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 September 30, 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 October 31, 1999 the Registrant had 36,977,488 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 September 30, 1999 and 1998
and December 31, 1998 3
Consolidated Statements of Income - for the three months ended
and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flow - for the nine months
periods ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 10-17
PART II OTHER INFORMATION 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I. FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
--------------------
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands) September 30, December 31, September 30,
ASSETS 1999 1998 1998
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Cash and due from banks $104,787 $113,210 $85,378
Short-term investments 32,815 83,063 49,217
Investment securities available for sale 881,064 891,907 867,618
Investment securities held to maturity 40,069 59,837 67,538
(Fair values of $40,633; $61,019; and $68,695 respectively)
Loans and leases, net of unearned income 2,957,119 2,847,185 2,793,908
Less: Allowance for loan and lease losses 36,465 36,157 36,451
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Net loans and leases 2,920,654 2,811,028 2,757,457
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Premises and equipment (net) 54,894 55,566 54,113
Accrued income receivable 22,771 22,774 23,293
Other assets 197,836 138,641 127,471
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Total assets $4,254,890 $4,176,026 $4,032,085
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LIABILITIES & STOCKHOLDERS' EQUITY
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Deposits:
Demand $422,561 $433,133 $383,883
Interest-bearing demand 940,250 997,718 895,410
Savings 435,808 448,865 445,538
Time 1,171,181 1,166,002 1,191,773
Time of $100 or more 183,567 171,161 164,079
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Total deposits 3,153,367 3,216,879 3,080,683
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Short-term borrowings 240,583 137,601 137,847
Long-term debt 403,825 375,576 374,274
Accrued interest, taxes, and expenses payable 31,473 31,522 33,042
Other liabilities 16,134 12,367 7,885
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Total liabilities 3,845,382 3,773,945 3,633,731
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Stockholders' equity:
Common stock
Authorized: 100,000,000 shares, $2.00 par value
Issued: 36,990,100; 36,967,572; and 36,938,897, respectively 73,980 73,935 73,907
Surplus 61,800 61,882 61,554
Retained earnings 283,265 261,043 255,443
Accumulated other comprehensive income, net of taxes of $(5,034);
$3,225 and $4,381 respectively (9,350) 6,004 8,108
Less: Treasury stock, (12,612; 65,050; and 64,471 common
shares at cost, respectively) 187 783 658
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Total stockholders' equity 409,508 402,081 398,354
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Total liabilities and stockholders' equity $4,254,890 $4,176,026 $4,032,085
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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(In thousands, except per share) 1999 1998 1999 1998
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INTEREST INCOME
Interest and fees on loans and leases $60,813 $61,303 $179,553 $181,706
Interest on investment securities: Taxable 12,582 12,401 37,358 36,173
Tax-exempt 1,261 1,450 4,056 4,224
Interest on short-term investments 601 743 1,927 3,304
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Total interest income 75,257 75,897 222,894 225,407
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 6,863 7,298 20,856 21,589
Savings 2,033 2,560 6,228 7,945
Time 17,459 19,070 52,126 56,964
Interest on short-term borrowings 2,481 1,531 5,384 4,144
Interest on long-term debt 6,142 5,750 18,023 16,432
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Total interest expense 34,978 36,209 102,617 107,074
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Net interest income 40,279 39,688 120,277 118,333
Provision for loan and lease losses 1,496 1,375 4,214 3,906
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Net interest income after provision for loan and lease 38,783 38,313 116,063 114,427
losses
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OTHER INCOME
