<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 3, 2000, the Registrant had 39,278,003 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 March 31, 2000 and 1999,
and December 31, 1999 3
Consolidated Statements of Income - for the three months ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flow - for the three months
ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 9-16
PART II. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
March 31 December 31 March 31
(Dollars in thousands) 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 109,598 $ 146,576 $ 98,141
Short-term investments 65,289 36,653 72,746
Investment securities available for sale 868,115 878,958 900,379
Investment securities held to maturity 37,306 33,090 54,014
(Fair values of $37,612; $33,461; and $55,071)
Loans and leases, net of unearned income 3,471,686 3,469,661 3,253,292
Less: Allowance for loan and lease losses 43,239 44,493 40,496
- ---------------------------------------------------------------------------------------------------------------------------
Net loans and leases 3,428,447 3,425,168 3,212,796
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment (net) 55,778 55,429 56,418
Accrued income receivable 23,525 23,763 22,312
Bank-owned life insurance 109,524 108,105 54,459
Other assets 136,416 102,828 96,594
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $4,833,998 $4,810,570 $4,567,859
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand $ 452,818 $ 430,054 $ 414,606
Interest-bearing demand 945,519 951,904 984,858
Savings 421,351 421,012 456,353
Time 1,202,300 1,187,524 1,149,896
Time of $100 or more 203,375 190,026 170,451
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 3,225,363 3,180,520 3,176,164
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 182,232 207,507 90,849
FHLB borrowings 369,303 372,414 313,503
Vehicle financing 471,578 482,104 426,730
Long-term debt 100,000 95,000 95,000
Accrued interest, taxes, and expenses payable 38,333 34,746 30,308
Other liabilities 28,083 22,597 18,053
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,414,892 4,394,888 4,150,607
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000; 100,000,000; and 32,000,000 shares,
($2.00 par value), respectively
Issued: 39,398,190; 39,394,094; and 39,327,572, respectively 78,796 78,788 78,655
Surplus 57,893 57,873 56,928
Retained earnings 299,923 292,810 278,592
Accumulated other comprehensive income, net of taxes of ($7,945);
($6,961) and $1,913, respectively (15,811) (13,616) 3,525
Less: Treasury stock, (120,187; 11,641; and 30,113
common shares at cost, respectively) 1,695 173 448
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 419,106 415,682 417,252
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,833,998 $4,810,570 $4,567,859
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------
Three Months Ended
March 31
- ----------------------------------------------------------------------------------
(Dollars in thousands, except per share) 2000 1999
- ----------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $71,468 $66,986
Interest on investment securities: Taxable 13,404 12,418
Tax-exempt 1,127 1,435
Interest on short-term investments 746 952
- ----------------------------------------------------------------------------------
Total interest income 86,745 81,791
- ----------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 7,188 7,200
Savings 1,863 2,154
Time 18,427 17,595
Interest on short-term borrowings 2,253 841
Interest on FHLB borrowings 5,230 4,283
Interest on vehicle financing 8,964 8,193
Interest on long-term debt 1,999 2,058
- ----------------------------------------------------------------------------------
Total interest expense 45,924 42,324
- ----------------------------------------------------------------------------------
Net interest income 40,821 39,467
Provision for loan and lease losses 864 2,077
- ----------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 39,957 37,390
- ----------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 2,582 2,250
Vehicle origination and servicing fees 5,085 3,344
Other service charges, commissions, fees 4,861 1,072
Income from fiduciary-related activities 1,122 759
Gain on sale of mortgages 411 1,010
Income from bank-owned life insurance 1,440 723
Other operating income 1,560 1,520
Investment security gains/(losses) 1 (1)
- ----------------------------------------------------------------------------------
Total other income 17,062 10,677
- ----------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 16,812 13,714
Net occupancy expense 2,498 2,316
Furniture and equipment expense 1,968 1,973
Amortization of intangible assets 784 1,014
Other operating expenses 15,525 10,560
- ----------------------------------------------------------------------------------
