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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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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.
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(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $2.00 per share
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant was approximately $516,273,439 as of February 29, 2000, based
upon the closing price on the Nadsaq National Market reported for such date.
Shares of common stock held by each executive officer and director and by each
person who beneficially owns more than 5% of the outstanding common stock have
been excluded in that such persons may under certain circumstances be deemed to
be affiliates. This determination of executive officer or affiliate status is
not necessarily a conclusive determination for other purposes. The number of
shares issued and outstanding of the registrant's common stock as of February
29, 2000, was 39,296,003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held
May 26, 2000, are incorporated by reference into Part III.
PART I
Item 1. Business
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General
Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state bank
holding company headquartered in Lititz, Pennsylvania. As of December 31, 1999,
Susquehanna operated as a super-community bank holding company with nine
commercial banks, one federal savings bank and two non-bank subsidiaries. As of
December 31, 1999, Susquehanna had consolidated assets of $4.3 billion, loans
receivable of $3.0 billion, deposits of $3.2 billion and shareholders' equity of
$404 million.
The relative sizes and profitability of Susquehanna's operating
subsidiaries as of and for the year ended December 31, 1999, are depicted in the
following table: (Dollars in Millions)
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Subsidiary* Assets Percent of Total Net Income Percent of Total
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Farmers First Bank $1,080 25% $19 44%
Farmers & Merchants Bank and Trust 616 14 7 16
First National Trust Bank 301 7 4 9
Williamsport National Bank 246 6 4 9
Citizens National Bank of Southern Pennsylvania 199 5 3 7
First American National Bank of Pennsylvania 139 3 2 5
First Capitol Bank 109 3 - -
Susquehanna Bank** 1,079 25 9 21
Equity Bank, National Association*** 336 8 4 9
Founders' Bank*** 143 3 2 5
Susque-Bancshares Leasing Co., Inc. (leasing) 48 - - -
Susque-Bancshares Life Insurance Co.
(life insurance) 4 - - -
Consolidation adjustments, including
Susquehanna, Susquehanna South and
Susquehanna East) 11 1 (11) (25)
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Total $4,311 100% $43 100%
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* Includes operations of wholly-owned subsidiaries.
** Subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares
South, Inc. ("Susquehanna South"), a non-operating holding company.
*** Subsidiaries of Susquehanna's wholly-owned subsidiary, Susquehanna
Bancshares East, Inc. ("Susquehanna East"), a non-operating holding company.
Susquehanna's depository institution subsidiaries are located in
Pennsylvania, Maryland and New Jersey, and provide commercial and retail banking
services in central and south central Pennsylvania, principally in Franklin,
Lancaster, Northumberland, Snyder, Union, Columbia, York and Lycoming Counties;
in southeastern Pennsylvania principally in Montgomery, Chester and Delaware
Counties; in southwestern Pennsylvania principally in Bedford and Blair
Counties; in western Maryland, principally in Allegany, Garrett and Washington
Counties; in northwestern, central and southeastern Maryland, including Allegany
County, Washington County, Baltimore County, Baltimore City, Carroll County,
Harford County, Worcester County, Wicomico County and Anne Arundel County; and
in southern New Jersey, principally in Camden, Burlington and Gloucester
Counties.
Susquehanna's non-depository institution subsidiaries provide
commercial leasing services in Pennsylvania, New Jersey, Maryland and Delaware
and credit life insurance services in central and southeastern Pennsylvania. On
February 1, 2000, Susquehanna acquired an additional non-depository institution
subsidiary, Boston Service Company, Inc. (t/a Hann Financial Service
Corporation), which provides consumer automobile
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financing services principally in New Jersey, eastern Pennsylvania, New York and
Connecticut. On March 3, 2000, Susquehanna also acquired an additional
non-depository institution subsidiary, Valley Forge Asset Management Corp., an
asset management company which provides services principally in southeastern
Pennsylvania (Philadelphia, Bucks, Montgomery, Delaware and Chester Counties),
New Jersey and Delaware.
As a "super-community" bank holding company, Susquehanna's strategy has
been to manage its subsidiaries on a decentralized basis, allowing each
subsidiary operating in different markets to retain its name and board of
directors as well as substantial autonomy in its day to day operations.
Susquehanna believes that this strategy permits these institutions greater
flexibility to better serve their markets, increasing responsiveness to local
needs, and differentiates Susquehanna from other large competitors. Susquehanna
continues, however, to implement consolidations in selected lines of business,
operations and support functions in order to achieve greater economies of scale
and cost savings. Consistent with this philosophy, Susquehanna is continuing its
program initiated in 1997 to convert all of its subsidiaries to a uniform
computer system. Seven of its depository institution subsidiaries were converted
to this system by March 31, 1999, with the remaining three to be converted by
mid-2000. Through the formation of Susquehanna Trust & Investment Company, a
subsidiary of Farmers First Bank which became operational in May of 1999, and
selection of a uniform processing system, Susquehanna anticipates further
integration of its trust department operations. Mortgage banking operations are
also expected to undergo increased consolidation. Susquehanna also provides its
banking subsidiaries guidance in the areas of credit policy and administration,
strategic planning, investment portfolio management and other financial and
administrative services.
In October of 1999, Susquehanna determined to undertake a detailed
process change in the way Susquehanna and its subsidiaries conduct their
business. Specifically, it determined to consolidate, outsource and restructure
certain back-office operations. The goal of this effort is to improve
operational efficiencies, maximize the return on Susquehanna's investment in
technology, provide superior customer service and to provide employees with
consistent, reliable service support.
Susquehanna anticipates that detailed restructuring for all centralized
functions will be conducted to include the utilization of available technology
features, elimination of non-value added steps, documentation of detailed work
processes, productivity standards, service standards, staffing models,
coordination with Susquehanna compliance and audit personnel to ensure
consistency with company policy and revalidation of work processes post
implementation. During this process, jobs will be re-defined, processes will be
refined and some jobs will be created, relocated or eliminated. Susquehanna
subsidiaries will continue to maintain their decision-making autonomy and
individual identities. Existing boards of directors will remain in place. The
new operating environment will consolidate support functions that are currently
provided from multiple locations across the Susquehanna enterprise. Some
activities will be outsourced to specialists in their industries, and new
technology will be added. See "Management's Discussion and Analysis of Results
of Operations and Financial Conditions - Other Expenses" for further discussion.
As of December 31, 1999, Susquehanna had 130 full-time and 35 part-time
employees, and Susquehanna and its subsidiaries, on a consolidated basis, had
1,622 full-time and 300 part-time employees.
Susquehanna was incorporated in Pennsylvania in 1982. Its executive
offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and
its telephone number is (717) 626-4721.
Business
Susquehanna, through its subsidiaries, provides a wide range of retail
and commercial banking and financial services. Its retail banking business
strategy is to expand its deposit and other product market share through a high
level of customer service, new product offerings, application of new
technologies and delivery systems, and selective acquisitions. Susquehanna
operates an extensive branch network and has a strong market presence in its
primary markets in Pennsylvania, Maryland and New Jersey. As a result of the
development of
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broad banking relations with its customers, core deposits fund Susquehanna's
lending and investing activities almost entirely.
Susquehanna's retail banking services include checking and savings
accounts, money market accounts, certificates of deposit, individual retirement
accounts, Christmas clubs, mutual funds and annuities (see discussion below),
home equity lines of credit, residential mortgage loans, home improvement loans,
student loans, automobile loans and personal loans.
Susquehanna also offers credit cards, and in 1996 introduced a check card
in Pennsylvania and Maryland. As of December 31, 1999, there were over 89,000
active debit cards.
The acquisition of certain Maryland thrifts in 1995 and 1996 substantially
enhanced Susquehanna's mortgage origination and mortgage banking capabilities.
The consolidation in 1996 of several mortgage operations into Susquehanna
Mortgage Company (formerly known as "Atlantic First Mortgage Company"), a
mortgage subsidiary of Susquehanna Bank, further enhanced the expansion of
Susquehanna's mortgage banking operations in its Maryland and Pennsylvania
markets.
Susquehanna's consolidated commercial lending operations include
commercial, financial and agricultural lending (11% of the total loan portfolio
at December 31, 1999), real estate construction lending (9%), and commercial
mortgage lending (20%). Loans originated by each subsidiary are subject to
central review and uniform Susquehanna credit standards. Nearly all of
Susquehanna's loans are concentrated in the markets served by its subsidiary
commercial and savings banks.
Certain of Susquehanna's subsidiary depository institutions, namely Farmers
First Bank, through its subsidiary, Susquehanna Trust & Investment Company,
Citizens National Bank of Southern Pennsylvania, First National Trust Bank,
Williamsport National Bank and Farmers & Merchants Bank and Trust also render
services as trustee, executor, administrator, guardian, managing agent,
custodian and investment advisor and perform other fiduciary activities
authorized by law.
Through its subsidiary, Susque-Bancshares Life Insurance Co., Susquehanna
offers certain credit related insurance products. Susquehanna also offers
certain leasing services through its subsidiary Susque-Bancshares Leasing Co.,
Inc., and its wholly owned subsidiary, Susquebanc Lease Co. Susquehanna expanded
its leasing service capabilities through its acquisition in February of 2000 of
Hann Financial Service Corporation, which provides comprehensive consumer
automobile financing services.
In 1999, Susquehanna also acquired a less than 5% equity interest in
AExpert, Inc., and entered into an arrangement with its wholly-owned subsidiary,
AExpert Advisory, Inc. AExpert Advisory, Inc. is a registered investment advisor
and offers fee-based management account services combining its proprietary
computer-based market-timing forecasting tool with certain mutual funds.
Susquehanna and certain of its subsidiaries share the fees received by AExpert
Advisory, Inc. in connection with the accounts specifically referred to it by
them. Susquehanna's subsidiaries also have similar referral fee arrangements
with other non-affiliated investment advisors/broker-dealers. Through
Susquehanna's acquisition of Valley Forge Asset Management Corp. in March of
2000, which represented Susquehanna's first acquisition of an investment
advisory services corporation, Susquehanna and its subsidiaries expect to be
able to offer a broader range of investment advisory, asset management and
brokerage services to its customers.
On February 4, 2000, Farmers First Bank and First Capitol Bank, both
wholly-owned subsidiaries of Susquehanna, signed an Agreement and Plan of Merger
pursuant to which First Capitol Bank will be merged with and into Farmers First
Bank. Farmers First Bank will be the surviving institution in the merger and
will continue its existence as a bank and trust company under Pennsylvania law
with its present name. The merger is currently pending approval of the
Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation
(the "FDIC") and is expected to be completed in the first half of 2000.
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Susquehanna and its subsidiaries do not have any portion of their business
dependent upon a single or limited number of customers, the loss of which would
have a material adverse effect on their business; no substantial portion of
their loans or investments are concentrated within a single industry or group of
related industries. The businesses of Susquehanna and its subsidiaries are not
seasonal in nature.
Susquehanna contemplates that in the future it will evaluate and may
acquire, or may cause its subsidiaries to acquire, other banks or savings
associations or other entities permitted by applicable law. Susquehanna may
acquire state and national banks whose principal business activities are in
Pennsylvania and in states which have not opted out of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (as described below).
Susquehanna may also seek to enter businesses closely related to banking or that
are financial in nature, or to acquire existing companies already engaged in
such activities, which includes savings associations. Any acquisition by
Susquehanna may require notice to or approval of the Board of Governors of the
Federal Reserve System, the Pennsylvania Department of Banking, other regulatory
agencies and, in some instances, its shareholders.
Recent Acquisitions
Hann Financial Service Corporation. On February 1, 2000, Susquehanna
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completed the acquisition of Boston Service Company, Inc., t/a Hann Financial
Service Corporation ("Hann"), a New Jersey chartered business corporation
headquartered in Jamesburg, New Jersey. The acquisition of Hann was completed
through the exchange of 2,360,000 shares of Susquehanna common stock for all the
outstanding capital stock of Hann. The transaction qualified for pooling of
interests accounting treatment.
Hann is engaged in consumer automobile financing which involves marketing
and origination services, structuring and placement of lease financing
arrangements and retail installment sales contracts and acting as an
intermediary between automobile dealers and financial institutions.
As of February 1, 2000, the date of Susquehanna's acquisition of Hann, Hann
had total assets of $607 million, total shareholder's equity of $11 million and
serviced over $800 million in automobile related receivables.
Valley Forge Asset Management Corp. On March 3, 2000, Susquehanna completed
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the acquisition of Valley Forge Asset Management Corp. ("VFAM"), a Pennsylvania
business corporation headquartered in King of Prussia, Pennsylvania.
VFAM and its predecessor companies have been in business as a broker-dealer
and investment adviser since 1970. The firm is registered under the federal
Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. It is a
member of the National Association of Securities Dealers. All of its business
activity is related directly or indirectly to managing client investment
portfolios on a fully discretionary basis.
As of March 3, 2000, the date of Susquehanna's acquisition of VFAM, VFAM
had approximately $900 million assets under management.
Other than as described above, Susquehanna currently has no formal
commitments with respect to the acquisition of any entities, although
discussions with prospects occur on a regular and continuing basis.
Supervision and Regulation
General. Susquehanna is a bank holding company registered with the Board of
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Governors of the Federal Reserve System ("Board") and is subject to regulation
under the Bank Holding Company Act of 1956, as amended. This law (the "BHC Act")
requires prior approval of an acquisition of assets or of ownership or control
of voting shares of any bank if the acquisition would give Susquehanna more than
5% of the voting shares of any bank or bank holding company. It also imposes
restrictions, summarized below, on the assets or voting shares of non-banking
companies which Susquehanna may acquire.
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Susquehanna's commercial and federal savings bank subsidiaries are also
subject to regulation and supervision. Farmers First Bank, a state bank, is
subject to regulation and periodic examination by the Pennsylvania Department of
Banking and the FDIC. Founders' Bank and First Capitol Bank are state member
banks subject to regulation and periodic examination by the Board and the
Pennsylvania Department of Banking. Citizens National Bank of Southern
Pennsylvania, First National Trust Bank, Williamsport National Bank, First
American National Bank of Pennsylvania and Equity Bank, National Association,
are national banks and are subject to regulation and periodic examination by the
Office of the Comptroller of the Currency (the "OCC"). Farmers & Merchants Bank
and Trust, a state bank, is subject to regulation and periodic examination by
the Maryland Banking Commission and the FDIC. Susquehanna Bank, a federal
savings bank, is subject to regulation and periodic examination by the Office of
Thrift Supervision (the "OTS"). Susquehanna South is also subject to supervision
and regulation by the OTS as a savings and loan holding company. Because
Susquehanna is a bank holding company, all of its subsidiaries are subject to
examination by the Board even if not otherwise regulated by the Board.
Consistent with the requirements of the BHC Act, Susquehanna's only lines
of business in 1999 consisted of providing to its customers commercial banking,
thrift and other banking-related services and products. These included
commercial banking through its nine subsidiary banks, thrift activities through
its federal savings bank subsidiary, credit life insurance through another
subsidiary and leasing operations through an additional subsidiary. Of these
activities, however, commercial banking and savings activities accounted for
more than 97% of Susquehanna's gross revenues in each of 1998 and 1999.
Regulations governing Susquehanna and its subsidiary depository
institutions restrict extensions of credit by such institutions to Susquehanna
and, with some exceptions, the other Susquehanna affiliates. For these purposes,
extension of credit include loans and advances to and guarantees and letters of
credit on behalf of Susquehanna and such affiliates. These regulations also
restrict investments by Susquehanna's depository institution subsidiaries in the
stock or other securities of Susquehanna and the covered affiliates as well as
the acceptance of such stock or other securities as collateral for loans to any
borrower, whether or not related to Susquehanna.
Susquehanna's commercial and savings bank subsidiaries are subject to
comprehensive federal and state regulations dealing with a wide variety of
subjects, including reserve requirements, loan limitations, restrictions as to
interest rates on loans and deposits, restrictions as to dividend payments,
requirements governing the establishment of branches and numerous other aspects
of their operations. These regulations generally have been adopted to protect
depositors and creditors rather than shareholders.
Financial Modernization Legislation. In late 1999, Congress enacted the
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Gramm-Leach-Bliley Act (the "GLB Act") to modernize the legal structure of the
U.S. financial services industry. The GLB Act permits a bank holding company,
all of whose depository institution subsidiaries meet certain tests (discussed
below), to elect to become a "financial holding company" (an "FHC"). The
Susquehanna depository institutions meet these tests, and Susquehanna recently
elected to become an FHC.
As an FHC, Susquehanna will be permitted to engage, directly or through
subsidiaries, in a wide variety of activities not previously allowed to it which
are financial in nature or are incidental or complimentary to a financial
activity. Susquehanna may still engage in all of the activities previously
allowed to it, whether or not presently conducted. The new activities
additionally permitted to Susquehanna as an FHC (if it so determines to conduct
them) include, among others, insurance and securities underwriting, merchant
banking activities, issuing and selling annuities and securitized interests in
financial assets and engaging domestically in activities that bank holding
companies previously have been permitted to engage in only overseas. It is
expected that in the future other activities will be added to the permitted
list. All of these listed activities can be conducted, through an acquisition or
on a start-up basis, without prior Board approval and with only notice to the
Board after the fact.
The GLB Act also generally permits well-capitalized national banks with
proper regulatory approval (and, if state law permits, state chartered banks as
well), to form or acquire financial subsidiaries to engage in most of these same
activities, with the exception of certain specified activities (insurance
underwriting, for example) which must be conducted only at the level of the
holding company or a nonbank subsidiary.
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As an FHC, Susquehanna will generally be subject to the same regulation as
other bank holding companies, including the reporting, examination, supervision
and consolidated capital requirements of the Board. However, in some respects
the regulation is modified as a result of FHC status. For example, Susquehanna
must continue to satisfy certain conditions (discussed below) to preserve its
full flexibility as an FHC. On the other hand, as an FHC, Susquehanna, unlike
traditional bank holding companies, will be permitted to embark on several new
types of activities and several additional types of acquisitions without Board
approval and with only notice afterward. To qualify as an FHC, Susquehanna had
to certify that all of its commercial and savings bank subsidiaries were
well-capitalized and well-managed and were rated "satisfactory" or better in
their most recent Community Reinvestment Act ("CRA") examinations.
An FHC ceasing to meet these standards will be subject to a variety of
restrictions, depending on the nature of the problem. If the Board determines
that any of the FHC's subsidiary depository institutions are either not
well-capitalized or not well-managed, it must notify the FHC. Until compliance
is restored, the Board has broad discretion to impose appropriate limitations on
the FHC's activities. If compliance is not restored within 180 days, the Board
may ultimately require the FHC to divest its depository institutions.
The potential restrictions are different if the lapse pertains to the CRA
requirement. In that case, until all the subsidiary institutions are restored to
at least "satisfactory" CRA rating status, the FHC may not engage, directly or
through a subsidiary, in any of the new activities permissible under the GLB Act
nor make additional acquisitions of companies engaged in the new activities.
However, completed acquisitions and new activities and affiliations previously
begun are left undisturbed, as the GLB Act does not require divestiture for this
type of problem.
Capital Adequacy. Under the risk-based capital requirements applicable to
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them, bank holding companies must maintain a ratio of total capital to
risk-weighted assets (including the asset equivalent of certain off-balance
sheet activities such as acceptances and letters of credit) of not less than 8%
(10% to be "well-capitalized"). At least 4% out of the total capital (6% to be
well capitalized) must be composed of common stock, retained earnings,
noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, after deducting goodwill and certain
other intangibles ("tier 1 capital"). The remainder of total capital ("tier 2
capital") may consist of mandatory convertible debt securities and a limited
amount of subordinated debt, qualifying preferred stock and loan loss allowance.
At December 31, 1999, Susquehanna's tier 1 capital and total capital (i.e., tier
1 plus tier 2) ratios were 12.7% and 15.6%, respectively.
