FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
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(Exact name of Registrant as specified in its Charter)
Pennsylvania 23-2201716
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
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(Address of principal executive offices) (Zip Code)
(717) 626-4721
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(Registrant's telephone number, including area code)
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 June 30, 1996 the Registrant had 13,172,881 shares of common stock
outstanding.
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION................................ 3
Item 1. FINANCIAL STATEMENTS................................. 3
Consolidated Balance Sheets -
As of June 30, 1996 and 1995,
And December 31, 1995.................................... 3
Consolidated Statements of Income
For the three months ended and six months ended
June 30,1996 and 1995.................................... 4
Consolidated Statements of Cash Flow
For the Six Month Periods
Ended June 30, 1996 and 1995............................. 5
Notes to Consolidated Financial Statements............... 6 - 8
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.............................. 9 - 21
PART II OTHER INFORMATION.................................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 22 - 23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 24
SIGNATURES........................................... 24
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands) June 30 December 31 June 30
ASSETS 1996 1995 1995
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Cash and due from banks $94,253 $87,107 $81,541
Short-term investments 67,010 92,110 50,318
Investment securities available for sale 475,838 476,139 392,261
Investment securities held to maturity 129,523 133,879 198,941
(Fair values of $129,512; $135,106; and $200,026)
Loans and leases, net of unearned income 2,130,353 1,712,951 1,712,460
Less: Allowance for loan and lease losses 32,004 27,563 27,779
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Net loans and leases 2,098,349 1,685,388 1,684,681
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Premises and equipment (net) 37,470 36,414 34,250
Accrued income receivable 21,772 19,148 18,239
Other assets 86,980 55,972 60,440
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Total assets $3,011,195 $2,586,157 $2,520,671
============= =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
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Deposits:
Demand $295,533 $270,411 $263,992
Interest-bearing demand 650,052 483,835 480,494
Savings 411,558 390,257 397,713
Time 1,060,190 899,013 857,770
Time of $100 or more 99,300 72,526 95,329
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Total deposits 2,516,633 2,116,042 2,095,298
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Short-term borrowings 48,584 69,432 65,279
Long-term debt 126,658 86,274 94,722
Accrued interest, taxes, and expenses payable 23,887 25,732 20,909
Other liabilities 12,430 15,278 14,565
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Total liabilities 2,728,192 2,312,758 2,290,773
Stockholders' equity:
Common stock
Authorized: 32,000,000 shares ($2.00 par value)
Issued: 13,193,184; 12,991,007; and 11,682,879, respectively 26,386 25,982 23,366
Surplus 78,349 73,173 43,014
Retained earnings 180,936 172,209 164,329
Unrealized gains and losses for available-for-sale
securities, net of taxes (2,513) 2,358 (488)
Less: Treasury stock, (20,303; 48,962 and 48,962 common shares
at cost, respectively) 155 323 323
------------- ----------- -----------
Total stockholders' equity 283,003 273,399 229,898
------------- ----------- -----------
Total liabilities and stockholders' equity $3,011,195 $2,586,157 $2,520,671
============= =========== ===========
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The accompanying notes are an integral part of these financial statements.
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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(In thousands, except per share ) 1996 1995 1996 1995
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INTEREST INCOME
Interest and fees on loans and leases $48,478 $39,003 $94,013 $71,633
Interest on investment securities: Taxable 7,697 6,552 15,399 13,595
Tax-exempt 1,231 1,327 2,464 2,706
Interest on short-term investments 1,028 772 2,145 1,389
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Total interest income 58,434 47,654 114,021 89,323
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 4,684 3,323 8,741 6,431
Savings 2,485 2,558 4,906 5,015
Time 16,067 12,318 31,731 21,494
Interest on short-term borrowings 682 769 1,288 1,683
Interest on long-term debt 2,368 2,048 4,604 3,500
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Total interest expense 26,286 21,016 51,270 38,123
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Net interest income 32,148 26,638 62,751 51,200
Provision for loan and lease losses 1,348 1,071 2,379 2,571
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Net interest income after provision for loan and lease losses 30,800 25,567 60,372 48,629
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OTHER INCOME
Service charges on deposit accounts 1,398 1,260 2,665 2,446
Other service charges, commissions, fees 515 272 961 531
Income from fiduciary-related activities 832 749 1,613 1,412
Other operating income 2,933 1,488 5,277 2,722
Investment security gains/(losses) 44 15 195 (73)
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Total other income 5,722 3,784 10,711 7,038
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OTHER EXPENSES
Salaries and employee benefits 12,600 10,429 24,708 20,429
Net occupancy expense 1,654 1,367 3,437 2,728
Furniture and equipment expense 1,204 1,053 2,328 2,030
FDIC insurance premiums 523 1,192 952 2,239
Other operating expenses 8,049 6,111 15,304 11,905
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Total other expenses 24,030 20,152 46,729 39,331
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Income before income taxes 12,492 9,199 24,354 16,336
Provision for income taxes 4,157 2,799 7,999 4,717
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Net income $8,335 $6,400 $16,355 $11,619
====================================================================================================================================
Per share information:
Net income $0.63 $0.55 $1.24 $1.00
Cash dividends 0.29 0.27 0.58 0.54
Average shares outstanding 13,157 11,639 13,149 11,637
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The accompanying notes are an integral part of these financial statements.
