SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-10674
Susquehanna Bancshares, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2201716
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (717) 626-4721
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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 [ ]
As of April 30, 2002, the Registrant had 39,370,541 shares of common
stock outstanding.
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION 3
Item 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets - as of March 31, 2002 and 2001 3
Consolidated Statements of Income - for the three months ended
March 31, 2002 and 2001 4
Consolidated Statements of Cash Flow - for the three months
periods ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 11-16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 17-19
PART II OTHER INFORMATION 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 20
EXHIBIT INDEX 21-23
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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March 31 December 31 March 31
(Dollars in thousands) 2002 2001 2001
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ASSETS
Cash and due from banks $ 109,553 $ 149,233 $ 113,878
Short-term investments:
Restricted 32,302 41,584 38,007
Unrestricted 16,595 46,981 49,835
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Total short-term investments 48,897 88,565 87,842
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Investment securities available for sale, at fair value 1,054,344 1,019,313 808,499
Investment securities held to maturity, at amortized cost 1,734 1,778 1,907
(Fair values of $1,734, $1,778 and $1,907)
Loans and leases, net of unearned income 3,626,790 3,519,498 3,456,481
Less: Allowance for loan and lease losses 38,532 37,698 37,848
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Net loans and leases 3,588,258 3,481,800 3,418,633
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Premises and equipment (net) 59,544 60,063 57,913
Accrued income receivable 21,301 21,268 22,984
Bank-owned life insurance 121,690 120,174 115,301
Goodwill 43,496 43,496 39,751
Intangible assets with finite lives 5,455 5,622 4,557
Other assets 111,665 97,642 97,804
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Total assets $5,165,937 $5,088,954 $4,769,069
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LIABILITIES
Deposits:
Demand $ 530,406 $ 529,162 $ 461,789
Interest-bearing demand 927,232 915,080 823,965
Savings 457,368 435,959 417,418
Time 1,315,484 1,322,494 1,322,076
Time of $100 or more 291,256 281,636 247,023
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Total deposits 3,521,746 3,484,331 3,272,271
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Short-term borrowings 222,180 169,803 219,894
FHLB borrowings 570,491 570,580 303,625
Vehicle financing 143,212 171,462 325,808
Long-term debt 105,000 105,000 100,000
Accrued interest, taxes, and expenses payable 41,148 36,652 39,238
Other liabilities 64,456 57,590 42,905
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Total liabilities 4,668,233 4,595,418 4,303,741
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STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000 ($2.00 par value)
Issued: 39,398,190 78,796 78,796 78,796
Surplus 57,971 57,986 57,878
Retained earnings 352,459 345,508 325,064
Accumulated other comprehensive income,
net of taxes of $4,782, $6,928 and $3,265, respectively 8,880 12,009 6,059
Less: Treasury stock, (28,534, 54,115 and 175,078
common shares at cost, respectively) 402 763 2,469
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Total stockholders' equity 497,704 493,536 465,328
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Total liabilities and stockholders' equity $5,165,937 $5,088,954 $4,769,069
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The accompanying notes are an integral part of these financial statements.
3
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
March 31
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(Dollars in thousands, except per share) 2002 2001
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INTEREST INCOME
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Interest and fees on loans and leases $64,288 $72,161
Interest on investment securities: Taxable 13,283 12,193
Tax-exempt 704 901
Interest on short-term investments 437 1,138
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Total interest income 78,712 86,393
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 2,906 5,817
Savings 1,077 1,890
Time 17,766 22,216
Interest on short-term borrowings 675 2,887
Interest on FHLB borrowings 7,261 4,665
Interest on vehicle financing 2,606 6,057
Interest on long-term debt 1,993 1,950
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Total interest expense 34,284 45,482
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Net interest income 44,428 40,911
Provision for loan and lease losses 2,273 1,846
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Net interest income after provision for loan and lease losses 42,155 39,065
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OTHER INCOME
Service charges on deposit accounts 3,843 3,002
Vehicle origination and servicing fees 7,032 5,775
Merchant credit card fees 3,727 3,766
Asset management fees 2,452 2,099
Income from fiduciary-related activities 1,251 1,218
Gain on sale of loans and leases 1,412 583
Income from bank-owned life insurance 1,718 1,506
Other operating income 2,835 2,570
Investment security gains/(losses) 141 0
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Total other income 24,411 20,519
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OTHER EXPENSES
Salaries and employee benefits 19,639 17,637
Net occupancy expense 3,098 3,026
Furniture and equipment expense 2,075 2,089
Amortization of intangible assets 168 898
Vehicle residual value expense 1,665 1,301
Vehicle delivery and preparation expense 1,562 934
Merchant credit card servicing expense 3,647 3,549
Other operating expenses 13,233 11,773
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Total other expenses 45,087 41,207
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Income before income taxes 21,479 18,377
Provision for income taxes 6,659 5,881
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NET INCOME $14,820 $12,496
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Per share information:
Basic earnings $ 0.38 $ 0.32
Diluted earnings $ 0.37 $ 0.32
Cash dividends $ 0.20 $ 0.19
Average shares outstanding: Basic 39,349 39,222
Diluted 39,816 39,455
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The accompanying notes are an integral part of these financial statements.
