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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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 $820,440,400 as of February 28, 2002, 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 28, 2002,
was 39,346,049.
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 29, 2002,
are incorporated by reference into Part III.
PART I
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Item 1. Business
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General
Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state financial
holding company headquartered in Lititz, Pennsylvania. As of December 31, 2001,
Susquehanna operated as a super-community financial holding company with nine
commercial banks and four non-bank subsidiaries. As of December 31, 2001,
Susquehanna had consolidated assets of $5.1 billion, loans receivable of $3.5
billion, deposits of $3.5 billion and shareholders' equity of $494 million.
The relative sizes and profitability of Susquehanna's operating
subsidiaries as of and for the year ended December 31, 2001, 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 $1,358.9 26.8% $ 20.3 36.4%
Farmers & Merchants Bank and Trust 752.8 14.9 8.2 14.7
First Susquehanna Bank & Trust 326.1 6.5 3.9 7.0
WNB Bank 286.0 5.7 4.5 8.1
Citizens Bank of Southern Pennsylvania 227.3 4.5 2.0 3.6
First American Bank of Pennsylvania 190.4 3.8 1.6 2.9
Susquehanna Bank** 1,080.8 21.3 7.0 12.6
Equity Bank*** 407.7 8.1 4.3 7.7
Founders' Bank*** 169.8 3.4 2.8 5.0
Susque-Bancshares Leasing Company, Inc. (leasing) 14.7 0.3 (0.5) (0.9)
Valley Forge Asset Management Corp. 19.4 0.4 0.8 1.4
Boston Service Company, Inc. (t/a Hann Financial 475.2 9.4 5.6 10.1
Service Corporation (auto leasing))
Susque-Bancshares Life Insurance Company 4.6 0.1 0.2 0.4
(life insurance)
Consolidation adjustments, including (262.6) (5.2) (5.0) (9.0)
Susquehanna, Susquehanna South and
Susquehanna East)
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Total $5,051.1 100.0% $ 55.7 100.0%
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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, New Jersey and West Virginia, 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 Baltimore County, Baltimore City, Carroll County, Harford
County, Worcester County, Wicomico County and Anne Arundel County; in southern
New Jersey, principally in Camden, Burlington and Gloucester Counties; and in
eastern West Virginia, principally in Berkeley County, West Virginia.
Susquehanna's non-depository institution subsidiaries provide commercial
leasing services in Pennsylvania, New Jersey, Maryland, Delaware, West Virginia
and northern Virginia; credit life insurance services in central and
southeastern Pennsylvania; consumer automobile financing services principally in
New Jersey, eastern Pennsylvania, New York and Connecticut; and asset management
services principally in southeastern Pennsylvania (Philadelphia, Bucks,
Montgomery, Delaware and Chester Counties), New Jersey and Delaware.
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As a "super-community" financial 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. 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.
As of December 31, 2001, Susquehanna had 420 full-time and 55 part-time
employees, and Susquehanna and its subsidiaries, on a consolidated basis, had
1,635 full-time and 308 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 broad
banking relations with its customers, core deposits fund 77% of Susquehanna's
lending and investing activities.
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.
In 1996, Susquehanna introduced a check card in Pennsylvania and Maryland.
In 1998, the check card was introduced in New Jersey. As of December 31, 2001,
there were over 190,845 active debit cards (over 249,361 issued). In 2000,
Susquehanna also sold its credit card portfolio to a third party purchaser.
Simultaneously with this sale, Susquehanna entered into a separate agreement
with the purchaser for it to continue to provide credit card products and
services to Susquehanna's customers.
Susquehanna conducts its mortgage origination and mortgage banking
operations in its Pennsylvania and Maryland markets through Susquehanna Mortgage
Company, a wholly-owned subsidiary of Susquehanna Bank.
Susquehanna's consolidated commercial lending operations include
commercial, financial and agricultural lending (12% of the total loan portfolio
at December 31, 2001), real estate construction lending (10%), and commercial
mortgage lending (25%). 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 insured
depository institution subsidiaries.
Susquehanna Trust & Investment Company, a subsidiary of Farmers First Bank,
renders services as trustee, executor, administrator, guardian, managing agent,
custodian and investment advisor and performs other fiduciary activities
authorized by law. It operates in Pennsylvania, New Jersey and Maryland.
Through its subsidiary, Susque-Bancshares Life Insurance Company,
Susquehanna offers certain credit related insurance products. Susquehanna also
offers certain leasing services through its subsidiary Susque-Bancshares Leasing
Company, Inc., and its wholly owned subsidiary, Susquebanc Lease Co. Susquehanna
expanded its leasing service capabilities through its acquisition in February of
2000 of Boston Service Company, Inc. (t/a Hann Financial Service Corp.), which
provides comprehensive consumer automobile financing services.
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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 offer
a broad range of investment advisory, asset management and brokerage services to
its customers. Susquehanna's subsidiaries also have referral fee arrangements
with other investment advisors/broker-dealers.
On October 12, 2001, Susquehanna's national bank subsidiaries, Citizens
National Bank of Southern Pennsylvania, First American National Bank of
Pennsylvania and First National Trust Bank converted into Pennsylvania
state-chartered banks under the names Citizens Bank of Southern Pennsylvania,
First American Bank of Pennsylvania and First Susquehanna Bank & Trust,
respectively, and Equity Bank, National Association, converted into a New Jersey
state-chartered bank under the name Equity Bank. On that same date, Susquehanna
Bank converted from a federally-chartered savings bank into a Maryland
state-chartered bank. On November 2, 2001, Williamsport National Bank converted
into a Pennsylvania state-chartered bank under the name WNB Bank.
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.
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 financial holding company registered with the
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Board of 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.
