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 June 30, 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.
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(Exact name of Registrant as specified in its Charter)
Pennsylvania 23-2201716
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
26 North Cedar Street
Lititz, Pennsylvania 17543
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(Address of principal executive offices) (Zip Code)
(717) 626-4721
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(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 June 30, 1998 the Registrant had 22,564,777 shares of common stock
outstanding.
1
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION
3
Item 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets - as if June 30, 1998 and 1997
and December 31, 1997 3
Consolidated Statements of Income - for the three months ended
and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flow - for the six months
periods ended June 30, 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 9-18
PART II OTHER INFORMATION 19
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 19 - 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands) June 30 December 31 June 30
ASSETS 1998 1997 1997
- --------------------------------------------------------------------------------------------------------
Cash and due from banks $ 102,768 $ 97,341 $ 97,310
Short-term investments 40,950 41,850 60,764
Investment securities available for sale 773,136 573,576 528,350
Investment securities held to maturity 71,649 83,102 98,321
(Fair values $72,347; $83,983 and $99,057)
Loans and leases, net of unearned income 2,627,123 2,569,613 2,414,730
Less: Allowance for loan and lease losses 34,321 34,550 33,799
---------- ---------- ----------
Net loans and leases 2,592,802 2,535,063 2,380,931
---------- ---------- ----------
Premises and equipment (net) 49,223 47,185 44,220
Accrued income receivable 22,990 22,234 20,921
Other assets 126,455 124,536 104,729
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Total assets $3,779,973 $3,524,887 $3,335,546
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
Deposits:
Demand $ 380,490 $ 351,943 $ 343,127
Interest-bearing demand 832,961 802,130 739,532
Savings 434,678 424,715 440,989
Time 1,138,241 1,108,205 1,066,561
Time of $100 or more 133,365 164,224 143,137
---------- ---------- ----------
Total deposits 2,919,735 2,851,217 2,733,346
---------- ---------- ----------
Short-term borrowings 93,230 103,323 104,832
Long-term debt 365,935 181,888 130,278
Accrued interest, taxes, and expenses payable 32,064 30,291 30,692
Other liabilities 9,048 11,430 17,097
---------- ---------- ----------
Total liabilities 3,420,012 3,178,149 3,016,245
Stockholders' equity:
Common stock
Authorized: 100,000,000; 32,000,000; and
32,000,000 shares ($2.00 par value), respectively
Issued: 33,885,029; 22,586,416; and 22,008,111, respectively 67,770 45,171 44,016
Surplus 55,207 77,519 70,684
Retained earnings 232,484 220,491 203,151
Accumulated other comprehensive income, net of taxes of $2,588;
$2,381 and $833, respectively 4,731 3,712 1,605
Less: Treasury stock, (34,866; 30,454 and 20,303 common shares
at cost, respectively) 231 155 155
---------- ---------- ----------
Total stockholders' equity 359,961 346,738 319,301
---------- ---------- ----------
Total liabilities and stockholders' equity $3,779,973 $3,524,887 $3,335,546
========== ========== ==========
- --------------------------------------------------------------------------------------------------------
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
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In thousands, except per share) 1998 1997 1998 1997
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INTEREST INCOME
Interest and fees on loans and leases $57,199 $54,670 $113,637 $107,472
Interest on investment securities: Taxable 11,532 8,184 22,017 16,454
Tax-exempt 1,328 1,224 2,565 2,467
Interest on short-term investments 1,063 975 2,179 1,952
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Total interest income 71,122 65,053 140,398 128,345
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 6,766 5,797 13,423 11,490
Savings 2,485 2,717 5,051 5,414
Time 17,709 16,583 35,289 32,851
Interest on short-term borrowings 1,088 1,027 2,196 1,863
Interest on long-term debt 5,811 2,431 10,682 4,910
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Total interest expense 33,859 28,555 66,641 56,528
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Net interest income 37,263 36,498 73,757 71,817
Provision for loan and lease losses 1,252 1,220 2,485 2,426
