<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number: 0-10674
December 31, 1995
SUSQUEHANNA BANCSHARES, INC.
____________________________________________________________
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Pennsylvania 23-2201716
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 626-4721
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which
- -------------------- registered:
-----------
Common Stock, Par Value $2.00 per share Common Stock is not registered
on any exchange.
</TABLE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__]
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 [__]
As of February 23, 1996, 13,143,761 shares of the registrant's Common Stock
were outstanding. The aggregate market value (based on the bid price) of such
shares held by non-affiliates on that date was $357,513,688.
1
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PART I
------
Item 1. Business and History
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General
Susquehanna Bancshares, Inc. ("Susquehanna" or the "Company") is a
multi-bank financial holding company headquartered in Lititz, Pennsylvania. As
of December 31, 1995, the Company operated as a super-community bank holding
company with six banks, two thrifts, and two non-bank subsidiaries. (An
additional thrift, Fairfax Financial Corporation, Baltimore, Maryland, and its
wholly-owned subsidiary, Fairfax Savings, a Federal Savings Bank ("Fairfax
Savings"), was acquired on February 1, 1996.) These subsidiaries provide banking
and banking-related services from 97 offices located in central Pennsylvania and
West and Central Maryland. As of December 31, 1995, Susquehanna had assets of
$2.6 billion, net loans receivable of $1.7 billion, deposits of $2.1 billion and
shareholders' equity of $273 million.
The relative sizes and profitability of Susquehanna's subsidiaries as
of and for the year ended December 31, 1995, are depicted in the following
table: (Dollars in Thousands)
<TABLE>
<CAPTION>
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Subsidiary Assets Percent of Total Net Income Percent of Total
---------- ------ ---------------- ----------- ----------------
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<S> <C> <C> <C> <C>
Farmers First Bank $ 801,858 31% $11,452 44%
Farmers & Merchants Bank and Trust 510,352 20% 4,536 17%
First National Bank 260,204 10% 3,310 13%
Williamsport National Bank 229,410 9% 4,107 16%
Citizens National Bank of So. Penna. 167,777 7% 2,062 8%
Spring Grove National Bank 63,344 2% 675 3%
*Atlantic Federal Savings Bank 226,093 9% 1,856 7%
*Reisterstown Federal Savings Bank 266,095 10% 3,482 13%
Susque-Bancshares Leasing Co., Inc. 29,516 1% 574 2%
(leasing)
Susque-Bancshares Life Insurance Co. 2,462 - 74 -
(life insurance)
Parent (including consolidation adjustments) 9,046 1% (6,111) (23%)
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Total $2,586,157 100% $26,017 100%
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</TABLE>
*subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares
South, Inc. On February 1, 1996, Susquehanna completed the acquisition of
Fairfax Savings, with total assets of approximately $476,000,000 as of such
date. For the period January 1, 1996 through February 1, 1996, Fairfax Savings'
net income (loss) was $2 thousand. Fairfax Savings is also a subsidiary of
Susquehanna Bancshares South, Inc.
Susquehanna's subsidiaries provide commercial and retail banking
services in Central and South Central Pennsylvania, principally in Franklin,
Lancaster, Northumberland, Snyder, York and Lycoming Counties, in Western
Maryland, principally in Allegany and Washington Counties, and in Central
Maryland, including
2
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Baltimore County, Baltimore City, Carroll County, Harford County, Cecil County
and Anne Arundel County. Certain Susquehanna subsidiaries also provide trust,
leasing and insurance services.
As a "super-community" bank holding company, the Company's strategy
has been to manage its banking subsidiaries on a decentralized basis, allowing
each subsidiary operating in different markets to retain its name and board of
directors as well as substantial autonomy in its day to day operations. The
Company believes that this strategy permits these institutions greater
flexibility to better serve their markets, increasing responsiveness to local
needs, and differentiates Susquehanna from other large competitors. Susquehanna
continues, however, to implement consolidations in selected businesses,
operations and support functions in order to achieve greater economies of scale
and cost savings. The Company has commenced a full consolidation of back office
data processing operations of its six bank subsidiaries, which is expected to be
completed by the end of 1996. The Company further anticipates integrating its
trust and mortgage banking operations. Susquehanna also provides its banking
subsidiaries guidance in the areas of credit policy and administration,
strategic planning, investment portfolio management and other financial and
administrative services.
Susquehanna has no employees, other than its officers, each of whom
are employees of one or the other of its bank or thrift subsidiaries. As of
December 31, 1995, the subsidiaries of Susquehanna employed 1,100 full-time and
278 part-time employees.
Susquehanna was incorporated in Pennsylvania in 1982. Its executive
offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and
its telephone number is (717) 626-4721.
Business
Susquehanna provides a wide range of retail and commercial banking
services. Susquehanna's strategy for its retail banking businesses is to expand
its deposit and other product market share through a high level of customer
service, new product offerings, application of new technologies and delivery
systems, and selective acquisitions. The Company operates an extensive branch
network and has a strong market presence in its primary markets in Pennsylvania
and Maryland. As a result of the development of broad banking relations with
its customers, the Company's lending and investing activities are funded almost
entirely by core deposits.
The Company's retail banking services include checking and savings
accounts, money market accounts, certificates of deposit, individual retirement
accounts, Christmas clubs, mutual funds and annuities (see discussion below),
home equity lines of credit, residential mortgage loans, home improvement loans,
student loans, automobile loans and personal loans.
In December, 1995, Susquehanna introduced six automated loan machines
("ALM"), three in Maryland and three in Pennsylvania. ALMs represent a
relatively new development in bank services delivery systems and afford
consumers the convenience of 24 hour credit up to a maximum loan amount of
$5,000.
The Company also initiated a credit card offering in late 1995. Using
experience and resources developed in a program operated through one of its
Pennsylvania bank subsidiaries, the credit card program was expanded to include
similar offerings through other Susquehanna subsidiaries. The program targets
existing
3
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customers and selected prospects in Susquehanna's market areas. Susquehanna
expects to begin offering a debit card some time in 1996.
Through its subsidiary, Susque-Bancshares Life Insurance Co., the Company
offers certain credit related insurance products.
The acquisition of the Maryland thrifts substantially enhances
Susquehanna's mortgage origination and mortgage banking capabilities. The
consolidation of the resources that are available throughout its system, planned
for 1996, will facilitate an expansion of Susquehanna's mortgage banking
operations in its Maryland and Pennsylvania markets.
Susquehanna's commercial lending operations include commercial, financial
and agricultural lending (12% of the total loan portfolio at December 31, 1995),
real estate construction lending (10%), and commercial mortgage lending (19%).
Loans originated by each subsidiary are subject to central review and uniform
Company credit standards. Nearly all of the Company's loans are concentrated in
the markets served by its subsidiary banks and thrifts.
Business of Farmers First. Farmers First is engaged in commercial banking and
- --------------------------
trust business as authorized by the Pennsylvania Banking Code of 1965. This
involves accepting demand, time and savings deposits and granting loans
(consumer, commercial, real estate and business) to individuals, corporations,
partnerships, associations, municipalities and other governmental bodies.
Through its trust department, Farmers First renders services as trustee,
executor, administrator, guardian, managing agent, custodian, investment advisor
and other fiduciary activities authorized by law. During 1994, Farmers First
acquired all of the assets of its subsidiary, Farmers AgCredit Corp., which has
ceased all business activity. Farmers First owns no other subsidiaries. As of
December 31, 1995, Farmers First had twenty-two (22) full-service and ten (10)
limited-service banking offices in Lancaster County. Farmers First's business
is not dependent on any one customer, and the loss of any customer or a few
customers would not have a material adverse effect upon it.
As of December 31, 1995, Farmers First on a consolidated basis had
total assets of $801.9 million, total shareholder's equity of $96.8 million and
total deposits of $657.9 million.
Business of Citizens. Citizens is engaged in commercial banking and trust
- --------------------
business as authorized by the National Bank Act. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Through its trust department,
Citizens renders services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other fiduciary activities
authorized by law. Citizens owns no subsidiaries.
As of December 31, 1995, Citizens had six (6) full-service banking
offices in Franklin County. Citizens' business is not dependent on any one
customer, and the loss of any customer or a few customers would not have a
material adverse effect upon it.
As of December 31, 1995, Citizens had total assets of $167.8 million,
total shareholder's equity of $15.2 million and total deposits of $150.7
million.
4
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Business of First National. First National is engaged in commercial banking and
- --------------------------
trust business authorized by the National Bank Act. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Through its trust department,
First National renders services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other fiduciary activities
authorized by law. First National owns no subsidiaries.
As of December 31, 1995, First National had ten (10) full-service and
one (1) limited-service banking offices. The main office of First National is
located in Sunbury, Pennsylvania. Five (5) full-service and one (1) limited-
service branches are located in Northumberland County, while three (3) full-
service branches are located in contiguous Snyder County, one (1) full-service
branch in each of Columbia County, and Union County. First National's business
is not dependent on any one customer, and the loss of any customer or a few
customers would not have a material adverse effect upon it.
As of December 31, 1995, First National had total assets of $260.2
million, total shareholder's equity of $23.9 million and total deposits of
$231.8 million.
Business of Williamsport. Williamsport is engaged in commercial banking and
- ------------------------
trust business authorized by the National Bank Act. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Through its trust department,
Williamsport renders services as trustee, executor, administrator, guardian,
managing agent, custodian, investment advisor and other fiduciary activities
authorized by law. Williamsport owns no subsidiaries.
As of December 31, 1995, Williamsport had six (6) full-service and one (1)
limited-service banking offices in Lycoming County. The main office of
Williamsport is located in Williamsport, Pennsylvania. Williamsport's business
is not dependent on any one customer, and the loss of any customer or a few
customers would not have a material adverse effect upon it.
As of December 31, 1995, Williamsport had total assets of $229.4
million, total shareholder's equity of $27.4 million and total deposits of
$198.1 million.
Business of Spring Grove. Spring Grove is engaged in commercial banking
- ------------------------
authorized by the National Bank Act. This involves accepting demand, time and
savings deposits and granting loans (consumer, commercial, real estate and
business) to individuals, corporations, partnerships, associations and
municipalities and other governmental bodies. Spring Grove owns no subsidiaries.
As of December 31, 1995, Spring Grove had three (3) full-service
banking offices. The main office is located in the borough of Spring Grove,
York County, Pennsylvania. A branch is maintained nearby in Jackson Township.
During 1995, Spring Grove also opened a new branch on the Susquehanna Trail
North in York. Spring Grove is not dependent on any one customer, and the loss
of any customer or a few customers would not have a material adverse effect upon
it.
5
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As of December 31, 1995, Spring Grove had total assets of $63.3
million, total shareholder's equity of $6.1 million and total deposits of $56.0
million.
Business of F & M. F & M is engaged in commercial banking as authorized by the
- -----------------
banking laws of the State of Maryland. This involves accepting demand, time and
savings deposits and granting loans (consumer, commercial, real estate and
business) to individuals, corporations, partnerships, associations,
municipalities and other governmental bodies. Through its Trust Department,
which commenced operation during 1993, F & M is able to render services as
trustee, executor, administrator, guardian, managing agent, custodian,
investment advisor, and other fiduciary activities authorized by law. On
November 30, 1993, F & M created an insurance agency subsidiary, F&M Insurance
Agency, Inc., whose purpose is to engage in insurance agency and brokerage
business as permitted for subsidiaries of banking institutions under Maryland
and federal law. During 1994, F&M changed its name to "Farmers & Merchants Bank
and Trust". Effective January 1, 1995, F&M commenced operation of an
investment subsidiary in Delaware, FMBT Incorporated, which purpose is to assist
in investment portfolio management.
As of December 31, 1995, F&M had twenty-one (21) full-service and six
(6) limited-service banking offices in Washington and Allegany Counties,
Maryland. F & M's business is not dependent on any one customer, and the loss
of any customer or a few customers would not have a material adverse effect upon
it.
As of December 31, 1995, F&M had total assets of $510.4 million, total
shareholder's equity of $45.8 million and total deposits of $445.7 million.
Business of Atlantic Federal. Atlantic Federal is a federally chartered savings
- ----------------------------
bank headquartered in Baltimore, Maryland. It is a wholly-owned subsidiary of
Susquehanna Bancshares South, Inc., which, in turn, is a wholly-owned subsidiary
of Susquehanna.
Atlantic Federal is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to invest in mortgage loans secured primarily by
residential real estate and, to a lesser extent, multi-family and commercial
loans, mortgage-backed securities and investment and money market securities.
A niche within the residential market includes construction loans, for which
Atlantic Federal competes vigorously. Atlantic Federal also generates, to a
lesser extent, consumer and commercial loans, and is involved in investment and
money market securities activities.
Atlantic Federal was originally chartered in 1897, and converted from
mutual to stock form in May 1986. Atlantic Federal is a member of the Federal
Home Loan Bank System and a stockholder of the Federal Home Loan Bank of
Atlanta. Its savings deposits have been federally insured since 1938. Atlantic
Federal has three subsidiaries, including Atlantic Home Mortgage Corporation,
Atlanfed Service Corporation and Atlanfed Financial Corporation.
As of December 31, 1995, Atlantic Federal had nine (9) full service
offices. Its main office is located in Baltimore County, Maryland. Two (2)
full service offices are located in each of the City of Baltimore and in Cecil,
Harford and Anne Arundel Counties, Maryland. Its business is not dependent upon
any one customer, and the loss of any customer or a few customers would have no
material adverse effect upon it.
6
<PAGE>
As of December 31, 1995, Atlantic Federal had total assets of $226.1
million, total shareholders' equity of $17.6 million, and total deposits of
$159.4 million.
Business of Reisterstown Federal.
- --------------------------------
Reisterstown Federal is a federally-chartered stock savings bank
headquartered in Reisterstown, Maryland, a suburb of Baltimore, Maryland. It
also is a wholly-owned subsidiary of Susquehanna Bancshares South, Inc.
Reisterstown Federal's business consists primarily of attracting
savings deposits from the general public and originating residential, land and
construction loans collateralized by single-family homes and first mortgage
loans on residential and commercial properties located in the State of Maryland.
Reisterstown Federal also makes savings account loans and invests in U.S.
Government and agency obligations, money market obligations and mortgage-backed
securities. Over 90 percent of Reisterstown Federal's assets are related to its
offering of services enabling a homebuyer to purchase a building lot, to obtain
construction financing either directly or indirectly through a builder and,
finally, to secure a permanent mortgage.
Reisterstown Federal was originally chartered in May, 1959 and
converted from mutual to stock form in February, 1987. Reisterstown Federal has
been a member of the Federal Home Loan Bank System, and its savings deposits
have been federally insured since 1959. It has two subsidiaries, including
American Title, Inc, and Time Financial Services, both located in Reisterstown,
Maryland.
As of December 31, 1995, Reisterstown Federal had two (2) full service
offices. The main office of Reisterstown Federal is located in Reisterstown.
The branch office is located in Carroll County, Maryland. Its business is not
dependant upon any one customer, and the loss of any customer or a few customers
would not have a material effect upon it.
As of December 31, 1995, Reisterstown Federal had total assets of
$266.1 million, total shareholder's equity of $28.5 million, and total deposits
of $223.6 million.
Business of Fairfax Savings
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On February 1, 1996, Susquehanna completed acquisition of Fairfax
Savings, a federally chartered, federally insured thrift institution. It is
headquartered in Baltimore, Maryland. Fairfax Savings also is a wholly-owned
subsidiary of Susquehanna Bancshares South, Inc.
Fairfax Savings attracts deposits from the general public through its
nine offices in metropolitan Baltimore and in Carroll, Wicomico and Worcester
Counties. It uses such deposits to originate loans on one-to-four family
residential collateralized first mortgage loans. Fairfax Savings also
originates non-residential and multi-family real estate and construction loans,
second mortgage loans on residential properties and consumer loans. Through its
subsidiary, Fairfax Mortgage Corporation, Fairfax Savings originates one-to-four
family residential mortgage loans for sale in the secondary market.
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Fairfax Savings occupies two narrow niche markets within the financial
services industry -- retail community banking, largely limited to deposit
gathering, and mortgage banking. Lending activities are either supportive to or
tangential to these niche markets.
As of February 1, 1996, Fairfax Savings had nine (9) full service
offices. The main office of Fairfax Savings is located in the City of
Baltimore. Five of its full service offices are located in Baltimore County,
and one full service office is located in each of Carroll, Wicomico and
Worcester counties. Its business is not dependent upon any one customer and the
loss of any customer or a few customers would have no material adverse effect
upon it.
As of February 1, 1996, the date of Susquehanna's acquisition of
Fairfax Savings, it had total assets of approximately $476,000,000.
Recent and Pending Acquisitions
In furtherance of its strategy to reinforce and expand its
North/Central Maryland franchise, in April 1994 Susquehanna entered into
definitive agreements to acquire three Maryland thrift holding companies
(collectively, the "Mergers"). Two of the Mergers closed during 1995, and the
third closed in February, 1996. The combined assets of these three institutions
were $955 million at December 31, 1995, and at such date Susquehanna would have,
on a proforma basis, $1.5 billion, or 48%, of its assets in Maryland and $1.6
billion, or 52%, of its assets in Pennsylvania. The three Mergers are summarized
below.
. Atlanfed Bancorp, Inc. ("Atlanfed") and its primary subsidiary,
Atlantic Federal Savings Bank, a federally-chartered stock savings
bank ("Atlantic Federal"), was acquired for 1.2 million shares of
Susquehanna Common Stock (the "Atlanfed Merger"), effective at the
beginning of day on April 1, 1995. At December 31, 1995, Atlanfed had
assets of $226 million and operated 9 banking offices in Baltimore
and surrounding suburbs.
. Reisterstown Holdings, Inc. ("Reisterstown") of Reisterstown,
Maryland, and its subsidiary, Reisterstown Federal Savings Bank
("Reisterstown Federal"), a federally-chartered stock savings bank,
were acquired for cash consideration of $28.6 million (the
"Reisterstown Merger"), effective at the close of day on April 21,
1995. At December 31, 1995, Reisterstown had assets of $266 million
and operated two banking offices located in a suburb of Baltimore.
. Fairfax Financial Corporation ("Fairfax") of Baltimore, Maryland, and
its subsidiary, Fairfax Savings, FSB, were acquired for cash
consideration of $62.6 million (the "Fairfax Merger"), effective at
the beginning of day on February 1, 1996. At December 31, 1995,
Fairfax had assets of $467 million and operated nine banking offices
located in metropolitan Baltimore and Carroll, Wicomico and Worcester
Counties.
In addition to these three thrift acquisitions, in July 1994
Susquehanna acquired certain assets and assumed certain liabilities associated
with eight branch banking offices of The First National Bank of Maryland located
in Allegany County, Maryland (the "Allegany Branch Acquisition"). This
transaction increased Susquehanna's assets by $194 million.
8
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As a result of the Mergers and the Allegany Branch Acquisition, as of
the close of business February 1, 1996, Susquehanna held consolidated assets of
approximately $3 billion, and operated 106 community banking offices throughout
Central Pennsylvania and Maryland.
On February 9, 1995, Susquehanna completed a public offering of $50
million of 9.00% subordinated notes due 2005 at a public offering price of
99.478% of the aggregate principal amount. The net proceeds of the offering
were approximately $49.4 million. Approximately $28.6 million of the net
proceeds of the offering were used to fund the cash consideration required for
the acquisition of Reisterstown. The balance was used for general corporate
purposes, including the repayment of short term indebtedness and to partially
fund the cash consideration for Fairfax.
On December 22, 1995, Susquehanna announced that it had completed an
underwritten public offering of 1,300,000 shares of its Common Stock at a public
offering price of $26.50. The sale of an additional 195,000 shares (a Greenshoe)
on January 2, 1996, netted an additional $4,935,450. The net proceeds of the
offering were used to fund a portion of the cash consideration for the
acquisition of Fairfax. The offering was managed by Oppenheimer & Co., Inc.,
Legg Mason Wood Walker, Inc. and Keefe, Bruyette & Woods, Inc.
On January 29, 1996, the Company announced that it had completed the
public offering of $35 million 6.30% Senior Notes due February 1, 2003.
Oppenheimer & Co., Inc. and Legg Mason Wood Walker, Inc. managed the offering.
The net proceeds of the offering were used to fund a portion of the cash
consideration for the acquisition by Susquehanna of Fairfax and for general
corporate purposes.
Susquehanna contemplates that in the future it will evaluate and may
acquire, or may cause its subsidiaries to acquire, other banks or savings
associations. Susquehanna may acquire state and national banks whose principal
business activities are conducted in Pennsylvania and in states which allow
reciprocal treatment of Pennsylvania banks and bank holding companies, as
hereinafter described. Susquehanna may also seek to enter businesses closely
related to banking or to acquire existing companies already engaged in such
activities which includes savings associations. Any acquisition by Susquehanna
will require prior approval of the Board of Governors of the Federal Reserve
System, the Pennsylvania Department of Banking, other regulatory agencies and,
in some instances, its shareholders.
Other than as described above, Susquehanna currently has no formal
commitments with respect to the acquisition of any entities, although
discussions with prospects occur on a regular and continuing basis.
Supervision and Regulation
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General. Susquehanna is registered with the Board of Governors of the
--------
Federal Reserve ("Board") and is subject to regulation under the Bank Holding
Company Act of 1956, as amended ("The Act"). Provisions in The Act require
prior approval of acquisitions of assets or ownership or control of any voting
shares of any bank, if such acquisitions would give Susquehanna more than 5% of
the voting shares of any bank or bank holding company.
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The Act also permits acquisition of a non-bank company, with the
Board's prior approval, if such company engages only in activities which are
determined to be closely related and incidental to banking. Susquehanna
presently owns several non-bank subsidiaries in accordance with the Board's
approval pursuant to these provisions of the Act. Furthermore, consistent with
the Congressional intent expressed in the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") the Board amended its
regulations in September 1989 to allow holding companies to acquire savings
associations.
In 1985, Susquehanna's re-insurance subsidiary, Susque-Bancshares Life
Insurance Company ("SBLIC"), became operational. SBLIC is a wholly-owned
subsidiary, and is organized under the laws of the State of Arizona to operate
as a credit life, health and accident reinsurer to the extent permitted by the
laws of Pennsylvania. SBLIC is regulated by the Department of Insurance of the
State of Arizona and is subject to periodic review by that department.
In 1986, Susquehanna's leasing subsidiary, Susque-Bancshares Leasing
Company, Inc. ("SBLC"), became operational. SBLC is a wholly-owned subsidiary
and is organized under the laws of the Commonwealth of Pennsylvania. SBLC in
turn owns a single leasing company subsidiary which resulted from a merger of
two leasing company subsidiaries during 1988. Effective September 30, 1992, the
Board granted to SBLC's leasing company subsidiary commercial finance powers
pursuant to The Act.
Susquehanna's subsidiary commercial and federal savings banks are also
subject to specific regulation and supervision. Farmers First, a state bank, is
subject to regulation and periodic examination by the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation. Citizens, First
National, Williamsport, and Spring Grove are national banks and are subject to
regulation and periodic examination by the Comptroller of the Currency. F&M, a
state bank, is subject to regulation and periodic examination by the Maryland
Banking Commission, and the Federal Deposit Insurance Corporation. Atlantic
Federal, Reisterstown Federal and Fairfax Savings are subject to regulation and
periodic examination by the Office of Thrift Supervision ("OTS"). Since
consummation of the Mergers, the Company has also been subject to supervision
and regulation by the OTS as a savings and loan holding company. In addition,
all of Susquehanna's banking subsidiaries are subject to examination by the
Board.
The regulations that govern Susquehanna and its subsidiary commercial
and federal savings banks impose certain restrictions on extensions of credit to
Susquehanna from such subsidiaries banks and with certain exceptions to other
affiliates, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of Susquehanna or any
other affiliate.
The federal and state regulations to which Susquehanna's subsidiary
commercial and federal savings banks are subject encompass a broad spectrum
including: reserve requirements, loan limitations, restrictions as to interest
rates on loans and deposits, restrictions as to payment of dividends and
requirements governing the establishment of branches and other aspects of its
operations. The regulations governing the subsidiary commercial and federal
savings banks have generally been promulgated to protect depositors and
creditors and not for the purpose of protecting shareholders.
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Because of limitations arising under the Bank Holding Company Act of
1956, Susquehanna's only line of business is that of providing commercial
banking and other bank-related services and products to its customers. Such
bank and bank-related services provided by Susquehanna and its subsidiaries
include commercial banking through its six banking subsidiaries, thrift
activities through its three federal savings bank subsidiaries, credit life
insurance through another subsidiary and leasing operations through its
remaining subsidiary. Of the foregoing, commercial banking and thrift
activities accounted for more than 90% of Susquehanna's gross revenues in each
of the past two fiscal years.
Environmental Impact Statement. Compliance by Susquehanna and its
------------------------------
subsidiaries with federal, state and local environmental protection laws during
1995 had no material effect upon capital expenditures, earnings or the
competitive position of Susquehanna and its subsidiaries and is not expected to
have a material effect on such expenditures or earnings during 1996.
Pending Legislation. From time to time legislation is proposed for
-------------------
enactment before the United States Congress and before the Pennsylvania
Legislature which could change a number of the regulations applicable to
Susquehanna and its subsidiaries. It is not possible at this time to predict if
or when such legislation might become law or the extent to which such
legislation might affect the business or competitive status of Susquehanna and
its subsidiaries.
Effects of FIRREA, FDICIA, and the Interstate Banking Act.
---------------------------------------------------------
Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). On August 9, 1989, major reform and financing legislation was
enacted into law in order to restructure the regulation of the thrift industry
and to address the financial condition of the FSLIC. FIRREA eliminated many of
the distinctions between commercial banks and thrift institutions and the
holding companies thereof, reinforced certain competitive advantages of
commercial banks over thrift institutions (such as with respect to insurance
premiums) and allowed bank holding companies to acquire savings institutions.
Pursuant to FIRREA, a new insurance fund, administered by the FDIC and
named the SAIF, insures the deposits of savings associations such as Atlantic
Federal Savings Bank. The FDIC fund existing prior to the enactment of FIRREA is
now known as the BIF and continues to insure the deposits of commercial banks,
such as the Susquehanna Bank Subsidiaries, and certain savings banks and is also
administered by the FDIC. Although the FDIC administers both funds, the assets
and liabilities of the two funds are not commingled. In addition, FIRREA
abolished the FHLBB and replaced it with the OTS, which is a bureau of the
Department of the Treasury. The OTS is headed by a single Director who is
appointed by the President.
FIRREA, among others, also: changed the capital requirements
applicable to savings institutions to be "no less stringent than the capital
standards applicable to national banks;" established a QTL test regarding
permissible investments for savings associations; and permits bank holding
companies, such as Susquehanna, to acquire savings associations.
Other provisions of FIRREA include substantial changes to the
enforcement power available to the regulators. The OCC and the FDIC, as the
primary regulators of the Susquehanna Bank Subsidiaries, are primarily
responsible for enforcement action. FIRREA also expanded the jurisdiction of
the regulators'
11
<PAGE>
enforcement powers to all "institution-affiliated parties," including
stockholders, attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action having or likely to have an adverse effect on an
insured institution.
Under FIRREA, civil penalties are classified into three levels, with
amounts increasing with the severity of the violation. The first tier provides
for civil penalties of up to $5,000 per day for any violation of law or
regulation. A civil penalty of up to $25,000 per day may be assessed if more
than a minimal loss or a pattern of misconduct is involved. Finally, a civil
penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties
are increased to $1.0 million per violation, up to $5.0 million for continuing
violations for the actual amount of gain or loss. These monetary penalties may
be combined with prison sentences for up to five years.
FIRREA also provides regulators with far greater flexibility to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to its capital requirements. Possible
enforcement actions include the imposition of a capital plan, termination of
deposit insurance and removal or temporary suspension of an officer, director or
other institution-affiliated party.
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The FDICIA was enacted on December 19, 1991, and made reforms to a
variety of bank regulatory laws. Some of these reforms have a direct impact on
the Susquehanna Bank Subsidiaries. The new provisions are discussed below.
Annual, full-scope, on-site examinations are required for all FDIC
insured institutions such as the Susquehanna Bank Subsidiaries. For small,
well-capitalized institutions that are well managed and in outstanding condition
and whose ownership has not changed in the preceding year, the examinations by
the FDIC may be at 18-month intervals. A "small" institution is defined as one
with total assets less than $100 million. Spring Grove National is the only
Susquehanna Bank Subsidiary which qualifies as a "small" institution.
Effective after December 31, 1992, all financial institutions
regulated by the FDIC must submit to the FDIC a publicly available annual audit
report. The independent accountants of such financial institutions must also
attest to the accuracy of the management's assertion concerning the internal
control structure. The accountants must also monitor management's compliance
with governing laws and regulations. Such financial institutions must also
select an independent audit compliance committee composed of outside directors
who are independent of management, to review with management and the independent
accountants the reports that must be submitted to the bank regulatory agencies.
If the independent accountants resign or are dismissed, written notification
must be given to the FDIC. These accounting and reporting reforms do not apply
to an institution with total assets at the beginning of its fiscal year of less
than $500 million. Furthermore, the FDIC may exempt institutions with assets in
excess of $500 million from these accounting and reporting requirements.
