-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V9PWQ58er039KE3hSYDSlM0VTxEYfDRC37nn02HZBqncRpSgdx0Xj6cOS+uiCNTS qlULXWMWJE9Eos4dOQaNIg== 0000950109-99-000988.txt : 19990329 0000950109-99-000988.hdr.sgml : 19990329 ACCESSION NUMBER: 0000950109-99-000988 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSQUEHANNA BANCSHARES INC CENTRAL INDEX KEY: 0000700863 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 232201716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10674 FILM NUMBER: 99571178 BUSINESS ADDRESS: STREET 1: 26 N CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 BUSINESS PHONE: 7176264721 MAIL ADDRESS: STREET 2: 26 NORTH CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- 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 ------------------------------------------------- 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 ------- Susquehanna Bancshares, Inc. - - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Pennsylvania 23-2201716 ------------------------------ ----------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 26 North Cedar St., Lititz, Pennsylvania 17543 - - ---------------------------------------- ------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (717) 626-4721 ------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - - ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $2.00 per share - - -------------------------------------------------------------------------------- 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 ------ Item 1. Business - - ------- -------- 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)
- - --------------------------------------------------------------------------------------------------------------------- Subsidiary Assets Percent of Total Net Income Percent of Total ---------- ------ ---------------- ---------- ---------------- - - --------------------------------------------------------------------------------------------------------------------- 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) - - --------------------------------------------------------------------------------------------------------------------- Total $4,065 100% $45.6 100% - - ---------------------------------------------------------------------------------------------------------------------
* 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 ----------------------------------------------------------- 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 -------------------------------------- ("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 -------------------------------------------------------- 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 ------------- 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 ------- 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"). ------------------------------------------------------------------------ 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 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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 - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
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. 68 (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. 69 EX-10 2 SUSQUEHANNA'S EXECUTIVE DEFERRED INCOME PLAN Exhibit 10 ---------- Susquehanna's Executive Deferred Income Plan SUSQUEHANNA BANCSHARES BANKS AND AFFILIATES EXECUTIVE DEFERRED INCOME PLAN TABLE OF CONTENTS ----------------- ARTICLE 1 ESTABLISHMENT, PURPOSE AND STATUS OF THE PLAN................5 1.1 Establishment of Plan........................................5 1.2 Purpose of Plan..............................................5 1.3 Status of Plan...............................................5 ARTICLE 2 DEFINITIONS..................................................6 2.1 Administrator................................................6 2.2 Beneficiary..................................................6 2.3 Board........................................................6 2.4 Bonus........................................................6 2.5 Cause........................................................6 2.6 Change in Control............................................6 2.7 Claimant.....................................................7 2.8 Code.........................................................7 2.9 Company......................................................7 2.10 Compensation.................................................8 2.11 Compensation Committee.......................................8 2.12 Deferral Agreement...........................................8 2.13 Deferred Compensation Ledger.................................9 2.14 Determination Date...........................................9 2.15 Disabled or Disability......................................10 2.16 Employee....................................................10 2.17 ERISA.......................................................10 2.18 Employment..................................................10 2.19 Financial Emergency.........................................11 2.20 Investment Experience.......................................12 2.21 Losses......................................................12 2.22 Outside Director............................................12 2.23 Participant.................................................12 2.24 Person......................................................13 2.25 Plan........................................................13 2.26 Plan Administration Employee................................13 2.27 Plan Year...................................................13 2.28 Qualified Plan..............................................13 2.29 Retirement Date.............................................13 2.30 Subsidiary..................................................13 2.31 Trust.......................................................14 2.32 Trust Agreement.............................................14 2.33 Trustee.....................................................14 -2- ARTICLE 3 ADMINISTRATION..............................................14 3.1 Administrator...............................................14 3.2 Administration of Plan......................................15 3.3 Delegation..................................................15 3.4 Reliance Upon Information...................................15 3.5 Responsibility and Indemnity................................16 ARTICLE 4 PARTICIPATION...............................................18 4.1 Eligibility of Employees and Outside Directors..............18 4.2 Notification of Eligible Employees and Outside Directors....19 4.3 Participant Compensation Deferral...........................19 4.4 Bonus Deferral..............................................21 4.5 Suspension of Deferrals.....................................22 4.6 Transfer of Previous Obligations............................22 4.7 Vesting.....................................................24 ARTICLE 5 ACCOUNTS....................................................24 5.1 Deferral of Compensation and/or Bonus.......................24 5.2 Investment of Accounts......................................24 5.3 Allocation of Investment Experience to Accounts.............25 5.4 Participants Rights Under the Trust.........................25 5.5 Determination of Account....................................25 ARTICLE 6 DISTRIBUTIONS...............................................26 6.1 Amount of Deferred Compensation Subject to Distribution.....26 6.2 Form of Distributions.......................................26 6.3 Timing of Distributions.....................................27 6.4 Advance Distribution Election Required......................29 6.5 Distributions in Connection with a Change in Control........30 6.6 Distributions upon a Termination other than in connection with a Change in Control.......................31 6.7 Withdrawals Due to Financial Emergency......................31 6.8 Payor of Deferred Compensation..............................32 6.9 Claims Procedures...........................................33 6.10 Facility of Payments........................................35 6.11 Beneficiary Designations....................................35 6.12 Withholding of Taxes........................................36 ARTICLE 7 RIGHTS OF PARTICIPANTS......................................37 7.1 Annual Statement to Participants............................37 7.2 Limitation of Rights........................................37 7.3 Nonalienation of Benefits...................................38 -3- 7.4 Prerequisites to Benefits...................................38 ARTICLE 8 MISCELLANEOUS......................................................39 8.1 Amendment or Termination of the Plan........................39 8.2 Powers of the Company.......................................40 8.3 Waiver......................................................40 8.4 Separability................................................40 8.5 Gender, Tense and Headings..................................41 8.6 Governing Law...............................................41 8.7 Notice......................................................41 -4- ARTICLE 1 ESTABLISHMENT, PURPOSE AND STATUS OF THE PLAN 1.1 Establishment of Plan. Susquehanna Bancshares, Inc. (the "Company") --------------------- hereby establishes, effective as of January 1, 1999, an unfunded deferred compensation plan to be known as the "Susquehanna Bancshares Banks and Affiliates Executive Deferred Income Plan" (the "Plan"). 