10-QFORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10674
SUSQUEHANNA BANCSHARES, INC.
----------------------------
(Exact name of Registrant as specified in its Charter)
Pennsylvania 23-2201716
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
---------------------------
(Address of principal executive offices) (Zip Code)
(717) 626-4721
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of March 31, 1996 the Registrant had 13,143,761 shares of common stock
outstanding.
1
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION.............................. 3
Item 1. FINANCIAL STATEMENTS............................... 3
Consolidated Balance Sheets -
As of March 31, 1996 and 1995,
And December 31, 1995................................... 3
Consolidated Statements of Income
For the three months ended
March 31, 1996 and 1995................................. 4
Consolidated Statements of Cash Flow
For the Three Month Periods
Ended March 31, 1996 and 1995........................... 5
Notes to Consolidated Financial Statements.............. 6-7
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.............................. 8-19
PART II OTHER INFORMATION.................................... 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 20
SIGNATURES........................................... 20
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands) March 31 December 31 March 31
ASSETS 1996 1995 1995
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Cash and due from banks $85,240 $87,107 $74,521
Short-term investments 99,600 92,110 52,488
Investment securities available for sale 479,938 476,139 352,853
Investment securities held to maturity 141,163 133,879 219,685
(Fair values of $142,012; $135,106; and $215,797)
Loans and leases, net of unearned income 2,123,977 1,712,951 1,486,144
Less: Allowance for loan and lease losses 32,358 27,563 23,802
----------- ----------- ----------
Net loans and leases 2,091,619 1,685,388 1,462,342
----------- ----------- ----------
Premises and equipment (net) 37,376 36,414 31,915
Accrued income receivable 22,129 19,148 16,752
Other assets 84,079 55,972 45,919
----------- ----------- ----------
Total assets $3,041,144 $2,586,157 $2,256,475
=========== =========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
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Deposits:
Demand $291,064 $270,411 $242,505
Interest-bearing demand 649,369 483,835 444,552
Savings 404,174 390,257 384,874
Time 1,079,230 899,013 732,378
Time of $100 or more 106,181 72,526 50,590
----------- ----------- ----------
Total deposits 2,530,018 2,116,042 1,854,899
----------- ----------- ----------
Short-term borrowings 57,923 69,432 52,798
Long-term debt 130,902 86,274 99,054
Accrued interest, taxes, and expenses payable 28,113 25,732 19,096
Other liabilities 13,708 15,278 7,447
----------- ----------- ----------
Total liabilities 2,760,664 2,312,758 2,033,294
Stockholders' equity:
Common stock
Authorized: 32,000,000 shares ($2.00 par value)
Issued: 13,186,092; 12,991,007; and 11,682,879,
respectively 26,372 25,982 23,366
Surplus 77,721 73,173 42,919
Retained earnings 176,417 172,209 161,072
Unrealized gains and losses for available-for-sale
securities, net of taxes 293 2,358 (3,803)
Less: Treasury stock, (42,331; 48,962 and 48,962 common shares
at cost, respectively) 323 323 373
----------- ----------- ----------
Total stockholders' equity 280,480 273,399 223,181
----------- ----------- ----------
Total liabilities and stockholders' equity $3,041,144 $2,586,157 $2,256,475
=========== =========== ==========
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The accompanying notes are an integral part of these financial statements.