The Board has also established minimum leverage ratio guidelines for bank
holding companies. These guidelines mandate a minimum leverage ratio of tier 1
capital to adjusted average quarterly assets less certain amounts ("leverage
amounts") equal to 3% for bank holding companies meeting certain criteria
(including those having the highest regulatory rating). All other banking
organizations are generally required to maintain a leverage ratio of at least 3%
plus an additional cushion of 100 to 200 basis points. The Board's guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions are expected to maintain capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Board will continue to consider a
"tangible tier 1 leverage ratio" (i.e., after deducting all intangibles) in
evaluating proposals for expansion or new activities. The Board has not advised
Susquehanna of any specific minimum leverage ratio applicable to it. At December
31, 1999, Susquehanna's leverage ratio was 9.1%.
Susquehanna's subsidiary depository institutions are all subject to similar
capital standards promulgated by their respective federal regulatory agencies.
No such agency has advised any of Susquehanna's subsidiary institutions of any
specific minimum leverage ratios applicable to it.
FDICIA Capital Categories. The Federal Deposit Insurance Corporation
-------------------------
Improvement Act of 1991 ("FDICIA") requires the federal regulators to take
prompt corrective action against any undercapitalized institution. FDICIA
establishes five capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Well-capitalized institutions significantly exceed the
required minimum level for each capital measure (currently, risk-based and
leverage). Adequately capitalized institutions
7
include depository institutions that meet the required minimum level for each
capital measure. Undercapitalized institutions consist of those that fail to
meet the required minimum level for one or more relevant capital measures.
Significantly undercapitalized characterizes depository institutions with
capital levels significantly below the minimum requirements. Currently, all of
Susquehanna's depository institution subsidiaries qualify as well-capitalized.
Cross Guarantees. Susquehanna's subsidiary commercial and federal savings
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bank subsidiaries are also subject to cross-guaranty liability under federal
law. This means that if one FDIC-insured depository institution subsidiary of a
multi-institution bank holding company fails or requires FDIC assistance, the
FDIC may assess "commonly controlled" depository institutions for the estimated
losses suffered by the FDIC. Such liability could have a material adverse effect
on the financial condition of any assessed subsidiary institution and on
Susquehanna as the common parent. While the FDIC's cross-guaranty claim is
junior to the claims of depositors, holders of secured liabilities, general
creditors and subordinated creditors, it is superior to the claims of
shareholders and affiliates.
Source of Strength Doctrine. Under Board policy, a bank holding company is
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expected to serve as a source of financial strength to each of its subsidiary
banks and to stand prepared to commit resources to support each of them.
Consistent with this policy, the Board has stated that, as a matter of prudent
banking, a bank holding company should generally not maintain a given rate of
cash dividends unless its net income available to common shareholders has been
sufficient to fully fund the dividends and the prospective rate of earnings
retention appears to be consistent with the corporation's capital needs, asset
quality and overall financial condition.
Interstate Banking and Branching. Under the Pennsylvania Banking Code of
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1965, there is no limit on the number of banks that may be owned or controlled
by a Pennsylvania-based bank holding company and the Pennsylvania bank
subsidiaries may branch freely throughout the Commonwealth and, with Department
of Banking approval, abroad.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
eliminated substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies. The same Act generally permits the federal
banking agencies to approve merger transactions resulting in the creation of
branches by banks outside their home states and permits the OCC to authorize the
creation by national banks of branches outside their home states if the host
state into which they propose to branch has enacted authorizing legislation. Of
the middle-Atlantic states, Pennsylvania, New Jersey, Ohio and West Virginia
have enacted legislation authorizing such "de novo" branching by banks located
in states offering reciprocal treatment to their institutions. Maryland has as
well, but without the requirement of reciprocity. Delaware and New York do not
allow de novo branching by sister-state banks and require that they enter the
state through mergers of established institutions. Qualifying federal savings
associations are also generally permitted to establish interstate branches.
Liberalizing the branching laws in recent years has had the effect of increasing
competition within the markets in which Susquehanna now operates.
Regulation of Nonbank Subsidiaries. Susquehanna has four direct non-bank
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subsidiaries, all wholly-owned: Susque-Bancshares Life Insurance Company
("SBLIC"), a reinsurance company, Susque-Bancshares Leasing Co., Inc. ("SBLC"),
a leasing company, Hann, a consumer automobile financing and leasing company,
and VFAM, an investment advisory firm. SBLIC is organized under Arizona law to
operate as a credit life, health and accident reinsurer to the extent permitted
by Pennsylvania law. SBLIC is regulated by the Arizona Department of Insurance
and is subject to periodic review by that Department. SBLC is organized under
the laws of the Commonwealth of Pennsylvania and owns a single leasing company
subsidiary with commercial finance powers. Hann is organized under New Jersey
law and is also authorized to do business in Pennsylvania, New York and
Connecticut. It is regulated by Connecticut as a motor vehicle leasing company,
by Delaware as a finance or small loan agency, and by New Jersey and
Pennsylvania as a sales finance company. VFAM is organized under the laws of
Pennsylvania. It is registered with the Securities and Exchange Commission (the
"SEC") as an investment advisor under the Investment Advisers Act of 1940, and
is licensed under the state securities laws of 17 states. VFAM is also a
registered broker-dealer, is a member of the National Association of Securities
Dealers (the "NASD") and is registered in Canada as an International Advisor.
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Privacy. The new GLB Act has provisions intended to increase the level of
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privacy protection afforded to customers of financial institutions, including
the securities and insurance affiliates of such institutions, partly in
recognition of the increased cross-marketing opportunities created by the Act's
elimination of many of the boundaries previously separating various segments of
the financial services industry. Among other things, these provisions will
require institutions to have in place administrative, technical and physical
safeguards to ensure the security and confidentiality of customer records and
information, to protect against anticipated threats or hazards to the security
or integrity of such records and to protect against unauthorized access to or
use of such records that could result in substantial harm or inconvenience to a
customer. The Act will also require institutions to furnish consumers at the
outset of the relationship and annually thereafter written disclosures
concerning the institution's privacy policies. Although these provisions of the
GLB Act will result in important operational modifications within all affected
financial institutions, Susquehanna included, they are not expected to have a
material effect on the operating results of Susquehanna and its subsidiaries.
Environmental Impact Statement. Compliance by Susquehanna and its
------------------------------
subsidiaries with federal, state and local environmental protection laws during
1999 had no material effect upon capital expenditures or earnings or upon the
competitive position of Susquehanna and its subsidiaries and is also not
expected to materially affect such expenditures, earnings or competition during
2000.
Pending Legislation. From time to time, legislation is proposed for
-------------------
enactment before the United States Congress and before the Pennsylvania General
Assembly which could result in various changes in the laws and regulations
applicable to Susquehanna and its subsidiaries. It is not possible at this time
to predict if or when any such legislation might become law or the extent to
which it might affect the business or competitive status of Susquehanna and its
subsidiaries.
National Monetary Policy. In addition to being affected by general economic
------------------------
conditions, the earnings and growth of Susquehanna and its subsidiaries are
affected by the policies of regulatory authorities, including the OCC, the
Board, the FDIC, the OTS, the SEC, the NASD and state agencies. An important
function of the Board is to regulate the money supply and credit conditions.
Among the instruments used by the Board to implement these objectives are open
market operations in U.S. Government securities, adjustments of the discount
rate and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments and deposits.
Their use may also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Board have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon the future
business, earnings and growth of Susquehanna and its subsidiaries cannot be
predicted.
Competition
Bank and financial holding companies and their subsidiaries compete with
many institutions for deposits, loans, trust services and other banking-related
and financial services. Susquehanna and its subsidiaries are subject to
competition from less heavily regulated entities such as brokerage firms, money
market funds, consumer finance and credit card companies and other financial
services companies.
The recently enacted GLB Act has liberalized many of the regulatory
restrictions previously imposed on Susquehanna and its subsidiaries. Further
legislative proposals are pending or may be introduced which could further
effect the financial services industry. It is not possible to assess whether any
of such proposals will be enacted, and if enacted, what effect such a proposal
would have on the competitive positions of Susquehanna in its market place.
As a result of state and federal legislation enacted over the past 20
years, consolidation in the industry has continued at a rapid pace. Further, as
a result of relaxation of laws and regulations pertaining to branch banking in
the state, and the opportunity to engage in interstate banking, the
consolidation within the banking industry has had a significant competitive
effect on Susquehanna and its markets. At present, Susquehanna and its
subsidiary
9
depository institutions compete with numerous super-regional institutions with
significantly greater resources and assets which conduct banking business
throughout the region.
Business Trends
Current business trends include an increasing interest rate environment, a
relatively strong and diverse local economy and continuing consumer confidence.
While conditions are presently stable, a variety of factors (e.g., any
substantial rise in the inflation or unemployment rates), may effect such
stability, both in Susquehanna's markets as well as national markets.
Susquehanna will continue its emphasis on control of funding costs and lending
rates to effectively maintain profitability. In addition, Susquehanna will seek
relationships which can generate fee income which is not directly tied to
lending relationships. Susquehanna anticipates that this approach will help
dampen its earnings fluctuations which are driven by movement in interest rates,
business and consumer loan cycles, and local economic factors.
Executive Officers
The executive officers of Susquehanna, their ages and their positions with
Susquehanna, is set forth in the following table:
Name Age Title
- ---- -- -----
Robert S. Bolinger(1)(2) 63 Chairman of the Board and Chief Executive Officer
William J. Reuter(3) 50 President
Gregory A. Duncan(4) 44 Executive Vice President
Drew K. Hostetter(5) 45 Senior Vice President, Treasurer and Chief Financial Officer
William T. Belden(6) 50 Vice President
Frederick W. Bisbee(7) 61 Vice President
Richard M. Cloney(1) (8) 58 Vice President
Charles L. Luppert(9) 58 Vice President
Peter C. Zimmerman(10) 53 Vice President
(1) Robert S. Bolinger and Richard M. Cloney are also principal executive
officers of Farmers First Bank and have been employed by that subsidiary bank in
substantially equivalent positions for more than the past five years.
(2) Mr. Bolinger has also served as a principal executive officer of
Susquehanna South since its inception in 1994, and has also been a principal
executive officer of Susquehanna East since its inception in 1997.
(3) William J. Reuter was appointed Senior Vice President of Susquehanna on
January 21, 1998 and promoted to President of Susquehanna on January 19, 2000.
He is also the principal executive officer of Farmers & Merchants Bank and Trust
and has been employed by that subsidiary bank in a substantially equivalent
position for more than the past five years. In 1996 Mr. Reuter was named an
executive officer of Susquehanna South, and in 1997, its wholly-owned
subsidiary, Susquehanna Bank.
(4) Gregory A. Duncan was also the principal executive officer of Citizens
National Bank of Southern Pennsylvania until September 1, 1999, and had been
employed by that subsidiary bank in a substantially equivalent position since
1992. He was appointed Senior Vice President - Administration, of Susquehanna on
January 21, 1998 and promoted to his current position on January 19, 2000. He
was also appointed President of SBLIC on June 14, 1999 and Secretary of SBLC on
July 15, 1998.
(5) Drew K. Hostetter was appointed Assistant Treasurer of Susquehanna in 1995,
was promoted to Treasurer in 1996 and promoted to Vice President, Treasurer and
Chief Financial Officer in 1998. He was promoted to his current position on
January 19, 2000. Mr. Hostetter was also appointed Treasurer and Assistant
Secretary of Susquebanc Lease Co. on September 17, 1998 and Assistant Treasurer
of Susquehanna East on April 18, 1997.
10
Prior to joining Susquehanna, Mr. Hostetter served as Senior Vice President and
Corporate Controller of MNC Financial, Baltimore, Maryland, from 1990 to 1994.
(6) William T. Belden is also a principal executive officer of Farmers First
Bank, having been appointed as President and Chief Operating Officer in 1995 and
promoted to President and Chief Executive Officer on March 22, 1999.
(7) Frederick W. Bisbee is also the President Emeritus of First National Trust
Bank, having been appointed to that position on January 1, 2000. Prior to that,
he served as the principal executive officer of that subsidiary bank for more
than the past five years. He has also been a Vice President of SBLIC since 1992.
(8) Mr. Cloney is also a Vice President of SBLIC, having been appointed to that
position in 1984, the President of SBLC, having been appointed to that position
in 1986, and the President and Chief Executive Officer of Susquebanc Lease Co.,
a Susquehanna subsidiary, having been appointed to that position in 1988.
(9) Charles W. Luppert is also the principal executive officer of Williamsport
National Bank and has been employed by that subsidiary bank in a substantially
equivalent position for more than the past five years.
(10) Mr. Zimmerman is also an Executive Vice President of Susquehanna East,
having been appointed to that position on April 1, 1998, and the Vice Chairman
of Equity Bank, National Association, a Susquehanna subsidiary, having been
appointed to that position on April 22, 1998. He was also appointed President
and Chief Executive Officer of Susquehanna Trust & Investment Company, also a
Susquehanna subsidiary, in May of 1999. Prior to joining Susquehanna, Mr.
Zimmerman was the President and Chief Operating Officer of Financial Trust Corp.
from 1995 to 1997 and the President and Chief Executive Officer of Financial
Trust Company in 1997.
There are no family relationships among the executive officers of
Susquehanna nor are there any arrangements or understandings between any of them
and any other person pursuant to which any of them was selected an officer of
Susquehanna.
Item 2. Properties
- ------- ----------
Susquehanna reimburses its subsidiaries for space and services utilized. It
also leases office space located at Topflight Airpark, Showalter Road,
Hagerstown, Maryland for its new loan servicing center, and office space located
at 701 South Broad Street, Lititz, Pennsylvania, for its Audit, Human Resources,
Loan Review, Marketing and Sales Support departments.
Susquehanna's subsidiary depository institutions operate 120 full-service
branches, 20 limited-service branches and 38 free-standing automated teller
machines. The depository institutions own 80 of the branches and lease the
remaining 60. Ten additional locations are owned or leased by subsidiary banks
to facilitate operations and expansion. Management of Susquehanna believes that
the properties currently owned and leased by its subsidiaries are adequate for
present levels of operation.
As of December 31, 1999, the offices (including executive offices) of
Susquehanna's depository institution subsidiaries, were as follows:
Executive Office Location of Offices
Subsidiary Location of Executive Office Owned/Leased (including executive office)
- ---------- ---------------------------- ------------ ----------------------------
Farmers First Bank 9 East Main Street Owned 29 full-service and 11
Lititz, Pennsylvania limited-service banking offices
in Lancaster and York Counties,
Pennsylvania
Citizens National Bank of 35 North Carlisle Street Owned 7 full-service banking offices in
11
Executive Office Location of Offices
Subsidiary Location of Executive Office Owned/Leased (including executive office)
- ---------- ---------------------------- ------------ ----------------------------
Southern Pennsylvania Greencastle, Pennsylvania Franklin County, Pennsylvania
First National Trust Bank 400 Market Street Owned 11 full-service and 1
Sunbury, Pennsylvania limited-service banking offices
in Northumberland, Snyder,
Columbia and Union Counties,
Pennsylvania
Williamsport National Bank 329 Pine Street Owned 6 full-service and 1 limited
Williamsport, Pennsylvania service banking offices in
Lycoming County, Pennsylvania
Farmers & Merchants Bank and 59 West Washington Street Owned 22 full-service and 6 limited
Trust Hagerstown, Maryland service banking offices in
Washington, Allegany and
Garrett Counties, Maryland
Susquehanna Bank 100 West Road Leased 21 full-service banking offices
Towson, Maryland located in Baltimore City and
Baltimore, Harford, Anne
Arundel, Carroll, Worcester and
Wicomico Counties, Maryland
First American National Bank 140 East Main Street Owned 5 full-service banking offices
of Pennsylvania Everett, Pennsylvania in Bedford and Blair Counties,
Pennsylvania
Equity Bank, National 8000 Sagemore Drive Leased 11 full-service and 1
Association Suite 8101 limited-service banking offices
Marlton, New Jersey in Camden, Gloucester and
Burlington Counties, New Jersey
Founders' Bank 101 Bryn Mawr Avenue Leased 3 full-service banking offices
Bryn Mawr, Pennsylvania in Montgomery, Chester and
Delaware Counties, Pennsylvania
First Capitol Bank 2951 Whiteford Road Leased 5 full-service banking offices
York, Pennsylvania in York County, Pennsylvania
The executive offices of Hann, a non-depository institution subsidiary of
Susquehanna that was acquired on February 1, 2000, are located at One Centre
Drive, Jamesburg, New Jersey. Hann leases both this facility and a second
facility located at 1051 North Black Horse Pike, Williamstown, New Jersey.
The executive offices of VFAM, another non-depository institution
subsidiary of Susquehanna that was acquired on March 3, 2000, are located at 120
South Warner Road, King of Prussia, Pennsylvania. VFAM leases this facility.
12
Item 3. Legal Proceedings.
- ------ -----------------
There are no material proceedings to which Susquehanna or any of its
subsidiaries are a party or by which they, or any of them, are threatened. All
legal proceedings presently pending or threatened against Susquehanna and its
subsidiaries involve routine litigation incidental to the business of
Susquehanna or the subsidiary involved and are not material in respect to the
amount in controversy.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of 1999.
13
PART II
-------
Item 5. Market for Susquehanna Capital Stock and Related Shareholder Matters.
- ------ --------------------------------------------------------------------
Susquehanna common stock is listed for quotation on the National
Association of Securities Dealers National Market System. Set forth below are
the quarterly high and low bid prices of Susquehanna's common stock as reported
on the Nasdaq National Market System for the years 1998 and 1999, and cash
dividends paid. The table represents prices between dealers and does not include
retail markups, markdowns or commissions and does not necessarily represent
actual transactions.
- --------------------------------------------------------------------------------
Price Range Per Share*
----------------------
- --------------------------------------------------------------------------------
Cash
----
Dividends
---------
Year Period Paid Low Bid High Bid
---- ------ ---- ------- --------
1998 1st Quarter $.14 $21.67 $26.00
Common
2nd Quarter .14 22.67 26.08
Common
3rd Quarter .14 17.88 26.75
Common
4th Quarter .15 15.50 22.75
Common
1999 1st Quarter $.15 $16.50 $21.25
Common
2nd Quarter .15 17.00 19.38
Common
3rd Quarter .15 15.75 18.50
Common
4th Quarter .17 14.88 18.25
Common
- ----------- ------------------- -------------- ------------- ----------------
*Prices and dividends have been adjusted to reflect Susquehanna's three-for-two
stock split paid on July 1, 1998 to shareholders of record on June 15, 1998.
As of February 29, 2000, there were 6,700 record holders of Susquehanna
common stock.
Dividends paid by Susquehanna are provided from dividends paid to it by its
subsidiaries. Susquehanna's ability to pay dividends is largely dependent upon
the receipt of dividends from its bank and savings bank subsidiaries. Both
federal and state laws impose restrictions on the ability of these subsidiaries
to pay dividends. These include the Pennsylvania Banking Code in the case of
Farmers First Bank, the Financial Institutions Article of the Annotated Code of
Maryland in the case of Farmers & Merchants Bank and Trust, the National Bank
Act in the case of First National Trust Bank, Williamsport National Bank,
Citizens National Bank of Southern Pennsylvania, Equity Bank, National
Association and First American National Bank of Pennsylvania, the Federal
Reserve Act in the case of Founders' Bank and First Capitol Bank, and the Home
Owners Loan Act in the case of Susquehanna Bank and the applicable regulations
under such laws. The net capital rules of the SEC under the Securities Exchange
Act of 1934 also limit the ability of VFAM to pay dividends to Susquehanna. In
addition to the specific restrictions, summarized below, the banking, thrift and
securities regulatory agencies also have broad authority to prohibit otherwise
permitted dividends proposed to be made by an institution regulated by them if
the agency determines that their distribution would constitute an unsafe or
unsound practice.
14
The Board and the FDIC have issued policy statements which provide that, as
a general matter, insured banks and bank holding companies may pay dividends
only out of current operating earnings.