Susquehanna has not requested that any of its Bank Subsidiaries be exempt.
In order to reduce losses to the BIF, the FDICIA establishes a format to more
closely monitor FDIC insured institutions and to enable prompt corrective action
by the FDIC if an institution begins to experience any difficulty. The prompt
corrective action regulations of FDICIA define specific capital categories based
on an institution's capital ratios. The capital categories, in declining order,
are "well capitalized," "adequately
12
<PAGE>
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Institutions categorized as undercapitalized or
worse are subject to certain restrictions, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may or,
in some cases, must be imposed on such an institution either by its primary
federal regulator or by the Federal Deposit Insurance Corporation ("FDIC"),
including requirements to raise additional capital, sell assets, or sell the
entire institution. Once an institution becomes critically undercapitalized, it
must generally be placed in receivership or conservatorship within 90 days.
To be considered well capitalized, an institution must generally have
a leverage ratio of at least five percent, a tier one risk-based capital ratio
of at least six percent and a total risk-based capital ratio of at least ten
percent. To be considered "adequately capitalized," an institution must
generally have a leverage ratio of at least four percent, a tier one risk-based
capital ratio of at least four percent and a total risk-based capital ratio of
at least eight percent. An institution is deemed to be critically
undercapitalized if it has a tangible capital ratio of two percent or less and
no more than 65 percent of the required minimum leverage capital level.
The FDIC, the Office of Thrift Supervision ("OTS"), the Board of
Governors of the Federal Reserve System ("Board") and the Office of Comptroller
of the Currency ("OCC") have amended their risk-based and leverage capital
adequacy guidelines in order to implement section 208 of the Riegle Community
Development and Regulatory Improvement Act of 1994 ("Riegle Act"). Section 208
states that a qualifying insured depository institution that transfers small
business loans and leases on personal property without recourse shall include
only the amount of retained recourse in its risk-weighted assets when
calculating its capital ratios, provided that certain conditions are met. This
rule has the effect of lowering the capital requirements for small business
loans and leases on personal property that have been transferred with recourse
by qualifying banking institutions. The FDIC's and the OTS' amendments became
effective August 31, 1995; the Board's amendment became effective September 1,
1995; and the OCC's amendments became effective on September 13, 1995.
An insured depository institution may not pay management fees to any
person, including any holding company, which has control of the institution if,
after making the payment, the institution would be undercapitalized, nor may an
institution, except under certain circumstances and with prior regulatory
approval, make any capital distribution, if, after making the distribution, the
institution would be undercapitalized. Depending of the level of capital, the
regulatory agencies' corrective powers include: requiring a capital restoration
plan; placing limits on asset growth and restrictions on activities; requiring
an institution to issue additional capital stock (which may include voting
stock) or be acquired; placing additional restrictions on transactions with
affiliates; restricting the interest rate an institution may pay on deposits;
ordering a new election for an institution's board of directors; requiring that
certain senior executive officers or directors be dismissed; prohibiting an
institution from accepting deposits from corresponding banks; requiring an
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; prohibiting a holding company from making
capital distributions without prior regulatory approval; requiring a holding
company to divest itself of an institution or an affiliate; and, ultimately,
appointing a receiver for an institution. If an insured depository institution
is undercapitalized, its parent holding company will be required to guarantee
that the institution will comply with any capital restoration plan submitted to
and approved by the appropriate federal banking agency. The holding company's
exposure is limited to an amount equal to the lesser of: (i) 5% of the
institution's total assets at the time the institution became undercapitalized;
or (ii) the amount which is necessary
13
<PAGE>
(or would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution failed to comply
with the capital restoration plan. The new statute also amends the current law
generally to permit only a well capitalized depository institution to accept
brokered deposits without prior regulatory approval. All of Susquehanna's bank
and thrift subsidiaries meet the criteria required to be considered "well
capitalized" in accordance with the above capital regulations.
Interstate Banking Act. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994.
The law provides that, among other things, substantially all state law barriers
to the acquisition of banks by out-of-state bank holding companies were
eliminated effective on September 29, 1995. The law will also permit interstate
branching by banks effective as of June 1, 1997, subject to the ability of
states to opt-out completely or to set an earlier effective date. The Company
anticipates that the effect of the new law will be to increase competition
within the markets in which the Company now operates, although the Company
cannot predict the extent to which competition will increase in such markets or
the timing of such increase.
National Monetary Policy. In addition to being affected by general
economic conditions, the earnings and growth of Susquehanna and the Susquehanna
Subsidiaries are affected by the policies of regulatory authorities, including
the OCC, the FRB and the FDIC. An important function of the FRB is to regulate
the money supply and credit conditions. Among the instruments used to implement
these objectives are open market operations in U.S. Government securities,
setting the discount rate and changes in reserve requirements against bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of credit, bank loans, investments and deposits,
and their use may also affect interest rates charged on loans or paid on
deposits.
The monetary policies and regulations of the FRB have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such policies
upon the future business, earnings and growth of Susquehanna and the Susquehanna
Subsidiaries cannot be predicted.
Proposed Legislation Regarding SAIF Assessments.
- -----------------------------------------------
Federal law requires that the FDIC maintain the reserve level of each
of the BIF and SAIF at 1.25% of insured deposits. Reserves are funded through
payments of insurance premiums by insured institutions. The BIF reached this
level during 1995 and the FDIC reduced the insurance premiums to a range of 0%
to .27% of deposits for members of the BIF while maintaining the current range
of between .23% and .31% of deposits for members of the SAIF. A one-time
assessment on thrift institutions sufficient to recapitalize the SAIF to a level
which would at least approach that of the BIF has been considered by Congress
and appeared in recently proposed legislation. It does not appear that such
legislation will be enacted in the near future. While there can be no assurance
that such an approach or any other approach to addressing the premium disparity
will in fact materialize, an assessment of this kind is not expected to have a
material adverse effect upon the financial condition of Susquehanna, although
such assessment may have a material adverse effect upon the results of
operations of Susquehanna for 1996.
14
<PAGE>
Competition
- -----------
Bank holding companies and their subsidiary banks compete with many
institutions for deposits, loans, trust services and other banking-related
services. Like other depository institutions, Susquehanna has been subject to
competition from less heavily regulated entities such as brokerage firms, money
market funds, consumer finance, credit card companies, and other financial
services companies.
Legislative proposals are pending which would further liberalize many
of the regulatory restrictions now imposed on Susquehanna and its subsidiaries
or require their non-banking competitors to comply with similar regulatory
restrictions. It is not possible to assess whether any of such proposals will
be enacted, and if enacted, what effect such a proposal would have on the
competitive positions of Susquehanna in its market place.
As a result of legislation enacted in Pennsylvania in the 1980's,
compression and consolidation in the industry has continued at a rapid pace.
Further, as a result of relaxation of laws and regulations pertaining to branch
banking in the state, and the opportunity to engage in interstate banking, the
consolidation within the banking industry has had a significant competitive
effect on Susquehanna and its markets. At present, Susquehanna and its
subsidiary banks compete with numerous super-regional institutions with
significantly greater resources and assets which conduct banking business
throughout the region.
Farmers First's principal market areas are within Lancaster County,
Pennsylvania. There are fifteen (15) commercial banks operating in Lancaster
County, six (6) of which are headquartered in that county; the other nine (9)
are headquartered elsewhere in Pennsylvania. Of the six (6) commercial banks
with headquarters in Lancaster County, Farmers First ranked second in total
deposits as of June 30, 1995, the last date for which information is available.
Citizens' principal market area consists of the central and
southeastern portion of Franklin County, Pennsylvania, the northcentral and
northeastern portion of Washington County, Maryland, and the northwestern
portion of Frederick County, Maryland. It services a substantial number of
depositors in this market area, with the greatest concentration within a limited
radius of Waynesboro, Pennsylvania, and within a north-south strip of Interstate
81 from Chambersburg, Pennsylvania to Hagerstown, Maryland. There are fifteen
(15) banks in this market area including Citizens, eight (8) of which are
headquartered in that market area. Citizens ranked fifth among the eight (8)
banks in total deposits as of June 30, 1995, the last date for which information
is available.
First National competes in market areas in Northumberland, Snyder,
Union and Columbia Counties, Pennsylvania. Twenty-one (21) commercial banks
operate offices in Northumberland, Snyder, Union and Columbia Counties, thirteen
(13) of which are headquartered in those counties, and of the thirteen (13),
First National ranked first in terms of total deposits as of June 30, 1995, the
last date for which information is available.
Williamsport's principal market area consists of the south central and
south eastern portions of Lycoming County, Pennsylvania. It services a
substantial number of depositors in this service area, with the greatest
concentration in the City of Williamsport. Eleven (11) commercial banks operate
offices in Lycoming
15
<PAGE>
County, six (6) of which are headquartered in that county, and of the six (6),
Williamsport ranked second in terms of total deposits as of June 30, 1995, the
last date for which information is available.
Spring Grove's principal market area consists of Central York County.
Sixteen (16) commercial banks operate offices in York County, eight (8) of which
are headquartered in that county, and of the eight (8) Spring Grove ranked
seventh in terms of total deposits as of June 30, 1995, the last date for which
information is available.
F&M's principal market area consists of Washington and Allegany
Counties, Maryland. Nine (9) commercial banks operate offices in the F&M
trading area, three (3) of which are headquartered in Washington County, and
two (2) of which are headquartered in Allegany County; and of the five (5) F&M
ranked first in terms of total deposits as of June 30, 1995, the last date for
which information is available.
Atlantic Federal's principal market area consists of Baltimore, Cecil,
Harford and Anne Arundel Counties, Maryland, and a portion of downtown Baltimore
city. Fifty-four (54) savings banks operate offices in the Atlantic Federal
trading area, thirty-three (33) of which are headquartered in that area, and of
the thirty-three (33), Atlantic Federal ranked fourth in terms of total deposits
as of June 30, 1995, the last date for which information is available.
Reisterstown Federal's principal market area consists of Baltimore and
Carroll Counties, Maryland, and the northwest corner of Baltimore city. Thirty
(30) savings banks operate offices in the Reisterstown Federal trading area,
thirteen (13) of which are headquartered in that area, and of the thirteen (13),
Reisterstown Federal ranked second in terms of total deposits as of June 30,
1995, the last date for which information is available.
The Susquehanna subsidiaries, like other depository institutions, have
been subjected to competition from less heavily regulated entities such as
brokerage firms, money market funds, consumer finance, credit card companies,
and other financial services companies.
Business Trends
- ---------------
Current business trends include rising interest rates, a relatively
strong local economy, a business cycle which is peaking and consumers becoming
more cautious of adding debt.
These factors create uncertainty in all of Susquehanna Bancshares'
markets. Susquehanna will place its emphasis on control of funding cost and
lending rates to effectively manage this uncertainty. In addition Susquehanna
will seek relationships which can generate fee income which is not directly tied
to lending relationships. This thrust will help dampen Susquehanna's earnings
fluctuations which are driven by movement in interest rates, business and
consumer loan cycles, and local economic factors.
16
<PAGE>
Item 2. Properties
- ------ ----------
Susquehanna does not own or lease any property. Susquehanna
reimburses its subsidiaries for space and services utilized.
Susquehanna's subsidiary banks operate seventy-nine (79) full-service
branches, eighteen (18) limited-service branches, eight (8) free-standing
automated teller machines, and four (4) automated loan machines. The banks own
fifty-eight (58) of the branches and lease the remaining thirty-nine (39).
Twenty (20) additional buildings are owned by subsidiary banks to facilitate
operations and expansion. Management of Susquehanna believes that the
properties currently owned and leased by its subsidiaries are adequate for
present levels of operation.
The executive offices of the subsidiary banks are:
Farmers First Bank Spring Grove National Bank
9 East Main Street 10 South Main Street
Lititz, Pennsylvania Spring Grove, Pennsylvania
First National Trust Bank Farmers & Merchants Bank and Trust
400 Market Street 59 West Washington Street
Sunbury, Pennsylvania Hagerstown, Maryland
Citizens National Bank of Southern Atlantic Federal Savings Bank
Pennsylvania 100 West Road
35 North Carlisle Street Baltimore, Maryland
Greencastle, Pennsylvania
Williamsport National Bank Reisterstown Federal Savings Bank
329 Pine Street 11817 Reisterstown Road
Williamsport, Pennsylvania Reisterstown, MD
Each of the executive offices is owned by the respective subsidiary except for
the office of Atlantic Federal, which is leased.
17
<PAGE>
Item 3. Legal Proceedings.
- ------ -----------------
There are no material proceedings to which Susquehanna or any of its
present subsidiaries, directors, or officers are a party or by which they, or
any of them, are threatened. All legal proceedings presently pending or
threatened against Susquehanna and its subsidiaries involve routine litigation
incidental to the business of Susquehanna or the subsidiary involved and are
either not material in respect to the amount in controversy or are fully covered
by insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of 1995.
18
<PAGE>
PART II
-------
Item 5. Market for Susquehanna Capital Stock
- ------ and Related Shareholder Matters.
--------------------------------
From May 24, 1984, to November 4, 1985, Susquehanna Common Stock was
listed for quotation on the National Association of Securities Dealers Automatic
Quotation System ("Nasdaq"). Since November 5, 1985, Susquehanna Common Stock
has been listed for quotation on the National Association of Securities Dealers
National Market System. Set forth below are the high and low sales prices of
Susquehanna's common stock as reported on the Nasdaq National Market System as
reflected on the over-the-counter market, for the years 1994 and 1995.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Price Range Per Share
--------------------------
----------------------------------------------------------------------------
Year Period Cash Dividends Paid Low Bid High Bid
---- ------ ------------------- ------- --------
<S> <C> <C> <C> <C>
1994 1st Quarter $23.75 $28.00
Common $0.25
2nd Quarter
Common $0.25 $23.75 $25.00
3rd Quarter
Common $0.25 $23.50 $24.25
4th Quarter
Common $0.27 $21.25 $24.75
1995 1st Quarter
Common $0.27 $21.50 $24.25
2nd Quarter
Common $0.27 $22.50 $24.00
3rd Quarter
Common $0.27 $23.25 $28.25
4th Quarter
Common $0.29 $26.00 $30.25
- --------------------------------------------------------------------------------
</TABLE>
The foregoing represents prices between dealers and does not include
retail markups, markdowns or commissions and does not necessarily represent
actual transactions. As of February 29, 1996, there were 5,800 record holders
of Susquehanna Common Stock and zero (0) record holders of Susquehanna Preferred
Stock, which was redeemed by Susquehanna on February 7, 1994.
Dividends paid by Susquehanna are provided from dividends paid to it
by Farmers First, First National, Williamsport, Citizens, Spring Grove, F & M,
Atlantic Federal, Reisterstown Federal, Fairfax Savings,
19
<PAGE>
and SBLC. The Pennsylvania Banking Code of 1965, in the case of Farmers First,
the Banking laws of the State of Maryland, in the case of F & M, and the
National Bank Act, in the case of First National, Williamsport, Citizens, and
Spring Grove and the Federal Home Loan Act, in the case of Atlantic Federal,
Reisterstown Federal, and Fairfax Savings, restrict the payment of dividends to
certain available funds.
Susquehanna's ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiaries. Both federal and state laws
impose restrictions on the ability of these banking subsidiaries to pay
dividends. In addition to the specific restrictions discussed below, bank
regulatory agencies, in general, also have the ability to prohibit proposed
dividends by a bank or savings institution which would otherwise be permitted
under applicable regulations if the regulatory body determines that such
distribution would constitute an unsafe or unsound practice.
The Federal Reserve Board and the FDIC have issued policy statements
which provide that, as a general matter, insured banks and bank holding
companies may pay dividends only out of current operating earnings.
For national banks, the approval of the Comptroller of the Currency is
required for the payment of dividends in any calendar year by a national bank
subsidiary if the total of all dividends declared by such bank in a calendar
year exceeds the current year's net income combined with the retained net income
of the two preceding years. "Retained net income" means the net income of a
specified period less any common or preferred stock dividends declared for that
period. Moreover, no dividends may be paid by a national bank in excess of its
undivided profits account.
Dividends payable by a Pennsylvania state-chartered bank are
restricted due to the requirement that such bank set aside to a surplus fund
each year at least 10% of its net earnings until such surplus equals the amount
of its capital. Furthermore, the payment of a dividend may not be made if it
results in the reduction of the surplus available to the bank.
For a Maryland state-chartered bank, dividends may be paid out of
undivided profits or, with the approval of the Maryland Bank Commissioner, from
surplus in excess of 100% of required capital stock. If, however, the surplus
of a Maryland bank is less than 100% of its required capital stock, cash
dividends may not be paid in excess of 90% of net earnings.
As noted, Susquehanna will look to Atlantic Federal, Fairfax Savings
and Reisterstown Federal for funds to distribute as dividends. However,
federal regulations impose restrictions on dividend payments on savings
institutions which convert from mutual to stock form of ownership and are
federally insured at the time of the conversion, as was the case with Atlantic
Federal and Reisterstown Federal. Upon conversion, regulations require that a
"liquidation account" be established by restricting a portion of net capital for
the benefit of eligible savings account holders who maintain their savings
accounts with the institution after conversion. In the event of complete
liquidation (and only in such event), each savings account holder who continues
to maintain a savings account will be entitled to receive a distribution from
the liquidation account after payment to all creditors, but before any
liquidation distribution with respect to capital stock. This account is
proportionally reduced for any decreases in the eligible holder's savings
accounts.
20
<PAGE>
Under federal regulations, savings institutions which have converted
under such regulations (including Atlantic Federal and Reisterstown Federal) may
not declare or pay a cash dividend on common stock if the dividend would cause
the institution's capital to be reduced below the amount required for the
liquidation account or, as to all savings institutions, below the capital
requirements imposed by the OTS under the Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA"), and regulations promulgated thereunder.
The OTS regulations impose limitations on all cash dividends by
savings institutions. The OTS regulations establish three tiers of
institutions. An institution that exceeds all fully phased-in capital
requirements before and after a proposed dividend ("Tier 1 Association") may,
after prior notice, but without the approval of the OTS, make capital
distributions during a calendar year of up to: (i) 100 percent of its net
income to date during the calendar year plus the amount that would reduce by
one-half of its surplus capital at the beginning of the calendar year; or (ii)
75 percent of its net income over the most recent four-quarter period. An
institution that meets its regulatory capital requirement, but not its fully
phased-in capital requirement before or after its cash dividend ("Tier 2
Association") may, after prior notice, but without the approval of the OTS, make
capital distributions of up to 75 percent of its net income over the most recent
four-quarter period if it satisfies the risk-based capital requirements that
would be applicable to it on January 1, 1993, computed on its current portfolio;
up to 50 percent of its net income over the most recent four-quarter period if
it satisfies the risk-based capital standard that was applicable to it on
January 1, 1991, computed on its current portfolio; and up to 25 percent of its
net income over the most recent four-quarter period if it satisfies its current
risk-based capital requirement. In computing the permissible percentage of cash
dividend, previous distributions made during the prior four-quarter period must
be included. A savings institution that does not meet its current regulatory
capital requirements before or after payment of a proposed cash dividend ("Tier
3 Association") may not make any capital distributions without prior approval of
the OTS. In addition, the OTS has the ability to prohibit a proposed cash
dividend by any institution which would otherwise be permitted by the
regulations if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
As of December 31, 1995, Atlantic Federal and Reisterstown Federal
satisfied the requirements of a Tier 1 Association. On February 1, 1996, the
date of its acquisition by Susquehanna, Fairfax Federal satisfied the
requirements of a Tier 1 Association; prior to this time, on December 31, 1995,
it had also satisfied such requirements.
The capital requirements mandated by the FIRREA require thrifts to
maintain tangible capital of at least 1.5 percent of adjusted total assets, a
leverage ratio or core capital of at least 3 percent of adjusted total assets,
and overall risk-based capital of at least 8 percent of total risk-weighted
assets.
Tangible capital includes common stockholder's equity with certain
assets phased out over several years. Core capital includes tangible capital
plus "supervisory" goodwill and certain other defined items. The risk-based
capital requirement involves the classification of certain assets, commitments
and obligations, as defined, based upon their credit risk level. Higher credit
risk amounts carry a progressively higher capital requirement.
In August 1993, the OTS adopted a final rule for calculating an
interest rate risk ("IRR") component of risk-based capital. Under this rule,
the IRR component of capital will be in addition to the existing
21
<PAGE>
8 percent risk-based capital requirement. The new rule became effective January
1, 1994, with institutions first required to meet the new standard in 1994.
The rule provides that the OTS will calculate the IRR component
quarterly for each institution starting in 1994 with information as of December
31, 1993. To estimate IRR, the OTS will compute each institution's market value
of portfolio equity ("MVPE") in the present interest rate environment versus
MVPEs derived after applying parallel rate shifts of plus and minus 200 basis
points. Provided any measured decline in MVPE under both rate shifts is less
than 2 percent of the estimated market value of the institution's assets, no
addition will be made to the 8 percent risk-based capital requirement. If there
is a measured decline in MVPE greater than 2 percent, then an institution will
be required to maintain additional capital equal to one-half of the difference
between its measured IRR and 2 percent, multiplied by the market value of its
assets. None of Atlantic Federal, Reisterstown Federal or Fairfax Savings has
been required to maintain additional capital as a result of such calculations.
In accordance with the above regulatory restrictions, each subsidiary
commercial and federal savings bank has the ability to pay dividends, and at
December 31, 1996, $26.1 million is available for dividend distribution to
Susquehanna in 1995 from its subsidiary commercial and federal savings banks
without regulatory approval.
For a description of the funds available for the payment of dividends,
see Note 16 to the Consolidated Financial Statements. Susquehanna currently
expects that comparable cash dividends will continue to be paid in the future.
22
<PAGE>
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 189,827 $ 150,633 $ 143,020 $ 153,570 $ 168,892
Interest expense 82,618 56,488 55,993 69,809 90,994
Net interest income 107,209 94,145 87,027 83,761 77,898
Provision for loan and lease losses 4,994 3,987 5,130 4,721 4,869
Other income 16,080 15,098 15,816 15,284 13,262
Other expenses 80,911 72,710 66,004 63,611 58,489
Income before taxes, extraordinary
item/cumulative effect 37,384 32,546 31,709 30,713 27,802
Extraordinary item/cumulative effect -- (732) 1,023 -- --
Net income 26,017 22,096 23,205 22,172 21,287
Cash dividends declared on common stock 12,478 11,024 9,811 9,129 8,745
Dividend payout ratio 48.0% 49.9% 42.3% 41.2% 41.1%
PER COMMON SHARE AMOUNTS*
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item/
cumulative effect $ 2.23 $ 1.96 $ 1.96 $ 1.99 $ 1.83
Net income 2.23 1.90 2.05 1.99 1.83
Cash dividends declared on common stock 1.10 1.02 0.922 0.872 0.840
FINANCIAL RATIOS
- ---------------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.07% 1.04% 1.18% 1.150% 1.14%
Return on average stockholders equity 11.29 10.17 11.47 11.88 12.25
Average stockholders equity to average assets 9.48 10.23 10.29 9.72 9.34
YEAR-END BALANCES
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,586,157 $ 2,231,409 $ 2,051,994 $ 1,967,450 $ 1,903,918
Investment securities 610,018 597,996 562,963 475,499 441,407
Loans and leases, net of unearned income 1,712,951 1,466,186 1,309,907 1,282,457 1,288,981
Deposits 2,116,042 1,866,330 1,717,807 1,671,352 1,596,279
Long-term debt 86,274 49,314 58,301 52,487 53,544
Stockholders equity 273,399 217,104 218,428 193,804 180,765
SELECTED SHARE DATA*
- ---------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period-end) 12,948,676 11,633,918 11,628,284 11,170,653 11,164,878
Average common shares outstanding 11,674,244 11,633,918 11,331,097 11,168,744 11,661,244
At December 31:
Book value per share $ 21.11 $ 18.66 $ 18.78 $ 17.35 $ 16.19
Market price per common share 26.50 22.25 27.25 22.60 16.00
Common stockholders 5,759 5,229 5,174 4,723 4,774
</TABLE>
*Prior years' amounts adjusted for five-for-four stock split completed in 1993.
23
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------ OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following pages of this report present management's discussion and
analysis of the consolidated financial condition and results of operations of
Susquehanna Bancshares, Inc., including its subsidiaries: Farmers First Bank;
Farmers & Merchants Bank and Trust; First National Trust Bank; Williamsport
National Bank; Citizens National Bank of Southern Pennsylvania; Spring Grove
National Bank; Susquehanna Bancshares South, Inc., and its thrift subsidiaries
Atlantic Federal Savings Bank and Reisterstown Federal Savings Bank; Susque-
Bancshares Leasing Co., Inc.;and Susque-Bancshares Life Insurance Company.
RESULTS OF OPERATIONS
Summary of 1995 Compared to 1994
Effective January 1, 1995, Susquehanna adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS 118. The adoption of these statements had no effect
on Susquehanna's allowance for loan and lease losses.
On February 9, 1995, Susquehanna issued $50 million of 9.00% subordinated
notes due 2005. The proceeds of the issuance were used to acquire Reisterstown
Holdings, Inc. ("RHI"), on April 21, 1995, and retire $10 million in short-term
borrowings. The balance of the proceeds was used for general corporate purposes.
On April 1, 1995, Susquehanna completed the acquisition of Atlanfed Bancorp,
Inc. ("ABI"), issuing 1,199,334 common shares for all of ABI's outstanding
shares. Total assets of ABI at the acquisition date were $255.1 million.
Deposits totaled $179.4 million, loans outstanding were $189.1 million, and
stockholders' equity was $22.6 million. The transaction was accounted for as a
pooling-of-interests and Susquehanna's consolidated financial statements and
related notes and management's discussion and analysis for all reported periods
have been restated to include ABI's financial results.
On April 21, 1995, Susquehanna completed the acquisition of RHI acquiring all
of the assets and assuming all the liabilities of RHI for $28.6 million.
Accordingly, the transaction was accounted for using the purchase method of
accounting whereby all the financial results are included with Susquehanna from
April 21, 1995, forward. The loans acquired totaled $201.2 million, investment
securities were $27.1 million and deposits were $209.8 million. The excess
purchase price of $12.7 million will be amortized over 15 years.
On December 22, 1995, Susquehanna closed a public common equity offering of
1,300,000 shares at $26.50, netting $32.6 million after underwriting commissions
and expenses.
The proceeds from the offering are to be used as part of the purchase price to
acquire Fairfax Financial Corporation.
Susquehanna's net income for the year ended December 31, 1995, was a record
$26,017,000, 17.7% above the $22,096,000 earned in 1994. Earnings per common
share were $2.23 in 1995 compared to $1.90 in 1994. The return on average assets
was 1.07% in 1995 compared to 1.04% in 1994, while the return on equity rose to
11.29% from 10.17% in 1994.
The performance level for the year ended December 31, 1995, was influenced by
several major factors. Assets acquired in the second half of 1994 of $194
million and the $257 million of assets acquired in April 1995 were a significant
factor in the increase of $13,064,000 in net interest income in 1995. Somewhat
offsetting this increase was a $6,008,000 increase in employee-related costs and
a $2,272,000 increase in other operating expenses, both of which, to a great
extent, were the result of these acquisitions. Two additional negative factors
were security transactions and the loan loss provision. In 1995, there were
$32,000 in net security losses while 1994 recorded net security gains of
$999,000. In 1995, the loan loss provision rose by $1,007,000 of which $660,000
was attributed to one credit loss. Two positive factors were lower FDIC premiums
of $1,060,000 and the $559,000 gain realized on the sale of PHEAA loans.
Net Interest Income--Taxable Equivalent Basis
The major source of operating revenues is net interest income which rose to a
level of $107,209,000 in 1995, $13,064,000 or 13.9% above the $94,145,000
attained in 1994. The net interest margin, on a tax equivalent basis, for 1995
fell to 4.89% from the 4.94% attained during 1994.
