FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10674
SUSQUEHANNA BANCSHARES, INC.
----------------------------
(Exact name of Registrant as specified in its Charter)
Pennsylvania 23-2201716
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
---------------------------
(Address of principal executive offices) (Zip Code)
(717) 626-4721
--------------
(Registrant's telephone number, including area code)
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 _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of March 31, 1995, the Registrant had 10,434,584 shares of common stock
outstanding.
Sequential Page 1 of 20
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION................................... 3
Item 1. FINANCIAL STATEMENTS.................................... 3-8
Consolidated Balance Sheets -
As of March 31, 1995, and 1994,
And December 31, 1994....................................... 3
Consolidated Statements of Income
For the three months ended
March 31, 1995 & 1994....................................... 4
Consolidated Statements of Cash Flow
For the Three Month Periods
Ended March 31, 1995, and 1994.............................. 5
Notes to Consolidated Financial
Statements.................................................. 6-8
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS........................... 9-18
PART II OTHER INFORMATION....................................... 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K........................ 19
SIGNATURES.............................................. 20
Page 2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) March 31 December 31 March 31
ASSETS 1995 1994 1994
- - ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks $72,471 $77,423 $71,664
Short-term investments 47,966 11,081 48,627
Investment securities available for sale 343,180 364,372 341,540
Investment securities held to maturity 175,017 179,283 112,091
(Fair values of $173,798; $111,965; and $175,036)
Loans and leases, net of unearned income 1,298,123 1,278,165 1,163,077
Less: Allowance for loan and lease losses 22,707 22,750 21,417
---------- ---------- ----------
Net loans and leases 1,275,416 1,255,415 1,141,660
---------- ---------- ----------
Premises and equipment (net) 30,698 30,669 28,156
Accrued income receivable 15,079 16,174 12,470
Other assets 41,525 41,869 32,780
---------- ---------- ----------
Total assets $2,001,352 $1,976,286 $1,788,988
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------------------------
Deposits:
Demand $233,433 $251,973 $200,968
Interest-bearing demand 403,245 422,745 395,911
Savings 355,341 368,890 360,667
Time 641,620 606,648 533,064
Time of $100 or more 42,197 37,011 36,564
---------- ---------- ----------
Total deposits 1,675,836 1,687,267 1,527,174
---------- ---------- ----------
Short-term borrowings 33,798 54,352 18,532
Long-term debt 67,676 17,936 18,714
Accrued interest, taxes, and expenses payable 15,994 15,376 13,763
Other liabilities 7,447 6,831 16,569
---------- ---------- ----------
Total liabilities 1,800,751 1,781,762 1,594,752
Stockholders' equity:
Common stock
Authorized: 32,000,000 shares ($2.00 par value)
Issued: 10,483,546 shares 20,967 20,967 20,967
Surplus 33,436 33,436 33,436
Retained earnings 150,345 148,324 139,979
Unrealized gains and losses for available-for-sale
securities, net of taxes (3,774) (7,830) 227
Less: Treasury stock, (48,962 common shares at cost) 373 373 373
---------- ---------- ----------
Total stockholders' equity 200,601 194,524 194,236
---------- ---------- ----------
Total liabilities and stockholders' equity $2,001,352 $1,976,286 $1,788,988
========== ========== ==========
- - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Page 3
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- - ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
- - ----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share ) 1995 1994
- - ----------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans and leases $28,574 $23,502
Interest on investment securities: Taxable 6,229 5,415
Tax-exempt 1,379 1,141
Interest on short-term investments 529 278
- - ----------------------------------------------------------------------------------------------
Total interest income 36,711 30,336
- - ----------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 2,745 2,183
Savings 2,235 2,208
Time 7,312 5,428
Time deposits of $100 or more 505 313
Interest on short-term borrowings 596 132
Interest on long-term debt 967 328
- - ----------------------------------------------------------------------------------------------
Total interest expense 14,360 10,592
- - ----------------------------------------------------------------------------------------------