Total other expenses 37,587 29,577
- ----------------------------------------------------------------------------------
Income before income taxes 19,432 18,490
Provision for income taxes 6,024 5,900
- ----------------------------------------------------------------------------------
NET INCOME $13,408 $12,590
- ----------------------------------------------------------------------------------
Per share information:
Basic earnings $ 0.34 $ 0.32
Diluted earnings $ 0.34 $ 0.32
Cash dividends $ 0.17 $ 0.15
Average shares outstanding: Basic 39,343 39,302
Diluted 39,431 39,540
- ----------------------------------------------------------------------------------
</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)
Three months ended March 31 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,408 $ 12,590
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 3,058 9,482
Provision for loan and lease losses 864 2,077
(Gain)/loss on securities transactions (1) 1
Gain on sale of loans (411) (1,010)
(Gain)/loss on sale of other real estate owned (30) 11
Mortgage loans originated for resale (25,420) (50,144)
Sale of mortgage loans originated for resale 26,853 54,770
Decrease in accrued interest receivable 238 462
Decrease in accrued interest payable (17,695) (2,519)
Increase in accrued expenses and taxes payable 21,282 1,101
Other, net (2,662) (9,869)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,484 16,952
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from the maturity of investment securities 29,130 80,870
Purchase of available-for-sale securities (18,117) (88,539)
Purchase of held-to-maturity securities (7,887) 0
Net increase in loans and leases (6,567) (8,702)
Net leases originated for warehouse (14,278) 0
Capital expenditures (1,926) (4,661)
Net cash and cash equivalents acquired/(paid) in acquisition (11,323) 0
- -----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (30,968) (21,032)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase/(decrease) in deposits 44,843 (40,715)
Net decrease in short-term borrowings (25,275) (13,682)
Net increase/(decrease) in FHLB borrowings (3,111) 5,282
Net increase/(decrease) in vehicle financing (10,526) 21,381
Proceeds from issuance of long-term debt 5,000 0
Repayment of long-term debt 0 (5,425)
Proceeds from issuance of common stock 49 384
Cash paid for treasury stock (1,543) (287)
Dividends paid (6,295) (5,543)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided from/(used for) financing activities 3,142 (38,605)
- -----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,342) (42,685)
Cash and cash equivalents at January 1 183,229 213,572
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $174,887 $170,887
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Cash and due from banks $109,598 $ 98,141
Short-term investments 65,289 72,746
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $174,887 $170,887
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Interest paid on deposits, short-term borrowings, and long-term debt was
$63,619 in 2000, and $46,161 in 1999. Income taxes paid were $109 in 2000, and
$284 in 1999. Amounts transferred to other real estate owned were $1,402 in
2000, and $2,440 in 1999.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE TREASURY TOTAL
Three Month Periods Ended March 31 STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1999 $78,655 $57,166 $271,545 $ 6,004 ($783) $412,587
Comprehensive income:
Net income 12,590 12,590
Change in unrealized gain/(loss) on securities, net of
taxes of ($1,312) and reclassification adjustment of
($1) (2,479) (2,479)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 12,590 (2,479) 10,111
Common stock issued under
employee benefit plans (238) 622 384
Purchase/conversion of treasury stock (287) (287)
Cash dividends paid:
Per common share of $0.15 (5,543) (5,543)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1999 $78,655 $56,928 $278,592 $ 3,525 ($448) $417,252
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 2000 $78,788 $57,873 $292,810 ($13,616) ($173) $415,682
Comprehensive income:
Net income 13,408 13,408
Change in unrealized gain/(loss) on securities, net of
taxes of ($984) and reclassification adjustment of $1 (2,195) (2,195)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 13,408 (2,195) 11,213
Common stock issued under
employee benefit plans 8 20 21 49
Purchase/conversion of treasury stock (1,543) (1,543)
Cash dividends paid:
Per common share of $0.17 (6,295) (6,295)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 2000 $78,796 $57,893 $299,923 ($15,811) ($1,695) $419,106
- -----------------------------------------------------------------------------------------------------------------------------------
</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 March 31, 2000 and 1999.