Susquehanna's insured depository institution subsidiaries are also subject
to regulation and supervision. Farmers First Bank, Citizens Bank of Southern
Pennsylvania, First Susquehanna Bank & Trust, First American Bank of
Pennsylvania and WNB Bank are all Pennsylvania state banks subject to regulation
and periodic examination by the Pennsylvania Department of Banking and the
Federal Deposit Insurance Corporation (the "FDIC"). Founders' Bank is a
Pennsylvania state member bank subject to regulation and periodic examination by
the Board and the Pennsylvania Department of Banking. Equity Bank is a New
Jersey state member bank subject to regulation and periodic examination by the
New Jersey Department of Banking and Insurance and the Board. Farmers &
Merchants Bank and Trust and Susquehanna Bank are both Maryland state banks
subject to regulation and periodic examination by the Division of Financial
Regulation of the Maryland Department of Labor, Licensing and Regulation and the
FDIC. Susquehanna Trust & Investment Company is a Pennsylvania non-depository
trust company subject to regulation and periodic examination by the Pennsylvania
Department of Banking. Because Susquehanna is a financial 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 2001 consisted of providing to its customers commercial banking,
trust and other banking-related services and products. These
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included commercial banking through its nine subsidiary banks, trust services
through Susquehanna Trust & Investment Company, credit life insurance through
another subsidiary, leasing operations through two subsidiaries and investment
advisory services through an additional subsidiary. Of these activities,
commercial banking activities accounted for 87% of Susquehanna's gross revenues
in 2000 and 85% of Susquehanna's gross revenues in 2001.
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,
extensions 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 insured depository institution 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 2000, Susquehanna elected to become
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a "financial holding company" (an "FHC") under the Gramm-Leach-Bliley Act (the
"GLB Act"). As an FHC, Susquehanna is 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, in addition to engaging 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 afterward.
The GLB Act also generally permits well-capitalized national banks and, if
state law permits, well-capitalized 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. State chartered banks in Pennsylvania, New Jersey and
Maryland are generally allowed to engage (with proper regulatory authority) in
activities that are permitted to national banks.
As an FHC, Susquehanna is generally 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. However, as an FHC, Susquehanna (unlike traditional bank
holding companies) is permitted to undertake several new types of activities,
and to acquire companies engaged in several additional kinds of activities,
without prior Board approval and with only notice afterward. To preserve its FHC
status, Susquehanna must ensure that all of its insured depository institution
subsidiaries remain well-capitalized and well-managed for regulatory purposes
and earn "satisfactory" or better ratings on their periodic Community
Reinvestment Act ("CRA") examinations.
An FHC ceasing to meet these standards is 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 or in the
alternative, to discontinue or divest any activities that are permitted only to
FHC bank holding companies.
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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% in order to be considered "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, 2001, Susquehanna's tier 1 capital and total capital
(i.e., tier 1 plus tier 2) ratios were 10.82% and 12.53%, 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 quarterly average total 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 at least 100 basis points and in some
cases more. 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, 2001, Susquehanna's leverage
ratio was 8.69%.
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
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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 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 insured depository institution subsidiaries
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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 generally junior to
the claims of depositors, holders of secured liabilities, general creditors and
subordinated creditors, it is generally 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
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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, elsewhere in the United States and 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 if the host state into which they
propose to branch has enacted authorizing legislation. Of the middle-Atlantic
states, Pennsylvania, 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, New Jersey 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. 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, a
reinsurance company, Susque-Bancshares Leasing Company, Inc., a leasing company,
Hann Financial Service Corp., a consumer automobile financing and leasing
company, and Valley Forge Asset Management Corp., an investment advisory firm.
Susque-Bancshares Life Insurance Company is organized under Arizona law to
operate as a credit life, health and accident reinsurer to the extent permitted
by Pennsylvania law. It is regulated by the Arizona Department of Insurance and
is subject to periodic review by that Department. Susque-Bancshares Leasing
Company, Inc. is organized under the laws of the Commonwealth of Pennsylvania
and owns a single leasing company subsidiary with commercial finance powers.
Hann Financial Service Corp. 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. Valley Forge Asset Management Corp. 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.
It is also a registered broker-dealer and is a member of the National
Association of Securities Dealers (the "NASD"). It is also licensed with the
securities commissions of various states.
Privacy. Title V of the GLB Act is 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 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 also requires institutions to furnish consumers at the outset of the
relationship and annually thereafter written disclosures concerning the
institution's privacy policies.
Environmental Impact Statement. Compliance by Susquehanna and its
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subsidiaries with federal, state and local environmental protection laws during
2001 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
2002.
Pending Legislation. From time to time, legislation is proposed for
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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
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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
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conditions, the earnings and growth of Susquehanna and its subsidiaries are
affected by the policies of regulatory authorities, including the Board, the
FDIC, 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 also affects 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
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 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 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 a stable interest rate environment, a
relatively strong and diverse local economy and fluctuating 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, are set forth in the following table:
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Name Age Title
- ---- --- -----
William J. Reuter(1) 52 President and Chief Executive Officer
Gregory A. Duncan(2) 46 Executive Vice President and Chief Operating Officer
Drew K. Hostetter(3) 47 Executive Vice President, Treasurer and Chief Financial Officer
Edward Balderston, Jr.(4) 54 Senior Vice President and Group Executive
David D. Keim (5) 53 Senior Vice President and Group Executive
Michael M. Quick (6) 53 Vice President and Group Executive
James G. Pierne (7) 50 Vice President and Group Executive
Peter J. Sahd (8) 42 Vice President and Group Executive
William T. Belden(9) 52 Vice President and Group Executive
Rodney A. Lefever (10) 35 Chief Technology Officer
Charles W. Luppert (11) 60 Vice President
(1) 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 was appointed as Chief Executive Officer on May 25, 2001. He was appointed as
Chairman of the Board of Farmers & Merchants Bank and Trust on March 21, 2000.
He was also the principal executive officer of Farmers & Merchants Bank and
Trust until March 21, 2000, and had 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 from 1997 until
April 19, 2000, its wholly-owned subsidiary, Susquehanna Bank. Mr. Reuter was
appointed Chairman of the Board of Susquehanna Bank on April 19, 2000.
(2) 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, was promoted to Executive Vice President on January 19, 2000,
and was promoted to Chief Operating Officer on May 25, 2001. He was also
appointed President of Susque-Bancshares Life Insurance Company on June 14, 1999
and Secretary of Susque-Bancshares Leasing Company, Inc. on July 15, 1998.