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Net interest income after provision for loan and lease losses 36,011 35,278 71,272 69,391
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OTHER INCOME
Service charges on deposit accounts 1,925 1,548 3,709 3,116
Other service charges, commissions, fees 1,187 871 2,184 1,460
Income from fiduciary-related activities 992 852 1,853 1,710
Gain on sale of mortgages 1,360 761 2,425 1,243
Other operating income 2,615 1,498 4,833 3,328
Investment security gains/(losses) 22 45 28 48
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Total other income 8,101 5,575 15,032 10,905
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OTHER EXPENSES
Salaries and employee benefits 13,952 15,433 27,658 29,604
Net occupancy expense 1,971 1,895 3,960 3,889
Furniture and equipment expense 1,732 1,513 3,329 2,949
FDIC insurance premiums 178 191 357 372
Other operating expenses 10,073 8,588 19,429 16,600
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Total other expenses 27,906 27,620 54,733 53,414
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Income before income taxes 16,206 13,233 31,571 26,882
Provision for income taxes 5,340 4,228 10,101 8,421
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Net income $10,866 $ 9,005 $ 21,470 $ 18,461
====================================================================================================================================
Per share information:
Basic earnings $0.32 $0.27 $0.63 $0.56
Diluted earnings $0.32 $0.27 $0.63 $0.56
Cash dividends $0.14 $0.13 $0.28 $0.27
Average shares outstanding: Basic 33,837 32,952 33,835 32,952
Diluted 34,044 33,027 34,043 33,020
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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)
Six months ended June 30 1998 1997
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OPERATING ACTIVITIES:
Net income $ 21,470 $ 18,461
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 5,794 5,153
Provision for loan and lease losses 2,485 2,426
Gain on securities transactions (28) (48)
Gain on sale of loans (2,425) (1,243)
Gain on sale of other real estate owned (107) (98)
Mortgage loans originated for resale (145,765) (32,283)
Sale of mortgage loans originated for resale 138,819 31,655
(Increase)/decrease in accrued interest receivable (756) 903
Increase/(decrease) in accrued interest payable 1,448 (192)
Decrease in accrued expenses and taxes payable 325 1,048
Other, net (4,330) 911
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Net cash provided by operating activities 16,930 26,693
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INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 16,939 30,094
Proceeds from the maturity of investment securities 127,993 111,367
Purchase of available-for-sale securities (333,100) (108,667)
Purchase of held-to-maturity securities -- (1,373)
Net increase in loans and leases (52,675) (67,695)
Capital expenditures (4,765) (2,374)
Purchase of Bank-Owned Life Insurance -- (25,000)
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Net cash (used for)/provided from investing activities (245,609) (63,648)
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FINANCING ACTIVITIES:
Net increase/(decrease) in deposits 68,518 (20,772)
Net (decrease)increase in short-term borrowings (10,093) 4,182
Proceeds from issuance of long-term debt 225,000 25,000
Repayment of long-term debt (40,953) (15,090)
Proceeds from issuance of common stock 362 208
Cash paid for treasury stock (113) --
Cash paid for fractional shares (38) (3)
Dividends paid (9,477) (8,461)
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Net cash provided from/(used for) financing activities 233,206 (14,936)
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NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 4,527 (51,891)
CASH AND CASH EQUIVALENTS AT JANUARY 1 139,191 209,965
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CASH AND CASH EQUIVALENTS AT JUNE 30 $ 143,718 $ 158,074
====================================================================================================================================
Cash and cash equivalents:
Cash and due from banks $ 102,768 $ 97,310
Short-term investments 40,950 60,764
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CASH AND CASH EQUIVALENTS AT JUNE 30 $ 143,718 $ 158,074
====================================================================================================================================
Interest paid on deposits, short-term borrowings, and long-term debt was
$65,193 in 1998, and $56,720 in 1997. Income taxes paid were $9,802 in 1998,
and $6,947 in 1997. Amounts transferred to other real estate owned were $4,554
in 1998, and $2,185 in 1997.
