FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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
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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 March 31, 1997 the Registrant had 14,645,335 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 March 31, 1997 and 1996,
And December 31, 1996................................ 3
Consolidated Statements of Income
For the three months ended
March 31, 1997 and 1996............................. 4
Consolidated Statements of Cash Flow
For the Three Month Periods
Ended March 31, 1997 and 1996........................ 5
Notes to Consolidated Financial Statements............ 6-8
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.......................... 9-20
PART II OTHER INFORMATION................................ 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................. 21
SIGNATURES....................................... 21
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 1997 1996 1996
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Cash and due from banks $108,859 $106,847 $92,106
Short-term investments 87,632 103,244 102,705
Investment securities available for sale 503,148 532,748 586,143
Investment securities held to maturity 116,760 126,022 141,413
(Fair values of $117,142; $127,020; and $142,262)
Loans and leases, net of unearned income 2,375,846 2,349,776 2,271,412
Less: Allowance for loan and lease losses 33,624 33,800 34,054
------------ ------------ ------------
Net loans and leases 2,342,222 2,315,976 2,237,358
------------ ------------ ------------
Premises and equipment (net) 44,576 43,931 41,452
Accrued income receivable 21,409 21,933 24,896
Other assets 83,984 84,733 86,939
------------ ------------ ------------
Total assets $3,308,590 $3,335,434 $3,313,012
============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
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Deposits:
Demand $325,481 $337,651 $321,839
Interest-bearing demand 750,673 757,103 714,016
Savings 435,227 432,253 438,504
Time 1,083,215 1,089,189 1,164,550
Time of $100 or more 145,219 137,922 134,536
------------ ------------ ------------
Total deposits 2,739,815 2,754,118 2,773,445
------------ ------------ ------------
Short-term borrowings 67,899 100,650 62,923
Long-term debt 139,523 120,368 130,902
Accrued interest, taxes, and expenses payable 29,673 29,993 29,593
Other liabilities 14,461 16,849 15,041
------------ ------------ ------------
Total liabilities 2,991,371 3,021,978 3,011,904
Stockholders' equity:
Common stock
Authorized: 32,000,000 shares ($2.00 par value)
Issued: 14,665,638; 14,665,471; and 14,650,240, respectively 29,331 29,331 29,300
Surplus 85,168 85,165 84,357
Retained earnings 203,447 198,058 187,293
Unrealized gains and losses for available-for-sale
securities, net of taxes (572) 1,057 481
Less: Treasury stock, (20,303; 20,303 and 42,331 common shares
at cost, respectively) 155 155 323
------------ ------------ ------------
Total stockholders' equity 317,219 313,456 301,108
------------ ------------ ------------
Total liabilities and stockholders' equity $3,308,590 $3,335,434 $3,313,012
============ ============ ============
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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
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THREE MONTHS ENDED
MARCH 31
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(In thousands, except per share ) 1997 1996
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INTEREST INCOME
Interest and fees on loans and leases $52,802 $48,810
Interest on investment securities: Taxable 8,270 9,042
Tax-exempt 1,243 1,423
Interest on short-term investments 977 1,182
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Total interest income 63,292 60,457
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 5,693 4,635
Savings 2,697 2,674
Time 16,268 16,957
Interest on short-term borrowings 836 677
Interest on long-term debt 2,479 2,236
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Total interest expense 27,973 27,179
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Net interest income 35,319 33,278
Provision for loan and lease losses 1,206 1,046
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Net interest income after provision for loan and lease losses 34,113 32,232
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OTHER INCOME
Service charges on deposit accounts 1,568 1,399
Other service charges, commissions, fees 589 465
Income from fiduciary-related activities 858 781
Gain on sale of mortgages 482 535
Other operating income 1,830 1,903
Investment security gains/(losses) 3 153
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Total other income 5,330 5,236
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OTHER EXPENSES
