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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-10674
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Susquehanna Bancshares, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2201716
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (717) 626-4721
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.00 per share
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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. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $624,321,657 as of February 28, 1999, 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 28, 1999,
was 36,942,459.
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 28, 1999,
are incorporated by reference into Part III.
PART I
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Item 1. Business
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General
Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state financial
institution holding company headquartered in Lititz, Pennsylvania. As of
December 31, 1998, Susquehanna operated as a super-community bank holding
company with eight commercial banks, one federal savings bank, and two non-bank
subsidiaries. (An additional commercial bank, First Capitol Bank, of York,
Pennsylvania, was acquired on January 4, 1999). These subsidiaries provide
banking and banking-related services from 134 offices located in central,
southwestern and southeastern Pennsylvania, Maryland, Delaware and southern New
Jersey. As of December 31, 1998, Susquehanna had assets of $4.1 billion, loans
receivable of $2.8 billion, deposits of $3.1 billion and shareholders' equity of
$391 million.
The relative sizes and profitability of Susquehanna's subsidiaries as of
and for the year ended December 31, 1998, are depicted in the following table:
(Dollars in Millions)
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Subsidiary Assets Percent of Total Net Income Percent of Total
---------- ------ ---------------- ---------- ----------------
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Farmers First Bank $1,000 25% $19.4 43%
Farmers & Merchants Bank and Trust 611 15 5.4 12
First National Trust Bank 289 7 4.4 10
Williamsport National Bank 249 6 5.2 11
Citizens National Bank of Southern Pennsylvania 192 5 3.0 7
First American National Bank of Pennsylvania 138 3 2.0 4
* Susquehanna Bank 1,020 25 7.9 17
** Equity Bank, National Association 332 8 3.2 7
** Founders' Bank 153 4 1.2 3
Susque-Bancshares Leasing Co., Inc. (leasing) 40 1 0.4 1
Susque-Bancshares Life Insurance Co. 3 -- 0.3 --
(life insurance)
Parent (including consolidation adjustments, 38 -- (6.8) (15)
Susquehanna South's parent and
Susquehanna East's parent)
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Total $4,065 100% $45.6 100%
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* 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, Union, Columbia, York and Lycoming Counties; in
southeastern Pennsylvania principally in Montgomery, Chester and Delaware
Counties; in southwestern Pennsylvania principally in Bedford and Blair
Counties; in western Maryland, principally in Allegany, Garrett and Washington
Counties; in central Maryland, including Baltimore County, Baltimore City,
Carroll County, Harford County, Cecil County, Worcester County, Wicomico County
and Anne Arundel County; and in southern New Jersey, principally in Camden,
Burlington and Gloucester Counties. Certain Susquehanna subsidiaries also
provide trust, leasing, insurance and passive investment services.
2
As a "super-community" bank holding company, Susquehanna'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.
Susquehanna 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, on October 1, 1998,
Susquehanna merged Farmers National Bank, a subsidiary of Susquehanna East, into
Equity National Bank, also a subsidiary of Susquehanna East, under the name
"Equity Bank, National Association." In addition, Susquehanna continued its
program initiated in 1997 to convert all of its affiliates to a uniform computer
system. Seven of its financial institution affiliates will be converted to this
system by March 31, 1999, with the remaining three (including First Capitol
Bank) to be converted by mid-2000. 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, Susquehanna
anticipates further integration 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, 1998, Susquehanna's subsidiaries employed 1,510
full-time and 356 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. It'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. Susquehanna 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, core deposits fund Susquehanna's lending and investing activities
almost entirely.
Susquehanna's retail banking services include checking and savings
accounts, money market accounts, certificates of deposit, individual retirement
accounts, Christmas clubs, mutual funds and annuities (see discussion below),
home equity lines of credit, residential mortgage loans, home improvement loans,
student loans, automobile loans and personal loans.
In December, 1995, Susquehanna introduced six automated loan machines
("ALM"), three in Maryland and three in Pennsylvania. ALM's 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, 1998, Susquehanna operated 19 ALM's within
Pennsylvania and Maryland.
Susquehanna 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, 1998, there were over 77,173 issued and active debit cards.
The acquisition of the Maryland thrifts in 1995 and 1996 substantially
enhanced Susquehanna's mortgage origination and mortgage banking capabilities.
The consolidation of the several mortgage operations into
3
Susquehanna Mortgage Company (formerly known as "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 consolidated commercial lending operations include
commercial, financial and agricultural lending (15% of the total loan portfolio
at December 31, 1998), real estate construction lending (9%), and commercial
mortgage lending (21%). Loans originated by each subsidiary are subject to
central review and uniform Susquehanna credit standards. Nearly all of
Susquehanna's loans are concentrated in the markets served by its subsidiary
commercial and savings banks.
Through its subsidiary, Susque-Bancshares Life Insurance Co., Susquehanna
offers certain credit related insurance products. Susquehanna also offers
certain leasing services through its subsidiary Susque-Bancshares Leasing Co.,
Inc., and its wholly owned subsidiary, Susquebanc Lease Co.
Business of Farmers First Bank. Farmers First Bank ("Farmers First"),
-------------------------------
headquartered in Lititz, Pennsylvania, is engaged in commercial banking and
trust business as authorized by the Pennsylvania Banking Code of 1965, as
amended. 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, 1998, Farmers First had twenty-eight (28) full-service and eleven
(11) 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 1998, Susquehanna formed 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, 1998, Farmers First had total assets of $1.0 billion,
total shareholder's equity of $104 million and total deposits of $759 million.
Business of Citizens National Bank of Southern Pennsylvania. Citizens
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National Bank of Southern Pennsylvania ("Citizens") is engaged in commercial
banking and trust business as authorized by the National Bank Act and its main
office is located in Greencastle, 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. 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, 1998, 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, 1998, Citizens had total assets of $192 million, total
shareholder's equity of $15 million and total deposits of $170 million.
4
Business of First National Trust Bank. First National Trust Bank ("First
-------------------------------------
National"), headquartered in Sunbury, Pennsylvania, is engaged in commercial
banking and trust business authorized by the National Bank Act. This involves
accepting demand, time and savings deposits and granting loans (consumer,
commercial, real estate and business) to individuals, corporations,
partnerships, associations and municipalities and other governmental bodies.
Through its trust department, First National renders services as trustee,
executor, administrator, guardian, managing agent, custodian, investment advisor
and other fiduciary activities authorized by law. First National owns no
subsidiaries.
As of December 31, 1998, First National had eleven (11) 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, 1998, First National had total assets of $289 million,
total shareholder's equity of $24 million and total deposits of $257 million.
Business of Williamsport National Bank. Williamsport National Bank
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("Williamsport") is engaged in commercial banking and trust business authorized
by the National Bank Act and its main office is in Williamsport, 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.
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, 1998, 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, 1998, Williamsport had total assets of $249 million,
total shareholder's equity of $28 million and total deposits of $212 million.
Business of Farmers & Merchants Bank and Trust. Farmers & Merchants Bank
----------------------------------------------
and Trust ("F&M"), headquartered in Hagerstown, Maryland, is engaged in
commercial banking as authorized by the banking laws of the State of Maryland.
This involves accepting demand, time and savings deposits and granting loans
(consumer, commercial, real estate and business) to individuals, corporations,
partnerships, associations, municipalities and other governmental bodies.
Through its Trust Department, which commenced operation during 1993, F&M is able
to render services as trustee, executor, administrator, guardian, managing
agent, custodian, investment advisor, and other fiduciary activities authorized
by law. F&M operates FMBT, Inc. 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 that was formed in 1997 for the purpose of providing title insurance and
related services.
As of December 31, 1998, F&M had twenty-two (22) full-service and six (6)
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, 1998, F&M had total assets of $611 million, total
shareholder's equity of $49 million and total deposits of $474 million.
Business of Susquehanna Bank. Susquehanna Bank is a federally chartered
----------------------------
savings 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 South, which, in turn, is a wholly-owned subsidiary of
Susquehanna.
5
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, Susquehanna 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, 1998, Susquehanna Bank had twenty-two (22) 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, Maryland. Its business is not dependent upon any one customer and the
loss of any customer or a few customers would have no material adverse effect
upon it.
As of December 31, 1998, Susquehanna Bank had total assets of $1.0 billion,
total shareholder's equity of $97 million, and total deposits of $700 million.
Business of First American National Bank of Pennsylvania. Effective at
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11:59 p.m. on December 16, 1998, Susquehanna completed the acquisition of the
First American National Bank of Pennsylvania ("First American"), a national
banking association headquartered in Everett, Pennsylvania.
First American is engaged in commercial banking as authorized by the
National Bank Act. This involves accepting demand, time and savings deposits
and granting loans (consumer, commercial, real estate and business) to
individuals, corporations, partnerships, associations and municipalities and
other governmental bodies. First American owns no active subsidiaries.
As of December 31, 1998, First American had five (5) full-service banking
offices in Bedford and Blair Counties, Pennsylvania. First American'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, 1998, First American had total assets of $138 million,
total shareholder's equity of $18 million and total deposits of $114 million.
Business of Equity Bank, National Association. Effective October 1, 1998,
---------------------------------------------
Farmers National Bank, a wholly-owned subsidiary of Susquehanna East, merged
into Equity National Bank, also a subsidiary of Susquehanna East, under the name
"Equity Bank, National Association" ("Equity Bank"). Equity Bank remains a
wholly-owned subsidiary of Susquehanna East, which, in turn, is a wholly-owned
subsidiary of Susquehanna.
Equity Bank is engaged in commercial banking as authorized by the National
Bank Act. This involves accepting demand, time and savings deposits and granting
loans (consumer, commercial, real estate and business) to individuals,
corporations, partnerships, associations and municipalities and other
governmental bodies. Equity Bank owns an investment subsidiary, EB Corp., whose
purpose is to assist in investment portfolio management. EB Corp. results from
the merger of Farmers Investment Company, a subsidiary of Farmers National Bank,
into AT Corp., a subsidiary of Equity National Bank, that occurred
simultaneously with the merger of Farmers National Bank into Equity National
Bank under the name "Equity Bank, National Association."
As of December 31, 1998, Equity Bank had ten (10) full service and one (1)
limited-service banking offices in Camden, Gloucester and Burlington Counties,
New Jersey. Equity Bank'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.
6
As of December 31, 1998, Equity Bank had total assets of $332 million,
total shareholder's equity of $25 million and total deposits of $304 million.
Business of Founders' Bank. Effective July 31, 1997, Susquehanna completed
--------------------------
the acquisition of Founders' Bank ("Founders'"), of Bryn Mawr, Pennsylvania, a
Pennsylvania state-chartered banking association and Federal Reserve member
bank. Founders' also is a wholly-owned subsidiary of Susquehanna East, which,
in turn, is 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, whose only asset was part
ownership of Founders' headquarters building. Old Lancaster Corporation sold the
building in January 1999. Founders' continues to lease its space in the building
from the building's new owner.
As of December 31, 1998, 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 45% of Founders' deposits at December 31, 1998, were from one
customer. If this customer would leave, Founders' would have funding sources to
replace those deposits.
As of December 31, 1998, Founders' had total assets of $153 million,
total shareholder's equity of $10 million and total deposits of $138 million.
Business of First Capitol Bank. On January 4, 1999, Susquehanna completed
------------------------------
the acquisition of First Capitol Bank ("First Capitol"), a Pennsylvania state-
chartered bank headquartered in York, Pennsylvania.
First Capitol is engaged in commercial banking and trust business as
authorized by the Pennsylvania Banking Code of 1965, as amended. 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 an affiliation it has with Hershey Trust Co., First Capitol also refers
certain of its customers to Hershey Trust Co. for trust services.
As of January 4, 1999, the date of Susquehanna's acquisition of First
Capitol, First Capitol had five (5) full-service banking offices in York
County. First Capitol'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. First Capitol owns no subsidiaries.
As of January 4, 1999, First Capitol had total assets of $111 million,
total shareholder's equity of $11 million and total deposits of $93 million.
Year 2000 and Operating System Conversion. Susquehanna has engaged
-----------------------------------------
consultants 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-Year 2000
Readiness Disclosure" for further discussion.
Recent Acquisitions
First American. Effective at 11:59 p.m. on December 16, 1998,
--------------
Susquehanna completed the acquisition of Cardinal Bancorp, Inc. ("Cardinal"),
Everett, Pennsylvania, and its wholly-owned subsidiary, First American. At
December 31, 1998, First American had assets of $138 million and operated five
banking offices located in Bedford and Blair Counties, Pennsylvania.
7
The acquisition of Cardinal and First American was completed through
the exchange of 2,027,296 shares of Susquehanna common stock for all the
outstanding capital stock of Cardinal. Cardinal shareholders received 2.048
shares of Susquehanna common stock for each share of Cardinal stock that they
held as of December 16, 1998. The transaction qualified for pooling of
interests accounting treatment. In connection with the transaction, Cardinal
was merged with Susquehanna Bancshares West, Inc. ("Susquehanna West"), a
wholly-owned subsidiary of Susquehanna formed solely for the purpose of
facilitating the acquisition of Cardinal. Susquehanna West was merged into
Susquehanna in January, 1999. As a result, First American became a wholly-owned
subsidiary of Susquehanna. This transaction represented Susquehanna's initial
entry into southwestern Pennsylvania.
First Capitol. The acquisition of First Capitol was completed through the
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exchange of 1,055,247 shares of Susquehanna common stock for all the outstanding
capital stock of First Capitol. First Capitol shareholders received 2.028 shares
of Susquehanna common stock for each share of First Capitol stock that they held
as of January 4, 1999. The transaction qualified for pooling of interests
accounting treatment. First Capitol is a direct, wholly-owned subsidiary of
Susquehanna. This transaction increased Susquehanna's presence in York County,
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 in Pennsylvania and in states which have not opted out
of the Interstate Banking Act, as hereinafter described. Susquehanna may also
seek to enter businesses closely related to banking or to acquire existing
companies already engaged in such activities which includes savings
associations. Any acquisition by Susquehanna will require prior approval of the
Board of Governors of the Federal Reserve System, the Pennsylvania Department of
Banking, other regulatory agencies and, in some instances, its shareholders.