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
Six month periods ended June 30 1996 1995
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OPERATING ACTIVITIES:
Net income $16,355 $11,619
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 5,476 4,382
Provision for loan and lease losses 2,379 2,571
Deferred taxes -- 160
(Gain) / loss on securities transactions (195) 73
Gain on sale of mortgages (872) (93)
(Gain)/loss on sale of other real estate owned 7 (81)
Mortgage loans originated for resale (114,745) (21,355)
Sale of mortgage loans originated for resale 112,915 18,230
(Increase)/decrease in accrued interest receivable (2,624) 1,312
Decrease in accrued interest payable (33) (2,184)
Decrease in accrued expenses and taxes payable (2,536) (1,838)
Change in fiscal year of pooled entity -- (1,174)
Other, net (7,043) 1,869
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Net cash provided by operating activities 9,084 13,491
INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 23,968 22,528
Proceeds from the maturity of investment securities 64,322 50,497
Purchase of available-for-sale securities (72,305) (27,216)
Purchase of held-to-maturity securities -- (2,265)
Net increase in loans and leases (18,675) (42,108)
Capital expenditures (2,447) (1,754)
Net cash (paid) / received in acquisition (31,298) (17,517)
Change in fiscal year of pooled entity -- (1,049)
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Net cash used for investing activities (36,435) (18,884)
FINANCING ACTIVITIES:
Net increase / (decrease) in deposits 4,201 19,149
Net increase / (decrease) in short-term borrowings (20,848) (18,012)
Proceeds from issuance of long-term debt 35,000 90,550
Repayment of long-term debt (7,076) (46,494)
Proceeds from issuance of common stock 5,748 768
Dividends paid (7,628) (5,960)
Change in fiscal year of pooled entity -- 2,175
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Net cash provided by/(used for) financing activities 9,397 42,176
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NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (17,954) 36,783
CASH AND CASH EQUIVALENTS AT JANUARY 1 179,217 95,076
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CASH AND CASH EQUIVALENTS AT JUNE 30 $161,263 $131,859
========= =========
Cash and cash equivalents:
Cash and due from banks $94,253 $81,541
Short-term investments 67,010 50,318
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CASH AND CASH EQUIVALENTS AT JUNE 30 $161,263 $131,859
========= =========
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Interest paid on deposits, short-term borrowings, and long-term debt was
$51,303 in 1996, and $37,307 in 1995. Income taxes paid were $7,395 in 1996,
and $4,472 in 1995. Amounts transferred to other real estate owned were $3,401
in 1996, and $1,809 in 1995.
On April 21, 1995, Susquehanna acquired Reisterstown Holdings, Inc.,
Reisterstown, MD for $28,640. At the time of the acquisition, loans acquired
were $201,182; investment securities were $26,798; and deposits were $209,819.
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.