Service charges on deposit accounts 2,612 2,265 7,278 6,327
Other service charges, commissions, fees 1,179 846 3,249 3,128
Income from fiduciary-related activities 1,296 981 2,972 2,834
Gain on sale of mortgages 779 1,218 2,779 3,643
Other operating income 7,047 2,550 11,787 7,465
Investment security gains 858 30 958 91
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Total other income 13,771 7,890 29,023 23,488
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OTHER EXPENSES
Salaries and employee benefits 14,870 15,059 42,657 44,635
Net occupancy expense 2,339 1,933 6,680 6,107
Furniture and equipment expense 2,011 2,137 5,806 5,955
Amortization of intangible assets 751 970 2,725 3,446
Other operating expenses 11,018 9,126 31,142 27,514
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Total other expenses 30,989 29,225 89,010 87,657
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Income before income taxes 21,565 16,978 56,076 50,258
Provision for income taxes 6,711 5,400 17,237 15,982
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Net income $14,854 $11,578 $38,839 $34,276
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Per share information:
Basic earnings $0.40 $0.31 $1.05 $0.93
Diluted earnings $0.40 $0.31 $1.05 $0.92
Cash dividends $0.15 $0.14 $0.45 $0.42
Average shares outstanding: Basic 36,974 36,888 36,953 36,868
Diluted 37,134 37,177 37,140 37,190
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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)
Nine months ended September 30 1999 1998
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OPERATING ACTIVITIES:
Net income $38,839 $34,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 8,826 9,388
Provision for loan and lease losses 4,214 3,906
Gain on sale of branch offices (3,352) 0
Gain on securities transactions (958) (91)
Gain on sale of loans (2,779) (3,643)
Gain on sale of other real estate owned (27) (15)
Mortgage loans originated for resale (148,012) (211,155)
Sale of mortgage loans originated for resale 161,226 208,109
Decrease in accrued interest receivable 3 6
Decrease in accrued interest payable (1,927) (329)
Decrease in accrued expenses and taxes payable 1,878 1,132
Other, net 8,546 (4,898)
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Net cash provided by operating activities 66,477 36,686
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INVESTING ACTIVITIES:
Proceeds from the sale of available-for-sale securities 14,999 57,835
Proceeds from the maturity of investment securities 101,355 234,480
Purchase of available-for-sale securities (109,507) (498,293)
Purchase of held-to-maturity securities 0 0
Net increase in loans and leases (129,523) (82,246)
Capital expenditures (4,133) (6,625)
Net cash received on sale of branch deposits (22,381) 0
Purchase of insurance products (50,000) 0
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Net cash used for investing activities (199,190) (294,849)
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FINANCING ACTIVITIES:
Net increase/(decrease) in deposits (41,131) 39,211
Net increase in short-term borrowings 102,982 21,087
Proceeds from issuance of long-term debt 31,199 225,000
Repayment of long-term debt (2,950) (37,147)
Proceeds from issuance of common stock 846 1,212
Cash paid for treasury stock (287) (440)
Cash paid for fractional shares 0 (38)
Dividends paid (16,617) (14,845)
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Net cash provided from financing activities 74,042 234,040
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Net decrease in cash and cash equivalents (58,671) (24,123)
Cash and cash equivalents at January 1 196,273 158,718
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Cash and cash equivalents at September 30 $137,602 $134,595
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Cash and cash equivalents:
Cash and due from banks $104,787 $85,378
Short-term investments 32,815 49,217
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Cash and cash equivalents at September 30 $137,602 $134,595
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Interest paid on deposits, short-term borrowings, and long-term debt was
$104,544 in 1999, and $106,373 in 1998. Income taxes paid were $10,695 in 1999,
and $15,307 in 1998. Amounts transferred to other real estate owned were $5,247
in 1999, and $5,976 in 1998.