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 of the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
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:
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
--------------------------- ---------------------------
Amortized cost Fair value Amortized cost Fair value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S.Treasury $ 10,748 $ 10,756 $ 16,658 $ 16,683
U.S. Government agencies 351,129 342,586 346,041 338,990
State & municipal 68,514 67,891 70,136 69,599
Mortgage-backed 411,039 394,637 414,317 399,428
Corporates 16,834 16,493 17,795 17,682
Equities 33,913 35,752 34,588 36,576
- ----------------------------------------------------------------------------------------------------------------------------
892,177 868,115 899,535 878,958
- ----------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S.Government agencies $ 7,976 $ 7,963 $ 0 $ 0
State & municipal 28,420 28,747 32,070 32,450
Mortgage-backed 910 902 1,020 1,011
- ----------------------------------------------------------------------------------------------------------------------------
37,306 37,612 33,090 33,461
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 929,483 $ 905,727 $ 932,625 $ 912,419
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LOANS AND LEASES
- ----------------------------------------------------------------------------------------------------------------------------
Loans and leases, net of unearned income at March 31, 2000 and
December 31, 1999, were as follows:
- ----------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 350,767 $ 327,670
Real estate - construction 252,723 255,054
Real estate - mortgage 1,850,476 1,850,375
Consumer 379,793 381,556
Leases 637,927 655,006
- ----------------------------------------------------------------------------------------------------------------------------
Total loans and leases $3,471,686 $3,469,661
- ----------------------------------------------------------------------------------------------------------------------------
Net investment in direct financing leases is as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Minimum lease payments receivable $ 228,961 $ 241,767
Estimated residual value of leases 480,418 495,309
Unearned income under lease contracts (71,452) (82,070)
- ----------------------------------------------------------------------------------------------------------------------------
Total leases $ 637,927 $ 655,006
- ----------------------------------------------------------------------------------------------------------------------------
An analysis of impaired loans as of March 31, 2000 and
December 31, 1999, is presented as follows:
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans without a related reserve $ 10,999 $ 11,491
Impaired loans with a reserve 1,512 1,460
- ----------------------------------------------------------------------------------------------------------------------------
Total impaired loans $ 12,511 $ 12,951
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for impaired loans $ 258 $ 532
- ----------------------------------------------------------------------------------------------------------------------------
An analysis of impaired loans for the three months periods
ended March 31, 2000 and 1999 is presented as follows:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $ 13,417 $ 10,103
Interest income on impaired loans (cash-basis) 17 19
</TABLE>
7
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BORROWINGS
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term borrowings at March 31, 2000 and December 31, 1999, were as follows:
- -------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $179,362 $179,278
Treasury tax and loan notes 2,463 14,010
Federal funds purchased 407 14,219
- -------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $182,232 $207,507
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt at March 31, 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
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EARNINGS-PER-SHARE
- -------------------------------------------------------------------------------------------------------------------------
The following tables sets forth the calculation of basic and diluted earnings per share for the periods ended March 31,
2000 and 1999:
- -------------------------------------------------------------------------------------------------------------------------
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 $13,408 39,343 $ 0.34 $12,590 39,302 $ 0.32
Effect of Diluted Securities:
Incentive stock options outstanding 88 238
------ ------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $13,408 39,431 $ 0.34 $12,590 39,540 $ 0.32
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPLETED ACQUISITIONS
- ------------------------------------------------------------------------------
On February 1, 2000, Susquehanna completed the acquisition of 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 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 Hann for all periods presented.
Previously reported information has been restated as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
- --------------------------------------------------------------------------------------------------------
Susquehanna Hann Susquehanna
As Reported As Reported Restated
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $39,330 $ 137 $39,467
Provision for loan and lease losses 1,424 653 2,077
Other income 7,333 3,344 10,677
Other expense 28,119 1,458 29,577
- --------------------------------------------------------------------------------------------------------
Income before taxes 17,120 1,370 18,490
Taxes 5,350 550 5,900
- --------------------------------------------------------------------------------------------------------
Net income $11,770 $ 820 $12,590
- --------------------------------------------------------------------------------------------------------
Earnings per share: Basic $ 0.32 $ 0.32
Diluted $ 0.32 $ 0.32
Average shares outstanding: Basic 36,942 2,360 39,302
Diluted 37,180 2,360 39,540
</TABLE>
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 transaction was accounted for under the purchase method of
accounting. Goodwill of $9.2 million was realized in the transaction 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 transaction is not material to Susquehanna.