3
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
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(In thousands, except per share) 1996 1995
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INTEREST INCOME
Interest and fees on loans and leases $45,535 $32,630
Interest on investment securities: Taxable 7,702 7,043
Tax-exempt 1,233 1,379
Interest on short-term investments 1,117 617
- ------------------------------------------------------------------------------------------------------------
Total interest income 55,587 41,669
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 4,057 3,108
Savings 2,421 2,457
Time 15,664 9,176
Interest on short-term borrowings 606 914
Interest on long-term debt 2,236 1,452
- ------------------------------------------------------------------------------------------------------------
Total interest expense 24,984 17,107
- ------------------------------------------------------------------------------------------------------------
Net interest income 30,603 24,562
Provision for loan and lease losses 1,031 1,500
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 29,572 23,062
- ------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 1,267 1,186
Other service charges, commissions, fees 446 259
Income from fiduciary-related activities 781 663
Other operating income 2,344 1,234
Investment security gains/(losses) 151 (88)
- ------------------------------------------------------------------------------------------------------------
Total other income 4,989 3,254
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OTHER EXPENSES
Salaries and employee benefits 12,108 10,000
Net occupancy expense 1,783 1,361
Furniture and equipment expense 1,124 977
FDIC insurance premiums 429 1,047
Other operating expenses 7,255 5,794
- ------------------------------------------------------------------------------------------------------------
Total other expenses 22,699 19,179
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Income before income taxes and extraordinary item 11,862 7,137
Provision for income taxes 3,842 1,918
- ------------------------------------------------------------------------------------------------------------
Net income $8,020 $5,219
============================================================================================================
Per share information:
Net income $0.61 $0.45
Cash dividends 0.29 0.27
Average shares outstanding 13,142 11,634
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three month periods ended March 31 1996 1995
--------- ---------
OPERATING ACTIVITIES:
Net income $8,020 $5,219
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 2,912 2,385
Provision for loan and lease losses 1,031 1,500
(Gain) / loss on securities transactions (151) 89
Gain on sale of mortgages (649) (90)
(Gain)/loss on sale of other real estate owned (24) (33)
Mortgage loans originated for resale (52,443) (5,506)
Sale of mortgage loans originated for resale 46,031 5,702
(Increase)/decrease in accrued interest receivable (2,981) 1,095
Decrease in accrued interest payable 1,228 729
Increase in accrued expenses and taxes payable 429 (111)
Change in fiscal year of pooled entity -- (1,174)
Other, net (4,768) (1,199)
--------- ---------
Net cash provided by operating activities (1,365) 8,606
--------- ---------
INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 19,838 22,528
Proceeds from the maturity of investment securities 32,628 20,429
Purchase of available-for-sale securities (48,066) (11,028)
Net increase in loans and leases (4,232) (21,556)
Capital expenditures (1,253) (935)
Net cash (paid) / received in acquisition (31,298) --
Change in fiscal year of pooled entity -- (1,049)
--------- ---------
Net cash used for investing activities (32,383) 8,389
FINANCING ACTIVITIES:
Net increase / (decrease) in deposits 17,586 (11,431)
Net increase / (decrease) in short-term borrowings (11,509) (20,554)
Proceeds from issuance of long-term debt 35,000 85,550
Repayment of long-term debt (2,832) (38,610)
Proceeds from issuance of common stock 4,938 625
Dividends paid (3,812) (2,817)
Change in fiscal year of pooled entity -- 2,175
Net cash provided by/(used for) financing activities 39,371 14,938
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 5,623 31,933
--------- ---------
CASH AND CASH EQUIVALENTS AT JANUARY 1 179,217 95,076
--------- ---------
CASH AND CASH EQUIVALENTS AT MARCH 31 $184,840 $127,009
========= =========
Cash and cash equivalents:
Cash and due from banks $85,240 $74,521
Short-term investments 99,600 52,488
--------- ---------
CASH AND CASH EQUIVALENTS AT MARCH 31 $184,840 $127,009
========= =========
Interest paid on deposits, short-term borrowings, and long-term debt was
$23,756 in 1996, and $16,398 in 1995. Income taxes paid were $87 in 1996, and
$280 in 1995. Amounts transferred to other real estate owned were $1,422 in
1996, and $1,139 in
On February 1, 1996, Susquehanna acquired Fairfax Finanacial Corp,
Baltimore, MD for $62,725. At the time of the acquisition, loans acquired were
$401,658; investment securities were $19,467; and deposits were $396,390.
The accompanying notes are an integral part of these financial statements.