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
nonperforming 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 inter-
<PAGE>
TABLE 1-DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL--TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
ASSETS Balance Interest % Balance Interest % Balance Interest %
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 52,179 $ 2,990 5.73 $ 44,368 $ 1,950 4.40 $ 62,597 $ 2,013 3.22
Investment securities:
Taxable 480,879 29,428 6.12 453,568 26,404 5.82 402,678 25,313 6.29
Tax-advantaged 111,207 7,839 7.05 111,827 7,994 7.15 88,532 7,026 7.94
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 592,086 37,267 6.29 565,395 34,398 6.08 491,210 32,339 6.58
Loans and leases (net of
unearned income):
Taxable 1,592,480 149,453 9.38 1,342,389 114,480 8.53 1,248,472 108,475 8.69
Tax-advantaged 44,001 4,387 9.97 39,722 3,989 10.04 38,606 4,064 10.53
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases 1,636,481 153,840 9.40 1,382,111 118,469 8.57 1,287,078 112,539 8.74
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 2,280,746 194,097 8.51 1,991,874 154,817 7.77 1,840,885 146,891 7.98
=============================================================================================================================
Allowance for loan and
lease losses (26,776) (22,965) (20,136)
All other non-earning
assets 177,755 154,385 145,114
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $2,431,725 $2,123,294 $1,965,863
=============================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing demand $ 475,205 $ 13,072 2.75 $ 465,265 $ 10,978 2.36 $ 444,320 $ 11,372 2.56
Savings 393,474 9,973 2.53 399,241 10,106 2.53 362,130 10,452 2.89
Time 901,170 49,014 5.44 692,180 30,130 4.35 665,219 29,935 4.50
Short-term borrowings 62,898 3,406 5.42 47,823 2,257 4.72 16,819 472 2.81
Long-term debt 89,017 7,153 8.04 48,431 3,017 6.23 54,827 3,762 6.86
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,921,764 $ 82,618 4.30 1,652,940 $ 56,488 3.42 1,543,315 $ 55,993 3.63
- -----------------------------------------------------------------------------------------------------------------------------
Demand deposits 251,146 229,096 197,758
Other liabilities 28,320 24,052 22,407
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,201,230 1,906,088 1,763,480
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 230,495 217,206 202,383
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $2,431,725 $2,123,294 $1,965,863
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income/yield
on average earning assets $111,479 4.89 $ 98,329 4.94 $ 90,898 4.94
=============================================================================================================================
</TABLE>
For purposes of calculating loan yields, the average loan volume includes
nonaccrual loans. For purposes of calculating yields on tax-advantaged interest
income, the taxable equivalent is made to equate tax-advantaged interest on the
same basis as taxable interest. The marginal tax rate is 35%.
<PAGE>
est income as a percentage of net interest income and other income was 87%, 86%,
and 85% for the twelve months ended December 31, 1995, 1994, and 1993,
respectively.
Table 2 illustrates that the growth in interest income In 1995 over 1994 was
attributed to both volume and rate. As was mentioned earlier in this section,
the average growth in interest-earning assets of $289 million in 1995 over 1994,
to a large extent, was due to the acquisitions. As illustrated in Table 1, the
tax equivalent yield on earning assets for 1995 rose to 8.51% from 7.77% in
1994. This increase in 1995 can be attributed to the 18% increase in loan
volumes as yields rose from 8.57% in 1994 to 9.40% in 1995. The investment
yields rose from a 6.08% average return in 1994 to 6.29% in 1995.
Table 2 also illustrates that the growth in interest expense in 1995 over 1994
was attributed to both volume and rate. The comparison of the change in the
volume of interest-bearing liabilities also was affected by the acquisitions in
July 1994 and April 1995, as well as the issuance of the $50 million of
subordinated debt in February 1995. The average funding costs rose in 1995 to
4.30% from 3.42% in 1994. The issuance of the 9%, $50 million subordinate notes
increased the cost of the long-term debt from 6.23% to 8.04% and the rise in
interest rates in late 1994 and throughout most of 1995 increased the rates paid
on certificates of deposit as demonstrated by the 5.44% rate in 1995, an
increase of 109 basis points over 1994. Although the general market rates began
to decline in late 1995, the funding costs rose in the latter half of 1995
primarily due to rates paid on the certificates of deposit acquired in April
1995. Because of the relatively short maturities on certificates of deposit, it
is expected that the rates paid on the renewing periods will begin to reduce the
funding costs of Susquehanna starting in the second quarter of 1996.
A positive influence on the ability of Susquehanna to maintain a net interest
margin at or near the 4.90% level has been the increase in non-interest-bearing
demand deposits and earnings retention. Variances do occur in the net interest
margin as an exact repricing of assets and liabilities is not
<TABLE>
<CAPTION>
TABLE 2--CHANGES IN NET INTEREST INCOME-TAX EQUIVALENT BASIS
- ------------------------------------------------------------------------------------------------------------
1995 Versus 1994 1994 Versus 1993
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollars in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Short-term investments $ 382 $ 658 $ 1,040 $ (681) $ 618 $ (63)
Investment securities:
Taxable 1,634 1,390 3,024 3,050 (1,959) 1,091
Tax-advantaged (44) (111) (155) 1,715 (747) 968
- ------------------------------------------------------------------------------------------------------------
Total investment securities 1,590 1,279 2,869 4,765 (2,706) 2,059
Loans and leases (net of unearned income):
Taxable 22,720 12,253 34,973 8,039 (2,034) 6,005
Tax-advantaged 427 (29) 398 115 (190) (75)
- ------------------------------------------------------------------------------------------------------------
Total loans and leases 23,147 12,224 35,371 8,154 (2,224) 5,930
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets $25,119 $14,161 $39,280 $12,238 $(4,312) $7,926
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Interest-bearing demand $ 239 $ 1,855 $ 2,094 $ 520 $ (914) $ (394)
Savings (146) 13 (133) 1,011 (1,357) (346)
Time 10,340 8,544 18,884 1,191 (996) 195
Short-term borrowings 783 366 1,149 1,303 482 1,785
Long-term debt 3,073 1,063 4,136 (416) (329) (745)
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $14,289 $11,841 $26,130 $ 3,609 $(3,114) $ 495
- ------------------------------------------------------------------------------------------------------------
Net interest margin $10,830 $ 2,320 $13,150 $ 8,629 $(1,198) $7,431
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Changes which are in part to volume and in part to rate are allocated in
proportion to their relationship to the amounts of changes attributed directly
to volume and rate.
<PAGE>
possible. A further explanation of the impact of asset and liability repricing
is found in the Asset/Liability Management section of this discussion.
Provision and Allowance for Loan and Lease Losses
Susquehanna's provision for loan and lease losses is based upon management's
quarterly loan portfolio review. The purpose of the review is to assess loan
quality, identify impaired loans, analyze delinquencies, ascertain loan growth,
evaluate potential charge-offs and recoveries, and assess general economic
conditions in the markets its affiliates serve.
Commercial and real estate loans are rated by loan officers and, periodically,
by loan review personnel. Consumer and residential real estate loans are
generally reviewed in the aggregate as they are of relatively small dollar size
and homogeneous in nature.
In addition to economic conditions, loan portfolio diversification,
delinquency and historic loss experience, consideration is also given to
examinations performed by the regulatory authorities.
To determine the allowance and corresponding provision, the amount required
for specific allocation is first determined. For all types of commercial and
construction loans, this amount is based upon specific borrower data determined
by reviewing individual non-performing, delinquent, or potentially troubled
credits. In addition, a general allocation is also determined using the same
criteria applied to the total commercial portfolio. Consumer and residential
real estate allowances, which may include specific allocations, generally are
based upon recent charge-off and delinquency history; other known trends and
expected losses over the remaining lives of these loans; as well as the
condition of local, regional and national economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio. Table 10 presents this allocation.
The loan portfolio represents loans made primarily within Susquehanna's market
area, which includes central Pennsylvania and western Maryland, and to a lesser
extent northeastern New Jersey, Delaware, West Virginia, northern Virginia, and
the southern tier of New York State.
Determining the level of the allowance for possible loan and lease losses at
any given period is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and
information which is often subjective and changing rapidly. The review of the
loan portfolio is a continuing event in light of a changing economy and the
dynamics of the banking and regulatory environment. In management's opinion, the
allowance for loan and lease losses is adequate at December 31, 1995. As
illustrated in Table 3, the provision for loan and lease losses was $5.0 million
for 1995 compared to $4.0 million in 1994. The rapid deterioration of one
borrower accounted for $0.7 million of the $1.0 million increase. Net charge-
offs, as seen in Table 3, were $4.6 million compared with $1.9 million in 1994.
As a result, the allowance for loan and lease losses at December 31, 1995, was
1.61% of period-end loans and leases, or $27.6 million, compared with 1.63% or
$23.8 million at December 31, 1994. The allowance for loan and lease losses as a
percentage of non-performing loans increased from 99% at December 31, 1994, to
108% at December 31, 1995.
Should the economic climate no longer continue to improve or begin to
deteriorate, borrowers may experience difficulty, and the level of non-
performing loans and assets, charge-offs, and delinquencies could rise and
require further increases in the provision.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan and lease
losses. They may require additions to allowances based upon their judgments
about information available to them at the time of examination.
It is the policy of Susquehanna not to renegotiate the terms of a loan simply
because of a delinquency status. Rather, a loan is transferred to non-accrual
status if it is not in the process of collection, and is delinquent in payment
of either principal or interest beyond 90 days. Interest income received on non-
performing loans in 1995 and 1994 was $0.9 million and $1.1 million,
respectively. Interest income which would have been recorded on these loans
under the original terms was $1.9 million and $2.3 million, respectively. At
December 31, 1995, Susquehanna had no outstanding commitments to advance
additional funds with respect to these non-performing loans.
Table 3 is an analysis of the provision levels as well as the activity in the
allowance for loan losses for the past five years. Table 4 reflects the five-
year history of non-performing assets and loans contractually past due 90 days
and still accruing. The total non-performing assets at December 31, 1995 and
1994, of $30.8 million and $29.5 million, respectively, includes $5.3 million in
other real estate acquired through foreclosure for both years. Also, included in
both 1995 and 1994 is a restructured loan totaling $6.7 million at December 31,
1995, down from $6.9 million at December 31, 1994. Excluding the RHI acquisition
in April 1995, the change in non-performing assets would have been a decrease of
$2.3 million.
<PAGE>
<TABLE>
<CAPTION>
TABLE 3--PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, January 1 $ 23,845 $ 21,717 $ 18,026 $ 16,435 $ 14,793
Allowance acquired in business combinations 3,323 -- 515 -- --
Change in fiscal year of pooled entity (8) -- -- -- --
Additions to provision for loan and lease losses
charged to operations 4,994 3,987 5,130 4,721 4,869
Loans and leases charged off during the year:
Commercial, financial, agricultural, and leases 1,939 1,258 1,080 1,446 1,492
Real estate--mortgage 1,655 191 157 676 841
Consumer 2,052 1,503 1,864 2,065 1,534
- -------------------------------------------------------------------------------------------------------------------------
Total charge-offs 5,646 2,952 3,101 4,187 3,867
- -------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged-off:
Commercial, financial, agricultural, and leases 237 305 209 389 255
Real estate--mortgage 45 28 25 37 5
Consumer 773 760 913 631 380
- -------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,055 1,093 1,147 1,057 640
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs 4,591 1,859 1,954 3,130 3,227
- -------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 27,563 $ 23,845 $ 21,717 $ 18,026 $ 16,435
- -------------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $1,636,481 $1,382,111 $1,287,078 $1,275,431 $1,278,155
Period-end loans and leases 1,712,951 1,466,186 1,309,907 1,282,457 1,288,981
Net charge-offs as a percentage of average loans
and leases 0.28% 0.13% 0.15% 0.25% 0.25%
Allowance as a percentage of period-end loans
and leases 1.61% 1.63% 1.66% 1.41% 1.28%
</TABLE>
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property served as
collateral or the fair market value of the property as determined by a current
appraisal less estimated costs to sell (fair value). Prior to foreclosure, the
recorded amount of the loan is written-down, if necessary, to fair value by
charging the allowance for loan losses. Subsequent to foreclosure, gains or
losses on the sale of real estate acquired through foreclosure are recorded in
operating income, and any losses determined as a result of periodic valuations
are charged to other operating expense.
Loans with principal and/or interest delinquent 90 days or more which are
still accruing interest were $4.8 million at December 31, 1995, down from $14.4
million at December 31, 1994. Although the economy is continuing to improve,
softness in certain areas of the economy may adversely affect certain borrowers
and may cause additional loans to become past due beyond 89 days or be placed on
non-accrual status because of uncertainty of receiving full payment of either
principal or interest on these loans.
Potential problem loans consist of loans which are performing, but for which
potential credit problems have caused Susquehanna to place them on its
internally monitored loan list. At December 31,1995, such loans, not included in
Table 4, amounted to $31.9 million. Depending upon the state of the economy and
the impact thereon to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing assets in the future.
Other Income
Non-interest income, recorded as other income, consists of service charges on
deposit accounts;commissions; fees received for travelers' check sales and money
orders; fees for trust services; premium income generated from reinsurance
activities; gains and losses on security transactions; net gains on sales of
mortgages; net gains on 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%,14%, and 15% for
1995, 1994, and 1993, respectively.
Non-interest income increased $982,000 or 6.5% in 1995 over 1994. Income from
fiduciary-related activities rose by $465,000 or 18.5% resulting from higher
volumes of assets under administration. Service charges on deposit accounts were
up $157,000 or 3.2% and other charges, fees, and com-
<PAGE>
<TABLE>
<CAPTION>
TABLE 4--NON-PERFORMING ASSETS
- ------------------------------------------------------------------------------
Dollars in thousands 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans contractually past due
90 days and still accruing $ 4,820 $14,450 $ 6,574 $ 7,836 $ 6,917
==============================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial,
agricultural, and leases $ 2,275 $ 2,161 $ 2,981 $ 2,577 $ 3,743
Real estate--mortgage 16,368 14,856 14,992 12,576 12,316
Consumer 111 198 131 693 134
Restructured loans 6,703 6,941 -- -- --
Other real estate owned 5,344 5,341 8,995 10,787 8,555
- ------------------------------------------------------------------------------
Total non-performing assets $30,801 $29,497 $27,099 $26,633 $24,748
==============================================================================
Total non-performing assets
as a percentage of period-
end loans and leases and
other real estate owned 1.79% 2.00% 2.05% 2.06% 1.91%
==============================================================================
</TABLE>
missions rose by $102,000 or 8.9%, reflecting the additional office locations
and higher account volumes. All other income exceeded 1994 results by $1,289,000
primarily due to $559,000 in gains on the sale of the PHEAA loans in September
1995 and the acquisitions accounted for as purchases noted above. Offsetting
these increases was an investment security loss of $32,000 in 1995 compared to a
gain of $999,000 in 1994.
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 (detailed in Table 5) incurred in operating
Susquehanna's business.
Along with normal recurring increases, the inclusion of the Allegany County,
Maryland, acquisition in July of 1994 and the Reisterstown acquisition in April
1995 were major influences on the growth in these expenses from 1994 to 1995.
The salary and employee benefits expenses rose by $6,008,000 or 16.6% from 1994
to 1995, occupancy and equipment expenses were higher by $981,000 or 11.2%,
while other operating expenses increased $2,272,000 or 9.5%. Offsetting these
increases was a decline in FDIC insurance premiums of $1,060,000 due to a
reassessment of the insurance rate in 1995.
Income Taxes
Susquehanna's effective tax rate for 1995 was 30.41% compared to 29.86% in
1994. This increase was primarily due to a higher state tax rate and non-
deductible goodwill amortization resulting from the Maryland acquisitions in
1995.
As tax-advantaged loans and securities continue to mature, and the
opportunities for investment in additional tax-advantaged enterprises become
less attractive due to certain provisions of the Tax Reform Act of 1986, the
upward trend of effective tax rates may continue in the years ahead.
In February 1992, the Financial Accounting Standards Board issued SFAS 109.
This statement establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes.
Under SFAS 109, Susquehanna recognizes deferred tax liabilities for taxable
temporary differences (the difference between financial and tax bases), and
deferred tax assets for deductible temporary differences. Management believes
the deferred tax assets recognized at December 31, 1995, will be realized in
future tax returns. While the ultimate realization of deferred tax assets is
dependent on future taxable income, taxable income in prior carryback years and
future reversals of existing taxable temporary differences are sufficient to
off-set the future reversals of deductible temporary differences without
implementing any tax strategies or assuming future taxable income.
<TABLE>
<CAPTION>
TABLE 5-ANALYSIS OF OTHER EXPENSES
- --------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Advertising, marketing,
and public relations $ 2,210 $ 1,606 $ 1,700
Amortization of
acquisition costs 2,829 1,843 1,614
Audits and examinations 812 845 712
Communications 1,261 1,033 933
Directors' fees 1,068 1,041 931
Legal and professional 1,403 2,452 1,360
Life Insurance Company
related expenses 754 690 741
Other real estate 1,213 1,649 801
Outside services 2,849 2,411 2,074
PA shares/capital stock tax 1,619 1,498 1,460
Postage 1,576 1,358 1,282
Stationery and supplies 2,137 2,200 1,596
All other 6,412 5,245 4,706
- --------------------------------------------------------------------
Total $26,143 $23,871 $19,910
====================================================================
</TABLE>
<PAGE>
FINANCIAL CONDITION
Investment Securities
Susquehanna follows SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities." This accounting pronouncement requires the segregation of
investment securities into three categories, each having a distinct accounting
treatment.
Securities identified as "held-to-maturity" continue to be carried at their
amortized cost and, except for limited circumstances, may not be sold prior to
maturity. Securities identified as "available-for-sale" must be reported at
their market or "fair" value and the difference between that value and their
amortized cost recorded in the equity section, net of taxes. Through the
operation of this accounting procedure, the downward movement of interest rates
between December 31, 1994, and December 31, 1995, has caused the total equity
of Susquehanna to be impacted positively by $10.2 million as the "unrealized
gains or losses for available-for-sale securities" changed from a negative $7.8
million to a positive $2.4 million. Securities identified as "trading account
securities" are marked-to-market with the change recorded in the income
statement.
Presently, Susquehanna does not engage in trading activity, but does engage in
active portfolio management which requires the majority of its security
portfolios to be identified as "available-for-sale." While SFAS 115 requires
segregation into "held-to-maturity" and "available-for-sale" categories (see
Table 6), it does not change Susquehanna's policy concerning the purchase of
only high quality securities. Strategies employed address liquidity, capital
adequacy, and net interest margin considerations which then determine the
assignment of purchases into these two categories. Table 7 illustrates the
maturities of these security portfolios and the weighted average yields based
upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35%
federal income tax rate. At December 31, 1995, Susquehanna held no securities of
one issuer, other than U.S. Government obligations, where the aggregate book
value exceeded ten percent of stockholders' equity.
Susquehanna has taken a conservative and prudent investment posture toward
mortgage-backed securities. Management periodically sets limits on the aggregate
amount of mortgage-backed securities which may be acquired by Susquehanna.
Presently, the strategy of management is to restrict new investment in federal
agency-issues to full range Priority Amortization Class (PAC) instruments with
expected average maturities of less than six years. These securities typically
have minimal movement, if any, in their expected principal paydown schedules
with a movement in market interest rates of plus or minus 300 basis points.
<TABLE>
<CAPTION>
TABLE 6--CARRYING VALUE OF INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
Available Held-to- Available Held-to- Available Held-to-
(Dollars in thousands) for-Sale Maturity for-Sale Maturity for-Sale Maturity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S.Treasury $173,203 $ -- $184,494 $ 10,948 $206,071 $ 1,000
U.S. Government agencies 70,641 21,883 20,932 28,506 32,371 12,500
State and municipal -- 102,927 -- 120,582 -- 95,341
Other securities 96,318 50 68,505 19,002 110,220 --
Mortgage-backed securities 118,341 9,019 84,989 44,913 57,401 36,425
Equity securities 17,636 -- 15,125 -- 11,634 --
- ------------------------------------------------------------------------------------------------------
Total investment securities $476,139 $133,879 $374,045 $223,951 $417,697 $145,266
======================================================================================================
</TABLE>
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1995, which includes the $197.9 million acquired in the
RHI acquisition, was 16.8%, or $246.8 million. Real estate construction and real
estate mortgage loans increased $92.4 million and $135.7 million, respectively,
primarily due to the RHI acquisition. As noted in Table 11, Susquehanna's loan
portfolio contains no significant concentrations other than geographic.
Susquehanna's banks and thrifts have historically reported a significant amount
of loans secured by real estate, as depicted in Table 8. Many of these loans
have real estate taken as collateral for additional security for business or
personal purposes not related to the acquisition of the real estate pledged.
Open-end home equity loans amounted to $102.9 million at year-end and an
additional $68.2 million was lent against junior liens on residential
properties. Senior liens on 1-4 family residential properties totaled $586.1
million, and much of the $253.1 million in loans secured by non-farm,
<PAGE>
TABLE 7--INVESTMENT SECURITIES
The following table shows the maturities of investment securities at fair
value and amortized cost as of December 31, 1995, and the weighted average
yields of such securities. Yields are shown on a tax equivalent basis, assuming
a 35% federal income tax rate.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Within After 1 Year but After 5 Years but After
Dollars in thousands 1 Year within 5 Years within 10 Years 10 Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury
Fair value $59,772 $ 113,431 -- -- $173,203
Amortized cost 59.383 112,350 -- -- 171,733
Yield 6.7% 5.8% -- -- 6.1%
U.S. Government agencies
Fair value $ 5,934 $ 60,710 $ 3,997 -- $ 70,641
Amortized cost 6,015 60,515 4,000 -- 70,530
Yield 4.8% 6.3% 6.3% -- 6.1%
Corporate debt securities
Fair value $ 9,167 $ 87,149 $ 2 -- $ 96,318
Amortized cost 9,158 85,639 1 -- 94,798
Yield 6.2% 6.5% 14.2% -- 6.4%
Mortgage-backed securities
Fair value $12,368 $ 59,936 $26,330 $ 19,707 $118,341
Amortized cost 12,391 59,743 26,716 19,730 118,580
Yield 5.8% 6.2% 5.8% 6.4% 6.1%
Equity securities
Fair value -- -- -- -- $ 17,636
Amortized cost -- -- -- -- 16,798
Yield -- -- -- -- 6.7%
HELD-TO-MATURITY
U.S. Government agencies
Fair value $12,912 $ 9,002 -- -- $ 21,914
Amortized cost 12,881 9,002 -- -- 21,883
Yield -- 6.0% -- -- 4.3%
Corporate debt securities
Fair value -- $ 50 -- -- $ 50
Amortized cost -- $ 50 -- -- $ 50
Yield -- 4.1% -- -- 4.1%
Mortgage-backed securities
Fair value -- $ 4,520 $ 4,548 -- $ 9,068
Amortized cost -- 4,492 4,527 -- 9,019
Yield -- 6.5% 6.5% -- 6.5%
State and municipal
Fair value $24,387 $ 62,076 $11,642 $ 5,969 $104,074
Amortized cost 24,322 61,686 11,207 5,712 102,927
Yield 6.8% 6.6% 7.7% 9.9% 7.0%
TOTAL SECURITIES
Fair value $611,245
Amortized cost 606,318
Yield 6.2%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 8--LOAN AND LEASE PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
At December 31 1995 1994
- -------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 198,802 11.6% $ 186,013 12.7%
Real estate--construction 177,253 10.3 84,886 5.8
Real estate-mortgage 1,091,066 63.7 955,357 65.1
Consumer 223,039 13.1 223,963 15.3
Leases 22,791 1.3 15,967 1.1
- -------------------------------------------------------------------------------------------------------------
Total $1,712,951 100.0% $1,466,186 100.0%
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE 9-L6AN MATURITY AND INTEREST SENSITIVITY
- -------------------------------------------------------------------------------------------------------------
At December 31
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------------------------------------------------------------
Under One One to Five Over Five
Maturity Year Years Years Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 85,988 $59,591 $53,223 $198,802
Real estate--construction 151,381 20,764 5,108 177,253
- -------------------------------------------------------------------------------------------------------------
$237,369 $80,355 $58,331 $376,055
=============================================================================================================
Rate sensitivity of loans with
maturities greater than 1 year:
Variable rate $ 52,506
Fixed rate 86,180
- -------------------------------------------------------------------------------------------------------------
$138,686
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE 10--ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------
At December 31
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 3,658 $ 3,616 $ 3,521 $ 2,772 $ 1,954
Real estate--construction 2,475 3,175 3,336 2,128 2,256
Real estate--mortgage 6,141 5,530 3,794 2,885 2,456
Consumer 3,212 3,247 2,879 1,604 2,260
Leases 602 453 303 283 192
Unused commitments 2,058 1,515 -- -- --
Unallocated 9,417 6,309 7,884 8,354 7,317
- -------------------------------------------------------------------------------------------------------------
Total $27,563 $23,845 $21,717 $18,026 $16,435
=============================================================================================================
</TABLE>
non-residential properties represented collateralization of operating lines, or
term loans that finance equipment, inventory, or receivables. Loans secured by
farmland totaled $35.9 million while loans secured by multi-family residential
properties totaled $44.9 million at December 31, 1995.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans, with maturities
after 1996, consist of $86.2 million with fixed rate pricing and $52.5 million
with variable rate pricing.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1993 1992 1991
- ---------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 174,544 13.3% $ 184,568 14.4% $ 191,419 14.9%
81,962 6.3 78,119 6.1 78,570 6.1
842,551 64.3 813,919 63.4 811,031 62.9
190,307 14.5 187,009 14.6 192,542 14.9
20,543 1.6 18,842 1.5 15,419 1.2
- ---------------------------------------------------------------------------------------------
$1,309,907 100.0% $1,282,457 100.0% $1,288,981 100.0%
=============================================================================================
</TABLE>
TABLE 11--LOAN CONCENTRATIONS
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania and Maryland. At December 31, 1995, Susquehanna's
portfolio included the following concentrations:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Total As a % of % Non-performing
Dollars in thousands Permanent Construction All Other Amount Total Loans in each category
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Housing developments $44,175 $164,130 $ 4,709 $213,014 12.5 3.4
Office buildings and warehouses 60,330 5,322 2,500 68,152 4.0 1.9
Retailing 17,332 -- 39,846 57,178 3.4 3.7
Agriculture 36,179 909 17,977 55,065 3.3 1.2
Manufacturing 15,527 743 14,873 31,143 1.9 1.2
Hotels/motels 16,628 917 12,486 30,031 1.8 25.8
Deposits
</TABLE>
Susquehanna's deposit base is consumer-oriented, consisting of time deposits,
primarily certificates of deposit of various terms; interest-bearing demand
accounts; savings accounts; and demand deposits. The average amounts of deposits
by type are summarized in Table 12. Susquehanna does not rely upon time deposits
of $100,000 or more as a principal source of funds. Table 13 presents a
breakdown of maturities of time deposits of $100,000 or more as of December 31,
1995.
<TABLE>
<CAPTION>
TABLE 12--AVERAGE DEPOSIT BALANCES
- ------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits $ 251,146 $ 229,096 $ 197,758
Interest-bearing
demand deposits 475,205 465,265 444,320
Savings deposits 393,474 399,241 362,130
Time deposits 901,170 692,180 665,219
- -----------------------------------------------------------------
Total $2,020,995 $1,785,782 $1,669,427
=================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE 13--DEPOSIT MATURITY
Maturity of time deposits of $100 or more at
December 31, 1995
- -------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------
<S> <C>
Three months or less $ 22,166
Over three months through
six months 16,563
Over six months through
twelve months 15,798
Over twelve months 17,999
- -------------------------------------------------------
Total $ 72,526
=======================================================
</TABLE>
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 de posit 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
<PAGE>
amounted to $124.4 million at December 31, 1995. These maturing investments
represent 20.4% of total investment securities. Short-term investments amounted
to $92.1 million and represent additional sources of liquidity.
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest margin,
an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the interest-
bearing assets and liabilities. It is the objective of management to control the
difference in the timing of the rate changes for these assets and liabilities to
preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors
to maximize earnings in an environment of changing interest rates. However,
there is a lag in maintaining the desired matching because the repricing of
products does occur at varying time intervals.
Susquehanna employs a variety of methods to monitor interest rate sensitivity.
By dividing the assets and liabilities into three groups--fixed rate, floating
rate, and those which reprice only at managements discretion--strategies are de
veloped which are designed to minimize exposure to interest rate fluctuations.
Management also utilizes gap analysis to evaluate rate sensitivity at a given
point in time.
Table 14 illustrates Susquehanna's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at December 31, 1995. These
estimates include anticipated paydowns on mortgage-backed securities, which were
derived from "stress tests" performed on these securities at December 31, 1995.
An institution with more assets repricing than liabilities over a given time
frame is considered asset sensitive, and one with more liabilities repricing
than assets is considered liability sensitive. An asset sensitive institution
will generally benefit from rising rates, and a liability sensitive institution
will generally benefit from declining rates. While Susquehanna has had and will
into the foreseeable future experience a negative gap position (liability
sensitive), the impact of a rapid rise in interest rates, as occurred in 1994,
did not have a significant effect on the net interest margin of Susquehanna,
which has consistently remained at or near the 4.90% level.
<TABLE>
<CAPTION>
TABLE 14--INTEREST RATE SENSITIVITY
- ------------------------------------------------------------------------------------------
At December 31, 1995 1-90--90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $ 92,110 $ 92,110
Investments 36,200 $ 32,401 $ 81,254 $ 460,163 610,018
Loans and leases, net of
unearned income* 620,270 106,797 203,178 763,952 1,694,197
- ------------------------------------------------------------------------------------------
Total $ 748,580 $ 139,198 $284,432 $1,224,115 $2,396,325
==========================================================================================
LIABILITIES
Interest-bearing demand $ 483,835 $483,835
Savings 390,257 390,257
Time 197,637 $ 153,464 $194,286 $ 353,626 899,013
Time in denominations of
$100 or more 22,166 16,563 15,798 17,999 72,526
Short-term borrowings 55,208 224 13,000 68,432
Long-term debt 4,000 8,000 74,274 86,274
- ------------------------------------------------------------------------------------------
Total $1,149,103 $ 174,251 $231,084 $ 445,899 $2,000,337
==========================================================================================
INTEREST SENSITIVITY GAP
Periodic $ (400,523) $ (35,053) $ 53,348 $ 778,216
Cumulative (435,576) (382,228) 395,988
Cumulative gap as a
percentage of earning assets -16.7% -18.2% -16.0% 16.5%
</TABLE>
*Does not include nonaccrual loans.