Salaries and employee benefits 14,171 13,152
Net occupancy expense 1,994 2,003
Furniture and equipment expense 1,436 1,262
FDIC insurance premiums 181 430
Other operating expenses 8,012 7,888
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Total other expenses 25,794 24,735
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Income before income taxes 13,649 12,733
Provision for income taxes 4,193 4,062
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Net income $9,456 $8,671
==================================================================================================
Per share information:
Net income $0.65 $0.59
Cash dividends $0.30 $0.29
Average shares outstanding 14,645 14,606
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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)
Three months period ended March 31 1997 1996
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OPERATING ACTIVITIES:
Net income $9,456 $8,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 2,404 3,094
Provision for loan and lease losses 1,206 1,046
(Gain) / loss on securities transactions (3) (153)
Gain on sale of loans (482) (649)
Gain on sale of other real estate owned (7) (24)
Mortgage loans originated for resale (25,391) (52,443)
Sale of mortgage loans originated for resale 26,264 46,031
(Increase)/decrease in accrued interest receivable 524 (2,991)
Increase/(decrease) in accrued interest payable (2,532) 1,705
Increase/(decrease) in accrued expenses and taxes payable 2,212 501
Other, net (1,669) (4,001)
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Net cash provided by operating activities 11,982 787
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INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 17,051 23,706
Proceeds from the maturity of investment securities 70,852 36,021
Purchase of available-for-sale securities (50,529) (58,835)
Purchase of held-to-maturity securities (1,373) (16,818)
Net increase in loans and leases (27,843) (16,292)
Capital expenditures (1,777) (1,316)
Net cash (paid) / received in acquisition -- (31,298)
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Net cash used for investing activities 6,381 (64,832)
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FINANCING ACTIVITIES:
Net increase / (decrease) in deposits (14,303) 41,292
Net increase / (decrease) in short-term borrowings (32,751) (11,509)
Proceeds from issuance of long-term debt 25,000 40,000
Repayment of long-term debt (5,845) (2,832)
Proceeds from issuance of common stock 6 4,938
Cash paid for fractional shares of pooled entity (3) --
Dividends paid (4,067) (3,812)
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Net cash provided by/(used for) financing activities (31,963) 68,077
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NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (13,600) 4,032
CASH AND CASH EQUIVALENTS AT JANUARY 1 210,091 192,170
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CASH AND CASH EQUIVALENTS AT MARCH 31 $196,491 $196,202
===================================================================================================================
Cash and cash equivalents:
Cash and due from banks $108,859 $92,606
Short-term investments 87,632 103,596
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $196,491 $196,202
===================================================================================================================
Interest paid on deposits, short-term borrowings, and long-term debt was
$30,505 in 1997, and $25,474 in 1996. Income taxes paid were $318 in 1997, and
$267 in 1996. Amounts transferred to other real estate owned were $809 in 1997,
and $1,441 in 1996.
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
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, 1996 $28,910 $79,809 $182,434 $3,077 ($323) $293,907
Net income 8,671 8,671
Stock issued in public offering 390 4,546 4,936
Common stock issued under
employee benefit plans 2 2
Change in unrealized gain/loss on securities (2,596) (2,596)
Cash dividends paid:
Per common share of $0.29 (3,812) (3,812)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1996 $29,300 $84,357 $187,293 $481 ($323) $301,108
- --------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 1997 $29,331 $85,165 $198,058 $1,057 ($155) $313,456
Net income 9,456 9,456
Common stock issued under
employee benefit plans 6 6
Change in unrealized gain/loss on securities (1,629) (1,629)
Cash paid for fractional shares of pooled entity (3) (3)
Cash dividends paid:
Per common share of $0.30 (4,067) (4,067)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1997 $29,331 $85,168 $203,447 ($572) ($155) $317,219
================================================================================================================================
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, 1997 and 1996.
