UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
November 20, 1995
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Date of Report (Date of earliest event reported)
Susquehanna Bancshares, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 0-10674 23-2201716
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(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File Number) ID No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
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(Address of principal executive offices) (Zip Code)
(717) 626-4721
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(registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report)
1
ITEM 5. Other Events.
Attached hereto as Appendix A are the audited financial statements,
related footnotes and management's discussion and analysis of the results of
operations and financial condition for the Registrant as of December 31, 1994
and 1993 and for the years ended December 31, 1994, 1993 and 1992. These
statements and the related notes and discussion have been restated to reflect
the pooling-of-interests by the Registrant with Atlanfed Bancorp, Inc. effective
April 1, 1995.
This financial information referred to above will be incorporated by
reference into the Registrant's registration statements on Form S-3 which will
shortly be filed with the Securities and Exchange Commission.
2
SIGNATURES
----------
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 hereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
Date: November 20, 1995 By:/s/Richard M. Cloney
-----------------------
Richard M. Cloney
Vice President and Secretary and
duly authorized signatory
3
APPENDIX A
SELECTED FINANCIAL DATA
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Dollars in thousands, except per share
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Year ended December 31 1994 1993 1992 1991 1990
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Interest income $ 150,633 $ 143,020 $ 153,570 $ 168,892 $ 171,138
Interest expense 56,488 55,993 69,809 90,994 98,089
Net interest income 94,145 87,027 83,761 77,898 73,049
Provision for loan and lease losses 3,987 5,130 4,721 4,869 5,021
Other income 15,098 15,816 15,284 13,262 10,244
Other expenses 72,710 66,004 63,611 58,489 54,435
Income before taxes, extraordinary
item/cumulative effect 32,546 31,709 30,713 27,802 23,837
Extraordinary item/cumulative effect (732) 1,023 - - -
Net income 22,096 23,205 22,172 21,287 18,842
Cash dividends declared on common stock 11,024 9,812 9,129 8,745 8,386
Dividend payout ratio 49.9% 42.3% 41.2% 41.1% 44.5%
PER COMMON SHARE AMOUNTS
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Income before extraordinary
item/cumulative effect $ 1.96 $ 1.96 $ 1.99 $ 1.83 $ 1.69
Net income 1.90 2.05 1.99 1.83 1.69
Cash dividends declared on common stock 1.02 0.922 0.872 0.840 0.808
FINANCIAL RATIOS
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Return on average total assets 1.04% 1.18% 1.15% 1.14% 1.05%
Return on average stockholders' equity 10.17 11.47 11.88 12.25 11.59
Average stockholders' equity to average assets 10.23 10.29 9.72 9.34 9.10
YEAR-END BALANCES
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Total assets $2,231,409 $2,051,994 $1,967,450 $1,903,918 $1,849,111
Investment securities 597,996 562,963 475,499 441,407 381,870
Loans and leases, net of unearned income 1,466,186 1,309,907 1,282,457 1,288,981 1,270,714
Deposits 1,866,330 1,717,807 1,671,352 1,596,279 1,556,428
Long-term debt 49,314 58,301 52,487 53,544 49,956
Stockholders' equity 217,104 218,428 193,804 180,765 168,256
SELECTED SHARE DATA*
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Common shares outstanding (period end) 11,633,918 11,628,284 11,170,653 11,164,878 11,156,575
Average common shares outstanding 11,633,918 11,331,097 11,168,744 11,661,244 11,153,082
At December 31:
Book value per share $ 18.66 $ 18.78 $ 17.35 $ 16.19 $ 15.08
Market price per common share 22.25 27.25 22.60 16.00 12.20
Common stockholders 5,229 5,174 4,723 4,774 4,856
*Prior years' amounts adjusted for the five-for-four stock split in August,
1993.
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 were $194,114, and total assets acquired were
$194,170.
A-1
Consolidated Balance Sheets
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Dollars in thousands Year Ended December 31
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1994 1993
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Assets
Cash and due from banks $ 79,473 $ 71,792
Short-term investments 15,603 53,599
Investment securities available-for-sale 374,045 417,697
Investment securities held-to-maturity (fair values of $217,035 and $146,041) 223,951 145,266
Loans and leases, net of unearned income 1,466,186 1,309,907
Less: Allowance for loan and lease losses 23,845 21,717
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Net loans and leases 1,442,341 1,288,190
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Premises & equipment (net) 31,886 29,259
Accrued income receivable 17,847 14,006
Other assets 46,263 32,185
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Total assets $2,231,409 $2,051,994
===================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 261,045 $ 212,525
Interest-bearing 1,605,285 1,505,282
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Total deposits 1,866,330 1,717,807
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Short-term borrowings 73,352 30,717
Long-term debt 49,314 58,301
Other liabilities 25,309 26,741
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Total liabilities 2,014,305 1,833,566
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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 0--1994; 1,884--1993 -- 40
Common stock ($2.00 par value) authorized 32,000,000 shares;
issued: 11,682,880--1994; 11,677,246--1993 23,366 23,355
Surplus 42,919 42,064
Retained earnings 159,051 147,979
Unrealized gains/(losses) for available-for-sale securities, net of taxes
(benefit) of ($4,468) and $2,971 at December 31, 1994 and 1993, respectively (7,859) 5,363
Less: Treasury stock (48,962 common shares at cost) 373 373
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Total stockholders' equity 217,104 218,428
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Total liabilities and stockholders' equity $2,231,409 $2,051,994
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
A-2
Consolidated Statements of Income
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Dollars in thousands except per share Year Ended December 31
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1994 1993 1992
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Interest Income
Interest & fees on loans and leases $ 117,073 $ 111,117 $ 119,171
Interest on investment securities 31,610 29,890 32,415
Interest on short-term investments 1,950 2,013 1,984
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Total interest income 150,633 143,020 153,570
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Interest Expense
Interest on deposits 51,214 51,759 64,806
Interest on short-term borrowings 2,257 472 854
Interest on long-term debt 3,017 3,762 4,149
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Total interest expense 56,488 55,993 69,809
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Net interest income 94,145 87,027 83,761
Provision for loan and lease losses 3,987 5,130 4,721
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Net interest income after provision for loan and lease losses 90,158 81,897 79,040
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Other Income
Service charges on deposit accounts 4,840 4,689 4,486
Other service charges, commissions, and fees 1,151 892 876
Income from fiduciary-related activities 2,509 2,510 2,520
Other operating income 5,599 7,495 6,225
Investment security gains 999 230 1,177
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Total other income 15,098 15,816 15,284
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Other Expenses
Salaries and employee benefits 36,227 33,770 31,976
Net occupancy expense 4,956 4,797 4,646
Furniture and equipment expense 3,818 3,807 3,732
FDIC insurance 3,838 3,720 3,655
Other operating expenses 23,871 19,910 19,602
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Total other expenses 72,710 66,004 63,611
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Income before income taxes, extraordinary item, and cumulative effect
of a change in accounting principle 32,546 31,709 30,713
Provision for income taxes 9,718 9,527 8,541
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Income before extraordinary item and cumulative effect of a change in
accounting principle 22,828 22,182 22,172
Extraordinary item (net of tax benefit of $394) (732) -- --
Cumulative effect of a change in accounting principle -- 1,023 --
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Net Income $ 22,096 $ 23,205 $ 22,172
======================================================================================================================
Earnings per share: Before extraordinary item /cumulative effect $ 1.96 $ 1.96 $ 1.99
Earnings per share: Extraordinary item $ (0.06) -- --
Earnings per share: Cumulative effect of a change in accounting principle -- $ 0.09 --
Earnings per share: Net income $ 1.90 $ 2.05 $ 1.99
======================================================================================================================
Per share data has been adjusted to reflect the five-for-four stock split in
August, 1993.
The accompanying notes are an integral part of these financial statements.
A-3
Consolidated Statements of Cash Flows
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Dollars in thousands Year Ended December 31
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1994 1993 1992
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Operating Activities
Net income $ 22,096 $ 23,205 $ 22,172
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 7,652 7,492 7,021
Provision for loan and lease losses 3,987 5,130 4,721
Increase in deferred taxes (2,306) (2,078) (1,237)
Gain on securities transactions (999) (230) (1,177)
Gain on sale of mortgages (231) (613) (578)
Loss/(gain) on sale of other real estate 1,180 (1,055) 100
Loss on the early extinguishment of debt 1,126 -- --
Mortgage loans originated for resale (42,652) (144,099) (118,626)
Sale of mortgage loans originated for resale 49,760 139,453 125,288
(Increase)/decrease in accrued interest receivable (3,865) (99) 903
Increase/(decrease) in accrued interest payable (148) (946) (3,824)
Increase in accrued expenses and taxes payable 1,533 300 708
Other, net (4,850) (2,632) 142
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Net cash provided by operating activities 32,283 23,828 35,613
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Investing Activities
Proceeds from the sale of investment securities 60,523 4,343 82,160
Proceeds from the maturity of investment securities 135,567 103,078 86,967
Purchase of investment securities (253,908) (188,678) (205,425)
(Increase)/decrease in loans and leases (118,618) 18,158 (3,904)
Capital expenditures (3,824) (3,376) (4,010)
Net cash and cash equivalents acquired in acquisition 139,439 27,453 --
Other, net 2,013 1,114 (128)
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Net cash used for investing activities (38,808) (37,908) (44,340)
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Financing Activities
Net (decrease)/increase in deposits (45,590) (14,164) 75,073
Net increase/(decrease) in short-term borrowings 42,635 4,214 (17,202)
Proceeds from issuance of long-term debt 14,350 14,000 14,928
Repayment of long-term debt (24,463) (8,186) (15,985)
Dividends paid (11,149) (9,813) (9,141)
Other, net 427 1,032 (407)
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Net cash (used for)/provided by financing activities (23,790) (12,917) 47,266
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Net (decrease)/increase in cash and cash equivalents (30,315) (26,997) 38,539
Cash and cash equivalents at January 1 125,391 152,388 113,849
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Cash and cash equivalents at December 31 $ 95,076 $125,391 $152,388
==============================================================================================================================
Cash and cash equivalents:
Cash and due from banks $ 79,473 $ 71,792 $ 78,128
Short-term investments 15,603 53,599 74,260
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Cash and cash equivalents at December 31 $ 95,076 $125,391 $152,388
==============================================================================================================================
The accompanying notes are an integral part of these financial statements.