Other than as described above, Susquehanna currently has no formal
commitments with respect to the acquisition of any entities, although
discussions with prospects occur on a regular and continuing basis.
Supervision and Regulation
General. Susquehanna is registered with the Board of Governors of the
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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' and
First Capitol are state member banks subject to regulation and periodic
examination by the Board. Citizens, First National, Williamsport, First
American and Equity Bank 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
8
regulation and periodic examination by the Office of Thrift Supervision ("OTS").
Susquehanna 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 its 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 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 1998 include commercial banking
through its eight banking subsidiaries, thrift activities through its federal
savings bank subsidiary, credit life insurance through another subsidiary,
leasing operations through another subsidiary and passive investment management
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 1989
-------------------------------------------------------------------
("FIRREA"). FIRREA eliminated many of the distinctions between commercial 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 violations of law or
regulation.
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
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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. The effect of the law has been to increase competition within
the markets in which Susquehanna now operates.
The Omnibus Consolidated Appropriations Act Of 1997 ("OCAA"). The OCAA was
------------------------------------------------------------
signed into law on September 30, 1996. It includes, among others, Savings
Association Insurance Fund ("SAIF") rescue provisions
9
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.
SAIF Rescue Provisions. In September 1996, the federal government assessed
a one-time special charge to recapitalize the SAIF. 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 reflected SAIF deposits held by three affiliated thrifts in Maryland
and one affiliated bank in Pennsylvania. After this one-time assessment, annual
SAIF deposit premiums for well capitalized institutions were 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 expected to be 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 amended 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, a well-capitalized and well-managed 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 the holding company; and no insured depository
institution controlled by the 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 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 amended
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
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 is excluded from the
definition of a savings and loan holding company, and is subject to only the BHC
Act. Accordingly, applications by such an organization have to be filed only
with the Board, and not the Director of the OTS.
Lender Liability and Fiduciary Liability. The OCAA reinstated the
Environmental Protection Agency lender liability rule and excluded 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 repealed 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 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 has issued several regulatory guidelines regarding Year 2000 readiness
which are applicable to all depository institutions. The guidelines highlight,
among others, risk management, contingency planning, fiduciary services,
customers' awareness and safety and soundness issues on which the federal
banking examiners will focus in 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 guidelines also require
financial institution fiduciaries to, among others, develop a process to
evaluate potential Year 2000 risks associated with managing clients' assets,
conduct a review of significant fiduciary assets to determine potential
liability or exposure attributable to issuers of securities with Year 2000
problems, and mitigate and manage Year 2000 exposure resulting from any such
risks.
11
The Pennsylvania Department of Banking has also issued a statement, dated
January 15, 1998, regarding Year 2000 readiness and state examinations. Other
federal regulatory agencies, including the Board, the FDIC and the OCC have also
issued a variety of advisory letters on the issue, including the OCC's advisory
letter 98-1, which informed 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-Year 2000 Readiness Disclosure" `for further
discussion.
Environmental Impact Statement. Compliance by Susquehanna and its
------------------------------
subsidiaries with federal, state and local environmental protection laws during
1998 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 1999.
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.
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 state and federal legislation enacted over the past 20
years, 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
12
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.
First American competes in market areas in Bedford and Blair Counties,
Pennsylvania. Nine (9) commercial banks operate offices in Bedford and Blair
Counties, four (4) of which are headquartered in those counties, and of the four
(4), First American ranked third in terms of total deposits in those counties as
of June 30, 1997, the last date for which information is available.
F&M's principal market area consists of Washington, Garrett and Allegany
Counties, Maryland. Eight (8) commercial banks operate offices in those
counties, three (3) of which are headquartered in Washington County, one (1) of
which is headquartered in Garrett County, and two (2) of which are headquartered
in Allegany County. Of the six (6), 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, none in Worcester
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 Bank's principal market area consists of Camden, Gloucester and
Burlington Counties, New Jersey. Eighteen (18) commercial banks operate offices
in those counties, four (4) of which are headquartered in Camden County, two (2)
of which are headquartered in Burlington County, and two (2) of which are
headquartered in Gloucester County. Of the eight (8), Equity Bank ranked third
in terms of total deposits in those counties 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.
13
First Capitol, which was acquired on January 4, 1999, competes in market
areas in York County, Pennsylvania. Nineteen (19) commercial banks operate
offices in York County, seven (7) of which are headquartered in that county, and
of the seven (7), First Capitol ranked fifth 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 declining 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.
14
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 fourteen (114) full-
service branches, twenty (20) limited-service branches, thirty-three (33) free-
standing automated teller machines and nineteen (19) automated loan machines.
The banks own eighty (80) of the branches and lease the remaining fifty-nine
(59). Ten (10) 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.
As of December 31, 1998, the executive offices of the subsidiary banks
are:1
Farmers First Bank Susquehanna Bank
9 East Main Street 100 West Road
Lititz, Pennsylvania Towson, Maryland
First National Trust Bank Equity Bank, National Association
400 Market Street 8000 Sagemore Drive, Suite 8101
Sunbury, Pennsylvania Marlton, New Jersey
Citizens National Bank of Southern First American National Bank of
Pennsylvania Pennsylvania
35 North Carlisle Street 140 East Main Street
Greencastle, PA Everett, 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 First American are owned by the respective
subsidiary, and the offices of Susquehanna Bank, Equity Bank and Founders' are
leased.
- - --------------------------
1 First Capitol Bank was acquired on January 4, 1999. Its executive offices are
located at 2951 Whiteford Road, York, Pennsylvania. First Capitol leases its
executive offices.
15
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 1998.
16
Executive Officers of Susquehanna
The following table sets forth the executive officers of Susquehanna, their
ages, and their positions with Susquehanna:
- - ----------------------------------------------------------------------------------------------------
Name Age Title
- - ---- --- -----
- - ----------------------------------------------------------------------------------------------------
Robert S. Bolinger 62 President & Chief Executive Officer
William J. Reuter 49 Senior Vice President
Gregory A. Duncan 43 Senior Vice President - Administration
William T. Belden 49 Vice President
Frederick W. Bisbee 60 Vice President
Richard M. Cloney 57 Vice President and Secretary
Drew K. Hostetter 44 Vice President, Treasurer and Chief Financial Officer
Charles W. Luppert 57 Vice President
- - ----------------------------------------------------------------------------------------------------
17
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 1997 and 1998.
- - -------------------------------------------------------------------
Price Range Per Share*
----------------------
- - -------------------------------------------------------------------
Cash
----
Year Period Dividends Paid Low Bid High Bid
---- ------ -------------- ------- --------
1997 1st Quarter
Common 0.133 14.33 17.55
2nd Quarter
Common 0.133 14.45 18.55
3rd Quarter
Common 0.140 17.25 21.17
4th Quarter
Common 0.140 17.67 25.92
1998 1st Quarter
Common 0.140 21.67 26.00
2nd Quarter
Common 0.140 22.67 26.08
3rd Quarter
Common 0.140 17.88 26.75
4th Quarter
Common 0.150 15.50 22.75
- - -------------------------------------------------------------------
*Common Stock prices and dividends have been adjusted to reflect Susquehanna's
three-for-two stock split paid on July 1, 1998 to shareholders of record on June
15, 1998.
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 28, 1999, there were 6,891 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, First American, First
Capitol, 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 in the case
of First National, Williamsport, Citizens, Equity Bank and First American; the
Federal Reserve Act in the case of Founders' and First Capitol; and the Federal
Home Loan Act in the case of Susquehanna Bank.
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.
18
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 OCC is required for the
payment of dividends in any calendar year by a national bank subsidiary if the
total of all dividends declared by the 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 looks 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 the former Atlantic Federal Savings Bank ("Atlantic Federal")
and Reisterstown Federal Savings Bank ("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 Federal.
Under federal regulations, savings institutions which have converted
under such regulations (including Atlantic Federal and Reisterstown Federal) may
not declare or pay a cash dividend on common stock if the dividend would cause
the institution's capital to be reduced below the amount required for the
liquidation account or, as to all savings institutions, below the capital
requirements imposed by the OTS under 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
19
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, 1998, 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 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, 1998, $22 million is available for dividend distribution to
Susquehanna in 1999 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.
20
Item 6. Selected Financial Data.
- - ------ -----------------------
See Page 22.
21
- - --------------------------------------------------------------------------------
Selected Financial Data
- - --------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share
- - ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 292,766 $ 274,052 $ 262,185 $ 215,787 $ 171,981
Interest expense 138,576 122,660 117,152 93,838 64,353
Net interest income 154,190 151,392 145,033 121,949 107,628
Provision for loan and lease losses 5,247 4,557 4,807 5,164 3,947
Other income 30,921 24,374 22,756 17,612 16,584
Other expenses 113,206 109,832 114,637 92,030 82,967
Income before taxes, extraordinary item/
cumulative effect 66,658 61,377 48,345 42,367 37,298
Extraordinary item/cumulative effect -- -- -- -- (732)
Net income 45,574 42,062 32,707 29,992 25,760
Cash dividends declared on common stock 20,037 18,297 16,226 13,156 11,937
Dividend payout ratio 44.0% 43.5% 49.6% 43.9% 46.3%
Per Common Share Amounts*
- - ----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item/
cumulative effect--basic $ 1.27 $ 1.19 $ 0.94 $ 0.95 $ 0.84
--diluted 1.26 1.18 0.93 0.95 0.84
Net income--basic 1.27 1.19 0.94 0.95 0.82
--diluted 1.26 1.18 0.93 0.95 0.82
Cash dividends declared on common stock 0.57 0.55 0.52 0.49 0.45
Financial Ratios
- - ----------------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.17% 1.19% 0.97% 1.08% 1.10%
Return on average stockholders' equity 12.08 12.27 10.24 11.42 10.76
Net interest margin 4.37 4.74 4.74 4.88 4.93
Average stockholders' equity to average assets 9.67 9.74 9.45 9.49 10.19
Tangible Operating Results
- - ----------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 48,683 $ 45,037 $ 35,524 $ 31,220 $ 26,255
Tangible earnings per share 1.36 1.27 1.02 0.99 0.83
Return on tangible average shareholders' equity 14.23% 14.75% 13.53% 13.14% 11.42%
Return on tangible average assets 1.26 1.29 1.05 1.13 1.12
Year-End Balances
- - ----------------------------------------------------------------------------------------------------------------------------
Total assets $4,064,827 $3,654,676 $3,464,522 $2,952,957 $2,542,846
Investment securities 932,923 700,834 710,215 750,111 705,969
Loans and leases, net of unearned income 2,773,550 2,643,553 2,416,949 1,908,997 1,635,357
Deposits 3,124,332 2,960,638 2,859,873 2,444,373 2,145,914
Long-term debt 370,160 181,888 120,368 86,274 47,314
Stockholders' equity 391,196 363,656 328,258 308,476 246,626
Selected Share Data*
- - ----------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period end) 35,857 35,860 34,980 34,456 31,498
Average common shares outstanding--basic 35,859 35,413 34,934 31,590 31,498
--diluted 36,179 35,628 35,012 31,659 31,544
At December 31:
Book value per share $ 10.91 $ 10.14 $ 9.38 $ 8.95 $ 7.83
Market price per common share 20.47 25.50 15.39 11.78 9.89
Common stockholders 6,661 6,237 5,693 5,759 5,229
*Amounts adjusted for the three-for-two stock splits.
22
Item 7. Management's Discussion and Analysis of Results of Operations and
- - ------ -----------------------------------------------------------------
Financial Condition
- - -------------------
See Pages 24-49.
23
- - --------------------------------------------------------------------------------
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 American National Bank of Pennsylvania; First
National Trust Bank; Williamsport National Bank; Citizens National Bank of
Southern Pennsylvania; Susquehanna Bancshares East, Inc. and its commercial bank
subsidiaries Equity Bank, N.A., 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, 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 where
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; economic and social
turbulence which might result from the Y2K or millennium problem; and the
success of Susquehanna in managing the risks involved in the foregoing.
RESULTS OF OPERATIONS
Summary of 1998 Compared to 1997
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1998 and
1997. These transactions are described in the following paragraphs.
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 1997 and 1998 stock splits) 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 1997 and 1998 stock splits) to the
shareholders of FBC based on an exchange ratio of 2.281 shares (prior to the
1997 and 1998 stock splits) 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, Maryland, 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 pre-tax cost savings related to these reductions approximates $1.3
million.
On July 31, 1997, Susquehanna acquired Founders' Bank ("Founders'"), Bryn
Mawr, Pa., through an exchange of 560,353 shares (prior to the 1998 stock split)
of Susquehanna 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. The results of operations for
Founders' prior to the acquisition were not material to Susquehanna's
consolidated financial statements and, accordingly, Susquehanna's prior period
consolidated financial statements have not been restated to reflect the
acquisition of Founders'.
On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc.
("Cardinal"), a Pennsylvania bank holding company with $138 million in assets
and $114 million in deposits at the acquisition date. Susquehanna issued
2,027,296 shares of its common stock to the shareholders of Cardinal based upon
an exchange ratio of 2.048 shares of Susquehanna common stock for each
outstanding share of Cardinal. 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
Cardinal for all periods presented.
24
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Susquehanna's net income for the year ended December 31, 1998, increased to
$45.6 million, or 8% above 1997 net income of $42.1 million. Susquehanna's
earnings performance was affected by significant growth in non-interest income
resulting primarily from an increase in mortgage-banking activities and the
purchase of certain insurance-related products, such as bank-owned life
insurance ("BOLI"). Non-interest income increased $6.5 million, or 27%, in 1998
over 1997.
