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 21, 1995
- --------------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
Susquehanna Bancshares, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 0-10674 23-2201716
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File Number) ID No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 626-4721
- --------------------------------------------------------------------------------
(registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 and
related footnotes for Fairfax Financial Corporation as of September 30, 1995 and
1994 and for the years ended September 30, 1995, 1994 and 1993. Fairfax
Financial Corporation is expected to be acquired by Susquehanna Bancshares, Inc.
in December 1995 or the first quarter of 1996.
This financial information referred to above will be incorporated by
reference into the Registrant's registration statements on Form S-3 which will
be filed shortly with the Securities and Exchange Commission.
Attached hereto as Appendix B is the Consent of Independent
Accountants.
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 21, 1995 By:/s/Richard M. Cloney
-----------------------
Richard M. Cloney
Vice President and Secretary and
duly authorized signatory
3
Appendix A
Independent Auditors' Report
----------------------------
The Board of Directors
Fairfax Financial Corporation
Baltimore, Maryland:
We have audited the accompanying consolidated statements of financial condition
of Fairfax Financial Corporation and subsidiaries (the Company) as of September
30, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three year
period ended September 30, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fairfax Financial
Corporation and subsidiaries as of September 30, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three year
period ended September 30, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" as of October 1, 1994.
/s/ KPMG Peat Marwick LLP
-------------------------
November 14, 1995
A-1
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1995 and 1994
Assets 1995 1994
------ ---- ----
Cash on hand and in banks, including interest
bearing deposits of $14,900,055 in 1995 and,
$7,895,855 in 1994 (note 2) $ 17,725,903 11,891,460
Federal funds sold 6,271,660 6,283,459
Securities purchased under agreements to resell (note 3) -- --
Investment securities, fair value $1,997,180 in 1995
and $3,954,400 in 1994 (note 4) 1,997,180 3,997,954
Mortgage-backed securities, fair value $16,515,895
in 1995 and $16,774,786 in 1994 (notes 5 and 14) 16,573,127 17,509,083
Loans held for sale (note 14) 8,364,755 7,890,098
Loans receivable, net (notes 6, 9 and 14) 408,502,102 345,659,266
Investments in real estate, net (notes 7 and 9) 3,871,580 4,949,471
Investments in and advances to joint ventures, net (note 8) -- --
Federal Home Loan Bank of Atlanta stock, at cost (note 10) 3,177,500 2,953,100
Property and equipment, net (note 11) 628,330 858,282
Prepaid expenses and other assets 7,046,947 5,076,942
Income taxes recoverable (note 15) 738,736 --
Deferred income taxes (note 15) 767,377 613,312
----------- -----------
$ 475,665,197 407,682,427
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits (note 13) $ 390,136,407 340,945,053
Borrowed funds (note 14) 36,658,680 22,952,463
Advance payments by borrowers for taxes,
insurance and ground rents 494,497 415,975
Accrued expenses and other liabilities 4,457,324 3,359,608
Income taxes payable -- 1,003,900
----------- -----------
Total liabilities 431,746,908 368,676,999
----------- -----------
Stockholders' equity (notes 12, 20 and 21):
Common stock, $1 par value per share; 150,000
shares authorized, 60,000 shares issued and outstanding 60,000 60,000
Non-voting common stock, $.01 par value per share;
9,000,000 shares authorized, issued and outstanding 90,000 90,000
Additional paid-in capital 284,538 284,538
Retained income -- substantially restricted 43,475,167 38,570,890
Unrealized net holding gains on available-for-sale
portfolios, net of taxes 8,584 --
----------- -----------
Total stockholders' equity 43,918,289 39,005,428
Commitments and contingencies (notes 6, 11, 18 and 21) ----------- -----------
$ 475,665,197 407,682,427
=========== ===========
See accompanying notes to consolidated financial statements.
A-2
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Interest income:
Loans receivable $ 33,869,405 24,415,606 23,617,051
Mortgage-backed securities 1,133,956 1,635,027 4,450,218
Investment securities 182,118 231,489 288,349
Federal funds sold and other investments 1,290,244 1,448,586 2,101,432
---------- ---------- ----------
Total interest income 36,475,723 27,730,708 30,457,050
---------- ---------- ----------
Interest expense:
Interest on deposits (note 13) 18,126,660 13,182,045 14,053,876
Interest on borrowed funds 1,633,125 498,584 1,332,134
---------- ---------- ----------
Total interest expense 19,759,785 13,680,629 15,386,010
---------- ---------- ----------
Net interest income 16,715,938 14,050,079 15,071,040
Provision for (recovery of) losses on loans (note 9) 45,233 (110,686) 37,303
---------- ---------- ----------
Net interest income after provision for
(recovery of) losses on loans 16,670,705 14,160,765 15,033,737
---------- ---------- ----------
Noninterest income:
Fees and service charges 1,288,920 1,579,552 1,298,961
Gain on sale of loans, net 1,062,061 3,467,754 2,962,832
Gain on sale of mortgage-backed securities -- 1,891,610 --
Gain on sale of investment securities -- 30,980 --
Other 294,925 133,109 227,398
---------- ---------- ----------
Total noninterest income 2,645,906 7,103,005 4,489,191
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 5,029,180 5,804,602 6,232,642
Occupancy 1,152,605 1,260,711 1,277,503
SAIF deposit insurance premiums 806,902 787,071 807,101
Loss on investments in real estate, net (note 7) 535,498 458,965 1,406,800
Legal fees expense (recovery) and costs of
litigation 1,879,937 (245,569) 4,737,687
Other 2,836,417 2,418,817 2,372,016
---------- ---------- ----------
Total noninterest expense 12,240,539 10,484,597 16,833,749
---------- ---------- ----------
Equity in net income (loss) of joint ventures -- 278,576 (197,231)
---------- ---------- ----------
Income before income tax provision 7,076,073 11,057,749 2,491,948
Income tax provision (note 15) 2,171,795 4,457,181 989,149
---------- ---------- ----------
Net income $ 4,904,277 6,600,568 1,502,799
========== ========== ==========
See accompanying notes to consolidated financial statements.
A-3
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1995, 1994 and 1993
Unrealized
net holding
gains on
available- Total
Non-voting Additional for-sale stock-
Common common paid-in Retained portfolios, holders'
stock stock capital income net equity
----- ----- ------- ------ --- ------
Balance at September 30, 1992 $ 60,000 -- 284,538 30,557,523 -- 30,902,061
Net income -- year ended
September 30, 1993 -- -- -- 1,502,799 -- 1,502,799
------- ------- -------- ----------- ------ -----------
Balance at September 30, 1993 60,000 -- 284,538 32,060,322 -- 32,404,860
Distribution of non-voting
common stock (note 1) -- 90,000 -- (90,000) -- --
Net income -- year ended
September 30, 1994 -- -- -- 6,600,568 -- 6,600,568
------- ------- -------- ----------- ------ -----------
Balance at September 30, 1994 60,000 90,000 284,538 38,570,890 -- 39,005,428
Net income -- year ended
September 30, 1995 -- -- -- 4,904,277 -- 4,904,277
Adjustment to unrealized
net holding gains, net
of taxes -- -- -- -- 8,584 8,584
------- ------- -------- ----------- ------ -----------
Balance at September 30, 1995 $ 60,000 90,000 284,538 43,475,167 8,584 43,918,289
======= ======= ======== =========== ====== ===========
See accompanying notes to consolidated financial statements.