4
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
Three months ended March 31, 2002 2001
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OPERATING ACTIVITIES:
Net income $ 14,820 $ 12,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 3,113 3,597
Provision for loan and lease losses 2,273 1,846
(Gain)/loss on securities transactions (141) 0
Gain on sale of loans (1,412) (583)
(Gain)/loss on sale of other real estate owned 55 (20)
Mortgage loans originated for resale (25,531) (21,868)
Sale of mortgage loans originated for resale 31,802 24,106
Leases acquired/originated for resale (79,415) 0
Sale of leases acquired/originated for resale 80,215 0
(Increase)/decrease in accrued interest receivable (33) 3,791
Increase in accrued interest payable (2,940) (3,853)
(Increase)/decrease in accrued expenses and taxes payable 7,436 709
Other, net 32,138 (11,001)
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Net cash provided by operating activities 62,380 9,220
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INVESTING ACTIVITIES:
Net increase in restricted short-term investments 9,282 (5,276)
Proceeds from the sale of available-for-sale securities 6,003 0
Proceeds from the maturity of investment securities 82,945 243,114
Purchase of available-for-sale securities (130,176) (144,546)
Net (increase)/decrease in loans and leases (114,301) (27,163)
Capital expenditures (473) (1,393)
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Net cash provided by/(used for) investing activities (146,720) 64,736
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FINANCING ACTIVITIES:
Net increase/(decrease) in deposits 38,907 23,258
Net increase/(decrease) in short-term borrowings 52,377 14,558
Net increase/(decrease) in FHLB borrowings (89) (64,329)
Net increase/(decrease) in vehicle financing (69,398) (31,714)
Proceeds from issuance of common stock 346 31
Dividends paid (7,869) (7,452)
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Net cash provided by/(used for) financing activities 14,274 (65,648)
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Net decrease in cash and cash equivalents (70,066) 8,308
Cash and cash equivalents at January 1 196,214 155,405
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Cash and cash equivalents at March 31 $126,148 $163,713
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Cash and cash equivalents:
Cash and due from banks $109,553 $113,878
Unrestricted short-term investments 16,595 49,835
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Cash and cash equivalents at March 31 $126,148 $163,713
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The accompanying notes are an integral part of these financial statements.
Interest paid on deposits, short-term borrowings, and long-term debt was
$37,224 and $49,335 in 2001. An income tax refund of $9,294 was received in 2002
and income taxes of $385 were paid in 2001. Amounts transferred to other real
estate owned were $710 in 2002 and $1,452 in 2001.
5
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE TREASURY TOTAL
Three months ended March 31 STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
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Balance - January 1, 2001 $78,796 $57,872 $320,020 $ (757) $(2,494) $453,437
Comprehensive income:
Net income 12,496 12,496
Change in unrealized gain/(loss) on securities, net of
taxes of ($3,270) and reclassification adjustment of $0 6,816 6,816
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Total comprehensive income 12,496 6,816 19,312
Common stock issued under employee benefit plans 6 25 31
Cash dividends paid:
Per common share of $0.19 (7,452) (7,452)
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Balance - March 31, 2001 78,796 57,878 325,064 6,059 (2,469) 465,328
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Balance - January 1, 2002 $78,796 $57,986 $345,508 $12,009 $ (763) $493,536
Comprehensive income:
Net income 14,820 14,820
Change in unrealized gain/(loss) on securities, net of
taxes of $1,685 and reclassification adjustment of $141 (3,129) (3,129)
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Total comprehensive income 14,820 (3,129) 11,691
Common stock issued under employee benefit plans (15) 361 346
Purchase/conversion of treasury stock
Cash dividends paid:
Per common share of $0.20 (7,869) (7,869)
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Balance - March 31, 2002 $78,796 $57,971 $352,459 $ 8,880 $ (402) $497,704
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ACCOUNTING POLICIES
The information contained in this report is unaudited and is subject to
year-end adjustments. Certain prior year amounts have been reclassified to
conform with current period classifications. The adjustments had no effect on
gross revenues, gross expenses or net income. In the opinion of management, the
information reflects all adjustments necessary for a fair statement of results
for the periods ended March 31, 2002 and 2001.