(3) 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 Senior Vice President on
January 19, 2000 and was promoted to Executive Vice President on May 25, 2001.
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. Prior to joining Susquehanna, Mr. Hostetter served as Senior
Vice President and Corporate Controller of MNC Financial, Baltimore, Maryland,
from 1992 to 1994.
(4) Edward Balderston, Jr. was appointed Senior Vice President and Group
Executive of Susquehanna on May 25, 2001. Prior to that, he served as Vice
President of Susquehanna in charge of Marketing and Human Resources from May of
1998 to May of 2001, Susquehanna's Director of Marketing and Human Resources
from May 1997 to May of 1998, and as Senior Vice President, Administrative
Services, of Farmers First Bank from December 1988 to May 1997.
(5) David D. Keim was appointed Senior Vice President and Group Executive of
Susquehanna on May 25, 2001. He was appointed as President of Susque-Bancshares
Leasing Company, Inc. on July 19, 2000. Prior to that, he served as Vice
President of Susquehanna from April 15, 1998 to May 24, 2001, and as Senior Vice
President of Susque-Bancshares Leasing Company, Inc. from April 17, 1991 to July
18, 2000.
(6) Michael M. Quick was appointed Vice President and Group Executive of
Susquehanna on May 25, 2001. He also serves as President and Chief Executive
Officer of Equity Bank and has served in that capacity since March 3, 1998 and
as President and Chief Executive Officer of Susquehanna East since April 15,
2000. Prior to joining Susquehanna, Mr. Quick served as President and Chief
Operating Officer of Equity National Bank from March 17, 1995 to March 3, 1998.
(7) James G. Pierne was appointed as Vice President and Group Executive of
Susquehanna on May 25, 2001. Since March of 2000, he has also served as
President and Chief Executive Officer of Farmers & Merchants Bank
9
and Trust. Prior to that, he served as Executive Vice President of Farmers &
Merchants Bank and Trust from March of 1999 until February of 2000, and as that
bank's Senior Vice President from March of 1993 until February of 1999.
(8) Peter J. Sahd was appointed as Vice President and Group Executive of
Susquehanna on May 25, 2001. Prior to that, he served as Director, Alternative
Delivery Services of Susquehanna from April 12, 1999 until May 25, 2001. Prior
to joining Susquehanna, Mr. Sahd served as Senior Vice President, Operations, of
Fulton Bank from August 23, 1994 until April 9, 1999.
(9) 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. He was
promoted to a Group Executive on December 31, 2001.
(10) Rodney A. Lefever joined Susquehanna as its Chief Technology Officer on
April 30, 2001. Prior to joining Susquehanna, he served as Director, Earthlink
Everywhere, Earthlink, Inc. from September of 2000 until April of 2001, as the
President of New Business Development, OneMain.com Inc. from December of 1999
until September of 2000 and the President of D&E Supernet (and its predecessors)
from March of 1995 until December of 1999.
(11) Charles W. Luppert is also the principal executive officer of WNB Bank and
has been employed by that subsidiary bank in a substantially equivalent position
for more than the past five years.
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 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 146 branches and
31 free-standing automated teller machines. The depository institutions own 82
of the branches and lease the remaining 64. Nine 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, 2001, 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 43 banking offices in Lancaster
Lititz, Pennsylvania and York Counties, Pennsylvania
Citizens Bank of 35 North Carlisle Street Owned 8 banking offices in Franklin
Southern Pennsylvania Greencastle, Pennsylvania County, Pennsylvania
First Susquehanna Bank & Trust 400 Market Street Owned 12 banking offices in
Sunbury, Pennsylvania Northumberland, Snyder,
Columbia and Union Counties,
Pennsylvania
10
Executive Office Location of Offices
Subsidiary Location of Executive Office Owned/Leased (including executive office)
- ---------- ---------------------------- ---------------- ----------------------------
WNB Bank 329 Pine Street Owned 7 banking offices in Lycoming
Williamsport, Pennsylvania County, Pennsylvania
Farmers & Merchants Bank and 59 West Washington Street Owned 32 banking offices in
Trust Hagerstown, Maryland Washington, Allegany and
Garrett Counties, Maryland and
Berkeley County, West Virginia
Susquehanna Bank 100 West Road Leased 22 banking offices located in
Towson, Maryland Baltimore City and Baltimore,
Harford, Anne Arundel, Carroll,
Worcester and Wicomico
Counties, Maryland
First American Bank of 140 East Main Street Owned 6 banking offices in Bedford
Pennsylvania Everett, Pennsylvania and Blair Counties, Pennsylvania
Equity Bank 8000 Sagemore Drive Leased 13 banking offices in Camden,
Suite 8101 Gloucester and Burlington
Marlton, New Jersey Counties, New Jersey
Founders' Bank 101 Bryn Mawr Avenue Leased 3 banking offices in
Bryn Mawr, Pennsylvania Montgomery, Chester and
Delaware Counties, Pennsylvania
The executive offices of Susquehanna Trust & Investment Company are located
at 24 North Cedar Street, Lititz, Pennsylvania. The trust company leases this
facility, as well as the facilities for each of its 5 branch offices.
The executive offices of Hann Financial Service Corp. are located at One
Centre Drive, Jamesburg, New Jersey. It leases both this facility and a second
facility located at 1051 North Black Horse Pike, Williamstown, New Jersey.
The executive offices of Valley Forge Asset Management Corp. are located at
120 South Warner Road, King of Prussia, Pennsylvania. Valley Forge Asset
Management Corp. leases this facility.
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 2001.