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 43 through 45 of the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 established standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. SFAS 128 simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15, "Earnings Per Share," by
replacing the presentation of primary earnings per share with a presentation of
basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application is not
permitted; however, restatement of all prior-period earnings per share data is
required upon adoption. The impact of adoption of SFAS 128 on Susquehanna
earnings per share data is immaterial. Susquehanna currently reports basic
earnings per share on its Consolidated Statements of Income and diluted earnings
per share would not be materially different from basic earnings per share.
Susquehanna Bancshares, Inc. and Subsidiaries
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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March 31, 1997 December 31, 1996
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(In thousands) Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S. Treasury $163,029 $162,553 $171,898 $172,241
U.S. Government agencies 125,524 124,592 128,513 128,243
State & municipal 9,628 9,695 9,505 9,680
Mortgage-backed 103,473 102,101 114,214 113,484
Corporates 82,294 82,554 86,398 87,130
Equities 20,131 21,653 20,576 21,970
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504,079 503,148 531,104 532,748
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Held-to-maturity:
U.S. Treasury $1,500 $1,500 $1,493 $1,493
U.S. Government agencies 2,045 1,979 2,487 2,439
State & municipal 97,186 97,627 104,815 105,788
Mortgage-backed 15,879 15,886 17,037 17,110
Corporates 150 150 190 190
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116,760 117,142 126,022 127,020
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Total investment securities $620,839 $620,290 $657,126 $659,768
====================================================================================================================================
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LOANS AND LEASES
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Loans and leases, net of unearned income at March 31, 1997 and
December 31, 1996, were as follows:
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March 31, December 31,
(In thousands) 1997 1996
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Commercial, financial, and agricultural $256,438 $249,886
Real estate - construction 228,400 226,920
Real estate - mortgage 1,571,564 1,539,898
Consumer 260,716 278,527
Leases 58,728 54,545
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Total loans and leases $2,375,846 $2,349,776
====================================================================================================================================
IMPAIRED LOANS
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An analysis of impaired loans as of March 31, 1997 and
December 31, 1996, is presented as follows:
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March 31, December 31,
(Dollars in thousands) 1997 1996
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Impaired loans without a related reserve $11,894 $10,401
Impaired loans with a reserve 1,342 3,961
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Total impaired loans $13,236 $14,362
====================================================================================================================================
Reserve for impaired loans $233 $601
====================================================================================================================================
An analysis of impaired loans for the three months periods ended
March 31, 1997 and 1996 is presented as follows:
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- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
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Average balance of impaired loans $14,457 $14,515
Interest income on impaired loans (cash-basis) 431 375
SHORT-TERM BORROWINGS
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Short-term borrowings at March 31, 1997 and
December 31, 1996, were as follows:
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March 31, December 31,
(In thousands) 1997 1996
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Securities sold under repurchase agreements $50,422 $58,516
Treasury tax and loan notes 7,477 5,634
Federal funds purchased -- 11,500
Federal Home Loan Bank borrowings 10,000 25,000
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Total short-term borrowings $67,899 $100,650
====================================================================================================================================
Susquehanna Bancshares, Inc. and Subsidiaries
LONG-TERM DEBT
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Long-term debt at March 31, 1997 and December 31, 1996, was as follows:
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March 31, December 31,
(In thousands) 1997 1996
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Subsidiaries:
Term note due July, 1998 $5,000 $5,000
Installment note due June, 1999 41 45
FHLB advances in varying maturities through December, 2003 48,956 29,795
Term loan note due September, 2014 526 528
Parent:
Senior notes due February, 2003 35,000 35,000
Subordinated notes due February, 2005 50,000 50,000
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Total long-term debt $139,523 $120,368
===================================================================================================================================
COMPLETED AND PENDING ACQUISITIONS
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(Dollars in thousands, except per share)
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On February 28, 1997, Susquehanna completed the acquisition of ATCORP,
Inc. ("AI"), a New Jersey bank holding company with $210 million in assets and
$186 million in deposits at the acquisition date. Susquehanna issued one share
of common stock to the shareholders of AI for each of the 771,750 outstanding
common shares of AI. The transaction was accounted for under the pooling-of-
interests method of accounting; accordingly, the consolidated financial
statements have been restated to include the consolidated accounts of AI for all
periods presented.
