<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10674
SUSQUEHANNA BANCSHARES, INC.
----------------------------
(Exact name of Registrant as specified in its Charter)
Pennsylvania 23-2201716
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
--------------------------
(Address of principal executive offices) (Zip Code)
(717) 626-4721
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of October 31, 2000 the Registrant had 39,210,914 shares of common stock
outstanding.
1
<PAGE>
SUSQUEHANNA BANCSHARES, INC.
INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
REFERENCE
<S> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets - as of September 30, 2000 and 1999
and December 31, 1999 3
Consolidated Statements of Income - for the three months ended
and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flow - for the nine months
periods ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 10 - 18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS 19 - 20
PART II OTHER INFORMATION 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 21
EXHIBIT INDEX 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 112,127 $ 146,576 $ 105,419
Short-term investments 47,684 36,653 50,258
Investment securities available for sale (at fair value) 867,452 878,958 881,064
Investment securities held to maturity 22,123 33,090 40,069
(Fair values of $22,439; $33,461; and $40,633)
Loans and leases, net of unearned income 3,424,630 3,469,661 3,433,607
Less: Allowance for loan and lease losses 37,422 44,465 41,386
---------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 3,387,208 3,425,196 3,392,221
---------------------------------------------------------------------------------------------------------------------------------
Premises and equipment (net) 57,875 55,429 55,987
Accrued income receivable 25,429 23,763 22,771
Bank-owned life insurance 112,400 108,105 101,200
Other assets 140,569 103,268 98,088
---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,772,867 $ 4,811,038 $ 4,747,077
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand $ 450,329 $ 430,054 $ 422,561
Interest-bearing demand 742,968 793,160 761,505
Savings 416,818 421,012 435,808
Time 1,311,394 1,346,268 1,349,926
Time of $100 or more 251,784 190,026 183,567
---------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,173,293 3,180,520 3,153,367
---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 212,675 207,507 158,483
FHLB borrowings 413,159 372,414 390,925
Vehicle financing 372,942 482,104 479,590
Long-term debt 100,000 95,000 95,000
Accrued interest, taxes, and expenses payable 45,404 34,746 31,827
Other liabilities 16,995 23,725 16,242
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,334,468 4,396,016 4,325,434
---------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000 ($2.00 par value)
Issued: 39,398,190; 39,394,094; and 39,350,100, respectively 78,796 78,788 78,700
Surplus 57,861 57,873 57,084
Retained earnings 313,756 292,150 295,396
Accumulated other comprehensive income, net of taxes of ($4,962);
($6,961) and ($5,034), respectively (9,594) (13,616) (9,350)
Less: Treasury stock, (172,276; 11,641; and 12,612
common shares at cost, respectively) 2,420 173 187
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 438,399 415,022 421,643
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,772,867 $ 4,811,038 $ 4,747,077
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------------------------------------------------- ------------------------------
(Dollars in thousands, except per share) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $74,363 $69,640 $218,779 $205,744
Interest on investment securities: Taxable 13,144 12,582 39,819 37,358
Tax-exempt 1,031 1,261 3,240 4,056
Interest on short-term investments 725 781 2,218 2,426
---------------------------------------------------------------------------------------------- ------------------------------
Total interest income 89,263 84,264 264,056 249,584
---------------------------------------------------------------------------------------------- ------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 5,219 4,720 16,139 14,424
Savings 2,001 2,033 5,678 6,228
Time 21,876 19,602 62,565 58,558
Interest on short-term borrowings 3,081 1,022 8,395 2,539
Interest on FHLB borrowings 6,397 5,320 17,429 14,294
Interest on vehicle financing 7,307 8,837 24,167 26,254
Interest on long-term debt 1,965 2,281 5,801 6,574
---------------------------------------------------------------------------------------------- ------------------------------
Total interest expense 47,846 43,815 140,174 128,871
---------------------------------------------------------------------------------------------- ------------------------------
Net interest income 41,417 40,449 123,882 120,713
Provision for loan and lease losses 766 1,920 2,273 5,853
---------------------------------------------------------------------------------------------- ------------------------------
Net interest income after provision for loan and lease losses 40,651 38,529 121,609 114,860
---------------------------------------------------------------------------------------------- ------------------------------
OTHER INCOME
Service charges on deposit accounts 2,562 2,612 7,940 7,278
Vehicle origination and servicing fees 6,023 3,520 16,689 10,242
Other service charges, commissions, fees 3,723 1,179 13,872 3,249
Income from fiduciary-related activities 1,116 1,296 3,349 2,972
Gain on sale of mortgages 413 779 1,353 2,779
Income from bank-owned life insurance 1,449 1,458 4,294 3,296
Other operating income 3,788 5,589 7,130 8,491
Investment security gains/(losses) (2) 858 (16) 958
---------------------------------------------------------------------------------------------- ------------------------------
Total other income 19,072 17,291 54,611 39,265
---------------------------------------------------------------------------------------------- ------------------------------
OTHER EXPENSES
Salaries and employee benefits 16,601 15,949 50,423 44,844
Net occupancy expense 2,418 2,432 7,400 6,914
Furniture and equipment expense 2,124 2,071 6,136 5,994
Amortization of intangible assets 850 751 2,463 2,725
Vehicle expense 2,695 731 6,363 723
Restructuring charge 0 0 (900) 0
Other operating expenses 14,471 12,296 44,555 34,131
---------------------------------------------------------------------------------------------- ------------------------------
Total other expenses 39,159 34,230 116,440 95,331
---------------------------------------------------------------------------------------------- ------------------------------
Income before income taxes 20,564 21,590 59,780 58,794
Provision for income taxes 6,375 6,721 18,532 18,327
---------------------------------------------------------------------------------------------- ------------------------------
NET INCOME $14,189 $14,869 $41,248 $40,467
---------------------------------------------------------------------------------------------- ------------------------------