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 38 through 40 of the Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
6
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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March 31, 2002 December 31, 2001
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Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S. Treasury $ 11,200 $ 11,276 $ 1,201 $ 1,302
U.S. Government agencies 63,055 64,105 86,329 88,289
State & municipal 57,972 59,389 63,334 64,712
Mortgage-backed 864,651 871,264 799,266 808,981
Corporates 13,309 13,816 20,073 20,844
Equities 32,507 34,493 33,373 35,185
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1,042,694 1,054,343 1,003,576 1,019,313
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Held-to-maturity:
State & municipal 1,734 1,734 1,778 1,778
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1,734 1,734 1,778 1,778
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Total investment securities $1,044,428 $1,056,077 $1,005,354 $1,021,091
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LOANS AND LEASES
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Loans and leases, net of unearned income at March 31, 2002
and December 31, 2001, were as follows:
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March 31, December 31,
2002 2001
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Commercial, financial, and agricultural $ 443,160 $ 434,780
Real estate - construction 391,867 359,445
Real estate - mortgage 2,067,632 1,963,094
Consumer 325,119 325,170
Leases 399,012 437,009
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Total loans and leases $3,626,790 $3,519,498
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Net investment in direct financing leases is as follows:
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Minimum lease payments receivable $ 161,102 $ 175,893
Estimated residual value of leases 272,735 299,433
Unearned income under lease contracts (34,825) (38,317)
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Total leases $ 399,012 $ 437,009
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An analysis of impaired loans as of March 31, 2002 and
December 31, 2001, is presented as follows:
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March 31, December 31,
2002 2001
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Impaired loans without a related reserve $ 9,891 $ 7,252
Impaired loans with a reserve 939 2,111
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Total impaired loans $ 10,830 $ 9,363
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Reserve for impaired loans $ 500 $ 560
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An analysis of impaired loans for the three month periods
ended March 31, 2002 and 2001 is presented as follows:
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Three Months ended March 31,
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2002 2001
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Average balance of impaired loans $ 10,107 $ 11,498
Interest income on impaired loans (cash-basis) 40 20
7
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BORROWINGS
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March 31, December 31,
2002 2001
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Short-term borrowings at March 31, 2002 and December 31, 2001, were as follows:
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Securities sold under repurchase agreements $218,936 $158,140
Treasury tax and loan notes 3,244 11,663
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Total short-term borrowings $222,180 $169,803
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Long-term debt at March 31, 2002 and December 31, 2001, was as follows:
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Subsidiaries:
Term notes due July, 2003 $ 10,000 $ 10,000
Term notes due July, 2003 5,000 5,000
Term notes due July, 2004 5,000 5,000
Parent:
Senior notes due February, 2003 35,000 35,000
Subordinated notes due February, 2005 50,000 50,000
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Total long-term debt $105,000 $105,000
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EARNINGS-PER-SHARE
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The following tables sets forth the calculation of basic and diluted earnings
per share for the years ended March 31, 2002 and 2001:
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For the three months ended March 31,
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2002 2001
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Per Share Per Share
Income Shares Amount Income Shares Amount
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Basic Earnings per Share:
Income available to common stockholders $14,820 39,349 $0.38 $12,496 39,222 $0.32
Effect of Diluted Securities:
Stock options outstanding 467 233
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Diluted Earnings per Share:
Income available to common stockholders
and assuming conversion $14,820 39,816 $0.37 $12,496 39,455 $0.32
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8
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires companies to use the purchase method of accounting for all
business combinations initiated after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangibles acquired in a
business combination. SFAS No. 142, which Susquehanna adopted on January 1,
2002, addresses the initial recognition and measurement of intangible assets
acquired outside a business combination and the recognition and measurement of
goodwill and other intangible assets subsequent to acquisition. Under the new
standard, goodwill is no longer amortized. Instead, it is tested for impairment
at least annually. Other intangible assets continue to be amortized over their
useful lives. During the second quarter of 2002, Susquehanna will perform the
required impairment tests of goodwill. Management does not expect these tests to
have a material effect on the company's financial condition or results of
operations.
The gross carrying amount and accumulated amortization of identifiable
intangible assets as of March 31, 2002 are as follows:
Gross
Carrying Accumulated
Amount Amortization
Amortized intangible assets:
Core deposit intangibles $ 5,874 $(586)
Favorable lease adjustments 393 (226)
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Total $ 6,267 $(812)
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Unamortized intangible assets:
Goodwill $ 43,496 N/A
================================================================================
There have been no changes in the carrying amount of goodwill for the quarter
ended March 31, 2002.
