Annual Report (Form 10-K), fiscal year 1994

ITEM 1. 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 (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 is not 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.
On January 1, 1994, Valley Bank and Trust Company of Chambersburg, Pennsylvania (Valleybank) merged into Dauphin Bank, with Dauphin Bank as the surviving institution. Valleybank had its principal place of business in Chambersburg, Franklin County, Pennsylvania. Valleybank maintained 14 offices and had total deposits of $285,310,000 and total loans of $219,255,000. The former Valleybank offices are now operated by Dauphin Bank as its Valleybank Division.
On February 1, 1994, Dauphin sold 100% of the issued and outstanding stock of Farmers Bank, a Federal Savings Bank (Farmers Savings) for a cash purchase price of $797,000. Farmers Savings operated one office in Baltimore City and one office in Baltimore County, Maryland. Farmers Savings became a wholly-owned subsidiary of Dauphin on July 1, 1992 as a result of the merger of FB&T Corporation with and into Dauphin. Farmers Savings had total assets of $12.7 million at December 31, 1993. The sale of Farmers Savings did not have a material impact on the financial condition or results of operations for Dauphin in 1994.
On July 1, 1994, Dauphin Bank merged with Farmers Bank and Trust Company of Hanover, Pennsylvania (Farmers Bank), with Dauphin Bank as the surviving bank. Farmers Bank had its principal place of business in Hanover, York County, Pennsylvania. Both Dauphin Bank and Farmers Bank, at the time of merger, were wholly-owned subsidiaries of Dauphin. Farmers Bank maintained 15 offices and had total deposits of $477,003,000 and total loans of $380,199,000. The former Farmers Bank offices are now operated by Dauphin Bank as its Farmers Bank Division.
Also on July 1, 1994, Dauphin Bank acquired 100% of the issued and outstanding stock of Eastern Mortgage Services, Inc. (Eastern Mortgage), a full service mortgage banking company which originates, services and sells first and second residential mortgage loans of varying types. Eastern Mortgage primarily serves the eastern Pennsylvania and New Jersey mortgage markets. Eastern Mortgage packages its mortgage loans for sale in the secondary mortgage market and is an approved mortgage lender by, among others, FNMA, FHLMC, FHA, GNMA and VA.
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. Following the sale of Farmers Savings, Dauphin is no longer subject to regulatory supervision by the Office of Thrift Supervision (OTS). 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. The operation of Dauphin Bank, as well as those of other banks, are significantly affected by the monetary and credit policies and regulations of the federal regulatory agencies.
DAUPHIN BANK AND TRUST COMPANY - ------------------------------ Dauphin Bank, which includes the Bank of Pennsylvania, Valleybank and Farmers Bank Divisions, maintains 104 offices with 94 automated teller machines located in Adams, Berks, Chester, Cumberland, Dauphin, Franklin,
DAUPHIN DEPOSIT CORPORATION 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 and includes one of the banking offices. 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, 1994, Dauphin Bank had total deposits of $3,515,621,000 and total loans of $2,863,455,000.
NON-BANKING 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 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. Directors of Dauphin Life are officers or directors of Dauphin. Effective January 1, 1993, Center Square Life Insurance Company, a credit life insurance company acquired through the merger of FB&T Corporation on July 1, 1992, was merged into Dauphin Life.
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. Directors of Dauphin Investment are officers or directors of Dauphin.
Financial Realty, Inc. is a wholly-owned subsidiary of Dauphin. It is incorporated under the laws of the State of Delaware, and commenced operations in 1982. Financial Realty, Inc. holds title to certain bank buildings which are leased to Dauphin Bank.
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.
Farmers Mortgage Company (Farmers Mortgage) is a wholly-owned subsidiary of Dauphin acquired through the merger of FB&T Corporation on July 1, 1992. Farmers Mortgage was organized in 1983 as a Pennsylvania mortgage banking corporation. Following Dauphin Bank's acquisition of Eastern Mortgage on July 1, 1994, Farmers Mortgage has been inactive.
FARMCO Realty, Inc. (FARMCO) is a Pennsylvania corporation organized in 1967 as a subsidiary of Farmers Bank. Effective September 30, 1985, FARMCO became a wholly-owned subsidiary of FB&T Corporation and, as a consequence of the merger of FB&T Corporation with and into Dauphin on July 1, 1992, is now a wholly- owned subsidiary of Dauphin. FARMCO is a real estate holding company which holds property leased to Dauphin Bank for its branch office locations.
DAUPHIN DEPOSIT CORPORATION
Financial Mineral Corporation is a Pennsylvania corporation wholly-owned by Dauphin Bank which was formed to hold assets acquired in loan liquidations. Dauphin is in the process of dissolving Financial Mineral Corporation.
Financial Land Corporation is a Pennsylvania corporation wholly-owned by Dauphin Bank which was formed to hold assets acquired in loan liquidations.
Reliance Consumer Discount Company (Discount Company) was a wholly-owned subsidiary of Dauphin acquired through the merger of FB&T Corporation on July 1, 1992. The assets of Discount Company were sold by Dauphin in October 1992 and Discount Company was dissolved during 1994.
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 - -------------------------- 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. Dauphin Bank is subject to regulation and supervision by the Pennsylvania Department of Banking and the FDIC. On January 31, 1995, Dauphin Bank applied to become a member bank of the Federal Reserve System by filing an application for membership with the Federal Reserve Bank of Philadelphia. Upon effectiveness of the application, Dauphin Bank's primary federal banking regulator will be the Federal Reserve Board rather than the FDIC. Dauphin Bank's deposits will continue to be insured by the FDIC following membership in the Federal Reserve System and the impact to Dauphin Bank from a regulatory and supervisory point of view is expected to be minimal.
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 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.
Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, 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. A bank
DAUPHIN DEPOSIT CORPORATION 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.
Since March 4, 1990, the Pennsylvania Banking Code of 1965, as amended (Banking Code), has authorized reciprocal interstate banking without any geographic limitation. Reciprocity between states exists when a foreign state's law authorizes Pennsylvania bank holding companies to acquire banks or bank holding companies located in that state on terms and conditions substantially no more restrictive than those applicable to such an acquisition by a bank holding company located in that state. Currently, the state banking statutes in Alaska, Delaware, Idaho, Indiana, Kentucky, Maine, Maryland, Michigan, New Jersey, New York, Ohio, Oregon, Rhode Island, Utah, Vermont, Washington, West Virginia and Wyoming authorize interstate ownership of banks and bank holding companies in each of those states and Pennsylvania. The Pennsylvania Banking Department is responsible for determining whether the laws of other states satisfy the reciprocity requirements on a case-by-case basis and also shall determine whether the interstate banking statutes in the above states continue to be reciprocal following any amendments to such statutes.
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 member state banks. The Riegle-Neal Act, which was signed by President Clinton on September 29, 1994, 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 has not taken any action at this time to either opt in or opt out of the provisions of the Riegle-Neal Act and management of Dauphin cannot predict with any reasonable degree of certainty the effects, if any, which the Riegle-Neal Act may have on Dauphin.
