<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 December 31, 1997 Commission file number: 0-10674
SUSQUEHANNA BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-2201716
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 626-4721
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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:
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Common Stock, Par Value $2.00 per share Common Stock is not registered on any exchange.
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate 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. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $792,841,539 as of February 27, 1998, based upon
the closing price on the Nadsaq National Market reported for such date. Shares
of Common Stock held by each executive officer and director and by each person
who beneficially owns more than 5% of the outstanding Common Stock have been
excluded in that such persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer or affiliate status is not
necessarily a conclusive determination for other purposes. The number of shares
issued and outstanding of the registrant's Common Stock as of February 27, 1998,
was 22,555,274.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held
May 29, 1998, (the "1998 Proxy Statement") are incorporated by reference into
Part III.
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PART I
Item 1. Business
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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, 1997, the Company operated as a super-community bank holding
company with eight commercial banks, one savings bank, and two non-bank
subsidiaries. These subsidiaries provide banking and banking-related services
from 124 offices located in central and eastern Pennsylvania, Maryland, and
southern New Jersey. As of December 31, 1997, Susquehanna had assets of $3.5
billion, loans receivable of $2.6 billion, deposits of $2.9 billion and
shareholders' equity of $347 million.
The relative sizes and profitability of Susquehanna's
subsidiaries as of and for the year ended December 31, 1997, are depicted in the
following table: (Dollars in Millions)
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<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 $948 27% $16.3 41%
Farmers & Merchants Bank and Trust 550 16 5.9 15
First National Trust Bank 286 8 4.2 10
Williamsport National Bank 240 7 5.0 12
Citizens National Bank of So. Penna. 185 5 2.8 7
*Susquehanna Bank 859 24 8.5 21
**Equity National Bank 210 6 1.6 4
**Farmers National Bank 87 3 1.3 3
**Founders' Bank 122 3 0.5 1
Susque-Bancshares Leasing Co., Inc. (leasing) 31 1 0.6 2
Susque-Bancshares Life Insurance Co. 3 - 0.3 1
(life insurance)
Parent (including consolidation adjustments, 4 - (6.8) (17)
Susquehanna South's parent and Susquehanna East's
parent)
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Total $3,525 100% $40.2 100%
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</TABLE>
*Subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares
South, Inc. ("Susquehanna South")
**Subsidiaries of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares
East, Inc. ("Susquehanna East")
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
eastern Pennsylvania principally in Montgomery, Chester and Delaware Counties;
in western Maryland,
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principally in Allegany and Washington Counties; in central
Maryland, including Baltimore County, Baltimore City, Carroll County, Harford
County, Cecil County and Anne Arundel County; and in southern New Jersey,
principally in Camden, Burlington and Gloucester Counties. 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 lines of business,
operations and support functions in order to achieve greater economies of scale
and cost savings. Consistent with this philosophy, Susquehanna merged its
subsidiary Spring Grove National Bank into its lead bank, Farmers First Bank,
effective June 6, 1996. On May 8, 1997, Susquehanna's subsidiary, Susquehanna
Bancshares South, Inc., announced the consolidation of Atlantic Federal Savings
Bank, Fairfax Savings Bank FSB, and Reisterstown Federal Savings Bank into
Susquehanna Bank, a wholly-owned subsidiary of the thrift holding company. (See
"Business of Susquehanna Bank" below). In addition, in late 1997, the Company
embarked on a program designed to convert all of its affiliates to a uniform
computer system by mid-1999. Through the formation of Susquehanna Trust Company,
which was approved by the Pennsylvania Department of Banking in January, 1998,
and selection of a uniform processing system, the Company anticipates further
integrating of its trust department operations. Mortgage banking operations are
also expected to undergo increased consolidation. 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 commercial bank or savings bank
subsidiaries. As of December 31, 1997, the subsidiaries of Susquehanna employed
1,429 full-time and 287 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,
Maryland and New Jersey. 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.
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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. As of December 31, 1997, the Company operated 25 ALM's within
Pennsylvania and Maryland.
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 customers and selected prospects in Susquehanna's market areas. During
1996, Susquehanna introduced a check (debit) card in Pennsylvania and Maryland.
As of December 31, 1997, over 119,000 debit cards had been issued.
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 several mortgage operations into Atlantic First Mortgage
Company, a mortgage subsidiary of Susquehanna Bank, is expected to continue to
enhance the expansion of Susquehanna's mortgage banking operations in its
Maryland and Pennsylvania markets.
Susquehanna's commercial lending operations include commercial,
financial and agricultural lending (11.8% of the total loan portfolio at
December 31, 1997), real estate construction lending (8.8%), and commercial
mortgage lending (16.2%). 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 commercial and
savings banks.
Business of Farmers First. Farmers First, headquartered in Lititz, Pa., is
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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. As of December 31, 1997, Farmers First had twenty-seven (27)
full-service and ten (10) limited-service banking offices in Lancaster and York
Counties. 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. Effective June 6, 1996, the former Spring Grove National Bank, a
Susquehanna affiliate, was merged into Farmers First, effectively expanding the
service area of Farmers First into York County. During 1997, Farmers First
commenced operation of an investment subsidiary in Delaware, Farmers First
Brandywine Corporation, whose purpose is to assist in loan and investment
portfolio management. During 1997, Susquehanna also established Susquehanna
Trust Company as a subsidiary of Farmers First for the purpose of further
integrating trust operations and services. Farmers First owns no other
subsidiaries.
As of December 31, 1997, Farmers First had total assets of
$948 million, total shareholder's equity of $116 million and total deposits of
$739 million.
4
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Business of Citizens. Citizens is engaged in commercial banking and trust
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business as authorized by the National Bank Act and its main office is located
in Greencastle, Pa. 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, 1997, Citizens had seven (7) 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, 1997, Citizens had total assets of $185
million, total shareholder's equity of $17 million and total deposits of $163
million.
Business of First National. First National, headquartered in Sunbury, Pa., is
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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, 1997, First National had thirteen (13)
full-service and one (1) limited-service banking offices in Northumberland,
Snyder, Columbia, and Union Counties. 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, 1997, First National had total assets of
$286 million, total shareholder's equity of $27 million and total deposits of
$251 million.
Business of Williamsport. Williamsport is engaged in commercial banking and
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trust business authorized by the National Bank Act and its main office is in
Williamsport, Pa. 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, 1997, Williamsport had six (6) full-service
and one (1) limited-service banking offices in Lycoming County. 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, 1997, Williamsport had total assets of $240
million, total shareholder's equity of $32 million and total deposits of $205
million.
Business of F&M. F&M, headquartered in Hagerstown, Md., is engaged in commercial
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banking as authorized by the banking laws of the State of Maryland. This
involves accepting demand, time and savings deposits and
5
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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. F&M operates FMBT Incorporated as a subsidiary to assist in
investment portfolio management and F&M Insurance Agency, Inc., as a subsidiary
to engage in insurance agency business. Atlantic First Title Corporation is a
subsidiary of F&M which was formed in 1997 for the purpose of providing title
insurance and related services.
As of December 31, 1997, F&M had twenty-two (22) full-service
and five (5) limited-service banking offices in Washington, Allegany and Garrett
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, 1997, F&M had total assets of $550 million,
total shareholder's equity of $48 million and total deposits of $454 million.
Business of Susquehanna Bank. Susquehanna Bank is a federally chartered savings
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bank headquartered in Towson, Maryland. It was established, effective May 8,
1997, by the consolidation of Atlantic Federal Savings Bank, Fairfax Savings
Bank FSB, and Reisterstown Federal Savings Bank. It is a wholly-owned subsidiary
of Susquehanna Bancshares South, Inc., which, in turn, is a wholly-owned
subsidiary of Susquehanna.
Susquehanna Bank 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 real estate and
commercial loans, mortgage-backed securities and investment and money market
securities. Construction lending and land and development loans are a major
focus of Susquehanna Bank. Through its subsidiary, Atlantic First Mortgage
Corporation, Susquehanna Bank originates one-to-four family residential mortgage
loans for sale in the secondary market. Susquehanna Bank has two other active
subsidiaries--Reisterstown Service Corporation, a loan management company, and
SBSI, Inc., a Delaware investment management company.
As of December 31, 1997, Susquehanna Bank had twenty (20) full
service offices located in Baltimore City, and Baltimore, Cecil, Harford, Anne
Arundel, Carroll, Worcester, and Wicomico Counties. It's main office is located
in Towson, Md. 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 December 31, 1997, Susquehanna Bank had total assets of
$859 million, total shareholder's equity of $97 million, and total deposits of
$662 million.
Business of Farmers National Bank. Effective at the close of business February
- ---------------------------------
28, 1997, Susquehanna completed the acquisition of Farmers National Bank
("Farmers National"), a national banking association headquartered in Mullica
Hill, New Jersey. Farmers National is a wholly-owned subsidiary of Susquehanna
Bancshares East, Inc., a wholly-owned subsidiary of Susquehanna.
Farmers National is engaged in commercial banking as
authorized by the National Banking Act. This involves accepting demand, time and
savings deposits and granting loans (consumer, commercial, real estate
6
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and business) to individuals, corporations, partnerships, associations and
municipalities and other governmental bodies. Farmers National owns an
investment subsidiary in Delaware, Farmers Investment Company, whose purpose is
to assist in investment portfolio management.
As of December 31, 1997, Farmers National had two (2)
full-service banking offices in Gloucester County, New Jersey. Farmers
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, 1997, Farmers National had total assets of
$87 million, total shareholder's equity of $10 million and total deposits of $77
million.
Business of Equity National Bank. Effective at the close of business February
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28, 1997, Susquehanna completed the acquisition of Equity National Bank ("Equity
National"), a national banking association headquartered in Marlton, New Jersey.
Equity National is a wholly-owned subsidiary of Susquehanna Bancshares East,
Inc., a wholly-owned subsidiary of Susquehanna.
Equity National is engaged in commercial banking as authorized
by the National Banking 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. Equity National owns an investment subsidiary, At
Corporation, whose purpose is to assist in investment portfolio management.
As of December 31, 1997, Equity National had seven (7) full
service banking offices in Camden and Burlington Counties, New Jersey. Equity
National's business is not dependent upon 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, 1997, Equity National had total assets of
$210 million, total shareholder's equity of $13 million and total deposits of
$191 million.
Business of Founders' Bank. Effective July 31, 1997, Susquehanna completed the
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acquisition of Founders' Bank of Bryn Mawr ("Founders'"), Pennsylvania, a
state-chartered banking association and Federal Reserve member bank. Founders'
also is a wholly-owned subsidiary of Susquehanna Bancshares East, Inc., a
wholly-owned subsidiary of Susquehanna.
Founders' is engaged in commercial banking as authorized by
the banking laws of the Commonwealth of Pennsylvania. 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. Founders' has a real estate
investment subsidiary, Old Lancaster Corporation, with its only asset being part
ownership of Founders' headquarters building.
As of December 31, 1997, Founders' had three (3) full-service
offices in Montgomery, Chester, and Delaware Counties, Pennsylvania. Founders'
business is not dependent upon any one customer, and the loss of any one
customer or a few customers would not have a material adverse effect upon it.
However, it should be noted that 24.5% of Founders' deposits at December 31,
1997, were from one customer. If this customer would leave, Founders' would have
funding sources to replace those deposits.
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As of December 31, 1997, Founders' had total assets of $122
million, total shareholder's equity of $9 million and total deposits of $107
million.
Year 2000 and Operating System Conversion. Susquehanna has engaged consultants
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to assist in assessing the Year 2000 situation, develop a business process
analysis and conduct remediation, where needed. Susquehanna has purchased new
core application processing software and new computing equipment which are
contracted to be Year 2000 compliant. See "Management's Discussion and Analysis
of Results of Operations and Financial Conditions" for further discussion.
Recent and Pending Acquisitions
Effective at the close of business on February 28, 1997,
Susquehanna completed the acquisitions of Farmers Bank Corp. ("FBC"), Mullica
Hill, New Jersey, and its wholly-owned subsidiary, Farmers National Bank; and
Atcorp, Inc. ("Atcorp"), Marlton, New Jersey, and its wholly-owned subsidiary,
Equity National Bank. At December 31, 1997, Farmers National had assets of $87
million and operated two banking offices located in Gloucester County, New
Jersey. At December 31, 1997, Equity National had assets of $210 million and
operated seven banking offices located in Camden and Burlington Counties, New
Jersey.
The acquisitions of FBC and Atcorp were completed through the
exchange of 692,398 shares of Susquehanna common stock for all the outstanding
capital stock of FBC, and 771,750 shares of Susquehanna common stock for all the
outstanding stock of Atcorp. FBC shareholders received 2.281 shares of
Susquehanna common stock for each share of FBC stock that they held as of
February 28, 1997, and Atcorp shareholders received one share of Susquehanna
common stock for each share of Atcorp common stock that they held as of February
28, 1997. The transactions qualified for pooling of interests accounting
treatment. Both Farmers National Bank and Equity National Bank became
wholly-owned subsidiaries of Susquehanna's subsidiary, Susquehanna Bancshares
East, Inc. These transactions represented Susquehanna's initial entry into New
Jersey.
On July 31, 1997, Susquehanna announced that it had completed
the acquisition of Founders' Bank of Bryn Mawr, Pennsylvania ("Founders'"). At
December 31, 1997, Founders' had assets of $122 million and operated three
banking offices located in Montgomery, Chester and Delaware Counties,
Pennsylvania.
The acquisition of Founders' was completed through the
exchange of 560,354 shares of Susquehanna common stock for all the outstanding
capital stock of Founders'. Founders' shareholders received 0.566 shares of
Susquehanna common stock for each share of Founders' stock that they held as of
the close of business on July 30, 1997. This transaction also qualified for
pooling of interests accounting treatment. Founders', a state-chartered
commercial bank which is a member of the Federal Reserve System, became a
wholly-owned subsidiary of Susquehanna's subsidiary, Susquehanna Bancshares
East, Inc. This transaction represented Susquehanna's initial entry into
Chester, Delaware and Montgomery Counties, Pennsylvania.
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
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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 System ("Board") and is subject to regulation under the
Bank Holding Company Act of 1956, as amended ("BHC Act"). Provisions in the BHC
Act require prior approval of an acquisition of assets or ownership or control
of any voting shares of any bank, if such acquisition would give Susquehanna
more than 5% of the voting shares of any bank or bank holding company.
The BHC Act also generally permits the acquisition of a
non-bank company if such company engages only in activities which are determined
to be closely related and incidental to banking. Susquehanna directly owns two
non-bank subsidiaries - Susque-Bancshares Life Insurance Company ("SBLIC"), a
wholly-owned reinsurance company, and Susque-Bancshares Leasing Company
("SBLC"), a wholly-owned leasing company. SBLIC 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 the Commonwealth of Pennsylvania. SBLIC
is regulated by the Department of Insurance of the State of Arizona and is
subject to periodic review by that department. SBLC is organized under the laws
of the Commonwealth of Pennsylvania. SBLC in turn owns a single leasing company
subsidiary (with commercial finance powers).
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 ("FDIC").
Founders' Bank is a state member bank subject to regulation and periodic
examination by the Federal Reserve Board. Citizens, First National,
Williamsport, Farmers National and Equity National are national banks and are
subject to regulation and periodic examination by the Office of the Comptroller
of the Currency ("OCC"). F&M, a state bank, is subject to regulation and
periodic examination by the Maryland Banking Commission and the FDIC.
Susquehanna Bank is subject to regulation and periodic examination by the Office
of Thrift Supervision ("OTS"). Susquehanna Bancshares South, Inc. ("SBI South"),
is also 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 subsidiary 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, without limitation, reserve requirements, loan
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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.
Because of limitations arising under the BHC Act, 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 in 1997 include commercial
banking through its eight banking subsidiaries, thrift activities through its
federal savings bank subsidiary, 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 97%
of Susquehanna's gross revenues in each of the past two fiscal years.
Financial Institutions Reform, Recovery and Enforcement Act of
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1989 ("FIRREA"). FIRREA eliminated many of the distinctions between commercial
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banks and thrift institutions and their holding companies. It changed the
capital requirements applicable to savings institutions to be "no less stringent
than the capital standards applicable to national banks" and established a
qualified thrift lender test regarding permissible investments for savings
associations. It also amended applicable statutory provisions to permit bank
holding companies to acquire savings institutions. FIRREA also expanded the
jurisdiction of the regulators' 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 money penalties (classified into three levels, with amounts
increasing with the severity of the violation) and/or prison sentences may be
imposed for any violations of law or regulation.
