SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 May 3, 1999, the Registrant had 36,937,459 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 of March 31, 1999 and 1998, and
December 31,1998 3
Consolidated Statements of Income - for the three months ended
March 31, 1999 and 1998 4
Consolidated Statements of Cash Flow - for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 9-16
PART II. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
EXHIBIT INDEX 18
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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MARCH 31 December 31 March 31
(Dollars in thousands) 1999 1998 1998
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ASSETS
Cash and due from banks $ 97,233 $ 113,210 $ 111,845
Short-term investments 57,003 83,063 136,666
Investment securities available for sale 900,379 891,907 783,304
Investment securities held to maturity 54,014 59,837 77,279
(Fair values of $55,071; $61,019; and $78,295)
Loans and leases, net of unearned income 2,827,845 2,847,185 2,708,763
Less: Allowance for loan and lease losses 36,560 36,158 36,273
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Net loans and leases 2,791,285 2,811,027 2,672,490
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Premises and equipment (net) 55,707 55,566 53,025
Accrued income receivable 22,312 22,774 24,149
Other assets 145,592 138,642 124,623
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Total assets $4,123,525 $4,176,026 $3,983,381
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LIABILITIES
Deposits:
Demand $ 414,606 $ 433,133 $ 400,729
Interest-bearing demand 984,858 997,718 879,479
Savings 456,353 448,865 462,618
Time 1,149,896 1,166,002 1,205,977
Time of $100 or more 170,451 171,161 160,433
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Total deposits 3,176,164 3,216,879 3,109,236
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Short-term borrowings 107,814 137,601 85,895
Long-term debt 391,538 375,576 361,646
Accrued interest, taxes, and expenses payable 30,104 31,522 31,601
Other liabilities 11,979 12,367 13,094
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Total liabilities 3,717,599 3,773,945 3,601,472
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STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000; 100,000,000; and 32,000,000 shares,
($2.00 par value), respectively
Issued: 36,967,572; 36,967,572; and 24,622,429, respectively 73,935 73,935 49,245
Surplus 61,644 61,882 85,948
Retained earnings 267,270 261,043 242,229
Accumulated other comprehensive income, net of taxes of $1,913;
$3,225 and $2,604, respectively 3,525 6,004 4,742
Less: Treasury stock, (30,113; 65,050; and 37,204
common shares at cost, respectively) 448 783 255
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Total stockholders' equity 405,926 402,081 381,909
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Total liabilities and stockholders' equity $4,123,525 $4,176,026 $$3,983,381
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The accompanying notes are an integral part of these financial statements.
3
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
March 31
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(Dollars in thousands, except per share) 1999 1998
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INTEREST INCOME
Interest and fees on loans and leases $58,804 $59,761
Interest on investment securities: Taxable 12,418 11,456
Tax-exempt 1,435 1,338
Interest on short-term investments 804 1,306
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Total interest income 73,461 73,861
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 7,200 7,071
Savings 2,154 2,733
Time 17,595 18,912
Interest on short-term borrowings 1,247 1,257
Interest on long-term debt 5,935 4,964
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Total interest expense 34,131 34,937
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Net interest income 39,330 38,924
Provision for loan and lease losses 1,424 1,269
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Net interest income after provision for loan and lease losses 37,906 37,655
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OTHER INCOME
Service charges on deposit accounts 2,250 1,938
Other service charges, commissions, fees 996 1,048
Income from fiduciary-related activities 759 861
Gain on sale of mortgages 1,010 1,065
Other operating income 2,319 2,261
Investment security gains/(losses) (1) 33
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Total other income 7,333 7,206
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OTHER EXPENSES
Salaries and employee benefits 13,140 14,634
Net occupancy expense 2,253 2,153
Furniture and equipment expense 1,904 1,676
Amortization of intangible assets 1,014 1,061
Other operating expenses 9,808 9,124
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Total other expenses 28,119 28,648
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Income before income taxes 17,120 16,213
Provision for income taxes 5,350 5,002
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NET INCOME $11,770 $11,211
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Per share information:
Basic earnings $0.32 $0.30
Diluted earnings $0.32 $0.30
Cash dividends $0.15 $0.14
Average shares outstanding: Basic 36,942 36,852
Diluted 37,180 37,193
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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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Three months ended March 31