During 1989, Congress passed new legislation (the Financial Institutions Reform, Recovery and Enforcement Act of 1989) to provide a workable solution to the financial problems of the financial services industry. The direct effect of this legislation on the banking industry was to substantially increase the assessments banks pay to the FDIC for the insurance of bank deposits. During 1993, a risk-based assessment was established which requires banks to pay an assessment rate based on the combination of their capital and supervisory condition.
On December 19, 1991, the President signed into law the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The primary purpose of FDICIA was to authorize approximately $70 billion in Federal Government loans to the FDIC's Bank Insurance Fund, which is used to satisfy the deposit insurance claims of customers of failed banks and thrifts. FDICIA also created a strict uniform system of capital-based
DAUPHIN DEPOSIT CORPORATION regulation, which became effective on December 19, 1992. FDICIA established five different levels of capitalization of financial institutions, with "prompt corrective actions" and significant operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
To be considered well-capitalized, an institution must have a total risk- based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a leverage capital ratio of 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An institution falls within the adequately capitalized category if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. In addition, the appropriate federal regulatory agency may downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound condition or is engaged in an unsafe or unsound practice. Institutions are required under FDICIA to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. On December 31, 1994, Dauphin and Dauphin Bank were deemed to be well-capitalized.
Regulatory oversight of an institution becomes more stringent with each lower capital category, with certain "prompt corrective actions" imposed depending on the level of capital deficiency.
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 implementing Section 303, 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.
On December 21, 1993, the Federal Reserve Board, FDIC, OTS and Office of the Comptroller of the Currency published a Joint Notice of Proposed Rule Making relating to proposed Community Reinvestment Act regulations. On October 7, 1994, the agencies published revised proposed regulations. The public comment period expired November 21, 1994. The revised proposed regulations would substitute a performance based evaluation system in lieu of the 12 Assessment Factors set forth in the current regulations. If adopted, compliance with the revised proposed regulations may require changes in certain operating procedures and additional costs, both of which cannot currently be determined.
EMPLOYEES - --------- At December 31, 1994, Dauphin and its subsidiaries employed approximately 2,300 persons.
ITEM 2.



ITEM 2. PROPERTIES
Dauphin's principal office is located in Dauphin Bank's main banking offices at 213 Market Street, Harrisburg, Pennsylvania. Dauphin owns no real estate.
Dauphin Bank, Financial Realty, Inc. and FARMCO Realty, Inc. own 71 of the branch offices and lease 35 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 13 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.
DAUPHIN DEPOSIT CORPORATION
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Various legal actions or proceedings are pending involving Dauphin and/or its subsidiaries. Management believes that the aggregate liability or loss, if any, will not be material.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of Dauphin as of February 1, 1995 are listed below along with their business experience during the past five years. Executive officers are appointed by the Board of Directors. There are no family relationships among these executive officers, nor any arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.
DAUPHIN DEPOSIT CORPORATION
DAUPHIN DEPOSIT CORPORATION PART II -------
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF DAUPHIN DEPOSIT CORPORATION STOCK AND DIVIDENDS PAID
The price information provided below reflects actual high, low and closing prices as quoted on The Nasdaq Stock Market.
DAUPHIN DEPOSIT CORPORATION
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
- -------- * Restated to reflect pooling-of-interests.
DAUPHIN DEPOSIT CORPORATION
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the financial condition and results of operations of Dauphin Deposit Corporation and subsidiaries (Dauphin), including Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania, Farmers Bank and Valleybank Divisions. The other primary subsidiaries include Hopper Soliday & Co., Inc., a broker/dealer, and Eastern Mortgage Services, Inc., a mortgage banking company. This discussion and analysis should be read in conjunction with the financial statements which appear elsewhere in this report.
On January 1, 1994, Dauphin acquired all the outstanding stock of Valley Bancorp., Inc. (Valley) in exchange for 2,600,643 shares of Dauphin's common stock, along with cash of $16,000 in lieu of fractional shares, consummating the merger announced in June 1993. At December 31, 1993, Valley had total assets, deposits and equity of $324,164,000, $285,310,000 and $33,948,000, respectively. Valley's principal subsidiary was Valley Bank and Trust Company. The acquisition was accounted for as a pooling-of-interests. Accordingly, financial data presented for prior periods has been restated to reflect this acquisition as if it had occurred at the beginning of the periods presented.
On August 23, 1993 Dauphin entered into an agreement to sell 100% of the stock of Farmers Savings Bank, a Federal Savings Bank (Farmers Savings), for $797,000. The sale was consummated on February 1, 1994. Farmers Savings had total assets of $11,674,000 million at January 31, 1994. The sale of Farmers Savings did not have a material impact on the financial condition or results of operations for Dauphin in 1994.
On July 1, 1994, Dauphin acquired Eastern Mortgage Services, Inc. (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.
On January 1, 1994, Dauphin adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in one of three categories and accounted for as follows: 1) debt securities that a company 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 determined that the entire investment securities portfolio would be classified as available-for-sale. On January 1, 1994, this change resulted in an increase in investment securities of $64.7 million and an increase in stockholders' equity of $42.1 million, representing the after tax impact. On December 31, 1994, this accounting change resulted in a decrease in investment securities of $63.1 million and a decrease in stockholders' equity of $41.0 million, representing the after tax impact.
RESULTS OF OPERATIONS
SUMMARY
Dauphin recorded net income of $70.0 million for 1994, compared with $67.9 million recorded in 1993. On a per common share basis, net income rose to $2.18 from $2.08 in 1993 and $1.89 in 1992. The 1994 results of operations represent the 23rd consecutive year that Dauphin has reported increased earnings per share.
DAUPHIN DEPOSIT CORPORATION
Return on average total assets was 1.42% for 1994, compared with 1.40% for 1993 and 1.31% for 1992. Return on average equity, excluding the SFAS 115 adjustment, was 13.72% for 1994 compared with 14.06% for 1993 and 13.93% for 1992. Return on average stockholders' equity, including the SFAS 115 adjustment, was 13.81% for 1994.
During 1994 average earning assets increased 1.9% to $4.6 billion and the net interest margin decreased from 4.21% to 4.17%. This growth in earning assets and the reduction in net interest margin resulted in an increase of $2.2 million or 1.2% 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, restructured loans and other real estate owned, represented .64% of year-end loans and other real estate owned, down from 1.07% at December 31, 1993. The allowance for loan losses was 1.41% of year-end loans at December 31, 1994 compared with 1.52% at December 31, 1993. Non-performing loans were covered 2.7 times by the allowance for loan losses. The allowance includes $1.7 million which is not allocated to any specific loan category. Because of this strong asset quality, the provision for loan losses was decreased by $2.6 million in 1994.
Non-interest income, other than securities gains, increased $.8 million, or 1.4%. Increased income was the result of growth in fiduciary activities, increase in volume of merchant credit card processing and mortgage banking activities. Offsetting these increases was a decline in commission and fee income generated by Hopper Soliday & Co., Inc. (Hopper Soliday) and the 1993 non-recurring tax refund from a settlement with the Commonwealth of Pennsylvania.
Non-interest expense items increased $2.8 million, or 2.1%. Contributing to this increase were normal salary adjustments and controlled additions to staffing levels and the addition of the results of Eastern Mortgage. Additionally, other non-interest expenses decreased due to reduced professional fees and other 1993 merger-related expenses.