Also on February 28, 1997, Susquehanna completed the acquisition of
Farmers Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in
assets and $77 million in deposits at the acquisition date. Susquehanna issued
692,398 shares of common stock to the shareholders of FBC based on an exchange
ratio of 2.281 shares of Susquehanna common stock for each outstanding share of
FBC. The transaction was accounted for under the pooling-of-interests method of
accounting; accordingly, the consolidated financial statements have been
restated to include the consolidated accounts of FBC for all periods presented.
Previously reported information has been restated as follows:
Three Months Ended March 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Susquehanna AI FBC Susquehanna
As reported As reported As reported Restated
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Net interest income $30,603 $1,748 $927 $33,278
Provision for loan and lease losses 1,031 0 15 1,046
Other income 4,989 184 63 5,236
Other expense 22,699 1,481 555 24,735
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Income before taxes 11,862 451 420 12,733
Taxes 3,842 124 96 4,062
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Net income $8,020 $327 $324 $8,671
===================================================================================================================================
Earnings per share $0.61 $0.42 $0.47 $0.59
Average shares outstanding 13,142 772 692 14,606
On February 11, 1997, Founders' Bank, Bryn Mawr, PA, ("Founders"),
announced it has signed a definitive agreement in which Founders would become
wholly-owned by Susquehanna. Under the terms of the agreement, Susquehanna will
issue its common shares in exchange for all of Founders outstanding shares at a
multiple that approximates the market value of Susquehanna common stock to two
times the Founders book value at September 30, 1996, ($7,484), as long as
Susquehanna's common stock market price remains between $34 and $40 per share.
At December 31, 1996, Founders reported total assets of $103 million. Results of
operations for Founders were not significant to Susquehanna's consolidated
financial statements, and accordingly, pro forma condensed results of operations
have not been presented.
SUBSEQUENT EVENTS
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In May, 1997, Susquehanna combined its three savings banks (Atlantic
Federal Savings Bank, Reisterstown Federal Savings Bank, and Fairfax Savings, a
FSB) into one savings bank named Susquehanna Bank. As a result of this
combination, there was a reduction in the work force of Susquehanna Bank with
related severance packages. Consequently, Susquehanna recorded pre-tax severance
expense of $1,325,000 in the second quarter of 1997 related to these reductions.
The annual pre-tax cost savings related to these reductions approximates
$1,335,000.
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
1997 versus the first quarter of 1996. These transactions are described in the
following paragraphs.
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.
On February 28, 1997, Susquehanna completed the acquisition of ATCORP,
Inc. ("AI"), a New Jersey Bank holding company with $210 million in assets, $140
million in loans, $186 million in deposits and $11 million in equity at the
acquisition date. Susquehanna issued one share of common stock to the
shareholders of AI for each of the
9
771,750 outstanding common shares of AI. The transaction was accounted for under
the pooling-of-interests method of accounting; accordingly, the consolidated
financial statements have been restated to include the consolidated accounts of
AI for all periods presented.
Also, on February 28, 1997, Susquehanna completed the acquisition of
Farmers Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in
assets, $44 million in loans, $77 million in deposits and $10 million in equity
at the acquisition date. Susquehanna issued 692,398 shares of common stock to
the shareholders of FBC based on an exchange ratio of 2.281 shares of
Susquehanna common stock for each outstanding share of FBC. The transaction was
accounted for under the pooling-of-interests method of accounting; accordingly,
the consolidated financial statements have been restated to include the
consolidated accounts of FBC for all periods presented.