Interest paid on deposits, short-term borrowings, and long-term debt was
$56,639 in 1994, $56,121 in 1993, and $73,637 in 1992. Income taxes paid were
$11,420 in 1994, $10,913 in 1993, and $9,755 in 1992. Amounts transferred to
other real estate owned were $1,797 in 1994, $1,673 in 1993, and $2,662 in 1992.
During 1994, $101,582 of securities purchased were designated as held-to-
maturity.
In 1992, Susquehanna purchased four banking offices in Washington County,
Maryland. At the time of the acquisition, fixed assets acquired were $1,764 and
deposits assumed were $32,032.
On September 1, 1993, Susquehanna acquired Central Financial Corp., Columbia,
Pennsylvania. At the time of the acquisition, loans acquired were $37,584,
interest-bearing deposits with banks were $27,287, and deposits were $60,618.
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.
A-4
Consolidated Statements of Changes in Stockholders' Equity
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Years Ended December 31, 1994, 1993, and 1992
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Unrealized
Dollars in thousands Preferred Common Retained Gain/(Loss) Treasury Total
except per share data Stock Stock Surplus Earnings on Securities Stock Equity
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Balance, January 1, 1992 $ 337 $18,422 $39,057 $123,324 $ 0 $(373) $180,767
Preferred shares converted to common (33) 9 24 --
Exercise of stock options 22 22
Stock dividend 1,702 (1,702)
Net income 22,172 22,172
Cash dividends declared:
Per common share of $.872 (9,130) (9,130)
Per preferred share of $1.80 (27) (27)
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Balance, December 31, 1992 304 18,431 40,805 134,637 0 (373) 193,804
Effect of five-for-four stock split 4,022 (4,022) (35) (35)
Acquisition of Central Financial Corp. 827 4,775 5,602
Preferred shares converted to common (264) 75 189 --
Exercise of stock options 141 141
Issuance of common stock 176 176
Net income 23,205 23,205
Unrealized gain on securities 5,363 5,363
Cash dividends declared:
Per common share of $.922 (9,811) (9,811)
Per preferred share of $1.80 (17) (17)
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Balance, December 31, 1993 40 23,355 42,064 147,979 5,363 (373) 218,428
Preferred shares converted to common (40) 11 29 --
Exercise of stock options 826 826
Net income 22,096 22,096
Change in unrealized gain on securities (13,222) (13,222)
Cash dividends declared:
Per common share of $1.02 (11,024) (11,024)
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Balance, December 31, 1994 $ 0 $23,366 $42,919 $159,051 $ (7,859) $(373) $217,104
====================================================================================================================================
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Shares Outstanding Preferred Common
Stock Stock
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Balance, January 1, 1992 15,853 9,171,769
Preferred shares converted to common (1,540) 4,620
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Balance, December 31, 1992 14,313 9,176,389
Preferred shares converted to common (12,429) 37,287
Effect of five-for-four stock split -- 2,001,077
Acquisition of Central Financial Corp. -- 413,531
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Balance, December 31, 1993 1,884 11,628,284
Preferred shares converted to common (1,884) 5,634
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Balance, December 31, 1994 -- 11,633,918
====================================================================================================================================
Dividends per share have been adjusted to reflect the five-for-four stock split.
The accompanying notes are an integral part of these financial statements.
A-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)
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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 and subsidiary ("Farmers"), Farmers and
Merchants Bank and Trust and subsidiaries ("F&M"), First National Trust Bank
("First National"), Williamsport National Bank ("Williamsport"), Citizens
National Bank of Southern Pennsylvania ("Citizens"), Spring Grove National Bank
("Spring Grove"), Susque-Bancshares Life Insurance Co. ("SBLIC"), and
Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC") as of and for
the years ended December 31, 1994, 1993, and 1992, and Susquehanna Bancshares
South, Inc. and subsidiaries ("Susquehanna South") as of and for the years ended
March 31, 1995, 1994 and 1993. 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.
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 and other intangible assets are amortized on a straight-line basis over
3 to 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 to
25 years. The unamortized amount of goodwill was $6,891 and $2,097 at December
31, 1994, and 1993, respectively.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and
cash equivalents includes cash, due from banks, and other short-term
investments. Short-term investments consist of interest-bearing deposits in
other banks, federal funds sold, and money market funds with original
maturities of three months or less.
INVESTMENT SECURITIES. At December 31, 1993, Susquehanna adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). This statement requires
enterprises to classify debt and equity securities as either
"held-to-maturity," "available-for-sale," or "trading." Investments for which
management has the intent, and Susquehanna has the ability, to hold to maturity
are carried at cost adjusted for amortization of premium and accretion of
discount. Amortization and accretion are calculated principally on the interest
method. Securities bought and held primarily for the purpose of selling them in
the near term are classified as "trading" and reported at fair value. Changes
in unrealized gains and losses on "trading" securities are recognized in the
Consolidated Statements of Income. At December 31, 1994, there were no
securities identified as "trading." All other securities are classified as
"available-for-sale" and reported at fair value. Changes in 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 AND LEASE LOSSES. The provision for loan and lease losses
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 and lease portfolio. Losses are charged
directly against the allowance, and recoveries on previously charged-off loans
and leases are added to the allowance.
In May 1993, the Financial Accounting Standards Board issued SFAS 114,
"Accounting by Creditors for Impairment of a Loan," which was subsequently
amended by SFAS 118. These statements, which Susquehanna will adopt in 1995,
address the accounting by creditors for impairment of certain loans. This
anticipated adoption will not have a material effect on Susquehanna's allowance
for loan and lease losses.
PREMISES AND EQUIPMENT. 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;
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.
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 collateral is inadequate to cover principal
and interest 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. 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 non-recognition of interest does not constitute forgiveness of the
borrower's obligation.
A-6
FEDERAL INCOME TAXES. Effective January 1993, Susquehanna adopted the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"), which uses the liability method of accounting
for income taxes. Prior to the adoption of SFAS 109, Susquehanna accounted for
income taxes using the deferred income approach prescribed by Accounting
Principals Board Opinion No. 11.
EARNINGS PER SHARE. On July 22, 1993, Susquehanna announced a five-for-four
stock split in the form of a 25% stock dividend on its common stock. The stock
split was distributed on August 27, 1993, to common shareholders of record
August 9, 1993. All per share data in these financial statements have been
adjusted to give effect to the stock split.
The $1.80 Series A Cumulative Convertible Preferred Stock is redeemable by
Susquehanna at $25 per share plus any accrued and unpaid dividends. Each share
is convertible into three shares of common stock at any time. During 1994, 1,884
shares were converted as were 12,429 shares in 1993, and 1,540 shares in 1992.
The preferred stock is not considered to be a common stock equivalent.
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
11,633,918 for 1994; 11,331,097 for 1993; and 11,168,744 for 1992.
- --------------------------------------------------------------------------------
2. 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").
In the first quarter of 1995, Susquehanna received approval from both the
Federal Reserve and the OTS to acquire Atlanfed and Reisterstown. On April 1,
1995, the Atlanfed acquisition closed with the exchange of approximately 1.2
million shares of common stock and was accounted for as a pooling-of-interests
in accordance with APB Opinion No. 16, "Business Combinations." On April 21,
1995, the Reisterstown acquisition closed for approximately $28 million in cash
and was accounted for as a purchase. Susquehanna financed the Reisterstown
acquisition through an offering of debt in February, 1995, with the issuance of
$50 million of its 9% fixed rate subordinated notes due 2005. Susquehanna
expects to finance the Fairfax acquisition (estimated at $63 million) through
offerings of debt and equity securities and expects to close the acquisition
in December 1995 or the first quarter of 1996.
The consolidated financial statements and related notes have been restated
to reflect the Atlanfed merger accounted for as a pooling-of-interests for all
periods presented. As of December 31, 1994, Atlanfed, Fairfax, and Reisterstown
reported the following unaudited financial information:
ATLANFED FAIRFAX REISTERSTOWN
-------- ------- ------------
Loans, net $182,322 $358,262 $197,141
Assets 252,880 425,838 246,865
Deposits 173,248 356,742 208,045
Equity 21,844 40,103 18,648
On July 11, 1994, Susquehanna completed its acquisition of eight Allegany
County, Maryland, branch locations of First National Bank of Maryland for $7.2
million in cash. 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 and subsequent to the transaction,
the eight branches were merged with and into F&M.
On September 1, 1993, Susquehanna completed the acquisition of Central
Financial Corp., Columbia, Pennsylvania ("Central"). In connection with the
transaction, Susquehanna issued 413,531 common shares in exchange for all the
common shares of Central. At the time of the acquisition, Central's wholly-owned
subsidiary, Central Savings and Loan, was merged with and into Farmers.
At the time of the acquisition, Central had loans of $37.6 million;
interest-bearing deposits with banks of $27.3 million; deposits of $60.6
million; and equity capital of $5.6 million. The transaction was accounted for
as a pooling-of-interests in accordance with APB Opinion No. 16, "Business
Combinations." The results of operations for Central prior to the acquisition
were not significant to Susquehanna's consolidated financial statements and,
accordingly, no prior periods of Susquehanna have been restated.