The accompanying notes are an integral part of these financial statements.
5
Susquehanna Bancshares, Inc. and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
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- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE TREASURY TOTAL
Six Month Periods Ended June 30 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 18,461 18,461
Change in unrealized gain/(loss) on securities,
net of taxes of $175 and reclassification
adjustment of $48 415 415
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Total comprehensive income 18,461 415 18,876
Common stock issued under
employee benefit plans 13 195 208
Effect of three-for-two stock split 14,672 (14,672) --
Cash paid for fractional shares of pooled entity (4) (4)
Cash dividends declared:
Per common share of $0.41 13,075 (13,075)
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Balance - June 30, 1997 $44,016 $70,684 $203,151 $1,605 ($155) $ 319,301
==================================================================================================================================
Balance - January 1, 1998 $45,171 $77,519 $220,491 $3,712 ($155) $ 346,738
Comprehensive income:
Net income 21,470 21,470
Change in unrealized gain/(loss) on securities,
net of taxes of $207 and reclassification
adjustment of $28 1,019 1,019
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 21,470 1,019 22,489
Common stock issued under employee benefit plans 11 314 37 362
Effect of three-for-two stock split 22,588 (22,626) (38)
Purchase of treasury stock (113) (113)
Cash dividends paid:
Per common share of $0.28 (9,477)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 $67,770 $55,207 $232,484 $4,731 ($231) $359,961
==================================================================================================================================
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 June 30, 1998 and 1997.
The accounting policies of Susquehanna Bancshares, Inc. & Subsidiaries
("Susquehanna"), 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.
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", ("SFAS 133"). SFAS 133 is effective for all fiscal quarters for all
fiscal years beginning after June 15, 1999. SFAS 133 requires that derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are to be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management anticipates that the adoption of SFAS 133 will not have a significant
effect on Susquehanna's results of operations or its financial position.
On July 1, 1998, Susquehanna paid a three-for-two stock split in the form
of a stock dividend. Per share information has been adjusted to reflect the
stock split.
6
Susquehanna Bancshares, Inc. and Subsidiaries
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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June 30, 1998 December 31, 1997
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(In thousands) Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S. Treasury $ 94,471 $ 95,099 $118,972 $119,624
U.S. Government agencies 200,195 200,791 231,410 232,238
State & municipal 52,083 52,756 31,470 32,200
Mortgage-backed 340,049 340,301 91,695 92,176
Corporates 53,099 53,545 72,136 72,672
Equities 25,919 30,644 21,800 24,666
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765,816 773,136 567,483 573,576
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Held-to-maturity:
U.S. Treasury $ 500 $ 500 $ 750 $ 750
State & municipal 66,199 66,872 75,882 76,739
Mortgage-backed 4,900 4,925 6,420 6,444
Corporates 50 50 50 50
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71,649 72,347 83,102 83,983
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Total investment securities $837,465 $845,483 $650,585 $657,559
====================================================================================================================================
LOANS AND LEASES
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Loans and leases, net of unearned income at June 30, 1998 and December 31, 1997,
were as follows:
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June 30, December 31,
(in thousands) 1998 1997
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Commercial, financial, and agricultural $ 314,051 $ 303,587
Real estate - construction 239,369 225,971
Real estate - mortgage 1,693,426 1,664,240
Consumer 311,344 311,393
Leases 68,933 64,422
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Total loans and leases $2,627,123 $2,569,613
====================================================================================================================================
IMPAIRED LOANS
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An analysis of impaired loans as of
June 30, 1998 and December 31, 1997, is
presented as follows:
June 30, December 31,
(Dollars in thousands) 1998 1997
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Impaired loans without a related reserve $ 7,304 $11,070
Impaired loans with a reserve 4,367 1,814
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Total impaired loans $11,671 $12,884
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Reserve for impaired loans $ 1,005 $ 269
====================================================================================================================================
An analysis of impaired loans for the three and six months periods ended June
30, 1998 and 1997 is presented as follows:
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Three Months Ended June 30 Six Months Ended June 30
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1998 1997 1998 1997
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Average balance of impaired loans $11,990 $14,640 $12,542 $13,962
Interest income on impaired loans (cash-basis) 79 149 113 580
7
Susquehanna Bancshares, Inc. and Subsidiaries
SHORT-TERM BORROWINGS
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Short-term borrowings at June 30, 1998 and December 31, 1997, were as follows:
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June 30, December 31,
(In thousands) 1998 1997
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Securities sold under repurchase agreements $ 60,527 $ 81,351
Treasury tax and loan notes 14,255 9,472
Federal funds purchased -- 8,500
Federal Home Loan Bank borrowings 18,448 4,000
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Total short-term borrowings $ 93,230 $103,323
====================================================================================================================================
LONG-TERM DEBT
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Long-term debt at June 30, 1998 and December 31, 1997, was as follows:
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June 30, December 31,
1998 1997
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Subsidiaries:
Term note due July, 1998 $ 5,000 $ 5,000
Installment note due June, 1999 19 28
FHLB advances in varying maturities through July, 2011 275,400 91,340
Term loan note due September, 2014 516 520
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 $365,935 $181,888
====================================================================================================================================
EARNINGS-PER-SHARE
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The following tables sets forth the calculation of basic and diluted earnings per share for the periods ended June 30, 1998 and
1997:
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For the three months ended June 30
--------------------------------------------------------------------------
1998 1997
-------------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income available to common stock $10,866 33,837 $0.32 $9,005 32,952 $ 0.27
Effect of Diluted Securities:
Stock options outstanding 207 75
------ ------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $10,866 34,044 $0.32 $9,005 33,027 $ 0.27
=================================================================================================================================
For the six months ended June 30
--------------------------------------------------------------------------
1998 1997
-------------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income available to common stock $21,470 33,835 $0.63 $18,461 32,952 $0.56
Effect of Diluted Securities:
Stock options outstanding 208 68
------ ------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $21,470 34,043 $0.63 $18,461 33,020 $0.56
=================================================================================================================================
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"). All per share data has
been adjusted to reflect the three-for-two stock split declared May 29, 1998.
One transaction occurred which affects the comparability of Susquehanna's
financial performance for the second quarter and first six months of 1998
compared with the second quarter and first six months of 1997. On July 31, 1997,
Susquehanna acquired Founders' Bank, Bryn Mawr, PA, through an exchange of
560,353 shares of common stock (prior to the split) to the shareholders of
Founders' based on an exchange ratio of .566 shares of Susquehanna common stock
(prior to the split) 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 second quarter of 1998 was $10.9 million,
a 21% increase over the net income of $9.0 million reported in the second
quarter of 1997. Net income
9
for the six months ended June 30, 1998 was $21.5 million, or 16% above the $18.5
million achieved for the same period of 1997.
Contributing to this strong earnings performance was significant growth in
non-interest income resulting primarily from an increase in mortgage-banking
activities and bank-owned life insurance ("BOLI") income and the sale of
mortgage servicing rights. Non-interest income was $2.5 million or 45% higher in
the second quarter of 1998 compared with the second quarter of 1997. For the six
months, non-interest income grew 38% or $4.1 million in 1998 compared with 1997.
Earnings per share ("EPS") increased 19% from $0.27 per share for the
second quarter of 1997 to $0.32 per share for the second quarter of 1998. Return
on average assets ("ROA"), and return on average equity ("ROE"), increased from
1.09% and 11.28%, respectively, in the second quarter of 1997 to 1.16% and
12.21%, respectively, in the second quarter of 1998. For the second quarter of
1998, tangible EPS, ROA and ROE were $0.34, 1.25%, and 14.48%, respectively.
For the six months ended June 30, 1998, EPS increased 13%, to $0.63 per
share compared with $0.56 per share for the same period of 1997. ROA and ROE
increased from 1.13% and 11.72% for the first six months of 1997 to 1.17% and
12.27% for the same period in 1998. For the six months ended June 30, 1998,
tangible EPS, ROA, and ROE were $0.68, 1.26%, and 14.60%, respectively.