Per share information:
Basic earnings $0.36 $0.38 $1.05 $1.03
Diluted earnings $0.36 $0.38 $1.05 $1.02
Cash dividends $0.17 $0.15 $0.51 $0.45
Average shares outstanding: Basic 39,246 39,334 39,281 39,313
Diluted 39,368 39,494 39,373 39,500
---------------------------------------------------------------------------------------------- ------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nine months ended September 30 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $41,248 $40,467
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 10,546 8,826
Provision for loan and lease losses 2,273 5,853
Gain on sale of branch offices 0 (3,352)
Gain on sale of credit card portfolio (1,761) 0
(Gain)/loss on securities transactions 16 (958)
(Gain)/loss on sale of loans (1,658) (2,779)
(Gain)/loss on sale of other real estate owned 17 (27)
Mortgage loans originated for resale (89,979) (148,012)
Sale of mortgage loans originated for resale 88,070 161,226
Leases originated for resale (222,376) 0
Sale of leases originated for resale 200,709 0
(Increase)/decrease in accrued interest receivable (1,666) 3
Increase/(decrease) in accrued interest payable (12) (1,927)
(Increase)/decrease in accrued expenses and taxes payable 10,670 1,878
Other, net 4,405 3,819
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,502 65,017
----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 4,482 14,999
Proceeds from the maturity of investment securities 93,626 101,355
Purchase of available-for-sale securities (62,470) (109,507)
Purchase of held-to-maturity securities (7,887) 0
Net (increase)/decrease in loans and leases 40,340 (149,964)
Transfer of allowance for loans and leases to third party guarantor (3,057) 0
Net leases originated for warehouse (22,767) 0
Capital expenditures (7,494) (4,133)
Net cash received on sale of branch deposits 0 (22,381)
Net cash and cash equivalents acquired/(paid) in acquisition (11,323) 0
Purchase of insurance products 0 (50,000)
----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities 23,450 (219,631)
----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase/(decrease) in deposits (7,227) (41,131)
Net increase/(decrease) in short-term borrowings 5,168 24,202
Net increase/(decrease) in FHLB borrowings 40,745 81,652
Net increase/(decrease) in vehicle financing (109,162) 22,677
Proceeds from issuance of long-term debt 5,000 28,327
Repayment of long-term debt 0 (2,950)
Proceeds from issuance of common stock 412 846
Cash paid for treasury stock (2,664) (287)
Dividends paid (19,642) (16,617)
----------------------------------------------------------------------------------------------------------------------
Net cash provided from/(used for) financing activities (87,370) 96,719
----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (23,418) (57,895)
Cash and cash equivalents at January 1 183,229 213,572
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $159,811 $155,677
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Cash and due from banks $112,127 $105,419
Short-term investments 47,684 50,258
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $159,811 $155,677
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest paid on deposits, short-term borrowings, and long-term debt was
$140,186 in 2000, and $134,947 in 1999. Income taxes paid were $143 in 2000, and
$10,695 in 1999. Amounts transferred to other real estate owned were $1,999 in
2000, and $5,247.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
Nine Month Periods Ended September 30 STOCK SURPLUS EARNINGS INCOME
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - January 1, 1999 $78,655 $57,166 $271,545 $6,004
Comprehensive income:
Net income 40,467
Change in unrealized gain/(loss) on securities, net of
taxes of ($7,909) and reclassification adjustment of $958 (15,354)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 78,655 57,166 312,012 (9,350)
Common stock issued under
employee benefit plans 45 (82)
Purchase/conversion of treasury stock
Cash dividends paid:
Per common share of $0.45 (16,616)
------------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 1999 $78,700 $57,084 $295,396 ($9,350)
====================================================================================================================================
Balance - January 1, 2000 $78,788 $57,873 $292,150 ($13,616)
Comprehensive income:
Net income 41,248
Change in unrealized gain/(loss) on securities, net of
taxes of $1,999 and reclassification adjustment of ($16) 4,022
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 333,398 (9,594)
Common stock issued under
employee benefit plans 8 (12)
Purchase/conversion of treasury stock
Cash dividends paid:
Per common share of $0.51 (19,642)
------------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 2000 $78,796 $57,861 $313,756 ($9,594)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TREASURY TOTAL
STOCK EQUITY
-------------------------------------------------------------------------------------------------------
Nine Month Periods Ended September 30
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - January 1, 1999 ($783) $412,587
Comprehensive income:
Net income 40,467
Change in unrealized gain/(loss) on securities, net of
taxes of ($7,909) and reclassification adjustment of $958 (15,354)
-------------------------------------------------------------------------------------------------------
Total comprehensive income (783) 437,700
Common stock issued under
employee benefit plans 883 846
Purchase/conversion of treasury stock (287) (287)
Cash dividends paid:
Per common share of $0.45 (16,616)
-------------------------------------------------------------------------------------------------------
Balance - September 30, 1999 ($187) $421,643
=======================================================================================================
Balance - January 1, 2000 ($173) $415,022
Comprehensive income:
Net income 41,248
Change in unrealized gain/(loss) on securities, net of
taxes of $1,999 and reclassification adjustment of ($16) 4,022
-------------------------------------------------------------------------------------------------------
Total comprehensive income 45,270
Common stock issued under
employee benefit plans 416 412
Purchase/conversion of treasury stock (2,663) (2,663)
Cash dividends paid:
Per common share of $0.51 (19,642)
-------------------------------------------------------------------------------------------------------
Balance - September 30, 2000 ($2,420) $438,399
=======================================================================================================
</TABLE>
ACCOUNTING POLICIES
The information contained in this report is unaudited and is subject to
year-end adjustments. However, in the opinion of management, the information
reflects all adjustments necessary for a fair statement of results for the
periods ended September 30, 2000.
The accounting policies of Susquehanna Bancshares, Inc. & Subsidiaries, as
