to
 common stock...........                          (137)                16,059       395                            258
Change in net unrealized
 gain (loss) on
 securities available-
 for-sale, net of
 taxes..................                                                                        54,686          54,686
Tax benefit of stock
 option transactions....                           386                                                             386
Impact of Performance
 Share Agreements.......                           206                                                             206
                          ---------- --------  -------   --------  ----------  --------       --------        --------
BALANCE, DECEMBER 31,
 1995...................  32,641,614  163,208   11,103    408,274  (2,013,771)  (49,632)        13,650         546,603
Net income..............                                   70,772                                               70,772
Cash dividends
 declared...............                                  (34,730)                                             (34,730)
Acquisition of treasury
 stock..................                                             (297,000)   (8,455)                        (8,455)
Sale of treasury stock
 to Employee Stock
 Purchase Plan..........                          (348)                85,920     2,137                          1,789
Sale of treasury stock
 under the Stock Option
 Plan of 1986 and the
 Stock Incentive Plan of
 1995...................                          (766)                99,649     2,442                          1,676
Sale of treasury stock
 under the Dividend
 Reinvestment and Stock
 Purchase Plan..........                           494                117,009     2,930                          3,424
Debentures converted to
 common stock...........                          (303)                33,308       838                            535
Change in net unrealized
 gain (loss) on
 securities available-
 for-sale, net of
 taxes..................                                                                       (12,073)        (12,073)
Tax benefit of stock
 option transactions....                           437                                                             437
Impact of Performance
 Share Agreements.......                           467                                                             467
                          ---------- --------  -------   --------  ----------  --------       --------        --------
BALANCE, DECEMBER 31,
 1996...................  32,641,614 $163,208  $11,084   $444,316  (1,974,885) $(49,740)      $  1,577        $570,445
                          ========== ========  =======   ========  ==========  ========       ========        ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       37
<PAGE>
 
                  Dauphin Deposit Corporation and Subsidiaries
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1996, 1995 and 1994
 
<TABLE>
<CAPTION>
                                                      (IN THOUSANDS)
                                                 1996        1995       1994
                                              -----------  ---------  ---------
<S>                                           <C>          <C>        <C>
Operating activities
  Net income................................  $    70,772  $  65,565  $  70,039
  Adjustments:
    Provision for loan losses...............        6,000      5,608      7,494
    Provision for depreciation, amortization
     and accretion..........................        6,633     11,316     11,867
    Provision for deferred income taxes.....        3,165      4,133      3,994
    Securities gains, net...................       (1,634)    (2,261)    (3,304)
    (Increase) decrease in interest
     receivable.............................       (4,445)     1,325     (2,222)
    Increase (decrease) in accrued expenses
     and taxes..............................          880     19,013     (3,064)
    Gain on sale of loans held for sale.....       (2,427)    (5,961)    (1,473)
    Net increase in assets held for sale....     (117,589)   (35,599)      (294)
    Other, net..............................      (46,803)   (13,918)   (14,339)
                                              -----------  ---------  ---------
      Net cash provided (used) by operating
       activities...........................      (85,448)    49,221     68,698
                                              -----------  ---------  ---------
Investing activities
  Proceeds from sales of investment
   securities available-for-sale............       96,879    252,613    201,395
  Proceeds from maturities of investment
   securities available-for-sale............      657,471    356,977    480,030
  Purchases of investment securities
   available-for-sale.......................   (1,043,171)  (526,811)  (481,357)
  Net increase in loans.....................     (236,734)  (231,067)  (330,366)
  Sale of residential mortgage and other
   consumer loans...........................                  39,507     52,544
  Net purchases of premises and equipment...      (11,546)   (12,139)    (8,268)
  Net proceeds from sale of subsidiary,
   Farmers Savings Bank, FSB................                                797
  Purchase of Eastern Mortgage Services,
   Inc......................................                            (21,038)
                                              -----------  ---------  ---------
      Net cash used for investing
       activities...........................     (537,101)  (120,920)  (106,263)
                                              -----------  ---------  ---------
Financing activities
  Net increase (decrease) in deposit
   accounts.................................       79,034    434,652    (60,410)
  Net increase (decrease) in short-term
   borrowings...............................      433,469   (262,616)   224,869
  Issuance of long-term debt................      150,000
  Repayments of long-term debt..............      (35,293)   (51,097)      (122)
  Issuance of treasury stock................        6,837      6,083      3,281
  Acquisition of treasury stock.............       (8,455)   (16,063)   (42,413)
  Cash dividends paid.......................      (33,654)   (30,836)   (29,024)
                                              -----------  ---------  ---------
      Net cash provided by financing
       activities...........................      591,938     80,123     96,181
                                              -----------  ---------  ---------
      Increase (decrease) in cash and cash
       equivalents..........................      (30,611)     8,424     58,616
Cash and cash equivalents at beginning of
 period.....................................      219,335    210,911    152,295
                                              -----------  ---------  ---------
Cash and cash equivalents at end of period..  $   188,724  $ 219,335  $ 210,911
                                              ===========  =========  =========
Cash........................................  $   176,024  $ 218,785  $ 202,911
Overnight federal funds sold................       12,700        550
                                              -----------  ---------  ---------
Total cash and cash equivalents at end of
 period.....................................  $   188,724  $ 219,335  $ 202,911
                                              ===========  =========  =========
Total interest paid.........................  $   214,016  $ 182,478  $ 153,527
Total income taxes paid.....................       17,951     12,715     20,495
Schedule of non-cash investing and financing
 activities:
  Loans charged off.........................        9,485      8,176      9,400
  Net loan transfers to other real estate
   owned....................................        3,073      2,508      4,563
  Conversion of convertible subordinated
   debentures...............................          535        258        432
  Securitization of mortgage loans..........       23,865     77,085
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       38
<PAGE>
 
                  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
 
                                       39
<PAGE>
 
                  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.
 
                                       40
<PAGE>
 
                  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.
 
                                       41
<PAGE>
 
                  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.
 
                                       42
<PAGE>
 
                  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.
 