Total assets at June 30, 1998 of $3.8 billion were $444 million higher than
one year ago. Loans totaled $2.6 billion at June 30, 1998, compared to $2.4
billion at June 30, 1997, and deposits were $2.9 billion at June 30, 1998
compared to $2.7 billion at June 30, 1997. Equity
10
capital was $360 million at June 30, 1998, or $10.63 per share compared to $319
million, or $9.69 per share at June 30, 1997.
Net Interest Income
-------------------
The major source of operating revenues is net interest income, which rose
to a level of $37.3 million in the second quarter of 1998 compared to $36.5
million for the same period in 1997. For the six months ended June 30, 1998, net
interest income was $73.8 million compared with $71.8 million for the six months
ended June 30, 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 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 82% and 87% for the
quarters ended
11
June 30, 1998 and 1997, respectively, and was 83% and 87% for the six months
ended June 30, 1998 and 1997, respectively.
While net interest income increased $1.9 million and $0.8 million,
respectively, during the first six months and second quarter of 1998 compared to
the first six months and second quarter of 1997, the net interest margin for the
six months ended declined to 4.43% from 4.84% and for the quarter ended to 4.39%
from 4.88% for 1998 versus 1997, respectively. 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 $175 million of GNMA
securities funded by Federal Home Loan Bank borrowings, caused about half of the
decline in the net interest margin. The remaining decline in net interest margin
was primarily due to lower reinvestment rates on loans and higher deposit costs
resulting from market forces impacting product pricing.
Other Income
------------
Non-interest income increased $2.5 million or 45% from $5.6 million in the
second quarter of 1997 to $8.1 million in the second quarter of 1997. This
increase resulted primarily from an increase in gains on mortgage sales of $0.6
million, an increase in deposit fees of $0.4 million and an increase of $0.3
million in BOLI income. Also, a gain of $0.7 million was realized on the sale of
mortgage servicing rights in the second quarter of 1998.
For the six months ended June 30, 1998, non-interest income increased $4.1
million or 38% over the same period of 1997. Gain on sale of mortgages was $1.2
million higher and BOLL income was $1.2 million higher in 1998 compared with
1997. The gain realized on the sale of the mortgage servicing rights noted above
as well as an increase in deposit fees of $0.6 million also contributed to the
favorable variance.
12
Other income as a percentage of net interest income and other income was
18% and 13% for the quarters ended June 30, 1998 and 1997, respectively, and was
17% and 13% for the six months ended June 30, 1998 and 1997, respectively.
Other Expenses
--------------
Total non-interest expenses increased $0.3 million or 1% from $27.6 million
in the second quarter of 1997 to $27.9 million in the second quarter of 1998.
For the six months ended June 30, 1998, non-interest expenses increased $1.3
million or 2% over the same period of 1997. During the second quarter of 1997,
Susquehanna incurred a one-time charge of $1.3 million for severance expense
relating to the consolidation of three Maryland savings bank subsidiaries.
During the second quarter of 1998, Susquehanna incurred unusual charges of $1.0
million related to acquisition activity and Year 2000. The net increase in non-
interest expenses after unusual charges for both the six months and quarter was
due primarily to the acquisition of Founders' Bank in July 1997.
Susquehanna has incurred consulting expenses of $0.7 million during the
first six months of 1998 and $0.6 million during the second quarter of 1998
directly related to Year 2000. Susquehanna estimates that total consulting costs
it will incur regarding Year 2000 compliance during 1998 and 1999 will total
$4.0 million. This is $1.0 million higher than the original estimate. The
original estimate of $7.0 million regarding the purchase of new software and
hardware associated with Susquehanna's systems conversion projects has not
changed.
Income Taxes
------------
Susquehanna's effective tax rate increased slightly to 32.00% for the first
six months of 1998 from 31.33% for the first six months of 1997.