Earnings Summary
----------------
Susquehanna's net income for the first quarter of 1997 was $9,456,000,
a 9% increase over the net income of $8,671,000 reported in the first quarter of
1996 restated for the New Jersey acquisitions which closed in February 1997 and
were accounted for as poolings-of-interests. Contributing to this strong
earnings performance was a $2,041,000 or 6% increase in net interest income
resulting from a growth in average earning assets of 5%.
Earnings per share ("EPS") increased 10% from $.59 per share for the
first quarter of 1996 to $.65 per share for the first quarter of 1997. ROA and
ROE increased from 1.12% and 11.66%, respectively, in the first quarter of 1996
to 1.17% and 12.17%,
10
respectively, in the first quarter of 1997. For the first quarter of 1997,
tangible EPS, ROA and ROE were $.70, 1.28%, and 14.87%, respectively.
Total assets at March 31, 1997 of $3.3 billion were unchanged from
March 31, 1996 levels. Loans totaled $2.4 billion compared to $2.3 billion and
deposits were $2.7 billion down slightly from March 31, 1996 levels. Equity
capital was $317 million at March 31, 1997, or $21.66 per share compared to $301
million, or $20.61 per share at March 31, 1996.
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 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
11
interest income as a percentage of net interest income and other income was 87%
and 86% for the quarters ended March 31, 1997 and 1996, respectively.
Net interest income increased $2.0 million from $33.3 million in the
first quarter to 1996 to $35.3 million in the first quarter of 1997. This
increase was due to a 5% increase in average earning assets as noted in Table 2
and a 7 basis point increase in net interest margin from 4.73% in 1996 to 4.80%
in 1997. The increase in average earning assets was due to an 11% increase in
loans and leases offset by a 9% decrease in investments. The increase in net
interest margin was due primarily to a reduction in time deposit cost of funds
from 5.62% in 1996 to 5.40% in 1997 as Susquehanna has been lowering time
deposit rates at its savings banks.
Other Income
------------
Non-interest income, recorded as other income, consists of service
charges on deposit accounts, commissions, fees received for travelers' check
sales and money orders, fees for trust services, premium income generated from
reinsurance activities, gains and losses on security transactions, net gains on
sales of mortgages, net gains on sales of other real estate owned and other
miscellaneous income, such as safe deposit box rents. Other income as a
percentage of net interest income and other income was 13% and 14% for the
periods ended March 31, 1997 and 1996, respectively.
Non-interest income increased $0.1 million or 2% from $5.2 million in
the first quarter of 1996 to $5.3 million in the first quarter of 1997. This
increase resulted primarily from an increase in service charges and trust fees
offset by a decline in mortgage gains, other income and security gains.
12
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 $1.1 million or 4% from $24.7 million
in the first quarter of 1996 to $25.8 million in the first quarter of 1997.
This increase resulted primarily from an increase in salaries and employee
benefits.
Income Taxes
------------
Susquehanna's effective tax rate decreased from 31.90% in the first
quarter of 1996 to 30.72% in the first quarter of 1997 due primarily to higher
tax-exempt income.
Risk Assets
-----------
Table 3 shows a slight increase in nonperforming assets from $33.6
million at December 31, 1996 to $33.8 million at March 31, 1997, while
nonperforming assets to period-end loans and OREO declined from 1.43% at
December 31, 1996 to 1.42% at March 31, 1997. Loan loss reserve to non-
performing loans at March 31, 1997 was 118% compared with 130% at December 31,
1996.
13
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 4, the provision increased by $0.2 million
from the first quarter of 1996 to the first quarter of 1997 as net charge-offs
increased by $0.9 million for the same periods. The allowance at March 31,
1997 was 1.42% of period-end loans and leases compared to 1.50% at March 31,
1996.
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, 1997
was 11.94%. The minimum total capital (Tier II) ratio is 8%; Susquehanna's
ratio at March 31, 1997 was 15.33%. The minimum leverage ratio is 4%;
Susquehanna's leverage ratio at March 31, 1997 was 8.64%.
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.