1.2 Purpose of Plan. The Plan is maintained for the purpose of providing --------------- Participants the opportunity to defer all or a portion of base compensation that would otherwise be received in an earlier year. In addition, the Plan provides a mechanism through which Participants may defer all or a portion of any annual bonus that would otherwise be received in an earlier year. 1.3 Status of Plan. The Plan is intended as an unfunded plan maintained -------------- primarily for the purpose of providing deferred compensation for (I) outside directors and (ii) a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Income Retirement Security Act of 1974, as amended ("ERISA'), and as such it is intended that the Plan be exempt from the participation and vesting, funding, and fiduciary responsibility requirements of Title I of ERISA and that the Plan qualify for simplified reporting under U.S. Department of Labor regulation Section 2530.1(14-23, which provides for an alternative method of compliance for plans described in such regulation. The Plan is not intended to satisfy the qualification requirements of Section 401 of the Internal Revenue Code (the "Code"). -5- ARTICLE 2 DEFINITIONS Each term below shall have the meaning assigned thereto for all purposes of the Plan unless the context reasonably requires a broader, narrower or different meaning. 2.1 Administrator. "Administrator" means the Person or Persons ------------- designated by the Compensation Committee pursuant to Section 3.1. 2.2 Beneficiary. "Beneficiary" means the beneficiary or ----------- beneficiaries designated by the Participant to receive any amounts distributable under the Plan upon the death of the Participant. 2.3 Board. "Board" means the Board of Directors of the Company. ----- 2.4 Bonus. "Bonus" means any amount paid to the Employee during the ----- Plan Year as an award granted under any bonus program of the Company or a Subsidiary. 2.5 Cause. "Cause" means but is not limited a Participant's ----- personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses), issuances of final cease-and-desist order by a state or federal agency having jurisdiction over the Company; or any material breach of any provision of a Participant's employment agreement, if applicable. 2.6 Change in Control. "Change in Control" means and shall be deemed ----------------- to have occurred upon the happening of any one or more of the following occurrences, if prior thereto, the happening of such occurrence has not received the approval of a majority of the disinterested member of the Board of Directors of the Company, as applicable: (i) a liquidation -6- or dissolution of the Company (excluding transfer to subsidiaries) or the sale of all or substantially all of the Company's assets; (ii) as a result of a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split or sale or transfer of assets, any person or group (as such terms are used in and under Section 13(d)(3) or 14(d)(2) of the Securities and Exchange Act of 1934 (the "Exchange Act")) becomes beneficial owner (as defined in 13-d under the Exchange Act), directly or indirectly, of securities of the Company representing 20% of the common stock of the Company then outstanding securities; provided, however, that for purposes of this Plan, a person or group shall not include the Company or any subsidiary or any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary; (iii) if at least a majority of the Board of Directors of the Company at any time does not consist of individuals who were elected, or nominated for election, by directors in office at the time of such election or nomination; or (iv) Company merges or consolidates with any other corporation (other than an Affiliate of the Company) and is not the surviving corporation (or survives only as a subsidiary of another corporation). 2.7 Claimant. "Claimant" means the Person or Persons described in -------- Section 6.7 who apply for benefits that may be payable under the Plan. 2.8 Code. "Code" means the Internal Revenue Code of 1986, as ---- amended, and the regulations and other authority issued thereunder by the appropriate governmental authority. References herein to any section of the Code shall include references to any successor section or provision of the Code. 2.9 Company. "Company" means Susquehanna Bancshares, Inc. or any ------- successor thereto. -7- 2.10 Compensation. "Compensation" means the base salary proposed to ------------ be paid in cash during the Plan Year by the Company or a Subsidiary to the Employee for services rendered or labor performed for the Company or Subsidiary, without regard to any amounts that the Employee has deferred or does defer under this Plan pursuant to Section 4.3., or under a plan subject to 401(k) of the Code, or has applied or does apply to tax-exempt benefits under a salary reduction agreement pursuant to (S)125 of the Code. In the case of an Outside Director, Compensation means the cash remuneration proposed to be paid in cash during the Plan Year as fees for services rendered to the Company as a member of the Board, without regard to any amounts that the Outside Director has deferred or does defer under this Plan pursuant to Section 4.3. 2.11 Compensation Committee. "Compensation Committee" means the ---------------------- Executive Compensation Committee of the Board. 2.12 Deferral Agreement. "Deferral Agreement" means a separate ------------------ written agreement entered into by and between the Company or a Subsidiary and a Participant, which agreement describes the terms and conditions of such Participant's deferred compensation arrangement hereunder for the Plan Year. This Deferral Agreement shall be executed and dated by the Participant and shall specify (i) the amount of Compensation and/or Bonus, by percentage or dollar amount, to be deferred and (ii) the date or dates for payment of deferred amounts, (iii) a predecessor plan as described in Section 4.6, the Deferral Agreement for the Participant's first Plan Year shall specify the date or the dates for payment of such amounts, subject to the limitations of Section 4.6. -8- 2.13 Deferred Compensation Ledger. "Deferred Compensation Ledger" ---------------------------- means the appropriate accounting records maintained by the Administrator the Participants which set forth the name of each Participant and separate accounts reflecting for each Participant the amount of Compensation and Bonus deferred pursuant to Article Four of the Plan and (ii) the amount of Investment Experience credited or charged to the Participant's accounts pursuant to Article Five. The Deferred Compensation Ledger shall be utilized solely as a device for the measurement and determination of the contingent amounts to be paid to Participants under the Plan. The Deferred Compensation Ledger shall not constitute or be treated as an escrow, trust fund, or any other type of funded account of whatever kind for Code or ERISA purposes and, moreover, contingent amounts credited thereto shall not be considered "plan assets" for ERISA purposes. In addition, no economic benefit or constructive receipt of income shall be provided to any Participant for purposes of the Code unless and until cash payments under the Plan are actually made to the Participant. The Deferred Compensation Ledger merely provides a record of the bookkeeping entries relating to the contingent benefits that the Company or a designated Subsidiary intends to provide to Participants and shall thus reflect a mere unsecured promise to pay such amounts in the future. 2.14 Determination Date. "Determination Date" means, with respect to ------------------ all or a portion of a Participant's deferrals for a given Plan Year, as specified by the Participant in his Deferral Agreement, either (i) the termination of his Employment due to his death, Disability, retirement or another reason (as set forth in Sections 6.5 and 6.6) or (ii) the first day of any calendar year that may be specified by the Participant in his Deferral Agreement which date shall -9- not be earlier than the first day of the calendar month following the third anniversary of the last day of the Plan Year with respect to which the relevant deferral(s) was (were) made. 2.15 Disabled or Disability. "Disabled" or "Disability" means any ---------------------- physical or mental incapacity of a Participant as defined in the Company's long term disability plan, as in effect from time to time. 2.16 Employee. "Employee" means a member of a select group of -------- management or highly compensated common-law employees of the Company or a designated Subsidiary. 2.17 ERISA. "ERISA" means the Employee Retirement Income Security ----- Act of 1974, as amended, and the regulations and other authority issued thereunder by the appropriate governmental authority. References herein to any section of ERISA shall include references to any successor section or provision of ERISA. 2.18 Employment. "Employment" means either (i) employment as an ---------- Employee or (ii) Board service as an Outside Director, whichever is applicable. In cases involving an Employee, all periods of employment by the Company or a Subsidiary shall be taken into account whether or not consecutive, and neither the transfer of the Employee from employment by the Company to employment by a Subsidiary nor the transfer of the Employee from employment by a Subsidiary to employment by the Company shall be deemed to be a termination of Employment by the Employee. Moreover, the Employment of an Employee shall not be deemed to have been terminated because of his absence from active employment on account of temporary illness or authorized vacation, or during temporary leaves of absence from active employment granted by the Company or a Subsidiary for reasons of professional -10- advancement, education, health, or government service, or during military leave for any period if the Employee returns to active employment within 90 days after the termination of his military leave, during any period required to be treated as a leave of absence by virtue of (i) any enforceable employment or other agreement or (ii) any applicable law, such as the federal Family and Medical Leave Act of 1993. 