A-4
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $ 4,904,277 6,600,568 1,502,799
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans and
investments in real estate 293,379 300,514 942,389
Depreciation and amortization of property
and equipment 274,010 319,850 315,104
Amortization of premium (discount)
on mortgage-backed securities 8,886 7,027 (13,387)
Amortization of premium (discount) on
investment securities (61,261) 45,562 64,010
Amortization of unearned loan fees (133,645) (172,421) (338,214)
(Increase) decrease in deferred income taxes (154,065) 297,329 (297,134)
(Increase) decrease in prepaid expenses
and other assets (1,970,005) 1,121,511 (245,008)
(Increase) decrease in accrued expenses
and other liabilities 1,097,716 (1,286,481) 948,713
(Decrease) increase in income taxes payable (1,742,636) 794,762 388,995
Gain on sale of investment securities -- (30,980) --
Gain on sale of mortgage-backed securities -- (1,891,610) --
Gain on sale of loans (1,062,061) (3,467,754) (2,962,832)
(Gain) loss on sale of investments in
real estate, net (203,112) (270,100) 15,146
Loss on retirement of property and equipment -- -- 2,309
Mortgage banking activity:
Originations of loans held for sale (122,819,668) (165,310,233) (236,995,876)
Mortgage loans sold 124,095,652 179,705,119 243,618,658
------------ ------------ ------------
Net cash provided by operating
activities 2,527,467 16,762,663 6,945,672
------------ ------------ ------------
Cash flows from investing activities:
(Decrease) increase in securities purchased
under agreements to resell -- 21,000,000 (8,520,000)
Maturities:
Available-for-sale investment securities 8,000,000 -- --
Investment securities -- 4,000,000 6,000,000
Principal repayments:
Available-for-sale mortgage-backed securities 118,372 -- --
Held-to-maturity mortgage-backed securities 836,886 -- --
Mortgage-backed securities -- 5,952,466 3,530,287
Sales of investment securities -- 7,467,774 --
Purchases of:
Available-for-sale investment securities (5,940,419) -- --
Held-to-maturity mortgage-backed securities (17,151) -- --
Investment securities -- (9,424,489) (6,120,313)
(Continued)
A-5
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
1995 1994 1993
---- ---- ----
Cash flows from investing activities, continued:
Proceeds from sale of mortgage-backed securities $ -- 35,223,922 --
Loan repayments net of originations 18,068,255 13,305,057 34,650,407
Purchases of loans (85,025,770) (141,392,326) (27,320,238)
Loan fees received 98,293 247,666 245,484
Proceeds from sale of loans 3,683,514 34,063,103 --
Proceeds from sale of investments in real estate 2,499,917 5,209,897 2,902,635
Advances for investments in real estate (1,734,355) (1,507,012) (1,797,051)
(Increase) decrease in investments in and advances
to joint ventures -- (151,424) 647,605
Federal Home Loan Bank of Atlanta stock purchases (224,400) -- --
Federal Home Loan Bank of Atlanta stock dividends -- (72,900) (105,000)
Purchases of property equipment (44,058) (59,560) (138,491)
------------- ------------- ------------
Net cash provided by (used) in
investing activities (59,680,916) (26,137,826) 3,975,325
------------- ------------- ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 49,191,354 (6,424,829) (14,136,224)
Decrease (increase) in short-term borrowings
(original maturities less than 3 months) (293,783) 5,619,703 518,327
Proceeds from advances from Federal Home
Loan Bank of Atlanta 26,000,000 11,000,000 7,200,000
Repayments of advances to Federal Home Loan
Bank of Atlanta (12,000,000) (3,000,000) --
Increase (decrease) in advance payments by
borrowers for taxes, insurance and
ground rents 78,522 (463,845) 249,829
------------- ------------- ------------
Net cash provided (used) by
financing activities 62,976,093 6,731,029 (6,168,068)
------------- ------------- ------------
Net increase (decrease) in cash
and cash equivalents 5,822,644 (2,644,134) 4,752,929
Cash and cash equivalents at beginning of period 18,174,919 20,819,053 16,066,124
------------- ------------- ------------
Cash and cash equivalents at end of period $ 23,997,563 18,174,919 20,819,053
============= ============= ============
Noncash activities:
Loans transferred to real estate acquired
through foreclosure $ 432,705 503,787 1,562,678
Loans to facilitate sale of real estate
acquired through foreclosure 700,000 622,214 1,096,810
Loans held for sale transferred to loans held
for investment -- 13,033,194 --
Distribution of non-voting common stock -- 90,000 --
============= ============= ============
See accompanying notes to consolidated financial statements.
A-6
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995, 1994 and 1993
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Business
--------
Fairfax Financial Corporation (the Company), through its wholly-owned
subsidiary, Fairfax Savings, A Federal Savings Bank (the Bank) and its
subsidiaries, provides a full range of banking services to individual
and corporate customers, primarily in the mid-Atlantic region. The
Bank is subject to competition from other financial institutions. The
Bank and the Company are also subject to the regulations of certain
federal agencies and undergo periodic examinations by those regulatory
authorities.
(b) Basis of Financial Statement Presentation
-----------------------------------------
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. The consolidated
financial statements include the accounts of the Company and the Bank
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statements of financial
condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and the valuation of investments in real estate. In
connection with these determinations, management obtains independent
appraisals for significant properties and/or prepares fair value
analyses as appropriate.
A major portion of the Company's loans is secured by single family
homes. Substantially all of these loans are in the mid-Atlantic
region. Accordingly, the ultimate collectibility of the Company's loan
portfolio is susceptible to changes in market conditions in the mid-
Atlantic region.
The Company's investment in real estate is composed of properties
located primarily in the mid-Atlantic region. The ultimate recovery of
the carrying amounts of its investments in real estate is susceptible
to changes in market conditions in those areas.
Management believes that the allowances for losses on loans and
investments in real estate are adequate. While management uses
available information to recognize losses on loans and investments in
real estate, future additions to the allowances may be necessary based
on changes in economic conditions, particularly in the mid-Atlantic
region. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's
allowances for losses on loans and investments in real estate. Such
agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to
them at the time of their examination.
A-7
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(c) Investment Securities and Mortgage-backed Securities
----------------------------------------------------
As of October 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," (SFAS No. 115), which addresses the
accounting and reporting for certain investments in debt and equity
securities.
SFAS No. 115 requires classification of investments into three
categories. Debt securities that the Company has the positive intent
and ability to hold to maturity are classified as held-to-maturity and
recorded at amortized cost. Debt and equity securities not classified
as held-to-maturity and equity securities with readily determinable
fair values are classified as trading securities if bought and held
principally for the purpose of selling them in the near term. Trading
securities are reported at fair value, with unrealized gains and
losses included in earnings. Investments not classified as held-to-
maturity or trading are considered available-for-sale and are reported
at fair value, with unrealized holding gains and losses excluded from
earnings and reported as a separate component of retained income (net
of tax effects). Fair value is determined based on bid prices
published in financial newspapers or bid quotations received from
securities dealers.
Premiums and discounts on investment and mortgage-backed securities
are amortized over the term of the security using the interest method.
Gain or loss on sale of investments available-for-sale is reflected in
income at the time of sale using the specific identification method.
(d) Loans Held for Sale
-------------------
Loans held for sale consisted of mortgage loans of $8,364,755, at
September 30, 1995 and $7,890,098 at September 30, 1994. Loans held
for sale are carried at the lower of cost or market as determined by
outstanding commitments from investors or current investor yield
requirements calculated on an aggregate basis.
(e) Property and Equipment
----------------------
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are
recorded using the straight-line method over the estimated useful
lives of the related assets or over the initial terms of the various
leases.
A-8
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(f) Investments in Real Estate
--------------------------
Real estate held for development and sale includes real estate
development projects, which are recorded at the lower of cost or
estimated net realizable value, and improved and unimproved real
estate acquired through foreclosure or in-substance foreclosure, which
is recorded initially at the lower of cost or estimated fair value and
subsequently at the lower of book value or estimated fair value less
estimated costs to sell. Management estimates fair value based on
appraisals and/or cash flow analyses. Costs relating to improving such
properties are capitalized and costs relating to holding such
properties are charged to expense.