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
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UNREALIZED
Six Month Periods Ended June 30 COMMON RETAINED GAIN/LOSS ON TREASURY TOTAL
(In thousands, except per share) STOCK SURPLUS EARNINGS SECURITIES STOCK EQUITY
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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 718 50 768
Net income 11,619 11,619
Change in unrealized gain/loss on securities 7,415 7,415
Cash dividends paid:
Per common share of $0.54 (5,960) (5,960)
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Balance - June 30, 1995 $23,366 $43,014 $164,329 ($488) ($323) $229,898
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Balance - January 1, 1996 $25,982 $73,173 $172,209 $2,358 ($323) $273,399
Net income 16,355 16,355
Common stock issued under
employee benefit plans 14 630 168 812
Stock issued in public offering 390 4,546 4,936
Change in unrealized gain/loss on securities (4,871) (4,871)
Cash dividends paid:
Per common share of $0.58 (7,628) (7,628)
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Balance - June 30, 1996 $26,386 $78,349 $180,936 ($2,513) ($155) $283,003
====================================================================================================================================
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
June 30, 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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June 30, 1996 December 31, 1995
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(In thousands) Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S.Treasury $179,999 $178,901 $171,733 $173,203
U.S. Government agencies 81,203 79,919 70,530 70,641
Mortgage-backed 114,331 112,545 118,580 118,341
Corporates 83,490 83,221 94,798 96,318
Equities 20,191 21,252 16,798 17,636
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479,214 475,838 472,439 476,139
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Held-to-maturity:
U.S. Government agencies $12,980 $12,964 $21,883 $21,914
State & municipal 107,884 108,072 102,927 104,074
Mortgage-backed 8,609 8,426 9,019 9,068
Corporates 50 50 50 50
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129,523 129,512 133,879 135,106
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Total investment securities $608,737 $605,350 $606,318 $611,245
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Susquehanna Bancshares, Inc. and Subsidiaries
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LOANS AND LEASES
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Loans and leases, net of unearned income at June 30, 1996 and December 31, 1995, were as follows:
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June 30, December 31,
(In thousands) 1996 1995
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Commercial, financial, and agricultural $203,362 $198,802
Real estate - construction 186,092 177,253
Real estate - mortgage 1,442,955 1,091,066
Consumer 264,699 223,039
Leases 33,245 22,791
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Total loans and leases $2,130,353 $1,712,951
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IMPAIRED LOANS
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An analysis of impaired loans as of June 30, 1996 and December 31, 1995, is presented as follows:
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June 30, December 31,
(Dollars in thousands) 1996 1995
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Impaired loans without a related reserve $12,944 $12,656
Impaired loans with a reserve 4,383 2,685
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Total impaired loans $17,327 $15,341
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Reserve for impaired loans $930 $416
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An analysis of impaired loans for the three and six months periods ended June 30, 1996 and 1995 is presented as follows:
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Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
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Average balance of impaired loans $15,404 $22,753 $14,640 $17,453
Interest income on impaired loans (cash-basis) 35 138 93 259
SHORT-TERM BORROWINGS
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Short-term borrowings at June 30, 1996 and December 31, 1995, were as follows:
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June 30, December 31,
(In thousands) 1996 1995
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Securities sold under repurchase agreements $36,720 $47,032
Treasury tax and loan notes 8,864 4,400
Federal Home Loan Bank borrowings 3,000 18,000
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Total short-term borrowings $48,584 $69,432
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LONG-TERM DEBT
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Long-term debt at June 30, 1996 and December 31, 1995, was as follows:
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June 30, December 31,
(In thousands) 1996 1995
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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 53 60
FHLB advances in varying maturities through December, 2003 32,073 24,678
Term loan note due September, 2014 532 536
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 $126,658 $86,274
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Susquehanna Bancshares, Inc. and Subsidiaries
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COMPLETED ACQUISITIONS
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(Dollars in thousands, except per share)
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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 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 $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:
Three Months Ended June 30, Six Months Ended June 30,
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1996 1995 1996 1995
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Net interest income $32,148 $31,275 $63,869 $62,250
Provision for loan and lease losses 1,348 1,071 2,881 2,615
Other income 5,722 4,856 11,199 9,526
Other expense 24,030 24,213 47,430 48,841
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Income before taxes 12,492 10,847 24,757 20,320
Taxes 4,157 3,610 8,267 6,666
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Net income $8,335 $7,237 $16,490 $13,654
====================================================================================================================================
Earnings per share $0.63 $0.55 $1.25 $1.04
Average shares outstanding 13,157 13,134 13,150 13,132
PROPOSED ACQUISITIONS
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On July 18, 1996, Susquehanna signed definitive agreements to acquire Farmers
Banc Corp., Mullica Hill, New Jersey, and ATCORP, INC., Marlton, New Jersey.