2.19 Financial Emergency. "Financial Emergency" means an ------------------- unforeseeable emergency and severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but a Financial Emergency shall not be deemed to exist to the extent that such hardship is or may be relieved; (i) Through reimbursement or compensation by insurance or otherwise, (ii) By liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) By cessation of Compensation or Bonus deferrals under the Plan. By way of example, the need to send a Participant's child to college or the desire to purchase a home would not be considered a Financial Emergency. As a further example, a Financial Emergency that may be relieved by a cessation of Compensation or Bonus deferrals -11- will be considered to be a Financial Emergency until such time as it is relieved by cessation of Compensation or Bonus deferrals or by other means. 2.20 Investment Experience. "Investment Experience" means the --------------------- hypothetical amounts credited (as income, gains or appreciation on any hypothetical investments that may be permitted under the Plan) or charged (as losses or depreciation on any such hypothetical investments) to the balances in the Participant's accounts under the Deferred Compensation Ledger pursuant to Article Five. 2.21 Losses. "Losses" mean any and all losses, claims, damages, ------ judgments, settlements, liabilities, expenses and costs (and all actions in respect thereof and any legal or other costs and expenses in giving testimony or furnishing documents in response to a subpoena or otherwise), including the cost of investigating, preparing or defending any pending threatened or anticipated possible action, claim, suit or other proceeding, whether or not in connection with litigation in which any Plan Administration Employee is a party. 2.22 Outside Director. "Outside Director" means a member of the ---------------- Board who is not at the time an Employee of the Company or any Subsidiary. 2.23 Participant. "Participant" means for a given Plan Year an ----------- Employee or Outside Director who meets the requirements set forth in Section 4.1. Notwithstanding the preceding sentence, an Employee or Outside Director shall be considered a participant hereunder as long as he has any balance credited to his accounts under the Deferred Compensation Ledger, regardless of whether he is eligible to authorize Compensation and/or Bonus deferrals hereunder for any Plan Year. -12- 2.24 Person. "Person" means any natural person, firm, partnership, ------ association, corporation company, trust, business trust or other legal entity. 2.25 Plan. "Plan" means the Susquehanna Bancshares Banks and ---- Affiliates Executive Deferred Income Plan as set forth herein, and as the same may hereafter be amended from time to time. 2.26 Plan Administration Employee. "Plan Administration Employee" ---------------------------- means each past, present and future Administrator and each other employee who acts in the capacity of an agent, delegate or representative of the Administrator or the Company under the Plan. 2.27 Plan Year. "Plan Year" means the twelve consecutive month --------- calendar year. 2.28 Qualified Plan. "Qualified Plan" means the Susquehanna -------------- Bancshares 401(k) Plan or any successor deemed contribution plan maintained by the Company which is intended to qualify under Section 401(a) and 401(k) of the Code. 2.29 Retirement Date. "Retirement Date" means the first day of the --------------- month coincident with or next following the later to occur of (i) or (ii) where (i) is the fifty-fifth birthday of the Participant and completion of at least five years of Employment or the sixty-fifth birthday of a Participant, whichever occurs first and (ii) the date of his actual termination of Employment. 2.30 Subsidiary. "Subsidiary" means any majority owned subsidiary if ---------- the Company or any majority-owned subsidiary thereof, or any other corporation, partnership or business venture to be a Subsidiary in which the Company owns, directly or indirectly, a significant financial interest provided that (i) the Board designates such corporation, partnership -13- or business venture to be a Subsidiary for the purposes of this Plan for any Plan Year and (ii) the Board of Directors (or equivalent governing authority) of such corporation, partnership or business venture consents to being designated as a Subsidiary. 2.31 Trust. "Trust" means a grantor trust of the type commonly ----- referred to as a "rabbi trust" created under the Trust Agreement to "informally fund" contingent benefits payable under the Plan. 2.32 Trust Agreement. "Trust Agreement" means the Trust under the --------------- Susquehanna Bancshares Banks and Affiliates Executive Deferred Income Plan. 2.33 Trustee. "Trustee" means the duly appointed and acting trustee ------- of the Trust, and any successor thereto. ARTICLE 3 ADMINISTRATION 3.1 Administrator. The Administrator shall be the Person or Persons ------------- as may be chosen by the Compensation Committee from time to time. In the event of a vacancy in the office of Administrator, the Compensation Committee shall be the Administrator. The Administrator shall serve at the pleasure of the Compensation Committee and the Compensation Committee may remove or replace the Administrator pursuant to procedures established by the Compensation Committee. The Administrator may also be a Participant. Any Administrator who is also a Participant shall not act on any matter relating solely to himself. Any action required under such circumstances shall be taken by the Compensation Committee. -14- The Administrator shall not receive any special compensation for serving as Administrator, but shall be reimbursed by the Company for any reasonable expenses incurred in connection therewith. No bond or other security need be required of the Administrator. 3.2 Administration of Plan. The Administrator shall operate, ---------------------- administer, interpret, construe and construct the Plan, including, without limitation, correcting any error or defect, supplying any omission or reconciling any inconsistency. The Administrator reserves all powers necessary or appropriate to implement and administer the terms and provisions of the Plan, including the power to make findings of fact. The determination of the Administrator as to the proper interpretation, construction, or application of any term or provision of the Plan shall be final, binding, and conclusive with respect to all interested persons and entities. In addition, the Administrator shall implement the provisions of Section 5.2 regarding investment of accounts. Furthermore, the Administrator shall direct the Trustee in matters relating to the payment to the Participants of amounts from their accounts maintained under the Plan in accordance with the terms of the Plan. 3.3 Delegation. The Administrator may, in his discretion, delegate ---------- one or more of his ministerial duties to his designated agents or to employees of the Company or a Subsidiary, but may not delegate his discretionary authority to make the determinations specified in Section 3.2. 3.4 Reliance Upon Information. The Administrator shall not be liable ------------------------- for any decision, action, omission, or mistake in judgment, provided that he acted in good faith in connection with the administration of the Plan. Without limiting the generality of the foregoing, any decision or action taken by, the Administrator in reasonable reliance upon any information -15- supplied to him by the Board, the Compensation Committee, any employee of the Company or a Subsidiary, the Company's legal counsel, or the Company's independent accountants shall be deemed to have been taken in good faith. The Administrator may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to his obligations or duties hereunder, or with respect to any action, proceeding or question at law, and shall not be liable with respect to any action taken, or omitted, in good faith pursuant to the advice of such counsel. 