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The following table sets forth the actual and estimated pre-tax amortization
expense of amortized intangible assets:
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Aggregate Amortization Expense:
For the quarter ended March 31, 2002 $ 168
Estimated Amortization Expense:
For the year ended December 31, 2002 $ 672
For the year ended December 31, 2003 672
For the year ended December 31, 2004 672
For the year ended December 31, 2005 672
For the year ended December 31, 2006 672
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9
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The following table sets forth the net income, basic EPS and fully diluted EPS
as adjusted to exclude goodwill amortization expense for the three months ended
March 31, 2002 and 2001:
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2002 2001
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Reported net income $ 14,820 $ 12,496
Add back: Goodwill amortization 0 787
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Adjusted net income $ 14,820 $ 13,283
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Basic earnings per share:
Reported net income $ 0.38 $ 0.32
Goodwill amortization 0.00 0.02
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Adjusted net income $ 0.38 $ 0.34
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Diluted earnings per share:
Reported net income $ 0.37 $ 0.32
Goodwill amortization 0.00 0.02
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Adjusted net income $ 0.37 $ 0.34
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SUBSEQUENT EVENTS
On April 30, 2002, management announced it had signed a definitive
agreement to purchase all of the outstanding stock of The Addis Group, a
property and casualty insurance brokerage located in King of Prussia, PA. The
Addis Group serves over 1,500 commercial and individual customers representing
over $60 million in premium, which generates approximately $6 million in annual
revenues. The transaction, subject to customary closing conditions, is expected
to be completed in the second quarter 2002.
10
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
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CONDITION
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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.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "expect," "estimate," "project," "anticipate," "should," "intend,"
"probability," "risk," "target," "objective" and similar expressions or
variations on such expressions. In particular, this document includes
forward-looking statements relating, but not limited, to Susquehanna's potential
exposures to various types of market risks, such as interest rate risk and
credit risk. Such statements are subject to certain risks and uncertainties. For
example, certain of the market risk disclosures are dependent on choices about
essential model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and could be materially different from what actually occurs in the
future. As a result, actual income gains and losses could materially differ from
those that have been estimated. Other factors that could cause actual results to
differ materially from those estimated by the forward-looking statements
contained in this document include, but are not limited to: general economic
conditions in market areas in which Susquehanna has significant business
activities or investments; the monetary and interest rate policies of the Board
of Governors of the Federal Reserve System; inflation; deflation; unanticipated
turbulence in interest rates; changes in laws, regulations and taxes; changes in
competition and pricing environments; natural disasters; the inability to hedge
certain risks economically; the adequacy of loss reserves; acquisitions or
restructuring; technological changes; changes in consumer spending and saving
habits and the success of Susquehanna in managing the risks involved in the
foregoing.
The management of Susquehanna encourages readers of this report to
understand forward-looking statements to be strategic objectives rather than
absolute targets of future performance. Forward-looking statements speak only
"as of" the date made. Susquehanna does not update forward-looking statements to
reflect circumstances or events that occur after the date the forward-looking
statements are made or to reflect the occurrence of unanticipated events.
The following discussion and analysis, the purpose of which is to provide
investors and others with information that Susquehanna's management believes to
be necessary for an understanding of its financial condition, changes in
financial condition, and results of operations, should be read in conjunction
with the financial statements, notes, and other information contained in this
document.
Results of Operations
---------------------
Summary of 2002 compared to 2001
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Susquehanna's net income for the first quarter of 2002 was $14.8 million,
an 18.6% increase from net income of $12.5 million in the first quarter of 2001.
During the first quarter of 2002, Susquehanna's fee income continued to improve
as it increased by 19.0% from the first quarter of 2001 and represented 35.5% of
total revenues for the first quarter of 2002. However,
11
this improvement in fee income was offset by a 9.4% increase in operating
expenses from first quarter 2001 to first quarter 2002.
Diluted earnings per share ("EPS") increased 15.6% from $0.32 per share for
the first quarter of 2001 to $0.37 per share for the first quarter of 2002.
Return on average assets ("ROA") and return on average equity ("ROE") finished
at 1.18% and 12.11%, respectively, in the first quarter of 2002 compared with
1.08% and 11.16%, respectively, in the first quarter of 2001.