While diluted earnings per common share increased from $1.18 in 1997 to $1.26
in 1998, return on average assets ("ROA"), and return on average equity ("ROE"),
decreased from 1.19% and 12.27%, respectively, in 1997 to 1.17% and 12.08%,
respectively, in 1998. During 1995 and 1996, Susquehanna acquired two Maryland
savings banks under the purchase method of accounting. These purchase
transactions created an intangible asset, goodwill, of $34 million, which
significantly affects Susquehanna's earnings and financial ratios. Goodwill
amortization is a non-cash charge to earnings. 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. For 1998, tangible
net income, earnings per
TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
- - ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
Assets Balance Interest % Balance Interest % Balance Interest %
- - ------------------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 75,540 $ 4,001 5.30 $ 71,999 $ 3,943 5.48 $ 76,950 $ 4,164 5.41
Investment securities:
Taxable 751,899 47,706 6.34 576,407 36,438 6.32 624,178 38,309 6.14
Tax-advantaged 116,745 8,302 7.11 116,332 8,305 7.14 130,544 9,272 7.10
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 868,644 56,008 6.45 692,739 44,743 6.46 754,722 47,581 6.30
Loans (net of unearned income):
Taxable 2,636,223 232,360 8.81 2,478,430 225,334 9.09 2,286,850 210,724 9.21
Tax-advantaged 54,612 5,077 9.30 47,098 4,510 9.58 45,926 4,538 9.88
- - ------------------------------------------------------------------------------------------------------------------------------------
Total loans 2,690,835 237,437 8.82 2,525,528 229,844 9.10 2,332,776 215,262 9.23
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,635,019 $297,446 8.18 3,290,266 $278,530 8.47 3,164,448 $267,007 8.44
====================================================================================================================================
Allowance for loan losses (35,199) (35,266) (34,788)
All other non-earning assets 301,132 264,945 247,092
- - ------------------------------------------------------------------------------------------------------------------------------------
Total assets $3,900,952 $3,519,945 $3,376,752
====================================================================================================================================
Liabilities & Stockholders' Equity
Deposits:
Interest-bearing demand $ 866,960 $ 27,323 3.15 $ 784,894 $ 24,468 3.12 $ 733,509 $ 21,407 2.92
Savings 443,676 9,931 2.24 451,588 11,208 2.48 457,136 11,413 2.50
Time 1,327,057 73,845 5.56 1,306,907 71,729 5.49 1,309,114 71,854 5.49
Short-term borrowings 103,355 5,282 5.11 85,809 4,406 5.13 65,650 3,322 5.06
Long-term debt 355,998 22,195 6.23 154,608 10,849 7.02 121,858 9,156 7.51
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,097,046 $138,576 4.47 2,783,806 $122,660 4.41 2,687,267 $117,152 4.36
- - ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits 381,730 344,222 323,626
Other liabilities 44,896 48,980 46,553
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,523,672 3,177,008 3,057,446
- - ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 377,280 342,937 319,306
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $3,900,952 $3,519,945 $3,376,752
====================================================================================================================================
Net interest income/yield on
average earning assets $158,870 4.37 $155,870 4.74 $149,855 4.74
====================================================================================================================================
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%.
25
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
share, ROA, and ROE were $48.7 million, $1.36, 1.26%, and 14.23%,
respectively, compared to actual net income, basic earnings per share, ROA and
ROE of $45.6 million, $1.27, 1.17% and 12.08%, respectively. Tangible net
income, earnings per share, ROA, and ROE for 1997 were $45.0 million, $1.27,
1.29% and 14.75%, respectively.
Net Interest Income--Taxable Equivalent Basis
The major source of operating revenues is net interest income, which rose to
a level of $154.2 million in 1998, representing a $2.8 million, or 2%, increase
above the $151.4 million attained in 1997. The net interest margin, on a tax
equivalent basis, declined to 4.37% during 1998 from 4.74% in 1997.
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 83%, 86%, and 86% for the
twelve months ended December 31, 1998, 1997, and 1996, respectively.
Table 2 illustrates that the growth in interest income in 1998 over 1997 was
attributed to volume. The growth in average interest-earning assets of $345
million in 1998 over 1997 was due to a $176 million increase in the investment
portfolio and a $165 million increase in loans. As illustrated in Table 1, the
tax equivalent yield on earning assets for 1998 declined to 8.18%
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
- - ----------------------------------------------------------------------------------------------------------------------------
1998 Versus 1997 1997 Versus 1996
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
- - ----------------------------------------------------------------------------------------------------------------------------
Interest Income
Short-term investments $ 190 $ (132) $ 58 $ (271) $ 50 $ (221)
Investment securities:
Taxable 11,135 133 11,268 (2,995) 1,124 (1,871)
Tax-advantaged 29 (32) (3) (1,015) 48 (967)
- - ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 11,164 101 11,265 (4,010) 1,172 (2,838)
Loans (net of unearned income):
Taxable 14,050 (7,024) 7,026 17,450 (2,840) 14,610
Tax-advantaged 702 (135) 567 114 (142) (28)
- - ----------------------------------------------------------------------------------------------------------------------------
Total loans 14,752 (7,159) 7,593 17,564 (2,982) 14,582
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $26,106 $(7,190) $18,916 $13,283 $(I,760) $11,523
============================================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 2,583 $ 272 $ 2,855 $ 1,552 $ 1,509 $ 3,061
Savings (193) (1,084) (1,277) (138) (67) (205)
Time 1,114 1,002 2,116 (121) (4) (125)
Short-term borrowings 897 (21) 876 1,034 50 1,084
Long-term debt 12,680 (1,334) 11,346 2,330 (637) 1,693
- - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 17,081 (1,165) 15,916 4,657 851 5,508
- - ----------------------------------------------------------------------------------------------------------------------------
Net interest margin $ 9,025 $(6,025) $ 3,000 $ 8,626 $(2,611) $ 6,015
============================================================================================================================
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.
26
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- - --------------------------------------------------------------------------------
from 8.47% in 1997. This decline was primarily due to lower reinvestment
rates on loans and investments and market forces impacting product pricing.
Table 2 also illustrates that the growth in interest expense in 1998 over 1997
was primarily attributed to volume. Increased levels of interest-bearing demand
deposits and long-term debt used to fund asset growth were the primary reasons
for the $15.9 million increase in interest expense. The average funding costs
rose slightly in 1998 to 4.47% from 4.41% in 1997 primarily due to competitive
pricing for time deposits in Susquehanna's markets and the funding of investment
growth with long-term debt, a higher cost of funds.
As a result of the preceding comments, Susquehanna's net interest margin, on
a taxable equivalent basis, declined from 4.74% in 1997 to 4.37% in 1998. The
increase in the investment portfolio was primarily due to a program that
Susquehanna began in the first quarter of 1998 to better utilize its capital and
to reduce its tax burden. Under this program, Susquehanna acquired $175 million
of GNMA securities and borrowed from the Federal Home Loan Bank to fund the
purchase. The program produced $1.1 million in net income for 1998, but
negatively impacted the net interest margin by 18 basis points.
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.
In addition to economic conditions, loan portfolio diversification,
delinquency, and historic loss experience, consideration is also given to
examinations performed by the regulatory authorities.
To determine the allowance and corresponding provision, the amount required
for specific allocation is first determined. For all types of commercial and
construction loans, this amount is based upon specific borrower data determined
by reviewing individual non-performing, delinquent, or potentially troubled
credits. In addition, a general allocation is also determined using the same
criteria applied to the total commercial portfolio. Consumer and residential
real estate allowances, which may include specific allocations, generally are
based upon recent charge-off and delinquency history, other known trends and
expected losses over the remaining lives of these loans, as well as the
condition of local, regional, and national economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio. Table 10 presents this allocation.
The loan portfolio represents loans made primarily within Susquehanna's
market area, which includes central and southeastern Pennsylvania, Maryland,
southern New Jersey, and, to a lesser extent, southwestern Pennsylvania,
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, 1998. As
illustrated in Table 3, the provision for loan and lease losses was $5.2 million
for 1998 compared to $4.6 million in 1997. Net charge-offs, as seen in Table 3,
were $5.6 million in 1998 compared with $5.3 million in 1997. As a result, the
allowance for loan and lease losses at December 31, 1998, was 1.27% of
period-end loans and leases, or $35.2 million, compared with 1.34%, or $35.5
million at December 31, 1997. The allowance for loan and lease losses as a
percentage of non-performing loans increased from 153% at December 31, 1997, to
165% at December 31, 1998.
Should the economic climate no longer continue to improve or should it 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 Susquehanna's policy not to renegotiate the terms of a loan simply
because of a delinquency status. Rather, a loan is transferred to non-accrual
status if not well secured and in the process of collection, and is delinquent
in payment of either principal or interest beyond 90 days. Interest income
received on non-performing loans in 1998 and 1997 was $0.9 million and $1.1
million, respectively. Interest income which would have been recorded on these
loans under the original terms was $2.3 million for 1998 and 1997. At December
31, 1998, 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.
27
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- - --------------------------------------------------------------------------------
TABLE 3--Provision and Allowance for Loan and Lease Losses
- - -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, January I $ 35,508 $ 34,757 $ 30,610 $ 26,904 $ 25,281
Allowance acquired in business combination -- 1,460 4,229 3,323 --
Change in fiscal year -- -- -- (8) --
Additions to provision for loan and lease losses
charged to operations 5,247 4,557 4,807 5,164 3,947
Loans and leases charged off during the year:
Commercial, financial, agricultural, and leases 1,977 1,471 1,787 2,026 1,481
Real estate--mortgage 1,566 1,355 2,098 1,683 311
Consumer 3,411 3,802 2,668 2,353 1,770
- - -------------------------------------------------------------------------------------------------------------------------
Total charge-offs 6,954 6,628 6,553 6,062 3,562
- - -------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously
charged-off:
Commercial, financial, agricultural, and leases 397 403 589 293 405
Real estate--mortgage 160 71 100 200 43
Consumer 813 888 975 796 790
- - -------------------------------------------------------------------------------------------------------------------------
Total recoveries 1,370 1,362 1,664 1,289 1,238
- - -------------------------------------------------------------------------------------------------------------------------
Net charge-offs 5,584 5,266 4,889 4,773 2,324
- - -------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 35,171 $ 35,508 $ 34,757 $ 30,610 $ 26,904
=========================================================================================================================
Average loans and leases outstanding $2,690,835 $ 2,525,528 $ 2,332,776 $ 1,820,942 $ 1,547,874
Period end loans and leases 2,773,550 2,643,553 2,416,949 1,908,997 1,635,357
Net charge-offs as a percentage of average loans
and leases 0.21% 0.21% 0.21% 0.26% 0.15%
Allowance as a percentage of period-end loans
and leases 1.27 1.34 1.44 1.60 1.65
=========================================================================================================================
TABLE 4--Non-Performing Assets
- - -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1997 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------------
Loans contractually past due
90 days and still accruing $10,420 $ 6,975 $ 8,962 $ 5,555 $15,102
=========================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural, and leases $ 1,655 $ 932 $ 2,266 $ 3,158 $ 2,934
Real estate--mortgage 18,203 21,742 17,501 19,106 16,021
Consumer 272 592 391 468 808
Restructured loans 1,201 -- 6,429 6,873 6,941
Other real estate owned 4,745 4,547 7,849 6,367 6,301
- - -------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $26,076 $27,813 $34,436 $35,972 $33,005
=========================================================================================================================
Total non-performing assets as a percentage of period-
end loans and leases and other real estate owned 0.94% 1.05% 1.42% 1.88% 2.01%
=========================================================================================================================
Allowance for loan and lease losses as a
percentage of non-performing loans 165% 153% 131% 103% 101%
=========================================================================================================================
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, 1998 and 1997, of $26.1 and $27.8 million, respectively,
includes $4.7 million and $4.5 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 0.94% at December 31, 1998, the
lowest level this decade.
28
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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 $10.4 million at December 31, 1998, up from the
$7.0 million at December 31, 1997. Although the economy is stable, softness in
the economy may adversely affect certain borrowers and may cause additional
loans to become past due beyond 89 days or be placed on non-accrual status
because of uncertainty of receiving full payment of either principal or interest
on these loans.
Potential problem loans consist of loans which are performing, but for which
potential credit problems have caused Susquehanna to place them on its
internally monitored loan list. At December 31, 1998, such loans, not included
in Table 4, amounted to $36.6 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, income generated from bank-owned life
insurance and 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 17%, 14%, and 14% for
1998, 1997, and 1996, respectively.
Non-interest income increased $6.5 million, or 27%, in 1998 over 1997.
Service charges on deposit accounts were up $1.3 million, or 19%, and other
charges, fees, and commissions rose by $0.4 million, or 12%, reflecting the
additional office locations and higher account volumes. All other income
exceeded 1997 results by $2.5 million, or 35%, primarily due to income from
bank-owned life insurance and increased debit card activity. Trust fees
increased $0.3 million, or 8%, while gain on sale of mortgage loans increased
$2.1 million, as loans originated for sale were $127 million more than 1997.
Other Expenses
Non-interest expenses are categorized into five main groupings:
employee-related expenses, which include salaries, fringe
TABLE 5--Analysis of Other Expenses
- - ------------------------------------------------------------------------
Dollars in thousands
- - ------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
- - ------------------------------------------------------------------------
Advertising, marketing,
and public relations $ 3,671 $ 3,425 $ 3,173
Amortization of acquisition
costs 4,532 4,293 4,141
Audits and examinations 876 898 1,047
Communications 2,530 2,035 1,699
Directors fees 1,243 1,225 1,371
Legal and professional 5,449 2,603 2,947
Life Insurance Company
related expenses 679 970 906
Other real estate 1,073 811 1,054
Outside services 3,144 3,188 3,677
PA shares/capital stock tax 2,187 2,153 1,947
Postage 2,941 2,654 2,397
Stationery and supplies 2,863 2,701 2,730
All other 8,292 8,839 9,205
- - ------------------------------------------------------------------------
Total $39,480 $35,795 $36,294
========================================================================
benefits, and employment taxes; occupancy expenses, which include depreciation,
rents, maintenance, utilities, and insurance; equipment expenses, which include
depreciation, rents, and maintenance; FDIC insurance premiums on deposits; and
other expenses (detailed in Table 5) incurred in operating Susquehanna's
business.
Non-interest expense increased $3.4 million, or 3%, in 1998 over 1997, due to
a $2.8 million increase in legal and other professional fees related to Year
2000 remediation and a $0.5 million increase in communications expense resulting
from new product delivery channels and additional branch locations.
Salaries and employee benefits decreased $2.4 million from 1997 to 1998 and
equipment expense increased $1.7 million when comparing the same periods. These
variances are due to the ongoing information systems conversions of
Susquehanna's banking affiliates and related reductions in staff.