11
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 sales prices of Susquehanna's common stock as
reported on the Nasdaq National Market System for the years 2000 and 2001, 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 High
- ---- ------ ---- ------ -------
2000 1st Quarter $.17 $11.25 $ 15.88
Common
2nd Quarter .17 12.38 15.00
Common
3rd Quarter .17 12.00 15.44
Common
4th Quarter .19 12.88 17.98
Common
2001 1st Quarter $.19 $15.00 $18.875
Common
2nd Quarter .19 16.25 20.81
Common
3rd Quarter .19 18.15 22.83
Common
4th Quarter .20 19.95 22.24
Common
- --------------------------------------------------------
As of February 28, 2002, there were 6,298 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 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,
Citizens Bank of Southern Pennsylvania, First American Bank of Pennsylvania,
First Susquehanna Bank & Trust and WNB Bank, the Financial Institutions Article
of the Annotated Code of Maryland in the case of Farmers & Merchants Bank and
Trust and Susquehanna Bank, the Federal Reserve Act in the case of Founders'
Bank and Equity 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 Valley Forge Asset Management Corp. to pay dividends to
Susquehanna. In addition to the specific restrictions, summarized below, the
banking 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.
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 state-chartered banks which are members of the Federal Reserve System
(like Founders' Bank and Equity 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
12
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.
Within the regulatory restrictions described above, each of the insured
depository institution subsidiaries of Susquehanna presently has the ability to
pay dividends and at December 31, 2001, $13,340,000 in the aggregate was
available for dividend distributions during calendar 2002 to Susquehanna from
its insured depository institution 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.
13
Item 6. Selected Financial Data.
- ------ -----------------------
See Page 15.
14
Selected Financial Data
- --------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Interest income $ 341,295 $ 353,416 $ 335,086 $ 335,614 $ 305,789
Interest expense 169,051 188,464 173,526 176,265 149,907
Net interest income 172,244 164,952 161,560 159,349 155,882
Provision for loan and lease losses 7,310 3,726 11,203 5,780 4,806
Other income 84,166 74,010 53,459 39,106 31,126
Other expenses 167,763 155,581 141,788 124,014 116,485
Income before taxes 81,337 79,655 62,028 68,661 65,717
Net income 55,716 54,962 43,523 46,804 44,770
Cash dividends declared on common stock 30,228 27,092 22,918 20,132 18,371
Dividend payout ratio 54.3% 49.3% 52.7% 43.0% 41.0%
Per Common Share Amounts*
- --------------------------------------------------------------------------------------------------------------------
Net income--Basic $ 1.42 $ 1.40 $ 1.11 $ 1.19 $ 1.16
Net income--Diluted 1.41 1.40 1.10 1.18 1.15
Cash dividends declared on common stock 0.77 0.70 0.62 0.57 0.55
Financial Ratios
- --------------------------------------------------------------------------------------------------------------------
Return on average total assets 1.14% 1.15% 0.94% 1.06% 1.14%
Return on average stockholders' equity 11.78 13.01 10.45 11.75 12.43
Net interest margin 3.91 3.83 3.82 3.98 4.34
Average stockholders' equity to average assets 8.85 8.85 8.95 9.05 9.17
Tangible Operating Results
- --------------------------------------------------------------------------------------------------------------------
Tangible net income $ 59,095 $ 58,075 $ 46,498 $ 49,056 $ 47,745
Tangible earnings per share 1.51 1.48 1.18 1.25 1.24
Return on tangible average shareholders' equity 13.81% 15.08% 12.13% 13.51% 14.79%
Return on tangible average assets 1.23 1.23 1.01 1.12 1.23
Year-End Balances
- --------------------------------------------------------------------------------------------------------------------
Total assets $5,051,092 $4,792,856 $4,804,997 $4,589,287 $4,130,138
Investment securities 1,021,091 898,604 912,048 951,744 723,745
Loans and leases, net of unearned income 3,519,498 3,433,610 3,469,661 3,248,818 3,072,685
Deposits 3,484,331 3,249,013 3,180,520 3,216,879 3,041,466
Total borrowings 1,016,845 1,030,812 1,157,025 915,676 652,926
Stockholders' equity 493,536 453,437 415,022 412,587 382,772
Selected Share Data*
- --------------------------------------------------------------------------------------------------------------------
Common shares outstanding (period end) 39,344 39,221 39,382 39,262 39,275
Average common shares outstanding--Basic 39,263 39,262 39,320 39,228 38,656
Average common shares outstanding--Diluted 39,593 39,365 39,497 39,548 38,911
At December 31:
Book value per share $ 12.54 $ 11.56 $ 10.54 $ 10.51 $ 9.75
Market price per common share 20.85 16.50 15.88 20.47 25.50
Common stockholders 6,340 6,543 6,720 6,662 6,238
* Amounts adjusted for the three-for-two stock splits in July 1997 and 1998.
15
Item 7. Management's Discussion and Analysis of Results of Operations and
- ------ -----------------------------------------------------------------
Financial Condition
-------------------
See Pages 17 to 32.
16
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 (collectively, "Susquehanna"):
Farmers First Bank; Farmers & Merchants Bank and Trust; First American Bank of
Pennsylvania; First Susquehanna Bank & Trust; WNB Bank; Citizens Bank of
Southern Pennsylvania; Susquehanna Bancshares East, Inc. and its commercial bank
subsidiaries Equity Bank and Founders' Bank; Susquehanna Bancshares South, Inc.
and its commercial bank subsidiary Susquehanna Bank; Boston Service Company,
Inc., t/a Hann Financial Service Corp. ("Hann"); Susque-Bancshares Leasing Co.,
Inc.; Susque-Banc-shares Life Insurance Company; Valley Forge Asset Management
Corp.; and Conestoga Management Company, a non-operating, passive investment
subsidiary.
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, actual income gains and losses could materially differ from
those that have been estimated. Other factors that could cause actual results to
differ materially from those estimated by the forward-looking statements
contained in this document include, but are not limited to: general economic
conditions in market areas in which Susquehanna has significant business
activities or investments; the monetary and interest rate policies of the Board
of Governors of the Federal Reserve System; inflation; deflation; unanticipated
turbulence in interest rates; changes in laws, regulations, and taxes; changes
in competition and pricing environments; natural disasters; the inability to
hedge certain risks economically; the adequacy of loss reserves; acquisitions or
restructuring; technological changes; changes in consumer spending and saving
habits; and the success of Susquehanna in managing the risks involved in the
foregoing.