Net interest income 22,351 19,744
Provision for loan and lease losses 1,461 951
- - ----------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 20,890 18,793
- - ----------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 1,117 1,072
Other service charges, commissions, fees 259 260
Income from fiduciary-related activities 663 564
Other operating income 902 1,172
Investment security gains/(losses) (88) 984
- - ----------------------------------------------------------------------------------------------
Total other income 2,853 4,052
- - ----------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 9,124 7,708
Net occupancy expense 1,090 1,100
Furniture and equipment expense 892 860
FDIC insurance premiums 945 857
Other operating expenses 5,238 4,447
- - ----------------------------------------------------------------------------------------------
Total other expenses 17,289 14,972
- - ----------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 6,454 7,873
Provision for income taxes 1,616 2,264
- - ----------------------------------------------------------------------------------------------
Income before extraordinary item 4,838 5,609
Extraordinary item - (732)
- - ----------------------------------------------------------------------------------------------
Net income $4,838 $4,877
==============================================================================================
Earnings per common share:
Before extraordinary item $0.46 $0.54
Extraordinary item - (0.07)
Net income 0.46 0.47
Cash dividends per common share 0.27 0.25
- - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Page 4
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Three month periods ended March 31 1995 1994
- - --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $4,838 $4,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 2,244 2,301
Provision for loan and lease losses 1,461 951
(Gain) / loss on securities transactions 88 (984)
Gain on sale of mortgages (34) (244)
(Gain)/loss on sale of other real estate owned (33) 12
Loss on the early extinguishment of debt - 1,126
Mortgage loans originated for resale (1,799) (9,684)
Sale of mortgage loans originated for resale 1,883 12,377
Decrease in accrued interest receivable 1,095 86
Increase / (decrease) in accrued interest payable 729 (1,022)
Increase / (decrease) in accrued expenses and taxes payable (111) 1,361
Other, net (1,757) (6,343)
-------- --------
Net cash provided from operating activities 8,605 4,814
-------- --------
INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 22,528 41,476
Proceeds from the maturity of investment securities 17,741 50,398
Purchase of available-for-sale securities (9,528) (25,904)
Purchase of held-to-maturity securities - (14,358)
Net increase in loans and leases (21,556) (13,285)
Capital expenditures (795) (1,032)
-------- --------
Net cash provided from investing activities 8,390 37,295
-------- --------
FINANCING ACTIVITIES:
Net decrease in deposits (11,431) (8,814)
Net decrease in short-term borrowings (20,554) (12,185)
Proceeds from issuance of long-term debt 50,000 -
Repayment of long-term debt (260) (11,335)
Dividends paid (2,817) (2,608)
-------- --------
Net cash provided from/(used for) financing activities 14,938 (34,942)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,933 7,167
CASH AND CASH EQUIVALENTS AT JANUARY 1 88,504 113,124
-------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31 $120,437 $120,291
======== ========
Cash and cash equivalents:
Cash and due from banks $72,471 $71,664
Short-term investments 47,966 48,627
-------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31 $120,437 $120,291
======== ========
Interest paid on deposits, short-term borrowings, and long-term debt was
$13,631 in 1995, and $11,614 in 1994. Income taxes paid were $32 in 1995, and
$68 in 1994. Amounts transferred to other real estate owned were $1,139 in 1995,
and $343 in 1994.
- - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Page 5
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per
share)
- - --------------------------------------------------------------------------------
ACCOUNTING POLICIES
The information contained in this report is unaudited and is subject to
year-end adjustments. However, in the opinion of management, the information
reflects all adjustments necessary for a fair statement of results for the
periods ended March 31, 1995 and 1994.
The accounting policies of Susquehanna Bancshares, Inc. & Subsidiaries
(Susquehanna), as applied in the consolidated interim financial statements
presented herein, are substantially the same as those followed on an annual
basis as presented on pages 28 and 29 of the 1994 Annual Report to Shareholders.