(g) Income Taxes
------------
The Company and its subsidiaries file consolidated federal income tax
returns.
Effective October 1, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets (including tax loss
carryforwards) are recognized only to the extent that it is more
likely than not that such amounts will be realized based on
consideration of available evidence, including tax planning strategies
and other factors.
(h) Discounts/Premiums on Loans Purchased
-------------------------------------
Discounts and premiums on mortgage loans purchased are amortized over
the contractual or weighted average life of the loans using the
interest method. Prepayments speed estimates were derived from actual
historical prepayment experience in the mortgage pass-through market.
(i) Loan Origination and Commitment Fees
------------------------------------
For loans held for investment, loan origination and commitment fees
and direct loan origination costs are deferred and amortized into
income over the contractual life of the loan using the interest
method. Under certain circumstances, commitment fees are recognized
over the commitment period or upon the expiration of the commitment.
A-9
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(i) Loan Origination and Commitment Fees, continued
-----------------------------------------------
For loans held for sale, all loan origination and commitment fees and
direct loan origination costs are deferred until the related loans are
sold. The deferred fees and costs are recognized as a component of
gains and losses.
(j) Provision for Losses on Loans Receivable
----------------------------------------
In October 1994, the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan" was amended by Statement 118 "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and
Disclosures" (collectively referred to as "Statement 114"). Statement
114 is effective for fiscal years beginning after December 15, 1994.
Statement 114 addresses the accounting by creditors for impairment of
certain loans. It is generally applicable for all loans except large
groups of smaller-balance homogenous loans, including residential
mortgage loans and consumer installment loans that are collectively
evaluated for impairment. It also applies to all loans that are
restructured in a troubled debt restructuring involving a modification
of terms. However, if a loan that was restructured in a troubled debt
restructuring involving a modification of terms before the effective
date of Statement 114 is not impaired based on the terms specified by
the restructuring agreement, a creditor may continue to account for
the loan in accordance with the provisions of Statement 15,
"Accounting for Troubled Debt Restructurings" prior to its amendment
by Statement 114.
Statement 114 requires that impaired loans be measured on the present
value of expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. A loan is
considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Company
adopted the provisions of Statement 114 as of October 1, 1995.
Adoption of Statement 114 will not have a material impact on the
Company's financial statements.
(k) Financial Instruments
---------------------
The Company uses financial options (interest-rate options) as a hedge
against exposure to interest rate risk on certain portions of
anticipated loan production through the purchase of puts or the
writing of calls. The instruments are based on notional amounts which
approximate the amount of production to be hedged. The underlying
securities subject to the contracts are either FNMA or GNMA mortgage-
backed securities based on the type of loan in production. Premiums
paid and received are amortized over the option periods, which are
generally sixty to ninety days. Gains and losses on exercise of the
puts and calls are used to offset the effects of changes in interest
rates on related anticipated loan production. Unamortized net premiums
as of September 30, 1995 and 1994 were approximately $0 and $15,000,
respectively.
A-10
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(l) Capital Stock
-------------
In June, 1994 the stockholders of the Company approved an amendment to
the Company's charter to provide for the authorization of 9,000,000
shares of non-voting common stock (par value $.01 per share).
Thereupon, the Company distributed 150 shares of non-voting common
stock for each share of voting common stock issued and outstanding.
Subsequent to the distribution, the Company had outstanding 60,000
shares of voting common stock and 9,000,000 shares of non-voting
common stock. Since, there is no active market for the stocks in order
to establish fair value, the amount of par value of the shares issued
was capitalized from retained income, in accordance with generally
accepted accounting principles.
(m) Statements of Cash Flows
------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and in banks and federal funds sold.
The Company paid interest on deposits, including interest credited
directly to customer accounts, and borrowings aggregating $19,743,740,
$13,518,363 and $15,471,169 during 1995, 1994 and 1993, respectively.
(2) Cash
----
Cash in the amount of $1,043,120 and $786,989 at September 30, 1995 and
1994, respectively, is restricted for payment of mortgagor principal,
interest, taxes, and insurance which relate to payments received in
connection with the Company's mortgage servicing operation. At September
30, 1994, cash in the amount of $1,184,039, was restricted for collateral
for an appeal bond.
(3) Securities Purchased Under Agreements to Resell
-----------------------------------------------
The Company purchases securities under agreements to resell (repurchase
agreements). The amounts advanced under the agreements represent short-term
loans.
There were no securities purchased under agreements to resell during the
year ended September 30, 1995.
Securities purchased under agreements to resell averaged $10,567,123 during
the year ended September 30, 1994. The maximum amount outstanding at any
month-end was $28,000,000 during the year ended September 30, 1994.
A-11
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Investment Securities
Investment securities consisting of United States government and sponsored
corporation obligations, are summarized as follows at September 30:
1995
------------------------------------------------------------------
Amortized Unrealized Fair Carrying
cost losses value value
---- ------ ----- -----
Available-for-sale
------------------
United States Treasury
notes due within 1 year $ 1,999,634 2,454 1,997,180 1,997,180
========= ===== ========= =========
1994
-----------------------------
Amortized Fair
cost value
---- -----
United States Treasury notes due:
Due within one year $ 2,002,708 1,999,400
Due one through five years 1,995,246 1,955,000
--------- ---------
$3,997,954 3,954,400
========= =========
At September 30, 1994 gross unrealized losses on investment securities
totaled $43,554.
(5) Mortgage-Backed Securities
--------------------------
Mortgaged-backed securities are summarized as follows at September 30:
1995
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Carrying
cost gains losses value value
---- ----- ------ ----- -----
Held-to-maturity:
Federal Home Loan
Mortgage Corporation
(FHLMC) $ 7,931,825 -- 65,923 7,865,902 7,931,825
Federal National Mortgage
Association (FNMA) 525,069 3,230 -- 528,299 525,069
Government National
Mortgage Association
(GNMA) 7,463,180 5,461 -- 7,468,641 7,463,180
----------- ------- ------- ----------- -----------
15,920,074 8,691 65,923 15,862,842 15,920,074
Available-for-sale:
FHLMC 636,613 16,440 -- 653,053 653,053
----------- ------- ------- ----------- -----------
$ 16,556,687 25,131 65,923 16,515,895 16,573,127
=========== ======= ======= =========== ===========
A-12
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Mortgage-Backed Securities, Continued
-------------------------------------
1994
-------------------
Amortized Fair
cost value
---- -----
FLHMC $ 8,768,833 8,467,040
FNMA 596,713 584,079
GNMA 8,143,837 7,723,667
---------- ----------
$ 17,509,083 16,774,786
========== ==========
At September 30, 1994, gross unrealized gains and gross unrealized losses
on mortgage-backed securities totaled $23,918 and $758,215, respectively.
At September 30, 1994, GNMA securities which are considered held-to-
maturity with an amortized cost of $6,817,054, and a market value of
$6,465,300, were pledged as collateral for an appeal bond.
(6) Loans Receivable
----------------
Loans receivable and accrued interest thereon are summarized as follows at
September 30:
1995 1994
---- ----
First mortgage loans:
Conventional $ 304,952,674 296,636,550
Construction 20,867,703 14,678,007
------------ ------------
Total mortgage loans 325,820,377 311,314,557
Loans secured by savings accounts 615,600 698,545
Home equity loans and second mortgages 32,282,929 18,549,921
Consumer loans and lines of credit 58,466,891 24,566,133
Accrued interest receivable, net of allowance
for loss on delinquent interest of $135,729
and $79,763 at September 30, 1995 and 1994,
respectively 2,804,639 1,948,891
Dealer reserve 148,129 231,196
------------ ------------
420,138,565 357,309,243
Less:
Allowance for losses 3,556,374 3,544,073
Undisbursed portion of loans in-process 7,812,796 7,179,063
Unearned discounts (premiums), net (3,980) 629,394
Unearned loan fees, net 271,273 297,447
------------ ------------
Loans receivable, net $ 408,502,102 345,659,266
============ ============
A-13
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans Receivable, Continued
---------------------------
As of September 30, 1995, conventional loans secured by mortgages on real
estate consisted of $263,749,093 in 1 to 4 family residential loans,
$498,000 in 5 or more family residential loans, $21,520,329 in commercial
property loans, $7,417,170 in mortgage lines of credit and $11,768,082 in
land development loans.
