SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 0-10674
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Susquehanna Bancshares, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2201716
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (717) 626-4721
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 1, 2001, the Registrant had 39,223,112 shares of common stock
outstanding.
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION 3
Item 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets - as of March 31, 2001 and 2000
and December 31, 2000 3
Consolidated Statements of Income - for the three months ended
March 31, 2001 and 2000 4
Consolidated Statements of Cash Flow - for the three months
ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 9 - 15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16 - 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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March 31, December 31, March 31,
(Dollars in thousands) 2001 2000 2000
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ASSETS
Cash and due from banks $113,878 $129,101 $109,598
Short-term investments:
Restricted 38,007 32,731 4,994
Unrestricted 49,835 26,304 60,295
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Total short-term investments 87,842 59,035 65,289
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Investment securities available for sale 808,499 882,285 868,115
Investment securities held to maturity 1,907 16,319 37,306
(Fair values of $1,907; $16,658; and $33,461)
Loans and leases, net of unearned income 3,456,481 3,433,610 3,471,686
Less: Allowance for loan and lease losses 37,848 37,187 43,239
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Net loans and leases 3,418,633 3,396,423 3,428,447
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Premises and equipment (net) 57,913 58,303 55,778
Accrued income receivable 22,984 26,775 23,525
Bank-owned life insurance 115,301 113,865 109,524
Other assets 116,223 110,750 136,416
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Total assets $4,743,180 $4,792,856 $4,833,998
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LIABILITIES
Deposits:
Demand $461,789 $462,297 $452,818
Interest-bearing demand 823,965 817,866 945,519
Savings 417,418 413,878 421,351
Time 1,322,076 1,303,297 1,202,300
Time of $100 or more 247,023 251,675 203,375
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Total deposits 3,272,271 3,249,013 3,225,363
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Short-term borrowings 219,894 205,336 182,232
FHLB borrowings 303,625 367,954 369,303
Vehicle financing 325,808 357,522 471,578
Long-term debt 100,000 100,000 100,000
Accrued interest, taxes, and expenses payable 39,238 42,382 38,333
Other liabilities 17,016 17,212 28,083
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Total liabilities 4,277,852 4,339,419 4,414,892
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STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000 ($2.00 par value)
Issued: 39,398,190 shares 78,796 78,796 78,796
Surplus 57,878 57,872 57,893
Retained earnings 325,064 320,020 299,923
Accumulated other comprehensive income,
net of taxes of $3,265; ($408); and ($6,961), respectively 6,059 (757) (15,811)
Less: Treasury stock, (175,078; 176,798; and 120,187
common shares at cost, respectively) 2,469 2,494 1,695
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Total stockholders' equity 465,328 453,437 419,106
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Total liabilities and stockholders' equity $4,743,180 $4,792,856 $4,833,998
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The accompanying notes are an integral part of these financial statements.
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 ) 2001 2000
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INTEREST INCOME
Interest and fees on loans and leases $72,161 $71,468
Interest on investment securities: Taxable 12,193 13,404
Tax-exempt 901 1,127
Interest on short-term investments 1,138 746
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Total interest income 86,393 86,745
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 5,817 7,188
Savings 1,890 1,863
Time 22,216 18,427
Interest on short-term borrowings 2,887 2,253
Interest on FHLB borrowings 4,665 5,230
Interest on vehicle financing 6,057 8,964
Interest on long-term debt 1,950 1,999
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Total interest expense 45,482 45,924
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Net interest income 40,911 40,821
Provision for loan and lease losses 1,846 864
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Net interest income after provision for loan and lease losses 39,065 39,957
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OTHER INCOME
Service charges on deposit accounts 3,002 2,582
Vehicle origination and servicing fees 5,775 5,085
Other service charges, commissions, fees 6,719 4,861
Income from fiduciary-related activities 1,218 1,122
Gain on sale of mortgages 583 411
Income from bank-owned life insurance 1,506 1,440
Other operating income 1,716 1,560
Investment security gains/(losses) 0 1
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Total other income 20,519 17,062
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OTHER EXPENSES
Salaries and employee benefits 17,637 16,812
Net occupancy expense 3,026 2,498
Furniture and equipment expense 2,089 1,968
Amortization of intangible assets 898 784
Vehicle expense 1,301 1,057
Other operating expenses 16,256 14,468
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Total other expenses 41,207 37,587
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Income before income taxes 18,377 19,432
Provision for income taxes 5,881 6,024
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NET INCOME $12,496 $13,408
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Per share information:
Basic earnings $0.32 $0.34
Diluted earnings $0.32 $0.34
Cash dividends $0.19 $0.17
Average shares outstanding: Basic 39,222 39,343
Diluted 39,455 39,431
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The accompanying notes are an integral part of these financial statements.