(Dollars in thousands) 1999 1998
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OPERATING ACTIVITIES:
Net income $ 11,770 $ 11,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 9,482 2,795
Provision for loan and lease losses 1,424 1,269
(Loss)/gain on securities transactions 1 (29)
Gain on sale of loans (1,010) (1,065)
(Loss)/gain on sale of other real estate owned 11 (92)
Mortgage loans originated for resale (50,144) (68,122)
Sale of mortgage loans originated for resale 54,770 56,455
(Decrease)/increase in accrued interest receivable 462 (677)
decrease in accrued interest payable (2,519) (932)
Increase in accrued expenses and taxes payable 1,101 852
Other, net (7,331) 3,298
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NET CASH PROVIDED BY OPERATING ACTIVITIES 18,017 4,963
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INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities - 24,784
Proceeds from the maturity of investment securities 80,870 77,903
Purchase of available-for-sale securities (88,539) (238,346)
Net increase in loans and leases 12,262 15,434
Capital expenditures (4,661) (2,950)
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NET CASH (USED FOR)/PROVIDED FROM INVESTING ACTIVITIES (68) (123,175)
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FINANCING ACTIVITIES:
Net (decrease)/increase in deposits (40,715) 67,769
Net decrease in short-term borrowings (29,787) (28,327)
Proceeds from issuance of long-term debt 16,305 200,000
Repayment of long-term debt (343) (27,313)
Proceeds from issuance of common stock 384 869
Cash paid for treasury stock (287) -
Dividends paid (5,543) (4,993)
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NET CASH PROVIDED FROM/(USED FOR) FINANCING ACTIVITIES (59,986) 208,005
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NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (42,037) 89,793
CASH AND CASH EQUIVALENTS AT JANUARY 1 196,273 158,718
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CASH AND CASH EQUIVALENTS AT DECEMBER 31 $154,236 $248,511
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CASH AND CASH EQUIVALENTS:
Cash and due from banks $97,233 $111,845
Short-term investments 57,003 136,666
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CASH AND CASH EQUIVALENTS AT DECEMBER 31 $154,236 $248,511
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Interest paid on deposits, short-term borrowings, and long-term debt was
$36,650 in 1999, and $39,758 in 1998. Income taxes paid were $284 in 1999 and
$1,053 in 1998. Amounts transferred to other real estate owned were $2,440 in
1999, and $1,837 in 1998.
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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)
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
Three Month Periods Ended March 31 STOCK SURPLUS EARNINGS INCOME
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Balance - January 1, 1998 $49,128 $85,196 $236,012 $3,825
Comprehensive income:
Net income 11,211
Change in unrealized gain/(loss) on securities, net of
taxes of $494 and reclassification adjustment of $33 917
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Total comprehensive income 11,211 917
Common stock issued under
employee benefit plans 117 752
Cash dividends paid:
By pooled entities (253)
Per common share of $0.14 (4,741)
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Balance - March 31, 1998 $49,245 $85,948 $242,229 $4,742
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Balance - January 1, 1999 $73,935 $61,882 $261,043 $6,004
Comprehensive income:
Net income 11,770
Change in unrealized gain/(loss) on securities, net of
taxes of ($1,312) and reclassification adjustment of ($1) (2,479)
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Total comprehensive income 11,770 (2,479)
Common stock issued under
employee benefit plans (238)
Purchase/conversion of treasury stock
Cash dividends paid:
Per common share of $0.15 (5,543)
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Balance - March 31, 1999 $73,935 $61,644 $267,270 $3,525
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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TREASURY TOTAL
Three Month Periods Ended March 31 STOCK EQUITY
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Balance - January 1, 1998 ($255) $373,906
Comprehensive income:
Net income 11,211
Change in unrealized gain/(loss) on securities, net of
taxes of $494 and reclassification adjustment of $33 917
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Total comprehensive income 12,128
Common stock issued under
employee benefit plans 869
Cash dividends paid:
By pooled entities (253)
Per common share of $0.14 (4,741)
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Balance - March 31, 1998 ($255) $381,909
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Balance - January 1, 1999 ($783) $402,081
Comprehensive income:
Net income 11,770
Change in unrealized gain/(loss) on securities, net of
taxes of ($1,312) and reclassification adjustment of ($1) (2,479)
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Total comprehensive income 9,291
Common stock issued under
employee benefit plans 622 384
Purchase/conversion of treasury stock (287) (287)
Cash dividends paid:
Per common share of $0.15 (5,543)
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Balance - March 31, 1999 ($448) $405,926
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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, 1999 and 1998.