13
Risk Assets
-----------
Table 2 shows a decrease in nonperforming assets from $27.3 million at
December 31, 1997 to $26.7 million at June 30, 1998, while nonperforming assets
to period-end loans and OREO declined from 1.06% at December 31, 1997 to 1.01%
at June 30, 1998. Loan loss reserve to non-performing loans at June 30, 1998 was
149% compared with 150% at December 31, 1997.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 3, the provision increased slightly at $1.3 million
in the second quarter of 1998 compared with $1.2 million in the second quarter
of 1997. Net charge-offs increased by $0.2 million for the same periods.
For the six months ended June 30, 1998, the provision was $2.5 million
compared with $2.4 million for the same period of 1997. Net charge-offs for the
six months ended June 30, 1998 increased by $0.3 million over the same period of
1997. The allowance at June 30, 1998 was 1.31% of period-end loans and leases
compared to 1.40% at June 30, 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 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 June 30,
1998 was 12.29%. The minimum total capital (Tier II) ratio is 8%; Susquehanna's
ratio at June 30, 1998 was 15.45%. The minimum leverage ratio is 4%;
Susquehanna's leverage ratio at June 30, 1998 was 8.59%.
14
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 June 30, 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 $453 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 $118 million at June 30, 1998. These maturing investments
represent 14% of total investment securities. Short-term investments amounted to
$41 million and represent additional sources of liquidity. Consequently,
Susquehanna's exposure to liquidity risk is not considered significant.
Closely related to the management of liquidity is the management of
interest rate risk which focuses on maintaining stability in the net interest
margin, an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the interest-
bearing assets and liabilities. 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.
15
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.
16
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
June 30, 1998 June 30, 1997
- -------------------------------------------------------------------------------------- -----------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
- -----------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Short-term investments $77,085 $1,063 5.53 $71,088 $975 5.50
Investment securities:
Taxable 720,076 11,532 6.42 523,382 8,184 6.27
Tax-advantaged 116,050 2,040 7.05 107,403 1,879 7.02
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 836,126 13,572 6.51 630,765 10,063 6.40
- -----------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,545,523 56,418 8.89 2,340,145 53,967 9.25
Tax-advantaged 51,708 1,201 9.32 45,840 1,082 9.47
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,597,231 57,619 8.90 2,385,985 55,049 9.25
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,510,442 $72,254 8.26 3,087,838 $66,087 8.58
======================== =======================
Allowance for loan and lease losses (34,142) (33,699)
Other non-earning assets 292,105 255,164
- ------------------------------------------------------------ ------------
Total assets $3,768,405 $3,309,303
============================================================ ============
Liabilities & Equity
- --------------------
Deposits:
Interest-bearing demand $838,254 $6,766 3.24 $749,084 $5,797 3.10
Savings 434,282 2,485 2.30 438,168 2,717 2.49
Time 1,269,586 17,709 5.59 1,217,720 16,583 5.46
Short-term borrowings 83,754 1,088 5.21 80,733 1,027 5.10
Long-term debt 372,780 5,811 6.25 134,950 2,431 7.23
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,998,656 $33,859 4.53 2,620,655 28,555 4.37
======================== =======================
Demand deposits 369,554 322,444
Other liabilities 43,281 46,013
- ------------------------------------------------------------
Total liabilities $3,411,491 $2,989,112
- ------------------------------------------------------------ ------------
Stockholders' equity 356,914 320,191
- ------------------------------------------------------------ ------------
Total liabilities & stockholders' equity $3,768,405 $3,309,303
============================================================ ============
Net interest income / yield on
average earning assets $38,395 4.39 $37,532 4.88
======================== =======================
- -----------------------------------------------------------------------------------------------------------------------------
For the Six Month Period Ended For the Six Month Period Ended
June 30, 1998 June 30, 1997
----------------------------------- -----------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