As of September 30, 1994, conventional loans secured by mortgages on real
estate consisted of $262,206,000 in 1 to 4 family residential loans,
$868,000 in 5 or more family residential loans, $25,728,000 in commercial
property loans, $2,424,000 in mortgage lines of credit and $5,411,000 in
land development loans.
As of September 30, 1995 and 1994, construction loans were secured by 1 to
4 family residential mortgage loans.
The Company's lending operations are concentrated in the mid-Atlantic
region. Substantially all of the Company's loans receivable are mortgage
loans secured by residential and commercial property and consumer loans
secured by automobiles and boats. Loans are extended only after evaluation
by management of borrowers' credit worthiness, value of collateral and
other relevant factors on a case-by-case basis.
The Company generally does not lend over 95% of the appraised value of a
property and generally requires private mortgage insurance on residential
first mortgages with loan-to-value ratios in excess of 80%. In addition,
the Company generally obtains personal guarantees of partial to full
repayment from the borrower and/or others for construction, commercial and
multi-family residential loans and disburses the proceeds of construction
and similar loans only as work progresses on the related projects.
Residential lending is generally considered to involve less risk than other
forms of lending although repayment of these loans is dependent to some
extent on economic and market conditions in the Company's primary lending
area. Multi-family residential, commercial and construction loan repayments
are generally dependent on the operations of the related properties or the
financial condition of the borrower or guarantor. Accordingly, repayment of
such loans can be more susceptible to adverse conditions in the real estate
market and the national and local economy. Repayment of consumer loans is
largely dependent on the condition of the regional economy and the used
automobile and boat market.
A-14
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans Receivable, Continued
---------------------------
The contractual or notional amounts of financial instruments with off-
balance sheet (statement of financial condition) credit risk were as
follows as of September 30:
Contract or Notional Amount
---------------------------
1995 1994
---- ----
Financial instruments representing credit risk:
Commitments to extend credit to qualified buyers
of residential units, exclusive of undisbursed
portion of loans-in-process $ 4,139,000 4,591,000
Commercial loan commitments 4,652,750 --
Undisbursed lines of credit (including mortgage lines
of credit, home equity lines and overdraft lines) 16,814,843 23,457,000
Unsecured standby letters of credit 854,104 809,000
Financial guarantees 16,461,000 11,692,000
Financial instruments with notional amounts
which exceed the amount of credit risk:
Put options purchased -- 4,000,000
Call options sold -- 2,000,000
The Company is a party to financial instruments with off-balance sheet
(statement of financial condition) risk in the normal course of business to
meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit, financial guarantees and options purchased
and written in connection with the management of interest rate risk on loan
production. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial condition. The contract or notional amounts of those
instruments reflect the Company's involvement in particular classes of
financial instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but generally may include cash, marketable
securities, and property. Mortgage loan commitments, exclusive of the
undisbursed portion of loans-in-process, are at market terms at the time of
closing. Substantially all of these commitments expire in less than 90
days.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Company holds collateral
supporting those commitments when deemed necessary.
A-15
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans Receivable, Continued
---------------------------
In addition, certain first mortgage residential loans sold by a subsidiary
of the Company are subject to recourse to that subsidiary as determined in
the loan sales agreements and represent financial guarantees of the
subsidiary. The recourse provisions generally require the subsidiary of the
Company to repurchase the buyer's interest in individual loans in the event
the borrower becomes delinquent on scheduled payments within a specified
period from the sale of the loan.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
recourse obligations on loans sold and financial guarantees is represented
by the contractual amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. For put options purchased and call
options written, the contract or notional amounts do not represent exposure
to credit loss. The commitments to extend credit and financial guarantees
are secured by residential real estate. Generally, the security is adequate
to satisfy the amount of commitment or guarantee and therefore management
believes that an allowance for loss is not required.
The Company generally enters into two types of interest-rate options,
purchase of puts and sale of calls. The put options are contracts that
allow the Company to sell a financial instrument to the seller or "writer"
of the option at a specified price during a specified period of time, and
call options allow the purchaser to sell a financial instrument to the
Company at a specified price during a specified period of time. The
underlying instruments are FNMA or GNMA mortgage-backed securities. These
options are used to hedge interest rate risk on a portion of anticipated
loan production. A premium is paid for the put and the Company would
normally exercise the right of sale at a gain in a rising interest rate
environment to offset the effect of rates committed on related anticipated
loan production. The calls are sold for a premium and would normally be
exercised in a declining interest rate environment and the loss incurred by
the Company would offset anticipated loan sales at higher rates committed
on related anticipated loan production. The contracts are settled for the
difference between the strike or exercise price and the market price on the
date the put or call is exercised. While the call option contracts are
accounted for as a part of the hedging strategy, the Company bears the risk
of an unfavorable change in the price of the financial instrument
underlying the option.
At September 30, 1995 and 1994 nonaccrual loans were $4,209,497 and
$1,453,214, respectively. At September 30, 1995 and 1994, past due 90 days
and accruing loans amounted to $869,669 and $1,013,989, respectively. In
addition to the nonaccrual loans identified above, management has
identified other loans within the commercial loan portfolio that, while
current in required payments, have exhibited potential weaknesses that
could weaken the asset and increase the level of risk in the future. Such
loans amounted to $477,433 at September 30, 1995 and $2,908,437 at
September 30, 1994. Management believes that the allowance for losses is
adequate to provide for potential losses on these loans.
A-16
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans Receivable, Continued
---------------------------
Interest income that would have been recognized on nonaccrual loans during
the years ended September 30 if the loans had been current in accordance
with their original terms and the interest income actually recognized are
summarized below:
1995 1994 1993
---- ---- ----
Interest income that would have been
recognized $ 395,733 143,783 238,070
Interest income recognized 264,050 58,077 88,312
------- ------- -------
Interest income foregone $ 131,683 85,706 149,758
======= ======= =======
At September 30, 1995, 1994 and 1993 the Company was servicing for third-
party investors whole loans and participating interests in loans of
approximately $63,060,000, $83,874,000 and $79,993,000, respectively, which
are not reflected in the consolidated statements of financial condition.
Such servicing operations result in annual service fees which generally
range from .25% to .44% based on unpaid principal balances of loans
serviced.
(7) Investments in Real Estate
--------------------------
Investments in real estate are summarized as follows at September 30:
1995 1994
---- ----
Held for development and sale $ -- 248,146
Real estate owned:
Acquired through foreclosure 4,031,375 4,859,120
Ground rents, at cost 238,900 240,900
--------- ---------
4,270,275 5,348,166
Less -- allowance for losses 398,695 398,695
--------- ---------
$ 3,871,580 4,949,471
========= =========
Loss on investments in real estate, net, is summarized as follows for the
years ended September 30:
1995 1994 1993
---- ---- ----
Loss (gain) on sale, net $ (203,112) (270,100) 15,146
Provision for losses 248,146 411,200 905,086
Other expenses, net 490,464 317,865 486,568
-------- -------- ---------
$ 535,498 458,965 1,406,800
======== ======== =========
A-17
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Investments in and Advances to Joint Ventures
---------------------------------------------
The Company has had through various subsidiaries, investments in joint
ventures formed for the purpose of acquiring and developing real estate for
sale.
