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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number: 0-10674
December 31, 1996
SUSQUEHANNA BANCSHARES, INC.
____________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2201716
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 626-4721
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Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Title of each class: Name of each exchange on
- -------------------- which registered:
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Common Stock, Par Value $2.00 per share Common Stock is not
registered on any
exchange.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [__]
As of February 28, 1997, 13,181,187 shares of the registrant's Common Stock
were outstanding. The aggregate market value (based on the bid price) of such
shares held by non-affiliates on that date was $450,028,280.
PART I
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Item 1. Business and History
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General
Susquehanna Bancshares, Inc. ("Susquehanna" or the "Company") is a
multi-bank financial holding company headquartered in Lititz, Pennsylvania. As
of December 31, 1996, the Company operated as a super-community bank holding
company with five banks, three thrifts, and two non-bank subsidiaries. These
subsidiaries provide banking and banking-related services from 109 offices
located in central Pennsylvania and West and Central Maryland. As of December
31, 1996, Susquehanna had assets of $3.0 billion, net loans receivable of $2.2
billion, deposits of $2.5 billion and shareholders' equity of $293 million.
The relative sizes and profitability of Susquehanna's subsidiaries as
of and for the year ended December 31, 1996, are depicted in the following
table: (Dollars in Thousands)
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Percent of Percent of
Subsidiary Assets Total Net Income Total
- --------------------------- ----------- ----------- ---------- -----------
................................................................................
Farmers First Bank $ 894,867 29% $12,766 43%
Farmers & Merchants Bank 514,174 17% 5,627 19%
and Trust
First National Trust Bank 271,772 9% 3,649 12%
Williamsport National Bank 231,041 8% 4,389 15%
Citizens National Bank of 178,155 6% 2,562 8%
So. Penna.
*Atlantic Federal Savings 194,412 6% 1,319 4%
Bank
*Reisterstown Federal 268,838 9% 3,383 11%
Savings Bank
*Fairfax Savings, AFSB 457,025 15% 1,982 7%
Susque-Bancshares Leasing 30,165 1% 622 2%
Co., Inc. (leasing)
Susque-Bancshares Life 2,825 - 230 1%
Insurance Co.
(life insurance)
Parent (including (4,823) - (6,553) (22%)
consolidation adjustments
and Susquehanna South's
parent and non-bank
subsidiaries)
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Total $3,038,451 100% $29,976 100%
================================================================================
*subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares
South, Inc. ("Susquehanna South")
Susquehanna's subsidiaries provide commercial and retail banking
services in Central and South Central Pennsylvania, principally in Franklin,
Lancaster, Northumberland, Snyder, York and Lycoming Counties, in Western
Maryland, principally in Allegany and Washington Counties, and in Central
Maryland, including Baltimore County, Baltimore City, Carroll County, Harford
County, Cecil County and Anne Arundel County. Certain Susquehanna subsidiaries
also provide trust, leasing and insurance services.
As a "super-community" bank holding company, the Company's strategy
has been to manage its banking subsidiaries on a decentralized basis, allowing
each subsidiary operating in different markets to retain its
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name and board of directors as well as substantial autonomy in its day to day
operations. The Company believes that this strategy permits these institutions
greater flexibility to better serve their markets, increasing responsiveness to
local needs, and differentiates Susquehanna from other large competitors.
Susquehanna continues, however, to implement consolidations in selected lines of
business, operations and support functions in order to achieve greater economies
of scale and cost savings. Consistent with this philosophy, Susquehanna merged
its subsidiary Spring Grove National Bank into its lead bank, Farmers First
Bank, effective June 6, 1996. The Company instituted a full consolidation of
back office data processing operations of its five bank subsidiaries, which was
completed in 1996. The Company further anticipates integrating its trust and
mortgage banking operations. Susquehanna also provides its banking subsidiaries
guidance in the areas of credit policy and administration, strategic planning,
investment portfolio management and other financial and administrative services.
Susquehanna has no employees, other than its officers, each of whom
are employees of one or the other of its bank or thrift subsidiaries. As of
December 31, 1996, the subsidiaries of Susquehanna employed 1,232 full-time and
292 part-time employees.
Susquehanna was incorporated in Pennsylvania in 1982. Its executive
offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and
its telephone number is (717) 626-4721.
Business
Susquehanna provides a wide range of retail and commercial banking
services. Susquehanna's strategy for its retail banking businesses is to expand
its deposit and other product market share through a high level of customer
service, new product offerings, application of new technologies and delivery
systems, and selective acquisitions. The Company operates an extensive branch
network and has a strong market presence in its primary markets in Pennsylvania
and Maryland. As a result of the development of broad banking relations with
its customers, the Company's lending and investing activities are funded almost
entirely by core deposits.
The Company's retail banking services include checking and savings
accounts, money market accounts, certificates of deposit, individual retirement
accounts, Christmas clubs, mutual funds and annuities (see discussion below),
home equity lines of credit, residential mortgage loans, home improvement loans,
student loans, automobile loans and personal loans.
In December, 1995, Susquehanna introduced six automated loan machines
("ALM"), three in Maryland and three in Pennsylvania. ALMs represent a
relatively new development in bank services delivery systems and afford
consumers the convenience of 24 hour credit up to a maximum loan amount of
$5,000. As of December 31, 1996, the Company operated 22 ALM's within
Pennsylvania and Maryland.
The Company also initiated a credit card offering in late 1995. Using
experience and resources developed in a program operated through one of its
Pennsylvania bank subsidiaries, the credit card program was expanded to include
similar offerings through other Susquehanna subsidiaries. The program targets
existing customers and selected prospects in Susquehanna's market areas. During
1996, Susquehanna introduced a check (debit) card in Pennsylvania and Maryland.
As of November 30, 1996, almost 64,000 cards had been issued.
3
Through its subsidiary, Susque-Bancshares Life Insurance Co., the Company
offers certain credit related insurance products.
The acquisition of the Maryland thrifts substantially enhances
Susquehanna's mortgage origination and mortgage banking capabilities. The
consolidation of the resources that are available throughout its system, planned
for 1997, will facilitate an expansion of Susquehanna's mortgage banking
operations in its Maryland and Pennsylvania markets.
Susquehanna's commercial lending operations include commercial, financial
and agricultural lending (10% of the total loan portfolio at December 31, 1996),
real estate construction lending (9%), and commercial mortgage lending (15%).
Loans originated by each subsidiary are subject to central review and uniform
Company credit standards. Nearly all of the Company's loans are concentrated in
the markets served by its subsidiary banks and thrifts.
Business of Farmers First. Farmers First is engaged in commercial banking and
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trust business as authorized by the Pennsylvania Banking Code of 1965. This
involves accepting demand, time and savings deposits and granting loans
(consumer, commercial, real estate and business) to individuals, corporations,
partnerships, associations, municipalities and other governmental bodies.
Through its trust department, Farmers First renders services as trustee,
executor, administrator, guardian, managing agent, custodian, investment advisor
and other fiduciary activities authorized by law. During 1994, Farmers First
acquired all of the assets of its subsidiary, Farmers AgCredit Corp., which has
ceased all business activity. Farmers First owns no other subsidiaries. As of
December 31, 1996, Farmers First had twenty-six (26) full-service and ten (10)
limited-service banking offices in Lancaster and York Counties. Farmers First's
business is not dependent on any one customer, and the loss of any customer or a
few customers would not have a material adverse effect upon it. Effective June
6, 1996, the former Spring Grove National Bank, a Susquehanna affiliate, was
merged into Farmers First, effectively expanding the service area of Farmers
First into York County.
As of December 31, 1996, Farmers First had total assets of $895
million, total shareholder's equity of $107 million and total deposits of $710
million.
Business of Citizens. Citizens is engaged in commercial banking and trust
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business as authorized by the National Bank Act. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Through its trust department,
Citizens renders services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other fiduciary activities
authorized by law. Citizens owns no subsidiaries.
As of December 31, 1996, Citizens had six (6) full-service banking
offices in Franklin County. Citizens' business is not dependent on any one
customer, and the loss of any customer or a few customers would not have a
material adverse effect upon it.
As of December 31, 1996, Citizens had total assets of $178 million,
total shareholder's equity of $16 million and total deposits of $158 million.
4
Business of First National. First National is engaged in commercial banking and
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trust business authorized by the National Bank Act. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Through its trust department,
First National renders services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other fiduciary activities
authorized by law. First National owns no subsidiaries.
As of December 31, 1996, First National had ten (10) full-service and
one (1) limited-service banking offices. The main office of First National is
located in Sunbury, Pennsylvania. Four (4) full-service and one (1) limited-
service branches are located in Northumberland County, while three (3) full-
service branches are located in contiguous Snyder County and one (1) full-
service branch is located in each of Columbia County and Union County. First
National's business is not dependent on any one customer, and the loss of any
customer or a few customers would not have a material adverse effect upon it.
As of December 31, 1996, First National had total assets of $272
million, total shareholder's equity of $25 million and total deposits of
$241 million.
Business of Williamsport. Williamsport is engaged in commercial banking and
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trust business authorized by the National Bank Act. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Through its trust department,
Williamsport renders services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other fiduciary activities
authorized by law. Williamsport owns no subsidiaries.
As of December 31, 1996, Williamsport had six (6) full-service and one (1)
limited-service banking offices in Lycoming County. The main office of
Williamsport is located in Williamsport, Pennsylvania. Williamsport's business
is not dependent on any one customer, and the loss of any customer or a few
customers would not have a material adverse effect upon it.
As of December 31, 1996, Williamsport had total assets of $231
million, total shareholder's equity of $29 million and total deposits of $198
million.
Business of F&M. F&M is engaged in commercial banking as authorized by the
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banking laws of the State of Maryland. This involves accepting demand, time and
savings deposits and granting loans (consumer, commercial, real estate and
business) to individuals, corporations, partnerships, associations,
municipalities and other governmental bodies. Through its Trust Department,
which commenced operation during 1993, F&M is able to render services as
trustee, executor, administrator, guardian, managing agent, custodian,
investment advisor, and other fiduciary activities authorized by law. On
November 30, 1993, F&M created an insurance agency subsidiary, F&M Insurance
Agency, Inc., whose purpose is to engage in insurance agency and brokerage
business as permitted for subsidiaries of banking institutions under Maryland
and federal law. During 1994, F&M changed its name to "Farmers & Merchants Bank
and Trust". Effective January 1, 1995, F&M commenced operation of an investment
subsidiary in Delaware, FMBT Incorporated, which purpose is to assist in
investment portfolio management.
5
As of December 31, 1996, F&M had twenty-one (21) full-service and five
(5) limited-service banking offices in Washington and Allegany Counties,
Maryland. F&M's business is not dependent on any one customer, and the loss of
any customer or a few customers would not have a material adverse effect upon
it.
As of December 31, 1996, F&M had total assets of $514 million, total
shareholder's equity of $40 million and total deposits of $447 million.
Business of Atlantic Federal. Atlantic Federal is a federally chartered savings
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bank headquartered in Towson, Maryland. It is a wholly-owned subsidiary of
Susquehanna Bancshares South, Inc., which, in turn, is a wholly-owned subsidiary
of Susquehanna.
Atlantic Federal is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to invest in mortgage loans secured primarily by
residential real estate and, to a lesser extent, multi-family and commercial
loans, mortgage-backed securities and investment and money market securities.
A niche within the residential market includes construction loans, for which
Atlantic Federal competes vigorously. Atlantic Federal also generates, to a
lesser extent, consumer and commercial loans, and is involved in investment and
money market securities activities.
Atlantic Federal was originally chartered in 1897, and converted from
mutual to stock form in May 1986. Atlantic Federal is a member of the Federal
Home Loan Bank System and a stockholder of the Federal Home Loan Bank of
Atlanta. Its savings deposits have been federally insured since 1938. Atlantic
Federal has two subsidiaries: Atlanfed Service Corporation and Atlanfed
Financial Corporation.
As of December 31, 1996, Atlantic Federal had nine (9) full service
offices. Its main office is located in Baltimore County, Maryland. Two (2)
full service offices are located in each of Cecil, Harford and Anne Arundel
Counties, and one (1) full service office in the City of Baltimore, Maryland.
Its business is not dependent upon any one customer and the loss of any customer
or a few customers would have no material adverse effect upon it.
As of December 31, 1996, Atlantic Federal had total assets of $194
million, total shareholders' equity of $18 million, and total deposits of $157
million.
Business of Reisterstown Federal. Reisterstown Federal is a federally-chartered
- --------------------------------
stock savings bank headquartered in Reisterstown, Maryland, a suburb of
Baltimore, Maryland. It also is a wholly-owned subsidiary of Susquehanna
Bancshares South, Inc.
Reisterstown Federal's business consists primarily of attracting
savings deposits from the general public and originating residential, land and
construction loans collateralized by single-family homes and first mortgage
loans on residential and commercial properties located in the State of Maryland.
Reisterstown Federal also makes savings account loans and invests in U.S.
Government and agency obligations, money market obligations and mortgage-backed
securities. Over 90 percent of Reisterstown Federal's assets are related to its
offering of services enabling a homebuyer to purchase a building lot, to obtain
construction financing either directly or indirectly through a builder and,
finally, to secure a permanent mortgage.
6
Reisterstown Federal was originally chartered in May, 1959 and
converted from mutual to stock form in February, 1987. Reisterstown Federal has
been a member of the Federal Home Loan Bank System, and its savings deposits
have been federally insured since 1959. It has one subsidiary, Reisterstown
Service Corp., located in Reisterstown, Maryland.
As of December 31, 1996, Reisterstown Federal had two (2) full service
offices. The main office of Reisterstown Federal is located in Reisterstown,
Baltimore County, Maryland. The branch office is located in Carroll County,
Maryland. Its business is not dependant upon any one customer, and the loss of
any customer or a few customers would not have a material effect upon it.
As of December 31, 1996, Reisterstown Federal had total assets of $269
million, total shareholder's equity of $30 million, and total deposits of $225
million.
Business of Fairfax Savings. On February 1, 1996, Susquehanna completed
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acquisition of Fairfax Savings, a federally chartered, federally insured thrift
institution. It is headquartered in Baltimore, Maryland. Fairfax Savings also
is a wholly-owned subsidiary of Susquehanna Bancshares South, Inc.
Fairfax Savings attracts deposits from the general public through its
nine offices in metropolitan Baltimore and in Carroll, Wicomico and Worcester
Counties. It uses such deposits to originate loans on one-to-four family
residential collateralized first mortgage loans. Fairfax Savings also
originates non-residential and multi-family real estate and construction loans,
second mortgage loans on residential properties and consumer loans. Through its
subsidiary, Atlantic First Mortgage Corporation, Fairfax Savings originates one-
to-four family residential mortgage loans for sale in the secondary market.
Atlantic First was formed in 1996 as a result of the merger of Atlantic Home
Mortgage Corporation, a wholly-owned subsidiary of Atlantic Federal, with
Fairfax Mortgage Corporation, effective May 1, 1996.
Fairfax Savings occupies two narrow niche markets within the financial
services industry -- retail community banking, largely limited to deposit
gathering, and mortgage banking. Lending activities are either supportive of or
tangential to these niche markets.
As of December 31, 1996, Fairfax Savings had nine (9) full service
offices. The main office of Fairfax Savings is located in the City of
Baltimore. Five (5) of its full service offices are located in Baltimore
County, and one (1) full service office is located in each of Carroll, Wicomico
and Worcester counties. Its business is not dependent upon any one customer and
the loss of any customer or a few customers would have no material adverse
effect upon it.
As of December 31, 1996, Fairfax Savings had total assets of $457
million, total shareholder's equity of $48 million, and total deposits of $361
million.
Planned Merger of Atlantic Federal, Reisterstown Federal and Fairfax Savings
- ----------------------------------------------------------------------------
On October 3, 1996, the Office of Thrift Supervision approved the
Company's application to merge Atlantic Federal, Reisterstown Federal and
Fairfax Savings into a single federal savings bank. The merger is planned to
occur in the second quarter of 1997. It will not have an affect on the current
operations or
7
businesses of the thrifts, although it is expected that certain economies and
efficiencies will result from the merger.
Recent and Pending Acquisitions
Effective February 1, 1996, Susquehanna completed its acquisition of
Fairfax Financial Corporation ("Fairfax") of Baltimore, Maryland, and its
subsidiary, Fairfax Savings, FSB, for cash consideration totaling $62.7 million
(the "Fairfax Merger"). At December 31, 1996, Fairfax Savings, FSB, had assets
of $457 million and operated nine banking offices located in metropolitan
Baltimore and Carroll, Wicomico and Worcester Counties. Along with the 1995
acquisitions of Atlanfed Bancorp, Inc., and its primary subsidiary, Atlantic
Federal Savings Bank, Baltimore, Maryland, and Reisterstown Holdings, Inc., and
its subsidiary, Reisterstown Federal Savings Bank, Reisterstown, Maryland, the
result was that Susquehanna held consolidated assets of approximately $3
billion, and operated 106 community banking offices throughout central
Pennsylvania and Maryland as of February 1, 1996.
Susquehanna's subsidiary, Spring Grove National Bank, Spring Grove,
Pennsylvania, was merged into subsidiary Farmers First Bank, effective June 6,
1996. Farmers First Bank, the resulting institution, had total assets of $895
million and operated 36 banking offices within Lancaster and York Counties,
Pennsylvania, as of December 31, 1996.
On July 18, 1996, Susquehanna executed a definitive agreement to
acquire Farmers Banc Corp., Mullica Hill, New Jersey (FBC) and its wholly owned
subsidiary, Farmers National Bank (FNB). On the same day, Susquehanna executed
a definitive agreement to acquire Atcorp, Inc., Marlton, New Jersey (AI) and its
wholly owned subsidiary, Equity National Bank (ENB). The acquisitions were
completed on February 28, 1997. As of December 31, 1996, FNB had $89 million in
total assets, and ENB had $208 million in assets. FNB and ENB exceed all
applicable regulatory capital requirements.
Susquehanna acquired FBC and FNB for 692,512 shares of Susquehanna
Common Stock, representing approximately $81.25 per share for each FBC share.
Susquehanna acquired AI and ENB for approximately 771,750 shares of Susquehanna
Common Stock, representing approximately $35.62 per share for each AI share.
The transactions qualified for pooling of interests accounting treatment.
The transaction represents Susquehanna's first foray into New Jersey.
FNB and ENB will be operated through a subsidiary of Susquehanna created for the
purpose of supervising the operations of Susquehanna's New Jersey banks.
On February 11, 1997, Susquehanna executed a definitive agreement to
acquire Founders' Bank of Bryn Mawr, Pennsylvania (Founders). Pursuant to the
agreement, Susquehanna will acquire Founders for between 373,276 and 471,298
shares of Susquehanna Common Stock, the specific number to be determined by the
value of Susquehanna Common Stock during a defined period prior to the closing
date. For purposes of illustration, based on the closing price of Susquehanna
Common Stock on the day the agreement was executed ($36.12), assuming such price
was the applicable average closing price, Susquehanna would acquire Founders for
414,366 shares of its common stock. Founders is a state chartered, commercial
bank, and is a member of the Federal Reserve System. As of December 31, 1996,
Founders had assets of approximately $103 million.