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3. SHORT-TERM INVESTMENTS
The book value of short-term investments and weighted average interest rates on
December 31, 1994 and 1993 were as follows:
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1994 1993
- --------------------------------------------------------------------------------
Book Book
Value Rates Value Rates
- --------------------------------------------------------------------------------
Interest-bearing deposits
in other banks $ 5,096 6.00% $12,517 3.41%
Federal funds sold 7,738 5.68 39,900 3.06
Money market funds 2,769 5.48 1,182 2.94
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Total $15,603 $53,599
================================================================================
A-7
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4. INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31, 1994
and 1993, are as follows:
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Gross Gross
At December 31, 1994 Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury $189,461 $ 86 $ 5,053 $184,494
U.S. Government agencies 22,042 -- 1,110 20,932
Corporate debt securities 70,797 -- 2,292 68,505
Mortgage-backed securities 89,629 2 4,642 84,989
Equity securities 14,443 744 62 15,125
- ----------------------------------------------------------------------------------------------------------------------
$386,372 $ 832 $13,159 $374,045
- ----------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury $ 10,948 3 $ 293 $ 10,658
U.S. Government agencies 28,506 -- 1,340 27,166
State and municipal 120,582 367 2,272 118,677
Corporate debt securities 19,002 -- 778 18,224
Mortgage-backed securities 44,913 89 2,692 42,310
- ----------------------------------------------------------------------------------------------------------------------
$223,951 $ 459 $ 7,375 $217,035
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities $610,323 $ 1,291 $20,534 $591,080
======================================================================================================================
At December 31, 1993
- ----------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury $200,191 $ 5,978 $ 98 $206,071
U.S. Government agencies 32,041 369 39 32,371
Mortgage-backed securities 109,594 744 118 110,220
Corporate debt securities 56,625 819 43 57,401
Equity securities 10,912 755 33 11,634
- ----------------------------------------------------------------------------------------------------------------------
$409,363 $ 8,665 $ 331 $417,697
- ----------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
State and municipal 95,341 2,717 273 97,785
U.S. Government agencies 13,500 50 383 13,167
Mortgage-backed securities 36,425 239 1,575 35,089
- ----------------------------------------------------------------------------------------------------------------------
145,266 3,006 2,231 146,041
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities $554,629 $11,671 $ 2,562 $563,738
======================================================================================================================
At December 31, 1994, investment securities with a carrying value of
$179,657 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, 1994.
The amortized cost and fair value of U.S. Treasury, government agency,
state and municipal, corporate debt, and mortgage-backed securities, at December
31, 1994, by contractual maturity, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay these obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Securities Available-for-Sale:
Within one year $ 96,958 $ 96,200
After one year but within five years 211,394 202,298
After five years but within ten years 38,602 36,467
After ten years 24,975 23,955
- --------------------------------------------------------------------------------
371,929 358,920
- --------------------------------------------------------------------------------
Securities Held-to-Maturity:
Within one year $ 24,581 $ 24,575
After one year but within five years 135,371 131,899
After five years but within ten years 29,060 28,532
After ten years 34,939 32,029
- --------------------------------------------------------------------------------
223,951 217,035
- --------------------------------------------------------------------------------
Total debt securities $595,880 $575,955
================================================================================
A-8
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 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 category.
- ----------------------------------------------------------------------
Year ended December 31, 1994
- ----------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
- ----------------------------------------------------------------------
Gross gains $992 $7
Gross losses -- --
- ----------------------------------------------------------------------
Net gains $992 $7
======================================================================
Year ended December 31 1993 1992
- ----------------------------------------------------------------------
Gross gains $261 $1,421
Gross losses 31 244
- ----------------------------------------------------------------------
Net gains $230 $1,177
======================================================================
Interest earned on investment securities for the years ended December 31 was as
follows:
- ----------------------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------------------
Taxable $26,404 $25,313 $26,876
Tax-advantaged 5,206 4,577 5,539
- ----------------------------------------------------------------------
Total $31,610 $29,890 $32,415
======================================================================
- --------------------------------------------------------------------------------
5. LOANS AND LEASES
At December 31, loans and leases, net of unearned income ($12,537 at
December 31, 1994 and $12,107 at December 31, 1993), were as follows:
- ----------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------
Commercial, financial, and
agricultural $ 186,013 $ 174,544
Real estate--construction 84,886 81,962
Real estate--mortgage 955,357 842,551
Consumer 223,963 190,307
Leases 15,967 20,543
- ----------------------------------------------------------------------
Total $1,466,186 $1,309,907
======================================================================
At December 31, 1994, real estate-mortgage loans included a $6.9 million
restructured loan. Susquehanna has no outstanding commitment to advance
additional funds on this loan and interest forgone on this loan during 1994 was
$244.
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.
The activity of loans to such persons whose balance exceeded $60,000 during
1994, 1993, and 1992 follows:
- -------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------
Balance--January 1 $15,927 $17,787 $18,422
Additions 27,982 19,601 18,572
Deductions:
Amounts collected 22,318 21,531 23,834
Amounts written-off -- -- --
Other changes 1,681 70 4,627
- -------------------------------------------------------------------------
Balance--December 31
Current $23,272 $15,927 $17,787
Non-performing -- -- --
- -------------------------------------------------------------------------
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.
A-9
- --------------------------------------------------------------------------------
6. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses were as follows:
- ---------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------
Balance--January 1 $21,717 $18,026 $16,435
Allowance acquired in
business combination -- 515 --
Provision charged to operating
expenses 3,987 5,130 4,721
- ---------------------------------------------------------------------
25,704 23,671 21,156
- ---------------------------------------------------------------------
Charge-offs (2,952) (3,101) (4,187)
Recoveries 1,093 1,147 1,057
- ---------------------------------------------------------------------
Net charge-offs (1,859) (1,954) (3,130)
- ---------------------------------------------------------------------
Balance--December 31 $23,845 $21,717 $18,026
=====================================================================
- --------------------------------------------------------------------------------
7. PREMISES AND EQUIPMENT
Property, buildings, and equipment, at December 31, were as follows:
- ---------------------------------------------------------------------
1994 1993
- ---------------------------------------------------------------------
Land $ 4,214 $ 3,878
Buildings--including capitalized
leases of $104 28,211 26,519
Furniture and equipment 26,905 24,370
Leasehold improvements 3,462 3,188
Land improvements 381 269
- ---------------------------------------------------------------------
63,173 58,224
- ---------------------------------------------------------------------
Less: accumulated depreciation
and amortization 31,287 28,965
- ---------------------------------------------------------------------
$31,886 $29,259
=====================================================================
Depreciation and amortization expense charged to operations amounted to
$3,276 in 1994, $3,139 in 1993, and $3,026 in 1992.
All subsidiaries lease certain banking branches and equipment under both capital
and operating leases which expire on various dates through 2009. Renewal options
are available for periods up to 20 years. Minimum future rental commitments
under non-cancellable leases, as of December 31, 1994, are as follows:
- ---------------------------------------------------------------------
Capital Operating
Leases Leases
- ---------------------------------------------------------------------
1995 $ 26 $ 1,262
1996 26 1,228
1997 26 1,118
1998 1 1,010
1999 -- 722
Subsequent years -- 2,036
- ---------------------------------------------------------------------
79 7,376
- ---------------------------------------------------------------------
Less amount representing interest 22 --
- ---------------------------------------------------------------------
$ 57 $7,376
=====================================================================
Total rent expense charged to operations amounted to $1,439 in 1994, $1,402
in 1993, and $1,348 in 1992.
A-10
- --------------------------------------------------------------------------------
8. DEPOSITS
Deposits at December 31 were as follows:
- ----------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------
Noninterest-bearing:
Demand $ 261,045 $ 212,525
Interest-bearing:
Interest-bearing demand 464,052 450,166
Savings 398,423 386,912
Time 697,406 625,948
Time of $100,000 or more 45,404 42,256
- ----------------------------------------------------------------------
Total deposits $1,866,330 $1,717,807
======================================================================
- --------------------------------------------------------------------------------
9. SHORT-TERM BORROWINGS
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
- --------------------------------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $36,522 4.76% $14,383 2.55%
Treasury tax and loan notes 5,630 5.10 15,334 2.60
Federal funds purchased -- -- 1,000 3.75
Federal Home Loan Bank borrowings 21,200 6.77 -- --
Other 10,000 6.50
- --------------------------------------------------------------------------------------------------------------
$72,352 $30,717
==============================================================================================================
Under an agreement with the Federal Home Loan Bank, Susquehanna subsidiary
banks have a line of credit available to them totaling $130 million, of which
$52.6 million was outstanding at December 31, 1994.
A-11
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT
Long-term debt at December 31 was as follows:
- ------------------------------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------
Farmers:
Installment note due June 2, 1999 $ 74 9.00% $ 87 9.00%
First National:
Subordinated notes due July 1, 1995 12 12.00 36 12.00
SBLC:
Promissory note due May 14, 1994 -- -- 1,000 8.75
Promissory note due October 30, 1994 -- -- 1,000 8.75
Term note due May 1, 1995 4,000 8.00 4,000 8.00
Promissory note due June 6, 1995 2,000 6.75 2,000 6.75
Term note due July 29, 1996 4,000 6.49 4,000 6.49
Term note due October 30, 1997 2,000 8.75 -- --
Susquehanna:
Promissory note due June 1, 1996 -- -- 10,000 10.50
Term loan note due June 30, 1999 5,850 6.62 6,800 4.24
Susquehanna South:
Federal Home Loan Bank borrowings due at various
dates through 2003 31,378 6.58 29,378 5.90
- ------------------------------------------------------------------------------------------------------------------
$49,314 $58,301
==================================================================================================================
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.