- -----------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Short-term investments $79,628 $2,179 5.52 $71,750 $1,952 5.49
Investment securities:
Taxable 684,489 22,017 6.49 528,153 16,454 6.28
Tax-advantaged 111,572 3,939 7.12 108,601 3,787 7.03
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 796,061 25,956 6.58 636,754 20,241 6.41
- ---------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,528,265 112,062 8.94 2,325,975 106,074 9.20
Tax-advantaged 51,751 2,423 9.44 45,806 2,151 9.47
- ---------------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,580,016 114,485 8.95 2,371,781 108,225 9.20
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,455,705 $142,620 8.32 3,080,285 $130,418 8.54
======================= =====================
Allowance for loan and lease losses (34,290) (33,744)
Other non-earning assets 286,124 247,661
- ------------------------------------------------------------ ------------
Total assets $3,707,539 $3,294,202
============================================================ ============
Liabilities & Equity
- --------------------
Deposits:
Interest-bearing demand $828,888 $13,423 3.27 $748,501 $11,490 3.10
Savings 430,124 5,051 2.37 436,444 5,414 2.50
Time 1,271,016 35,289 5.60 1,219,626 32,851 5.43
Short-term borrowings 85,217 2,196 5.20 73,794 1,863 5.09
Long-term debt 338,438 10,682 6.36 137,461 4,910 7.20
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,953,683 $66,641 4.55 2,615,826 $56,528 4.36
======================= ====================
Demand deposits 357,858 316,753
Other liabilities 43,067 43,925
- ------------------------------------------------------------ ------------
Total liabilities $3,354,608 $2,976,504
- ------------------------------------------------------------ ------------
Stockholders' equity 352,931 317,698
- ------------------------------------------------------------ ------------
Total liabilities & stockholders' equity $3,707,539 $3,294,202
============================================================ ============
Net interest income / yield on
average earning assets $75,979 4.43 $73,890 4.84
======================= =====================
For purposes of calculating loan yields, the average loan volume includes
non-accrual loans. For purposes of calculating yields on non-taxable interest
income, the taxable equivalent adjustment is made to equate non-taxable interest
on the same basis as taxable interest. The marginal tax rate is 35%.
17
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
(Dollars in thousands) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $21,992 $22,964 $26,029
Restructured accrual loans 1,095 --- ---
Other real estate owned 3,565 4,379 4,978
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $26,652 $27,343 $31,007
=================================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 1.01% 1.06% 1.28%
Loans and leases contractually
past due 90 days and still accruing $6,768 $6,760 $7,173
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $34,317 $33,624 $34,550 $33,800
Additions charged to operating expenses 1,252 1,220 2,485 2,426
- ---------------------------------------------------------------------------------------------------------------------------------
35,569 34,844 37,035 36,226
- ---------------------------------------------------------------------------------------------------------------------------------
Charge-offs (1,621) (1,287) (3,466) (3,029)
Recoveries 373 242 752 602
- ---------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,248) (1,045) (2,714) (2,427)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $34,321 $33,799 $34,321 $33,799
=================================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.19% 0.18% 0.21% 0.21%
Allowance as a percent of period-end loans and leases 1.31% 1.40% 1.31% 1.40%
Average loans and leases $2,597,231 $2,385,985 $2,580,016 $2,371,781
Period-end loans and leases 2,627,123 2,414,730 2,627,123 2,414,730
18
PART II. OTHER INFORMATION
-----------------
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Shareholders was held on May 29, 1998. Proxies
of the meeting were solicited by management; there was no solicitation in
opposition to management's nominees for directors set forth in the Proxy
Statement and all such nominees were elected.
a). The following details the voting results with respect to each nominee
for office, including the number of shares not voted at all (Not Present)
and the proxies that brokers did not vote in full (Broker Non-voted). The
terms of office of Robert S. Bolinger, Richard M. Cloney, Richard E. Funke,
Henry H. Gibbel, Edward W. Helfrick, C. William Hetzer, George J. Morgan,
Robert C. Reymer, Jr., and Roger V. Wiest continued after the meeting.