8
Consummation of the merger is subject to a number of conditions, including
receipt of regulatory approvals and approval by Founders' shareholders.
Susquehanna contemplates that in the future it will evaluate and may
acquire, or may cause its subsidiaries to acquire, other banks or savings
associations. Susquehanna may acquire state and national banks whose principal
business activities are conducted in Pennsylvania and in states which allow
reciprocal treatment of Pennsylvania banks and bank holding companies, as
hereinafter described. Susquehanna may also seek to enter businesses closely
related to banking or to acquire existing companies already engaged in such
activities which includes savings associations. Any acquisition by Susquehanna
will require prior approval of the Board of Governors of the Federal Reserve
System, the Pennsylvania Department of Banking, other regulatory agencies and,
in some instances, its shareholders.
Other than as described above, Susquehanna currently has no formal
commitments with respect to the acquisition of any entities, although
discussions with prospects occur on a regular and continuing basis.
Supervision and Regulation
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General. Susquehanna is registered with the Board of Governors of the
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Federal Reserve System ("Board") and is subject to regulation under the Bank
Holding Company Act of 1956, as amended ("BHC Act"). Provisions in the BHC Act
require prior approval of an acquisition of assets or ownership or control of
any voting shares of any bank, if such acquisition would give Susquehanna more
than 5% of the voting shares of any bank or bank holding company.
The BHC Act also generally permits the acquisition of a non-bank
company if such company engages only in activities which are determined to be
closely related and incidental to banking. Susquehanna directly owns two non-
bank subsidiaries - Susque-Bancshares Life Insurance Company ("SBLIC"), a
wholly-owned reinsurance company, and Susque-Bancshares Leasing Company
("SBLC"), a wholly-owned leasing company. SBLIC is organized under the laws of
the State of Arizona to operate as a credit life, health and accident reinsurer
to the extent permitted by the laws of the Commonwealth of Pennsylvania. SBLIC
is regulated by the Department of Insurance of the State of Arizona and is
subject to periodic review by that department. SBLC is organized under the laws
of the Commonwealth of Pennsylvania. SBLC in turn owns a single leasing company
subsidiary (with commercial finance powers).
Susquehanna's subsidiary commercial and federal savings banks are also
subject to specific regulation and supervision. Farmers First, a state bank, is
subject to regulation and periodic examination by the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation ("FDIC"). Citizens, First
National, Williamsport and Spring Grove (prior to its merger with and into
Farmers First) are national banks and are subject to regulation and periodic
examination by the Office of the Comptroller of the Currency ("OCC"). F&M, a
state bank, is subject to regulation and periodic examination by the Maryland
Banking Commission and the FDIC. Atlantic Federal, Reisterstown Federal and
Fairfax Savings are subject to regulation and periodic examination by the Office
of Thrift Supervision ("OTS"). Since the acquisitions of Atlantic Federal,
Reisterstown Federal and Fairfax Savings, Susquehanna's wholly-owned subsidiary,
Susquehanna Bancshares South, Inc. ("SBI South"), has also been subject to
supervision and regulation by the OTS as a savings and loan holding company. In
addition, all of Susquehanna's banking subsidiaries are subject to examination
by the Board.
9
The regulations that govern Susquehanna and its subsidiary commercial
and federal savings banks impose certain restrictions on extensions of credit to
Susquehanna from such subsidiary banks and with certain exceptions to other
affiliates, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower and on the
issuance of a guarantee or letter of credit on behalf of Susquehanna or any
other affiliate.
The federal and state regulations to which Susquehanna's subsidiary
commercial and federal savings banks are subject encompass a broad spectrum
including, without limitation, reserve requirements, loan limitations,
restrictions as to interest rates on loans and deposits, restrictions as to
payment of dividends and requirements governing the establishment of branches
and other aspects of its operations. The regulations governing the subsidiary
commercial and federal savings banks have generally been promulgated to protect
depositors and creditors and not for the purpose of protecting shareholders.
Because of limitations arising under the BHC Act, Susquehanna's only
line of business is that of providing commercial banking and other bank-related
services and products to its customers. Such bank and bank-related services
provided by Susquehanna and its subsidiaries in 1996 include commercial banking
through its six banking subsidiaries, thrift activities through its three
federal savings bank subsidiaries, credit life insurance through another
subsidiary and leasing operations through its remaining subsidiary. Of the
foregoing, commercial banking and thrift activities accounted for more than 95%
of Susquehanna's gross revenues in each of the past two fiscal years.
Financial Institutions Reform, Recovery and Enforcement Act of 1989
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("FIRREA"). FIRREA eliminated many of the distinctions between commercial banks
- ----------
and thrift institutions and their holding companies. It changed the capital
requirements applicable to savings institutions to be "no less stringent than
the capital standards applicable to national banks" and established a qualified
thrift lender test regarding permissible investments for savings associations.
It also amended applicable statutory provisions to permit bank holding companies
to acquire savings institutions. FIRREA also expanded the jurisdiction of the
regulators' enforcement powers to all "institution-affiliated parties,"
including stockholders, attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action having or likely to have an adverse
effect on an insured institution. Under FIRREA, civil money penalties
(classified into three levels, with amounts increasing with the severity of the
violation) and/or prison sentences may be imposed for any violations of law or
regulation.
Federal Deposit Insurance Corporation Improvement Act of 1991
-------------------------------------------------------------
("FDICIA"). The FDICIA requires prompt corrective action against
- ----------
undercapitalized institutions and has established five capital categories.
These are well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Well-
capitalized institutions significantly exceed the required minimum level for
each capital measure (currently, risk-based and leverage). Adequately
capitalized institutions include depository institutions that meet the required
minimum level for each capital measure. Undercapitalized institutions represent
depository institutions that fail to meet the required minimum level for any
relevant capital measure. Significantly undercapitalized describes depository
institutions that are significantly below the capital minimum requirements.
Currently, all of Susquehanna's depository institution subsidiaries are
considered well-capitalized.
Interstate Banking Act. Under the Riegle-Neal Interstate Banking and
----------------------
Branching Efficiency Act of 1994, substantially all state law barriers to the
acquisition of banks by out-of-state bank holding companies
10
were eliminated. The law will also permit interstate branching by banks
effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Susquehanna anticipates that the
effect of the new law will be to increase competition within the markets in
which it now operates, although Susquehanna cannot predict the extent to which
competition will increase in such markets or the timing of such increase.
The Omnibus Consolidated Appropriations Act, 1997 ("OCAA"). The OCAA
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was signed into law on September 30, 1996. It includes, among others, Savings
Association Insurance Fund ("SAIF") rescue provisions and a number of other
regulatory relief provisions for insured depository institutions and their
holding companies. A summary of its more relevant provisions is set forth
below.
SAIF Rescue Provisions. In September 1996, the federal government
assessed a one-time special charge to recapitalize the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. All U.S.
banks and thrifts with deposits insured by SAIF were assessed a one-time charge
of 65.7 cents per $100 of deposits. Susquehanna's assessment was $5.5 million
before taxes. The assessment reflects SAIF deposits held by three affiliated
thrifts in Maryland and one affiliated bank in Pennsylvania. However, going
forward, annual SAIF deposit premiums for well capitalized institutions will be
reduced from 23 cents per $100 of deposits to 6.44 cents per $100 of deposits,
and in the year 2000 when BIF and SAIF are combined, the annual premium will be
reduced to 2.43 cents per $100 of deposits. These reductions result in a
payback period of approximately four years to recover the one-time special
assessment of 65.7 cents per $100 of deposits.
Non-Banking Acquisitions by Well-Capitalized and Well-Managed Banking
Organizations. The OCAA amends the BHC Act by eliminating or simplifying the
notice procedure for well-managed and well-capitalized bank holding companies
that seek to engage in permissible nonbanking activities de novo or through
acquisitions subject to a size limitation, respectively.
A well-capitalized and well-managed bank holding company generally may
engage de novo in any activity that is on the "laundry list" of permissible
activities in Regulation Y promulgated by the Board without having to give prior
notice to the Board. However, the bank holding company must provide written
notification to the Board within 10 days after commencing the activity.
In addition, such a bank holding company may, with 12 days' prior
notice, engage de novo in activities previously approved by the Board by order
(i.e., activities that have been approved on a case-by-case basis and are not on
the "laundry list" as generally approved) or make acquisitions of companies that
fall within certain size limitations and whose activities are confined to
permissible (by regulation or order) nonbanking activities. For this latter
purpose, the (i) book value of the total assets to be acquired may not exceed
10% of the consolidated total risk-weighted assets of the acquiring bank holding
company; (ii) the gross consideration to be paid for the securities or assets
may not exceed 15% of the consolidated tier 1 capital of the acquiring bank
holding company; and (iii) the holding company and its subsidiary depository
institutions may not have recently been subject to a bank regulatory agency
enforcement action. The notice only needs to include a description of the
proposed activities and the terms of the proposed acquisition.
To meet the "well-capitalized" criteria, both before and immediately
after the proposed transaction, the acquiring bank holding company itself must
be well-capitalized; the lead insured depository institution subsidiary must be
well-capitalized; well-capitalized insured depository institutions must hold at
least
11
80% of the aggregate total risk-weighted assets of insured depository
institutions controlled by such holding company; and no insured depository
institution controlled by such holding company may be undercapitalized. "Well-
capitalized" has the meaning set forth in the federal bank regulatory agencies'
prompt corrective action regulations (i.e., a total risk-based capital ratio of
10% or greater, a tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater).
A banking organization is considered "well-managed" if the acquiring
bank holding company, its lead insured depository institution, and insured
depository institution subsidiaries controlling at least 90% of the aggregate
total risk-weighted assets of the banking organization, are well-managed. A
banking institution is considered well-managed if it has a composite rating of 1
or 2 under the CAMEL or similar rating system as of its most recent examination,
and at least a satisfactory management rating in that examination.
Extension of Divestiture Period for Certain Shares. The OCAA also
amends the BHC Act to allow a bank holding company to hold shares acquired
pursuant to a debt previously acquired in good faith by extending to 10 years
(instead of five years) the maximum time period for holding such shares. This
gives bank holding companies the same flexibility as national banks, which may
hold foreclosed shares or real estate for up to 10 years. The OCAA also allows
a bank holding company to apply (within the 10-year limit) for extensions for
more than one year at a time.
Savings and Loan Holding Companies that are also Bank Holding
Companies. Before the passage of the OCAA, a holding company that controlled
both a bank and a savings and loan association was subject to both the BHC Act
and the Home Owners' Loan Act. Under the OCAA, such a company will be excluded
from the definition of a savings and loan holding company, and will be subject
to only the BHC Act. Accordingly, applications by such an organization would
have to be filed only with the Board, and not the Director of the OTS.
Lender Liability and Fiduciary Liability. The OCAA reinstates the
Environmental Protection Agency lender liability rule and excludes from the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") definition of "owner or operator" those lenders that did not
participate in the management of a vessel or facility prior to foreclosure and
who, after foreclosure, sell, re-lease, or otherwise divest themselves of
ownership of the vessel or facility, having sought to do so "at the earliest
practicable, commercially reasonable time, on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements."
In addition, the CERCLA liability of a fiduciary for releases or threatened
releases of hazardous substances from a vessel or facility held in a fiduciary
capacity are limited to the assets so held, unless liability is predicated on
something more than the fiduciary's ownership of the vessel or facility (e.g.,
the fiduciary's own negligence).
Loans to Executive Officers. The OCAA provides an exception to
section 22(h)(2) of the Federal Reserve Act, which prohibits preferential loans
to officers and directors of a member bank, by allowing an extension of credit
made pursuant to a benefit or compensation program that is widely available to
employees of the member bank and that does not give preference to any officer,
director or principal shareholder of the member bank over other employees of
that bank. The OCAA also allows the Board to grant exemptions from the
prohibition in section 22(h)(2) to executive officers and directors of certain
bank holding company subsidiaries where those individuals do not have authority
to participate, and do not participate, in major policy making functions of the
affiliated bank.
12
Audits and Audit Committees. The OCAA repeals the requirement imposed
by the FDICIA that an independent public accountant attest to the extent of
compliance of an insured depository institution and its holding company with
laws and regulations designated by the FDIC.
In addition, the OCAA permits the independent audit committee of an
insured depository institution to include inside directors, so long as a
majority of the committee is composed of outside directors, if the appropriate
federal bank regulatory agency determines that the institution has encountered
hardships in retaining and recruiting a sufficient number of competent outside
directors to serve on the committee. In making such a determination, the
regulatory agency may take into account the size of the institution and whether
the institution has made a good faith effort to elect additional outside
directors who might serve on the internal audit committee.
Environmental Impact Statement. Compliance by Susquehanna and its
------------------------------
subsidiaries with federal, state and local environmental protection laws during
1996 had no material effect upon capital expenditures, earnings or the
competitive position of Susquehanna and its subsidiaries and is not expected to
have a material effect on such expenditures or earnings during 1997.
Pending Legislation. From time to time legislation is proposed for
-------------------
enactment before the United States Congress and before the Pennsylvania
Legislature which could change a number of the regulations applicable to
Susquehanna and its subsidiaries. It is not possible at this time to predict if
or when such legislation might become law or the extent to which such
legislation might affect the business or competitive status of Susquehanna and
its subsidiaries.
National Monetary Policy. In addition to being affected by general
------------------------
economic conditions, the earnings and growth of Susquehanna and its subsidiaries
are affected by the policies of regulatory authorities, including the OCC, the
Board, the FDIC and the OTS. An important function of the Board is to regulate
the money supply and credit conditions. Among the instruments used to implement
these objectives are open market operations in U.S. Government securities,
setting the discount rate and changes in reserve requirements against bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of credit, bank loans, investments and deposits,
and their use may also affect interest rates charged on loans or paid on
deposits.
The monetary policies and regulations of the Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such policies
upon the future business, earnings and growth of Susquehanna and its
subsidiaries cannot be predicted.
Competition
- -----------
Bank holding companies and their subsidiary banks compete with many
institutions for deposits, loans, trust services and other banking-related
services. Like other depository institutions, Susquehanna has been subject to
competition from less heavily regulated entities such as brokerage firms, money
market funds, consumer finance, credit card companies, and other financial
services companies.
13
Legislative proposals are pending which would further liberalize many
of the regulatory restrictions now imposed on Susquehanna and its subsidiaries
or require their non-banking competitors to comply with similar regulatory
restrictions. It is not possible to assess whether any of such proposals will be
enacted, and if enacted, what effect such a proposal would have on the
competitive positions of Susquehanna in its market place.
As a result of legislation enacted in Pennsylvania in the 1980's,
compression and consolidation in the industry has continued at a rapid pace.
Further, as a result of relaxation of laws and regulations pertaining to branch
banking in the state, and the opportunity to engage in interstate banking, the
consolidation within the banking industry has had a significant competitive
effect on Susquehanna and its markets. At present, Susquehanna and its
subsidiary banks compete with numerous super-regional institutions with
significantly greater resources and assets which conduct banking business
throughout the region.
Farmers First's principal market areas are within Lancaster County and
central York County, Pennsylvania. There are twenty-four (24) commercial banks
operating in those counties, six (6) of which are headquartered in Lancaster
County and seven (7) of which are headquartered in York County; the others are
headquartered elsewhere in Pennsylvania. Of the thirteen (13) commercial banks
with headquarters in Lancaster or York Counties, Farmers First ranked third in
total deposits as of June 30, 1996, the last date for which information is
available.
Citizens' principal market area consists of the central and
southeastern portion of Franklin County, Pennsylvania, the northcentral and
northeastern portion of Washington County, Maryland, and the northwestern
portion of Frederick County, Maryland. It services a substantial number of
depositors in this market area, with the greatest concentration within a limited
radius of Waynesboro, Pennsylvania, and within a north-south strip of Interstate
81 from Chambersburg, Pennsylvania to Hagerstown, Maryland. There are fourteen
(14) banks in this market area including Citizens, seven (7) of which are
headquartered in that market area. Citizens ranked sixth among the seven (7)
banks in total deposits as of June 30, 1996, the last date for which information
is available.
First National competes in market areas in Northumberland, Snyder,
Union and Columbia Counties, Pennsylvania. Twenty-one (21) commercial banks
operate offices in Northumberland, Snyder, Union and Columbia Counties, thirteen
(13) of which are headquartered in those counties, and of the thirteen (13),
First National ranked first in terms of total deposits as of June 30, 1996, the
last date for which information is available.
Williamsport's principal market area consists of the south central and
south eastern portions of Lycoming County, Pennsylvania. It services a
substantial number of depositors in this service area, with the greatest
concentration in the City of Williamsport. Eleven (11) commercial banks operate
offices in Lycoming County, six (6) of which are headquartered in that county,
and of the six (6), Williamsport ranked second in terms of total deposits as of
June 30, 1996, the last date for which information is available.
F&M's principal market area consists of Washington and Allegany
Counties, Maryland. Eight (8) commercial banks operate offices in the F&M
trading area, three (3) of which are headquartered in Washington County, and
two (2) of which are headquartered in Allegany County; and of the five (5), F&M
ranked first in terms of total deposits as of June 30, 1996, the last date for
which information is available.
14
Atlantic Federal's principal market area consists of Baltimore, Cecil,
Harford and Anne Arundel Counties, Maryland, and a portion of northeastern
Baltimore city. Fifty-five (55) savings banks operate offices in the Atlantic
Federal trading area, thirty-six (36) of which are headquartered in that area,
and of the thirty-six (36), Atlantic Federal ranked sixth in terms of total
deposits as of June 30, 1996, the last date for which information is available.
Reisterstown Federal's principal market area consists of Baltimore and
Carroll Counties, Maryland, and the northwestern corner of Baltimore City.
Twenty-nine (29) savings banks operate offices in the Reisterstown Federal
trading area, ten (10) of which are headquartered in that area, and of the ten
(10), Reisterstown Federal ranked first in terms of total deposits as of June
30, 1996, the last date for which information is available.
Fairfax Savings' principal market area includes Baltimore County,
Baltimore City, Carroll County, Wicomico County, and Worcester County, Maryland.
Fifty-three (53) savings banks operate offices in the Fairfax Savings trading
area, forty-eight (48) of which are headquartered in that area, and of the
forty-eight (48), Fairfax Savings ranked third in terms of total deposits as of
June 30, 1996, the last date for which information is available.
The Susquehanna subsidiaries, like other depository institutions, have
been subjected to competition from less heavily regulated entities such as
brokerage firms, money market funds, consumer finance, credit card companies,
and other financial services companies.
Business Trends
- ---------------
Current business trends include a stable interest rate environment, a
relatively strong and diverse local economy, a business climate which is
sustaining, and continuing consumer confidence.