First National's subordinated notes require equal quarterly payments. These
notes are subordinated to all deposits and to obligations of other creditors.
SBLC's notes are payable with interest only payments being made until
maturity. These notes are guaranteed by Susquehanna.
Susquehanna's term loan note is payable in quarterly principal and interest
payments of varying amounts until the final maturity. Voluntary principal
payments of the note may be made at any time.
Under a blanket floating lien security with the FHLB of Atlanta,
Susquehanna South's thrift subsidiary, Atlantic Federal Savings Bank (AFSB), is
required to maintain as collateral for all borrowings qualifying first mortgage
loans in an amount equal to 133% of the advances. In addition, all of AFSB's
stock in the FHLB of Atlanta is pledged as collateral for such advances.
On January 14, 1994, Susquehanna elected to prepay the $10 million, 10.5%
promissory note, due May, 1996. In connection with the prepayment, Susquehanna
incurred a one-time, pre-tax charge of approximately $1.1 million, on the early
extinguishment of the note which is disclosed as an extraordinary item in the
Consolidated Statements of Income.
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 will be used for pending acquisitions and
for general corporate purposes.
- --------------------------------------------------------------------------------
11. INCOME TAXES
The components of the provision for income taxes are as follows:
- --------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------
Current $12,024 $10,582 $9,778
Deferred (2,306) (1,055) (1,237)
- --------------------------------------------------------------
Total $ 9,718 $ 9,527 $8,541
==============================================================
Effective January 1, 1993, Susquehanna adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires 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. As of
January 1, 1993, Susquehanna recorded a tax benefit of approximately $1,023, or
$.09 per share, which amount represents the net increase to the deferred tax
asset as of that date. Such amount has been reflected in the Consolidated
Statements of Income as the cumulative effect of a change in accounting
principle.
A-12
The components of the deferred tax assets as of December 31, 1994 and 1993, were
as follows:
- ---------------------------------------------------------------------
1994 1993
- ---------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $8,167 $6,616
Loan fee income 1,365 1,479
Accrued pension expense 1,518 1,415
Deferred directors' fees 620 726
Deferred compensation 345 400
Nonaccrual loan interest 1,287 --
Other assets 679 351
Deferred tax liabilities:
FHLB stock dividends (470) (494)
Premises and equipment (836) (846)
Core deposit intangible (167) (167)
Other liabilities (859) (137)
- ---------------------------------------------------------------------
Net deferred income tax assets $11,649 $9,343
=====================================================================
The tax effect of timing differences which resulted in the deferred tax
provisions for 1992 are summarized as follows:
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Excess of book over tax provision for loan losses $ (477)
Accretion of discount on investment securities (32)
Deferral of loan fees and costs (111)
Deferred compensation and directors' fees 41
Deficit of pension contribution to expense (381)
Other, net (277)
- ------------------------------------------------------------------
Total $(1,237)
==================================================================
The provision for income taxes differs from the amount derived from applying
the statutory income tax rate to income before income taxes as follows:
- ------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------
Provision at statutory rates $11,391 $11,098 $10,442
Tax-advantaged income (2,484) (2,314) (2,447)
Recapture of tax bad debt
reserve from acquisition -- 475 --
Other, net 811 268 546
- ------------------------------------------------------------------
Total $ 9,718 $ 9,527 $ 8,541
==================================================================
As provided in SFAS No. 109 "Accounting for Income Taxes," AFSB established a
deferred tax liability on qualifying bad debt reserves for tax purposes that
arose in fiscal years beginning before December 31, 1987. Such bad debt reserve
for AFSB amounted to approximately $4,670,000 with an income tax effect of
$1,803,000 at December 31, 1994. This bad debt reserve would become taxable if
AFSB does not maintain certain qualified assets as defined for federal income
tax purposes, equal to 60% of total assets, if the reserve is charged for other
than bad debt losses or if AFSB does not maintain its thrift charter.
- --------------------------------------------------------------------------------
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
Balance Sheets. The contract or notional amount of those instruments reflect 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 as it does for on-balance sheet
instruments.
Financial instruments with off-balance sheet risk at December 31, 1994 and 1993
are as follows:
- -------------------------------------------------------------------
Contractual 1994 1993
- -------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Standby letters of credit $ 16,161 $ 15,588
Commitments to originate loans 42,470 55,235
Unused portion of home equity
and credit card lines 110,350 102,861
Other unused commitments, principally
commercial lines of credit 140,122 140,069
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 amount does not
necessarily represent future cash requirements. Susquehanna evaluates each
customer's credit worthiness 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.
A-13
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107"), Susquehanna has presented estimated fair value
information about financial instruments, whether or not recognized in the
Consolidated Balance Sheets 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 No. 107 may vary
significantly between institutions based on the estimates and assumptions used
in the various valuation methodologies. SFAS No. 107 excludes disclosure of non-
financial 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 are 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 of credit 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:
- --------------------------------------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 79,473 $ 79,473 $ 71,792 $ 71,792
Short-term investments 15,603 15,603 53,599 53,599
Investment securites 597,996 591,080 562,963 563,738
Loans, net of unearned income and allowance 1,418,865 1,366,825 1,267,950 1,286,797
Liabilities:
Deposits 1,866,330 1,850,328 1,717,807 1,724,335
Short-term borrowings 73,352 73,352 30,717 30,717
Long-term debt 49,314 47,889 58,301 58,702
A-14
- --------------------------------------------------------------------------------
14. EMPLOYEE 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 1994 1993 1992
- -----------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 1,587 $ 1,363 $ 1,137
Interest cost on projected
benefit obligation 1,865 1,652 1,457
Actual (gain)/loss on plan assets 170 (1,707) (1,440)
Net amortization and deferral (1,858) 167 (32)
- -----------------------------------------------------------------------------
Pension expense of defined
benefit plans $ 1,764 $ 1,475 $ 1,122
=============================================================================
- -----------------------------------------------------------------------------
At December 31 1994 1993 1992
- -----------------------------------------------------------------------------
Discount rate 8.00% 7.00% 7.50%
Rate of increase in
compensation levels 6.00 6.00 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 funded defined benefit pension plan:
- ---------------------------------------------------------------------------
Year Ended December 31 1994 1993
- ---------------------------------------------------------------------------
Actuarial present value of vested
benefit obligation $15,217 $16,432
===========================================================================
Actuarial present value of accumulated
benefit obligation $15,643 $16,977
===========================================================================
Actuarial present value of projected
benefit obligation $24,744 $26,745
Plan assets at market value 21,730 21,331
- ---------------------------------------------------------------------------
Plan assets less than projected
benefit obligation 3,014 5,414
Unrecognized net gain/(loss) from
past experience different than that
assumed and effects of changes in
assumptions 1,874 (1,055)
Unrecognized prior service cost (1,104) (1,073)
Unrecognized net asset at January 1,
1987, being amortized over 15 years 666 752
- ---------------------------------------------------------------------------
Net pension liability recognized
in the balance sheet $ 4,450 $ 4,038
===========================================================================
The plan assets at December 31, 1994, were invested principally in U.S.
Government securities and listed stocks and bonds including 13,125 shares of
Susquehanna common stock.
On January 1, 1993, Susquehanna adopted SFAS 106, "Employer's Accounting
for Post-Retirement Benefits Other than Pensions" ("SFAS 106"). This statement
requires the cost of the benefits to be accrued during the employees' credited
service period. The adoption of SFAS 106 resulted in an accumulated post-
retirement benefit obligation of approximately $2.6 million. Susquehanna elected
the prospective transition approach and is amortizing the transition obligation
over a 20-year period. The net periodic benefit expense for 1994 and 1993 was
$384 and $350, 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 $782 in 1994, $691 in 1993, and $659 in 1992.