The management of Susquehanna encourages readers of this report to
understand forward-looking statements to be strategic objectives rather than
absolute targets of future performance. Forward-looking statements speak only as
of the date they are made. Susquehanna does not update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made or to reflect the occurrence of
unanticipated events.
The following discussion and analysis, the purpose of which is to provide
investors and others with information that Susque-hanna's management believes to
be necessary for an understanding of its financial condition, changes in
financial condition, and results of operations should be read in conjunction
with the financial statements, notes, and other information contained in this
document.
Results of Operations
Summary of 2001 Compared to 2000
Susquehanna's net income for the year ended December 31, 2001, increased $0.7
million, or 1%, over 2000 net income of $55.0 million. Susquehanna's earnings
performance was enhanced by significant improvements in non-interest income,
which during the year 2001 exceeded 33% of total revenues. The $10.2 million
improvement in non-interest income over the year ended December 31, 2000, was
split almost equally between banking activities and non-bank affiliate
operations.
Diluted earnings per share ("EPS") increased 1% from $1.40 per share for
the year ended 2000 to $1.41 per share for the year ended 2001. Return on
average assets ("ROA") and return on average equity ("ROE") finished at 1.14%
and 11.78 %, respectively, for the year 2001, compared with 1.15% and 13.01%,
respectively, for 2000.
Through various acquisitions utilizing the purchase method of accounting
for business combinations, Susquehanna has created intangible assets.
Amortization of such intangible assets is a non-cash charge that significantly
affects Susquehanna's earnings and financial ratios. Tangible net income is
actual net income increased by the tax-effected amortization of those intangible
assets that are deducted from stockholders' equity in determining Tier I
capital.
For 2001, tangible net income, basic earnings per share, ROA, and ROE were
$59.1 million, $1.51, 1.23%, and 13.81%, respectively, compared to 2001 actual
net income, basic earnings per share, ROA, and ROE of $55.7 million, $1.42,
1.14%, and 11.78%, respectively.
Tangible net income, basic earnings per share, ROA, and ROE for 2000 were
$58.1 million, $1.48, 1.23%, and 15.08%, respectively.
Net Interest Income - Taxable Equivalent Basis
The major source of operating revenues for Susquehanna is net interest income,
which rose to a level of $172.2 million in 2001, $7.3 million, or 4%, above the
$164.9 million attained in 2000. Net interest income increased in 2001 despite
the substantial decline in the levels of total interest income, which was more
than offset by a decline in total interest expense. These declines are the
direct result of the Federal Reserve Bank's lowering of interest rates eleven
times during 2001.
Net interest income is the income that remains after deducting, from total
income generated by earning assets, the interest expense attributable to the
acquisition of the funds required to support earning assets. Income from earning
assets includes income from loans, income from investment securities and in-
17
come from short-term investments. The amount of interest income is dependent
upon many factors including the volume of earning assets, the general level of
interest rates, the dynamics of the change in interest rates, and levels of
nonperforming loans. The cost of funds varies with the amount of funds necessary
to support earning assets, the rates paid to attract and hold deposits, rates
paid on borrowed funds, and the levels of non-interest-bearing demand deposits
and equity capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses, and yields earned or paid on these assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-exempt interest has been adjusted using a marginal tax rate of 35% in order
to equate the yield to that of taxable interest rates. Net interest income as
apercentage of net interest income and other income was 67%, 69%, and 75% for
the twelve months ended December 31, 2001, 2000 and 1999, respectively.
Table 2 illustrates that the increase in net interest income in 2001
compared with 2000 was primarily attributable to volumes. The average growth in
interest-earning assets of $67 million in 2001 over 2000 was due to a $39
million increase in loans and a $28 million increase in Susquehanna's investment
portfolio. As illustrated in Table 1, the tax equivalent yield on earning assets
for 2001 decreased to 7.68% from 8.09% in 2000. This decrease was due to the
steady drop in interest rates throughout 2001, which was the primary cause for
the $13.0 million decrease in taxable equivalent interest income. Table 2 also
illustrates that the decrease in interest expense in 2001 compared
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity
Interest Rates and Interest Differential--Tax Equivalent Basis
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Average Rate Average Rate Average Rate
Assets Balance Interest % Balance Interest % Balance Interest %
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term investments $ 88,379 $ 3,539 4.00 $ 50,715 $ 2,937 5.79 $ 67,021 $ 3,089 4.61
Investment securities:
Taxable 834,066 51,219 6.14 824,902 53,238 6.45 811,255 50,394 6.21
Tax-advantaged 72,090 5,115 7.10 90,898 6,455 7.10 116,037 8,189 7.06
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 906,156 56,334 6.22 915,800 59,693 6.52 927,292 58,583 6.32
- ---------------------------------------------------------------------------------------------------------------------------------
Loans and leases (net):
Taxable 3,444,049 280,730 8.15 3,393,175 289,827 8.54 3,298,442 273,387 8.29
Tax-advantaged 43,945 3,820 8.69 55,970 4,952 8.85 49,380 4,451 9.01
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,487,994 284,550 8.16 3,449,145 294,779 8.55 3,347,822 277,838 8.30
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,482,529 344,423 7.68 4,415,660 $357,409 8.09 4,342,135 $339,510 7.82
=================================================================================================================================
Allowance for loan and lease losses (38,409) (41,340) (41,011)
Other non-earning assets 423,029 401,395 351,187
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $4,867,149 $4,775,715 $4,652,311
=================================================================================================================================
Liabilities & Stockholders' Equity
Deposits:
Interest-bearing demand $ 834,950 $ 18,145 2.20 $ 773,552 $ 22,080 2.85 $ 785,175 $ 20,359 2.59
Savings 420,818 6,324 1.50 420,512 7,709 1.83 444,938 8,166 1.84
Time 1,568,646 84,222 5.37 1,552,939 85,216 5.49 1,519,267 77,488 5.10
Short-term borrowings 211,033 7,976 3.78 199,001 11,597 5.83 122,406 5,754 4.70
FHLB borrowings 446,835 23,656 5.29 388,078 23,139 5.96 354,644 19,600 5.53
Long-term debt 101,329 7,843 7.74 99,105 7,762 7.83 95,000 7,481 7.87
Vehicle financing 293,885 20,886 7.11 416,295 30,961 7.44 451,841 34,679 7.68
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,867,496 169,052 4.37 3,849,482 $188,464 4.90 3,773,271 $173,527 4.60
- ---------------------------------------------------------------------------------------------------------------------------------
Demand deposits 468,319 441,894 421,055
Other liabilities 58,362 61,725 41,614
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,394,177 4,353,101 4,235,940
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 472,972 422,614 416,371
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders'
equity $4,867,149 $4,775,715 $4,652,311
=================================================================================================================================
Net interest income/yield on
average earning assets $175,371 3.91 $168,945 3.83 $165,983 3.82
=================================================================================================================================
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%.