While conditions are presently stable, certain other factors create
uncertainty in Susquehanna's markets as well as national markets. Susquehanna
will continue its emphasis on control of funding costs and lending rates to
effectively maintain profitability. In addition, Susquehanna will seek
relationships which can generate fee income which is not directly tied to
lending relationships. This thrust will help dampen Susquehanna's earnings
fluctuations which are driven by movement in interest rates, business and
consumer loan cycles, and local economic factors.
15
Item 2. Properties
- ------ ----------
Susquehanna does not own or lease any property. Susquehanna reimburses
its subsidiaries for space and services utilized.
Susquehanna's subsidiary banks operate ninety-eight (98) full-service
branches, seventeen (17) limited-service branches, fourteen (14) free-standing
automated teller machines, and twenty-two (22) automated loan machines. The
banks own sixty-five (65) of the branches and lease the remaining fifty (50).
Sixteen (16) additional buildings are owned or leased by subsidiary banks to
facilitate operations and expansion. Management of Susquehanna believes that
the properties currently owned and leased by its subsidiaries are adequate for
present levels of operation.
The executive offices of the subsidiary banks are:
Farmers First Bank Atlantic Federal Savings Bank
9 East Main Street 100 West Road
Lititz, Pennsylvania Baltimore, Maryland
First National Trust Bank Reisterstown Federal Savings Bank
400 Market Street 11817 Reisterstown Road
Sunbury, Pennsylvania Reisterstown, Maryland
Citizens National Bank of Southern Fairfax Savings, AFSB
Pennsylvania 17 Light Street
35 North Carlisle Street Baltimore, Maryland
Greencastle, Pennsylvania
Williamsport National Bank Equity National Bank
329 Pine Street 8000 Sagemore Drive, Suite 8101
Williamsport, Pennsylvania Marlton, New Jersey
Farmers & Merchants Bank and Trust Farmers National Bank
59 West Washington Street 114 North Main Street
Hagerstown, Maryland Mullica Hill, New Jersey
Each of the executive offices is owned by the respective subsidiary, except for
the offices of Atlantic Federal, Equity National, and Fairfax Savings, which are
leased.
16
Item 3. Legal Proceedings.
- ------ -----------------
There are no material proceedings to which Susquehanna or any of its
present subsidiaries, directors, or officers are a party or by which they, or
any of them, are threatened. All legal proceedings presently pending or
threatened against Susquehanna and its subsidiaries involve routine litigation
incidental to the business of Susquehanna or the subsidiary involved and are
either not material in respect to the amount in controversy or are fully covered
by insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
Executive Officers of Susquehanna
The following table sets forth the executive officers of Susquehanna,
their ages, and their positions with Susquehanna:
---------------------------------------------------------------
Name Age Title
---------------------------------------------------------------
Robert S. Bolinger 60 President & Chief Executive Officer
William T. Belden 47 Vice President
Frederick W. Bisbee 58 Vice President
Richard M. Cloney 55 Vice President and Secretary
Gregory A. Duncan 41 Vice President
Drew K. Hostetter 42 Treasurer
Charles W. Luppert 55 Vice President
William J. Reuter 47 Vice President
---------------------------------------------------------------
17
PART II
-------
Item 5. Market for Susquehanna Capital Stock and Related Shareholder Matters.
- ------ --------------------------------------------------------------------
From May 24, 1984, to November 4, 1985, Susquehanna Common Stock was
listed for quotation on the National Association of Securities Dealers Automatic
Quotation System ("Nasdaq"). Since November 5, 1985, Susquehanna Common Stock
has been listed for quotation on the National Association of Securities Dealers
National Market System. Set forth below are the high and low sales prices of
Susquehanna's common stock as reported on the Nasdaq National Market System as
reflected on the over-the-counter market, for the years 1995 and 1996.
- -------------------------------------------------------------
Price Range Per Share
---------------------
- -------------------------------------------------------------
Cash
----
Dividends
---------
Year Period Paid Low Bid High Bid
---- ------ ---- ------- --------
1995 1st Quarter
Common $0.27 $21.50 $24.25
2nd Quarter
Common $0.27 $22.50 $24.00
3rd Quarter
Common $0.27 $23.25 $28.25
4th Quarter
Common $0.29 $26.00 $30.25
1996 1st Quarter
Common $0.29 $26.00 $30.00
2nd Quarter
Common $0.29 $26.75 $29.50
3rd Quarter
Common $0.29 $26.50 $30.63
4th Quarter
Common $0.30 $29.00 $35.75
- ---------------------------------------------------------------
The foregoing represents prices between dealers and does not include
retail markups, markdowns or commissions and does not necessarily represent
actual transactions. As of February 28, 1997, there were 5,669 record holders
of Susquehanna Common Stock and zero (0) record holders of Susquehanna Preferred
Stock, which was redeemed by Susquehanna on February 7, 1994.
Dividends paid by Susquehanna are provided from dividends paid to it
by Farmers First, First National, Williamsport, Citizens, F&M, Atlantic Federal,
Reisterstown Federal, Fairfax Savings, and SBLC. The Pennsylvania Banking Code
of 1965, in the case of Farmers First, the Banking laws of the State of
Maryland, in the case of F&M, and the National Bank Act, in the case of First
National, Williamsport, and Citizens, and the
18
Federal Home Loan Act, in the case of Atlantic Federal, Reisterstown Federal,
and Fairfax Savings, restrict the payment of dividends to certain available
funds.
Susquehanna's ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiaries. Both federal and state laws
impose restrictions on the ability of these banking subsidiaries to pay
dividends. In addition to the specific restrictions discussed below, bank
regulatory agencies, in general, also have the ability to prohibit proposed
dividends by a bank or savings institution which would otherwise be permitted
under applicable regulations if the regulatory body determines that such
distribution would constitute an unsafe or unsound practice.
The Federal Reserve Board and the FDIC have issued policy statements
which provide that, as a general matter, insured banks and bank holding
companies may pay dividends only out of current operating earnings.
For national banks, the approval of the Comptroller of the Currency is
required for the payment of dividends in any calendar year by a national bank
subsidiary if the total of all dividends declared by such bank in a calendar
year exceeds the current year's net income combined with the retained net income
of the two preceding years. "Retained net income" means the net income of a
specified period less any common or preferred stock dividends declared for that
period. Moreover, no dividends may be paid by a national bank in excess of its
undivided profits account.
Dividends payable by a Pennsylvania state-chartered bank are
restricted due to the requirement that such bank set aside to a surplus fund
each year at least 10% of its net earnings until such surplus equals the amount
of its capital. Furthermore, the payment of a dividend may not be made if it
results in the reduction of the surplus available to the bank.
For a Maryland state-chartered bank, dividends may be paid out of
undivided profits or, with the approval of the Maryland Bank Commissioner, from
surplus in excess of 100% of required capital stock. If, however, the surplus
of a Maryland bank is less than 100% of its required capital stock, cash
dividends may not be paid in excess of 90% of net earnings.
As noted, Susquehanna will look to Atlantic Federal, Fairfax Savings
and Reisterstown Federal for funds to distribute as dividends. However,
federal regulations impose restrictions on dividend payments on savings
institutions which convert from mutual to stock form of ownership and are
federally insured at the time of the conversion, as was the case with Atlantic
Federal and Reisterstown Federal. Upon conversion, regulations require that a
"liquidation account" be established by restricting a portion of net capital for
the benefit of eligible savings account holders who maintain their savings
accounts with the institution after conversion. In the event of complete
liquidation (and only in such event), each savings account holder who continues
to maintain a savings account will be entitled to receive a distribution from
the liquidation account after payment to all creditors, but before any
liquidation distribution with respect to capital stock. This account is
proportionally reduced for any decreases in the eligible holder's savings
accounts.
Under federal regulations, savings institutions which have converted
under such regulations (including Atlantic Federal and Reisterstown Federal) may
not declare or pay a cash dividend on common stock if the dividend would cause
the institution's capital to be reduced below the amount required for the
liquidation
19
account or, as to all savings institutions, below the capital requirements
imposed by the OTS under the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA"), and regulations promulgated thereunder.
The OTS regulations impose limitations on all cash dividends by
savings institutions. The OTS regulations establish three tiers of institutions.
An institution that exceeds all fully phased-in capital requirements before and
after a proposed dividend ("Tier 1 Association") may, after prior notice, but
without the approval of the OTS, make capital distributions during a calendar
year of up to: (i) 100 percent of its net income to date during the calendar
year plus the amount that would reduce by one-half of its surplus capital at the
beginning of the calendar year; or (ii) 75 percent of its net income over the
most recent four-quarter period. An institution that meets its regulatory
capital requirement, but not its fully phased-in capital requirement before or
after its cash dividend ("Tier 2 Association") may, after prior notice, but
without the approval of the OTS, make capital distributions of up to 75 percent
of its net income over the most recent four-quarter period if it satisfies the
risk-based capital requirements that would be applicable to it on January 1,
1993, computed on its current portfolio; up to 50 percent of its net income over
the most recent four-quarter period if it satisfies the risk-based capital
standard that was applicable to it on January 1, 1991, computed on its current
portfolio; and up to 25 percent of its net income over the most recent four-
quarter period if it satisfies its current risk-based capital requirement. In
computing the permissible percentage of cash dividend, previous distributions
made during the prior four-quarter period must be included. A savings
institution that does not meet its current regulatory capital requirements
before or after payment of a proposed cash dividend ("Tier 3 Association") may
not make any capital distributions without prior approval of the OTS. In
addition, the OTS has the ability to prohibit a proposed cash dividend by any
institution which would otherwise be permitted by the regulations if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. As of December 31, 1996, Atlantic Federal, Fairfax, and Reisterstown
Federal satisfied the requirements of a Tier 1 Association.
The capital requirements mandated by FIRREA require thrifts to
maintain tangible capital of at least 1.5 percent of adjusted total assets, a
leverage ratio or core capital of at least 3 percent of adjusted total assets,
and overall risk-based capital of at least 8 percent of total risk-weighted
assets.
Tangible capital includes common stockholder's equity with certain
assets phased out over several years. Core capital includes tangible capital
plus "supervisory" goodwill and certain other defined items. The risk-based
capital requirement involves the classification of certain assets, commitments
and obligations, as defined, based upon their credit risk level. Higher credit
risk amounts carry a progressively higher capital requirement.
In August 1993, the OTS adopted a final rule for calculating an
interest rate risk ("IRR") component of risk-based capital. Under this rule,
the IRR component of capital will be in addition to the existing 8 percent risk-
based capital requirement. The new rule became effective January 1, 1994, with
institutions first required to meet the new standard in 1994.
The rule provides that the OTS will calculate the IRR component
quarterly for each institution starting in 1994 with information as of December
31, 1993. To estimate IRR, the OTS will compute each institution's market value
of portfolio equity ("MVPE") in the present interest rate environment versus
MVPEs derived after applying parallel rate shifts of plus and minus 200 basis
points. Provided any measured decline in MVPE under both rate shifts is less
than 2 percent of the estimated market value of the institution's assets, no
addition will be made to the 8 percent risk-based capital requirement. If there
is a measured decline in MVPE
20
greater than 2 percent, then an institution will be required to maintain
additional capital equal to one-half of the difference between its measured IRR
and 2 percent, multiplied by the market value of its assets. None of Atlantic
Federal, Reisterstown Federal or Fairfax Savings has been required to maintain
additional capital as a result of such calculations.
In accordance with the above regulatory restrictions, each subsidiary
commercial and federal savings bank has the ability to pay dividends, and at
December 31, 1996, $43 million is available for dividend distribution to
Susquehanna in 1997 from its subsidiary commercial and federal savings banks
without regulatory approval.
For a description of the funds available for the payment of dividends,
see Note 16 to the Consolidated Financial Statements. Susquehanna currently
expects that comparable cash dividends will continue to be paid in the future.
21
Item 6. Selected Financial Data.
- ------ -----------------------
See Page 23.
22
SELECTED FINANCIAL DATA
================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 231,835 $ 189,827 $ 150,633 $ 143,020 $ 153,570
Interest expense 103,138 82,618 56,488 55,993 69,809
Net interest income 128,697 107,209 94,145 87,027 83,761
Provision for loan and lease losses 4,599 4,994 3,987 5,130 4,721
Other income 21,344 16,080 15,098 15,816 15,284
Other expenses 100,816 80,911 72,710 66,004 63,611
Income before taxes, extraordinary
item/cumulative effect 44,626 37,384 32,546 31,709 30,713
Extraordinary item/cumulative effect -- -- (732) 1,023 --
Net income 29,976 26,017 22,096 23,205 22,172
Cash dividends declared on common stock 15,400 12,478 11,024 9,811 9,129
Dividend payout ratio 51.4% 48.0% 49.9% 42.3% 41.2%
Per Common Share Amounts*
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item $ 2.28 $ 2.23 $ 1.96 $ 1.96 $ 1.99
Net income 2.28 2.23 1.90 2.05 1.99
Cash dividends declared on common stock 1.17 1.10 1.02 0.922 0.872
Financial Ratios
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.01% 1.07% 1.04% 1.18% 1.15%
Return on average stockholders' equity 10.57 11.29 10.17 11.47 11.88
Average stockholders' equity to average assets 9.55 9.48 10.23 10.29 9.72
Tangible Operating Results
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 32,793 $ 27,245 $ 22,591 $ 23,545 $ 22,534
Tangible earnings per share 2.49 2.33 1.94 2.08 2.02
Return on tangible average shareholders' equity 13.24% 12.69% 10.65% 11.76% 12.23%
Return on tangible average assets 1.12 1.13 1.07 1.20 1.18
Year-End Balances
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,038,451 $ 2,586,157 $ 2,231,409 $ 2,051,994 $ 1,967,450
Investment securities 561,601 610,018 597,996 562,963 475,499
Loans and leases, net of unearned income 2,173,081 1,712,951 1,466,186 1,309,907 1,282,457
Deposits 2,493,504 2,116,042 1,866,330 1,717,807 1,671,352
Long-term debt 115,368 86,274 49,314 58,301 52,487
Stockholders' equity 292,680 273,399 217,104 218,428 193,804
Selected Share Data*
- ------------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period end) 13,181,020 12,948,676 11,633,918 11,628,284 11,170,653
Average common shares outstanding 13,161,253 11,674,244 11,633,918 11,331,097 11,168,744
At December 31:
Book value per share $ 22.20 $ 21.11 $ 18.66 $ 18.78 $ 17.35
Market price per common share 34.63 26.50 22.25 27.25 22.60
Common stockholders 5,693 5,759 5,229 5,174 4,723
*Prior years' amounts adjusted for five-for-four stock split completed in 1993.
23
Item 7. Management's Discussion and Analysis of Results of Operations and
- ------ -----------------------------------------------------------------
Financial Condition
-------------------
See Pages 25 to 37.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
================================================================================
The following pages of this report present management's discussion and
analysis of the consolidated financial condition and results of operations of
Susquehanna Bancshares, Inc., including its subsidiaries: Farmers First Bank,
Farmers & Merchants Bank and Trust, First National Trust Bank, Williamsport
National Bank, Citizens National Bank of Southern Pennsylvania, Susquehanna
Bancshares South, Inc. and its savings bank subsidiaries Atlantic Federal
Savings Bank, Fairfax Savings, and Reisterstown Federal Savings Bank,
Susque-Bancshares Leasing Co., Inc., and Susque-Bancshares Life Insurance
Company.
RESULTS OF OPERATIONS
Summary of 1996 Compared to 1995
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1996 and
1995. These transactions are described in the following paragraphs.
On February 9, 1995, Susquehanna issued $50 million of 9.00% subordinated
notes due 2005. The proceeds of the issuance were used to acquire Reisterstown
Holdings, Inc. ("Reisterstown") on April 21, 1995, and retire $10 million in
short-term borrowings. The balance of the proceeds were used for general
corporate purposes.
On April 1, 1995, Susquehanna completed the acquisition of Atlanfed Bancorp,
Inc. ("Atlanfed"), issuing 1,199,333 common shares for all of Atlanfed's
outstanding shares. Total assets of Atlanfed at the acquisition date were $255
million. Deposits totaled $179 million, loans outstanding were $189 million, and
stockholders' equity was $22.6 million. The transaction was treated as a
pooling-of-interests and Susquehanna's financial results for all reported
periods are restated to include Atlanfed's financial results.
On April 21, 1995, Susquehanna completed the acquisition of Reisterstown,
acquiring all of the assets and assuming all the liabilities of Reisterstown for
$28.6 million. Accordingly, the transaction was treated under the purchase
method of accounting whereby all the financial results are included with
Susquehanna from April 21, 1995, forward. The loans acquired totaled $201
million, total assets were $248 million, and deposits were $210 million. The
excess purchase price of $12.7 million will be amortized over 15 years.
On December 22, 1995, Susquehanna closed a public common equity offering of
1,300,000 shares at $26.50 per share, netting $32.6 million after underwriting
commissions and expenses. The proceeds from the offering were used as part of
the purchase price to acquire Fairfax Financial Corporation ("Fairfax").
On January 2, 1996, the underwriters exercised their 15% over-allotment
option and another 195,000 shares of Susquehanna's common stock were issued to
the public. The net proceeds to Susquehanna after underwriting commissions were
$4.9 million and were used as part of the purchase price to acquire Fairfax.
On January 29, 1996, Susquehanna issued $35 million of 6.30% senior notes due
2003. The proceeds of this issuance were used to partially fund the purchase of
Fairfax and for general corporate purposes.
On February 1, 1996, Susquehanna acquired all of the assets and assumed all
the liabilities of Fairfax for $62.7 million. Accordingly, the transaction was
treated under the purchase method of accounting. Assets acquired were $455
million, loans acquired were $402 million, and deposits acquired were $396
million. The excess purchase price of $21.4 million will be amortized over 15
years.
In the third quarter of 1996, Susquehanna's earnings were significantly
affected by a one-time special charge assessed by the federal government to
recapitalize the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). All U.S. banks and thrifts with deposits
insured by SAIF were assessed a one-time, special charge of 65.7 cents per $100
of deposits. Susquehanna's assessment was $5.5 million before taxes. The
assessment reflects SAIF deposits held by three affiliated savings banks in
Maryland and one affiliated bank in Pennsylvania. However, going forward, annual
SAIF deposit premiums for well-capitalized institutions will be reduced from 23
cents per $100 of deposits to 6.44 cents per $100 of deposits, and in the year
2000 when the Bank Insurance Fund and SAIF are combined, the annual premium will
be reduced to 2.43 cents per $100 of deposits. These reductions result in a
payback period of approximately four years to recover the one-time, special
assessment.
Susquehanna's net income for the year ended December 31, 1996, increased to
$29,976,000 or 15% above 1995 net income of $26,017,000 despite a one-time
special pre-tax charge of $5.5 million assessed by the federal government to
recapitalize the SAIF. Excluding the SAIF special charge, net income would have
increased 28% from $26,017,000 in 1995 to $33,294,000 in 1996.