In June 2001, the Financial Accounting Standards Board adopted SFAS 142,
Goodwill and Other Intangible Assets. Because of the adoption of SFAS 142,
goodwill amortization ceased in 2002. Had the new rules been in effect last
year, fully diluted earnings per share would have been $ 0.34 and net income
would have been $13.3 million for the three months ended March 31, 2001,
resulting in a 8.8% increase in diluted earnings per share and a 11.6% increase
in net income for the first quarter of 2002.
Total assets at March 31, 2002 were $5.2 billion, compared with $4.8
billion at March 31, 2001. Loans of $3.6 billion at March 31, 2002 increased
from $3.5 billion at March 31, 2001, while deposits increased from $3.3 billion
at March 31, 2001 to $3.5 billion at March 31, 2002. Equity capital was $498
million at March 31, 2002, or $12.64 per share, compared to $465 million, or
$11.86 per share, at March 31, 2001.
Net Interest Income - Taxable Equivalent Basis
- ----------------------------------------------
The major source of operating revenues is net interest income, which rose
to a level of $44.4 million in the first quarter of 2002, compared to $40.9
million for the same period in 2001. Net interest income is the income that
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
and leases, income from investment securities and income from short-term
investments. The amount of interest income is dependent upon many factors,
including the volume of earning assets, the general level of interest rates, the
dynamics of the change in interest rates, and levels of 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 64.5% for the quarter
ended March 31, 2002, and was 66.6% for the quarter ended March 31, 2001,
respectively.
Net interest income for the first quarter 2002 increased $3.5 million
compared to the first quarter of 2001. Average earning assets in the first
quarter of 2002 increased $300 million over the same period in 2001. The net
interest margin improved to 3.94% in the first quarter of 2002 from 3.90% in the
first quarter of 2001. This increase in margin was due to a 142 basis point
decrease in the cost of funds that was partially offset by a 122 basis point
decrease in the yield on earning assets. Actions by the Board of Governors of
the Federal Reserve System to decrease interest rates primarily caused the above
noted decreases.
12
Variances do occur in the net interest margin, as an exact repricing of
assets and liabilities is not possible. A further explanation of the impact of
asset and liability repricing is found in the section titled "Market Risks"
below.
Provision and Allowance for Loan and Lease Losses
- -------------------------------------------------
As illustrated in Table 3, the provision was $2.3 million in the first
quarter of 2002, an increase of $0.4 million from the same period in 2001. Net
charge-offs were $1.4 million for the three-month period in 2002 versus the 2001
corresponding amount of $1.2 million. Despite the fact that interest rates have
been lowered recently, a slowdown of economic growth could occur. Borrowers may
experience difficulty and the level of non-performing loans and assets,
charge-offs and delinquencies could rise and require further increases to the
provision.
Other Income
- ------------
Non-interest income increased $3.9 million, or 19.0%, from $20.5 million in
the first quarter of 2001, to $24.4 million in the first quarter of 2002.
Significant increases were realized in gain on sale of loans and leases of
142.2% to $1.4 million, and vehicle origination and servicing fees of 21.8% to
$7.0 million. Service charges on deposit accounts and asset management fees
increased $0.8 million and $0.4 million, respectively.
Other income as a percentage of net interest income and other income, was
35.5% for the quarter ended March 31, 2001 compared with 33.4% for the
comparable period of 2001.
Other Expenses
- --------------
Total non-interest expenses increased $3.9 million from $41.2 million in
the first quarter of 2001 to $45.1 million in the first quarter of 2002. The
quarter-to-quarter increase was primarily due to increases in salaries and
benefits of 11.4%, or $2.0 million, vehicle delivery and preparation expense of
67.2%, or $0.6 million. The increase in salaries and benefits was primarily due
to normal annual salary increases, increased sales force and the addition of the
seven branches. Other expenses increased $1.5 million over 2001 due, in part, to
the acquisition of four branches in West Virginia during the fourth quarter 2001
and the addition of three de novo branched during 2001 and early 2002.
Income Taxes
- ------------
Susquehanna's effective tax rate decreased to 31.0% for the first three
months of 2002 from 32.0% for the first three months of 2001 due to the adoption
of SFAS 142 and the cessation of goodwill amortization.
Financial Condition
-------------------
Risk Assets
- -----------
Table 2 shows an increase in non-accrual loans and leases from $15.5
million at December 31, 2001 to $17.0 million at March 31, 2002. Loans past due
90 days or more and still accruing decreased from $11.5 million at December 31,
2001 to $11.2 million at March 31, 2002. Non-performing assets to period-end
loans and OREO increased slightly from .55% at December 31, 2001 to .56% at
March 31, 2002. Loan loss reserve to non-performing loans at March 31, 2002 was
227% compared with 243% at December 31, 2001.