                                       43

<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                  (IN THOUSANDS)
                                                 DECEMBER 31, 1996
                                    -------------------------------------------
                                                 GROSS      GROSS
                                    AMORTIZED  UNREALIZED UNREALIZED    FAIR
                                       COST      GAINS      LOSSES     VALUE
                                    ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
U.S. Treasury securities and other
 U.S. government agencies and
 corporations.....................  $  799,155  $ 1,154    $ (7,151) $  793,158
Obligations of states and
 political subdivisions...........     345,020   12,026      (1,517)    355,529
Debt securities issued by foreign
 governments......................       1,000                            1,000
Corporate securities..............      11,515       82          (1)     11,596
Mortgage-backed securities........     955,421    6,556      (9,700)    952,277
                                    ----------  -------    --------  ----------
  Total debt securities...........   2,112,111   19,818     (18,369)  2,113,560
Equity securities.................      55,669      978                  56,647
                                    ----------  -------    --------  ----------
  Total investment securities
   available-for-sale.............  $2,167,780  $20,796    $(18,369) $2,170,207
                                    ==========  =======    ========  ==========
</TABLE>
 
                                       44
<PAGE>
 
                  DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                  (IN THOUSANDS)
                                                 DECEMBER 31, 1995
                                    -------------------------------------------
                                                 GROSS      GROSS
                                    AMORTIZED  UNREALIZED UNREALIZED    FAIR
                                       COST      GAINS      LOSSES     VALUE
                                    ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
U.S. Treasury securities and other
 U.S. government agencies and
 corporations.....................  $  804,086  $ 6,413    $  (136)  $  810,363
Obligations of states and
 political subdivisions...........     287,697   15,639       (634)     302,702
Debt securities issued by foreign
 governments......................         800                              800
Corporate securities..............      22,736      351                  23,087
Mortgage-backed securities........     705,279    7,215     (7,882)     704,612
                                    ----------  -------    -------   ----------
  Total debt securities...........   1,820,598   29,618     (8,652)   1,841,564
Equity securities.................      19,272       33                  19,305
                                    ----------  -------    -------   ----------
  Total investment securities
   available-for-sale.............  $1,839,870  $29,651    $(8,652)  $1,860,869
                                    ==========  =======    =======   ==========
</TABLE>
 
  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.
 
<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                            DECEMBER 31, 1996
                                                          ---------------------
                                                          AMORTIZED     FAIR
                                                             COST      VALUE
                                                          ---------- ----------
     <S>                                                  <C>        <C>
     Due in one year or less............................. $  194,540 $  195,716
     Due after one year through five years...............    670,439    667,467
     Due after five years through ten years..............    168,253    171,740
     Due after ten years.................................    123,458    126,360
                                                          ---------- ----------
                                                           1,156,690  1,161,283
     Mortgage-backed securities..........................    955,421    952,277
                                                          ---------- ----------
       Total debt securities............................. $2,112,111 $2,113,560
                                                          ========== ==========
</TABLE>
 
  Gains and losses from sales of investment securities available-for-sale are
as follows:
 
<TABLE>
<CAPTION>
                                                           (IN THOUSANDS)
                                                         1996    1995    1994
                                                        ------  ------  ------
   <S>                                                  <C>     <C>     <C>
   Debt securities
     Gross gains....................................... $1,670  $3,496  $3,366
     Gross losses......................................    (43) (1,235) (1,007)
                                                        ------  ------  ------
       Total debt securities...........................  1,627   2,261   2,359
   Equity securities, net..............................      7             945
                                                        ------  ------  ------
       Total securities gains.......................... $1,634  $2,261  $3,304
                                                        ======  ======  ======
</TABLE>
 
 
                                       45
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                        1996     1995     1994
                                                       ------- -------- --------
   <S>                                                 <C>     <C>      <C>
   Debt securities.................................... $96,481 $252,613 $199,083
   Equity securities..................................     398             2,312
                                                       ------- -------- --------
     Total proceeds................................... $96,879 $252,613 $201,395
                                                       ======= ======== ========
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                            1996        1995
                                                         ----------  ----------
     <S>                                                 <C>         <C>
     Commercial, financial and agricultural:
       Commercial secured by real estate................ $  732,953  $  640,670
       Agricultural.....................................     36,290      36,415
       Other............................................    795,202     719,137
     Real estate, construction..........................    114,234      97,444
     Real estate, residential...........................    391,105     446,059
     Consumer:
       Home equity......................................    451,742     385,194
       Installment and credit card......................    481,073     507,425
     Lease financing....................................    198,850     150,943
     Unearned income....................................     (1,415)     (1,949)
                                                         ----------  ----------
         Total loans.................................... $3,200,034  $2,981,338
                                                         ==========  ==========
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                               (IN THOUSANDS)
                                                              1996 1995  1994
                                                              ---- ---- ------
     <S>                                                      <C>  <C>  <C>
      Interest income which would have been recorded under
       original terms........................................ $759 $743 $1,187
      Interest income recorded during the period.............  326  395    477
                                                              ---- ---- ------
      Net impact on interest income.......................... $433 $348 $  710
                                                              ==== ==== ======
</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,
 
                                       46
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
     <S>                                                          <C>
     Balance--January 1, 1996....................................   $ 119,393
     New loans...................................................     219,352
     Repayments..................................................    (217,461)
                                                                    ---------
     Balance--December 31, 1996..................................   $ 121,284
                                                                    =========
</TABLE>
 
6--ALLOWANCE FOR LOAN LOSSES
 
  An analysis of the changes in the allowance for loan losses is as follows:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                         1996    1995    1994
                                                        ------- ------- -------
     <S>                                                <C>     <C>     <C>
     Balance, beginning of year........................ $41,737 $40,216 $39,182
       Allowance of subsidiary sold....................                    (101)
       Provision charged to operations.................   6,000   5,608   7,494
       Recoveries on loans charged off.................   4,633   4,089   3,041
                                                        ------- ------- -------
                                                         52,370  49,913  49,616
       Loans charged off...............................   9,485   8,176   9,400
                                                        ------- ------- -------
     Balance, end of year.............................. $42,885 $41,737 $40,216
                                                        ======= ======= =======
</TABLE>
 
7--PREMISES AND EQUIPMENT
 
  A summary of premises and equipment at December 31, 1996 and 1995 is as
follows:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                               ESTIMATED   ------------------
                                              USEFUL LIFE    1996      1995
                                             ------------- --------  --------
     <S>                                     <C>           <C>       <C>
     Land...................................               $ 10,200  $ 10,352
     Premises............................... 5 to 40 years   77,171    75,659
     Leasehold improvements................. 2 to 40 years    4,080     2,476
     Equipment.............................. 3 to 10 years   55,607    55,753
                                                           --------  --------
                                                            147,058   144,240
     Accumulated depreciation and
      amortization..........................                (73,232)  (72,678)
                                                           --------  --------
         Total..............................               $ 73,826  $ 71,562
                                                           ========  ========
</TABLE>
 
  Depreciation and amortization amounted to $9,205,000 for 1996, $7,665,000 for
1995 and $6,834,000 for 1994.
 