14
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 $111 million or 17.9% of the investment
portfolio at March 31, 1997. Short-term investments totaling $88 million at
March 31, 1997 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 March 31, 1997. An
institution with more
15
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.
16
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
March 31, 1997 March 31, 1996
- ------------------------------------------------------------------------------------------- ---------------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
====================================================================================================================================
Assets
- ------
Short - term investments $72,419 $977 5.47 $88,250 $1,182 5.39
Investment securities:
Taxable 532,997 8,270 6.29 585,002 9,042 6.22
Tax - advantaged 109,812 1,908 7.05 124,967 2,184 7.03
------------- ----------- ------- ------------- ----------- --------
Total investment securities 642,809 10,178 6.42 709,969 11,226 6.36
------------- ----------- ------- ------------- ----------- --------
Loans and leases, (net):
Taxable 2,311,648 52,107 9.14 2,083,380 48,061 9.28
Tax - advantaged 45,772 1,069 9.47 46,306 1,153 10.01
------------- ----------- ------- ------------- ----------- --------
Total loans and leases 2,357,420 53,176 9.15 2,129,686 49,214 9.29
------------- ----------- ------- ------------- ----------- --------
Total interest - earning assets 3,072,648 $64,331 8.49 2,927,905 $61,622 8.46
=========== ======= =========== ========
Allowance for loan and lease losses (33,789) (32,322)
Other non - earning assets 240,075 216,579
------------- -------------
Total assets $3,278,934 $3,112,162
============= =============
Liabilities & Equity
- --------------------
Deposits:
Interest - bearing demand $747,912 $5,693 3.09 $657,387 $4,635 2.84
Savings 434,701 2,697 2.52 435,209 2,674 2.47
Time 1,221,553 16,268 5.40 1,213,650 16,957 5.62
Short - term borrowings 66,778 836 5.08 54,720 677 4.98
Long - term debt 140,000 2,479 7.18 107,586 2,236 8.36
------------- ----------- ------- ------------- ----------- --------
Total interest - bearing liabilities 2,610,944 $27,973 4.35 2,468,552 $27,179 4.43
=========== ======= =========== ========
Demand deposits 310,999 294,184
Other liabilities 41,814 50,205
-------------- -------------
Total liabilities $2,963,757 $2,812,941
-------------- -------------
Stockholders' equity 315,177 299,221
-------------- -------------
Total liabilities & stockholders' equity $3,278,934 $3,112,162
============== =============
Net interest income / yield on
average earning assets $36,358 4.80 $34,443 4.73
=========== ======= =========== ========
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 Three months ended
March 31, 1997 compared March 31, 1997 compared
to March 31, 1996 to December 31, 1996
(In thousands) Average Volumes Income / Expense Average Volumes Income / Expense
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS: $ % $ % $ % $ %
- ------------------------------------------------------------------------------------------------------------------------------
Loans and Leases 227,734 10.7 3,992 8.2 14,877 0.6 (1,235) (2.3)
Investments (67,160) (9.5) (952) (9.1) (25,789) (3.9) (443) (4.4)
Short-term investments (15,831) (17.9) (205) (17.3) 9,385 14.9 89 10.0
- ------------------------------------------------------------------------------------------------------------------------------
Total 144,743 4.9 2,835 4.7 (1,527) (0.0) (1,589) (2.4)
==================== --------------------- ================= -------------------
LIABILITIES:
Interest-bearing demand 90,525 13.8 1,058 22.8 5,851 0.8 53 0.9
Savings (508) (0.1) 23 0.9 1,615 0.4 8 0.3
Time 7,903 0.7 (689) (4.1) (23,403) (1.9) (713) (4.2)
Short-term borrowings 12,058 22.0 159 23.5 (3,756) (5.3) (138) (14.2)
Long-term debt 32,414 30.1 243 10.9 16,016 12.9 249 11.2
- ------------------------------------------------------------------------------------------------------------------------------
Total 142,392 5.8 794 2.9 (3,677) (0.1) (541) (1.9)
==================== --------------------- ================= -------------------
Net interest income 2,041 6.1 (1,048) (2.9)
Provision for loan and lease losses 160 15.3 16 1.3
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan and lease losses 1,881 5.8 (1,064) (3.0)