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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COMMON RETAINED
Nine Month Periods Ended September 30, STOCK SURPLUS EARNINGS
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Balance - January 1, 1998 $49,128 $85,196 $236,012
Comprehensive income:
Net income 34,276
Change in unrealized gain/(loss) on securities, net of
taxes of $1,925 and reclassification adjustment of $58
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Total comprehensive income 34,276
Common stock issued under
employee benefit plans 156 1,019
Effect of three-for-two stock split 24,623 (24,661)
Purchase of treasury stock
Cash dividends paid:
By pooled entities (630)
Per common share of $0.42 (14,215)
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Balance - September 30, 1998 $73,907 $61,554 $255,443
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Balance - January 1, 1999 $73,935 $61,882 $261,043
Comprehensive income:
Net income 38,839
Change in unrealized gain/(loss) on securities, net of
taxes of ($7,909) and reclassification adjustment of $958
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Total comprehensive income 38,839
Common stock issued under
employee benefit plans 45 (82)
Purchase/conversion of treasury stock
Cash dividends paid:
Per common share of $0.45 (16,617)
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Balance - September 30, 1999 $73,980 $61,800 $283,265
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ACCUMULATED
OTHER
COMPREHENSIVE TREASURY TOTAL
Nine Month Periods Ended September 30, INCOME STOCK EQUITY
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Balance - January 1, 1998 $3,825 ($255) $373,906
Comprehensive income:
Net income 34,276
Change in unrealized gain/(loss) on securities, net of
taxes of $1,925 and reclassification adjustment of $58 4,283 4,283
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Total comprehensive income 4,283 38,559
Common stock issued under
employee benefit plans 37 1,212
Effect of three-for-two stock split (38)
Purchase of treasury stock (440) (440)
Cash dividends paid:
By pooled entities (630)
Per common share of $0.42 (14,215)
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Balance - September 30, 1998 $8,108 ($658) $398,354
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Balance - January 1, 1999 $6,004 ($783) $402,081
Comprehensive income:
Net income 38,839
Change in unrealized gain/(loss) on securities, net of
taxes of ($7,909) and reclassification adjustment of $958 (15,354) (15,354)
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Total comprehensive income (15,354) 23,485
Common stock issued under
employee benefit plans 883 846
Purchase/conversion of treasury stock (287) (287)
Cash dividends paid:
Per common share of $0.45 (16,617)
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Balance - September 30, 1999 ($9,350) ($187) $409,508
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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 September 30, 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
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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September 30, 1999 December 31, 1998
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(In thousands) Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S.Treasury $28,893 $29,035 $67,043 $67,954
U.S. Government agencies 326,357 321,761 214,841 215,967
State & municipal 70,240 70,209 70,417 71,990
Mortgage-backed 420,141 407,879 466,005 466,534
Corporates 14,338 14,306 34,993 35,392
Equities 35,129 37,874 29,379 34,070
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895,098 881,064 882,678 891,907
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Held-to-maturity:
U.S.Treasury $0 $0 $500 $500
State & municipal 39,041 39,581 55,810 56,965
Mortgage-backed 1,030 1,027 3,502 3,529
Corporates 25 25 25 25
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40,069 40,633 59,837 61,019
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Total investment securities $935,167 $921,697 $942,515 $952,926
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LOANS AND LEASES
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Loans and leases, net of unearned income at September 30, 1999, and December 31, 1998, were as follows:
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September 30, December 31,
(In thousands) 1999 1998
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Commercial, financial, and agricultural $313,501 $301,385
Real estate - construction 250,687 256,451
Real estate - mortgage 1,832,256 1,821,485
Consumer 401,801 346,180
Leases 158,874 121,684
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Total loans and leases $2,957,119 $2,847,185
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IMPAIRED LOANS
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An analysis of impaired loans as of September 30, 1999, and December 31, 1998, is presented as follows:
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September 30, December 31,
(Dollars in thousands) 1999 1998
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Impaired loans without a related reserve $11,835 $9,437
Impaired loans with a reserve 730 3,571
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Total impaired loans $12,565 $13,008
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Reserve for impaired loans $182 $591
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An analysis of impaired loans for the three and nine months periods ended September 30, 1999 and 1998 is presented as follows:
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Three Months Ended Nine Months Ended
September 30, September 30,
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1999 1998 1999 1998
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Average balance of impaired loans $13,867 $11,632 $10,742 $12,239
Interest income on impaired loans (cash-basis) 42 90 94 203
7
Susquehanna Bancshares, Inc. and Subsidiaries
SHORT-TERM BORROWINGS
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Short-term borrowings at September 30, 1999, and December 31, 1998, were as follows:
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September 30, December 31,
(In thousands) 1999 1998
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Securities sold under repurchase agreements $141,645 $98,694
Federal Home Loan Bank borrowings 82,100 33,070
Treasury tax and loan notes 10,338 4,837
Federal funds purchased 6,500 1,000
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Total short-term borrowings $240,583 $137,601
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LONG-TERM DEBT
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Long-term debt at September 30, 1999 and December 31, 1998, was as follows:
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September 30, December 31,
1999 1998
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Subsidiaries:
FHLB advances in varying maturities through July, 2011 $307,773 $280,054
Term note due July, 2003 10,000 10,000
Term loan notes due June, 2019 1,052 512
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 $403,825 $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 September 30, 1999,
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and 1998:
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For the three months ended September 30,
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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 $14,854 36,974 $0.40 $11,578 36,888 $0.31
Effect of Diluted Securities:
Incentive stock options outstanding 160 289
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Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $14,854 37,134 $0.40 $11,578 37,177 $0.31
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For the nine months ended September 30,
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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 $38,839 36,953 $1.05 $34,276 36,868 $0.93
Effect of Diluted Securities:
Stock options outstanding 187 322
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Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $38,839 37,140 $1.05 $34,276 37,190 $0.92
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8
Susquehanna Bancshares, Inc. and Subsidiaries
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 September 30, 1998
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Susquehanna CBI FCB Susquehanna
As Reported As Reported As Reported Restated
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Net interest income $37,150 $1,556 $982 $39,688
Provision for loan and lease losses 1,375 -- -- 1,375
Other income 7,671 156 63 7,890
Other expense 27,341 1,022 862 29,225
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Income before taxes 16,105 690 183 16,978
Taxes 5,155 206 39 5,400
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Net income $10,950 $484 $144 $11,578
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Earnings per share: Basic $0.32 $0.24 $0.14 $0.31
Diluted $0.32 $0.23 $0.14 $0.31
Average shares outstanding: Basic 33,835 2,027 1,026 36,888
Diluted 34,001 2,150 1,026 37,177
Nine Months Ended September 30, 1998
Susquehanna CBI FCB Susquehanna
As Reported As Reported As Reported Restated
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Net interest income $110,907 $4,481 $2,945 $118,333
Provision for loan and lease losses 3,860 -- 46 3,906
Other income 22,703 587 198 23,488
Other expense 82,074 3,110 2,473 87,657
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Income before taxes 47,676 1,958 624 50,258
Taxes 15,256 579 147 15,982
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Net income $32,420 $1,379 $477 $34,276
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Earnings per share: Basic $0.96 $0.68 $0.47 $0.93
Diluted $0.95 $0.64 $0.47 $0.92
Average shares outstanding: Basic 33,835 2,027 1,006 36,868
Diluted 34,029 2,155 1,006 37,190
9
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF
------------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
Management's discussion and analysis of the significant changes in the
consolidated results of operations, financial condition, and cash flows of
Susquehanna Bancshares, Inc. ("Susquehanna") is set forth below for the periods
indicated.
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 third quarter of 1999 was $14.9
million, a 28% increase over the net income of $11.6 million reported in the
third quarter of 1998. A pre-tax gain of $3.3 million from the sale of two
branch offices was realized during the third quarter of 1999. Excluding the gain
on sale of branches, net income for the third quarter of 1999 would have
increased by 10% over the third quarter of 1998.
Diluted earnings per share ("EPS") were $0.40 per share for the third
quarter of 1999 compared with $0.31 per share in the third quarter of 1998.
Return on average assets ("ROA") and return on average equity ("ROE") were 1.40%
and 14.61%, respectively, in the third quarter of 1999 compared with 1.14% and
11.74%, respectively, in the third quarter of 1998. For the
10
third quarter of 1999, tangible EPS, ROA and ROE were $0.42, 1.48%, and 16.66%,
respectively.