3.5 Responsibility and Indemnity. To the full extent permitted by ---------------------------- law, the Company shall indemnify and hold harmless each Plan Administration Employee against, and each Plan Administration Employee shall be entitled without further act on his part to indemnity from the Company for, any and all Losses, as and when incurred, directly or indirectly, relating to, based upon, arising out of, or resulting, from his being or having been a Plan Administration Employee; provided, however, that such indemnity shall not include any Losses incurred by such Plan Administration Employee with respect to any matters as to which he is finally adjudged in any such action, suit or proceeding to have been guilty of criminal misconduct in the performance of his duties as a Plan Administration Employee. Any such Plan Administration Employee shall give Company prompt written notice of his actual receipt of service of process in any such action, suit or other proceeding. Notwithstanding the foregoing, the right to indemnification hereunder shall not be affected by any failure of a Plan Administration Employee to give such notice (or by delay by a Plan Administration Employee in giving such notice) unless, and then only to the extent that, the rights and remedies of the Company shall have been prejudiced as a result of the failure to give, or delay in giving, such notice. In -16- addition, any such Plan Administration Employee shall, upon request of the Company, offer the Company in writing, the opportunity to handle and defend same at its sole expense. The decision by the Company to handle such proceeding shall conclusively determine that the Plan Administration Employee is entitled to the indemnity provided herein. The foregoing right of indemnification shall be in addition to any liability that the Company may otherwise have to the Plan Administration Employee. The Company's obligation hereunder to indemnify the Plan Administration Employee shall exist without regard to the cause or causes of the matters for which indemnity is owed and expressly includes (but is not limited to) the Losses, directly or indirectly, relating to, based upon, arising out of, or resulting from any one or more of the following: (i) the sole negligence or fault of any Plan Administration Employee or combination of Plan Administration Employees; (ii) the sole negligence or fault of the Company; (iii) the sole negligence or fault of third parties; (iv) the concurrent negligence or fault or any combination of the Plan Administration Employee and/or the Company and/or any third party; and (v) any other conceivable or possible combination of fault or negligence, it being the specific intent of the Company to provide the maximum possible indemnification protection hereunder, but excluding any such Losses that are finally adjudged by a court of competent jurisdiction to have resulted from the criminal misconduct of the Plan Administration Employee. -17- The Plan Administration Employee shall have the right to retain counsel of its own choice to represent him, however, such counsel shall be acceptable to the Company which acceptance shall not be unreasonably withheld. The Company shall pay the fees and expenses of such counsel and such counsel shall to the full extent consistent with its professional responsibilities cooperate with the Company and any counsel designated by it. The Company shall be liable for any settlement of any claim against the Plan Administration Employee made with the written consent of the Company which consent shall not be unreasonably withheld. The foregoing right of indemnification shall inure to the benefit of the successors and assigns, and the heirs, executors, administrators and personal representatives of each Plan Administration Employee, and shall be in addition to all other rights to which the Plan Administration Employee may be entitled as a matter of law, contract, or otherwise. ARTICLE 4 PARTICIPATION 4.1 Eligibility of Employees and Outside Directors. The only ---------------------------------------------- individuals who shall be eligible to authorize Compensation and/or Bonus deferrals under the Plan for the Plan Year are (i) Outside Directors scheduled for Board service during the Plan Year and (ii) Employees who are (1) determined by the Company's Chief Executive Officer (and any other officers of the Company appointed for this purpose by such Chief Executive Officer) to be included in a select group of management or highly compensated Employees of the Company or a Subsidiary, (2) nominated by such officer or officers to participate in the Plan for such Plan Year and (3) approved for such participation by the Compensation Committee. A Participant's deferral election for a given Plan Year shall continue to be fully operative during any paid leave -18- of absence granted in accordance with Company or Subsidiary policies. See Section 4.5 regarding unpaid leaves of absence. 4.2 Notification of Eligible Employees and Outside Directors. -------------------------------------------------------- Not less than thirty (30) days prior to the beginning of each Plan Year, the Administrator shall notify in writing each of the affected Employees and Outside Directors that they are eligible to elect to defer Compensation and/or Bonus under the Plan. Employees or Outside Directors may be nominated and approved as new Participants at any time during a Plan Year. As soon as practicable (but in all events within thirty (30) days) after the effective date on which an Employee or Outside Director described in the preceding sentence first becomes eligible, the Administrator shall notify in writing each of the designated persons of their initial eligibility to defer Compensation and/or Bonus under the Plan. An Employee or Outside Director shall be a Participant hereunder as long as he has any balance credited to his accounts under the Deferred Compensation Ledger, regardless of whether he is eligible to authorize Compensation and/or Bonus deferrals hereunder for any Plan Year. 4.3 Participant Compensation Deferral. The following provisions of --------------------------------- this Section 4.3 shall apply for such period or periods as determined by the Compensation Committee from time to time in its sole discretion. After an Employee or Outside Director has been notified by the Administrator that he is eligible to authorize deferrals under the Plan, he must, in order to defer Compensation with respect to a given Plan Year, notify the Administrator of his deferral election by completing and executing a Deferral Agreement which shall be irrevocable after the commencement of the Plan Year. The Employee may defer up to seventy-five percent (75%) of his Compensation, that is paid during the Plan Year or the portion hereof that he is a Participant -19- who satisfies the eligibility requirements of Sections 4.1 and 4.2. Outside Directors must elect to defer one hundred percent (100%) of his Compensation, that is paid during the Plan Year or the portion hereof that he is a Participant who satisfies the eligibility requirements of Sections 4.1 and 4.2. Notwithstanding the foregoing, deferrals of Compensation (and Bonus) for any Plan Year, shall not be less than three thousand dollars ($3,000) in the aggregate and shall be deferred to a Determination Date as specified by the Participant in the Deferral Agreement. An effective Deferral Agreement, completed and signed by the Participant, must be received by the Administrator within a time period established by the Administrator and in all events prior to the commencement of the Plan Year in order for the Participant to make a deferral during such Plan Year. Failure to have a completed and signed Deferral Agreement on file with the Administrator at the commencement of any Plan Year shall be treated as the Participant's election not to defer Compensation for that Plan Year. Should any minimum level of participation established by the Compensation Committee not be met for a given Plan Year, deferrals of Compensation under this Section 4.3 shall not be permitted and, as soon as practicable after he determines that such minimum level of participation for such year has not been met, the Administrator shall appropriately notify in writing each of the affected Employees and Outside Directors. Notwithstanding any provisions hereof to the contrary, if pursuant to Section 4.1 an Employee or Outside Director is eligible to become a Participant for the first time as of a date that occurs after the Plan Year has begun, the newly eligible Participant, in order to defer Compensation hereunder, must complete and execute a Deferral Agreement and return it to the -20- Administrator within thirty (30) days after the date on which the individual first was notified by the Administrator that he became eligible to be a Participant. Such Deferral Agreement shall only apply to defer Compensation for services to be performed for the remainder of the Plan Year by the Participant provided that such services are to be performed subsequent to receipt of his Deferral Agreement by the Administrator. Deferrals will commence on the first day of the pay period next following the Administrator's receipt of the Participant's Deferral Agreement or, if later, the first day of the Plan Year to which the Deferral Agreement relates. The amount of Compensation elected to be deferred pursuant to a Deferral Agreement shall be withheld on a pro rata basis from the Participant's regular payments of Compensation for each pay period during the Plan Year. 4.4 Bonus Deferral. Subject to approval of the Compensation -------------- Committee, the following provisions of this Section 4.4 shall apply for such period or periods as determined by the Compensation Committee from time to time in its sole discretion. A Participant who wishes to make a deferral election with respect to the amount of any Bonus that may be payable to him during a given Plan Year must make such deferral election when completing his Deferral Agreement for that Plan Year. The Participant may defer up to one hundred percent (100%) of his Bonus for any Plan Year. Notwithstanding the foregoing, deferrals of Bonus (and Compensation) for any Plan Year shall not be less than three thousand dollars ($3,000) in the aggregate and shall be deferred to a Determination Date as specified by the Participant. Should any minimum level of participation established by the Compensation Committee not be met for a given Plan Year, -21- deferrals of any Bonus under this Section 4.4 shall not be permitted and, as soon as practicable after he determines that such minimum level of participation for such year has not been met, the Administrator shall appropriately notify in writing each of the affected Employees. The dollar amount or percentage of a Bonus elected to be deferred under this option shall be deferred in one lump sum and shall be deemed to have been deferred on the date the deferred portion of the Bonus would otherwise have been paid to the Participant in the absence of his deferral election. Any Bonus deferral election hereunder shall be void and ineffective to the extent that no Bonus is awarded to the Participant with respect to the Plan Year. 4.5 Suspension of Deferrals. All deferrals of Compensation and ----------------------- Bonuses hereunder for a Plan Year shall be irrevocable, except that the Administrator may, in his discretion, grant a suspension of a Participant's deferral election for such time as the Administrator deems to be necessary upon a finding that the Participant has suffered a Financial Emergency. A Participant who believes he has suffered a Financial Emergency must petition the Administrator in writing to request a suspension of his deferrals hereunder. In addition, a Participant's deferral election shall be suspended during any unpaid leave of absence granted in accordance with Company or Subsidiary policies; provided, however that such deferral election shall become fully operative as of the first day of the payroll period commencing coincident with or next following the Participant's return to active Employment following termination of the approved unpaid leave in the Plan Year to which the Participant's Deferral Agreement pertains. 