A-15
- --------------------------------------------------------------------------------
15. SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY)
CONDENSED BALANCE SHEETS
- -----------------------------------------------------------------------
December 31 1994 1993
- -----------------------------------------------------------------------
ASSETS
Cash in subsidiary bank $ 97 $ 96
Short-term investments 2,716 1,019
Investment in consolidated sub-
sidiaries at equity in net assets 228,602 220,905
Other investment securities 1,396 13,317
Premises and equipment (net) 59 39
Other assets 2,099 1,469
- -----------------------------------------------------------------------
Total assets $234,969 $236,845
=======================================================================
LIABILITIES
Short-term borrowings $ 10,000 $ --
Long-term debt 5,850 16,800
Accrued taxes and expenses
payable 2,015 1,617
- -----------------------------------------------------------------------
Total liabilities 17,865 18,417
- -----------------------------------------------------------------------
EQUITY
Preferred stock (no par) -- 40
Common stock ($2 par value) 23,366 23,355
Surplus 42,919 42,064
Retained earnings 159,051 147,979
Unrealized gain on available-for-sale
securities, net (7,859) 5,363
Less: Treasury stock at cost 373 373
- -----------------------------------------------------------------------
Total stockholders' equity 217,104 218,428
- -----------------------------------------------------------------------
Total liabilities and stockholders'
equity $234,969 $236,845
=======================================================================
SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY)
CONDENSED STATEMENTS OF INCOME
- -----------------------------------------------------------------------
Year ended December 31 1994 1993 1992
- -----------------------------------------------------------------------
INCOME
Dividends from subsidiaries $18,859 $25,040 $11,683
Interest and dividends on
investment securities 89 72 55
Interest and management
fee from subsidiaries 310 206 236
- -----------------------------------------------------------------------
Total income 19,258 25,318 11,974
- -----------------------------------------------------------------------
EXPENSES
Service fees paid to
subsidiary 969 971 750
Interest expense 683 1,355 1,423
Other expenses 1,273 754 707
- -----------------------------------------------------------------------
Total expenses 2,925 3,080 2,880
- -----------------------------------------------------------------------
Income before taxes, equity
in undistributed income of
subsidiaries, and
extraordinary item 16,333 22,238 9,094
Equity in undistributed
income of subsidiaries 6,889 967 13,078
Extraordinary item
(net of taxes of $0) (1,126) -- --
- -----------------------------------------------------------------------
NET INCOME $22,096 $23,205 $22,172
=======================================================================
A-16
- --------------------------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------
Year ended December 31 1994 1993 1992
- ------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 22,096 $ 23,205 $ 22,172
Adjustment to reconcile net
income to cash provided by
operating activities:
Depreciation and amort-
ization 142 135 130
Equity in undistributed
income of subsidiaries
and income of subsid-
iaries accrued not
received (11,889) (967) (13,078)
Loss on the early
extinguishment of debt 1,126 -- --
Increase in other assets (751) (144) (32)
Increase/(decrease) in
accrued expenses pay-
able 398 387 (282)
Other, net (19) (4) --
- ------------------------------------------------------------------------
Net cash provided from
operating activities 11,103 22,612 8,910
- ------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment
securities -- (12,144) --
Proceeds from the sale of
investment securities 11,956 -- --
Net cash from acquisition -- 26 --
Capital expenditures (42) (38) (4)
(Infusion of)/repayment of
investment in subsidiary (8,600) 200 --
- ------------------------------------------------------------------------
Net cash provided from/(used
for) investing activities 3,314 (11,956) (4)
- ------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term
borrowings $ 10,000 $ -- $ --
Repayment of long-term debt (12,076) (750) (450)
Dividends paid (10,643) (9,331) (8,720)
Cash paid for fractional shares -- (35) --
- ------------------------------------------------------------------------
Net cash used for financing
activities (12,719) (10,116) (9,170)
- ------------------------------------------------------------------------
Net increase/(decrease) in
cash and cash equivalents 1,698 540 (264)
Cash and cash equivalents at
January 1 1,115 575 839
- ------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 2,813 $ 1,115 $ 575
========================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 97 $ 96 $ 59
Short-term investments 2,716 1,019 516
- ------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 2,813 $ 1,115 $ 575
========================================================================
- --------------------------------------------------------------------------------
16. REGULATORY RESTRICTIONS OF BANKING SUBSIDIARIES
Susquehanna is limited by regulatory provisions in the amount it can receive in
dividends from its banking subsidiaries. At December 31, 1994, $11,748 is
available for dividend distribution to Susquehanna in 1995 from its banking
subsidiaries.
Included in cash and due from banks are balances required to be maintained
by subsidiary banks on deposit with the Federal Reserve. The amounts of such
reserves are based on percentages of certain deposit types and totalled $15,671
at December 31, 1994.
- --------------------------------------------------------------------------------
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 so
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.
A-17
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, 1994 and
1993, 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, 1994. 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 total assets of $255,123,000 and
$236,669,000 as of March 31, 1995 and 1994, respectively, and net interest
income of $8,563,000, $7,723,000, and $8,403,000 for each of the three years in
the period 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, 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, 1994 and
1993, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in Note 1 and Note 11 to the financial statements, Susquehanna
changed its method of accounting for investments and income taxes in 1993.
/s/ Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
February 13, 1995, except for
Note 2 and above first paragraph
as to which the date is April 1, 1995
A-18
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 and Merchants Bank and Trust, First National Trust Bank, Williamsport
National Bank, Citizens National Bank of Southern Pennsylvania, Spring Grove
National Bank, Susquehanna Bancshares South, Inc. and subsidiaries, Susque-
Bancshares Leasing Co., Inc., and Susque-Bancshares Life Insurance Company.
Results of Operations
Summary of 1994 Compared to 1993
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 and Merchants Bank and Trust, Hagerstown, Maryland, a wholly-owned
subsidiary of Susquehanna.
Susquehanna's net income for the year ended December 31, 1994, includes an
after-tax extraordinary charge of $732,000 in connection with the early
extinguishment of debt. In January 1994, Susquehanna was notified by the holder
of the $10 million, 10.5% note due June 1996 that Susquehanna could prepay the
note for approximately $500,000 less than the "make whole" penalty. The
creditors' offer was accepted by Susquehanna and resulted in that charge to
first quarter earnings of $732,000, or $.06 per share.
Excluding the effects of the adoption of SFAS 109 in January 1993 and the
extraordinary charge in January 1994, earnings for 1994 were $22,828,000
compared to the $22,182,000 earned in 1993, a $646,000 or 2.9% increase. Net
income in 1994 was $22,096,000 compared to $23,205,000 in 1993, a decline of
$1,109,000 or 4.8%. On a per share basis, income before the extraordinary item
was $1.96 in 1994 versus $1.96 in 1993 on income before the change in accounting
principle while the return on average equity was 10.51% in 1994 versus 10.96% in
1993.
Items which have affected the annual operating results and comparisons between
1994 and 1993 were pre-tax items of: a $909,000 loss relating to the sale of
an other real estate owned property; higher security gains, $769,000; and a
lower loan loss provision, $1,143,000, in 1994; the addition of the assets and
deposits acquired in the purchase of the eight Allegany County, Maryland,
branches in 1994; and the gain of $1.3 million realized in 1993 through the sale
of other real estate owned property.
- --------------------------------------------------------------------------------
Summary of 1993 Compared to 1992
Susquehanna adopted the Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes" ("SFAS 109"), in the first quarter of 1993.
The cumulative effect of SFAS 109 is recorded in the income statement as
"Cumulative Effect of a Change in an Accounting Principle." SFAS 109 was adopted
prospectively and added $1,023,000, or $.09 per fully diluted share, to 1993 net
income.
On December 31, 1993, Susquehanna adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115). 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, but, 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.
Securities identified as "trading account securities" are marked-to-market with
the change recorded in the income statement. Susquehanna does not engage,
presently, in trading activity, but does engage in active portfolio management
which requires the majority of its security portfolios be identified as
"available-for-sale."
On September 1, 1993, the acquisition of Central Financial Corporation
("Central") was completed. Its subsidiary, Central Savings Bank was merged into
Farmers First Bank. Loans acquired were $37.6 million, interest-bearing deposits
were $27.3 million, deposits totaled $60.6 million and equity acquired was $5.6
million. The results of operations of Central prior to the acquisition were not
significant to Susquehanna's consolidated financial statements and, accordingly,
no prior periods of Susquehanna have been restated.
Susquehanna achieved record earnings in 1993 of $23,205,000, 4.7%, above the
$22,172,000 realized in 1992. Income before the effects of SFAS 109 also
exceeded the 1992 results by $10,000. Net income per common share was $2.05
($1.96 before SFAS 109). The return on average assets was 1.18% (1.13% before
SFAS 109). The return on average shareholders' equity was 11.47% (10.96% before
SFAS 109). Factors that moderated the growth of net income in 1993 were lower
security gains, $230,000 vs. $1.2 million in 1992; increased provision for loan
and lease losses, $5,130,000 vs. $4,721,000; and a higher provision for income
taxes, $9,527,000 vs. $8,541,000 in 1992. The 1993 tax provision includes a one-
time charge of $475,000 for the recognition of the Central tax loan loss
reserve.
A-19
TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
Assets Balance Interest % Balance Interest % Balance Interest %
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 44,368 $ 1,950 4.4 $ 62,597 $ 2,013 3.2 $ 51,600 $ 1,984 3.8
Investment securities:
Taxable 453,568 26,404 5.8 402,678 25,313 6.3 377,533 26,876 7.1
Tax-advantaged 111,827 7,994 7.1 88,532 7,026 7.9 91,486 8,378 9.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 565,395 34,398 6.1 491,210 32,339 6.6 469,019 35,254 7.5
Loans (net of unearned income):
Taxable 1,342,389 114,480 8.5 1,248,472 108,475 8.7 1,241,360 116,581 9.4
Tax-advantaged 39,722 3,989 10.0 38,606 4,064 10.5 34,071 3,924 11.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 1,382,111 118,469 8.6 1,287,078 112,539 8.7 1,275,431 120,505 9.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,991,874 $154,817 7.8 1,840,885 $146,891 8.0 1,796,050 $157,743 8.8
====================================================================================================================================
Allowance for loan losses (22,965) (20,136) (17,238)
All other non-earning assets 154,385 145,114 141,354
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $2,123,294 $1,965,863 $1,920,166
====================================================================================================================================
Liabilities & Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest-bearing demand $ 465,265 $ 10,978 2.4 $ 444,320 $ 11,372 2.6 $ 422,323 $ 14,258 3.4
Savings 399,241 10,106 2.5 362,130 10,452 2.9 305,819 11,216 3.7
Time 692,180 30,130 4.4 665,219 29,935 4.5 718,867 39,332 5.5
Short-term borrowings 47,823 2,257 4.7 16,819 472 2.8 22,132 854 3.9
Long-term debt 48,431 3,017 6.2 54,827 3,762 6.9 56,256 4,149 7.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,652,940 $ 56,488 3.4 1,543,315 $ 55,993 3.6 1,525,397 $ 69,809 4.6
====================================================================================================================================
Demand deposits 229,096 197,758 184,463
Other liabilities 24,052 22,407 23,677
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,906,088 1,763,480 1,733,537
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 217,206 202,383 186,629
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $2,123,294 $1,965,863 $1,920,166
====================================================================================================================================
Net interest income/yield on
average earning assets $ 98,329 4.9 $ 90,898 4.9 $ 87,934 4.9
====================================================================================================================================
For purposes of calculating loan yields, the average loan volume includes
non-accrual 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%
for 1994 and 1993, and 34% for 1992.