Income Taxes
Susquehanna's effective tax rate for 1998 was 31.63% compared to 31.47% in
1997. These effective rates were maintained because of increased levels of
tax-advantaged income. During 1997 and 1998, Susquehanna purchased $60 million
of insurance-related products and recognized $1.1 million and $3.4 million,
respectively, of tax-advantaged income from the increase in cash surrender
values and insurance proceeds. Offsetting the increase in tax-advantaged income
was an increase in permanent differences resulting from acquisition-related
activity.
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 provi-
29
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
sions of the Tax Reform Act of 1986, effective tax rates may increase in the
years ahead.
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, 1998, 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 $2.2 million as the "unrealized
gains or losses for available-for-sale securities," changed from a positive $3.8
million at December 31, 1997, to a positive $6.0 million at December 31, 1998.
Securities identified as "trading account securities" are marked-to-market with
the change recorded in the income statement.
Presently, Susquehanna does not engage in trading activity, but does engage
in active portfolio management which requires the majority of its security
portfolios to be identified as "available-for-sale." While SFAS 115 requires
segregation into "held-to-maturity" and "available-for-sale" categories (see
Table 6), it does not change Susquehanna's policy concerning the purchase of
only high-quality securities. Strategies employed address liquidity, capital
adequacy, and net interest margin considerations which then determine the
assignment of purchases into these two categories. Table 7 illustrates the
maturities of these security portfolios and the weighted average yields based
upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35%
federal income tax rate. At December 31, 1998, 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 1998 was 5%, or $130 million. Loan growth in 1998 was
mainly associated with real estate mortgage and construction loans which
increased $85 million and leases which grew by $57 million. As noted in Table
11, Susquehanna's loan portfolio contains no significant concentrations other
than the 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 $106 million at year end, and an additional $185 million was lent against
junior liens on residential properties. Senior liens on 1-4 family residential
properties totaled $888 million, and much of the $509 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 $38 million, while loans secured by
multi-family residential properties totaled $42 million at December 31, 1998.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 1999 consist of $132 million with fixed-rate pricing and $94 million with
variable-rate pricing.
TABLE 6--Carrying Value of Investment Securities
- - ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to- Available- Held-to-
Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity
- - ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 66,181 $ 500 $119,624 $ 750 $172,241 $ 1,493
U.S. Government agencies 210,464 -- 252,730 -- 154,988 2,486
State and municipal 65,447 55,810 34,824 75,882 19,550 104,815
Other securities 35,392 25 72,672 50 87,130 190
Mortgage-backed securities 462,650 3,502 112,741 6,420 127,765 17,038
Equity securities 32,952 -- 25,141 -- 22,519 --
- - ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $873,086 $59,837 $ 617,732 $83,102 $584,193 $126,022
===========================================================================================================================
30
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
TABLE 7--Investment Securities
The following table shows the maturities of investment securities at fair value
and amortized cost as of December 31, 1998, and the weighted average yields of
such securities. Those securities that do not have a single maturity date are
shown in total based upon final maturity. Yields are shown on a tax equivalent
basis assuming a 35% federal income tax rate.
- - ---------------------------------------------------------------------------------------------------------------------------
Within After 1 Year but After 5 Years but After
Dollars in thousands 1 Year within 5 Years within 10 Years 10 Years Total
- - ---------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury
Fair value $46,599 $ 19,370 $ 212 -- $ 66,181
Amortized cost 46,189 18,900 195 -- 65,284
Yield 6.0% 6.1% 6.5% -- 6.1%
U.S. Government agencies
Fair value $27,945 $144,921 $ 30,434 $ 7,164 $210,464
Amortized cost 27,972 143,722 30,496 7,151 209,341
Yield 5.7% 6.4% 5.9% 6.3% 6.2%
Corporate debt securities
Fair value $26,771 $ 8,606 $ 12 $ 3 $ 35,392
Amortized cost 26,582 8,394 12 5 34,993
Yield 6.9% 6.6% 4.7% 2.6% 6.8%
Mortgage-backed securities
Fair value $12,581 $100,224 $ 32,827 $317,018 $462,650
Amortized cost 12,555 100,159 32,593 316,819 462,126
Yield 6.5% 6.3% 6.5% 6.5% 6.4%
State and municipal
Fair value $ 1,936 $ 47,515 $ 12,998 $ 2,998 $ 65,447
Amortized cost 1,920 46,507 12,690 2,900 64,017
Yield 4.9% 5.9% 5.4% 9.0% 5.9%
Equity securities
Fair value -- -- -- -- $ 32,952
Amortized cost -- -- -- -- 28,170
Yield -- -- -- -- 7.0%
Held-to-Maturity:
U.S. Treasury
Fair value $ 500 -- -- -- $ 500
Amortized cost 500 -- -- -- 500
Yield 5.9% -- -- -- 5.9%
Corporate debt securities
Fair value $ 25 -- -- -- $ 25
Amortized cost 25 -- -- -- 25
Yield 8.0% -- -- -- 8.0%
Mortgage-backed securities
Fair value $ 1,762 $ 1,767 -- -- $ 3,529
Amortized cost 1,754 1,748 -- -- 3,502
Yield 6.5% 6.5% -- -- 6.5%
State and municipal
Fair value $23,103 $ 27,655 $ 2,576 $ 3,631 $ 56,965
Amortized cost 22,912 27,037 2,414 3,447 55,810
Yield 6.4% 7.0% 9.3% 9.7% 7.0%
Total Securities
Fair value $934,105
Amortized cost 923,768
Yield 6.4%
31
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
TABLE 8--Loan and Lease Portfolio
- - ---------------------------------------------------------------------------------------------------------------------------
At December 31 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- - ---------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 288,852 10.4% $ 317,579 12.0%
Real estate--construction 250,835 9.0 225,971 8.5
Real estate--mortgage 1,768,172 63.8 1,708,409 64.6
Consumer 344,007 12.4 327,172 12.4
Leases 121,684 4.4 64,422 2.5
- - ---------------------------------------------------------------------------------------------------------------------------
Total $2,773,550 100.0% $2,643,553 100.0%
===========================================================================================================================
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
- - ---------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $125,278 $ 97,518 $66,056 $288,852
Real estate--construction 187,553 58,144 5,138 250,835
- - ---------------------------------------------------------------------------------------------------------------------------
$312,831 $155,662 $71,194 $539,687
===========================================================================================================================
Rate sensitivity of loans with maturities greater than 1 year:
Variable rate $ 94,413
Fixed rate 132,443
- - ---------------------------------------------------------------------------------------------------------------------------
$226,856
===========================================================================================================================
TABLE 10--Allocation of Allowance for Loan and Lease Losses
- - ---------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- - ---------------------------------------------------------------------------------------------------------------------------
At December 31 1998 1997 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 4,772 $ 4,754 $ 4,320 $ 4,805 $ 4,448
Real estate--construction 5,937 5,994 5,810 2,480 3,262
Real estate--mortgage 7,884 7,570 7,521 7,049 6,425
Consumer 5,375 5,103 4,900 3,792 3,928
Leases 1,375 1,125 1,097 602 453
Unused commitments 2,366 2,558 1,656 2,063 1,525
Unallocated 7,462 8,404 9,453 9,819 6,863
- - ---------------------------------------------------------------------------------------------------------------------------
Total $35,171 $35,508 $34,757 $30,610 $26,904
===========================================================================================================================
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 $100,000 or more as a principal source of funds, as they represent only 5% of
total deposits. Table 13 presents a breakdown of maturities of time deposits of
$100,000 or more as of December 31, 1998.
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.
32
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- - ---------------------------------------------------------------------------------------------------------------------------
$ 262,819 10.9% $ 244,365 12.8% $ 221,955 13.6%
226,920 9.4 187,543 9.8 92,802 5.7
1,578,474 65.3 1,187,518 62.2 1,041,418 63.7
294,191 12.2 266,780 14.0 263,215 16.1
54,545 2.2 22,791 1.2 15,967 0.9
- - ---------------------------------------------------------------------------------------------------------------------------
$2,416,949 100.0% $1,908,997 100.0% $1,635,357 100.0%
===========================================================================================================================
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, 1998,
Susquehanna's portfolio included the following concentrations:
- - ---------------------------------------------------------------------------------------------------------------------------
Total As a % of % Nonperforming
Dollars in thousands Permanent Construction All Other Amount Total Loans in each category
- - ---------------------------------------------------------------------------------------------------------------------------
Housing developments $53,568 $228,426 $11,539 $293,533 10.6 2.2
Office buildings and warehouses 95,204 13,561 1,598 110,363 4.0 --
Retailing 42,448 123 54,400 96,971 3.5 4.6
Agriculture 38,689 176 17,727 56,592 2.0 --
Professional 28,032 -- 14,035 42,067 1.5 --
Manufacturing 23,410 -- 17,064 40,474 1.5 0.3
Hotels/motels 25,360 -- 12,702 38,062 1.4 --
Due to the nature of its operations, only interest rate risk 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, 1998, Susquehanna's subsidiary banks and
savings bank have an unused line of credit available to them from the Federal
Home Loan Bank totaling $377 million.
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 $141 million at December 31, 1998. These maturing
investments represent 15% of total investment securities. Short-term investments
amounted to $76 million and represent additional sources of liquidity.
Closely related to the management of liquidity is the man-
TABLE 12--Average Deposit Balances
- - ------------------------------------------------------------
Dollars in thousands
- - ------------------------------------------------------------
Year ended December 31 1998 1997 1996
- - ------------------------------------------------------------
Demand deposits $ 381,730 $ 344,222 $ 323,626
Interest-bearing
demand deposits 866,960 784,894 733,509
Savings deposits 443,676 451,588 457,136
Time deposits 1,327,057 1,306,907 1,309,114
- - ------------------------------------------------------------
Total $3,019,423 $2,887,611 $2,823,385
============================================================
TABLE 13--Deposit Maturity
Maturity of time deposits of $100 or more at
December 31, 1998
- - -----------------------------------------------------------
Dollars in thousands
- - -----------------------------------------------------------
Three months or less $ 53,686
Over three months through six months 26,539
Over six months through twelve months 34,608
Over twelve months 43,805
- - -----------------------------------------------------------
Total $158,638
===========================================================
33
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
TABLE 14--Balance Sheet Gap Analysis
- - ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 1-3 3-12 1-3 Over 3
Dollars in thousands months months years years Total
- - ---------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 76,015 $ 76,015
Investments 66,806 $ 149,237 $226,859 $490,021 932,923
Loans and leases, net of unearned income 1,696,268 405,537 356,198 315,547 2,773,550
- - ---------------------------------------------------------------------------------------------------------------------------
Total $1,839,089 $ 554,774 $583,057 $805,568 $3,782,488
===========================================================================================================================
Liabilities
Interest-bearing demand $ 489,460 $ 93,230 $192,764 $185,242 $ 960,696
Savings 222,314 74,996 74,564 71,654 443,528
Time 570,877 568,020 1,138,897
Time in denominations of $100 or more 53,686 61,147 43,805 158,638
Short-term borrowings 137,601 137,601
Long-term debt 3,651 11,222 16,325 338,962 370,160
- - ---------------------------------------------------------------------------------------------------------------------------
Total $1,477,589 $ 808,615 $327,458 $595,858 $3,209,520
===========================================================================================================================
Interest Sensitivity Gap:
Periodic $ 361,500 $(253,841) $255,599 $209,710
Cumulative 107,659 363,258 572,968
Cumulative gap as a percentage of
earning assets 10% 3% 10% 15%
- - ---------------------------------------------------------------------------------------------------------------------------
1-3 3-12 1-3 Over 3
At December 31, 1997 months months years years Total
- - ---------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 44,692 $ 100 $ 44,792
Investments 58,281 120,210 $196,484 $325,859 700,834
Loans and leases, net of unearned income 1,606,483 391,502 341,529 304,039 2,643,553
- - ---------------------------------------------------------------------------------------------------------------------------
Total $1,709,456 $ 511,812 $538,013 $629,898 $3,389,179
===========================================================================================================================
Liabilities
Interest-bearing demand $ 517,727 $ 98,123 $103,078 $ 99,056 $ 817,984
Savings 336,573 106,179 442,752
Time 306,962 419,430 226,928 204,073 1,157,393
Time in denominations of $100 or more 61,182 64,118 24,385 24,354 174,039
Short-term borrowings 104,406 1,393 105,799
Long-term debt 35,004 5,014 6,978 134,892 181,888
- - ---------------------------------------------------------------------------------------------------------------------------
Total $1,361,854 $ 694,257 $361,369 $462,375 $2,879,855
===========================================================================================================================
Interest Sensitivity Gap:
Periodic $ 347,602 $(182,445) $176,644 $167,523
Cumulative 165,157 341,801 509,324
Cumulative gap as a percentage of
earning assets 10% 5% 10% 15%
agement 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.
Dividing assets and liabilities into three groups--fixed rate, floating rate,
and those which reprice only at management's discretion--strategies are
developed to minimize exposure to interest rate fluctuations . Management
utilizes gap analysis to evaluate rate sensitivity at a given point in time.