5
Susquehanna Bancshares, Inc. and Subsidiaries
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
UNREALIZED
Three Month Periods Ended March 31 COMMON RETAINED GAIN/(LOSS) ON TREASURY TOTAL
(In thousands, except per share) STOCK SURPLUS EARNINGS SECURITIES STOCK EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 1995 $23,366 $42,919 $159,051 ($7,859) ($373) $217,104
Change in fiscal year of pooled entity (623) (381) (44) (1,048)
Common stock issued under
employee benefit plans 623 623
Net income 5,219 5,219
Change in unrealized gain/loss on securities 4,100 4,100
Cash dividends paid:
Per common share of $0.27 (2,817) (2,817)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1995 $23,366 $42,919 $161,072 ($3,803) ($373) $223,181
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 1996 $25,982 $73,173 $172,209 $2,358 ($323) $273,399
Net income 8,020 8,020
Common stock issued under
employee benefit plans 2 2
Stock issued in public offering 390 4,546 4,936
Change in unrealized gain/loss on securities (2,065) (2,065)
Cash dividends paid:
Per common share of $0.29 (3,812) (3,812)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31,1996 $26,372 $77,721 $176,417 $293 ($323) $280,480
====================================================================================================================================
ACCOUNTING POLICIES
The information contained in this report is unaudited and is subject to year-
end adjustments. However, in the opinion of management, the information reflects
all adjustments necessary for a fair statement of results for the periods ended
March 31, 1996 and 1995.
The accounting policies of Susquehanna Bancshares, Inc. & Subsidiaries
("Susquehanna"), as applied in the consolidated interim financial statements
presented herein, are substantially the same as those followed on an annual
basis as presented on pages 44 and 45 of the Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, except as noted in the following
paragraphs.
Susquehanna adopted Statement of Financial Accounting Standards No.121 -
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121") in the first quarter of 1996. SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS 121 had no effect on Susquehanna's financial
condition or results of operations as Susquehanna has historically applied the
principles of SFAS 121 to its financial statements and notes.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 122 - "Accounting for Mortgage-Servicing Rights" ("SFAS
122") in 1995. SFAS 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based on its fair
value relative to the loans as a whole and recorded as an asset separate from
the underlying loans. SFAS 122 prohibits retroactive application; accordingly,
SFAS 122 was adopted in the first quarter of 1996 and did not have a material
effect on Susquehanna's financial condition or results of operations.
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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March 31, 1996 December 31, 1995
------------------------------ --------------------------------
(In thousands) Amortized cost Fair value Amortized cost Fair value
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S.Treasury $174,576 $174,745 $171,733 $173,203
U.S. Government agencies 72,166 71,908 70,530 70,641
Mortgage-backed 126,383 125,776 118,580 118,341
Corporates 85,563 86,275 94,798 96,318
Equities 20,247 21,234 16,798 17,636
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478,935 479,938 472,439 476,139
- ------------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Government agencies $16,935 $16,953 $21,883 $21,914
State & municipal 115,349 116,203 102,927 104,074
Mortgage-backed 8,829 8,806 9,019 9,068
Corporates 50 50 50 50
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141,163 142,012 133,879 135,106
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Total investment securities $620,098 $621,950 $606,318 $611,245
====================================================================================================================================
6
Susquehanna Bancshares, Inc. and Subsidiaries
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LOANS AND LEASES
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Loans and leases, net of unearned income at March 31, 1996 and December 31, 1995, were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $199,766 $198,802
Real estate - construction 194,630 177,253
Real estate - mortgage 1,417,679 1,091,066
Consumer 282,822 223,039
Leases 29,080 22,791
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Total loans and leases $2,123,977 $1,712,951
====================================================================================================================================
IMPAIRED LOANS
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An analysis of impaired loans as of March 31, 1996 and December 31, 1995, is presented as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Impaired loans without a related reserve $12,755 $12,656
Impaired loans with a reserve 2,637 2,685
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Total impaired loans $15,392 $15,341
====================================================================================================================================
Reserve for impaired loans $353 $416
====================================================================================================================================