Federal Deposit Insurance Corporation Improvement Act of 1991
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("FDICIA"). The FDICIA requires prompt corrective action against
- ---------
undercapitalized institutions and has established five capital categories. These
are well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Well-capitalized institutions
significantly exceed the required minimum level for each capital measure
(currently, risk-based and leverage). Adequately capitalized institutions
include depository institutions that meet the required minimum level for each
capital measure. Undercapitalized institutions represent depository institutions
that fail to meet the required minimum level for any relevant capital measure.
Significantly undercapitalized describes depository institutions that are
significantly below the capital minimum requirements. Currently, all of
Susquehanna's depository institution subsidiaries are considered
well-capitalized.
Interstate Banking Act. Under the Riegle-Neal Interstate
----------------------
Banking and Branching Efficiency Act of 1994, substantially all state law
barriers to the acquisition of banks by out-of-state bank holding companies were
eliminated. The law permits 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. Susquehanna anticipates that the effect of the law will
be to increase competition within the markets in which it now operates, although
Susquehanna cannot predict the extent to which competition will increase in such
markets or the timing of such increase.
The Omnibus Consolidated Appropriations Act, 1997 ("OCAA").
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The OCAA was signed into law on September 30, 1996. It includes, among others,
Savings Association Insurance Fund ("SAIF") rescue provisions and a number of
other regulatory relief provisions for insured depository institutions and their
holding companies. A summary of its more relevant provisions is set forth below.
10
<PAGE>
SAIF Rescue Provisions. In September 1996, the federal
government assessed a one-time special charge to recapitalize the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation. All U.S. banks and thrifts with deposits insured by SAIF were
assessed a one-time charge of 65.7 cents per $100 of deposits. Susquehanna's
assessment was $5.5 million before taxes. The assessment reflects SAIF deposits
held by three affiliated thrifts in Maryland and one affiliated bank in
Pennsylvania. However, going forward, annual SAIF deposit premiums for well
capitalized institutions will be reduced from 23 cents per $100 of deposits to
6.44 cents per $100 of deposits, and in the year 2000 when the Bank Insurance
Fund ("BIF") and SAIF are combined, the annual premium will be reduced to 2.43
cents per $100 of deposits. These reductions result in a payback period of
approximately four years to recover the one-time special assessment of 65.7
cents per $100 of deposits.
Non-Banking Acquisitions by Well-Capitalized and Well-Managed
Banking Organizations. The OCAA amends the BHC Act by eliminating or simplifying
the notice procedure for well-managed and well-capitalized bank holding
companies that seek to engage in permissible nonbanking activities de novo or
through acquisitions subject to a size limitation, respectively.
A well-capitalized and well-managed bank holding company
generally may engage de novo in any activity that is on the "laundry list" of
permissible activities in Regulation Y promulgated by the Board without having
to give prior notice to the Board. However, the bank holding company must
provide written notification to the Board within 10 days after commencing the
activity.
In addition, such a bank holding company may, with 12 days'
prior notice, engage de novo in activities previously approved by the Board by
order (i.e., activities that have been approved on a case-by-case basis and are
not on the "laundry list" as generally approved) or make acquisitions of
companies that fall within certain size limitations and whose activities are
confined to permissible (by regulation or order) nonbanking activities. For this
latter purpose, the (i) book value of the total assets to be acquired may not
exceed 10% of the consolidated total risk-weighted assets of the acquiring bank
holding company; (ii) the gross consideration to be paid for the securities or
assets may not exceed 15% of the consolidated tier 1 capital of the acquiring
bank holding company; and (iii) the holding company and its subsidiary
depository institutions may not have recently been subject to a bank regulatory
agency enforcement action. The notice only needs to include a description of the
proposed activities and the terms of the proposed acquisition.
To meet the "well-capitalized" criteria, both before and
immediately after the proposed transaction, the acquiring bank holding company
itself must be well-capitalized; the lead insured depository institution
subsidiary must be well-capitalized; well-capitalized insured depository
institutions must hold at least 80% of the aggregate total risk-weighted assets
of insured depository institutions controlled by such holding company; and no
insured depository institution controlled by such holding company may be
undercapitalized. "Well-capitalized" has the meaning set forth in the federal
bank regulatory agencies' prompt corrective action regulations (i.e., a total
risk-based capital ratio of 10% or greater, a tier 1 risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater).
A banking organization is considered "well-managed" if the
acquiring bank holding company, its lead insured depository institution, and
insured depository institution subsidiaries controlling at least 90% of the
aggregate total risk-weighted assets of the banking organization, are
well-managed. A banking institution is
11
<PAGE>
considered well-managed if it has a composite rating of 1 or 2 under the CAMEL
or similar rating system as of its most recent examination, and at least a
satisfactory management rating in that examination.
Extension of Divestiture Period for Certain Shares. The OCAA
also amends the BHC Act to allow a bank holding company to hold shares acquired
pursuant to a debt previously acquired in good faith by extending to 10 years
(instead of five years) the maximum time period for holding such shares. This
gives bank holding companies the same flexibility as national banks, which may
hold foreclosed shares or real estate for up to 10 years. The OCAA also allows a
bank holding company to apply (within the 10-year limit) for extensions for more
than one year at a time.
Savings and Loan Holding Companies that are also Bank Holding
Companies. Before the passage of the OCAA, a holding company that controlled
both a bank and a savings and loan association was subject to both the BHC Act
and the Home Owners' Loan Act. Under the OCAA, such a company will be excluded
from the definition of a savings and loan holding company, and will be subject
to only the BHC Act. Accordingly, applications by such an organization would
have to be filed only with the Board, and not the Director of the OTS.
Lender Liability and Fiduciary Liability. The OCAA reinstates
the Environmental Protection Agency lender liability rule and excludes from the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") definition of "owner or operator" those lenders that did not
participate in the management of a vessel or facility prior to foreclosure and
who, after foreclosure, sell, re-lease, or otherwise divest themselves of
ownership of the vessel or facility, having sought to do so "at the earliest
practicable, commercially reasonable time, on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements." In
addition, the CERCLA liability of a fiduciary for releases or threatened
releases of hazardous substances from a vessel or facility held in a fiduciary
capacity are limited to the assets so held, unless liability is predicated on
something more than the fiduciary's ownership of the vessel or facility (e.g.,
the fiduciary's own negligence).
Loans to Executive Officers. The OCAA provides an exception to
section 22(h)(2) of the Federal Reserve Act, which prohibits preferential loans
to officers and directors of a member bank, by allowing an extension of credit
made pursuant to a benefit or compensation program that is widely available to
employees of the member bank and that does not give preference to any officer,
director or principal shareholder of the member bank over other employees of
that bank. The OCAA also allows the Board to grant exemptions from the
prohibition in section 22(h)(2) to executive officers and directors of certain
bank holding company subsidiaries where those individuals do not have authority
to participate, and do not participate, in major policy making functions of the
affiliated bank.
Audits and Audit Committees. The OCAA repeals the requirement
imposed by the FDICIA that an independent public accountant attest to the extent
of compliance of an insured depository institution and its holding company with
laws and regulations designated by the FDIC.
In addition, the OCAA permits the independent audit committee
of an insured depository institution to include inside directors, so long as a
majority of the committee is composed of outside directors, if the appropriate
federal bank regulatory agency determines that the institution has encountered
hardships in retaining and recruiting a sufficient number of competent outside
directors to serve on the committee. In making
12
<PAGE>
such a determination, the regulatory agency may take into account the size of
the institution and whether the institution has made a good faith effort to
elect additional outside directors who might serve on the internal audit
committee.
Year 2000 Guidelines. The Federal Financial Institutions
--------------------
Examination Council issued regulatory guidelines on May 5, 1997 and December 17,
1997 regarding Year 2000 readiness which are applicable to all depository
institutions. The guidelines highlight risk management issues on which the
federal banking examiners will focus in upcoming bank examinations. In addition
to readiness with respect to core operating systems, the guidelines also speak
to the issue of the readiness of loan customers, bank suppliers and other
third-parties which exchange data with depository institutions. The Pennsylvania
Department of Banking issued a statement dated January 15, 1998 to similar
effect regarding state examinations. The Office of the Comptroller of the
Currency has issued advisory letter 98-1 to inform national banks that
preparation for Year 2000 will be a factor in the OCC's review of certain
corporate applications, including bank mergers. See "Management's Discussion and
Analysis of Results of Operations and Financial Conditions" for further
discussion.
Environmental Impact Statement. Compliance by Susquehanna and
------------------------------
its subsidiaries with federal, state and local environmental protection laws
during 1997 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 1998.
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.
National Monetary Policy. In addition to being affected by
------------------------
general economic conditions, the earnings and growth of Susquehanna and its
subsidiaries are affected by the policies of regulatory authorities, including
the OCC, the Board, the FDIC and the OTS. An important function of the Board 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 Board 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 its
subsidiaries cannot be predicted.
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.
13
<PAGE>
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 and central York County, Pennsylvania. There are twenty-seven (27)
commercial banks operating in those counties, seven (7) of which are
headquartered in Lancaster County and eight (8) of which are headquartered in
York County; the others are headquartered elsewhere in Pennsylvania, Maryland or
New Jersey. Of the fifteen (15) commercial banks with headquarters in Lancaster
or York Counties, Farmers First ranked third in total deposits in those counties
as of June 30, 1997, 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 thirteen
(13) commercial banks in this market area including Citizens, seven (7) of which
are headquartered in that market area. Citizens ranked fifth among the seven (7)
banks in total deposits in that market area as of June 30, 1997, the last date
for which information is available.
First National competes in market areas in Northumberland,
Snyder, Union and Columbia Counties, Pennsylvania. Twenty-two (22) 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 in those counties
as of June 30, 1997, the last date for which information is available.
Williamsport's principal market area consists of the south
central and southeastern 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 County, six (6) of which are headquartered in that county,
and of the six (6), Williamsport ranked second in terms of total deposits in
Lycoming County as of June 30, 1997, the last date for which information is
available.
F&M's principal market area consists of Washington and
Allegany Counties, Maryland. Eight (8) commercial banks operate offices in those
counties, two (2) of which are headquartered in Washington County,
14
<PAGE>
and two (2) of which are headquartered in Allegany County. Of the four (4), F&M
ranked second in terms of total deposits in those counties as of June 30, 1997,
the last date for which information is available.
Susquehanna Bank's principal market area consists of
Baltimore, Cecil, Harford, Anne Arundel, Carroll, Worcester, and Wicomico
Counties, Maryland, and portions of Baltimore City. Sixty-one (61) federal
savings banks operate offices in that area, seven (7) of which are headquartered
in Baltimore County, one (1) in Cecil County, two (2) in Harford County, three
(3) in Anne Arundel County, two (2) in Carroll County, two (2) in Wicomico
County and thirty-two (32) in applicable portions of Baltimore City. Of the
forty-nine (49) savings banks headquartered in that area, Susquehanna Bank
ranked first in terms of total deposits in that area as of June 30, 1997, the
last date for which information is available.
Equity National's principal market area consists of Camden and
Burlington Counties, New Jersey. Thirteen (13) commercial banks operate offices
in those counties, two (2) of which are headquartered in Camden County, and four
(4) of which are headquartered in Burlington County. Of the six (6), Equity
National ranked second in terms of total deposits in those counties as of June
30, 1997, the last date for which information is available.
Farmers National's principal market area consists of
Gloucester County, New Jersey. Fourteen (14) commercial banks operate offices in
that county, three (3) of which are headquartered there; and of the three (3),
Farmers National ranked third in terms of total deposits in the county as of
June 30, 1997, the last date for which information is available.
Founders' principal market area consists of Chester, Delaware,
and Montgomery Counties, Pennsylvania. Thirty-four (34) commercial banks operate
offices in those counties, eight (8) of which are headquartered in Chester
County, two (2) of which are headquartered in Delaware County and ten (10) of
which are headquartered in Montgomery County. Of the twenty (20), Founders'
ranked fourteenth in terms of total deposits in those counties as of June 30,
1997, the last date for which information is available.
Business Trends
- ---------------
Current business trends include a stable interest rate
environment, a relatively strong and diverse local economy, a business climate
which is sustaining, and continuing consumer confidence.
While conditions are presently stable, certain other factors
create uncertainty in Susquehanna's markets as well as national markets.
Susquehanna will continue its emphasis on control of funding costs and lending
rates to effectively maintain profitability. 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.
15
<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 one hundred and four
(104) full-service branches, seventeen (17) limited-service branches, twenty-one
(21) free-standing automated teller machines, and twenty-two (22) automated loan
machines. The banks own sixty-eight (68) of the branches and lease the remaining
fifty-three (53). Seventeen (17) additional locations are owned or leased 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 Susquehanna Bank
9 East Main Street 100 West Road
Lititz, Pennsylvania Towson, Maryland
First National Trust Bank Equity National Bank
400 Market Street 8000 Sagemore Drive, Suite 8101
Sunbury, Pennsylvania Marlton, New Jersey
Citizens National Bank of Southern Farmers National Bank
Pennsylvania 114 North Main Street
35 North Carlisle Street Mullica Hill, New Jersey
Greencastle, Pennsylvania
Williamsport National Bank Founders' Bank
329 Pine Street 101 Bryn Mawr Avenue
Williamsport, Pennsylvania Bryn Mawr, Pennsylvania
Farmers & Merchants Bank and Trust
59 West Washington Street
Hagerstown, Maryland
The executive offices of Farmers First, First National, Citizens National,
Williamsport National, F&M, and Farmers National are owned by the respective
subsidiary, and the offices of Susquehanna Bank, Equity National and Founders'
are leased.
16
<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 1997.
Executive Officers of Susquehanna
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 61 President & Chief Executive Officer
William J. Reuter 48 Senior Vice President
Gregory A. Duncan 42 Senior Vice President - Administration
William T. Belden 48 Vice President
Frederick W. Bisbee 59 Vice President
Richard M. Cloney 56 Vice President and Secretary
Drew K. Hostetter 43 Vice President, Treasurer and Chief Financial Officer
Charles W. Luppert 56 Vice President
===============================================================================================
</TABLE>
17
<PAGE>
PART II
-------
Item 5. Market for Susquehanna Capital Stock and Related Shareholder Matters.
- ------ --------------------------------------------------------------------
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 1996 and 1997.
====================================================================
Price Range Per Share*
---------------------
====================================================================
Cash
----
Dividends
---------
Year Period Paid Low Bid High Bid
---- ------ ---- ------- --------
1996 1st Quarter
Common $0.19 $17.33 $20.00
2nd Quarter
Common $0.19 $17.83 $19.67
3rd Quarter
Common $0.19 $17.67 $20.42
4th Quarter
Common $0.20 $19.33 $23.83
1997 1st Quarter
Common $0.20 $21.50 $26.33
2nd Quarter
Common $0.20 $21.67 $27.83
3rd Quarter
Common $0.21 $25.88 $31.75
4th Quarter
Common $0.21 $26.50 $38.88
====================================================================
*Common Stock prices and dividends have been adjusted to reflect Susquehanna's
three-for-two stock split payable on July 2, 1997 to shareholders of record June
10, 1997.
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 27, 1998, there were 6,206 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, F&M, Susquehanna South,
Susquehanna East, and SBLC; under 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; the National Bank Act and the Federal Reserve Act (for Founders') in the
case of First National, Williamsport, Citizens, Equity National and Farmers
National; and the Federal Home Loan Act in the case of Susquehanna Bank.
18
<PAGE>
Susquehanna's ability to pay dividends is largely dependent upon the
receipt of dividends from its bank and savings bank subsidiaries. Both federal
and state laws impose restrictions on the ability of these subsidiaries to pay
dividends. In addition to the specific restrictions discussed below, bank and
savings bank regulatory agencies, in general, also have the ability to prohibit
proposed dividends by a bank or savings bank 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 Susquehanna Bank 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. Susquehanna Bank has succeeded to the liquidation account obligations
of Atlantic Federal and Reisterstown.
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
19
<PAGE>
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
banks. 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,
1997, Susquehanna Bank satisfied the requirements of a Tier 1 Association.
The capital requirements mandated by 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 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
20
<PAGE>
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. Susquehanna Bank
has not 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, 1997, $48.7 million is available for dividend distribution to
Susquehanna in 1998 from its subsidiary commercial and federal savings banks
without regulatory approval. Susquehanna currently expects that cash dividends
will continue to be paid by subsidiaries in the future at levels comparable with
prior years.