8
<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
merger 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 restructurings;
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
9
<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. ("VFAM"), a Pennsylvania asset management corporation
registered both as a broker/dealer and as an investment advisor, in a cash
transaction. Since this transaction 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 first quarter of 2000 was $13.4 million, a
6% increase over the net income of $12.6 million reported in the first quarter
of 1999. Susquehanna's earnings performance was enhanced primarily by
improvement in fee income. Other income (primarily fee income) increased $6.4
million or 60% from that of the first quarter of 1999.
Diluted earnings per share ("EPS") increased 6% from $0.32 per share for
the first quarter of 1999 to $0.34 per share for the first quarter of 2000.
Return on average assets ("ROA"), and return on average equity ("ROE") finished
at 1.12% and 13.23% in the first quarter of 2000 compared with 1.12% and 12.38%
in the first quarter of 1999. For the first quarter of 2000, tangible EPS, ROA
and ROE were $0.36, 1.19%, and 15.23%, respectively.
Total assets at March 31, 2000 of $4.8 billion increased 6% over the March
31, 1999 levels. Loans totaled $3.5 billion at March 31, 2000 compared to $3.3
billion at March 31, 1999. Deposits remained at $3.2 billion. Equity capital was
$419 million at March 31, 2000, or $10.67 per share compared to $417 million, or
$10.62, per share at March 31, 1999.
Net Interest Income
-------------------
The major source of operating revenues is net interest income, which rose
to a level of $40.8 million in the first quarter of 2000 compared to $39.5
million for the same period in 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
supporting earning assets. Income from earning assets includes income from
loans, income from investment
10
<PAGE>
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 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 71% for the quarter ended March 31,
2000 and 79% for the quarter ended March 31, 1999.
Net interest income increased $1.3 million during the first quarter of 2000
compared to the first quarter of 1999. This improvement was due to an increase
in average earning assets of $193 million offset by a decline in the net
interest margin from 3.86% in 1999 to 3.78% in 2000. Due to the rising rate
environment, this decline in margin was due to an 8 basis point increase in the
cost of funds partially offset by a 3 basis point increase in interest-earning
asset yield.
Other Income
------------
Non-interest income increased $6.4 million, or 60%, from $10.7 million in
the first quarter of 1999 to $17.1 million in the first quarter of 2000. This
increase resulted primarily from an increase in credit card fees of $3.3 million
and vehicle origination and servicing fees of $1.7 million. Other increases were
service charges on deposit accounts, $0.3 million; trust income, $0.4 million;
other service charges and commissions, $0.5; and bank-owned life insurance
income, $0.7 million. Gain on the sale of mortgages decreased $0.6 million in
2000 compared with 1999 as mortgages sold declined to $26.9 million compared
with $54.8 million, respectively.
Other income as a percentage of net interest income and other income was
29% for the quarter ended March 31, 2000 and 21% for the quarter ended March
31, 1999.
11
<PAGE>
Other Expenses
--------------
Total non-interest expenses increased $8.0 million, or 27%, from $29.6
million in the first quarter of 1999 to $37.6 million in the first quarter of
2000 due primarily to an increase in salaries and benefits expense of $3.1
million and an increase in credit card expenses of $3.0 million. The increase in
salaries and benefits was primarily due to an increase in employees as
Susquehanna has begun to staff its consolidated back-office central sites. The
related reductions in the workforce at the bank affiliates will not occur until
the later half of this year. The current status of the $7.4 million restructure
charge recorded in the fourth quarter of 1999 is as follows:
<TABLE>
<CAPTION>
Original Remaining Accrual
Item Accrual Incurred-to-Date at 3/31/00
- ---- ------- ---------------- -----------------
<S> <C> <C> <C>
Employee severance benefits $3,170 $ 0 $3,170
Professional fees 2,850 2,479 371
Employment services 660 134 526
Asset disposals 732 732 0
------ ------ ------
Total $7,412 $3,345 $4,067
</TABLE>
Income Taxes
------------
Susquehanna's effective tax rate decreased from 31.90% for the first three
months of 1999 to 31.00% for the first three months of 2000 due to an increase
in tax-advantaged income.