An analysis of impaired loans for the quarters ended March 31, 1996 and 1995 is presented as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $14,180 $12,722
Interest income on impaired loans (cash-basis) 58 121
SHORT-TERM BORROWINGS
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Short-term borrowings at March 31, 1996 and December 31, 1995, were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Securities sold under repurchase agreements $48,565 $47,032
Treasury tax and loan notes 6,358 4,400
Federal Home Loan Bank borrowings 3,000 18,000
Parent:
None
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Total short-term borrowings $57,923 $69,432
====================================================================================================================================
LONG-TERM DEBT
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Long-term debt at March 31, 1996 and December 31, 1995, was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Term note due July, 1996 $4,000 $4,000
Term note due October, 1997 --- 2,000
Term note due July, 1998 5,000 5,000
Installment note due June, 1999 56 60
FHLB advances in varying maturities through December, 2003 36,312 24,678
Term loan note due September, 2014 534 536
Parent:
Senior notes due February, 2003 35,000 ---
Subordinated notes due February, 2005 50,000 50,000
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Total long-term debt $130,902 $86,274
====================================================================================================================================
ACQUISITIONS
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(Dollars in thousands, except per share
- ------------------------------------------------------------------------------------------------------------------------------------
On April 21, 1995, SBI purchased Reisterstown Holdings,
Inc.("Reisterstown"), a Maryland thrift holding company with $248 million in
assets and $210 million in deposits at the acquisition date, for $28.6 million.
The transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Reisterstown have been included in
Susquehanna since the date of the acquisition. Under this method of accounting,
the purchase price is allocated to the respective assets acquired and
liabilities assumed based on their estimated fair values, net of income tax
effects. Goodwill of $12.7 million was created in this transaction and will be
amortized to other operating expense on a straight-line basis over 15 years.
On February 1, 1996, SBI purchased Fairfax Financial Corporation
("Fairfax"), a Maryland thrift holding company with $455 million in assets and
$396 million in deposits at the acquisition date, for $62.7 million. The
transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Fairfax have been included in Susque-
hanna since the date of the acquisition. Under this method of accounting, the
purchase price is allocated to the respective assets acquired and liabilities
assumed based on their estimated fair values, net of income tax effects.
Goodwill of $21.4 million was created in this transaction and will be amortized
to other operating expense on a straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for
Susquehanna, Reisterstown, and Fairfax follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended March 31 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $31,721 $30,975
Provision for loan and lease losses 1,533 1,544
Other income 5,477 4,670
Other expense 23,400 24,628
- ------------------------------------------------------------------------------------------------------------------------------------
Income Taxes 12,265 9,473
Taxes 4,110 3,056
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $8,155 $6,417
====================================================================================================================================
Earnings per share $0.62 $0.49
7
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
- ------------------------------------------------------------------
AND FINANCIAL CONDITION
- -----------------------
The following is management's discussion and analysis of the significant changes
in the consolidated results of operations, financial condition, and cash flows
of Susquehanna Bancshares, Inc. ("Susquehanna").
Significant Transactions
------------------------
Several significant transactions occurred which affect the
comparability of Susquehanna's financial performance for the first quarter of
1996 versus the first quarter of 1995. These transactions are described in the
following paragraphs.
On February 9, 1995, Susquehanna issued $50 million 9.00%
subordinated notes due 2005. The proceeds of the issuance were used to acquire
Reisterstown Holdings, Inc. ("Reisterstown") on April 21, 1995, and retire $10
million in short-term borrowings. The balance of the proceeds were used for
general corporate purposes.
On April 1, 1995, Susquehanna completed the acquisition of Atlanfed
Bancorp, Inc. ("Atlanfed") issuing 1,199,333 common shares for all of
Atlanfed's outstanding shares. Total assets of Atlanfed at the acquisition date
were $255 million. Deposits totaled $179 million; loans outstanding were $189
million; and stockholders' equity was $22.6 million. The transaction was
treated as a pooling-of-interests and Susquehanna's financial results for all
reported periods are restated to include Atlanfed's financial results.
On April 21, 1995, Susquehanna completed the acquisition of
Reisterstown acquiring all of the assets and assuming all the liabilities of
Reisterstown for $28.6 million.