Capital Adequacy
Risk-based capital ratios, based upon guidelines adopted by bank regulators in
1989, focus upon credit risk. Assets and certain off-balance sheet items are
segmented into one of four broad-risk categories and weighted according to the
relative percentage of credit risk assigned by the regulatory authorities. Off-
balance sheet instruments are converted into a balance sheet credit equivalent
before being assigned to one of the four risk-weighted categories. To supplement
the risk-
<PAGE>
based capital ratios, the regulators issued a minimum leverage ratio guideline
(Tier 1 capital as a percentage of average assets less excludable intangibles).
Capital elements are segmented into two tiers. Tier 1 capital represents
shareholders' equity reduced by excludable intangibles, while total capital
represents Tier 1 capital plus certain allowable long-term debt and the portion
of the allowance for loan losses equal to 1.25% of risk-adjusted assets.
The maintenance of a strong capital base at both the parent company level as
well as at each bank affiliate is an important aspect of Susquehanna's
philosophy. Table 15 illustrates these capital ratios for each bank and thrift
subsidiary and Susquehanna on a consolidated basis. The components of the bank
and thrift subsidiaries' capital, as well as Susquehanna's capital, are also
included in Table 15. Susquehanna and each of its banking and thrift
subsidiaries have leverage and risk-weighted ratios well in excess of regulatory
minimums and each entity is considered well capitalized" under regulatory
guidelines.
<TABLE>
<CAPTION>
TABLE 15--CAPITAL ADEQUACY
- ---------------------------------------------------------------------------------------------------------
At December 31, 1995
- ---------------------------------------------------------------------------------------------------------
Tier I Capital Ratio (A) Total Capital Ratio (B) Leverage Ratio (C)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Required Ratio 4.00% 8.00% 4.00%
Atlantic Federal Savings
Bank 13.90 14.74 7.70
Citizens National Bank 12.94 13.90 8.98
Farmers First Bank 16.26 17.52 12.37
Farmers & Merchants Bank &
Trust 9.69 10.92 6.62
First National Trust Bank 13.37 14.52 9.20
Reisterstown Federal
Savings Bank 9.79 16.35 6.42
Spring Grove National Bank 13.81 15.06 9.78
Williamsport National Bank 16.67 17.93 11.90
Total Susquehanna 14.04% 18.08% 10.06%
</TABLE>
(A) Tier I capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total risk-based capital divided by year-end risk-adjusted assets.
(C) Tier I capital divided by average total assets less disallowed intangible
assets.
Impact of Proposed Legislation
Federal law requires that the FDIC maintain the reserve level of each of the
BIF and SAIF at 1.25% of insured deposits. Reserves are funded through payments
of insurance premiums by insured institutions. The BIF reached this level during
1995, and the FDIC reduced the insurance premiums to a range of 0% to .27% of
deposits for members of the BIF, while maintaining the current range of between
.23% and .31% of deposits for members of SAIF. A onetime assessment on thrift
institutions sufficient to recapitalize the SAIF to a level which would at least
approach that of the BIF has been considered by Congress and appears in recently
proposed legislation. It does not appear that such legislation will be enacted
in the near future. While there can be no assurance that such an approach or any
other approach to addressing the premium disparity will, in fact, materialize,
an assessment of this kind is not expected to have a material adverse effect
upon the financial condition of Susquehanna, although such assessment may have a
material adverse effect upon the results of operations of Susquehanna for 1996.
Summary of 1994 Compared to 1993
On July 11,1994, Susquehanna completed its acquisition of eight Allegany
County, Maryland, branch locations of First National Bank of Maryland. At the
time of the acquisition, the Allegany County locations had loans of $45.5
million, fixed assets of $2.7 million, deposits of $194.1 million, and total
assets of $194.2 million. The transaction has been accounted for under the
purchase method of accounting. The eight branches were subsequently merged into
Farmers & Merchants Bank and Trust, Hagerstown, Maryland, a wholly-owned
subsidiary of Susquehanna.
Susquehanna's net income for the year ended December 31, 1994, includes an
after-tax extraordinary charge of $732,000 in connection with the early
extinguishment of debt. In January 1994, Susquehanna was notified by the holder
of the $10 million 10.5% note due June 1996 that Susquehanna could prepay the
note for approximately $500,000 less than the "make whole" penalty. The
creditors' offer was accepted by Susquehanna and resulted in that charge to
first quarter earnings of $732,000, or $.06 per share.
<PAGE>
Excluding the effects of the adoption of SFAS 109 in January 1993 and the
extraordinary charge in January 1994, earnings for 1994 were $22,828,000
compared to the $22,182,000 earned in 1993, a $646,000 or 2.9% increase. Net
income in 1994 was $22,096,000 compared to $23,205,000 in 1993, a decline of
$1,109,000 or 4.8%. On a per share basis, income before the extraordinary item
and change in accounting principle was $1.96 in both 1994 and 1993 while the
return on average equity was 10.51% in 1994 vs 10.96% in 1993.
Items which have affected the annual operating results and comparisons between
1994 and 1993 were pre-tax items of: $909,000 loss in 1994 relating to the sale
of an other real estate owned property; higher security gains in 1994, $769,000;
and a lower loan loss provision, $1,143,000, in 1994; the addition of the assets
and deposits acquired in the purchase of the eight Allegany County, Maryland,
branches in 1994; and the gain of$ 1.3 million realized in 1993 through the sale
of other real estate owned property.
Subsequent Events
On January 2,1996, the underwriters exercised their 15% over-allotment option
and another 195,000 shares of Susquehanna's common stock was issued to the
public. The net proceeds to Susquehanna after underwriting commissions were $4.9
million and were used as part of the purchase price to acquire Fairfax Financial
Corporation.
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 Financial Corporation and for general corporate purposes.
On February 1, 1996, Susquehanna acquired all of the assets and assumed all
the liabilities of Fairfax Financial Corporation for $62.7 million. Accordingly,
the transaction will be recorded under the purchase method of accounting. As-
sets acquired were $455 million; loans acquired were $402 million; and deposits
acquired were $396 million.
<PAGE>
SUMMARY OF QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
The unaudited quarterly results of operations for the years ended December 31, 1995 and 1994 are as follows:
- ------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Quarter Ended Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $41,669 $47,654 $49,674 $50,830 $34,600 $35,729 $39,460 $40,844
Interest expense 17,107 21,016 22,304 22,191 12,874 13,041 14,870 15,703
- ------------------------------------------------------------------------------------------------------------------
Net interest income 24,562 26,638 27,370 28,639 21,726 22,688 24,590 25,141
Provision for loan losses 1,500 1,071 1,140 1,283 998 978 1,013 998
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 23,062 25,567 26,230 27,356 20,728 21,710 23,577 24,143
- ------------------------------------------------------------------------------------------------------------------
Other income 3,254 3,784 4,704 4,338 4,758 3,422 3,714 3,204
Other expenses 19,179 20,152 20,218 21,362 17,554 16,984 18,864 19,308
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes,
extraordinary item 7,137 9,199 10,716 10,332 7,932 8,148 8,427 8,039
Applicable income taxes 1,918 2,799 3,467 3,183 2,507 2,440 2,427 2,344
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 5,219 6,400 7,249 7,149 5,425 5,708 6,000 5,695
Extraordinary item -- -- -- -- (732) -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net income $ 5,219 $ 6,400 $ 7,249 $ 7,149 $ 4,693 $ 5,708 $ 6,000 $ 5,695
==================================================================================================================
Earnings per common share:
Before extraordinary item $0.45 $0.55 $ 0.62 $ 0.61 $ 0.46 $ 0.49 $ 0.52 $ 0.49
Net income $0.45 $0.55 $ 0.62 $ 0.61 $ 0.40 $ 0.49 $ 0.52 $ 0.49
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The following consolidated financial statements of Susquehanna are
submitted herewith:
Page Reference
--------------
Consolidated Balance Sheets at December 31, 1995 and 1994... [ ]
Consolidated Statements of Income for the years ended
December 31, 1995, 1994, and 1993......................
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994, and 1993......................
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994, and 1993..
Notes to Consolidated Financial Statements..................
Report of Independent Accountants...........................
Summary of Quarterly Financial Data.........................
38
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 87,107 $ 79,473
Short-term investments 92,110 15,603
Investment securities available-for-sale 476,139 374,045
Investment securities held-to-maturity (Fair values of $135,106 and $217,035) 133,879 223,951
Loans and leases, net of unearned income 1,712,951 1,466,186
Less: Allowance for loan and lease losses 27,563 23,845
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 1,685,388 1,442,341
- ---------------------------------------------------------------------------------------------------------------------------------
Premises & equipment (net) 36,414 31,886
Accrued income receivable 19,148 17,847
Other assets 55,972 46,263
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $2,586,157 $2,231,409
=================================================================================================================================
LIABILITIES
Deposits:
Non-interest-bearing $ 270,411 $ 261,045
Interest-bearing 1,845,631 1,605,285
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 2,116,042 1,866,330
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 69,432 73,352
Long-term debt 86,274 49,314
Other liabilities 41,010 25,309
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,312,758 2,014,305
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 17)
STOCKHOLDERS' EQUITY
Preferred stock, $1.80 series A cumulative convertible (no par value) authorized
5,000,000 shares; issued and outstanding-none -- --
Common stock, ($2.00 par value) authorized 32,000,000 shares;
issued: 12,991,007 and 11,682,880 at December 31, 1995 and 1994, respectively 25,982 23,366
Surplus 73,173 42,919
Retained earnings 172,209 159,051
Unrealized gains/(losses) for available-for-sale securities, net of taxes(benefit) of
$1,342 and ($4,468) at December 31, 1995 and 1994, respectively 2,358 (7,859)
Less: Treasury stock (42,331 and 48,962 common shares at cost at
December 31,1995 and 1994, respectively) 323 373
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 273,399 217,104
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $2,586,157 $2,231,409
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Dollars in thousands except per share Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest & fees on loans and leases $152,305 $117,073 $111,117
Interest on investment securities 34,532 31,610 29,890
Interest on short-term investments 2,990 1,950 2,013
- ----------------------------------------------------------------------------------------------------------------
Total interest income 189,827 150,633 143,020
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 72,059 51,214 51,759
Interest on short-term borrowings 3,406 2,257 472
Interest on long-term debt 7,153 3,017 3,762
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 82,618 56,488 55,993
- ----------------------------------------------------------------------------------------------------------------
Net interest income 107,209 94,145 87,027
Provision for loan and lease losses 4,994 3,987 5,130
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 102,215 90,158 81,897
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 4,997 4,840 4,689
Other service charges, commissions, and fees 1,253 1,151 892
Income from fiduciary-related activities 2,974 2,509 2,510
Other operating income 6,888 5,599 7,495
Investment security gains/(losses) (32) 999 230
- ----------------------------------------------------------------------------------------------------------------
Total other income 16,080 15,098 15,816
- ----------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 42,235 36,227 33,770
Net occupancy expense 5,563 4,956 4,797
Furniture and equipment expense 4,192 3,818 3,807
FDIC insurance 2,778 3,838 3,720
Other operating expenses 26,143 23,871 19,910
- ----------------------------------------------------------------------------------------------------------------
Total other expenses 80,911 72,710 66,004
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item, and cumulative effect
of a change in accounting principle 37,384 32,546 31,709
Provision for income taxes 11,367 9,718 9,527
- ----------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative effect of a change in
accounting principle 26,017 22,828 22,182
Extraordinary item (net of tax benefit of $394) -- (732) --
Cumulative effect of a change in accounting principle -- -- 1,023
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 26,017 $ 22,096 $ 23,205
================================================================================================================
Earnings per share: Before extraordinary item/cumulative effect $ 2.23 $ 1.96 $ 1.96
Extraordinary item -- $ (0.06) --
Cumulative effect of a change in accounting principle -- -- $ 0.09
Net income $ 2.23 $ 1.90 $ 2.05
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
Dollars in thousands Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 26,017 $ 22,096 $ 23,205
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion 9,355 7,652 7,492
Provision for loan and lease losses 4,994 3,987 5,130
Deferred taxes (112) (2,306) (2,078)
Loss/(gain) loss on securities transactions 32 (999) (230)
Gain on sale of loans 1,566) (231) (613)
Loss/(gain) on sale of other real estate (284) 1,180 (1,055)
Loss on the early extinguishment of debt -- 1,126 --
Mortgage loans originated for resale (73,117) (42,652) (144,099)
Sale of loans including loans originated for resale 101,731 49,760 139,453
Decrease/(increase) in accrued interest receivable 403 (3,865) (99)
Decrease in accrued interest payable (209) (148) (946)
Increase in accrued expenses and taxes payable 1,010 1,533 300
Change in fiscal year of pooled entity (381) -- --
Other, net 1,076 (4,850) (2,632)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 68,949 32,283 23,828
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from the sale of available-for-sale securities 27,404 60,523 4,343
Proceeds from the maturity of investment securities 161,746 135,567 103,078
Purchase of available-for-sale securities (139,113) (152,326) --
Purchase of held-to-maturity securities (21,977) (101,582) (188,678)
(Increase)/decrease in loans and leases (72,431) (118,618) 18,158
Capital expenditures (5,960) (3,824) (3,376)
Net cash and cash equivalents acquired in acquisition (17,517) 139,439 27,453
Change in fiscal year of pooled entity 81 -- --
Other, net -- 2,013 1,114
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (67,767) (38,808) (37,908)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase /(decrease) in deposits 39,893 (45,590) (14,164)
Net (decrease)/increase in short-term borrowings (13,859) 42,635 4,214
Proceeds from issuance of long-term debt 55,122 14,350 14,000
Repayment of long-term debt (19,439) (24,463) (8,186)
Proceeds from issuance of common stock 33,543 -- --
Dividends paid (12,478) (11,024) (9,828)
Change in fiscal year of pooled entity 177 -- --
Other, net -- 302 1,047
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by/(used for) financing activities 82,959 (23,790) (12,917)
- ----------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 84,141 (30,315) (26,997)
Cash and cash equivalents at January 1 95,076 125,391 152,388
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $179,217 $ 95,076 $125,391
================================================================================================================
Cash and Cash Equivalents:
Cash and due from banks $ 87,107 $ 79,473 $ 71,792
Short-term investments 92,110 15,603 53,599
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $179,217 $ 95,076 $125,391
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31,1995, 1994, and 1993
- ----------------------------------------------------------------------------------------------------------------
Unrealized
Dollars in thousands Preferred Common Retained Gain/(Loss) Treasury Total
except per share data Stock Stock Surplus Earnings Securities Stock Equity
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,1993 $ 304 $18,431 $40,805 $134,637 $ 0 $(373) $193,804
Effect of five-for-four stock split 4,022 (4,022) (35) (35)
Acquisition of Central Financial Corp. 827 4,775 5,602
Preferred shares converted to common (264) 75 189 --
Stock issued under employee benefit plans 141 141
Issuance of common stock 176 176
Net income 23,205 23,205
Unrealized gain on securities 5,363 5,363
Cash dividends declared:
Per common share of $.922 (9,811) (9,811)
Per preferred share of $1.80 (17) (17)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,1993 40 23,355 42,064 147,979 5,363 (373) 218,428
Preferred shares converted to common (40) 11 29 --
Stock issued under employee benefit plans 826 826
Net income 22,096 22,096
Change in unrealized gain on securities (13,222) (13,222)
Cash dividends declared:
Per common share of $1.02 (11,024) (11,024)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,1994 0 23,366 42,919 159,051 (7,859) (373) 217,104
Net income 26,017 26,017
Change in fiscal year of pooled entity (623) (381) (44) (1,048)
Stock issued under employee benefit plans 16 874 50 940
Stock issued in public offering 2,600 30,003 32,603
Change in unrealized gain on securities 10,261 10,261
Cash dividends declared:
Per common share of $1.10 (12,478) (12,478)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,1995 $ 0 $25,982 $73,173 $172,209 $ 2,358 $(323) $ 273,399
================================================================================================================
SHARES OUTSTANDING Preferred Common
Stock Stock
- ----------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 14,313 9,176,389
Preferred shares converted to common (12,429) 37,287
Effect of five-for-four stock split -- 2,001,077
Acquisition of Central Financial Corp. -- 413,531
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 1,884 11,628,284
Preferred shares converted to common (1,884) 5,634
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 -- 11,633,918
Stock issued under employee benefit plans -- 14,758
Stock issued in public offering -- 1,300,000
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 -- 12,948,676
================================================================================================================
</TABLE>
Dividends per share have been adjusted to reflect the five-for-four stock split.
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Susquehanna Bancshares, Inc. and
subsidiaries (Susquehanna) conform to generally accepted accounting principles
and to general practices in the banking industry. The more significant policies
follow:
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of Susquehanna and its wholly-owned subsidiaries: Farmers
First Bank ("Farmers"), Farmers & Merchants Bank and Trust ("F&M"), First
National Trust Bank ("First National"), Williamsport National Bank
("Williamsport"), Citizens National Bank of Southern Pennsylvania ("Citizens"),
Spring Grove National Bank ("Spring Grove"), Susquehanna Bancshares South, Inc.
and subsidiaries ("Susquehanna South") SusqueBancshares Life Insurance Co.
("SBLIC") and Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC") as
of and for the years ended December 31, 1995, 1994, and 1993. All material
intercompany transactions have been eliminated.
Income and expenses are recorded on the accrual basis of accounting except for
trust and certain other fees which are recorded principally on the cash basis.
This does not materially affect the results of operations or financial position
of Susquehanna.
NATURE OF OPERATIONS. Susquehanna is a multi-financial institution which
operates six banks and two thrifts based upon the sound principles of
supercommunity banking. These subsidiaries provide financial services from 99
branches located in central and south central Pennsylvania and central and
western Maryland. In addition, Susquehanna operates two non-bank subsidiaries
which provide leasing and insurance services. Susquehanna's primary source of
revenue is derived from loans to customers, who are predominately small- and
middle-market businesses and middle-income Individuals.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
PURCHASE METHOD OF ACCOUNTING. Net assets of companies acquired in purchase
transactions are recorded at the fair value at the date of acquisition. Core
deposit and other intangible assets are amortized on a straight-line basis over
10 years. The excess of purchase price over the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis generally over 15
years. The unamortized amount of goodwill was $19,134 and $6,891 at December
31, 1995 and 1994 respectively.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash
equivalents includes cash, due from banks, and short-term investments. Short-
term investments consist of interest-bearing deposits in other banks, federal
funds sold and money market funds with original maturities of three months or
less.
CONSOLIDATED STATEMENT OF CASH FLOWS. Interest paid on deposits, short-term
borrowings, and long-term debt was $79,827 in 1995, $56,639 in 1994, and $56,121
in 1993. Income taxes paid were $11,5131,513 in 1995, $11,420 in 1994, and
$10,913 in 1993. Amounts transferred to other real estate owned were $4,959 In
1995, $1,673 in 1994, and $2,662 in 1993.
On September 1, 1993, Susquehanna acquired Central Financial Corp., Columbia,
Pa. At the time of the acquisition, loans acquired were $37,584, interest-
bearing deposits acquired were $27,287, and deposits acquired were, $60,618.
On July 11, 1994, Susquehanna acquired eight banking offices of The First
National Bank of Maryland. At the time of the acquisition, loans acquired were
$45,538, deposits acquired were, $194,114, and premises and equipment acquired
were, $2,709.
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 acquired were $26,798; and deposits
acquired were $209,819.
INVESTMENT SECURITIES. At December 31, 1993, Susquehanna adopted Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investment in
Debt and Equity Securities" ("SFAS 115"). This statement requires enterprises to
classify debt and equity securities as either "held-to-maturity,"
"available-for-sale," or "trading." Investments for which management has the
intent, and Susquehanna has the ability to hold to maturity are carried at
cost adjusted for amortization of premium and accretion of discount.
Amortization and accretion are calculated principally on the interest method.
Securities bought and held primarily for the purpose of selling them in the near
term are classified as "trading" and reported at fair value. Changes in
unrealized gains and losses on "trading" securities are recognized in the
Consolidated Statements of Income. At December 31, 1995, there were no
securities identified as "trading." All other securities are classified as
"available-for-sale" and reported at fair value. Changes in unrealized gains and
losses for "available-for-sale" securities are recorded as a component of
shareholders' equity.
Securities classified as "available-for-sale" include investments
management intends to use as part of its asset/liability management strategy,
and that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors. Realized gains and losses on the sale of
securities are recognized using the specific identification method and are
included in Other Income in the Consolidated Statements of Income.
ALLOWANCE FOR LOAN LOSSES. The loan loss provision charged to operating expense
reflects the amount deemed appropriate by management to produce an adequate
reserve to meet the present and foreseeable risk characteristics of the loan
portfolio. Loan losses are charged directly against the allowance for loan
losses, and recoveries on previously charged-off loans are added to the
allowance.
In May 1993, the Financial Accounting Standards Board issued SFAS 114,
"Accounting by Creditors for Impairment of a Loan" amended by SFAS 118. These
statements, which Susquehanna adopted in 1995, address the accounting by
creditors for impairment of certain loans. The adoption of these statements in
1995 did not have a material effect on Susquehanna's allowance for loan losses.
PREMISES AND EQUIPMENT. Buildings, leasehold improvements, and furniture and
equipment are stated at cost less accumulated
<PAGE>
depreciation and amortization. Depreciation is computed primarily by the
straight-line method over the estimated useful lives of the related property as
follows: Buildings, 40 years and furniture and equipment, 3 to 20 years.
Leasehold improvements are amortized over the shorter of the lease term or 10 to
20 years. Maintenance and normal repairs are charged to operations as incurred,
while additions and improvements to buildings and furniture and equipment are
capitalized. Gain or loss on disposition is reflected in operations.
OTHER REAL ESTATE. Other Real Estate property acquired through foreclosure or
other means is recorded at the lower of its carrying value or fair value of
the property at the transfer date less estimated selling costs. Costs to
maintain Other Real Estate are expensed as incurred.
INTEREST INCOME ON LOANS. Interest income on commercial, consumer, and mortgage
loans is recorded on the interest method. Interest income on installment loans
is recorded on the sum-of-the-years-digits and the actuarial methods. Loan fees
and certain direct loan origination costs are being deferred and the net amount
amortized as an adjustment to the related loan yield on the interest method,
generally over the contractual life of the related loans.
Nonaccrual loans are those on which the accrual of interest has ceased and
where all previously accrued and unpaid interest is reversed. Loans, other than
consumer loans, are placed on nonaccrual status when principal or interest is
past due 90 days or more and the collateral is inadequate to cover principal and
interest or immediately, if, in the opinion of management, full collection is
doubtful. Interest accrued but not collected as of the date of placement on
nonaccrual status is reversed and charged against current income. Subsequent
cash payments received either are applied to the outstanding principal balance
or recorded as interest income, depending upon management's assessment of the
ultimate collectibility of principal and interest. Consumer loans are charged
off to the allowance for loan losses when they become 120 days or more past due,
unless such loans are in the process of collection. In any case, the deferral or
non-recognition of interest does not constitute forgiveness of the borrower's
obligation.
FEDERAL INCOME TAXES. Effective January 1993, Susquehanna adopted the provisions
of Statement of Financial Accounting Standards No.109: "Accounting for Income
Taxes, ("SFAS 109"), which uses the liability method of accounting for income
taxes.
EARNINGS PER SHARE. On July 22, 1993, Susquehanna announced a five-for-four
stock split in the form of a 25% stock dividend on its common stock. The stock
split was distributed on August 27, 1993, to common shareholders of record
August 9, 1993. All per share data in these financial statements have been
adjusted to give effect to the stock split.
Earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding for the periods
presented. The average common shares outstanding for the periods presented are
11,674,244 for 1995; 11,633,918 for 1994; and 11,331,097 for 1993.
RECENT ACCOUNTING PRONOUNCEMENTS. Susquehanna will adopt 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 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 in the first quarter of 1996 will have 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 Financial Accounting
Standard No.122--"Accounting for Mortgage Servicing Rights" ("SFAS 122"). 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 for those loans which will be sold with servicing rights retained. SFAS
122 prohibits retroactive application; accordingly, SFAS 122 will be adopted in
the first quarter of 1996 and will not have a material effect on Susquehanna's
financial condition or results of operation.
- ----------------------------------
2. COMPLETED ACQUISITIONS
On April 1, 1995, Susquehanna ("SBI") acquired Atlanfed Bancorp, Inc.
("ABI"), a Maryland thrift holding company with $255 million in assets and $179
million in deposits. Susquehanna issued 1,199,334 shares of common stock to
shareholders of ABI based on an exchange ratio of .802 shares of Susquehanna's
common stock for each share of ABI common stock. The ABI acquisition 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 ABI for all periods presented. Previously reported
information was as follows:
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Quarter Ended Year Ended Year Ended
March 31, 1995 December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------------
SBI ABI SBI ABI SBI ABI
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $22,351 $2,211 $85,582 $8,563 $79,304 $7,723
Provision for loan and lease losses 1,461 39 3,823 164 4,961 169
Other income 2,853 401 13,058 2,040 12,436 3,379
Other expense 7,289 1,890 64,115 8,595 57,619 8,384
- ----------------------------------------------------------------------------------------------------------------
Income before taxes 6,454 683 30,702 1,844 29,160 2,549
Taxes 1,616 302 8,713 1,005 8,501 1,026
- ----------------------------------------------------------------------------------------------------------------
Income before extraordinary item
and cumulative effect 4,838 381 21,989 839 20,659 1,523
Extraordinary item -- -- (732) -- -- --
Cumulative effect of a change
in accounting principle -- -- -- -- 1,023 --
- ----------------------------------------------------------------------------------------------------------------
Net income $ 4,838 $ 381 $21,257 $ 839 $21,682 $1,523
================================================================================================================
Earnings per share:
Before extraordinary item / $ 0.46 $ 0.26 $ 2.11 $ 0.58 $ 2.04 $ 1.06
cumulative effect
Net income 0.46 0.26 2.04 0.58 2.14 1.06
</TABLE>
In conjunction with the merger, ABI changed its fiscal year end from March 31
to December 31, and as a result, ABI's earnings for their quarter ended March
31, 1995 are included in the pooled consolidated income statements for both the
fourth quarter of 1994 and the first quarter of 1995.
On April 21, 1995, Susquehanna purchased Reisterstown Holdings, Inc. ("RHI"),
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 RHI have been included with Susquehanna since the date
of 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 applicable 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.
A summary of unaudited pro formance financial information for Susquehanna and
RHI combined follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Year Ended December 31 1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Net interest income $110,244 $102,701
Provision for loan and lease losses 4,994 4,114
Other income 16,645 18,613
Other expense 83,296 79,726
- -----------------------------------------------------------
Income before taxes 38,599 37,474
Taxes 11,973 12,120
- -----------------------------------------------------------
Income before extraordinary item 26,626 25,354
Extraordinary item -- (732)
- -----------------------------------------------------------
Net income $ 26,626 $ 24,622
===========================================================
Earnings per share:
Before extraordinary item $ 2.28 $ 2.18
Net income 2.28 2.12
</TABLE>
On February 1, 1996, Susquehanna ("SBI") purchased Fairfax Financial
Corporation("FFC"), a Maryland thrift holding company with $455 million in
assets and $396 million in deposits at the acquisition date, for $62.7 million.