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, 1998.
6
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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MARCH 31, 1999 DECEMEBER 31, 1998
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AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
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Available-for-sale:
U.S.Treasury $ 58,224 $ 58,791 $ 67,043 $ 67,954
U.S. Government agencies 246,619 246,245 214,841 215,967
State & municipal 71,059 72,492 70,417 71,990
Mortgage-backed 464,191 463,580 466,005 466,534
Corporates 24,911 25,113 34,993 35,392
Equities 29,937 34,158 29,379 34,070
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894,941 900,379 882,678 891,907
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Held-to-maturity:
U.S.Treasury $ 0 $ 0 $ 500 $ 500
State & municipal 50,947 51,972 55,810 56,965
Mortgage-backed 3,042 3,074 3,502 3,529
Corporates 25 25 25 25
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54,014 55,071 59,837 61,019
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Total investment securities $ 948,955 $ 955,450 $ 942,515 $ 952,926
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LOANS AND LEASES
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Loans and leases, net of unearned income at March 31, 1999 and December 31,
1998, were as follows:
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MARCH 31, December 31,
1999 1998
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Commercial, financial, and agricultural $ 296,428 $ 301,385
Real estate - construction 242,307 256,451
Real estate - mortgage 1,806,428 1,821,485
Consumer 356,269 346,180
Leases 126,413 121,684
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Total loans and leases $2,827,845 $2,847,185
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IMPAIRED LOANS
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An analysis of impaired loans as of March 31, 1999 and December 31, 1998, is
presented as follows:
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MARCH 31, December 31,
1999 1998
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Impaired loans without a related reserve $ 7,125 $ 9,437
Impaired loans with a reserve 2,614 3,571
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Total impaired loans $ 9,739 $ 13,008
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Reserve for impaired loans $ 522 $ 591
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An analysis of impaired loans for the three months periods ended March 31, 1
and 1998 is presented as follows:
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1999 1998
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Average balance of impaired loans $ 10,103 $ 13,100
Interest income on impaired loans (cash-basis) 19 34
7
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHORT-TERM BORROWINGS
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Short-term borrowings at March 31, 1999 and December 31, 1998, were as follows:
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MARCH 31, December 31,
1999 1998
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Securities sold under repurchase agreements $ 87,908 $ 98,694
Federal Home Loan Bank borrowings 16,965 33,070
Treasury tax and loan notes 2,941 4,837
Federal funds purchased -- 1,000
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Total short-term borrowings $107,814 $137,601
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LONG-TERM DEBT
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Long-term debt at March 31, 1999 and December 31, 1998, was as follows:
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MARCH 31, December 31,
1999 1998
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Subsidiaries:
FHLB advances in varying maturities through July, 2011 $296,020 $280,054
Term note due July, 2003 10,000 10,000
Term loan note due September, 2014 518 512
Installment note due June, 1999 -- 10
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 $391,538 $375,576
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EARNINGS-PER-SHARE
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The following tables sets forth the calculation of basic and diluted earnings
per share for the periods ended March 31, 1999 and 1998:
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1999 1998
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Per Share Per Share
Income Shares Amount Income Shares Amount
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Basic Earnings per Share:
Income available to common stockholders $ 11,770 36,942 $ 0.32 $11,211 36,852 $0.30
Effect of Diluted Securities:
Incentive stock options outstanding 238 341
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Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $ 11,770 37,180 $ 0.32 $11,211 37,193 $0.30
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COMPLETED ACQUISITIONS
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On December 16, 1998, Susquehanna completed the acquisition of Cardinal
Bancorp, Inc. ("CBI"), a Pennsylvania bank holding company with $138 million in
assets and $114 million in deposits at the acquisition date. Susquehanna issued
2.048 shares of common stock to the shareholders of CBI for each of the 990,000
outstanding common shares of CBI. The transaction was accounted for under the
pooling-of-interests method of accounting; accordingly, the consolidated
financial statements have been restated to include the consolidated accounts of
CBI for all periods presented.