- - -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
PREFERRED COMMON RETAINED GAINS/LOSSES ON TREASURY TOTAL
Year Ended December 31 STOCK STOCK SURPLUS EARNINGS SECURITIES STOCK EQUITY
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 1994 $40 $20,956 $33,407 $137,710 $5,356 ($373) $197,096
Preferred shares converted to
common (1,884 shares) (40) 11 29 --
Net income 4,877 4,877
Change in unrealized gain/loss on securities (5,129) (5,129)
Cash dividends paid:
Per common share of $0.25 (2,608) (2,608)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1994 $0 $20,967 $33,436 $139,979 $227 ($373) $194,236
===================================================================================================================================
Balance - January 1, 1995 $20,967 $33,436 $148,324 ($7,830) ($373) $194,524
Net income 4,838 4,838
Change in unrealized gain/loss on securities 4,056 4,056
Cash dividends paid:
Per common share of $0.27 (2,817) (2,817)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1995 $20,967 $33,436 $150,345 ($3,774) ($373) $200,601
===================================================================================================================================
INVESTMENT SECURITIES
- - ---------------------------------------------------------------------------------------------------------------------
The amortized costs and fair values of securities are as follows:
- - ---------------------------------------------------------------------------------------------------------------------
March 31, 1995 December 31, 1994
--------------------------------- ----------------------------------
Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ----------
Available-for-sale:
U.S.Treasury $161,286 $159,136 $189,461 $184,494
U.S. Government agencies 30,658 30,027 22,042 20,932
Mortgage-backed 86,454 83,752 70,797 68,505
Corporates 65,601 64,502 89,629 84,989
Equities 5,013 5,763 4,723 5,452
- - ---------------------------------------------------------------------------------------------------------------------
349,012 343,180 376,652 364,372
- - ---------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S.Treasury $9,953 $9,925 9,948 9,655
U.S. Government agencies 15,005 14,839 15,006 14,494
State & municipal 116,415 115,968 120,582 118,677
Mortgage-backed 14,634 14,326 19,002 18,224
Corporates 19,010 18,740 14,745 13,986
- - ---------------------------------------------------------------------------------------------------------------------
175,017 173,798 179,283 175,036
- - ---------------------------------------------------------------------------------------------------------------------
Total investment securities $524,029 $516,978 $555,935 $539,408
=====================================================================================================================
Page 6
Susquehanna Bancshares, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES
- - --------------------------------------------------------------------------------------------------------------------------
Loans and leases, net of unearned income at March 31, 1995, and December 31, 1994, were as follows:
- - --------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1995 1994
- - --------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $189,568 $184,276
Real estate - construction 46,089 58,594
Real estate - mortgage 819,184 797,538
Consumer 230,386 221,790
Leases 12,896 15,967
- - --------------------------------------------------------------------------------------------------------------------------
Total loans and leases $1,298,123 $1,278,165
==========================================================================================================================
SHORT-TERM BORROWINGS
- - --------------------------------------------------------------------------------------------------------------------------
Short-term borrowings at March 31, 1995, and December 31, 1994, were as follows:
- - --------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1995 1994
- - --------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $30,615 $36,522
Treasury tax and loan notes 3,183 5,630
Federal Home Loan Bank borrowings - 2,200
Other - 10,000
- - --------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $33,798 $54,352
==========================================================================================================================
LONG-TERM DEBT
- - --------------------------------------------------------------------------------------------------------------------------
Long-term debt at March 31, 1995, and December 31, 1994 was as follows:
- - --------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1995 1994
- - --------------------------------------------------------------------------------------------------------------------------
Term note due May, 1995 $4,000 $4,000
Promissory note due June, 1995 2,000 2,000
Subordinated debt due in varying
installments through July, 1995 6 12
Term note due July, 1996 4,000 4,000
Term note due October, 1997 2,000 2,000
Term loan note due in varying
installments through March, 1999 5,600 5,850
Installment note due June, 1999 70 74
Subordinated notes due February, 2005 50,000 -
- - --------------------------------------------------------------------------------------------------------------------------
Total long-term debt $67,676 $17,936
==========================================================================================================================
IMPAIRED LOANS
- - --------------------------------------------------------------------------------
Susquehanna adopted SFAS 114, "Accounting by Creditors for Impairment of
a Loan", effective January 1, 1995. Under this standard, a loan is considered
impaired, based on current information and events, if it is probable that
Susquehanna will be unable to collect the scheduled payments of principal and
interest in accordance with the contractual terms of the loan agreement. The
measurement of impaired loan values is based on either the present value of the
loan's expected future cash flows discounted at the loan's historical effective
interest rate, or on the fair value of the loan's underlying collateral value,
less estimated selling costs, if the loan is collateral dependent. Management
performs a quarterly review of Susquehanna's impaired loans. The adoption of
SFAS 114 did not result in any additional provision to the Allowance for Loan
and Lease Losses.
Susquehanna does not accrue interest income on impaired loans and
subsequent cash payments received 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.