4.6 Transfer of Previous Obligations. Notwithstanding any other -------------------------------- provision of this Plan to the contrary, any obligation of the Company for compensation deferred by an Employee or Outside Director under the Farmers First Bank Directors Deferred Compensation -22- Plan (for purposes of this section "Farmers First Plan") that remains an obligation of the Farmers First Plan as of January 1, 1999 shall be transferred to and assumed by this Plan. The Plan Administrator shall notify the Employees and Outside Directors who were participants in the Farmers First Plan, of the intended transfer of obligations under the Farmers First Plan and their rights under this Plan with respect to these transferred obligations. Obligations transferred from the Farmers First Plan shall be treated as deferrals made by the Employee or Outside Director effective January 1, 1999. The Employee or Outside Director shall notify the Administrator of his or her allocation of such amounts among the hypothetical investment funds on the Deferral Agreement. In the event that the Employee or Outside Director fails to allocate such balances, with regard to any obligations transferred under this Section 4.6, the amount of the transferred obligation shall be treated as if the Employee or Outside Director had directed the Plan Administrator to treat the amount of deferral as if the deferred amounts were invested in the hypothetical money market fund included in the Deferred Compensation Ledger. Any obligation of the Farmers First Plan transferred pursuant to this Section 4.6 shall be subject to deferral under this Plan until the Determination Date selected by the Employee or Outside Director. However, for purposes of obligations transferred pursuant to this Section 4.6, the Employee or Outside Director's deferral shall not in any event end prior to the earlier of the following: (1) the date that the deferral would have been available for distribution under the terms of the Farmers First Plan, or (2) the date following the first anniversary of the last day of the Plan Year for which the original deferral of the transferred obligation was made. -23- 4.7 Vesting. For any Determination Date, amounts attributable to ------- deferral of Compensation or Bonus which are credited to the Participant's account maintained in the Deferred Compensation ledger shall be fully vested. ARTICLE 5 ACCOUNTS 5.1 Deferral of Compensation and/or Bonus. If a Participant has ------------------------------------- elected to defer Compensation and/or a Bonus hereunder for a Plan Year, the deferred amounts shall not be paid when they otherwise would have been paid in the absence of such election. A bookkeeping entry to reflect the deferred amounts shall be credited by the Administrator to the Participant's accounts under the Deferred Compensation Ledger. With respect to Compensation and Bonuses deferred hereunder for a Plan Year, each such deferred amount shall be credited to the Participant's accounts under the Deferred Compensation Ledger as of the date it otherwise would have been paid to the Participant. 5.2 Investment of Accounts. Subject to the terms of the Plan, the ---------------------- Administrator shall provide for direction by Participants of amounts credited to their accounts in the Deferred Compensation Ledger, in any one or a combination of hypothetical investment funds that shall be maintained in connection with the Plan. In either event, the investment funds shall be at least as diverse as the investment funds that are made available from time to time to participants in the Qualified Plan; provided, however, no direct investment in securities issued by the Company or any Subsidiary shall be permitted under the Plan. Except as otherwise provided below, each Participant shall direct the Administrator (or its delegate) as to how the amounts credited to his account in the Deferred Compensation Ledger shall be hypothetically invested in -24- the investment fund or funds made available under the Plan. The Participant's directions, if any, shall be in a form and manner and in the minimum increments prescribed by the Administrator. The Administrator may prescribe the fund in which the Participants' amounts shall be hypothetically invested in the absence of a direction by any such Participant. 5.3 Allocation of Investment Experience to Accounts. As of the last ----------------------------------------------- day of each Plan Year (or such shorter period as may be determined to be appropriate by the Administrator in the Administrator's sole discretion), the Administrator shall determine the Investment Experience of the hypothetical investment or investments for the applicable accounting period and as soon as practicable after such period, shall post the amount of Investment Experience to the Participant's accounts, effective as of the end of such period. If the Participant validly elects installment payments, then Investment Experience shall continue to be credited by the Administrator to undistributed amounts allocated to the Participant's accounts under the Deferred Compensation Ledger. 5.4 Participants Rights Under the Trust. The assets of the Trust ----------------------------------- shall be held for the benefit of the Participants in accordance with the terms of the Plan and Trust Agreement. In accordance with the provisions of the Trust Agreement, the assets of the Trust that are attributable to the Company or a Subsidiary shall remain subject to the claims of the general creditors of the Company or the Subsidiary and not otherwise, and the rights of the affected Participants to the amounts in the Trust shall be limited as provided in the Trust Agreement in the event that the Company or the Subsidiary that employs such Participants becomes insolvent. 5.5 Determination of Account. The aggregate amount credited to a ------------------------ Participant's accounts under the Deferred Compensation Ledger shall consist of (i) the amounts -25- of Compensation and Bonuses that were deferred pursuant to Article Four, plus (or minus) (ii) the amounts of Investment Experience credited (or charged) to such accounts pursuant to Article Five, minus (iii) the aggregate amount of any distributions made from such accounts pursuant to Article Six. ARTICLE 6 DISTRIBUTIONS 6.1 Amount of Deferred Compensation Subject to Distribution. As of ------------------------------------------------------- the Participant's Determination Date, the aggregate distributable vested amount credited to his accounts maintained under the Deferred Compensation Ledger shall be distributable in accordance with the provisions of Section 6.2. Any amount that is to be distributed to a Participant or Beneficiary pursuant to this Article Six shall be fixed and determined as is provided in Sections 6.3(a) and 6.3(b). 6.2 Form of Distributions. Subject to Section 6.4, upon the --------------------- occurrence of the Participant's Determination Date with respect to all or a portion of amounts deferred under the Plan for a given Plan Year, the amounts credited to a Participant's accounts maintained under the Deferred Compensation Ledger with respect to such Plan Year shall become distributable to such Participant (or to his Beneficiary in the event of Participant's death) in one of the forms set forth under Section 6.2(a) or Section 6.2(b), as elected in writing by such Participant at the time the election was made to defer the Compensation and/or Bonus. (a) Lump Sum. If elected by the Participant in his Deferral -------- Agreement for a given Plan Year, the affected portion of the Participant's accounts pertaining to such Plan Year shall be paid in a lump-sum distribution of the entire vested balance credited to the -26- Participant's accounts maintained under the Deferred Compensation Ledger with respect to the affected Plan Year(s) measured as of the applicable Determination Date plus any deferrals of Compensation or Bonus that were subsequently credited ---- to the affected accounts of the Participant up to the date benefits are paid pursuant to Section 6.3(a), less any distributions that were subsequently made ---- from such accounts up to the date benefits are paid pursuant to Section 6.3(a). (b) Installment Payments. If the Participant's account balance -------------------- is at least fifty thousand dollars ($50,000) and if the aggregate distributable amount of installment payments for any twelve (12) consecutive month period is or will be at least $10,000, the affected portion of the Participant's accounts pertaining to a given Plan Year shall be paid in annual installments, to be paid during a specified period of not less than five (5) years nor more than ten (10) years, as elected by the Participant in his Deferral Agreement. If the Participant's account balance at the beginning of the period is (or during the distribution period drops) below fifty thousand dollars ($50,000), a lump sum payment may be made at the Company's discretion. Should a Participant die prior to receiving all installments due under the Plan, installment payments shall be made or continue if the Participant's Beneficiary is his surviving spouse; otherwise all unpaid installments shall be paid to the any nonspouse Beneficiary of the deceased participant as soon as administratively practicable following the Participant's death in the form of a lump sum payment. 