18
with 2000 was also attributed to lower interest rates. Decreases in rates paid
for interest-bearing deposits, short-term borrowings, and Federal Home Loan Bank
("FHLB") borrowings were the primary reasons for the $19.4 million decrease in
interest expense. Consequently, the average cost of funds decreased from 4.90%
in 2000 to 4.37% in 2001. Also contributing to the lower cost of funds was an
increase in lower cost deposits offsetting a decrease in higher cost borrowings.
As a result of the preceding comments, Susquehanna's net interest margin,
on a taxable equivalent basis, increased from 3.83% in 2000 to 3.91% in 2001.
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 section titled "Market Risks."
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses is the expense necessary to maintain the
allowance for loan and lease losses at a level adequate to absorb management's
estimate of inherent losses in the loan and lease portfolio. Susquehanna's
provision for loan and lease losses is based upon management's quarterly review
of the loan portfolio. 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 are internally risk rated by Susquehanna's
loan officers and periodically reviewed by loan quality personnel. Consumer,
residential real estate loans, and leases are generally analyzed in the
aggregate as they are of relative small dollar size and homogeneous in nature.
In addition to economic conditions, consideration of loan portfolio
diversification, delinquency, and historic loss experience, consideration is
also given in examinations performed by the regulatory authorities.
To determine the allowance and corresponding loan and lease loss provision,
the amount required for specific loans is first determined. For certain
commercial and construction loans, this amount is based upon specific borrower
data determined by reviewing individual non-performing, delinquent, or
potentially troubled credits. The remaining commercial loans as well as
consumer, residential real estate, and lease allowances, which may include
specific reserves, 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. In addition, a reserve for unused commitments is determined using the
same criteria applied to the remaining commercial portfolio by risk-rating type.
Table 2 - Changes in Net Interest Income - Tax Equivalent Basis
- ------------------------------------------------------------------------------------------------
2001 Versus 2000 2000 Versus 1999
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
Other short-term investments $ 1,706 $ (1,104) $ 602 $ (846) $ 694 $ (152)
Investment securities:
Taxable 586 (2,605) (2,019) 858 1,986 2,844
Tax-advantaged (1,335) (5) (1,340) (1,785) 51 (1,734)
- ------------------------------------------------------------------------------------------------
Total investment securities (749) (2,610) (3,359) (927) 2,037 1,110
Loans (net of unearned income):
Taxable 4,296 (13,393) (9,097) 7,968 8,472 16,440
Tax-advantaged (1,046) (86) (1,132) 584 (83) 501
- ------------------------------------------------------------------------------------------------
Total loans 3,250 (13,479) (10,229) 8,553 8,388 16,941
- ------------------------------------------------------------------------------------------------
Total interest-earning assets $ 4,207 $(17,193) $(12,986) $ 6,780 $11,119 $17,899
================================================================================================
Interest Expense
Deposits:
Interest-bearing demand $ 1,392 $ (5,327) $ (3,935) $ (305) $ 2,026 $ 1,721
Savings 6 (1,391) (1,385) (448) (9) (457)
Time 856 (1,850) (994) 1,747 5,981 7,728
Short-term borrowings 665 (4,286) (3,621) 4,225 1,618 5,843
FHLB borrowings 3,278 (2,761) 517 1,927 1,612 3,539
Long-term debt 173 (92) 81 322 (41) 281
Vehicle financing (8,753) (1,322) (10,075) (2,668) (1,050) (3,718)
- ------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (2,383) (17,029) (19,412) 4,800 10,137 14,937
- ------------------------------------------------------------------------------------------------
Net interest income $ 6,590 $ (164) $ 6,426 $ 1,979 $ 983 $ 2,962
================================================================================================
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.
19
To ensure adequacy to a higher degree of confidence, a portion of the
allowance for loan and lease losses is considered unallocated. 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 and lease portfolios. Table 10 presents this allocation.
The loan portfolio represents loans and leases made primarily within
Susquehanna's market area, which includes principally central and southeastern
Pennsylvania, Maryland, and New Jersey, and to a lesser extent, southwestern
Pennsylvania, Con-necticut, 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 and lease portfolios 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,
2001. There can be no assurance, however, that Susquehanna will not sustain
losses in future periods, which could be greater than the size of the allowance
at December 31, 2001. As illustrated in Table 3, the provision for loan and
lease losses was $7.3 million for 2001 compared to $3.7 million in 2000. Net
charge-offs, as presented in Table 3, were $7.3 million in 2001 compared with
$7.9 million in 2000. The allowance for loan and lease losses at December 31,
2001, was 1.07% of period-end loans and leases, or $37.7 million, compared with
1.08% or $37.2 million at December 31, 2000.
Should the economic climate deteriorate further, 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 typically transferred
to non-accrual status if it is not well secured and in the process of
collection, and is considered delinquent in payment if either principal or
interest is past due beyond 90 days. Interest income received on non-performing
loans in 2001 and 2000 was $1.0 million and $0.9 million, respectively. Interest
income which would have been recorded on these loans under the original terms
was $1.3 million and $1.5 million for 2001 and 2000, respectively. At December
31, 2001, Sus-quehanna 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 and leases
contractually past due 90 days and still accruing. Total non-performing assets
at December 31, 2001 and 2000, were $19.3 and $20.6 million, respectively,
including $3.8 million and $4.0 million, respectively, in other real estate
acquired through foreclosure. Non-performing assets as a percentage of
period-end loans and leases and other real estate owned was 0.55% at December
31, 2001, a decline from 0.60% at December 31, 2000.