13
Capital Resources
- -----------------
Capital elements for Susquehanna are segmented into two tiers. Tier 1
capital represents shareholders' equity reduced by most intangible assets. Tier
2 capital represents certain allowable long-term debt, the portion of the
allowance for loan and lease losses limited to 1.25% of risk-adjusted assets,
and 45% of the unrealized gain on equity securities. The sum of Tier 1 capital
and Tier 2 capital is "total risk-based capital."
The minimum Tier I capital ratio is 4%; Susquehanna's ratio at March 31,
2002 was 10.69%. The minimum total capital (Tier II) ratio is 8%; Susquehanna's
ratio at March 31, 2002 was 12.15%. The minimum leverage ratio is 4%;
Susquehanna's leverage ratio at March 31, 2002 was 8.62%.
14
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest rates and interest differential - taxable equivalent basis
- ------------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
March 31, 2002 March 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Short - term investments $ 94,706 $ 437 1.87 $ 85,416 $ 1,138 5.40
Investment securities:
Taxable 949,523 13,282 5.67 759,313 12,193 6.51
Tax - advantaged 61,487 1,083 7.14 77,956 1,386 7.21
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,011,010 14,365 5.76 837,269 13,579 6.58
- ------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 3,489,377 63,710 7.40 3,370,785 71,420 8.59
Tax - advantaged 49,932 889 7.22 51,308 1,140 9.01
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,539,309 64,599 7.40 3,422,093 72,560 8.60
- ------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 4,645,025 $79,401 6.93 4,344,778 $87,276 8.15
---------------------- -------------------
Allowance for loan and lease losses (38,243) (37,586)
Other non - earning assets 500,718 400,945
- ---------------------------------------------------- --------------
Total assets $5,107,500 $4,708,137
- ---------------------------------------------------- --------------
Liabilities
Deposits:
Interest - bearing demand $ 918,984 $ 2,906 1.28 $ 814,464 $ 5,817 2.90
Savings 445,208 1,077 0.98 413,266 1,890 1.85
Time 1,617,015 17,766 4.46 1,559,110 22,216 5.78
Short - term borrowings 175,232 675 1.56 215,970 2,887 5.42
FHLB borrowings 577,246 7,261 5.10 328,407 4,665 5.76
Vehicle financing 157,986 2,606 6.69 335,464 6,057 7.32
Long - term debt 105,000 1,993 7.70 100,000 1,950 7.91
------------- --------- -------------- ------------- --------- ------
Total interest - bearing liabilities 3,996,671 $34,284 3.48 3,766,681 $45,482 4.90
------------------------- -------------------
Demand deposits 516,462 433,246
Other liabilities 97,905 53,950
- -----------------------------------------------------
Total liabilities 4,611,038 4,253,877
- ----------------------------------------------------- -------------
Equity 496,462 454,260
- ----------------------------------------------------- -------------
Total liabilities & stockholders' equity $5,107,500 $4,708,137
- ----------------------------------------------------- -------------
Net interest income / yield on
average earning assets $45,117 3.94 $41,794 3.90
------------------------- -------------------
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 baisis as taxable interest. The marginal tax rate is 35%.
15
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS
- --------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 2002 2001 2001
- --------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $16,976 $15,516 $21,100
Restructured accrual loans 0 0 0
Other real estate owned 3,248 3,761 4,623
- --------------------------------------------------------------------------------------------------
Total nonperforming assets $20,224 $19,277 $25,723
- --------------------------------------------------------------------------------------------------
As a percent of period-end loans and leases and
other real estate owned 0.56% 0.55% 0.74%
Loans and leases contractually
past due 90 days and still accruing $11,201 $11,498 $8,961
- --------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------
Balance - Beginning of period $37,698 $37,187
Additions charged to operating expenses 2,273 1,846
- --------------------------------------------------------------------------------------------------
39,971 39,033
- --------------------------------------------------------------------------------------------------
Charge-offs (2,002) (1,585)
Recoveries 563 400
- --------------------------------------------------------------------------------------------------
Net charge-offs (1,439) (1,185)
- --------------------------------------------------------------------------------------------------
Balance - Period end $38,532 $37,848
- --------------------------------------------------------------------------------------------------
Net charge-offs as a percent of average loans and leases (annualized) 0.16% 0.14%
Allowance as a percent of period-end loans and leases 1.06% 1.09%
Average loans and leases $3,539,309 $3,422,093
Period-end loans and leases 3,626,790 3,456,481
16
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
- ----------------------------------------
ABOUT MARKET RISK
- -----------------
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 Risk
- --------------
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, 2002, Susquehanna's
subsidiary banks have unused lines of credit available to them from the Federal
Home Loan Bank totaling approximately $555 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 $55 million at March 31, 2002. These maturing investments
represented 5% of total investment securities. Unrestricted short-term
investments amounted to $16.6 million and represent additional sources of
liquidity. Consequently, Susquehanna's exposure to liquidity risk is not
considered significant.