applied in the consolidated interim financial statements presented herein, are
substantially the same as those followed on an annual basis as presented on
pages 30 through 32.
6
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
------------------------------------------------------------------------------------------------------------------------------
The amortized costs and fair values of securities are as follows:
------------------------------------------------------------------------------------------------------------------------------
September 30, 2000 December 31, 1999
----------------------------------- -----------------------------------
Amortized cost Fair value Amortized cost Fair value
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury $3,249 $3,280 $16,658 $16,683
U.S. Government agencies 365,396 360,184 346,041 338,990
State & municipal 64,261 64,189 70,136 69,599
Mortgage-backed 395,278 384,593 414,317 399,428
Corporates 19,748 19,534 17,795 17,682
Equities 34,076 35,672 34,588 36,576
------------------------------------------------------------------------------------------------------------------------------
882,008 867,452 899,535 878,958
------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
State & municipal 21,577 21,897 32,070 32,450
Mortgage-backed 546 542 1,020 1,011
------------------------------------------------------------------------------------------------------------------------------
22,123 22,439 33,090 33,461
------------------------------------------------------------------------------------------------------------------------------
Total investment securities $904,131 $889,891 $932,625 $912,419
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LOANS AND LEASES
------------------------------------------------------------------------------------------------------------------------------
Loans and leases, net of unearned income at September 30, 2000 and December 31, 1999, were as follows:
------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $369,290 $327,670
Real estate - construction 260,205 255,054
Real estate - mortgage 1,909,271 1,850,375
Consumer 364,713 381,556
Leases 521,151 655,006
------------------------------------------------------------------------------------------------------------------------------
Total loans and leases $3,424,630 $3,469,661
------------------------------------------------------------------------------------------------------------------------------
Net investment in direct financing leases is as follows:
------------------------------------------------------------------------------------------------------------------------------
Minimum lease payments receivable $171,191 $241,767
Estimated residual value of leases 405,257 495,309
Unearned income under lease contracts (55,297) (82,070)
------------------------------------------------------------------------------------------------------------------------------
Total leases $521,151 $655,006
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
An analysis of impaired loans as of September 30, 2000 and December 31, 1999, is presented as follows:
------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans without a related reserve $7,494 $11,491
Impaired loans with a reserve 2,979 1,460
------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $10,473 $12,951
------------------------------------------------------------------------------------------------------------------------------
Reserve for impaired loans $877 $532
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
An analysis of impaired loans for the three and nine month periods ended September 30, 2000 and 1999 is presented as follows:
------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
------------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average balance of impaired loans $10,099 $13,867 $11,292 $10,742
Interest income on impaired loans (cash-basis) 48 42 250 94
</TABLE>
7
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BORROWINGS
---------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term borrowings at September 30, 2000 and December 31, 1999, were as
follows:
---------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $196,350 $179,278
Treasury tax and loan notes 8,594 14,010
Federal funds purchased 7,731 14,219
---------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $212,675 $207,507
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Long-term debt at September 30, 2000 and December 31, 1999, was as follows:
---------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Term note due July, 2003 $15,000 $10,000
Parent:
Senior notes due February, 2003 35,000 35,000
Subordinated notes due February, 2005 50,000 50,000
---------------------------------------------------------------------------------------------------------------------
Total long-term debt $100,000 $95,000
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
EARNINGS-PER-SHARE
------------------------------------------------------------------------------------------------------------------------------------
The following tables sets forth the calculation of basic and diluted earnings
per share for the periods ended September 30, 2000 and 1999:
------------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30,
------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share:
Income available to common stockholders $14,189 39,246 $0.36 $14,869 39,334 $0.38
Effect of Diluted Securities:
Incentive stock options outstanding 122 160
----------- -----------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $14,189 39,368 $0.36 $14,869 39,494 $0.38
====================================================================================================================================
<CAPTION>
For the nine months ended September 30,
------------------------------------------------------------------------------------
2000 1999
----------------------------------------- ----------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share:
Income available to common stockholders $41,248 39,281 $1.05 $40,467 39,313 $1.03
Effect of Diluted Securities:
Incentive stock options outstanding 92 187
----------- -----------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $41,248 39,373 $1.05 $40,467 39,500 $1.02
====================================================================================================================================
</TABLE>
8
<PAGE>
COMPLETED ACQUISITIONS
--------------------------------------------------------------------------------
On February 1, 2000, Susquehanna completed the acquisition of Boston
Service Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), a
closely-held consumer automobile financing company that services more than $800
million in lease receivables. Susquehanna issued 2,360,000 shares of common
stock to the shareholders of Hann for the outstanding common shares of Hann. The
acquisiton 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 Hann for all periods presented.