Earnings per common share were $2.28 ($2.53 adjusted for the SAIF special
charge) in 1996 compared to $2.23 in 1995. Excluding the SAIF special charge,
ROA and ROE increased from 1.07% and 11.29%, respectively, in 1995 to 1.12% and
11.74%, respectively, in 1996.
During 1995 and 1996, Susquehanna acquired Reisterstown Federal Savings Bank
and Fairfax Savings under the
25
================================================================================
TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
Assets Balance Interest % Balance Interest % Balance Interest %
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 68,191 $ 3,705 5.43 $ 52,179 $ 2,990 5.73 $ 44,368 $ 1,950 4.40
Investment securities:
Taxable 490,470 29,905 6.10 480,879 29,428 6.12 453,568 26,404 5.82
Tax-advantaged 106,168 7,249 6.83 111,207 7,839 7.05 111,827 7,994 7.15
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 596,638 37,154 6.23 592,086 37,267 6.29 565,395 34,398 6.08
Loans (net of unearned income):
Taxable 2,069,289 190,636 9.21 1,592,480 149,453 9.38 1,342,389 114,480 8.53
Tax-advantaged 44,180 4,409 9.98 44,001 4,387 9.97 39,722 3,989 10.04
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 2,113,469 195,045 9.23 1,636,481 153,840 9.40 1,382,111 118,469 8.57
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,778,298 235,904 8.49 2,280,746 194,097 8.51 1,991,874 154,817 7.77
===================================================================================================================================
Allowance for loan losses (31,707) (26,776) (22,965)
All other non-earning assets 223,014 177,755 154,385
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $2,969,605 $2,431,725 $2,123,294
===================================================================================================================================
Liabilities & Stockholders' Equity
Deposits:
Interest-bearing demand $ 642,258 $ 18,557 2.89 $ 475,205 $ 13,072 2.75 $ 465,265 $ 10,978 2.36
Savings 402,071 9,797 2.44 393,474 9,973 2.53 399,241 10,106 2.53
Time 1,140,992 62,787 5.50 901,170 49,014 5.44 692,180 30,130 4.35
Short-term borrowings 57,187 2,841 4.97 62,898 3,406 5.42 47,823 2,257 4.72
Long-term debt 121,858 9,156 7.51 89,017 7,153 8.04 48,431 3,017 6.23
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,364,366 103,138 4.36 1,921,764 82,618 4.30 1,652,940 56,488 3.42
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 279,805 251,146 229,096
Other liabilities 41,839 28,320 24,052
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,686,010 2,201,230 1,906,088
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 283,595 230,495 217,206
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $2,969,605 $2,431,725 $2,123,294
===================================================================================================================================
Net interest income/yield on
average earning assets $132,766 4.78 $111,479 4.89 $ 98,329 4.94
===================================================================================================================================
For purposes of calculating loan yields, the average loan volume includes
nonaccrual loans. For purposes of calculating yields on tax-advantaged interest
income, the taxable equivalent is made to equate tax-advantaged interest on the
same basis as taxable interest. The marginal tax rate is 35%.
purchase method of accounting. These purchase transactions created goodwill of
$34 million which significantly affects Susquehanna's earnings and financial
ratios. Goodwill amortization is a non-cash charge to earnings. For 1996,
tangible net income, earnings per share, ROA, and ROE were $32,793,000, $2.49,
1.12%, and 13.24%, respectively, compared to actual net income, earnings per
share, ROA, and ROE of $29,976,000, $2.28, 1.01%, and 10.57%, respectively.
Tangible net income, earnings per share, ROA, and ROE for 1996, excluding the
SAIF special charge, were $36,111,000, $2.74, 1.23%, and 14.58%, respectively,
compared to 1995 tangible net income, earnings per share, ROA, and ROE of
$27,245,000, $2.33, 1.13%, and 12.69%, respectively. Tangible net income is
actual net income increased by the tax-effected amortization of those intangible
assets which are deducted from equity in determining Tier 1 capital.
The $3,959,000 or 15% increase in net income from
26
================================================================================
$26,017,000 in 1995 to $29,976,000 in 1996 was primarily the result of the
Fairfax and Reisterstown acquisitions and lower bank FDIC insurance premiums
offset by the one-time SAIF special assessment.
Net Interest Income--Taxable Equivalent Basis
The major source of operating revenues is net interest income which rose to a
level of $128,697,000 in 1996, $21,488,000 or 20.0% above the $107,209,000
attained in 1995. The net interest margin, on a tax equivalent basis, for 1996
fell to 4.78% from the 4.89% attained during 1995.
Net interest income is the income which remains after deducting from total
income generated by earning assets the interest expense attributable to the
acquisition of the funds required to support earning assets. Income from earning
assets includes income from loans, income from investment securities, and income
from short-term investments. The amount of interest income is dependent upon
many factors including the volume of earning assets, the general level of
interest rates, the dynamics of the change in interest rates, and levels of
nonperforming loans. The cost of funds varies with the amount of funds necessary
to support earning assets, the rates paid to attract and hold deposits, rates
paid on borrowed funds, and the levels of non-interest-bearing demand deposits
and equity capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-exempt interest has been adjusted using a marginal tax rate of 35% in order
to equate the yield to that of taxable interest rates. Net interest income as a
percentage of net interest income and other income was 86%, 87%, and 86% for the
years ended December 31, 1996, 1995, and 1994, respectively.
Table 2 illustrates that the growth in interest income in 1996 over 1995 was
attributed to volume. As was mentioned earlier in this section, the average
growth in interest-
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
- ----------------------------------------------------------------------------------------------------------------------------------
1996 Versus 1995 1995 Versus 1994
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollars in thousands) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income
Other short-term investments $ 877 $ (162) $ 715 $ 382 $ 658 $ 1,040
Investment securities:
Taxable 585 (108) 477 1,634 1,390 3,024
Tax-advantaged (349) (241) (590) (44) (111) (155)
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 236 (349) (113) 1,590 1,279 2,869
Loans (net of unearned income):
Taxable 43,974 (2,791) 41,183 22,720 12,253 34,973
Tax-advantaged 18 4 22 427 (29) 398
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 43,992 (2,787) 41,205 23,147 12,224 35,371
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $45,105 $ (3,298) $41,807 $25,119 $14,161 $39,280
===================================================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 4,798 $ 687 $ 5,485 $ 239 $ 1,855 $ 2,094
Savings 215 (391) (176) (146) 13 (133)
Time 13,191 582 13,773 10,340 8,544 18,884
Short-term borrowings (296) (269) (565) 783 366 1,149
Long-term debt 2,494 (491) 2,003 3,073 1,063 4,136
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $20,402 $ 118 $20,520 $14,289 $11,841 $26,130
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin $24,703 $ (3,416) $21,287 $10,830 $ 2,320 $13,150
===================================================================================================================================
Changes which are in part to volume and in part to rate are allocated in
proportion to their relationship to the amounts of changes attributed directly
to volume and rate.
27
================================================================================
earning assets of $498 million in 1996 over 1995, to a large extent, was due to
the acquisitions of Fairfax and Reisterstown. As illustrated in Table 1, the tax
equivalent yield on earning assets for 1996 fell slightly to 8.49% from 8.51% in
1995. This decrease in 1996 can be attributed to the decrease in the loan yield
from 9.40% in 1995 to 9.23% in 1996, due to the acquisition of the savings banks
whose loan portfolios are oriented toward residential mortgages which have less
risk and therefore yield less as well. These loan yields at the savings banks
should improve in 1997 as more commercial and consumer revolving line and
installment products are offered. The investment yields declined from a 6.29%
average return in 1995 to 6.23% in 1996.
Table 2 also illustrates that the growth in interest expense in 1996 over
1995 was primarily attributed to volume. The comparison of the change in the
volume of interest-bearing liabilities was primarily affected by the
acquisitions noted above. The average funding costs rose in 1996 to 4.36% from
4.30% in 1995, due to the acquisition of the savings banks whose deposits are
oriented toward higher yielding certificates of deposit and interest-bearing
demand. These deposit yields at the savings banks should lower in 1997 as they
are currently being priced more in line with local bank rates.
A positive influence on the ability of Susquehanna to maintain a net interest
margin at or near the 4.80% level has been the increase in non-interest-bearing
demand deposits and earnings retention. Variances do occur in the net interest
margin as an exact repricing of assets and liabilities is not possible. A
further explanation of the impact of asset and liability repricing is found in
the Asset/Liability Management section of this discussion.
Provision and Allowance for Loan and Lease Losses
Susquehanna's provision for loan and lease losses is based upon management's
quarterly loan portfolio review. The review's purpose is to assess loan quality,
identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate
potential charge-offs and recoveries, and assess general economic conditions in
the markets its affiliates serve.
Commercial and real estate loans are rated by loan officers and,
periodically, by loan review personnel. Consumer and residential real estate
loans are generally reviewed in the aggregate as they are of relative small
dollar size and homogeneous in nature.
In addition to economic conditions, loan portfolio diversification,
delinquency, and historic loss experience, consideration is also given to
examinations performed by the regulatory authorities.
To determine the allowance and corresponding provision, the amount required
for specific allocation is first determined. For all types of commercial and
construction loans, this amount is based upon specific borrower data determined
by reviewing individual non-performing, delinquent, or potentially troubled
credits. In addition, a general allocation is also determined using the same
criteria applied to the total commercial portfolio. Consumer and residential
real estate allowances, which may include specific allocations, generally are
based upon recent charge-off and delinquency history, other known trends and
expected losses over the remaining lives of these loans, as well as the
condition of local, regional, and national economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio. Table 10 presents this allocation.
The loan portfolio represents loans made primarily within Susquehanna's
market area, which includes central Pennsylvania and western Maryland, and to a
lesser extent New Jersey, Delaware, West Virginia, northern Virginia, and the
southern tier of New York state.
Determining the level of the allowance for possible loan and lease losses at
any given period is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and
information which is often subjective and changing rapidly. The review of the
loan portfolio is a continuing event in light of a changing economy and the
dynamics of the banking and regulatory environment. In management's opinion, the
allowance for loan and lease losses is adequate at December 31, 1996. As
illustrated in Table 3, the provision for loan and lease losses was $4.6 million
for 1996 compared to $5.0 million in 1995. Net charge-offs, as seen in Table 3,
were $4.4 million compared with $4.6 million in 1995. As a result, the allowance
for loan and lease losses at December 31, 1996, was 1.47% of period-end loans
and leases, or $31.9 million compared with 1.61% or $27.6 million at December
31, 1995. The allowance for loan and lease losses as a percentage of
non-performing loans increased from 108% at December 31, 1995, to 130% at
December 31, 1996.
Should the economic climate no longer continue to improve or begin to
deteriorate, borrowers may experience difficulty, and the level of
non-performing loans and assets, charge-offs, and delinquencies could rise and
require further increases in the provision.
28
================================================================================
TABLE 3--Provision and Allowance for Loan and Lease Losses
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, January 1 $ 27,563 $ 23,845 $ 21,717 $ 18,026 $ 16,435
Allowance acquired in business combination 4,229 3,323 -- 515 --
Change in fiscal year of pooled entity -- (8) -- -- --
Additions to provision for loan and lease losses
charged to operations 4,599 4,994 3,987 5,130 4,721
Loans and leases charged off during the year:
Commercial, financial, agricultural, and leases 1,414 1,939 1,258 1,080 1,446
Real estate--mortgage 2,003 1,655 191 157 676
Consumer 2,470 2,052 1,503 1,864 2,065
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 5,887 5,646 2,952 3,101 4,187
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged-off:
Commercial, financial, agricultural, and leases 504 237 305 209 389
Real estate--mortgage 17 45 28 25 37
Consumer 916 773 760 913 631
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,437 1,055 1,093 1,147 1,057
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 4,450 4,591 1,859 1,954 3,130
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 31,941 $ 27,563 $ 23,845 $ 21,717 $ 18,026
===================================================================================================================================
Average loans and leases outstanding $2,113,469 $1,636,481 $1,382,111 $1,287,078 $1,275,431
Period-end loans and leases 2,173,081 1,712,951 1,466,186 1,309,907 1,282,457
Net charge-offs as a percentage of average loans
and leases 0.21% 0.28% 0.13% 0.15% 0.25%
Allowance as a percentage of period-end loans
and leases 1.47 1.61 1.63 1.66 1.41
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan and lease
losses. They may require additions to allowances based upon their judgments
about information available to them at the time of examination.
It is the policy of Susquehanna not to renegotiate the terms of a loan simply
because of a delinquency status. Rather, a loan is transferred to non-accrual
status if it is not well secured and in the process of collection, and is
delinquent in payment of either principal or interest beyond 90 days. Interest
income received on non-performing loans in 1996 and 1995 was $0.8 million and
$0.9 million, respectively. Interest income which would have been recorded on
these loans under the original terms was $1.9 million for both years. At
December 31, 1996, Susquehanna had no outstanding commitments to advance
additional funds with respect to these non-performing loans.
Table 3 is an analysis of the provision levels as well as the activity in the
allowance for loan losses for the past five years. Table 4 reflects the
five-year history of non-performing assets and loans contractually past due 90
days and still accruing. Total non-performing assets at December 31, 1996 and
1995, of $31.6 million and $30.8 million, respectively, includes $7.0 million
and $5.3 million, respectively, in other real estate acquired through
foreclosure. Also, included in both 1996 and 1995 is a restructured loan
totaling $6.4 million at December 31, 1996, down from $6.7 million at December
31, 1995. Excluding the Fairfax acquisition in February 1996, the change in
non-performing assets would have been a decrease of $2.4 million. Non-performing
assets as a percentage of period-end loans and other real estate owned was 1.45%
at December 31, 1996, the lowest level this decade.
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property served as
collateral or the fair market value of the property as determined by a current
appraisal less estimated costs to sell (fair value). Prior to foreclosure, the
recorded amount of the loan is written-down, if necessary, to fair value by
charging the allowance for loan losses. Subsequent to foreclosure, gains or
losses on the sale of real estate acquired through foreclosure are recorded in
operating income and any losses determined as a result of periodic valuations
are charged to other operating expense.
29
================================================================================
TABLE 4--Non-Performing Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Loans contractually past due
90 days and still accruing $ 8,905 $ 4,820 $14,450 $ 6,574 $ 7,836
===================================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural, and leases $ 1,568 $ 2,275 $ 2,161 $ 2,981 $ 2,577
Real estate--mortgage 16,230 16,368 14,856 14,992 12,576
Consumer 354 111 198 131 693
Restructured loans 6,429 6,703 6,941 -- --
Other real estate owned 6,980 5,344 5,341 8,995 10,787
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $31,561 $30,801 $29,497 $27,099 $26,633
===================================================================================================================================
Total non-performing assets as a percentage of period-
end loans and leases and other real estate owned 1.45% 1.79% 2.00% 2.05% 2.06%
===================================================================================================================================
Loans with principal and/or interest delinquent 90 days or more which are
still accruing interest were $8.9 million at December 31, 1996, up from $4.8
million at December 31, 1995. Although the economy is continuing to improve,
softness in certain areas of the economy may adversely affect certain borrowers
and may cause additional loans to become past due beyond 89 days or be placed on
non-accrual status because of uncertainty of receiving full payment of either
principal or interest on these loans.
Potential problem loans consist of loans which are performing, but for which
potential credit problems have caused Susquehanna to place them on its
internally monitored loan list. At December 31, 1996, such loans, not included
in Table 4, amounted to $27.4 million. Depending upon the state of the economy
and the impact thereon to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing assets in the future.
Other Income
Non-interest income, recorded as other income, consists of service charges on
deposit accounts, commissions, fees received for travelers' check sales and
money orders, fees for trust services, premium income generated from reinsurance
activities, gains and losses on security transactions, net gains on sales of
mortgages, net gains on sales of other real estate owned, and other
miscellaneous income, such as safe deposit box rents. Other income as a
percentage of net interest income and other income was 14%,13%, and 14% for
1996, 1995, and 1994, respectively.
Non-interest income increased $5,264,000, or 32.7%, in 1996 over 1995. Income
from fiduciary-related activities rose by $274,000, or 9.2%, resulting from
higher volumes of assets under administration. Service charges on deposit
accounts were up $748,000, or 15.0%, and other charges, fees, and commissions
rose by $1,054,000, or 84.1%, reflecting the additional office locations and
higher account volumes as well as increased insurance commissions and increased
mortgage company activity. All other income exceeded 1995 results by $444,000
primarily due to increased credit card and debit card activity. Gain on sale of
mortgage loans increased $2,543,000 primarily due to the Fairfax acquisition.
Other Expenses
Non-interest expenses are categorized into five main groupings:
employee-related expenses, which include salaries, fringe benefits, and
employment taxes; occupancy expenses, which include depreciation, rents,
maintenance, utilities, and insurance; equipment expenses, which include
depreciation, rents, and maintenance; FDIC insurance premiums on deposits; and
other expenses (detailed in Table 5) incurred in operating Susquehanna's
business.
Along with normal recurring increases, the Fairfax acquisition in February
1996 and the Reisterstown acquisition in April 1995 were major influences on the
growth in these expenses from 1995 to 1996. The salary and employee benefits
expenses rose by $8,076,000, or 19.1%, from 1995 to 1996; occupancy and
equipment expenses were higher by $1,897,000, or 19.4%, while other operating
expenses increased $5,536,000, or 21.2%. FDIC insurance premiums increased
$4,396,000 due primarily to the one-time special SAIF charge.
Income Taxes
Susquehanna's effective tax rate for 1996 was 32.83% compared to 30.41% in
1995. This increase was primarily
30
================================================================================
TABLE 5--Analysis of Other Expenses
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Advertising, marketing,
and public relations $ 2,870 $ 2,210 $ 1,606
Amortization of
acquisition costs 4,472 2,829 1,843
Audits and examinations 896 812 845
Communications 1,623 1,261 1,033
Directors fees 1,161 1,068 1,041
Legal and professional 1,930 1,403 2,452
Life Insurance Company
related expenses 906 754 690
Other real estate 735 1,213 1,649
Outside services 3,310 2,849 2,411
PA shares/capital stock tax 1,803 1,619 1,498
Postage 2,007 1,576 1,358
Stationery and supplies 2,311 2,137 2,200
All other 7,655 6,412 5,245
- --------------------------------------------------------------------------------
Total $31,679 $26,143 $23,871
================================================================================
due to a higher state tax rate and non-deductible goodwill amortization
resulting from the Fairfax and Reisterstown acquisitions.
As tax-advantaged loans and securities continue to mature, and the
opportunities for investment in additional tax-advantaged enterprises become
less attractive due to certain provisions of the Tax Reform Act of 1986, the
upward trend of effective tax rates may continue in the years ahead.
In February 1992, the Financial Accounting Standards Board issued SFAS 109.
This statement establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes.