The investments were liquidated during 1994.
Following are the income statements for the investments in joint ventures
for the years ended September 30:
1994 1993
---- ----
Operations
----------
Sales of developed real estate $ 265,950 2,440,850
Gain on forgiveness of debt 447,952 --
------- ---------
713,902 2,440,850
------- ---------
Cost of sales 248,791 2,184,965
Operating expenses 47,268 459,179
------- ---------
296,059 2,644,144
------- ---------
Net income (loss) $ 417,843 (203,294)
======= =========
The loss amounts which relate directly to the Company do not agree directly
to the consolidated financial statements due to various percentages of
ownership, timing differences in recognizing loan fees, interest, certain
expenses, delinquent interest and charge-offs of advances.
(9) Allowance for Losses on Loans Receivable and Investments in Real Estate
-----------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1995 1994 1993
---- ---- ----
Beginning balance $ 3,544,073 3,863,000 3,999,897
Provision for (recovery of) losses 45,233 (110,686) 37,303
Charge-offs (69,207) (323,950) (207,174)
Recoveries 36,042 115,709 32,974
--------- --------- ---------
Ending balance $ 3,556,374 3,544,073 3,863,000
========= ========= =========
A-18
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Allowance for Losses on Loans Receivable and Investments in Real Estate,
------------------------------------------------------------------------
Continued
---------
Activity in the allowance for losses on investments in real estate is as
follows for the years ended September 30:
1995 1994 1993
---- ---- ----
Beginning balance $ 398,695 924,018 1,648,840
Provision for losses 248,146 411,200 905,086
Charge-offs (248,146) (998,983) (1,636,379)
Recoveries -- 62,460 6,471
-------- -------- ----------
Ending balance $ 398,695 398,695 924,018
======== ======== ==========
(10) Federal Home Loan Bank of Atlanta Stock
---------------------------------------
The Company is required to maintain an investment in the stock of the
Federal Home Loan Bank (FHLB) of Atlanta in an amount equal to at least 1%
of the unpaid principal balances of the Company's residential mortgage
loans or .3% of total assets or 5% of its outstanding advances from the
FHLB, whichever is greater. Purchases and sales of stock are made directly
with the FHLB of Atlanta at par value.
(11) Property and Equipment
----------------------
Property and equipment are summarized as follows at September 30:
Estimated
1995 1994 useful lives
---- ---- ------------
Land $ 157,994 157,994 --
Buildings and improvements 398,045 398,045 15 - 25 years
Furniture, fixtures and equipment 1,915,749 2,319,140 3 - 12 years
Leasehold improvements 384,490 401,822 12 - 20 years
--------- ---------
Total, at cost 2,856,278 3,277,001
Less accumulated depreciation and
amortization 2,227,948 2,418,719
--------- ---------
$ 628,330 858,282
========= =========
A-19
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Property and Equipment, Continued
---------------------------------
At September 30, 1995, the Company was obligated under noncancellable long-
term operating leases for eleven of its branch offices and administrative
offices. These leases expire on various dates and have approximate
aggregate rentals as follows:
1996 $ 502,672
1997 470,724
1998 204,112
1999 118,264
2000 75,103
Subsequent years 1,465,880
---------
Total minimum lease payments $ 2,836,755
=========
Rent expense was $572,749, $652,118 and $682,686 for the years ended
September 30, 1995, 1994 and 1993, respectively.
(12) Insurance of Accounts and Regulatory Capital
--------------------------------------------
The Federal Deposit Insurance Corporation (FDIC), through the Savings
Association Insurance Fund (SAIF), insures deposits of accountholders up to
$100,000. To provide for this insurance, the Bank must pay an annual
premium. The Bank is also required to maintain an investment in the stock
of the Federal Home Loan Bank. See note 10.
In connection with the insurance of its deposits, the Bank is required to
maintain a minimum level of regulatory capital. The regulatory capital
regulations require minimum levels of tangible and core capital of 1.5% and
3%, respectively, of adjusted total assets and risk-based capital of 8% of
risk-weighted assets. For risk-based capital purposes, the Bank is
permitted to include its general valuation loan loss allowance subject to a
limitation of 1.25% of risk-weighted assets. At September 30, 1995, the
Bank was in compliance with the regulatory capital requirements, with
tangible, core and risk-based capital ratios of 8.77%, 8.77% and 15.03%,
respectively.
Certain investments, including investments in subsidiaries involved in
activities which are not permissible for national banks, are required to
be excluded from capital, except that any such investments made as of
April 12, 1989 are subject to a phased-in exclusion at specified rates on
July 1 of each year from 1990 to 1994. The percentages of such investments
subject to exclusion from capital are as follows: 1991, 25%; 1992, 40%;
1993, 60%; and 1994, 100%. On July 1, 1992 the increase in the percentage
exclusion to 40% was postponed until October 31, 1992. On October 30, 1992,
the Office of Thrift Supervision (OTS) issued an order to immediately
freeze current capital deductions for investments and loans made by savings
associations to their real estate subsidiaries at 25 percent pursuant to
authority granted under the Housing and Community Development Act of 1992.
The immediate freeze was effective until January 1, 1993. Savings
associations that wanted to take advantage of an extended capital phase-out
schedule after January 1 were required to submit
A-20
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Insurance of Accounts and Regulatory Capital, Continued
-------------------------------------------------------
an application to their OTS regional office by December 1, 1992. During
November 1992, the Bank submitted its application to the OTS and received
approval in December 1992. At September 30, 1995 and September 30, 1994,
the Bank's net investment subject to the phased-in exclusion from capital
was approximately $838,000 and $2,255,000, respectively, and is effective
until July 1996.
On a fully phased-in basis the Bank would have had tangible, core and risk-
based capital ratios of 8.72%, 8.72% and 14.95% at September 30, 1995,
respectively.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
was signed into law on March 19, 1991, and regulations implementing the
prompt correction action provisions became effective on March 19, 1992.
FDICIA also includes significant changes to the legal and regulatory
environment for insured depository institutions, including reduction in
insurance coverage for certain kinds of deposits, increased supervision by
the federal regulatory agencies, increased reporting requirements for
insured institutions, and new regulations concerning internal controls,
accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in
declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." Institutions categorized as "undercapitalized" or worse
are subject to certain restrictions, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the
payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring, among other things.
To be considered "well capitalized," an institution must generally have a
leverage capital ratio of at least 5%, a tier one risk-based capital ratio
of at least 6% and a total risk-based capital ratio of at least 10%. At
September 30, 1995, the Bank met the criteria required to be considered
"well-capitalized" under this regulation.
Dividends may not be paid if doing so would cause the Bank to fail to meet
the minimum levels of regulatory capital. See also note 20 for additional
restrictions on the payment of dividends.
The Office of Thrift Supervision adopted a final rule in August of 1993
incorporating an interest rate risk (IRR) component into the risk-based
capital rules. The new rule is effective January 1, 1994, however,
institutions have not yet been required to meet the new standards. The IRR
component is a dollar amount that will be deducted from total capital for
the purpose of calculating an institution's risk-based capital requirement
and is measured in terms of the sensitivity of its net portfolio value
(NPV) to changes in interest rates. NPV is the difference between incoming
and outgoing discounted cash flows from assets, liabilities, and off-
balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point change in market
interest rates. A resulting
A-21
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Insurance of Accounts and Regulatory Capital, Continued
-------------------------------------------------------
change in NPV of more than 2% of the estimated market value of its assets
will require the institution to deduct from its capital 50% of that excess
change. The rule provides that the OTS will calculate the IRR component
quarterly for each institution. Based on the information provided by the
OTS on the Bank's NPV as of June 30, 1995, the new requirement would not
have required an adjustment to risk-based capital as of September 30, 1995.
