FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 March 31, 1998 the Registrant had 22,556,274 shares of common stock
outstanding.
Page 1
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION.................................. 3
Item 1. FINANCIAL STATEMENTS........................................ 3
Consolidated Balance Sheets -
As of March 31, 1998 and 1997,
And December 31, 1997....................................... 3
Consolidated Statements of Income
For the three months ended
March 31, 1998 and 1997 ................................... 4
Consolidated Statements of Cash Flow
For the three month periods
ended March 31, 1998 and 1997............................... 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...................................... None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................ None
SIGNATURES............................................. 17
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) March 31 December 31 March 31
ASSETS 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $102,879 $97,341 $108,859
Short-term investments 121,314 41,850 87,632
Investment securities available for sale 715,442 573,576 503,148
Investment securities held to maturity 77,279 83,102 116,760
(Fair values of $78,295; $83,983; and $117,142)
Loans and leases, net of unearned income 2,560,452 2,569,613 2,375,846
Less: Allowance for loan and lease losses 34,317 34,550 33,624
-------------- -------------- --------------
Net loans and leases 2,526,135 2,535,063 2,342,222
-------------- -------------- --------------
Premises and equipment (net) 48,756 47,185 44,576
Accrued income receivable 22,800 22,234 21,409
Other assets 122,186 124,536 83,984
-------------- -------------- --------------
Total assets $3,736,791 $3,524,887 $3,308,590
============== ============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Deposits:
Demand $374,706 $351,943 $325,481
Interest-bearing demand 828,913 802,130 750,673
Savings 438,181 424,715 435,227
Time 1,133,122 1,108,205 1,083,215
Time of $100 or more 136,599 164,224 145,219
-------------- -------------- --------------
Total deposits 2,911,521 2,851,217 2,739,815
-------------- -------------- --------------
Short-term borrowings 73,806 103,323 67,899
Long-term debt 356,142 181,888 139,523
Accrued interest, taxes, and expenses payable 30,118 30,291 29,673
Other liabilities 11,517 11,430 14,754
-------------- -------------- --------------
Total liabilities 3,383,104 3,178,149 2,991,664
Stockholders' equity:
Common stock
Authorized: 32,000,000 shares ($2.00 par value)
Issued: 22,586,728; 22,586,416; and 14,665,638,
respectively 45,173 45,171 29,331
Surplus 77,548 77,519 85,168
Retained earnings 226,354 220,491 203,154
Accumulated other comprehensive income, net of taxes of $2,586;
$2,381 and ($359), respectively 4,767 3,712 (572)
Less: Treasury stock, (30,454; 30,454; and 20,303
common shares at cost, respectively) 155 155 155
-------------- -------------- --------------
Total stockholders' equity 353,687 346,738 316,926
-------------- -------------- --------------
Total liabilities and stockholders' equity $3,736,791 $3,524,887 $3,308,590
============== ============== ==============
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
- --------------------------------------------------------------------------------
(In thousands, except per share) 1998 1997
- --------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans and leases $56,438 $52,802
Interest on investment securities: Taxable 10,485 8,270
Tax-exempt 1,237 1,243
Interest on short-term investments 1,116 977
- --------------------------------------------------------------------------------
Total interest income 69,276 63,292
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 6,657 5,693
Savings 2,566 2,697
Time 17,580 16,268
Interest on short-term borrowings 1,108 836
Interest on long-term debt 4,871 2,479
- --------------------------------------------------------------------------------
Total interest expense 32,782 27,973
- --------------------------------------------------------------------------------
Net interest income 36,494 35,319
Provision for loan and lease losses 1,233 1,206
- --------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 35,261 34,113
- --------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 1,784 1,568
Other service charges, commissions, fees 997 589
Income from fiduciary-related activities 861 858
Gain on sale of mortgages 1,065 482
Other operating income 2,218 1,830
Investment security gains/(losses) 6 3
- --------------------------------------------------------------------------------
Total other income 6,931 5,330
- --------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 13,706 14,171
Net occupancy expense 1,989 1,994
Furniture and equipment expense 1,597 1,436
FDIC insurance premiums 179 181
Other operating expenses 9,356 8,012