For national banks and state-chartered banks which are members of the
Federal Reserve System (like Founders' Bank and First Capitol Bank), the
approval of the applicable federal regulatory agency is required for the payment
of dividends by the bank subsidiary in any calendar year if the total of all
dividends declared by the bank in that calendar year exceeds the current year's
retained net income combined with the retained net income for the two preceding
years. "Retained net income" for any period means the net income for that period
less any common or preferred stock dividends declared in that period. Moreover,
no dividends may be paid by such bank in excess of its undivided profits
account.
Dividends payable by a Pennsylvania state-chartered bank are restricted by
the requirement that the bank set aside to a surplus fund each year at least 10%
of its net earnings until the bank's surplus equals the amount of its capital (a
requirement presently satisfied in the case of all of the Pennsylvania state
bank subsidiaries of Susquehanna). Furthermore, a Pennsylvania bank may not pay
a dividend if the payment would result in a reduction of the surplus available
to the bank.
A Maryland state-chartered bank may pay dividends out of undivided profits
or, with the approval of the Maryland Bank Commissioner, from surplus in excess
of 100% of required capital stock. If, however, the surplus of a Maryland bank
is less than 100% of its required capital stock, cash dividends may not be paid
in excess of 90% of net earnings.
As indicated above, Susquehanna looks to distributions from Susquehanna
Bank (along with the other Susquehanna operating subsidiaries) as the source of
funds to distribute as dividends. However, federal regulations impose
restrictions on dividend payments by savings institutions which converted from
the mutual to stock form of ownership and were federally insured at the time of
the conversion, as was the case with the two predecessors of Susquehanna Bank,
the former Atlantic Federal Savings Bank ("Atlantic Federal") and Reisterstown
Federal Savings Bank ("Reisterstown Federal"). Upon their conversion to stock
form, mutual savings institutions are required by regulation to establish a
"liquidation account" by restricting a portion of their net capital for the
benefit of eligible savings account holders who continue to maintain their
savings accounts with the institution after the conversion. In the event of a
subsequent complete liquidation of the institution (and only in such event),
each savings account holder who continues to maintain a savings account would be
entitled to receive a distribution from the liquidation account after payment to
all creditors, but before any liquidation distribution with respect to the
institution's capital stock. This account is proportionally reduced for any
decreases in the eligible holder's savings accounts. Susquehanna Bank has
succeeded to the liquidation account obligations of Atlantic Federal and
Reisterstown Federal.
Under federal regulations, savings institutions such as Atlantic Federal
and Reisterstown Federal which have converted from mutual form may not declare
or pay a cash dividend on common stock if the dividend would cause the
institution's capital to be reduced below the amount required for the
maintenance of the liquidation account or for regulatory capital requirements
generally.
Savings associations such as Susquehanna Bank are subject to federal
regulatory limitations on the amount of cash dividends they may pay, depending
on the level of their regulatory capital in relation to regulatory capital
requirements. At present, Susquehanna Bank may, after notice to but without
approval of the OTS, make capital distributions during a calendar year of up to
100% of its year to date net income plus such additional amounts as would not
reduce by more than one-half its surplus capital at the beginning of the
calendar year, or, if greater, 75% of its net income for the most recent
four-quarter period. However, the OTS has overriding authority to prohibit an
otherwise permissible cash dividend proposed to be made by a federal savings
bank if the OTS determines that the distribution would result in an unsafe or
unsound practice.
The capital requirements applicable to federal savings banks require them
to maintain tangible capital of at least 1.5% of adjusted total assets, a
leverage ratio or core capital of at least 3% of adjusted total assets, and
overall risk-based capital of at least 8% of total risk-weighted assets. For
these purposes, tangible capital consists of
15
common stockholder's equity net of certain intangible assets phased out over
several years, and core capital consists of tangible capital augmented by
"supervisory" goodwill and certain other items. The risk-based capital
requirement involves the risk weighting of various classes of assets (including
the asset equivalent of certain commitments and obligations) and is comparable
to the risk-based capital regimen applicable to banks.
The capital rules applicable to federal savings banks include provisions
intended to measure the sensitivity of the institution's portfolio market values
to hypothetical shifts in market interest rates. If interest rate risk is found
to exist at levels above certain thresholds prescribed by these rules, an
additional level of capital is required. Susquehanna Bank has not to date been
required to maintain additional capital as a result of the interest rate risk
component of the risk-based capital rule.
Within the regulatory restrictions described above, each of the commercial
and federal savings bank subsidiaries of Susquehanna presently has the ability
to pay dividends and at December 31, 1999, $56.8 million in the aggregate was
available for dividend distributions during calendar 2000 to Susquehanna from
its commercial and savings bank subsidiaries without regulatory approval.
Susquehanna presently expects that cash dividends will continue to be paid by
its subsidiaries in the future at levels comparable with those of prior years.
16
Item 6. Selected Financial Data.
- ------ -----------------------
See Page 18.
17
Selected Financial Data
Dollars in thousands, except per share
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 299,770 $ 300,842 $ 282,011 $ 269,313 $ 222,475
Interest expense 138,848 142,713 126,852 120,959 97,563
Net interest income 160,922 158,129 155,159 148,354 124,912
Provision for loan and lease losses 7,200 5,333 4,731 4,989 5,323
Other income 39,979 31,188 24,651 22,900 17,775
Other expenses 131,882 118,064 112,763 117,099 94,424
Income before taxes 61,819 65,920 62,316 49,166 42,940
Net income 43,397 45,163 42,734 33,260 30,523
Cash dividends declared on common stock 22,918 20,132 18,371 16,226 13,156
Dividend payout ratio 52.8% 44.6% 43.0% 48.8% 43.1%
Per Common Share Amounts*
- -----------------------------------------------------------------------------------------------------------------------------------
Net income--basic $ 1.17 $ 1.22 $ 1.18 $ 0.92 $ 0.93
--diluted 1.17 1.21 1.17 0.92 0.93
Cash dividends declared on common stock 0.62 0.57 0.55 0.52 0.49
Financial Ratios
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.04% 1.13% 1.18% 0.96% 1.07%
Return on average stockholders' equity 10.73 11.62 12.13 10.14 11.27
Net interest margin 4.27 4.36 4.72 4.72 4.85
Average stockholders' equity to average assets 9.66 9.70 9.74 9.46 9.48
Tangible Operating Results
- -----------------------------------------------------------------------------------------------------------------------------------
Tangible net income $ 46,372 $ 47,415 $ 45,709 $ 36,077 $ 31,750
Tangible earnings per share 1.25 1.29 1.26 1.00 0.97
Return on tangible average shareholders' equity 12.48% 13.41% 15.46% 13.31% 12.93%
Return on tangible average assets 1.12 1.19 1.26 1.04 1.11
Year-End Balances
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $4,310,606 $4,176,026 $3,762,469 $3,558,414 $3,034,182
Investment securities 912,048 951,744 723,745 729,234 766,073
Loans and leases, net of unearned income 2,995,152 2,847,185 2,714,779 2,483,371 1,967,061
Deposits 3,180,520 3,216,879 3,041,466 2,933,301 2,511,104
Total borrowings 674,921 513,177 294,758 229,574 158,676
Stockholders' equity 404,390 402,081 373,906 337,040 317,002
Selected Share Data*
- -----------------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period end) 37,023 36,902 36,915 36,035 35,511
Average common shares outstanding--basic 36,960 36,868 36,296 35,989 32,645
--diluted 37,137 37,188 36,551 36,067 32,714
At December 31:
Book value per share $ 10.92 $ 10.91 $ 10.14 $ 9.38 $ 8.95
Market price per common share 15.88 20.47 25.50 15.39 11.78
Common stockholders 6,719 6,661 6,237 5,693 5,759
* Amounts adjusted for the three-for-two stock splits in July 1997 and 1998.
18
Item 7. Management's Discussion and Analysis of Results of Operations
- ------ -------------------------------------------------------------
and Financial Condition
-----------------------
See Pages 20-34.
19
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following pages of this report present management's discussion and analysis
of the consolidated financial condition and results of operations of Susquehanna
Bancshares, Inc., including its subsidiaries: Farmers First Bank; Farmers &
Merchants Bank and Trust; First American National Bank of Pennsylvania; First
Capitol Bank; First National Trust Bank; Williamsport National Bank; Citizens
National Bank of Southern Pennsylvania; Susquehanna Bancshares East, Inc. and
its commercial bank subsidiaries Equity Bank, N.A., and Founders' Bank;
Susquehanna Bancshares South, Inc. and its savings bank subsidiary Susquehanna
Bank; Susque-Bancshares Leasing Co., Inc.; and Susque-Bancshares Life Insurance
Company.
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, such as statements that 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 various types
of market risks, such as interest rate risk and credit risk. Such statements are
subject to certain risks and uncertainties. For example, certain of the market
risk disclosures are dependent on choices about key model characteristics and
assumptions and are subject to various limitations. By their nature, certain of
the market risk disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, future 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; and the success of
Susquehanna in managing the risks involved in the foregoing.
RESULTS OF OPERATIONS
Summary of 1999 Compared to 1998
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for the years ended December 31, 1999 and
1998. These transactions are described in the following paragraphs.
On January 24, 2000, Susquehanna announced that it recognized $10.8 million
of pre-tax special charges relating to the consolidation of Susquehanna's back
office operations and a special bonus. The restructure charge of $7.4 million
represents severance, employee and employment assistance services, consulting,
and asset write-offs related to a reduction in the work force. This reduction in
the work force should result in an estimated net annual savings of $6.0 million,
of which approximately 50% will be realized in the year 2000 with 100%
realization in years after 2000. The special bonus is awarded to Susquehanna
employees (excluding executive and senior management) for extraordinary efforts
in 1999.
On January 4, 1999, Susquehanna acquired First Capitol Bank, a Pennsylvania
commercial bank with $111 million in assets and $93 million in deposits at the
acquisition date. Susquehanna issued 1,055,247 shares of its common stock to the
shareholders of First Capitol based upon an exchange ratio of 2.028 shares of
Susquehanna common stock for each outstanding share of First Capitol. 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 First Capitol for all periods
presented.
On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc.
("Cardinal"), a Pennsylvania bank holding company with $138 million in assets
and $114 million in deposits at the acquisition date. Susquehanna issued
2,027,296 shares of its common stock to the shareholders of Cardinal based upon
an exchange ratio of 2.048 shares of Susquehanna common stock for each
outstanding share of Cardinal. 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
Cardinal for all periods presented.
Susquehanna's net income for the year ended December 31, 1999, decreased to
$43.4 million, or 4% below 1998 net income of $45.2 million. Excluding the
special charges noted above, Susquehanna's net income for 1999 would have been
$51.0 million, or a 13% increase over annual 1998 earnings. Susquehanna's
earnings performance was affected by significant growth in non-interest income
resulting primarily from the purchase of certain insurance-related products,
such as bank-owned life insurance ("BOLI"), and a one-time $3.3 million pre-tax
gain on the sale of two branch offices. Non-interest income increased $8.8
million, or 28%, in 1999 over 1998.
Diluted earnings per common share ("EPS"), were $1.17 in 1999 compared to
$1.21 in 1998. Excluding the special
20
charges noted above, Susquehanna's diluted EPS would have been $1.37 for 1999,
13% higher than 1998 diluted EPS. Return on average assets ("ROA") and return on
average equity ("ROE") decreased from 1.13% and 11.62%, respectively, in 1998 to
1.04% and 10.73%, respectively, in 1999. Excluding the special charges noted
above, Susquehanna's ROA and ROE for 1999 would have been 1.22% and 12.60%,
respectively.
During 1995 and 1996, Susquehanna acquired two Maryland savings banks under
the purchase method of accounting. These purchase transactions created an
intangible asset, goodwill, of $34 million, which significantly affects
Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash
charge to earnings. Tangible net income is actual net income increased by the
tax-effected amortization of those intangible assets that are deducted from
equity in determining Tier 1 capital.
For 1999, tangible net income, earnings per share, ROA and ROE were $46.4
million, $1.25, 1.12% and 12.48%, respectively, compared to actual net income,
basic earnings
TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
Assets Balance Interest % Balance Interest % Balance Interest %
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 49,673 $ 2,420 4.87 $ 80,924 $ 4,289 5.30 $ 75,408 $ 4,131 5.48
Investment securities:
Taxable 811,255 50,394 6.21 766,342 48,578 6.34 594,467 37,604 6.33
Tax-advantaged 116,037 8,189 7.06 122,691 8,731 7.12 120,261 8,598 7.15
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 927,292 58,583 6.32 889,033 57,309 6.45 714,728 46,202 6.46
- ----------------------------------------------------------------------------------------------------------------------------------
Loans (net of unearned income):
Taxable 2,848,901 238,740 8.38 2,708,037 238,946 8.82 2,546,473 231,755 9.10
Tax-advantaged 49,380 4,451 9.01 54,612 5,077 9.30 47,098 4,511 9.58
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 2,898,281 243,191 8.39 2,762,649 244,023 8.83 2,593,571 236,266 9.11
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,875,246 304,194 7.85 3,732,606 305,621 8.19 3,383,707 286,599 8.47
==================================================================================================================================
Allowance for loan losses (36,530) (36,206) (36,228)
All other non-earning assets 348,450 308,171 271,012
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,187,166 $ 4,004,571 $ 3,618,491
==================================================================================================================================
Liabilities &
Stockholders' Equity
Deposits:
Interest-bearing demand $ 966,906 $ 27,901 2.89 $ 900,160 $ 28,795 3.20 $ 805,808 $ 25,401 3.15
Savings 444,938 8,172 1.84 449,022 10,102 2.25 463,609 11,732 2.53
Time 1,337,536 69,940 5.23 1,361,984 75,807 5.57 1,342,077 73,717 5.49
Other borrowings 477,050 25,354 5.31 377,287 20,707 5.49 163,476 8,757 5.36
Long-term debt 95,000 7,481 7.87 91,370 7,302 7.99 90,000 7,245 8.05
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3,321,430 $ 138,848 4.18 3,179,823 $142,713 4.49 2,864,970 $126,852 4.43
- ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 421,055 390,231 351,311
Other liabilities 40,132 45,889 49,942
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,782,617 3,615,943 3,266,223
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 404,549 388,628 352,268
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $ 4,187,166 $ 4,004,571 $ 3,618,491
==================================================================================================================================
Net interest income/yield on
average earning assets $ 165,346 4.27 $ 162,908 4.36 $159,747 4.72
==================================================================================================================================
For purposes of calculating loan yields, the average loan volume includes
nonaccrual loans. For purposes of calculating yields on tax-advantaged interest
income, the taxable equivalent is made to equate tax-advantaged interest on the
same basis as taxable interest. The marginal tax rate is 35%.
21
per share, ROA and ROE of $43.4 million, $1.17, 1.04% and 10.73%, respectively.
Excluding the special charges, tangible net income, EPS, ROA and ROE were $53.9
million, $1.46, 1.30% and 14.51%, respectively. Tangible net income, earnings
per share, ROA and ROE for 1998 were $47.4 million, $1.29, 1.19% and 13.41%,
respectively.
Net Interest Income--Taxable Equivalent Basis
The major source of operating revenues is net interest income, which rose to a
level of $160.9 million in 1999, $2.8 million, or 2%, above the $158.1 million
attained in 1998. The net interest margin, on a tax equivalent basis, declined
to 4.27% during 1999 from 4.36% in 1998.
Net interest income is the income which remains after deducting from total
income generated by interest-earning assets the interest expense attributable to
the acquisition of the funds required to support interest-earning assets. Income
from interest-earning assets includes income from loans and leases, income from
investment securities, and income from short-term investments. The amount of
interest income is dependent upon many factors including the volume of
interest-earning assets, the general level of interest rates, the dynamics of
the change in interest rates, and levels of non-performing loans. The cost of
funds varies with the amount of funds necessary to support interest-earning
assets, the rates paid to attract and hold deposits, rates paid on borrowed
funds, and the levels of non-interest-bearing demand deposits and equity
capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-advantaged 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 80%, 84%, and 86%
for the twelve months ended December 31, 1999, 1998, and 1997, respectively.
Table 2 illustrates that the decline in interest income in 1999 compared with
1998 was attributed to interest rates. The average growth in interest-earning
assets of $143 million in 1999 over 1998 was due to a $136 million increase in
loans and a $38 million increase in the investment portfolio. As shown in Table
1, the tax equivalent yield on interest-earning assets for 1999 declined to
7.85% from 8.19% in interest 1998. This decline was primarily due to lower
reinvestment rates on loans and investments, and market forces impacting product
pricing. Table 2 illustrates the decline in interest expense in 1999 compared
with 1998
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
- ------------------------------------------------------------------------------------------------------------------------------------
1999 Versus 1998 1998 Versus 1997
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Dollars in thousands Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income
Short-term investments $ (1,546) $ (323) $ (1,869) $ 295 $ (137) $ 158
Investment securities:
Taxable 2,805 (989) 1,816 10,895 79 10,974
Tax-advantaged (471) (71) (542) 173 (40) 133
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,334 (1,060) 1,274 11,068 39 11,107
Loans (net of unearned income):
Taxable 12,112 (12,318) (206) 14,401 (7,210) 7,191
Tax-advantaged (475) (151) (626) 702 (136) 566
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 11,637 (12,469) (832) 15,103 (7,346) 7,757
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 12,425 $(13,852) $ (1,427) $ 26,466 $ (7,444) $ 19,022
====================================================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 2,045 $ (2,939) $ (894) $ 3,013 $ 381 $ 3,394
Savings (91) (1,839) (1,930) (360) (1,270) (1,630)
Time (1,342) (4,525) (5,867) 1,101 989 2,090
Other borrowings 5,320 (673) 4,647 11,730 220 11,950
Long-term debt 287 (108) 179 109 (52) 57
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,219 (10,084) (3,865) 15,593 268 15,861
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin $ 6,206 $ (3,768) $ 2,438 $ 10,873 $ (7,712) $ 3,161
====================================================================================================================================
Changes which are due in part to volume and in part to rate are allocated in
proportion to their relationship to the amounts of changes attributed directly
to volume and rate.
22
1998 was primarily attributed to interest rates. Increased levels of demand
deposits and a general reduction in all rates paid for interest-bearing deposits
and borrowings were the primary reasons for the $3.9 million decrease in
interest expense. The average funding costs declined to 4.18% in 1999 compared
with 4.49% in 1998, as increased levels of lower cost interest-bearing demand
deposits outpaced the declines in savings and time deposit balances.
As a result of the preceding comments, Susquehanna's net interest margin, on
a taxable equivalent basis, declined from 4.36% in 1998 to 4.27% in 1999.
Variances do occur in the net interest margin as an exact repricing of assets
and liabilities is not possible. A further explanation of the impact of asset
and liability repricing is found in the Market Risks section of this discussion.
Provision and Allowance for Loan and Lease Losses
Susquehanna's provision for loan and lease losses is based upon management's
quarterly loan portfolio review. The purpose of the review is to assess loan
quality, identify impaired loans, analyze delinquencies, ascertain loan growth,
evaluate potential charge-offs and recoveries, and assess general economic
conditions in the markets its affiliates serve.
Commercial and real estate loans and leases are rated by loan officers and,
periodically, by loan review personnel. Consumer and residential real estate
loans are generally reviewed in the aggregate as they are of relative small
dollar size and homogeneous in nature.
In addition to economic conditions, loan portfolio diversification,
delinquency, and historic loss experience, consideration is also given to
examinations performed by the regulatory authorities.
To determine the allowance and corresponding provision, the amount required
for specific allocation is first determined. For all types of commercial loans
and leases and construction loans, this amount is based upon specific borrower
data determined by reviewing individual non-performing, delinquent, or
potentially troubled credits. In addition, a general allocation is also
determined using the same criteria applied to the total commercial portfolio.
Consumer and residential real estate allowances, which may include specific
allocations, generally are based upon recent charge-off and delinquency history,
other known trends, and expected losses over the remaining lives of these loans,
as well as the condition of local, regional, and national economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio. Table 10 presents this allocation.