This transaction will be accounted for under the purchase method of accounting
and, accordingly, the results of operations of FFC will be included with
Susquehanna from February 1, 1996, forward. 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 applicable income tax
effects. Goodwill of approximately $21 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, RHI and FFC follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Year Ended December 31, 1995
- -----------------------------------------------------------
SBI/
SBI As SBI/FFC RHI /FFC
Reported Combined Combined
- -----------------------------------------------------------
<S> <C> <C> <C>
Net interest income $ 107,209 $122,259 $125,294
Provision for loan and
lease losses 4,994 5,039 5,039
Other income 16,080 18,726 19,291
Other expense 80,911 94,519 96,904
- -----------------------------------------------------------
Income before taxes 37,384 41,427 42,642
Taxes 11,367 12,956 13,562
- -----------------------------------------------------------
Net income $ 26,017 $ 28,471 $ 29,080
===========================================================
Earnings per share $2.23 $2.17 $2.21
</TABLE>
<PAGE>
3. SHORT-TERM INVESTMENTS
The book value of short-term investments and weighted average interest rates on
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1995 1994
- -----------------------------------------------------------
Book Book
Value Rates Value Rates
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing deposits
in other banks $18,146 5.41% $ 5,096 6.00%
Federal funds sold 37,856 4.92 7,738 5.68
Commercial paper 32,998 5.88 -- --
Money market funds 3,110 5.34 2,769 5.48
- -----------------------------------------------------------
Total $92,110 $15,603
===========================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
4. INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31, 1995 and 1994, are as follows:
- ----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 1995 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury $171,733 $1,735 $ 265 $173,203
U.S. Government agencies 70,530 359 248 70,641
Corporate debt securities 94,798 1,578 58 96,318
Mortgage-backed securities 118,580 321 560 118,341
Equity securities 16,798 853 15 17,636
- ----------------------------------------------------------------------------------------------------------------
$472,439 $4,846 $ 1,146 $476,139
- ----------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Government agencies $ 21,883 $ 53 $ 22 $ 21,914
State and municipal 102,927 1,321 174 104,074
Corporate debt securities 50 -- -- 50
Mortgage-backed securities 9,019 49 -- 9,068
- ----------------------------------------------------------------------------------------------------------------
$133,879 $1,423 $ 196 $135,106
- ----------------------------------------------------------------------------------------------------------------
Total Investment Securities $606,318 $6,269 $ 1,342 $611,245
================================================================================================================
At December31, 1994
- ----------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S. Treasury $189,461 $ 86 $ 5,053 $184,494
U.S. Government agencies 22,042 -- 1,110 20,932
Corporate debt securities 70,797 -- 2,292 68,505
Mortgage-backed securities 89,629 2 4,642 84,989
Equity securities 14,443 744 62 15,125
- ----------------------------------------------------------------------------------------------------------------
$386,372 $ 832 $13,159 $374,045
- ----------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury $ 10,948 $ 3 $ 293 $ 10,658
U.S. Government agencies 28,506 -- 1,340 27,166
State and municipal 120,582 367 2,272 118,677
Corporate debt securities 19,002 -- 778 18,224
Mortgage-backed securities 44,913 89 2,692 42,310
- ----------------------------------------------------------------------------------------------------------------
$223,951 $ 459 $ 7,375 $217,035
- ----------------------------------------------------------------------------------------------------------------
Total investment securities $ 610,323 $1,291 $20,534 $591,080
================================================================================================================
</TABLE>
<PAGE>
At December 31, 1995, investment securities with a carrying value of $155,755
were pledged to secure public funds and for other purposes as required by law.
There were no investment securities whose ratings were less than investment
grade at December 31, 1995.
In accordance with the Financial Accounting Standards Board's SFAS 115
guidance issued in November 1995, securities with a cost basis of $44,069 and
unrealized gains of $1,289 were transferred from held-to-maturity to
available-for-sale in 1995.
The amortized cost and fair values of U.S. Treasury, government agency, state
and municipal, and corporate debt and mortgage-backed securities, at December
31, 1995, by contractual maturity, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities available-for-sale:
Within one year $ 86,947 $ 87,241
After one year but within five years 318,247 321,226
After five years but within ten years 30,717 30,329
After ten years 19,730 19,707
- ----------------------------------------------------------------------------------------------------------------
455,641 458,503
- ----------------------------------------------------------------------------------------------------------------
Securities held-to-maturity:
Within one year $ 37,203 $ 37,299
After one year but within five years 75,230 75,648
After five years but within ten years 15,734 16,190
After ten years 5,712 5,969
- ----------------------------------------------------------------------------------------------------------------
133,879 135,106
- ----------------------------------------------------------------------------------------------------------------
Total debt securities $589,520 $593,609
================================================================================================================
</TABLE>
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 1995 and 1994, certain securities
classified as held-to-maturity were called for early redemption by the issuer.
The results of those transactions are recorded in the corresponding category.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Year ended December 31, 1995
- -----------------------------------------------------------
Available-for-sale Held-to-maturity
- -----------------------------------------------------------
<S> <C> <C>
Gross gains $ 45 $ 15
Gross losses 89 3
- -----------------------------------------------------------
Net gains $ (44) $ 12
===========================================================
Year ended December 31, 1994
- -----------------------------------------------------------
Gross gains $ 992 $ 7
Gross losses
- -----------------------------------------------------------
Net gains $ 992 $ 7
===========================================================
Year ended December 31 1993
- -----------------------------------------------------------
Gross gains $ 261
Gross losses 31
- -----------------------------------------------------------
Net gains $ 230
===========================================================
Interest earned on investment securities for the years ended
December 31 was as follows:
- -----------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Taxable $29,428 $26,404 $25,313
Tax-advantaged 5,104 5,206 4,577
- -----------------------------------------------------------
Total $34,532 $31,610 $29,890
===========================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
5. LOANS AND LEASES
At December31, loans and leases, net of unearned income
($14,185 at December 31,1995 and $12,537 at December 31, 1994),
were as follows:
- -----------------------------------------------------------
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Commercial, financial, and
agricultural $ 198,802 $ 186,013
Real estate--construction 177,253 84,886
Real estate--mortgage 1,091,066 955,357
Consumer 223,039 223,963
Leases 22,791 15,967
- -----------------------------------------------------------
Total $1,712,951 $1,466,186
===========================================================
</TABLE>
At December 31, 1995 and 1994, real estate mortgage loans included a
restructured loan that totalled $6.7 million and $6.9 million, respectively.
Susquehanna has no outstanding commitment to advance additional funds on this
loan, and interest forgone on this loan during 1995 was $239 and during 1994 was
$244.
Certain directors and executive officers of Susquehanna and its affiliates,
including their immediate families and companies in which they are principal
owners (more than 10%), were indebted to banking subsidiaries. In the opinion of
management, such loans are consistent with sound banking practices and are
within applicable regulatory bank lending limitations. Susquehanna relies on the
directors and executive officers for the identification of their associates.
The activity of loans to such persons whose balance exceeded $60 during
1995, 1994, and 1993 follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Balance--January 1 $23,272 $15,927 $17,787
Additions 19,213 27,982 19,601
Deductions:
Amounts collected 14,920 22,318 21,531
Amounts written-off -- -- --
Other Changes -- 1,681 70
- -----------------------------------------------------------
Balance-December 31
Current 27,565 23,272 15,927
Non-performing -- -- --
===========================================================
</TABLE>
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania and Maryland. Susquehanna has no concentration of
loans to borrowers in any one industry, or related industry, which exceeds 10%
of total loans.
Susquehanna adopted SFAS 114,"Accounting by Creditors for Impairment of a
Loan," as amended by SFAS 118, on January 1, 1995, (collectively "the
Statements"). Under the Statements, a loan is considered impaired, based on
current information and events, if it is probable that Susquehanna will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. For purposes of
applying the Statements, larger groups of smaller-balance loans, such as
residential mortgage and installment loans are collectively evaluated for
impairment and, therefore are not subject to the Statements. Management has
established a smaller-dollar value threshold of $100 for commercial loans.
Commercial loans exceeding this threshold are evaluated in accordance with the
Statements. An insignificant delay or shortfall in the amounts of payments,
when considered independent of other factors, would not cause a loan to be
rendered impaired. Insignificant delays or shortfalls may include, depending on
specific facts and circumstances, those that are associated with temporary
operational downturns or seasonal delays.
Management performs periodic reviews of its loans to identify impaired loans.
The measurement of impaired loans is based on the present value of expected
future cash flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based on the
fair value of the collateral. The adoption of the Statements did not result in
an additional provision for loan and lease losses at January 1, 1995.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principle is considered
probable. When an impaired loan or portion of an impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance and subsequent recoveries, if any, are credited to
the valuation allowance. Susquehanna does not accrue interest on impaired loans.
While a loan is considered impaired, cash payments received are applied to
principle or interest depending upon management's assessment of the ultimate
collectibility of principle and interest.
Susquehanna's impaired loans totalled $15,341 at December 31, 1995, of which
$12,656 had no related SFAS 114 allowance. The remaining impaired loans of
$2,685 had a related SFAS 114 allowance of $416. For the year 1995, the average
balance for impaired loans was $12,365 and the interest income recognized on
impaired loans was $422. All interest income recognized on impaired loans was
recorded on the cash basis.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
6. ALLOWANCE OF LOAN AND LEASE LOSSES
Changes in the allowance for loan losses were as follows:
- -----------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Balance--January 1 $23,845 $21,717 $18,026
Allowance acquired in
business combination 3,323 -- 515
Change in fiscal year (8) -- --
Provision charged to
operating expenses 4,994 3,987 5,130
- -----------------------------------------------------------
32,154 25,704 23,671
- -----------------------------------------------------------
Charge-offs (5,646) (2,952) (3,101)
Recoveries 1,055 1,093 1,147
- -----------------------------------------------------------
Net charge-offs (4,591) (1,859) (1,954)
- -----------------------------------------------------------
Balance--December 31 $27,563 $23,845 $21,717
===========================================================
</TABLE>
- -----------------------------------------------------------
7. PREMISES AND EQUIPMENT
Property, buildings, and equipment, at December 31, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Land $ 5,377 $ 4,214
Buildings--including capitalized
leases of $104 in 1994 31,588 28,211
Furniture and equipment 29,021 26,905
Leasehold improvements 3,609 3,462
Land improvements 399 381
- -----------------------------------------------------------
69,994 63,173
- -----------------------------------------------------------
Less: accumulated depreciation
and amortization 33,580 31,287
- -----------------------------------------------------------
$36,414 $31,886
===========================================================
</TABLE>
Depreciation and amortization expense charged to operations amounted to $3,706
in 1995, $3,276 in 1994, and $3,139 in 1993.
All subsidiaries lease certain banking branches and equipment under operating
leases which expire on various dates through 2009. Renewal options are available
for periods up to 20 years. Minimum future rental commitments under non-
cancellable leases, as of December 31, 1995, areas follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Operating
Leases
- -----------------------------------------------------------
<S> <C>
1995 $1,469
1996 1,465
1997 1,316
1998 1,144
1999 603
Subsequent years 2,159
- -----------------------------------------------------------
$8,156
===========================================================
</TABLE>
Total rent expense charged to operations amounted to $1,521 in 1995, $1,439 in
1994, and $1,402 in 1993.
<PAGE>
- -----------------------------------------------------------
8. DEPOSITS
<TABLE>
<CAPTION>
Deposits at December 31 were as follows:
- -----------------------------------------------------------
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Non-interest-bearing:
Demand $ 270,411 $ 261,045
Interest-bearing:
Interest-bearing demand 483,835 464,052
Savings 390,257 398,423
Time 899,013 697,406
Time of $100 or more 72,526 45,404
- -----------------------------------------------------------
Total deposits $2,116,042 $1,866,330
===========================================================
</TABLE>
- --------------------------------------------------------------------------------
9. SHORT--TERM BORROWINGS
<TABLE>
<CAPTION>
Short-term borrowings and weighted average interest rates, at December 31, were as follows:
- ----------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements $47,032 4.75% $36,522 4.76%
Treasury tax and loan notes 4,400 4.92 5,630 5.10
Federal Home Loan Bank borrowings 18,000 6.01 21,200 6.77
Other -- -- 10,000 6.50
- ----------------------------------------------------------------------------------------------------------------
$69,432 $73,352
================================================================================================================
</TABLE>
Under an agreement with the Federal Home Loan Bank, Susquehanna subsidiary
banks have a line of credit available totaling approximately $192 million, of
which $43 million was outstanding at December 31, 1995.
<PAGE>
- --------------------------------------------------------------------------------
10. LONG--TERM DEBT
<TABLE>
<CAPTION>
Long-term debt at December 31 was as follows:
- ----------------------------------------------------------------------------------------------------------------
1995 1995
- ----------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Farmers:
Installment note due June 2, 1999 $ 60 9.00% $ 74 9.00%
First National:
Subordinated notes due July 1, 1995 -- -- 12 12.00
SBLC:
Term note due May 1, 1995 -- -- 4,000 8.00
Promissory note due June 6, 1995 -- -- 2,000 6.75
Term note due July 29, 1996 4,000 6.49 4,000 6.49
Term note due October 30, 1997 2,000 8.75 2,000 8.75
Term note due July 19, 1998 5,000 7.51 -- --
Susquehanna South:
Federal Home Loan Bank borrowings due at
various dates through 2003 24,678 6.56 31,378 6.58
Federal Home Loan Bank term loan note due
September 1, 2014 536 5.00 -- --
Susquehanna:
Term loan note due June 30, 1999 -- -- 5,850 6.62
Subordinate notes due February 1, 2005 50,000 9.00 -- --
- ----------------------------------------------------------------------------------------------------------------
$86,274 $49,314
================================================================================================================
</TABLE>
Farmers' installment note is a demand note with a final maturity of June 2,
1999. Until such demand is made, Farmers will pay equal monthly payments to the
individual holder.
Susquehanna South's Federal Home Loan Bank ("FHLB") debt is under a blanket
floating loan security with the FHLB of Atlanta. Susquehanna South's thrifts are
required to maintain as collateral for all borrowings certain amounts of
qualifying first mortgage loans. In addition, all of the thrifts' stock in the
FHLB of Atlanta is pledged as collateral for such debt.
On January 14, 1994, Susquehanna elected to prepay the $10 million, 10.5%
promissory note, due May 1996. In connection with the prepayment, Susquehanna
incurred a one-time, pre-tax charge of approximately $1.1 million, on the early
extinguishment of the note which is disclosed as an extraordinary item in the
Consolidated Statements of Income.
On February 9, 1995, Susquehanna issued $50 million of its 9.00% subordinated
notes due 2005. The proceeds were used to retire $10 million in short-term
borrowings and the balance was used for acquisitions and general corporate
purposes.
On January 29, 1996, Susquehanna issued $35 million of its 6.30% senior notes
due 2003. The proceeds were used for acquisition and general corporate purposes.
<PAGE>
- -----------------------------------------------------------
11. INCOME TAXES
- -----------------------------------------------------------
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Dollars in thousands 1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Current $11,479 $12,024 $10,582
Deferred (112) (2,306) (1,055)
- -----------------------------------------------------------
Total $11,367 $ 9,718 $ 9,527
===========================================================
</TABLE>
Effective January 1, 1993, Susquehanna adopted the provisions of Statement of
Financial Accounting Standards No.1 09--"Accounting for Income Taxes" ("SFAS
109"). SFAS 109 required recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax return. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. As
of January 1, 1993, Susquehanna recorded a tax benefit of approximately $1,023,
or $.09 per share, which amount represents the net increase to the net deferred
tax asset as of that date. Such amount has been reflected in the consolidated
statement of income as the cumulative effect of a change in accounting
principle.
The components of the net deferred tax asset as of December 31, 1995, 1994,
and 1993 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 8,416 $8,167 $6,616
Loan fee income 1,200 1,365 1,479
Accrued pension expense 1,509 1,518 1,415
Deferred directors' fees 690 620 726
Deferred compensation 234 345 400
Non-accrual loan intere 1,454 1,287 --
Other assets 270 679 351
Deferred tax liabilities:
FHLB stock dividends (429) (470) (494)
Premises and equipment (1,388) (836) (846)
Core deposit intangible (167) (167) (167)
Other liabilities (462) (859) (137)
- -----------------------------------------------------------
Net deferred income tax $11,327 $11,649 $ 9,343
===========================================================
</TABLE>
The provision for income taxes differs from the amount derived from applying the
statutory income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rates $13,084 $11,391 $11,098
Tax-advantaged income (2,806) (2,484) (2,314)
Recapture of tax bad debt
reserve from acquisition -- -- 475
Other, net 1,089 811 268
- -----------------------------------------------------------
Total $11,367 $ 9,718 $ 9,527
===========================================================
</TABLE>
<PAGE>
- -----------------------------------------------------------
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Susquehanna is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
statement of condition. The contract or notional amount of those instruments
reflect the extent of involvement Susquehanna has in particular classes of
financial instruments.
Susquehanna's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for loan commitments and standby
letters of credit is represented by the contractual amount of these instruments.
Susquehanna uses the same credit policies for these instruments as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risk at December 31, 1995 and
1994, are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Contractual 1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Financial instruments whose
contract amounts represent
credit risk:
Standby letters of credit $ 32,058 $ 16,161
Commitments to originate loans 54,878 42,470
Unused portion of home equity
and credit card lines 132,428 110,350
Other unused commitments,
principally commercial and
construction 259,136 140,122
</TABLE>
Standby letters of credit are conditional commitments issued by Susquehanna to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment does not necessarily represent
future cash requirements. Susquehanna evaluates each customers credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by Susquehanna upon extension of credit, is based on managements credit
evaluation of the borrower.
<PAGE>
- ----------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS 107"), Susquehanna has
presented estimated fair value information about financial instruments, whether
or not recognized in the Consolidated Balance Sheet for which it is practicable
to estimate that value. Fair value is best determined by values quoted through
active trading markets. Active trading markets are characterized by numerous
transactions of similar financial instruments between willing buyers and willing
sellers. Because no active trading market exists for various types of financial
instruments, many of the fair values disclosed were derived using present value
discounted cash flow or other valuation techniques. As a result, Susquehanna's
ability to actually realize these derived values cannot be assured.
The estimated fair values disclosed under SFAS 107 may vary significantly
between institutions based on the estimates and assumptions used in the various
valuation methodologies. SFAS 107 excludes disclosure of non-financial assets
such as buildings as well as certain financial instruments such as leases.
Susquehanna also has several intangible assets which are not included in the
fair value disclosures such as mortgage servicing rights, customer lists, and
core deposit intangibles. Accordingly, the aggregate estimated fair values
presented do not represent the underlying value of Susquehanna. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument.
Cash and Due from Banks and Short-Term Investments. The fair value of cash
and due from banks and short-term investments is deemed to be the same as their
carrying value.
Investment Securities. The fair value of investment securities is estimated
based on quoted market prices, where available. When quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans. Variable rate loans which do not expose Susquehanna to interest rate
risk have a fair value that equals their carrying value, discounted for
estimated future credit losses. The fair value of fixed rate loans was based
upon the present value of projected cash flows. The discount rate was based upon
the U.S. Treasury yield curve, adjusted for credit risk.
Deposits. The fair values of demand, interest-bearing demand, and savings
deposits are the amounts payable on demand at the balance sheet date. The
carrying value of variable rate time deposits represents a reasonable estimate
of fair value. The fair value of fixed rate time deposits is based upon the
discounted value of future cash flows expected to be paid at maturity. Discount
rates are calculated off the U.S. Treasury yield curve.
Short-Term Borrowings. The carrying amounts reported in the balance sheet
represent a reasonable estimate of fair value since the majority of these
liabilities mature in less than six months.
Long-Term Debt. The fair values of long-term debt is estimated based upon
quoted market prices, where applicable. When quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Off-Balance Sheet Items. The fair value of unused commitments to lend and
standby letters of credit is deemed to be the same as their carrying value.
The following table represents the carrying amount and estimated fair value of
Susquehanna's financial instruments at December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 87,107 $ 87,107 $ 79,473 $ 79,473
Short-term investments 92,110 92,110 15,603 15,603
Investment securities 610,018 611,245 597,996 591,080
Loans, net of unearned income and
allowance 1,663,199 1,678,169 1,418,865 1,366,825
Liabilities:
Deposits 2,116,042 2,119,634 1,866,330 1,850,328
Short-term borrowings 69,432 69,432 73,352 73,352
Long-term debt 86,274 95,014 49,314 47,889
</TABLE>
<PAGE>
- ----------------------------------------------------------
14. BENEFIT PLANS
Susquehanna maintains a single non-contributory pension plan that covers
substantially all full-time employees. Benefits are based upon years of service
and the employee's highest five years of compensation during the last ten years
of employment. Susquehanna's policy has been to fund the pension plan on a
current basis to the extent deductible under existing tax regulations. A summary
of the components of pension expense follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Year ended December 31 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 1,803 $ 1,587 $ 1,363
Interest cost on projected
benefit obligation 2,103 1,865 1,652
Actual (gain)/loss on plan assets (3,658) 170 (1,707)
Net amortization and deferral 1,936 (1,858) 167
- -----------------------------------------------------------------
Pension expense of defined
benefit plans $ 2,184 $ 1,764 $ 1,475
=================================================================
- -----------------------------------------------------------------
At December 31
- -----------------------------------------------------------------
Discount rate 7.00% 8.00% 7.00%
Rate of increase in
compensation levels 5.00 6.00 6.00
Expected long-term rate of
return on assets 8.00 8.00 8.00
- -----------------------------------------------------------------
</TABLE>
The following table sets forth the funded status and amounts recognized in the
consolidated balance sheets for the defined benefit pension plan:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
At December 31 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Actuarial present value of vested
benefit obligation $21,443 $15,217
=================================================================
Actuarial present value of accumulated
benefit obligation $21,830 $15,643
=================================================================
Actuarial present value of projected
benefit obligation 32,845 $24,744
Plan assets at market value 26,555 21,730
- -----------------------------------------------------------------
Plan assets less than projected
benefit obligation 6,290 3,014
Unrecognized net gain (loss) from
past experience different than that
assumed and effects of changes in
assumptions (1,136) 1,874
Unrecognized prior service cost (1,002) (1,104)
Unrecognized net asset at January 1,
1987, being amortized over 15 years 581 666
- -----------------------------------------------------------------
Net pension liability recognized
in the balance sheet $ 4,733 $ 4,450
================================================================
</TABLE>
The plan assets at December 31, 1995, were invested principally in U.S.
Government securities and listed stocks and bonds including 13,125 shares of
Susquehanna common stock.
The change in the discount rate and rate of increase in compensation levels
assumptions in 1995 resulted in a net increase in the actuarial present value of
accumulated benefit obligation and projected benefit obligation of $1,955 and
$2,886, respectively.
On January 1, 1993, Susquehanna adopted Statement of Financial Accounting
Standard No.106, "Employer's Accounting for Post-Retirement Benefits Other than
Pensions" ("SFAS 106"). SFAS 106 requires the cost of the benefits to be accrued
during the employees' credited service period. The adoption of SFAS 106 resulted
in an accumulated post-retirement benefit obligation of approximately $2.6
million. Susquehanna elected the prospective transition approach and is
amortizing the transition obligation over a 20-year period. The net periodic
benefit expense for 1995, 1994, and 1993 was $452, $384, and $350, respectively.
Susquehanna maintains a 401(k) savings plan which allows employees to invest a
percentage of their earnings, matched up to a certain amount specified by
Susquehanna. Contributions to the savings plan which are included in salaries
and benefits expense amounted to $713 in 1995, $782 in 1994, and $691 in 1993.
Susquehanna adopted a Phantom Stock Appreciation Plan ("PSP"), which is
designed to provide specific individuals an award based upon the movement of
Susquehanna's Common Stock price over a five-year period. The award is paid to
participants in the form of shares of Susquehanna Common Stock at the end of
plan years three, four, and five based upon the appreciation in Susquehanna's
Common Stock price over those respective periods and the number of PSP units
awarded at the inception of the program. Expense related to the PSP was $706,
$105, $150 for 1995, 1994, and 1993, respectively.
<PAGE>
- -----------------------------------------------------------------
15. SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY) CONDENSED BALANCE SHEETS
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
December 31 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash in subsidiary bank $ 1,337 $ 97
Short-term investments 32,998 2,716
Investment in consolidated sub-
sidiaries at equity in net assets 287,367 228,602
Other investment securities 1,451 1,396
Premises and equipment (net) 48 59
Other assets 5,273 2,099
- -----------------------------------------------------------------
Total assets $328,474 $234,969
=================================================================
LIABILITIES
Short-term borrowings -- $ 10,000
Long-term debt $ 50,000 5,850
Accrued taxes and expenses payable 5,075 2,015
- -----------------------------------------------------------------
Total liabilities 55,075 17,865
- -----------------------------------------------------------------
EQUITY
Preferred stock (no par) -- --
Common stock ($2 par value) 25,982 23,366
Surplus 73,173 42,919
Retained earnings 172,209 159,051
Unrealized gain/(losses) on
available-for-sale securities, net 2,358 (7,859)
Less: Treasury stock at cost 323 373
- -----------------------------------------------------------------
Total stockholders' equity 273,399 217,104
- -----------------------------------------------------------------
Total liabilities and stockholders'
equity $328,474 $234,969
=================================================================
- -----------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY) CONDENSED STATEMENTS
OF INCOME
- -----------------------------------------------------------------
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------
INCOME
Dividends from subsidiaries $17,531 $18,859 $25,040
Interest and dividends on
investment securities 833 89 72
Interest and management
fee from subsidiaries 1,398 310 206
- -----------------------------------------------------------------
Total income 19,762 19,258 25,318
- -----------------------------------------------------------------
EXPENSES
Service fees paid to
subsidiary 946 969 971
Interest expense 4,339 683 1,355
Other expenses 2,408 1,273 754
- -----------------------------------------------------------------
Total expenses 7,693 2,925 3,080
- -----------------------------------------------------------------
Income before taxes,
equity in undistributed
income of subsidiaries, and
extraordinary item 12,069 16,333 22,238
Equity in undistributed
income of subsidiaries 13,948 6,889 967
Extraordinary item
(net of taxes of $0) -- (1,126) --
- -----------------------------------------------------------------
Net Income $26,017 $22,096 $23,205
=================================================================
</TABLE>
<PAGE>
SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $26,017 $22,096 $23,205
Adjustment to reconcile net
income to cash provided
by operating activities:
Depreciation and
amortization 195 142 135
Equity in undistributed
income of subsidiaries
and income of
subsidiaries accrued
not received (13,948) (11,889) (967)
Loss on the early
extinguishment of debt -- 1,126 --
Increase in other assets (3,343) (751) (144)
Increase in accrued
expenses payable 3,060 398 387
Other, net (451) (19) (4)
- -----------------------------------------------------------------
Net cash provided from
operating activities 11,530 11,103 22,612
- -----------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment
securities (9,528) -- (12,144)
Proceeds from the sale/
maturities of investment
securities 9,760 11,956 --
Net cash from acquisition -- -- 26
Capital expenditures (15) (42) (38)
Net (infusion of)/repayment
of investment in
subsidiaries (35,440) (8,600) 200
- -----------------------------------------------------------------
Net cash (used for)/provided
from investing activities (35,223) 3,314 (11,956)
- -----------------------------------------------------------------
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------
FINANCING ACTIVITIES:
Increase/(decrease) in
short-term borrowings $(10,000) $10,000 $ --
Repayment of long-term debt (5,850) (12,076) (750)
Proceeds from issuance of
long-term debt 50,000 -- --
Proceeds from issuance of
common stock 33,543 -- --
Dividends paid (12,478) (10,643) (9,331)
Cash paid for fractional shares -- -- (35)
- -----------------------------------------------------------------
Net cash provided from/
(used for) financial activities 55,215 (12,719) (10,116)
- -----------------------------------------------------------------
Net increase in cash and
cash equivalents 31,522 1,698 540
Cash and cash equivalents at
January 1 2,813 1,115 575
- -----------------------------------------------------------------
Cash and cash equivalents at
December 31 $34,335 $ 2,813 $ 1,115
=================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 1,337 $ 97 $ 96
Short-term investments 32,998 2,716 1,019
- -----------------------------------------------------------------
Cash and cash equivalents at
December 31 $34,335 $ 2,813 $ 1,115
=================================================================
</TABLE>
16. REGULATORY RESTRICTIONS OF BANKING AND THRIFT SUBSIDIARIES
Susquehanna is limited by regulatory provisions in the amount it can receive in
dividends from its banking and thrift subsidiaries. At December 31, 1995,
$26,052 is available for dividend distribution to Susquehanna in 1996 from its
banking and thrift subsidiaries.
Included in cash and due from banks are balances required to be maintained by
subsidiary banks and thrifts on deposit with the Federal Reserve. The amounts of
such reserves are based on percentages of certain deposit types and totalled
$15,069 at December 31, 1995.
17. CONTINGENT LIABILITIES
Susquehanna is party to various legal proceedings incidental to its business.
Certain claims, suits, and complaints arising in the ordinary course of business
have been filed or are pending against Susquehanna. In the opinion of
management, all such matters are adequately covered by insurance or, if not
covered, are without merit or are of such kind, or involve such amounts, as
would not have a significant effect on the financial position, results of
operations, or cash flows of Susquehanna, if disposed of unfavorably.
<PAGE>
COOPERS & LYBRAND, L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Susquehanna Bancshares, Inc.
Lititz, Pennsylvania
We have audited the accompanying consolidated balance sheets of Susquehanna
Bancshares, Inc. and its subsidiaries (Susquehanna) as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
Susquehanna's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Atlanfed Bancorp, Inc. and Subsidiaries, a wholly-owned
subsidiary, which statements reflect total assets of $255,123,000 as of March
31,1995 and net interest income of $8,563,000 and $7,723,000 for the each of the
two years in the period ended March 31, 1995. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Atlanfed Bancorp, Inc. and
subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Susquehanna Bancshares, Inc. and its subsidiaries as of December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 and Note 11 to the financial statements, Susquehanna
changed its method of accounting for income taxes in 1993.
Harrisburg, Pennsylvania
January 23, 1996, except for
Note 2 as to which the date is February 1, 1996
<PAGE>
Item 9. Changes in and Disagreements on Accounting and Financial
- ------ --------------------------------------------------------
Disclosure.
-----------
There has been no change in Susquehanna's principal accountants in
over two years. There have been no disagreements with such principal
accountants on any matters of accounting principles, practices, financial
statement disclosure, auditing scope or procedures.
59
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of Susquehanna.
- ------- -----------------------------------------------
ELECTION OF DIRECTORS AND EXECUTIVE OFFICERS
Susquehanna's Board of Directors currently consists of fourteen
directors. The Board is classified into three classes, one of which is elected
each year to serve a term of three years. Directors of each class hold office
until the expiration of the term for which they were elected and their
successors have qualified or until the annual meeting following their attaining
the age of seventy-two years.