Table 14 illustrates Susquehanna's estimated interest rate
34
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
TABLE 15--Balance Sheet Shock Analysis
- - ---------------------------------------------------------------------------------------------------------------------------
Base
At December 31, 1998 Present
Dollars in thousands -2% -1% Value 1% 2%
- - --------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 105,274 $ 105,274 $ 105,263 $ 105,252 $ 105,252
Short-term investments 76,023 76,015 76,015 76,015 76,007
Investment securities:
Held-to-maturity 66,500 63,687 61,019 58,512 56,145
Available-for-sale 920,668 898,579 873,086 848,377 823,930
Loans net of unearned income 2,864,724 2,844,409 2,821,555 2,798,982 2,777,257
Other assets 211,278 211,278 211,278 211,278 211,278
- - --------------------------------------------------------------------------------------------------------------------------
Total assets $4,244,467 $4,199,242 $4,148,216 $4,098,416 $4,049,869
==========================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 406,706 $ 401,781 $ 397,174 $ 392,765 $ 390,779
Interest-bearing 2,763,962 2,738,627 2,713,853 2,700,000 2,689,369
Short-term borrowings 137,615 137,615 137,601 137,587 137,587
Long-term debt 427,092 403,001 380,585 359,691 340,167
Other liabilities 57,630 50,132 41,538 33,060 24,740
- - --------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,793,005 3,731,156 3,670,751 3,623,103 3,582,642
Total economic equity 451,462 468,086 477,465 475,313 467,227
- - --------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $4,244,467 $4,199,242 $4,148,216 $4,098,416 $4,049,869
==========================================================================================================================
Economic equity ratio 11% 11% 12% 12% 12%
Value at risk $ (26,003) $ (9,379) -- $ (2,152) $ (10,238)
% value at risk -5% -2% -- -- -2%
- - --------------------------------------------------------------------------------------------------------------------------
Base
Present
At December 31, 1997 -2% -1% Value 1% 2%
- - ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 102,714 $ 102,705 $ 102,702 $ 102,695 $ 102,692
Short-term investments 44,793 44,790 44,792 44,791 44,791
Investment securities:
Held-to-maturity 89,760 86,816 83,983 81,293 78,720
Available-for-sale 648,426 633,615 617,732 602,186 586,728
Loans net of unearned income 2,698,224 2,677,753 2,655,996 2,634,691 2,613,610
Other assets 194,802 194,802 194,802 194,802 194,802
- - --------------------------------------------------------------------------------------------------------------------------
Total assets $3,778,719 $3,740,481 $3,700,007 $3,660,458 $3,621,343
==========================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 356,170 $ 352,988 $ 350,002 $ 347,186 $ 344,022
Interest-bearing 2,650,227 2,623,748 2,597,900 2,573,251 2,549,267
Short-term borrowings 105,813 105,806 105,799 105,792 105,785
Long-term debt 201,902 192,191 183,112 174,620 166,672
Other liabilities 52,823 47,787 42,695 37,100 31,845
- - --------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,366,935 3,322,520 3,279,508 3,237,949 3,197,591
Total economic equity 411,784 417,961 420,499 422,509 423,752
- - --------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $3,778,719 $3,740,481 $3,700,007 $3,660,458 $3,621,343
==========================================================================================================================
Economic equity ratio 11% 11% 11% 12% 12%
Value at risk $ (8,715) $ (2,538) -- $ 2,010 $ 3,253
% value at risk -2% -1% -- -- 1%
35
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
sensitivity and periodic and cumulative gap positions as calculated at
December 31, 1998 and 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. See Table 16 for the estimated net
interest income effect of Susquehanna's positive gap position.
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 cat-
TABLE 16--Net Interest Income Shock Analysis
- - --------------------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 1998 -2% -1% Value 1% 2%
- - --------------------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 1,749 $ 2,363 $ 2,953 $ 3,527 $ 4,084
Investments 58,682 60,368 61,563 62,728 63,859
Loans and leases 208,072 224,732 240,851 256,884 272,859
- - --------------------------------------------------------------------------------------------------------------------------
Total interest income 268,503 287,463 305,367 323,139 340,802
- - --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 24,992 33,241 40,438 47,469 55,223
Time 54,060 61,695 69,252 76,758 84,244
Short-term borrowings 2,983 4,037 5,090 6,144 7,197
Long-term debt 19,934 20,008 20,082 20,157 20,231
- - --------------------------------------------------------------------------------------------------------------------------
Total interest expense 101,969 118,981 134,862 150,528 166,895
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income $166,534 $168,482 $170,505 $172,611 $173,907
==========================================================================================================================
Net interest income at risk $(3,971) $(2,023) -- $ 2,106 $ 3,402
% net interest income at risk -2% -1% -- 1% 2%
- - --------------------------------------------------------------------------------------------------------------------------
Base
Present
At December 31, 1997 -2% -1% Value 1% 2%
- - --------------------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 1,871 $ 2,417 $ 2,962 $ 3,508 $ 4,056
Investments 40,210 41,265 42,188 43,086 43,938
Loans and leases 203,668 219,208 234,362 249,428 264,403
- - --------------------------------------------------------------------------------------------------------------------------
Total interest income 245,749 262,890 279,512 296,022 312,397
- - --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 5,506 15,065 24,484 33,766 42,914
Time 73,299 78,036 82,702 87,352 92,129
Short-term borrowings 3,896 4,991 6,087 7,182 8,276
Long-term debt 11,258 11,299 11,340 11,381 11,422
- - --------------------------------------------------------------------------------------------------------------------------
Total interest expense 93,959 109,391 124,613 139,681 154,741
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income $151,790 $153,499 $154,899 $156,341 $157,656
==========================================================================================================================
Net interest income at risk $(3,109) $(1,400) -- $ 1,442 $ 2,757
% net interest income at risk -2% -1% -- 1% 2%
36
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
egory 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 is more sensitive to change in a
higher or lower market interest rate 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- 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
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 change 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 is 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.
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, 1998 and 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 five percent at an interest
rate change of minus two percent, while Table 16 discloses that net interest
income at risk is only two percent at an interest rate change of minus two
percent.
Capital Adequacy
Risk-based capital ratios, based upon guidelines adopted by bank regulators in
1989, focus upon credit risk. Assets and
TABLE 17--Capital Adequacy
- - ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1998
- - ---------------------------------------------------------------------------------------------------------------------------
Tier I Capital Total Capital Leverage
Ratio (A) Ratio (B) Ratio (C)
- - ---------------------------------------------------------------------------------------------------------------------------
Required Ratio 4.00% 8.00% 4.00%
Citizens National Bank of Southern Pennsylvania 12.48 13.57 7.99
Equity Bank, N.A. 11.25 12.45 7.39
Farmers First Bank 12.25 13.51 10.53
Farmers & Merchants Bank and Trust 10.82 11.93 7.34
First American National Bank of Pennsylvania 20.54 21.53 12.81
First National Trust Bank 11.50 12.76 8.12
Founders' Bank 8.84 10.08 7.32
Susquehanna Bank 10.85 15.62 7.11
Williamsport National Bank 16.50 17.75 11.29
Total Susquehanna 12.24% 15.28% 8.83%
===========================================================================================================================
(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.
(C) Tier I capital dividend by average total assets less disallowed intangible
assets.
37
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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, the portion of
the allowance for loan losses equal to 1.25% of risk-adjusted assets, and 45% of
the unrealized gain on equity securities.
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.
Year 2000 Readiness Disclosure
The following section contains forward-looking statements which involve risks
and uncertainties. Susquehanna's actual impact from the Year 2000 issue could
materially differ from that which is anticipated in these forward-looking
statements, as a result of certain factors identified below.
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 has 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 is
currently on schedule.
Included within the scope of Susquehanna's Year 2000 Action Plan is the
assessment of non-information technology systems with embedded chips.
Susquehanna's assessment process generally includes inventorying such equipment
and making a determination as to the Year 2000 readiness status of these items.
This assessment has been completed. No Year 2000 modifications or replacements
of a material nature have been identified for non-information technology
systems.
Susquehanna's Year 2000 Action Plan has been categorized into five phases:
Awareness, Assessment, Renovation (testing), Validation, and Implementation. The
initial focus within those phases has been on systems and vendors that are
related to mission-critical business processes. Mission-critical processes are
defined as those areas of the business whose continued operations are required
in order to provide basic banking services. All other business processes were
categorized as either significant or ancillary and have also been subject to Y2K
remediation programs. As of December 31, 1998, the Awareness and Assessment
phases for all business processes (mission-critical, significant and ancillary)
were completed. The Renovation and Validation phases for all business processes
(mission-critical, significant and ancillary) were substantially completed. The
Implementation phase for all business processes (mission-critical, significant
and ancillary) is expected to be substantially completed by the end of the first
quarter of 1999.
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.
Vendors of services to Susquehanna were evaluated for Y2K compliancy. As of
December 31, 1998, the evaluation of vendors has substantially been completed.
All vendors evaluated have been determined to be Y2K compliant or alternative
vendors have been designated. Y2K risk assessments of borrowers and depositors
have been conducted. Identified risks are deemed to be nominal.
Susquehanna believes that it will be Year 2000 ready before December 31,
1999, and testing to date has not revealed a need for business remediation
contingency plans for core or other internal processing systems. Exposure to
counter-parties and other directly related external vendors was deemed limited
and required only nominal contingency planning, such as the designation of an
alternative vendor. The greatest risk is believed to be through external parties
that are not within Susquehanna's control. A significant electrical failure, for
example, may require the company to limit or even eliminate services until power
is restored. Backup records will be produced immediately prior to January 1,
2000, to assure an orderly resumption of business if major disruptions occur.
Further, business resumption contingency planning is being done throughout the
company in order to assure rapid and disciplined approaches to handling any
unexpected occurrence.
Susquehanna is utilizing both internal and external resources
38
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
to reprogram, or replace, and test its software and hardware for Year 2000
modifications. Concurrent with the Year 2000 project, Susquehanna is also
converting all its major data processing systems, both hardware and software, to
current Year 2000 compliant technology. Susquehanna plans to complete both the
Year 2000 and systems conversion projects by March 31, 1999, for all critical
systems. The total cost of the Year 2000 and systems conversion projects is
estimated at $12 million. Of the total projects' cost, approximately $8 million
is attributable to the purchase of new software and hardware which will be
capitalized. The remaining $4 million will be expensed as incurred during 1998
and 1999. 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, new initiatives, if any, undertaken to assure
compliancy, and information regarding externalities presently unknown.
As a bank holding company, Susquehanna and its subsidiaries are subject to
the regulation and oversight of various banking regulators. Their oversight
includes the provision of specific timetables, programs, and guidance regarding
Year 2000 issues. Regulatory examination of the holding company and its
subsidiaries' Year 2000 program are conducted on a quarterly basis, and reports
are submitted by Susquehanna to the regulators on a periodic basis.
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.
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 expected to be
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 AI, a New
Jersey bank holding company with $210 million in assets and $186 million in
deposits at the acquisition date, and Susquehanna also completed the acquisition
of FBC, a New Jersey bank holding company with $88 million in assets and $77
million of deposits at the acquisition date. Specific details as to the
acquisitions have been previously discussed. However, please note that these
transactions were 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 and FBC for all periods
presented.
On May 1, 1997, Susquehanna combined its three savings banks located in and
around Baltimore, Maryland, into one savings bank, and there was a reduction in
the work force. Consequently, Susquehanna recorded a pre-tax charge of $1.3
million in 1997 related to the severance. The annual pre-tax cost savings
related to these reductions approximates $1.3 million.
On July 31, 1997, Susquehanna acquired Founders'. 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 material 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
$42.1 million, or 29%, above 1996 net income of $32.7 million, which included
the 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 $36.0 million in
1996 to $42.1 million in 1997, due primarily to improved net interest income
resulting from increased volume.
Diluted earnings per common share were $1.18 in 1997 compared to $0.93 ($1.03
adjusted for the SAIF special charge) in 1996. Return on average assets and
return on average equity increased from 0.97% and 10.24%, respectively, in 1996
to 1.19% and 12.27%, respectively, in 1997.
For 1997, tangible net income, earnings per share, return on average assets,
and return on average equity were $45.0 million, $1.27, 1.29% and 14.75%,
respectively. Tangible net income, earnings per share, return on average assets,
and return on average equity for 1996, excluding the SAIF special charge, were
$38.8 million, $1.12, 1.16%, and 14.69%, 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.
39
Item 8. Financial Statements and Supplementary Data
- - ------ -------------------------------------------
The following consolidated financial statements of Susquehanna are submitted
herewith:
Page Reference
--------------
Consolidated Balance Sheets at December 31, 1998 and 1997........... 41
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996................................... 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996................................... 43
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997, and 1996............... 44
Notes to Consolidated Financial Statements ......................... 45
Report of Independent Accountants .................................. 61
Summary of Quarterly Financial Data ................................ 62
40
- - --------------------------------------------------------------------------------
Consolidated Balance Sheets
- - --------------------------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- - ---------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- - ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 105,263 $ 102,702
Short-term investments 76,015 44,792
Investment securities available-for-sale 873,086 617,732
Investment securities held-to-maturity (Fair values of $61,019 and $83,983) 59,837 83,102
Loans and leases, net of unearned income 2,773,550 2,643,553
Less: Allowance for loan and lease losses 35,171 35,508
- - ---------------------------------------------------------------------------------------------------------------------------
Net loans 2,738,379 2,608,045
- - ---------------------------------------------------------------------------------------------------------------------------
Premises & equipment (net) 53,173 49,817
Accrued income receivable 22,414 23,121
Other assets 136,660 125,365
- - ---------------------------------------------------------------------------------------------------------------------------
Total assets $4,064,827 $3,654,676
===========================================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 422,573 $ 368,470
Interest-bearing 2,701,759 2,592,168
- - ---------------------------------------------------------------------------------------------------------------------------
Total deposits 3,124,332 2,960,638
- - ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 137,601 105,799
Long-term debt 370,160 181,888
Other liabilities 41,538 42,695
- - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,673,631 3,291,020
- - ---------------------------------------------------------------------------------------------------------------------------
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 100,000,000 and 32,000,000
shares, respectively; issued: 35,912,325 and 23,936,946 at December 31,
1998 and 1997, respectively 71,825 47,874
Surplus 53,993 77,575
Retained earnings 260,106 234,569
Accumulated other comprehensive income net of taxes of $3,200 and
$2,425 at December 31, 1998 and 1997, respectively 5,955 3,793
Less: Treasury stock (55,014 and 30,454 common shares at cost at
December 31, 1998 and 1997, respectively) 683 155
- - ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 391,196 363,656
- - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $4,064,827 $3,654,676
===========================================================================================================================
The accompanying notes are an integral part of these financial statements.