The loan and lease portfolio represents loans and leases made primarily
within Susquehanna's market area which includes central and southeastern
Pennsylvania, Maryland, southern New Jersey, and to a lesser extent,
southwestern Pennsylvania, Delaware, West Virginia, northern Virginia, and the
southern tier of New York state.
Determining the level of the allowance for possible loan and lease losses at
any given period is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and
information which is often subjective, and changing rapidly. The review of the
loan portfolio is a continuing event in light of a changing economy and the
dynamics of the banking and regulatory environment. In management's opinion, the
allowance for loan and lease losses is adequate at December 31, 1999. As
illustrated in Table 3, the provision for loan and lease losses was $7.2 million
for 1999 compared to $5.3 million in 1998. This increase was due to a growing
loan portfolio and increased charge-offs. Net charge-offs, as seen in Table 3,
were $6.1 million in 1999 compared with $5.7 million in 1998. As a result, the
allowance for loan and lease losses at December 31, 1999, was 1.26% of
period-end loans and leases, or $37.2 million compared with 1.27% or $36.2
million at December 31, 1998. The allowance for loan and lease losses as a
percentage of non-performing loans decreased from 167% at December 31, 1998 to
164% at December 31, 1999.
Should the economic climate no longer continue to improve or begin to
deteriorate, borrowers may experience difficulty, and the level of
non-performing loans and assets, charge-offs, and delinquencies could rise and
require further increases in the provision.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan and lease
losses. They may require additions to allowances based upon their judgments
about information available to them at the time of examination.
It is the policy of Susquehanna not to renegotiate the terms of a loan simply
because of a delinquency status. Rather, a loan is transferred to non-accrual
status if it is not well secured and in the process of collection, and is
delinquent in payment of either principal or interest beyond 90 days. Interest
income received on non-performing loans in 1999 and 1998 was $0.5 million and
$0.9 million, respectively. Interest income which would have been recorded on
these loans under the original terms was $1.9 million and $2.3 million for 1999
and 1998, respectively. At December 31, 1999, Susquehanna had no outstanding
commitments to advance additional funds with respect to these non-performing
loans.
Table 3 is an analysis of the provision levels as well as the activity in the
allowance for loan and lease losses for the past five years. Table 4 reflects
the five-year history of non-performing assets and loans contractually past due
90 days and still accruing. Total non-performing assets at December 31, 1999 and
1998, of $27.5 and $26.4 million, respectively, includes $4.7 million in other
real estate acquired through foreclosure. Non-performing assets as a percentage
of period-end loans and other real estate owned was 0.93% at December 31, 1999,
unchanged from Decem-
23
ber 31, 1998
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property served as
collateral or the fair market value of the property as determined by a current
appraisal less estimated costs to sell (fair value). Prior to foreclosure,
TABLE 3--Provision and Allowance for Loan and Lease Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, January 1 $ 36,158 $ 36,481 $ 35,704 $ 31,564 $ 27,798
Allowance acquired in business combination 0 0 1,460 4,229 3,323
Change in fiscal year 0 0 0 0 (8)
Additions to provision for loan and lease losses
charged to operations 7,200 5,333 4,731 4,989 5,323
Loans and leases charged off during the year:
Commercial, financial, agricultural, and leases 3,128 2,039 1,612 1,944 2,145
Real estate--mortgage 2,050 1,657 1,355 2,124 1,683
Consumer 3,188 3,413 3,820 2,686 2,367
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 8,366 7,109 6,787 6,754 6,195
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously
charged-off:
Commercial, financial, agricultural, and leases 550 428 413 601 320
Real estate--mortgage 812 182 71 100 200
Consumer 879 843 889 975 803
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 2,241 1,453 1,373 1,676 1,323
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 6,125 5,656 5,414 5,078 4,872
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 37,233 $ 36,158 $ 36,481 $ 35,704 $ 31,564
====================================================================================================================================
Average loans and leases outstanding $ 2,898,281 $ 2,762,649 $ 2,593,571 $ 2,395,371 $ 1,878,693
Period-end loans and leases 2,955,152 2,847,185 2,714,779 2,483,371 1,967,061
Net charge-offs as a percentage of average loans
and leases 0.21% 0.20% 0.21% 0.21% 0.26%
Allowance as a percentage of period-end loans
and leases 1.26 1.27 1.34 1.44 1.60
====================================================================================================================================
TABLE 4--Non-Performing Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Loans contractually past due
90 days and still accruing $ 10,160 $ 10,529 $ 7,169 $ 9,059 $ 5,651
====================================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural,
and leases $ 1,510 $ 1,659 $ 934 $ 2,299 $ 3,213
Real estate--mortgage 20,989 18,409 21,995 17,665 19,502
Consumer 271 343 622 477 574
Restructured loans -- 1,258 93 6,429 6,873
Other real estate owned 4,703 4,745 4,547 7,849 6,483
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 27,473 $ 26,414 $ 28,191 $ 34,719 $ 36,645
====================================================================================================================================
Total non-performing assets as a percentage
of period-end loans and leases and other
real estate owned 0.93% 0.93% 1.04% 1.39% 1.86%
====================================================================================================================================
Allowance for loan and lease losses as a
percentage of non-performing loans 164% 167% 154% 133% 105%
====================================================================================================================================
24
the recorded amount of the loan is reduced, if necessary, to fair value by
charging the allowance for loan losses. Subsequent to foreclosure, gains or
losses on the sale of real estate acquired through foreclosure are recorded in
operating income and any losses determined as a result of periodic valuations
are charged to other operating expense.
Loans with principal and/or interest delinquent 90 days or more which are
still accruing interest were $10.2 million at December 31, 1999, down from the
$10.5 million at December 31, 1998. Although the economy is stable, softness in
certain areas of the economy may adversely affect certain borrowers and may
cause additional loans to become past due beyond 89 days or be placed on
nonaccrual status because of uncertainty of receiving full payment of either
principal or interest on these loans.
Potential problem loans consist of loans which are performing but for which
potential credit problems have caused Susquehanna to place them on its
internally monitored loan list. At December 31, 1999, such loans, not included
in Table 4, amounted to $32.5 million. Depending upon the state of the economy
and the impact thereon to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing assets in the future.
Other Income
Non-interest income, recorded as other income, consists of: service charges on
deposit accounts; commissions; fees received for credit cards, travelers' check
sales, and money orders; fees for trust services; income generated from bank-
owned life insurance and reinsurance activities; gains and losses on security
transactions; net gains on sales of mortgages; net gains on sales of other real
estate owned; and other miscellaneous income, such as safe deposit box rents and
gains on the sale of branch offices. Other income as a percentage of net
interest income and other income was 20%, 16%, and 14% for 1999, 1998, and 1997,
respectively.
Non-interest income increased $8.8 million or 28%, in 1999 over 1998. Service
charges on deposit accounts were up $1.5 million or 17%. Gain on sale of
mortgage loans decreased $1.5 million, as loans originated for sale were $95
million less than 1998. During the third quarter of 1999, Susquehanna sold two
of its branch locations in Elkton, Md., and a pre-tax gain of $3.3 million was
realized as a result of that sale. Merchant credit card fees increased $2.4
million over 1998 as Susquehanna's merchant program expanded over the prior
year. Income on bank-owned life insurance increased $1.2 million in 1999 over
1998, as Susquehanna purchased an additional $50.0 million of insurance in the
second quarter of 1999. Gains on the sale of investment securities were $0.9
million higher in 1999 compared with 1998.
Other Expenses
Non-interest expenses are categorized into six main groupings:
employee-related expenses, which include salaries,
TABLE 5--Analysis of Other Expenses
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Advertising, marketing,
and public relations $ 3,789 $ 3,781 $ 3,444
Audits and examinations 723 933 945
Communications 2,689 2,559 2,065
Directors' fees 1,212 1,337 1,320
Legal and professional 4,678 5,597 2,492
Life Insurance Company
related expenses 924 679 970
Other real estate 1,089 1,083 814
Outside services 3,692 3,192 3,219
PA shares/capital stock tax 2,407 2,295 2,155
Postage and delivery 3,317 3,030 2,728
Stationery and supplies 3,132 2,971 2,785
FDIC insurance 769 729 760
Credit card assessments 3,122 984 822
All other 12,106 8,958 8,445
- --------------------------------------------------------------------------------
Total $43,649 $38,128 $32,964
================================================================================
fringe benefits, and employment taxes; occupancy expenses, which include
depreciation, rents, maintenance, utilities, and insurance; equipment expenses,
which include depreciation, rents, and maintenance; amortization of intangible
assets; restructuring charges; and other expenses (detailed in Table 5) incurred
in operating Susquehanna's business.
Non-interest expense increased $13.8 million, or 12%, in 1999 over 1998,
primarily due to a special $7.4 million pre-tax restructure charge relating to
the consolidation of back office operations.
Salaries and employee benefits, excluding bonuses, increased $2.1 million, or
4%, from 1998 to 1999. Susque-hanna's annual bonus program, based upon certain
financial benchmarks, earned zero in 1999 and $3.6 million in 1998. However, due
to extraordinary efforts by employees during 1999 related to mergers, systems
conversions and Year 2000 computer preparations, Susquehanna's Board of
Directors approved a special bonus for all Susquehanna employees excluding
executive and senior management. This bonus, including related benefits, totals
$3.4 million.
Charges for occupancy and equipment remained stable with only a slight
increase in 1999 over 1998. Amortization of intangible assets declined $1.0
million in 1999 from 1998 as certain intangibles have reached the end of their
amortization period. The $7.4 million restructuring charge represents severance,
employee and employment assistance services, consulting, and asset write-offs
related to a reduction in the work force. This reduction in the work force
should result in an annual, estimated net savings of $6.0 million of which
approximately 50% will be realized in 2000 and 100% realized in years after
2000. All other expenses increased $5.5 million, (see Table 5), with increases
in credit card assessments of $2.1 million, amortization of
25
capitalized data processing systems conversion costs of $2.2 million, and data
processing and related communications charges of $0.6 million.
Income Taxes
Susquehanna's effective tax rate for 1999 was 29.80% compared to 31.49% in 1998.
The effective rate for 1999 was reduced because of increased levels of
tax-advantaged income. Since 1997, Susquehanna purchased $110 million of
insurance-related products and recognized $4.9 million and $3.4 million in 1999
and 1998, respectively, of tax-advantaged income from the increase in cash
surrender values and insurance proceeds.
As tax-advantaged loans and securities continue to mature, and the
opportunities for investment in additional tax-advantaged enterprises become
less attractive due to certain provisions of the Tax Reform Act of 1986,
effective tax rates may increase in the years ahead.
Susquehanna recognizes deferred tax liabilities for taxable temporary
differences (the difference between financial and tax bases), and deferred tax
assets for deductible temporary differences. Management believes the deferred
tax assets recognized at December 31, 1999, will be realized in future tax
returns. While the ultimate realization of deferred tax assets is dependent on
future taxable income, taxable income in prior carry-back years and future
reversals of existing taxable temporary differences are sufficient to offset the
future reversals of deductible temporary differences without implementing any
tax strategies or assuming future taxable income.
FINANCIAL CONDITION
Investment Securities
Susquehanna follows SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities." This accounting pronouncement requires the segregation of
investment securities into three categories, each having a distinct accounting
treatment.
Securities identified as "held-to-maturity" continue to be carried at their
amortized cost, and, except for limited circumstances, may not be sold prior to
maturity. Securities identified as "available-for-sale" must be reported at
their market or "fair" value and the difference between that value and their
amortized cost recorded in the equity section, net of taxes. As a result, total
equity of Susquehanna was negatively impacted by $19.6 million as the
"unrealized gains or losses for available-for-sale securities net of taxes,"
changed from a positive $6.0 million at December 31, 1998, to a negative $13.6
million at December 31, 1999. Securities identified as "trading account
securities" are marked-to-market with the change recorded in the income
statement.
Presently, Susquehanna does not engage in trading activity, but does engage
in active portfolio management which requires the majority of its security
portfolio to be identified as "available-for-sale." While SFAS 115 requires
segregation into "held-to-maturity" and "available-for-sale" categories (see
Table 6), it does not change Susquehanna's policy concerning the purchase of
only high-quality securities. Strategies employed address liquidity, capital
adequacy, and net interest margin considerations which then determine the
assignment of purchases into these two categories. Table 7 illustrates the
maturities of these security portfolios and the weighted average yields based
upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35%
federal income tax rate. At December 31, 1999, Susquehanna held no securities of
one issuer, other than U.S. Government obligations, where the aggregate book
value exceeded ten percent of stockholders' equity.
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1999 was 5%, or $148 million, over 1998. Loan growth in
1999 was realized in all major loan types, except construction loans. Consumer
loans increased $50 million, leases increased $45 million, mortgages increased
$27 million, and commercial loans grew by $26 million. As noted in Table 11,
Susquehanna's loan portfolio contains no significant concentrations other than
geographic locations and housing developments.
Susquehanna's banking subsidiaries have historically reported a significant
amount of loans secured by real estate, as depicted in Table 8. Many of these
loans have real estate collateral taken as additional security not related to
the acquisition of the real estate pledged. Open-end home equity loans amounted
to $96 million at year end and an additional $186 million was lent against
junior liens on residential properties. Senior liens on one- to four- family
residential properties totaled $875 million, and much of the
TABLE 6--Carrying Value of Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to- Available- Held-to-
Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 16,683 $ 0 $ 67,955 $ 500 $121,633 $ 750
U.S. Government agencies 338,990 0 215,966 55,810 268,078 0
State and municipal 69,599 32,070 71,990 0 34,824 75,882
Other securities 17,682 0 35,392 25 72,672 50
Mortgage-backed securities 399,428 1,020 466,534 3,502 112,741 6,420
Equity securities 36,576 0 34,070 0 26,011 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $878,958 $ 33,090 $891,907 $ 59,837 $635,959 $ 83,102
====================================================================================================================================
26
TABLE 7--Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Within After 1 Year but After 5 Years but After
Dollars in thousands 1 Year Within 5 Years Within 10 Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale
U.S. Treasury
Fair value $ 13,425 $ 3,258 $ 16,683
Amortized cost 13,414 3,244 16,658
Yield 6.07% 5.92% 6.04%
U.S. Government agencies
Fair value $ 2,249 $328,277 $ 5,426 $ 3,038 $338,990
Amortized cost 2,253 335,181 5,567 3,040 346,041
Yield 5.45% 6.34% 7.45% 7.66% 6.36%
Corporate debt securities
Fair value $ 1,266 $ 14,448 $ 995 $ 973 $ 17,682
Amortized cost 1,264 14,590 980 961 17,795
Yield 6.78% 6.79% 7.05% 6.49% 6.79%
Mortgage-backed securities
Fair value $ 1,760 $ 3,511 $ 24,118 $370,039 $399,428
Amortized cost 1,769 3,539 24,525 384,484 414,317
Yield 6.38% 6.49% 6.59% 6.49% 6.50%
State and municipal securities
Fair value $ 2,943 $ 53,913 $ 7,383 $ 5,360 $ 69,599
Amortized cost 2,933 54,274 7,437 5,492 70,136
Yield 7.19% 6.58% 7.48% 7.45% 6.77%
Equity securities
Fair value $ 36,576
Amortized cost 34,588
Yield 7.20%
Held-to-Maturity
Mortgage-backed securities
Fair value $ 1,011 $ 1,011
Amortized cost 1,020 1,020
Yield 6.49% 6.49%
State and municipal securities
Fair value $ 14,229 $ 10,888 $ 2,331 $ 5,002 $ 32,450
Amortized cost 14,192 10,780 2,168 4,930 32,070
Yield 6.77% 7.42% 10.18% 7.87% 7.40%
Total Securities
Fair value $ 35,872 $415,306 $ 40,253 $384,412 $912,419
Amortized cost 35,825 422,628 40,677 398,907 932,625
Yield 6.44% 6.30% 6.97% 6.29% 6.10%
$605 million in loans secured by non-farm, non-residential properties
represented collateralization of operating lines, or term loans that finance
equipment, inventory, or receivables. Loans secured by farmland totaled $39
million, while loans secured by multifamily residential properties totaled $49
million at December 31, 1999.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 2000 consist of $150 million with fixed rate pricing and $150 million with
variable rate pricing.
Deposits
Susquehanna's deposit base is consumer-oriented, consisting of time deposits,
primarily certificates of deposit of various terms, interest-bearing demand
accounts, savings accounts, and demand deposits. The average amounts of deposits
by type are summarized in Table 12. Susquehanna does not rely upon time deposits
of $100,000 or more as a principal source of funds as they represent only 6% of
total deposits. Table 13 presents a breakdown by maturity of time deposits of
$100,000 or more as of December 31, 1999.
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 com-
27
TABLE 8--Loan and Lease Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 327,670 10.9% $ 301,385 10.6%
Real estate--construction 255,054 8.5 256,451 9.0
Real estate--mortgage 1,850,375 61.8 1,821,485 64.0
Consumer 395,566 13.2 346,180 12.2
Leases 166,487 5.6 121,684 4.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,995,152 100.0% $2,847,185 100.0%
====================================================================================================================================
TABLE 9--Loan Maturity and Interest Sensitivity
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Under One One to Five Over Five
Maturity Year Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $141,654 $115,212 $ 70,804 $327,670
Real estate--construction 141,561 85,529 27,964 255,054
- ------------------------------------------------------------------------------------------------------------------------------------
$283,215 $200,741 $ 98,768 $582,724
====================================================================================================================================
Rate sensitivity of loans with maturities greater than 1 year:
Variable rate $149,957
Fixed rate 149,552
- ------------------------------------------------------------------------------------------------------------------------------------
$299,509
====================================================================================================================================
TABLE 10--Allocation of Allowance for Loan and Lease Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 5,773 $ 5,212 $ 5,184 $ 4,700 $ 5,122
Real estate--construction 6,018 5,937 5,994 5,810 2,480
Real estate--mortgage 8,000 8,014 7,698 7,632 7,151
Consumer 6,981 5,500 5,225 5,020 3,918
Leases 1,881 1,375 1,125 1,097 602
Unused commitments 2,937 2,366 2,558 1,656 2,063
Unallocated 5,643 7,754 8,697 9,789 10,228
- ------------------------------------------------------------------------------------------------------------------------------------
Total $37,233 $36,158 $36,481 $35,704 $31,564
====================================================================================================================================
modity price risk. Due to the nature of its operations, only interest rate risk
and liquidity risk are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity--the ability to meet the cash
requirements of its customers and other financial commitments--is a fundamental
aspect of Susquehanna's asset/liability management strategy. Susquehanna's
policy of diversifying its funding sources--purchased funds, repurchase
agreements, and deposit accounts--allows it to avoid undue concentration in any
single financial market and also to avoid heavy funding requirements within
short periods of time. At December 31, 1999, Susquehanna's subsidiary banks and
savings bank have an unused line of credit available to them from the Federal
Home Loan Bank for more than $600 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 December 31, 1999.
28
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
$ 327,598 12.1% $ 272,442 11.0% $ 251,573 12.8%
231,120 8.5 230,212 9.3 190,895 9.7
1,761,763 64.9 1,629,559 65.6 1,232,352 62.6
329,876 12.2 296,613 11.9 269,450 13.7
64,422 2.3 54,545 2.2 22,791 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
$2,714,779 100.0% $2,483,371 100.0% $1,967,061 100.0%
====================================================================================================================================
TABLE 11--Loan Concentrations
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, and Maryland. At December 31, 1999,
Susquehanna's portfolio included the following concentrations:
- ------------------------------------------------------------------------------------------------------------------------------------
Total As a % of % Nonperforming
Dollars in thousands Permanent Construction All Other Amount Total Loans in each category
- ------------------------------------------------------------------------------------------------------------------------------------
Housing developments $ 70,260 $225,694 $13,283 $309,237 10.3 1.3
Office buildings and warehouses 133,003 14,138 1,867 149,008 5.0 0.0
Retailing 89,862 2,565 44,003 136,430 4.6 0.9
Agricultural 39,838 427 18,911 59,176 2.0 0.6
Manufacturing 29,779 0 24,621 54,400 1.8 8.4
Hotels/motels 34,328 2,559 10,926 47,813 1.6 0.0
These maturing investments represent 4% of total investment securities. Cash and
due from banks amounted to $145 million and short-term investments amounted to
$18 million, which represent additional sources of liquidity.