Net income for the nine months ended September 30, 1999 was $38.8
million, a 13% increase over the net income of $34.3 million reported for the
same period of 1998. Excluding the gain on sale of branches, net income for the
first nine months of 1999 would have increased by 7% over the same period of
1998. The drop in the cost of interest-bearing liabilities and steady loan
growth has improved the net interest income during the first nine months of
1999. The cost on total interest-bearing liabilities dropped from 4.54% during
the first nine months of 1998 to 4.16% during the same period of 1999. Excluding
the gain on sale of branch offices, non-interest income increased by $2.2
million, or 9%, over 1998.
Diluted earnings per share ("EPS") were $1.05 per share for the first
nine months of 1999 compared with $0.92 per share during the same period of
1998. Return on average assets ("ROA") and return on average equity ("ROE") were
1.25% and 12.88%, respectively, for the nine months ended September 30, 1999
compared with 1.15% and 11.92%, respectively, for the nine months ended
September 30, 1998. For the first nine months of 1999, tangible EPS, ROA and ROE
were $1.11, 1.33%, and 14.85%, respectively.
Total assets at September 30, 1999 of $4.3 billion were $223 million
higher than one year ago. Loans totaled $3.0 billion at September 30, 1999,
compared to $2.8 billion at September 30, 1998, and deposits were $3.2 billion
at September 30, 1999, compared to $3.1 billion at September 30, 1998. Equity
capital was $410 million at September 30, 1999, or $11.07 per share, compared to
$398 million, or $10.79 per share, at September 30, 1998.
Net Interest Income
-------------------
The major source of operating revenues is net interest income, which
rose to a level of $40.3 million in the third quarter of 1999 compared to $39.7
million for the same period in 1998. For the nine months ended September 30,
1999, net interest income was $120.3 million compared with $118.3 million for
the same period of 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 requiring supporting earning
assets. Income from earning assets includes income from loans, investment
securities and 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 75% and 83% for the
quarters ended September 30, 1999 and 1998, respectively. Net interest income as
a percentage of net interest income and other income was 81% and 83% for the
nine months ended September 30, 1999 and 1998, respectively.
Net interest income as of third quarter 1999 increased $0.6 million
compared to the third quarter of 1998. This improvement was due to an increase
in average earning assets of $139
11
million offset by a decline in the net interest margin from 4.33% in the third
quarter of 1998 to 4.22% in the third quarter of 1999. This decline in margin
was due to a 37 basis point drop in earning asset yield that was partially
offset by a 36 basis point drop in the cost of funds.
Net interest income for the nine months ended September 30, 1999
increased $1.9 million over the same period of 1998. An increase in average
earning assets of $151 million was offset by a decline in the net interest
margin from 4.40% in the first nine months of 1998 to 4.29% during the
comparable period of 1999. This decline in margin was due to a 42 basis point
drop in yield on earning assets, partially offset by a 38 basis point drop in
the cost of funds. This decline, as well as the decline for the quarter noted
above, was primarily due to the respective interest rate environments.
Other Income
------------
Non-interest income increased $5.9 million, or 75%, from $7.9 million
in the third quarter of 1998 to $13.8 million in the third quarter of 1999.
Deposit fees and other commissions and fees each increased $0.3 million over the
third quarter of 1998. Increased deposit volumes and improved pricing
contributed to these increases. Trust income increased $0.3 million in the third
quarter of 1999 over the third quarter of 1998. During the third quarter of
1999, Susquehanna Bank, a wholly-owned subsidiary of Susquehanna, sold its two
branch offices in Elkton, MD. At the time of the sale, these branches had
approximately $23 million in deposits and the transaction resulted in a gain of
$3.3 million recorded as other income for Susquehanna.
For the first nine months of 1999, non-interest income of $29.0 million
was $5.5 million higher than the same period of 1998. In addition to the gain on
the sale of the two branch offices, other factors that positively influenced the
results were: deposit fees up $1.0 million over the prior year; security gains
increased by $0.9 million; and income from bank-owned life insurance was up $0.4
million over the same period of 1998.
Other income as a percentage of net interest income and other income
was 25% and 17% for the quarters ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999 and 1998, other
income as a percentage of net interest income and non-interest income was 19%
and 17%, respectively.