On January 4, 1999, Susquehanna completed the acquisition of First Capitol
Bank ("FCB"), a Pennsylvania commercial bank with $111 million in assets and $93
million in deposits at the acquisition date. Susquehanna issued 2.028 shares of
common stock to the shareholders of FCB for each of the 520,393 outstanding
common shares of FCB. The transaction was accounted for under the pooling-of-
interests method of accounting; accordingly, the consolidated financial
statements have been restated to include the consolidated accounts of FCB for
all periods presented.
Previously reported information has been restated as follows:
Three Months Ended March 31, 1998
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Susquehanna CBI FCB Susquehanna
As Reported As Reported As Reported Restated
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Net interest income $36,494 $1,471 $959 $38,924
Provision for loan and lease losses 1,233 --- 36 1,269
Other income 6,931 209 66 7,206
Other expense 26,827 1,069 752 28,648
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Income before taxes 15,365 611 237 16,213
Taxes 4,761 180 61 5,002
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Net income $10,604 $431 $176 $11,211
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Earnings per share: Basic $0.31 $0.30
Diluted $0.31 $0.30
Average shares outstanding: Basic 33,833 2,027 992 36,852
Diluted 34,043 2,158 992 37,193
8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
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CONDITION
---------
Management's discussion and analysis of the significant changes in the
consolidated results of operations, financial condition, and cash flows of
Susquehanna Bancshares, Inc. ("Susquehanna") is set forth below for the periods
indicated. All per share data has been adjusted to reflect the three-for-two
stock split paid July 1, 1998.
Certain statements in this document may be considered to be "forward-
looking statements" as that term is defined in the U.S. Private Securities
Litigation Reform Act of 1995. These statements include the words "expect",
"estimate", "project", "anticipate", "should", "intend", "probability", "risk",
"target", "objective" and similar expressions or variations on such expressions.
In particular, this document includes forward-looking statements relating, but
not limited to, Susquehanna's potential exposures to Year 2000 compliance issues
and various types of market risks, such as interest rate risk and credit risk.
These statements are subject to certain risks and uncertainties. For example,
certain market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. By their
nature, certain market risk disclosures are only estimates and could be
materially different from what actually occurs in the future. As a result,
actual income gains and losses could materially differ from those that have been
estimated. Other factors that could cause actual results to differ materially
from those estimated by the forward-looking statements contained in this
document include, but are not limited to: general economic conditions in market
areas which Susquehanna has significant business activities or investments; the
monetary and interest rate policies of the Board of Governors of the Federal
Reserve System; inflation; deflation; unanticipated turbulence in interest
rates; changes in laws, regulations and taxes; changes in competition and
pricing environments; natural disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructurings;
technological changes; changes in consumer spending and saving habits; economic
and social turbulence which might result from the Y2K or millennium problem; and
the success of Susquehanna in managing the risks involved in the foregoing.
On December 16, 1998, Susquehanna completed the acquisition of Cardinal
Bancorp, Inc. ("Cardinal"), a Pennsylvania bank holding company. On January 4,
1999, Susquehanna completed the acquisition of First Capitol Bank, ("First
Capitol"), a Pennsylvania state-chartered bank. Since these transactions were
accounted for under the pooling-of-interests method of accounting, all financial
results reported include Cardinal and First Capitol.
EARNINGS SUMMARY
----------------
Susquehanna's net income for the first quarter of 1999 was $11.8 million, a
5% increase over the net income of $11.2 million reported in the first quarter
of 1998. Increased net interest income and fee income and a modest decline in
other expenses enhanced Susquehanna's earnings performance.
9
Diluted earnings per share ("EPS") were $0.32 per share for the first
quarter of 1999 compared with $0.30 per share in the first quarter of 1998.
Return on average assets ("ROA") and return on average equity ("ROE") decreased
from 1.17% and 12.07%, respectively, in the first quarter of 1998 to 1.16% and
11.89%, respectively, in the first quarter of 1998. For the first quarter of
1999, tangible EPS, ROA and ROE were $0.34, 1.25%, and 13.85%, respectively.