A-20
Net Interest Income--Taxable Equivalent Basis
The largest source of Susquehanna's operating revenue is net interest income.
For purposes of management's discussion and analysis, net interest income is
adjusted to a taxable equivalent basis. For purposes of calculating yields on
tax-exempt interest income, the taxable equivalent adjustment equates tax-exempt
interest rates to taxable interest rates as noted in Table 1.
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 volumes 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 1 presents average balances, taxable equivalent interest income and
expense and the yields earned or paid on these assets and liabilities of
Susquehanna. The net interest margin has been maintained at 4.9% in the three
years presented despite fluctuation in volumes and interest rates. Net interest
income as a percentage of net interest income and other income was 86.2%, 84.6%,
and 84.6% for 1994, 1993, and 1992, respectively.
The volume of average earning assets in 1994, which includes $45.5 million of
loans acquired in the Allegany acquisition, rose to $1.992 billion, $151.0
million over 1993. This growth was funded primarily through deposits acquired in
that acquisition. The rate of return realized in 1994 was 7.8%. In 1993, the
volume of average earning assets, which included $64.9 million acquired through
the acquisition of Central Financial Corp. on September 1, rose to $1.841
billion, $44.8 million over 1992, and returned an average yield of 8.0%, down
from 8.8% in 1992. While the average yield on earning assets fell two-tenths of
one percent between 1994 and 1993, the growth in earning assets more than offset
that decline and produced $7.9 million additional interest income on a tax
equivalent basis. Between 1993 and 1992, the eight-tenths of one percent decline
was partially offset by higher volumes as the interest earned fell by $10.9
million. General market interest rates were in a declining mode throughout 1993
while rates began to rise during 1994 with the major movements during the latter
part of the year.
Table 2 illustrates that the growth in interest income in 1994 was attributed
to the increases in volumes of earning assets while the decline in 1993 compared
to 1992 was related to lower interest rates.
The excess deposits acquired in the Allegany acquisition were employed in
investment securities maturing in three years or less and had an effect on the
average yield realized on the total earning asset base. Loan yields averaged
8.6% in 1994 while the yield on the investment portfolio was 6.1%. It is
expected that continued loan growth will replace the maturing investments at
higher returns and should improve the yield on the total earning asset base.
Interest-bearing liabilities averaged $1.653 billion in 1994 compared to
$1.543 billion in 1993 and $1.525 billion in 1992. As previously discussed, the
deposits acquired in 1994 and 1993 contributed to the significant growth in
those years. Throughout 1992 and 1993, funding costs declined, mirroring the
general interest rate movement. While the direction of interest rates changed in
1994, the effect on Susquehanna was mitigated by the lag in the rise in the
rates on certificates of deposits until late in the year and minimal rate
increases in the core savings and the interest-bearing transaction accounts. The
weighted average cost of funds in 1994, 1993, and 1992 was 3.4%, 3.6%, and 4.6%,
respectively. Table 1 shows the volumes and average rates paid on the major
classes of interest bearing liabilities.
Contributing to the maintenance of the net interest margin at 4.9% was the
growth in non-interest bearing demand deposits as volumes average $229.1 million
in 1994 compared to $197.8 million in 1993 and $184.5 million in 1992. Also,
equity capital rose by $14.8 million in 1994 and $15.8 million during 1993 and
is a contributing factor to the net interest margin.
A-21
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
- ------------------------------------------------------------------------------------------------------------------------------------
1994 Versus 1993 1993 Versus 1992
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
Short-term investments $ (681) $ 618 $ (63) $ 384 $ (355) $ 29
Investment securities:
Taxable 3,050 (1,959) 1,091 1,714 (3,277) (1,563)
Tax-advantaged 1,715 (747) 968 (264) (1,088) (1,352)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 4,765 (2,706) 2,059 1,450 (4,365) (2,915)
Loans and leases, net:
Taxable 8,039 (2,034) 6,005 664 (8,770) (8,106)
Tax-advantaged 115 (190) (75) 495 (355) 140
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net 8,154 (2,224) 5,930 1,159 (9,125) (7,966)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $12,238 $(4,312) $7,926 $ 2,993 $(13,845) $(10,852)
====================================================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 520 $ (914) $ (394) $ 711 $ (3,597) $ (2,886)
Savings 1,011 (1,357) (346) 1,861 (2,625) (764)
Time 1,191 (996) 195 (2,781) (6,616) (9,397)
Short-term borrowings 1,303 482 1,785 (179) (203) (382)
Long-term debt (416) (329) (745) (103) (284) (387)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 3,609 $(3,114) $ 495 $ (491) $(13,325) $(13,816)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin $ 8,629 $(1,198) $7,431 $ 3,484 $ (520) $ 2,964
====================================================================================================================================
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.
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 purpose of the review is to assess loan
quality, 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, and
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 Maryland, and to a lesser extent
northeastern New Jersey, Delaware, West Virginia, and the southern tier of New
York State.
A-22
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, 1994. As
illustrated in Table 3, the provision for loan losses was $4.0 million for 1994
compared to $5.1 million in 1993. Net charge-offs, as seen in Table 3, were $1.9
million compared with $2.0 million in 1993. As a result, the allowance for loan
and lease losses at December 31, 1994, was 1.63% of period-end loans and leases,
or $23.8 million, compared with 1.66% or $21.7 million at December 31, 1993.
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.
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 a non-accrual
status if it is not 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 1994 and 1993 was $1,106,000 and $653,000, respectively.
Interest income which would have been recorded on these loans under the original
terms was $2.3 million and $1.6 million, respectively. At December 31, 1994,
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. The total non-performing assets at December 31, 1994, and
1993, of $29.5 and $27.1 million, respectively, includes $5.3 million and $9.0
million, respectively, in other real estate acquired through foreclosure. Also
included in 1994 is a restructured loan totaling $6.9 million which had
previously been identified as a potential problem loan.
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 esti-
TABLE 3--Provision and Allowance for Loan and Lease Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, January 1 $ 21,717 $ 18,026 $ 16,435 $ 14,793 $ 14,330
Allowance acquired in mergers -- 515 -- -- --
Additions to provision for loan and lease losses
charged to operations 3,987 5,130 4,721 4,869 5,021
Loans and leases charged off during the year:
Commercial, financial, agricultural, and leases 1,258 1,080 1,446 1,492 1,207
Real estate--mortgage 191 157 676 841 2,390
Consumer 1,503 1,864 2,065 1,534 1,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 2,952 3,101 4,187 3,867 5,319
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged-off:
Commercial, financial, agricultural, and leases 305 209 389 255 167
Real estate--mortgage 28 25 37 5 144
Consumer 760 913 631 380 450
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,093 1,147 1,057 640 761
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,859 1,954 3,130 3,227 4,558
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 23,845 $ 21,717 $ 18,026 $ 16,435 $ 14,793
====================================================================================================================================
Average loans and leases outstanding $1,382,111 $1,287,078 $1,275,431 $1,278,155 $1,242,701
Period-end loans and leases 1,466,186 1,309,907 1,282,457 1,288,981 1,270,714
Net charge-offs as a percentage of average loans
and leases 0.13% 0.15% 0.25% 0.25% 0.37%
Allowance as a percentage of period-end loans
and leases 1.63 1.66 1.41 1.28 1.16
A-23
TABLE 4--Non-Performing Assets
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------
Loans contractually past due 90 days
and still accruing $14,450 $ 6,574 $ 7,836 $ 6,917 $11,713
=============================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural, and leases $ 2,161 $ 2,981 $ 2,577 $ 3,743 $ 2,898
Real estate--mortgage 14,856 14,992 12,576 12,316 12,915
Consumer 198 131 693 134 115
Restructured loans 6,941 -- -- -- 38
Other real estate owned 5,341 8,995 10,787 8,555 8,136
- -------------------------------------------------------------------------------------------------------------
Total non-performing assets $29,497 $27,099 $26,633 $24,748 $24,102
=============================================================================================================
Total non-performing assets as a percentage of period-
end loans and leases and other real estate owned 2.00% 2.05% 2.06% 1.91% 1.88%
=============================================================================================================
mated 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.
Loans with principal and/or interest delinquent 90 days or more which are
still accruing interest were $14.4 million at December 31, 1994, up from $6.6
million at December 31, 1993. This increase is primarily the result of one hotel
loan, which had been previously identified as a potential problem loan, falling
in the over 90-day category at year-end. 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 in a 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, 1994, such loans, not included
in Table 4, amounted to $24.4 million of which $11.1 million are residential
construction and development properties. 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 sale 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 13.8%, 15.4%, and 15.4% for 1994, 1993, and
1992, respectively.
Excluding security transactions and a gain on the sale of other real estate
owned of $1.3 million which was recorded in 1993, other income was less than the
1993 results by $187,000. Service charges on deposit accounts rose $151,000
primarily due to volume increases. Commissions and fees were higher by $259,000,
and other operating income was down $596,000 excluding the $1.3 million gain
recorded in 1993. The major contributor to this decrease was net gains on sales
of mortgages.
Security gains realized from the sale of available-for-sale securities and
early redemptions were $999,000 in 1994, compared to $230,000 in 1993.
A-24
Other Expense
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 (detailed in Table 5) incurred in operating
Susquehanna's business.
The inclusion of the Central offices beginning in September 1993 and the
Allegany offices beginning in July 1994 have influenced the comparisons between
the 1994 and 1993 periods as well as expenses relating to pending acquisitions
and costs relating to the sale of other real estate which occurred in December
1994. Salaries and employee benefits rose $2.5 million, or 7.3%, in 1994 over
1993. Occupancy and equipment costs rose $159,000, or 3.3%. The FDIC insurance
expenses were $118,000 higher and all other expenses rose $4.0 million and are
detailed in Table 5. These factors contributed to the $6.7 million or 10.2%
increase in non-interest expenses for 1994 over 1993.