21
<PAGE>
Item 6. Selected Financial Data.
- ------ -----------------------
See Page 23.
22
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 264,100 $ 252,653 $ 206,550 $ 164,037 $ 155,543
Interest expense 118,447 113,054 89,844 61,123 60,391
Net interest income 145,653 139,599 116,706 102,914 95,152
Provision for loan and lease losses 4,557 4,807 5,164 4,247 5,280
Other income 23,754 22,223 17,136 16,127 17,034
Other expenses 106,028 110,541 88,316 79,480 72,326
Income before taxes, extraordinary item/
cumulative effect 58,822 46,474 40,362 35,314 34,580
Extraordinary item/cumulative effect -- -- -- (732) 1,123
Net income 40,202 31,183 28,252 24,095 25,354
Cash dividends declared on common stock 17,812 15,855 12,859 11,392 10,179
Dividend payout ratio 44.3% 50.8% 45.5% 47.3% 40.1%
Per Common Share Amounts*
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item/
cumulative effect--basic $ 1.81 $ 1.42 $ 1.43 $ 1.26 $ 1.26
--diluted $ 1.80 $ 1.42 $ 1.43 $ 1.26 $ 1.26
Net income--basic 1.81 1.42 1.43 1.23 1.32
--diluted 1.80 1.42 1.43 1.23 1.32
Cash dividends declared on common stock 0.82 0.78 0.73 0.68 0.61
Financial Ratios
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.19% 0.96% 1.07% 1.08% 1.13%
Return on average stockholders' equity 12.30 10.25 11.34 10.61 11.12
Average stockholders' equity to average assets 9.64 9.37 9.41 10.14 10.20
Tangible Operating Results
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 43,177 $ 34,000 $ 29,480 $ 24,590 $ 25,694
Tangible earnings per share 1.94 1.55 1.50 1.25 1.34
Return on tangible average shareholders' equity 14.94% 12.66% 12.63% 10.74% 11.91%
Return on tangible average assets 1.29 1.06 1.12 1.07 1.20
Year-End Balances
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,524,887 $ 3,335,117 $ 2,828,637 $ 2,430,392 $ 2,234,556
Investment securities 656,678 658,770 699,112 665,625 621,034
Loans and leases, net of unearned income 2,569,613 2,349,776 1,847,396 1,574,512 1,410,275
Deposits 2,851,217 2,754,118 2,335,577 2,046,264 1,882,630
Long-term debt 181,888 120,368 86,274 49,314 58,301
Stockholders' equity 346,738 313,296 293,910 234,765 234,814
Selected Share Data*
- ------------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period end) 22,555 21,968 21,619 19,647 19,639
Average common shares outstanding--basic 22,257 21,938 19,708 19,647 19,193
--diluted 22,330 21,944 19,708 19,647 19,233
At December 31:
Book value per share $ 15.37 $ 14.26 $ 13.59 $ 11.95 $ 11.96
Market price per common share 38.25 23.08 17.67 14.83 18.17
Common stockholders 6,237 5,693 5,759 5,229 5,174
</TABLE>
*Prior years' amounts adjusted for the three-for-two stock split in July 1997.
23
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
- ------ -----------------------------------------------------------------
Financial Condition
-------------------
See Pages 25 - 39
24
<PAGE>
- --------------------------------------------------------------------------------
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; Susquehanna Bancshares East,
Inc., and its commercial bank subsidiaries Farmers National Bank, Equity
National Bank, and Founders' Bank; Susquehanna Bancshares South, Inc. and its
savings bank subsidiary Susquehanna Bank; Susque-Bancshares Leasing Co., Inc.;
and Susque-Bancshares Life Insurance Company.
Certain statements in this document may be considered to be "forward-looking
statements" as that term is defined in the U.S. Private Securities Litigation
Reform Act of 1995, such as statements that include the words "expect,"
"estimate," "project," "anticipate," "should," "intend," "probability," "risk,"
"target," "objective," and similar expressions or variations on such
expressions. In particular, this document includes forward-looking statements
relating to, but not limited to, Susquehanna's potential exposures to various
types of market risks, such as interest rate risk and credit risk. Such
statements are subject to certain risks and uncertainties. For example, certain
of the market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. By their
nature, certain of the market risk disclosures are only estimates and could be
materially different from what actually occurs in the future. As a result,
actual income gains and losses could materially differ from those that have been
estimated. Other factors that could cause actual results to differ materially
from those estimated by the forward-looking statements contained in this
document include, but are not limited to: general economic conditions in market
areas in which Susquehanna has significant business activities or investments;
the monetary and interest rate policies of the Board of Governors of the Federal
Reserve System; inflation; deflation; unanticipated turbulence in interest
rates; changes in laws, regulations, and taxes; changes in competition and
pricing environments; natural disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructurings;
technological changes; changes in consumer spending and saving habits; and the
success of Susquehanna in managing the risks involved in the foregoing.
RESULTS OF OPERATIONS
Summary of 1997 Compared to 1996
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1997 and
1996. These transactions are described in the following paragraphs.
On January 29, 1996, Susquehanna issued $35 million 6.30% senior notes due
2003. The proceeds of this issuance were used to partially fund the purchase of
Fairfax Financial Corp ("Fairfax") and for general corporate purposes.
On February 1, 1996, Susquehanna acquired all of the assets and assumed all
the liabilities of Fairfax for $62.7 million. Accordingly, the transaction was
accounted for under the purchase method of accounting. Assets acquired were $455
million; loans acquired were $402 million; and deposits acquired were $396
million. The excess purchase price of $21.4 million will be amortized over 15
years.
In September 1996, Susquehanna's earnings were significantly affected by a
one-time special charge assessed by the federal government to recapitalize the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation. All U.S. banks and thrifts with deposits insured by SAIF were
assessed a one-time charge of 65.7 cents per $100 of deposits. Susquehanna's
assessment was $5.5 million before taxes. However, going forward, annual SAIF
deposit insurance premiums for well-capitalized institutions will be reduced
from 23 cents per $100 of deposits to 6.44 cents per $100 of deposits, and in
the year 2000, when the Bank Insurance Fund and the SAIF are combined, the
annual premium will be reduced to 2.43 cents per $100 of deposits. These
reductions result in a payback period of approximately four years to recover the
one-time special assessment.
On February 28, 1997, Susquehanna completed the acquisition of ATCORP, Inc.
("AI"), a New Jersey bank holding company with $210 million in assets and $186
million in deposits at the acquisition date. Susquehanna issued one share (prior
to Susquehanna's stock split) of common stock to the shareholders of Al for each
of the 771,750 outstanding common shares of AI. The transaction was accounted
for under the pooling-of-interests method of accounting; accordingly, the
consolidated financial statements have been restated to include the consolidated
accounts of Al for all periods presented.
Also on February 28, 1997, Susquehanna completed the acquisition of Farmers
Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in assets
and $77 million of deposits at the acquisition date. Susquehanna issued 692,398
shares of common stock (prior to Susquehanna's stock split) to the shareholders
of FBC based on an exchange ratio of 2.281 shares (prior to Susquehanna's stock
split) of Susquehanna common stock for each outstanding share of FBC. The
transaction was accounted for under the pooling-of-interests method of
accounting; accordingly, the consolidated financial statements have been
restated to include the consolidated accounts of FBC for all periods presented.
On May 1, 1997, Susquehanna combined its three savings banks located in and
around Baltimore, Md., into one savings bank named Susquehanna Bank. As a result
of this combination, there was a reduction in the work force of Susquehanna Bank
with related severance packages. Consequently, Susquehanna recorded pre-tax
severance of $1.3 million in 1997 related to these reductions. The annual pretax
cost savings related to these reductions approximates $1.3 million.
On July 31, 1997, Susquehanna acquired Founders' Bank, Bryn Mawr, Pa.,
through an exchange of 560,354 shares of common stock to the shareholders of
Founders' based on exchange ratio of 0.566 shares of Susquehanna common stock
for each share of Founders' outstanding capital stock. The transaction was
accounted for under the pooling-of-
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
interests method of accounting. At the time of the acquisition, Founders'
reported total assets of $103 million. Results of operations for Founders' prior
to the acquisition were not significant to Susquehanna's consolidated financial
statements, and, accordingly, Susquehanna's prior period consolidated financial
statements have not been restated for Founders'.
Susquehanna's net income for the year ended December 31, 1997, increased to
$40.2 million or 29% above 1996 net income of $31.2 million, which included a
special one-time charge of $5.5 million assessed by the federal government to
recapitalize the SAIF of the FDIC in the third quarter of 1996. Excluding the
SAIF special charge, net income would have increased 17% from $34.5 million in
1996 to $40.2 million in 1997.
Basic earnings per common share were $1.81 in 1997 compared to $1.42 ($1.57
adjusted for the SAIF special charge) in 1996. Return on average assets ("ROA")
and return on average equity ("ROE") increased from 0.96% and 10.25%,
respectively, in 1996 to 1.19% and 12.30%, respectively, in 1997.
During 1995 and 1996, Susquehanna acquired Reisterstown Federal Savings Bank
and Fairfax Savings Bank under the purchase method of accounting. These purchase
transactions created goodwill of $34 million, which significantly affects
Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash
charge to earnings. For 1997, tangible net income, earnings per share, ROA, and
ROE were $43.2 million, $1.94, 1.29%, and 14.94%, respectively, compared to
actual net income, earnings per share, ROA, and ROE of $40.2 million, $1.81,
1.19%, and 12.30%, respectively. Tangible net income, earnings per share, ROA,
and ROE for 1996, excluding the SAIF special charge, were $37.3 million, $1.70,
1.16%, and 13.90%, respectively. Tangible net income is actual net income
increased by the tax-effected amortization of those intangible assets which are
deducted from equity in determining Tier 1 capital.
The $9.0 million or 29% increase in net income from $31.2 million in 1996 to
$40.2 million in 1997 was primarily the result of improved net interest income
due to volume and reduced expenses due to the one-time SAIF assessment in 1996.
Net Interest Income--Taxable Equivalent Basis
The major source of operating revenues is net interest income, which rose to a
level of $145.7 million in 1997, $6.1 million or 4% above the $139.6 million
attained in 1996. The net interest margin, on a tax equivalent basis, remained
at 4.73% during 1997 and 1996.
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 interest income as a
percentage of net interest income and other income was 86%, 86%, and 87% for the
twelve months ended December 31, 1997, 1996, and 1995, respectively.
Table 2 illustrates that the growth in interest income in 1997 over 1996 was
attributed to volume. The average growth in interest-earning assets of $122
million in 1997 over 1996 was due to loan growth as noted in Table 1. As
illustrated in Table 1, the tax equivalent yield on earning assets for 1997 rose
slightly to 8.47% from 8.44% in 1996. This increase in 1997 can be attributed to
the increase in the investment securities yield from 6.24% in 1996 to 6.41% in
1997 due to higher reinvestment rates. The yield on the loan portfolio dropped
from 9.22% in 1996 to 9.09% in 1997. However, an increase of $186 million in
average loans outstanding improved the tax equivalent yield on earning assets in
1997, as the mix of earning assets moved to higher yielding loans from lower
yielding investments.
Table 2 also illustrates that the growth in interest expense in 1997 over
1996 was primarily attributed to volume. Increased levels of interest-bearing
demand deposits, short-term borrowings and long-term debt were primarily the
reasons for the $5.4 million increase in interest expense. The average funding
costs rose slightly in 1997 to 4.41% from 4.37% in 1996, primarily due to
competitive pricing for interest-bearing demand deposits in our southern New
Jersey and central Maryland markets.
A positive influence on the ability of Susquehanna to maintain its net
interest margin of 4.73 percent 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 possible. A
further explanation of the impact of asset and liability repricing is found in
the Market Risks 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 relative small
dollar size and homogeneous in nature.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 65,580 $ 3,587 5.47 $ 75,339 $ 4,078 5.41 $ 60,497 $ 3,473 5.74
Investment securities:
Taxable 535,956 33,708 6.29 579,613 35,376 6.10 540,575 33,375 6.17
Tax-advantaged 110,364 7,743 7.02 121,082 8,373 6.92 125,150 8,945 7.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 646,320 41,451 6.41 700,695 43,749 6.24 665,725 42,320 6.36
Loans (net of unearned income):
Taxable 2,408,618 218,830 9.09 2,224,071 204,795 9.21 1,713,040 160,943 9.40
Tax-advantaged 47,098 4,510 9.58 45,926 4,538 9.88 45,963 4,512 9.82
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 2,455,716 223,340 9.09 2,269,997 209,333 9.22 1,759,003 165,455 9.41
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,167,616 268,378 8.47 3,046,031 257,160 8.44 2,485,225 211,248 8.50
====================================================================================================================================
Allowance for loan losses (34,298) (33,506) (28,432)
All other non-earning assets 255,135 237,153 191,797
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $3,388,453 $3,249,678 $2,648,590
====================================================================================================================================
Liabilities & Stockholders' Equity
Deposits:
Interest-bearing demand $ 767,549 $ 24,188 3.15 $ 714,442 $ 21,025 2.94 $ 526,144 $ 14,819 2.82
Savings 432,600 10,696 2.47 436,578 10,835 2.48 420,263 10,829 2.58
Time 1,245,766 68,391 5.49 1,252,280 68,751 5.49 992,200 53,607 5.40
Short-term borrowings 84,240 4,323 5.13 64,804 3,287 5.07 63,398 3,436 5.42
Long-term debt 154,608 10,849 7.02 121,858 9,156 7.51 89,017 7,153 8.04
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,684,763 $118,447 4.41 2,589,962 $113,054 4.37 2,091,022 $ 89,844 4.30
- ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits 329,303 310,001 278,032
Other liabilities 47,633 45,369 30,423
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,061,699 2,945,332 2,399,477
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 326,754 304,346 249,113
Total liabilities & equity $3,388,453 $3,249,678 2,648,590
====================================================================================================================================
Net interest income/yield on
average earning assets $149,931 4.73 $144,106 4.73 $121,404 4.89
====================================================================================================================================
</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%.
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
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Versus 1996 1996 Versus 1995
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 $ (534) $ 43 $ (491) $ 812 $ (207) $ 605
Investment securities:
Taxable (2,723) 1,055 (1,668) 2,387 (386) 2,001
Tax-advantaged (750) 120 (630) (286) (286) (572)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities (3,473) 1,175 (2,298) 2,101 (672) 1,429
Loans (net of unearned income):
Taxable 16,798 (2,763) 14,035 47,116 (3,264) 43,852
Tax-advantaged 114 (142) (28) (4) 30 26
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 16,912 (2,905) 14,007 47,112 (3,234) 43,878
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $12,905 $(1,687) $11,218 $50,025 $(4,113) $45,912
====================================================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 1,620 $ 1,543 $ 3,163 $ 5,514 $ 692 $ 6,206
Savings (98) (41) (139) 412 (406) 6
Time (358) (2) (360) 14,266 878 15,144
Short-term borrowings 997 39 1,036 75 (224) (149)
Long-term debt 2,330 (637) 1,693 2,494 (491) 2,003
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,491 902 5,393 22,761 449 23,210
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin $ 8,414 $(2,589) $ 5,825 $27,264 $(4,562) $22,702
====================================================================================================================================
</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.
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 and southeastern Pennsylvania, Maryland,
southern New Jersey, and to a lesser extent 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, 1997. As
illustrated in Table 3, the provision for loan and lease losses was $4.6 million
for 1997 compared to $4.8 million in 1996. Net charge-offs, as seen in Table 3,
were $5.3 million in 1997 compared with $4.5 million in 1996. As a result, the
allowance for loan and lease losses at December 31, 1997, was 1.34% of
period-end loans and leases, or $34.6 million compared with 1.44% or $33.8
million at December 31, 1996. The allowance for loan and lease losses as a
percentage of non-performing loans increased from 130% at December 31, 1996, to
150% at December 31, 1997.