Other Expenses
--------------
Total non-interest expenses increased $1.8 million from $29.2 million
in the third quarter of 1998 to $31.0 million in the third quarter of 1999. For
the nine months ended September 30, 1999, total non-interest expenses increased
$1.4 million over the same period in 1998. Salaries and benefits expense
decreased $2.0 million in the first nine months of 1999 compared with the first
nine months of 1998. This improvement was offset by an increase of $3.6 million
in other operating expenses, primarily due to special projects, during the first
nine months of 1999.
During the third quarter of 1999, Susquehanna incurred charges of $0.3
million related to Year 2000 systems remediation compared with $1.2 million in
the third quarter of 1998. Total expense, including both 1998 and 1999 expenses,
for Year 2000 remediation is $4.2 million at September 30, 1999. For a further
discussion on these matters, please see the section herein entitled "Impact of
the Year 2000 Issue".
Income Taxes
------------
Susquehanna's effective tax rate decreased from 31.80% for the first
nine months of 1998 to 30.74% for the first nine months of 1999 due to an
increase in tax-advantaged income.
12
Risk Assets
-----------
Table 2 shows an increase in non-performing assets from $26.4 million
at December 31, 1998 to $27.1 million at September 30, 1999, as non-performing
assets to period-end loans and OREO remained at 0.92% at December 31, 1998 and
September 30, 1999. Loan loss reserve to non-performing loans at September 30,
1999 was 161% compared with 167% at December 31, 1998.
Provision and Allowance for Loan and Lease Losses
-------------------------------------------------
As illustrated in Table 3, the provision increased to $1.5 million in
the third quarter of 1999 from $1.4 million in the third quarter of 1998. For
the nine months ended September 30, 1999, the provision was $0.3 million higher
than one year ago. Net charge-offs remained at $3.9 million for the same nine
month period.
The allowance at September 30, 1999 was 1.23% of period-end loans and
leases compared to 1.30% at September 30, 1998 as period-end loans increased
$163 million at September 30, 1999, from one year ago.
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 September
30, 1999 was 12.72%. The minimum total capital (Tier II) ratio is 8%;
Susquehanna's ratio at September 30, 1999 was 15.57%. The minimum leverage ratio
is 4%; Susquehanna's leverage ratio at September 30, 1999 was 9.24%.
Market Risks
------------
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk and commodity price risk. Due to the nature of its operations,
only interest rate and liquidity risks are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different
from one another. The maintenance of adequate liquidity -- the ability to meet
the cash requirements of its customers and other financial commitments -- is a
fundamental aspect of Susquehanna's asset/liability management strategy.
Susquehanna's policy of diversifying its funding sources -- purchased funds,
repurchase agreements, and deposit accounts -- allows it to avoid undue
concentration in any single financial market and also to avoid heavy funding
requirements within short periods of time. At September 30, 1999, Susquehanna's
subsidiary banks and its savings bank have unused lines of credit available to
them from the Federal Home Loan Bank totaling approximately $420 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 $66 million at September 30, 1999. These
maturing investments represent 7% of total investment securities. Short-term
investments amounted to $33 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
13
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 a system assessment, Susquehanna has determined that it was
necessary to modify or replace portions of its software and hardware so that its
computer systems would properly utilize dates beyond December 31, 1999.
Susquehanna presently believes that as a result of modifications to existing
software and hardware and conversions to new software and hardware, the Year
2000 Issue has been mitigated internally.
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 June 30, 1999, the
Awareness, Assessment, Renovation and Validation phases for all business
processes (mission critical, significant and ancillary) were completed. The
Implementation phase for all business processes (mission critical, significant
and ancillary) is also now completed.
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
14
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 June 30, 1999, the evaluation of vendors was completed. All vendors
evaluated were determined to be Y2K compliant or alternative vendors were
designated. Y2K risk assessments of borrowers and depositors have been
conducted. Identified risks are deemed to be nominal.
Susquehanna believes that it is Year 2000 ready. System testing did
reveal 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 has been 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 was
the assessment of non-information technology systems with embedded chips.