- --------------------------------------------------------------------------------
Total other expenses 26,827 25,794
- --------------------------------------------------------------------------------
Income before income taxes 15,365 13,649
Provision for income taxes 4,761 4,193
- --------------------------------------------------------------------------------
Net income $10,604 $9,456
================================================================================
Per share information:
Basic earnings $0.47 $0.43
Diluted earnings $0.47 $0.43
Cash dividends $0.21 $0.20
Average shares outstanding: Basic 22,555 21,968
Diluted 22,695 22,008
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Three months ended March 31 1998 1997
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $10,604 $9,456
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 2,683 2,404
Provision for loan and lease losses 1,233 1,206
Gain on securities transactions (6) (3)
Gain on sale of loans (1,065) (482)
Gain on sale of other real estate owned (125) (7)
Mortgage loans originated for resale (68,122) (25,391)
Sale of mortgage loans originated for resale 56,455 26,264
(Increase)/decrease in accrued interest receivable (566) 524
Decrease in accrued interest payable (1,025) (2,532)
Decrease in accrued expenses and taxes payable 852 2,212
Other, net 2,778 (1,669)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,696 11,982
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 4,431 17,051
Proceeds from the maturity of investment securities 70,860 70,852
Purchase of available-for-sale securities (209,979) (50,529)
Purchase of held-to-maturity securities -- (1,373)
Net decrease/(increase) in loans and leases 18,605 (27,843)
Capital expenditures (2,942) (1,777)
- --------------------------------------------------------------------------------------------------------------
Net cash (used for)/provided from investing activities (119,025) 6,381
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase/(decrease) in deposits 60,304 (14,303)
Net decrease in short-term borrowings (29,517) (32,751)
Proceeds from issuance of long-term debt 200,000 25,000
Repayment of long-term debt (25,746) (5,845)
Proceeds from issuance of common stock 31 6
Cash paid for fractional shares of pooled entity -- (3)
Dividends paid (4,741) (4,067)
- --------------------------------------------------------------------------------------------------------------
Net cash provided from/(used for) financing activities 200,331 (31,963)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 85,002 (13,600)
CASH AND CASH EQUIVALENTS AT JANUARY 1 139,191 210,091
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $224,193 $196,491
==============================================================================================================
Cash and cash equivalents:
Cash and due from banks $102,879 $108,859
Short-term investments 121,314 87,632
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $224,193 $196,491
==============================================================================================================
Interest paid on deposits, short-term borrowings, and long-term debt was
$37,519 in 1998, and $30,505 in 1997. Income taxes paid were $913 in 1998, and
$318 in 1997. Amounts transferred to other real estate owned were $1,822 in
1998, and $809 in 1997.
The accompanying notes are an integral part of these financial statements.
5
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 1997 $29,331 $85,165 $197,765 $1,190 ($155) $313,296
Comprehensive income:
Net income 9,456 9,456
Change in unrealized gain/(loss) on securities, net of
taxes of ($949) and reclassification adjustment of $3 (1,762) (1,762)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 9,456 (1,762) 7,694
Common stock issued under
employee benefit plans 6 6
Cash paid for fractional shares of pooled entity (3) (3)
Cash dividends paid:
Per common share of $0.20 (4,067) (4,067)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1997 $29,331 $85,168 $203,154 ($572) ($155) $316,926
====================================================================================================================================
Balance - January 1, 1998 $45,171 $77,519 $220,491 $3,712 ($155) $346,738
Comprehensive income:
Net income 10,604 10,604
Change in unrealized gain/(loss) on securities, net of
taxes of $568 and reclassification adjustment of $6 1,055 1,055
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 10,604 1,055 11,659
Common stock issued under
employee benefit plans 2 29 31
Cash dividends paid:
Per common share of $0.21 (4,741) (4,741)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1998 $45,173 $77,548 $226,354 $4,767 ($155) $353,687
====================================================================================================================================
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, 1998 and 1997.