                                       47

<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                      (IN THOUSANDS)
                                                1996       1995       1994
                                             ---------- ---------- ----------
     <S>                                     <C>        <C>        <C>
     Total loans serviced for others at
      year-end.............................. $1,400,722 $1,283,435 $1,015,745
                                             ========== ========== ==========
     Gain on sale of loans.................. $    2,116 $    1,946 $    1,757
     Other origination income...............      7,029      5,989      2,841
     Mortgage servicing fees, net...........     21,993      9,749      1,241
     Gain on sale of servicing..............      1,256      1,046      1,623
                                             ---------- ---------- ----------
       Total mortgage banking income........ $   32,394 $   18,730 $    7,462
                                             ========== ========== ==========
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                          (IN THOUSANDS)
                                                    EXCESS  PURCHASED ORIGINATED
                                                    ------  --------- ----------
     <S>                                            <C>     <C>       <C>
     Balance--January 1, 1994...................... $1,607   $         $
     Additions.....................................  1,434    8,547
     Amortization..................................   (588)    (503)
                                                    ------   ------    -------
     Balance--December 31, 1994....................  2,453    8,044
     Additions.....................................    546               7,169
     Amortization..................................   (911)  (1,641)      (495)
                                                    ------   ------    -------
     Balance--December 31, 1995....................  2,088    6,403      6,674
     Additions.....................................             435     18,233
     Sales.........................................          (3,822)   (12,169)
     Amortization..................................   (599)    (630)      (899)
                                                    ------   ------    -------
     Balance--December 31, 1996.................... $1,489   $2,386    $11,839
                                                    ======   ======    =======
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                             1996       1995
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Non-interest bearing deposits......................... $  521,387 $  518,004
   Interest bearing demand deposits......................    504,506    492,079
   Savings deposits......................................    399,008    412,185
   Money market deposit accounts.........................    378,286    475,815
   Time deposits.........................................  1,656,098  1,592,379
   Time deposits of $100,000 or more.....................    569,285    459,074
                                                          ---------- ----------
     Total............................................... $4,028,570 $3,949,536
                                                          ========== ==========
</TABLE>
 
 
                                       48
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   1997..........................................................   $1,450,510
   1998..........................................................      481,482
   1999..........................................................      109,658
   2000..........................................................       45,401
   2001..........................................................       95,613
</TABLE>
 
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:
 
<TABLE>
<CAPTION>
                                                  (DOLLARS IN THOUSANDS)
                                                  1996       1995      1994
                                               ----------  --------  --------
   <S>                                         <C>         <C>       <C>
   Overnight federal funds purchased.......... $  522,650  $266,370  $438,490
   Term federal funds purchased...............     75,000             260,000
   Eurodollars purchased......................                1,672
   Federal Home Loan Bank borrowings..........              149,000
   Securities sold under agreements to
    repurchase................................    447,581   233,830   196,021
   U.S. Treasury tax and loan notes...........     66,399    27,289    46,266
                                               ----------  --------  --------
     Total short-term borrowings.............. $1,111,630  $678,161  $940,777
                                               ==========  ========  ========
   Average interest rate at year-end..........       5.86%     5.33%     5.88%
   Maximum amount outstanding at any month-
    end....................................... $1,219,758  $958,804  $940,777
   Average amount outstanding................. $  998,730  $646,537  $778,906
   Weighted average interest rate.............       5.20%     5.55%     4.12%
</TABLE>
 
  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.
 
                                       49
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                               (IN THOUSANDS)
                                                                1996    1995
                                                              -------- -------
   <S>                                                        <C>      <C>
   Dauphin Deposit Corporation
    8.70% Senior Notes due 1996.............................. $        $35,000
    9% Convertible Subordinated Debentures due June 1999,
     convertible into common stock at $16.06 per share.......    4,420   4,955
    Variable rate mortgage (collateralized by premises)......              235
   Dauphin Deposit Bank and Trust Company
    Advance from The Federal Home Loan Bank of Pittsburgh....  150,000
                                                              -------- -------
                                                               154,420  40,190
   Obligations under capitalized lease.......................      351     409
                                                              -------- -------
     Total................................................... $154,771 $40,599
                                                              ======== =======
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
                                                                  --------------
   <S>                                                            <C>
   1997..........................................................    $     68
   1998..........................................................          44
   1999..........................................................       4,458
   2000..........................................................          44
   2001..........................................................     150,050
</TABLE>
 
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
 
                                       50
<PAGE>
 
                  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.
 
<TABLE>
<CAPTION>
                                            (DOLLARS IN THOUSANDS)
                                                               TO BE WELL CAPITALIZED
                                             FOR CAPITAL      UNDER PROMPT CORRECTIVE
                              ACTUAL      ADEQUACY PURPOSES      ACTION PROVISIONS
                          --------------  ------------------- -------------------------
                           AMOUNT  RATIO    AMOUNT    RATIO      AMOUNT       RATIO
                          -------- -----  ---------- -------- ------------- -----------
<S>                       <C>      <C>    <C>        <C>      <C>           <C>
As of December 31, 1996:
 Total Capital (to Risk
  Weighted Assets):
  Dauphin...............  $599,811 14.03% $  328,424   ^8.0%  $     410,530      ^10.0%
  The Bank..............   518,925 12.82%    323,945   ^8.0%        404,931      ^10.0%
 Tier 1 Capital (to Risk
  Weighted Assets):
  Dauphin...............   555,158 13.25%    164,212   ^4.0%        246,318       ^6.0%
  The Bank..............   476,040 11.76%    161,972   ^4.0%        242,958       ^6.0%
 Tier 1 Capital (to Av-
  erage Assets):
  Dauphin...............   555,158  9.47%    234,460   ^4.0%        293,075       ^5.0%
  The Bank..............   476,040  8.20%    232,213   ^4.0%        290,267       ^5.0%
As of December 31, 1995:
 Total Capital (to Risk
  Weighted Assets):
  Dauphin...............  $537,012 14.87% $  288,881   ^8.0%  $     361,101      ^10.0%
  The Bank..............   515,440 14.40%    286,443   ^8.0%        358,054      ^10.0%
 Tier 1 Capital (to Risk
  Weighted Assets):
  Dauphin...............   505,033 13.99%    144,440   ^4.0%        216,661       ^6.0%
  The Bank..............   473,703 13.23%    143,221   ^4.0%        214,832       ^6.0%
 Tier 1 Capital (to Av-
  erage Assets):
  Dauphin...............   505,033 10.00%    202,004   ^4.0%        252,505       ^5.0%
  The Bank..............   473,703  9.49%    199,653   ^4.0%        249,566       ^5.0%
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                          1996    1995    1994
                                                         ------- ------- -------
   <S>                                                   <C>     <C>     <C>
   Current taxes........................................ $22,012 $19,077 $18,768
   Deferred taxes.......................................   3,165   4,133   3,994
                                                         ------- ------- -------
     Total.............................................. $25,177 $23,210 $22,762
                                                         ======= ======= =======
</TABLE>
 
                                       51
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                               (IN THOUSANDS)
                                                              1996  1995  1994
                                                              ----  ----  -----
   <S>                                                        <C>   <C>   <C>
   Statutory Federal income tax rate......................... 35.0% 35.0%  35.0%
   Tax exempt income......................................... (8.5) (8.9) (10.5)
   Other, net................................................  (.3)
                                                              ----  ----  -----
   Effective income tax rate................................. 26.2% 26.1%  24.5%
                                                              ====  ====  =====
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                          (IN THOUSANDS)
                                                         1996      1995
                                                       --------  --------
   <S>                                                 <C>       <C>       
   Deferred tax assets:
     Gross unrealized losses on investment securities
      available-for-sale.............................. $  6,429  $  3,029
     Allowance for loan losses........................   14,882    15,322
     Employee benefit programs........................    3,365     2,443
     Other............................................      972     1,031
                                                       --------  --------
       Total gross deferred tax assets................   25,648    21,825
                                                       --------  --------
   Deferred tax liabilities:
     Gross unrealized gains on investment securities
      available-for-sale..............................   (7,279)  (10,378)
     Depreciation.....................................   (3,144)   (3,070)
     Lease financing transactions.....................  (20,669)  (14,610)
     Prepaid pension..................................   (1,255)   (1,126)
     Mortgage servicing rights........................   (6,068)   (2,959)
     Prepaid expenses.................................   (1,262)     (894)
     Other............................................   (1,812)   (1,464)
                                                       --------  --------
       Total gross deferred tax liabilities...........  (41,489)  (34,501)
                                                       --------  --------
       Net deferred tax asset (liability)............. $(15,841) $(12,676)
                                                       ========  ========
</TABLE>
 
  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.
 