NET INTEREST INCOME
Net interest income is the product of the volume of average earning assets and the average rates earned on them, less the volume of average interest bearing liabilities and the average rates paid thereon. The amount of net interest income is affected by changes in interest rates, account balances, or volume, and the mix of earning assets and interest bearing liabilities.
DAUPHIN DEPOSIT CORPORATION TABLE 1--AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY (TAXABLE EQUIVALENT BASIS)
- -------- (1) Includes fees on loans. Average loan balances include non-accruing loans. (2) Includes home equity loans. (3) Loans outstanding net of unearned income.
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% for 1994 and 1993 and 34% for 1992.
Table 2 presents the net interest income on a fully taxable equivalent basis for each of the years in the three year period ended December 31, 1994.
TABLE 2--NET INTEREST INCOME
TABLE 3--RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
Note: The changes not due solely to change in volume or solely to change in rate are allocated proportionally to both change in volume and rate.
Net interest income on a fully taxable equivalent basis totaled $193.6 million in 1994, an increase of $2.2 million or 1.1% from $191.4 million in 1993. Net interest income in 1993 was up 5.4% from $181.6 million in 1992.
Table 1 presents average balances, taxable equivalent interest income and expense and average rates earned and paid for Dauphin's assets and liabilities. Table 3 analyzes the changes attributable to the volume and rate components of net interest income.
During 1994 there was an increase in net interest income of $9.4 million due to changes in volume and a decrease of $7.2 million due to changes in rate. In 1993 there was an increase of $13.3 million due to changes in volume and a decrease of $3.5 million due to changes in rate.
DAUPHIN DEPOSIT CORPORATION
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.
As reflected in Table 4, average earning assets were $4.6 billion in 1994 and in 1993 and $4.4 billion in 1992. The interest rate spread for 1994 was 3.61% compared with 3.67% for 1993 and 3.52% for 1992. The net interest margin for 1994 was 4.17% compared with 4.21% for 1993 and 4.13% for 1992.
TABLE 4--INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS
Interest rates rose during 1994. The average prime rate in 1994 was 7.17% compared with 6.00% in 1993. The average federal funds rate increased to 4.23% for 1994 compared with 3.02% for 1993. During 1994, compared with 1993, the average yield on earning assets decreased 1 basis point while the average cost of funds increased 5 basis points resulting in a decrease in the interest rate spread of 6 basis points. The yield on the investment portfolio decreased 17 basis points due to the reinvestment of maturities at significantly lower rates, when compared with the yield of the security maturing. Average loans, which represent the highest yielding earning assets, increased $191.0 million or 7.8% and produced a yield of 7.92% in 1994 compared with 7.91% in 1993. This slight increase was the result of a higher interest rate environment during 1994, somewhat offset by fee income which is included in interest income. The reduction of fees, due to lower refinancings in residential mortgages, reduced the yield by 2 basis points. Average loans represented 57.1% of the average earning assets for 1994. The cost of interest bearing deposits decreased to 3.68% in 1994 compared with 3.86% in 1993. Rates paid on interest bearing transaction accounts decreased in early 1994 and remained relatively flat throughout the year. Interest rates on time deposits have recently been rising. Consequently, depositors are shifting from transaction accounts to higher yielding time deposits, reversing the trend of the prior three years. The increase in the cost of short-term borrowings (111 basis points) was caused primarily by the rise in the federal funds rate. While the interest rate spread decreased 6 basis points, the increased value of non-interest bearing funds in a higher interest rate environment, resulted in only a 4 basis point decline in net interest margin.
Interest rates fell during 1993. The average prime rate in 1993 was 6.00% compared with 6.25% in 1992. The average federal funds rate decreased to 3.02% for 1993 compared with 3.53% for 1992. During 1993, compared with 1992, the average yield on earning assets decreased 77 basis points while the average cost of funds decreased 92 basis points resulting in an increase in the interest rate spread of 15 basis points. The yield on the investment portfolio decreased 74 basis points due to the reinvestment of maturities at significantly lower rates. Average loans, which represent the highest yielding earning assets, increased $59.6 million or 2.5% and produced a yield of 7.91% in 1993 compared with 8.68% in 1992. This 77 basis point decrease in yield was
DAUPHIN DEPOSIT CORPORATION caused by the decrease in the prime interest rate affecting variable rate loans, the amount of refinancings of fixed rate loans and the interest rates on consumer loans compared with 1992. Average loans represented 54.0% of the average earning assets for 1993. The cost of interest bearing deposits decreased to 3.80% in 1993 compared with 4.72% in 1992. The overall interest rates offered on these deposits continued to decline during 1993. Additionally, the mix of these deposits continued to change significantly as depositors allowed longer term certificates of deposit to mature and decided to reinvest these proceeds into shorter term instruments. The decrease in the cost of short-term borrowings (52 basis points) was caused primarily by the decline in the federal funds rate. The increase in the interest rate spread, adjusted by the decline in the value of non interest bearing deposits in a lower interest rate environment, negatively affected the increase 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% 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 decreased by 24 basis points, 21 basis points and 15 basis points for 1994, 1993 and 1992, respectively.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged against earnings was $7.5 million in 1994 compared with $10.1 million in 1993, a decrease of 26.1%. This decrease was mainly due to the improved asset quality of 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.
Management takes an aggressive approach to charging off loans partly due to its analysis of the general economic outlook. This does not necessarily indicate a decline in the asset quality of the loan portfolio.
Several improvements were seen in certain measures of loan portfolio performance. The ratio of net charge-offs to average loans decreased to .24% in 1994 from .29% in 1993 and the level of non-accruing loans and restructured loans decreased to $15.2 million (.53% of year-end loans) at December 31, 1994 from $24.8 million (.96% of year-end loans) at December 31, 1993.
NON-INTEREST INCOME
Total non-interest income increased $.9 million or 1.5% in 1994 compared with an increase of $4.4 million or 7.8% in 1993. Excluding gains on investment securities, the 1994 increase was $.8 million or 1.4% compared with an increase of $5.1 million or 9.9% for 1993.
Income from fiduciary activities increased $1.1 million or 7.4% in 1994. Revenue in 1994 increased in the areas of employee benefits and personal trust. The increase of $.3 million or 1.7% in 1993 was negatively impacted by a decline in trust income fees as interest rates fell during 1993. Estate fees also declined in 1993 when compared to 1992.
Service charges on deposit accounts decreased $1.0 million or 8.1% during 1994. In 1993, an increase of $1.1 million or 9.2% was realized. Management continuously monitors the fee structure and makes changes where appropriate. The 1994 decrease was primarily due to a lower number of fees assessed for services in 1994.
DAUPHIN DEPOSIT CORPORATION
Other service charges and fees increased $2.1 million or 23.4% in 1994 compared with an increase of $1.1 million or 14.0% in 1993. The increase for 1994 and 1993 was due to increases in volume of merchant credit card processing and other fees relating to increased volume in consumer lending.