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 45 through 47 of the Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
6
Susquehanna Bancshares, Inc. and Subsidiaries
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
The amortized costs and fair values of securities are as follows:
- ------------------------------------------------------------------------------------------------------------------------
March 31, 1998 December 31, 1997
--------------------------- --------------------------
Amortized cost Fair value Amortized cost Fair value
- ------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
U.S.Treasury $109,734 $110,470 $118,972 $119,624
U.S. Government agencies 215,078 216,124 231,410 232,238
State & municipal 40,698 41,533 31,470 32,200
Mortgage-backed 254,310 254,161 91,695 92,176
Corporates 64,211 64,709 72,136 72,672
Equities 24,058 28,445 21,800 24,666
- ------------------------------------------------------------------------------------------------------------------------
708,089 715,442 567,483 573,576
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S.Treasury $750 $750 $750 $750
State & municipal 70,394 71,377 75,882 76,739
Mortgage-backed 6,085 6,118 6,420 6,444
Corporates 50 50 50 50
- ------------------------------------------------------------------------------------------------------------------------
77,279 78,295 83,102 83,983
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities $785,368 $793,737 $650,585 $657,559
========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES
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Loans and leases, net of unearned income at March 31, 1998 and December 31, 1997, were as follows:
- ------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $295,393 $303,587
Real estate - construction 233,355 225,971
Real estate - mortgage 1,655,848 1,664,240
Consumer 309,936 311,393
Leases 65,920 64,422
- ------------------------------------------------------------------------------------------------------------------------
Total loans and leases $2,560,452 $2,569,613
========================================================================================================================
IMPAIRED LOANS
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An analysis of impaired loans as of March 31, 1998 and December 31, 1997, is presented as follows:
- -----------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Impaired loans without a related reserve $10,034 $11,070
Impaired loans with a reserve 3,015 1,814
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Total impaired loans $13,049 $12,884
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Reserve for impaired loans $558 $269
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An analysis of impaired loans for the three months periods ended March 31, 1998 and 1997 is presented as follows:
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $13,100 $14,457
Interest income on impaired loans (cash-basis) 34 431
SHORT-TERM BORROWINGS
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Short-term borrowings at March 31, 1998 and December 31, 1997, were as follows:
- ------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $69,000 $81,351
Treasury tax and loan notes 4,806 9,472
Federal funds purchased -- 8,500
Federal Home Loan Bank borrowings -- 4,000
- ------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $73,806 $103,323
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7
Susquehanna Bancshares, Inc. and Subsidiaries
LONG-TERM DEBT
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Long-term debt at March 31, 1998 and December 31, 1997, was as follows:
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March 31, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Term note due July, 1998 $5,000 $5,000
Installment note due June, 1999 24 28
FHLB advances in varying maturities through July, 2011 265,600 91,340
Term loan note due September, 2014 518 520
Parent:
Senior notes due February, 2003 35,000 35,000
Subordinated notes due February, 2005 50,000 50,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $356,142 $181,888
====================================================================================================================================
EARNINGS-PER-SHARE
- ------------------------------------------------------------------------------------------------------------------------------
The following tables sets forth the calculation of basic and diluted earnings per share for the periods ended March 31, 1998
and 1997:
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income available to common stockholders $10,604 22,555 $0.47 $ 9,456 21,968 $0.43
Effect of Diluted Securities:
Incentive stock options outstanding 140 40
------- -------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $10,604 22,695 $0.47 $ 9,456 22,008 $0.43
==============================================================================================================================
SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share)
- --------------------------------------------------------------------------------
On April 14, 1998, Susquehanna Bancshares, Inc., ("Susquehanna"), announced
it had signed a definitive agreement to acquire Cardinal Bancorp, Inc., Everett,
PA, ("Cardinal"). Under the terms of the agreement, Susquehanna will exchange
approximately 1,267,000 shares of Susquehanna common stock for all the
outstanding shares of Cardinal as long as Susquehanna's common stock market
price remains between $34 and $40 per share. At December 31, 1997, Cardinal had
total assets of $130 million. The agreement is subject to regulatory approval,
as well as the approval of Cardinal shareholders. In conjunction with the
agreement, the parties to the agreement executed a stock option agreement,
pursuant to which Cardinal granted an option to Susquehanna to purchase up to
15% of all Cardinal's total, issued and outstanding shares immediately prior to
the purchase upon the occurrence of specific purchase events as specified in the
option agreement. Results of operations for Cardinal were not significant to
Susquehanna's consolidated financial results, and accordingly, pro forma
condensed results of operations have not been presented.