Closely related to the management of liquidity is the management of interest
rate risk. Interest rate risk focuses on maintaining stability in the net
interest margin, an important factor in earnings growth. Interest rate
sensitivity is the matching or mismatching of the maturity and rate structure of
the interest-bearing assets and liabilities. It is the objective of management
to control the difference in the timing of the rate changes for these assets and
liabilities to preserve a satisfactory net interest margin. In doing so,
Susquehanna endeavors to maximize earnings in an environment of changing
interest rates. However, there is a lag in maintaining the desired matching
because the repricing of products does occur at varying time intervals.
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 analysis to evaluate rate sensitivity at a given
point in time.
Table 14 illustrates Susquehanna's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at December 31, 1999 and
1998. These estimates include anticipated paydowns on mortgage-backed securities
and certain assumptions regarding core deposits. An institution with more assets
repricing than liabilities over a given time frame is considered asset
sensitive, and one with more liabilities repricing than assets is consid-
TABLE 12--Average Deposit Balances
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Demand deposits $ 421,055 $ 390,231 $ 351,311
Interest-bearing
demand deposits 966,906 900,160 805,808
Savings deposits 444,938 449,022 463,609
Time deposits 1,337,536 1,361,984 1,342,077
- --------------------------------------------------------------------------------
Total $3,170,435 $3,101,397 $2,962,805
================================================================================
TABLE 13--Deposit Maturity
- --------------------------------------------------------------------------------
Maturity of time deposits of $100 or more at December
31, 1999
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Three months or less $ 66,621
Over three months through six months 37,752
Over six months through twelve months 43,948
Over twelve months 41,705
- --------------------------------------------------------------------------------
Total $190,026
================================================================================
29
TABLE 14--Balance Sheet Gap Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1-3 3-12 1-3 Over 3
At December 31, 1999 months months years years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 17,689 $ 17,689
Investments 41,067 $ 96,746 $ 273,186 $ 501,049 912,048
Loans and leases, net of unearned income 1,827,043 449,271 389,370 329,468 2,995,152
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,885,799 $ 546,017 $ 662,556 $ 830,517 $3,924,889
====================================================================================================================================
Liabilities
Interest-bearing demand $ 612,453 $ 178,411 $ 82,455 $ 78,584 $ 951,903
Savings 315,759 42,101 31,871 31,281 421,012
Time 286,086 480,556 214,629 206,254 1,187,525
Time in denominations of $100 or more 72,317 83,847 17,268 16,594 190,026
Total borrowings 314,832 149,250 210,839 674,921
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,601,447 $ 784,915 $ 495,473 $ 543,552 $3,425,387
====================================================================================================================================
Interest Sensitivity Gap:
Periodic $ 284,352 $ (238,898) $ 167,083 $ 286,965
Cumulative 45,454 212,537 499,502
Cumulative gap as a percentage of
earning assets 7% 1% 5% 13%
- ------------------------------------------------------------------------------------------------------------------------------------
1-3 3-12 1-3 Over 3
At December 31, 1998 months months years years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 83,063 $ 83,063
Investments 67,423 $ 150,662 $ 228,949 $ 504,901 951,935
Loans and leases, net of unearned income 1,703,185 438,106 371,763 334,132 2,847,186
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,853,671 $ 588,768 $ 600,712 $ 839,033 $3,882,184
====================================================================================================================================
Liabilities
Interest-bearing demand $ 490,690 $ 104,776 $ 192,764 $ 209,488 $ 997,718
Savings 222,314 75,209 75,151 76,156 448,830
Time 579,240 581,047 4,744 4,741 1,169,772
Time in denominations of $100 or more 45,715 123,421 1,825 200 171,161
Total borrowings 141,448 11,810 17,891 342,028 513,177
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,479,407 $ 896,263 $ 292,375 $ 632,613 $3,300,658
====================================================================================================================================
Interest Sensitivity Gap:
Periodic $ 374,264 $ (307,495) $ 308,337 $ 206,420
Cumulative 66,769 375,106 581,526
Cumulative gap as a percentage of
earning assets 10% 2% 10% 15%
ered liability sensitive. An asset sensitive institution will generally benefit
from rising rates, and a liability sensitive institution will generally benefit
from declining rates. Sus-quehanna currently has a positive gap position
(asset-sensitive) at one year and, therefore, would be negatively affected by a
decline in interest rates. See Table 16 for the estimated net interest income
effect of Susquehanna's positive gap position.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a quarterly report prepared for Susquehanna by
independent third-party consultants based on information provided by Susquehanna
which measures Susquehanna's exposure to interest rate risk. The model
calculates the income effect and the present value of assets, liabilities, and
equity at current interest rates, and at hypothetical higher and lower interest
rates at one percent intervals. The income effect and present value of each
major category of financial instrument is calculated by the model using
estimated cash flows based on prepayments, early withdrawals, and weighted
average contractual rates and
30
TABLE 15--Balance Sheet Shock Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 1999 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 144,562 $ 144,562 $ 144,548 $ 144,534 $ 144,534
Short-term investments 17,691 17,689 17,689 17,689 17,687
Investment securities:
Held-to-maturity 36,598 34,984 33,461 32,027 30,674
Available-for-sale 932,544 906,389 878,958 852,306 824,614
Loans net of unearned income 2,969,042 2,945,163 2,923,709 2,906,701 2,902,792
Other assets 275,980 275,980 275,980 275,980 275,980
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,376,417 $ 4,324,767 $ 4,274,345 $ 4,229,237 $ 4,196,281
====================================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 415,513 $ 411,840 $ 408,410 $ 405,114 $ 403,865
Interest-bearing 2,787,660 2,761,592 2,736,328 2,712,028 2,693,073
Total borrowings 716,559 693,893 672,786 653,110 634,740
Other liabilities 70,447 61,282 50,776 40,413 30,242
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,990,179 3,928,607 3,868,300 3,810,665 3,761,920
Total economic equity 386,238 396,160 406,045 418,572 434,361
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 4,376,417 $ 4,324,767 $ 4,274,345 $ 4,229,237 $ 4,196,281
====================================================================================================================================
Economic equity ratio 9% 9% 9% 10% 10%
Value at risk $ (19,807) $ (9,885) -- $ 12,527 $ 28,316
% Value at risk -5% -2% -- 3% 7%
- ------------------------------------------------------------------------------------------------------------------------------------
Base
Present
At December 31, 1998 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 117,450 $ 117,450 $ 117,439 $ 117,428 $ 117,428
Short-term investments 83,071 83,063 83,063 83,063 83,055
Investment securities:
Held-to-maturity 66,500 63,687 61,020 58,512 56,145
Available-for-sale 942,778 919,441 892,811 867,068 841,676
Loans net of unearned income 2,939,204 2,918,314 2,894,817 2,871,542 2,849,045
Other assets 211,752 211,752 211,752 211,752 211,752
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,360,755 $ 4,313,707 $ 4,260,902 $ 4,209,365 $ 4,159,101
====================================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 415,850 $ 410,333 $ 405,183 $ 400,274 $ 397,829
Interest-bearing 2,850,564 2,822,582 2,795,357 2,779,230 2,766,489
Total borrowings 570,331 546,138 523,610 502,606 482,990
Other liabilities 60,892 52,969 43,889 34,931 26,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,897,637 3,832,022 3,768,039 3,717,041 3,673,448
Total economic equity 463,118 481,685 492,863 492,324 485,653
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 4,360,755 $ 4,313,707 $ 4,260,902 $ 4,209,365 $ 4,159,101
====================================================================================================================================
Economic equity ratio 11% 11% 12% 12% 12%
Value at risk $ (29,745) $ (11,178) -- $ (539) $ (7,210)
% Value at risk -6% -2% -- 0% -1%
31
terms. For present value calculations, the model also considers discount rates
for similar financial instruments. The resulting present value of longer-term
fixed-rate financial instruments are more sensitive to change in a higher or
lower market interest rate scenario, while adjustable-rate financial instruments
largely reflect only a change in present value representing the difference
between the contractual and discounted rates until the next interest rate
repricing date.
A substantial portion of Susquehanna's loans and mortgage-backed securities
are residential mortgage loans containing significant imbedded options which
permit the borrower to prepay the principal balance of the loan prior to
maturity ("prepayments") without penalty. A loan's propensity for prepayment is
dependent upon a number of factors, including, the current interest rate, the
interest rate on the loan, the financial ability of the borrower to refinance,
the economic benefit to be obtained from refinanc-ing, availability of
refinancing at attractive terms, as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase or
decrease on fixed- and adjustable-rate loans depending on the current relative
levels and expectations of future short- and long-term interest rates. Since a
significant portion of Susquehanna's loans are variable rate loans, prepayments
on such loans generally increase when long-term interest rates fall or are at
historically low levels relative to short-term interest rates, making fixed-rate
loans more desirable.
Investment securities, other than those with early call provisions, generally
do not have significant imbedded options and repay pursuant to specific terms
until maturity. While savings and checking deposits generally may be withdrawn
upon the customer's request without prior notice, a continuing relationship with
customers resulting in
TABLE 16--Net Interest Income Shock Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 1999 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 982 $ 1,290 $ 1,597 $ 1,904 $ 2,212
Investments 56,098 57,054 57,786 58,482 59,045
Loans and leases 208,505 234,103 260,144 284,142 310,029
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 265,585 292,447 319,527 344,528 371,286
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 16,470 27,269 37,910 48,398 58,735
Time 64,589 69,607 74,599 79,584 85,059
Total borrowings 36,783 42,611 48,519 54,502 60,572
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 117,842 139,487 161,028 182,484 204,366
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 147,743 $ 152,960 $ 158,499 $ 162,044 $ 166,920
====================================================================================================================================
Net interest income at risk $ (10,756) $ (5,539) -- $ 3,545 $ 8,421
% Net interest income at risk -7% -3% -- 2% 5%
- ------------------------------------------------------------------------------------------------------------------------------------
Base
Present
At December 31, 1998 -2% -1% Value 1% 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 1,954 $ 2,635 $ 3,291 $ 3,930 $ 4,554
Investments 59,642 61,352 62,571 63,758 64,913
Loans and leases 214,268 231,222 247,655 263,985 280,201
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 275,864 295,209 313,517 331,673 349,668
Interest expense:
Interest-bearing demand and savings 26,492 34,797 42,049 49,136 56,946
Time 55,879 63,703 71,449 79,149 86,829
Total borrowings 23,197 24,339 25,481 26,616 27,758
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 105,568 122,839 138,979 154,901 171,533
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 170,296 $ 172,370 $ 174,538 $ 176,772 $ 178,135
====================================================================================================================================
Net interest income at risk $ (4,242) $ (2,168) -- $ 2,234 $ 3,597
% Net interest income at risk -2% -1% -- 1% 2%
32
future deposits and withdrawals is generally predictable, resulting in a
dependable and uninterruptible source of funds. Time deposits generally have
early withdrawal penalties, while term FHLB borrowings and subordinated notes
have prepayment penalties which discourage customer withdrawal of time deposits
and prepayment of FHLB borrowings and subordinated notes prior to maturity.
Susquehanna's loans and mortgage-backed securities are primarily indexed to
the national interest indices. When such loans and mortgage-backed securities
are funded by interest-bearing liabilities which are determined by other
indices, primarily deposits and FHLB borrowings, a changing interest rate
environment may result in different levels of changes in the different indices,
resulting in disproportionate changes in the value of, and the net earnings
generated from, Susquehanna's financial instruments. Each index is unique and is
influenced by different external factors; therefore, the historical
relationships in various indices may not be indicative of the actual change
which may result in a changing interest rate environment.
Tables 15 and 16 reflect the estimated income effect and present value of
assets, liabilities, and equity calculated using certain assumptions determined
by Susquehanna as of December 31, 1999 and 1998, at current interest rates and
at hypothetical higher and lower interest rates of one and two percent. As noted
in Table 15, the economic equity at risk is only five percent at an interest
rate change of minus two percent, while Table 16 discloses that net interest
income at risk is seven percent at an interest rate change of minus two percent.
Capital Adequacy
Risk-based capital ratios focus upon credit risk. Assets and certain off-balance
sheet items are segmented into one of four broad-risk categories and weighted
according to the relative percentage of credit risk assigned by the regulatory
authorities. Off-balance sheet instruments are converted into a balance sheet
credit equivalent before being assigned to one of the four risk-weighted
categories. To supplement the risk-based capital ratios, the regulators issued a
minimum leverage ratio guideline (Tier 1 capital as a percentage of average
assets less excludable intangibles).
Capital elements are segmented into two tiers. Tier 1 capital represents
shareholders' equity reduced by excludable intangibles, while total capital
represents Tier 1 capital plus certain allowable long-term debt, the portion of
the allowance for loan losses equal to 1.25% of risk-adjusted assets, and 45% of
the unrealized gain on equity securities.
The maintenance of a strong capital base at both the parent company level as
well as at each bank affiliate is an important aspect of Susquehanna's
philosophy. Table 17 illustrates these capital ratios for each bank and savings
bank subsidiary and Susquehanna on a consolidated basis. Susquehanna and each of
its banking and savings bank subsidiaries have leverage and risk-weighted ratios
well in excess of regulatory minimums, and each entity is considered "well
capitalized" under regulatory guidelines.
Impact of the Year 2000
Issue The "Year 2000 Issue" dealt with computer programs having been written
using two digits rather than four to define the applicable year (i.e., date-
sensitive software or date-sensitive hardware recognizing a date using "00" as
the Year 1900 rather than the Year 2000.
Based on system assessments, Susquehanna 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. Susque-hanna has
determined that as a result of its modifications to existing software and
hardware and conversions to new
TABLE 17--Capital Adequacy
- --------------------------------------------------------------------------------
At December 31, 1999
- --------------------------------------------------------------------------------
Tier I Capital Total Capita Leverage
Ratio (A) Ratio (B) Ratio (C)
- --------------------------------------------------------------------------------
Required Ratio 4.00% 8.00% 4.00%
Citizens National Bank of Southern Pennsylvania 12.23 13.25 8.14
Equity Bank, N.A. 10.78 12.03 7.57
Farmers First Bank 12.28 13.53 10.75
Farmers & Merchants Bank and Trust 11.08 11.74 7.76
First American National Bank of Pennsylvania 18.22 19.14 12.96
First Capitol Bank 10.96 12.21 8.74
First National Trust Bank 14.42 15.68 8.37
Founders' Bank 11.18 12.43 7.97
Susquehanna Bank 10.30 14.86 6.76
Williamsport National Bank 17.51 18.77 12.50
Total Susquehanna 12.70% 15.56% 9.11%
================================================================================
(A) Tier I capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier I capital divided by average total assets less disallowed intangible
assets.
33
software and hardware, the Year 2000 Issue has been successfully mitigated.
The total cost of the Year 2000 and systems conversion projects was
approximately $12.0 million. Of the total project's cost, $7.8 million was
attributable to the purchase of new software and hardware which was capitalized.
The remaining $4.2 million was expensed as incurred during 1998 ($2.7 million)
and 1999 ($1.5 million).
Summary of 1998 Compared to 1997
Several significant transactions occurred which have affected the comparability
of Susquehanna's financial performance for the years ended December 31, 1998 and
1997. These transactions are described in the following paragraphs.
On February 28, 1997, Susquehanna completed the acquisition of ATCORP, Inc.
("AI"), a New Jersey bank holding company with $210 million in assets and $186
million in deposits at the acquisition date. Susquehanna issued one share (prior
to Susquehanna's stock splits) of common stock to the shareholders of AI for
each of the 771,750 outstanding common shares of AI. 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 AI for all periods presented.
Also on February 28, 1997, Susquehanna completed the acquisition of Farmers
Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in assets
and $77 million of deposits at the acquisition date. Susquehanna issued 692,398
shares of common stock (prior to Susquehanna's stock splits) to the shareholders
of FBC based on an exchange ratio of 2.281 shares (prior to Susquehanna's stock
splits) of Susquehanna common stock for each outstanding share of FBC. 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 FBC for all periods presented.
On May 1, 1997, Susquehanna combined its three savings banks located in and
around Baltimore, Md., into one savings bank named Susquehanna Bank. As a result
of this combination, there was a reduction in the work force of Susquehanna Bank
with related severance packages. Consequently, Susquehanna recorded pre-tax
severance of $1.3 million in 1997 related to these reductions. The annual
pre-tax cost savings related to these reductions approximates $1.3 million.
On July 31, 1997, Susquehanna acquired Founders' Bank ("Founders'"), Bryn
Mawr, Pa., through an exchange of 560,353 shares (prior to the 1998 stock split)
of Susque-hanna common stock to the shareholders of Founders' based on an
exchange ratio of 0.566 shares of Susquehanna common stock for each share of
Founders' outstanding capital stock. The transaction was accounted for under the
pooling-of-interests method of accounting. At the time of the acquisition,
Founders' reported total assets of $103 million. Results of operations for
Founders' prior to the acquisition were not significant to Susquehanna's
consolidated financial statements, and, accordingly, Susquehan-na's prior period
consolidated financial statements have not been restated for Founders'.
On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc., a
Pennsylvania bank holding company with $138 million in assets and $114 million
in deposits at the acquisition date. Susquehanna issued 2,027,296 shares of its
common stock to the shareholders of Cardinal, based upon an exchange ratio of
2.048 shares of Susquehanna common stock for each outstanding share of Cardinal.
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 Cardinal for all periods
presented.
Susquehanna's net income for the year ended December 31, 1998, increased to
$45.2 million, or 6%, above 1997 net income of $42.7 million. Susquehanna's
earnings performance was affected by significant growth in non-interest income
resulting primarily from an increase in mortgage-banking activities and the
purchase of certain insurance-related products, such as bank-owned life
insurance ("BOLI"). Non-interest income increased $6.5 million, or 27%, in 1998
over 1997.
Diluted earnings per common share were $1.21 in 1998 compared to $1.17 in
1997. ROA and ROE decreased from 1.18% and 12.13%, respectively, in 1997 to
1.13% and 11.62%, respectively, in 1998.
During 1995 and 1996, Susquehanna acquired two Maryland savings banks under
the purchase method of accounting. These purchase transactions created an
intangible asset, goodwill, of $34 million, which significantly affects
Susquehanna's earnings and financial ratios.
Goodwill amortization is a non-cash charge to earnings. For 1998, tangible net
income, earnings per share, ROA and ROE were $47.4 million, $1.29, 1.19% and
13.41%, respectively, compared to actual net income, basic earnings per share,
ROA and ROE of $45.2 million, $1.22, 1.13% and 11.62%, respectively. Tangible
net income, earnings per share, ROA and ROE for 1997 were $45.7 million, $1.26,
1.26% and 15.46%, respectively. Tangible net income is actual net income
increased by the tax-effected amortization of those intangible assets which are
deducted from equity in determining Tier 1 capital.