Broker/dealer commissions and fees represent the income 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. Gross income decreased 26.8% primarily as a result of a 35% decrease in volume of bond issues underwritten. The national decrease of bond issues underwritten was 44%.
The mortgage banking subsidiary, Eastern Mortgage, was purchased as of July 1, 1994. The increase of $5.1 million in mortgage banking income is due to the acquisition of a full service mortgage banking operation for six months. Prior year's income includes a limited mortgage banking operation within other subsidiaries.
Securities gains totaled $3.3 million in 1994 as compared with $3.2 million in 1993 and $4.0 million in 1992. The sale of debt securities generated $2.4 million in net gains for 1994. The sale of equity securities generated $.9 million in net gains. During 1993 the sale of debt securities generated $1.5 million in net gains compared with $1.7 million in net gains from equity securities transactions.
Other non-interest income decreased $3.7 million for 1994 compared with 1993. In 1993, compared with 1992, other non-interest income increased $3.1 million. In December 1993, a settlement with the Commonwealth of Pennsylvania was entered into which resulted in a refund of $3.6 million in previously paid Bank Shares Tax plus interest. This non-recurring refund was the result of litigation contesting the Commonwealth's ability to tax United States Obligations.
TABLE 5--NON-INTEREST INCOME
NON-INTEREST EXPENSE
Non-interest expense increased $2.8 million or 2.1% in 1994 compared with an increase of $5.0 million or 3.8% in 1993. Without including the expenses of Hopper Soliday and Eastern Mortgage, a decrease of $5.0 million or 4.0% was realized in 1994 compared with an increase of $5.3 million or 4.4% for 1993.
Salaries and employee benefits increased 5.8% in 1994 and 1.3% in 1993. The $6.3 million increase for 1994 was, for the most part, due to the addition of Eastern Mortgage, which was partially offset by a $1.8 million decrease in Hopper Soliday's salaries and employee benefits due to the decreased commission and fee income produced. Without Hopper Soliday and Eastern Mortgage, salaries and employee benefits decreased $.5 million
DAUPHIN DEPOSIT CORPORATION or .9% for 1994 compared with 1993. For 1993, compared with 1992, the increase was $1.1 million or 1.8%. Included in 1993 results is the impact of adopting SFAS 112 which amounted to an incremental cost of $.5 million. As explained in more detail in Note 14 of the Notes to Consolidated Financial Statements, SFAS 112 changed the practice of accounting for postemployment benefits from a pay- as-you-go basis to an accrual basis. Full-time equivalent employees increased 8.1% to 2,300 at December 31, 1994 compared with 2,127 at year-end 1993. The addition of Eastern Mortgage increased full-time employees by 318. The ratio of average assets (millions) per average full-time equivalent employees was $2.31 for 1994 compared with $2.27 for 1993.
All other non-interest expense items decreased $1.2 million or 1.7% in 1994 and increased $4.1 million or 6.5% in 1993. Without the effect of Hopper Soliday and Eastern Mortgage, the decrease would have been $4.5 million or 6.9% for 1994 and an increase of $4.1 million or .3% for 1993. The decrease for 1994 was primarily the result of decreases in professional fees, other merger related activities and the consolidation of Valley Bancorp., Inc. The increase in 1993 included $.5 million in merger expenses in connection with the acquisition of Valley Bancorp., Inc. along with increases in insurance, occupancy expenses, professional fees, computer processing, purchased software costs, merchant processing interchange expense and advertising expense. Increases in computer processing and purchased software costs are, in most cases, brought about by increases in volume of transactions and the acquisition of new software and hardware for future growth and expansion.
During 1989 Congress passed legislation (The Financial Institutions Reform, Recovery and Enforcement Act of 1989) to provide a workable solution to the financial problems of the financial services industry. The direct effect of this legislation on the banking industry was to substantially increase both the expense and burden of regulation and the assessment banks pay to the FDIC, the entity which insures a bank's depositors of their funds deposited with a bank. During 1993 a risk-based assessment was established which required banks to pay an assessment rate based on the combination of its capital and supervisory condition. Recently, proposals have been made that, after the Bank Insurance Fund reaches 1.25% of all insured deposits, could result in significant reductions in Dauphin's deposit insurance.
TABLE 6--NON-INTEREST EXPENSE
PROVISION FOR INCOME TAXES
Income tax expense amounted to $22.8 million in 1994 as compared with $22.0 million in 1993 and $18.5 million in 1992. Dauphin's effective tax rate for 1994 was 24.5% compared with 24.5% in 1993 and 23.2% in 1992. In 1992 Dauphin adopted the provisions of SFAS 109 (see Note 1 of the Notes to Consolidated Financial Statements) and elected to restate prior years financial statements. In connection with this adoption, net income for the year 1992 was increased by $.5 million. Additionally, during 1993 new tax legislation was enacted retroactive to January 1, 1993. The immediate impact, among other things, was to increase the corporate tax rate from 34% to 35%. This increased rate resulted in additional income tax expense of $.3 million for 1993. For a more comprehensive analysis of income tax expense, refer to Note 13 of the Notes to Consolidated Financial Statements.
DAUPHIN DEPOSIT CORPORATION
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 7 indicates how Dauphin has managed these elements. Average funding uses increased $88.0 million or 1.9% in 1994 as compared with an increase of $159.5 million or 3.6% in 1993.
TABLE 7--SOURCES AND USES OF FUNDS
- -------- (1) Non-interest bearing liabilities and stockholders' equity less non-interest bearing assets.
INVESTMENT SECURITIES AND OTHER SHORT-TERM INVESTMENTS
Average short-term investments and investment securities, in the aggregate, decreased $96.5 million or 4.7% during 1994 compared with an increase of $75.9 million or 3.8% during 1993. During 1994 loan growth exceeded the funding source of both deposits and short-term borrowings and the investment portfolio maturities were allocated for loan growth. During 1993 funds provided from increases in deposits and short-term borrowings exceeded the increase in the loan portfolio.
The balances maintained for short-term investments and investment securities are, for the most part, supported by short-term deposits such as money market and NOW accounts, short-term borrowings and time deposits. As reflected in Table 8, the average maturity of the investment portfolio was 8.5 years at year-end 1994. 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 1.8 years at December 31, 1994.
Dauphin had no investments in any foreign country that aggregated more than 1% of assets at December 31, 1994, 1993 or 1992.
DAUPHIN DEPOSIT CORPORATION
At December 31, 1994, net unrealized losses in the portfolio were $63.1 million consisting of gross unrealized gains of $11.2 million and gross unrealized losses of $74.3 million. Dauphin adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in one of three categories and accounted for as follows: 1) debt securities that a company 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. Management determined that the entire investment securities portfolio would be classified as available-for-sale. The impact of this change on January 1, 1994 resulted in an increase in investment securities of $64.7 million and an increase in stockholders' equity of $42.1 million, representing the after tax impact. The impact of this change on December 31, 1994 resulted in a decrease in investment securities of $63.1 million and a decrease in stockholders' equity of $41.0 million, representing the after tax impact.
TABLE 8--ANALYSIS OF INVESTMENT SECURITIES
LOANS
Average loans increased $191.0 million or 7.8% during 1994 compared with an increase of $60.0 million or 2.5% in 1993. Loan demand continued to improve in 1994, primarily in the area of consumer loans.