On March 3, 2000, Susquehanna completed the acquisition of Valley Forge
Asset Management Corp. ("VFAM"), a Pennsylvania asset management corporation
registered both as a broker/dealer and as an investment advisor, and Valley
Forge Investment Company, Inc. ("VFICO"), its parent corporation, in cash
transactions. The acquisition was accounted for under the purchase method of
accounting. Goodwill of $9.3 million was realized in the acquisition and will be
amortized to other operating expense on a straight-line basis over 25 years. In
this transaction, there are also contingent cash payments totalling $6.0
million. These contingent cash payments are based upon certain earnings targets
and will be recorded as goodwill if earned. No pro forma data is disclosed
because the acquisition is not material to Susquehanna.
Previously reported information has been restated as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
--------------------------------------------------------------------------------------------------
Susquehanna Hann Susquehanna
(Dollars in thousands, except per share) As Reported As Reported Restated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $40,279 $170 $40,449
Provision for loan and lease losses 1,496 424 1,920
Other income 13,771 3,520 17,291
Other expense 30,989 3,241 34,230
--------------------------------------------------------------------------------------------------
Income before taxes 21,565 25 21,590
Taxes 6,711 10 6,721
--------------------------------------------------------------------------------------------------
Net income $14,854 $15 $14,869
==================================================================================================
Earnings per share: Basic $0.40 $0.38
Diluted $0.40 $0.38
Average shares outstanding: Basic 36,974 2,360 39,334
Diluted 37,134 2,360 39,494
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------------------------
Susquehanna Hann Susquehanna
As Reported As Reported Restated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $120,277 $436 $120,713
Provision for loan and lease losses 4,214 1,639 5,853
Other income 29,023 10,242 39,265
Other expense 89,010 6,321 95,331
--------------------------------------------------------------------------------------------------
Income before taxes 56,076 2,718 58,794
Taxes 17,237 1,090 18,327
--------------------------------------------------------------------------------------------------
Net income $38,839 $1,628 $40,467
==================================================================================================
Earnings per share: Basic $1.05 $1.03
Diluted $1.05 $1.02
Average shares outstanding: Basic 36,953 2,360 39,313
Diluted 37,140 2,360 39,500
</TABLE>
9
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF
------------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
Management's discussion and analysis of the significant changes in the
consolidated results of operations, financial condition, and cash flows of
Susquehanna Bancshares, Inc. ("Susquehanna") is set forth below for the periods
indicated. All prior period financial data presented has been restated for the
acquisition of Boston Service Company, Inc. (t/a Hann Financial Service
Corporation) ("Hann").
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. These statements include the words "expect",
"estimate", "project", "anticipate", "should", "intend", "probability", "risk",
"target", "objective" and similar expressions or variations on such expressions.
These statements are subject to certain risks and uncertainties. For example,
certain market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. By their
nature, certain 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 which Susquehanna has significant business activities or investments; the
monetary and interest rate policies of the Board of Governors of the Federal
Reserve System; inflation; deflation; unanticipated turbulence in interest
rates; changes in laws, regulations and taxes; changes in competition and
pricing environments; natural disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructuring;
technological changes; changes in consumer spending and saving habits and the
success of Susquehanna in managing the risks involved in the foregoing.
On January 4, 1999, Susquehanna completed the acquisition of First Capitol
Bank ("First Capitol"), a Pennsylvania state-chartered bank. On February 1,
2000, Susquehanna completed
10
<PAGE>
the acquisition of Hann, a New Jersey automobile leasing company. Since these
transactions were accounted for under the pooling-of-interests method of
accounting, all financial results reported include First Capitol and Hann.