34
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The following consolidated financial statements of Susquehanna are
submitted herewith:
Page Reference
--------------
Consolidated Balance Sheets at December 31, 1999 and 1998................... 36
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997.................................. 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.................................. 38
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998, and 1997.............. 39
Notes to Consolidated Financial Statements.................................. 40
Report of Independent Accountants........................................... 56
Summary of Quarterly Financial Data......................................... 57
35
Consolidated Balance Sheets
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 144,548 $ 113,210
Short-term investments 17,689 83,063
Investment securities available-for-sale 878,958 891,907
Investment securities held-to-maturity
(Fair values of $33,461 and $61,019) 33,090 59,837
Loans and leases, net of unearned income 2,995,152 2,847,185
Less: Allowance for loan and lease losses 37,233 36,158
- --------------------------------------------------------------------------------
Net loans 2,957,919 2,811,027
- --------------------------------------------------------------------------------
Premises & equipment (net) 54,404 55,566
Accrued income receivable 23,763 22,774
Bank-owned life insurance 108,105 53,736
Other assets 92,130 84,906
- --------------------------------------------------------------------------------
Total assets $4,310,606 $4,176,026
================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 430,054 $ 433,133
Interest-bearing 2,750,466 2,783,746
- --------------------------------------------------------------------------------
Total deposits 3,180,520 3,216,879
- --------------------------------------------------------------------------------
Short-term borrowings 207,507 104,531
FHLB borrowings 372,414 313,636
Long-term debt 95,000 95,010
Other liabilities 50,775 43,889
- --------------------------------------------------------------------------------
Total liabilities 3,906,216 3,773,945
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 17)
Stockholders' Equity
Preferred stock, $1.80 series A cumulative
convertible (no par value) authorized
5,000,000 shares; issued and out-
standing--none -- --
Common stock ($2.00 par value), authorized
100,000,000 shares; issued: 37,034,094
and 36,967,572 at December 31, 1999 and
1998, respectively 74,068 73,935
Surplus 62,589 61,882
Retained earnings 281,522 261,043
Accumulated other comprehensive income net
of taxes of ($6,961) and $3,225 at
December 31, 1999 and 1998, respectively (13,616) 6,004
Less: Treasury stock (11,641 and 65,050
common shares at cost at December 31, 1999
and 1998, respectively) 173 783
- --------------------------------------------------------------------------------
Total stockholders' equity 404,390 402,081
- --------------------------------------------------------------------------------
Total liabilities & stockholders' equity $4,310,606 $4,176,026
================================================================================
The accompanying notes are an integral part of these financial statements.
36
Consolidated Statements of Income
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Dollars in thousands, except per share
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Interest Income
Interest and fees on loans and leases $241,633 $242,300 $234,687
Interest on investment securities 55,717 54,253 43,193
Interest on short-term investments 2,420 4,289 4,131
- --------------------------------------------------------------------------------
Total interest income 299,770 300,842 282,011
- --------------------------------------------------------------------------------
Interest Expense
Interest on deposits 106,013 114,704 110,850
Interest on short-term borrowings 8,574 5,477 4,778
Interest on long-term debt 24,261 22,532 11,224
- --------------------------------------------------------------------------------
Total interest expense 138,848 142,713 126,852
- --------------------------------------------------------------------------------
Net interest income 160,922 158,129 155,159
Provision for loan and lease losses 7,200 5,333 4,731
- --------------------------------------------------------------------------------
Net interest income after provision for
loan and lease losses 153,722 152,796 150,428
- --------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 10,054 8,570 7,186
Other service charges, commissions, and
fees 4,419 4,184 3,742
Income from fiduciary-related activities 4,028 3,958 3,675
Gain on sale of mortgages 3,427 4,923 2,820
Income from bank-owned life insurance 4,528 3,374 1,122
Other income 12,545 6,104 5,840
Investment security gains 978 75 266
- --------------------------------------------------------------------------------
Total other income 39,979 31,188 24,651
- --------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 60,545 58,994 61,217
Net occupancy expense 9,010 8,958 8,281
Furniture and equipment expense 7,790 7,452 6,008
Amortization of intangible assets 3,476 4,532 4,293
Restructuring charge 7,412 0 0
Other expenses 43,649 38,128 32,964
- --------------------------------------------------------------------------------
Total other expenses 131,882 118,064 112,763
- --------------------------------------------------------------------------------
Income before income taxes 61,819 65,920 62,316
Provision for income taxes 18,422 20,757 19,582
- --------------------------------------------------------------------------------
Net Income $ 43,397 $ 45,163 $ 42,734
================================================================================
Per share information:
Basic earnings $ 1.17 $ 1.22 $ 1.18
Diluted earnings 1.17 1.21 1.17
Cash dividends 0.62 0.57 0.55
Average shares outstanding:
Basic 36,960 36,868 36,296
Diluted 37,137 37,188 36,551
================================================================================
The accompanying notes are an integral part of these financial statements.
37
Consolidated Statements of Cash Flows
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------
Operating Activities
Net income $ 43,397 $ 45,163 $ 42,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion 11,628 9,492 11,338
Provision for loan and lease losses 7,200 5,333 4,731
Gain on sale of branch offices (3,352) 0 0
Gain on securities transactions (978) (75) (266)
Gain on sale of loans (3,427) (4,923) (2,820)
Gain/(loss) on sale of other real estate
owned 6 (274) (327)
Mortgage loans originated for resale (187,017) (282,073) (155,138)
Sale of mortgage loans originated for resale 203,158 273,707 150,932
(Increase)/decrease in accrued interest
receivable (989) 691 (695)
Increase in accrued interest payable 734 1,255 2,268
Increase/(decrease) in accrued expenses and
taxes payable 2,635 (2,018) (1,683)
Other, net 9,226 2,073 4,181
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 82,221 48,351 55,255
- --------------------------------------------------------------------------------------
Investing Activities
Proceeds from the sale of available-for-
sale securities 47,719 37,933 83,471
Proceeds from the maturity of investment
securities 264,783 360,343 257,675
Purchase of available-for-sale securities (302,763) (625,038) (310,933)
Purchase of held-to-maturity securities 0 0 (1,373)
Net increase in loans and leases (174,148) (133,109) (156,260)
Capital expenditures (5,400) (7,722) (7,226)
Net cash received on sale of branch deposits (22,381) 0 0
Purchase of insurance products (50,000) (9,438) (50,000)
Net cash and cash equivalents acquired in
acquisition 0 0 3,579
Other, net 0 0 137
- --------------------------------------------------------------------------------------
Net cash used for investing activities (242,190) (377,031) (180,930)
- --------------------------------------------------------------------------------------
Financing Activities
Net increase/(decrease) in deposits (13,978) 175,413 18,589
Net increase in short-term and FHLB
borrowings 161,754 205,014 60,107
Proceeds from issuance of long-term debt 0 10,000 0
Repayment of long-term debt (10) (5,018) (17)
Proceeds from issuance of common stock 1,372 1,675 1,410
Cash paid for treasury stock (287) (742) 0
Dividends paid (22,918) (20,132) (18,371)
Other, net 0 26 (43)
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 125,933 366,236 61,675
- --------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash
equivalents (34,036) 37,556 (64,000)
Cash and cash equivalents at January 1 196,273 158,717 222,717
- --------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 162,237 $ 196,273 $ 158,717
======================================================================================
Cash and cash equivalents:
Cash and due from banks $ 144,548 $ 113,210 $ 106,913
Short-term investments 17,689 83,063 51,804
- --------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 162,237 $ 196,273 $ 158,717
======================================================================================
The accompanying notes are an integral part of these financial statements.
38
Consolidated Statements of Changes in Stockholders' Equity
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998, and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Dollars in thousands, Common Retained Comprehensive Treasury Total
except per share data Stock Surplus Earnings Income Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1997 $ 32,678 $ 92,647 $211,327 $ 643 $ (255) $337,040
Net income 42,734 42,734
Change in unrealized gain on securities, net of
taxes of $2,021 and reclassification
adjustment of $266 3,376 3,376
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 42,734 3,376 46,110
Transfer of retained earnings 14 (14) 0
Stock issued under employee benefit plans 411 922 1,333
Effect of three-for-two stock split 16,206 (16,167) 39
Acquisition of Founders' Bank 1,121 6,497 336 (194) 7,760
Cash paid for fractional shares of
acquired entities (5) (5)
Cash dividends declared:
By pooled entities (672) (672)
Per common share of $0.55 (17,699) (17,699)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 50,416 83,908 236,012 3,825 (255) 373,906
Net income 45,163 45,163
Change in unrealized gain on securities, net of
taxes of $954 and reclassification
adjustment of $75 2,179 2,179
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 45,163 2,179 47,342
Stock issued under employee benefit plans 12 325 214 551
Effect of three-for-two stock split 23,507 (22,346) 1,161
Purchase of treasury stock (742) (742)
Cash paid for fractional shares of acquired entities (5) (5)
Cash dividends declared:
By pooled entities (847) (847)
Per common share of $0.57 (19,285) (19,285)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 73,935 61,882 261,043 6,004 (783) 402,081
Net income 43,397 43,397
Change in unrealized loss on securities, net of
taxes of $(10,186) and reclassification
adjustment of $978 (19,620) (19,620)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 43,397 (19,620) 23,777
Stock issued under employee benefit plans (includes
related tax benefit of $365) 133 707 897 1,737
Purchase of treasury stock (287) (287)
Cash dividends declared:
Per common share of $0.62 (22,918) (22,918)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 74,068 $ 62,589 $281,522 $(13,616) $ (173) $404,390
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
39
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in thousands, except as noted and per share data)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Susquehanna Bancshares, Inc. and
subsidiaries ("Susquehanna") conform to generally accepted accounting principles
and to general practices in the banking industry. The more significant policies
follow:
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Susquehanna and its wholly-owned subsidiaries: Farmers
First Bank and subsidiaries ("Farmers"), Farmers & Merchants Bank and Trust and
subsidiaries ("F&M"), First American National Bank of Pennsylvania ("FANB"),
First Capitol Bank ("First Capitol"), First National Trust Bank ("First
National"), Williamsport National Bank ("Williamsport"), Citizens National Bank
of Southern Pennsylvania ("Citizens"), Susquehanna Bancshares East, Inc. and
subsidiaries ("Susquehanna East"), Susquehanna Bancshares South, Inc. and
subsidiaries ("Susquehanna South"), Susque-Bancshares Life Insurance Co.
("SBLIC"), and Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC"),
as of and for the years ended December 31, 1999, 1998, and 1997. All material
intercompany transactions have been eliminated.
Income and expenses are recorded on the accrual basis of accounting except
for trust and certain other fees which are recorded principally on the cash
basis. This does not materially affect the results of operations or financial
position of Susquehanna.
Nature of Operations. Susquehanna is a multi-financial institution which
operates nine commercial banks and one savings bank based upon the sound
principles of super-community banking. These subsidiaries provide financial
services from 140 branches located in central and southeastern Pennsylvania,
Maryland, and southern New Jersey. In addition, Susquehanna operates two
non-bank subsidiaries that provide leasing and credit insurance services.
Susquehanna's primary source of revenue is derived from loans to customers, who
are predominately small- and middle-market businesses and middle-income
individuals.
Use of Estimates in the Preparation of Financial Statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
Purchase Method of Accounting. Net assets of companies acquired in purchase
transactions are recorded at the fair value at the date of acquisition. Core
deposit and other intangible assets are amortized on a straight-line basis over
10 years. The excess of purchase price over the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis generally over 15
years. The unamortized amount of goodwill was $31,106 and $34,101 at December
31, 1999 and 1998, respectively.
Consolidated Statements of Income. Included in the consolidated Statements of
Income is a $7.4 million restructuring charge. The restructuring plan was
approved by Susquehanna's Board of Directors and communicated to employees in
the fourth quarter of 1999. The following summarizes the components of that
charge as accrued in the fourth quarter of 1999.
- --------------------------------------------------------------------------------
Expense
- --------------------------------------------------------------------------------
Employee severance benefits $3,170
Professional fees related to reduction in work force 2,850
Employment services for terminated employees 660
Asset disposals/write-downs 732
- --------------------------------------------------------------------------------
Total restructuring costs $7,412
================================================================================
Consolidated Statement of Cash Flows. Interest paid on deposits, short-term
borrowings, and long-term debt was $138,114 in 1999, $141,733 in 1998, and
$124,558 in 1997. Income taxes paid were $16,409 in 1999, $19,805 in 1998, and
$17,286 in 1997. Amounts transferred to other real estate owned were $7,342 in
1999, $8,408 in 1998, and $5,516 in 1997.
On July 30, 1997, Susquehanna acquired Founders' Bank, Bryn Mawr, Pa., using
the pooling-of-interests method. Results of operations for Founders' prior to
the acquisition were not material to Susquehanna's consolidated results and,
therefore, prior periods were not restated.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash
equivalents includes cash due from banks, and short-term investments. Short-term
investments consist of interest-bearing deposits in other banks, federal funds
sold, and money market funds with an original maturity of three months or less.
Investment Securities. Susquehanna classifies debt and equity securities as
either "held-to-maturity" or "available-for-sale." Susquehanna does not have any
securities classified as "trading" at December 31, 1999, or 1998. Investments
for which management has the intent, and Susquehanna has the ability, to hold
to maturity are carried at the lower of cost or market adjusted for amortization
of premium and accretion of discount. Amortization and accre-
40
tion are calculated principally on the interest method. All other securities are
classified as "available-for-sale" and reported at fair value. Changes in
unrealized gains and losses for "available-for-sale" securities are recorded as
a component of shareholders' equity.
Securities classified as "available-for-sale" include investments management
intends to use as part of its asset/ liability management strategy, and that may
be sold in response to changes in interest rates, resultant prepayment risk, and
other factors. Realized gains and losses on the sale of securities are
recognized using the specific identification method and are included in Other
Income in the Consolidated Statements of Income.
Allowance for Loan and Lease Losses. The loan and lease loss provision charged
to operating expense reflects the amount deemed appropriate by management to
produce an adequate reserve to meet the present and foreseeable risk
characteristics of the loan and lease portfolio. Loan and lease losses are
charged directly against the allowance for loan and lease losses, and recoveries
on previously charged-off loans and leases are added to the allowance.
Susquehanna considers a loan to be impaired, based upon current information
and events, if it is probable that Susquehanna will be unable to collect the
scheduled payments of principal or interest according to the contractual terms
of the loan agreement. Larger groups of small-balance loans, such as residential
mortgage and installment loans, are collectively evaluated for impairment. Only
commercial loans exceeding $100 are individually evaluated for impairment. An
insignificant delay or shortfall in the amounts of payments, when considered
independent of other factors, would not cause a loan to be rendered impaired.
Insignificant delays or shortfalls may include, depending on specific facts and
circumstances, those that are associated with temporary operational downturns or
seasonal delays.
Management performs periodic reviews of Susquehanna's loan portfolio to
identify impaired loans. The measurement of impaired loans is based on the
present value of expected future cash flows discounted at the historical
effective interest rate, except that all collateral-dependent loans are measured
for impairment based on the fair value of the collateral.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of an impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance, and subsequent recoveries, if any, are credited to
the valuation allowance.
Depreciable Assets. Buildings, leasehold improvements, and furniture and
equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the related property as follows: buildings, 40 years;
and furniture and equipment, 3 to 20 years. Leasehold improvements are amortized
over the shorter of the lease term or 10 to 20 years. Maintenance and normal
repairs are charged to operations as incurred, while additions and improvements
to buildings and furniture and equipment are capitalized. Gain or loss on
disposition is reflected in operations.
Long-lived assets and certain intangible assets are evaluated for impairment
by management on an ongoing basis. An impairment may occur whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Other Real Estate. Other real estate property acquired through foreclosure or
other means is recorded at the lower of its carrying value, or fair value, of
the property at the transfer date less estimated selling costs. Costs to
maintain other real estate are expensed as incurred.
Interest Income on Loans and Leases. Interest income on commercial, consumer,
and mortgage loans is recorded on the interest method. Interest income on
installment loans is recorded on the sum-of-the-years digits and the actuarial
methods. Loan fees and certain direct loan origination costs are being deferred
and the net amount amortized as an adjustment to the related loan yield on the
interest method, generally over the contractual life of the related loans.
Nonaccrual loans are those on which the accrual of interest has ceased and
where all previously accrued and unpaid interest is reversed. Loans, other than
consumer loans, are placed on nonaccrual status when principal or interest is
past due 90 days or more and the loan is not well collateralized and in the
process of collection, or immediately, if, in the opinion of management, full
collection is doubtful. Interest accrued but not collected as of the date of
placement on nonaccrual status is reversed and charged against current income.
Susquehanna does not accrue interest on impaired loans. While a loan is
considered impaired or on nonaccrual status, subsequent cash payments received
either are applied to the outstanding principal balance or recorded as interest
income, depending upon management's assessment of the ultimate collectibility of
principal and interest. In any case, the deferral or non-recognition of interest
does not constitute forgiveness of the borrower's obligation. Consumer loans are
recorded in accordance with the Uniform Retail Classification regulation.
Generally, the regulation requires that consumer loans are charged off to the
allowance for loan losses when they become 120 days or more past due.
Federal Income Taxes. Deferred income taxes reflect the temporary tax
consequences on future years of differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the difference is expected to reverse.
Earnings Per Share. All share, per share, and option data in these financial
statements have been adjusted to give effect to the three-for-two stock splits
of 1998 and 1997.
41
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
Common Shares Outstanding
- --------------------------------------------------------------------------------
Balance, January 1, 1997 15,922,939
Stock issued under employee benefit plans 24,997
Exercise of stock-warrants of pooled entity 36,008
Effect of three-for-two stock split 7,982,333
Acquistion of Founders' Bank 560,354
- --------------------------------------------------------------------------------
Balance, December 31, 1997 24,526,631
Stock issued under employee benefit plans 27,167
Exercise of stock-warrants of pooled entity 76,814
Effect of three-for-two stock split 12,304,910
Purchase of treasury stock (33,000)
- --------------------------------------------------------------------------------
Balance, December 31, 1998 36,902,522
Stock issued under employee benefit plans 134,931
Purchase of treasury stock (15,000)
Balance, December 31, 1999 37,022,453
================================================================================
Recent Accounting Pronouncements. During 1998, Susquehanna adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), which established standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains, and losses).
SFAS 130 requires all items required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income includes a reclassification adjustment for net realized
investment gains included in net income of $978, $75, and $266 for the years
ended December 31, 1999, 1998, and 1997, respectively. The new standard requires
only additional disclosures in the consolidated financial statements; it does
not affect Susquehanna's financial position or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS 131"), in 1997. SFAS 131 establishes standards for
disclosures about products, services, geographic areas, and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has reviewed SFAS 131 and determined that Susquehanna has one
qualifying segment and therefore no additional disclosure is required.
During 1998, Susquehanna also adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" (SFAS No. 132), which revises employers' disclosures
about pensions and other Post-retirement benefit plans. It standardizes the
disclosure requirements for pensions and other Post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were under previous pronouncements.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS 133 establishes standards for recording derivative
financial instruments on the balance sheet at their fair value. This Statement
requires that changes in the fair value of derivatives be recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. As amended, this Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management anticipates
that the adoption of SFAS 133 will not have a material effect on Susquehanna's
financial condition or results of operations.
SFAS 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," requires that after a securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interest based on its ability and
intent to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by non-mortgage
banking enterprises. The Statement was effective for the first fiscal quarter of
1999 and did not have a material effect on Susquehanna's financial condition or
results of operations.