On April 16, 1998, Susquehanna announced it had signed a definitive
agreement to acquire First Capitol Bank, York, PA, ("FCB"). Under the terms of
the agreement, Susquehanna will exchange approximately 684,000 shares of
Susquehanna common stock for all the outstanding shares of FCB as long as
Susquehanna's common stock market price remains between $32 and $42 per share.
At December 31, 1997, FCB had total assets of $108 million. The agreement is
subject to regulatory approval, as well as the approval of FCB shareholders. In
conjunction with the agreement, the parties to the agreement also executed a
stock option agreement, pursuant to which FCB granted an option to Susquehanna
to purchase up to 100,681 shares of FBC's common stock upon the occurrence of
specific purchase events as specified in the option agreement. Results of
operations for FBC were not significant to Susquehanna's consolidated financial
statements, and accordingly, pro forma condensed results of operations have not
been presented.
8
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
- -------------------------------------------------------------------------------
CONDITION
- ---------
The following is 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").
One transaction occurred which affects the comparability of
Susquehanna's financial performance for the first quarter of 1998 compared with
the first quarter of 1997. On July 31, 1997, Susquehanna acquired Founders'
Bank, Bryn Mawr, PA, through an exchange of 560,353 shares of common stock to
the shareholders of Founders' based on an exchange ratio of .566 shares of
Susquehanna common stock for each share of Founders' outstanding capital stock.
The transaction was accounted for under the pooling-of-interests method of
accounting. At the time of the acquisition, Founders' reported total assets of
$103 million. Results of operations for Founders' prior to the acquisition were
not significant to Susquehanna's consolidated financial statements, and
accordingly, Susquehanna's prior period consolidated financial statements have
not been restated for Founders'.
Earnings Summary
----------------
Susquehanna's net income for the first quarter of 1998 was $10.6
million, a 12% increase over the net income of $9.5 million reported in the
first quarter of 1997. Contributing to this strong earnings performance was an
$1.6 million or 30% increase in non-interest income
9
resulting primarily from an increase in mortgage-banking activities and bank-
owned life insurance ("BOLI") income .
Earnings per share ("EPS") increased 9% from $0.43 per share for the
first quarter of 1997 to $0.47 per share for the first quarter of 1998. Return
on average assets ("ROA"), and return on average equity ("ROE"), increased from
1.17% and 12.17%, respectively, in the first quarter of 1997 to 1.18% and
12.33%, respectively, in the first quarter of 1998. For the first quarter of
1998, tangible EPS, ROA and ROE were $0.50, 1.28%, and 14.72%, respectively.
Total assets at March 31, 1998 of $3.7 billion were $428 million higher
than one year ago. Loans totaled $2.6 billion at March 31, 1998, compared to
$2.4 billion at March 31, 1997, and deposits were $2.9 billion at March 31, 1998
compared to $2.7 billion at March 31, 1997. Equity capital was $354 million at
March 31, 1998, or $15.68 per share compared to $317 million, or $14.44 per
share at March 31, 1997.