41
- - --------------------------------------------------------------------------------
Consolidated Statements Of Income
- - --------------------------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------------------------------------------------
Dollars in thousands except per share
- - --------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------
Interest Income
Interest & fees on loans and leases $235,661 $228,266 $213,674
Interest on investment securities 53,104 41,843 44,347
Interest on short-term investments 4,001 3,943 4,164
- - --------------------------------------------------------------------------------------------------------------------------
Total interest income 292,766 274,052 262,185
- - --------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 111,099 107,405 104,674
Interest on short-term borrowings 5,282 4,406 3,322
Interest on long-term debt 22,195 10,849 9,156
- - --------------------------------------------------------------------------------------------------------------------------
Total interest expense 138,576 122,660 117,152
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income 154,190 151,392 145,033
Provision for loan and lease losses 5,247 4,557 4,807
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 148,943 146,835 140,226
- - --------------------------------------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 8,412 7,071 6,661
Other service charges, commissions, and fees 4,122 3,673 2,523
Income from fiduciary-related activities 3,958 3,675 3,248
Gain on sale of mortgages 4,923 2,820 3,349
Other operating income 9,433 6,962 6,780
Investment security gains/(losses) 73 173 195
- - --------------------------------------------------------------------------------------------------------------------------
Total other income 30,921 24,374 22,756
- - --------------------------------------------------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 57,184 59,575 57,508
Net occupancy expense 8,371 7,958 7,920
Furniture and equipment expense 7,452 5,753 5,735
FDIC insurance 719 751 7,180
Other operating expenses 39,480 35,795 36,294
- - --------------------------------------------------------------------------------------------------------------------------
Total other expenses 113,206 109,832 114,637
- - --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 66,658 61,377 48,345
Provision for income taxes 21,084 19,315 15,638
- - --------------------------------------------------------------------------------------------------------------------------
Net Income $ 45,574 $ 42,062 $ 32,707
==========================================================================================================================
Per share information:
Basic earnings $ 1.27 $ 1.19 $ 0.94
Diluted earnings 1.26 1.18 0.93
Cash dividends 0.57 0.55 0.52
Average shares outstanding:
Basic 35,859 35,413 34,934
Diluted 36,179 35,628 35,012
==========================================================================================================================
Per share amounts adjusted for the three-for-two stock split.
The accompanying notes are an integral part of these financial statements.
42
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- - --------------------------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- - ---------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- - ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 45,574 $ 42,062 $ 32,707
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion 9,234 11,298 11,131
Provision for loan and lease losses 5,247 4,557 4,807
Deferred taxes 4,543 4,641 227
Loss on securities transactions (73) (173) (195)
Gain on sale of loans (4,923) (2,820) (3,534)
Gain on sale of other real estate (274) (327) (289)
Mortgage loans originated for resale (282,073) (155,138) (204,986)
Sale of mortgage loans originated for resale 273,707 150,932 204,819
Decrease/(increase) in accrued interest receivable 707 (684) (516)
Increase in accrued interest payable 980 2,239 871
(Decrease)/increase in accrued expenses and taxes payable (2,382) (1,757) 2,584
Other, net (1,444) (341) (328)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,823 54,489 47,298
- - ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from the sale of available-for-sale securities 33,986 79,100 53,175
Proceeds from the maturity of investment securities 346,787 253,380 195,684
Purchase of available-for-sale securities (611,524) (298,156) (168,934)
Purchase of held-to-maturity securities -- (1,373) (26,423)
Increase in loans and leases (130,700) (151,456) (115,852)
Capital expenditures (7,722) (7,226) (7,578)
Net cash and cash equivalents acquired/(paid) in acquisition -- 3,579 (31,298)
Purchase of insurance products (9,438) (50,000) --
Other, net -- 137 595
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (378,611) (172,015) (100,631)
- - ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase in deposits 163,694 11,183 19,110
Net increase/(decrease) in short-term borrowings 31,802 (2,518) 38,885
Proceeds from issuance of long-term debt 225,000 75,000 40,000
Repayment of long-term debt (36,728) (17,355) (18,366)
Proceeds from issuance of common stock 551 619 5,945
Cash paid for treasury stock (742) -- --
Dividends paid (20,037) (18,297) (16,226)
Other, net 32 (43) --
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 363,572 48,589 69,348
- - ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 33,784 (68,937) 16,015
Cash and cash equivalents at January 1 147,494 216,431 200,416
- - ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 181,278 $ 147,494 $ 216,431
===========================================================================================================================
Cash and Cash Equivalents:
Cash and due from banks $ 105,263 $ 102,702 $ 113,292
Short-term investments 76,015 44,792 103,139
- - ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 181,278 $ 147,494 $ 216,431
===========================================================================================================================
The accompanying notes are an integral part of these financial statements.
43
- - --------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
- - --------------------------------------------------------------------------------
SUSQUEHANNA BANKSHARES, INC. AND SUBSIDIARIES
- - ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998, 1997, and 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Dollars in thousands Common Retained Comprehensive Treasury Total
except per share data Stock Surplus Earnings Income Stock Equity
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 $30,712 $ 80,766 $193,987 $ 3,334 $(323) $308,476
Net income 32,707 32,707
Change in unrealized gain on securities, net of
taxes of $(1,395) and reclassification
adjustment of $195 (2,644) (2,644)
- - ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 32,707 (2,644) 30,063
Stock issued under employee benefit plans 31 810 168 1,009
Stock issued in public offering 390 4,546 4,936
Cash dividends declared:
By pooled entities (826) (826)
Per common share of $0.52 (15,400) (15,400)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 31,133 86,122 210,468 690 (155) 328,258
===========================================================================================================================
Net income 42,062 42,062
Change in unrealized gain on securities,
net of taxes of $1,974 and
reclassification adjustment of $173 3,297 3,297
- - ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 42,062 3,297 45,359
Stock issued under employee benefit plans 50 569 619
Effect of three-for-two stock split 15,570 (15,608) (38)
Acquisition of Founders' Bank 1,121 6,497 336 (194) 7,760
Cash paid for fractional shares of
acquired entities (5) (5)
Cash dividends declared:
By pooled entities (598) (598)
Per common share of $0.55 (17,699) (17,699)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 47,874 77,575 234,569 3,793 (155) 363,656
===========================================================================================================================
Net income 45,574 45,574
Change in unrealized gain on securities,
net of taxes of $775 and
reclassification adjustment of $73 2,162 2,162
- - ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 45,574 2,162 47,736
Stock issued under employee benefit plans 12 325 214 551
Effect of three-for-two stock split 23,939 (23,902) 37
Purchase of treasury stock (742) (742)
Cash paid for fractional shares of
acquired entities (5) (5)
Cash dividends declared:
By pooled entities (752) (752)
Per common share of $0.57 (19,285) (19,285)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $71,825 $ 53,993 $260,106 $ 5,955 $(683) $391,196
===========================================================================================================================
Dividends per share have been adjusted to reflect the three-for-two stock
splits.
The accompanying notes are an integral part of these financial statements.
44
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
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 Bancshares, Inc., and its
wholly-owned subsidiaries: Farmers First Bank ("Farmers"), Farmers & Merchants
Bank and Trust ("F&M"), First American National Bank of Pennsylvania ("FANB"),
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, 1998, 1997, and 1996. 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 multifinancial institution holding
company which operates eight commercial banks and one savings bank based upon
the sound principles of supercommunity banking. These subsidiaries provide
financial services from 134 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 $34,101 and $35,530 at December
31, 1998 and 1997, 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 $137,596 in 1998, $120,421 in 1997, and
$116,281 in 1996. Income taxes paid were $19,478 in 1998, $16,959 in 1997, and
$14,674 in 1996. Amounts transferred to other real estate owned were $8,408 in
1998, $5,516 in 1997, and $8,040 in 1996.
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 material 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, 1998, or 1997. 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 allowance for loan and lease losses, and recoveries
on previously charged-off loans and leases are added to the allowance.
45
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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. Only
commercial loans exceeding $100 are individually evaluated for impairment. 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 uncollectable, the portion deemed uncollectable 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;
furniture and equipment, 3-20 years. Leasehold improvements are amortized over
the shorter of the lease term, or 10-20 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
by management on an ongoing basis. An impairment may occur whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
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 and the actuarial
methods. Loan fees and certain direct loan origination costs are being deferred
and the net amount amortized as an adjustment to the related loan yield on the
interest method, generally over the contractual life of the related loans.
Nonaccrual loans are those on which the accrual of interest has ceased, and
where all previously accrued and unpaid interest is reversed. Loans, other than
consumer loans, are placed on nonaccrual status when principal or interest is
past due 90 days or more and the 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
are either 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.
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.
On April 15, 1998, 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 1, 1998, to common shareholders of record June 15, 1998. All
share, per share and option data in these financial statements have been
adjusted to give effect to the stock splits.
Consolidated Statements of Changes in Stockholders' Equity
- - --------------------------------------------------------------------------------
Common Shares Outstanding
- - --------------------------------------------------------------------------------
Balance, January 1, 1996 15,313,844
Stock issued under employee benefit plans 37,344
Stock issued in public offering 195,000
- - --------------------------------------------------------------------------------
Balance, December 31, 1996 15,546,188
Stock issued under employee benefit plans 24,997
Effect of three-for-two stock split 7,774,953
Acquisition of Founders' Bank 560,354
- - --------------------------------------------------------------------------------
Balance, December 31, 1997 23,906,492
Stock issued under employee benefit plans 27,167
Effect of three-for-two stock split 11,956,652
Purchase of treasury stock (33,000)
- - --------------------------------------------------------------------------------
Balance, December 31, 1998 35,857,311
================================================================================
46
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Recent Accounting Pronouncements. During 1998, Susquehanna adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), which established standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains, and losses).
SFAS 130 requires that all items required to be recognized under accounting
standards as components of comprehensive income are to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes a reclassification
adjustment for net realized investment gains included in net income of $73,
$173, and $195 for the years ended December 31, 1998, 1997, and 1996,
respectively. The new standard requires only additional disclosures in the
consolidated financial statements; it does not affect Susquehanna's financial
position or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
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.
Management has reviewed SFAS 131 and determined that Susquehanna has one
qualifying segment, and, therefore, no additional disclosure is required.
During 1998, Susquehanna also adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which revises employers' disclosures
about pensions and other postretirement benefit plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous pronouncements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in June of 1998. SFAS 133 establishes standards for recording
derivative financial instruments on the balance sheet at their fair value. This
Statement requires changes in the fair value of derivatives be recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management anticipates that the
adoption of SFAS 133 will not have a material effect on Susquehanna's financial
condition or results of operations.
SFAS 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," requires that after a securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classifies the resulting
mortgage-backed securities or other retained interest based on its ability and
intent to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by non-mortgage
banking enterprises. The Statement is effective for the first fiscal quarter
beginning after December 15, 1998. Management anticipates that this Statement
will not have a material effect on Susquehanna's financial condition or results
of operations.
- - --------------------------------------------------------------------------------
2. Completed Acquisitions
On December 16, 1998, Susquehanna completed the acquisition of Cardinal Bancorp,
Inc. ("CBI"), a Pennsylvania bank holding company with $138 million in assets
and $114 million in deposits at the acquisition date. Susquehanna issued 2.048
shares of common stock to the shareholders of CBI for each of the 990,000
outstanding common shares of CBI. 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
CBI for all periods presented.
Previously reported information has been restated as follows:
47
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------
1997
- - ---------------------------------------------------------------------------------------------------------------------------
Susquehanna CBI Susquehanna
As Reported As Reported Restated
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income $145,653 $5,739 $151,392
Provision for loan and lease losses 4,557 -- 4,557
Other income 23,754 620 24,374
Other expense 106,028 3,804 109,832
- - ---------------------------------------------------------------------------------------------------------------------------
Income before taxes 58,822 2,555 61,377
Taxes 18,620 695 19,315
- - ---------------------------------------------------------------------------------------------------------------------------
Net income $ 40,202 $1,860 $ 42,062
===========================================================================================================================
Earnings per share: Basic $ 1.20 $ 1.19
Diluted $ 1.20 $ 1.18
Average shares outstanding: Basic 33,386 2,027 35,413
Diluted 33,495 2,133 35,628
- - ---------------------------------------------------------------------------------------------------------------------------
1996
- - ---------------------------------------------------------------------------------------------------------------------------
Susquehanna CBI Susquehanna
As Reported As Reported Restated
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income $139,599 $5,434 $145,033
Provision for loan and lease losses 4,807 -- 4,807
Other income 22,223 533 22,756
Other expense 110,541 4,096 114,637
- - ---------------------------------------------------------------------------------------------------------------------------
Income before taxes 46,474 1,871 48,345
Taxes 15,291 347 15,638
- - ---------------------------------------------------------------------------------------------------------------------------
Net income $ 31,183 $1,524 $ 32,707
===========================================================================================================================
Earnings per share: Basic $ 0.95 $ 0.94
Diluted $ 0.95 $ 0.93
Average shares outstanding: Basic 32,907 2,027 34,934
Diluted 32,916 2,096 35,012
On January 4, 1999, Susquehanna completed the acquisition of First Capitol Bank
("FCB"), a Pennsylvania commercial bank with $111 million in assets and $93
million in deposits at the acquisition date. Susquehanna issued 2.028 shares of
common stock to the shareholders of FCB for each of the 520,393 outstanding
common shares of FCB. The transaction will be accounted for under the pooling-
of-interests method of accounting. No pro forma data has been disclosed because
the transaction is not material to Susquehanna.
- - --------------------------------------------------------------------------------
3. Short-Term Investments
The book value of short-term investments and weighted average interest rates on
December 31, 1998 and 1997 were as follows:
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Book Book
Value Rates Value Rates
- - --------------------------------------------------------------------------------
Interest-bearing deposits
in other banks $17,926 4.69% $15,543 5.55%
Federal funds sold 44,435 4.75% 20,084 6.24%
Money market funds 13,654 5.10% 9,165 5.17%
- - --------------------------------------------------------------------------------
Total $76,015 $44,792
================================================================================
48
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
4. Investment Securities
The amortized cost and fair values of investment securities at December 31, 1998
and 1997, are as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 1998 Cost Gains Losses Value
- - ---------------------------------------------------------------------------------------------------------------------------
Available-for-Sale
U.S. Treasury $ 65,284 $ 897 $ -- $ 66,181
U.S. Government agencies 209,341 1,245 122 210,464
State and municipal 64,017 1,506 76 65,447
Corporate debt securities 34,993 399 -- 35,392
Mortgage-backed securities 462,126 851 327 462,650
Equity securities 28,170 4,792 10 32,952
- - ---------------------------------------------------------------------------------------------------------------------------
$863,931 $ 9,690 $535 $873,086
- - ---------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 500 $ -- $ -- $ 500
State and municipal 55,810 1,155 -- 56,965
Corporate debt securities 25 -- -- 25
Mortgage-backed securities 3,502 27 -- 3,529
- - ---------------------------------------------------------------------------------------------------------------------------
$ 59,837 $ 1,182 $ -- $ 61,019
- - ---------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $923,768 $10,872 $535 $934,105
===========================================================================================================================
- - ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $118,972 $ 692 $ 40 $119,624
U.S. Government agencies 251,794 1,183 247 252,730
State and municipal 34,003 824 3 34,824
Corporate debt securities 72,136 549 13 72,672
Mortgage-backed securities 112,334 643 236 112,741
Equity securities 22,275 2,868 2 25,141
- - ---------------------------------------------------------------------------------------------------------------------------
$611,514 $ 6,759 $541 $617,732
- - ---------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 750 $ -- $ -- 750
State and municipal 75,882 896 39 76,739
Corporate debt securities 50 -- -- 50
Mortgage-backed securities 6,420 24 -- 6,444
- - ---------------------------------------------------------------------------------------------------------------------------
$ 83,102 $ 920 $ 39 $ 83,983
- - ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $694,616 $ 7,679 $580 $701,715
===========================================================================================================================
49
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
At December 31, 1998 and 1997, investment securities with a carrying value
of $289,186 and $308,109, 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, 1998 or 1997.