At the Susquehanna Annual Meeting the shareholders will elect four
persons to serve as directors for three year terms expiring in 1999 ("Class of
1999"). The candidates nominated to such class who receive the highest number
of votes will be elected. In the election, shareholders will be entitled to
cast one vote for each share held for each of the five candidates to the Class
of 1999 but will not be entitled to cumulate such votes.
Nominations for four members of the Class of 1999 have been made by
the Board of Directors. Additional nominations for election to the Board of
Directors may be made by any holder of Susquehanna Common Stock. Each
nomination shall be made in writing and delivered or mailed to the President of
Susquehanna not less than fourteen days prior to the Annual Meeting. Such
notification shall contain the following information to the extent known by the
notifying shareholder without unreasonable effort or expense: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the total number of shares of capital stock of the corporation that
will be voted by the notifying shareholder for such proposed nominee; (d) the
name and residence address of the notifying shareholder; and (e) the number of
shares of capital stock of Susquehanna owned by the notifying Shareholder.
Management's nominees for the Class of 1999 are Richard M. Cloney,
Richard E. Funke, Edward W. Helfrick and C. William Hetzer, Jr.
In the absence of instructions to the contrary, proxies will be voted
in favor of the election of Management's nominees. In the event any of the
nominees should become unavailable, it is intended that the proxies will be
voted for such substitute nominee(s) as may be chosen by management. Management
has no present knowledge that any of the nominees will be unavailable to serve.
The following table sets forth the name and age of each nominee and continuing
director, as well as their business experience, including principal occupation
and the period during which each has served as a director. It includes
directors who will be retiring as of the 1996 Annual Meeting.
60
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Business Experience
-------------------
Including Principal
-------------------
Occupation for Past Five
------------------------
Name, Address (1) Age Years Director Since Present Term Expires
----------------- --- ----- --------------- --------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard M. Cloney (2) 54 Vice President and Secretary, 1985 1996
Susquehanna; Executive Vice
President and Secretary,
Farmers First Bank;
President, Susquehanna Banc-
shares South, Inc.
Richard E. Funke (2) 60 Chairman of the Board, 1995 1996
Atlantic Federal Savings Bank
Edward W. Helfrick (2) 67 State Senator, 1985 1996
Commonwealth of
Pennsylvania since 1980.
Other Directorships: Farragut
Anthracite Co.; Bear Gap
Stone, Inc.; Helker
Contracting Co.; Rand Realty
Corp.
C. William Hetzer, Jr. (2) 63 President, C. William Hetzer, 1989 1996
Inc. (General Contractor)
Robert S. Bolinger 59 President & Chief Executive 1982 1997
Officer, Susquehanna;
Chairman & Chief Executive Officer,
Farmers First Bank;
Chairman & Chief Executive
Officer, Susquehanna
Bancshares South, Inc.
Henry H. Gibbel 60 President, Lititz Mutual 1982 1997
Insurance Co. & Penn Charter
Mutual Insurance Co.;
Partner, Hershey & Gibbel
(Insurance Agency)
George J. Morgan 64 President, Morgan, Hallgren, 1982 1997
Crosswell & Kane, P.C. (Law
Firm)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Business Experience
-------------------
Including Principal
-------------------
Occupation for Past Five
------------------------
Name, Address (1) Age Years Director Since Present Term Expires
----------------- --- ----- --------------- --------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert C. Reymer, Jr. 69 Retired Vice President, 1985 1997
McDowell Insurance Inc.
(Insurance Agency)
Roger V. Wiest 55 Managing and Senior Partner, 1992 1997
Wiest, Wiest, Saylor &
Muolo (Law Firm)
James G. Apple 60 President, Butter Krust 1992 1998
Baking Co., Inc.
John M. Denlinger 56 President, Denlinger, Inc. 1985 1998
(Building Materials)
Marley R. Gross 63 President, Marley R. Gross
Ford, Inc. 1995 1998
T. Max Hall 61 Attorney/Managing Partner, 1986 1998
McNerney, Page, Vanderlin
and Hall; Chairman of the
Board, Data Papers, Inc.;
Chairman of the Board, Data
Papers of North Carolina, Inc.
Raymond M. O'Connell 69 Chairman of the Board, 1986 1998
Williamsport National Bank;
Director, Phoenix Data, Inc.
</TABLE>
- ------------------------
(1) The business address for all directors of Susquehanna is Susquehanna
Bancshares, Inc., 26 North Cedar Street, Lititz, Pennsylvania 17543.
(2) Management nominees for election at the Annual Meeting for terms expiring
1999.
- -----------------------
Messrs. Gibbel, Morgan, Denlinger and Bolinger are directors of
Farmers First Bank ("Farmers First"), a Susquehanna subsidiary, and have been
directors of that bank and its predecessor for more than five years. In
addition, Mr. Bolinger serves as a Director of Atlantic Federal, Fairfax Savings
and Reisterstown
62
<PAGE>
Federal. Messrs. Apple, Helfrick, and Wiest are directors of First National
Trust Bank ("First National"), a Susquehanna subsidiary, and have been directors
of that bank for more than five years. Mr. Reymer is a director of Citizens
National Bank of Southern Pennsylvania ("Citizens"), a Susquehanna subsidiary,
and has been a director of that bank and its predecessors for more than five
years. Messrs. Hall, and O'Connell are directors of Williamsport National Bank
("Williamsport National"), a Susquehanna subsidiary, and have been directors of
that bank for more than five years. Mr. Gross is a director of Spring Grove
National Bank ("Spring Grove"), a Susquehanna subsidiary, and has been a
director of that bank for more than five years. Mr. Hetzer is a director of
Farmers and Merchants Bank of Hagerstown, Maryland ("F & M"), a Susquehanna
subsidiary, and has been a director of that bank for more than five years. Mr.
Funke is a director of Atlantic Federal Savings Bank ("Atlantic Federal"), a
wholly-owned subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna
Bancshares South, Inc., and has been a director of that thrift for more than
five years. Messrs. Bolinger, Cloney, Denlinger, Funke and Morgan also serve as
directors of Susquehanna Bancshares South, Inc. In addition, Mr. Cloney is a
director of Atlantic Federal, Fairfax Savings and Reisterstown Federal.
T. Max Hall is a partner in the law firm of McNerney, Page, Vanderlin
and Hall located in Williamsport, Pennsylvania. During the last fiscal year,
McNerney, Page, Vanderlin and Hall was retained to provide legal services to
Williamsport National. Also, Roger V. Wiest is a partner in the law firm of
Wiest, Wiest, Saylor & Muolo located in Sunbury, Pennsylvania. During the last
five years, Wiest, Wiest, Saylor & Muolo was retained to provide services to
First National. George J. Morgan is a shareholder and President in the law firm
of Morgan, Hallgren, Crosswell & Kane, P.C. During the last fiscal year,
Morgan, Hallgren, Crosswell & Kane, P.C., was retained to provide legal services
to Susquebanc Lease Co., a Susquehanna subsidiary. See "Certain Relationships
and Related Transactions."
Board Committees and Meetings
The Board of Directors of Susquehanna has two standing committees, an
Audit Committee and a Compensation Committee, both of which were established in
1987. The members of both committees are all outside directors.
The principal purpose of the Audit Committee is to meet with
Susquehanna's independent public accountants and review the scope and results of
Susquehanna's annual audit, to review the reports of examination of regulatory
agencies and the replies to the reports, and to review information pertaining to
internal auditing and Susquehanna's systems of internal controls. The directors
serving on the Audit Committee in 1995 were James G. Apple, T. Max Hall, Robert
C. Reymer, Jr., and Roger V. Wiest. The Audit Committee met four (4) times
during 1995.
The principal purposes of the Compensation Committee are to review and
approve key executive salary policy, systems for distribution of incentive
compensation or bonuses, and the design of any new supplemental compensation
programs applicable to executive compensation. The directors serving on the
Compensation Committee in 1995 were John M. Denlinger, Henry H. Gibbel, Edward
W. Helfrick, C. William Hetzer, Jr., and George J. Morgan. The Compensation
Committee met six (6) times during 1995.
The Board of Directors has no other standing committees. It operates
as a committee of the whole for all other matters including nominations.
63
<PAGE>
During the last fiscal year the Susquehanna Board of Directors met six
(6) times. Each of the directors attended at least 75% of the meetings of the
Board of Directors that were held in the fiscal year in the period during which
he served as a director, except that two incumbent directors, Mr. Helfrick and
Mr. Apple, attended fewer than 75% of the total meetings of the Board of
Directors and Committees of the Board on which they served.
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
Compensation of Directors
Directors currently receive an annual fee of $5,000 and a payment of
$800 for attendance at each Board of Directors' meeting except telephonic
meetings, where the compensation is $250. Directors are paid $800 for each
committee meeting which they attend, unless the committee meets on the day of a
meeting of the entire Board, in which case the fee is $250.
The following table sets forth the executive officers of Susquehanna,
their ages, and their positions with Susquehanna:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Name Age Title
- ---- --- -----
- -----------------------------------------------------------------------
<S> <C> <C>
Robert S. Bolinger 59 President & Chief Executive Officer
William T. Belden 46 Vice President
Frederick W. Bisbee 57 Vice President
Richard M. Cloney 54 Vice President and Secretary
Gregory A. Duncan 40 Vice President
Charles W. Luppert 54 Vice President
J. Stanley Mull, Jr. 62 Vice President and Treasurer
William J. Reuter 46 Vice President
Robert L. Strausbaugh 64 Vice President
- -----------------------------------------------------------------------
</TABLE>
Robert S. Bolinger, Richard M. Cloney and J. Stanley Mull, Jr., are also
principal executive officers of Farmers First and have been employed by Farmers
First in substantially equivalent positions for more than the past five years.
Messrs. Bolinger and Cloney also serve as principal executive officers of
Susquehanna Bancshares South, Inc. William T. Belden is a principal executive
officer of Farmers First, having been appointed as President and Chief Operating
Officer, effective January 17, 1995. Prior to assuming his present position,
Belden served as a Vice President with PNC Bank for more than the past five
years. Frederick W. Bisbee is also the principal executive officer of First
National and has been employed by First National in a substantially equivalent
position for more than the past five years. Gregory A. Duncan is also the
principal executive officer of Citizens. Prior to his present position, Mr.
Duncan served as an executive officer of Citizens for more than the past five
years, including Executive Vice President from May 1990. He assumed his
present position as President and Chief Executive Officer of Citizens in July
1992. Charles W. Luppert is also a principal executive officer of Williamsport.
Mr. Luppert served as an officer of Williamsport, including Executive Vice
President, Chief Operating Officer & Cashier prior to his appointment as Chief
Executive Officer in January 1988; he was named President in March 1989.
William J. Reuter is also the principal executive officer of Farmers & Merchants
Bank and Trust and has been employed by F & M Bank in a substantially equivalent
position for more than the past
64
<PAGE>
five years. Robert L. Strausbaugh is the principal executive officer of Spring
Grove and has been employed by Spring Grove in a substantially equivalent
position for more than the past five years. Richard E. Funke is a director of
Susquehanna and is also President and Chief Executive Officer of Atlantic
Federal. Mr. Funke is not, however, an executive officer of Susquehanna.
There are no family relationships among the executive officers of
Susquehanna nor are there arrangements or understandings between any of them and
any other person pursuant to which any of them was selected as an Officer of
Susquehanna.
Section 16(a) of the Securities Exchange Act of 1934 requires
Susquehanna's officers and directors, and persons who own more than ten percent
of a registered class of Susquehanna's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish Susquehanna with copies of all Section 16(a) forms
they file.
Based solely on its review of the copies of such forms received by it,
and written representations from certain reporting persons that no Forms 5 were
required for those persons, Susquehanna believes that, during the period January
1 - December 31, 1995, all filing requirements applicable to its officers,
directors and greater than ten-percent beneficial owners were satisfied, except
that one report, covering one transaction, was inadvertently not timely filed by
Mr. Reymer.
Item 11. Executive Compensation.
- ------- ----------------------
General
On October 21, 1992, the Securities and Exchange Commission ("SEC")
adopted new rules for executive compensation disclosure. The SEC announced that
the new rules are intended to improve shareholders' understanding of all forms
of compensation paid to senior executives and directors, the criteria utilized
by the board of directors in reaching compensation decisions, and the degree of
relationship between compensation and corporate performance. Generally the new
rules are effective for any proxy or information statement filed on or after
January 1, 1993.
REPORT OF THE COMPENSATION COMMITTEE
------------------------------------
The Committee
The Compensation Committee of the Board of Directors of Susquehanna is
composed entirely of independent outside directors. The Committee is charged
with responsibility for (i) assuring that key management personnel of
Susquehanna and its affiliates are effectively compensated in terms of salaries,
supplemental compensation and benefits which are internally equitable and
externally competitive in order to allow Susquehanna to attract and retain
qualified personnel; and (ii) developing and initiating incentive programs and
plans that will serve to attract and retain qualified personnel in key
management positions of Susquehanna and its affiliates.
65
<PAGE>
Overall Policy
Susquehanna's executive compensation program is designed to be closely
linked to corporate performance and returns to shareholders. To this end,
Susquehanna has developed an overall compensation strategy and specific
compensation plans that tie a significant portion of executive compensation to
Susquehanna's success in meeting specified performance goals and to appreciation
in Susquehanna's stock price. The overall objectives of this strategy are to
attract and retain the best possible executive talent, to motivate these
executives to achieve the goals inherent in Susquehanna's business strategy, to
link executive and shareholder interests through equity based plans and,
finally, to provide a compensation package that recognizes individual
contributions as well as overall business results.
Each year the Compensation Committee conducts a review of
Susquehanna's executive compensation program. The Compensation Committee
reviews the selection of peer companies used for compensation analysis. The
Compensation Committee believes that Susquehanna's most direct competitors for
executive talent are not necessarily all of the companies that would be included
in a peer group established for comparing shareholder returns. Successful
executives in the banking industry have a broad range of opportunities in the
financial industry generally, either with larger or smaller institutions, or
with related industry groups or unrelated industry groups in some instances (a
chief financial officer, for example). Many of these companies are not publicly
traded. The annual compensation reviews permit an ongoing evaluation of the
link between Susquehanna's performance and its executive compensation in the
context of the compensation programs of other companies.
The Compensation Committee determines the compensation for the
Susquehanna officers designated as participants in the Susquehanna Long Term
Incentive Plans, set forth in more detail below. This includes all individuals
whose compensation is set forth in the "Summary Compensation Table" which
follows. The Committee believes that utilization of this approach ensures
consistency throughout the executive compensation program. In reviewing the
individual performance of the executives whose compensation is detailed in this
proxy statement (other than that of the President and Chief Executive Officer of
Susquehanna), the Compensation Committee solicits and considers the views of Mr.
Bolinger.
The key elements of executive compensation consist of base salary,
annual short term and long term incentive bonus, and a "Phantom" stock
appreciation plan. The Compensation Committee's policies with respect to each
of these elements, including the bases for the compensation awarded to Mr.
Bolinger, Susquehanna's President and Chief Executive Officer, are discussed
below. In addition, while the elements of compensation described below are
considered separately, the Compensation Committee takes into account the full
compensation package afforded by Susquehanna to the individual, including
pension benefits, severance plans, insurance and other benefits, as well as the
programs described below.
66
<PAGE>
Base Salaries
Base salaries for new executive officers are initially determined by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the competitive marketplace for executive
talent, including a comparison to base salaries for comparable positions at
other companies.
Annual salary adjustments are determined by evaluating the performance
of Susquehanna and of each executive officer, and also take into account new
responsibilities. In the case of executive officers with responsibility for a
particular business unit, such unit's financial results are also considered.
Business units include each of Susquehanna's subsidiary banks, and its leasing
company, as well as discrete and identifiable operating areas, including
commercial lending, retail lending and operations and finance, among others.
In conducting its deliberations, the Compensation Committee makes use
of an executive compensation survey prepared by nationally recognized
consultants on executive compensation matters. The survey for 1995 analyzed
compensation paid to executives at thirteen (13) participating financial
institutions with assets between $500 million and $5 billion.
The survey describes the compensation ranges paid to executives at
various management levels. The base salary of all similar positions within the
survey group was used as the basis for calculating a midpoint for each job
description within Susquehanna's management program. The Compensation Committee
then established a range around the midpoint, with 80% of the midpoint as the
minimum and 120% of the midpoint as the maximum.
The salaries of Susquehanna's principal officers were compared to the
midpoint, and increases were awarded in the context of individual performance
and contribution, as explained below, with each salary targeted to fall within
the midpoint range. Accordingly, salaries which are established by the
Compensation Committee may slightly exceed or fall below the median range. Mr.
Bolinger's salary falls within the range established for the position he
occupies.
In evaluating an executive officer's performance, the Compensation
Committee looks to his/her accomplishments, which are based on qualitative and
quantitative measures, and the results produced by the executive officer, which
are based on quantitative measures. In determining accomplishments and results,
the Compensation Committee considers corporate and business unit performance
factors. Business unit factors include revenues of the business unit for which
the executive officer has responsibility, the business unit's growth in
earnings, the business unit's results expressed in terms of savings realized or
efficiencies achieved, the effective use of the executive officer's time within
his/her business unit, the executive officer's management skills and, finally,
the business unit and/or executive officer's development of new products or
lines of business. Management skills include improving operations, planning and
organizing, responding to change, communication skills and working with others.
The corporate factors which are considered include earnings growth of
Susquehanna and the subsidiary bank with which the executive officer serves,
asset growth of Susquehanna and the subsidiary bank with which the executive
officer serves, and the ability of the executive officer to demonstrate
management skills.
67
<PAGE>
In determining the quantitative measures, the Compensation Committee
looks, in part, to the Uniform Bank Performance Results which is published
quarterly by the Federal Financial Institution Examination Council. This
material measures and compares each Susquehanna bank subsidiary against other
banks in its peer group in over 40 different financial areas. The peer groups
used includes banks between $50 million and $100 million in size; between $100
million and $300 million in size; and between $500 million and $1 billion in
size. The basis for the bank's performance in these areas in relation to the
business unit and the bank in which the executive serves allows the committee to
assess such individual's and his/her business unit's quantitative success.
A majority of the financial institutions participating in the salary
survey are included in the line of business group which is indexed in
Susquehanna's Stock Price Performance Graph, set forth in Susquehanna's proxy
statement. All of the financial institutions which are indexed in the Stock
Price Performance Group are reported in the Uniform Bank Performance Results.
In considering the various factors that are weighed in this process,
no differentiation as to weighting or relative importance has been established;
rather the members of the Compensation Committee are permitted to assign such
weight and importance to each factor as they, in their discretion, deem
appropriate.
In determining the compensation package to be awarded to Messrs.
Bolinger, Cloney, Mull, Bisbee and Reuter, the Compensation Committee did not
attach particular weight to the employment agreements between these individuals
and Susquehanna other than to recognize that the employment agreements provide
that base salary will be set at a rate agreed between the parties, or in the
absence of agreement, increased on the basis of the Consumer Price Index. These
executive officers have agreed to the base salary increases made by the
Compensation Committee.
With respect to the base salary granted to Mr. Bolinger in 1995, the
Compensation Committee took into account a comparison of base salaries of chief
executive officers of peer companies based on the salary survey, Susquehanna's
success in meeting its return on equity goals in 1994, the performance of
Susquehanna's common stock and the assessment by the Compensation Committee of
Mr. Bolinger's individual performance. The Compensation Committee also took
into account the fact that Mr. Bolinger served in a dual capacity as Chief
Executive Officer of both Susquehanna and Farmers First, the longevity of Mr.
Bolinger's service to Susquehanna and Farmers First, and its belief that Mr.
Bolinger is a representative of Susquehanna and Farmers First to the public by
virtue of his stature in the community and the industry. Mr. Bolinger was
granted a base salary of $337,881 for 1995, an increase of 9.1% over his
$309,804 base salary for 1994.
Annual Bonus
Each subsidiary of Susquehanna ("Subsidiary," collectively, the
"Subsidiaries") maintains an annual cash bonus program in which all persons
employed by that subsidiary on a certain date are eligible to participate. The
amount of the bonus is determined based upon utilization of a "performance bonus
calculation" which is a formula relationship based on return on average assets
and assets per employee that produces a "performance bonus percentage." In
general, as return on assets increase over 1% and as assets per employee
increase over $1 million, the performance bonus percentage is increased. A
"performance bonus percentage" is adopted by the Board of Directors of each
Subsidiary (excluding the thrifts) and uniformly applied to the salaries of each
eligible employee. Performance bonus percentages differed at each Subsidiary
(excluding the thrifts) and ranged between 5.75% at F&M to 11% at Farmers First.
The annual cash bonus percentage for 1995 was
68
<PAGE>
changed to incorporate Susquehanna's performance with that of Farmers First for
selected Susquehanna executive officers. For 1995, the applicable ratio for Mr.
Bolinger was 60% Susquehanna and 40% Farmers First. Mr. Bolinger participated in
the Farmers First performance bonus program in 1995 and thus earned a bonus of
9.8% of his base salary under this plan which represented $33,112. The
applicable ratio for 1996 for Mr. Bolinger is expected to be 75% Susquehanna and
25% Farmers First, and 100% Susquehanna thereafter. The total of annual bonuses
awarded to all executive officers of Susquehanna in 1995 was $252,665. In
addition, the Susquehanna Compensation Committee awarded a discretionary merit
cash bonus to Mr. Bolinger of $25,000, representing outstanding individual
financial and non-financial contributions to Susquehanna.
Susquehanna's Performance Award Plan
Susquehannana's Performance Award Plan ("Plan") is a long-term
incentive program administered by the Compensation Committee, designed to
provide incentives to key executive officers based upon the financial
performance of Susquehanna and its Subsidiaries.
The Plan was adopted by the Board of Directors of Susquehanna on
October 14, 1986. The Plan was approved for an initial three-year period,
referred to as an Earnout Period, which began on January 1, 1986, and ended
December 31, 1988. Two subsequent Earnout Periods were approved running from
January 1, 1989, through December 31, 1991, and from January 1, 1992, through
December 31, 1994. The third Earnout Period was approved, running from January
1, 1992, through December 31, 1994. A fourth Earnout Period has also been
approved, which will run from January 1, 1995, through December 31, 1997.
The express purpose of the Plan is to provide key executives with an
increased incentive to make significant and extraordinary contributions to the
long-term performance and growth of Susquehanna and its Subsidiaries; to join
the common interests of Susquehanna and key executives; and to attract and
retain executives of exceptional ability.
The Plan is administered by the Compensation Committee which has full
and complete authority in its discretion, but subject to the express provisions
of the Plan, to select the executives entitled to participate in the Plan; to
determine the amount of such performance awards to be granted; to determine the
time or times at which such awards shall be granted; to establish the terms and
conditions upon which such awards shall become payable under the Plan; to remove
any restrictions and conditions upon such awards; and to make all of the
determinations deemed necessary or desirable for the administration of the Plan.
As indicated, however, the Board reserves the right to determine whether the
Plan will be continued for successive Earnout Periods.
Pursuant to the Plan, a Target Award is established for each executive
officer selected by the Compensation Committee to participate in the Plan
("Participant") for the applicable Earnout Period. The Earnout Periods are
three-year periods coterminous with the corresponding fiscal years of
Susquehanna. As indicated, Earnout Periods ended on December 31, 1988, December
31, 1991; and December 31, 1994; a fourth and the current Earnout Period has
begun for the period January 1, 1995, through December 31, 1997.
At the end of each Earnout Period, the percentage of the Target Award
that was achieved by each Participant with respect to such period is calculated
from Incentive Award Tables which are based on a comparison of the performance
of both Susquehanna and its Subsidiaries for the Earnout Period in relation to
certain Internal and External Criteria designated in advance by the Compensation
Committee. The award
69
<PAGE>
actually received by the Participant represents a percentage of the Target Award
and is based on the performance of Susquehanna and the Subsidiary with which the
Participant serves.
During the current Earnout Period, sixty percent of the actual award
is based on the Subsidiary's performance and 40% is based on Susquehanna's
performance. The performance of the Subsidiary and of Susquehanna is measured
against "Internal Criteria" and "External Criteria." In each case the Criteria
consists of return on average assets, return on equity, equity/asset ratio and
asset/employee ratio. The Internal Criteria assesses Susquehanna and the
Subsidiary's success during the earnout period in achieving certain goals (i.e.,
benchmarks) which are established by the Compensation Committee in consultation
with independent consultants, and which constitute returns and ratios designed
to put Susquehanna's consolidated operations at a high level of profitability
and performance if achieved. The External Criteria compare Susquehanna and the
Subsidiary's actual performance in each area of the Criteria against the
performance of their respective peers, on a national, regional and local level.
The peers against which Susquehanna's performance is measured are generally
included within the line of business group indexed in Susquehanna's Stock
Performance Graph, although the national peer group is larger than the line of
business group.
As noted, the award earned by each executive officer is based
principally on the success of the Subsidiary (60%) and the balance (40%) on the
success of Susquehanna. The specific Criteria carry the following aggregated
weights: return on average assets, 42.5%; return on equity, 27.5%; equity/asset
ratio, 12.5%; asset/employee ratio, 17.5%. Effective with the Fourth Earnout
Period, which began on January 1, 1995, the awards for Messrs. Bolinger, Cloney
and Mull will be computed based principally upon the success of Susquehanna
(75%) and the balance (25%) on the success of the Subsidiaries.
Prior to the commencement of any Earnout Period, the Compensation
Committee designates the Participants in the Plan, the Target Award for each
Participant with respect to that Earnout Period, the relevant Internal and
External criteria, the Peer Groups for external comparison with respect to that
Earnout Period, and establishes the Incentive Award Table with respect to such
period.
The percentage of the Target Award achieved by each Plan Participant
is payable in three installments with one-half of the amount earned payable on
or before June 1 of the calendar year commencing immediately following the
conclusion of such Earnout Period and the remaining one-half paid in two equal
installments over the next two years with each such subsequent installment
payable on January 1 of each of the two such following years.
From the inception of the Plan through December 31, 1991, each Plan
Participant had the right to elect to receive the amount earned in either cash
or Susquehanna Common Stock or to defer payments under the Plan for up to ten
years (by deferral election prior to commencement of the Earnout Period). In
the event a Participant elected to receive Susquehanna Common Stock in lieu of
cash for any designated performance award installment, the amount of Susquehanna
Common Stock transferred to the Participant was determined by dividing the
earned performance award installment by the market value of Susquehanna Common
Stock: (i) in the case of the first installment, on the business day
immediately preceding the first day of the first year of the three-year Earnout
Period; (ii) in the case of the second installment, on the business day
immediately preceding the first day of the second year of the three-year Earnout
Period; and (iii) in the case of the third installment, on the business day
immediately preceding the first day of the third year of the three-year Earnout
Period. Effective January 1, 1992, amounts received under the Plan are paid
only in cash.
70
<PAGE>
No amounts shall be paid to any Participant under the Plan with
respect to the Earnout Period if: (i) Susquehanna has experienced a net loss
during the Earnout Period, taken as a whole, but only if the Board is comprised
of a majority of "continuing directors" as defined in Susquehanna's Articles of
Incorporation in effect on January 1, 1987; or (ii) to particular Participants
if the Subsidiary whose performance provides the Subsidiary measure of the
Participant's benefit under the Plan has experienced a net loss over the Earnout
Period, taken as a whole (either of which events hereinafter referred to as an
"Event of Nullification").
Under the Plan, 100% of the Target Award applicable to a then-current
Earnout Period becomes due and payable to each Participant if (1) any entity or
person becomes the beneficial owner of, or shall obtain voting control, over 25%
or more of the outstanding shares of the Company's Common Stock; (2) the
shareholders of the Company and the shareholders of any other constituent
corporation approve a definitive agreement to merge or consolidate the Company
with or into another corporation other than a merger or consolidation of the
Company in which holders of shares of the Company's Common Stock immediately
prior to the merger or consolidation have at least 60% of the ownership of
common stock of the surviving corporation immediately after the merger or
consolidation, which common stock is then held substantially in the same
proportion as such holders' ownership of Common Stock of the Company immediately
prior to the merger or consolidation; or (3) the shareholders of the Company
approve a definitive agreement to sell or otherwise dispose of all or
substantially all of the assets of the Company. Upon the occurrence of any such
event, the Target Award is deemed earned and immediately payable in full with
the same force and effect as if all performance criteria had been achieved for
the entire Earnout Period, whether or not such is the case.
Earned performance awards may also be forfeited by a Participant if
the Participant's employment with Susquehanna or its Subsidiaries is terminated
pursuant to certain circumstances described in the Plan (any such termination
hereinafter referred to as an "Event of Forfeiture").
During the Initial Earnout Period an Event of Nullification occurred
with respect to one subsidiary; no Event of Forfeiture occurred. Accordingly,
most of the Participants during the Initial Earnout Period received performance
awards. Based on the performance of Susquehanna and its Subsidiaries for the
Third Earnout Period which ended December 31, 1994, the performance award
applicable to each qualifying Participant for the first installment,
representing 50% of the total award, under the Third Earnout Period was as
follows: Mr. Bolinger, $64,576; Mr. Cloney, $26,778; Mr. Mull, $14,716; Mr.