The Bank's premiums for deposit insurance are based upon rates established
for the Savings Association Insurance fund ("SAIF") of the FDIC. As SAIF
remains substantially undercapitalized, legislation has been introduced in
Congress (i) to recapitalize SAIF, (ii) to merge SAIF with the Bank
Insurance Fund ("BIF"), and (III) to provide for the payment of interest on
the Financing Corporation ("FICO") bonds issued in 1987. Under the proposed
legislation, a significant one-time special assessment may have to be paid
by the Bank (amounting to $.85 to $.90 per $100 of SAIF insured deposits or
between $3.3 million and $3.5 million based on deposits at September 30,
1995). Further, the Bank would have to pay annually approximately $.025 per
$100 of insured deposits (in addition to regular deposit insurance
premiums) to fund FICO interest payments. Although passage of the
legislation appears likely, the ultimate form of the legislation, including
the timing and amount of any payments to be made thereunder, cannot be
determined at this time.
(13) Deposits
--------
Deposits are summarized as follows at September 30:
Weighted Average Rate
---------------------
1995 1994
---- ----
Certificates 5.95% 4.90%
Passbook 2.80 2.81
NOW accounts:
Non-interest bearing -- --
Fixed rate 2.53 2.55
Money market deposit accounts:
Monthly 3.14 2.95
Other intervals 4.74 3.97
A-22
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Deposits, Continued
-------------------
1995 1994
--------------------- --------------------
Amount % Amount %
------ - ------ -
Certificate $ 264,639,579 67.8% 179,796,016 52.7%
Statement savings 5,879,474 1.5 6,990,592 2.0
NOW accounts:
Non-interest bearing 6,539,426 1.7 8,021,573 2.4
Fixed rate 16,422,856 4.2 18,109,218 5.3
Money market deposit accounts:
Monthly 17,247,535 4.4 23,105,398 6.8
Other intervals 79,407,537 20.4 104,922,256 30.8
----------- ----- ----------- -----
$ 390,136,407 100.0% 340,945,053 100.0%
=========== ===== =========== =====
Certificate accounts mature
as follows:
Under 12 months $ 186,294,426 70.4% 115,293,136 64.1%
12 to 24 months 39,177,946 14.8 48,428,458 26.9
24 to 36 months 23,200,463 8.8 10,917,661 6.1
36 to 48 months 15,966,744 6.0 5,156,761 2.9
----------- ----- ----------- -----
$ 264,639,579 100.0% 179,796,016 100.0%
=========== ===== =========== =====
The aggregate amount of deposits with a minimum denomination of $100,000
was $29,752,652 and $27,238,185 at September 30, 1995 and 1994,
respectively.
Accrued interest payable on deposits was $81,418 and $124,305 at September
30, 1995 and 1994, respectively, and is included in other liabilities.
Interest expense on deposits for the years ended September 30 consists of
the following:
1995 1994 1993
---- ---- ----
Certificates $ 11,976,570 6,752,889 6,022,536
Passbooks 175,321 211,917 246,777
NOW accounts 422,276 450,834 489,318
Money market deposit accounts 5,552,493 5,766,405 7,295,245
---------- ---------- ----------
$ 18,126,660 13,182,045 14,053,876
========== ========== ==========
A-23
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Borrowed Funds
--------------
Borrowed funds are summarized as follows at September 30:
1995 1994
---- ----
Advances from the Federal Home Loan Bank with
interest rates and fiscal year maturities as follows:
5.38 -- 5.60%, due in 1995 $ -- 12,000,000
5.90 -- 5.94%, due in 1996 17,000,000 1,000,000
6.47 -- 6.64%, due in 1997 7,200,000 2,200,000
6.68 -- 6.71%, due in 1998 5,000,000 --
---------- ----------
29,200,000 15,200,000
Dollar reverse repurchase agreement 7,458,680 7,752,463
---------- ----------
$ 36,658,680 22,952,463
========== ==========
Under a blanket floating lien security agreement with the FHLB, the Company
is required to maintain, as collateral for its advances, qualifying first
mortgage loans in an amount equal to 100% of the advances.
The Company sells securities under agreements to repurchase in the form of
dollar reverse repurchase agreements and fixed coupon reverse repurchase
agreements. Under dollar reverse repurchase agreements, securities are sold
and transferred to a second party broker for cash. The agreement states
that securities with identical rates and par values within the accepted
"good delivery" standard will be repurchased. With fixed-coupon reverse
repurchase agreements securities underlying the agreement are book entry
securities which are held in trust with a third-party custodian. Both
agreements are treated as financings and the obligations to repurchase
securities sold are reflected as liabilities in the consolidated statements
of financial condition. The dollar amount of securities underlying the
current agreement to repurchase remain in the asset accounts. Securities
sold under agreements to repurchase averaged $7,654,661, $596,343 and
$26,226,205 during 1995, 1994 and 1993, respectively. The maximum amounts
outstanding at any month-end were $8,035,625 $7,752,463 and $55,500,794
during 1995, 1994 and 1993, respectively. The agreements mature within 30
days. At September 30, 1995, mortgage-backed securities with a fair value
of $7,468,641 and amortized cost of $7,463,180 were sold under the
agreement to repurchase, with an approximate weighted average rate paid of
5.77%. At September 30, 1994, mortgage-backed securities with a fair value
of $7,694,456 and amortized cost of $8,020,167 were sold under the
agreement to repurchase, with an approximate weighted average rate paid of
4.13%.
A-24
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Income Taxes
------------
The provision for income taxes is composed of the following for the years
ended September 30:
1995 1994 1993
---- ---- ----
Current:
Federal $ 1,902,951 3,439,702 1,046,419
State 353,900 720,150 239,864
--------- --------- ---------
2,256,851 4,159,852 1,286,283
--------- --------- ---------
Deferred:
Federal (69,639) 243,437 (243,277)
State (15,417) 53,892 (53,857)
--------- --------- ---------
(85,056) 297,329 (297,134)
--------- --------- ---------
Provision for income taxes $ 2,171,795 4,457,181 989,149
========= ========= =========
The types of temporary differences that give rise to significant portions
of the deferred tax asset at September 30 are presented below.
1995 1994
---- ----
Deferred tax assets:
Allowance for losses on loans and investments
in real estate $ 1,562,100 1,504,930
Deferred fees 133,452 216,237
Accrued compensation -- 96,550
--------- ----------
Total deferred tax assets 1,695,552 1,817,717
--------- ----------
Deferred tax liabilities:
Property and equipment (24,384) (49,503)
Investments in real estate (133,229) (429,808)
Federal Home Loan Bank stock (363,638) (363,638)
Tax bad debt reserve in excess of base year (273,422) (227,954)
Prepaid expenses (133,502) (133,502)
--------- ----------
Total deferred tax liabilities (928,175) (1,204,405)
--------- ----------
Net deferred tax asset $ 767,377 613,312
========= ==========
A-25
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Income Taxes, Continued
-----------------------
A reconciliation between the provision for income taxes and the amount
computed by multiplying income before income taxes by the Federal income
tax rate of 34% is as follows for the years ended September 30:
1995 1994 1993
---- ---- ----
Tax at Federal statutory rate $ 2,405,865 3,759,635 847,262
State income taxes, net of
Federal income tax benefit 223,399 510,868 122,764
Reversal of previously provided
Federal taxes (457,469) -- --
Other -- 186,678 19,123
--------- --------- -------
$ 2,171,795 4,457,181 989,149
========= ========= =======
Income taxes paid during the years ended September 30, 1995 and 1994
aggregated approximately $3,397,000 and $3,365,000, respectively.