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, 1998, 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 $115,218 $115,832
After one year but within
five years 317,682 320,636
After five years but within
ten years 75,986 76,483
After ten years 326,875 327,183
- - --------------------------------------------------------------------------------
835,761 840,134
- - --------------------------------------------------------------------------------
Securities Held-to-Maturity:
Within one year $ 25,191 $ 25,390
After one year but within
five years 28,785 29,422
After five years but within
ten years 2,414 2,576
After ten years 3,447 3,631
- - --------------------------------------------------------------------------------
59,837 61,019
- - --------------------------------------------------------------------------------
Total debt securities $895,598 $901,153
================================================================================
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 1998, 1997, and 1996,
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, 1998
- - --------------------------------------------------------------------------------
Gross gains $208 $ 0
Gross losses 133 2
- - --------------------------------------------------------------------------------
Net gains $ 75 $(2)
================================================================================
- - --------------------------------------------------------------------------------
For the year ended December 31, 1997
- - --------------------------------------------------------------------------------
Gross gains $446 $ 1
Gross losses 271 3
- - --------------------------------------------------------------------------------
Net gains $175 $(2)
================================================================================
- - --------------------------------------------------------------------------------
For the year ended December 31, 1996
- - --------------------------------------------------------------------------------
Gross gains $326 $ 1
Gross losses 130 2
- - --------------------------------------------------------------------------------
Net gains $196 $(1)
================================================================================
Interest earned on investment securities for the years ended December 31 was
as follows:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Taxable $47,706 $36,438 $38,309
Tax-advantaged 5,398 5,405 6,038
- - --------------------------------------------------------------------------------
Total $53,104 $41,843 $44,347
================================================================================
50
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
5. Loans and Leases
At December 31, loans and leases, net of unearned income ($26,293 at December
31, 1998, and $25,585 at December 31, 1997), were as follows:
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Commercial, financial,
and agricultural $ 288,852 $ 317,579
Real estate--construction 250,835 225,971
Real estate--mortgage 1,768,172 1,708,409
Consumer 344,007 327,172
Leases 121,684 64,422
- - --------------------------------------------------------------------------------
Total $2,773,550 $2,643,553
================================================================================
At December 31, 1998, commercial, financial, and agricultural loans included
a $1.2 million, restructured loan. Susquehanna had no outstanding commitment to
advance additional funds on this loan.
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
1998, 1997, and 1996 follows:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Balance--January 1 $26,779 $29,017 $34,466
Additions 20,379 11,797 19,071
Deductions:
Amounts collected 20,656 11,616 23,190
Other changes -- (2,419) (1,330)
- - --------------------------------------------------------------------------------
Balance--December 31
Current $26,502 $26,779 $29,017
================================================================================
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, 1998 and 1997, is presented as
follows:
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Impaired loans without a related
reserve $ 9,437 $11,359
Impaired loans with a reserve 3,571 1,814
- - --------------------------------------------------------------------------------
Total impaired loans $13,008 $13,173
================================================================================
Reserve for impaired loans $ 591 $ 269
================================================================================
An analysis of impaired loans for the years ended December 31, 1998 and 1997, is
presented as follows:
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Average balance of impaired loans $11,869 $13,871
Interest income on impaired loans
(cash basis) 242 376
- - --------------------------------------------------------------------------------
6. Allowance for Loan and Lease Losses Changes in the allowance for loan losses
were as follows:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Balance--January 1 $35,508 $34,757 $30,610
Allowance acquired in
business combination --- 1,460 4,229
Provision charged to
operating expenses 5,247 4,557 4,807
- - --------------------------------------------------------------------------------
40,755 40,774 39,646
- - --------------------------------------------------------------------------------
Charge-offs (6,954) (6,628) (6,553)
Recoveries 1,370 1,362 1,664
- - --------------------------------------------------------------------------------
Net charge-offs (5,584) (5,266) (4,889)
- - --------------------------------------------------------------------------------
Balance--December 31 $35,171 $35,508 $34,757
================================================================================
51
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
7. Premises and Equipment
Property, buildings, and equipment, at December 31, were as follows:
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Land $ 8,045 $ 8,049
Buildings 43,987 41,169
Furniture and equipment 53,017 45,325
Leasehold improvements 6,266 6,228
Land improvements 1,148 1,532
- - --------------------------------------------------------------------------------
112,463 102,303
- - --------------------------------------------------------------------------------
Less: Accumulated depreciation
and amortization 59,290 52,486
- - --------------------------------------------------------------------------------
$ 53,173 $ 49,817
================================================================================
Depreciation and amortization expense charged to operations amounted to
$5,636 in 1998, $5,340 in 1997, and $4,969 in 1996.
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, 1998, are as
follows:
- - --------------------------------------------------------------------------------
Operating Leases
- - --------------------------------------------------------------------------------
1999 $2,181
2000 1,312
2001 1,085
2002 967
2003 705
Subsequent years 3,416
- - --------------------------------------------------------------------------------
$9,666
================================================================================
Total rent expense charged to operations amounted to $2,919 in 1998, $2,678 in
1997, and $2,384 in 1996.
- - --------------------------------------------------------------------------------
8. Deposits
Deposits at December 31 were as follows:
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
Non-interest-bearing:
Demand $ 422,573 $ 368,470
Interest-bearing:
Interest-bearing demand 960,696 817,984
Savings 443,528 442,752
Time 1,138,897 1,157,393
Time of $100 or more 158,638 174,039
- - --------------------------------------------------------------------------------
Total deposits $3,124,332 $2,960,638
================================================================================
- - --------------------------------------------------------------------------------
9. Short-Term Borrowings
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
- - ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- - ---------------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $ 98,694 4.46% $ 83,827 4.88%
Treasury tax and loan notes 4,837 5.00 9,472 4.92
Federal funds purchased 1,000 5.43 8,500 7.25
Federal Home Loan Bank borrowings 33,070 5.25 4,000 6.01
- - ---------------------------------------------------------------------------------------------------------------------------------
$137,601 $105,799
=================================================================================================================================
Under an agreement with the Federal Home Loan Bank, Susquehanna subsidiary banks
and savings bank have a line of credit available to them totaling $685 million
and $538 million, of which $308 million and $96 million was outstanding at
December 31, 1998 and 1997, respectively.
52
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
10. Long-Term Debt
Long-term debt at December 31 was as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- - ---------------------------------------------------------------------------------------------------------------------------
Farmers:
Installment note due June 2, 1999 $10 9.00% $28 9.00%
Federal Home Loan Bank borrowings due
January 11, 2002 10,000 5.60 35,000 5.87
Federal Home Loan Bank borrowings due
February 20, 2008 50,000 5.43 --- ---
Farmers & Merchants:
Federal Home Loan Bank borrowings due
January 24, 2000 8,750 5.14 --- ---
Federal Home Loan Bank borrowings due
January 22, 2003 26,250 5.69 --- ---
SBLC:
Term note due July 19, 1998 -- -- 5,000 7.51
Term note due July 19, 2003 10,000 6.09
Susquehanna East:
Federal Home Loan Bank borrowings due
June 15, 1999 3,000 6.30 3,000 6.30
Susquehanna South:
Federal Home Loan Bank borrowings due
at various dates through 2018 176,638 5.55 53,340 5.63
Federal Home Loan Bank term loan due
September 1, 2014 512 5.00 520 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
- - ---------------------------------------------------------------------------------------------------------------------------
$370,160 $181,888
===========================================================================================================================
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
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
11. Income Taxes
The components of the provision for income taxes are as follows:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Current $17,109 $17,051 $15,411
Deferred 3,975 2,264 227
- - --------------------------------------------------------------------------------
Total $21,084 $19,315 $15,638
================================================================================
The provision for income taxes differs from the amount derived from applying the
statutory income tax rate to income before income taxes as follows:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Provision at statutory rates $23,330 $21,482 $16,921
Tax-advantaged income (3,044) (2,910) (3,165)
Other, net 798 743 1,882
- - --------------------------------------------------------------------------------
Total $21,084 $19,315 $15,638
================================================================================
Accounting for income tax 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:
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $13,107 $12,729 $11,781
Loan fee income (404) 817 1,496
Accrued pension expense 1,314 1,473 1,644
Deferred directors' fees 811 760 744
Deferred compensation 108 177 180
Nonaccrual loan interest 1,073 1,065 1,514
Core deposit intangible 25 490 (179)
Other assets 1,179 1,143 1,183
Deferred tax liabilities:
FHLB stock dividends (395) (395) (330)
Premises and equipment (2,146) (2,158) (1,699)
Operating lease income, net (6,770) (4,731) (2,340)
Purchase accounting 449 (519) (819)
Recapture of savings banks'
bad debt reserve (598) (1,016) (1,058)
Unrealized investment
gains and losses (3,200) (2,425) (451)
Other liabilities (2,194) (301) (319)
- - --------------------------------------------------------------------------------
Net deferred income tax assets $2,359 $7,109 $11,347
================================================================================
- - --------------------------------------------------------------------------------
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 orginate loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
statement of condition. The contract or notional amount of those instruments
reflect the extent of involvement Susquehanna has in particular classes of
financial instruments.
Susquehanna's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for loan commitments and standby
letters of credit is represented by the contractual amount of these instruments.
Susquehanna uses the same credit policies for these instruments as it does for
on-balance sheet instruments.
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, 1998 and
1997, are as follows:
- - --------------------------------------------------------------------------------
Contractual 1998 1997
- - --------------------------------------------------------------------------------
Financial instruments whose contract amounts represent
credit risk:
Standby letters of credit $ 33,117 $ 30,438
Commitments to originate loans 93,527 77,292
Unused portion of home equity and credit card lines 174,653 167,543
Other unused commitments, principally commercial
lines of credit 366,674 343,595
54
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
13. Fair Value of Financial Instruments
Susquehanna's estimated fair value information about financial instruments is
presented below. Some of this information is presented whether it is recognized
in the Consolidated Balance Sheet or not, and if 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 herewith may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. The disclosure requirements exclude 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. 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 one year.
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:
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- - ---------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 105,263 $ 105,263 $ 102,702 $ 102,702
Short-term investments 76,015 76,015 44,792 44,792
Investment securities 932,923 934,105 700,834 701,715
Loans, net of unearned income and allowance 2,618,020 2,699,606 2,544,748 2,582,251
Liabilities:
Deposits 3,124,332 3,135,655 2,960,638 2,969,833
Short-term borrowings 137,601 137,601 105,799 105,799
Long-term debt 370,160 383,583 181,888 186,720
55
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
14. Benefit Plans
Susquehanna maintains a single non-contributory pension plan that covers
substantially all full-time employees. In addition, Susquehanna offers life
insurance and other benefits to its retirees. A summary of the plans at December
31 is as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 35,549 $ 31,760 $ 2,888 $ 3,441
Service cost 1,529 1,959 116 92
Interest cost 2,238 2,216 197 191
Plan participants' contributions -- -- 72 77
Amendments (3,936) -- 120 28
Actuarial (gain)/loss 2,860 (234) 36 (775)
Acquisitions 2,345 1,028 -- --
Benefits paid (980) (1,180) (178) (166)
- - ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 39,605 $ 35,549 $ 3,251 $ 2,888
- - ---------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year $ 37,496 $ 30,517 $ -- $ --
Actual return on plan assets 2,734 5,582 -- --
Acquisitions 3,789 1,222 -- --
Employer contributions -- 1,355 106 89
Plan participants' contributions -- -- 72 77
Benefits paid (980) (1,180) (178) (166)
- - ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 43,039 $ 37,496 $ -- $ --
- - ---------------------------------------------------------------------------------------------------------------------------
Funded status $ 3,434 $ 1,947 $(3,251) $(2,888)
Unrecognized net actuarial gain (4,363) (7,109) (722) (794)
Unrecognized prior service cost (2,861) 795 395 302
Unrecognized transition asset (548) (372) 1,590 1,703
- - ---------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (4,338) $ (4,739) $(1,988) $(1,677)
===========================================================================================================================
Components of Net Periodic Benefit Expense/(Income)
Pension Benefits Other Benefits
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Service cost $ 1,529 $ 1,959 $ 2,411 $116 $ 92 $166
Interest cost 2,238 2,216 2,264 197 191 243
Expected return on plan assets (3,332) (2,707) (2,096) -- -- --
Amortization of prior service cost (279) 102 104 27 24 21
Amortization of transition asset (67) (86) (86) 113 113 113
Amortization of net actuarial gain (322) (326) 4 (36) (42) 4
- - ---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit expense/(income) $ (233) $ 1,158 $ 2,601 $417 $378 $547
===========================================================================================================================
Weighted-Average Assumptions at Year-End
Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected return on plan assets 9.00% 9.00% 8.00% -- -- --
Rate of compensation increase 4.50% 4.50% 5.00% 4.50% 4.50% 5.00%
The plan assets were invested principally in U.S. Government securities and
listed stocks and bonds including 30,697 and 29,531 shares of Susquehanna common
stock at December 31, 1998 and 1997, respectively.
56
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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 $1,213 in 1998, $1,007 in 1997, and $889 in
1996.
Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows
employees to purchase Susquehanna common stock up to 3% of their salary at
discount to the market price, through payroll deductions.