Susquehanna will acquire Farmers Banc Corp. and its subsidiaries for
approximately 629,620 shares of Susquehanna's common stock. Susquehanna will
acquire ATCORP, INC. and its subsidiaries for approximately 771,750 shares of
Susquehanna's common stock. The acquisitions are intended to be accounted for by
the pooling-of-interests method of accounting. The acquisitions are both subject
to federal and state (New Jersey) regulatory approvals, as well as, the
shareholders of Farmers Banc Corp. and ATCORP, INC.
At March 31, 1996, Farmers Banc Corp reported total assets of $82,847; loans
of $38,745; deposits of $72,009; and total equity of $10,185. At March 31, 1996,
ATCORP, INC. reported total assets of $189,023; loans of $100,959; deposits of
$171,418; and total equity of $10,443.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
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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 affected the compara-
bility of Susquehanna's financial performance for the six months ended
June 30, 1996 and 1995 and for the second quarter of 1996 and 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 Reisters-
town 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 all the
outstanding capital stock of Reisterstown, thereby acquiring all of the assets
and assuming all the
liabilities of Reisterstown for $28.6 million in cash. 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 per share, 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"),
discussed later.
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 also 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 completed the acquisition of all of the
outstanding capital stock of Fairfax, thereby acquiring all of the assets and
assuming all the liabilities of Fairfax for $62.7 million in cash.
Accordingly, the transaction was treated under the purchase method of
accounting. Assets acquired were $455 million; loans acquired were $402
million; and deposits acquired were $396 million. The excess purchase price
of $21.4 million will be amortized over 15 years.
Earnings Summary
----------------
Susquehanna's net income for the quarter ended June 30, 1996 was a record
$8.3 million, 30.2% above the $6.4 million earned in the second quarter of
1995 and $315 thousand or 3.9% higher than the $8.0 million realized in the
first quarter of 1996. For the six months ended June 30, 1996 net income was
a record $16.4 million, $4.7 million or 40.8% above the $11.6 million earned
in the comparable period in 1995. The major influences on these earnings
increases were the Reisterstown and Fairfax acquisitions and the decrease in
the FDIC insurance premiums paid by the commercial banks.
Earnings per share for the first six months of 1996 was $1.24 compared to
$1.00 in 1995, while the return on average assets rose to 1.12% from the 1.00%
realized in 1995. The return on average equity rose to 11.76% at June 30,
1996 compared to 10.57% at June 30, 1995.
At June 30, 1996, the equity-to-assets ratio was 9.40% compared to 9.22%
at March 31, 1996, 10.57% at December 31, 1995 and 9.12% at June 30, 1995.
The book value per share at the same period ends was $21.48, $21.34, $21.11
and $19.75 respectively.
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 retain
deposits, rates paid on borrowed funds, and the levels of non-interest-bearing
demand deposits and equity capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-exempt interest has been adjusted using a marginal tax rate of 35% in
order to equate the yield to that of taxable interest rates. Net interest
income as a percentage of the sum of net interest income and other income was
85.4% and 87.9% for the six months ended June 30, 1996 and 1995,
respectively, and for the quarters ended June 30, 1996 and 1995 was 84.9% and
87.6%, respectively.
Net interest income, which is the major source of operating income,
reached $62.7 million through the six month period ending June 30, 1996, which
is 22.6% (i.e. $11.5 million) above that realized through June 30, 1995. This
increase was the result of a 25.2% increase in average earning assets as shown
in Table 2 offset by a slight decline in the net interest margin -- 4.89% to
4.74%. The primary factors for the asset growth are the acquisitions of
Reisterstown and Fairfax. The decline in the net interest margin was the
result of a 23 basis point increase in the cost of interest-bearing
liabilities, compared to a 10 basis point rise in the yield on earning assets.
The yield on time deposits rose from 5.20% during the first half of 1995 to
5.56% for the same period of 1996. For the three months ending June 30,
1996,compared to the three months ended March 31, 1996, the net interest
margin remained at 4.74% and, while the yield on time deposits declined to
5.48% from 5.64%, the interest-bearing demand deposits and the regular savings
deposits recorded
deposit increases of $57.7 million and $3.1 million respectively, with little
change in rates paid.
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 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 14.6% and 12.1% for the six months ended June 30,
1996 and 1995, respectively and for the three months ended June 30, 1996 and
1995 was 15.1% and 12.4% respectively.