Susquehanna's impaired loans totalled $21,270 at March 31, 1995, of
which $10,401 had no related SFAS 114 allowance. The remaining impaired loans of
$10,869 had a related SFAS 114 allowance of $1,289. For the first quarter of
1995, the average balance for impaired loans was $12,722 and the interest income
recognized on impaired loans was $121. All interest income recognized on
impaired loans was recorded on a cash basis.
Page 7
Susquehanna Bancshares, Inc. and Subsidiaries
- - --------------------------------------------------------------------------------
COMPLETED AND PENDING ACQUISITIONS
- - --------------------------------------------------------------------------------
On April 8, 1994, Susquehanna signed definitive agreements to acquire
Atlanfed Bancorp., Inc., Baltimore, Maryland ("Atlanfed"), Fairfax Financial
Corporation, Baltimore, Maryland ("Fairfax"), and Reisterstown Holdings, Inc.,
Reisterstown, Maryland ("Reisterstown").
At the close of day on March 31, 1995 (effective April 1, 1995), Susquehanna
acquired Atlanfed and its subsidiaries for 1.2 million shares of its common
stock. This transaction will be accounted for as a pooling and combined
unaudited financial information is as follows:
Quarter Ended March 31, 1995 Quarter Ended March 31, 1994
---------------------------- ----------------------------
Susquehanna Atlanfed Combined Susquehanna Atlanfed Combined
----------------------------------------------------------------
Interest income $36,711 $4,957 $41,668 $30,336 $4,264 $34,600
Interest expense 14,360 2,747 17,107 10,592 2,282 12,874
----------------------------------------------------------------
Net interest income 22,351 2,210 24,561 19,744 1,982 21,726
Loan loss provision 1,461 39 1,500 951 47 998
Other income 2,853 403 3,256 4,052 706 4,758
Other expense 17,289 1,892 19,181 14,972 2,582 17,554
----------------------------------------------------------------
Income before taxes 6,454 682 7,136 7,873 59 7,932
Taxes 1,616 302 1,918 2,264 243 2,507
----------------------------------------------------------------
Income before
extraordinary item 4,838 380 5,218 5,609 (184) 5,425
Extraordinary item 0 0 0 (732) 0 (732)
----------------------------------------------------------------
Net income $4,838 $380 $5,218 $4,877 ($184) $4,693
================================================================
Earnings per common share:
Before extraordinary item $0.46 $0.26 $0.45 $0.54 ($0.13) $0.47
Net income 0.46 0.26 0.45 0.47 (0.13) 0.40
On April 21, 1995, Susquehanna acquired Reisterstown and its subsidiaries for
$28.6 million in cash. This transaction will be accounted for as a purchase and
unaudited financial information for Reisterstown is as follows:
3-31-95 12-31-94
-------------------
Loans, net $198,519 $197,141
Assets 246,935 246,865
Deposits 209,332 208,045
Equity 19,074 18,648
The Fairfax merger is not expected to close until the latter half of 1995.
Page 8
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
- - -------------------------------------------------------------------------------
CONDITION
- - ---------
The following is management's discussion and analysis of the significant changes
in the consolidated financial condition, results of operations, and cash flows
of Susquehanna Bancshares, Inc. ("Susquehanna").
(1) Material Changes in Financial Condition
---------------------------------------
Liquidity and Interest Rate Sensitivity
---------------------------------------
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 increasing 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 $112.4 million or 21.7% of the investment portfolio at
March 31, 1995. Short-term investments totaling $48 million at March 31, 1995
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 can be a lag in maintaining the desired
matching because the repricing of products occurs at varying time intervals.
Susquehanna employs a variety of methods to monitor interest rate
sensitivity and limit net interest income exposure. 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.
Page 9
Table 1 illustrates Susquehanna's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at March 31, 1995. 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, which has
consistently remained at or slightly above the 5.0% level.
Capital Resources
-----------------
Capital elements are segmented into two tiers. Tier I capital represents
shareholders' equity reduced by most intangible assets, while total capital
includes certain allowable long-term debt and the general portion of the
allowance for loan and lease losses limited to 1.25% of risk-adjusted assets.
The minimum Tier I capital ratio was set at 4%; Susquehanna's ratio at March 31,
1995, was 13.63%. The total capital ratio (Tier II) minimum ratio is 8%;
Susquehanna's ratio at March 31, 1995, was 18.36%. The minimum leverage ratio
was set at 4%; Susquehanna's leverage ratio at March 31, 1995, was 9.97%.