Real estate acquired through foreclosure is carried at its fair value,
which is calculated as 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.
Prior to foreclosure, the recorded amount of the loan is written-down, if
necessary, to fair value by charging the allowance for loan and lease 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 and still
accruing interest were $11.5 million at December 31, 2001, a decrease from $13.8
million at December 31, 2000. A softening of certain segments of the economy may
adversely affect certain borrowers and may cause additional loans to become past
due beyond 89 days or be placed on non-accrual status because of uncertainty of
receiving full payment of either principal or interest on these loans.
Potential problem loans consist of loans that are performing under contract
but for which potential credit problems have caused Susquehanna to place them on
its internally monitored loan list. At December 31, 2001, such loans, which are
not included in Table 4, amounted to $12.9 million. Depending upon the state of
the economy and the impact thereon to these borrowers, as well as future events
such as regulatory examination assessments, these loans and others not currently
so identified could be classified as non-performing assets in the future.
Related Party Transaction and Residual Value Risk
In the third quarter of 2000, Hann entered into a Servicing Agreement with Auto
Lenders Liquidation Center, Inc. ("Auto Lenders"), pursuant to which Hann
effectively transferred to Auto Lenders all residual risk of the managed auto
lease portfolio originated by Hann and all residual risk on any new leases
originated over the term of the agreement. Michael J. Wimmer, who is a member of
Susquehanna's Board of Directors and the chief executive officer of Hann, along
with his immediate family, owns 100% of the outstanding equity interest of Auto
Lenders. Auto Lenders, which was formed in 1990, is a used vehicle remarketer
with three retail locations in New Jersey. Under this Servicing Agreement, Auto
Lenders agreed to purchase the beneficial interest in all vehicles returned by
the obligors at the scheduled expiration of the related leases for a purchase
price equal to the stated residual value of such vehicles. Further, Hann agreed
to set its stated residual values in accordance with the standards approved in
advance by Auto Lenders, and Hann agreed to pay to Auto Lenders an upfront fee
of $3.1 million, as shown in Table 3, to cover all the auto leases serviced by
Hann which had been originated by Hann prior to the agreement. Hann also agreed
to make monthly guaranty payments to Auto Lenders based upon a fixed schedule
covering a three-year period. At the end of each year, the Servicing Agreement
may be renewed by the mutual agreement of the parties for an additional one-year
term beyond the current three-year term, subject to renegotiation of the pay-
20
ments. During the renewal process, competitive quotes are obtained by Hann from
third parties to determine the best remarketing alternative for Hann. The
aggregate fees paid by Hann to Auto Lenders under the Servicing Agreement in
2001 were $9.2 million. Under the Servicing Agreement, Auto Lenders retains all
residual gains and bears all residual losses with respect to the vehicles. The
obligations of Auto Lenders under the Servicing Agreement are secured by a
Guaranty dated December 31, 2001, executed by Mr. Wimmer in favor of Hann.
Other Income
Non-interest income, recorded as other income, consists of: service charges
on deposit accounts; commissions and fees received for credit cards (merchant
processing), travelers' checks sales, money orders, and investment advisory
services; fees for trust services; vehicle origination and servicing fees;
income generated from bank-owned life insurance and reinsurance activities; net
gains and losses on security transactions; net gains on sales of loans; and
other miscellaneous income, such as safe deposit box rents and net gains on the
sale of other real estate and branch offices. Other income as a percentage of
net interest income and other income was 33%, 31%, and 25% for 2001, 2000, and
1999, respectively.
Non-interest income increased $10.2 million, or 14%, in 2001 over 2000.
Asset management fees increased $2.5 million from 2000 to 2001 as a result of an
increase in assets under manage-
TABLE 3 - Provision and Allowance for Loan and Lease Losses
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, January 1 $ 37,187 $ 44,465 $ 39,440 $ 39,316 $ 38,464
Allowance acquired in business combination 539 0 0 0 1,460
Allowance transferred to third-party guarantor 0 3,057 0 0 0
Additions to provision for loan and lease losses
charged to operations 7,310 3,726 11,203 5,780 4,806
Loans and leases charged-off during the year:
Commercial, financial, agricultural, and leases 4,976 3,880 3,181 2,039 1,612
Real estate--mortgage 1,270 1,634 2,050 1,657 1,355
Consumer 3,178 4,186 3,188 3,413 3,820
- -----------------------------------------------------------------------------------------------------------------------
Total charge-offs 9,424 9,700 8,419 7,109 6,787
- -----------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously
charged-off:
Commercial, financial, agricultural, and leases 397 275 550 428 413
Real estate--mortgage 363 369 812 182 71
Consumer 1,326 1,109 879 843 889
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 2,086 1,753 2,241 1,453 1,373
- -----------------------------------------------------------------------------------------------------------------------
Net charge-offs 7,338 7,947 6,178 5,656 5,414
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 37,698 $ 37,187 $ 44,465 $ 39,440 $ 39,316
=======================================================================================================================
Average loans and leases outstanding $3,537,316 $3,449,145 $3,347,822 $3,140,339 $2,891,979
Period-end loans and leases 3,519,498 3,433,610 3,469,661 3,248,818 3,072,685
Net charge-offs as a percentage of average loans
and leases 0.21% 0.23% 0.18% 0.18% 0.19%
Allowance as a percentage of period-end loans and
leases 1.07% 1.08% 1.28% 1.21% 1.28%
=======================================================================================================================
TABLE 4--Non-Performing Assets
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ----------------------------------------------------------------------------------------------------------------------
At December 31 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Loans contractually past due 90 days and still
accruing $ 11,498 $ 13,798 $ 10,360 $ 10,645 $ 7,248
======================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, agricultural, and
leases 4,680 3,856 1,510 1,659 934
Real estate--mortgage 10,795 12,568 20,989 18,409 21,995
Consumer 41 117 271 343 622
Restructured loans 0 0 0 1,258 93
Other real estate owned 3,761 4,039 4,703 4,745 4,547
- ----------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 19,277 $ 20,580 $ 27,473 $ 26,414 $ 28,191
======================================================================================================================
Total non-performing assets as a percentage of
period-end loans and leases and other real
estate owned 0.55% 0.60% 0.79% 0.81% 0.92%
======================================================================================================================
Allowance for loan and lease losses as a
percentage of non-performing loans 243% 225% 195% 182% 166%
======================================================================================================================
21
ment. Service charges on deposit accounts increased $2.9 million in 2001 over
2000 as the introduction of a new overdraft program improved fee collection
significantly. Contributing to the $2.2 million increase in other operating
income was improved debit card volume resulting from new marketing efforts.