- --------------------------------------------------------------------------------
2. Completed Acquisitions
On January 4, 1999, Susquehanna completed the acquisition of First Capitol Bank
("FCB"), a Pennsylvania commercial bank company 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 is 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:
42
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Susquehanna FCB Susquehanna
As Reported As Reported Restated
- --------------------------------------------------------------------------------
Net interest income $154,190 $ 3,939 $158,129
Provision for loan and lease losses 5,247 86 5,333
Other income 30,921 267 31,188
Other expense 113,206 4,858 118,064
- --------------------------------------------------------------------------------
Income before taxes 66,658 (738) 65,920
Taxes 21,084 (327) 20,757
- --------------------------------------------------------------------------------
Net income $ 45,574 $ (411) $ 45,163
================================================================================
Earnings per share: Basic $ 1.27 $ 1.22
Diluted $ 1.26 $ 1.21
Average shares outstanding: Basic 35,859 1,009 36,868
Diluted 36,179 1,009 37,188
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Susquehanna FCB Susquehanna
As Reported As Reported Restated
- --------------------------------------------------------------------------------
Net interest income $151,392 $ 3,767 $155,159
Provision for loan and lease losses 4,557 174 4,731
Other income 24,374 277 24,651
Other expense 109,832 2,931 112,763
- --------------------------------------------------------------------------------
Income before taxes 61,377 939 62,316
Taxes 19,315 267 19,582
- --------------------------------------------------------------------------------
Net income $ 42,062 $ 672 $ 42,734
================================================================================
Earnings per share: Basic $ 1.19 $ 1.18
Diluted $ 1.18 $ 1.17
Average shares outstanding: Basic 35,413 883 36,296
Diluted 35,628 923 36,551
- --------------------------------------------------------------------------------
3. Short-Term Investments
The book value of short-term investments and weighted average interest rates on
December 31, 1999 and 1998, were as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Book Book
Value Rates Value Rates
- --------------------------------------------------------------------------------
Interest-bearing deposits
in other banks $ 4,817 3.99% $18,151 4.66%
Federal funds sold 3,418 4.52 51,258 4.75
Money market funds 9,454 5.30 13,654 5.10
- --------------------------------------------------------------------------------
Total $17,689 $83,063
================================================================================
43
- --------------------------------------------------------------------------------
4. Investment Securities
The amortized cost and fair values of investment securities at December 31, 1999
and 1998, are as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 1999 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $ 16,658 $ 49 $ 24 $ 16,683
U.S. Government agencies 346,041 36 7,087 338,990
State and municipal 70,136 201 738 69,599
Corporate debt securities 17,795 52 165 17,682
Mortgage-backed securities 414,317 47 14,936 399,428
Equity securities 34,588 1,988 0 36,576
- --------------------------------------------------------------------------------------------
$899,535 $ 2,373 $22,950 $878,958
- --------------------------------------------------------------------------------------------
Held-to-Maturity:
State and municipal $ 32,070 $ 388 $ 8 $ 32,450
Mortgage-backed securities 1,020 0 9 1,011
- --------------------------------------------------------------------------------------------
$ 33,090 $ 388 $ 17 $ 33,461
- --------------------------------------------------------------------------------------------
Total investment securities $932,625 $ 2,761 $22,967 $912,419
============================================================================================
- --------------------------------------------------------------------------------------------
At December 31, 1998
- --------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $ 67,043 $ 912 $ 0 $ 67,955
U.S. Government agencies 214,841 1,249 124 215,966
State and municipal 70,417 1,649 76 71,990
Corporate debt securities 34,993 399 0 35,392
Mortgage-backed securities 466,005 856 327 466,534
Equity securities 29,379 4,701 10 34,070
- --------------------------------------------------------------------------------------------
$882,678 $ 9,766 $ 537 $891,907
- --------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 500 $ 0 $ 0 $ 500
U.S. Government agencies 55,810 1,155 0 56,965
Corporate debt securities 25 0 0 25
Mortgage-backed securities 3,502 27 0 3,529
- --------------------------------------------------------------------------------------------
$ 59,837 $ 1,182 $ 0 $ 61,019
- --------------------------------------------------------------------------------------------
Total investment securities $942,515 $10,948 $ 537 $952,926
============================================================================================
44
At December 31, 1999 and 1998, investment securities with a carrying value of
$463,071 and $291,285 respectively, were pledged to secure public funds and for
other purposes as required by law.
There were no investment securities whose ratings were less than investment
grade at December 31, 1999 or 1998.
The amortized cost and fair values of U.S. Treasury, government agency, state
and municipal, corporate debt, and mortgage-backed securities, at December 31,
1999, by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Securities Available-for-Sale:
Within one year $ 21,633 $ 21,643
After one year but within
five years 410,828 403,407
After five years but within
ten years 38,509 37,922
After ten years 393,977 379,410
- --------------------------------------------------------------------------------
864,947 842,382
- --------------------------------------------------------------------------------
Securities Held-to-Maturity:
Within one year $ 14,192 $ 14,229
After one year but within
five years 11,800 11,899
After five years but within
ten years 2,168 2,331
After ten years 4,930 5,002
- --------------------------------------------------------------------------------
33,090 33,461
- --------------------------------------------------------------------------------
Total debt securities $898,037 $875,843
================================================================================
The gross realized gains and gross realized losses on investment securities
transactions are summarized below. During 1999, 1998, and 1997, certain
securities classified as held-to-maturity were called for early redemption by
the issuer. The results of those transactions are recorded in the corresponding
category.
- --------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
For the year ended December 31, 1999
- --------------------------------------------------------------------------------
Gross gains $998 $ 1
Gross losses 18 3
- --------------------------------------------------------------------------------
Net gains $980 $ (2)
================================================================================
For the year ended December 31, 1998
- --------------------------------------------------------------------------------
Gross gains $210 $ 0
Gross losses 133 2
- --------------------------------------------------------------------------------
Net gains $ 77 $ (2)
================================================================================
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
Gross gains $687 $ 1
Gross losses 419 3
- --------------------------------------------------------------------------------
Net gains $268 $ (2)
================================================================================
Interest earned on investment securities for the years ended December 31 was as
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Taxable $50,485 $48,587 $37,605
Tax-advantaged 5,232 5,666 5,588
- --------------------------------------------------------------------------------
Total $55,717 $54,253 $43,193
================================================================================
45
- --------------------------------------------------------------------------------
5. Loans and Leases
At December 31, loans and leases, net of unearned income ($37,233 at December
31, 1999, and $26,293 at December 31, 1998), were as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Commercial, financial,
and agricultural $ 327,670 $ 301,385
Real estate--construction 255,054 256,451
Real estate--mortgage 1,850,375 1,821,485
Consumer 395,566 346,180
Leases 166,487 121,684
- --------------------------------------------------------------------------------
Total $2,995,152 $2,847,185
================================================================================
Certain directors and executive officers of Susquehanna and its affiliates,
including their immediate families and companies in which they are principal
owners (more than 10%), were indebted to banking subsidiaries. In the opinion of
management, such loans are consistent with sound banking practices and are
within applicable regulatory bank lending limitations. Susquehanna relies on the
directors and executive officers for the identification of their associates.
The activity of loans to such persons whose balance exceeded $60 during 1999,
1998, and 1997 follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance--January 1 $27,225 $27,740 $29,653
Additions 28,273 20,379 12,477
Deductions:
Amounts collected 24,657 20,894 11,971
Other changes 5,134 0 (2,419)
- --------------------------------------------------------------------------------
Balance--December 31
Current $35,975 $27,225 $27,740
================================================================================
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, and Maryland. Susquehanna has no
concentration of loans to borrowers in any one industry, or related industry,
which exceeds 10% of total loans with the exception of housing developments.
An analysis of impaired loans at December 31, 1999 and 1998, is presented as
follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Impaired loans without a related
reserve $11,491 $ 9,437
Impaired loans with a reserve 1,460 3,571
- --------------------------------------------------------------------------------
Total impaired loans $12,951 $13,008
================================================================================
Reserve for impaired loans $ 532 $ 591
================================================================================
An analysis of impaired loans for the years ended Decem- ber 31, 1999 and 1998
is presented as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Average balance of impaired loans $10,560 $11,869
Interest income on impaired loans
(cash basis) 134 242
================================================================================
- --------------------------------------------------------------------------------
6. Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses were as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance--January 1 $ 36,158 $ 36,481 $ 35,704
Allowance acquired in
business combination 0 0 1,460
Provision charged to
operating expenses 7,200 5,333 4,731
- --------------------------------------------------------------------------------
43,358 41,814 41,895
- --------------------------------------------------------------------------------
Charge-offs (8,366) (7,109) (6,787)
Recoveries 2,241 1,453 1,373
- --------------------------------------------------------------------------------
Net charge-offs (6,125) (5,656) (5,414)
- --------------------------------------------------------------------------------
Balance--December 31 $ 37,233 $ 36,158 $ 36,481
================================================================================
46
- --------------------------------------------------------------------------------
7. Premises and Equipment
Property, buildings, and equipment, at December 31, were as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Land $ 8,393 $ 8,504
Buildings 45,346 45,321
Furniture and equipment 51,184 54,172
Leasehold improvements 6,321 6,461
Land improvements 1,136 1,148
- --------------------------------------------------------------------------------
112,380 115,606
- --------------------------------------------------------------------------------
Less: accumulated depreciation
and amortization 57,976 60,040
- --------------------------------------------------------------------------------
$ 54,404 $ 55,566
================================================================================
Depreciation and amortization expense charged to operations amounted to
$6,652 in 1999, $5,808 in 1998, and $5,468 in 1997.
All subsidiaries lease certain banking branches and equipment under operating
leases which expire on various dates through 2011. Renewal options are available
for periods up to 20 years. Minimum future rental commitments under
non-cancellable leases, as of December 31, 1999, are as follows:
- --------------------------------------------------------------------------------
Operating Leases
- --------------------------------------------------------------------------------
2000 $ 3,058
2001 2,730
2002 2,396
2003 2,070
2004 1,898
Subsequent years 7,582
- --------------------------------------------------------------------------------
$19,734
================================================================================
Total rent expense charged to operations amounted to $3,320 in 1999, $3,113
in 1998, and $2,915 in 1997.
- --------------------------------------------------------------------------------
8. Deposits
Deposits at December 31 were as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Noninterest-bearing:
demand $ 430,054 $ 433,133
Interest-bearing:
Interest-bearing demand 951,904 997,718
Savings 421,012 448,865
Time 1,187,524 1,166,002
Time of $100 or more 190,026 171,161
- --------------------------------------------------------------------------------
Total deposits $3,180,520 $3,216,879
================================================================================
- --------------------------------------------------------------------------------
9. Borrowings
Short-Term Borrowings
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
- ---------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $179,278 5.02% $ 98,694 4.46%
Treasury tax and loan notes 14,010 4.54 4,837 5.00
Federal funds purchased 14,219 5.07 1,000 5.43
- ---------------------------------------------------------------------------------------------
$207,507 $104,531
=============================================================================================
47
Federal Home Loan Bank Borrowings
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Due 1999, 4.50% to 6.30% $ 0 $ 36,420
Due 2000, 4.05% to 6.16% 107,325 55,000
Due 2001, 5.27% to 6.33% 13,750 2,250
Due 2002, 5.30% to 6.08% 10,000 26,000
Due 2003, 5.69% to 5.98% 115,500 116,300
Due 2004, 4.65% 15,000 0
Due 2006, 6.65% 788 875
Due 2008, 5.43% to 5.50% 75,000 75,000
Due 2009, 5.30% to 5.34% 33,000 0
Due 2011, 3.25% 85 90
Due 2012, 3.25% 155 164
Due 2013, 5.94% 210 222
Due 2014, 5.00% to 6.51% 1,057 1,077
Due 2018, 6.00% 347 238
Due 2019, 4.50% 197 0
- --------------------------------------------------------------------------------
$372,414 $313,636
================================================================================
Susquehanna subsidiary banks are members of the Federal Home Loan Banks
("FHLB") of Atlanta, New York, and Pittsburgh and, as such, can take advantage
of the FHLB program for overnight and term advances at published daily rates.
Under the terms of a blanket collateral agreement, advances from the FHLB are
collateralized by qualifying first mortgages. In addition, all of the
subsidiaries' stock in the FHLB is pledged as collateral for such debt. Advances
available under this agreement are limited by available and qualifying
collateral and the amount of FHLB stock held by the borrower.
Under this program Susquehanna subsidiaries have lines of credit available to
them totalling $1.0 billion and $691 million, of which $372 million and $314
million were outstanding at December 31, 1999 and 1998, respectively. At
December 31, 1999, Susquehanna subsidiaries could borrow an additional $633
million based on qualifying collateral. Such additional borrowings would require
the subsidiaries to increase their investment in FHLB stock by approximately $12
million.
Long-Term Debt
- ------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------
Installment note due June 2, 1999 $ 0 0.00% $ 10 9.00%
Term note due July 19, 2003 10,000 6.09 10,000 6.09
Subordinate notes due February 1, 2005 50,000 9.00 50,000 9.00
Senior notes due February 1, 2003 35,000 6.30 35,000 6.30
- ------------------------------------------------------------------------------------
$95,000 $95,010
====================================================================================
The installment note was a demand note with a final maturity of June 2, 1999.
The term note is payable with interest only payments being made until
maturity. This note is guaranteed by Susquehanna.
On February 9, 1995, Susquehanna issued $50 million of its 9.00% subordinated
notes due 2005. The proceeds were used to retire $10 million in short-term
borrowings and the balance was used for acquisitions and for general corporate
purposes.
On January 29, 1996, Susquehanna issued $35 million of its 6.30% senior notes
due 2003. The proceeds were used for acquisitions and general corporate
purposes.
48
- --------------------------------------------------------------------------------
10. Income Taxes
The components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Current $ 19,009 $ 17,250 $ 17,286
Deferred (587) 3,507 2,296
- --------------------------------------------------------------------------------
Total $ 18,422 $ 20,757 $ 19,582
================================================================================
The provision for income taxes differs from the amount derived from applying
the statutory income tax rate to income before income taxes as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Provision at statutory rates $ 21,637 $ 23,079 $ 21,801
Tax-advantaged income (2,857) (3,144) (2,963)
Other, net (358) 822 744
- --------------------------------------------------------------------------------
Total $ 18,422 $ 20,757 $ 19,582
================================================================================
Accounting for income taxes requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax return. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The components of the net deferred tax asset as of December 31 were as
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $ 13,429 $ 13,406 $ 13,004
Accrued pension expense 1,180 1,314 1,473
Deferred directors' fees 564 811 760
Deferred compensation 775 451 177
Nonaccrual loan interest 1,398 1,078 1,065
Core deposit intangible 101 25 490
Purchase accounting 493 449 (519)
Unrealized investment
(gains) and losses 6,961 (3,225) (2,425)
Other assets 4,835 1,248 1,147
Deferred tax liabilities:
Deferred loan costs (1,914) (404) 817
FHLB stock dividends (395) (395) (395)
Premises and equipment (2,208) (2,160) (2,178)
Operating lease income, net (8,490) (6,770) (4,731)
Recapture of savings banks'
bad debt reserve (344) (598) (1,016)
Other liabilities (2,551) (2,169) (301)
- --------------------------------------------------------------------------------
Net deferred income tax assets $ 13,834 $ 3,061 $ 7,368
================================================================================
- --------------------------------------------------------------------------------
11. Financial Instruments with Off-Balance Sheet Risk
Susquehanna is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to orginate loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
statement of condition. The contract or notional amount of those instruments
reflects the extent of involvement Susquehanna has in particular classes of
financial instruments.
Susquehanna's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for loan commitments and standby
letters of credit is represented by the contractual amount of these instruments.
Susquehanna uses the same credit policies for these instruments as it does for
on-balance sheet instruments.
Standby letters of credit are conditional commitments issued by Susquehanna
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment does not necessarily represent
future cash requirements. Susquehanna evaluates each customer's creditworthiness
on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by Susquehanna upon
extension of credit, is based on management's credit evaluation of the borrower.
Financial instruments with off-balance sheet risk at December 31, 1999 and
1998, are as follows:
- --------------------------------------------------------------------------------
Contractual 1999 1998
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Standby letters of credit $ 36,426 $ 34,711
Commitments to originate loans 136,257 93,746
Unused portion of home equity
and credit card lines 188,043 175,331
Other unused commitments,
principally commercial
lines of credit 418,387 381,866
49
- --------------------------------------------------------------------------------
12. Fair Value of Financial Instruments
Susquehanna's estimated fair value information about financial instruments is
presented below. Some of this information is presented whether it is recognized
in the Consolidated Balance Sheet or not, and if it is practicable to estimate
that value. Fair value is best determined by values quoted through active
trading markets.
Active trading markets are characterized by numerous transactions of similar
financial instruments between willing buyers and willing sellers. Because no
active trading market exists for various types of financial instruments, many of
the fair values disclosed were derived using present value discounted cash flow
or other valuation techniques. As a result, Susquehanna's ability to actually
realize these derived values cannot be assured.
The estimated fair values disclosed herewith may vary significantly between
institutions based on the estimates and assumptions used in the various
valuation methodologies. The disclosure requirements exclude disclosure of
nonfinancial assets such as buildings as well as certain financial instruments
such as leases.
Susquehanna also has several intangible assets which are not included in the
fair value disclosures such as mortgage servicing rights, customer lists, and
core deposit intangibles. Accordingly, the aggregate estimated fair values
presented do not represent the underlying value of Susquehanna. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument.
Cash and Due from Banks and Short-Term Investments. The fair value of cash and
due from banks and short-term investments is deemed to be the same as their
carrying value.
Investment Securities. The fair value of investment securities is estimated
based on quoted market prices, where available. When quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Loans. Variable rate loans which do not expose Susquehanna to interest rate
risk have a fair value that equals their carrying value, discounted for
estimated future credit losses. The fair value of fixed rate loans was based
upon the present value of projected cash flows. The discount rate was based upon
the U.S. Treasury yield curve, adjusted for credit risk.
Deposits. The fair values of demand, interest-bearing demand, and savings
deposits are the amounts payable on demand at the balance sheet date. The
carrying value of variable rate time deposits represents a reasonable estimate
of fair value. The fair value of fixed rate time deposits is based upon the
discounted value of future cash flows expected to be paid at maturity. Discount
rates are calculated off the U.S. Treasury yield curve.
Short-Term Borrowings. The carrying amounts reported in the balance sheet
represent a reasonable estimate of fair value since these liabilities mature in
less than one year.
Long-Term Debt. Fair values were based upon quoted rates of similar instruments,
issued by banking companies with similar credit ratings.
Off-Balance Sheet Items. The fair value of unused commitments to lend and
standby letters is deemed to be the same as their carrying value.
The following table represents the carrying amount and estimated fair value
of Susquehanna's financial instruments at December 31:
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 144,548 $ 144,548 $ 113,210 $ 113,210
Short-term investments 17,689 17,689 83,063 83,063
Investment securities 912,048 912,419 951,744 952,926
Loans, net of unearned income and allowance 2,793,313 2,923,709 2,690,668 2,772,868
Liabilities:
Deposits 3,180,520 3,176,336 3,216,879 3,225,168
Short-term borrowings 207,507 207,507 104,531 104,531
FHLB borrowings 372,414 372,559 313,636 320,037
Long-term debt 95,000 95,379 95,010 102,040
50
- --------------------------------------------------------------------------------
13. Benefit Plans
Susquehanna maintains a single non-contributory pension plan that covers
substantially all full-time employees. In addition, Susquehanna offers life
insurance and other benefits to its retirees. A summary of the plans at December
31 is as follows:
- -----------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 39,605 $ 35,549 $ 3,251 $ 2,888
Service cost 1,916 1,529 146 116
Interest cost 2,505 2,238 212 197
Plan participants' contributions 0 0 66 72
Amendments 21 (3,936) 32 120
Actuarial (gain)/loss (7,709) 2,860 (437) 36
Acquisitions 0 2,345 0 0
Benefits paid (1,187) (980) (171) (178)
- -----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 35,151 $ 39,605 $ 3,099 $ 3,251
- -----------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year $ 44,600 $ 37,496 $ 0 $ 0
Actual return on plan assets 3,939 2,734 0 0
Acquisitions 0 3,789 0 0
Employer contributions 0 0 105 106
Plan participants' contributions 0 0 66 72
Benefits paid (1,187) (980) (171) (178)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 47,352 $ 43,039 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------
Funded status $ 12,202 $ 3,434 $ (3,099) $ (3,251)
Unrecognized net actuarial gain (13,306) (4,363) (1,131) (722)
Unrecognized prior service cost (2,562) (2,861) 386 395
Unrecognized transition asset (481) (548) 1,477 1,590
- -----------------------------------------------------------------------------------------------------
Accrued benefit cost $ (4,147) $ (4,338) $ (2,367) $ (1,988)
=====================================================================================================
Components of Net Periodic Benefit
Expense /(Income)
- -------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Service cost $ 1,916 $ 1,529 $ 1,959 $ 146 $ 116 $ 92
Interest cost 2,505 2,238 2,216 212 197 191
Expected return on plan assets (3,962) (3,332) (2,707) 0 0 0
Amortization of prior service cost (277) (279) 102 41 27 24
Amortization of transition asset (68) (67) (86) 113 113 113
Amortization of net actuarial gain (305) (322) (326) (28) (36) (42)
- -------------------------------------------------------------------------------------------------------------
Net periodic benefit expense/(income) $ (191) $ (233) $ 1,158 $ 484 $ 417 $ 378
=============================================================================================================
Weighted-Average Assumptions at Year-End
Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets 9.00% 9.00% 9.00% 0.00% 0.00% 0.00%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
The plan assets were invested principally in U.S. Government securities and
listed stocks and bonds including 31,751 and 30,697 shares of Susquehanna common
stock at December 31, 1999 and 1998, respectively.