Investment security gains/(losses) (150) (98.0) 63 105.0
Other operating income 244 4.8 (263) (4.7)
- ------------------------------------------------------------------------------------------------------------------------------
Income before operating expenses 1,975 5.3 (1,264) (3.1)
- ------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits 1,019 7.7 (389) (2.7)
Net occupancy & equipment 165 5.1 48 1.4
Other operating expenses (125) (1.5) (1,939) (19.1)
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,059 4.3 (2,280) (8.1)
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 916 7.2 1,016 8.0
Provision for income taxes 131 3.2 (316) (7.0)
- ------------------------------------------------------------------------------------------------------------------------------
Net income 785 9.1 1,332 16.4
==============================================================================================================================
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 3- RISK ASSETS
- --------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $22,049 $19,574 $25,299
Restructured accrual loans 6,349 6,429 6,645
Other real estate owned 5,408 7,620 6,835
- --------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $33,806 $33,623 $38,779
==========================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 1.42% 1.43% 1.70%
Loans and leases contractually
past due 90 days and still accruing $ 9,469 $ 8,962 $ 8,438
TABLE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $33,800 $29,277
Allowance acquired in business combination -- 4,229
Additions charged to operating expenses 1,206 1,046
- --------------------------------------------------------------------------------------------------------------------------
35,006 34,552
- --------------------------------------------------------------------------------------------------------------------------
Charge-offs (1,742) (807)
Recoveries 360 309
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,382) (498)
- --------------------------------------------------------------------------------------------------------------------------
Balance - Period end $33,624 $34,054
==========================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.24% 0.09%
Allowance as a percent of period-end loans and leases 1.42% 1.50%
Average loans and leases $2,357,420 $2,129,686
Period-end loans and leases 2,375,846 2,271,412
Susquehanna Bancshares, Inc. and subsidiaries
TABLE 5 --- Interest Rate Sensitivity
- -----------------------------------------------------------------------------------------------------------------------------
At March 31, 1997 1 - 90 90 - 180 180 - 365 1 year
(In thousands) days days days or more TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Short-term investments $87,632 $87,632
Investment securities 73,646 39,720 80,018 426,524 619,908
Loans and leases, net of unearned income * 701,925 97,551 368,910 1,185,411 2,353,797
-----------------------------------------------------------------------
Total $863,203 $137,271 $448,928 $1,611,935 $3,061,337
=======================================================================
LIABILITIES:
Interest-bearing demand $750,673 $750,673
Savings 435,227 435,227
Time 204,852 196,961 270,116 411,286 1,083,215
Time in denominations of $100 or more 49,915 18,410 35,828 41,066 145,219
Short-term borrowings 67,899 67,899
Long-term debt 29,004 82 6,287 104,150 139,523
-----------------------------------------------------------------------
Total $1,537,570 $215,453 $312,231 $556,502 $2,621,756
=======================================================================
INTEREST SENSITIVITY GAP:
Periodic ($674,367) ($78,182) $136,697 $1,055,433 $439,581
Cumulative (752,549) (615,852) 439,581
Cumulative gap as a percentage of
earning assets -22.0% -24.6% -20.1% 14.4%
* Does not include nonaccruing loans and leases.
20
PART II. OTHER INFORMATION
-----------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
On March 14, 1997, Registrant filed a Report on Form 8-K, under Item
5, which discussed completion of the acquisitions of Farmers Banc Corp and
ATCORP, Inc. 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, 1997 /s/ Robert S. Bolinger
___________________________________
Robert S. Bolinger
President and Chief Executive Officer
May 13, 1997 /s/ Drew K. Hostetter
____________________________________
Drew K. Hostetter
Treasurer, and Principal Financial
Officer