Non interest income increased $3.7 million, or 52.2%, from $7.0 million
in the first six months of 1995 to $10.7 million in the first six months of
1996. For the three months ended June 30, 1996, the total of non interest
income was $5.7 million. This was $1.9 million or 51.2% above the comparable
quarter of 1995. For the first six months of 1996, trust revenues rose $201
thousand over the prior year's six months results, security gains realized
totaled $195 thousand compared to a $73 thousand loss in 1995 and gains on
the sale of loans exceeded 1995 gains by $1.7 million.
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.
Total non-interest expenses totaled $46.7 million in 1996, a $7.4
million, or 18.8%, increase over the first six months of 1995. For the
quarter ended June 30, 1996, the total of these expenses were $24.0 million.
This was $3.9 million, or 19.2%, above the same quarter of 1995 and exceeded
the first quarter of 1996 by $1.4 million. The reduction in the FDIC insurance
premium in the first six months of 1996 over 1995 totaled $1.3 million and
between the comparable second quarters was $669 thousand. Also included in
the operating expenses for the first six months of 1996 was amortization of
intangible assets of $2.2 million compared to $1.2 million in 1995.
Income Taxes
------------
Susquehanna's effective tax rate increased from 28.9% through the first
six months of 1995 to 32.8% through the first six months of 1996. State income
taxes applicable to Maryland banking companies and additional non-deductible
expenses relating to the Reisterstown and Fairfax acquisitions are the
principal causes for this rise.
Risk Assets
-----------
Table 3 shows an increase in non-performing assets at June 30, 1996 of
$6.4 million from December 31, 1995, compared to a decrease from June 30,
1995 of $3.9 million. The increase shown for the period January 1 through
June 30, 1996 includes $4.7 million acquired in the Fairfax transaction.
However, the ratio of non-performing assets to period-end loans and leases and
other real estate owned fell to 1.74% at June 30, 1996 from 1.79% at December
31, 1995.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 4, the provision was $192 thousand lower in 1996
while net charge-offs rose by $215 thousand. The allowance totaled $32.0
million at June 30, 1996 and represents 1.50% of period-end loans and leases
and 101% of the total of the non-performing loans and leases.
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 Tier I ratio at June 30,
1996 was 11.93%. The minimum total capital (Tier I & Tier II) ratio is 8%;
Susquehanna's total capital ratio at June 30, 1996 was 15.63%. The minimum
leverage ratio is 4%; Susquehanna's leverage ratio at June 30, 1996 was
8.21%.
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 $108.6 million or 17.9% of the investment
portfolio at June 30, 1996. Short-term investments totaling $67.0 million at
June 30, 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,
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 June 30, 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.
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
June 30, 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
====================================================================================================================================
Assets
- ------
Short - term investments $79,308 $1,028 5.21 $52,831 $772 5.86
Investment securities:
Taxable 505,981 7,697 6.12 472,076 6,552 5.57
Tax - advantaged 111,096 1,891 6.85 114,430 2,039 7.15
------------- -------- ------------- ------------ -------- -------------
Total investment securities 617,077 9,588 6.25 586,506 8,591 5.88
------------- -------- ------------- ------------ -------- -------------
Loans and leases, (net):
Taxable 2,076,983 47,760 9.25 1,619,022 38,421 9.52
Tax - advantaged 43,634 1,104 10.18 37,235 896 9.65
------------- -------- ------------- ------------ -------- -------------
Total loans and leases 2,120,617 48,864 9.27 1,656,257 39,317 9.52
------------- -------- ------------- ------------ -------- -------------
Total interest - earning assets 2,817,002 $59,480 8.49 2,295,594 $48,680 8.51
Allowance for loan and lease losses (32,501) ======== ============= (26,713) ======== =============
Other non - earning assets 237,715 182,301
------------- ------------
Total assets $3,022,216 $2,451,182
============= ============
Liabilities & Equity
- --------------------
Deposits:
Interest - bearing demand $648,744 $4,684 2.90 $477,990 $3,323 2.79
Savings 404,010 2,485 2.47 401,308 2,558 2.56