Impacting reported total equity has been the effect of the adoption of
SFAS 115. The increase in interest rates during 1994 has caused the "unrealized
gains and losses for available-for-sale securities" account in the equity
section to move from a net gain at March 31, 1994, of $227,000 to a net loss at
December 31, 1994, of $7,830,000. However, by March 31, 1995, the net loss
declined to $3,774,000 as interest rates began to decline and the amortized cost
balance of the available-for-sale portfolio lessened by $2.8 million.
(2) Material Changes in Results of Operations
-----------------------------------------
Earnings Summary
----------------
Effective January 1, 1995, Susquehanna adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by SFAS 118. These statements had no effect on
Susquehanna's allowance for loan and lease losses.
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 $2.1 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 and Merchants Bank and Trust, Hagerstown, Maryland, a wholly-owned
subsidiary of Susquehanna.
Page 10
On February 9, 1995, Susquehanna issued $50 million 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 will be used for general
corporate purposes.
Susquehanna's net income for the first quarter of 1995 was $4,838,000
compared to $4,877,000 in the first quarter of 1994, a decline of $39,000 or
.8%. In January 1994 Susquehanna prepaid a $10 million 10.5% note due May 1996
incurring an after tax extraordinary charge of $732,000. Therefore, income
before this extraordinary item reported in the first quarter of 1994 was
$5,609,000, compared to the $4,838,000 earned in the first quarter of 1995,
which resulted in a $771,000 or 13.7% quarter to quarter decline.
Several major items impacted the quarter to quarter comparisons. While
higher average earning assets, $189 million, and an increase in the net interest
margin, 5.1% vs 5.0%, in 1995 produced $2.6 million additional net interest
income, investment security sales produced $88,000 in losses in 1995 compared
to $984,000 in gains in 1994, which resulted in a reduction of $1,072,000 in
other income. The provision for loan and lease losses was $510,000 higher in
1995. In 1995, non-interest expenses, which reflected the addition of the
Allegany offices and acquisition costs relating to the Maryland acquisitions,
increased $2.3 million while income tax expense declined by $648,000 due to
lower taxable income.
Affecting the reported net worth of Susquehanna was the effect of the
adoption of SFAS 115 in December 1993. The unrealized loss, net of taxes, on
the available-for-sale securities at March 31, 1995, was $3,774,000 compared to
a gain of $227,000 at March 31, 1994. However, the loss at December 31, 1994,
was $7,830,000. This rapid increase and decrease in the fair value of these
securities is the result of rapid movement in general market interest rates.
Income before extraordinary items on a per share basis in 1995 was $.46
compared to $.54 in 1994 and the return on average assets was .99% compared to
1.28%. Net income per share was $.46 compared to $.47 and the return on average
assets was .99% compared to 1.11%.
At March 31, 1995, the equity capital to total assets ratio was 10.02%
compared to 10.86% at March 31, 1994, and 9.84% at December 31, 1994. The book
value per share at the same period ends was $19.22, $18.61 and $18.64,
respectively.
Net Interest Income
-------------------
The increase in earning assets, principally the result of the acquisition
in July 1994 of the eight Allegany County, Maryland, offices, combined with the
.1% increase in the net interest margin to 5.1% produced $2.6 million higher net
interest income.
Page 11
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 non-
performing 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 2 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. Table 3 presents changes
in volumes and revenues and expenses between the periods. Net interest income
as a percentage of net interest income and other income was 88.7% and 83.0%
for the quarters ended March 31, 1995 and 1994, respectively.
The acquisition of the Allegany offices in July 1994 accounted for the
major portion of the growth in total interest-bearing liabilities, when
comparing the quarters ending March 31, 1995 and 1994, in Table 3. Loan growth
was primarily derived internally as loans acquired in the acquisition totaled
$45.5 million. The long-term debt increase was the result of the $50 million
issue of subordinated debt in February 1995. The proceeds were temporarily
used to pay off $10 million of short-term debt and the balance was temporarily
invested in lower yielding short-term investments pending settlement of the
Reisterstown acquisition. The growth in short-term borrowings was primarily an
increase in securities sold under repurchase agreements.
When comparing the first quarter of 1995 to the fourth quarter of 1994,
the growth in volumes of interest-bearing liabilities and interest-earning
assets was the result of the debt offering. Both interest-bearing demand
deposits and savings deposits declined by $16 million more than was attracted in
time deposits. The growth in loan volumes of $26 million was funded through
investment security sales and maturities.