Susquehanna's assessment process generally included inventorying such equipment
and making a determination as to the Year 2000 readiness status of those items.
This assessment has been completed. No Year 2000 modifications or replacements
of a material nature were identified for non-information technology systems. As
part of the contingency plan Susquehanna has installed additional electric
generating capacity at its operations processing center in Lititz, PA.
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 June 30, 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.
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.
15
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
September 30, 1999
- ---------------------------------------------------------------------------------------------------------------
Average
Balance Interest Rate (%)
- ---------------------------------------------------------------------------------------------------------------
Assets
- ------
Short - term investments $48,108 $601 4.96
Investment securities:
Taxable 800,646 12,582 6.23
Tax - advantaged 113,338 1,940 6.85
- ---------------------------------------------------------------------------------------------------------------
Total investment securities 913,984 14,522 6.30
- ---------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,877,566 60,113 8.29
Tax - advantaged 48,448 1,077 8.82
- ---------------------------------------------------------------------------------------------------------------
Total loans and leases 2,926,014 61,190 8.30
- ---------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,888,106 $76,313 7.79
Allowance for loan and lease losses (36,228) ----------------------------
Other non - earning assets 363,588
- -----------------------------------------------------------------------
Total assets $4,215,466
- -----------------------------------------------------------------------
Liabilities & Equity
- --------------------
Deposits:
Interest - bearing demand $956,058 $6,863 2.85
Savings 447,214 2,033 1.80
Time 1,343,044 17,459 5.16
Short - term borrowings 201,505 2,481 4.88
Long - term debt 400,587 6,142 6.08
- ---------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,348,408 $34,978 4.14
Demand deposits 424,749 ----------------------------
Other liabilities 39,012
- ---------------------------------------------------------------------
Total liabilities $3,812,169
- ---------------------------------------------------------------------
Stockholders' equity 403,297
- ---------------------------------------------------------------------
Total liabilities & stockholders' equity $4,215,466
- ---------------------------------------------------------------------
Net interest income/yield on
average earning assets $41,335 4.22
----------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended
September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Balance Interest Rate (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Short - term investments $55,051 $743 5.35
Investment securities:
Taxable 788,160 12,401 6.24
Tax - advantaged 125,362 2,231 7.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 913,522 14,632 6.35
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,726,083 60,462 8.80
Tax - advantaged 54,592 1,294 9.40
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,780,675 61,756 8.81
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,749,248 $77,131 8.16
Allowance for loan and lease losses (36,114) ----------------------------
Other non - earning assets 301,301
-------------
Total assets 4,014,435
-------------
Liabilities & Equity
- --------------------
Deposits:
Interest - bearing demand $898,799 $7,298 3.22
Savings 451,947 2,560 2.25
Time 1,359,080 19,070 5.57
Short - term borrowings 111,873 1,531 5.43
Long - term debt 371,210 5,750 6.15
------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,192,909 $36,209 4.50
Demand deposits 387,199 ----------------------------
Other liabilities 42,969
-------------
Total liabilities 3,623,077
-------------
Stockholders' equity 391,358
-------------
Total liabilities & stockholders' equity 4,014,435
- -------------------------------------------------------------
Net interest income/yield on
average earning assets $40,922 4.33
-----------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
For the Nine Month Period Ended
September 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Balance Interest Rate (%)
-----------------------------------------------------------------------------------
Assets
Short - term investments $53,544 $1,927 4.81
Investment securities:
Taxable 808,250 37,358 6.18
Tax - advantaged 119,415 6,240 6.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 927,665 43,598 6.28
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,823,236 177,385 8.40
Tax - advantaged 49,218 3,335 9.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,872,454 180,720 8.41
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,853,663 $226,245 7.85