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.
Loan balances during 1994 were influenced by the improving economy and, as a result, balances in both the commercial and consumer areas increased. Additionally, as interest rates increased, many residential mortgages were originated into lower adjustable rate products. Dauphin continues to sell fixed rate mortgages in the secondary market in order to avoid taking interest rate risk.
DAUPHIN DEPOSIT CORPORATION
Dauphin's policy is to make the vast majority of its loans and commitments in the market area it serves. This tends to reduce risk and 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, 1994.
TABLE 9--LOANS OUTSTANDING, NET OF UNEARNED INCOME
- -------- (1) Includes home equity loans
TABLE 10--LOAN MATURITIES AND INTEREST SENSITIVITY (1)
- -------- (1) Excludes residential mortgages, consumer loans and lease financing
DEPOSITS
Average deposits, including non-interest bearing demand deposits, decreased $62.3 million or 1.7% during 1994 compared with a decrease of $55.7 million or 1.5% in 1993. Dauphin's subsidiary bank, like many other commercial banks, has experienced slow deposit growth 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 is also affected by the movement of interest rates. Rates paid on interest bearing transaction accounts decreased in early 1994. Rates paid on time deposits have been increasing due to rising interest rates. Depositors appear to be shifting from transaction accounts to time deposits, reversing the trend of the prior three years. Included in interest bearing deposits are certain individual retirement accounts (IRA) totaling $173.5 million which are invested in 18 month variable interest rate products with a minimum interest rate of 10%. During 1993, Dauphin charged a service fee on these products, and initiated the process to discontinue the products in accordance with the terms of the IRA contract. In furtherance of its right to terminate this investment product, Dauphin commenced a legal action for a
DAUPHIN DEPOSIT CORPORATION declaratory judgment in 1994 seeking a judicial determination from the Court permitting Dauphin to discontinue the 18 month variable rate investment product at issue and/or to charge an annual maintenance fee and an additional fee on rollovers or transfers into the IRA accounts. Dauphin's right to terminate the variable rate investment product and to charge a service fee 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 rate investment product is not in the best interests of Dauphin. Management intends to vigorously assert its legal right to discontinue the 18 month variable rate investment product. Also during 1994 and 1993 average time deposits decreased $41.5 million and $207.9 million, respectively. This funding source was replaced by lower costing overnight federal funds. Additionally, the growth of non-interest bearing deposits has been relatively slow in recent years. The percentage of average non-interest bearing demand deposits to average total deposits amounted to 11.6% in 1994, 11.0% for 1993 and 10.0% for 1992. 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 $132.7 million or 20.5% during 1994 compared with an increase of $163.2 million or 33.8% in 1993. 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 items such as loan growth, deposit growth and the interest rates paid for these funds. As previously mentioned, a portion of the growth in 1994 and 1993 was the result of a need to replace the decrease in time deposits. The average cost of short-term borrowings decreased from 3.53% in 1992 to 3.01% in 1993 and increased to 4.12% in 1994.
NON-PERFORMING ASSETS
Table 11 reflects Dauphin's non-performing assets for the five years ended December 31, 1994. Dauphin's policy is to discontinue the accrual of interest on commercial loans on which principal or interest is past due 90 days or more and on commercial mortgages on which principal or interest is past due 120 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 will insure that the historically high quality of the loan portfolio will be maintained. Other real estate owned represents property acquired through foreclosure or considered to be an in-substance foreclosure.
Loan quality is maintained through diversification of risk, strict enforcement of credit control practices and continued monitoring of the loan portfolio.
At December 31, 1994, 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.
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 or reduced rate in the future are estimated to total approximately $11.1 million at December 31, 1994 compared with $7.0 million at December 31, 1993.
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 is the policy of Dauphin to consider financing HLT's for its customers or for potential customers in its market
DAUPHIN DEPOSIT CORPORATION 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 $8.2 million at December 31, 1994 and $7.2 at December 31, 1993 and represents Dauphin's portion of a shared national credit within its market area.
TABLE 11--NON-PERFORMING ASSETS
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 12 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.
TABLE 12--ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
- -------- Gross loans represent loans before unamortized net loan fees.
DAUPHIN DEPOSIT CORPORATION
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 13 reflects an analysis of the allowance for loan losses for the past five years.
The provision for loan losses of $7.5 million exceeded the net charge-offs of $6.4 million. The allowance for loan losses was increased from $39.2 million in 1993 to $40.2 million in 1994. The allowance for loan losses as a percentage of year-end loans was 1.41% at December 31, 1994 and 1.52% at December 31, 1993.
TABLE 13--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
DAUPHIN DEPOSIT CORPORATION
In May 1993, Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan" was issued. SFAS 114 addresses the accounting by creditors for impairment of certain loans. SFAS 114 requires that impaired loans that are within the scope of the Statement be 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 the fair value of the collateral if the loan is collateral dependent. In October 1994, Statement of Financial Accounting Standards No. 118 (SFAS 118), "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" was issued. SFAS 118 amended SFAS 114. SFAS 114 and SFAS 118 are effective for fiscal years beginning after December 15, 1994 and earlier adoption is permitted. Dauphin will adopt SFAS 114 and SFAS 118 on January 1, 1995. Management does not believe the adoption will have a significant impact on its financial statements. On January 1, 1995 the balance of impaired loans was $17.4 million and the reserve on these loans was $3.9 million.
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 8), the amount of short-term investments, the funds provided by loan maturities (Table 10) and the funds available to Dauphin by established federal funds lines of credit. Additionally, in 1991 Dauphin Deposit Bank and Trust Company became 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 decreased by $71.3 million or 2.0% from year-end 1993 to year-end 1994. As previously mentioned, this funding source was replaced by overnight federal funds. Table 14 reflects the change in the major classifications of deposits by comparing the year-end balances for the past three years and Table 15 reflects the maturity of large dollar deposits for the same periods. As shown in Table 16, 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 14--DEPOSITS BY MAJOR CLASSIFICATION
DAUPHIN DEPOSIT CORPORATION
TABLE 15--MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
TABLE 16--SHORT-TERM BORROWINGS
CAPITAL RESOURCES
During 1994, Dauphin announced that the Board of Directors authorized the repurchase of up to 2,000,000 shares of the outstanding common stock. Available investments were 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 1994, Dauphin repurchased 1,744,500 shares for $42.4 million.
Total stockholders' equity decreased $39.4 million or 7.8% in 1994 compared with an increase of $44.0 million or 9.5% in 1993. The decrease for 1994 was primarily due to the repurchase of outstanding common stock throughout the year and the SFAS 115 valuation for net unrealized losses on investments available- for-sale. The increase for 1993 was, for the most part, retained earnings or internal capital generation. The ratio of average equity to average assets amounted to 10.27% for 1994, compared with 9.99% for 1993 and 9.37% for 1992. 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 7.9% for 1994 compared with 8.6% for 1993 and 8.3% for 1992.
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 17 presents the capital ratios for Dauphin for the past three years calculated at year-end in accordance with these guidelines. At December 31, 1994, Dauphin and its banking subsidiary exceeded all capital requirements and is considered to be "well-capitalized".