Under SFAS 109, Susquehanna recognizes deferred tax liabilities for taxable
temporary differences (the difference between financial and tax bases), and
deferred tax assets for deductible temporary differences. Management believes
the deferred tax assets recognized at December 31, 1996, will be realized in
future tax returns. While the ultimate realization of deferred tax assets is
dependent on future taxable income, taxable income in prior carryback years and
future reversals of existing taxable temporary differences are sufficient to
offset the future reversals of deductible temporary differences without
implementing any tax strategies or assuming future taxable income.
FINANCIAL CONDITION
Investment Securities
Susquehanna follows SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities." This accounting pronouncement requires the segregation of
investment securities into three categories, each having a distinct accounting
treatment.
Securities identified as "held-to-maturity" continue to be carried at their
amortized cost and, except for limited circumstances, may not be sold prior to
maturity. Securities identified as "available-for-sale" must be reported at
their market or "fair" value and the difference between that value and their
amortized cost recorded in the equity section, net of taxes. As a result, total
equity of Susquehanna was negatively impacted by $1.3 million as the "unrealized
gains or losses for available-for-sale securities," changed from a positive $2.4
million at December 31, 1995, to a positive $1.1 million at December 31, 1996.
Securities identified as "trading account securities" are marked-to-market with
the change recorded in the income statement.
Presently, Susquehanna does not engage in trading activity, but does engage
in active portfolio management which requires the majority of its security
portfolios to be identified as "available-for-sale." While SFAS 115 requires
segre
TABLE 6--Carrying Value of Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to- Available- Held-to-
Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
U.S.Treasury $164,392 $-- $173,203 $-- $184,494 $ 10,948
U.S. Government agencies 94,556 1,001 70,641 21,883 20,932 28,506
State and municipal -- 98,512 -- 102,927 -- 120,582
Other securities 82,910 50 96,318 50 68,505 19,002
Mortgage-backed securities 93,295 7,982 118,341 9,019 84,989 44,913
Equity securities 18,903 -- 17,636 -- 15,125 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $454,056 $107,545 $476,139 $133,879 $374,045 $223,951
====================================================================================================================================
31
================================================================================
TABLE 7--Investment Securities
The following table shows the maturities of investment securities at fair
value and amortized cost as of December 31, 1996, and the weighted average
yields of such securities. Yields are shown on a tax equivalent basis, assuming
a 35% federal income tax rate.
- ---------------------------------------------------------------------------------------------------------------------------
Within After 1 Year but After 5 Years but After
Dollars in thousands 1 Year within 5 Years within 10 Years 10 Years Total
- ---------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury
Fair value $64,705 $99,687 -- -- $164,392
Amortized cost 64,667 99,425 -- -- 164,092
Yield 5.6% 5.9% -- -- 5.8%
U.S. Government agencies
Fair value $11,005 $79,477 $ 4,074 -- $ 94,556
Amortized cost 10,997 79,496 4,150 -- 94,643
Yield 6.1% 6.2% 6.4% -- 6.2%
Corporate debt securities
Fair value $14,668 $68,240 $ 2 -- $ 82,910
Amortized cost 14,674 67,569 1 -- 82,244
Yield 5.5% 6.6% 14.2% -- 6.4%
Mortgage-backed securities
Fair value $15,087 $36,232 $18,652 $23,324 $ 93,295
Amortized cost 15,144 36,567 18,659 23,448 93,818
Yield 5.4% 6.7% 5.8% 6.5% 6.2%
Equity securities
Fair value -- -- -- -- $ 18,903
Amortized cost -- -- -- -- 17,521
Yield -- -- -- -- 6.4%
Held-to-Maturity:
U.S. Government agencies
Fair value $ 1,003 -- -- -- $ 1,003
Amortized cost 1,001 -- -- -- 1,001
Yield 5.9% -- -- -- 5.9%
Corporate debt securities
Fair value -- $ 50 -- -- $ 50
Amortized cost -- 50 -- -- 50
Yield -- 8.0% -- -- 8.0%
Mortgage-backed securities
Fair value -- $ 8,007 -- -- $ 8,007
Amortized cost -- 7,982 -- -- 7,982
Yield -- 6.5% -- -- 6.5%
State and municipal
Fair value $25,464 $61,196 $ 6,398 $ 6,294 $ 99,352
Amortized cost 25,426 60,857 6,165 6,064 98,512
Yield 5.8% 6.0% 5.8% 9.0% 6.2%
Total Securities
Fair value $562,468
Amortized cost 559,863
Yield 6.1%
32
================================================================================
TABLE 8--Loan and Lease Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 211,234 9.7% $ 198,802 11.6%
Real estate--construction 193,793 8.9 177,253 10.3
Real estate--mortgage 1,482,590 68.2 1,091,066 63.7
Consumer 241,198 11.2 223,039 13.1
Leases 44,266 2.0 22,791 1.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 2,173,081 100.0% $1,712,951 100.0%
=================================================================================================================================
TABLE 9--Loan Maturity and Interest Sensitivity
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------------------
Under One One to Five Over Five
Maturity Year Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 99,671 $62,694 $48,869 $ 211,234
Real estate--construction $168,846 13,311 11,636 193,793
- ---------------------------------------------------------------------------------------------------------------------------------
$268,517 $76,005 $60,505 $ 405,027
=================================================================================================================================
Rate sensitivity of loans with maturities greater than 1 year:
Variable rate $ 48,637
Fixed rate 87,873
- ---------------------------------------------------------------------------------------------------------------------------------
$ 136,510
=================================================================================================================================
TABLE 10-- Allocation of Allowance for Loan and Lease Losses
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 3,660 $ 3,658 $ 3,616 $ 3,521 $ 2,772
Real estate--construction 5,757 2,475 3,175 3,336 2,128
Real estate--mortgage 6,541 6,141 5,530 3,794 2,885
Consumer 4,418 3,212 3,247 2,879 1,604
Leases 1,097 602 453 303 283
Unused commitments 1,647 2,058 1,515 -- --
Unallocated 8,821 9,417 6,309 7,884 8,354
- -----------------------------------------------------------------------------------------------------------------------------------
Total $31,941 $27,563 $23,845 $21,717 $18,026
- -----------------------------------------------------------------------------------------------------------------------------------
33
================================================================================
- --------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------------------------------------------------
$ 186,013 12.7% $ 174,544 13.3% $ 184,568 14.4%
84,886 5.8 81,962 6.3 78,119 6.1
955,357 65.1 842,551 64.3 813,919 63.4
223,963 15.3 190,307 14.5 187,009 14.6
15,967 1.1 20,543 1.6 18,842 1.5
- --------------------------------------------------------------------------------------------------------------------------
$1,466,186 100.0% $1,309,907 100.0% $1,282,457 100.0%
==========================================================================================================================
TABLE 11--Loan Concentrations
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania and Maryland. At December 31, 1996, Susquehanna's
portfolio included the following concentrations:
- -----------------------------------------------------------------------------------------------------------------------------------
Total As a % of % Nonperforming
Dollars in thousands Permanent Construction All Other Amount Total Loans in each category
- -----------------------------------------------------------------------------------------------------------------------------------
Housing developments $42,162 $177,861 $ 4,056 $224,079 10.3 2.7
Office buildings and warehouses 82,665 7,860 2,793 93,318 4.3 1.6
Retailing 18,806 -- 42,025 60,831 2.8 2.3
Agriculture 36,361 1,029 17,672 55,062 2.5 0.8
Manufacturing 10,144 14 17,221 27,379 1.3 1.6
Hotels/motels 23,198 -- 9,765 32,963 1.5 22.7
gation into "held-to-maturity" and "available-for-sale" categories (see
Table 6), it does not change Susquehanna's policy concerning the purchase of
only high-quality securities. Strategies employed address liquidity, capital
adequacy and net interest margin considerations which then determine the
assignment of purchases into these two categories. Table 7 illustrates the
maturities of these security portfolios and the weighted average yields based
upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35%
federal income tax rate. At December 31, 1996, Susquehanna held no securities of
one issuer, other than U.S. Government obligations, where the aggregate book
value exceeded ten percent of stockholders' equity.
Susquehanna has taken a conservative and prudent investment posture toward
mortgage-backed securities. Management periodically sets limits on the aggregate
amount of mortgage-backed securities which may be acquired by Susquehanna.
Presently, the strategy of management is to restrict new investment in federal
agency-issues to full range Priority Amortization Class (PAC) instruments with
expected average maturities of less than six years. These securities typically
have minimal movement, if any, in their expected principal paydown schedules
with a movement in market interest rates of plus or minus 300 basis points.
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1996, which includes the $381.7 million as a result of
the Fairfax acquisition, was 26.9%, or $460.1 million. Loan growth in 1996 was
mainly associated with real estate mortgage loans which increased $391.5
million, primarily due to the Fairfax acquisition. As noted in Table 11,
Susquehanna's loan portfolio contains no significant concentrations other than
geographic.
Susquehanna's banks and savings banks have historically reported a
significant amount of loans secured by real estate, as depicted in Table 8. Many
of these loans have real estate taken as collateral for additional security for
business or personal purposes not related to the acquisition of the real estate
pledged. Open-end home equity loans amounted to $106.6 million at year end and
an additional $122.9 million was lent against junior liens on residential
properties. Senior liens on 1-4 family residential properties totaled $883.7
million and much of the $289.5 million in loans secured by non-farm,
non-residential properties represented collateralization of operating lines, or
term loans that finance equipment, inventory, or receivables. Loans secured by
farmland totaled $36.0 million while loans se-
34
================================================================================
TABLE 12--Average Deposit Balances
- -------------------------------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
Demand deposits $ 279,805 $ 251,146 $ 229,096
Interest-bearing
demand deposits 642,258 475,205 465,265
Savings deposits 402,071 393,474 399,241
Time deposits 1,140,992 901,170 692,180
- -------------------------------------------------------------------------------
Total $2,465,126 $2,020,995 $1,785,782
===============================================================================
cured by multi-family residential properties totaled $43.9 million at
December 31, 1996.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 1997 consist of $87.9 million with fixed-rate pricing and $48.6 million
with variable-rate pricing.
Deposits
Susquehanna's deposit base is consumer-oriented, consisting of time deposits
primarily certificates of deposit of various terms; interest-bearing demand
accounts; savings accounts; and demand deposits. The average amounts of deposit
by type are summarized in Table 12. Susquehanna does not rely upon time deposit
of $100,000 or more as a principal source of funds. Table 13 presents a
breakdown
TABLE 13--Deposit Maturity
Maturity of time deposits of $100 or more at
December 31, 1996
- -------------------------------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------------------------------
Three months or less $26,582
Over three months through six months 16,943
Over six months through twelve months 27,324
Over twelve months 40,273
- -------------------------------------------------------------------------------
Total $111,122
===============================================================================
of maturities of time deposits of $100,000 or more as of December 31, 1996.
Asset/Liability Management
Liquidity and interest rate sensitivity are related but distinctly different
from one another. The maintenance of adequate liquidity--the ability to meet the
cash requirements of its customers and other financial commitments--is a
fundamental aspect of Susquehanna's asset/liability management strategy.
Susquehanna's policy of diversifying its funding sources--purchased funds,
repurchase agreements, and deposit accounts--allows it to avoid undue
concentration in any single financial market and also to avoid heavy funding
requirements within short periods of time.
However, liquidity is not entirely dependent on increas
TABLE 14--Interest Rate Sensitivity
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 1-90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 96,007 $ 100 $ 96,107
Investments 27,781 37,814 $ 102,331 $ 393,675 561,601
Loans and leases, net of unearned income* 622,604 98,399 358,778 1,075,148 2,154,929
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 746,392 $ 136,313 $ 461,109 $1,468,823 $2,812,637
==================================================================================================================================
Liabilities
Interest-bearing demand $ 676,332 $ 676,332
Savings 397,893 397,893
Time 245,162 $ 153,470 $ 245,968 $ 359,673 1,004,273
Time in denominations of $100 or more 26,582 16,943 27,324 40,273 111,122
Short-term borrowings 93,989 161 94,150
Long-term debt 4 4,004 5,359 106,001 115,368
- ----------------------------------------------------------------------------------------------------------------------------------
Total $1,439,962 $ 174,578 $ 278,651 $ 505,947 $2,399,138
==================================================================================================================================
Interest Sensitivity Gap
Periodic $ (693,570) $ (38,265) $ 182,458 $ 962,876
Cumulative (731,835) (549,377) 413,499
Cumulative gap as a percentage of earning assets -24.7% -26.0% -19.5% 14.7%
* Does not include nonaccrual loans.
35
================================================================================
ing Susquehanna's liability balances. Liquidity can also be generated from
maturing or readily marketable assets. The carrying value of investment
securities maturing within one year amounted to $131.9 million at December 31,
1996. These maturing investments represent 23.9% of the total investment
securities. Short-term investments amounted to $96.1 million and represent
additional sources of liquidity.
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest margin,
an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the
interest-bearing assets and liabilities. It is the objective of management to
control the difference in the timing of the rate changes for these assets and
liabilities to preserve a satisfactory net interest margin. In doing so,
Susquehanna endeavors to maximize earnings in an environment of changing
interest rates. However, there is a lag in maintaining the desired matching
because the repricing of products does occur at varying time intervals.
Susquehanna employs a variety of methods in order to monitor interest rate
sensitivity. By dividing the assets and liabilities into three groups--fixed
rate, floating rate, and those which reprice only at management's
discretion--strategies are developed which are designed to minimize exposure to
interest rate fluctuations. Management also utilizes gap analysis to evaluate
rate sensitivity at a given point in time.
Table 14 illustrates Susquehanna's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at December 31, 1996. These
estimates include anticipated paydowns on mortgage-backed securities, which were
derived from "stress tests" performed on these securities at December 31, 1996.
An institution with more assets repricing than liabilities over a given time
frame is considered asset sensitive, and one with more liabilities repricing
than assets is considered liability sensitive. An asset sensitive institution
will generally benefit from rising rates, and a liability sensitive institution
will generally benefit from declining rates. While Susquehanna has had and will
into the foreseeable future experience a negative gap position (liability
sensitive), the impact of a rapid rise in interest rates, as occurred in 1994,
did not have a significant effect on the net interest margin of Susquehanna.
Capital Adequacy
Risk-based capital ratios, based upon guidelines adopted by bank regulators
in 1989, focus upon credit risk. Assets and certain off-balance sheet items are
segmented into one of four broad-risk categories and weighted according to the
relative percentage of credit risk assigned by the regulatory authorities.
Off-balance sheet instruments are converted into a balance sheet credit
equivalent before being assigned to one of the four risk-weighted categories. To
supplement the risk-based capital ratios, the regulators issued a minimum
leverage ratio guideline (Tier 1 capital as a percentage of average assets less
excludable intangibles).
Capital elements are segmented into two tiers. Tier 1 capital represents
shareholders' equity reduced by excludable intangibles, while total capital
represents Tier 1 capital plus certain allowable long-term debt and the portion
of the allowance for loan and lease losses equal to 1.25% of risk-adjusted
assets.
TABLE 15--Capital Adequacy
- ----------------------------------------------------------------------------------------------------------------------
At December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
Tier I Capital Ratio (A) Total Capital Ratio (B) Leverage Ratio (C)
- ----------------------------------------------------------------------------------------------------------------------
Required Ratio 4.00% 8.00% 4.00%
Atlantic Federal Savings Bank 15.46 16.60 8.52
Citizens National Bank 13.48 14.58 9.15
Fairfax Savings 11.05 18.30 6.20
Farmers First Bank 15.64 16.90 12.60
Farmers & Merchants Bank and Trust 9.30 10.44 6.62
First National Trust Bank 12.74 13.87 9.99
Reisterstown Federal Savings Bank 9.63 16.21 6.98
Williamsport National Bank 17.74 19.00 12.72
Total Susquehanna 11.99% 15.62% 8.54%
======================================================================================================================
(A) Tier I capital divided by year-end risk-adjusted assets.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier I capital divided by quarterly average total assets less disallowed
intangible assets.
36
================================================================================
The maintenance of a strong capital base at both the parent company level as
well as at each banking affiliate is an important aspect of Susquehanna's
philosophy. Table 15 illustrates these capital ratios for each banking
subsidiary and Susquehanna on a consolidated basis. Susquehanna and each of its
banking subsidiaries have leverage and risk-weighted ratios well in excess of
regulatory minimums and each entity is considered "well capitalized" under
regulatory guidelines.
Subsequent Events
On February 28, 1997, Susquehanna acquired ATCORP, Inc. for approximately
772,000 shares of its common stock and Farmers Banc Corp. for approximately
693,000 shares of its common stock. Accordingly, these transactions will be
recorded under the pooling-of-interests method of accounting. At December 31,
1996, combined assets acquired were $297 million, loans acquired were $177
million, and deposits acquired were $261 million.
Summary of 1995 Compared to 1994
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1995 and
1994. These transactions are described in the following paragraphs.
On July 11, 1994, Susquehanna completed its acquisition of eight Allegany
County, Maryland, branch locations of First National Bank of Maryland. At the
time of the acquisition, the Allegany County locations had loans of $45.5
million, fixed assets of $2.7 million, deposits of $194.1 million, and total
assets of $194.2 million. The transaction has been accounted for under the
purchase method of accounting. The eight branches were subsequently merged into
Farmers & Merchants Bank and Trust, Hagerstown, Maryland, a wholly-owned
subsidiary of Susquehanna.
On February 9, 1995, Susquehanna issued $50 million of 9.00% subordinated
notes due 2005. The proceeds of the issuance were used to acquire Reisterstown
Holdings, Inc. ("RHI") on April 21, 1995, and retire $10 million in short-term
borrowings. The balance of the proceeds was used for general corporate purposes.
On April 1, 1995, Susquehanna completed the acquisition of Atlanfed Bancorp,
Inc. ("ABI"), issuing 1,199,333 common shares for all of ABI's outstanding
shares. Total assets of ABI at the acquisition date were $255 million. Deposits
totaled $179 million, loans outstanding were $189 million, and stockholders'
equity was $22.6 million. The transaction was accounted for as a
pooling-of-interests and Susquehanna's consolidated financial statements and
related notes and management's discussion and analysis for all reported periods
have been restated to include ABI's financial results.
On April 21, 1995, Susquehanna completed the acquisition of RHI, acquiring
all of the assets and assuming all the liabilities of RHI for $28.6 million.
Accordingly, the transaction was treated under the purchase method of accounting
whereby all the financial results are included with Susquehanna from April 21,
1995, forward. The loans acquired totaled $201 million, total assets were $248
million, and deposits were $210 million. The excess purchase price of $12.7
million will be amortized over 15 years.
On December 22, 1995, Susquehanna closed a public common equity offering of
1,300,000 shares at $26.50, netting $32.6 million after underwriting commissions
and expenses. The proceeds from the offering were used as part of the purchase
price to acquire Fairfax.