The Company has qualified under provisions of the Federal Internal Revenue
Code which permit it to deduct from taxable income a provision for bad
debts based on a percentage of taxable income before such deduction, or
based on actual experience. The Company's deduction is computed based on
actual experience.
Statement 109 continues the exception for providing a deferred tax
liability on bad debt reserves for tax purposes of qualified thrift
lenders, such as the Company, that arose in fiscal years beginning before
March 31, 1987. Such bad debt reserve for the Company amounted to
approximately $14,900,000 at September 30, 1995, with an income tax effect
of approximately $5,754,000 at September 30, 1995. This bad debt reserve
would become taxable if the Company does not maintain certain qualified
assets as defined, if the reserve is charged for other than bad debt losses
or if the Company does not maintain the Bank's thrift charter.
(16) Related Party Transactions
--------------------------
A branch office of the Bank is leased from a partnership in which the
Chairman of the Board and a stockholder of the Company are partners. Total
rental payments under this lease for the years ended September 30, 1995,
1994 and 1993 amounted to $40,434, $38,253 and $38,253, respectively.
First mortgage loans serviced for others, which are not included in the
Company's assets, included $8,738,835 and $9,480,353 of loans which are
serviced for the Chairman of the Board and another stockholder of the
Company at September 30, 1995 and 1994, respectively; the Company charges a
normal servicing fee for servicing these loans.
A-26
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Profit Sharing Plan and Trust
-----------------------------
The Bank has defined contribution profit sharing and 401k plans covering
substantially all employees. Employees who have worked 1,000 hours or more,
completed one year of service, as defined in the Plan agreements, and have
reached the age of 21 are eligible to participate. Contributions to the
profit sharing plan by the Bank are discretionary and contributions by
participants are not allowed. The Bank does not contribute to the 401k
plan. Participants' contributions to the 401k plan as a percentage of their
annual compensation are subject to certain limitations. The total expense
relating to the profit sharing plan for the years ended September 30, 1995,
1994 and 1993 was $160,000, $205,852 and $303,500, respectively.
(18) Legal Proceedings
-----------------
The Company is a party to various lawsuits arising out of the normal course
of its business. Management of the Company does not anticipate that the
ultimate resolution of these cases, considered in the aggregate, will
materially affect the financial condition or results of operation of the
Company.
The Company was a party to various litigation as disclosed in prior years.
The costs resolving these matters are included in the accompanying
statements of income.
(19) Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (Statement 107) requires the Company
to disclose estimated fair values for certain on- and off-balance sheet
financial instruments. Fair value estimates, methods, and assumptions are
set forth below for the Company's financial instruments as of September 30,
1995 and 1994.
Cash on Hand and in Banks
-------------------------
The carrying amount for cash on hand and in banks approximates fair value
due to the short maturity of these instruments.
Federal Funds Sold
------------------
The carrying amount for federal funds sold approximates fair value due to
the overnight maturity of these instruments.
Securities Purchased Under Agreements to Resell
-----------------------------------------------
The carrying amount for securities purchased under agreements to resell
approximates fair value due to the short maturity of these instruments.
A-27
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Fair Value of Financial Instruments, Continued
----------------------------------------------
Investment Securities
---------------------
The fair value of investment securities is based on bid prices received
from an external pricing service or bid quotations received from securities
dealers. The carrying amounts and fair values of investment securities are
presented in note 4 to the consolidated financial statements.
Mortgage-backed Securities
--------------------------
The fair value of mortgage-backed securities is based on bid prices
received from an external pricing service or bid quotations received from
securities dealers. The carrying amounts and fair values of mortgage-backed
securities are presented in note 5 to the consolidated financial
statements.
Loans
-----
Loans were segmented into portfolios with similar financial
characteristics. Loans were also segmented by type such as residential,
multifamily and nonresidential, construction and land, second mortgage
loans, commercial, and consumer. Each loan category was further segmented
by fixed and adjustable rate interest terms and performing and
nonperforming categories.
The fair value of residential loans was calculated by discounting
anticipated cash flows based on weighted-average contractual maturity,
weighted-average coupon, prepayment assumptions and discount rate.
Prepayment speed estimates were derived from published historical
prepayment experience in the mortgage pass-through market and recent
issuance activity in the primary and secondary mortgage markets. The
discount rate for residential loans was calculated by adding to the
Treasury yield for the corresponding weighted average maturity associated
with each prepayment assumption a market spread as observed for mortgage-
backed securities with similar characteristics. The fair values of
multifamily and nonresidential loans were calculated by discounting the
contractual cash flows at the Bank's current nonresidential loan
origination rate. Construction, land and commercial loans, loans secured by
savings accounts and mortgage lines of credit were determined to be at fair
value due to their adjustable rate nature. The fair value of second
mortgage loans was calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflected
the credit and interest rate risk inherent in the portfolio. The fair value
of consumer loans was calculated by discounting the contractual cash flows
at the Company's current consumer loan origination rate.
The fair value for nonperforming loans was determined by reducing the
carrying value of nonperforming loans by the Company's historical loss
percentage for each specific loan category.
A-28
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Fair Value of Financial Instruments, Continued
----------------------------------------------
Loans, Continued
----------------
The carrying amounts and fair values of loans receivable consisted of the
following at September 30, respectively:
1995 1994
-------------------- --------------------
Carrying Fair Carrying Fair
amount value amount value
First mortgage loans $ 310,471,247 315,725,600 301,016,313 300,961,000
Second mortgage loans 32,282,929 32,505,000 18,549,921 18,831,000
Loans secured by savings
accounts 615,600 616,000 698,545 699,000
Mortgage lines of credit 7,417,170 7,417,000 2,423,536 2,424,000
Consumer loans 58,466,891 58,254,000 24,566,133 25,446,000
----------- ----------- ----------- -----------
409,253,837 414,517,600 347,254,448 348,361,000
Allowance for possible
losses 3,556,374 -- 3,544,073 --
----------- ----------- ----------- -----------
Total loans $ 405,697,463 414,517,600 343,710,375 348,361,000
=========== =========== =========== ===========
Accrued Interest Receivable
---------------------------
The carrying amount of accrued interest receivable approximates its fair
value.
Loans Held for Sale
-------------------
The fair value of mortgage loans held for sale was estimated based on
outstanding commitments from investors or current investor yield
requirements. The fair value of second mortgage loans was calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflected the credit and interest rate
risk inherent in the portfolio. The fair value of consumer loans was
calculated by discounting the contractual cash flows at the Bank's current
consumer loan origination rate.
The carrying amounts and fair values of loans held for sale consisted of
the following at September 30, respectively:
1995 1994
------------------ ------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Mortgage loans held for sale $ 8,364,755 8,543,830 7,890,098 7,991,000
========= ========= ========= =========
A-29
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Fair Value of Financial Instruments, Continued
----------------------------------------------
Deposits
--------
Under Statement 107, the fair value of deposits with no stated maturity,
such as noninterest bearing deposits, interest bearing now accounts, money
market and statement savings accounts, is equal to the carrying amounts.
The fair value of certificates of deposit was based on the discounted value
of contractual cash flows. The discount rate for certificates of deposit
was estimated using the rate currently offered for deposits of similar
remaining maturities.
The carrying value and estimated fair value of certificates of deposit at
September 30 were:
1995 1994
---- ----
Carrying value $ 264,639,579 179,796,016
Fair value 265,768,000 179,257,000
=========== ===========
Borrowed Funds
--------------
The fair value of borrowed funds was based on the discounted value of
contractual cash flows. The discount rate for borrowed funds was estimated
using the rate currently offered for borrowings of similar remaining
maturities.