DAUPHIN DEPOSIT CORPORATION
TABLE 17--CAPITAL RATIOS
INTEREST RATE SENSITIVITY
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between prime rates and rates paid on purchased funds are not constant over time. The rate of growth in interest free sources of funds will influence the level of interest sensitive funding sources. In addition, the absolute level of 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 net interest margin.
Table 18 presents an interest sensitivity analysis of Dauphin's assets and liabilities at December 31, 1994, for several time intervals. This table reflects the interest sensitivity gap in two formats. The detailed presentation represents management's position on certain interest bearing deposits, such as 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 18 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 18 is a summary of the gap, as viewed by certain regulatory authorities, which presents these interest bearing deposits as being subject to immediate repricing.
DAUPHIN DEPOSIT CORPORATION
TABLE 18--INTEREST SENSITIVITY ANALYSIS
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. An asset sensitive gap will benefit Dauphin during periods of rising interest rates, while a liability sensitive gap will benefit Dauphin during declining rates. The gap reflects Dauphin's sensitivity to rate changes over a period of time. Dauphin continuously monitors and adjusts the gap position, taking into consideration current interest rate projections, and maintaining flexibility if rates move contrary to expectations.
EFFECTS OF INFLATION
The impact of inflation upon banks differs from the impact upon non-financial institutions. Banks, as financial intermediaries, have assets which are primarily monetary in nature and change corresponding to movements in the inflation rate. The precise impact of inflation upon Dauphin is difficult to measure. Inflation may cause non-interest expense items to increase at a more rapid rate than earning sources. Inflation may also affect the borrowing needs of consumers, thereby affecting the growth rate of Dauphin's assets. Inflation may also affect the general level of interest rates, which can have an effect on the profitability of Dauphin.
DAUPHIN DEPOSIT CORPORATION ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and documents are set forth in this Annual Report on Form 10-K on the following pages:
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993
See accompanying notes to consolidated financial statements.
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1994, 1993 and 1992
See accompanying notes to consolidated financial statements.
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1994, 1993 and 1992
See accompanying notes to consolidated financial statements.
Dauphin Deposit Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992
See accompanying notes to consolidated financial statements.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies of Dauphin Deposit Corporation and subsidiaries.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The 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 estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dauphin Deposit Corporation and subsidiaries (Dauphin), including its principal subsidiary, Dauphin Deposit Bank and Trust Company, which includes the Bank of Pennsylvania, Farmers Bank and Valleybank Divisions (the Bank). All material intercompany balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES
Dauphin adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities" on January 1, 1994. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in one of three categories and accounted for as follows: 1) debt securities that a company 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. Management has determined that the entire investment securities portfolio will be classified as available-for-sale.
Prior to January 1, 1994, investment debt securities were carried at cost adjusted for amortization of premiums and accretion of discounts. Debt securities were carried at cost since Dauphin had the ability and intent to hold securities to maturity. Marketable equity securities were carried at the lower of cost or market value. Unrealized losses on equity securities were reported as a reduction of investment securities and net of taxes as a reduction of stockholders' equity.
Premiums and discounts are amortized and accreted over the term of the related securities using a method that approximates the interest method. Realized gains or losses on the sale of investment securities (determined by the specific identification method) are shown separately in the statements of income.
ASSETS HELD FOR SALE
Assets held for sale consist of the securities inventory of Hopper Soliday & Co., Inc., Dauphin's broker/dealer subsidiary, and mortages held for sale, primarily the inventory of Eastern Mortgage Services, Inc. (Eastern Mortgage). The securities inventory is recorded at current quoted market value. The mortgages held for sale are carried at the lower of aggregate cost or estimated market value with unrealized losses recognized
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 through a provision included in other income. Gains and losses on the sale of mortgages 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.
Loan fees and costs of loan origination are deferred and recognized over the life of the loan as a component of interest income. 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.
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.
In May 1993, Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan" was issued. SFAS 114 addresses the accounting by creditors for impairment of certain loans. SFAS 114 requires that impaired loans that are within the scope of the Statement be 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 the fair value of the collateral if the loan is collateral dependent. In October 1994, Statement of Financial Accounting Standards No. 118 (SFAS 118), Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" was issued. SFAS 118 has amended SFAS 114. SFAS 114 and SFAS 118 are effective for fiscal years beginning after December 15, 1994 and earlier adoption is permitted. Dauphin will adopt SFAS 114 and SFAS 118 on January 1, 1995. Management does not believe the adoption of SFAS 114 and SFAS 118 will have a significant impact on its financial statements.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, including capitalized interest during construction, less accumulated depreciation and amortization. Bank 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
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 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 $15.5 million and $4.9 million of goodwill at December 31, 1994 and 1993, respectively. Goodwill is being amortized using the straight-line method over periods not exceeding 15 years.
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.
Purchased mortgage servicing rights represent the cost of acquiring the right from third parties to service mortgage loans. Purchased mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. The amortization of purchased mortgage servicing rights is periodically evaluated in relation to estimated future net servicing revenues based on management's best estimate of remaining loan lives.
DERIVATIVES
Dauphin's mortgage subsidiary, Eastern Mortgage, has limited involvement with derivative financial instruments and does not use them for trading purposes. Derivatives are primarily used to manage well-defined interest rate risks, as described in Note 16.
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 in accordance with the requirements of Statement of Financial Accounting Standards No. 87 "Employers' Accounting for Pensions". The projected unit credit method is utilized for measuring net periodic pension cost over the employees' service lives.
Dauphin adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", as of January 1, 1992, which established a new accounting principle for the cost of retiree health care and other postretirement benefits. Prior to 1992, Dauphin recognized these benefits on a cash basis.
Dauphin adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" effective January 1, 1993. This standard establishes accounting requirements for employers who provide benefits to former or inactive employees after employment but before retirement. Prior to 1993, these costs were recognized on a cash basis.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
INCOME TAXES
In 1992, Dauphin adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 requires the asset and liability method in computing income tax expense for financial reporting purposes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS 109, 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 using the treasury stock method. The difference between primary and fully diluted earnings per share is not significant in any year.
STATEMENT OF CASH FLOWS
For purposes of the 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 for 1993 and 1992 due to pooling-of- interests. Certain other reclassifications have been made for comparability as reporting requirements have changed.
2--ACQUISITIONS AND DIVESTITURE
On January 1, 1994, Dauphin acquired all the outstanding stock of Valley Bancorp., Inc. (Valley) in exchange for 2,600,643 shares of Dauphin's common stock, along with cash of $16,000 in lieu of fractional shares, consummating the merger announced in June 1993. At December 31, 1993 Valley had total assets, deposits and equity of $324,164,000, $285,310,000 and $33,948,000, respectively. Valley's principal subsidiary was Valley Bank and Trust Company. The acquisition was accounted for as a pooling-of-interests, and financial information for all prior periods presented has been restated to include the results of operations and financial position of Valley.