NOMINEE COMMON STOCK
------- ------------
James G. Apple
For 17,393,482
Withold/abstain 767,878
Not present 4,054,937
Broker non-voted 339,977
Trudy B. Cunningham
For 17,286,435
Withold/abstain 874,925
Not present 4,054,937
Broker non-voted 339,977
John M. Denlinger
For 17,391,625
Withold/abstain 769,735
Not present 4,054,937
Broker non-voted 339,977
Marley R. Gross
For 17,365,420
Withold/abstain 795,940
Not present 4,054,937
Broker non-voted 339,977
19
T. Max Hall
For 17,329,575
Withold/abstain 831,785
Not present 4,054,937
Broker non-voted 339,977
Raymond M. O'Connell
For 17,380,598
Withold/abstain 780,762
Not present 4,054,937
Broker non-voted 339,977
b). The shares of Common Stock were voted for the proposal to amend
Susquehanna's Articles of Incorporation to increase the aggregate
authorized capital of Susquehanna by increasing the common stock of
Susquehanna from thirty-two million shares (par value $2.00 per share), to
one hundred million shares (par value $2.00 per share) as follows:
For 15,415,046
Withold/abstain 2,746,314
Not present 4,054,937
Broker non-voted 339,977
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a). Exhibits
--------
3.1 Registrant's Articles of Incorporation.
3.2 Registrant's By-laws.
3.3 Articles of Amendment to Registrant's Articles of
Incorporation.
27.1 Financial Data Schedule.
b). Report on Form 8 - K. On April 28, 1998, Registrant filed a Report on
---------------------
Form 8-K, under Item 5, which discussed the proposed acquisition by the
Registrant of First Capitol Bank, York, PA, and Cardinal Bancorp., Inc.,
Everett, PA.
20
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.
August 7, 1998
/s/ Robert S. Bolinger
----------------------
Robert S, Bolinger
President and Chief Executive Officer
August 7, 1998
/s/ Drew K. Hostetter
---------------------
Drew K. Hostetter
Vice President, Treasurer,
and Chief Financial Officer
21
Exhibit Index
-------------
Exhibit Description Method
- ------- ----------- ------
3.1 Articles of Incorporation. Previously filed. Incorporated
by reference to Attachment E
to the Registrant's Joint
Proxy Statement / Prospectus
on Registrant's Registration
Statement on Form S-4,
Registration No. 33-76319.
3.2 By-laws. Previously filed. Incorporated
by reference to
Exhibit (3)(b) of Registrant's
Annual Report on Form 10-K
for the fiscal year ended
December 31, 1994.
3.3 Articles of Amendment. Effective June 1, 1998, filed
herewith.
27.1 Financial Data Schedule. Submitted electronically to
the Securities and Exchange
Commission for information
only and not filed.
22
EXHIBIT A TO ARTICLES OF AMENDMENT
The current text of Article 5 of Susquehanna Bancshares, Inc.'s Articles of
Incorporation is hereby deleted and restated in its entirety as follows:
Article 5. The aggregate number of shares which the corporation will have
---------
the authority to issue is one hundred five million (105,000,000) shares,
divided into two classes consisting of five million (5,000,000) shares of
Preferred Stock, without par value ("Preferred Stock") and one hundred
million (100,000,000) shares of Common Stock, par value $2.00 per share
("Common Stock").
The Board of Directors shall have the full authority permitted
by law to fix by resolution full, limited, multiple or fractional, or no
voting rights, and such designations and preferences, priorities,
qualifications, privileges, limitations, restrictions, options, conversion
rights, dividend features, retirement features, liquidation features,
redemption features and any other special or relative rights that may be
desired for the Preferred Stock and any series thereof, and to issue such
Preferred Stock from time to time in one or more series. The designations,
preferences, priorities, qualifications, privileges, limitations,
restrictions, options, conversion rights, dividend features, retirement
features, liquidation features, redemption features and any other special
or relative rights of any series of Preferred Stock may differ from those
of any and all series at any time outstanding.