6.3 Timing of Distributions. The following provisions are subject to ----------------------- Section 6.4. -27- (a) Lump Sum Distribution. Lump sum distributions shall be made --------------------- within sixty (60) days after the Participant's elected Determination Date. (b) Installment Payments. Installment payments shall commence -------------------- as of the date selected by the Participant which date must be (i) the first day of any calendar month and (ii) within sixty (60) days after the Participant's Determination Date or Retirement Date as elected by the Participant. The initial installment will be based on the amount credited to the recipient's account as of the Determination Date last preceding the date of payment. Thereafter, the remaining installment payments shall be made as of the anniversary of the first installment date and will be based on the recipient's account balance as of the anniversary of the Determination Date last preceding the date of such installment payment. Installment payments shall be determined by determining the recipient's account balance as of the relevant anniversary and multiplying the recipient's account balance as of the relevant anniversary by a fraction the numerator of which is one and the denominator of which is the remaining number of years of the term for which payments have not been made. (c) Acceleration of Distribution(s). Notwithstanding any other ------------------------------- provision of the Plan to the contrary, the Participant, through submission of a written application to the Administrator, may apply for a distribution of the entire balance of his/her accounts, without regard to (i) whether payment of benefits due under the Plan have commenced, or (ii) any condition of Financial Emergency. Any distribution so requested shall be made as soon as practical following the Participant's application and shall be subject to a forfeiture of ten percent (10%) of the entire account balance of his or her accounts and a permanent suspension of his participation in the Plan. Provided; however, if the Administrator determines in good faith -28- that there is a reasonable likelihood that any benefits that are intended to be deferred pursuant to this Plan would not be deferred under applicable income tax provisions then in effect due to the provisions of this Section 6.3(c), then to the extent deemed necessary by the Administrator to ensure that the desired deferral features of this Plan are operative with respect to Participants who desire to avoid current taxation of vested benefits accrued under the Plan, the Administrator may defer payment of all or any portion of such benefits that would otherwise be distributable under this section 6.3(c). Any amounts deferred pursuant to this Plan shall continue to receive Investment Experience pursuant to the Plan until distribution. The amounts so deferred shall be distributed to the affected Participant (or his Beneficiary in the event of the Member's death) at the earliest possible date, as determined by the Administrator in good faith, as of which such desirable deferral features will be ensured. 6.4 Advance Distribution Election Required. Subject to Section -------------------------------------- 6.3(c), the Participant's election as to the form and timing of his distribution hereunder must be made at the same time the Participant's Deferral Agreement is completed and signed by the Participant prior to the last day of the Plan Year immediately preceding the Plan Year to which the Deferral Agreement applies or, if applicable, within thirty (30) days after the date on which an Employee or Outside Director was first notified of eligibility to become a Participant after the beginning of a Plan Year. Notwithstanding the preceding language of this Section, the Participant may submit a subsequent election regarding form of payout, provided however, such election shall only be effective if (i) it is submitted at least thirteen (13) months prior to Participant's actual Determination Date and (ii) is approved by the Compensation Committee. Pending receipt of -29- any distribution from the Plan, the Participant or Beneficiary shall remain subject to Section 7.2 and other applicable provisions of the Plan. 6.5 Distributions in connection with a Change in Control. In the ---------------------------------------------------- event of a Change in Control, the full amount of any remaining unpaid vested benefits credited to the accounts maintained under the Deferred Compensation Ledger for each Participant shall be paid as follows: (a) A Participant who voluntarily terminates Employment in connection with a Change in Control shall be paid the full amount of any remaining unpaid vested benefits credited to his or her accounts maintained under the Deferred Compensation Ledger in a single lump sum. (b) A Participant whose Employment is involuntarily terminated in connection with a Change in Control shall be paid the full amount of any remaining unpaid vested benefits credited to his or her accounts maintained under the Deferred Compensation Ledger in accordance with the form of benefit elected by such Participant at the time his or her election to defer Compensation and/or Bonus was made; provided, however, that any election to receive installments at a later Determination Date or upon the Participant's Retirement Date shall be accelerate and begin as soon as administratively practicable following the Participants termination. For purposes of this Section 6.5, a Participant's termination of Employment within six months before or twelve months after following a Change in Control shall be presumed to be in connection with such Change in Control. -30- 6.6 Distributions upon a Termination other than in connection with a ---------------------------------------------------------------- Change in Control. In the event of a Participant's termination of Employment in - - ----------------- any situation that does not involve a Change in Control, the full amount of any remaining unpaid vested benefits credited to the accounts maintained under the Deferred Compensation Ledger for each Participant shall be paid as follows: (a) A Participant who voluntarily terminates Employment shall be paid the full amount of any remaining unpaid vested benefits credited to his or her accounts maintained under the Deferred Compensation Ledger in a single lump sum. (b) A Participant who is involuntarily terminated for Cause shall be paid the full amount of any remaining unpaid vested benefits credited to his or her accounts maintained under the Deferred Compensation Ledger in a single lump sum. (c) A Participant whose Employment is involuntarily terminated not for Cause shall be paid the full amount of any remaining unpaid vested benefits credited to his or her accounts maintained under the Deferred Compensation Ledger in accordance with the form of benefit elected by such Participant at the time his or her election to defer Compensation and/or Bonus was made; provided, however, that any election to receive installments at a later Determination Date or upon the Participant's Retirement Date shall be accelerate and begin as soon as administratively practicable following the Participants termination. 6.7 Withdrawals Due to Financial Emergency. A Participant who -------------------------------------- believes he has suffered a Financial Emergency may in writing request a withdrawal of the portion of his account balances needed to satisfy the emergency need. The Administrator will review the Participant's request to determine whether, in his discretion, a Financial Emergency has occurred -31- and, if so, the amount reasonably needed to satisfy the emergency need. The Participant must provide the Administrator with all relevant information needed to make these determinations. All deferrals of Compensation and/or Bonuses authorized by the Participant for the remainder of the Plan Year shall be suspended before any withdrawal is made hereunder on account of the Financial Emergency. In his discretion, the Administrator shall authorize a withdrawal to the Participant in the amount reasonably necessary to satisfy the Financial Emergency. No Investment Experience shall be credited (or charged) to the Participant's accounts during an applicable accounting period with respect to the amount withdrawn to satisfy the Financial Emergency. Withdrawals will be made with respect to the first amounts available for distribution for each Plan Year; provided, however, if access must be had to amounts credited under the Plan for a Plan Year where all amounts credited with respect to such Plan Year will not be exhausted, amounts will be withdrawn pro rata between and among any hypothetical investment funds that may be operative with respect to such year. 6.8 Payor of Deferred Compensation. Benefits payable under the Plan ------------------------------ with respect to a Participant's accounts maintained under the