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
Three months ended March 31 2001 2000
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OPERATING ACTIVITIES:
Net income $12,496 $13,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 3,597 3,058
Provision for loan and lease losses 1,846 864
(Gain)/loss on securities transactions 0 (1)
(Gain)/loss on sale of loans (583) (411)
(Gain)/loss on sale of other real estate owned (20) (30)
Mortgage loans originated for resale (21,868) (25,420)
Sale of mortgage loans originated for resale 24,106 26,853
Leases originated for resale 0 (14,278)
Decrease in accrued interest receivable 3,791 238
Decrease in accrued interest payable (3,853) (17,695)
Decrease in accrued expenses and taxes payable 709 21,282
Other, net (11,001) (2,662)
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Net cash provided by operating activities 9,220 5,206
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INVESTING ACTIVITIES:
Net increase in restricted short-term investments (5,276) 0
Proceeds from the maturity of investment securities 243,114 29,130
Purchase of available-for-sale securities (144,546) (18,117)
Purchase of held-to-maturity securities 0 (7,887)
Net (increase)/decrease in loans and leases (27,163) (6,567)
Capital expenditures (1,393) (1,926)
Net cash and cash equivalent paid in acquisition 0 (11,323)
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Net cash provided by/(used for) investing activities 64,736 (16,690)
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FINANCING ACTIVITIES:
Net increase in deposits 23,258 44,843
Net increase/(decrease) in short-term borrowings 14,558 (25,275)
Net decrease in FHLB borrowings (64,329) (3,111)
Net decrease in vehicle financing (31,714) (10,526)
Proceeds from issuance of long-term debt 0 5,000
Proceeds from issuance of common stock 31 49
Cash paid for treasury stock 0 (1,543)
Dividends paid (7,452) (6,295)
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Net cash provided by/(used for) financing activities (65,648) 3,142
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Net decrease in cash and cash equivalents 8,308 (8,342)
Cash and cash equivalents at January 1 155,405 183,229
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Cash and cash equivalents at March 31 $163,713 $174,887
===============================================================================================================
Cash and cash equivalents:
Cash and due from banks $113,878 $109,598
Unrestricted short-term investments 49,835 65,289
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Cash and cash equivalents at March 31 $163,713 $174,887
===============================================================================================================
Interest paid on deposits, short-term borrowings, and long-term debt was
$49,335 in 2001, and $63,619 in 2000. Income taxes paid were $385 in 2001, and
$109 in 2000. Amounts transferred to other real estate owned were $1,452 in
2001, and $1,402 in 2000.
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 TREASURY TOTAL
Three Month Period Ended March 31 STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Balance - January 1, 2000 $78,788 $57,873 $292,810 ($13,616) ($173) $415,682
Comprehensive income:
Net income 13,408 13,408
Change in unrealized gain/(loss)
on securities, net of taxes of
($984) and reclassification
adjustment of $1 (2,195) (2,195)
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive income 13,408 (2,195) 11,213
Common stock issued under employee
benefit plans 8 20 21 49
Purchase/conversion of treasury stock (1,543) (1,543)
Cash dividends paid:
Per common share of $0.17 (6,295) (6,295)
- -----------------------------------------------------------------------------------------------------------------------
Balance - March 31, 2000 $78,796 $57,893 $299,923 ($15,811) ($1,695) $419,106
=======================================================================================================================
Balance - January 1, 2001 $78,796 $57,872 $320,020 ($757) ($2,494) $453,437
Comprehensive income:
Net income 12,496 12,496
Change in unrealized gain/(loss)
on securities, net of taxes
of $3,265 and reclassification
adjustment of $0 6,816 6,816
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Total comprehensive income 12,496 6,816 19,312
Common stock issued under
employee benefit plans 6 25 31
Cash dividends paid:
Per common share of $0.19 (7,452) (7,452)
- -----------------------------------------------------------------------------------------------------------------------
Balance - March 31, 2001 $78,796 $57,878 $325,064 $6,059 ($2,469) $465,328
=======================================================================================================================
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, 2001 and 2000.