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 1,462,500 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. 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. The option prices range
from a low of $6.44 to a high of $24.75.
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
assumptions noted below. Option data noted below has been adjusted for the
three-for-two stock splits of 1998 and 1997. The pro forma effects on net income
include both the Compensation Plan and the ESPP.
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- - ---------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 676,151 $12.22 566,523 $11.33 135,168 $ 7.43
Granted 224,219 24.75 120,878 16.47 431,355 12.56
Exercised 7,500 13.00 11,250 13.00 -- --
- - ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 892,870 $15.36 676,151 $12.22 566,523 $11.33
===========================================================================================================================
Outstanding at end of year:
Granted prior to 1996 135,168 $ 7.43 135,168 $ 7.43 135,168 $ 7.43
Granted 1996 412,605 12.54 420,105 12.55 431,355 12.56
Granted 1997 120,878 16.47 120,878 16.47 -- --
Granted 1998 224,219 24.75 -- -- -- --
- - ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 892,870 $15.36 676,151 $12.22 566,523 $11.33
===========================================================================================================================
Options exercisable at year-end:
Granted prior to 1996 135,168 $7.43 135,168 $7.43 135,168 $7.43
Granted 1996 73,317 10.39 80,817 10.63 92,067 10.92
Granted 1997 73,629 15.85 73,629 15.85 -- --
Granted 1998 -- -- -- -- -- --
- - ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 282,114 $10.40 289,614 $10.46 227,235 $ 8.84
===========================================================================================================================
Weighted average remaining contractual maturity
of options outstanding at year-end:
Granted prior to 1996 4 years
Granted 1996 7 years
Granted 1997 8 years
Granted 1998 9 years
- - ---------------------------------------------------------------------------------------------------------------------------
Total 7 years
57
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
Dollars Per Share Dollars Per Share Dollars Per Share
- - ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $1,348 $6.01 $521 $4.31 $1,333 $3.09
Fair value disclosures pro forma effect on:
Net income 484 428 291
Basic earnings per share 0.01 0.01 0.01
Diluted earnings per share 0.01 0.01 0.01
- - ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value assumptions:
Dividend yield 3.0% 3.0% 3.0%
Expected volatility 22.0 20.0 20.0
Risk-free interest rate 5.5 6.7 6.6
Expected term 7 years 7 years 7 years
- - ----------------------------------------------------------------------------------------------------------------------------------
15. Susquehanna Bancshares, Inc.(Parent Only)
Condensed Balance Sheets
- - --------------------------------------------------------------------------------
December 31 1998 1997
- - --------------------------------------------------------------------------------
Assets
Cash in subsidiary bank $ 746 $ 794
Short-term investments 62 665
Investment in consolidated subsidiaries at equity in
net assets 465,560 436,879
Other investment securities 5,466 11,999
Premises and equipment (net) 215 96
Other assets 11,276 4,082
- - --------------------------------------------------------------------------------
Total assets $483,325 $454,515
================================================================================
Liabilities
Long-term debt $ 85,000 $ 85,000
Accrued taxes and expenses payable 7,129 5,859
- - --------------------------------------------------------------------------------
Total liabilities 92,129 90,859
- - --------------------------------------------------------------------------------
Equity
Preferred stock (no par) -- --
Common stock ($2 par value) 71,825 47,874
Surplus 53,993 77,575
Retained earnings 260,106 234,569
Accumulated other comprehensive income, net of taxes 5,955 3,793
Less: Treasury stock at cost 683 155
- - --------------------------------------------------------------------------------
Total stockholders' equity 391,196 363,656
- - --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $483,325 $454,515
================================================================================
- - --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only)
Condensed Statements of Income
- - --------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 68,171 $28,537 $24,356
Interest and dividends on investment securities 231 191 546
Interest and management fee from subsidiaries 4,137 4,115 3,601
- - --------------------------------------------------------------------------------
Total income 72,539 32,843 28,503
- - --------------------------------------------------------------------------------
Expenses
Interest expense 6,864 6,861 6,684
Other expenses 4,036 4,096 3,097
- - --------------------------------------------------------------------------------
Total expenses 10,900 10,957 9,781
- - --------------------------------------------------------------------------------
Income before taxes, and equity in undistributed
income of subsidiaries 61,639 21,886 18,722
Income taxes 241 (386) (2)
Equity in undistributed income of subsidiaries (15,824) 19,790 13,983
- - --------------------------------------------------------------------------------
Net Income $ 45,574 $42,062 $32,707
================================================================================
58
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only)
Condensed Statements of Cash Flows
- - --------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- - --------------------------------------------------------------------------------
Operating Activities:
Net income $ 45,574 $ 42,062 $ 32,707
Adjustment to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 313 158 182
Equity in undistributed income of
subsidiaries and income of subsidiaries
accrued not received 15,824 (19,790) (13,983)
Increase in other assets (6,712) (549) (1,173)
Increase/(decrease) in accrued expenses
payable 1,271 602 (55)
Other, net 960 29 (809)
- - --------------------------------------------------------------------------------
Net cash provided from operating activities 57,230 22,512 16,869
- - --------------------------------------------------------------------------------
Investing Activities:
Purchase of investment securities -- (8,489) (29,987)
Proceeds from the sale/maturities of
investment securities 8,500 -- 29,987
Net cash paid in acquisition -- -- (62,700)
Capital expenditures (179) (72) (24)
Net infusion of investment in subsidiaries (46,006) (1,200) (9,400)
- - --------------------------------------------------------------------------------
Net cash used for investing activities (37,685) (9,761) (72,124)
- - --------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of long-term debt -- -- 35,000
Proceeds from issuance of common stock 551 619 5,945
Dividends paid (20,037) (18,297) (16,226)
Cash paid for treasury stock (742) -- --
Other, net 32 (43) --
- - --------------------------------------------------------------------------------
Net cash (used for)/provided from financing
activities (20,196) (17,721) 24,719
- - --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (651) (4,970) (30,536)
Cash and cash equivalents at January 1 1,459 6,429 36,965
- - --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 808 $ 1,459 $ 6,429
================================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 746 $ 794 $ 603
Short-term investments 62 665 5,826
- - --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 808 $ 1,459 $ 6,429
================================================================================
59
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
16. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per
share for the years ended below:
- - -----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income available to common
stockholders $45,574 35,859 $1.27 $42,062 35,413 $1.19 $32,707 34,934 $0.94
Effect of Diluted Securities:
Stock options outstanding 320 215 78
- - -----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share:
Income available to common
stockholders and assumed
conversion $45,574 36,179 $1.26 $42,062 35,628 $1.18 $32,707 35,012 $0.93
===================================================================================================================================
- - --------------------------------------------------------------------------------
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, 1998,
$21,646 is available for dividend distribution to Susquehanna in 1999 from its
banking subsidiaries.
Included in cash and due from banks are balances required to be maintained
by banking subsidiaries on deposit with the Federal Reserve. The amounts of such
reserves are based on percentages of certain deposit types and totalled $5,638
and $7,019 at December 31, 1998 and 1997, 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 material effect on the financial position, results of
operations, and cash flows of Susquehanna, if disposed of unfavorably.
60
PriceWaterhouseCoopers LLP
One South Market Square
Harrisburg, PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Susquehanna Bancshares, Inc.
Lititz, Pennsylvania
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Susquehanna Bancshares, Inc. (Susquehanna) and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, PA
January 26, 1999
61
- - --------------------------------------------------------------------------------
Summary of Quarterly Financial Data
- - --------------------------------------------------------------------------------
The unaudited quarterly results of operations for the years ended December 31,
1998 and 1997, are as follows:
- - --------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------
Quarter Ended Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
- - --------------------------------------------------------------------------------------------------------------------------
Interest income $73,430 $73,885 $73,638 $71,813 $70,971 $69,824 $67,575 $65,682
Interest expense 34,650 35,178 34,900 33,848 32,463 31,527 29,653 29,017
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income 38,780 38,707 38,738 37,965 38,508 38,297 37,922 36,665
Provision for loan and lease losses 1,387 1,375 1,252 1,233 1,150 981 1,220 1,206
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 37,393 37,332 37,486 36,732 37,358 37,316 36,702 35,459
- - --------------------------------------------------------------------------------------------------------------------------
Other income 7,653 7,822 8,306 7,140 6,939 6,239 5,727 5,469
Other expenses 28,022 28,359 28,929 27,896 27,390 27,204 28,553 26,685
- - --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 17,024 16,795 16,863 15,976 16,907 16,351 13,876 14,243
Applicable income taxes 5,249 5,361 5,533 4,941 5,425 5,161 4,395 4,334
- - --------------------------------------------------------------------------------------------------------------------------
Net income $11,775 $11,434 $11,330 $11,035 $11,482 $11,190 $ 9,481 $ 9,909
- - --------------------------------------------------------------------------------------------------------------------------
Earnings per common share: Basic $ 0.33 $ 0.32 $ 0.32 $ 0.31 $ 0.32 $ 0.31 $ 0.27 $ 0.28
Diluted 0.33 0.32 0.31 0.30 0.32 0.31 0.27 0.28
- - --------------------------------------------------------------------------------
Market for Susquehanna Capital Stock
- - --------------------------------------------------------------------------------
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 for the years 1998 and 1997.
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Quarterly Quarterly
Market Price Dividend Market Price Dividend
- - ---------------------------------------------------------------------------------------------------------------------------
First Quarter $26.00-$21.67 $0.14 $17.55-$14.33 $0.13
Second Quarter $26.08-$22.67 $0.14 $18.55-$14.45 $0.13
Third Quarter $26.75-$17.88 $0.14 $21.17-$17.25 $0.14
Fourth Quarter $22.75-$15.50 $0.15 $25.92-$17.67 $0.14
Common stock prices and dividends have been adjusted to reflect Susquehanna's
three-for-two stock splits of 1998 and 1997.
62
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
PART III
--------
Item 10. Directors and Executive Officers of Susquehanna.
- - ------- -----------------------------------------------
The information required by this Item will be included in Susquehanna's
Proxy Statement for its 1999 Annual Meeting of Shareholders (the "1999 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 Susquehanna."
Item 11. Executive Compensation
- - ------- ----------------------
The information required by this Item will be included in the 1999 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 will be included in the 1999 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 will be included in the 1999 Proxy
Statement in the Business Relationships; Related Transactions and Certain Legal
Proceedings section, and is incorporated herein by reference.
64
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
- - ------- --------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements. See Item 8 of this report for the consolidated
financial statements of Susquehanna and its subsidiaries (including
the index to financial statements).
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits. A list of the Exhibits to this Form 10-K is set forth on the
Exhibit Index immediately preceding such exhibits.
(b) Report on Form 8-K.
(1) Susquehanna filed a Current Report on form 8-K, dated December 16,
1998, to report the consummation of the transactions contemplated in
the Agreement and Plan of Affiliation dated April 13, 1998, between
and among Susquehanna, Susquehanna Bancshares West, Inc., Cardinal
Bancorp, Inc. and the First American National Bank of Pennsylvania,
filed pursuant to Item 5.
(c) Exhibits. The exhibits required to be filed as part of this report pursuant
to Item 601 of Regulation S-K are filed herewith or incorporated by
reference.
(d) Financial Statement Schedule. None Required.
65
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
---------------------------
Robert S. Bolinger, President
Dated: March 17, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ Robert S. Bolinger President, Chief Executive March 17, 1999
- - -------------------------- Officer and Director
(Robert S. Bolinger)
/s/ Drew K. Hostetter Vice President, Treasurer March 17, 1999
- - -------------------------- and Chief Financial Officer
(Drew K. Hostetter)
/s/ Richard M. Cloney Vice President, Secretary March 18, 1999
- - -------------------------- and Director
(Richard M. Cloney)
/s/ James G. Apple Director March 17, 1999
- - --------------------------
(James G. Apple)
/s/ Trudy B. Cunningham Director March 18, 1999
- - --------------------------
(Trudy B. Cunningham)
/s/ John M. Denlinger Director March 17, 1999
- - --------------------------
(John M. Denlinger)
/s/ Owen O. Freeman, Jr. Director March 17, 1999
- - --------------------------
(Owen O. Freeman, Jr.)
/s/ Henry H. Gibbel Director March 17, 1999
- - --------------------------
(Henry H. Gibbel)
/s/ Marley R. Gross Director March 17, 1999
- - --------------------------
(Marley R. Gross)
/s/ T. Max Hall Director March 17, 1999
- - --------------------------
(T. Max Hall)
/s/ Edward W. Helfrick Director March 17, 1999
- - --------------------------
(Edward W. Helfrick)
66
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1998
[SIGNATURES CONTINUED]
Signature Title Date
- - --------- ----- ----
/s/ C. William Hetzer, Jr. Director March 17, 1999
- - ----------------------------
(C. William Hetzer, Jr.)
/s/ George J. Morgan Director March 17, 1999
- - ----------------------------
(George J. Morgan)
/s/ Clyde R. Morris Director March 17, 1999
- - ----------------------------
(Clyde R. Morris)
/s/ Raymond M. O'Connell Director March 22, 1999
- - ----------------------------
(Raymond M. O'Connell)
Director March ___, 1999
- - ----------------------------
(Robert C. Reymer, Jr.)
/s/ Roger V. Wiest Director March 17, 1999
- - ----------------------------
(Roger V. Wiest)
[END OF SIGNATURE PAGES]
67
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
- - --------------- --------------------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession. Incorporated by reference to Appendices C and D to
Susquehanna's Joint Proxy Statement/Prospectus on Susquehanna's
Registration Statement on Form S-4, Registration No. 333-58373.
(3) (i) Articles of Incorporation. Incorporated by reference to
Attachment E to Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-13276 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Susquehanna'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 Susquehanna's Common Stock
and the rights of Susquehanna'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 Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Susquehanna'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
Susquehanna's 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's Executive Deferred Income Plan,
effective January 1, 1999, is filed herewith as Exhibit 10.
Susquehanna's Performance Award Plan as amended in 1995, is
incorporated by reference to Exhibit (a)(10) of Susquehanna's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995. The
Equity Compensation Plan, as adopted in 1996, is incorporated by
reference to Exhibit (a)(10) of Susquehanna'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.
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(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.
(99) Additional Exhibits. Not Applicable.
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