Total assets at March 31, 1999 of $4.1 billion were $140 million higher
than one year ago. Loans totaled $2.8 billion at March 31, 1999, compared to
$2.7 billion at March 31, 1998, and deposits were $3.2 billion at March 31,
1999, compared to $3.1 billion at March 31, 1998. Equity capital was $406
million at March 31, 1999, or $10.99 per share, compared to $382 million, or
$10.36 per share, at March 31, 1998.
NET INTEREST INCOME
-------------------
The major source of operating revenues is net interest income, which rose
to a level of $39.3 million in the first quarter of 1999 compared to $38.9
million for the same period in 1998. Net interest income is the income which
remains after deducting, from total income generated by earning assets, the
interest expense attributable to the acquisition of the funds required
supporting earning assets. Income from earning assets includes income from
loans, income from investment securities and income from short-term investments.
The amount of interest income is dependent upon many factors including the
volume of earning assets, the general level of interest rates, the dynamics of
the change in interest rates, and levels of non-performing assets. The cost of
funds varies with the amount of funds necessary to support earning assets, the
rates paid to attract and hold deposits, rates paid on borrowed funds, and the
levels of non-interest bearing demand deposits and equity capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses and yields earned or paid on the assets and liabilities of Susquehanna.
For purposes of calculating taxable equivalent interest income, tax-exempt
interest has been adjusted using a marginal tax rate of 35% in order to equate
the yield to that of taxable interest rates. Net interest income as a percentage
of net interest income and other income was 84% for the quarters ended March 31,
1999 and 1998.
Net interest income increased $0.4 million during the first quarter of 1999
compared to the first quarter of 1998. This improvement was due to an increase
in average earning assets of $212 million offset by a decline in the net
interest margin from 4.49% in 1998 to 4.28% in 1999. This decline in margin was
due to a 50 basis point drop in earning asset yield which was partially offset
by a 35 basis point drop in the cost of funds. The drop in earning asset yield
was greater because of asset prepayments, the difference in the timing of
maturities and repricing, and market forces impacting product pricing. However,
the net interest margin for the three months ended March 31 declined to 4.28% in
1999 from 4.49% in 1998.
OTHER INCOME
------------
Non-interest income increased $0.1 million, or 1%, from $7.2 million in the
first quarter of 1998 to $7.3 million in the first quarter of 1999. This
increase resulted primarily from an increase in deposit fees of $0.3 million.
Other income as a percentage of net interest income and other income was
16% for the quarters ended March 31, 1999 and 1998, respectively.
10
OTHER EXPENSES
--------------
Total non-interest expenses decreased $0.5 million, or 2%, from $28.6
million in the first quarter of 1998 to $28.1 million in the first quarter of
1999 due primarily to a reduction in salaries and benefits expense. During the
first quarter of 1999, Susquehanna incurred charges of $0.8 million related to
Year 2000 systems remediation compared with $0.1 million in the first quarter of
1998. Total expense for Year 2000 remediation is $3.5 million at March 31, 1999.
Susquehanna estimates that the total project expenses it will incur regarding
Year 2000 remediation during 1998 and 1999 will total $4.0 million. For a
further discussion on these matters, please see the following section entitled
"Impact of the Year 2000 Issue".
INCOME TAXES
------------
Susquehanna's effective tax rate increased slightly to 31.25% for the first
three months of 1999 from 30.85% for the first three months of 1998.
RISK ASSETS
-----------
Table 2 shows a decrease in nonperforming assets from $26.4 million at
December 31, 1998 to $24.0 million at March 31, 1999, while nonperforming assets
to period-end loans and OREO declined from 0.92% at December 31, 1998 to 0.85%
at March 31, 1999. Loan loss reserve to non-performing loans at March 31, 1999
was 194% compared with 167% at December 31, 1998.
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
-------------------------------------------------
As illustrated in Table 3, the provision increased to $1.4 million in the
first quarter of 1999 compared with $1.3 million in the first quarter of 1998.
Net charge-offs decreased $0.5 million for the same periods.
The allowance at March 31, 1999 was 1.29% of period-end loans and leases
compared to 1.34% at March 31, 1998.