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 well secured and in the process of collection, and is delin-
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28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 3--Provision and Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, January 1 $ 33,800 $ 29,277 $ 25,410 $ 23,328 $ 19.502
Allowance acquired in business combination 1,460 4,229 3,323 -- 515
Change in fiscal year -- -- (8) -- --
Additions to provision for loan and lease losses
charged to operations 4,557 4,807 5,164 4,247 5,280
Loans and leases charged off during the year:
Commercial, financial, agricultural and leases 1,470 1,459 2,011 1,443 1,116
Real estate--mortgage 1,355 2,085 1,683 288 196
Consumer 3,727 2,519 2,173 1,615 1,972
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 6,552 6,063 5,867 3,346 3,284
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged-off:
Commercial, financial, agricultural and leases 358 513 266 354 353
Real estate--mortgage 43 77 200 43 41
Consumer 884 960 789 784 921
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,285 1,550 1,255 1,181 1,315
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 5,267 4,513 4,612 2,165 1,969
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 34,550 $ 33,800 $ 29,277 $ 25,410 $ 23,328
====================================================================================================================================
Average loans and leases outstanding $2,455,716 $2,269,997 $1,759,003 $1,485,746 $1,382,905
Period end loans and leases 2,569,613 2,349,776 1,847,396 1,574,512 1,410,275
Net charge-offs as a percentage of average loans
and leases 0.21% 0.20% 0.26% 0.15% 0.14%
Allowance as a percentage of period-end loans
and leases 1.34 1.44 1.58 1.61 1.65
</TABLE>
TABLE 4--Non-Performing Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans contractually past due
90 days and still accruing $ 6,760 $ 8,962 $ 5,555 $ 15,101 $ 7,605
====================================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural, and leases $ 932 $ 1,812 $ 3,134 $ 2,920 $ 3,934
Real estate--mortgage 21,541 17,371 17,679 15,578 15,276
Consumer 491 391 245 645 323
Restructured loans -- 6,429 6,703 6,941 --
Other real estate owned 4,379 7,620 6,010 5,465 9,983
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 27,343 $ 33,623 $ 33,771 $ 31,549 $ 29,516
====================================================================================================================================
Total non-performing assets as a percentage of period-
end loans and leases and other real estate owned 1.06% 1.43% 1.82% 2.00% 2.08%
====================================================================================================================================
</TABLE>
quent in payment of either principal or interest beyond 90 days. Interest income
received on non-performing loans in 1997 and 1996 was $1.1 million and $0.8
million, respectively. Interest income which would have been recorded on these
loans under the original terms was $2.3 million for 1997 and $1.9 million for
1996. At December 31, 1997, 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. Total non-performing assets at December 31, 1997 and
1996, of $27.3 million and $33.6 million, respectively,
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
includes $4.4 million and $7.6 million, respectively, in other real estate
acquired through foreclosure. Non-performing assets as a percentage of
period-end loans and other real estate owned was 1.06% at December 31, 1997, the
lowest level this decade.
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 $6.8 million at December 31, 1997, down from the
$9.0 million at December 31, 1996. Although the economy is stable, 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
nonaccrual 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, 1997, such loans, not included
in Table 4, amounted to $39.3 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 14%, 14%, and 13% for
1997, 1996, and 1995, respectively.
Non-interest income increased $1.5 million, or 7%, in 1997 over 1996. Income
from fiduciary-related activities rose by $427 thousand, or 13%, resulting from
higher volumes of assets under administration. Service charges on deposit
accounts were up $356 thousand, or 6%, and other charges, fees, and commissions
rose by $1.1 million, or 48%. reflecting the additional office locations and
higher account volumes. All other income exceeded 1996 results by $182 thousand
primarily due to income from Bank-Owned Life Insurance, increased credit card
and debit card activity, and ATM service fees. Gain on sale of mortgage
TABLE 5--Analysis of Other Expenses
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Advertising, marketing,
and public relations $ 3,378 $ 3,131 $ 2,405
Amortization of
acquisition costs 4,293 4,141 2,829
Audits and examinations 853 1,003 966
Communications 1,995 1,655 1,332
Directors' fees 1,169 1,314 1,207
Legal and professional 2,501 2,847 1,671
Life Insurance Company
related expenses 970 906 754
Other real estate 765 953 1,278
Outside services 2,927 3,450 3,050
PA shares/capital stock tax 1,998 1,803 1,619
Postage 2,185 2,309 1,728
Stationery and supplies 2,578 2,585 2,394
All other 8,948 8,949 7,093
- --------------------------------------------------------------------------------
Total $34,560 $35,046 $28,326
================================================================================
loans decreased $529 thousand, as loans originated for sale were $50 million
less than 1996.
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; EDIC insurance premiums on deposits; and other expenses (detailed
in Table 5) incurred in operating Susquehanna's business.
Non-interest expense decreased $4.5 million, or 4%, in 1997 over 1996,
primarily due to a $6.4 million decrease in FDIC insurance offset by a $2.3
million increase in salaries and employee benefits.
Salaries and employee benefits rose by $2.3 million or 4% from 1996 to 1997
due to the $1.3 million severance charge noted earlier and normal salary
increases. EDIC insurance premiums decreased $6.4 million due primarily to the
onetime special SAIF assessment in 1996.
Income Taxes
Susquehanna's effective tax rate for 1997 was 31.65% compared to 32.90% in
1996. This decrease was due to increased levels of tax-advantaged income. During
1997, Susquehanna purchased $50 million of bank-owned life insurance and
recognized $1.1 million of tax-advantaged income from the increase in cash
surrender values.
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,
effective tax rates may increase in the years ahead.
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997, 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
offset the future reversals of deductible temporary differences without
implementing any tax strategies or assuming future taxable income.
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. As a result, total
equity of Susquehanna was positively impacted by $2.5 million as the "unrealized
gains or losses for available-for-sale securities," changed from a positive $1.2
million at December 31, 1996, to a positive $3.7 million at December 31, 1997.
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 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, 1997, Susquehanna held no securities of
one issuer, other than U. S. Government obligations, where the aggregate book
value exceeded ten percent of stockholders' equity.
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1997, which includes the $79 million acquired in the
Founders' acquisition, was 9%, or $220 million. Loan growth in 1997 was mainly
associated with real estate mortgage loans and commercial loans, which increased
$178 million. As noted in Table 11, Susquehanna's loan portfolio contains no
significant concentrations other than geographic and housing developments.
Susquehanna's banking subsidiaries have historically reported a significant
amount of loans secured by real estate, as depicted in Table 8. Many of these
loans have real estate collateral taken as additional security not related to
the acquisition of the real estate pledged. Open-end home equity loans amounted
to $120 million at year end and an additional $169 million was lent against
junior liens on residential properties. Senior liens on 1-4 family residential
properties totaled $878 million and much of the $416 million in loans secured by
non-farm, non-residential properties represented collateralization of operating
lines, or term loans that finance equipment, inventory or receivables. Loans
secured by farmland totaled $36 million, while loans secured by multi-family
residential properties totaled $45 million at December 31, 1997.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 1998 consist of $111 million with fixed-rate pricing and $92 million with
variable rate pricing.
TABLE 6--Carrying Value of Investment Securities
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
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 $119,624 $ 750 $172,241 $ 1,493 $187,113 $ 3,632
U.S. Government agencies 232,238 -- 128,243 2,486 94,357 22,732
State and municipal 32,200 75,882 9,680 104,815 10,978 108,568
Corporate debt securities 72,672 50 87,130 190 103,075 367
Mortgage-backed securities 92,176 6,420 113,484 17,038 130,569 19,365
Equity securities 24,666 -- 21,970 -- 18,357 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $573,576 $83,102 $532,748 $126,022 $544,449 $154,664
====================================================================================================================================
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 7--Investment Securities
The following table shows the maturities of investment securities at fair value
and amortized cost as of December 31, 1997, and the weighted average yields of
such securities. Those securities that do not have a single maturity date are
shown in total. 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 Year Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury
Fair value $54,301 $ 64,038 $ 1,285 -- $119,624
Amortized cost 54,196 63,578 1,198 -- 118,972
Yield 5.9% 6.1% 7.1% -- 6.0%
U.S. Government agencies
Fair value $13,918 $182,897 $ 26,179 $ 9,244 $232,238
Amortized cost 13,928 182,460 26,096 8,926 231,410
Yield 5.8% 6.5% 6.8% 7.7% 6.5%
Corporate debt securities
Fair value $39,140 $ 31,885 $ 1,547 $ 100 $ 72,672
Amortized cost 39,043 31,520 1,471 102 72,136
Yield 6.4% 6.8% 7.5% 4.6% 6.6%
Mortgage-backed securities
Fair value $ 3,892 $ 42,964 $ 9,631 $35,689 $ 92,176
Amortized cost 3,884 42,852 9,516 35,443 91,695
Yield 6.5% 6.6% 6.8% 6.7% 6.6%
Equity securities
Fair value -- -- -- -- $ 24,666
Amortized cost -- -- -- -- 21,800
Yield -- -- -- -- 6.8%
State and municipal
Fair value $ 2,353 $ 21,619 $ 4,198 $ 4,030 $ 32,200
Amortized cost 2,348 21,230 4,007 3,885 31,470
Yield 7.0% 7.2% 8.1% 5.9% 7.1%
Held-to-Maturity:
U.S. Government agencies
Fair value $ 250 $ 500 -- -- $ 750
Amortized cost 250 500 -- -- 750
Yield 5.4% 5.9% -- -- 5.7%
Corporate debt securities
Fair value $ 25 $ 25 -- -- $ 50
Amortized cost 25 25 -- -- 50
Yield 7.9% 7.9% -- -- 7.9%
Mortgage-backed securities
Fair value -- $ 6,444 -- -- $ 6,444
Amortized cost -- 6,420 -- -- 6,420
Yield -- 6.5% -- -- 6.5%
State and municipal
Fair value $18,504 $ 51,721 $ 1,155 $ 5,359 $ 76,739
Amortized cost 18,468 50,969 1,136 5,309 75,882
Yield 6.2% 7.0% 10.8% 8.9% 7.0%
Total Securities
Fair value $657,559
Amortized cost 650,585
Yield 6.5%
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TABLE 8--Loan and Lease Portfolio
- --------------------------------------------------------------------------------------------------------------
At December 31 1997 1996
- --------------------------------------------------------------------------------------------------------------
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 $ 303,587 11.8% $ 249,886 10.6%
Real estate--construction 225,971 8.8 226,920 9.7
Real estate--mortgage 1,664,240 64.8 1,539,898 65.5
Consumer 311,393 12.1 278,527 11.9
Leases 64,422 2.5 54,545 2.3
- --------------------------------------------------------------------------------------------------------------
Total $2,569,613 100.0% $2,349,776 100.0%
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE 9--Loan 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 $151,982 $ 79,551 $72,054 $303,587
Real estate-construction 174,068 39,614 12,289 225,971
- --------------------------------------------------------------------------------------------------------------
$326,050 $119,165 $84,343 $529,558
==============================================================================================================
Rate sensitivity of loans with maturities greater than 1 year:
Variable rate $ 92,011
Fixed rate 111,497
- --------------------------------------------------------------------------------------------------------------
$203,508
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TABLE 10--Allocation of Allowance for Loan and Lease Losses
- --------------------------------------------------------------------------------------------------------------
At December 31
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 4,402 $ 3,980 $ 4,213 $ 4,003 $ 3,828
Real estate-construction 5,994 5,810 2,480 3,262 3,381
Real estate--mortgage 7,570 7,505 7,013 6,276 4,460
Consumer 4,873 4,618 3,407 3,572 3,185
Leases 1,125 1,097 602 453 303
Unused commitments 2,548 1,647 2,058 1,515 --
Unallocated 8,038 9,143 9,504 6,329 8,171
- --------------------------------------------------------------------------------------------------------------
Total $34,550 $33,800 $29,277 $25,410 $23,328
==============================================================================================================
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
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>
$ 234,411 12.7% $ 210,415 13.4% $ 194,561 13.8%
187,543 10.2 92,793 5.9 87,343 6.2
1,150,722 62.3 1,006,310 63.9 898,632 63.7
251,929 13.6 249,027 15.8 209,196 14.8
22,791 1.2 15,967 1.0 20,543 1.5
- --------------------------------------------------------------------------------------------------------------
$1,847,396 100.0% $1,574,512 100.0% $1,410,275 100.0%
==============================================================================================================
</TABLE>
TABLE 11--Loan Concentrations
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, and Maryland. At December 31, 1997,
Susquehanna's portfolio included the following concentrations:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Total As a % of % Nonperforming
Dollars in thousands Permanent Construction All Other Amount Total Loans in each category
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Housing developments $ 55,993 $207,305 $ 9,227 $272,525 10.6 2.8
Office buildings and warehouses 106,003 4,215 9,578 119,796 4.7 0.2
Retailing 22,959 -- 61,670 84,629 3.3 0.0
Agriculture 36,416 471 20,490 57,377 2.2 0.0
Manufacturing 15,641 79 14,938 30,658 1.2 0.4
Hotels/motels 27,119 -- 10,709 37,828 1.5 0.0
</TABLE>
Deposits
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 thousand or more as a principal source of funds, as they represent less
than 6% of total deposits. Table 13 presents a breakdown of maturities of time
deposits of $100 thousand or more as of December 31, 1997.
Market Risks
The types of market risk exposures generally faced by banking entities include
interest rate risk, liquidity risk, equity market price risk, foreign currency
risk, and commodity price risk. Due to the nature of its operations, only
interest rate and liquidity risk are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity--the ability to meet the cash
requirements of its customers and other financial commitments--is a fundamental
aspect of Susquehanna's asset/liability management strategy. Susquehanna's
policy of diversifying its funding sources--purchased funds, repurchase
agreements, and deposit accounts--allows it to avoid undue concentration in any
single financial market and also to avoid heavy funding requirements within
short periods of time. At December 31, 1997, Susquehanna subsidiary banks and
savings bank have an unused line of credit available to them from the Federal
Home Loan Bank totaling $420 million.
TABLE 12--Average Deposit Balances
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits $ 329,303 $ 310,001 $ 278,032
Interest-bearing
demand deposits 767,549 714,442 526,144
Savings deposits 432,600 436,578 420,263
Time deposits 1,245,766 1,252,280 992,200
- -------------------------------------------------------------------------------
Total $2,775,218 $2,713,301 $2,216,639
===============================================================================
</TABLE>
TABLE 13--Deposit Maturity
<TABLE>
<CAPTION>
Maturity of time deposits of $100 or more at
December 31, 1997
- ------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------
<S> <C>
Three months or less $ 58,466
Over three months through six months 24,497
Over six months through twelve months 32,522
Over twelve months 48,739
- ------------------------------------------------------------------------------
Total $164,224
==============================================================================
</TABLE>
34
<PAGE>
TABLE 14--Balance Sheet Gap Analysis
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1--3 3--12 1--3 Over 3
Dollars in thousands months months years years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Short-term investments $ 41,750 $ 100 $ 41,850
Investments 49,743 115,761 193,191 297,983 656,678
Loans and leases, net of unearned income 1,569,147 377,354 330,668 292,444 2,569,613
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,660,640 $ 493,215 $ 523,859 $ 590,427 $3,268,141
===================================================================================================================================
Liabilities
Interest-bearing demand $ 501,873 $ 98,123 $ 103,078 $ 99,056 $ 802,130
Savings 318,536 106,179 424,715
Time 297,929 396,660 210,923 202,693 1,108,205
Time in denominations of $100 or more 58,466 57,019 24,385 24,354 164,224
Short-term borrowings 101,930 1,393 103,323
Long-term debt 35,004 5,014 6,978 134,892 181,888
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,313,738 $ 664,388 $ 345,364 $460,995 $2,784,485
===================================================================================================================================
Interest Sensitivity Gap
Periodic $ 346,902 $ (171,173) $ 178,495 $129,432
Cumulative 175,729 354,224 483,656
Cumulative gap as a percentage of
earning assets 11% 5% 11% 15%
</TABLE>
However, liquidity is not entirely dependent on increasing Susquehanna's
liability balances. Liquidity can also be generated from maturing or readily
marketable assets. The carrying value of investment securities maturing within
one year amounted to $132 million at December 31, 1997. These maturing
investments represent 20% of total investment securities. Short-term investments
amounted to $42 million and represent additional sources of liquidity.
Consequently, Susquehanna's exposure to liquidity risk is not considered
significant.
Closely related to the management of liquidity is the management of interest
rate risk, 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 risk. By
dividing the assets and liabilities into three groups--fixed rate, floating
rate, and those which reprice only at management's discretion--strategies are
developed which are designed to minimize exposure to interest rate fluctuations.
Management also utilizes gap analysis to evaluate rate sensitivity at a given
point in time.
Table 14 illustrates Susquehanna's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at December 31, 1997. These
estimates include anticipated paydowns on mortgage-backed securities and certain
assumptions regarding core deposits. 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.
Susquehanna currently has a positive gap position (asset-sensitive) at one year
and, therefore, would be negatively affected by a decline in interest rates.