Deferred Compensation Ledger shall be the obligation of, and payable by, the Company and any Subsidiary that employed that Participant with respect to the periods for which deferrals are made hereunder; provided, however, should the Company pay any portion of a Subsidiary's obligation hereunder, the Company may seek reimbursement from any Subsidiary which employed the Participant. Adoption and maintenance of the Plan by the Company and any Subsidiary shall not, for that -32- reason, create a joint venture or partnership relationship between or among such entities for purposes of payment of benefits under the Plan or for any other purpose. Neither the Company nor any Subsidiary shall set aside any assets or otherwise create any type of fund in which any Participant, or any person claiming under such Participant, has an interest other than that of an unsecured general creditor of the Company or Subsidiary, or which would provide any Participant, or any person claiming under such Participant, with a legally enforceable right to priority over any general creditor of the Company or Subsidiary in the event of insolvency of the Company or Subsidiary. For all purposes of the Plan, the Company or Subsidiary shall be considered insolvent if it is unable to pay its debts as they mature or if it is subject to a pending proceeding as a debtor under the U.S. Bankruptcy Code. During any period in which a Trust which conforms to the prior paragraph is in existence, benefits payable under the Plan shall be payable by the Trustee in accordance with the terms, provisions, conditions and limitations of the Plan and Trust. To the extent that any distribution described in the immediately preceding sentence does not fully satisfy the obligation for any benefit due under the Plan, the Company or Subsidiary shall remain fully liable and obligated for full payment of any unpaid benefit due and payable under the Plan. 6.9 Claims Procedures. A Participant is not required to file a claim ----------------- to receive benefits payable under the Plan. The Administrator or Trustee, as applicable, shall pay benefits due under the Plan in accordance with the terms of the various Deferral Agreements. To the extent that such payments are not made when due, a claim should be submitted to the Administrator or Trustee, as applicable, by the Participant, or by his Beneficiary in the event of Participant's death ("Claimant" for purposes of this section). A decision on a Claimant's claim -33- for benefits shall be made within twenty (20) days after receipt of the claim. In the event there is a disagreement concerning the amount payable to the Claimant, the Claimant shall receive written notification of the amount in dispute and shall be entitled to a full review of his claim. If a claim is denied, a Claimant desiring a review must submit a written request to the Compensation Committee requesting such a review, which request should include whatever comments or arguments that the Claimant wishes to make. Incident to the review, the Claimant may represent himself or appoint a representative to do so, and he shall have the right to inspect all documents pertaining to the issue. The Compensation Committee, in its discretion, may schedule any meeting with the Claimant and/or the Claimant's representative that it deems to be necessary or appropriate to facilitate or expedite its review of the amount in dispute. A request for a review must be filed with the Compensation Committee within sixty (60) days after notice of the disputed amount is received by the Claimant. If no request is received within the 60-day time limit, the determination of the amount due by the Administrator or Trustee, as applicable, will be final. However, if a request for review of a disputed amount is timely filed, the Compensation Committee must render its decision under normal circumstances within thirty (30) days of its receipt of the request for review. In special circumstances the decision may be delayed if, prior to expiration of the initial 30-day period, the Claimant is notified (of the extension, but must in any event be rendered no later than sixty (60) days after receipt of the Claimant's request. All decisions of the Compensation Committee shall be in writing and shall include specific reasons for whatever action has been taken, as well as the Plan provisions on which the decision is based. -34- 6.10 Facility of Payments. Every person receiving or claiming -------------------- benefits under the Plan shall be conclusively presumed to be mentally competent until the date on which the Administrator receives written notice, in a form and manner acceptable to the Administrator, that such person is incompetent, and that a guardian, conservator, or other person legally vested with the care of such person's person or estate has been appointed; provided, however, that if the Administrator shall find that any person to whom a benefit is payable under the Plan is unable to care for such person's affairs because of incompetency, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid as provided in the Qualified Plan. Any such payment so made shall be a complete discharge of liability therefor under the Plan. 6.11 Beneficiary Designations. Each Employee or Outside Director ------------------------ upon becoming a Participant shall file with the Administrator a designation of one or more Beneficiaries to whom benefits otherwise payable to the Participant shall be made in the event of his death prior to the complete distribution of the amount credited to his accounts under the Deferred Compensation Ledger. Such designation shall be effective when received in writing by the Administrator subject to the subsequent provisions of this paragraph. Subject to the following provisions of this Section 6.10, a Participant may, from time to time, revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Administrator. The last valid designation received by the Administrator shall be controlling; provided, however, that no Beneficiary designation, or change or revocation thereof, shall be effective unless received by the Administrator prior to the Participant's death and in no event shall it be effective as of a date prior to its receipt. Notwithstanding any contrary -35- provision of this paragraph, no Beneficiary designation made by a married Participant, other than one under which the spouse of such Participant is designated as the sole Beneficiary, shall be valid without the written consent of the spouse of such Participant. In addition, except in the case of unpaid installments that are payable to the spouse of the deceased retired Participant, all unpaid amounts credited to the accounts maintained under the Deferred Compensation Ledger for a Participant who dies prior to receiving such amounts in full shall be paid to the deceased Participant's Beneficiary as soon as administratively practicable following the Participant's death in the form of a lump sum cash distribution. If no valid Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with applicable law, the payment of the Participant's death benefits under the Plan shall be made to the Participant's estate. If the Administrator is in doubt as to the right of any person to receive such amount, the Administrator may direct that the amount be paid into any court of competent jurisdiction, and such payment shall be a full and complete discharge of any liability or obligation of the Plan, Trust, Company, Administrator, Compensation Committee, Board and other interested parties, therefor. 6.12 Withholding of Taxes. The Company or, if appropriate, the -------------------- Trustee, shall withhold from the amount of benefits payable under the Plan all federal, state and local taxes required to be withheld under any applicable law or governmental regulation or ruling. Without limiting the scope of the immediately preceding sentence, the Employee portion of any employment taxes due on deferrals hereunder shall be withheld from the Participant's compensation or under such other arrangement as may be acceptable to the Administrator. -36- ARTICLE 7 RIGHTS OF PARTICIPANTS 7.1 Annual Statement to Participants. As soon as practicable after -------------------------------- the end of each Plan Year, or at such other time as the Administrator determines to be appropriate, the Administrator shall cause to be prepared and delivered to each Participant a written statement showing such information as the Administrator decides is appropriate. 7.2 Limitation of Rights. Nothing in this Plan shall be construed -------------------- to: (i) Give any individual who is employed by the Company or any Subsidiary any right to be a Participant in the Plan unless and until such person meets applicable eligibility requirements; (ii) Give a Participant or any other person any interests or rights, other than as an unsecured general creditor of the Company or any Subsidiary, with respect to the Compensation, Bonuses and Investment Experience credited or charged to his accounts under the Deferred Compensation Ledger until such amounts are actually distributed to him; (iii) Limit in any way the right of the Company or any Subsidiary to terminate a Participant's Employment with the Company or any Subsidiary; (iv) Give a Participant or any other person any interest in any fund or in any specific asset of the Company or any Subsidiary; (v) Be evidence of any agreement or understanding, express or implied, that the Company or any Subsidiary will employ a Participant in any particular position, at any particular rate of remuneration, or for any particular time period; or -37- (vi) Create a fiduciary relationship between the Participant and the Company, Subsidiary, Compensation Committee, Board, and/or Administrator. 