                                       52
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                              1996     1995
                                                             -------  -------
   <S>                                                       <C>      <C>
   Actuarial present value of benefit obligations:
     Vested................................................. $37,573  $43,235
     Non-vested.............................................   7,337    1,811
                                                             -------  -------
       Accumulated benefit obligation.......................  44,910   45,046
   Effects of future compensation levels....................   7,622    9,164
                                                             -------  -------
   Projected benefit obligation.............................  52,532   54,210
   Plan assets at fair value................................  69,219   63,532
                                                             -------  -------
   Excess of plan assets over the projected benefit
    obligation..............................................  16,687    9,322
   Unrecognized net asset being amortized over 15 years.....  (2,954)  (3,664)
   Unrecognized prior service cost..........................     100      275
   Unrecognized gain........................................  (9,065)  (1,620)
                                                             -------  -------
   Prepaid pension cost included in the consolidated
    financial statements.................................... $ 4,768  $ 4,313
                                                             =======  =======
</TABLE>
 
  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:
 
<TABLE>
<CAPTION>
                                                                     1996  1995
                                                                     ----  ----
   <S>                                                               <C>   <C>
   Expected return on plan assets................................... 8.50% 8.50%
   Discount rate.................................................... 7.50  7.00
   Rate of increase in future compensation levels................... 5.00  4.50
</TABLE>
 
  Net pension expense (credit) for 1996, 1995 and 1994 was comprised of the
following:
 
<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
                                                     1996      1995     1994
                                                    -------  --------  -------
   <S>                                              <C>      <C>       <C>
   Service cost.................................... $ 1,920  $  1,568  $ 1,812
   Interest cost on projected benefit obligation...   3,815     3,648    3,312
   Return on plan assets...........................  (8,369)  (10,989)    (402)
   Net amortization and deferral...................   2,529     5,791   (4,623)
                                                    -------  --------  -------
     Net pension expense (credit).................. $  (105) $     18  $    99
                                                    =======  ========  =======
</TABLE>
 
  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.
 
                                       53
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                             1996     1995
                                                            -------  -------
   <S>                                                      <C>      <C>
   Actuarial present value of accumulated postretirement
    benefit obligation:
     Retirees.............................................. $ 9,381  $ 9,975
     Fully eligible active plan participants...............     440      633
     Other active plan participants........................   4,761    3,991
                                                            -------  -------
                                                             14,582   14,599
   Unrecognized transition liability being amortized over
    20 years...............................................  (8,477)  (9,042)
   Unrecognized prior service cost.........................    (650)    (757)
   Unrecognized net loss...................................   1,851    1,093
                                                            -------  -------
   Accrued postretirement obligation....................... $ 7,306  $ 5,893
                                                            =======  =======
</TABLE>
 
  The assumptions used in determining the actuarial present value of the
accumulated postretirement benefit obligation are as follows:
 
<TABLE>
<CAPTION>
                                                                     1996  1995
                                                                     ----  ----
   <S>                                                               <C>   <C>
   Discount rate.................................................... 7.50% 7.00%
   Rate of increase in future compensation levels................... 5.00  4.50
</TABLE>
 
  The cost for postretirement benefits other than pensions for 1996, 1995 and
1994 consisted of the following components:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                          1996   1995    1994
                                                         ------ ------  ------
   <S>                                                   <C>    <C>     <C>
   Service cost......................................... $  504 $  348  $  506
   Interest cost on accumulated postretirement benefit
    obligation..........................................  1,035    989   1,313
   Amortization of transition obligation................    565    565     565
   Amortization of past service cost....................     65     65      65
   Net amortization and deferral........................           (89)    174
                                                         ------ ------  ------
    Net postretirement benefit cost..................... $2,169 $1,878  $2,623
                                                         ====== ======  ======
</TABLE>
 
  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.
 
 
                                       54
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                 1996               1995
                                          ------------------ ------------------
   <S>                                    <C>                <C>
   Net income:
     As reported......................... $           70,772 $           65,565
     Pro forma........................... $           70,257 $           65,406
   Primary earnings per share:
     As reported......................... $             2.30 $             2.12
     Pro forma........................... $             2.28 $             2.11
</TABLE>
 
  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
 
                                       55
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                                     AVERAGE
                                                        SHARES    EXERCISE PRICE
                                                       ---------  --------------
   <S>                                                 <C>        <C>
   Balance, December 31, 1993.........................   702,396      $18.52
     Granted..........................................   160,500      $25.63
     Exercised........................................   (31,057)     $14.44
     Terminated.......................................    (2,400)     $21.10
                                                       ---------
   Balance, December 31, 1994.........................   829,439      $20.04
     Granted..........................................   179,000      $24.00
     Exercised........................................  (109,584)     $15.06
     Terminated.......................................    (5,000)     $25.63
                                                       ---------
   Balance, December 31, 1995.........................   893,855      $21.41
     Granted..........................................   302,000      $29.10
     Exercised........................................  (109,183)     $17.46
     Terminated.......................................    (2,914)     $12.77
                                                       ---------
   Balance, December 31, 1996......................... 1,083,758      $23.97
                                                       =========
</TABLE>
 
                                       56
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                    WEIGHTED
                                      NUMBER        AVERAGE         WEIGHTED
      RANGE OF                      OUTSTANDING    REMAINING        AVERAGE
   EXERCISE PRICES                  AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
   ---------------                  ----------- ---------------- --------------
    <S>                             <C>         <C>              <C>
    $9.48 to $16.57................    207,098     3.6 years         $14.78
    $23.72 to $25.63...............    575,660     7.2 years         $24.59
    $28.50 to $29.13...............    301,000     9.4 years         $29.10
                                     ---------
    $9.48 to $29.13................  1,083,758     7.1 years         $23.97
                                     =========
</TABLE>
 
  The following table summarizes information on the exercisable stock options
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                                       NUMBER       WEIGHTED
      RANGE OF                                       OUTSTANDING    AVERAGE
   EXERCISE PRICES                                   AT 12/31/96 EXERCISE PRICE
   ---------------                                   ----------- --------------
    <S>                                              <C>         <C>
    $9.48 to $16.57.................................   207,098       $14.78
    $23.72 to $25.63................................   308,200       $24.63
                                                       -------
    $9.48 to $25.63.................................   515,298       $20.67
                                                       =======
</TABLE>
 
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.
 