However, as noted in Table 16, a decline in interest rates would not have a
significant effect on the net interest margin of Susquehanna.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a quarterly report prepared for Susquehanna by
independent third-party consultants based on information provided by Susquehanna
which measures Susquehanna's exposure to interest rate risk. The model
calculates the income effect and the present value of assets, liabilities, and
equity at current interest rates, and at hypothetical higher and lower interest
rates at one percent intervals. The income effect and present value of each
major category of financial instrument is calculated by the model using
estimated cash flows based on prepayments, early withdrawals, and weighted
average contractual rates and terms. For present value calculations, the model
also considers discount rates for similar financial instruments. The resulting
present value of longer-term fixed-rate financial instruments are more sensitive
to change in a higher or lower market interest rate
35
<PAGE>
scenario, while adjustable-rate financial instruments largely reflect only a
change in present value representing the difference between the contractual and
discounted rates until the next interest rate repricing date.
A substantial portion of Susquehanna's loans and mortgage-backed securities
are residential mortgage loans containing significant imbedded options which
permit the borrower to prepay the principal balance of the loan prior to
maturity ("prepayments") without penalty. A loan's propensity for prepayment is
dependent upon a number of factors, including the current interest rate, the
interest rate on the loan, the financial ability of the borrower to refinance,
the economic benefit to be obtained from refinancing, availability of
refinancing at attractive terms, as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase or
decrease on fixed- and adjustable-rate loans depending on the current relative
levels and expectations of future short-term and long-term interest rates. Since
a significant portion of Susquehanna's loans are variable rate loans,
prepayments on such loans generally increase when long-term interest rates fall
or are at historically low levels, relative to short-term interest rates, making
fixed-rate loans more desirable.
Investment securities, other than those with early call provisions, generally
do not have significant imbedded options and repay pursuant to specific terms
until maturity. While savings and checking deposits generally may be withdrawn
upon the customer's request without prior notice, a continuing relationship with
customers resulting in future deposits and withdrawals is generally predictable
resulting in a dependable and uninterruptible source of funds. Time deposits
generally have early withdrawal penalties, while term FHLB borrowings and
subordinated notes have prepayment penalties, which discourage customer
withdrawal of time deposits and prepayment of FHLB borrowings and subordinated
notes prior to maturity.
Susquehanna's loans and mortgage-backed securities are primarily indexed to
the national interest indices. When such loans and mortgage-backed securities
are funded by interest-bearing liabilities which are determined by other
indices, primarily deposits and FHLB borrowings, a changing interest rate
environment may result in different levels of changing in the different indices
resulting in disproportionate changes in the value of, and the net earnings
generated from, Susquehanna's financial instruments. Each index is unique and
influenced by different external factors; therefore, the historical
relationships in various indices may not be indicative of the actual change
which may result in a changing interest rate environment.
TABLE 15--Balance Sheet Shock Analysis
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Base
At December 31, 1997 Present
Dollars in thousands --2% --1% Value 1% 2%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 97,353 $ 97,344 $ 97,341 $ 97,334 $ 97,331
Short-term investments 41,851 41,848 41,850 41,849 41,849
Investment securities:
Held-to-maturity 89,760 86,816 83,983 81,293 78,720
Available-for-sale 601,451 588,049 573,576 559,557 545,626
Loans net of unearned income 2,622,611 2,603,339 2,582,782 2,562,610 2,542,662
Other assets 190,454 190,454 190,454 190,454 190,454
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,643,480 $ 3,607,850 $ 3,569,986 $ 3,533,097 $ 3,496,642
===================================================================================================================================
Liabilities
Deposits:
Non-interest bearing $ 340,150 $ 337,140 $ 334,327 $ 331,624 $ 328,574
Interest-bearing 2,555,350 2,530,269 2,505,820 2,482,328 2,459,502
Short-term borrowings 103,337 103,330 103,323 103,316 103,309
Long-term debt 201,902 192,191 183,112 174,620 166,672
Other liabilities 50,890 46,334 41,721 36,646 31,909
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,251,629 3,209,264 3,168,303 3,128,534 3,089,966
Total economic equity 391,851 398,586 401,683 404,563 406,676
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 3,643,480 $ 3,607,850 $ 3,569,986 $ 3,533,097 $ 3,496,642
===================================================================================================================================
Economic equity ratio 11% 11% 11% 11% 12%
Value at risk $ (9,832) $ (3,097) -- $ 2,880 $ 4,993
Percent value at risk --2% --1% -- 1% 1%
</TABLE>
36
<PAGE>
TABLE 16--Net Interest Income Shock Analysis
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Base
At December 31, 1997 Present
Dollars in thousands --2% --1% Value 1% 2%
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Short-term investments $ 1,821 $ 2,352 $ 2,882 $ 3,411 $ 3,942
Investments 37,381 38,340 39,168 39,983 40,753
Loans and leases 197,597 212,818 227,654 242,408 257,072
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 236,799 253,510 269,704 285,802 301,767
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 4,833 14,359 23,746 32,997 42,114
Time 70,411 74,946 79,410 83,849 88,416
Short-term borrowings 3,882 4,975 6,069 7,162 8,255
Long-term debt 11,258 11,299 11,340 11,381 11,422
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 90,384 105,579 120,565 135,389 150,207
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 146,415 $ 147,931 $ 149,139 $ 150,413 $ 151,560
===================================================================================================================================
Net interest income at risk $ (2,724) $ (1,208) -- $ 1,274 $ 2,421
Percent net interest income at risk --2% --1% -- 1% 2%
</TABLE>
Tables 15 and 16 reflect the estimated income effect and present value of
assets, liabilities, and equity calculated using certain assumptions determined
by Susquehanna as of December 31, 1997, at current interest rates and at
hypothetical higher and lower interest rates of one and two percent. As noted in
Table 15, the economic equity at risk is only two percent at an interest rate
change of minus two percent, while Table 16 discloses that net interest income
at risk is also only two percent at an interest rate change of minus two
percent. Consequently, Susquehanna's exposure to interest rate risk is not
considered significant.
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-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 17 illustrates these capital ratios for each bank and savings
bank subsidiary and Susquehanna on a consolidated basis. Susquehanna and each of
its banking and savings bank subsidiaries have leverage and risk-weighted ratios
well in excess of regulatory minimums, and each entity is considered "well
capitalized" under regulatory guidelines.
Impact of the Year 2000 Issue
The "Year 2000 Issue" is the result of computer programs having been written
using two digits, rather than four, to define the applicable year. Any of
Susquehanna's computer systems that have date-sensitive software or
date-sensitive hardware may recognize a date using "00" as the Year 1900 rather
than the Year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send statements, or engage in similar normal
business activities.
Based on an ongoing assessment, Susquehanna determined that it will be
required to modify or replace portions of its software and hardware so that its
computer systems will properly utilize dates beyond December 31, 1999.
Susquehanna presently believes that, as a result of modifications to existing
software and hardware and conversions to new software and hardware, the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made, or are not completed on a timely basis, the Year 2000 Issue could have
a material adverse impact on the operations of Susquehanna.
Susquehanna has initiated formal communications with all of its vendors and
large commercial customers to determine the extent to which Susquehanna is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. Susquehanna's estimated Year 2000 project costs include the costs and
time associated with the impact of a third party's Year 2000 Issue, and are
based on presently available information.
37
<PAGE>
- -------------------------------------------------------------------------------
TABLE 17--Capital Adequacy
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Tier I Capital Total Capital Leverage
Ratio (A) Ratio (B) Ratio (C)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Required Ratio 4.00% 8.00% 4.00%
Citizens National Bank 13.33 14.37 9.06
Equity National Bank 8.87 10.12 5.64
Farmers First Bank 15.31 16.57 12.49
Farmers National Bank 17.64 18.54 10.53
Farmers and Merchants Bank & Trust 10.85 11.97 7.81
First National Trust Bank 12.38 13.49 8.82
Founders' Bank 9.33 10.59 7.78
Susquehanna Bank 11.45 16.83 8.06
Williamsport National Bank 18.68 19.93 13.32
Total Susquehanna 12.11% 15.33% 8.83%
===================================================================================================================================
</TABLE>
(A) Tier I capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier I capital divided by average total assets less disallowed intangible
assets.
For significant vendors, Susquehanna will validate that they are Year 2000
compliant by December 31, 1998, or make plans to switch to a new vendor or
system that is compliant. For insignificant vendors, Susquehanna will not
necessarily validate that they are Year 2000 compliant. However, for any
insignificant vendor who responds that they will not be compliant by December
31, 1998, Susquehanna will seek a new vendor or system that is compliant. For
large commercial loan customers, Susquehanna will take appropriate action based
upon the customer's response.
Susquehanna will utilize both internal and external resources to reprogram,
or replace, and test its software and hardware for Year 2000 modifications.
Concurrent with the Year 2000 project, Susquehanna will also be converting all
its major data processing systems, both hardware and software, to current
technology. Susquehanna plans to complete both the Year 2000 and systems
conversion projects within eighteen months, or no later than June 30, 1999, for
all critical systems. The total cost of the Year 2000 and systems conversion
projects is estimated at $10 million. Of the total project's cost, approximately
$7 million is attributable to the purchase of new software and hardware which
will be capitalized. The remaining $3 million will be expensed as incurred over
the next eighteen months. These costs are not expected to have a material effect
on the results of operations of Susquehanna.
The costs of the projects and the date on which Susquehanna plans to complete
both the Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party modification plans, and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Summary of 1996 Compared to 1995
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1996 and
1995. These transactions are described in the following paragraphs.
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. ("Reisterstown") on April 21, 1995, and retire $10 million in
short-term borrowings. The balance of the proceeds were used for general
corporate purposes.
On April 1, 1995, Susquehanna completed the acquisition of Atlanfed Bancorp,
Inc. ("Atlanfed"), issuing 1,199,333 common shares (prior to Susquehanna's stock
split) for all of Atlanfed's outstanding shares. Total assets of Atlanfed at the
acquisition date were $255 million. Deposits totaled $179 million; loans
outstanding were $189 million; and stockholders' equity was $22.6 million. The
transaction was treated as a pooling-of-interests and Susquehanna's financial
results for all reported periods are restated to include Atlanfed's financial
results.
On April 21, 1995, Susquehanna completed acquisition of Reisterstown.
acquiring all of the assets and assuming all the liabilities of Reisterstown for
$28.6 million. Accordingly, the transaction was treated under the purchase
method of accounting, whereby all the financial results are included with
Susquehanna from April 21 forward. The loans acquired totaled $201 million,
total assets were $248 million, and deposits were $210 million. The excess
purchase price of $12.7 million will be amortized over 15 years.
On December 22, 1995, Susquehanna closed a public common equity offering of
1,300,000 shares (prior to the stock split) at $26.50 per share, netting $32.6
million after
38
<PAGE>
- -------------------------------------------------------------------------------
underwriting commissions and expenses. The proceeds from the offering were used
as part of the purchase price to acquire Fairfax Financial Corporation
("Fairfax").
On January 2,1996, the underwriters exercised their 15% over-allotment
option, and another 195,000 shares (prior to Susquehanna's stock split) of
Susquehanna's common stock were issued to the public. The net proceeds to
Susquehanna after underwriting commissions were $4.9 million and were used as
part of the purchase price to acquire Fairfax.
On January 29, 1996, Susquehanna issued $35 million of 6.30% senior notes due
2003. The proceeds of this issuance were used to partially fund the purchase of
Fairfax and for general corporate purposes.
On February 1, 1996, Susquehanna acquired all of the assets and assumed all
the liabilities of Fairfax for $62.7 million. Accordingly, the transaction was
treated under the purchase method of accounting. Assets acquired were $455
million; loans acquired were $402 million; and deposits acquired were $396
million. The excess purchase price of $21.4 million will be amortized over 15
years.
In the third quarter of 1996, Susquehanna's earnings were significantly
affected by a one-time special charge assessed by the federal government to
recapitalize the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). All U.S. banks and thrifts with deposits
insured by SAIF were assessed a one-time charge of 65.7 cents per $100 of
deposits. Susquehanna's assessment was $5.5 million before taxes. The assessment
reflects SAIF deposits held by three affiliated thrifts in Maryland and one
affiliated bank in Pennsylvania. However, going forward, annual SAIF deposit
premiums for well-capitalized institutions will be reduced from 23 cents per
$100 of deposits to 6.44 cents per $100 of deposits, and in the year 2000, when
the Bank Insurance Fund and SAIF are combined, the annual premium will be
reduced to 2.43 cents per $100 of deposits. These reductions result in a pay-
back period of approximately four years to recover the one-time special
assessment.
Susquehanna's net income for the year ended December 31, 1996, increased to
$31.2 million, or 10% above 1995 net income of $28.3 million, despite a one-time
special pre-tax charge of $5.5 million assessed by the federal government to
recapitalize the SAIF of the FDIC in the third quarter of 1996. Excluding the
SAIF special charge, net income would have increased 22%, from $28.3 million in
1995 to $34.5 million in 1996.
Basic earnings per common share were $1.42 ($1.57 adjusted for the SAIF
special charge) in 1996 compared to $1.43 in 1995. Excluding the SAIF special
charge, ROA and ROE increased from 1.07% and 11.34%, respectively, in 1995 to
1.16% and 13.90%, respectively, in 1996.
During 1995 and 1996, Susquehanna acquired Reisterstown Federal Savings Bank
and Fairfax Savings Bank under the purchase method of accounting. These purchase
transactions created goodwill of $34 million which significantly affects
Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash
charge to earnings.
For 1996, tangible net income, earnings per share, ROA, and ROE were $34.0
million, $1.55, 1.06%, and 12.66%, respectively, compared to actual net income,
earnings per share, ROA, and ROE of $31.2 million, $1.42, 0.96%, and 10.25%,
respectively. Tangible net income, earnings per share, ROA, and ROE for 1996,
excluding the SAIF special charge, were $37.3 million, $1.70, 1.16%, and 13.90%,
respectively, compared to 1995 tangible net income, earnings per share, ROA, and
ROE of $29.5 million, $1.50, 1.12%, and 12.63%, respectively. Tangible net
income is actual net income increased by the tax-effected amortization of those
intangible assets which are deducted from equity in determining Tier 1 capital.
The $2.9 million, or 10%, increase in net income from $28.3 in 1995 to $31.2
million in 1996 was primarily the result of the Fairfax and Reisterstown
acquisitions and lower commercial bank FDIC insurance premiums offset by the
one-time SAIF special assessment.