CAPITAL RESOURCES
-----------------
Capital elements for Susquehanna are segmented into two tiers. Tier I
capital represents shareholders' equity reduced by most intangible assets, while
total capital includes certain allowable long-term debt and the general portion
of the allowance for loan and lease losses limited to 1.25% of risk-adjusted
assets. The minimum Tier I capital ratio is 4%; Susquehanna's ratio at March
31, 1999 was 12.63%. The minimum total capital (Tier II) ratio is 8%;
Susquehanna's ratio at March 31, 1999 was 15.60%. The minimum leverage ratio is
4%; Susquehanna's leverage ratio at March 31, 1999 was 9.01%.
MARKET RISKS
------------
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk and commodity price risk. Due to the nature of its operations,
only interest rate and liquidity risks are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity -- the ability to meet the
cash requirements of its customers and other financial commitments -- is a
fundamental aspect of Susquehanna's asset/liability
11
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, 1999,
Susquehanna's subsidiary banks and its savings bank have unused lines of credit
available to them from the Federal Home Loan Bank totaling $372 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 $98 million at March 31, 1999. These maturing investments
represent 10% of total investment securities. Short-term investments amounted to
$57 million and represent additional sources of liquidity. Consequently,
Susquehanna's exposure to liquidity risk is not considered significant.
Closely related to the management of liquidity is the management of
interest rate risk, which focuses on maintaining stability in the net interest
margin, an important factor in earnings growth. Interest rate sensitivity is
the matching or mismatching of the maturity and rate structure of the interest-
bearing assets and liabilities. Management's objective is to control the
difference in the timing of the rate changes for these assets and liabilities to
preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors
to maximize earnings in an environment of changing interest rates. However,
there is a lag in maintaining the desired matching because the repricing of
products does occur at varying time intervals.
Susquehanna employs a variety of methods to monitor interest rate risk. By
dividing the assets and liabilities into three groups -- fixed rate, floating
rate and those which reprice only at management's discretion -- strategies are
developed which are designed to minimize exposure to interest rate fluctuations.
Management also utilizes gap and interest rate shock analyses to evaluate
interest rate sensitivity.
Susquehanna's policy, as approved by its Board of Directors, is for
Susquehanna to experience no more than a 15% decline in net interest income and
no more than a 25% decline in economic equity for a 200 basis point shock
(immediate change) in interest rates. The assumptions used for the interest rate
shock analysis are reviewed and updated on a periodic basis. Based upon the most
recent interest rate shock analysis, Susquehanna was well within the policy
limits.
IMPACT OF THE YEAR 2000 ISSUE
-----------------------------
The following section contains forward-looking statements, which involve
risks and uncertainties. Susquehanna's actual impact from the Year 2000 issue
could materially differ from that which is anticipated in these forward-looking
statements as a result of certain factors identified below.
The "Year 2000 Issue" is the result of computer programs having been
written using two digits rather than four to define the applicable year. Any of
Susquehanna's computer systems that have date-sensitive software or date
sensitive hardware may recognize a date using "00" as the Year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements, or engage in similar normal business
activities.
Based on an ongoing assessment, Susquehanna has determined that it will be
required to modify or replace portions of its software and hardware so that its
computer systems will properly utilize dates beyond December 31, 1999.
Susquehanna presently believes that as a
12
result of modifications to existing software and hardware and conversions to new
software and hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material adverse impact on the
operations of Susquehanna. Susquehanna is currently on schedule.
Susquehanna's Year 2000 Action Plan has been categorized into five phases:
Awareness, Assessment, Renovation (testing), Validation and Implementation. The
initial focus within those phases has been on systems and vendors that are
related to mission critical business processes. Mission critical processes are
defined as those areas of the business whose continued operations are required
in order to provide basic banking services. All other business processes were
categorized as either significant or ancillary and have also been subject to Y2K
remediation programs. As of March 31, 1999, the Awareness and Assessment phases
for all business processes (mission critical, significant and ancillary) were
completed. The Renovation and Validation phases for all business processes
(mission critical, significant and ancillary) were substantially completed. The
Implementation phase for all business processes (mission critical, significant
and ancillary) is underway and is expected to be completed by the end of the
second quarter of 1999.
Susquehanna has initiated formal communications with all of its vendors and
large commercial customers to determine the extent to which Susquehanna is
vulnerable to those third parties' failure to remedy their own Year 2000 Issue.
Susquehanna's estimated Year 2000 project costs include the costs and time
associated with the impact of a third party's Year 2000 Issue, and are based on
presently available information.