The tax equivalent yields on earning assets, as illustrated in Table 2,
rose to 8.3%, during the first quarter of 1995 compared to 7.6% in the first
quarter of 1994. This increase in the rate of return is attributed to both the
growth in loans at higher yields than investment securities and the general
increase in interest rates. Loan yields increased from 8.4% to 9.1% on volume
growth of $135 million while investment security yields increased from 6.1% to
6.4% on volume growth of $54 million. In addition, demand deposits and equity
capital also increased by $33 million providing additional funds for the loan
and investment accounts.
Page 12
The growth in interest-bearing liabilities, when comparing the quarters
ended March 1995 and 1994, was influenced both by the acquisition of the
Allegany offices and the issuance of the $50 million subordinated debt in
February 1995. Long-term debt increased $26 million in average outstandings and
its funding costs rose to 8.5% from 6.6%. Interest-bearing demand deposits rose
$14 million with an increase in rate of .5% to 2.7%. Savings deposits increased
$3 million with no increase in interest rate while time deposits were $88
million higher and the average rate paid rose to 4.8% from 4.1%.
The average volume of interest-earning assets comparing the first quarter
of 1995 to the fourth quarter of 1994 rose $12 million. The loan and lease
volumes were $26 million higher funded by the decline of investment securities
which were sold or matured in the first quarter of 1995. The $16 million
increase in short-term investments was due to the temporary investment of the
proceeds from the sale of the subordinated notes until the Reisterstown
acquisition.
The average volume of interest-bearing liabilities grew by $12 million
between the first quarter of 1995 and the fourth quarter of 1994 and was the
result of the issuance of the $50 million notes. Interest-bearing demand and
savings deposit volumes fell by $22 million and $19 million, respectively, while
time deposits grew by $25 million. The growth in time deposits was the result
of specific maturity and rate offerings designed to attract and retain deposits.
An additional positive influence on the ability of Susquehanna to
maintain the 5.0% or better net interest margin has been the increase in non-
interest-bearing demand deposits and earnings retention. While Susquehanna's
interest margin has generally remained at the 5.0% level, variances do occur as
an exact repricing match of assets and liabilities is not possible.
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 11.3% and 17.0% for the
periods ended March 31, 1995 and 1994, respectively.
Excluding the gains and losses realized on the sale of investment
securities, other operating income declined $127,000, 4.1%, when comparing the
first quarter of 1995 with the first quarter of 1994. While service charges on
deposit accounts rose $45,000 primarily on volume increases and income from
fiduciary-related activities were higher by $99,000, all other income fell
$270,000 as revenues from mortgage and insurance related activities fell by
$210,000 and $71,000, respectively.
Page 13
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; Federal Deposit Insurance Corporation's
insurance premiums on deposits; and other expenses incurred in operating
Susquehanna's business.
The inclusion of the Allegany offices beginning in July 1994 have
influenced the comparisons between the 1995 and 1994 periods. Comparing the
first quarter of 1995 and 1994, total operating expenses were up 15.5%, $2.3
million. Salary and benefits costs rose 18.4%, $1.4 million, which reflects the
employee costs relating to these branches as well as normal salary and benefit
increases. Other operating expenses rose by $791,000, 17.8%, primarily due to
the Allegany acquisition.
Income Taxes
------------
Susquehanna's effective tax rate in 1995 was 25.04% compared to 28.76% in
1994 as interest income not subject to tax increased over 1994.
Risk Assets
-----------
Table 4 shows an increase in non-performing assets at March 31, 1995,
compared to December 31 and March 31, 1994. Non-accrual loans and leases
increased to $22.8 million from $15.3 million at December 31, 1994, primarily
the result of one hotel loan that previously was reported in the past due 90-day
category which declined at March 31, 1995, to $5.8 million from $14.5 million at
December 31, 1994.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 5, the provision was increased by $510,000 to
$1,461,000 in 1995 and was primarily the result of the rapid deterioration of
one borrower. Charge-offs, also impacted by this credit, rose to $1,721,000 up
from $479,000. The allowance at March 31, 1995 was $22.7 million up from $21.4
million at March 31, 1994, and was 1.75% of period end loans and leases at March
31, 1995.