TABLE 5--Analysis of Other Expenses
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1994 1993 1992
- --------------------------------------------------------------------------------
Advertising, marketing,
and public relations $ 1,606 $ 1,700 $ 1,437
Amortization of
acquisition costs 1,843 1,614 1,595
Audits and examinations 845 712 660
Communications 1,033 933 836
Directors' fees 1,041 931 952
Legal and professional 2,452 1,360 1,752
Life Insurance Company
related expenses 690 741 745
Other real estate 1,649 801 925
Outside services 2,411 2,074 1,866
PA shares/capital stock tax 1,498 1,460 1,414
Postage 1,358 1,282 1,232
Stationery and supplies 2,200 1,596 1,594
All other 5,245 4,706 4,594
- --------------------------------------------------------------------------------
Total $23,871 $19,910 $19,602
================================================================================
Income Taxes
Susquehanna's effective tax rate for 1994 was 29.9% compared to 30.0% in 1993,
which included a $475,000 charge to recognize the tax liability for the Central
loan loss reserve. Excluding such charges, the effective tax rates for 1994,
1993, and 1992 were 29.9%, 28.5%, and 27.8%, respectively.
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. The cumulative effect of
SFAS 109 was adopted prospectively by Susquehanna in the first quarter of 1993.
The adoption of SFAS 109 increased deferred tax assets by $1,023,000. The
offsetting credit was recognized in the Consolidated Statement of Income as a
"cumulative effect of a change in accounting principle."
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, 1994, 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
On December 31, 1993, Susquehanna adopted 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, but, 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. Through the
operation of this accounting procedure, the upward movement of interest rates
between December 31, 1993, and December 31, 1994, has caused the total equity of
Susquehanna to be impacted negatively by $13.2 million as the "unrealized gains
or losses for available-for sale securi-
A-25
ties," changed from a positive $5.4 to a negative $7.9 million. 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 be identified as "available-for-sale." While SFAS 115 requires
segregation 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, 1994, Susquehanna held no securities of
one issuer, other than the 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.
TABLE 6--Carrying Value of Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to-
Dollars in thousands for-Sale Maturity for-Sale Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $184,494 $ 10,948 $206,071 $ 1,000 $181,013
U.S. Government agencies 20,932 28,506 32,371 12,500 7,568
State and municipal -- 120,582 -- 95,341 91,697
Other securities 68,505 19,002 110,220 -- 68,210
Mortgage-backed securities 84,989 44,913 57,401 36,425 116,171
Equity securities 15,125 -- 11,634 -- 10,840
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $374,045 $223,951 $417,697 $145,266 $475,499
====================================================================================================================================
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1994, which includes the $45.5 million acquired in the
Allegany acquisition, was 11.9%, or $156.3 million. Commercial, financial, and
agricultural loans increased $11.5 million primarily due to the Allegany
acquisition. As a result of improved economic conditions and specific loan
programs, real estate mortgage loans and consumer loans increased by $112.8
million and $33.7 million, respectively. As noted in Table 11, Susquehanna's
loan portfolio contains no significant concentrations other than geographic.
Susquehanna's 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 $102.7 million at year-end, and an additional
$66.0 million was lent against junior liens on residential properties. Senior
liens on 1-4 family residential properties totaled $492.5 million, and much of
the $223.9 million in loans secured by non-farm, non-residential properties
represented collateralization of operating lines, or term loans that finance
equipment, inventory, or receivables.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 1995 consist of $62.3 million with fixed rate pricing and $58.5 million
with variable rate pricing.
A-26
TABLE 7--Investment Securities
The following table shows the maturities of investment securities at fair
value and amortized cost as of December 31, 1994, 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 $64,908 $119,586 -- -- $184,494
Amortized cost 65,373 124,088 -- -- 189,461
Yield 5.6% 6.1% -- -- 5.9%
U.S. Government agencies
Fair value $ 3,968 $ 16,964 -- -- $ 20,932
Amortized cost 3,992 18,050 -- -- 22,042
Yield 5.5% 5.8% -- -- 5.7%
Corporate debt securities
Fair value $25,834 $ 41,652 $ 1,019 -- $ 68,505
Amortized cost 26,051 43,681 1,065 70,797
Yield 5.6% 6.2% 7.3% -- 6.0%
Mortgage-backed securities`
Fair value $ 1,490 $ 24,096 $35,448 $23,955 $ 84,989
Amortized cost 1,542 25,575 37,537 24,975 89,629
Yield 5.5% 5.6% 5.4% 6.2% 5.7%
Equity securities
Fair value $ 15,125
Amortized cost 14,443
Yield 6.6%
Held-to-Maturity:
U.S. Treasury
Fair Value $ 1,003 $ 9,655 -- -- $ 10,658
Amortized cost 1,000 9,948 -- -- 10,948
Yield 8.5% 6.8% -- -- 7.0%
U.S. Government agencies
Fair value -- $ 21,715 $ 5,451 -- $ 27,166
Amortized cost -- 22,506 6,000 -- 28,506
Yield -- 6.5% 6.1% -- 6.4%
Corporate debt securites
Fair value -- $ 18,224 -- -- $ 18,224
Amortized cost -- $ 19,002 -- -- $ 19,002
Yield -- 7.0% -- -- 7.0%
Mortgage-backed securities
Fair value -- $ 8,476 $ 7,417 $26,417 $ 42,310
Amortized cost -- 8,687 6,874 29,352 44,913
Yield -- 7.1% 6.3% 5.9% 6.2%
State and municipal
Fair value $23,572 $73,829 $15,664 $ 5,612 $118,677
Amortized cost 23,581 75,228 16,186 5,587 120,582
Yield 6.9% 6.3% 7.7% 10.2% 6.8%
Total securities:
Fair value $591,080
Amortized cost 610,323
Yield 6.2%
A-27
TABLE 8--Loan and Lease Portfolio
- ---------------------------------------------------------------------------------------------------------------
At December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 186,013 12.7% $ 174,544 13.3%
Real estate--construction 84,886 5.8 81,962 6.3
Real estate--mortgage 955,357 65.1 842,551 64.3
Consumer 223,963 15.3 190,307 14.5
Leases 15,967 1.1 20,543 1.6
- ---------------------------------------------------------------------------------------------------------------
Total $1,466,186 100.0% $1,309,907 100.0%
===============================================================================================================
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 $ 91,890 $ 53,582 $ 40,541 $186,013
Real estate--construction 58,208 23,051 3,627 84,886
- ---------------------------------------------------------------------------------------------------------------
$150,098 $ 76,633 $ 44,168 $270,899
===============================================================================================================
Rate sensitivity of loans with maturities greater than one year:
Variable rate $ 58,537
Fixed rate 62,264
- ---------------------------------------------------------------------------------------------------------------
$120,801
===============================================================================================================
TABLE 10--Allocation of Allowance for Loan and Lease Losses
- ---------------------------------------------------------------------------------------------------------------
At December 31
- ---------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 3,616 $ 3,521 $ 2,772 $ 1,954 $ 3,093
Real estate--construction 3,175 3,336 2,128 2,256 936
Real estate--mortgage 5,530 3,794 2,885 2,456 2,506
Consumer 3,247 2,879 1,604 2,260 931
Leases 453 303 283 192 222
Unused commitments 1,515 -- -- -- --
Unallocated 6,309 7,884 8,354 7,317 7,105
- --------------------------------------------------------------------------------------------------------------
Total $23,845 $21,717 $18,026 $16,435 $14,793
==============================================================================================================
A-28
- ------------------------------------------------------------------------------------------------------------------------------------
1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
$184,568 14.4% $ 191,419 14.9% $ 258,893 20.4%
78,119 6.1 78,570 6.1 67,607 5.3
813,919 63.4 811,031 62.9 738,459 58.1
187,009 14.6 192,542 14.9 191,416 15.1
18,842 1.5 15,419 1.2 14,339 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
$1,282,457 100.0% $1,288,981 100.0% $1,270,714 100.0%
====================================================================================================================================
TABLE 11--Loan Concentrations
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania and Maryland. At December 31, 1994, Susquehanna's
portfolio included the following concentrations:
- ------------------------------------------------------------------------------------------------------------------------------------
As a % of % Non-performing
Dollars in thousands Permanent Construction All Other Total Total Loans in each category
- ------------------------------------------------------------------------------------------------------------------------------------
Housing developments $43,008 $34,394 $ 3,688 $81,090 5.5 5.7
Office buildings and warehouses 56,479 10,495 462 67,436 4.6 1.6
Agriculture 35,511 -- 17,874 53,385 3.6 1.2
Retailing 9,621 -- 40,148 49,769 3.4 3.8
Manufacturing 14,258 738 10,813 25,809 1.8 1.3
Hotels/motels 28,612 202 1,198 30,012 2.0 27.0
Deposits
Susquehanna's deposit base is consumer-oriented, consisting of time deposits,
primarily certificates of deposits of various terms, interest-bearing demand
accounts, savings accounts, and demand deposits. The average amounts of deposits
by type are summarized in Table 12. Susquehanna does not rely upon time deposits
of $100,000 or more as a principal source of funds. Table 13 presents a
breakdown of maturities of time deposits of $100,000 or more as of December 31,
1994.