39
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The following consolidated financial statements of Susquehanna are
submitted herewith:
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
Consolidated Balance Sheets at December 31, 1997 and 1996............................... 41
Consolidated Statements of Income for the years ended
December 31, 1997, 1996, and 1995................................................ 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995................................................ 43
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996, and 1995............................ 44
Notes to Consolidated Financial Statements............................................. 45 - 60
Report of Independent Accountants...................................................... 61
Summary of Quarterly Financial Data.................................................... 62
</TABLE>
40
<PAGE>
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
December 31 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 97,341 $ 106,840
Short-term investments 41,850 103,125
Investment securities available-for-sale 573,576 532,748
Investment securities held-to-maturity (Fair values of $83,983 and $127,021) 83,102 126,022
Loans and leases, net of unearned income 2,569,613 2,349,776
Less: Allowance for loan and lease losses 34,550 33,800
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 2,535,063 2,315,976
- ------------------------------------------------------------------------------------------------------------------------------------
Premises & equipment (net) 47,185 43,931
Accrued income receivable 22,234 21,824
Other assets 124,536 84,651
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $3,524,887 $3,335,117
====================================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 351,943 $ 337,651
Interest-bearing 2,499,274 2,416,467
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 2,851,217 2,754,118
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 103,323 100,650
Long-term debt 181,888 120,368
Other liabilities 41,721 46,685
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,178,149 3,021,821
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 18)
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: 22,585,416 and 14,665,471 at December 31, 1997 and
1996, respectively 45,171 29,331
Surplus 77,519 85,165
Retained earnings 220,491 197,765
Unrealized gains for available-for-sale securities, net of taxes of
$2,381 and $709 at December 31, 1997 and 1996, respectively 3,712 1,190
Less: Treasury stock (30,454 and 20,303 common shares at cost
at December 31, 1997 and 1996, respectively) 155 155
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 346,738 313,296
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $3,524,887 $3,335,117
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
41
<PAGE>
- --------------------------------------------------------------------------------
Susquehanna Banchares, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands except per share
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest & fees on loans and leases $221,762 $207,745 $163,862
Interest on investment securities 38,751 40,830 39,215
Interest on short-term investments 3,587 4,078 3,473
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 264,100 252,653 206,550
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 103,275 100,611 79,255
Interest on short-term borrowings 4,323 3,287 3,436
Interest on long-term debt 10,849 9,156 7,153
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 118,447 113,054 89,844
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 145,653 139,599 116,706
Provision for loan and lease losses 4,557 4,807 5,164
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 141,096 134,792 111,542
- -----------------------------------------------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 6,644 6,288 5,577
Other service charges, commissions, and fees 3,511 2,368 1,294
Income from fiduciary-related activities 3,675 3,248 2,974
Gain on sale of mortgages 2,820 3,349 804
Other operating income 6,962 6,780 6,397
Investment security gains/(losses) 142 190 90
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income 23,754 22,223 17,136
- -----------------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 57,451 55,107 46,070
Net occupancy expense 7,742 7,698 6,369
Furniture and equipment expense 5,537 5,512 4,571
FDIC insurance 738 7,178 2,980
Other operating expenses 34,560 35,046 28,326
- -----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 106,028 110,541 88,316
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 58,822 46,474 40,362
Provision for income taxes 18,620 15,291 12,110
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 40,202 $ 31,183 $ 28,252
===================================================================================================================================
Per share information:
Basic earnings $ 1.81 $ 1.42 $ 1.43
Diluted earnings 1.80 1.42 1.43
Cash dividends 0.82 0.78 0.73
Average shares outstanding:
Basic 22,257 21,938 19,708
Diluted 22,330 21,944 19,708
===================================================================================================================================
</TABLE>
Prior year's amounts adjusted for the three-for-two stock split in July 1997.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dollars in thousands
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 40,202 $ 31,183 $ 28,252
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion 11,081 10,875 9,895
Provision for loan and lease losses 4,557 4,807 5,164
Deferred taxes 4,600 216 (410)
Loss/(gain) on securities transactions (142) (190) (90)
Gain on sale of loans (2,820) (3,534) (1,564)
Loss/(gain) on sale of other real estate (328) (300) (287)
Mortgage loans originated for resale (155,138) (204,986) (73,117)
Sale of mortgage loans originated for resale 150,932 204,819 101,731
(Increase)/decrease in accrued interest receivable (410) (330) (199)
Increase/(decrease) in accrued interest payable 2,212 948 138
(Decrease)/increase in accrued expenses and taxes payable (1,757) 2,584 1,706
Change in fiscal year of pooled entity -- -- (381)
Other, net (974) (395) 1,469
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 52,015 45,697 72,307
- ----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from the sale of available-for-sale securities 64,369 42,107 47,186
Proceeds from the maturity of investment securities 248,884 189,044 174,912
Purchase of available-for-sale securities (287,123) (149,602) (188,061)
Purchase of held-to-maturity securities (1,373) (26,423) (25,950)
(Increase)/decrease in loans and leases (144,582) (109,610) (99,206)
Capital expenditures (7,142) (7,469) (7,277)
Net cash and cash equivalents acquired in acquisition 3,579 (31,298) (17,517)
Purchase of Bank-Owned Life Insurance (50,000) -- --
Change in fiscal year of pooled entity -- -- 81
Other, net -- 256 107
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (173,388) (92,995) (115,725)
- ----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase/(decrease) in deposits 7,517 22,151 79,493
Net increase/(decrease) in short-term borrowings 2,673 31,218 (13,859)
Proceeds from issuance of long-term debt 75,000 40,000 55,122
Repayment of long-term debt (17,355) (18,366) (19,439)
Proceeds from issuance of common stock 619 5,945 33,543
Dividends paid (17,812) (15,855) (12,859)
Change in fiscal year of pooled entity -- -- 177
Other, net (43) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used for)/provided by financing activities 50,599 65,093 122,178
- ----------------------------------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (70,774) 17,795 78,760
Cash and cash equivalents at January 1 209,965 192,170 113,410
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $139,191 $ 209,965 $ 192,170
==================================================================================================================================
Cash and cash equivalents:
Cash and due from banks $ 97,341 $ 106,840 $ 94,816
Short-term investments 41,850 103,125 97,354
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $139,191 $ 209,965 $ 192,170
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Years Ended December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
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, 1995 $ -- $26,294 $49,555 $ 167,425 $(8,137) $ (373) $234,764
Net income 28,252 28,252
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
Unrealized gain on securities 11,257 11,257
Cash dividends declared:
By pooled entity (381) (381)
Per common share of $0.73 (12,478) (12,478)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- 28,910 79,809 182,437 3,076 (323) 293,909
Net income 31,183 31,183
Stock issued under employee benefit plans 31 810 168 1,009
Stock issued in public offering 390 4,546 4,936
Change in unrealized gain on securities (1,886) (1,886)
Cash dividends declared:
By pooled entity (455) (455)
Per common share of $0.78 (15,400) (15,400)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- 29,331 85,165 197,765 1,190 (155) 313,296
Net income 40,202 40,202
Stock issued under employee benefit plans 50 569 619
Effect of three-for-two stock split 14,669 (14,707) (38)
Acquisition of Founders' Bank 1,121 6,497 336 (194) 7,760
Change in unrealized gain on securities 2,716 2,716
Cash paid for fractional shares of
acquired entities (5) (5)
Cash dividends declared:
By pooled entity (113) (113)
Per common share of $0.82 (17,699) (17,699)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $-- $45,171 $77,519 $220,491 $3,712 $ (155) $346,738
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
Common Shares Outstanding Common
Stock
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 13,098,066
Stock issued under employee benefit plans 14,758
Stock issued in public offering 1,300,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 14,412,824
Stock issued under employee benefit plans 37,344
Stock issued in public offering 195,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 14,645,168
Stock issued under employee benefit plans 24,997
Effect of three-for-two stock split 7,324,443
Acquisition of Founders' Bank 560,354
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 22,554,962
==================================================================================================================================
</TABLE>
Dividends per share have been adjusted to reflect the three-for-two stock split.
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
(Dollars in thousands, except as noted and per share data)
- --------------------------------------------------------------------------------
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"), Susquehanna Bancshares East, Inc. and subsidiaries ("Susquehanna
East"), Susquehanna Bancshares South, Inc. and subsidiaries ("Susquehanna
South"), Susque-Bancshares Life Insurance Co. ("SBLIC") and Susque-Bancshares
Leasing Company, Inc. and subsidiary ("SBLC"), as of and for the years ended
December 31, 1997, 1996, and 1995. 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 eight commercial banks and one savings bank based upon the sound
principles of super-community banking. These subsidiaries provide financial
services from 124 branches located in central and south-central Pennsylvania,
central and western Maryland, and southern New Jersey. 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
materially 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 $35,530 and $37,821 at December
31, 1997 and 1996, 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 S116,235 in 1997, $112,106 in 1996, and
$86,706 in 1995. Income taxes paid were $16,434 in 1997, $14,304 in 1996, and
$12,172 in 1995. Amounts transferred to other real estate owned were $5,408 in
1997, $7,747 in 1996, and $5,489 in 1995.
On April 21, 1995, Susquehanna acquired Reisterstown Holdings, Inc.,
Reisterstown, Md., for $28,640. At the time of the acquisition, loans acquired
were $201,182; investment securities, $26,798; and deposits, $209,819.
On February 1,1996, Susquehanna acquired Fairfax Financial Corporation,
Baltimore, Md., for $62,725. At the time of the acquisition, loans acquired were
$401,658; investment securities, $19,467; and deposits, $396,390.
On July 30, 1997, Susquehanna acquired Founders' Bank, Bryn Mawr, Pa., using
the pooling-of-interests method. Results of operations for Founders' prior to
the acquisition were not significant to Susquehanna's consolidated results and
therefore, prior periods were not restated.
Investment Securities. Susquehanna classifies debt and equity securities as
either "held-to-maturity" or "available-for-sale." Susquehanna does not have any
securities classified as "trading" at December 31, 1997 or 1996. Investments for
which management has the intent and Susquehanna has the ability to hold to
maturity are carried at the lower of cost or market adjusted for amortization of
premium and accretion of discount. Amortization and accretion are calculated
principally on the interest method. 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 and Lease Losses. The loan and lease 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 and lease portfolio. Loan and lease losses are
charged directly against the
45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
allowance for loan and lease losses, and recoveries on previously charged-off
loan and leases are added to the allowance.
Susquehanna adopted Statement of Financial Accounting Standard No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by Number 118, on
January 1, 1996 (collectively "the Statements"). The adoption of the Statements
did not have a material effect on Susquehanna's allowance for loan and lease
losses or result in an additional provision for loan and lease losses at January
1, 1995. Susquehanna considers a loan to be impaired. based upon current
information and events, if it is probable that Susquehanna will be unable to
collect the scheduled payments of principle or interest according to the
contractual terms of the loan agreement. Larger groups of small-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 Susquehanna's loan portfolio 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.
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.
Depreciable Assets. Buildings, leasehold improvements, and furniture and
equipment are stated at cost less accumulated 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.
Long-lived assets and certain intangible assets are evaluated for impairment
using guidance provided by Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"), which was adopted on January 1, 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. Adoption of SFAS 121 had no effect on Susquehanna's financial
condition or results of operations, as Susquehanna has historically applied the
principles of SFAS 121 to its financial statements and notes.
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 and Leases. 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 method and the
actuarial method. 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 loan is not well collateralized and in the
process of collection 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.
Susquehanna does not accrue interest on impaired loans. While a loan is
considered impaired or on nonaccrual status, 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. Deferred income taxes reflect the temporary tax
consequences on future years of differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the difference is expected to reverse.
Mortgage Servicing Rights. On January 1, 1996, Susquehanna adopted the
provisions of Statement of 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. SFAS 122 did
46
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
not have a material effect on Susquehanna's financial condition or results of
operations.
Stock Option Plan. On January 1,1996, Susquehanna adopted the provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires a fair-value based method of
accounting for stock options or an intrinsic-value-based method with
fair-value-based pro forma disclosures. Susquehanna has elected the
intrinsic-value-based method, but had Susquehanna elected the fair-value-based
method, it would not have had a material effect on Susquehanna's financial
condition or results of operations.
Earnings Per Share. Susquehanna has adopted Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS 128"), in 1997. SFAS 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
This statement replaces the presentation of primary and fully diluted earnings
per share with basic and diluted earnings per share.
On May 29, 1997, Susquehanna announced a three-for-two stock split in the
form of a 50% stock dividend on its common stock. The stock split was
distributed on July 2, 1997, to common shareholders of record June 10, 1997. All
share, per share, and option data in these financial statements have been
adjusted to give effect to the stock split.
Recent Accounting Pronouncements. The Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" ("SFAS 130") was adopted in 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components, which includes all changes in stockholders' equity during a
period except those resulting from investments by owners and distributions to
owners. SFAS 130 is effective for fiscal years beginning after December 15,
1997. As SFAS 130 is for disclosure purposes only, the adoption of SFAS 130 will
not have a material effect on Susquehanna's financial condition or results of
operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"), in 1997. SFAS 131 establishes standards for
disclosures about products, services, geographic areas, and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Adoption of SFAS 131 will not have a material effect on Susquehanna's financial
condition or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 132, "Employers' Disclosure About Pensions and other
Post-retirement Benefits" ("SFAS 132"), in January 1998. SFAS 132 revises
current note disclosure requirements for employers' pensions and other retiree
benefits. It does not address recognition or measurement issues. SFAS 132 is
effective for fiscal years beginning after December 15, 1997. Adoption of SFAS
132 will not have a material effect on Susquehanna's financial condition or
results of operations.
- --------------------------------------------------------------------------------
2. Completed Acquisitions
On February 28, 1997, Susquehanna completed the acquisition of ATCORP, Inc.
("AI"), a New Jersey bank holding company with $210 million in assets and $186
million in deposits at the acquisition date. Susquehanna issued one share (prior
to the split) of common stock to the shareholders of AI for each of the 771,750
outstanding common shares of AI. The transaction was accounted for under the
pooling-of-interests method of accounting; accordingly, the consolidated
financial statements have been restated to include the consolidated accounts of
AI for all periods presented.
Also on February 28, 1997, Susquehanna completed the acquisition of Farmers
Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in assets
and $77 million of deposits at the acquisition date. Susquehanna issued 692,398
shares of common stock (prior to the split) to the shareholders of FBC, based on
an exchange ratio of 2.281 shares (prior to the split) of Susquehanna common
stock for each outstanding share of FBC.
The transaction was accounted for under the pooling-of-interests method of
accounting; accordingly, the consolidated financial statements have been
restated to include the consolidated accounts of FBC for all periods presented.
Previously reported information has been restated as follows:
47
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Susquehanna Al FBC Susquehanna
As Reported As Reported As Reported Restated
Net interest income $128,697 $7,251 $3,651 $139,599
Provision for loan and lease losses 4,599 163 45 4,807
Other income 21,344 645 234 22,223
Other expense 100,816 7,007 2,718 110,541
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 44,626 726 1,122 46,474
Taxes 14,650 285 356 15,291
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 29,976 $ 441 $ 766 $ 31,183
==================================================================================================================================
Earnings per share: Basic $ 1.52 $ 1.42
Diluted $ 1.52 $ 1.42
Average shares outstanding: Basic 19,741 1,158 1,039 21,938
Diluted 19,747 1,158 1,039 21,944
- ----------------------------------------------------------------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------------------------------------------------------------
Susquehanna AI FBC Susquehanna
As Reported As Reported As Reported Restated
Net interest income $107,209 $5,909 $3,588 $116,706
Provision for loan and lease losses 4,994 115 55 5,164
Other income 16,080 809 247 17,136
Other expense 80,911 5,189 2,216 88,316
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 37,384 1,414 1,564 40,362
Taxes 11,367 360 383 12,110
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 26,017 $1,054 $1,181 $ 28,252
==================================================================================================================================
Earnings per share: Basic $ 1.49 $ 1.43
Diluted $ 1.49 $ 1.43
Average shares outstanding: Basic 17,511 1,158 1,039 19,708
Diluted 17,511 1,158 1,039 19,708
</TABLE>
On July 30, 1997, Susquehanna completed its acquisition of Founders' Bank, Bryn
Mawr, Pa., ("Founders' "). Under the terms of the agreement, Susquehanna issued
560,354 shares of common stock to the shareholders of Founders' based on
exchange ratio of 0.566 shares of Susquehanna common stock for each share of
Founders' outstanding capital stock. The transaction was accounted for under the
pooling-of-interests method of accounting. At the time of the acquisition,
Founders' reported total assets of $103 million. Results of operations for
Founders' prior to the acquisition were not significant to Susquehanna's
consolidated financial statements, and accordingly, Susquehanna's prior period
consolidated financial statements have not been restated for Founders'.
- --------------------------------------------------------------------------------
3. Short-Term Investments
The book value of short-term investments and weighted average interest rates on
December 31, 1997 and 1996 were as follows:
1997 1996
- ----------------------------------------------------------------
Book Book
Value Rates Value Rates
Interest-bearing deposits
in other banks $14,109 5.53% $ 26,973 6.63%
Federal funds sold 18,576 6.22 46,873 6.28
Commercial paper -- -- 24,993 5.32
Money market funds 9,165 5.17 4,286 5.08
--------------------------------------------------------------
Total $41,850 $103,125
==============================================================
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Investment Securities
The amortized cost and fair values of investment securities at December 31, 1997
and 1996, are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury $118,972 $ 692 $ 40 $119,624
U.S. Government agencies 231,410 1,071 243 232,238
State and municipal 31,470 733 3 32,200
Corporate debt securities 72,136 549 13 72,672
Mortgage-backed securities 91,695 559 78 92,176
Equity securities 21,800 2,868 2 24,666
- ---------------------------------------------------------------------------------------------------
$567,483 $6,472 $ 379 $573,576
- ---------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 750 $ 0 $ 0 $ 750
U.S. Government agencies 0 0 0 0
State and municipal 75,882 896 39 76,739
Corporate debt securities 50 0 0 50
Mortgage-backed securities 6,420 24 0 6,444
- ---------------------------------------------------------------------------------------------------
$ 83,102 $ 920 $ 39 $ 83,983
- ---------------------------------------------------------------------------------------------------
Total investment securities $650,585 $7,392 $ 418 $657,559
===================================================================================================
At December 31, 1996
- ---------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $171,898 $ 653 $ 310 $172,241
U.S. Government agencies 128,258 537 552 128,243
State and municipal 9,504 180 4 9,680
Corporate debt securities 86,398 783 51 87,130
Mortgage-backed securities 114,215 389 1,120 113,484
Equity securities 20,576 1,404 10 21,970
- ---------------------------------------------------------------------------------------------------
$530,849 $3,946 $2,047 $532,748
- ---------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 1,493 $ 0 $ 0 $ 1,493
U.S. Government agencies 2,486 2 49 2,439
State and municipal 104,815 1,117 144 105,788
Corporate debt securities 190 1 0 191
Mortgage-backed securities 17,038 209 137 17,110
- ---------------------------------------------------------------------------------------------------
$126,022 $1,329 $ 330 $127,021
- ---------------------------------------------------------------------------------------------------
Total investment securities $656,871 $5,275 $2,377 $659,769
===================================================================================================
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, investment securities with a carrying value of
$285,881 and $180,173, respectively, 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, 1997 or 1996.