Risk Assets
-----------
Table 2 shows a decrease in nonaccrual loans and leases from $22.8 million
at December 31, 1999 to $20.9 million at March 31, 2000, while nonperforming
assets to period-end loans and OREO declined from 0.79% at December 31, 1999 to
0.71% at March 31, 2000. Loan loss reserve to non-performing loans at March 31,
2000 was 207% compared with 195% at December 31, 1999.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 3, the provision decreased to $0.9 million in the
first quarter of 2000 compared with $2.1 million in the first quarter of 1999.
Net loans charged off increased to $2.1 million for the quarter ended March 31,
2000 compared with $1.0 million for the same quarter of 1999.
12
<PAGE>
The reduction in the provision resulted from a declining automobile lease
portfolio in the first quarter of 2000 compared with a growing automobile lease
portfolio in the same quarter of 1999. The decline in 2000 is due to
originations being sold to various third-parties.
The allowance at March 31, 2000 was 1.25% of period-end loans and leases
compared to 1.24% at March 31, 1999.
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 March 31,
2000 was 10.56%. The minimum total capital (Tier II) ratio is 8%; Susquehanna's
ratio at March 31, 2000 was 12.79%. The minimum leverage ratio is 4%;
Susquehanna's leverage ratio at March 31, 2000 was 8.30%.
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 March 31, 2000, Susquehanna's
subsidiary banks and its savings bank have unused lines of credit available to
them from the Federal Home Loan Bank totaling $631 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
13
<PAGE>
carrying value of investment securities maturing within one year amounted to $54
million at March 31, 2000. These maturing investments represent 6% of total
investment securities. Short-term investments amounted to $65 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.
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.
14
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Interest rates and interest differential - taxable equivalent basis
- -----------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
March 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------ -------------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
- ---------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short - term investments $ 52,753 $ 746 5.69 $ 85,326 $ 952 4.52
Investment securities:
Taxable 826,355 13,404 6.52 817,529 12,418 6.16
Tax - advantaged 100,090 1,752 7.04 124,487 2,208 7.19
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities 926,445 15,156 6.58 942,016 14,626 6.30
- ----------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 3,427,435 70,716 8.30 3,189,111 66,264 8.43
Tax - advantaged 52,505 1,160 8.89 49,980 1,109 9.00
- ----------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,479,940 71,876 8.31 3,239,091 67,373 8.44
- ----------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 4,459,138 $87,778 7.92 4,266,433 $ 82,951 7.89
------------------ --------------------
Allowance for loan and lease losses (44,674) (40,087)
Other non - earning assets 383,403 325,518
- ------------------------------------------------------- ----------
Total assets $4,797,867 $4,551,864
- ------------------------------------------------------- ----------
Liabilities
Deposits:
Interest - bearing demand $ 949,658 $ 7,188 3.04 $ 987,929 $ 7,200 2.96
Savings 422,573 1,863 1.77 446,775 2,154 1.96
Time 1,396,669 18,427 5.31 1,332,593 17,595 5.35
Short - term borrowings 180,842 2,253 5.01 96,041 841 3.55
FHLB borrowings 366,694 5,230 5.74 315,551 4,283 5.50
Long - term debt 96,399 1,999 8.34 95,000 2,058 8.79
Vehicle financing 488,164 8,964 7.39 414,871 8,193 8.01
- ----------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,900,999 $45,924 4.73 3,688,760 $ 42,324 4.65
------------------ --------------------
Demand deposits 428,910 403,578
Other liabilities 60,224 47,138
- ------------------------------------------------------- ----------
Total liabilities $4,390,133 $4,139,476
- ------------------------------------------------------- ----------
Equity 407,734 412,388
- ------------------------------------------------------- ----------
Total liabilities & stockholders' equity $4,797,867 $4,551,864
- ------------------------------------------------------- ----------
Net interest income / yield on
average earning assets $41,854 3.78 $ 40,627 3.86
------------------ --------------------
</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%.