On March 3, 2000, Susquehanna completed the acquisition of Valley Forge
Asset Management Corp., a Pennsylvania asset management corporation registered
both as a broker/dealer and as an investment advisor, and Valley Forge
Investment Company, Inc., collectively ("VFAM"), in cash transactions. Since
this acquisition was accounted for under the purchase method of accounting, the
results of operation for VFAM are included with Susquehanna from March 3, 2000
forward.
Earnings Summary
----------------
Susquehanna's net income for the third quarter of 2000 was $14.2 million, a
5% decrease from net income of $14.9 million in the third quarter of 1999.
Included in the third quarter of 2000 is a $1.8 million gain on the sale of the
credit card portfolio, which no longer provided a strategic benefit to
Susquehanna, while the third quarter of 1999 included a $3.3 million gain on the
sale of two branches. Excluding these two items, third quarter 2000 net income
increased 3% over 1999. For the nine months ended September 30, 2000, net income
of $41.2 million was 2% higher than the $40.5 million achieved in the first nine
months of 1999. Susquehanna's earnings performance was enhanced by significant
improvements in fee income.
Diluted earnings per share ("EPS") decreased 5% from $0.38 per share for
the third quarter of 1999 to $0.36 per share for the third quarter of 2000.
Excluding the two items noted above, third quarter 2000 diluted EPS increased 3%
over 1999. Return on average assets ("ROA") and return on average equity ("ROE")
finished at 1.18% and 13.21%, respectively, in the third quarter of 2000,
compared with 1.26% and 14.20% in the third quarter of 1999. For the third
quarter of 2000, tangible EPS, ROA and ROE were $0.38, 1.26%, and 15.33%,
respectively.
Diluted EPS increased 3% from $1.02 per share for the first nine months of
1999 to $1.05 per share for the first nine months of 2000. ROA and ROE finished
at 1.15% and 13.21%, in the first nine months of 2000 compared with 1.17% and
13.04% in the first nine months of 1999. For
11
<PAGE>
the nine months ended September 30, 2000, tangible EPS, ROA and ROE were $1.11,
1.23%, and 15.31%, respectively.
Total assets at September 30, 2000 of $4.8 billion increased 1% over the
September 30, 1999 levels. Loans remained at $3.4 billion, while deposits
remained at $3.2 billion. Equity capital was $438 million at September 30, 2000,
or $11.18 per share compared to $422 million, or $10.72 per share at September
30, 1999.
Net Interest Income
-------------------
The major source of operating revenues is net interest income, which rose
to a level of $41.4 million in the third quarter of 2000 compared to $40.4
million for the same period in 1999. For the nine months ended September 30,
2000, net interest income was $123.9 million compared with $120.7 million for
the same period of 1999. 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, investment securities and
short-term investments. The amount of interest income is dependent upon many
factors, including the volume of earning assets, the general level of interest
rates, the dynamics of the change in interest rates, and levels of
non-performing assets. 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 the 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 68% for the quarter
ended, and 69% for the nine months ended September 30, 2000, and was 70% for the
quarter ended and 75% for the nine months ended September 30, 1999,
respectively.
Net interest income for the third quarter 2000 increased $1.0 million
compared to the third quarter of 1999. Average earning assets in the third
quarter of 2000 increased $27 million over the same period in 1999. Also
contributing to this improvement was an increase in the net
12
<PAGE>
interest margin of 7 basis points. This increase in margin was due to a 42 basis
point increase in the earning asset yield that was partially offset by a 42
basis point increase in the cost of funds.
Net interest income for the nine months ended September 30, 2000 increased
$3.2 million over the same period of 1999. An increase in average earning assets
of $116 million was offset by a decline in the net interest margin from 3.85%
for the first nine months of 1999 to 3.83% during the comparable period of 2000.
This decline in margin was due to a 24 basis point increase in the cost of
funds, partially offset by a 22 basis point increase in the yield on earning
assets. These increases in asset yield and cost of funds are primarily due to a
higher interest rate environment.
Other Income
------------
Non-interest income increased $1.8 million, or 10%, from $17.3 million in
the third quarter of 1999, to $19.1 million in the third quarter of 2000. This
increase resulted primarily from an increase in vehicle origination and
servicing fees of $2.5 million and an increase in other service charges,
commissions and fees of $2.5 million, of which $1.5 million is attributable to
VFAM. Investment securities gains declined $0.9 million in 2000 compared with
1999. Gain on sale of mortgages decreased $0.4 million in 2000 compared with the
same period in 1999 as mortgages sold declined to $25.7 million from $58.6
million. During the third quarter of 2000, Susquehanna sold its credit card
portfolio and the transaction resulted in a gain of $1.8 million recorded as
other operating income. However, this category shows a decline from the same
period in 1999, as Susquehanna Bank, a wholly-owned subsidiary of Susquehanna,
sold two branch offices in the third quarter of 1999 which resulted in a gain of
$3.3 million.