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, 1997, 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.
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
Securities Available-for-Sale:
Within one year $113,399 $113,604
After one year but within
five years 341,640 343,403
After five years but within
ten years 42,288 42,840
After ten years 48,356 49,063
- -------------------------------------------------------------------------------
545,683 548,910
- -------------------------------------------------------------------------------
Securities Held-to-Maturity:
Within one year 18,743 18,779
After one year but within
five years 57,914 58,690
After five years but within
ten years 1,136 1,155
After ten years 5,309 5,359
- -------------------------------------------------------------------------------
83,102 83,983
- -------------------------------------------------------------------------------
Total debt securities $628,785 $632,893
===============================================================================
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 1997, 1996, and 1995, 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.
- --------------------------------------------------------------------------------
Available-for-sale Held-to-maturity
- --------------------------------------------------------------------------------
For the year ended December 31, 1997
Gross gains $267 $ 1
Gross losses 123 3
- -------------------------------------------------------------
Net gains $144 $(2)
=============================================================
- --------------------------------------------------------------------------------
For the year ended December 31, 1996
Gross gains $205 $ 1
Gross losses 14 2
- -------------------------------------------------------------
Net gains $191 $(1)
=============================================================
- --------------------------------------------------------------------------------
For the year ended December 31, 1995
Gross gains $167 $15
Gross losses 89 3
- -------------------------------------------------------------
Net gains $78 $12
- -------------------------------------------------------------
Interest earned on investment securities for the years ended December 31 was
as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
Taxable $33,708 $35,376 $33,375
Tax-advantaged 5,043 5,454 5,840
- -------------------------------------------------------------
Total $38,751 $40,830 $39,215
=============================================================
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. Loans and Leases
At December 31, loans and leases, net of unearned income ($23,353 at December
31, 1997, and $20,507 at December 31, 1996), were as follows:
- --------------------------------------------------------------------
1997 1996
Commercial, financial,
and agricultural $ 303,587 $ 249,886
Real estate--construction 225,971 226,920
Real estate--mortgage 1,664,240 1,539,898
Consumer 311,393 278,527
Leases 64,422 54,545
- ----------------------------------------------------------------
Total $2,569,613 $2,349,776
================================================================
At December 31, 1996, real estate-mortgage loans included a $6.4 million
restructured loan. Susquehanna had no outstanding commitment to advance
additional funds on this loan. During 1997, the loan returned to a market rate
of interest and was removed from restructured loan status.
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 1997,
1996, and 1995 follows:
- --------------------------------------------------------------------
1997 1996 1995
Balance--January 1 $28,509 $34,466 $23,272
Additions 8,798 19,071 19,213
Deductions:
Amounts collected 11,031 23,190 14,920
Other Changes (2,419) (1,838) 6,901
- -----------------------------------------------------------------
Balance--December 31 $23,857 $28,509 $34,466
=================================================================
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, and Maryland. Susquehanna has no
concentration of loans to borrowers in any one industry, or related industry,
which exceeds 10% of total loans with the exception of housing developments.
An analysis of impaired loans at December 31, 1997 and 1996, is presented
as follows:
- --------------------------------------------------------------------
1997 1996
Impaired loans without a related reserve $11,070 $10,105
Impaired loans with a reserve 1,814 4,255
- ----------------------------------------------------------------
Total impaired loans $12,884 $14,360
================================================================
Reserve for impaired loans $269 $636
================================================================
An analysis of impaired loans for the years ended December 31, 1997 and 1996,
is presented as follows:
- --------------------------------------------------------------------
1997 1996
Average balance of impaired loans $13,790 $14,183
Interest income on impaired loans
(cash basis) 376 374
- --------------------------------------------------------------------------------
6. Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses were
as follows:
- --------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
Balance--January 1 $33,800 $29,277 $25,410
Allowance acquired in
business combination 1,460 4,229 3,323
Change in fiscal year -- -- (8)
Provision charged to
operating expenses 4,557 4,807 5,164
- -----------------------------------------------------------------
39,817 38,313 33,889
- -----------------------------------------------------------------
Charge-offs (6,552) (6,063) (5,867)
Recoveries 1,285 1,550 1,255
- -----------------------------------------------------------------
Net charge-offs (5,267) (4,513) (4,612)
- -----------------------------------------------------------------
Balance--December 31 $34,550 $33,800 $29,277
=================================================================
51
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. Premises and Equipment
Property, buildings, and equipment, at December 31, were as follows:
- ---------------------------------------------------------------------
1997 1996
Land $ 7,550 $ 6,282
Buildings 38,381 35,371
Furniture and equipment 43,328 36,826
Leasehold improvements 6,228 5,223
Land improvements 980 2,191
- ---------------------------------------------------------------
96,467 85,893
- ---------------------------------------------------------------
Less: accumulated depreciation
and amortization 49,282 41,962
- ---------------------------------------------------------------
$47,185 $43,931
===============================================================
Depreciation and amortization expense charged to operations amounted to
$5,132 in 1997, $4,746 in 1996, and $4,153 in 1995.
All subsidiaries lease certain banking branches and equipment under
operating leases which expire on various dates through 2011. Renewal options are
available for periods up to 20 years. Minimum future rental commitments under
non-cancellable leases, as of December 31, 1997, are as follows:
- ---------------------------------------------------------------------
Operating Leases
1998 $ 2,560
1999 1,656
2000 1,172
2001 943
2002 825
Subsequent years 3,627
- -----------------------------------------------------
$10,783
=====================================================
Total rent expense charged to operations amounted to $2,678 in 1997, $2,384
in 1996, and $1,747 in 1995.
- --------------------------------------------------------------------------------
8. Deposits
Deposits at December 31 were as follows:
- ---------------------------------------------------------------------
1997 1996
Non-interest-bearing:
Demand $ 351,943 $ 337,651
Interest-bearing:
Interest-bearing demand 802,130 757,103
Savings 424,715 432,253
Time 1,108,205 1,089,189
Time of $100 or more 164,224 137,922
- ---------------------------------------------------------------
Total deposits $2,851,217 $2,754,118
===============================================================
- --------------------------------------------------------------------------------
9. Short-Term Borrowings
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements $81,351 4.90% $58,516 4.86%
Treasury tax and loan notes 9,472 4.92 5,634 4.92
Federal funds purchased 8,500 7.25 5,000 7.25
Federal Home Loan Bank borrowings 4,000 6.01 31,500 5.00
- --------------------------------------------------------------------------------------------------------------
$103,323 $100,650
==============================================================================================================
</TABLE>
Under an agreement with the Federal Home Loan Bank, Susquehanna subsidiary
banks and savings bank have a line of credit available to them totaling $516
million and $435 million, of which $96 million and $62 million was outstanding
at December 31, 1997 and 1996, respectively.
52
<PAGE>
- --------------------------------------------------------------------------------
10. Long-Term Debt
Long-term debt at December 31 was as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Farmers:
Installment note due June 2,1999 $ 28 9.00% $ 45 9.00%
Federal Home Loan Bank borrowings due
July 11, 2011 35,000 5.87 -- --
SBLC:
Term note due July 19, 1998 5,000 7.51 5,000 7.51
Susquehanna East:
Federal Home Loan Bank borrowings due
June 15, 1999 3,000 6.30 5,000 5.54
Susquehanna South:
Federal Home Loan Bank borrowings due at
various dates through 2003 53,340 5.63 24,795 6.71
Term loan note due September 1, 2014 520 5.00 528 5.00
Susquehanna:
Subordinate notes due February 2005 50,000 9.00 50,000 9.00
Senior notes due February 2003 35,000 6.30 35,000 6.30
- -------------------------------------------------------------------------------------------------
$181,888 $120,368
=================================================================================================
</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.
SBLC's notes are payable with interest-only payments being made until
maturity. These notes are guaranteed by Susquehanna.
Susquehanna subsidiaries' Federal Home Loan Bank debt is under a blanket
floating lien security with the FHLB of Atlanta and Pittsburgh. Susquehanna
subsidiaries are required to maintain as collateral for all borrowings certain
amounts of qualifying first mortgage loans. In addition, all of the
subsidiaries' stock in the FHLB of Atlanta and Pittsburgh is pledged as
collateral for such debt.
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 for general corporate
purposes.
On January 29, 1996, Susquehanna issued $35 million of its 6.30% senior notes
due 2003. The proceeds were used for acquisitions and general corporate
purposes.
53
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11. Income Taxes
The components of the provision for income taxes are as follows:
- ----------------------------------------------------------------
1997 1996 1995
Current $14,020 $15,075 $12,520
Deferred 4,600 216 (410)
- ---------------------------------------------------------------
Total $18,620 $15,291 $12,110
===============================================================
The provision for income taxes differs from the amount derived from applying the
statutory income tax rate to income before income taxes as follows:
- ----------------------------------------------------------------
1997 1996 1995
Provision at statutory rates $20,588 $16,254 $14,237
Tax-advantaged income (2,787) (2,966) (3,078)
Other, net 819 2,003 951
- ---------------------------------------------------------------
Total $18,620 $15,291 $12,110
===============================================================
Susquehanna accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"), which requires the 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.
The components of the net deferred tax asset as of December 31 were as
follows:
- ----------------------------------------------------------------
1997 1996 1995
Deferred tax assets:
Reserve for loan losses $12,579 $11,631 $ 8,813
Loan fee income 817 1,496 1,332
Accrued pension expense 1,514 1,679 1,506
Deferred directors' fees 760 744 690
Deferred compensation 177 180 234
Nonaccrual loan interest 1,008 1,463 1,504
Core deposit intangible 490 (179) (167)
Other assets 1,065 1,066 1,627
Deferred tax liabilities:
FHLB stock dividends (395) (330) (429)
Premises and equipment (2,164) (1,707) (1,512)
Operating lease income, net (4,731) (2,340) (563)
Purchase accounting (519) (819) (999)
Recapture of savings banks'
bad debt reserve (1,016) (1,058) --
Unrealized investment
gains and losses (2,381) (709) (1,712)
Other liabilities (303) (319) (372)
- ---------------------------------------------------------------
Net deferred income tax assets $ 6,901 $10,798 $ 9,952
===============================================================
- --------------------------------------------------------------------------------
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
reflects 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.
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 customer's creditworthiness
on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by Susquehanna upon
extension of credit, is based on management's credit evaluation of the borrower.
Financial instruments with off-balance sheet risk at December 31, 1997 and
1996, are as follows:
- ---------------------------------------------------------------
Contractual 1997 1996
Financial instruments whose contract
amounts represent credit risk:
Standby letters of credit $ 30,228 $ 31,305
Commitments to originate loans 76,225 66,929
Unused portion of home equity
and credit card lines 165,669 150,983
Other unused commitments,
principally commercial
lines of credit 335,180 349,575
54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13. Fair Value of Financial Instruments
As required by Statement of Financial Accounting Standard 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 nonfinancial 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 these liabilities mature in
less than six months.
Long-Term Debt. Fair values were based upon quoted rates of similar
instruments, issued by banking companies with similar credit ratings.
Off Balance Sheet Items. The fair value of unused commitments to lend and
standby letters 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:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and due from banks $ 97,341 $ 97,341 $ 106,840 $ 106,840
Short-term investments 41,850 41,850 103,125 103,125
Investment securities 656,678 657,559 658,770 659,769
Loans, net of unearned income
and allowance 2,471,285 2,509,037 2,262,528 2,302,623
Liabilities:
Deposits 2,851,217 2,860,072 2,754,118 2,754,204
Short-term borrowings 103,323 103,323 100,650 100,650
Long-term debt 181,888 186,720 120,368 124,327
55
<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:
- -------------------------------------------------------------------
Year ended December 31 1997 1996 1995
Service cost-benefits earned
during the period $ 1,959 $ 2,487 $ 1,672
Interest cost on projected
benefit obligation 2,215 2,362 1,963
Actual (gain)/loss on plan
assets (5,569) (3,028) (196)
Net amortization and deferral 2,554 856 (1,587)
- ---------------------------------------------------------------
Pension expense of defined
benefit plans $ 1,159 $ 2,677 $ 1,852
===============================================================
- -------------------------------------------------------------------
At December 31
Discount rate 7.75% 7.00% 7.00%
Rate of increase in
compensation levels 4.50 5.00 5.00
Expected long-term rate of
return on assets 9.00 8.00 8.00
- ---------------------------------------------------------------
The effect of the actuarial assumption changes noted above was to reduce
the 1997 pension expense by $1,200.
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets for the defined benefit pension plan:
- -------------------------------------------------------------------
At December 31 1997 1996
Actuarial present value of vested
benefit obligation $27,570 $23,717
=================================================================
Actuarial present value of
accumulated benefit obligation $28,232 $24,200
=================================================================
Actuarial present value of projected
benefit obligation $35,549 $32,894
Plan assets at market value 37,483 31,582
- -----------------------------------------------------------------
Plan assets (greater than)/less than
projected benefit obligation (1,934) 1,312
Unrecognized net gain from past
experience different than that
assumed and effects of changes
in assumptions 7,109 4,128
Unrecognized prior service cost (795) (898)
Unrecognized net asset at January 1,
1987, being amortized over 15 years 359 440
- -----------------------------------------------------------------
Net pension liability recognized in
the balance sheet $4,739 $4,982
=================================================================
The plan assets were invested principally in U.S. Government securities and
listed stocks and bonds including 19,687 and 19,963 shares of Susquehanna common
stock at December 31, 1997 and 1996, respectively.
Susquehanna accrues the cost of post-retirement benefits during the
employees' credited service period and is amortizing the transition obligation
over a 20-year period. The net periodic benefit expense for 1997, 1996, and 1995
was $378, $547, and $452, 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 $981 in 1997, $878 in 1996, and $713 in 1995.
During 1996, Susquehanna terminated its Phantom Stock Appreciation Plan
("PSP"). Expense related to the PSP was $11 and $706, in 1996 and 1995,
respectively.
Susquehanna implemented a nonqualified Equity Compensation Plan (the
"Compensation Plan"), in 1996, under which Susquehanna may grant options to its
employees and directors for up to 975,000 shares of common stock. Under the
Compensation Plan, the exercise price of each option equals the market price of
the company's stock on the date of grant, and an option's maximum term is 10
years. Options are granted upon approval of the Board of Directors and typically
vest one-third at the end of years three, four, and five.
On January 1, 1996, Susquehanna adopted SFAS 123; and as permitted by SFAS
123, Susquehanna has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for the
Compensation Plan. Accordingly, no compensation cost has been recognized for
options granted under the Compensation Plan.
For purposes of disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
based upon the following assumptions noted on the next page.