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 37 through 39 of the Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
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, 2001 December 31, 2000
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Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S. Treasury $2,849 $2,949 $3,249 $3,307
U.S. Government agencies 209,785 211,996 360,276 359,773
State & municipal 75,012 76,583 63,674 63,922
Mortgage-backed 462,065 465,656 405,678 403,094
Corporates 16,372 16,865 16,499 16,641
Equities 33,092 34,450 34,074 35,548
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799,175 808,499 883,450 882,285
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Held-to-maturity:
State & municipal 0 0 15,833 16,176
Mortgage-backed 0 0 486 482
Corporates 1,907 1,907 0 0
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1,907 1,907 16,319 16,658
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Total investment securities $801,082 $810,406 $899,769 $898,943
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LOANS AND LEASES
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Loans and leases, net of unearned income at March 31, 2001 and December 31, 2000, were as follows:
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March 31, December 31,
2001 2000
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Commercial, financial, and agricultural $395,567 $371,320
Real estate - construction 282,036 264,182
Real estate - mortgage 1,935,752 1,933,772
Consumer 343,082 350,707
Leases 500,044 513,629
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Total loans and leases $3,456,481 $3,433,610
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Net investment in direct financing leases is as follows:
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Minimum lease payments receivable $171,475 $172,775
Estimated residual value of leases 375,373 391,625
Unearned income under lease contracts (46,804) (50,771)
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Total leases $500,044 $513,629
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An analysis of impaired loans as of March 31, 2001 and December 31, 2000, is presented as follows:
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March 31, December 31,
2000 2000
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Impaired loans without a related reserve $9,694 $4,379
Impaired loans with a reserve 1,747 2,970
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Total impaired loans $11,441 $7,349
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Reserve for impaired loans $521 $866
An analysis of impaired loans for the three month periods ended March 31, 2001 and 2000 is presented as follows:
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Three Months ended March 31,
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2001 2000
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Average balance of impaired loans $11,498 $13,417
Interest income on impaired loans (cash-basis) 20 17
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BORROWINGS
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March 31, December 31,
2001 2000
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Short-term borrowings at March 31, 2001 and December 31, 2000, were as follows:
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Securities sold under repurchase agreements $218,058 $198,573
Treasury tax and loan notes 1,836 6,763
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Total short-term borrowings $219,894 $205,336
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Long-term debt at March 31, 2001 and December 31, 2000, was as follows:
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Subsidiaries:
Term notes due July, 2003 $15,000 $15,000
Parent:
Senior notes due February, 2003 35,000 35,000
Subordinated notes due February, 2005 50,000 50,000
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Total long-term debt $100,000 $100,000
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EARNINGS-PER-SHARE
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The following tables sets forth the calculation of basic and diluted earnings per share for the years ended March 31, 2001 and 2000:
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For the three months ended March 31,
-------------------------------------------------------------------------------------
2001 2000
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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 $12,496 39,222 $0.32 $13,408 39,343 $0.34
Effect of Diluted Securities:
Incentive stock options outstanding 233 88
------ ------
Diluted Earnings per Share:
Income available to common stockholders
and assumed conversion $12,496 39,455 $0.32 $13,408 39,431 $0.34
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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.
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.
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 restructuring;
technological changes; changes in consumer spending and saving habits and the
success of Susquehanna in managing the risks involved in the foregoing.
On March 3, 2000, Susquehanna completed the acquisition of Valley Forge
Asset Management Corp., a Pennsylvania asset management corporation registered
both as a broker/dealer and as an investment advisor, and Valley Forge
Investment Company, Inc., collectively ("VFAM"), in cash transactions. Since
this acquisition was accounted for under the
9
purchase method of accounting for business combinations, the results of
operation for VFAM are included with Susquehanna from March 3, 2000 forward.
Earnings Summary
- ----------------
Susquehanna's net income for the first quarter of 2001 was $12.5 million, a
7% decrease from net income of $13.4 million in the first quarter of 2000.