                                       57
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
                                                            1996       1995
                                                         ---------- ----------
   <S>                                                   <C>        <C>
   Amounts representing credit risk:
     Commitments to extend credit....................... $1,735,583 $1,343,251
     Financial and performance standby letters of
      credit............................................    248,227    134,242
     Commercial and similar letters of credit...........        718        900
     Commitments to purchase securities.................                12,365
   Notional or contract amounts of off-balance-sheet
    financial instruments not constituting credit risk:
     Forward commitments to sell in the secondary
      market............................................    133,907     62,455
     Forward commitments to sell to permanent
      investors.........................................     65,244     31,939
     Purchased call and put options.....................     88,500
</TABLE>
 
                                       58
<PAGE>
 
                  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.
 
                                       59
<PAGE>
 
                  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.
 
                                       60
<PAGE>
 
                  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.
 
                                       61
<PAGE>
 
                  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:
 
<TABLE>
<CAPTION>
                                                (IN THOUSANDS)
                                          1996                   1995
                                  ---------------------- ----------------------
                                   CARRYING      FAIR     CARRYING      FAIR
                                    AMOUNT      VALUE      AMOUNT      VALUE
                                  ----------  ---------- ----------  ----------
<S>                               <C>         <C>        <C>         <C>
Financial assets:
Cash and due from banks.......... $  176,024  $  176,024 $  218,785  $  218,785
Short-term investments...........     17,379      17,379     11,573      11,573
Investment securities............  2,170,207   2,170,207  1,860,869   1,860,869
Assets held for sale.............    207,798     207,798     87,782      87,782
Loans
  Commercial.....................  1,678,679   1,670,204  1,493,666   1,485,988
  Residential mortgages..........    391,105     389,452    446,059     447,172
  Consumer.......................  1,130,250   1,132,030  1,041,613   1,044,935
  Allowance for loan losses......    (42,885)               (41,737)
                                  ----------  ---------- ----------  ----------
    Net loans....................  3,157,149   3,191,686  2,939,601   2,978,095
Other financial assets...........     13,328      13,378     42,973      43,048
Financial liabilities:
Deposits
  Non-interest bearing demand....    521,387     521,387    518,004     518,004
  Interest bearing demand and
   savings.......................  1,281,800   1,281,800  1,380,079   1,380,079
  Time deposits..................  2,225,383   2,257,846  2,051,453   2,094,764
                                  ----------  ---------- ----------  ----------
    Total deposits...............  4,028,570   4,061,033  3,949,536   3,992,847
Short-term borrowings............  1,111,630   1,111,630    678,161     678,161
Long-term debt...................    154,771     159,374     40,599      44,459
Accrued interest payable.........     28,225      28,225     25,250      25,250
</TABLE>
 
<TABLE>
<CAPTION>
                                    1996                          1995
                         ---------------------------  -----------------------------
                          CONTRACT  CARRYING   FAIR    CONTRACT   CARRYING   FAIR
                           AMOUNT   AMOUNT(1) VALUE     AMOUNT   AMOUNT (1)  VALUE
                         ---------- --------- ------  ---------- ---------- -------
<S>                      <C>        <C>       <C>     <C>        <C>        <C>
Off-balance-sheet
 financial instruments:
  Commitments to extend
   credit............... $1,735,583   $ 523   $  523  $1,343,251   $ 643    $   758
  Financial and
   performance standby
   letters of credit....    248,227            2,482     134,242              1,342
  Commercial and similar
   letter of credit.....        718                7         900                  9
  Commitments to
   purchase securities..                                  12,365             12,365
  Forward commitments to
   sell in the secondary
   market...............    133,907    (109)    (109)     62,455    (663)      (663)
  Forward commitments to
   sell to permanent
   investors............     65,244                       31,939
  Purchased call and put
   options..............     88,500    (192)    (196)
</TABLE>
--------
(1) The amounts shown under "carrying amount" represent accruals or deferred
    income arising from those unrecognized financial instruments.
 
                                       62
<PAGE>
 
                  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
 
<TABLE>
<CAPTION>
                                                             (IN THOUSANDS)
                                                              DECEMBER 31,
                                                            ------------------
                                                              1996      1995
                                                            --------  --------
<S>                                                         <C>       <C>
Assets:
  Due from Bank (subsidiary)............................... $    143  $     22
  Investment securities available-for-sale.................   66,081    63,815
  Investment in subsidiaries
    Banking subsidiary.....................................  491,413   502,964
    Non-banking subsidiaries...............................   21,234    22,159
                                                            --------  --------
      Total investment in subsidiaries.....................  512,647   525,123
  Other assets.............................................    6,945     7,379
                                                            --------  --------
      Total assets......................................... $585,816  $596,339
                                                            ========  ========
Liabilities and Stockholders' Equity:
  Liabilities:
    Accrued expenses and taxes............................. $ 10,951  $  9,546
    Long-term debt.........................................    4,420    40,190
                                                            --------  --------
      Total liabilities....................................   15,371    49,736
                                                            --------  --------
  Stockholders' Equity:
    Common stock...........................................  163,208   163,208
    Additional paid-in capital.............................   11,084    11,103
    Retained earnings......................................  445,888   421,875
    Unrealized gain on securities available-for-sale, net
     of deferred taxes.....................................        5        49
                                                            --------  --------
                                                             620,185   596,235
    Less: Treasury stock--at cost..........................  (49,740)  (49,632)
                                                            --------  --------
      Total stockholders' equity...........................  570,445   546,603
                                                            --------  --------
      Total liabilities and stockholders' equity........... $585,816  $596,339
                                                            ========  ========
</TABLE>
 
                                       63
<PAGE>
 
                  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
 
<TABLE>
<CAPTION>
                                                        (IN THOUSANDS)
                                                   YEARS ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1996      1995      1994
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenue
  Dividend income:
    Banking subsidiary........................... $ 69,964  $ 66,890  $ 44,130
    Non-banking subsidiaries.....................    2,400     3,450
  Interest on investment securities..............    1,331     1,409     2,155
  Interest on time deposits with Bank............    1,929       691       191
  Other income...................................      866       696       460
  Gains on sales of investment securities........       56         5       345
                                                  --------  --------  --------
      Total revenue..............................   76,546    73,141    47,281
                                                  --------  --------  --------
Expenses
  Interest on long-term debt.....................    3,072     3,501     3,516
  Other expenses.................................    2,829     1,865     1,243
                                                  --------  --------  --------
      Total expenses.............................    5,901     5,366     4,759
                                                  --------  --------  --------
Income before income taxes and equity in
 undistributed net income of subsidiaries........   70,645    67,775    42,522
Income tax benefit...............................      573       873       602
                                                  --------  --------  --------
Income before equity in undistributed net income
 (loss) of subsidiaries..........................   71,218    68,648    43,124
Equity in undistributed net income (loss):
  Banking subsidiary.............................      397       276    25,389
  Non-banking subsidiaries.......................     (843)   (3,359)    1,526
                                                  --------  --------  --------
      Net income................................. $ 70,772  $ 65,565  $ 70,039
                                                  ========  ========  ========
</TABLE>
 