Time 1,179,341 16,067 5.48 907,718 12,318 5.44
Short - term borrowings 56,371 682 4.87 54,836 769 5.62
Long - term debt 137,436 2,368 6.93 97,917 2,048 8.39
------------- -------- ------------- ------------ -------- -------------
Total interest - bearing liabilities 2,425,902 $26,286 4.36 1,939,769 $21,016 4.35
Demand deposits 283,987 ======== ============= 250,676 ======== =============
Other liabilities 31,733 38,023
------------- ------------
Total liabilities $2,741,622 $2,228,468
------------- ------------
Stockholders' equity 280,594 222,714
------------- ------------
Total liabilities &stockholders' equity $3,022,216 $2,451,182
============= ============
Net interest income / yield on
average earning assets $33,194 4.74 $27,664 4.83
======== ============= ======== =============
- ------------------------------------------------------------------------------------------------------------------------------------
For the Six Month Period Ended For the Six Month Period Ended
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------------- --------------------------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
====================================================================================================================================
Assets
- ------
Short - term investments $80,981 $2,145 5.33 $46,228 $1,389 6.06
Investment securities:
Taxable 504,860 15,399 6.13 470,189 13,595 5.83
Tax - advantaged 110,440 3,783 6.89 116,507 4,157 7.20
------------- --------- ------------- ------------ -------- -------------
Total investment securities 615,300 19,182 6.27 586,696 17,752 6.10
------------- --------- ------------- ------------ -------- -------------
Loans and leases, (net):
Taxable 2,011,137 92,561 9.26 1,524,582 70,440 9.32
Tax - advantaged 44,242 2,234 10.15 40,267 1,836 9.19
------------- --------- ------------- ------------ -------- -------------
Total loans and leases 2,055,379 94,795 9.27 1,564,849 72,276 9.31
------------- --------- ------------- ------------ -------- -------------
Total interest - earning assets 2,751,660 $116,122 8.49 2,197,773 $91,417 8.39
Allowance for loan and lease losses (31,557) ========= ============= (25,387) ======== =============
Other non - earning assets 219,541 168,719
------------- ------------
Total assets $2,939,644 $2,341,105
============= ============
Liabilities & Equity
- --------------------
Deposits:
Interest - bearing demand $619,895 $8,741 2.84 $468,640 $6,431 2.77
Savings 402,466 4,906 2.45 394,141 5,015 2.57
Time 1,148,011 31,731 5.56 832,845 21,494 5.20
Short - term borrowings 52,782 1,288 4.91 59,373 1,683 5.72
Long - term debt 122,511 4,604 7.56 88,440 3,500 7.98
------------- --------- ------------- ------------ -------- -------------
Total interest - bearing liabilities 2,345,665 $51,270 4.40 1,843,439 $38,123 4.17
Demand deposits 274,930 ========= ============= 245,106 ======== =============
Other liabilities 39,426 30,898
------------- ------------
Total liabilities $2,660,021 $2,119,443
------------- ------------
Stockholders' equity 279,623 221,662
------------- ------------
Total liabilities &stockholders' equity $2,939,644 $2,341,105
============= ============
Net interest income / yield on
average earning assets $64,852 4.74 $53,294 4.89
========= ============= ======== =============
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%.
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - STATEMENTS OF CHANGES IN INCOME AND EXPENSES
- -------------------------------------------------------------------------------
Three months ended
June 30, 1996 compared
(In thousands) to June 30, 1995
- -------------------------------------------------------------------------------
Average Volumes Income / Expense
------------------- --------------------
$ % $ %
ASSETS:
Loans and leases, net 464,360 28.0 9,475 24.3
Investments 30,571 5.2 1,049 13.3
Money market investments 26,477 50.1 256 33.2
------------------------------------------
Total 521,408 22.7 10,780 22.6
==================== --------------------
LIABILITIES:
Interest-bearing demand 170,754 35.7 1,361 41.0
Savings 2,702 0.7 (73) (2.9)
Time 271,623 29.9 3,749 30.4
Short-term borrowings 1,535 2.8 (87) (11.3)
Long-term debt 39,519 40.4 320 15.6
------------------------------------------
Total 486,133 25.1 5,270 25.1
==================== --------------------
Net interest income 5,510 20.7
Provision for loan and lease losses 277 25.9
--------------------
Net interest income after
provision for loan and lease losses 5,233 20.5
Investment security gains/(losses) 29 193.3