Allowance for loan and lease losses (36,365) -------------------------------
Other non - earning assets 341,048
-------------
Total assets $4,158,346
-------------
Liabilities & Equity
Deposits:
Interest - bearing demand $970,205 $20,856 2.87
Savings 449,305 6,228 1.85
Time 1,329,863 52,126 5.24
Short - term borrowings 154,908 5,384 4.65
Long - term debt 393,205 18,023 6.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,297,486 $102,617 4.16
Demand deposits 417,541 -------------------------------
Other liabilities 40,025
-------------
Total liabilities $3,755,052
-------------
Stockholders' equity 403,294
-------------
Total liabilities & stockholders' equity $4,158,346
-------------
Net interest income/yield on
average earning assets $123,628 4.29
-------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
For the Nine Month Period Ended
September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Balance Interest Rate (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Short - term investments $80,373 $3,304 5.50
Investment securities:
Taxable 755,361 36,173 6.40
Tax - advantaged 121,603 6,498 7.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 876,964 42,671 6.51
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 2,690,143 179,163 8.90
Tax - advantaged 55,409 3,912 9.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 2,745,552 183,075 8.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 3,702,889 $229,050 8.27
Allowance for loan and lease losses (36,162) ------------------------------
Other non - earning assets 302,086
-----------
Total assets $3,968,813
-----------
Liabilities & Equity
Deposits:
Interest - bearing demand $884,825 $21,589 3.26
Savings 450,271 7,945 2.36
Time 1,366,114 56,964 5.57
Short - term borrowings 100,301 4,144 5.52
Long - term debt 353,681 16,432 6.21
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest - bearing liabilities 3,155,192 $107,074 4.54
Demand deposits 384,325 ------------------------------
Other liabilities 44,857
-------------
Total liabilities $3,584,374
-------------
Stockholders' equity 384,439
-------------
Total liabilities & stockholders' equity $3,968,813
-------------
Net interest income/yield on
average earning assets $121,976 4.40
------------------------------
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%.
16
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
(Dollars in thousands) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $22,667 $20,412 $22,610
Restructured accrual loans -- 1,201 1,243
Other real estate owned 4,435 4,745 3,839
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $27,102 $26,358 $27,692
- ------------------------------------------------------------------------------------------------------------------------------------
As a percent of period-end loans and leases and
other real estate owned 0.92% 0.92% 0.99%
Loans and leases contractually
past due 90 days and still accruing $9,791 $10,531 $8,560
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $36,141 $36,284 $36,157 $36,481
Additions charged to operating expenses 1,496 1,375 4,214 3,906
- ----------------------------------------------------------------------------------------------------------------------------------
37,637 37,659 40,371 40,387
- ----------------------------------------------------------------------------------------------------------------------------------
Charge-offs (1,679) (1,471) (5,350) (4,966)
Recoveries 507 263 1,444 1,030
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,172) (1,208) (3,906) (3,936)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $36,465 $36,451 $36,465 $36,451
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs as a percent of average loans and leases(annualized) 0.16% 0.17% 0.18% 0.19%
Allowance as a percent of period-end loans and leases 1.23% 1.30% 1.23% 1.30%
Average loans and leases $2,926,014 $2,780,675 $2,872,454 $2,745,552
Period-end loans and leases 2,957,119 2,793,908 2,957,119 2,793,908
17
PART II. OTHER INFORMATION
-----------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a). Exhibits
--------
3.1 Registrant's Articles of Incorporation.
3.2 Registrant's By-laws.
3.3 Articles of Amendment to Registrant's Articles of
Incorporation.
27.1 Financial Data Schedule.
b). Report on Form 8-K NONE
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
November 9, 1999
/s/ Robert S. Bolinger
----------------------
Robert S. Bolinger
President and Chief Executive Officer
November 9, 1999
/s/ Drew K. Hostetter
---------------------
Drew K. Hostetter
Vice President, Treasurer,
and Chief Financial Officer
18
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 Amendment of June 1, 1998 Previously filed. Incorporated
to Registrant's Articles of by reference to Exhibit 3.3 of
Incorporation. Registrant's Quarterly Report
on Form 10-Q for the quarterly
period ended June 30, 1998.
27.1 Financial Data Schedule. Submitted electronically to
the Securities and Exchange
Commission for information
only and not filed.
19