During the first quarter of 2001, Susquehanna's fee income continued to improve
as it increased by 20% from the first quarter of 2000 and represented over 33%
of total revenues for the first quarter of 2001. However, this improvement in
fee income was more than offset by a 10% increase in operating expenses from
first quarter 2000 to first quarter 2001.
Diluted earnings per share ("EPS") decreased 6% from $0.34 per share for
the first quarter of 2000 to $0.32 per share for the first quarter of 2001.
Return on average assets ("ROA") and return on average equity ("ROE") finished
at 1.08% and 11.07%, respectively, in the first quarter of 2001 compared with
1.12% and 13.23%, respectively, in the first quarter of 2000. For the first
quarter of 2001, tangible EPS, ROA and ROE were $0.34, 1.16%, and 13.06%,
respectively.
Total assets at March 31, 2001 were $4.7 billion, compared with $4.8
billion at March 31, 2000. Loans of $3.5 billion at March 31, 2001 remained the
same as March 31, 2000 levels, while deposits increased from $3.2 billion at
March 31, 2000 to $3.3 billion at March 31, 2001. Equity capital was $465
million at March 31, 2001, or $11.86 per share compared to $419 million, or
$10.67 per share at March 31, 2000.
Net Interest Income
- -------------------
The major source of operating revenues is net interest income, which rose
to a level of $40.9 million in the first quarter of 2001, compared to $40.8
million for the same period in 2000. Net interest income is the income which
remains after deducting, from total income generated by earning assets, the
interest expense attributable to the acquisition of the funds required to
support earning assets. Income from earning assets includes income from loans,
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
10
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 67% for the quarter ended
March 31, 2001, and was 70% for the quarter ended March 31, 2000, respectively.
Net interest income for the first quarter 2001 increased $0.1 million
compared to the first quarter of 2000. Average earning assets in the first
quarter of 2001 decreased $114 million over the same period in 2000. The net
interest margin improved from 3.78% in the first quarter of 2000 to 3.90% in the
first quarter of 2001. This increase in margin was due to a 23 basis point
increase in the earning asset yield that was partially offset by a 17 basis
point increase in the cost of funds. Recent actions by the Federal Reserve to
decrease interest rates caused substantial realignment of Susquehanna's balance
sheet. During the first quarter of 2001, Susquehanna's asset sensitive balance
sheet experienced downward pressure on earning asset returns as loans, whose
rates are tied to market rates, priced lower as market rates were reduced. Also,
approximately $190 million of callable investment securities paid off early as
these debtors refinanced at lower rates. This run-off of investment securities
could not be met with loan demand and the monies that were not invested in new
securities or new loans were used to retire $64 million in higher cost Federal
Home Loan Bank borrowings.
Other Income
- ------------
Non-interest income increased $3.5 million, or 20.3%, from $17.1 million in
the first quarter of 2000, to $20.5 million in the first quarter of 2001. This
increase resulted from an increase in all categories of income. Significant
increases were realized in other service charges, commissions and fees of $1.9
million, of which $1.5 million is attributable to VFAM, and vehicle origination
and servicing fees of $0.7 million.
11
Other income as a percentage of net interest income and other income, was
33% for the quarter ended March 31, 2001 compared with 30% for the comparable
period of 2000.
Other Expenses
- --------------
Total non-interest expenses increased $3.6 million from $37.6 million in
the first quarter of 2000 to $41.2 million in the first quarter of 2000. The
quarter-to-quarter increase was primarily due to increases in salaries and
benefits of $0.8 million, occupancy expenses of $0.5 million, and other expense
of $1.8 million. The increase in salaries and benefits was primarily due to the
acquisition of VFAM, normal annual salary increases, and higher health benefit
costs. The increase in occupancy costs is the direct result of the central
processing sites from the back-office consolidation which occurred in the second
half of 2000 and higher than normal branch system repairs. The increase in other
expense was due to several factors: additional costs of auditing services were
$0.3 million; additional costs related to the re-engineering project were $0.6
million; increases in merchant credit card expense were $0.3 million;
communications expense increased $0.3 million; insurance costs increased $0.3
million, and the impact of VFAM expenses increased $0.5 million.
Income Taxes
- ------------
Susquehanna's effective tax rate increased from 31% for the first three
months of 2000 to 32% for the first three months of 2001 due to a decrease in
tax-advantaged income.