Net Interest Income
-------------------
The major source of operating revenues is net interest income, which
rose to a level of $36.5 million in the first quarter of 1998 compared to $35.3
million for the same period in 1997. Net interest income is the income which
remains after deducting from total income generated by earning assets the
interest expense attributable to the acquisition of the funds required to
support earning assets. Income from earning assets includes income from loans,
income from investment securities and income from short-term investments. The
amount of interest income is dependent upon many factors including the volume of
earning assets, the general level of interest rates, the dynamics of the change
in interest rates, and levels of non-performing assets. The cost of funds varies
with the amount of funds necessary to support earning assets, the rates paid to
attract and
10
hold deposits, rates paid on borrowed funds, and the levels of non-interest
bearing demand deposits and equity capital.
Table 1 presents average balances, taxable equivalent interest income
and expenses and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-exempt interest has been adjusted using a marginal tax rate of 35% in order
to equate the yield to that of taxable interest rates. Net interest income as a
percentage of net interest income and other income was 84% and 87% for the
quarters ended March 31, 1998 and 1997, respectively.
While net interest income increased $1.2 million during the first
quarter of 1998 compared to the first quarter of 1997, the net interest margin
declined to 4.48% from 4.80% for the same periods. During the first quarter of
1998, Susquehanna began an investment program to better utilize its capital and
to reduce its tax burden. This program, which purchased $150 million of GNMA
securities funded by Federal Home Loan Bank borrowings, caused part of the
decline in the net interest margin. Lower reinvestment rates on loans and higher
deposit costs also contributed to the decline in margin.
Other Income
------------
Non-interest income increased $1.6 million or 30% from $5.3 million in
the first quarter of 1997 to $6.9 million in the first quarter of 1997. This
increase resulted primarily from an increase in gains on mortgage sales of $0.6
million, an increase in title insurance fees of $0.2 million and an increase of
$0.8 million in BOLI income.
Other income as a percentage of net interest income and other income
was 16% and 13% for the periods ended March 31, 1998 and 1997, respectively.
11
Other Expenses
--------------
Total other expenses increased $1.0 million or 4% from $25.8 million in
the first quarter of 1997 to $26.8 million in the first quarter of 1998. This
increase resulted primarily from increases in advertising expense of $0.4
million, data processing and communications expense of $0.2 million, and
furniture and equipment expense of $0.2 million.
Income Taxes
------------
Susquehanna's effective tax rate increased slightly to 31.00% in the
first quarter of 1998 from 30.72% in the first quarter of 1997.
Risk Assets
-----------
Table 2 shows a decrease in nonperforming assets from $27.3 million at
December 31, 1997 to $26.7 million at March 31, 1998, while nonperforming assets
to period-end loans and OREO declined from 1.06% at December 31, 1997 to 1.04%
at March 31, 1998. Loan loss reserve to non-performing loans at March 31, 1998
was 146% compared with 150% at December 31, 1997.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 3, the provision remained at $1.2 million in
the first quarter of 1998 compared with the first quarter of 1997. Net charge-
offs increased by $0.1 million for the same periods. The allowance at March 31,
1998 was 1.34% of period-end loans and leases compared to 1.42% at March 31,
1997.
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
12
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, 1998 was 12.15%. The
minimum total capital (Tier II) ratio is 8%; Susquehanna's ratio at March 31,
1998 was 15.34%. The minimum leverage ratio is 4%; Susquehanna's leverage ratio
at March 31, 1998 was 8.71%.
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 risk and liquidity risk are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different
from one another. The maintenance of adequate liquidity -- the ability to meet
the cash requirements of its customers and other financial commitments -- is a
fundamental aspect of Susquehanna's asset/liability management strategy.