Bisbee, $9,157; Mr. Luppert, $14,352; Mr. Strausbaugh, $5,574; Mr. Reuter,
$7,079; Mr. Duncan, $7,405; Mr. Krantz, $5,469; Mr. Walsh, $4,151; and Mr. Keim,
$3,339.
For the current Earnout Period of the Plan which began on January 1,
1995, the Compensation Committee designated the following Plan Participants:
Robert S. Bolinger, Richard M. Cloney, J. Stanley Mull, Jr., Frederick W.
Bisbee, Charles W. Luppert, William J. Reuter, Robert L. Strausbaugh, William T.
Belden, Donald J. Showers, Robert E. Krantz, Thomas C. Walsh, David D. Keim, and
Gregory A. Duncan. This Earnout Period will end December 31, 1997.
Compared to its peers under the External Criteria in 1994, the last
year for which data is available, Susquehanna's performance ranged between the
50th and 96th percentile brackets. The only measure below the 87th percentile
bracket was return on equity where Susquehanna's strong capital position
impacted its performance. The performance of Farmers First, which represented
the Subsidiary component of Mr. Bolinger's
71
<PAGE>
compensation, placed it between the 44th percentile and the 99th percentile
brackets measured against the External Criteria, with the lowest performance in
the area of assets to employee ratio and the highest in return on assets.
In 1995, Mr. Bolinger received a payment of $64,576, which represented
50% of the award he earned during the Third Earnout Period, which ended December
31, 1994, representing his attaining 48.8% of the Target Amount. Susquehanna's
executive officers earned $162,596 for the same period. The second installment
under the Third Earnout Period, representing 25% of the awards earned, is
payable on or about June 1, 1996.
Susquehanna Phantom Stock Appreciation Plan
In recognition of the contributions made by members of management in
improving Susquehanna's performance and the resultant increase in the market
value of its securities, Susquehanna adopted the Susquehanna Phantom Stock
Appreciation Plan ("Phantom Stock Plan") which is designed to provide specific
individuals an award based upon Susquehanna's Common Stock price over a defined
period.
On October 18, 1989, the Susquehanna Board adopted the Phantom Stock
Plan for the purpose of: (i) recognizing key executives who contribute to the
success of Susquehanna; (ii) allowing Susquehanna to keep and attract talented
and qualified executives; and (iii) providing a means of incentive compensation
based on the value of contributions to shareholders as measured by the increase
in value of Susquehanna stock. Under the Phantom Stock Plan, which is also
administered by the Compensation Committee, key executives who have been
selected to participate ("PSP Participants") are awarded Phantom Stock
Appreciation Units ("Units"). On the date Units are "awarded" to a PSP
Participant (the "Award"), the Compensation Committee ascribes a value to each
Unit which is based on the value of Susquehanna Common Stock on such date,
determined in conformity with the formula provided in the Phantom Stock Plan.
The valuation formula looks to the closing price of Susquehanna Common Stock
based on transactions for Nasdaq listed issues or, alternately, on any exchanges
where Susquehanna Common Stock is traded. If Susquehanna Common Stock is not
listed on a national exchange, valuation is based on book value. Currently
Susquehanna Common Stock is listed on the Nasdaq National Market System.
The Phantom Stock Plan allows PSP Participants to enjoy the increase
in the market value of Susquehanna Common Stock from the date they are first
awarded Units to the date their rights under the plan vest. This increase (the
"Appreciation") is the measure of the award. The Appreciation, once vested, is
paid to the PSP Participant in the form of shares of Susquehanna Common Stock,
by dividing the value of a share of Susquehanna Common Stock on the date of
vesting into the dollar value of the Appreciation; the PSP Participant receives
the number of shares of Susquehanna Common Stock resulting from the division.
An Award does not confer upon a PSP Participant any rights as a shareholder
including the right to dividends or to vote, until Units are vested, and the
Appreciation in the form of Susquehanna Common Stock is paid.
The Phantom Stock Plan is designed so that a PSP Participant's
entitlement to Appreciation in Units vest in three equal parts, with the first
portion vesting on the third anniversary of the Award, the second portion
vesting on the fourth anniversary of the Award, and the final portion vesting on
the fifth anniversary of the Award. Thus, if a PSP Participant is awarded
thirty Units on January 1, 1991, he is entitled to Appreciation
72
<PAGE>
as to ten of those Units on January 1, 1994; the second ten on January 1, 1995;
and the final ten on January 1, 1996.
The PSP Participant may lose his rights under the Phantom Stock Plan
and will not vest if the PSP Participant voluntarily terminates his employment
with Susquehanna (other than termination by reason of death or disability or,
under certain circumstances, retirement) or if Susquehanna has terminated his
employment subsequent to a determination by two-thirds of the Board of Directors
acting in good faith and reasonably, that the PSP Participant has either
committed an act which adversely affects the interests of Susquehanna or that
the PSP Participant has been willfully or grossly negligent, or has committed
willful or gross misconduct, in discharging his duties as an employee.
A PSP Participant's right to vest will not be affected by his death,
disability, or retirement after attaining the age of 65; earlier retirement is
permitted with the written consent of Susquehanna.
The Phantom Stock Plan also provides that a PSP Participant's rights
to an award vest immediately on the date of a "Change-of-Control," defined under
the Phantom Stock Plan to include: (i) situations in which any entity or person
becomes a beneficial owner of more than 25% of the outstanding voting stock in
Susquehanna; or (ii) execution of a definitive agreement to merge or consolidate
between Susquehanna and another, unaffiliated corporation, if, immediately
subsequent to the merger, less than 60% of the surviving corporation's common
stock is owned by the persons who owned all of the outstanding Susquehanna
Common Stock immediately prior to the merger, and in the same relative
proportion of ownership; or (iii) shareholder approval of a definitive agreement
to sell or otherwise dispose of all or substantially all of the assets of
Susquehanna. Accordingly, if a Change-of-Control occurs, the PSP Participant's
right to Appreciation vests upon the occurrence of the event giving rise to the
Change-of-Control.
The Compensation Committee may also accelerate vesting of a PSP
Participant in his Award in the event of merger in which the corporation is not
the surviving entity, or an acquisition, divestiture or liquidation or other
significant recapitalization of Susquehanna which would not otherwise constitute
a "Change-of-Control."
In administering the Phantom Stock Plan, the Compensation Committee
has complete authority to interpret its provisions; to prescribe, amend and
rescind rules and regulations relating to it; and to make all other
determinations necessary for its proper implementation. Material changes or
modifications to the Phantom Stock Plan require Board approval. Because the
Phantom Stock Plan is unfunded, benefits are paid from general assets. In
making a payment of a vested Award under the Phantom Stock Plan, Susquehanna may
use Treasury shares, or Common Stock purchased on the market.
The Compensation Committee has designated Phantom Stock Participants
and awarded Units as set forth on the following table:
73
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Year 1 Year 2 Year 3
------- ------- -------
Participant Base Price* Total Units 4/15/92 4/15/95 4/15/96 4/15/97
- ----------- ----------- ------------------- ------- ------- -------
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bolinger $18.60 24,658 8,220 8,219 8,219
Cloney 18.60 12,270 4,090 4,090 4,090
Mull 18.60 8,429 2,810 2,810 2,809
Duncan 18.60 8,270 2,757 2,757 2,756
Luppert 18.60 8.270 2,757 2,757 2,756
Reuter 18.60 8,270 2,757 2,757 2,756
Bisbee 18.60 8,270 2,757 2,757 2,756
Strausbaugh 18.60 6,315 2,105 2,105 2,105
Krantz 18.60 7,171 2,391 2,390 2,390
Walsh 18.60 5,443 1,815 1,814 1,814
Keim 18.60 4,378 1,460 1,459 1,459
----- ----- ----- -----
Total 101,744 33,919 33,915 33,910
- ----------------------------------------------------------------------------
</TABLE>
* Adjusted to reflect 5-for-4 Stock Split during 1993.
Payments during 1995 to Participants in shares of Susquehanna Common
Stock, accompanied by the market value, were as follows: Mr. Bolinger, 1,608
($37,195); Mr. Cloney, 800 ($18,608); Mr. Mull, 549 ($12,715); Mr. Reuter, 539
($12,475); Mr. Luppert, 539 ($12,475); Mr. Bisbee, 539 ($12,475); Mr. Duncan,
539 ($12,475); Mr. Strausbaugh, 411 ($9,506); Mr. Krantz, 467 ($10,819); Mr.
Walsh, 355 ($8,213); and Mr. Keim, 285 ($6,606).
During 1995, the Compensation Committee designated Phantom Stock
Participants and awarded Units as set forth on the following chart:
[Chart on following page.]
74
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Year 1 Year 2 Year 3
------- ------- ---------
Participant Base Price Total Units 4/19/98 4/19/99 4/19/2000
- ----------- ---------- ----------- ------- ------- ---------
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bolinger $22.75 29,142 9,714 9,714 9,714
Cloney 22.75 20,828 6,943 6,943 6,942
Mull 22.75 15,000 5,000 5,000 5,000
Reuter 22.75 13,200 4,400 4,400 4,400
Bisbee 22.75 12,428 4,143 4,143 4,142
Belden 22.75 11,142 3,714 3,714 3,714
Luppert 22.75 10,628 3,543 3,543 3,542
Duncan 22.75 10,628 3,543 3,543 3,542
Krantz 22.75 9,942 3,314 3,314 3,314
Showers 22.75 9,171 3,057 3,057 3,057
Strausbaugh 22.75 7,714 2,572 2,571 2,571
Walsh 22.75 6,857 2,286 2,286 2,285
Keim 22.75 5,828 1,943 1,943 1,942
------- ------- ------- ---------
Total 162,508 54,172 54,171 54,165
- --------------------------------------------------------------------
</TABLE>
General
Section 162(n) of the Internal Revenue Code of 1986, as amended,
generally provides that a publicly held reporting company such as Susquehanna
may not deduct, as an expense, amounts paid to any executive officer in excess
of $1 million per year. Because the compensation paid Susquehanna's most highly
compensated officer amounted to $507,514, which is substantially below the $1
million threshold called for in Section 162, the Compensation Committee has not
adopted a formal policy on awarding compensation in excess of such threshold.
Conclusion
Through the programs described above, a significant portion of
Susquehanna's executive compensation is linked directly to individual and
corporate performance and stock price appreciation. In 1995, as in previous
years, performance-based variable elements played a major role in the
Compensation Committee's executive compensation determinations, including those
relating to Mr. Bolinger. The Compensation Committee intends to continue the
policy of linking executive compensation to Susquehanna's performance and return
to shareholders, recognizing that rises and falls in the business cycle from
time to time must be recognized, and may result in an apparent imbalance for a
particular period.
The Susquehanna Bancshares, Inc., Compensation Committee:
John M. Denlinger C. William Hetzer, Jr.
Henry H. Gibbel George J. Morgan
Edward W. Helfrick
75
<PAGE>
Summary Compensation Table
The following table sets forth the cash compensation paid to, as well
as the value of stock awards and other payments earned by, Susquehanna's five
most highly compensated executive officers during 1995 and the prior two years.
Except for director fees paid by Susquehanna, all "annual compensation" was
received from Farmers First, F & M or Williamsport National.
[Table on following page.]
76
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
----------------------------- -----------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Other Stock All
Annual Appreciation Other
Compen- Rights LTIP SAR Compen-
Principal Salary Bonus sation (# of Units) Payouts Payouts sation
Name Position Year (4) (5) (6) (7) (8) (9) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Robert S. President and 1995 $347,631 $58,112 - 29,142 $64,576 $37,195 $4,500
Bolinger(1) Chief Executive 1994 321,925 59,078 - - None None 4,500
Officer of 1993 294,523 44,224 - - $70,500 None 8,553
Susquehanna;
Chairman and
Chief Executive
Officer of
Farmers First
Richard M. Vice President 1995 $252,930 $43,832 - 20,828 $26,778 $18,507 $4,500
Cloney(1) and Secretary 1994 233,565 44,730 - - None None 4,500
of Susquehanna; 1993 214,507 31,329 - - 34,645 None 6,243
Executive Vice
President and
Secretary of
Farmers First;
President of
Susquehanna
Bancshares
South, Inc.
J. Stanley Vice President 1995 $185,090 $23,139 - 15,000 $14,716 $12,715 $4,500
Mull, Jr.(1) and Treasurer 1994 166,343 38,298 - - None None 4,500
of Susquehanna; 1993 143,795 19,755 - - 16,740 None 4,318
Senior Vice
President and
Treasurer of
Farmers First
William J. Vice President 1995 $156,542 $15,095 - 13,000 $ 7,079 $12,475 $4,500
Reuter(2) of Susquehanna; 1994 143,083 12,154 - - None None 4,119
President of 1993 125,831 8,576 - - 7,284 None 3,812
F & M
Charles W. Vice President 1995 $144,324 $20,740 - 10,628 $14,352 $12,475 $4,330
Luppert(3) of Susquehanna; 1994 133,264 18,885 - - None None 4,330
President of 1993 124,981 13,973 - - 14,517 None 3,749
Williamsport
National
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
- ------------------------------------
Footnotes to Summary Compensation Table
(1) Messrs. Bolinger, Cloney and Mull have employment contracts with
Susquehanna and receive their annual compensation, other than director's
fees (where applicable), from Farmers First.
(2) Mr. Reuter has an employment contract with Susquehanna, and receives his
annual compensation from F & M.
(3) Mr. Luppert has an employment contract with Susquehanna and receives his
annual compensation from Williamsport National.
(4) Includes all fees payable to directors of Susquehanna or its subsidiaries
including fees payable to directors who have elected to defer receipt under
the Directors' Deferred Compensation Plan. Payment of such fees is
deferred until retirement. The sums in participants' accounts are fully
vested and may be withdrawn in accordance with such plan.
(5) Includes any general or performance based bonuses paid by Farmers &
Merchants Bank, Farmers First, or Williamsport.
(6) The aggregate value of perquisites received did not exceed the lesser of
$50,000 or 10% of total salary and bonuses set forth in this table. No
other applicable compensation was received.
(7) Represents number of units awarded under Susquehanna's "Phantom Stock
Appreciation Plan" discussed above.
(8) Represents payments under Susquehanna's "Performance Award Plan" discussed
above.
(9) Represents payments under Susquehanna's "Phantom Stock Appreciation Plan"
discussed above.
(10) Represents payments made by Susquehanna into the "Susquehanna 401(k) Plan"
on behalf of each participant, as more fully discussed below.
- ------------------------------------
The chart below summarizes possible payments to the five most highly
compensated executives under the Performance Award Plan, a long term incentive
plan, as determined by the Compensation Committee in 1992, and additional Plan
Awards provided by the Compensation Committee on April 19, 1995. A more
extensive description of this plan and its participants is contained in the
report from the Compensation Committee.
PERFORMANCE AWARD PLAN
AWARDS GRANTED IN 1992
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Estimated Future Payouts
Under Non-Stock Price-Based Plan
- --------------------------------------------------------------------------
Performance
-----------
Name Period(1) Threshold(2) Target(3) Maximum(4)
---- --------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Bolinger 1/1/92- $397 $182,045 $264,600
12/31/94
Cloney " " 165 75,491 109,725
Mull " " 90 41,486 60,300
Reuter " " 67 n/a 44,370
Luppert " " 67 29,730 44,370
- --------------------------------------------------------------------------
</TABLE>
78
<PAGE>
- -----------------------------------
Footnotes to Performance Award Plan Chart
(1) Three year measurement period (See Plan described on Page [ ]).
(2) Award possible meeting minimum required performance objective from only 1
of 18 peer or internal measurements.
(3) Amount calculated using percentage attained in participation in past award
periods.
(4) Maximum possible award assuming all 18 measurements for each of the three
years included in the plan were met at the highest level.
- -----------------------------------
PERFORMANCE AWARD PLAN
AWARDS GRANTED IN 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Estimated Future Payouts
Under Non-Stock Price-Based Plan
- -------------------------------------------------------------------------
Performance
------------------
Name Period(1) Threshold(2) Target(3) Maximum(4)
- ---------- ------------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Bolinger 1/1/95- $3,570 $179,316 $306,090
12/31/97
Cloney " " 2,126 106,798 182,250
Mull " " 1,224 61,530 105,000
Reuter " " 808 25,294 69,300
Luppert " " 650 37,721 55,800
- -------------------------------------------------------------------------
</TABLE>
- -----------------------------------
Footnotes to Performance Award Plan Chart
(1) Three year measurement period (See Plan described on Page [ ]).
(2) Award possible meeting minimum required performance objective from only 1
of 18 peer or internal measurements.
(3) Amount calculated using percentage attained in participation in past award
periods.
(4) Maximum possible award assuming all 18 measurements for each of the three
years included in the plan were met at the highest level.
- -----------------------------------
On April 15, 1992, the Compensation Committee designated participants,
including Mr. Bolinger, and awarded units in its Phantom Stock Plan, an
option/SAR plan, as set forth in the chart below. Additional units were
subsequently awarded by the Compensation Committee on April 19, 1995.
79
<PAGE>
PHANTOM STOCK PLAN GRANTS IN 1992
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
----------
Options/SARs
------------
Granted to Exercise or
---------- -----------
Options/SARs Employees in Base Price Expiration 5% 10%
------------ ------------ ---------- ---------- -- ---
Name Granted(#) Fiscal Year (SH)* Date (1) (1)
- ---- ------------ ----------- ----- ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Robert S. Bolinger 24,658 24.2 $18.60 4-15-97 $124,028 $268,605
Richard M. Cloney 12,270 12.1 18.60 4-15-97 61,718 133,661
J. Stanley Mull, Jr. 8,429 8.3 18.60 4-15-97 42,397 91,817
William J. Reuter 8,270 8.1 18.60 4-15-97 41,598 90,085
Charles W. Luppert 8,270 8.1 18.60 4-15-97 41,598 90,085
</TABLE>
(1) Potential Realizable Value at Annual Rates of Stock Price Appreciation for
Grant Term.
* Adjusted for 5-for-4 Stock Split during 1993.
PHANTOM STOCK PLAN GRANTS IN 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
----------
Options/SARs
------------
Granted to Exercise or
---------- -----------
Options/SARs Employees in Base Price Expiration 5% 10%
------------ ------------ ---------- ---------- -- ---
Name Granted(#) Fiscal Year (SH) Date (1) (1)
- ---- ------------ ----------- ----- ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Robert S. Bolinger 29,142 17.9 $22.75 4-19-2000 $143,545 $310,630
Richard M. Cloney 20,828 12.8 22.75 4-19-2000 102,570 222,005
J. Stanley Mull, Jr. 15,000 9.2 22.75 4-19-2000 73,869 159,887
William J. Reuter 13,200 8.1 22.75 4-19-2000 65,005 140,701
Charles W. Luppert 10,628 6.5 22.75 4-19-2000 52,339 113,283
</TABLE>
(1) Potential Realizable Value at Annual Rates of Stock Price Appreciation for
Grant Term.
80
<PAGE>
Description of Certain Plans and Employment Contracts
Executive Employment Contracts
Susquehanna has five-year employment contracts with Messrs. Bolinger,
Cloney and Mull which were executed in 1984 and renewed most recently in 1996.
The contracts provide for base salaries for the first twelve months following
execution. In subsequent years, the base compensation is as agreed upon between
Susquehanna and the officers, and in the absence of an agreement, is increased
based on the Suburban Consumer Price Index for Suburban Wage Earners prepared by
the United States Department of Labor. The contracts also provide fringe
benefits comparable to those generally supplied to other salaried employees of
Farmers First. If the officer becomes permanently disabled, he is entitled to
all benefits under the contract, other than bonuses, for a period of not less
than six months.
On each contract anniversary date, Susquehanna may renew the contract
with the effect that it will run for five years from such renewal. If
Susquehanna fails to renew on any such anniversary date, the officer may
terminate the contract. If the officer does not so terminate the contract, it
will run for five years from its execution or latest renewal. As indicated, the
contract may also be terminated by Susquehanna if the officer is responsible for
a loss to Susquehanna or Farmers First in excess of Farmers First's loan loss
reserve or for actions bringing discredit to the business reputation or goodwill
of Farmers First. Upon any termination described above, the officer will be
entitled to receive the base salary and all other benefits provided by the
contract for a period of one year reduced, however, by any compensation
received, during the period, from any other employment entered into. Following
any such termination, Susquehanna may require the officer to perform his duties
under the contract for up to three months and hold himself reasonably available
for advice and consultation for an additional period of nine months.
In addition, the contract can be terminated by the officer on two
months' notice or by Susquehanna immediately for breach of the contract by the
officer, upon a felony conviction of the officer or on commission by the officer
of a material fraudulent act against Susquehanna or Farmers First. If
Susquehanna terminates the contract for any reason other than those set forth
above, or if the officer resigns upon being reduced to a position of materially
lesser authority, stature or responsibility, the officer will be entitled to a
lump sum payment of the amounts he would have received under the contract for
the balance of its term plus the value of other benefits to which he was
entitled under the agreement.
The Board of Directors of Susquehanna has approved three-year
employment contracts with Messrs. Bisbee, Reuter, Luppert, Duncan, and
Strausbaugh. The form of these employment contracts is substantially similar,
in material respects, to the executive employment contracts existing between
Susquehanna and Messrs. Bolinger, Cloney and Mull.
As noted above, Richard E. Funke has served as a director of
Susquehanna since 1995 and is also President and Chief Executive Officer of
Atlantic Federal. Mr. Funke is not, however, an executive officer of
Susquehanna. The form of a three-year Employment Agreement between Susquehanna
Bancshares South, Inc. and Mr. Funke (the "Employment Agreement") is generally
the same in material respects to the three-year executive employment contracts
between Susquehanna and Messrs. Brisbee, Reuter, Luppert, Duncan and
Strausbaugh, as described above. However, unlike the others, Mr. Funke's
Employment Agreement provides certain relief in the event that a change of
control occurs. Under the Employment Agreement, Mr. Funke may
81
<PAGE>
terminate his employment with Atlantic Federal within 12 months following a
change of control if there occurs an adverse change in Mr. Funke's circumstances
(as defined in the Agreement). The Employment Agreement also provides for
termination of certain non-competition provisions contained in the Employment
Agreement upon a change of control. These noncompetition provisions do not
appear in Susquehanna's other employment agreements. For purposes of the
Employment Agreement, a "change of control" is deemed to occur when a person
shall acquire control of either Atlantic Federal, Susquehanna Bancshares South,
Inc. or Susquehanna.
Change-of-Control Plans
The Phantom Stock Plan, previously described, contains a "Change-of-
Control" provision which will allow executive officers of Susquehanna covered by
the plans to receive the appreciated value of the stock previously granted under
the plan. Any "Change-of-Control" will be found to exist and the right to
appreciation in stock will vest in three situations: (i) when any entity or
person becomes the beneficial owner or obtains voting control over more than 25%
of Susquehanna's outstanding Common Stock; (ii) when the shareholders of
Susquehanna have approved a definitive agreement to merge or consolidate
Susquehanna with or into an unaffiliated corporation if, as result of the merger
or consolidation, Susquehanna's shareholders hold less than 60% of the ownership
in the surviving corporation; (iii) when Susquehanna's shareholders approve a
definitive agreement to sell substantially all of Susquehanna's assets. Upon
the occurrence of a Change-of-Control event, valuation of the vested interest
will be made on the basis of the highest value in Susquehanna's stock within 90
days of the date of the Change-of-Control event. If Susquehanna's shares are
not publicly traded, a valuation will be made on the basis of book value, at the
highest rate within 90 days of the Change-of-Control event.
The Compensation Committee may also accelerate vesting in the event of
a merger in which Susquehanna is not the surviving entity, or an acquisition,
divestiture or liquidation or other significant recapitalization of Susquehanna,
which would not otherwise constitute a "Change-of-Control." The public offering
of Susquehanna Common Stock to fund the Mergers which is discussed later will
not constitute a "Change-of-Control."
No other plan or program maintained by Susquehanna contains "Change-
of-Control" features.
Pension Plans
Effective January 1, 1989, Susquehanna Bancshares, Inc., and each
Subsidiary adopted a defined benefit pension plan (the "Susquehanna Retirement
Plan") under which benefits are determined by "Final Average Compensation" as
defined below. This plan covers employees of Susquehanna and its Subsidiaries
upon their attaining age 21 and the completion of one year's service in which
1,000 hours are worked. All Participants in predecessor plans maintained by
Susquehanna subsidiaries as of January 1, 1989, became members of the
Susquehanna Retirement Plan effective that date.
Participants under the Susquehanna Retirement Plan are entitled to an
annual retirement pension at normal retirement age of 65 equal to 1.5% of Final
Average Compensation up to the Social Security Covered Compensation level plus
2% of Final Average Compensation in excess of Social Security Covered
Compensation, multiplied by years of credited service up to a maximum of 25
years. Final Average Compensation means the average earnings during the five
highest-paid consecutive calendar years of employment
82
<PAGE>
with Susquehanna affiliates. Social Security Covered Compensation means the
compensation upon which a Social Security benefit at Social Security Normal
Retirement Age will be calculated as defined in regulations.
Participants with 15 years of service are eligible for early
retirement at age 55, in which event retirement benefits are actuarially
reduced.
Effective January 1, 1994, the Board has agreed to adopt a Restoration
Plan which will provide for benefits lost under the Susquehanna Retirement Plan
on account of IRC Section 401(a)(17) and 415 which limit the compensation and
benefits under a qualified retirement plan. Selected participants of the
Susquehanna Retirement Plan are eligible for benefits under the Restoration
Plan.
The following table sets forth the annual benefits under both the
Susquehanna Retirement and the Restoration Plans upon normal retirement at age
65 to persons in specified salary classifications, assuming election by the
employee of payment only in the form of a life annuity.
THE SUSQUEHANNA BANCSHARES RETIREMENT AND RESTORATION PLANS
ANNUAL NORMAL RETIREMENT BENEFIT FOR PARTICIPANT
TURNING AGE 65 IN 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Years of Service at Retirement
- -----------------------------------------------------------------------
Final Average
-------------
Compensation 15 20 25 30 35
------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 $ 35,556 $ 47,408 $ 59,260 $ 59,260 $ 59,260
150,000 43,056 57,408 71,760 71,760 71,760
175,000 50,556 67,408 84,260 84,260 84,260
200,000 58,056 77,408 96,760 96,760 96,760
225,000 65,556 87,408 109,260 109,260 109,260
250,000 73,056 97,408 121,760 121,760 121,760
300,000 88,056 117,408 146,760 146,760 146,760
350,000 103,056 137,408 171,760 171,760 171,760
400,000 118,056 157,408 196,760 196,760 196,760
450,000 133,056 177,408 221,760 221,760 221,760
500,000 148,056 197,408 246,760 246,760 246,760
</TABLE>
For purposes of the Susquehanna Retirement Plan, as of December 31,
1995, Messrs. Bolinger, Cloney, Mull, Luppert, and Reuter had 20, 19, 22, 25 and
21 credited years of service respectively. Only the base salary of Messrs.
Bolinger, Cloney, Mull, Luppert and Reuter is compensation covered under the
Susquehanna Retirement Plan. Other components of such officers' total
compensation do not affect benefits payable under the Susquehanna Retirement
Plan. In 1995, Mr. Bolinger's base salary was $337,881, Mr. Cloney's base
salary was $243,180, Mr. Mull's base salary was $185,090, Mr. Luppert's base
salary was $144,324, and Mr. Reuter's base salary was $156,542.
Also, effective January 1, 1989, Susquehanna and each Subsidiary
adopted a 401(k) Plan under which employees may defer portions of their income
on a pre-tax basis. This Plan covers employees of
83
<PAGE>
Susquehanna and its subsidiaries upon their attaining age 21 and the completion
of one year of service in which 1,000 hours are worked. All members of
predecessor thrift or 401(k) plans as of January 1, 1989, became Participants in
the Susquehanna 401(k) Plan effective that date.
Participants under the Susquehanna 401(k) Plan are allowed to defer
between 1% and 15% of their compensation during the year. Subject to Board
discretion, Susquehanna will match 100% of the first 3% of employee deferrals.
These funds will be accumulated under the Plan until paid out at termination,
disability, death or retirement. The Plan allows for loans and hardship
withdrawals within legal limitations.
The vested portion of matching contributions made to the 401(k) Plan
during 1995 on behalf of the individual officers named above and the Executive
Officers as a group are as follows: Mr. Bolinger, $4,500; Mr. Cloney, $4,500;
Mr. Mull, $4,500; Mr. Luppert, $4,330; Mr. Reuter, $4,500; and the Executive
Officers as a group, $45,804..
Item 12. Security Ownership of Certain Beneficial Owners
- ------- -----------------------------------------------
and Management.
---------------
To the best of Susquehanna's knowledge, no person owns beneficially more
than 5% of Susquehanna's Common Stock.