For the first nine months of 2000, non-interest income of $54.6 million was
$15.3 million more than the same period of 1999. Other service charges,
commissions and fees increased $10.6 million, while vehicle origination and
servicing fees increased $6.4 million. The increase in other service charges,
commissions and fees was primarily attributable to VFAM ($4.2 million) and
merchant credit card fees ($6.2 million). Also contributing to the nine month
increase were income from bank-owned life insurance, $1.0 million; trust
activities, $0.4 million; and service charges on deposit accounts, $0.7 million.
Partially offsetting these increases were decreases in investment securities
gains, $1.0 million; and gain on sale of mortgages, which
13
<PAGE>
declined by $1.4 million. Mortgages sold for the first nine months of 2000
totaled $88.1 million versus $161.2 million in 1999.
Other income as a percentage of net interest income and other income, was
32% for the quarter, and 31% for the nine months ended September 30, 2000, and
was 30% and 25% for the comparable periods of 1999.
Other Expenses
--------------
Total non-interest expenses increased $5.0 million from $34.2 million in
the third quarter of 1999 to $39.2 million in the third quarter of 2000. For the
nine months ended September 30, 2000, total non-interest expenses increased
$21.1 million from the same period in 1999.
The quarter-to-quarter increase was primarily due to increases in salaries
and benefits of $0.7 million, vehicle expenses of $2.0 million, and other
expense of $2.2 million. The increase in salaries and benefits was primarily due
to the acquisition of VFAM, normal annual salary increases, and the staffing of
central sites for loans, deposits, administration and finance regarding the back
office consolidation project offset by a pension credit due to actuarial gains.
Anticipated savings from the reduction in the workforce associated with the back
office consolidation project will be approximately $0.5 million in the fourth
quarter of 2000 and $6.0 million in the year 2001 and each succeeding year. The
increase in vehicle expense is due to residual value losses on vehicles coming
off lease. These losses related primarily to large class sport utility vehicles.
In the third quarter of 2000, Hann entered into an agreement with a third party
to guarantee the remaining residual values on Hann's balance sheet. This
agreement eliminates the residual value risk for Hann with regard to those
leased vehicles. The increase in other expense was primarily due to increases in
merchant credit card expense ($0.9 million) and back office consolidation
project expenses ($0.8 million).
The nine month increase in expenses was primarily due to increases in
salaries and benefits of $5.6 million, vehicle expense of $5.6 million and other
expense of $10.4 million. The increases in salaries and benefits and vehicle
expense were for the same reasons as described above for the quarter. The
increase in other expense was primarily due to increases in merchant credit card
expense ($5.8 million) and back office consolidation project expenses ($2.2
million). Offsetting the above noted increases was a credit of $0.9 million to
the restructure charge. This
14
<PAGE>
credit represents a reduction in the severance accrual recorded in December 1999
as more employees than anticipated, who were eligible for severance, have left
prior to their severance date as of September 30, 2000.
In December 1999, Susquehanna incurred a special, one-time charge of $7.4
million relating to the consolidation of back office operations. Susquehanna
will continue to pay these costs with cash obtained from normal operating
activities. The current status of the $7.4 million restructure charge recorded
in the fourth quarter of 1999 is as follows:
<TABLE>
<CAPTION>
Remaining
Original Incurred Accrual Accrual
Item Accrual to-Date Reversal at 09/30/00
---- ------- ------- -------- -----------
<S> <C> <C> <C> <C>
Employee severance benefits $3,170 $0 ($900) $2,270
Professional fees 2,850 2,850 0 0
Employment services 660 421 0 239
Asset disposals 732 732 0 0
------------- -------------- -------------- -------------
Total $7,412 $4,003 ($900) $2,509
============= ============== ============== =============
</TABLE>
Income Taxes
------------
Susquehanna's effective tax rate decreased from 31.17% for the first nine
months of 1999 to 31.00% for the first nine months of 2000 due to an increase in
tax-advantaged income.
Risk Assets
-----------
Table 2 shows a decrease in non-accrual loans and leases from $22.8 million
at December 31, 1999 to $18.7 million at September 30, 2000, while
non-performing assets to period-end loans and OREO declined from 0.79% at
December 31, 1999 to 0.65% at September 30, 2000. Loan loss reserve to
non-performing loans at September 30, 2000 was 200% compared with 195% at
December 31, 1999.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 3, the provision was $0.8 million in the third
quarter of 2000, a decline of $1.2 million from the same time period in 1999.
For the nine months ended September
15
<PAGE>
30, 2000, the provision was $3.6 million lower than one year ago. Net charge-
offs were $6.3 million for the nine month period in 2000 versus the 1999 amount
of $3.9 million while third quarter 2000 net charge-offs were $1.9 million
compared to $1.2 million for 1999.
The reduction in the provision resulted from a declining vehicle lease
portfolio during the first nine months of 2000 compared with a growing vehicle
lease portfolio during the first nine months of 1999. The decline in 2000 is due
to origination's being sold to various third parties.