                                       64
<PAGE>
 
                  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
 
<TABLE>
<CAPTION>
                                                        (IN THOUSANDS)
                                                   YEARS ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1996      1995      1994
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Operating activities
  Net income....................................  $ 70,772  $ 65,565  $ 70,039
  Adjustments
    Equity in undistributed net income of
     subsidiaries...............................       446     3,083   (26,915)
    Other, net..................................     1,452    (2,112)    4,736
                                                  --------  --------  --------
      Net cash provided by operating
       activities...............................    72,670    66,536    47,860
                                                  --------  --------  --------
Investing activities
  Proceeds from investment securities...........    84,858    37,477    43,484
  Purchase of investment securities.............   (86,900)  (63,469)  (24,488)
  Sale of subsidiary............................                           797
                                                  --------  --------  --------
      Net cash provided (used) by investing
       activities...............................    (2,042)  (25,992)   19,793
                                                  --------  --------  --------
Financing activities
  Repayment of long-term debt...................   (35,235)
  Issuance of treasury stock....................     6,837     6,341     3,713
  Repurchase of treasury stock..................    (8,455)  (16,063)  (42,413)
  Cash dividends paid...........................   (33,654)  (30,836)  (29,024)
                                                  --------  --------  --------
      Net cash used by financing activities.....   (70,507)  (40,558)  (67,724)
                                                  --------  --------  --------
      Increase (decrease) in cash and cash
       equivalents..............................       121       (14)      (71)
Cash and cash equivalents at beginning of year..        22        36       107
                                                  --------  --------  --------
Cash and cash equivalents at end of year........  $    143  $     22  $     36
                                                  ========  ========  ========
Schedule of non-cash investing and financing
 activities:
  Conversion of convertible subordinated
   debentures...................................  $    535  $    258  $    432
  Net assets of subsidiaries merged.............               2,799
</TABLE>
 
  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.
 
                                       65
<PAGE>
 
                  DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1996, 1995 AND 1994
 
19--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                       1996                             1995
                         --------------------------------- -------------------------------
                          FOURTH   THIRD   SECOND   FIRST  FOURTH   THIRD  SECOND   FIRST
                         QUARTER  QUARTER  QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
                         -------- -------- ------- ------- ------- ------- ------- -------
<S>                      <C>      <C>      <C>     <C>     <C>     <C>     <C>     <C>     
Interest income......... $105,736 $101,970 $97,685 $93,213 $92,098 $90,272 $90,662 $90,612
Interest expense........   58,390   56,245  52,728  48,757  47,302  46,558  47,719  46,352
                         -------- -------- ------- ------- ------- ------- ------- -------
Net interest income.....   47,346   45,725  44,957  44,456  44,796  43,714  42,943  44,260
Provision for loan
 losses.................    1,200    1,200   1,800   1,800   1,246   1,246   1,246   1,870
Non-interest income.....   26,283   23,740  22,502  21,378  19,966  18,234  18,426  15,163
Non-interest expense....   46,657   43,964  42,576  41,241  39,628  37,566  38,427  37,498
                         -------- -------- ------- ------- ------- ------- ------- -------
Income before income
 taxes..................   25,772   24,301  23,083  22,793  23,888  23,136  21,696  20,055
Provision for income
 taxes..................    6,653    6,354   5,986   6,184   6,494   6,261   5,619   4,836
                         -------- -------- ------- ------- ------- ------- ------- -------
Net income.............. $ 19,119 $ 17,947 $17,097 $16,609 $17,394 $16,875 $16,077 $15,219
                         ======== ======== ======= ======= ======= ======= ======= =======
Net income per share.... $    .62 $    .58 $   .56 $   .54 $   .56 $   .55 $   .52 $   .49
                         ======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
 
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
 
                                       66
<PAGE>
 
                  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.
 
                                       67
<PAGE>
 
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
 
                                       68
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                       69

<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
                                    PART III
 
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. EXECUTIVE COMPENSATION
 
  This item is incorporated by reference to Executive Compensation in the 1997
Proxy Statement.
 
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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  This item is incorporated by reference to Transactions with Management in the
1997 Proxy Statement.
 
                                       70
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
<TABLE>
   <S>     <C>
   (a) 1.  Financial Statements
           The consolidated financial statements listed on the index to Item 8 of
           this Annual Report on Form 10-K are filled as a part of this Annual
           Report.
   (a) 2.  Financial Statement Schedules
           All schedules applicable to the Registrant are shown in the respective
           financial statements or in the notes thereto included in this Annual
           Report.
   (a) 3.  Exhibits
           (2)    Agreement and Plan of Merger dated January 21, 1997, by and between
                  Allied Irish Banks, p.l.c., First Maryland Bancorp and Dauphin.
           (3)(a) Articles of Incorporation, as amended, of Dauphin, are incorporated
                  herein by reference to Exhibit 3(b) to Dauphin's Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1992 (Commission
                  File Number 0-8415).
           (3)(b) By-Laws, as amended, of Dauphin are incorporated herein by
                  reference to Exhibit 3(b) to Dauphin's Annual Report on Form 10-K
                  for the year ended December 31, 1995 (Commission File Number 0-
                  8415).
           (10)(a) Dauphin Stock Option Plan of 1986, as amended, is incorporated
                   herein by reference to Exhibit 4.1 to Amendment No. 1 to Dauphin's
                   Registration Statement on Form S-8, as filed with the Commission
                   on April 28, 1993 (Commission File Number 33-17401).
           (10)(b) Dauphin Annual Management Performance Incentive Plan, as amended,
                   is incorporated herein by reference to Exhibit 10(b) to Dauphin's
                   Annual Report on Form 10-K for the year ended December 31, 1995
                   (Commission File Number 0-8415).
           (10)(c) Dauphin 1995 Stock Incentive Plan is incorporated herein by
                   reference to Exhibit 4.1 to Dauphin's Registration Statement on
                   Form S-8, as filed with the Commission on June 5, 1995 (Commission
                   File Number 33-59941).
           (10)(d) Form of Performance Share Agreement entered into in 1995 between
                   Dauphin and the following officers of Dauphin, Dauphin Bank and
                   other wholly-owned subsidiaries of Dauphin or Dauphin Bank: David
                   L. Brewin, Richard B. Brokenshire, Dennis L. Dinger, Robert L.
                   Fryer, Jr., Rick A. Gold, Christopher R. Jennings, Michael B.
                   Johnson, George W. King, Lawrence J. LaMaina, Jr., Stewart P.
                   McEntee, Richard W. Payne, III, Donald H. Ross, Robert A. Rupel,
                   Kenneth H. Sallade, Paul B. Shannon and Michael D. Zarcone--is
                   incorporated herein by reference to Exhibit 10(d) to Dauphin's
                   Annual Report on Form 10-K for the year ended December 31, 1995
                   (Commission File Number 0-8415).
           (10)(e) Dauphin 1996 Non-Employee Directors' Stock Plan is incorporated
                   hereby by reference to Exhibit 10(e) to Dauphin's Annual Report on
                   Form 10-K for the year ended December 31, 1995 (Commission File
                   Number 0-8415).
           (10)(f) Supplemental Executive Benefit and Change in Control Agreement,
                   dated as of January 23, 1984, between Dauphin Bank and William J.
                   King (King Agreement) is incorporated herein by reference to
                   Exhibit 10(c) to Dauphin's Annual Report on Form 10-K for the year
                   ended December 31, 1992 (Commission File Number 0-8415).
</TABLE>
 