7.3 Nonalienation of Benefits. No right or benefit under this Plan ------------------------- shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same will be void and without effect. No right or benefit hereunder shall in any manner be liable for or subject to any debts, contracts, liabilities or torts of the person entitled to such benefits. If any Participant or Beneficiary hereunder shall become bankrupt or attempt to anticipate, alienate, assign, sell, pledge, encumber, or charge any right or benefit hereunder, or if any creditor shall attempt to subject the same to a writ of garnishment, attachment, execution, sequestration, or any other form of process or involuntary lien or seizure, then such right or benefit shall be held by the Company for the sole benefit of the Participant or Beneficiary, his spouse, children, or other dependents, or any of them, in such manner as the Administrator shall deem proper, free and clear of the claims of any party. The first paragraph of this section shall not preclude (i) the Participant from designating a Beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Participant or his estate from assigning any rights hereunder to the person or persons entitled thereto. 7.4 Prerequisites to Benefits. No Participant, nor any person ------------------------- claiming through a Participant, shall have any right or interest in the Plan, or any benefits hereunder, unless and until all the terms, conditions and provisions of the Plan which affect such Participant or such other person shall have been complied with as specified herein. -38- ARTICLE 8 MISCELLANEOUS 8.1 Amendment or Termination of the Plan. The Board may amend or ------------------------------------ terminate the Plan at any time effective as of the date specified by the Board, including amendments with a retroactive effective date; provided, however, the provisions of Section 8.2 may not be amended without the consent of at least two-thirds of all affected Participants. In addition, unless the particular Participant (or his Beneficiary in the event of the Participant's death) consents in writing, no such amendment or termination shall adversely affect any rights of such Participant or Beneficiary to any amounts which are required to be allocated and credited hereunder to his accounts maintained under the Deferred Compensation Ledger, to the extent credited as of the date of the amendment. However, in the event that incident to any such amendment or termination, payment of any benefit accrued under the Plan is accelerated, such benefit shall be paid by the Company or Subsidiary if payment of such benefit would otherwise be made by the Trustee from assets of the Trust under circumstances which would at any time when the Company or Subsidiary is insolvent defined in Section 6.8 (i) treat the Participant, or any person claiming under the Participant, as other than a general unsecured creditor of the Company or Subsidiary or (ii) provide the Participant, or any person claiming under the Participant, with a legally enforceable right to priority over any general unsecured creditor of the Company or Subsidiary. Notwithstanding the foregoing, the Board may amend the Plan at any time to change the hypothetical investment funds referenced in Section 5.2, with respect to future crediting of Investment Experience to amounts previously credited to Participant accounts. -39- 8.2 Powers of the Company. The existence of outstanding and unpaid --------------------- benefits under the Plan shall not affect in any way the right or power of the Company or any Subsidiary to make or authorize any adjustments, recapitalization, reorganization or other changes in the Company's or Subsidiary's capital structure or in its business, or any merger or consolidation of the Company or any Subsidiary, or any issue of bonds, debentures, common or preferred stock, or the dissolution or liquidation of the Company or any Subsidiary, or any sale or transfer of all or any part of their assets or business, or any other act or corporate proceeding, whether of a similar character or otherwise. 8.3 Waiver. No term or condition of this Plan shall be deemed to ------ have been waived, nor shall there be an estoppel against the enforcement of any provision of this Plan, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver- unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. Any waiver by either party hereto of a breach of any provision of this Plan by the other party shall not operate or be construed as-a waiver by such party of any subsequent breach thereof. 8.4 Separability. In the event that any provision of this Plan is ------------ declared invalid and not binding on the parties hereto in a decree or order issued by a court of competent jurisdiction, such declaration shall not affect the validity of the other provisions of this Plan to -40- which such declaration of invalidity does not relate and such other provisions shall remain in full force and effect. 8.5 Gender, Tense and Headings. Whenever the context requires, words -------------------------- of the masculine gender used herein shall include the feminine and neuter, and words used in the singular shall include the plural. The words `hereof', `hereunder', `herein,' and similar compounds of the word `here' shall refer to the entire Plan and not to any particular term or provision of the Plan. Headings of Articles and Sections, as used herein, are inserted solely for convenience and reference and shall not affect the meaning, interpretation or scope of the Plan. 8.6 Governing Law. The Plan shall be subject to and governed by the ------------- laws of the Commonwealth of Pennsylvania (other than such laws relating to choice of laws), except to the extent preempted by ERISA or other applicable federal law. 8.7 Notice. Any notice required or permitted to be given under this ------ Plan shall be sufficient if in writing and hand-delivered with appropriate proof of same, or sent by registered or certified mail, return receipt requested, to the Company, Administrator, Compensation Committee, Participant, Beneficiary or other person or entity at the address last furnished by such person or entity. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. -41- IN WITNESS WHEREOF, this Plan document is executed this 31st day of December, 1998 by a duly authorized officer of the Company, to be effective as of January 1, 1999. SUSQUEHANNA BANCSHARES, INC. By: /s/ Edward Balderston, Jr. --------------------------------- Name: Edward Balderston, Jr. -------------------------------- Title: Vice President Human Resources ------------------------------ -42- EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 ---------- SUBSIDIARIES OF THE REGISTRANT 1. Farmers First Bank, 9 East Main Street, Lititz, Pennsylvania; a Bank and Trust Company organized under the Pennsylvania Banking Code of 1965. 2. The Citizens National Bank of Southern Pennsylvania, 35 North Carlisle Street, Greencastle, Pennsylvania; a National Bank organized under the National Bank Act. 3. First National Trust Bank, 400 Market Street, Sunbury, Pennsylvania; a National Bank organized under the National Bank Act. 4. Williamsport National Bank, 329 Pine Street, Williamsport, Pennsylvania; a National Bank organized under the National Bank Act. 5. Farmers & Merchants Bank and Trust, 59 West Washington Street, Hagerstown, Maryland; a Bank and Trust Company organized under the Maryland Banking Code. 6. Susque-Bancshares Life Insurance Company, Phoenix, Arizona; an insurance company organized under the laws of the State of Arizona. 7. Susque-Bancshares Leasing Company, Inc., 9 East Main Street, Lititz, Pennsylvania; a company organized under the laws of the Commonwealth of Pennsylvania. 8. Susquehanna Bancshares South, Inc., 100 West Road, Baltimore, Maryland; a thrift holding company organized under the laws of the State of Delaware. 9. Susquehanna Bank, 100 West Road, Towson, Maryland; a wholly-owned subsidiary of Susquehanna Bancshares South, Inc. 10. Susquehanna Bancshares East, Inc., 114 North Main Street, Mullica Hill, New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares, Inc. 11. Equity Bank, National Association, 8000 Sagemore Drive, Suite 8101, Marlton, New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares East, Inc. 12. Founders' Bank, 101 Bryn Mawr Avenue, Bryn Mawr, Pennsylvania; a wholly- owned subsidiary of Susquehanna Bancshares East, Inc. 13. First American National Bank of Pennsylvania, 140 East Main Street, Everett, Pennsylvania, a National Bank organized under the National Bank Act. 14. First Capitol Bank, 2951 Whiteford Road, York, Pennsylvania; a Bank organized under the Pennsylvania Banking Code of 1965 (acquired January 4, 1999). EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 ---------- PriceWaterhouseCoopers LLP One South Market Square Harrisburg, PA 17101-9916 Telephone (717) 231-5900 Facsimile (717) 232-5672 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Susquehanna Bancshares, Inc., on Form S-8 (File No. 33-92512) of our report dated January 26, 1999, on our audits of the consolidated financial statements of Susquehanna Bancshares, Inc., as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP One South Market Square Harrisburg, Pennsylvania March 20, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 105,263 17,926 58,089 0 873,086 59,837 61,019 2,773,550 35,171 4,064,827 3,124,332 137,601 41,538 370,160 0 0 71,825 319,371 4,064,827 235,661 53,104 4,001 292,766 111,099 138,576 154,190 5,247 73 113,206 66,658 66,658 0 0 45,574 1.27 1.26 8.18 20,130 10,420 1,201 36,608 35,508 6,954 1,370 35,171 35,171 0 0
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