8
Accordingly, the transaction was treated under the purchase method of accounting
whereby all the financial results are included with Susquehanna from April 21,
1995 forward. The loans acquired totaled $198 million, total assets were $248
million and deposits were $210 million. The excess purchase price of $12.7
million will be amortized over 15 years.
On December 22, 1995, Susquehanna closed a public common equity
offering of 1,300,000 shares at $26.50, netting $32.6 million after underwriting
commissions. The proceeds from the offering were used as part of the purchase
price to acquire Fairfax Financial Corporation ("Fairfax").
Earnings Summary
----------------
Susquehanna's net income for the first quarter of 1996 was $8.0
million, a 54% increase over the net income of $5.2 million reported in the
first quarter of 1995. Contributing to this strong earnings performance was a
$6.0 million or 25% increase in net interest income resulting from a growth in
average earning assets of 28%. This growth was primarily the result of the
acquisitions of Reisterstown and Fairfax.
Earnings per share increased 36% from $.45 per share for the first
quarter of 1995 to $.61 per share for the first quarter of 1996 while ROA and
ROE increased from 0.95% and 9.61%, respectively, in 1995 to 1.13% and 11.58%,
respectively, in 1996.
At March 31, 1996, the equity to total assets ratio was 9.22% compared
to 10.57% at December 31, 1995 and 9.89% at March 31, 1995. The book value per
share at the same period ends was $21.34, $21.11 and $19.18, respectively.
9
On January 2, 1996, the underwriters exercised their 15% over-
allotment option and another 195,000 shares of Susquehanna's common stock were
issued to the public. The net proceeds to Susquehanna after underwriting
commissions were $4.9 million and were used as part of the purchase price to
acquire Fairfax.
On January 29, 1996, Susquehanna issued $35 million 6.30% senior notes
due 2003. The proceeds of this issuance were used to partially fund the
purchase of Fairfax and for general corporate purposes.
On February 1, 1996, Susquehanna acquired all of the assets and
assumed all the liabilities of Fairfax for $62.7 million. Accordingly, the
transaction will be recorded under the purchase method of accounting. Assets
acquired were $455 million; loans acquired were $402 million; and deposits
acquired were $396 million. The excess purchase price of $21.4 million will be
amortized over 15 years.
Net Interest Income
-------------------
Net interest income is the income which remains after deducting from
total income generated by earning assets the interest expense attributable to
the acquisition of the funds required to support earning assets. Income from
earning assets includes income from loans, income from investment securities and
income from short-term investments. The amount of interest income is dependent
upon many factors including the volume of earning assets, the general level of
interest rates, the dynamics of the change in interest rates, and levels of non-
performing loans. The cost of funds varies with the amount of funds necessary to
support earning assets, the rates paid to attract and hold deposits, rates paid
10
on borrowed funds, and the levels of non-interest bearing demand deposits and
equity capital.
Table 1 presents average balances, taxable equivalent interest income
and expenses and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-exempt interest has been adjusted using a marginal tax rate of 35% in order
to equate the yield to that of taxable interest rates. Net interest income as a
percentage of net interest income and other income was 86% and 88% for the
quarters ended March 31, 1996 and 1995, respectively.
Net interest income increased $6.0 million from $24.6 million in the
first quarter to 1995 of $30.6 million in the first quarter of 1996. This
increase was due to a 28% increase in average earning assets as noted in Table 2
offset by a 21 basis point decline in net interest margin from 4.95% in 1995 to
4.74% in 1996. The increase in average earning assets was primarily the result
of the Reisterstown and Fairfax acquisitions. The decline in net interest
margin was due primarily to the issuance of 9.00% subordinated notes in February
1995 and the acquisition of Reisterstown and Fairfax which have higher funding
costs especially with regard to certificates of deposit. Susquehanna's net
interest margin should decline slightly in the second quarter as the effect of
Fairfax will be included for three months in the second quarter versus only two
months in the first quarter.