                                       71
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
<TABLE>
   <S>   <C>
         (10)(g) Corrective Amendment, dated as of July 18, 1989, to the King
                 Agreement is incorporated herein by reference to Exhibit 10(d) to
                 Dauphin's Annual Report on Form 10-K for the year ended December
                 31, 1992 (Commission File Number 0- 8415).
         (10)(h) Amendment, dated as of November 8, 1991, to the King Agreement is
                 incorporated herein by reference to Exhibit 10(e) to Dauphin's
                 Annual Report on Form 10-K for the year ended December 31, 1992
                 (Commission File Number 0- 8415).
         (10)(i) Second Amended and Restated Supplemental Executive Benefit and
                 Change in Control Agreement, dated as of June 17, 1996, between
                 Dauphin and Christopher R. Jennings.
         (10)(j) Form of Change in Control Agreement between Dauphin and the
                 following officers of Dauphin, Dauphin Bank and other wholly-owned
                 subsidiaries of Dauphin or Dauphin Bank: David L. Brewin, Richard
                 B. Brokenshire, Dennis L. Dinger, Rick A. Gold, Michael B.
                 Johnson, George W. King, Stewart P. McEntee, Richard W. Payne,
                 III, Donald H. Ross, Jacqueline E. Rothschild, Robert A. Rupel,
                 Kenneth H. Sallade, Paul B. Shannon, James J. Trupp, Jr., Michael
                 D. Zarcone, William T. Burke, John G. Coulson, Robert S. Jones,
                 Joseph T. Lysczek, Jr., Craig A. Obeck and Robert J. Unruh--is
                 incorporated herein by reference to Exhibit 10(j) to Dauphin's
                 Annual Report on Form 10-K for the year ended December 31, 1995
                 (Commission File Number 0-8415).
         (10)(k) Employment and Consulting Agreement, dated as of January 27, 1992,
                 between FB&T Corporation, Dauphin and Lawrence J. LaMaina, Jr.
                 (LaMaina Agreement) is incorporated herein by reference to Exhibit
                 10(k) to Dauphin's Annual Report on Form 10-K for the year ended
                 December 31, 1992 (Commission File Number 0-8415).
         (10)(l) First Amendment, dated as of April 2, 1993, to the LaMaina
                 Agreement is incorporated herein by reference to Exhibit 10(l) to
                 Dauphin's Annual Report on Form 10-K for the year ended December
                 31, 1993.
         (10)(m) Form of Director and Executive Officer Indemnification Agreements
                 is incorporated herein by reference to Exhibit 10(m) to Dauphin's
                 Annual Report on Form 10-K for the year ended December 31, 1995
                 (Commission File Number 0-8415).
         (10)(n) Amendment dated January 21, 1997, to the Form of Change in Control
                 Agreement listed above as Exhibit (10)(j).
         (10)(o) Change in Control Agreement, dated June 17, 1996, between Dauphin
                 and Robert L. Fryer, Jr.
         (10)(p) Form of Performance Share Agreement entered into in 1996 between
                 Dauphin and the following officers of Dauphin, Dauphin Bank and
                 other wholly-owned subsidiaries of Dauphin or Dauphin Bank--David
                 L. Brewin, Richard B. Brokenshire, William T. Burke, John G.
                 Coulson, Dennis L. Dinger, Robert L. Fryer, Jr., Rick A. Gold,
                 Christopher R. Jennings, Michael B. Johnson, George W. King,
                 Lawrence J. LaMaina, Jr., Henry K. Long, Jr., Stewart P. McEntee,
                 Craig A. Obeck, Richard W. Payne, III, Donald H. Ross, Jacqueline
                 E. Rothschild, Robert A. Rupel, Kenneth H. Sallade, Paul B.
                 Shannon and Michael D. Zarcone.
         (11)   Statement regarding computation of per share earnings.
         (21)   Subsidiaries of the Registrant.
         (23)   Consent of Independent Auditors.
         (27)   Financial Data Schedule.
</TABLE>
 
                                       72
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
<TABLE>
   <S>   <C>
         (99)(a) The Rights Agreement, dated as of January 22, 1990, between
                 Dauphin and Dauphin Bank, as Rights Agent, is incorporated herein
                 by reference to Exhibit 1 to Dauphin's Current Report on Form 8-K,
                 dated January 22, 1990, and filed with the Securities and Exchange
                 Commission on February 9, 1990.
         (99)(b) Amendment to Rights Agreement, dated as of January 21, 1997,
                 between Dauphin and Dauphin Bank, as Rights Agent, is incorporated
                 herein by reference to Exhibit 1 to Dauphin's Current Report on
                 Form 8-K dated January 21, 1997 (Commission File Number 0-8415).
         (99)(c) Stock Option Agreement, dated January 21, 1997, between Dauphin
                 and Allied Irish Banks, p.l.c.
   (b)   Reports on Form 8-K
         There were no reports on Form 8-K filed for the three months ended
         December 31, 1996.
</TABLE>
 
 
                                       73
<PAGE>
 
                          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
 
                                       74
<PAGE>
 
                          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
 
                                       75

<PAGE>
 
                          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.
 