On August 23, 1993 Dauphin entered into an agreement to sell 100% of the stock of Farmers Savings Bank, a Federal Savings Bank (Farmers Savings) for $797,000. The sale was subject to regulatory approval and was consummated on February 1, 1994. Farmers Savings had total assets of $12,678,000 at December 31, 1993. The sale of Farmers Savings did not have a material impact on the financial condition or results of operations for Dauphin in 1994.
On July 1, 1994, Dauphin acquired Eastern Mortgage Services, Inc. (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 $11.9 million has been recorded as goodwill and is being amortized on a straight-line basis over 15 years. The acquisition is not material to the financial position and results of operations of Dauphin, and accordingly, pro forma information is deemed not necessary.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 3--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS AND INVESTMENT SECURITIES
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, 1994 and 1993 was approximately $78,522,000 and $76,529,000, respectively.
The Bank is required to maintain an investment in Federal Home Bank of Pittsburgh stock of $12,652,000 which is included with equity securities.
4--INVESTMENT SECURITIES
As discussed in Note 1, Dauphin adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities" on January 1, 1994. The impact of this change at January 1, 1994 resulted in an increase in investment securities of $64,740,000 and an increase in stockholders' equity of $42,080,000, representing the after tax impact. The impact as of December 31, 1994 was a decrease in investment securities of $63,133,000 and a decrease in stockholders' equity of $41,036,000, representing the after tax impact.
The amortized cost and fair value of investment securities are as follows:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 The amortized cost and fair value of debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Gains and losses from sales of investment securities are as follows:
Securities with a carrying value of $816,290,000 at December 31, 1994 and $853,935,000 at December 31, 1993 are pledged to secure public deposits and for other purposes as provided by law.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
5--LOANS
The loan portfolio, net of unearned income, at December 31, 1994 and 1993 is as follows:
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 aggegate loans totaling less than $60,000 to any one related party, is as follows:
Included within the loan portfolio are loans on which the Bank has ceased the accrual of interest and restructured loans. Such loans amounted to $15,168,000 and $24,802,000 at December 31, 1994 and 1993, respectively. If interest income had been recorded on all such loans outstanding during the years 1994, 1993 and 1992, interest income would have been increased as shown in the following table:
The Bank does not have any significant commitments to lend additional funds on non-accrual or restructured loans at December 31, 1994.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
6--ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows:
7--BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31, 1994 and 1993 is as follows:
Depreciation and amortization amounted to $6,834,000 for 1994, $6,495,000 for 1993 and $6,193,000 for 1992.
8--EXCESS AND PURCHASED MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the consolidated balance sheet. The outstanding balance of these loans at year-end and gains on the sale of servicing during the year are presented below:
An analysis of the activity of excess and purchased mortgage servicing rights for the year ended December 31, 1994 is as follows:
The balances and activities of excess and purchased mortgage servicing rights were not significant to the consolidated balance sheets or results of operations of Dauphin during 1993 and 1992.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
9--TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 or more at December 31, 1994 and 1993 amounted to $270,777,000 and $300,335,000, respectively.
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, 1994, 1993 and 1992:
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 $2,814,000,000 at December 31, 1994.
11--LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1994 and 1993:
In November 1986, Dauphin issued $35,000,000, 8.70% Senior Notes due 1996 at par. These Senior Notes are not subordinated in right of payment to any other unsecured indebtedness of Dauphin.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
Advances from The Federal Home Loan Bank of Pittsburgh consists of two advances with interest rates ranging from 5.89% to 6.17% and mature in 1995. These advances are subject to restrictions and penalties if repaid prior to maturity and are collateralized by qualifying investments.
Aggregate long-term debt maturities, for each of the next five years are as follows:
1995--$51,096,000; 1996--$35,094,000; 1997--$105,000; 1998--$84,000; 1999-- $5,293,000
At December 31, 1994, Dauphin and its subsidiaries had unused lines of credit totaling approximately $3,000,000 with a non-affiliated bank.
12--RESTRICTION ON PAYMENT OF DIVIDENDS
Certain restrictions exist regarding the ability of the subsidiaries to transfer funds to Dauphin in the form of cash dividends. Dauphin Deposit Corporation and the Bank are required to maintain minimum amounts of capital to total risk weighted assets as defined by the banking regulators. The requirement is to have a minimum Tier 1 and total capital ratios of 4.00% and 8.00%, respectively. The Bank may not pay dividends to Dauphin, which would allow these risk-based capital ratios to fall below the minimum capital requirements.
13--INCOME TAXES
The provision for income taxes, consisting primarily of Federal income taxes, for the years 1994, 1993 and 1992, consists of the following:
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994, 1993 and 1992 are as follows:
Included in the table above is the recognition of certain temporary differences for which no deferred tax expense or benefit was recognized in the consolidated statements of income. Such items include unrealized gain and losses on certain investments in debt and equity securities accounted for under SFAS 115 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 $40,294,000 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.
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.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
The following table sets forth the pension plan's funded status and amounts recognized in Dauphin's consolidated financial statements at December 31, 1994 and 1993:
The assumptions used in determining the actuarial present value of the projected benefit obligation and the expected rate of return on plan assets are as follows:
Net pension expense (credit) for 1994, 1993 and 1992 was comprised of the following:
Plan assets are primarily invested in listed stocks (including 100,000 and 86,000 shares of Dauphin at December 31, 1994 and 1993) and U.S. Treasury and federal agency securities.
Effective January 1, 1992, Dauphin adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other than Pensions". This pronouncement focuses principally on postretirement health care and life insurance benefits and significantly changed Dauphin's prior practice of accounting for these benefits on a pay-as- you-go basis to an accrual basis during the years that the employee renders the necessary service to eventually receive these benefits.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
Dauphin's postretirement benefits other than pensions are currently not funded. The status of the plan at December 31, 1994 and 1993 is as follows:
The assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligation are as follows:
The cost for postretirement benefits other than pensions for 1994, 1993 and 1992 consisted of the following components:
The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 16 1/2% in 1992, the year of adoption, decreasing by 1% per year to an ultimate rate of 6% in 2012 (14 1/2% at December 31, 1994) 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 $2,100,000 at December 31, 1994 and increase the aggregate of the service and interest cost components by $264,000 for the year ended December 31, 1994.
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 $563,000, $468,000 and $405,000 during 1994, 1993 and 1992, respectively.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
In 1993, Dauphin adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". The adoption resulted in an incremental cost of $30,000 and $500,000 to salaries and benefits expense in 1994 and 1993, respectively. This accrual was established to record the liability for benefits to former or inactive employees after employment but before retirement. The balance at December 31, 1994 is $530,000.
15--EMPLOYEE STOCK PURCHASE PLAN, STOCK OPTION PLAN AND STOCKHOLDERS' EQUITY
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. 840,000 shares of common stock have been authorized to be offered under the plan, of which 658,545 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, 1994.
During 1987, the shareholders approved the adoption of the Stock Option Plan of 1986 (the Plan). Under the 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. The exercise price of options granted may not be less than 85% of the fair 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.
Stock option transactions during 1994, 1993 and 1992 are summarized below:
In connection with the adoption of a shareholder rights plan on January 22, 1990, Dauphin 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
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 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.
During 1994, Dauphin announced that the Board of Directors authorized the repurchase of up to 2,000,000 shares of the outstanding common stock. Available investments were 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 1994, Dauphin repurchased 1,744,500 shares for $42.4 million.