Interest Rate Risk
- ------------------
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 uses gap and interest rate shock analyses to evaluate interest
rate sensitivity at a given point in time.
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 30% decline in economic equity for a 300 basis point shock
(immediate change) in interest rates. The assumptions used for the interest rate
shock analysis are reviewed and updated on a periodic
17
basis. Based upon the most recent interest rate shock analysis, Susquehanna was
well within the policy limits.
At March 31, 2002, Susquehanna continues to be an asset sensitive institution
and should benefit from a rise in interest rates in the future, if that should
occur.
Securitizations and Off-Balance Sheet Financings
- ------------------------------------------------
Assets securitizations and other off-balance sheet financings can further
affect liquidity and interest rate risk. Automobile leases originated by
Susquehanna's wholly-owned subsidiary, Boston Service Company, Inc. trading as
Hann Financial Service Corporation, ("Hann"), are financed primarily in four
ways: agency arrangements with other financial institutions; securitization
transactions; sale-leaseback transactions; and other sources of funds, including
internally generated sources. Assets financed in the first three of these
manners generally are not reflected on Susquehanna's consolidated balance sheet.
As of March 31, 2002, Hann's off-balance sheet, managed portfolio was funded in
the following manners: agency arrangements, $616 million; asset securitization
transactions, $186 million; and sale-leaseback transaction, $163 million.
During the first quarter of 2002, Hann entered into a new securitization
transaction (which is included in the amounts referenced above) and sold the
beneficial interests in $79.5 million in automobile leases and related vehicles
at par to a wholly-owned, special purpose entity, or SPE. The SPE finances the
purchase by borrowing funds from a non-related, asset-backed commercial paper
issuer ("lender"). Hann continues to act as servicer for the sold portfolio and
Hann receives a servicing fee based upon a percentage of the dollar amount of
assets serviced. This transaction is accounted for as a sale under the
guidelines of SFAS 140. Neither Hann nor Susquehanna provide recourse for credit
losses.
The debt issued in the transaction bears a floating rate of interest, and
Susquehanna retains the related interest rate risk. Neither Hann nor Susquehanna
has retained residual risk in the vehicle leases and related vehicles. However,
in the event of a breach by Auto Lenders Liquidation Center, Inc., ("Auto
Lenders"), the residual value guarantor, Susquehanna would be required to
reimburse up to $20.0 million under a letter of credit facility for losses
suffered by the lender to the extent of amounts not paid by Auto Lenders. The
relationship between Auto Lenders and Michael J. Wimmer, a member of the
Susquehanna Board of Directors and the Chief Executive Officer of Hann, is
described in more detail in Susquehanna's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. The transaction documents contain several
requirements, obligations, liabilities, provisions and consequences, including
events of default, which become applicable upon, among other conditions, the
failure of the sold portfolio to meet certain performance tests. The SPE retains
the right to receive excess cash flows from the sold portfolio and, under SFAS
140, Hann is required to recognize a receivable representing the present value
of these excess cash flows, which is subordinate to the lender. The value of
this recorded receivable is subject to credit, prepayment, and interest rate
risk. The recorded receivable in this transaction was $1.8 million. The
aggregate amount of all recorded receivables at March 31, 2002 was $5.2 million.
Partially offsetting the $1.8 million gain noted above was a $1.0 million
adjustment increasing amortization of capitalized costs on the December 2000
sale-leaseback transaction due to revised income estimates on replacement
vehicles.
18
The aggregate amount of Susquehanna's reimbursement obligation under letter
of credit facilities for losses suffered by the lenders to the extent of amounts
not paid by Auto Lenders at March 31, 2002, was $40.5 million.
19
PART II. OTHER INFORMATION
-----------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits. The exhibits required to be filed as part of this report
pursuant to Item 601 of Regulation S-K are filed herewith or incorporated by
reference.
(b) Report on Form 8-K. No Current Reports on Form 8-K were filed during
the quarterly period ended March 31, 2002. However, a Current Report on Form 8-K
was filed on May 3, 2002 regarding the execution of a definitive agreement by
Susquehanna to purchase all of the outstanding stock of The Addis Group, Inc., a
property and casualty insurance brokerage located in King of Prussia,
Pennsylvania.