Other Income
------------
Non-interest income, recorded as other income, consists of service
charges on deposit accounts, commissions, fees received for servicing loans,
fees for trust services, premium income generated from reinsurance activities,
gains and losses on security
11
transactions, net gains on sales of mortgages, net gains on sales of other real
estate owned and other miscellaneous income, such as safe deposit box rents.
Other income as a percentage of net interest income and other income was 14% and
12% for the periods ended March 31, 1996 and 1995, respectively.
Non-interest income increased $1.7 million or 53% from $3.3 million in
the first quarter of 1995 to $5.0 million in the first quarter of 1996. This
increase resulted primarily from the acquisitions of Reisterstown and Fairfax
which contributed $1.3 million to non-interest income and investment security
gains of $151,000 in 1996 versus losses of $88,000 in 1995.
Other Expenses
--------------
Non-interest expenses are categorized into five main groupings:
employee-related expenses, which include salaries, fringe benefits, and
employment taxes; occupancy expenses, which include depreciation, rents,
maintenance, utilities, and insurance; equipment expenses, which include
depreciation, rents and maintenance; Federal Deposit Insurance Corporation's
insurance premiums on deposits; and other expenses incurred in operating
Susquehanna's business.
Non-interest expense increased $3.5 million or 18% from $19.2 million
in the first quarter of 1995 to $22.7 million in the first quarter of 1996.
This increase resulted from the acquisitions of Reisterstown and Fairfax which
contributed $3.9 million to non-interest expense offset by a $0.6 million
improvement in FDIC insurance premiums due to a reassessment of the insurance
rate.
12
Income Taxes
------------
Susquehanna's effective tax rate increased from 26.87% in the first
quarter of 1995 to 32.39% in the first quarter of 1996 as non-deductible
expenses increased due to the acquisitions of Reisterstown and Fairfax.
Risk Assets
-----------
Table 3 shows a $5.7 million increase in nonperforming assets from
$30.8 million at December 31, 1995 to $36.5 million at March 31, 1996. This
increase was primarily due to the acquisition of Fairfax in February 1996 as
nonperforming assets to period-end loans and OREO declined from 1.79% at
December 31, 1995 to 1.71% at March 31, 1996. Loan loss reserve to non-
performing loans at March 31, 1996 was 107% compared with 108% at December 31,
1995.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 4, the provision declined by $0.5 million from
the first quarter of 1995 to the first quarter of 1996 as net charge-offs
declined by $1.1 million for the same periods. The allowance at March 31, 1996
was 1.52% of period-end loans and leases compared to 1.60% at March 31, 1995.
Capital Resources
-----------------
Capital elements are segmented into two tiers. Tier I capital
represents shareholders' equity reduced by most intangible assets, while total
capital includes certain allowable long-term debt and the general portion of the
allowance for loan and lease losses limited to 1.25% of risk-adjusted assets.
The minimum Tier I capital ratio is 4%; Susquehanna's ratio at March 31, 1996
was 11.84%. The minimum total capital (Tier II)
13
ratio is 8%; Susquehanna's ratio at March 31, 1996 was 15.56%. The minimum
leverage ratio is 4%; Susquehanna's leverage ratio at March 31, 1996 was 8.53%.
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 generated from maturing
or readily marketable assets. The carrying value of investment securities
maturing within one year amounted to $100 million or 16% of the investment
portfolio at March 31, 1996. Short-term investments totaling $100 million at
March 31, 1996 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,
14
there can be a lag in maintaining the desired matching because the repricing of
products occurs at varying time intervals.
Susquehanna employs a variety of methods to monitor interest rate
sensitivity and limit net interest income exposure. By dividing the assets and
liabilities into three groups -- fixed rate, floating rate, and those which
reprice only at management's discretion -- strategies are developed which are
designed to minimize exposure to interest rate fluctuations. Management also
utilizes gap analysis to evaluate rate sensitivity at a given point in time.