16--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/or meet the financing needs of its customers and which reduces 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 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:
Commitments to extend credit, which includes 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
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 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 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 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, has limited involvement with derivative financial instruments and does not use them for trading purposes. Derivatives are primarily used to manage well-defined interest rate risks.
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.
The secondary marketing department at Eastern Mortgage is primarily responsible for mitigating the exposure 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 executed, and the primary objective of hedging is achieved. However, in the normal course of business, to the extent that management believes that market conditions may change favorably, or fewer loans are closed than previously anticipated, certain forward commitments may be paired-off. In instances where management paired-off forward commitments on the basis of certain expectations of market conditions, any gains or losses arising from 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.
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 is delivered into.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
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 options on treasury securities 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 expensed as an adjustment to gains (losses) on sale of mortgage loans when the options expire. 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 deliberately exposes a portion of its mortgage loan portfolio (warehouse and pipeline, net of estimated fall-out) 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. At December 31, 1994, the maximum exposure position authorized by management is $12 million. The secondary marketing department produces a daily exposure report summarizing the exposure position. This report is reviewed and adjustments to the exposure position, to the extent considered necessary by management, are made daily.
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
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.
Other financial assets
The fair value for accrued interest receivable is estimated to be the current book value. The fair value for 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.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
Deposits
The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, NOW and money market deposits, is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is based on the discounted value of contractual cash flows, using the rates currently offered for deposits of similar remaining maturities.
Short-term borrowings
The fair value of short-term borrowings is estimated using the current rates for similar terms and maturities.
Long-term debt
The fair value of long-term debt is estimated using current rates for debt with similar terms and remaining maturities.
Accrued interest payable
The fair value of accrued interest payable is estimated to be the current book value.
Off-balance-sheet financial instruments
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The fair value of options is estimated based on quoted market prices.
Limitations
The fair values estimated are dependent upon subjective assumptions and involve significant uncertainties resulting in estimates that vary with changes in assumptions. Any sales of financial instruments may incur potential tax and other expenses that would not be reflected in the fair values. Any changes in assumptions or estimation methodologies may have a material effect on the estimated fair values disclosed. The reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques. Also, the estimates do not reflect any additional premium or discount that could result from the sale of Dauphin's entire holdings of a particular instrument.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 At December 31, 1994 and 1993, Dauphin's estimated fair values of financial instruments based on disclosed assumptions are as follows:
- -------- (1)The amounts shown under "carrying amount" represent accruals or deferred income arising from those unrecognized financial instruments.
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 17--CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Dauphin Deposit Corporation (Parent Company Only) Condensed Balance Sheets
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Income
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992 Dauphin Deposit Corporation (Parent Company Only) Condensed Statements of Cash Flows
DAUPHIN DEPOSIT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1994, 1993 AND 1992 18--CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
19--CONTINGENT LIABILITIES
Various legal actions or proceedings are pending involving Dauphin or its subsidiaries. Management believes that the aggregate liability or loss, if any, will not be material.
(LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Dauphin Deposit Corporation
We have audited the accompanying consolidated balance sheets of Dauphin Deposit Corporation and subsidiaries as of December 31, 1994 and 1993, 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, 1994. These consolidated financial statements are the responsibility of Dauphin'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 as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in notes 1 and 4 to the consolidated financial statements, Dauphin changed its method of accounting for investment securities in 1994 to adopt the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
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January 27, 1995
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DAUPHIN DEPOSIT CORPORATION ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
DAUPHIN DEPOSIT CORPORATION PART III --------
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relative to directors of the Registrant is incorporated herein by reference to Election of Directors in Dauphin's 1995 Proxy Statement. Information relative to executive officers of the Registrant is set forth herein in Part I under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to Executive Compensation in the 1995 Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference to Outstanding Stock and Principal Holders Thereof and Security Ownership of Management in the 1995 Proxy Statement.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to Transactions with Management in the 1995 Proxy Statement.
DAUPHIN DEPOSIT CORPORATION PART IV -------
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DAUPHIN DEPOSIT CORPORATION
DAUPHIN DEPOSIT CORPORATION 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 21, 1995 By: /s/ Christopher R. Jennings __________________________________ 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.
SIGNATURES TITLE DATE ---------- ----- ----
/s/ Christopher R. Jennings Chairman of the February 21, 1995 - ------------------------------------ Board, Chief CHRISTOPHER R. JENNINGS Executive Officer and Director
/s/ Robert L. Fryer, Jr. President, Chief February 21, 1995 - ------------------------------------ Operating Officer ROBERT L. FRYER, JR. and Director
/s/ Paul B. Shannon Vice Chairman and February 21, 1995 - ------------------------------------ Chief Credit PAUL B. SHANNON Policy Officer
/s/ Lawrence J. LaMaina, Jr. Vice Chairman and February 21, 1995 - ------------------------------------ Director LAWRENCE J. LAMAINA, JR.
/s/ Dennis L. Dinger Senior Executive February 21, 1995 - ------------------------------------ Vice President, DENNIS L. DINGER Chief Fiscal and Administrative Officer (Principal Financial and Accounting Officer)
/s/ William H. Alexander Director February 21, 1995 - ------------------------------------ WILLIAM H. ALEXANDER
/s/ James O. Green Director February 21, 1995 - ------------------------------------ JAMES O. GREEN
/s/ Derek C. Hathaway Director February 21, 1995 - ------------------------------------ DEREK C. HATHAWAY
DAUPHIN DEPOSIT CORPORATION
SIGNATURES TITLE DATE ---------- ----- ----
/s/ Alfred G. Hemmerich Director February 21, 1995 - ------------------------------------- ALFRED G. HEMMERICH
/s/ Lee H. Javitch Director February 21, 1995 - ------------------------------------- LEE H. JAVITCH
Director February , 1995 - ------------------------------------- WILLIAM J. KING
/s/ William T. Kirchhoff Director February 21, 1995 - ------------------------------------- WILLIAM T. KIRCHHOFF
/s/ Andrew Maier, II Director February 21, 1995 - ------------------------------------- ANDREW MAIER, II
/s/ James E. Marley Director February 21, 1995 - ------------------------------------- JAMES E. MARLEY
/s/ Robert F. Nation Director February 21, 1995 - ------------------------------------- ROBERT F. NATION
/s/ Elmer E. Naugle Director February 21, 1995 - ------------------------------------- ELMER E. NAUGLE
Director February , 1995 - ------------------------------------- WALTER F. RAAB
/s/ Paul C. Raub Director February 21, 1995 - ------------------------------------- PAUL C. RAUB
/s/ Henry W. Rhoads Director February 21, 1995 - ------------------------------------- HENRY W. RHOADS
/s/ Jean D. Seibert Director February 21, 1995 - ------------------------------------- JEAN D. SEIBERT
/s/ R. Champlin Sheridan, Jr. Director February 21, 1995 - ------------------------------------- R. CHAMPLIN SHERIDAN, JR.
DAUPHIN DEPOSIT CORPORATION
EXHIBIT INDEX
DAUPHIN DEPOSIT CORPORATION