 
                                       76
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT                                                            SEQUENTIAL
 NUMBER                                                             PAGE NUMBER
 -------                                                            -----------
 <C>     <S>                                                        <C>
  (2)    Agreement and Plan of Merger dated January 21, 1997, by
         and between Allied Irish Banks, p.l.c., First Maryland
         Bancorp and Dauphin.
  (3)(a) Articles of Incorporation, as amended, of Dauphin, are
         incorporated herein by reference to Exhibit 3(b) to
         Dauphin's Quarterly Report on Form 10-Q for the quarter
         ended September 30, 1992 (Commission File Number 0-
         8415).
  (3)(b) By-Laws, as amended, of Dauphin are incorporated herein
         by reference to Exhibit 3(b) to Dauphin's Annual Report
         on Form 10-K for the year ended December 31, 1995
         (Commission File Number 0-8415).
 (10)(a) Dauphin Stock Option Plan of 1986, as amended, is
         incorporated herein by reference to Exhibit 4.1 to
         Amendment No. 1 to Dauphin's Registration Statement on
         Form S-8, as filed with the Commission on April 28, 1993
         (Commission File Number 33-17401).
 (10)(b) Dauphin Annual Management Performance Incentive Plan, as
         amended, is incorporated herein by reference to Exhibit
         10(b) to Dauphin's Annual Report on Form 10-K for the
         year ended December 31, 1995 (Commission File Number 0-
         8415).
 (10)(c) Dauphin 1995 Stock Incentive Plan is incorporated herein
         by reference to Exhibit 4.1 to Dauphin's Registration
         Statement on Form S-8, as filed with the Commission on
         June 5, 1995 (Commission File Number 33-59941).
 (10)(d) Form of Performance Share Agreement entered into in 1995
         between Dauphin and the following officers of Dauphin,
         Dauphin Bank and other wholly-owned subsidiaries of
         Dauphin or Dauphin Bank: David L. Brewin, Richard B.
         Brokenshire, Dennis L. Dinger, Robert L. Fryer, Jr.,
         Rick A. Gold, Christopher R. Jennings, Michael B.
         Johnson, George W. King, Lawrence J. LaMaina, Jr.,
         Stewart P. McEntee, Richard W. Payne, III, Donald H.
         Ross, Robert A. Rupel, Kenneth H. Sallade, Paul B.
         Shannon and Michael D. Zarcone--is incorporated herein
         by reference to Exhibit 10(d) to Dauphin's Annual Report
         on Form 10-K for the year ended December 31, 1995
         (Commission File Number 0-8415).
 (10)(e) Dauphin 1996 Non-Employee Directors' Stock Plan is
         incorporated hereby by reference to Exhibit 10(e) to
         Dauphin's Annual Report on Form 10-K for the year ended
         December 31, 1995 (Commission File Number 0-8415).
 (10)(f) Supplemental Executive Benefit and Change in Control
         Agreement, dated as of January 23, 1984, between Dauphin
         Bank and William J. King (King Agreement) is
         incorporated herein by reference to Exhibit 10(c) to
         Dauphin's Annual Report on Form 10-K for the year ended
         December 31, 1992 (Commission File Number 0-8415).
 (10)(g) Corrective Amendment, dated as of July 18, 1989, to the
         King Agreement is incorporated herein by reference to
         Exhibit 10(d) to Dauphin's Annual Report on Form 10-K
         for the year ended December 31, 1992 (Commission File
         Number 0-8415).
 (10)(h) Amendment, dated as of November 8, 1991, to the King
         Agreement is incorporated herein by reference to Exhibit
         10(e) to Dauphin's Annual Report on Form 10-K for the
         year ended December 31, 1992 (Commission File Number 0-
         8415).
 (10)(i) Second Amended and Restated Supplemental Executive
         Benefit and Change in Control Agreement, dated as of
         June 17, 1996, between Dauphin and Christopher R.
         Jennings.
</TABLE>
 
                                       77
<PAGE>
 
                          DAUPHIN DEPOSIT CORPORATION
<TABLE>
<CAPTION>
 EXHIBIT                                                            SEQUENTIAL
 NUMBER                                                             PAGE NUMBER
 -------                                                            -----------
 <C>     <S>                                                        <C>
 (10)(j) Form of Change in Control Agreement between Dauphin and
         the following officers of Dauphin, Dauphin Bank and
         other wholly-owned subsidiaries of Dauphin or Dauphin
         Bank: David L. Brewin, Richard B. Brokenshire, Dennis L.
         Dinger, Rick A. Gold, Michael B. Johnson, George W.
         King, Stewart P. McEntee, Richard W. Payne, III, Donald
         H. Ross, Jacqueline E. Rothschild, Robert A. Rupel,
         Kenneth H. Sallade, Paul B. Shannon, James J. Trupp,
         Jr., Michael D. Zarcone, William T. Burke, John G.
         Coulson, Robert S. Jones, Joseph T. Lysczek, Jr., Craig
         A. Obeck and Robert J. Unruh--is incorporated herein by
         reference to Exhibit 10(j) to Dauphin's Annual Report on
         Form 10-K for the year ended December 31, 1995
         (Commission File Number 0-8415).
 (10)(k) Employment and Consulting Agreement, dated as of January
         27, 1992, between FB&T Corporation, Dauphin and Lawrence
         J. LaMaina, Jr. (LaMaina Agreement) is incorporated
         herein by reference to Exhibit 10(k) to Dauphin's Annual
         Report on Form 10-K for the year ended December 31, 1992
         (Commission File Number 0-8415).
 (10)(l) First Amendment, dated as of April 2, 1993, to the
         LaMaina Agreement is incorporated herein by reference to
         Exhibit 10(l) to Dauphin's Annual Report on Form 10-K
         for the year ended December 31, 1993.
 (10)(m) Form of Director and Executive Officer Indemnification
         Agreements is incorporated herein by reference to
         Exhibit 10(m) to Dauphin's Annual Report on Form 10-K
         for the year ended December 31, 1995 (Commission File
         Number 0-8415).
 (10)(n) Amendment dated January 21, 1997, to the Form of Change in
         Control Agreement listed above as Exhibit (10)(j).
 (10)(o) Change in Control Agreement, dated June 17, 1996,
         between Dauphin and Robert L. Fryer, Jr.
 (10)(p) Form of Performance Share Agreement entered into in 1996 
         between Dauphin and the following officers of Dauphin, 
         Dauphin Bank and other wholly-owned subsidiaries of 
         Dauphin or Dauphin Bank--David L. Brewin, Richard B. 
         Brokenshire, William T. Burke, John G. Coulson, Dennis L.
         Dinger, Robert L. Fryer, Jr., Rick A. Gold, Christopher R. 
         Jennings, Michael B. Johnson, George W. King, Lawrence J. 
         LaMaina, Jr., Henry K. Long, Stewart P. McEntee, Craig A. 
         Obeck Richard W. Payne, III, Donald H. Ross, Jacqueline E. 
         Rothschild, Robert A. Rupel, Kenneth H. Sallade, Paul B. 
         Shannon and Michael D. Zarcone.
 (11)    Statement regarding computation of per share earnings.
 (21)    Subsidiaries of the Registrant
 (23)    Consent of Independent Auditors.
 (27)    Financial Data Schedule.
 (99)(a) The Rights Agreement, dated as of January 22, 1990,
         between Dauphin and Dauphin Bank, as Rights Agent, is
         incorporated herein by reference to Exhibit 1 to
         Dauphin's Current Report on Form 8-K, dated January 22,
         1990, and filed with the Securities and Exchange
         Commission on February 9, 1990.
 (99)(b) Amendment to Rights Agreement, dated as of January 21,
         1997, between Dauphin and Dauphin Bank, as Rights Agent,
         is incorporated herein by reference to Exhibit 1 to
         Dauphin's Current Report on Form 8-K dated January 21,
         1997 (Commission File Number 0-8415).
 (99)(c) Stock Option Agreement, dated January 21, 1997, between
         Dauphin and Allied Irish Banks, p.l.c.
</TABLE>
 
                                       78