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, 2002 /s/ William J. Reuter
---------------------------------------
William J. Reuter
President and Chief Executive Officer
May 10, 2002 /s/ Drew K. Hostetter
---------------------------------------
Drew K. Hostetter
Executive Vice President, Treasurer and
Chief Financial Officer
20
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
- -------------- --------------------------------
(3) (i) Articles of Incorporation. Incorporated by reference to
Attachment E to Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-13276 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3 of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of Susquehanna's Common Stock
and the rights of Susquehanna's note holders are contained in the
following documents or instruments, which are incorporated herein by
reference.
(i) Articles of Incorporation. Incorporated by reference to
Attachment E to Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(iii) By-laws. Incorporated by reference to Exhibit 3 of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
(iv) Form of Subordinated Note/Indenture incorporated by reference to
Exhibit 4.1 to Susquehanna's Registration Statement on Form S-3,
Registration No. 33-87624.
(10) Material Contracts.
(i) Susquehanna's Key Employee Severance Pay Plan, adopted in 1999
and amended on May 26, 2000 and on February 22, 2001, is
incorporated by reference to Exhibit 10 of Susquehanna's Annual
Report on Form 10-K for fiscal year ended December 31, 1999 and
to Exhibit 10(i) of Susquehanna's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.
(ii) Susquehanna's Executive Deferred Income Plan, effective January
1, 1999, is incorporated by reference to Exhibit 10(a) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
(iii) Susquehanna's Equity Compensation Plan, as amended on May 25,
2001, is incorporated by reference to Exhibit 10(iii) of
Susquehanna's Annual Report of Form 10-K for the fiscal year
ended December 31, 2001.
(iv) Susquehanna's Supplemental Executive Retirement Plan as amended
and restated effective January 1, 1998 is incorporated by
reference to Exhibit 10(iv) of Susquehanna's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
(v) Forms of The Insurance Trust for Susquehanna Bancshares Banks and
Affiliates Split Dollar Agreement and Split Dollar Policy
Endorsement are incorporated by reference to Exhibit 10(v) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
(vi) 2002 Amended Servicing Agreement dated January 1, 2002 between
Boston Service Company, Inc. t/a Hann Financial Service Corp. and
Auto Lenders Liquidation Center, Inc. is incorporated by
reference to Exhibit 10(vi) of Susquehanna's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. First
Amendment to the 2002 Amended Servicing Agreement between Boston
Service Company, Inc. and Auto Lenders Liquidation Center, Inc.,
dated April 25, 2002, is filed herewith as Exhibit 10(vi).
(vii) Guaranty Agreement dated December 31, 2001 by Michael J. Wimmer
in favor of Boston Service Company, Inc. is incorporated by
reference to Exhibit 10(vii) of Susquehanna's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
(viii) Employment Agreement between Susquehanna and William J. Reuter,
dated March 21, 2001, is incorporated by reference to Exhibit
10(vi) of Susquehanna's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000. Amendment dated February 28, 2002
is incorporated by reference to Exhibit 10(viii) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
(ix) Employment Agreement between Susquehanna and Gregory A. Duncan,
dated March 14, 2001, is incorporated by reference to Exhibit
10(vii) of Susquehanna's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000. Amendment dated February 28,
2002, is incorporated by reference to Exhibit 10(ix) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
(x) Employment Agreement between Susquehanna and Drew K. Hostetter,
dated March 12, 2001, is incorporated by reference to Exhibit
10(viii) of Susquehanna's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000. Amendment dated February 28,
2002, is
incorporated by reference to Exhibit 10(x) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
(xi) Employment Agreement between Susquehanna and Williamsport
National Bank and Charles W. Luppert, dated March 20, 2001, is
incorporated by reference to Exhibit 10(ix) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000. Amendment dated February 28, 2002, is incorporated by
reference to Exhibit 10(xi) of Susquehanna's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
(xii) Employment Agreement between Boston Service Company, Inc. t/a
Hann Financial Service Corp. and Michael J. Wimmer, dated
February 1, 2000, is incorporated by reference to Exhibit 10(x)
of Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
(xiii) Consulting Agreement between Susquehanna and Robert S. Bolinger,
dated June 4, 2001, is incorporated by reference to
Exhibit 10(xiii) of Susquehanna's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
(xiv) Guaranty Agreement dated March 11, 2002 by Michael J. Wimmer in
favor of Boston Service Company, Inc. is incorporated by
reference to Exhibit 10(xiv) of Susquehanna's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.