In the third quarter of 2000, Hann entered into an agreement with a third
party to guarantee the residual values on Hann's balance sheet. As part of this
agreement, Hann transferred (cash payment) $3.1 million of it's Allowance for
Loan and Lease Losses to the third party. As a result of this transaction, the
allowance at September 30, 2000 was 1.09% of period-end loans and leases
compared to 1.21% at September 30, 1999. Excluding Hann's residual values, which
no longer have any risk due to the third party guarantee, from period-end loans
and leases, the allowance at September 30, 2000 would be 1.23% of period-end
loans and leases.
Capital Resources
-----------------
Capital elements for Susquehanna are segmented into two tiers. Tier I
capital represents shareholders' equity reduced by most intangible assets, while
total capital includes certain allowable long-term debt and the general portion
of the allowance for loan and lease losses limited to 1.25% of risk-adjusted
assets. The minimum Tier I capital ratio is 4%; Susquehanna's ratio at September
30, 2000 was 11.06%. The minimum total capital (Tier II) ratio is 8%;
Susquehanna's ratio at, September 30, 2000 was 13.17%. The minimum leverage
ratio is 4%; Susquehanna's leverage ratio at September 30, 2000 was 8.63%.
16
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest rates and interest differential - taxable equivalent basis
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
September 30, 2000 September 30, 1999
------------------------------------------------------------------------------------------------------------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short - term investments $42,010 $725 6.87 $66,145 $781 4.68
Investment securities:
Taxable 830,170 13,144 6.30 800,646 12,582 6.23
Tax - advantaged 88,193 1,586 7.15 113,338 1,940 6.79
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 918,363 14,730 6.38 913,984 14,522 6.30
------------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 3,380,199 73,529 8.65 3,343,695 68,940 8.18
Tax - advantaged 58,476 1,283 8.73 48,448 1,077 8.82
------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,438,675 74,812 8.66 3,392,143 70,017 8.19
------------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 4,399,048 $90,267 8.16 4,372,272 $85,320 7.74
======================= =======================
Allowance for loan and lease losses (40,894) (40,976)
Other non - earning assets 423,336 366,160
-------------------------------------------------------------- --------------
Total assets $4,781,490 $4,697,456
============================================================== ==============
Liabilities
Deposits:
Interest - bearing demand $743,830 $5,219 2.79 $767,712 $4,907 2.54
Savings 423,166 2,001 1.88 447,214 2,033 1.80
Time 1,552,004 21,876 5.61 1,531,390 19,415 5.03
Short - term borrowings 202,696 3,081 6.05 122,325 1,022 3.31
FHLB borrowings 415,457 6,397 6.13 384,767 5,321 5.49
Long - term debt 100,000 1,965 7.82 95,000 2,281 9.53
Vehicle financing 389,876 7,307 7.46 468,703 8,837 7.48
------------------------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,827,029 $47,846 4.97 3,817,111 $43,816 4.55
======================= =======================
Demand deposits 447,994 424,749
Other liabilities 79,131 40,169
-------------------------------------------------------------- --------------
Total liabilities 4,354,154 4,282,029
-------------------------------------------------------------- --------------
Equity 427,337 415,427
-------------------------------------------------------------- --------------
Total liabilities & stockholders' equity $4,781,491 $4,697,456
============================================================== ==============
Net interest income / yield on
average earning assets $42,421 3.84 $41,504 3.77
======================= =======================
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
For the Nine Month Period Ended For the Nine Month Period Ended
September 30, 2000 September 30, 1999
------------------------------------------------------------------------------------------------------------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short - term investments $48,846 $2,218 6.07 $70,554 $2,426 4.60
Investment securities:
Taxable 825,045 39,819 6.45 808,250 37,358 6.18
Tax - advantaged 93,638 4,985 7.11 119,415 6,240 6.99
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 918,683 44,804 6.51 927,665 43,598 6.28
------------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 3,404,339 216,393 8.49 3,264,291 203,576 8.34
Tax - advantaged 55,572 3,671 8.82 49,218 3,335 9.06
------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,459,911 220,064 8.50 3,313,509 206,911 8.35
------------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 4,427,440 $267,086 8.06 4,311,728 $252,935 7.84
======================= =======================
Allowance for loan and lease losses (42,605) (40,560)
Other non - earning assets 403,483 342,324
-------------------------------------------------------------- --------------
Total assets $4,788,318 $4,613,492
============================================================== ==============
Liabilities
Deposits:
Interest - bearing demand $770,440 $16,139 2.80 $785,003 $15,061 2.57
Savings 421,789 5,678 1.80 449,305 6,228 1.85
Time 1,550,506 62,565 5.39 1,515,065 57,921 5.11
Short - term borrowings 195,449 8,395 5.74 82,072 2,539 4.14
FHLB borrowings 391,797 17,429 5.94 372,815 14,294 5.13
Long - term debt 98,804 5,801 7.84 95,000 6,637 9.34
Vehicle financing 434,197 24,167 7.43 441,055 26,191 7.94
------------------------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,862,982 $140,174 4.85 3,740,315 $128,871 4.61
==================== ===================
Demand deposits 441,166 417,541
Other liabilities 66,932 40,732
-------------------------------------------------------------- --------------
Total liabilities 4,371,080 4,198,588
-------------------------------------------------------------- --------------
Equity 417,238 414,904
-------------------------------------------------------------- --------------
Total liabilities & stockholders' equity $4,788,318 $4,613,492
============================================================== ==============
Net interest income / yield on
average earning assets $126,912 3.83 $124,064 3.85
======================= =======================
</TABLE>
For purposes of calculating loan yields, the average loan volume includes
non-accrual loans. For purposes of calculating yields on non-taxable interest
income, the taxable equivalent adjustment is made to equate non-taxable interest
on the same basis as taxable interest. The marginal tax rate is 35%.