Risk Assets
- -----------
Table 2 shows an increase in non-accrual loans and leases from $20.6
million at December 31, 2000 to $25.7 million at March 31, 2001. This increase
is reflective of two commercial real estate transactions that should be resolved
in the near future with the risk of loss being minimal. Loans past due 90 days
or more and still accruing decreased from $13.8 million at December 31, 2000 to
$9.0 million at March 31, 2001. Non-performing assets to period-end loans and
OREO increased from 0.60% at December 31, 2000 to 0.74% at March 31, 2001. Loan
loss reserve to non-performing loans at March 31, 2001 was 179% compared with
225% at December 31, 2000.
12
Provision and Allowance for Loan and Lease Losses
- -------------------------------------------------
As illustrated in Table 3, the provision was $1.8 million in the first
quarter of 2001, an increase of $1.0 million from the same period in 2000. Net
charge-offs were $1.2 million for the three-month period in 2001 versus the 2000
corresponding amount of $2.1 million. The increase in the provision resulted
from a lower provision in 2000 due to a reduction in automobile residual value
exposure during 2000. While charged-off loans are considerably lower in 2001
compared to the same period in 2000, management will provide for potential
losses based upon the characteristics of our current loan portfolio and the
current economic environment. Despite the fact that interest rates have been
lowered recently, a slowdown of economic growth could occur which could increase
the potential for loan and lease losses.
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, 2001 was 10.86%. The minimum total capital (Tier II) ratio is 8%;
Susquehanna's ratio at March 31, 2001 was 12.64%. The minimum leverage ratio is
4%; Susquehanna's leverage ratio at March 31, 2001 was 8.90%.
13
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest rates and interest differential - taxable equivalent basis
- -------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
March 31, 2001 March 31, 2000
- ----------------------------------------------------------------------------------- ----------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
- -------------------------------------------------------------------------------------------------------------------------
Assets
Short - term investments $85,416 $1,138 5.40 $52,753 $746 5.69
Investment securities:
Taxable 759,313 12,193 6.51 826,355 13,404 6.52
Tax - advantaged 77,956 1,386 7.21 100,090 1,752 7.04
- ----------------------------------------------------------------------- ------------------------------
Total investment securities 837,269 13,579 6.58 926,445 15,156 6.58
- ----------------------------------------------------------------------- ------------------------------
Loans and leases, (net):
Taxable 3,370,785 71,420 8.59 3,427,435 70,716 8.30
Tax - advantaged 51,308 1,140 9.01 52,505 1,160 8.89
- ----------------------------------------------------------------------- ------------------------------
Total loans and leases 3,422,093 72,560 8.60 3,479,940 71,876 8.31
- ----------------------------------------------------------------------- ------------------------------
Total interest - earning assets 4,344,778 $87,276 8.15 4,459,138 $87,778 7.92
------- ----------------
Allowance for loan and lease losses (37,586) (44,674)
Other non - earning assets 400,945 383,403
- ------------------------------------------------------- ----------
Total assets $4,708,137 4,797,867
- ------------------------------------------------------- ----------
Liabilities
Deposits:
Interest - bearing demand $814,464 $5,817 2.90 $798,067 $5,552 2.80
Savings 413,266 1,890 1.85 422,573 1,863 1.77
Time 1,559,110 22,216 5.78 1,548,260 20,063 5.21
Short - term borrowings 215,970 2,887 5.42 180,842 2,253 5.01
FHLB borrowings 328,407 4,665 5.76 366,694 5,230 5.74
Vehicle financing 335,464 6,057 7.32 488,164 8,964 7.39
Long - term debt 100,000 1,950 7.91 96,399 1,999 8.34
------------ -------- ------ ---------- -------- -----
Total interest - bearing liabilities 3,766,681 $45,482 4.90 3,900,999 $45,924 4.73
-------- ----------------
Demand deposits 433,246 428,910
Other liabilities 53,950 60,224
- ------------------------------------------------------- ---------
Total liabilities 4,253,877 4,390,133
- ------------------------------------------------------- ---------
Equity 454,260 407,734
- ------------------------------------------------------- ---------
Total liabilities & stockholders' equity $4,708,137 4,797,867
- ------------------------------------------------------- ---------
Net interest income / yield on
average earning assets $41,794 3.90 $41,854 3.78
---------------- ----------------
For purposes of calculating loan yields, the average loan volume includes
non-accrual loans. For purposes of calculating yields on non-taxable interest
income, the taxable equivalent adjustment is made to equate non-taxable interest
on the same baisis as taxable interest. The marginal tax rate is 35%.