Vendors of services to Susquehanna were evaluated for Y2K compliancy. As of
March 31, 1999, the evaluation of vendors has substantially been completed. All
vendors evaluated have been determined to be Y2K compliant or alternative
vendors have been designated. Y2K risk assessments of borrowers and depositors
have been conducted. Identified risks are deemed to be nominal.
Susquehanna believes that it will be Year 2000 ready before December 31,
1999 and testing to date has not revealed a need for business remediation
contingency plans for core or other internal processing systems. Exposure to
counter-parties and other directly related external vendors was deemed limited
and required only nominal contingency planning, such as the designation of an
alternative vendor. The greatest risk is believed to be through external
parties that are not within Susquehanna's control. A significant electrical
failure, for example, may require the company to limit or even eliminate
services until power is restored. Backup records will be produced immediately
prior to January 1, 2000 to assure an orderly resumption of business if major
disruptions occur. Further, business resumption contingency planning is being
done throughout the company in order to assure rapid and disciplined approaches
to handling any unexpected occurrence.
Included within the scope of Susquehanna's Year 2000 Action Plan is the
assessment of non-information technology systems with embedded chips.
Susquehanna's assessment process generally includes inventorying such equipment
and making a determination as to the Year 2000 readiness status of these items.
This assessment has been completed. No Year 2000 modifications or replacements
of a material nature have been identified for non-information technology
systems.
13
Susquehanna is utilizing both internal and external resources to reprogram,
or replace, and test its software and hardware for Year 2000 modifications.
Concurrent with the Year 2000 project, Susquehanna is also converting all its
major data processing systems, both hardware and software, to current Year 2000
compliant technology. As of March 31, 1999, Susquehanna has completed the
systems conversion projects for all critical systems. The total cost of the
Year 2000 and systems conversion projects is estimated at $12 million. Of the
total projects' cost, approximately $8 million is attributable to the purchase
of new software and hardware, which is capitalized. The remaining $4 million is
expensed as incurred during 1998 and 1999. These costs are not expected to have
a material effect on the results of operations of Susquehanna.
The costs of the projects and the date on which Susquehanna plans to
complete both the Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, new initiatives, if any, undertaken to assure
compliancy, and information regarding externalities presently unknown.
As a bank holding company, Susquehanna and its subsidiaries are subject to
the regulation and oversight of various banking regulators. Their oversight
includes the provision of specific timetables, programs and guidance regarding
Year 2000 issues. Regulatory examination of the holding company and its
subsidiaries' Year 2000 program are conducted on a quarterly basis, and reports
are submitted by Susquehanna to the regulators on a periodic basis.
14
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest rates and interest differential - taxable equivalent basis
-------------------------------------------------------------------------------
For the Three Month Period Ended
March 31, 1999
-----------------------------------------------------------------------------------------------------------------
Average
(Dollars in thousands) Balance Interest Rate (%)
------------------------------------------------------------------------------------------------------------------
ASSETS
Short - term investments $ 69,453 $ 804 4.69
Investment securities:
Taxable 817,529 12,418 6.16
Tax - advantaged 124,487 2,208 7.19
------------------------------------------------------------------------------------------------------------------
Total investment securities 942,016 14,626 6.30
------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,775,324 58,082 8.49
Tax - advantaged 49,980 1,109 9.00
------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,825,304 59,191 8.50
------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,836,773 $ 74,621 7.89
================================
Allowance for loan and lease losses (36,460)
Other non - earning assets 319,518
--------------------------------------------------------------------
Total assets $4,119,831
====================================================================
LIABILITIES
Deposits:
Interest - bearing demand $ 987,929 $ 7,200 2.96
Savings 446,775 2,154 1.96
Time 1,332,593 17,595 5.35
Short - term borrowings 117,240 1,247 4.31
Long - term debt 389,352 5,935 6.18
------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,273,889 $ 34,131 4.23
================================
Demand deposits 403,578
Other liabilities 40,896
--------------------------------------------------------------------
Total liabilities $3,718,363
--------------------------------------------------------------------