TABLE 12--Average Deposit Balances
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1994 1993 1992
- --------------------------------------------------------------------------------
Demand deposits $ 229,096 $ 197,758 $ 184,463
Interest-bearing
demand deposits 465,265 444,320 422,323
Savings deposits 399,241 362,130 305,819
Time deposits 692,180 665,219 718,867
- --------------------------------------------------------------------------------
Total $1,785,782 $1,669,427 $1,631,472
================================================================================
TABLE 13--Deposit Maturity
Maturity of time deposits of $100,000 or more at
December 31, 1994
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Three months or less $ 9,059
Over three months through six months 7,427
Over six months through twelve months 11,339
Over twelve months 17,579
- --------------------------------------------------------------------------------
Total $45,404
================================================================================
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 increasing Susquehanna's
liability balances. Liquidity can also be gen-
A-29
erated from maturing or readily marketable assets. The carrying value of
investment securities maturing within one year amounted to $120.8 million at
December 31, 1994. These maturing investments represent 20.2% of total
investment securities. Short-term investments amounted to $15.6 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 margin
because the repricing of products does occur at varying time intervals.
Susquehanna employs a variety of methods 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, 1994. These
estimates include anticipated paydowns on mortgage-backed securities, which
were derived from "stress tests" performed on these securities at December 31,
1994. 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 the 4.9% level.
TABLE 14--Interest Rate Sensitivity
- --------------------------------------------------------------------------------------------------------------
At December 31, 1994 1-90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- --------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 15,503 $ 100 $ $ $ 15,603
Investments 26,807 28,084 78,133 464,972 597,996
Loans and leases, net of unearned income* 562,816 72,831 173,150 640,174 1,448,971
- --------------------------------------------------------------------------------------------------------------
Total $ 605,126 $ 101,015 $ 251,283 $1,105,146 $2,062,570
==============================================================================================================
Liabilities
Interest-bearing demand $ 464,052 $ $ $ $ 464,052
Savings 398,423 398,423
Time 176,712 115,107 137,959 267,628 697,406
Time in denominations of $100,000 or more 9,059 7,427 11,339 17,579 45,404
Short-term borrowings 51,739 17,613 4,000 73,352
Long-term debt 3,850 8,012 5,500 31,952 49,314
- --------------------------------------------------------------------------------------------------------------
Total $1,103,835 $ 148,159 $ 158,798 $ 317,159 $1,727,951
==============================================================================================================
Interest Sensitivity Gap
Periodic $ (498,709) $ (47,144) $ 92,485 $ 787,987
Cumulative (545,853) (453,368) 334,619
Cumulative gap as a percentage of earning assets -24.2% -26.5% -22.0% 16.2%
*Does not include nonaccrual loans.
Capital Adequacy
At December 31, 1992, risk-adjusted capital requirements became fully
implemented. The 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 in-
A-30
tangibles, while total capital represents Tier 1 capital plus certain allowable
long-term debt and the portion of the allowance for loan losses equal to 1.25%
of risk-adjusted assets.
The maintenance of a strong capital base at both the parent company level
as well as at each bank affiliate is an important aspect of Susquehanna's
philosophy. Table 15 illustrates these capital ratios for each bank subsidiary,
all bank subsidiaries combined, and Susquehanna on a consolidated basis. The
components of the bank subsidiaries' capital, as well as Susquehanna's capital,
are also included in Table 15. 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.
TABLE 15--Capital Adequacy
- -----------------------------------------------------------------------------------------------------------------------------
Total Total
At December 31, 1993 Required First Spring Banking Susque-
Dollars in thousands Ratio Farmers National W'port F&M Citizens Grove AFSB Subsid. hanna
- -----------------------------------------------------------------------------------------------------------------------------
Tier I Capital Ratio (A) 4.00% 16.07% 12.75% 15.50% 9.07% 13.32% 14.58% 14.59% 13.78% 14.20%
Total (Tier II) Capital Ratio (B) 8.00% 17.32% 14.00% 16.75% 10.36% 14.54% 15.83% 15.27% 15.16% 15.45%
Leverage Ratio (C) 4.00% 11.90% 8.90% 11.41% 5.73% 9.02% 9.75% 7.47% 9.36% 9.89%
- -----------------------------------------------------------------------------------------------------------------------------
The following table shows the components of capital:
- -----------------------------------------------------------------------------------------------------------------------------
Tier I Capital:
Common stockholders' equity $ 91,490 $ 22,417 $ 25,136 $ 35,150 $ 14,707 $ 6,007 $ 19,189 $ 214,096 $ 225,336
Less: Treasury stock -- -- -- -- -- -- -- -- (373)
Disallowed intangible assets -- -- -- (7,073) -- -- (242) (7,315) (8,708)
- -----------------------------------------------------------------------------------------------------------------------------
Total Tier I Capital 91,490 22,417 25,136 28,077 14,707 6,007 18,947 206,781 216,255
- -----------------------------------------------------------------------------------------------------------------------------
Tier II Capital:
Qualifying allowance for loan
and lease losses 7,119 2,198 2,028 1,973 1,343 515 883 18,755 19,032
Qualifying long-term debt -- -- -- 2,000 -- -- -- 2,000 --
- -----------------------------------------------------------------------------------------------------------------------------
Total Tier II Capital 7,119 2,198 2,028 3,973 1,343 515 883 20,755 19,032
- -----------------------------------------------------------------------------------------------------------------------------
Total Capital (Tier I and Tier II) $ 98,609 $ 24,615 $ 27,164 $ 32,050 $ 16,050 $ 6,522 $ 19,830 $ 227,536 $ 235,287
=============================================================================================================================
Risk-adjusted assets $569,482 $175,809 $162,207 $309,471 $110,388 $41,200 $129,892 $1,500,407 $1,522,540
=============================================================================================================================
(A) Tier I capital divided by year-end risk-adjusted assets, as defined by
the risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier I capital divided by average fourth quarter total assets less
disallowed intangible assets.
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").
Susquehanna acquired Atlanfed and its subsidiaries for approximately 1.2
million shares of its common stock, and Reisterstown for approximately $28
million in cash. Fairfax will be acquired for approximately $63 million in
cash. Susquehanna expects to finance the Fairfax acquisition and has financed
the Reisterstown acquisition through offerings of debt and equity. In February
1995, Susquehanna issued $50 million of its 9% fixed-rate subordinated notes
due 2005.
In the first quarter of 1995, Susquehanna received approval from both the
Federal Reserve and the OTS to acquire Atlanfed and Reisterstown. The Atlanfed
acquisition closed on April 1, 1995, and Reisterstown on April 21, 1995, while
the Fairfax merger is not expected to close until December 1995 or the first
quarter of 1996. Atlanfed was accounted for as a pooling while Reisterstown was
accounted for as a purchase. Fairfax will be accounted for as a purchase. See
Note 2 to Susquehanna's Consolidated Financial Statements for financial
information regarding Atlanfed, Reisterstown, and Fairfax. The Management's
Discussion and Analysis, Quarterly Financial Data, and Selected Financial Data
have been restated to reflect the Atlanfed merger accounted for as a pooling-of-
interests.
A-31
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December
31, 1994 and 1993 are as follows:
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Quarter Ended Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
- ------------------------------------------------------------------------------------------------------------------------
Interest income $34,600 $35,729 $39,460 $40,844 $35,996 $35,590 $35,515 $35,919
Interest expense 12,874 13,041 14,870 15,703 14,520 13,941 13,865 13,667
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 21,726 22,688 24,590 25,141 21,476 21,649 21,650 22,252
Provision for loan losses 998 978 1,013 998 2,026 1,110 993 1,001
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 20,728 21,710 23,577 24,143 19,450 20,539 20,657 21,251
- ------------------------------------------------------------------------------------------------------------------------
Other income 4,758 3,422 3,714 3,204 4,550 3,760 3,683 3,823
Other expenses 17,554 16,984 18,864 19,308 16,241 16,327 16,785 16,651
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary
item/cumulative effect 7,932 8,148 8,427 8,039 7,759 7,972 7,555 8,423
Applicable income taxes 2,507 2,440 2,427 2,344 2,230 2,261 2,552 2,484
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item/cumulative effect 5,425 5,708 6,000 5,695 5,529 5,711 5,003 5,939
Extraordinary item (732) -- -- -- -- -- -- --
Cumulative effect -- -- -- -- 1,023 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 4,693 $ 5,708 $ 6,000 $ 5,695 $ 6,552 $ 5,711 $ 5,003 $ 5,939
========================================================================================================================
Earnings per common share:
Before extraordinary item/cumulative effect $ 0.47 $ 0.49 $ 0.52 $ 0.49 $ 0.49 $ 0.51 $ 0.44 $ 0.51
Net income $ 0.40 $ 0.49 $ 0.52 $ 0.49 $ 0.58 $ 0.51 $ 0.44 $ 0.51
Per share data has been adjusted to reflect five-for-four stock split in
August 1993.
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 1994 and 1993.
- -------------------------------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------------------------------
Quarterly Quarterly
Market Price Dividend Market Price* Dividend*
- -------------------------------------------------------------------------------------------------------
First Quarter $23.75-28.00 $ .250 $22.00-24.20 $ .224
Second Quarter $23.75-25.00 $ .250 $24.20-27.80 $ .224
Third Quarter $23.50-24.25 $ .250 $24.80-28.75 $ .224
Fourth Quarter $21.25-24.75 $ .270 $26.75-28.75 $ .250
*Adjusted to reflect the five-for-four stock split in August, 1993.
A-32
APPENDIX B
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-8 (File No. 33-92512) of our report, which includes an explanatory
paragraph related to changes in the method of accounting for investments and
income taxes in 1993, dated February 13, 1995, except for Note 2 and the first
paragraph of our report as to which the date is April 1, 1995, on our audits of
the consolidated financial statements of Susquehanna Bancshares Inc., as of
December 31, 1994 and 1993, and for the three years in the period ended December
31, 1994, included in this Form 8-K.
/s/ Coopers & Lybrand L.L.P.
Harrisburg, Pennsylvania
November 20, 1995