Susquehanna's net income for the year ended December 31, 1995, was a record
$26,017,000, 17.7% above the $22,096,000 earned in 1994. Earnings per common
share were $2.23 in 1995 compared to $1.90 in 1994. The return on average assets
was 1.07% in 1995 compared to 1.04% in 1994, while the return on equity rose to
11.29% from 10.17% in 1994.
The performance level for the year ended December 31, 1995, was influenced by
several major factors. Assets acquired in the second half of 1994 of $194
million and the $248 million of assets acquired in April 1995 were a significant
factor in the increase of $13,064,000 in net interest income in 1995. Somewhat
offsetting this increase was a $6,008,000 increase in employee-related costs and
a $2,272,000 increase in other operating expenses, both of which, to a great
extent, were the result of these acquisitions. Two additional negative factors
were security transactions and the provision for loan and lease losses. In 1995,
there were $32,000 in net security losses, while 1994 recorded net security
gains of $999,000. In 1995, the provision rose by $1,007,000 of which $660,000
was attributed to one credit loss. Two positive factors were lower FDIC premiums
of $1,060,000 and a $559,000 gain realized on the sale of PHEAA loans.
37
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The following consolidated financial statements of Susquehanna are
submitted herewith:
Page Reference
--------------
Consolidated Balance Sheets at December 31, 1996 and
1995................................................. 39
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994.................... 40
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995, and 1994.............. 41
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1996, 1995,
and 1994............................................. 42
Notes to Consolidated Financial Statements............ 43-55
Report of Independent Accountants..................... 56
Summary of Quarterly Financial Data................... 57
38
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 98,519 $ 87,107
Short-term investments 96,107 92,110
Investment securities available-for-sale 454,056 476,139
Investment securities held-to-maturity (Fair values of $108,412 and $135,106) 107,545 133,879
Loans and leases, net of unearned income 2,173,081 1,712,951
Less: Allowance for loan and lease losses 31,941 27,563
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 2,141,140 1,685,388
- ---------------------------------------------------------------------------------------------------------------------------------
Premises & equipment (net) 38,548 36,414
Accrued income receivable 19,378 19,148
Other assets 83,158 55,972
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $3,038,451 $2,586,157
=================================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 303,884 $ 270,411
Interest-bearing 2,189,620 1,845,631
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 2,493,504 2,116,042
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 94,150 69,432
Long-term debt 115,368 86,274
Other liabilities 42,749 41,010
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,745,771 2,312,758
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 17)
Stockholders' Equity
Preferred stock, $1.80 series A cumulative convertible (no par value)
authorized 5,000,000 shares; issued and outstanding--none -- --
Common stock, ($2.00 par value) authorized 32,000,000 shares;
issued: 13,201,323 and 12,991,007 at December 31, 1996 and
1995, respectively 26,403 25,982
Surplus 78,529 73,173
Retained earnings 186,785 172,209
Unrealized gains for available-for-sale securities, net of taxes of
$620 and $1,342 at December 31, 1996 and 1995, respectively 1,118 2,358
Less: Treasury stock (20,303 and 42,331 common shares at cost
at December 31, 1996 and 1995, respectively) 155 323
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 292,680 273,399
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $3,038,451 $2,586,157
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
39
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands except per share Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income
Interest & fees on loans and leases $193,502 $152,305 $117,073
Interest on investment securities 34,628 34,532 31,610
Interest on short-term investments 3,705 2,990 1,950
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 231,835 189,827 150,633
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 91,141 72,059 51,214
Interest on short-term borrowings 2,841 3,406 2,257
Interest on long-term debt 9,156 7,153 3,017
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 103,138 82,618 56,488
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 128,697 107,209 94,145
Provision for loan and lease losses 4,599 4,994 3,987
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 124,098 102,215 90,158
- ------------------------------------------------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 5,745 4,997 4,840
Other service charges, commissions, and fees 2,307 1,253 1,151
Income from fiduciary-related activities 3,248 2,974 2,509
Gain on sale of mortgage loans 3,349 806 714
Other operating income 6,526 6,082 4,885
Investment security gains/(losses) 169 (32) 999
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 21,344 16,080 15,098
- ------------------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 50,311 42,235 36,227
Net occupancy expense 6,766 5,563 4,956
Furniture and equipment expense 4,886 4,192 3,818
FDIC insurance 7,174 2,778 3,838
Other operating expenses 31,679 26,143 23,871
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 100,816 80,911 72,710
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 44,626 37,384 32,546
Provision for income taxes 14,650 11,367 9,718
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 29,976 26,017 22,828
Extraordinary item (net of tax benefit of $394) -- -- (732)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 29,976 $ 26,017 $ 22,096
====================================================================================================================================
Earnings per share: before extraordinary item $ 2.28 $ 2.23 $ 1.96
extraordinary item -- -- (0.06)
net income $ 2.28 $ 2.23 $ 1.90
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
40
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 29,976 $ 26,017 $ 22,096
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 9,683 9,355 7,652
Provision for loan and lease losses 4,599 4,994 3,987
Deferred taxes 377 (360) (2,306)
(Gain)/loss on securities transactions (169) 32 (999)
Gain on sale of loans (3,534) (1,566) (231)
(Gain)/loss on sale of other real estate (318) (284) 1,180
Loss on the early extinguishment of debt -- -- 1,126
Mortgage loans originated for resale (204,986) (73,117) (42,652)
Sale of mortgage loans originated for resale 204,819 101,731 49,760
(Increase)/decrease in accrued interest receivable (230) 403 (3,865)
Increase/(decrease) in accrued interest payable 469 (209) (148)
Increase in accrued expenses and taxes payable 1,405 1,010 1,533
Change in fiscal year of pooled entity -- (381) --
Other, net (504) 1,324 (4,850)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,587 68,949 32,283
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from the sale of available-for-sale securities 28,973 27,404 60,523
Proceeds from the maturity of investment securities 170,922 161,746 135,567
Purchase of available-for-sale securities (114,595) (139,113) (152,326)
Purchase of held-to-maturity securities (20,510) (21,977) (101,582)
Increase in loans and leases (67,033) (72,431) (118,618)
Capital expenditures (5,606) (5,960) (3,824)
Net cash and cash equivalents acquired in acquisition (31,298) (17,517) 139,439
Change in fiscal year of pooled entity -- 81 --
Other, net -- -- 2,013
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (39,147) (67,767) (38,808)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net (decrease)/increase in deposits (18,928) 39,893 (45,590)
Net increase/(decrease) in short-term borrowings 24,718 (13,859) 42,635
Proceeds from issuance of long-term debt 35,000 55,122 14,350
Repayment of long-term debt (18,366) (19,439) (24,463)
Proceeds from issuance of common stock 5,945 33,543 --
Dividends paid (15,400) (12,478) (11,024)
Change in fiscal year of pooled entity -- 177 --
Other, net -- -- 302
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by /(used for) financing activities 12,969 82,959 (23,790)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 15,409 84,141 (30,315)
Cash and cash equivalents at January 1 179,217 95,076 125,391
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 194,626 $179,217 $ 95,076
===================================================================================================================================
Cash and cash equivalents:
Cash and due from banks $ 98,519 $ 87,107 $ 79,473
Short-term investments 96,107 92,110 15,603
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 194,626 $179,217 $ 95,076
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
41
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996, 1995, and 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Dollars in thousands Preferred Common Retained Gain/(Loss) Treasury Total
except per share data Stock Stock Surplus Earnings Securities Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $ 40 $23,355 $42,064 $147,979 $ 5,363 $(373) $218,428
Preferred shares converted to common (40) 11 29 --
Stock issued under employee benefit plans 826 826
Net income 22,096 22,096
Change in unrealized gain/(loss)
on securities (13,222) (13,222)
Cash dividends declared:
Per common share of $1.02 (11,024) (11,024)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 0 23,366 42,919 159,051 (7,859) (373) 217,104
Net income 26,017 26,017
Change in fiscal year of pooled entity (623) (381) (44) (1,048)
Stock issued under employee benefit plans 16 874 50 940
Stock issued in public offering 2,600 30,003 32,603
Change in unrealized gain/(loss)
on securities 10,261 10,261
Cash dividends declared:
Per common share of $1.10 (12,478) (12,478)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 0 25,982 73,173 172,209 2,358 (323) 273,399
Net income 29,976 29,976
Stock issued under employee benefit plans 31 810 168 1,009
Stock issued in public offering 390 4,546 4,936
Change in unrealized gain/(loss) on securities (1,240) (1,240)
Cash dividends declared:
Per common share of $1.17 (15,400) (15,400)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 0 $26,403 $78,529 $186,785 $ 1,118 $(155) $292,680
====================================================================================================================================
Shares Outstanding Preferred Common
Stock Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 1,884 11,628,284
Preferred shares converted to common (1,884) 5,634
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 -- 11,633,918
Stock issued under employee benefit plans -- 14,758
Stock issued in public offering -- 1,300,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- 12,948,676
Stock issued under employee benefit plans -- 37,344
Stock issued in public offering -- 195,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- 13,181,020
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
42
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
================================================================================
(Dollars in thousands except as noted and per share data)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Susquehanna Bancshares, Inc. and
subsidiaries (Susquehanna) conform to generally accepted accounting principles
and to general practices in the banking industry. The more significant policies
follow:
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Susquehanna and its wholly-owned subsidiaries: Farmers
First Bank ("Farmers"), Farmers & Merchants Bank and Trust ("F&M"), First
National Trust Bank ("First National"), Williamsport National Bank
("Williamsport"), Citizens National Bank of Southern Pennsylvania ("Citizens"),
Susquehanna Bancshares South, Inc. and subsidiaries ("Susquehanna South"),
Susque-Bancshares Life Insurance Co. ("SBLIC") and Susque-Bancshares Leasing
Company, Inc. and subsidiary ("SBLC"), as of and for the years ended December
31, 1996, 1995, and 1994. All material intercompany transactions have been
eliminated.
Income and expenses are recorded on the accrual basis of accounting except for
trust and certain other fees which are recorded principally on the cash basis.
This does not materially affect the results of operations or financial position
of Susquehanna.
Nature of Operations. Susquehanna is a multi-financial institution which
operates five commercial banks and three savings banks. These subsidiaries
provide financial services from 107 branches located in central and south
central Pennsylvania and central and western Maryland. In addition, Susquehanna
operates two non-bank subsidiaries which provide leasing and insurance services.
Susquehanna's primary source of revenue is derived from loans to customers, who
are predominately small- and middle-market businesses and middle-income
individuals.
Use of Estimates in the Preparation of Financial Statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
Purchase Method of Accounting. Net assets of companies acquired in purchase
transactions are recorded at the fair value at the date of acquisition. Core
deposit intangibles are amortized on a straight-line basis over 10 years. The
excess of purchase price over the fair value of net assets acquired (goodwill)
is amortized on a straight-line basis generally over 15 years. The unamortized
amount of goodwill was $37,821 and $19,134 at December 31, 1996 and 1995,
respectively.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash
equivalents includes cash, due from banks, and short-term investments. Short-
term investments consist of interest-bearing deposits in other banks, federal
funds sold, commercial paper, and money market funds with original maturities of
three months or less.
Consolidated Statement of Cash Flows. Interest paid on deposits, short-term
borrowings, and long-term debt was $102,669 in 1996, $79,827 in 1995, and
$56,639 in 1994. Income taxes paid were $13,251 in 1996, $11,513 in 1995, and
$11,420 in 1994. Amounts transferred to other real estate owned were $7,747 in
1996, $4,959 in 1995, and $1,673 in 1994.
On July 11, 1994, Susquehanna acquired eight banking offices of The First
National Bank of Maryland. At the time of the acquisition, loans acquired were
$45,538, deposits acquired, $194,114, and premises and equipment, $2,709.
On April 21, 1995, Susquehanna acquired Reisterstown Holdings, Inc., ("RHI"),
Reisterstown, Md., for $28,640. At the time of the acquisition, loans acquired
were $201,182, investment securities, $26,798, and deposits, $209,819.
On February 1, 1996, Susquehanna acquired Fairfax Financial
Corporation,("FFC"), Baltimore, Md., for $62,725. At the time of the
acquisition, loans acquired were $401,658, investment securities, $19,467, and
deposits, $396,390.
Investment Securities. Susquehanna classifies debt and equity securities as
either "held-to-maturity" or "available-for-sale." Susquehanna does not have any
securities classified as "trading" at December 31, 1996, or 1995. Investments
for which management has the intent, and Susquehanna has the ability to hold to
maturity are carried at the lower of cost or market adjusted for amortization of
premium and accretion of discount. Amortization and accretion are calculated
principally on the interest method. All other securities are classified as
"available-for-sale" and reported at fair value. Unrealized gains and losses for
"available-for-sale" securities, net of taxes, are recorded as a component of
shareholders' equity.
Securities classified as "available-for-sale" include investments management
intends to use as part of its asset/liability management strategy, and that may
be sold in response to changes in interest rates, resultant prepayment risk and
other factors. Realized gains and losses on the sale of securities are
recognized using the specific identification method and are included in Other
Income in the Consolidated Statements of Income.
Allowance for Loan Losses. The loan loss provision charged to operating expense
reflects the amount deemed appropriate by management to produce an adequate
reserve to meet the present and foreseeable risk characteristics of the loan
portfolio. Loan losses are charged directly against the allowance for loan
losses, and recoveries on previously charged-off loans are added to the
allowance.
Susquehanna adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by Number 118, on
January 1, 1996 (collectively "the Statements"). The adoption of the Statements
did not have a material effect on Susquehanna's allowance for loan losses or
result in an additional provision for loan losses in 1995. Susquehanna considers
a loan to be impaired, based upon current information and events, if it is
probable that Susquehanna will be unable to collect the scheduled payments of
principle or interest according to the contractual terms of the loan agreement.
Larger groups of small-balance loans, such as residential mortgage and
installment loans are collectively evaluated for impairment and, therefore, are
not subject to the Statements. Management has established a smaller-dollar value
threshold of $100 for commercial loans. Commercial loans exceeding this
threshold
43
- --------------------------------------------------------------------------------
================================================================================
are evaluated in accordance with the Statements. An insignificant delay or
shortfall in the amounts of payments, when considered independent of other
factors, would not cause a loan to be rendered impaired. Insignificant delays or
shortfalls may include, depending on specific facts and circumstances, those
that are associated with temporary operational downturns or seasonal delays.
Management performs periodic reviews of Susquehanna's loan portfolio to
identify impaired loans. The measurement of impaired loans is based on the
present value of expected future cash flows discounted at the historical
effective interest rate, except that all collateral-dependent loans are measured
for impairment based on the fair value of the collateral.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principle is considered
probable. When an impaired loan or portion of an impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance and subsequent recoveries, if any, are credited to
the valuation allowance.
Depreciable Assets. Buildings, leasehold improvements, and furniture and
equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the related property as follows: Buildings, 40 years,
and furniture and equipment, 3 to 20 years. Leasehold improvements are amortized
over the shorter of the lease term or 10 to 20 years. Maintenance and normal
repairs are charged to operations as incurred, while additions and improvements
to buildings and furniture and equipment are capitalized. Gain or loss on
disposition is reflected in operations.
Long-lived assets and certain intangible assets are evaluated for impairment
using guidance provided by Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), which was adopted on January 1, 1996. SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Adoption of SFAS 121 had no effect on Susquehanna's financial
condition or results of operations.
Other Real Estate. Other real estate property acquired through foreclosure or
other means is recorded at the lower of its carrying value, or fair value of the
property at the transfer date less estimated selling costs. Costs to maintain
other real estate are expensed as incurred.
Interest Income on Loans. Interest income on commercial, consumer, and mortgage
loans is recorded on the interest method. Interest income on installment loans
is recorded on the sum-of-the-years-digits and the actuarial methods. Loan fees
and certain direct loan origination costs are being deferred and the net amount
amortized as an adjustment to the related loan yield on the interest method,
generally over the contractual life of the related loans.
Nonaccrual loans are those on which the accrual of interest has ceased and
where all previously accrued and unpaid interest is reversed. Loans, other than
consumer loans, are placed on nonaccrual status when principal or interest is
past due 90 days or more and the loan is not well-collateralized and in the
process of collection, or immediately, if, in the opinion of management, full
collection is doubtful. Interest accrued but not collected as of the date of
placement on nonaccrual status is reversed and charged against current income.
Susquehanna does not accrue interest on nonaccrual or impaired loans. While a
loan is considered impaired or on nonaccrual status, subsequent cash payments
received either are applied to the outstanding principal balance or recorded as
interest income, depending upon management's assessment of the ultimate
collectibility of principal and interest. Consumer loans are charged off to the
allowance for loan losses when they become 120 days or more past due, unless
such loans are in the process of collection. In any case, the deferral or
nonrecognition of interest does not constitute forgiveness of the borrower's
obligation.
Federal Income Taxes. Deferred income taxes reflect the temporary tax
consequences on future years of differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the difference is expected to reverse.
Mortgage Servicing Rights. On January 1, 1996, Susquehanna adopted the
provisions of Statement of Financial Accounting Standard No. 122, "Accounting
for Mortgage-Servicing Rights" ("SFAS 122"). SFAS 122 requires that a portion of
the cost of originating a mortgage loan be allocated to the mortgage servicing
right based on its fair value relative to the loans as a whole and recorded as
an asset separate from the underlying loans. SFAS 122 did not have a material
effect on Susquehanna's financial condition or results of operations.
Stock Option Plan. On January 1, 1996, Susquehanna adopted the provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires a fair-value based method of
accounting for stock options or an intrinsic value-based method with fair value
based proforma disclosures. Susquehanna has elected the intrinsic value-based
method, but had Susquehanna elected the fair value-based method, it would not
have had a material effect on Susquehanna's financial condition or results of
operations in 1996.
Earnings Per Share. Earnings per common share were computed by dividing net
income by the weighted average number of shares of common stock outstanding for
the periods presented. The average common shares outstanding for the periods
presented are 13,161,253 for 1996; 11,674,244 for 1995; and 11,633,918 for 1994.
Recent Accounting Pronouncements. The Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), in 1996. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings based on a control-oriented "financial components" approach. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The provisions of SFAS 125 are effective for
transactions occurring after December 31, 1996, except those provisions relating
to repurchase agreements, securities lending and other similar transactions and
44
- --------------------------------------------------------------------------------
================================================================================
pledged collateral, which have been delayed until after December 31, 1997, by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS 125,
An Amendment of FASB Statement No. 125." The adoption of these statements is not
expected to have a material effect on Susquehanna's financial condition or
results of operation.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 established standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
SFAS 128 simplifies the standards for computing earnings per share previously
found in APB Opinion No. 15, "Earnings Per Share," by replacing the presentation
of primary earnings per share with a presentation of basic earnings per share.
It also requires dual presentation of basic and diluted earnings per share on
the face of the income statement for all entities with complex capital
structures.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application is not
permitted; however, restatement of all prior-period earnings per share data is
required upon adoption. The impact of adoption of SFAS 128 on Susquehanna's
earnings per share data has not yet been determined.