Susquehanna's policy of diversifying its funding sources -- purchased funds,
repurchase agreements, and deposit accounts -- allows it to avoid undue
concentration in any single financial market and also to avoid heavy funding
requirements within short periods of time. At March 31, 1998, Susquehanna's
subsidiary banks and its savings bank have an unused line of credit available to
them from the Federal Home Loan Bank totaling $462 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 $133 million at March 31, 1998. These
maturing investments represent 17% of total investment securities. Short-term
investments amounted to $121 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
13
growth. Interest rate sensitivity is the matching or mismatching of the maturity
and rate structure of the interest-bearing assets and liabilities. It is the
objective of management to control the difference in the timing of the rate
changes for these assets and liabilities to preserve a satisfactory net interest
margin. In doing so, Susquehanna endeavors to maximize earnings in an
environment of changing interest rates. However, there is a lag in maintaining
the desired matching because the repricing of products does occur at varying
time intervals.
Susquehanna employs a variety of methods to monitor interest rate risk. 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
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL - TAX EQUIVALENT BASIS
- ------------------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
March 31, 1998 March 31, 1997
- ------------------------------------------------------------------------------------ --------------------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Short - term investments $81,662 $1,116 5.54 $72,419 $977 5.47
Investment securities:
Taxable 648,345 10,485 6.56 532,997 8,270 6.29
Tax - advantaged 107,045 1,899 7.19 109,812 1,908 7.05
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 755,390 12,384 6.65 642,809 10,178 6.42
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,510,629 55,644 8.99 2,311,648 52,107 9.14
Tax - advantaged 51,980 1,222 9.53 45,772 1,069 9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,562,609 56,866 9.00 2,357,420 53,176 9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,399,661 $70,366 8.39 3,072,648 $64,331 8.49
=========================== ===========================
Allowance for loan and lease losses (34,441) (33,789)
Other non - earning assets 280,776 240,075
- -------------------------------------------------------- -------------
Total assets $3,645,996 $3,278,934
======================================================== =============
Liabilities & Equity
- --------------------
Deposits:
Interest - bearing demand $819,421 $6,657 3.29 $747,912 $5,693 3.09
Savings 425,919 2,566 2.44 434,701 2,697 2.52
Time 1,272,304 17,580 5.60 1,221,553 16,268 5.40
Short - term borrowings 86,696 1,108 5.18 66,778 836 5.08
Long - term debt 303,713 4,871 6.50 140,000 2,479 7.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 2,908,053 $32,782 4.57 2,610,944 $27,973 4.35
=========================== ===========================
Demand deposits 346,032 310,999
Other liabilities 43,017 41,814
- -------------------------------------------------------- -------------
Total liabilities $3,297,102 $2,963,757
- -------------------------------------------------------- -------------
Stockholders' equity 348,894 315,177
- -------------------------------------------------------- -------------
Total liabilities & stockholders' equity $3,645,996 $3,278,934
======================================================== =============
Net interest income / yield on
average earning assets $37,584 4.48 $36,358 4.80
=========================== ===========================
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
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $23,471 $22,964 $22,049
Restructured accrual loans -- -- 6,349
Other real estate owned 3,274 4,379 5,408
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $26,745 $27,343 $33,806
====================================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 1.04% 1.06% 1.42%
Loans and leases contractually
past due 90 days and still accruing $5,154 $6,760 $9,469
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $34,550 $33,800
Additions charged to operating expenses 1,233 1,206
- ------------------------------------------------------------------------------------------------------------------------------------
35,783 35,006
- ------------------------------------------------------------------------------------------------------------------------------------
Charge-offs (1,845) (1,742)
Recoveries 379 360
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,466) (1,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $34,317 $33,624
====================================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.23% 0.24%
Allowance as a percent of period-end loans and leases 1.34% 1.42%
Average loans and leases $2,562,609 $2,357,420
Period-end loans and leases 2,560,452 2,375,846
16
PART II. OTHER INFORMATION
-----------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
May 7, 1998
/s/ Robert S. Bolinger
----------------------
Robert S. Bolinger
President and Chief Executive Officer
May 7, 1998 /s/ Drew K. Hostetter
---------------------
Drew K. Hostetter
Vice President, Treasurer and
Chief Financial Officer
17