Other operating income 1,992 52.9
--------------------
Income before operating expenses 7,254 24.7
Salaries and employee benefits 2,323 22.3
Net occupancy and equipment 426 17.6
Other operating expenses 1,212 16.6
--------------------
Total operating expenses 3,961 19.7
--------------------
Income before income taxes 3,293 35.8
Provision for income taxes 1,358 48.5
--------------------
Net income 1,935 30.2
====================
- -------------------------------------------------------------------------------
Six months ended
June 30, 1996 compared
(In thousands) to June 30, 1995
- -------------------------------------------------------------------------------
Average Volumes Income / Expense
-------------------- --------------------
$ % $ %
ASSETS:
Loans and leases, net 490,530 31.3 22,380 31.2
Investments 28,604 4.9 1,562 9.6
Money market investments 34,753 75.2 756 54.4
------------------------------------------
Total 553,887 25.2 24,698 27.7
==================== --------------------
LIABILITIES:
Interest-bearing demand 151,255 32.3 2,310 35.9
Savings 8,325 2.1 (109) (2.2)
Time 315,166 37.8 10,237 47.6
Short-term borrowings (6,591) (11.1) (395) (23.5)
Long-term debt 34,071 38.5 1,104 31.5
------------------------------------------
Total 502,226 27.2 13,147 34.5
==================== --------------------
Net interest income 11,551 22.6
Provision for loan and lease losses (192) (7.5)
--------------------
Net interest income after
provision for loan and lease losses 11,743 24.1
Investment security gains/(losses) 268 367.1
Other operating income 3,488 49.1
--------------------
Income before operating expenses 15,499 27.8
Salaries and employee benefits 4,431 21.7
Net occupancy and equipment 995 20.9
Other operating expenses 2,055 14.5
--------------------
Total operating expenses 7,481 19.0
--------------------
Income before income taxes 8,018 49.1
Provision for income taxes 3,282 69.6
--------------------
Net income 4,736 40.8
====================
- -------------------------------------------------------------------------------
Three months ended
June 30, 1996 compared
(In thousands) to March 31, 1996
- -------------------------------------------------------------------------------
Average Volumes Income / Expense
-------------------- --------------------
$ % $ %
ASSETS:
Loans and leases, net 130,476 6.6 2,943 6.5
Investments 3,554 0.6 (7) (0.1)
Money market investments (3,346) (4.0) (89) (8.0)
------------------------------------------
Total 130,684 4.9 2,847 5.1
==================== --------------------
LIABILITIES:
Interest-bearing demand 57,698 9.8 627 15.5
Savings 3,088 0.8 64 2.6
Time 62,660 5.6 403 2.6
Short-term borrowings 7,178 14.6 76 12.5
Long-term debt 29,850 27.7 132 5.9
------------------------------------------
Total 160,474 7.1 1,302 5.2
==================== --------------------
Net interest income 1,545 5.0
Provision for loan and lease losses 317 30.7
--------------------
Net interest income after
provision for loan and lease losses 1,228 4.2
Investment security gains/(losses) (107) (70.9)
Other operating income 923 19.1
--------------------
Income before operating expenses 2,044 5.9
Salaries and employee benefits 644 5.3
Net occupancy and equipment (61) (2.1)
Other operating expenses 831 10.8
--------------------
Total operating expenses 1,414 6.2
--------------------
Income before income taxes 630 5.3
Provision for income taxes 315 8.2
--------------------
Net income 315 3.9
====================
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 3 - RISK ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
(Dollars in thousands) 1996 1995 1995
- ---------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $24,995 $18,754 $27,876
Restructured accrual loans 6,589 6,703 6,818
Other real estate owned 5,638 5,344 6,464
- ---------------------------------------------------------------------------------------------------
Total nonperforming assets $37,222 $30,801 $41,158
===================================================================================================
As a percent of period-end loans and leases and
other real estate owned 1.74% 1.79% 2.39%
Loans and leases contractually
past due 90 days and still accruing $7,720 $4,820 $5,125
TABLE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $32,358 $23,803 $27,563 $23,845
Allowance acquired in business combination -- 3,323 4,229 3,323
Change in fiscal year of pooled entity -- -- -- (8)
Additions charged to operating expenses 1,348 1,071 2,379 2,571
- ----------------------------------------------------------------------------------------------------------------------------------