The following table sets forth, as of February 16, 1996, the shares of
Susquehanna's Common Stock deemed to be owned beneficially by each director
and/or nominee and by directors and executive officers as a group:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Nature and Amount of Beneficial
Ownership of Susquehanna Common Percentage of Outstanding
Name of Beneficial Owner Stock(1) Susquehanna Common Stock
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
James G. Apple(5) 17,054 0.130%
Robert S. Bolinger 11,174 0.085%
Richard M. Cloney(2) 1,695 0.013%
John M. Denlinger 14,292 0.109%
Richard E. Funke(2)(6) 39,972 0.304%
Henry H. Gibbel(3) 68,562 0.521%
Marley R. Gross 1,428 0.011%
T. Max Hall(4) 4,581 0.035%
Edward W. Helfrick(2) 116,196 0.884%
C. William Hetzer, Jr.(2) 2,000 0.015%
George J. Morgan 4,947 0.038%
Raymond M. O'Connell 49,419 0.376%
Robert C. Reymer, Jr. 3,651 0.028%
Roger V. Wiest 15,500 0.118%
All Directors, Nominees
and Officers as a Group
(26 in number) 375,415 2.86%
- -----------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
Footnotes to Security Ownership of Certain Beneficial Owners Table
(1) Unless otherwise indicated, shares shown as beneficially owned are held
individually by the person indicated or jointly with spouse or children
living in the same household, individually by the spouse or children living
in the same household, or as trustee, custodian or guardian for minor
children living in the same household.
(2) Nominee for three year term expiring in 1999.
(3) Mr. Gibbel has sole beneficial ownership with respect to 53,250 shares and
shares beneficial ownership with his wife with respect to 10,812 shares.
4,500 shares are beneficially owned solely by Mr. Gibbel's wife. Mr.
Gibbel is also an officer and director of Gibbel Foundation, Inc., Penn
Charter Mutual Insurance Co., and Lititz Mutual Insurance Co. These three
organizations hold 3,125 shares, 12,500 shares, and 108,750 shares
respectively, to which Mr. Gibbel disclaims beneficial ownership.
(4) Mr. Hall has sole beneficial ownership of 3,937 shares. In addition, 644
shares are held in a Keogh Plan for the benefit of Mr. Hall.
(5) Mr. Apple, has sole beneficial ownership with respect to 5,542 shares. In
addition, 11,512 shares are held in trust under the John A. Apple,
Deceased, Marital Trust with respect to which Mr. Apple shares beneficial
ownership.
(6) Mr. Funke has sole beneficial ownership with respect to 16,931 shares.
18,000 shares are beneficially owned solely by Mr. Funke's wife, and 1,380
shares are beneficially owned solely by his children. In addition, Mr.
Funke shares joint ownership with his mother with respect to 3,661 shares.
- ------------------------------------
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
Certain directors and executive officers of Susquehanna and its
subsidiaries, including their immediate families and companies in which they are
principal owners (more than 10%), were indebted to banking subsidiaries. All
such transactions were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than the normal risk of collectibility or present other
unfavorable features. At December 31, 1995, these loans totaled $27.6 million,
which represented 10% of stockholder's equity.
During 1995 the law firms in which directors Hall, Morgan, and Wiest
are principals, received fees from Susquehanna affiliates in amounts which did
not exceed 5% of their respective firm's gross revenues for that year.
85
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and
- -------
Reports on Form 8-K.
--------------------
(a) Financial Statement Schedules and Exhibits
(1) Financial Statements. See Item 8 of this report for the index to
Financial statements.
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits.
Exhibit Numbers
---------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession. Not applicable.
(3) (a) Articles of Incorporation. Incorporated by reference to
Attachment E to the Registrant's Joint Proxy Statement/Prospectus
on Registrant's Registration Statement on Form S-4, Registration
No. 33-13276.
(b) By-laws. Incorporated by reference to Exhibit (3)(b) of
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of Registrant's Common Stock
and the rights of the note holders of the Registrant's wholly-owned
subsidiary, Farmers First, are contained in the following documents or
instruments, which are incorporated herein by reference or are filed
herewith:
(i) Articles of Incorporation. Incorporated by reference to
Attachment E to the Registrant's Joint Proxy
Statement/Prospectus on Registrant's Registration Statement on
Form S-4, Registration No. 33-76319.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(iii) Form of Subordinated Note/Indenture incorporated by reference
to Registration Statement on Form S-3, Registration No. 33-
87624 to which it was attached as an exhibit.
(9) Voting trust agreement. Not Applicable.
86
<PAGE>
(10) Material Contracts. Susquehanna Bancshares, Inc.'s, Performance Award
Plan as amended in 1995, is filed herewith. The Phantom Stock
Appreciation Plan is incorporated by reference to the Exhibit attached
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989.
(11) Statement re: computation of per share earnings. Filed herewith.
(12) Statements re: computation of ratios. Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders. Not applicable.
(16) Letter re: change in certified accountant. Not applicable.
(18) Letter re: change in accounting principles. Not Applicable.
(19) Report furnished to security holders. Not Applicable.
(21) Subsidiaries of the registrant. Filed herewith.
(22) Published report regarding matters submitted to vote of security
holders. Not Applicable.
(23) Consents of experts and counsel. Filed herewith.
(24) Power of Attorney. Not Applicable.
(27) Financial Data Schedule. Filed herewith.
(28) Information from reports furnished to state insurance regulatory
authorities. Not Applicable.
(99) Additional exhibits. Not Applicable.
(b) Reports on Form 8-K. The Current Report on Form 8-K dated December 21,
1994, which Report contains (i) for Atlanfed Bancorp, Inc., unaudited
interim consolidated financial information as of September 30, 1994, and
for the interim periods ended September 30, 1994 and 1993, and (ii) for
Fairfax Financial Corporation and Reisterstown Holdings, Inc., audited
consolidated financial information as of September 30, 1994 and 1993, and
for the years ended September 30, 1994, 1993 and 1992.
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/
By: ___________________________________
Dated: March 27, 1996 Robert S. Bolinger, President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/
- -------------------------- President, Chief Executive March 27, 1996
(Robert S. Bolinger) Officer and Director
/s/
- -------------------------- Principal Financial and March 27, 1996
(J. Stanley Mull, Jr.) Accounting Officer
/s/
- -------------------------- Vice President, Secretary March 27, 1996
(Richard M. Cloney) and Director
/s/
- -------------------------- Director March 27, 1996
(John M. Denlinger)
- -------------------------- Director March , 1996
(Henry H. Gibbel)
/s/
- -------------------------- Director March 27, 1996
(George J. Morgan)
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
88
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1995
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
- -------------------------- Director March , 1996
(James G. Apple)
/s/
- -------------------------- Director March 27, 1996
(Edward W. Helfrick)
/s/ Director March 27, 1996
- --------------------------
(Roger V. Wiest)
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
89
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1995
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
/s/
- -------------------------- Director March 27, 1996
(T. Max Hall)
- -------------------------- Director March , 1996
(Raymond M. O'Connell)
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
90
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1995
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
/s/
- -------------------------- Director March 27, 1996
(Richard E. Funke)
/s/
- -------------------------- Director March 27, 1996
(Marley R. Gross)
/s/
- -------------------------- Director March 27, 1996
(C. William Hetzer, Jr.)
/s/
- -------------------------- Director March 27, 1996
(Robert C. Reymer, Jr.)
[END OF SIGNATURE PAGES]
91
<PAGE>
EXHIBIT INDEX
Exhibit No. Sequentially Numbered Page
- ----------- --------------------------
(10) Performance Award Plan
(11) Computation of per share earnings
(21) Subsidiaries of the Registrant
(23) Consents of experts and counsel
(27) Financial Data Schedule
92
<PAGE>
Exhibit 10
SUSQUEHANNA BANCSHARES, INC.
PERFORMANCE AWARD PLAN
Adopted: October 14, 1986
Amended: December 20, 1991
Amended: _______________, 1995
<PAGE>
SUSQUEHANNA BANCSHARES, INC.
PERFORMANCE AWARD PLAN
1. PURPOSE
-------
The purpose of the Performance Award Plan is to provide key
management employees of Susquehanna Bancshares, Inc. ("Company"), and
its subsidiaries ("Subsidiaries"), with an increased incentive to
make significant and extraordinary contributions to the long-term
performance and growth of the Company, and its Subsidiaries; to join
the common interest of the Company and key executives; and to attract
and retain executives of exceptional ability.
2. ADMINISTRATION
--------------
2.1. The Plan shall be administered by the Compensation Committee
("Committee") of the Company's Board of Directors ("Board").
2.2. The Committee shall have full and complete authority in its
discretion, but subject to the express provisions of the Plan, to
select the executives to be granted performance awards under the
Plan; to determine the amount of such performance awards to be
granted; to determine the time or times at which such awards shall be
granted; to establish the terms and conditions upon which such awards
shall become payable under the Plan; to remove any restrictions and
conditions upon such awards; and to make all other determinations
deemed necessary or desirable for the administration of the Plan.
2.3. The Committee, by majority vote, shall have the authority to adopt
and amend rules and regulations governing operation and
administration of the Plan provided; however, that such rules and
regulations shall not contravene any express provision contained in
the Plan.
Adoption or amendment of any substantive rule or regulation (those
provisions affecting the time, manner or amount of performance
awards) shall require the vote of a majority of the Board. No
substantive amendment, which has an adverse effect on the interests
of a Participant, shall apply to a Participant during the then-
current Earnout Periods.
The Committee shall provide Participants with a copy of any and all
Plan rules and regulations and amendments thereto as adopted.
2.4. The Board shall have the authority to amend or terminate the Plan at
any time by majority vote, provided, however, that if the Board
terminates the Plan, the Company shall be required to complete
payment of performance awards already earned by Participants in the
current Earnout Period.
<PAGE>
3. DEFINITIONS
-----------
3.1. Target Award means, in the case of any Participant as to any Earnout
------------
period, the target award for the Earnout Period. The target award is
calculated based on a percentage, which shall be prescribed by the
Committee, of the midpoint of the developed salary range.
3.2. Earnout Period means each three year period established pursuant to
--------------
Paragraph 6.1 below, subject to acceleration of the Target Award as
provided at Paragraph 6.8 below.
3.3. Incentive Award Tables means tables established by the Board in
----------------------
conjunction with management for each Earnout Period which correlates
the Company's and Subsidiary's performance in selected internal
parameters to the percentage of Target Awards that may be earned.
3.4. Participant means any executive of the Company or Subsidiaries who
-----------
has been designated by the Board to participate in the Plan.
3.5. Peer Group means a designated group of bank holding companies, banks,
----------
or other appropriate corporations determined by the Committee to be
comparable on the established national, regional and local level to
the Company and its Subsidiaries. This peer group will be utilized as
the basis for external comparison of the Company's and Subsidiary's
performance in selected financial criteria. If any one of the
entities in the Peer Group is eliminated through acquisition or some
other transaction during an Earnout Period, that entity will be
eliminated from the Peer Group for such period.
3.6. Permanently Disabled means a Participant's inability, as a result of
--------------------
illness, incapacity, disease or calamity to perform a substantial
part of his reasonable duties as set forth in his employment contract
or job description with no reasonable expectation that the
Participant will be able to resume the performance of his reasonable
duties.
3.7. Plan means this Long Term Performance Award Plan.
----
4. ELIGIBILITY AND PARTICIPATION
-----------------------------
Executives eligible for awards under the Plan shall be selected by
the Committee from those executives who, in the opinion of the
Committee, are in positions which enable them to make significant and
extraordinary contributions to the long-term performance and growth
of the Company, and its Subsidiaries. Awards under the Plan shall be
granted in the form of performance awards.
<PAGE>
5. DESIGNATION OF EARNOUT PERIOD, PARTICIPANTS, PEER GROUP AND TARGET
------------------------------------------------------------------
PERCENTAGES
-----------
5.1. The Board shall establish Earnout Periods which shall be three (3)
years in length (subject to acceleration of the Target Award pursuant
to Paragraph 6.8 below), each to begin on the first day of a fiscal
year of the Company, provided that the first Earnout Period shall
begin retroactively on January 1, 1986.
5.2. Prior to the beginning of an Earnout Period, the Committee shall
designate the Participants in the Plan, the Target Award for each
Participant with respect to that Earnout Period, the relevant
internal and external criteria, the Peer Groups for external
comparison with respect to that Earnout Period, and shall establish
the Incentive Award Table with respect to that Earnout Period.
5.3. The designation of an employee as a Participant for an Earnout Period
shall not confer upon such employee a right to be designated as a
Participant in a subsequent Earnout Period.
5.4. An employee who has been designated by the Committee as a Participant
for an Earnout Period shall be notified in writing of such
designation. Such written notification shall include the Target Award
for the Participant.
5.5. The designation of a Participant may be made after the beginning of
an Earnout Period in the case of a new employee or a promoted
employee, but in determining the Target Award to such Participant the
Committee shall take into consideration the length of the then
unexpired portion of the Earnout Period.
6. DETERMINATION AND MANNER OF PAYOUT
----------------------------------
6.1. At the end of an Earnout Period, the percentage of the Target Award
that was achieved with respect to such period shall be calculated
from the Incentive Award Tables which is based on a comparison of the
performance of both the Company and Subsidiaries for the Earnout
Period in relation to the designated internal and external criteria.
For the initial Earnout Period beginning January 1, 1986, the
designated criteria shall be as follows:
External Criteria Internal Criteria
----------------- -----------------
. Return on Average Assets . Return on Average Assets
. Return on Equity . Return on Equity (Parent)
. Equity/Asset Ratio . Assets/Employee Ratio
(Subsidiary)
<PAGE>
6.2. The amount earned by each Participant as of the close of the Earnout
Period shall be equal to the cumulative percentages determined
through a comparison of the Company and Subsidiary performance with
the internal and external Incentive Award Tables. Exhibit I presents
the Incentive Award Tables for the initial Earnout Period.
6.3. Subject to an election for deferral as provided at Paragraph 6.7 or
acceleration of the Target Award as provided at Paragraph 6.8
hereunder, one-half of the final award determined for each
Participant shall be paid in cash on or before June 1 of the calendar
year commencing immediately following the conclusion of such Earnout
Period. The remaining one-half of the earned award shall be paid out
in two equal installments over the next two years with each such
subsequent installment payable on January 1 of each of the two years
next following.
6.4. All distributions under this Plan should be made to Participants in
cash.
6.5. Amounts payable to Participants pursuant to the Plan shall be
provided to Company by the Subsidiaries, as directed by the Board.
6.6. Notwithstanding the foregoing, no amounts shall be paid to any
Participant under this Plan with respect to an Earnout Period which
has expired:
(a) If the Company has experienced a net loss during the Earnout
Period, taken as a whole, but only if the Board of the Company
is comprised of a majority of "continuing directors" as that
term is defined in the Company's Articles of Incorporation as in
effect on January 1, 1987; or
(b) If the Subsidiary whose performance provides the Subsidiary
measure of the Participant's benefit under the Plan has
experienced a net loss over the Earnout Period, taken as a
whole.
This provision shall not apply to acceleration of a Target Award
pursuant to Paragraph 6.8 in respect to an Earnout Period which
has not expired.
6.7. Participants may elect to defer payments made under this Plan at any
time prior to the first day of the Earnout Period, or in the case of
the current Earnout Period, prior to December 31, 1986, for a period
up to 10 years, or such greater period as the Company may agree,
provided, however, such deferred payments shall be paid in cash, in a
lump sum on the date to which payment is deferred. In no event shall
payment be deferred beyond the day on which employment with the
Company is terminated; provided, further, amounts which have been
deferred shall be immediately due and payable upon the occurrence of
an event described at Paragraph 6.8 below unless the Participant
shall elect in writing to continue deferral of such amount in
accordance with original arrangements.
6.8. Notwithstanding any other provision of this Plan to the contrary,
100% of the Target Award applicable to a then-current Earnout Period
shall be due and payable to each Participant participating in the
Plan upon the occurrence of any one or more of the following:
<PAGE>
(a) Any entity or person shall have become the beneficial owner of,
or shall have obtained voting control, over 25% or more of the
outstanding shares of the Company's Common Stock subsequent to
the date this amendment to the Plan is adopted by the Board of
Directors of the Company; or
(b) The shareholders of the Company and the shareholders of any
other constituent corporation shall have approved a definitive
agreement to merge or consolidate the Company with or into
another corporation other than a merger or consolidation of the
Company in which holders of shares of the Company's Common Stock
immediately prior to the merger or consolidation have at least
60% of the ownership of common stock of the surviving
corporation immediately after the merger or consolidation, which
common stock is then held substantially in the same proportion
as such holders' ownership of Common Stock of the Company
immediately prior to the merger or consolidation; or
(c) The shareholders of the Company shall have approved a definitive
agreement to sell or otherwise dispose of all or substantially
all of the assets of the Company.
Upon the occurrence of any such event, the Target Award shall be
deemed earned and immediately payable in full with the same
force and effect as if all performance criteria had been
achieved for the entire Earnout Period, whether or not such is
the case.
7. TERMINATION OF EMPLOYMENT
-------------------------
7.1. If a Participant's employment is terminated prior to the conclusion
of an Earnout Period or, following the conclusion of an Earnout
Period, but prior to distribution of all installments:
(a) By reason of (i) any deliberate material breach by Participant
of his obligations under an employment agreement with the
Company which, if curable, is not cured within thirty (30) days
after the Company shall have notified the Participant in a
writing describing to Participant all material facts concerning
such breach or (ii) the conviction of a felony or the commission
of a material, fraudulent act by the Participant against
Company;
(b) By reason of the expiration of the term provided in any
employment agreement between Participant and Company if such
agreement is not renewed as provided therein; or
(c) By reason of a determination by two-thirds of the Board of
Directors of the Company, acting in good faith, that Participant
is directly responsible for actions or omissions that either
occasion monetary loss in an amount greater than the total
amount of loan loss reserves maintained by the applicable
Subsidiary or the Company, as the case may be, or result in
immediate discredit to the business reputation or goodwill of
the Company or the applicable Subsidiary; or
(d) Voluntarily by Participant other than for a "Reason Constituting
Good Cause." Reasons Constituting Good Cause include, and are
limited to: (i) a significant change in the nature
<PAGE>
scope of Participant's duties as described in an employment
agreement with the Company such that the Participant has been
reduced to a position of materially lesser authority, stature or
responsibility or such that the time required to be spent by the
Participant beyond the applicable bank subsidiary's geographic
market area shall be significantly increased; or (ii) a
reduction in the Participant's compensation; or (iii) breach by
the Company of the employment agreement with Participant,
then Participant shall forfeit all rights to any installments
coming due after termination of employment.
7.2. If a Participant's employment is terminated:
(a) By reason of Death, Permanent Disability or Retirement; or
(b) By the Company for a reason other than one described at
subparagraphs 7.1(a), (b) or (c); or
(c) By the Participant for a "Reason Constituting Good Cause"
then,
If such termination occurs prior to the conclusion of an Earnout
Period, the Participant shall receive the amount which he
otherwise would have been entitled to receive had he remained in
the employ of the Company, but prorated based on the number of
complete months of employment with the Company during such
Earnout Period. The entire amount shall be paid within 165 days
after the conclusion of the Earnout Period.
If such termination occurs following the conclusion of an
Earnout Period, the Participant shall be paid the balance of
installments payable to him by reason of such Earnout Period.
This amount shall be due and payable within 30 days of
termination of Participant's employment.
8. BENEFICIARY DESIGNATIONS; WITHHOLDINGS
--------------------------------------
8.1. If a Participant's employment with the Company is terminated by his
death or if he dies after termination of his employment but prior to
the distributions to him of all amounts payable to him under the
Plan, any amounts otherwise payable to him hereunder shall be
distributed to his designated beneficiary or beneficiaries. All
beneficiary designations shall be made in such form as may from time
to time be prescribed by the committee. A Participant may from time
to time revoke or change any beneficiary designation on file with the
Company. If there is no effective beneficiary designation on file
with the Company at the time of a Participant's death, distribution
of amounts otherwise payable to the deceased participant under this
Plan shall be made to the Participant's estate. If a beneficiary
designated by the Participant to receive his benefits shall survive
the Participant but die before receiving all distributions hereunder,
the balance thereof
<PAGE>
shall be paid to such deceased beneficiary's estate, unless the
deceased participant's beneficiary designation provides otherwise.
8.2. The Company shall deduct from the distributions to be made to a
Participant or his designated beneficiary or beneficiaries under this
Plan any federal, state or local withholdings or other taxes or
charges which the Company is from time to time required to deduct
under applicable law and all amounts distributable under this Plan
are stated herein before any such deductions. The Company may rely on
a written opinion from its legal counsel regarding any questions
which may arise in connection with any such deductions.
9. RIGHTS, PRIVILEGES AND DUTIES OF PARTICIPANTS
---------------------------------------------
9.1. No Participant or any other person shall have any interest in any
fund or in any specific asset or assets of the Company and its
Subsidiaries by reason of being a Participant under this Plan nor any
right to receive any distributions under the Plan except as and to
the extent expressly provided in the Plan.
9.2. The Company shall have the right, but shall be under no obligation,
to segregate cash to fund any Target Awards made under this Plan.
9.3. Each Participant shall be entitled to receive a current copy of the
Plan upon his designation as a Participant. Thereafter, as long as he
remains a Participant, he shall be entitled to receive copies of any
amendments to the Plan within sixty (60) days after their adoption.
9.4. The designation of an employee as a Participant under this Plan shall
not be construed as conferring upon such employee any right to remain
in the employ of the Company. Subject to the terms of any employment
agreement with a Participant, the right of the Company to discipline
or discharge an employee shall not be affected in any manner by
reason of such employee's designation as a Participant under this
Plan.
9.5. To the extent permitted by law, the right of any Participant or any
beneficiary to receive any payment hereunder shall not be subject to
alienation, transfer, sale, assignment, pledge, attachment,
garnishment or encumbrance of any kind. Any attempt to alienate,
sell, transfer, assign, pledge or otherwise encumber any such
payments, whether presently or thereafter payable, shall be void. Any
payment due hereunder shall not in any manner be subject to any debts
or liabilities of any Participant or his beneficiary.
9.6. The "Claims Procedure" attached hereto as Exhibit II is incorporated
herein and made a part hereof.
<PAGE>
EXHIBIT 1
SUSQUEHANNA BANCSHARES, INC.
PERFORMANCE AWARD PROGRAM
-------------------------
Long-term performance awards for participants in the Susquehanna
Bancshares, Inc. Performance Award Program will be determined based upon the
ability of the Company and Subsidiaries to meet a series of performance criteria
which will be measured annually over a three year period (1986-1988). Each
participant in the plan will have a target award (stated in dollars) for the
Earnout Period which they will earn if all performance criteria are met for all
---
three (3) years. If some, but not all, goals are met the participant will earn
a portion of the target award based on the formula described below.
BONUS FORMULA
- -------------
The performance criteria are major operating statistics of banks
which taken as a whole indicate the overall condition of the bank. Awards will
be based 40% on achievement of goals of the parent company and 60% on
achievement of goals of the individual subsidiary bank. Awards for both the
parent company and the individual subsidiary bank will be based on a series of
external criteria (i.e., performance in relation to the industry) and internal
criteria (i.e., performance in relation to measurable internal objectives
established by the Compensation Committee). Each performance criterion is
assigned a weighted value and the aggregate of all the criteria for each year
equals 100. Based on the result for each performance criterion a sliding scale
has been developed so that a portion of the value from 0% to 100% will be
awarded. The aggregate result of all the criteria produce an annual raw score
ranging from 0 - 100. These annual scores, when added and divided by three,
represent the percentage of the target award which has been achieved for the
Earnout Period.
The formula distribution and weighting of the criteria are presented
in Exhibits I-A, I-B, and I-C.
<PAGE>
EXHIBIT 11
Computation of Earnings per Common Share
Susquehanna Bancshares, Inc.
<TABLE>
<CAPTION>
(in thousands, except per share information) Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Earnings per Common Share:
- --------------------------
Net income before extraordinary item &
accounting change (EIAC) $26,017 $22,828 $22,182
Less preferred stock dividends 0 0 17
------- ------- -------
Net income before EIAC available
to common stockholders $26,017 $22,828 $22,165
Divided by average common shares outstanding 11,674 11,634 11,331
------- ------- -------
Earnings per common share before EIAC $ 2.23 $ 1.96 $ 1.96
======= ======= =======
Net income $26,017 $22,096 $23,205
Less preferred stock dividends 0 0 17
------- ------- -------
Net income available to common stockholders $26,017 $22,096 $23,188
Divided by average common shares outstanding 11,674 11,634 11,331
------- ------- -------
Earnings per common share $ 2.23 $ 1.90 $ 2.05
======= ======= =======
Earnings per Common Share, Assuming Full Dilution:
- --------------------------------------------------
Net income before EIAC $26,017 $22,828 $22,182
Divided by average common shares outstanding,
assuming full dilution 11,674 11,634 11,358
------- ------- -------
Earnings per common share before EIAC,
assuming full dilution $ 2.23 $ 1.96 $ 1.95
======= ======= =======
Net income $26,017 $22,096 $23,205
Divided by average common shares outstanding,
assuming full dilution 11,674 11,634 11,358
------- ------- -------
Earnings per common share, assuming full
dilution $ 2.23 $ 1.90 $ 2.04
======= ======= =======
Average Common Shares Outstanding,
- ----------------------------------
Assuming Full Dilution:
- -----------------------
Average common shares outstanding 11,674 11,634 11,331
Add shares of common stock issued on
conversion of preferred stock 0 0 27
------- ------- -------
Average common shares outstanding,
assuming full dilution 11,674 11,634 11,358
======= ======= =======
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF
THE REGISTRANT
1. Farmers First Bank, 9 East Main Street, Lititz, Pennsylvania; a Bank and
Trust Company organized under the Pennsylvania Banking Code of 1965.
2. The Citizens National Bank of Southern Pennsylvania, 35 North Carlisle
Street, Greencastle, Pennsylvania; a National Bank organized under the
National Bank Act.
3. First National Trust Bank, 400 Market Street, Sunbury, Pennsylvania; a
National Bank organized under the National Bank Act.
4. Williamsport National Bank, 329 Pine Street, Williamsport, Pennsylvania; a
National Bank organized under the National Bank Act.
5. Spring Grove National Bank, 10 South Main Street, Spring Grove,
Pennsylvania; a National bank organized under the National Bank Act.
6. Farmers & Merchants Bank and Trust, 59 West Washington Street, Hagerstown,
Maryland; a Bank organized under the Maryland Banking Code.
7. Susque-Bancshares Life Insurance Company, Phoenix, Arizona; an insurance
company organized under the laws of the State of Arizona.
8. Susque-Bancshares Leasing Company, Inc., 9 East Main Street, Lititz,
Pennsylvania; a company organized under the laws of the Commonwealth of
Pennsylvania.
9. Susquehanna Bancshares South, Inc., 100 West Road, Baltimore, Maryland; a
thrift holding company organized under the laws of the State of Delaware.
10. Atlantic Federal Savings Bank, 100 West Road, Baltimore, Maryland; a
wholly-owned subsidiary of Susquehanna Bancshares South, Inc.
11. Reisterstown Federal Savings Bank, 11817 Reisterstown Road, Reisterstown,
Maryland; a wholly-owned subsidiary of Susquehanna Bancshares South, Inc.
12. Fairfax Savings Bank, a FSB, 17 Light Street, Baltimore, Maryland; a
wholly-owned subsidiary of Susquehanna Bancshares South, Inc. (acquired
2/1/96).
<PAGE>
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Susquehanna Bancshares, Inc. on Form S-8 (File No. 33-92512) of our report,
which includes an explanatory paragraph related to a change in the method of
accounting for income taxes in 1993, dated January 23, 1996, except for Note 2
as to which the date is February 1, 1996, on our audits of the consolidated
financial statements of Susquehanna Bancshares, Inc., as of December 31, 1995
and 1994, and for the three years in the period ended December 31, 1995, which
report is incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, Pennsylvania
March 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 87,107
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 92,110
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 476,139
<INVESTMENTS-CARRYING> 133,879
<INVESTMENTS-MARKET> 135,106
<LOANS> 1,712,951
<ALLOWANCE> 27,563
<TOTAL-ASSETS> 2,586,157
<DEPOSITS> 2,116,042
<SHORT-TERM> 69,432
<LIABILITIES-OTHER> 41,010
<LONG-TERM> 86,274
<COMMON> 273,399
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 2,586,157
<INTEREST-LOAN> 152,305
<INTEREST-INVEST> 34,532
<INTEREST-OTHER> 2,990
<INTEREST-TOTAL> 189,827
<INTEREST-DEPOSIT> 72,059
<INTEREST-EXPENSE> 82,618
<INTEREST-INCOME-NET> 107,209
<LOAN-LOSSES> 4,994
<SECURITIES-GAINS> (32)
<EXPENSE-OTHER> 80,911
<INCOME-PRETAX> 37,384
<INCOME-PRE-EXTRAORDINARY> 26,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,017
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 2.23
<YIELD-ACTUAL> 4.89
<LOANS-NON> 18,754
<LOANS-PAST> 4,820
<LOANS-TROUBLED> 6,703
<LOANS-PROBLEM> 31,900
<ALLOWANCE-OPEN> 23,845
<CHARGE-OFFS> 5,646
<RECOVERIES> 1,055
<ALLOWANCE-CLOSE> 27,563
<ALLOWANCE-DOMESTIC> 27,563
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