The carrying amounts and fair values of borrowed funds consisted of the
following at September 30, respectively:
1995 1994
------------------- ------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Advances from the Federal
Home Loan Bank $ 29,200,000 29,265,000 15,200,000 15,144,000
Dollar reverse repurchase
agreements 7,458,680 7,459,000 7,752,463 7,752,000
---------- ---------- ---------- ----------
$ 36,658,680 36,724,000 22,952,463 22,896,000
========== ========== ========== ==========
Accrued Interest Payable
------------------------
The carrying amount of accrued interest payable approximates its fair
value.
A-30
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Fair Value of Financial Instruments, Continued
----------------------------------------------
Off-Balance Sheet Financial Instruments
---------------------------------------
The carrying amount of options at September 30, 1995 and 1994 of
approximately $0 and $15,000, respectively, represents accrued or deferred
income and fees arising from these financial instruments and the estimated
fair values represent the net unrealized gain. As of September 30, 1994,
the Company did not have any material unrealized gains or losses on options
outstanding. Accordingly, no fair value is attributed to these financial
instruments.
A significant portion of the Company's fixed rate commitments are presold
in the secondary market, therefore, they are not subject to interest rate
risk. The Company's adjustable rate commitments to extend credit move with
market rates and are not subject to interest rate risk. The rates and terms
of the Company's commitments to lend are competitive with others in the
various markets in which the Company operates. The carrying amounts are
reasonable estimates of the fair value of these instruments. Carrying
amounts are comprised of the unamortized fee income from these financial
instruments. See note 6 to the consolidated financial statements for the
amounts of such instruments.
The fair value of standby letters of credit at September 30, 1995 and 1994
of $4,000 and $3,000, respectively, is estimated by discounting the
remaining contractual fees over the term using the fees currently charged
to enter into similar agreements. Carrying amounts are comprised of the
unamortized fee income from these financial instruments. See note 6 to the
consolidated financial statements for the amounts of such instruments.
The disclosure of fair value amounts does not include the fair values of
any intangibles, including core deposit intangibles and mortgage servicing
rights. Core deposit intangibles represent the value attributable to total
deposits based on an expected duration of customer relationships. Mortgage
servicing rights represent the right to service mortgage loans owned by
third parties.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about financial instruments.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect estimates.
A-31
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Limitations on Capital Distributions
------------------------------------
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments
to stockholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") may, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year up to (i) 100% of its net
income to date during the calendar year plus the amount that would reduce
by one-half its surplus capital at the beginning of the calendar year or
(ii) 75% of its net income over the most recent four-quarter period. Any
additional capital distributions would require prior regulatory approval.
An institution that meets its regulatory capital requirement, but not its
fully phased-in capital requirement before or after its capital
distribution ("Tier 2 Association") may, after prior notice but without the
approval of the OTS, make capital distributions of: up to 75% of its net
income over the most recent four quarter period if it satisfies the risk-
based capital requirement that would be applicable to it on January 1,
1993, computed based on its current portfolio; up to 50% of its net income
over the most recent four quarter period if it satisfies the risk based
capital standard that was applicable to it on January 1, 1991, computed
based on its current portfolio; and up to 25% of its net income over the
most recent four quarter period if it satisfies its current risk-based
capital requirement. In computing the institution's permissible percentage
of capital distributions, previous distributions made during the prior four
quarter period must be included. A savings institution that does not meet
its current regulatory capital requirements before or after payment of a
proposed capital distribution ("Tier 3 Association") may not make any
capital distributions, without prior approval of the OTS. In addition, OTS
would prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice. In
addition, FDICIA provides that, as a general rule, a financial institution
may not make a capital distribution if it would be undercapitalized after
making the capital distribution. Also, an institution meeting the Tier 1
capital criteria which has been notified that it needs more than normal
supervision will be treated as a Tier 2 or Tier 3 institution unless the
OTS deems otherwise. As of September 30, 1995, the Bank was a Tier 1
Association.
(21) Proposed Acquisition
--------------------
The Company has entered into a purchase agreement with Susquehanna
Bancshares, Inc. (Susquehanna), a Pennsylvania bank holding company, that
will permit Susquehanna to acquire the Company in a cash transaction. It is
anticipated that the transaction will be completed during the first quarter
of 1996. Based on the terms of the agreement, the acquisition would be
accounted for using the purchase method of accounting, which requires that
the assets and liabilities acquired be recorded at estimated fair values.
The consolidated financial statements of the Company presented herein do
not reflect any adjustments for the estimated fair values of the assets and
liabilities of the Company that might be necessary as a result of this
transaction.
A-32
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) Condensed Financial Information (Parent Company Only)
-----------------------------------------------------
Information as to the financial position, results of operations and cash
flows of Fairfax Financial Corporation as of September 30, 1995 and 1994
and for each of the years in the three-year period ended September 30, 1995
is summarized below:
Statements of Financial Condition 1995 1994
--------------------------------- ---- ----
Assets:
Cash $ 445,249 767,125
Loan receivable, net 1,332,424 --
Equity in net assets of wholly-owned subsidiaries
(the Bank and its wholly-owned subsidiaries) 42,078,209 38,175,536
Other assets 62,977 62,977
---------- ----------
Total assets $ 43,918,859 39,005,638
========== ==========
Liabilities and Stockholder's Equity
------------------------------------
Liabilities:
Liabilities -- other $ 570 210
Stockholders' equity:
Common stock 60,000 60,000
Non-voting common stock 90,000 90,000
Additional paid-in capital 284,538 284,538
Retained income -- substantially restricted 43,483,751 38,570,890
---------- ----------
Total stockholders' equity 43,918,289 39,005,428
---------- ----------
Total liabilities and stockholders' equity $ 43,918,859 39,005,638
========== ==========
A-33
FAIRFAX FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(23) Condensed Financial Information (Parent Company Only), Continued
----------------------------------------------------------------
Statements of Income 1995 1994 1993
-------------------- ---- ---- ----
Interest income $ 20,159 20,880 1,768
Expenses 9,971 9,644 7,346
--------- --------- ---------
Income (loss) before equity in net income
of wholly-owned subsidiaries 10,188 11,236 (5,578)
Equity in net income of wholly-owned
subsidiaries 4,894,089 6,589,332 1,508,377
--------- --------- ---------
Net income $ 4,904,277 6,600,568 1,502,799
========= ========= =========
Statements of Cash Flows 1995 1994 1993
------------------------ ---- ---- ----
Cash flows from operating activities:
Net income $ 4,904,277 6,600,568 1,502,799
Adjustments to reconcile net income
to cash provided by (used in) operating
activities:
Equity in net income of subsidiaries (4,894,089) (6,589,332) (1,508,377)
Other 261 (1,601) 420
---------- ---------- ----------
Net cash provided by (used in)
operating activities 10,449 9,635 (5,158)
---------- ---------- ----------
Cash flows from investing activities:
Dividend distributions from Bank -- -- 750,000
Investment in wholly-owned subsidiary (1,332,325) -- --
Cash flows from financing activities:
Dividends paid from Bank 1,000,000 -- --
---------- ---------- ----------
(Decrease) increase in cash and
cash equivalents (321,876) 9,635 744,842
Cash and cash equivalents at beginning
of period 767,125 757,490 12,648
---------- ---------- ----------
Cash and cash equivalents at end of
period $ 445,249 767,125 757,490
========== ========== ==========
A-34
Appendix B
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Fairfax Financial Corporation
Baltimore, Maryland
We consent to incorporation by reference in the registration statement (No.
33-92512) on Form S-8 (Registration Statement) of Susquehanna Bancshares, Inc.
(Susquehanna) of our report dated November 14, 1995, relating to the
consolidated statements of financial condition of Fairfax Financial Corporation
and subsidiaries (the Company) as of September 30, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended September 30, 1995, which
appears in Appendix A to Susquehanna's Form 8-K dated November 21, 1995. Our
report refers to the Company's adoption of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
KPMG PEAT MARWICK LLP
Baltimore, Maryland
November 22, 1995
B-1