33,706 28,197 34,171 29,731
- ----------------------------------------------------------------------------------------------------------------------------------
Charge-offs (2,078) (662) (2,852) (2,413)
Recoveries 376 244 685 461
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,702) (418) (2,167) (1,952)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $32,004 $27,779 $32,004 $27,779
===================================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.32% 0.10% 0.21% 0.25%
Allowance as a percent of period-end loans and leases 1.50% 1.62% 1.50% 1.62%
Average loans and leases $2,120,617 $1,656,257 $2,055,379 $1,564,849
Period-end loans and leases 2,130,353 1,712,460 2,130,353 1,712,460
Susquehanna Bancshares, Inc. and subsidiaries
TABLE 5 -- Interest Rate Sensitivity
At June 30, 1996 1 - 90 90 - 180 180 - 365 1 year
(In thousands) days days days or more TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Short-term investments $66,910 $100 $67,010
Investment securities 41,266 37,120 79,138 447,837 605,361
Loans and leases, net of unearned income* 642,933 93,807 350,516 1,018,102 2,105,358
-----------------------------------------------------------------------
Total $751,109 $131,027 $429,654 $1,465,939 $2,777,729
=======================================================================
LIABILITIES:
Deposits:
Interest-bearing demand $650,052 $650,052
Savings 411,558 411,558
Time 208,243 152,029 277,307 422,611 1,060,190
Time in denominations of $100 or more 20,759 12,225 26,585 39,731 99,300
Short-term borrowings 44,357 4,227 48,584
Long-term debt 4,000 6,200 9,000 107,458 126,658
-----------------------------------------------------------------------
Total $1,338,969 $174,681 $312,892 $569,800 $2,396,342
=======================================================================
INTEREST SENSITIVITY GAP:
Periodic ($587,860) ($43,654) $116,762 $896,139 $381,387
Cumulative (631,514) (514,752) 381,387
CUMULATIVE GAP AS A PERCENTAGE
OF EARNING ASSETS -21.2% -22.7% -18.5% 13.7%
* Does not include nonaccruing loans and leases.
PART II. OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Shareholders was held on May 31, 1996. Proxies of
the meeting were solicited by management; there was no solicitation in
opposition to management's nominees for Directors set forth in the Proxy
Statement and all such nominees were elected. In addition, management's
proposal for the Equity Compensation Plan was approved by the shareholders as
required by Registrant's Articles of Incorporation.
a.) The following details the voting results with respect to each
nominee for office, including the number of shares not voted at
all (Not Present) and the proxies that brokers did not vote in
full (Broker Non-voted):
NOMINEE COMMON STOCK
------- ------------
Richard M. Cloney
For 10,547,229
Withhold/Abstain 187,517
Not Present 2,258,905
Broker Non-voted 162,266
----------
TOTAL 13,155,917
Richard E. Funke
For 10,599,537
Withhold/Abstain 135,209
Not Present 2,258,905
Broker Non-voted 162,266
----------
TOTAL 13,155,917
Edward W. Helfrick
For 10,323,795
Withhold/Abstain 410,951
Not Present 2,258,905
Broker Non-voted 162,266
----------
TOTAL 13,155,917
C. William Hetzer
For 10,595,175
Withhold/Abstain 139,571
Not Present 2,258,905
Broker Non-voted 162,266
----------
TOTAL 13,155,917
The terms of office of James G. Apple, Robert S. Bolinger, John M.
Denlinger, Henry H. Gibbel, Marley R. Gross, T. Max Hall, George J. Morgan,
Raymond M. O'Connell, Robert C. Reymer, Jr., and Roger V. Wiest continued
after the meeting.
b.) The following details the voting results with respect to the
approval of the Equity Compensation Plan:
COMMON STOCK
------------
For 9,710,739
Withhold/Abstain 780,192
Not Present 2,502,720
Broker Non-voted 162,266
----------
TOTAL 13,155,917
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Registrant was not required to file any reports on Form 8-K for the
period ended June 30, 1996. However, a report on Form 8-K was filed on or
about July 30, 1996, covering the proposed acquisition of ATCORP, INC., and
its wholly-owned subsidiary Equity National Bank, and the proposed acquisition
of Farmers Banc Corp, and its wholly-owned subsidiary Farmers National Bank.
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.
August 9, 1996 /s/ Robert S. Bolinger
-------------------------------------
Robert S. Bolinger
President and Chief Executive Officer
August 9, 1996 /s/ Drew K. Hostetter
-------------------------------------
Drew K. Hostetter
Treasurer & Principal Financial Officer