Page 14
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE - 1 INTEREST RATE SENSITIVITY
At March 31, 1995 1-90 90-180 180-365 1 year
(Dollars in thousands) days days days or more TOTAL
- - ------------------------------------------------------------------------------------------------------------
ASSETS:
Short-term investments $47,966 $47,966
Investment securities 21,979 33,583 73,472 389,163 518,197
Loans and leases, net of unearned income* 489,926 89,014 148,030 548,368 1,275,338
- - ------------------------------------------------------------------------------------------------------------
Total $559,871 $122,597 $221,502 $937,531 $1,841,501
============================================================================================================
LIABILITIES:
Deposits:
Interest-bearing demand $403,245 $403,245
Savings 355,341 355,341
Time 160,322 113,150 132,743 235,405 641,620
Time in denominations of $100 or more 11,687 8,453 8,764 13,293 42,197
Short-term borrowings 33,298 500 33,798
Long-term debt 11,600 6 56,070 67,676
- - ------------------------------------------------------------------------------------------------------------
Total $975,493 $122,109 $141,507 $304,768 $1,543,877
============================================================================================================
* Does not include nonaccruing loans and leases.
INTEREST SENSITIVITY GAP:
Periodic ($415,622) $488 $79,995 $632,763
Cumulative (415,134) (335,139) 297,624
CUMULATIVE GAP AS A PERCENTAGE OF EARNING ASSETS -22.6% -22.5% -18.2% 16.2%
Page 15
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL - TAX EQUIVALENT BASIS
- - --------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
(Dollars in thousands) March 31, 1995 March 31, 1994
---------------------------------- ----------------------------------
AVERAGE RATE AVERAGE RATE
ASSETS BALANCE INTEREST (%) BALANCE INTEREST (%)
---------- -------- -------- ---------- -------- --------
INTEREST-EARNING ASSETS
Short-term investments $35,943 $529 6.0 $35,180 $278 3.2
Investment securities:
Taxable 413,191 6,229 6.1 380,971 5,415 5.8
Tax advantaged 118,607 2,118 7.2 97,128 1,750 7.3
---------- -------- ---------- --------
Total investment securities 531,798 8,347 6.4 478,099 7,165 6.1
Loans and leases, net:
Taxable 1,242,433 27,963 9.1 1,111,143 22,866 8.3
Tax advantaged 43,333 940 8.8 39,993 978 9.9
---------- -------- ---------- --------
Total loans and leases 1,285,766 28,903 9.1 1,151,136 23,844 8.4
---------- -------- ---------- --------
TOTAL INTEREST-EARNING ASSETS 1,853,507 $37,779 8.3 1,664,415 $31,287 7.6
======== ======== ======== ========
ALLOWANCE FOR LOAN AND LEASE LOSSES (22,939) (21,040)
OTHER NON-EARNING ASSETS 145,956 140,601
---------- ----------
TOTAL ASSETS $1,976,524 $1,783,976
========== ==========
LIABILITIES & EQUITY
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $412,706 $2,745 2.7 $398,271 $2,183 2.2
Savings 360,830 2,235 2.5 357,691 2,208 2.5
Time 660,320 7,817 4.8 571,895 5,741 4.1
Short-term borrowings 44,960 596 5.4 19,173 132 2.8
Long-term debt 46,023 967 8.5 20,059 328 6.6
---------- -------- ---------- --------
TOTAL INTEREST-BEARING LIABILITIES 1,524,839 $14,360 3.8 1,367,089 $10,592 3.1
======== ======== ======== ========
DEMAND DEPOSITS 231,137 199,888
OTHER LIABILITIES 22,318 20,515
---------- ----------
TOTAL LIABILITIES 1,778,294 1,587,492
STOCKHOLDERS' EQUITY 198,230 196,484
---------- ----------
TOTAL LIABILITIES & EQUITY $1,976,524 $1,783,976
========== ==========
NET INTEREST INCOME/YIELD ON $23,419 5.1 $20,695 5.0
AVERAGE EARNING ASSETS ======== ======== ======== ========
For purposes of calculating loan yields, the average loan volume includes
non-accrual loans. For purposes of calculating yields on non-taxable interest
income, the taxable equivalent adjustment is made to equate non-taxable interest
on the same basis as taxable interest. The marginal tax rate is 35%.