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 260,263 $19.50 -- --
Granted 69,663 26.17 260,263 $19.50
Exercised 7,500 19.50 -- --
-------- --------
Outstanding at end of year 322,426 20.94 260,263 19.50
======== ========
Outstanding at end of year:
Granted 1996 252,763 19.50 260,263 19.50
Granted 1997 69,663 26.17 -- --
-------- --------
Outstanding at end of year 322,426 20.94 260,263 19.50
======== ========
Options exercisable at year-end:
Granted 1996 26,571 19.50 34,071 19.50
Granted 1997 38,163 26.17 -- --
-------- --------
Options exercisable at year-end 64,734 23.43 34,071 19.50
======== ========
Weighted average remaining contracted
maturity of options outstanding at year-end:
Granted 1996 8 years
Granted 1997 9 years
Total 8 years
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Dollars Per Share Dollars Per Share
<S> <C> <C> <C> <C>
Weighted-average fair value of options granted
during the year $468 $6.72 $1,226 $4.71
Fair value disclosures pro forma reduction of:
Net income $375 $ 184
Basic earnings per share $0.02 $0.01
Diluted earnings per share $0.02 $0.01
Weighted-average fair value assumptions:
Dividend yield 3.0% 3.0%
Expected volatility 20.0% 20.0%
Risk-free interest rate 6.7% 6.6%
Expected term 7 years 7 years
</TABLE>
57
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. Susquehanna Bancshares, Inc. (Parent Only) Condensed Balance Sheets
- --------------------------------------------------------------------------------
December 31 1997 1996
Assets
Cash in subsidiary bank $ 788 $ 600
Short-term investments 665 5,826
Investment in consolidated subsidiaries at equity in
net assets 419,970 391,343
Other investment securities 11,999 2,041
Premises and equipment (net) 96 60
Other assets 4,079 3,652
- --------------------------------------------------------------------------------
Total assets $437,597 $403,522
================================================================================
Liabilities
Long-term debt $ 85,000 $ 85,000
Accrued taxes and expenses payable 5,858 5,226
- --------------------------------------------------------------------------------
Total liabilities 90,858 90,226
- --------------------------------------------------------------------------------
Equity
Preferred stock (no par) -- --
Common stock ($2 par value) 45,171 29,331
Surplus 77,519 85,165
Retained earnings 220,491 197,765
Unrealized gain on available-for-sale securities, net 3,712 1,190
Less: Treasury stock at cost 155 155
- --------------------------------------------------------------------------------
Total stockholders' equity 346,738 313,296
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $437,596 $403,522
================================================================================
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Income
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
Income
Dividends from subsidiaries $28,042 $23,985 $17,912
Interest and dividends on investment securities 191 546 833
Interest and management fee from subsidiaries 4,115 3,601 1,398
- --------------------------------------------------------------------------------
Total income 32,348 28,132 20,143
- --------------------------------------------------------------------------------
Expenses
Service fees paid to subsidiary -- -- 946
Interest expense 6,861 6,684 4,339
Other expenses 4,088 3,091 2,408
- --------------------------------------------------------------------------------
Total expenses 10,949 9,775 7,693
- --------------------------------------------------------------------------------
Income before taxes, and equity in undistributed
income of subsidiaries 21,399 18,357 12,450
Income taxes (383) -- --
Equity in undistributed income of subsidiaries 18,420 12,826 15,802
- --------------------------------------------------------------------------------
Net Income $40,202 $31,183 $28,252
================================================================================
58
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
Operating Activities
Net income $ 40,202 $ 31,183 $ 28,252
Adjustment to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 158 182 195
Equity in undistributed income of
subsidiaries and income of subsidiaries
accrued not received (18,420) (12,826) (15,802)
Decrease/(increase) in other assets (548) (1,171) (721)
Increase/(decrease) in accrued expenses
payable 602 (55) 3,060
Other, net 30 (810) (451)
- --------------------------------------------------------------------------------
Net cash provided from operating activities 22,024 16,503 14,533
- --------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities (8,489) (29,987) (9,528)
Proceeds from the sale, maturities of investment
securities -- 29,987 9,760
Net cash paid in acquisition -- (62,700) (28,640)
Capital expenditures (72) (24) (15)
Net (infusion of)/repayment of investment in
subsidiaries (1,200) (9,400) (6,800)
- --------------------------------------------------------------------------------
Net cash provided from/(used for) investing
activities (9,761) (72,124) (35,223)
- --------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
Financing Activities:
(Decrease)/increase in short-term borrowings $ -- $ -- $(10,000)
Repayment of long-term debt -- -- (5,850)
Proceeds from issuance of long-term debt -- 35,000 50,000
Proceeds from issuance of common stock 619 5,945 33,543
Dividends paid (17,812) (15,855) (12,859)
Cash paid for fractional shares (43) -- --
- --------------------------------------------------------------------------------
Net cash provided from/(used for) financing
activities (17,236) 25,090 54,834
- --------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash
equivalents (4,973) (30,531) 34,144
Cash and cash equivalents at January 1 6,426 36,957 2,813
- --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 1,453 $ 6,426 $ 36,957
================================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 788 $ 600 $ 1,337
Short-term investments 665 5,826 35,620
- --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 1,453 $ 6,426 $ 36,957
================================================================================
59
<PAGE>
- --------------------------------------------------------------------------------
16. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings
per share for the years ended below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share:
Income available to common
stockholders $40,202 22,257 $1.81 $31,183 21,938 $1.42 $28,252 19,708 $1.43
Effect of Diluted Securities:
Incentive stock options
outstanding 73 6 0
------- ------- -------
Diluted Earnings per Share:
Income available to common
stockholders and assumed
conversion $40,202 22,330 $1.80 $31,183 21,944 $1.42 $28,252 19,708 $1.43
========================= ========================= =========================
</TABLE>
- --------------------------------------------------------------------------------
17. Regulatory Restrictions of Banking Subsidiaries
Susquehanna is limited by regulatory provisions in the amount it can receive in
dividends from its banking subsidiaries. Accordingly, at December 31, 1997,
$48,695 is available for dividend distribution to Susquehanna in 1998, from its
banking subsidiaries.
Included in cash and due from banks are balances required to be maintained
by subsidiary commercial and savings banks on deposit with the Federal Reserve.
The amounts of such reserves are based on percentages of certain deposit types
and totalled $6,429 and $14,174 at December 31, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
18. 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, and cash flows of Susquehanna, if disposed of unfavorably.
60
<PAGE>
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, 1997 and
1996, 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, 1997. 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 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, based on our audit and the report of other auditors, 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Harrisburg, Pennsylvania
January 26, 1998
61
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------
The unaudited quarterly results of operations for the years ended December 31,
1997 and 1996, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter ended Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $68,423 $67,332 $65,053 $63,292 $64,784 $64,094 $63,318 $60,457
Interest expense 31,425 30,494 28,555 27,973 28,515 28,617 28,743 27,179
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 36,998 36,838 36,498 35,319 36,269 35,477 34,575 33,278
Provision for loan and lease losses 1,150 981 1,220 1,206 1,190 1,165 1,406 1,046
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 35,848 35,857 35,278 34,113 35,079 34,312 33,169 32,232
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 6,773 6,076 5,575 5,330 5,598 5,439 5,950 5,236
Other expenses 26,388 26,226 27,620 25,794 28,045 31,713 26,048 24,735
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,233 15,707 13,233 13,649 12,632 8,038 13,071 12,733
Applicable income taxes 5,222 4,977 4,228 4,193 4,508 2,466 4,255 4,062
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $11,011 $10,730 $ 9,005 $ 9,456 $ 8,124 $ 5,572 $ 8,816 $ 8,671
====================================================================================================================================
Earnings per common share: Basic $ 0.49 $ 0.48 $ 0.41 $ 0.43 $ 0.37 $ 0.25 $ 0.40 $ 0.40
Diluted 0.49 0.48 0.40 0.43 0.37 0.25 0.40 0.40
</TABLE>
62
<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.
63
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of Susquehanna.
- ------- -----------------------------------------------
The information required by this Item is included in the
Corporation's proxy statement for its 1998 Annual Meeting of Shareholders (the
"1998 Proxy Statement") in the Election of Directors-Biographical Summaries of
Nominees and Continuing Directors section and in the Additional Information
section, each of which sections is incorporated herein by reference, and in Part
I of this Form 10-K under the heading "Executive Officers of the Registrant."
Item 11. Executive Compensation
- ------- ----------------------
The information required by this Item is included in the 1998 Proxy
Statement in the Directors' Compensation section and in the Executive
Compensation section, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information required by this Item is included in the 1998 Proxy
Statement in the Beneficial Ownership of Stock section, and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information required by this Item is included in the 1998 Proxy
Statement in the Business Relationships; Related Transactions and Certain Legal
Proceedings section, and is incorporated herein by reference.
64
<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 Registrant's note holders are contained in the
following documents or instruments, which are incorporated herein by
reference.
(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.
(10) Material Contracts. Susquehanna Bancshares, Inc.'s, Performance Award
Plan as amended in 1995, is incorporated by reference to Exhibit
(a)(10) of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995. The Equity Compensation Plan, as
adopted in
65
<PAGE>
1996, is incorporated by reference to Exhibit (a)(10) of Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
(11) Statement re: computation of per share earnings. Not Applicable.
(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) Not applicable.
66
<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.
By: /s/ Robert S. Bolinger
--------------------------------------
Dated: March 20, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert S. Bolinger President, Chief Executive March 20, 1998
- ------------------------------------ Officer and Director
(Robert S. Bolinger)
/s/ Drew K. Hostetter Vice President, Treasurer March 20, 1998
- ------------------------------------ and Chief Financial Officer
(Drew K. Hostetter)
/s/ Richard M. Cloney Vice President, Secretary March 20, 1998
- ------------------------------------ and Director
(Richard M. Cloney)
- ------------------------------------ Director , 1998
(James G. Apple) --------
/s/ John M. Denlinger Director March 24, 1998
- ------------------------------------
(John M. Denlinger)
/s/ Richard E. Funke Director March 23, 1998
- ------------------------------------
(Richard E. Funke)
/s/ Henry H. Gibbel Director March 20, 1998
- ------------------------------------
(Henry H. Gibbel)
/s/ Marley R. Gross Director March 24, 1998
- ------------------------------------
(Marley R. Gross)
/s/ T. Max Hall Director March 23, 1998
- ------------------------------------
(T. Max Hall)
</TABLE>
67
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1997
[SIGNATURES CONTINUED]
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Director , 1998
- ------------------------------------ --------
(Edward W. Helfrick)
/s/ C. William Hetzer, Jr. Director March 23, 1998
- ------------------------------------
(C. William Hetzer, Jr.)
/s/ George J. Morgan Director March 24, 1998
- ------------------------------------
(George J. Morgan)
Director , 1998
- ------------------------------------ --------
(Raymond M. O'Connell)
Director , 1998
- ------------------------------------ ---------
(Robert C. Reymer, Jr.)
/s/ Roger V. Wiest Director March 23, 1998
- ------------------------------------
(Roger V. Wiest)
</TABLE>
[END OF SIGNATURE PAGES]
68
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Sequentially Numbered Page
- ---------- --------------------------
<S> <C>
(21) Subsidiaries of the Registrant 70
(23) Consents of Experts and Counsel 71
(27) Financial Data Schedule 72
</TABLE>
69
<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. Farmers & Merchants Bank and Trust, 59 West Washington Street,
Hagerstown, Maryland; a Bank organized under the Maryland Banking Code.
6. Susque-Bancshares Life Insurance Company, Phoenix, Arizona; an
insurance company organized under the laws of the State of Arizona.
7. Susque-Bancshares Leasing Company, Inc., 9 East Main Street, Lititz,
Pennsylvania; a company organized under the laws of the Commonwealth of
Pennsylvania.
8. Susquehanna Bancshares South, Inc., 100 West Road, Baltimore, Maryland;
a thrift holding company organized under the laws of the State of
Delaware.
9. Susquehanna Bank, 100 West Road, Towson, Maryland; a wholly-owned
subsidiary of Susquehanna Bancshares South, Inc.
10. Susquehanna Bancshares East, Inc., 114 North Main Street, Mullica Hill,
New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares, Inc.
11. Equity National Bank, 8000 Sagemore Drive, Suite 8101, Marlton, New
Jersey; a wholly-owned subsidiary of Susquehanna Bancshares East, Inc.
12. Farmers National Bank, 114 North Main Street, Mullica Hill, New Jersey;
a wholly-owned subsidiary of Susquehanna Bancshares East, Inc.
13. Founders' Bank, 101 Bryn Mawr Avenue, Bryn Mawr, Pennsylvania; a
wholly-owned subsidiary of Susquehanna Bancshares East, Inc.
70
<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
dated January 26, 1998, on our audits of the consolidated financial statements
of Susquehanna Bancshares, Inc., as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996, and 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 24, 1998
71
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 97,341
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 41,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 573,576
<INVESTMENTS-CARRYING> 83,102
<INVESTMENTS-MARKET> 83,983
<LOANS> 2,569,613
<ALLOWANCE> 34,550
<TOTAL-ASSETS> 3,524,887
<DEPOSITS> 2,851,217
<SHORT-TERM> 103,323
<LIABILITIES-OTHER> 41,721
<LONG-TERM> 181,888
0
0
<COMMON> 45,171
<OTHER-SE> 301,567
<TOTAL-LIABILITIES-AND-EQUITY> 3,524,887
<INTEREST-LOAN> 221,762
<INTEREST-INVEST> 38,751
<INTEREST-OTHER> 3,587
<INTEREST-TOTAL> 264,100
<INTEREST-DEPOSIT> 103,275
<INTEREST-EXPENSE> 118,447
<INTEREST-INCOME-NET> 145,653
<LOAN-LOSSES> 4,557
<SECURITIES-GAINS> 142
<EXPENSE-OTHER> 106,028
<INCOME-PRETAX> 58,822
<INCOME-PRE-EXTRAORDINARY> 40,202
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,202
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.80
<YIELD-ACTUAL> 8.47
<LOANS-NON> 22,964
<LOANS-PAST> 6,760
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 33,800
<CHARGE-OFFS> 6,552
<RECOVERIES> 1,285
<ALLOWANCE-CLOSE> 34,550
<ALLOWANCE-DOMESTIC> 34,550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<CASH> 106,840 109,059 101,484 92,106 94,816
<INT-BEARING-DEPOSITS> 0 0 0 0 0
<FED-FUNDS-SOLD> 103,125 44,953 80,087 102,705 97,354
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 532,748 547,652 564,389 586,143 544,448
<INVESTMENTS-CARRYING> 126,022 133,852 146,920 141,413 154,664
<INVESTMENTS-MARKET> 127,021 134,444 146,904 142,262 156,133
<LOANS> 2,349,776 2,345,366 2,286,261 2,271,412 1,847,396
<ALLOWANCE> 33,800 33,530 33,836 34,054 29,277
<TOTAL-ASSETS> 3,335,117 3,299,411 3,300,453 3,313,012 2,828,637
<DEPOSITS> 2,754,118 2,735,543 2,777,231 2,773,445 2,335,577
<SHORT-TERM> 100,650 90,886 53,584 62,923 69,432
<LIABILITIES-OTHER> 46,685 44,634 39,448 44,634 43,444
<LONG-TERM> 120,368 121,813 126,658 130,902 86,274
0 0 0 0 0
0 0 0 0 0
<COMMON> 29,331 29,315 29,314 29,300 28,911
<OTHER-SE> 283,965 277,220 274,218 271,808 264,999
<TOTAL-LIABILITIES-AND-EQUITY> 3,335,117 3,299,411 3,300,453 3,313,012 2,828,637
<INTEREST-LOAN> 207,745 153,749 100,741 48,810 163,862
<INTEREST-INVEST> 40,830 30,940 20,718 10,465 39,215
<INTEREST-OTHER> 4,078 3,180 2,316 1,182 3,473
<INTEREST-TOTAL> 252,653 187,869 123,775 60,457 206,550
<INTEREST-DEPOSIT> 100,611 75,301 49,874 24,266 79,255
<INTEREST-EXPENSE> 113,054 84,539 55,922 27,179 89,844
<INTEREST-INCOME-NET> 139,599 103,330 67,853 33,278 116,706
<LOAN-LOSSES> 4,807 3,617 2,452 1,046 5,164
<SECURITIES-GAINS> 190 250 197 153 90
<EXPENSE-OTHER> 110,541 82,496 50,783 24,735 88,316
<INCOME-PRETAX> 46,474 33,842 25,804 12,733 40,362
<INCOME-PRE-EXTRAORDINARY> 31,183 23,059 17,487 8,671 28,252
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 31,183 23,059 17,487 8,671 28,252
<EPS-PRIMARY> 1.42 1.05 0.80 0.40 1.43
<EPS-DILUTED> 1.42 1.05 0.80 0.40 1.43
<YIELD-ACTUAL> 8.44 8.42 8.44 8.46 8.50
<LOANS-NON> 19,574 23,659 26,527 25,299 21,058
<LOANS-PAST> 8,962 8,491 8,026 8,438 5,555
<LOANS-TROUBLED> 6,429 6,509 6,589 6,645 6,703
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 29,277 29,277 29,277 29,277 25,410
<CHARGE-OFFS> 6,063 4,636 2,908 807 5,867
<RECOVERIES> 1,550 1,043 786 309 1,255
<ALLOWANCE-CLOSE> 33,800 33,530 33,836 34,054 29,277
<ALLOWANCE-DOMESTIC> 33,800 33,530 33,836 34,054 29,277
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0 0
</TABLE>