17
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
TABLE 2 - RISK ASSETS
------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans and leases $18,739 $22,770 $22,667
Restructured accrual loans 0 0 0
Other real estate owned 3,592 4,703 4,435
------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $22,331 $27,473 $27,102
==================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 0.65% 0.79% 0.79%
Loans and leases contractually
past due 90 days and still accruing $15,096 $10,360 $9,894
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - Beginning of period $41,609 $40,638 $44,465 $39,440
Reserve transferred to third party guarantor (3,057) 0 (3,057) 0
Additions charged to operating expenses 766 1,920 2,273 5,853
-----------------------------------------------------------------------------------------------------------------------------------
39,318 42,558 43,681 45,293
-----------------------------------------------------------------------------------------------------------------------------------
Charge-offs (2,268) (1,679) (7,552) (5,351)
Recoveries 372 507 1,293 1,444
-----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,896) (1,172) (6,259) (3,907)
-----------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $37,422 $41,386 $37,422 $41,386
===================================================================================================================================
Net charge-offs as a percent of average loans and leases
(annualized) 0.22% 0.14% 0.24% 0.16%
Allowance as a percent of period-end loans and leases 1.09% 1.21% 1.09% 1.21%
Average loans and leases $3,438,675 $3,392,143 $3,459,911 $3,313,509
Period-end loans and leases 3,424,630 3,433,607 3,424,630 3,433,607
</TABLE>
18
<PAGE>
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk, and commodity price risk. Due to the nature of its operations,
only interest rate and liquidity risks 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 September 30, 2000, Susquehanna's
subsidiary banks and its savings bank have unused lines of credit available to
them from the Federal Home Loan Bank totaling approximately $500 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 $50 million at September 30, 2000. These maturing
investments represent 6% of total investment securities. Short-term investments
amounted to $48 million and represent additional sources of liquidity.
Consequently, Susquehanna's exposure to liquidity risk is not considered
significant.
Closely related to the management of liquidity is the management of
interest rate risk, which focuses on maintaining stability in the net interest
margin, an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the
interest-bearing assets and liabilities. Management's objective is 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.
19
<PAGE>
Susquehanna employs a variety of methods to monitor interest rate risk. By
dividing the assets and liabilities into three groups -- fixed rate, floating
rate and those which reprice only at management's discretion -- strategies are
developed which are designed to minimize exposure to interest rate fluctuations.
Management also utilizes gap and interest rate shock analyses to evaluate
interest rate sensitivity.
Susquehanna's policy, as approved by its Board of Directors, is for
Susquehanna to experience no more than a 15% decline in net interest income and
no more than a 25% decline in economic equity for a 200 basis point shock
(immediate change) in interest rates. The assumptions used for the interest rate
shock analysis are reviewed and updated on a periodic basis. Based upon the most
recent interest rate shock analysis, Susquehanna was well within the policy
limits.
20
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a). Exhibits
--------
3.1 Registrant's Articles of Incorporation.
3.2 Registrant's By-laws.
3.3 Articles of Amendment to Registrant's Articles of
Incorporation.
27.1 Financial Data Schedule.
b). Report on Form 8-K NONE
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
November 13, 2000
/s/ Robert S. Bolinger
----------------------
Robert S. Bolinger
Chairman and Chief Executive Officer
November 13, 2000
/s/ Drew K. Hostetter
---------------------
Drew K. Hostetter
Senior Vice President, Treasurer,
and Chief Financial Officer
21
<PAGE>
Exhibit Index
-------------
Exhibit Description Method
------- ----------- ------
3.1 Articles of Incorporation. Previously filed. Incorporated
by reference to Attachment E to
the Registrant's Joint
Proxy Statement / Prospectus on
Registrant's Registration
Statement on Form S-4,
Registration No. 33-76319.
3.2 By-laws. Previously filed. Incorporated
by reference to
Exhibit (3)(b) of Registrant's
Annual Report on Form 10-K for
the fiscal year ended
December 31, 1994.
3.3 Amendment of June 1, 1998 Previously filed. Incorporated
to Registrant's Articles of by reference to Exhibit 3.3 of
Incorporation. Registrant's Quarterly Report
on Form 10-Q for the quarterly
period ended June 30, 1998.
27.1 Financial Data Schedule. Submitted electronically to
the Securities and Exchange
Commission for information
only and not filed.
22