Page 16
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 3 - STATEMENTS OF CHANGES IN INCOME AND EXPENSES
- - -----------------------------------------------------------------------------------------------------------------------------------
Three months ended Three months ended
March 31, 1995 compared March 31, 1995 compared
(Dollars in thousands) to March 31, 1994 to December 31, 1994
- - -----------------------------------------------------------------------------------------------------------------------------------
Average Volumes Income / Expense Average Volumes Income / Expense
----------------- ------------------ ------------------ -------------------
ASSETS: $ % $ % $ % $ %
Loans and Leases 134,630 11.7 5,072 21.6 25,524 2.0 960 3.5
Investments 53,699 11.2 1,052 16.0 (29,824) (5.3) (421) (5.2)
Short-term investments 763 2.2 251 90.3 16,376 83.7 285 116.8
------- ------- ------- -------
Total 189,092 11.4 6,375 21.0 12,076 0.7 824 2.3
======= =======
LIABILITIES:
Interest-bearing demand 14,435 3.6 562 25.7 (21,959) (5.1) 82 3.1
Savings 3,139 0.9 27 1.2 (18,990) (5.0) (125) (5.3)
Time 88,425 15.5 2,076 36.2 24,710 3.9 759 10.8
Short-term borrowings 25,787 134.5 464 351.5 (587) (1.3) 27 4.7
Long-term debt 25,964 129.4 639 194.8 28,407 161.3 660 215.0
------- ------- ------- -------
Total 157,750 11.5 3,768 35.6 11,581 0.8 1,403 10.8
======= ------- ======= -------
Net interest income 2,607 13.2 (579) (2.5)
Provision for loan and lease losses 510 53.6 502 52.3
------- -------
Net interest income after
provision for loan and lease losses 2,097 11.2 (1,081) (4.9)
Investment security gains/(losses) (1,072) (108.9) (88) (100.0)
Other operating income (127) (4.1) 138 4.9
------- -------
Income before operating expenses 898 3.9 (1,031) (4.2)
Salaries and employee benefits 1,416 18.4 783 9.4
Net occupancy & equipment 22 1.1 360 22.2
Other operating expenses 879 16.6 (1,272) (17.1)
------- -------
Total operating expenses 2,317 15.5 (129) (0.7)
------- -------
Income before taxes and extraordinary item (1,419) (18.0) (902) (12.3)
Provision for income taxes (648) (28.6) (426) (20.9)
------- -------
Income before extraordinary item (771) (13.7) (476) (9.0)
======= =======
Extraordinary item 732 (100.0) 0 -
------- -------
Net income (39) (0.8) (476) (9.0)
======= =======
Page 17
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 4 - RISK ASSETS
- - ----------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 1995 1994 1994
- - ----------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $22,785 $15,291 $16,239
Restructured accrual loans 6,914 6,941 -
Other real estate owned 3,195 3,102 5,675
- - ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $32,894 $25,334 $21,914
==========================================================================================================
As a percent of period-end loans and leases and
other real estate owned 2.53% 1.98% 1.87%
Loans and leases contractually
past due 90 days and still accruing $5,790 $14,450 $6,559
TABLE 5 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- - ---------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 1995 1994
- - ---------------------------------------------------------------------------------------------------
Balance - Beginning of period $22,750 $20,676
Additions charged to operating expenses 1,461 951
- - ---------------------------------------------------------------------------------------------------
24,211 21,627
- - ---------------------------------------------------------------------------------------------------
Charge-offs (1,721) (479)
Recoveries 217 269
- - ---------------------------------------------------------------------------------------------------
Net charge-offs (1,504) (210)
- - ---------------------------------------------------------------------------------------------------
Balance - End of period $22,707 $21,417
===================================================================================================
Net charge-offs as a percent of average loans and leases (annualized) 0.47% 0.07%
Allowance as a percent of period-end loans and leases 1.75 1.84
Average loans and leases $1,285,766 $1,151,136
Period-end loans and leases 1,298,123 1,163,077
Page 18
PART II. OTHER INFORMATION
-----------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Registrant was not required to file any Reports on Form 8-K for the
period ended March 31, 1995.
Page 19
Pursuant to the requirements 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.
May 8, 1995 /s/ Robert S. Bolinger
-------------------------------------
Robert S. Bolinger
President and Chief Executive Officer
May 8, 1995 /s/ J. Stanley Mull, Jr.
-------------------------------------
J. Stanley Mull, Jr., Vice President
Treasurer, and Principal Financial
Officer
Page 20