15
<PAGE>
Susquehanna Bancshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
TABLE 2 - RISK ASSETS
- --------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 2000 1999 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans and leases $20,894 $22,770 $17,974
Restructured accrual loans 0 0 838
Other real estate owned 3,946 4,703 5,168
- --------------------------------------------------------------------------------------------------
Total nonperforming assets $24,840 $27,473 $23,980
- --------------------------------------------------------------------------------------------------
As a percent of period-end loans and leases and
other real estate owned 0.71% 0.79% 0.74%
Loans and leases contractually
past due 90 days and still accruing $10,338 $10,360 $10,575
- --------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - Beginning of period $ 44,493 $ 39,440
Additions charged to operating expenses 864 2,077
- --------------------------------------------------------------------------------------------------
45,357 41,517
- --------------------------------------------------------------------------------------------------
Charge-offs (2,655) (1,372)
Recoveries 537 351
- --------------------------------------------------------------------------------------------------
Net charge-offs (2,118) (1,021)
- --------------------------------------------------------------------------------------------------
Balance - Period end $ 43,239 $ 40,496
- --------------------------------------------------------------------------------------------------
Net charge-offs as a percent of average loans and leases (annualized) 0.24% 0.13%
Allowance as a percent of period-end loans and leases 1.25% 1.24%
Average loans and leases $3,479,940 $3,239,091
Period-end loans and leases 3,471,686 3,253,292
</TABLE>
<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 Amendment of June 1, 1998 to Registrant's Articles of
Incorporation.
27.1 Financial Data Schedule.
b). Report on Form 8-K. On February 8, 2000, Registrant filed a report on
-------------------
Form 8-K regarding the completion of Registrant's acquisition of Boston Service
Company, Inc., Jamesburg, NJ, effective February 1, 2000.
On March 8, 2000, Registrant filed a report on Form 8-K regarding the
completion of Registrant's acquisition of Valley Forge Asset Management Corp.,
and its parent company, Valley Forge Investment Company, Inc., King of Prussia,
PA, effective March 3, 2000.
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.
May 10, 2000 /s/ Robert S. Bolinger
----------------------
Robert S, Bolinger
Chairman and Chief Executive Officer
May 10, 2000 /s/ Drew K. Hostetter
---------------------
Drew K. Hostetter
Sr. Vice President, Treasurer,
and Chief Financial Officer
17
<PAGE>
Exhibit Index
-------------
<TABLE>
Exhibit Description Method
- ------- ----------- ------
<S> <C> <C>
3.1 Articles of Incorporation. Previously filed. Incorporated by
reference to Attachment E in 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.
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 109,598
<INT-BEARING-DEPOSITS> 33,876
<FED-FUNDS-SOLD> 31,413
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 868,115
<INVESTMENTS-CARRYING> 905,421
<INVESTMENTS-MARKET> 905,727
<LOANS> 3,471,686
<ALLOWANCE> 43,239
<TOTAL-ASSETS> 4,833,998
<DEPOSITS> 3,225,363
<SHORT-TERM> 182,232
<LIABILITIES-OTHER> 28,083
<LONG-TERM> 100,000
0
0
<COMMON> 78,796
<OTHER-SE> 340,310
<TOTAL-LIABILITIES-AND-EQUITY> 4,833,998
<INTEREST-LOAN> 71,468
<INTEREST-INVEST> 14,531
<INTEREST-OTHER> 746
<INTEREST-TOTAL> 86,745
<INTEREST-DEPOSIT> 27,478
<INTEREST-EXPENSE> 45,924
<INTEREST-INCOME-NET> 40,821
<LOAN-LOSSES> 864
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 37,587
<INCOME-PRETAX> 19,432
<INCOME-PRE-EXTRAORDINARY> 19,432
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,408
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.92
<LOANS-NON> 20,894
<LOANS-PAST> 10,338
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,493
<CHARGE-OFFS> (2,655)
<RECOVERIES> 537
<ALLOWANCE-CLOSE> 43,239
<ALLOWANCE-DOMESTIC> 43,239
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