Table 5 illustrates Susquehanna's estimated interest rate sensitivity
and periodic and cumulative gap positions as calculated at March 31, 1996. An
institution with more assets repricing than liabilities over a given time frame
is considered asset sensitive, and one with more liabilities repricing than
assets is considered liability sensitive. An asset sensitive institution will
generally benefit from rising rates, and a liability sensitive institution will
generally benefit from declining rates. While Susquehanna has had and will into
the foreseeable future experience a negative gap position (liability sensitive),
the impact of a rapid rise in interest rates, as occurred in 1994, did not have
a significant effect on the net interest margin of Susquehanna.
15
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL - TAX EQUIVALENT BASIS
For the Three Month Period Ended For the Three Month Period Ended
(In thousands) March 31, 1996 March 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
Average Average
Assets Balance Interest Rate (%) Balance Interest Rate (%)
- ------------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 82,654 $ 1,117 5.44 $ 39,552 $ 617 6.33
Investment securities:
Taxable 503,739 7,702 6.15 468,281 7,043 6.10
Tax-advantaged 109,784 1,893 6.94 118,607 2,118 7.24
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities 613,523 9,595 6.29 586,888 9,161 6.33
Loans and leases, (net):
Taxable 1,945,291 44,801 9.26 1,429,092 32,019 9.09
Tax-advantaged 44,850 1,130 10.13 43,333 940 8.80
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 1,990,141 45,931 9.28 1,472,425 32,959 9.08
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,686,318 $56,643 8.48 2,098,865 42,737 8.26
====================== ====================
Allowance for loan and lease losses (30,613) (24,046)
Other non-earning assets 201,367 154,986
----------- -----------
Total assets $2,857,072 $2,229,805
=========== ===========
Liabilities & Equity
Deposits:
Interest-bearing demand $ 591,046 $ 4,057 2.76 $ 459,207 $ 3,108 2.74
Savings 400,922 2,421 2.43 389,896 2,457 2.56
Time 1,116,681 15,664 5.64 757,126 9,176 4.92
Short-term borrowings 49,193 606 4.95 64,627 914 5.74
Long-term debt 107,586 2,236 8.36 78,187 1,452 7.53
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,265,428 $24,984 4.44 1,749,043 $17,107 3.97
====================== ====================
Demand deposits 265,873 239,473
Other liabilities 47,119 21,059
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities $2,578,420 $2,009,575
Stockholders' equity 278,652 220,230
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $2,857,072 $2,229,805
============ ============
Net interest income/yield on
average earning assets $31,659 4.74 $25,630 4.95
====================== ====================
For purposes of calculating loan yields, the average loan volume includes
non-accrual loans. For purposes of calculating yields on non-taxable interest
income, the taxable equivalent adjustment is made to equate non-taxable interest
on the same basis as taxable interest. The marginal tax rate is 35%.
16
Susquehanna Bancshares, Inc. and subsidiaries
TABLE 2 - STATEMENTS OF CHANGES IN INCOME AND EXPENSES
Three months ended Three months ended
March 31, 1996 compared March 31, 1996 compared
to March 31, 1995 to December 31, 1995
(In thousands) Average Volumes Income / Expense Average Volumes Income / Expense
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS: $ % $ % $ % $ %
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and Leases 517,716 35.2 12,905 39.5 289,547 17.0 4,595 11.2
Investments 26,635 4.5 513 6.1 10,131 1.7 (26) (0.3)
Short-term investments 43,102 109.0 500 81.0 15,297 22.7 188 20.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total 587,453 28.0 13,918 33.4 314,975 13.3 4,757 9.4
====================== ---------------------- ==================== ---------------------
LIABILITIES:
Interest-bearing demand 131,839 28.7 949 30.5 108,960 22.6 688 20.4
Savings 11,026 2.8 (36) (1.5) 9,151 2.3 58 2.5
Time 359,555 47.5 6,488 70.7 143,712 14.8 1,759 12.7
Short-term borrowings (15,434) (23.9) (308) (33.7) (14,966) (23.3) (180) (22.9)
Long-term debt 29,399 37.6 784 54.0 20,314 23.3 468 26.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total 516,385 29.5 7,877 46.0 267,171 13.4 2,793 12.6
====================== ---------------------- ==================== ---------------------
Net interest income 6,041 24.6 1,964 6.9
Provision for loan and lease losses (469) (31.3) (252) (19.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan and lease losses 6,510 28.2 2,216 8.1