Reclassifications. Certain prior year amounts have been reclassified to
conform with the current year presentation. The reclassifications had no impact
on total assets, liabilities, stockholder's equity, or net income.
- --------------------------------------------------------------------------------
2. Completed and Pending Acquisitions
On February 1, 1996, Susquehanna purchased Fairfax Financial Corporation
("FFC"), a Maryland thrift holding company with $455 million in assets and $396
million in deposits at the acquisition date, for $62.7 million. This transaction
will be accounted for under the purchase method of accounting and, accordingly,
the results of operations of FFC are included with Susquehanna from February 1,
1996, forward. Under this method of accounting, the purchase price is allocated
to the respective assets acquired and liabilities assumed based on their
estimated fair values, net of applicable income tax effects. Goodwill of $21.4
million was created in this transaction and will be amortized to other operating
expense on a straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for
Susquehanna, FFC, and RHI follows:
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Susquehanna/ Susquehanna/
Susquehanna FFC Susquehanna RHI/FFC
As Reported Combined As Reported Combined
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $128,697 $129,815 $107,209 $125,294
Loan loss provision 4,599 5,101 4,994 5,039
Other income 21,344 21,832 16,080 19,291
Other expense 100,816 101,517 80,911 96,904
- -----------------------------------------------------------------------------------------------------------------------
Income before taxes 44,626 45,029 37,384 42,642
Taxes 14,650 14,918 11,367 13,562
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 29,976 $ 30,111 $ 26,017 $ 29,080
=======================================================================================================================
Earnings per share $ 2.28 $ 2.29 $ 2.23 $ 2.21
=======================================================================================================================
On February 11, 1997, Founders' Bank, Bryn Mawr, Pa. ("Founders"), announced
it has signed a definitive agreement in which Founders would become wholly-owned
by Susquehanna. Under the terms of the agreement, Susquehanna will issue its
common shares in exchange for all of Founders' outstanding shares in a multiple
that approximates the market value of Susquehanna's common stock to two times
the Founders book value at September 30, 1996 ($7,484), as long as Susquehanna's
common stock market price remains between $34 and $40 per share. At December 31,
1996, Founders reported total assets of $103 million. Results of operations for
Founders were not significant to Susquehanna's consolidated financial
statements, and, accordingly, pro forma condensed results of operations for 1996
have not been presented.
On February 28, 1997, Susquehanna completed the acquisitions of ATCORP,
Inc., Marlton, N.J. ("Al"), and Farmers Banc Corp. ("FBC"), Mullica Hill, N.J.,
for approximately 772,000 and 693,000 common shares of Susquehanna,
respectively. At December 31, 1996, Al had total assets of $208 million and FBC
had total assets of $89 million. Results of operations for Al and FBC prior to
the acquisitions were not significant to Susquehanna's consolidated financial
statements, and, accordingly, pro forma condensed results of operations for 1996
have not been presented.
- --------------------------------------------------------------------------------
3. Short-Term Investments
The book value of short-term investments and weighted average interest rates on
December 31, 1996 and 1995 were as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Book Book
Value Rates Value Rates
- --------------------------------------------------------------------------------
Interest-bearing deposits
in other banks $26,056 6.67% $18,146 5.41%
Federal funds sold 42,303 6.29 37,856 4.92
Commercial paper 24,993 5.32 32,998 5.88
Money market funds 2,755 5.13 3,110 5.34
- --------------------------------------------------------------------------------
Total $96,107 $92,110
================================================================================
45
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
4. Investment Securities
The amortized cost and fair values of investment securities at December 31, 1996
and 1995, were as follows:
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 1996 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury $164,092 $ 584 $ 284 $164,392
U.S. Government agencies 94,643 214 301 94,556
Corporate debt securities 82,244 710 44 82,910
Mortgage-backed securities 93,818 362 885 93,295
Equity securities 17,521 1,392 10 18,903
- --------------------------------------------------------------------------------------------------------------------
$452,318 $3,262 $1,524 $454,056
- --------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Government agencies $ 1,001 $ 2 $ -- $ 1,003
State and municipal 98,512 976 136 99,352
Corporate debt securities 50 -- -- 50
Mortgage-backed securities 7,982 36 11 8,007
- --------------------------------------------------------------------------------------------------------------------
$107,545 $1,014 $ 147 $108,412
- --------------------------------------------------------------------------------------------------------------------
Total Investment Securities $559,863 $4,276 $1,671 $562,468
====================================================================================================================
At December 31, 1995
- --------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury $171,733 $1,735 $ 265 $173,203
U.S. Government agencies 70,530 359 248 70,641
Corporate debt securities 94,798 1,578 58 96,318
Mortgage-backed securities 118,580 321 560 118,341
Equity securities 16,798 853 15 17,636
- --------------------------------------------------------------------------------------------------------------------
$472,439 $4,846 $1,146 $476,139
- --------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Government agencies $ 21,883 $ 53 $ 22 $ 21,914
State and municipal 102,927 1,321 174 104,074
Corporate debt securities 50 0 0 50
Mortgage-backed securities 9,019 49 0 9,068
- --------------------------------------------------------------------------------------------------------------------
$133,879 $1,423 $ 196 $135,106
- --------------------------------------------------------------------------------------------------------------------
Total investment securities $606,318 $6,269 $1,342 $611,245
====================================================================================================================
At December 31, 1996 and 1995, investment securities with a carrying value of
$169,072 and $155,755, respectively, were pledged to secure public funds and for
other purposes as required by law.
There were no investment securities whose ratings were less than investment
grade at December 31, 1996 or 1995.
46
================================================================================
The amortized cost and fair values of U.S. Treasury, government agency, state
and municipal, corporate debt and mortgage-backed securities, at December 31,
1996, by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalities.
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Securities available-for-sale:
Within one year $105,482 $105,465
After one year but within five years 283,057 283,636
After five years but within ten years 22,810 22,728
After ten years 23,448 23,324
- --------------------------------------------------------------------------------
$434,797 $435,153
- --------------------------------------------------------------------------------
Securities held-to-maturity:
Within one year $ 26,427 $ 26,467
After one year but within five years 68,889 69,253
After five years but within ten years 6,165 6,398
After ten years 6,064 6,294
- --------------------------------------------------------------------------------
$107,545 $108,412
- --------------------------------------------------------------------------------
Total debt securities $542,342 $543,565
================================================================================
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 1996, 1995, and 1994, certain
securities classified as held-to-maturity were called for early redemption by
the issuer. The results of those transactions are recorded in the corresponding
categories.
- --------------------------------------------------------------------------------
Available-for-sale Held-to-maturity
- --------------------------------------------------------------------------------
Year ended December 31, 1996
- --------------------------------------------------------------------------------
Gross gains $184 $ 1
Gross losses 14 2
- --------------------------------------------------------------------------------
Net $170 $ (1)
================================================================================
- --------------------------------------------------------------------------------
Year ended December 31, 1995
- --------------------------------------------------------------------------------
Gross gains $ 45 $15
Gross losses 89 3
- --------------------------------------------------------------------------------
Net $ (44) $12
================================================================================
- --------------------------------------------------------------------------------
Year ended December 31, 1994
- --------------------------------------------------------------------------------
Gross gains $992 $ 7
Gross losses -- --
- --------------------------------------------------------------------------------
Net $992 $ 7
================================================================================
Interest earned on investment securities for the years ended December 31 was as
follows:
- --------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Taxable $29,905 $29,428 $26,404
Tax-advantaged 4,723 5,104 5,206
- --------------------------------------------------------------------------------
Total $34,628 $34,532 $31,610
================================================================================
47
================================================================================
- --------------------------------------------------------------------------------
5. Loans and Leases
At December 31, loans and leases, net of unearned income ($14,825 at December
31, 1996, and $14,185 at December 31, 1995), were as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Commercial, financial,
and agricultural $ 211,234 $ 198,802
Real estate--construction 193,793 177,253
Real estate--mortgage 1,482,590 1,091,066
Consumer 241,198 223,039
Leases 44,266 22,791
- --------------------------------------------------------------------------------
Total $2,173,081 $1,712,951
================================================================================
At December 31, 1996 and 1995, real estate-mortgage loans included a $6.4
million and $6.7 million, respectively, restructured loan. Susquehanna has no
outstanding commitment to advance additional funds on this loan and interest
forgone on this loan was $273 and $239 during 1996 and 1995, respectively.
Certain directors and executive officers of Susquehanna and its affiliates,
including their immediate families and companies in which they are principal
owners (more than 10%), were indebted to banking subsidiaries. In the opinion of
management, such loans are consistent with sound banking practices and are
within applicable regulatory bank lending limitations. Susquehanna relies on the
directors and executive officers for the identification of their associates. All
such loans were performing at December 31, 1996, 1995, and 1994, respectively.
The activity of loans to such persons whose balance exceeded $60 during 1996,
1995, and 1994 follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance--January 1 $27,565 $23,272 $15,927
Additions 19,071 19,213 27,982
Deductions:
Amounts collected 23,190 14,920 22,318
Other changes -- -- 1,681
- --------------------------------------------------------------------------------
Balance--December 31 $23,446 $27,565 $23,272
================================================================================
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania and Maryland. Susquehanna has no concentration of
loans to borrowers in any one industry, or related industry, which exceeds 10%
of total loans with the exception of housing developments.
An analysis of impaired loans at December 31, 1996 and 1995, is presented as
follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Impaired loans without a related reserve $ 9,712 $12,656
Impaired loans with a reserve 3,715 2,685
- --------------------------------------------------------------------------------
Total impaired loans $13,427 $15,341
================================================================================
Reserve for impaired loans $ 589 $ 416
================================================================================
An analysis of impaired loans for the years ended December 31 is presented as
follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Average balance of impaired loans $13,140 $12,365
Interest income on impaired loans
(cash basis) 374 422
- --------------------------------------------------------------------------------
6. Allowance for Loan and Lease Losses
Changes in the allowance for loan losses were as follows:
- --------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Balance--January 1 $27,563 $23,845 $21,717
Allowance acquired
in business combination 4,229 3,323 --
Change in fiscal year -- (8) --
Provision charged to
operating expenses 4,599 4,994 3,987
- --------------------------------------------------------------------------------
36,391 32,154 25,704
- --------------------------------------------------------------------------------
Charge-offs (5,887) (5,646) (2,952)
Recoveries 1,437 1,055 1,093
- --------------------------------------------------------------------------------
Net charge-offs (4,450) (4,591) (1,859)
- --------------------------------------------------------------------------------
Balance--December 31 $31,941 $27,563 $23,845
================================================================================
48
================================================================================
- --------------------------------------------------------------------------------
7. Premises and Equipment
Property, buildings, and equipment, at December 31, were as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Land $ 5,925 $ 5,377
Buildings 31,404 31,588
Furniture and equipment 33,570 29,021
Leasehold improvements 4,493 3,609
Land improvements 2,191 399
- --------------------------------------------------------------------------------
77,583 69,994
- --------------------------------------------------------------------------------
Less: accumulated depreciation
and amortization 39,035 33,580
- --------------------------------------------------------------------------------
$38,548 $36,414
================================================================================
Depreciation and amortization expense charged to operations amounted to $4,155
in 1996; $3,706 in 1995; and $3,276 in 1994.
All subsidiaries lease certain banking branches and equipment under operating
leases which expire on various dates through 2008. Renewal options are available
for periods up to 20 years. Minimum future rental commitments under non-
cancellable leases, as of December 31, 1996, are as follows:
- --------------------------------------------------------------------------------
Operating
Leases
- --------------------------------------------------------------------------------
1997 $2,014
1998 1,900
1999 1,468
2000 832
2001 617
Subsequent years 3,642
- --------------------------------------------------------------------------------
$10,473
================================================================================
Total rent expense charged to operations amounted to $2,108 in 1996; $1,521 in
1995; and $1,439 in 1994.
- --------------------------------------------------------------------------------
8. Deposits
Deposits at December 31 were as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Non-interest-bearing:
Demand $ 303,884 $ 270,411
Interest-bearing:
Interest-bearing demand 676,332 483,835
Savings 397,893 390,257
Time 1,004,273 899,013
Time of $100 or more 111,122 72,526
- --------------------------------------------------------------------------------
Total deposits $2,493,504 $2,116,042
================================================================================
- --------------------------------------------------------------------------------
9. Short-Term Borrowings
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
- -----------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $58,516 4.86% $47,032 4.75%
Treasury tax and loan notes 5,634 4.92 4,400 4.92
Federal funds purchased 5,000 7.25 -- --
Federal Home Loan Bank borrowings 25,000 4.93 18,000 6.01
- -----------------------------------------------------------------------------------------------
$94,150 $69,432
===============================================================================================
Under an agreement with the Federal Home Loan Bank, certain Susquehanna
subsidiary banks have lines of credit available to them totaling $423 million
and $192 million, of which $50 million and $43 million was outstanding at
December 31, 1996 and 1995, respectively.
49
================================================================================
- --------------------------------------------------------------------------------
10. Long-Term Debt
Long-term debt at December 31 was as follows:
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------
Farmers:
Installment note due June 2, 1999 $ 45 9.00% $ 60 9.00%
SBLC:
Term note due July 29, 1996 -- -- 4,000 6.49
Term note due October 30, 1997 -- -- 2,000 8.75
Term note due July 19, 1998 5,000 7.51 5,000 7.51
Susquehanna South:
Federal Home Loan Bank borrowings due
at various dates through 2003 24,795 6.71 24,678 6.56
Federal Home Loan Bank term loan note due
September 1, 2014 528 5.00 536 5.00
Susquehanna:
Subordinate notes due February 2005 50,000 9.00 50,000 9.00
Senior notes due February 2003 35,000 6.30 -- --
- --------------------------------------------------------------------------------------------------------
$115,368 $86,274
========================================================================================================
Farmers' installment note is a demand note with a final maturity of June 2,
1999. Until such demand is made, Farmers will pay equal monthly payments to the
individual holder.
SBLC's notes are payable with interest only payments being made until
maturity. These notes are guaranteed by Susquehanna.
Susquehanna South's Federal Home Loan Bank debt is under a blanket floating
lien security with the FHLB of Atlanta. Susquehanna South is required to
maintain as collateral for all borrowings certain amounts of qualifying first
mortgage loans. In addition, all of Susquehanna South's stock in the FHLB of
Atlanta is pledged as collateral for such debt.
On February 9, 1995, Susquehanna issued $50 million of its 9.00% subordinated
notes due 2005. The proceeds were used to retire $10 million in short-term
borrowings and the balance was used for acquisitions and for general corporate
purposes.
On January 29, 1996, Susquehanna issued $35 million of its 6.30% senior
notes due 2003. The proceeds were used for acquisitions and general corporate
purposes.
50
================================================================================
- --------------------------------------------------------------------------------
11. Income Taxes
The components of the provision for income taxes were as follows:
- --------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Current $14,273 $11,727 $12,024
Deferred 377 (360) (2,306)
- --------------------------------------------------------------------------------
Total $14,650 $11,367 $ 9,718
================================================================================
The provision for income taxes differs from the amount derived from applying the
statutory income tax rate to income before income taxes as follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Provision at statutory rates $15,619 $13,084 $11,391
Tax-advantaged income (2,677) (2,806) (2,484)
Other, net 1,708 1,089 811
- --------------------------------------------------------------------------------
Total $14,650 $11,367 $ 9,718
================================================================================
Susquehanna accounts for income taxes under the provisions of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax return. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
The components of the net deferred tax asset as of December 31 were as
follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $11,179 $ 8,416 $ 8,167
Loan fee income 1,404 1,200 1,365
Accrued pension expense 1,689 1,509 1,518
Deferred directors' fees 744 690 620
Deferred compensation 180 234 345
Nonaccrual loan interest 1,418 1,454 1,287
Other assets 875 1,269 679
Deferred tax liabilities:
FHLB stock dividends (330) (429) (470)
Premises and equipment (1,589) (1,388) (836)
Core deposit intangible (179) (167) (167)
Operating lease income, net (2,340) (563) --
Purchase accounting (819) (999) --
Recapture of savings banks'
bad debt reserve (1,058) -- --
Unrealized investment securities
gains and losses (620) (1,342) 4,468
Other liabilities (223) (274) (859)
- --------------------------------------------------------------------------------
Net deferred income tax assets $10,331 $9,610 $16,117
================================================================================
- --------------------------------------------------------------------------------
12. Financial Instruments with Off-Balance Sheet Risk
Susquehanna is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to orginate loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
statement of condition. The contract or notional amount of those instruments
reflects the extent of involvement Susquehanna has in particular classes of
financial instruments.
Susquehanna's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for loan commitments and standby
letters of credit is represented by the contractual amount of these instruments.
Susquehanna uses the same credit policies for these instruments as it does for
on-balance sheet instruments.
Standby letters of credit are conditional commitments issued by Susquehanna to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Commitments to originate loans are agreements to lend to a customer provided
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 does not necessarily represent
future cash requirements. Susquehanna evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by Susquehanna upon extension of credit, is based on management's credit
evaluation of the borrower.
Financial instruments with off-balance sheet risk at December 31, 1996 and 1995,
were as follows:
- --------------------------------------------------------------------------------
Contractual 1996 1995
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Standby letters of credit $ 28,944 $ 32,058
Commitments to originate loans 49,313 54,878
Unused portion of home equity
and credit card lines 145,674 132,428
Other unused commitments,
principally commercial lines
of credit 324,885 259,136
51
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
13. Fair Value of Financial Instruments
As required by Statement of Financial Accounting Standard No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS 107"), Susquehanna has
presented estimated fair value information about financial instruments, whether
or not recognized in the Consolidated Balance Sheet for which it is practicable
to estimate that value. Fair value is best determined by values quoted through
active trading markets. Active trading markets are characterized by numerous
transactions of similar financial instruments between willing buyers and willing
sellers. Because no active trading market exists for various types of financial
instruments, many of the fair values disclosed were derived using present value
discounted cash flow or other valuation techniques. As a result, Susquehanna's
ability to actually realize these derived values cannot be assured.
The estimated fair values disclosed under SFAS 107 may vary significantly
between institutions based on the estimates and assumptions used in the various
valuation methodologies. SFAS 107 excludes disclosure of nonfinancial assets
such as buildings as well as certain financial instruments such as leases.
Susquehanna also has several intangible assets which are not included in the
fair value disclosures such as mortgage servicing rights, customer lists, and
core deposit intangibles. Accordingly, the aggregate estimated fair values
presented do not represent the underlying value of Susquehanna.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument.
Cash and Due from Banks and Short-Term Investments. The fair value of cash and
due from banks and short-term investments is deemed to be the same as their
carrying value.
Investment Securities. The fair value of investment securities is estimated
based on quoted market prices, where available. When quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans. Variable rate loans which do not expose Susquehanna to interest rate
risk have a fair value that equals their carrying value, discounted for
estimated future credit losses. The fair value of fixed rate loans was based
upon the present value of projected cash flows. The discount rate was based upon
the U.S. Treasury yield curve, adjusted for credit risk.