14
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 2001 2000 2000
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $21,100 $16,541 $20,894
Restructured accrual loans 0 0 0
Other real estate owned 4,623 4,039 3,946
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $25,723 $20,580 $24,840
- --------------------------------------------------------------------------------------------------------------------------------
As a percent of period-end loans and leases and
other real estate owned 0.74% 0.60% 0.71%
Loans and leases contractually
past due 90 days and still accruing $8,961 $13,798 $10,338
- --------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $37,187 $44,493
Additions charged to operating expenses 1,846 864
- --------------------------------------------------------------------------------------------------------------------------------
39,033 45,357
- --------------------------------------------------------------------------------------------------------------------------------
Charge-offs (1,585) (2,655)
Recoveries 400 537
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,185) (2,118)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $37,848 $43,239
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs as a percent of average loans and leases(annualized) 0.14% 0.24%
Allowance as a percent of period-end loans and leases 1.09% 1.25%
Average loans and leases $3,422,093 $3,479,940
Period-end loans and leases 3,456,481 3,471,686
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
- ----------------------------------------
ABOUT MARKET RISK
- -----------------
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk, and commodity price risk. Due to the nature of its operations,
only interest rate and liquidity risks are significant to Susquehanna.
Liquidity Risk
- --------------
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity -- the ability to meet the
cash requirements of its customers and other financial commitments -- is a
fundamental aspect of Susquehanna's asset/liability management strategy.
Susquehanna's policy of diversifying its funding sources -- purchased funds,
repurchase agreements, and deposit accounts -- allows it to avoid undue
concentration in any single financial market and also to avoid heavy funding
requirements within short periods of time. At March 31, 2001, Susquehanna's
subsidiary banks and its savings bank have unused lines of credit available to
them from the Federal Home Loan Bank totaling approximately $557 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 $36 million at March 31, 2001. These maturing investments
represent 4% of total investment securities. Unrestricted short-term
investments amounted to $50 million and represent additional sources of
liquidity. Consequently, Susquehanna's exposure to liquidity risk is not
considered significant.
Interest Rate Risk
- ------------------
Closely related to the management of liquidity is the management of
interest rate risk, which focuses on maintaining stability in the net interest
margin, an important factor in earnings growth. Interest rate sensitivity is
the matching or mismatching of the maturity and rate structure of the interest-
bearing assets and liabilities. Management's objective is to control the
difference
16
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.
At March 31, 2001, Susquehanna continues to be a slightly asset sensitive
institution. Consequently, a further decline in interest rates could have a
negative effect on Susquehanna's net interest income.
17
PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits. The exhibits required to be filed as part of this report
pursuant to Item 601 of Regulation S-K are filed herewith or incorporated by
reference.
b). Report on Form 8 - K On March 6, 2001, the Registrant filed a report
on Form 8-K regarding management succession and executive appointments.
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 9, 2001 /s/ Robert S. Bolinger
------------------------------------
Robert S. Bolinger
Chairman and Chief Executive Officer
May 9, 2001 /s/ Drew K. Hostetter
------------------------------------
Drew K. Hostetter
Senior Vice President, Treasurer,
and Chief Financial Officer
18
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
(3) (i) Articles of Incorporation. Incorporated by reference to
Attachment E to the Registrant's Joint Proxy
Statement/Prospectus on the Registrant's Registration Statement
on Form S-4, Registration No. 33-13276 and to Exhibit 3.3 of the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of the Registrant's common
stock and the rights of the Registrant's note holders are contained in
the following documents or instruments, which are incorporated herein
by reference.
(i) Articles of Incorporation. Incorporated by reference to
Attachment E to the Registrant's Joint Proxy
Statement/Prospectus on the Registrant's Registration Statement
on Form S-4, Registration No. 33-76319 and to Exhibit 3.3 of the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
(iii) Form of Subordinated Note/Indenture incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-3, Registration No. 33-87624.
19