Investment security gains/(losses) 239 271.6 137 978.6
Other operating income 1,496 44.8 514 11.9
- ------------------------------------------------------------------------------------------------------------------------------------
Income before operating expenses 8,245 31.3 2,867 9.0
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits 2,108 21.1 1,137 10.4
Net occupancy & equipment 569 24.3 343 13.4
Other operating expenses 843 12.3 (143) (1.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,520 18.4 1,337 6.3
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,725 66.2 1,530 14.8
Provision for income taxes 1,924 100.3 659 20.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2,801 53.7 871 12.2
====================================================================================================================================
17
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 3- RISK ASSETS
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 1996 1995 1995
- -------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $23,712 $18,754 $24,709
Restructured accrual loans 6,645 6,703 6,914
Other real estate owned 6,150 5,344 5,434
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $36,507 $30,801 $37,057
===================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 1.71% 1.79% 2.48%
Loans and leases contractually
past due 90 days and still accruing $7,613 $4,820 $5,790
TABLE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $27,563 $23,845
Allowance acquired in business combination 4,229 -
Change in fiscal year of pooled entity - (8)
Additions charged to operating expenses 1,031 1,500
- -------------------------------------------------------------------------------------------------------------------
32,823 25,337
- -------------------------------------------------------------------------------------------------------------------
Charge-offs (774) (1,751)
Recoveries 309 216
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs (465) (1,535)
- -------------------------------------------------------------------------------------------------------------------
Balance - Period end $32,358 $23,802
===================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.09% 0.42%
Allowance as a percent of period-end loans and leases 1.52% 1.60%
Average loans and leases $1,990,141 $1,472,425
Period-end loans and leases 2,123,977 1,486,144
18
Susquehanna Bancshares, Inc. and subsidiaries
TABLE 5 --- Interest Rate Sensitivity
At March 31, 1996 1 - 90 90 - 180 180 - 365 1 year
(In thousands) days days days or more TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Short - term investments $99,600 $99,600
Investment securities 40,418 45,352 72,085 463,246 621,101
Loans and leases, net of unearned income * 663,360 104,176 347,302 985,427 2,100,265
-----------------------------------------------------------------------
Total $803,378 $149,528 $419,387 $1,448,673 $2,820,966
=======================================================================
LIABILITIES:
Deposits:
Interest - bearing demand $649,369 $649,369
Savings 404,174 404,174
Time 248,746 159,925 272,563 397,996 1,079,230
Time in denominations of $100 or more 25,172 12,349 28,959 39,701 106,181
Short - term borrowings 57,223 700 57,923
Long - term debt 1,000 4,000 9,200 116,702 130,902
----------------------------------------------------------------------
Total $1,385,684 $176,974 $310,722 $554,399 $2,427,779
======================================================================
INTEREST SENSITIVITY GAP:
Periodic ($582,306) ($27,446) $108,665 $894,274 $393,187
Cumulative (609,752) (501,087) 393,187
CUMULATIVE GAP AS A PERCENTAGE
OF EARNING ASSETS -20.6% -21.6% -17.8% 13.9%
* Does not include nonaccruing loans and leases.
19
PART II. OTHER INFORMATION
-----------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
On January 23, 1996, Registrant filed a report on Form 8-K, under Item 5,
which presented the Registrant's Fourth Quarter 1995 earnings release to the
public.
On February 14, 1996, Registrant filed a Report on Form 8-K, under Item 2,
which discussed completion of the acquisition of Fairfax Financial Corporation
by the Registrant.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
May 13, 1996 /s/ Robert S. Bolinger
___________________________________
Robert S. Bolinger
President and Chief Executive Officer
May 13, 1996 /s/ J. Stanley Mull, Jr.
____________________________________
J. Stanley Mull, Jr., Vice President
Treasurer, and Principal Financial
Officer
20