Deposits. The fair values of demand, interest-bearing demand, and savings
deposits are the amounts payable on demand at the balance sheet date. The
carrying value of variable rate time deposits represents a reasonable estimate
of fair value. The fair value of fixed rate time deposits is based upon the
discounted value of future cash flows expected to be paid at maturity. Discount
rates are calculated off the U.S. Treasury yield curve.
Short-Term Borrowings. The carrying amounts reported in the balance sheet
represent a reasonable estimate of fair value since these liabilities mature in
less than six months.
Long-Term Debt. Fair values were based upon quoted rates of similar
instruments, issued by banking companies with similar credit ratings.
Off-Balance Sheet Items. The fair value of unused commitments to lend and
standby letters is deemed to be the same as their carrying value.
The following table represents the carrying amount and estimated fair value of
Susquehanna's financial instruments at December 31:
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $98,519 $98,519 $ 87,107 $ 87,107
Short-term investments 96,107 96,107 92,110 92,110
Investment securities 561,601 562,468 610,018 611,245
Loans, net of unearned income and allowance 2,097,971 2,137,233 1,663,199 1,678,169
Liabilities:
Deposits 2,493,504 2,493,723 2,116,042 2,119,634
Short-term borrowings 94,150 94,150 69,432 69,432
Long-term debt 115,368 119,327 86,274 95,014
52
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
14. Benefit Plans
Susquehanna maintains a single non-contributory pension plan that covers
substantially all full-time employees. Benefits are based upon years of service
and the employee's highest five years of compensation during the last ten years
of employment. Susquehanna's policy has been to fund the pension plan on a
current basis to the extent deductible under existing tax regulations. A summary
of the components of pension expense follows:
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 2,411 $ 1,803 $ 1,587
Interest cost on projected
benefit obligation 2,264 2,103 1,865
Actual (gain)/loss on plan
assets (2,801) (3,658) 170
Net amortization and deferral 727 1,936 (1,858)
- --------------------------------------------------------------------------------
Pension expense of defined
benefit plans $ 2,601 $ 2,184 $ 1,764
================================================================================
- --------------------------------------------------------------------------------
At December 31
- --------------------------------------------------------------------------------
Discount rate 7.00% 7.00% 8.00%
Rate of increase in
compensation levels 5.00 5.00 6.00
Expected long-term rate of
return on assets 8.00 8.00 8.00
- --------------------------------------------------------------------------------
The following table sets forth the funded status and amounts recognized in the
consolidated balance sheets for the defined benefit pension plan:
- --------------------------------------------------------------------------------
At December 31 1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of vested
benefit obligation $22,584 $21,443
================================================================================
Actuarial present value of accumulated
benefit obligation $23,067 $21,830
================================================================================
Actuarial present value of projected
benefit obligation $31,761 $32,845
Plan assets at market value 30,517 26,555
- --------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation 1,244 6,290
Unrecognized net gain (loss) from
past experience different than that
assumed and effects of changes in
assumptions 4,022 (1,136)
Unrecognized prior service cost (898) (1,002)
Unrecognized net asset at January 1,
1987, being amortized over 15 years 495 581
- --------------------------------------------------------------------------------
Net pension liability recognized
in the balance sheet $ 4,863 $ 4,733
================================================================================
The plan assets at December 31, 1996 and 1995, were invested principally in
U.S. Government securities and listed stocks and bonds including 13,125 shares
of Susquehanna common stock.
Susquehanna accrues the cost of postretirement benefits during the employees'
credited service period and is amortizing the transition obligation over a
20-year period. The net periodic benefit expense for 1996, 1995, and 1994 was
$547, $452, and $384, respectively.
Susquehanna maintains a 401(k) savings plan which allows employees to invest a
percentage of their earnings, matched up to a certain amount specified by
Susquehanna. Contributions to the savings plan which are included in salaries
and benefits expense amounted to $856 in 1996, $713 in 1995, and $782 in 1994.
Susquehanna has an Employee Stock Purchase Plan ("ESPP"), which enables
qualified employees to purchase the common stock of the Company. The common
stock is purchased at a price equal to 90% of the market value of the common
stock at either the first day of the offering period or the purchase date,
whichever value is lower. Through the ESPP, Susquehanna issued 15,483 and 8,128
common shares to its participating employees in 1996 and 1995, respectively.
Susquehanna implemented a nonqualified Equity Compensation Plan (the
"Compensation Plan") in 1996, under which Susquehanna may grant options to its
employees and directors for up to 650,000 shares of common stock. Under the
Compensation Plan, the exercise price of each option equals the market price of
the Company's stock on the date of grant and an option's maximum term is 10
years. Options are granted to employees upon approval of the Board of Directors
and typically vest one-third at the end of years three, four, and five. On May
31, 1996, 173,508 non-qualified stock options were granted at an exercise price
of $29.25 to employees and directors. No options were exercised during 1996, and
22,714 options were exercisable at December 31, 1996. Total options outstanding
at December 31, 1996, were 173,508.
On January 1, 1996, Susquehanna adopted SFAS 123, and as permitted by SFAS
123, Susquehanna has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for the ESPP and
the Compensation Plan. Accordingly, no compensation cost has been recognized for
stock purchased under the ESPP or options granted under the Compensation Plan in
1996. Had compensation cost been determined under the fair value-based method at
the purchase and grant dates consistent with SFAS 123, the impact on
Susquehanna's net income and net income per share for 1996 would not have been
material.
During 1996, Susquehanna terminated its Phantom Stock Appreciation Plan
("PSP"). Expense related to the PSP was $11, $706, and $105 in 1996, 1995, and
1994, respectively.
53
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
15. Susquehanna Bancshares, Inc. (Parent Only)
Condensed Balance Sheets
- --------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------
Assets
Cash in subsidiary bank $ 600 $ 1,337
Short-term investments 5,826 35,620
Investment in consolidated sub-
sidiaries at equity in net assets 370,727 287,367
Other investment securities 2,041 1,451
Premises and equipment (net) 60 48
Other assets 3,652 2,651
- --------------------------------------------------------------------------------
Total assets $382,906 $328,474
================================================================================
Liabilities
Long-term debt $ 85,000 $ 50,000
Accrued taxes and expenses payable 5,226 5,075
- --------------------------------------------------------------------------------
Total liabilities 90,226 55,075
- --------------------------------------------------------------------------------
Equity
Preferred stock (no par) -- --
Common stock ($2 par value) 26,403 25,982
Surplus 78,529 73,173
Retained earnings 186,785 172,209
Unrealized gain on available-
for-sale securities, net 1,118 2,358
Less: Treasury stock at cost 155 323
- --------------------------------------------------------------------------------
Total stockholders' equity 292,680 273,399
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $382,906 $328,474
================================================================================
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only)
Condensed Statements of Income
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Income
Dividends from subsidiaries $23,530 $17,531 $18,859
Interest and dividends on
investment securities 546 833 89
Interest and management
fee from subsidiaries 3,601 1,398 310
- --------------------------------------------------------------------------------
Total income 27,677 19,762 19,258
- --------------------------------------------------------------------------------
Expenses
Service fees paid to
subsidiary 1,106 946 969
Interest expense 6,684 4,339 683
Other expenses 1,985 2,408 1,273
- --------------------------------------------------------------------------------
Total expenses 9,775 7,693 2,925
- --------------------------------------------------------------------------------
Income before taxes, equity
in undistributed income
of subsidiaries, and
extraordinary item 17,902 12,069 16,333
Equity in undistributed
income of subsidiaries 12,074 13,948 6,889
Extraordinary item -- -- (1,126)
- --------------------------------------------------------------------------------
Net Income $29,976 $26,017 $22,096
================================================================================
54
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only)
Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
Operating Activities:
Net income $ 29,976 $ 26,017 $ 22,096
Adjustment to reconcile net
income to cash provided
by operating activities:
Depreciation and
amortization 182 195 142
Equity in undistributed
income of subsidiaries
and income of
subsidiaries accrued
not received (12,074) (13,948) (11,889)
Loss on the early
extinguishment of debt -- -- 1,126
(Increase)/decrease in
other assets (1,171) (721) (751)
(Decrease)/increase in
accrued expenses payable (55) 3,060 398
Other, net (810) (451) (19)
- --------------------------------------------------------------------------------
Net cash provided from
operating activities 16,048 14,152 11,103
- --------------------------------------------------------------------------------
Investing Activities:
Purchase of investment
securities (29,987) (9,528) --
Proceeds from the sale/
maturities of investment
securities 29,987 9,760 11,956
Net cash paid in acquisition (62,700) (28,640) --
Capital expenditures (24) (15) (42)
Net infusion of investment
in subsidiaries (9,400) (6,800) (8,600)
- --------------------------------------------------------------------------------
Net cash (used for)/provided from
investing activities (72,124) (35,223) 3,314
- --------------------------------------------------------------------------------
Financing Activities:
(Decrease)/increase in
short-term borrowings -- (10,000) 10,000
Repayment of long-term debt -- (5,850) (12,076)
Proceeds from issuance of
long-term debt 35,000 50,000 --
Proceeds from issuance of
common stock 5,945 33,543 --
Dividends paid (15,400) (12,478) (10,643)
- --------------------------------------------------------------------------------
Net cash provided from/(used
for) financing activities 25,545 55,215 (12,719)
- --------------------------------------------------------------------------------
Net (decrease)/increase in
cash and cash equivalents (30,531) 34,144 1,698
Cash and cash equivalents at
January 1 36,957 2,813 1,115
- --------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 6,426 $ 36,957 $ 2,813
================================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 600 $ 1,337 $ 97
Short-term investments 5,826 35,620 2,716
- --------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 6,426 $ 36,957 $ 2,813
================================================================================
- --------------------------------------------------------------------------------
16. Regulatory Restrictions of Banking Subsidiaries
Susquehanna is limited by regulatory provisions in the amount it can receive in
dividends from its banking subsidiaries. Accordingly, at December 31, 1996,
$43,016 is available for dividend distribution to Susquehanna in 1997 from its
banking subsidiaries.
Included in cash and due from banks are balances required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve. The amounts
of such reserves are based on percentages of certain deposit types and totalled
$11,526 and $15,069 at December 31, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
17. Contingent Liabilities
Susquehanna is party to various legal proceedings incidental to its business.
Certain claims, suits, and complaints arising in the ordinary course of business
have been filed or are pending against Susquehanna. In the opinion of
management, all such matters are adequately covered by insurance or, if not
covered, are without merit or are of such kind, or involve such amounts, as
would not have a significant effect on the financial position, results of
operations, and cash flows of Susquehanna, if disposed of unfavorably.
55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Susquehanna Bancshares, Inc.
Lititz, Pennsylvania
We have audited the accompanying consolidated balance sheets of Susquehanna
Bancshares, Inc. and its subsidiaries (Susquehanna) as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
Susquehanna's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Atlanfed Bancorp, Inc. and Subsidiaries, a wholly-owned
subsidiary, which statements reflect net interest income of $8,563,000 for the
year ended March 31, 1995. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Atlanfed Bancorp, Inc. and subsidiaries, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Susquehanna
Bancshares, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Harrisburg, Pennsylvania
January 22, 1997
56
SUMMARY OF QUARTERLY FINANCIAL DATA
================================================================================
The unaudited quarterly results of operations for the years ended December 31,
1996 and 1995 are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $55,587 $58,434 $58,676 $59,138 $41,669 $47,654 $49,674 $50,830
Interest expense 24,984 26,286 26,086 25,782 17,107 21,016 22,304 22,191
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 30,603 32,148 32,590 33,356 24,562 26,638 27,370 28,639
Provision for loan and leases losses 1,031 1,348 1,090 1,130 1,500 1,071 1,140 1,283
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 29,572 30,800 31,500 32,226 23,062 25,567 26,230 27,356
- --------------------------------------------------------------------------------------------------------------------------------
Other income 4,989 5,722 5,258 5,375 3,254 3,784 4,704 4,338
Other expenses 22,699 24,030 29,406 24,681 19,179 20,152 20,218 21,362
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,862 12,492 7,352 12,920 7,137 9,199 10,716 10,332
Applicable income taxes 3,842 4,157 2,243 4,408 1,918 2,799 3,467 3,183
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,020 $ 8,335 $ 5,109 $ 8,512 $ 5,219 $ 6,400 $ 7,249 $ 7,149
================================================================================================================================
Earnings per common share $ 0.61 $ 0.63 $ 0.39 $ 0.65 $ 0.45 $ 0.55 $ 0.62 $ 0.61
Market for Susquehanna Capital Stock and Related Shareholder Matters
From May 24, 1984, to November 4, 1985, Susquehanna Common Stock was listed
for quotation on the National Association of Securities Dealers Automatic
Quotation System ("Nasdaq"). Since November 5, 1985, Susquehanna Common Stock
has been listed for quotation on the National Association of Securities Dealers
National Market System. Set forth below are the high and low sales prices of
Susquehanna's common stock as reported on the Nasdaq National Market System for
the years 1996 and 1995.
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Quarterly Quarterly
Market Price Dividend Market Price Dividend
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter $26.00-30.00 $ .29 $21.50-24.25 $ .27
Second Quarter $26.75-29.50 $ .29 $22.50-24.00 $ .27
Third Quarter $26.50-30.63 $ .29 $23.25-28.25 $ .27
Fourth Quarter $29.00-35.75 $ .30 $26.00-30.25 $ .29
57
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
- ------ --------------------------------------------------------------------
There has been no change in Susquehanna's principal accountants in
over two years. There have been no disagreements with such principal
accountants on any matters of accounting principles, practices, financial
statement disclosure, auditing scope or procedures.
58
PART III
--------
Item 10. Directors and Executive Officers of Susquehanna.
- ------- -----------------------------------------------
The information required by this Item is included in the Corporation's
proxy statement for its 1997 Annual Meeting of Shareholders (the "1997 Proxy
Statement") in the Election of Directors-Biographical Summaries of Nominees and
Continuing Directors section and in the Additional Information section, each of
which sections is incorporated herein by reference, and in Part I of this Form
10-K under the heading "Executive Officers of the Registrant."
Item 11. Executive Compensation
- ------- ----------------------
The information required by this Item is included in the 1997 Proxy
Statement in the Directors' Compensation section and in the Executive
Compensation section, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information required by this Item is included in the 1997 Proxy
Statement in the Beneficial Ownership of Stock section, and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information required by this Item is included in the 1997 Proxy
Statement in the Business Relationships; Related Transactions and Certain Legal
Proceedings section, and is incorporated herein by reference.
59
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
- ------- --------------------------------------------------------------
(a) Financial Statement Schedules and Exhibits
(1) Financial Statements. See Item 8 of this report for the index to
financial statements.
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits.
Exhibit Numbers
---------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession. Not applicable.
(3) (a) Articles of Incorporation. Incorporated by reference to
Attachment E to the Registrant's Joint Proxy
Statement/Prospectus on Registrant's Registration Statement on
Form S-4, Registration No. 33-13276.
(b) By-laws. Incorporated by reference to Exhibit (3)(b) of
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of Registrant's Common Stock
and the rights of the note holders of the Registrant's wholly-owned
subsidiary, Farmers First, are contained in the following documents
or instruments, which are incorporated herein by reference or are
filed herewith:
(i) Articles of Incorporation. Incorporated by reference to
Attachment E to the Registrant's Joint Proxy
Statement/Prospectus on Registrant's Registration Statement on
Form S-4, Registration No. 33-76319.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(iii) Form of Subordinated Note/Indenture incorporated by reference
to Registration Statement on Form S-3, Registration No. 33-
87624 to which it was attached as an exhibit.
(9) Voting trust agreement. Not Applicable.
(10) Material Contracts. Susquehanna Bancshares, Inc.'s, Performance
Award Plan as amended in 1995, is incorporated by reference to
Exhibit (a)(10) of Registrant's Annual Report on Form 10-
60
K for the fiscal year ended December 31, 1995. The Equity
Compensation Plan, as adopted in 1996, is filed herewith.
(11) Statement re: computation of per share earnings. Filed herewith.
(12) Statements re: computation of ratios. Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders. Not applicable.
(16) Letter re: change in certified accountant. Not applicable.
(18) Letter re: change in accounting principles. Not Applicable.
(19) Report furnished to security holders. Not Applicable.
(21) Subsidiaries of the registrant. Filed herewith.
(22) Published report regarding matters submitted to vote of security
holders. Not Applicable.
(23) Consents of experts and counsel. Filed herewith.
(24) Power of Attorney. Not Applicable.
(27) Financial Data Schedule. Filed herewith.
(28) Information from reports furnished to state insurance regulatory
authorities. Not Applicable.
(99) Additional exhibits. Not Applicable.
(b) Not applicable.
61
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.
SUSQUEHANNA BANCSHARES, INC.
By:/s/ Robert S. Bolinger
-----------------------------------
Dated: March 27, 1997 Robert S. Bolinger, President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert S. Bolinger President, Chief Executive March 27, 1997
- ------------------------------ Officer and Director
(Robert S. Bolinger)
/s/ Drew K. Hostetter Treasurer March 27, 1997
- ------------------------------
(Drew K. Hostetter)
/s/ Richard M. Cloney Vice President, March 27, 1997
- ------------------------------ Secretary and Director
(Richard M. Cloney)
/s/ James G. Apple Director March 27, 1997
- ------------------------------
(James G. Apple)
/s/ John M. Denlinger Director March 27, 1997
- ------------------------------
(John M. Denlinger)
/s/ Richard E. Funke Director March 27, 1997
- ------------------------------
(Richard E. Funke)
/s/ Henry H. Gibbel Director March 27, 1997
- ------------------------------
(Henry H. Gibbel)
/s/ Marley R. Gross Director March 27, 1997
- ------------------------------
(Marley R. Gross)
/s/ T. Max Hall Director March 27, 1997
- ------------------------------
(T. Max Hall)
62
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1996
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
Director March __, 1997
- ---------------------------
(Edward W. Helfrick)
/s/ C. William Hetzer, Jr. Director March 27, 1997
- ---------------------------
(C. William Hetzer, Jr.)
Director March __, 1997
- ---------------------------
(George J. Morgan)
Director March __, 1997
- ---------------------------
(Raymond M. O'Connell)
Director March __, 1997
- ---------------------------
(Robert C. Reymer, Jr.)
/s/ Roger V. Wiest Director March 27, 1997
- ---------------------------
(Roger V. Wiest)
[END OF SIGNATURE PAGES]
63
EXHIBIT INDEX
Exhibit No. Sequentially Numbered Page
- ----------- --------------------------
(10) Equity Compensation Plan 65
(11) Computation of per share earnings 75
(21) Subsidiaries of the Registrant 76
(23) Consents of Experts and Counsel 77
(27) Financial Data Schedule 78
64