EQUITY 401,468
--------------------------------------------------------------------
Total liabilities & stockholders' equity $4,119,831
====================================================================
Net interest income / yield on
average earning assets $ 40,490 4.28
===================================
For the Three Month Period Ended
March 31, 1998
----------------------------------------------------------------------------------------------------------------
Average
(Dollars in thousands) Balance Interest Rate (%)
---------------------------------------------------------------------------------------------------------------------
ASSETS
Short - term investments $ 95,565 $ 1,306 5.54
Investment securities:
Taxable 706,292 11,456 6.58
Tax - advantaged 114,841 2,054 7.25
---------------------------------------------------------------------------------------------------------------------
Total investment securities 821,133 13,510 6.67
---------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,652,586 58,920 9.01
Tax - advantaged 55,913 1,300 9.43
---------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,708,499 60,220 9.02
---------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,625,197 $ 75,036 8.39
===============================
Allowance for loan and lease losses (36,377)
Other non - earning assets 296,669
-------------------------------------------------------
Total assets $3,885,489
======================================================== ==========
LIABILITIES
Deposits:
Interest - bearing demand $ 866,313 $ 7,071 3.31
Savings 445,494 2,733 2.49
Time 1,372,796 18,912 5.59
Short - term borrowings 97,969 1,257 5.20
Long - term debt 310,395 4,964 6.49
---------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,092,967 $ 34,937 4.58
===============================
Demand deposits 370,090
Other liabilities 45,694
-------------------------------------------------------
Total liabilities $3,508,751
-------------------------------------------------------
EQUITY 376,738
-------------------------------------------------------
Total liabilities & stockholders' equity $3,885,489
======================================================= ==========
Net interest income / yield on
average earning assets $ 40,099 4.49
===============================
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) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $17,974 $ 20,412 $24,268
Restructured accrual loans 838 1,201 ---
Other real estate owned 5,168 4,745 3,421
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $23,980 $ 26,358 $27,689
===============================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 0.85% 0.92% 1.02%
Loans and leases contractually
past due 90 days and still accruing $10,475 $ 10,531 $ 5,307
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $ 36,157 $ 36,481
Additions charged to operating expenses 1,424 1,269
- -------------------------------------------------------------------------------------------------------------------------------
37,581 37,750
- -------------------------------------------------------------------------------------------------------------------------------
Charge-offs (1,372) (1,859)
Recoveries 351 382
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,021) (1,477)
- -------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $ 36,560 $ 36,273
===============================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.15% 0.22%
Allowance as a percent of period-end loans and leases 1.29% 1.34%
Average loans and leases $2,825,304 $2,708,499
Period-end loans and leases 2,827,845 2,708,763
16
PART II OTHER INFORMATION
ITEM 6 EXHIBIT AND REPORTS ON FORM 8-K
-------------------------------
a). Exhibits
--------
3.1 Registrant's Articles of Incorporation.
3.2 Registrant's By-laws.
3.3 Amendment of June 1, 1998 to Registrant's Articles of
Incorporation.
27.1 Financial Data Schedule.
b). Report on Form 8-K. On January 8, 1999, Registrant filed a report on
------------------
Form 8-K regarding the completion of Registrant's acquisition of First Capitol
Bank, York, PA, effective January 4, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
May 10, 1999 /s/ Robert S. Bolinger
----------------------
Robert S. Bolinger
President and Chief Executive Officer
May 10, 1999 /s/ Drew K. Hostetter
---------------------
Drew K. Hostetter
Vice President, Treasurer,
and Chief Financial Officer
17
Exhibit Index
-------------
Exhibit Description Method
- ------- ----------- ------
3.1 Articles of Incorporation. Previously filed.
Incorporated by reference to
Attachment E in the
Registrant's Joint Proxy
Statement/Prospectus on
Registrant's Registration
Statement on Form S-4,
Registration No. 33-76319.
3.2 By-laws. Previously filed.
Incorporated by reference to
Exhibit (3)(b) of
Registrant's Annual Report
on Form 10-K for the fiscal
year ended December 31,
1994.
3.3 Amendment of June 1, 1998 Previously filed.
to Registrant's Articles Incorporated by reference to
of Incorporation. Exhibit 3.3 of Registrant's
Quarterly Report on Form 10-
Q for the quarterly period
ended June 30, 1998.
27.1 Financial Data Schedule. Submitted electronically to
the Securities and Exchange
Commission for information
only and not filed.
18