Susquehanna maintains a 401(k) savings plan which allows employees to invest
a percentage of their earnings, matched up to a certain amount specified by
Susquehanna. Contributions to the savings plan which are included in salaries
and benefits expense amounted to $1,192 in 1999, $1,213 in 1998, and $1,007 in
1997.
51
Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows
employees to purchase Susquehanna common stock up to 5% of their salary at
discount to the market price, through payroll deductions.
Susquehanna implemented a nonqualified Equity Compensation Plan (the
"Compensation Plan"), in 1997, under which Susquehanna may grant options to its
employees and directors for up to 1,462,500 shares of common stock. Under the
Compensation Plan, the exercise price of each option equals the market price of
the company's stock on the date of grant, and an option's maximum term is 10
years. Options are granted upon approval of the Board of Directors and typically
vest one-third at the end of years three, four, and five. The option prices
range from a low of $6.44 to a high of $24.75.
On January 1, 1996, Susquehanna adopted SFAS 123 and as permitted by SFAS
123, Susquehanna has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for the
Compensation Plan. Accordingly, no compensation cost has been recognized for
options granted under the Compensation Plan.
For purposes of disclosure, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model
based upon the assumptions noted below. Option data noted below has been
adjusted for the three-for-two stock splits of 1998 and 1997. The pro forma
effects on net income include both the Compensation Plan and the ESPP.
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 892,870 $15.36 676,151 $12.22 566,523 $11.33
Granted 294,117 18.19 224,219 24.75 120,878 16.47
Exercised 92,362 7.81 7,500 13.00 11,250 13.00
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,094,625 $16.76 892,870 $15.36 676,151 $12.22
==================================================================================================================================
Outstanding at end of year:
Granted prior to 1997 459,507 $11.96 547,773 $11.28 555,273 $11.30
Granted 1997 116,782 16.69 120,878 16.47 120,878 16.47
Granted 1998 224,219 24.75 224,219 24.75 0 0
Granted 1999 294,117 18.19 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,094,625 $16.76 892,870 $15.36 676,151 $12.22
==================================================================================================================================
Options exercisable at year-end:
Granted prior to 1997 233,314 $10.96 208,485 $ 8.47 215,985 $ 9.25
Granted 1997 69,534 16.18 73,629 15.85 73,629 15.85
Granted 1998 0 0 0 0 0 0
Granted 1999 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 302,848 $12.16 282,114 $10.40 289,614 $10.46
==================================================================================================================================
Weighted average remaining contractual maturity
of options outstanding at year-end:
Granted prior to 1997 6 years
Granted 1997 7 years
Granted 1998 8 years
Granted 1999 9 years
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 years
52
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Dollars Per Share Dollars Per Share Dollars Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $1,321 $4.49 $1,348 $6.01 $521 $4.31
Fair value disclosures (pro forma) effect on:
Net income (328) (484) (428)
Basic earnings per share (0.01) (0.01) (0.01)
Diluted earnings per share (0.01) (0.01) (0.01)
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value assumptions:
Dividend yield 3.0% 3.0% 3.0%
Expected volatility 22.0% 22.0% 20.0%
Risk-free interest rate 5.7% 5.5% 6.7%
Expected term 7 years 7 years 7 years
- --------------------------------------------------------------------------------
14. Susquehanna Bancshares, Inc. (Parent Only) Condensed Balance Sheets
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Assets
Cash in subsidiary bank $ 247 $ 746
Short-term investments 0 62
Investment in consolidated
subsidiaries at equity in net assets 485,166 476,604
Other investment securities 2,920 5,275
Premises and equipment (net) 320 215
Other assets 7,588 11,308
- --------------------------------------------------------------------------------
Total assets $ 496,241 $ 494,210
================================================================================
Liabilities
Long-term debt $ 85,000 $ 85,000
Accrued taxes and expenses payable 6,851 7,129
- --------------------------------------------------------------------------------
Total liabilities 91,851 92,129
- --------------------------------------------------------------------------------
Equity
Preferred stock (no par) 0 0
Common stock ($2 par value) 74,068 73,935
Surplus 62,589 61,882
Retained earnings 281,522 261,043
Accumulated other comprehensive
income, net of taxes (13,616) 6,004
Less: Treasury stock at cost 173 783
- --------------------------------------------------------------------------------
Total stockholders' equity 404,390 402,081
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 496,241 $ 494,210
================================================================================
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Income
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 35,814 $ 68,266 $ 28,611
Interest, dividends, and gains
on sales of investment
securities 959 231 191
Interest and management
fee from subsidiaries 3,408 4,137 4,115
- --------------------------------------------------------------------------------
Total income 40,181 72,634 32,917
- --------------------------------------------------------------------------------
Expenses
Interest expense 6,864 6,864 6,861
Recurring charges 3,410 0 0
Other expenses 7,145 4,036 4,096
- --------------------------------------------------------------------------------
Total expenses 17,419 10,900 10,957
- --------------------------------------------------------------------------------
Income before taxes, and
equity in undistributed
income of subsidiaries 22,762 61,734 21,960
Income taxes (1,470) 241 (386)
Equity in undistributed
income of subsidiaries 19,165 (16,330) 20,388
- --------------------------------------------------------------------------------
Net Income $ 43,397 $ 45,163 $ 42,734
================================================================================
53
- --------------------------------------------------------------------------------
Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Cash
Flows
- --------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Operating Activities
Net income $ 43,397 $ 45,163 $ 42,734
Adjustment to reconcile net
income to cash provided
by operating activities:
Depreciation and
amortization 357 313 158
Equity in undistributed
income of
subsidiaries and
income of subsidiaries
accrued not received (19,165) 16,330 (20,388)
Increase in other assets (651) (5,752) (520)
Increase/(decrease) in
accrued expenses
payable (278) 1,271 602
Other, net (959) 0 0
- --------------------------------------------------------------------------------
Net cash provided from
operating activities 22,701 57,325 22,586
- --------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities (500) 0 (8,489)
Proceeds from the sale/
maturities of investment
securities 1,089 8,500 0
Capital expenditures (204) (179) (72)
Net infusion of investment
in subsidiaries (1,814) (46,006) (1,200)
- --------------------------------------------------------------------------------
Net cash used for investing
activities (1,429) (37,685) (9,761)
- --------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of
common stock $ 1,372 $ 51 $ 619
Dividends paid (22,918) (20,132) (18,371)
Cash paid for treasury stock (287) (742) 0
Other, net 0 32 (43)
- --------------------------------------------------------------------------------
Net cash used for financing
activities (21,833) (20,291) (17,795)
- --------------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (561) (651) (4,970)
Cash and cash equivalents at
January 1 808 1,459 6,429
- --------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 247 $ 808 $ 1,459
================================================================================
Cash and cash equivalents:
Cash in subsidiary bank $ 247 $ 746 $ 794
Short-term investments 0 62 665
- --------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 247 $ 808 $ 1,459
================================================================================
- --------------------------------------------------------------------------------
15. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per
share for the years ended below:
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income available to common
stockholders $43,397 36,960 $1.17 $45,163 36,868 $1.22 $42,734 36,296 $1.18
Effect of diluted securities:
Stock options outstanding 177 320 255
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income available to common
stockholders and assumed
conversion $43,397 37,137 $1.17 $45,163 37,188 $1.21 $42,734 36,551 $1.17
===================================================================================================================================
54
- --------------------------------------------------------------------------------
16. Regulatory Restrictions of Banking Subsidiaries
Susquehanna is limited by regulatory provisions in the amount it can receive in
dividends from its banking subsidiaries. Accordingly, at December 31, 1999,
$56,819 is available for dividend distribution to Susquehanna in 2000 from its
banking subsidiaries.
Included in cash and due from banks are balances required to be maintained by
banking subsidiaries on deposit with the Federal Reserve. The amounts of such
reserves are based on percentages of certain deposit types and totalled $2,231
and $5,807 at December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
17. Contingent Liabilities
Susquehanna is party to various legal proceedings incidental to its business.
Certain claims, suits, and complaints arising in the ordinary course of business
have been filed or are pending against Susquehanna. In the opinion of
management, all such matters are adequately covered by insurance or, if not
covered, are without merit or are of such kind, or involve such amounts, as
would not have a material effect on the financial position, results of
operations, and cash flows of Susquehanna, if disposed of unfavorably.
- --------------------------------------------------------------------------------
18. Subsequent Events
On February 1, 2000, Susquehanna completed the acquisition of Boston Service
Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), a closely held
consumer automobile financing company, for 2,360,000 shares of Susquehanna
common stock. Hann, headquartered in Jamesburg, New Jersey, originates
high-quality automobile loans and leases in the New Jersey, eastern
Pennsylvania, New York, and Connecticut market areas. Hann services more than
$800 million in automobile-related receivables.
The acquisition of Hann will be accounted for under the pooling-of-interests
method of accounting. Pro forma information that gives effect of the acquisition
of Hann is as follows:
Pro forma: Susquehanna and Hann
- -----------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------
Net interest income and
other income $212,245 $196,843 $188,251
Net income 44,182 46,804 44,770
Earning per share--basic $ 1.12 $ 1.19 $ 1.16
--diluted 1.12 1.18 1.15
On March 3, 2000, Susquehanna completed the acquisition of Valley Forge Asset
Management Corp., King of Prussia, Pa. ("VFAM"), and its holding company, Valley
Forge Investment Companies, Inc., for $12.7 million. VFAM provides investment
advisory services and, at the time of the acquisition, had approximately $900
million in assets under management. The acquisition of VFAM will be accounted
for under the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the respective assets acquired
and liabilities assumed based on their estimated fair values, net of applicable
income tax effects. Goodwill of approximately $9.0 million was created in this
transaction and will be amortized to other operating expense on a straight-line
basis over 25 years. In this transaction, there is also contingent cash payments
totalling $6.0 million. These contingent cash payments are based upon certain
earnings targets and will be recorded as goodwill if earned.
55
PriceWaterhouseCoopers LLP
One South Market Square
Harrisburg, PA 17101-9916
Telephone (717) 231-5900
Facsimile (717) 232-5672
Report of Independent Accountants
To the Board of Directors and Stockholders
of Susquehanna Bancshares, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Susquehanna Bancshares, Inc. (Susquehanna) and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of Susquehanna's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 24, 2000, except as to
Note 18 which is as of March 3, 2000
56
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31,
1999 and 1998, are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except
per share 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $76,876 $75,257 $74,176 $73,461 $75,435 $75,897 $75,649 $73,861
Interest expense 36,231 34,978 33,508 34,131 35,639 36,209 35,928 34,937
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 40,645 40,279 40,668 39,330 39,796 39,688 39,721 38,924
Provision for loan and lease losses 2,986 1,496 1,294 1,424 1,427 1,375 1,262 1,269
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 37,659 38,783 39,374 37,906 38,369 38,313 38,459 37,655
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 10,956 13,771 7,919 7,333 7,700 7,890 8,392 7,206
Other expenses 42,872 30,989 29,902 28,119 30,407 29,225 29,784 28,648
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,743 21,565 17,391 17,120 15,662 16,978 17,067 16,213
Applicable income taxes 1,185 6,711 5,176 5,350 4,775 5,400 5,580 5,002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,558 $14,854 $12,215 $11,770 $10,887 $11,578 $11,487 $11,211
====================================================================================================================================
Earnings per common share: Basic $ 0.12 $ 0.40 $ 0.33 $ 0.32 $ 0.30 $ 0.31 $ 0.31 $ 0.30
Diluted 0.12 0.40 0.33 0.32 0.29 0.31 0.31 0.30
Market for Susquehanna Capital Stock
Since November 5, 1985, Susquehanna common stock has been listed for quotation
on the National Association of Securities Dealers National Market System. Set
forth below are the high and low sales prices of Susquehanna's common stock as
reported on the Nasdaq National Market System for the years 1999 and 1998.
- ---------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------
Quarterly Quarterly
Market Price Dividend Market Price Dividend
- ---------------------------------------------------------------------------------
First Quarter $21.25-$16.50 $0.15 $26.00-$21.67 $0.14
Second Quarter $19.38-$17.00 $0.15 $26.08-$22.67 $0.14
Third Quarter $18.50-$15.75 $0.15 $26.75-$17.88 $0.14
Fourth Quarter $18.25-$14.88 $0.17 $22.75-$15.50 $0.15
Common stock prices and dividends have been adjusted to reflect Susquehanna's
three-for-two stock splits of 1999 and 1998.
57
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
- ------ --------------------------------------------------------------------
There has been no change in Susquehanna's principal accountants in over
two years. There have been no disagreements with such principal accountants on
any matters of accounting principles, practices, financial statement disclosure,
auditing scope or procedures.
58
PART III
--------
Item 10. Directors and Executive Officers of Susquehanna.
- ------- -----------------------------------------------
The information required by this Item will be included in Susquehanna's
Proxy Statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy
Statement") in the Election of Directors section and the Director and Executive
Officer Compensation section, each of which sections is incorporated herein by
reference.
Item 11. Executive Compensation
- ------- ----------------------
The information required by this Item will be included in the 2000
Proxy Statement in the Director and Executive Officer Compensation section, and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
The information required by this Item will be included in the 2000
Proxy Statement in the Principal Holders of Voting Securities and Holdings of
Management section, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
The information required by this Item will be included in the 2000
Proxy Statement in the Certain Relationships and Related Transaction section,
and is incorporated herein by reference.
59
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
- ------- --------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements. See Item 8 of this report for the
consolidated financial statements of Susquehanna and its
subsidiaries (including the index to financial statements).
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits. A list of the Exhibits to this Form 10-K is set forth
on the Exhibit Index immediately preceding such exhibits.
(b) Report on Form 8-K.
(1) Susquehanna filed a Current Report on form 8-K, dated November
17, 1999, to report the execution of a definitive Share Exchange
Agreement, dated November 17, 1999, to acquire all of the
outstanding stock of Boston Service Company, Inc. (t/a Hann
Financial Service Corporation), filed pursuant to Item 5.
(2) Susquehanna filed a Current Report on Form 8-K, dated December
23, 1999, to report the execution of a definitive Stock Purchase
Agreement with Valley Forge Asset Management Corp. ("VFAM") and a
definitive Agreement and Plan of Reorganization with Valley Forge
Investment Company, Inc. ("VFICO"), to acquire all of the
outstanding stock of VFAM and VFICO, filed pursuant to Item 5.
(c) 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.
(d) Financial Statement Schedule. None Required.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/s/ Robert S. Bolinger
----------------------
Robert S. Bolinger, Chairman of the
Board and Chief Executive Officer
Dated: March 20, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert S. Bolinger Chairman of the Board, Chief Executive March 20, 2000
- ------------------------------------ Officer and Director
(Robert S. Bolinger)
/s/ Drew K, Hostetter Sr. Vice President, Treasurer March 20, 2000
- ------------------------------------ and Chief Financial Officer
(Drew K. Hostetter)
/s/ William J. Reuter President and Director March 20, 2000
- ------------------------------------
(William J. Reuter)
/s/ Richard M. Cloney Vice President and Director March 22, 2000
- ------------------------------------
(Richard M. Cloney)
/s/ James G. Apple Director March 20, 2000
- ------------------------------------
(James G. Apple)
/s/ Trudy B. Cunningham Director March 20, 2000
- ------------------------------------
(Trudy B. Cunningham)
/s/ John M. Denlinger Director March 20, 2000
- ------------------------------------
(John M. Denlinger)
/s/ Owen O. Freeman, Jr. Director March 21, 2000
- ------------------------------------
(Owen O. Freeman, Jr.)
/s/ Henry H. Gibbel Director March 20, 2000
- ------------------------------------
(Henry H. Gibbel)
/s/ Marley R. Gross Director March 21, 2000
- ------------------------------------
(Marley R. Gross)
/s/ T. Max Hall Director March 20, 2000
- ------------------------------------
(T. Max Hall)
61
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 1999
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
/s/ Edward W. Helfrick Director March 22, 2000
- ------------------------------------
(Edward W. Helfrick)
/s/ C. William Hetzer, Jr. Director March 20, 2000
- ------------------------------------
(C. William Hetzer, Jr.)
/s/ Guy W. Miller, Jr. Director March 22, 2000
- ------------------------------------
(Guy W. Miller, Jr.)
/s/ George J. Morgan Director March 23, 2000
- ------------------------------------
(George J. Morgan)
/s/ Clyde R. Morris Director March 20, 2000
- ------------------------------------
(Clyde R. Morris)
/s/ Roger V. Wiest Director March 20, 2000
- ------------------------------------
(Roger V. Wiest)
[END OF SIGNATURE PAGES]
62
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
- --------------- --------------------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession.
(i) Share Exchange Agreement dated as of November 17, 1999 by
among Susquehanna, Boston Service Company, Inc. (t/a Hann
Financial Service Corporation) and the shareholders of Hann.
The Disclosure Annexes to this agreement are omitted. Pursuant
to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna
agrees to furnish a copy of such schedules to the Commission
upon request.
(ii) Stock Purchase Agreement dated as of December 23, 1999 by and
among Susquehanna, Susquehanna Bancshares Central, Inc.,
Valley Forge Asset Management Corp. and certain of the
shareholders of VFAM. The Disclosure Annexes to this agreement
are omitted. Pursuant to paragraph (2) of Item 601(b) of
Regulation S-K, Susquehanna agrees to furnish a copy of such
schedules to the Commission upon request.
(iii) Agreement and Plan of Reorganization dated as of December 23,
1999 by and among Susquehanna, Susquehanna Bancshares Central,
Inc. and Valley Forge Investment Company, Inc. The Disclosure
Annexes to this agreement are omitted. Pursuant to paragraph
(2) of Item 601(b) of Regulation S-K, Susquehanna agrees to
furnish a copy of such schedules to the Commission upon
request.
(3) (i) Articles of Incorporation. Incorporated by reference to
Attachment E to Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-13276 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of Susquehanna's Common Stock
and the rights of Susquehanna'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 Susquehanna's Joint Proxy Statement/Prospectus
on Susquehanna's Registration Statement on Form S-4,
Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998.
(ii) By-laws. Incorporated by reference to Exhibit (3)(b) of
Susquehanna's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(iii) Form of Subordinated Note/Indenture incorporated by reference
to Exhibit 4.1 to Susquehanna's Registration Statement on Form
S-3, Registration No. 33-87624.
(9) Voting trust agreement. Not Applicable
(10) Material Contracts.
63
(i) Susquehanna's Key Employee Severance Pay Plan, adopted in
1999, is filed herewith as Exhibit 10.
(ii) Susquehanna's Executive Deferred Income Plan, effective
January 1, 1999, is incorporated by reference to Exhibit 10(a)
of Susquehanna's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
(iii) Susquehanna's Performance Award Plan as amended in 1995, is
incorporated by reference to Exhibit (a)(10) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
(iv) Susquehanna's Equity Compensation Plan, as adopted in 1996, is
incorporated by reference to Exhibit (a)(10) of Susquehanna's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
(11) Statement re: computation of per share earnings. Not Applicable.
(12) Statements re: computation of ratios. Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders. Not applicable.
(16) Letter re: change in certified accountant. Not applicable.
(18) Letter re: change in accounting principles. Not Applicable.
(19) Report furnished to security holders. Not Applicable.
(21) Subsidiaries of the registrant. Filed herewith.
(22) Published report regarding matters submitted to vote of security
holders. Not Applicable.
(23) Consents of experts and counsel. Filed herewith.
(24) Power of Attorney. Not Applicable.
(27) Financial Data Schedule. Filed herewith.
(99) Additional Exhibits. Not Applicable.
64