Gain on sale of loans and leases was $4.2 million in 2001 compared with
$3.9 million in 2000. During the second quarter of 2001, Hann sold approximately
$117 million in automobile leases. In conjunction with this transaction, Hann
realized a $1.7 million gain on the sale. During 2001, Susquehanna affiliate
banks sold approximately $118 million of mortgage loans that were originated for
resale. In conjunction with the sale of mortgage loans, Susquehanna realized
approximately $2.5 million in gains. In the third quarter of 2000, Susquehanna
sold its credit card portfolio, which resulted in a gain of $1.8 million. During
2000, Susquehanna affiliate banks sold approximately $114 million of mortgage
loans which resulted in a gain of $2.1 million.
All other categories experienced modest gains over the prior year, as well.
Other Expenses
Non-interest expenses are categorized into the following nine groupings:
employee-related expenses, which include salaries, fringe benefits, and
employment taxes; occupancy expenses, which include depreciation, rents,
maintenance, utilities, and insurance; furniture and equipment expenses, which
include depreciation, rents, and maintenance; amortization of intangible assets;
vehicle residual value expense; vehicle delivery and preparation expense;
merchant credit card servicing expense; restructuring charges; and other
expenses (detailed in Table 5) incurred in operating Susquehanna's business.
Non-interest expense increased $12.2 million, or 8%, in 2001 over 2000.
Salaries and employee benefits increased $5.7 million, or 8%, from 2000 to 2001.
The increase in salaries and benefits was primarily due to normal annual salary
increases, recent branch openings, new revenue producing positions, and higher
health benefit costs.
Table 5 - Analysis of Other Expenses
Dollars in thousands
- ------------------------------------------------------------------
Year ended December 31 2001 2000 1999
- ------------------------------------------------------------------
Advertising, marketing, and
public relations $ 4,865 $ 4,051 $ 3,938
Audits and examinations 1,214 1,353 723
Communications 3,938 3,149 2,827
Directors' fees 1,291 1,255 1,212
Legal and professional 3,768 5,702 4,880
Life Insurance Company
related expenses 967 1,058 924
Other real estate 2,568 1,071 1,089
Outside services 3,989 4,711 3,735
PA shares/capital stock tax 2,571 2,284 2,407
Postage and delivery 4,806 3,631 3,438
Stationery and supplies 3,123 3,204 3,359
FDIC insurance 596 642 769
All other 16,051 14,977 13,539
- ------------------------------------------------------------------
Total $49,747 $47,088 $42,840
==================================================================
Charges for occupancy and equipment increased $1.6 million, or 16%, in 2001
from 2000, the result of recent branch openings, and the full-year impact of
central processing established throughout the second half of 2000. Amortization
of intangible assets increased $0.4 million in 2001 from 2000. Vehicle residual
value expense in 2001 decreased $3.2 million from 2000. In the third quarter of
2000, Hann entered into a Servicing Agreement, described earlier in the section
"Related Party Transaction and Residual Value Risk," to guarantee all residual
values of vehicle leases serviced by Hann. Consequently, year 2000 vehicle
residual value expense included both actual residual value losses and residual
value guarantee fees, whereas year 2001 included only residual value guarantee
fees.
Vehicle delivery and preparation expense for 2001 increased $4.0 million
over the prior year's expense due to costs associated with an increased number
of vehicles being prepared for retail sale during 2001.
All other expenses increased $2.7 million (see Table 5), with notable
increases in postage and delivery costs of $1.2 million, and other real estate
expenses of $1.5 million. While modest increases were realized in most of the
other categories, a decrease of $1.9 million was recorded in legal and
professional, primarily due to less acquisition-related activity.
Income Taxes
Susquehanna's effective tax rate for 2001 was 31.5% compared to 31.0% in 2000.
The effective rate for 2001 was increased because of reduced levels of
tax-advantaged income. 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. However,
beginning in 2002, as required by the FASB that issued SFAS 142, Susquehanna
will no longer amortize goodwill created in previous business combinations. The
reduction in pre-tax amortization expense of $3.3 million will have a favorable
impact on Susquehanna's effective tax rate, as most of the amortization expense
was not deductible from 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: held-to-maturity, trading, or available-for-sale.
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 positively impacted by $10.9 million as the
"unrealized gains or losses for available-for-sale securities," changed from a
negative $0.8 million at December 31, 2000, to a positive $10.1 million at
December 31, 2001.
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 activ-
22
TABLE 6 - Carrying Value of Investment Securities
- ---------------------------------------------------------------------------------------------------
Year ended December 31 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Available- Held-to- Available- Held-to- Available- Held-to-
Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity
- ---------------------------------------------------------------------------------------------------
U.S. Treasury $ 1,302 $ 0 $ 3,307 $ 0 $ 16,683 $ 0
U.S. Government agencies 88,289 0 359,773 0 338,990 0
State and municipal 64,712 1,778 63,922 15,833 69,599 32,070
Other securities 20,844 0 16,641 0 17,682 0
Mortgage-backed securities 808,981 0 403,094 486 399,428 1,020
Equity securities 35,185 0 35,548 0 36,576 0
- ---------------------------------------------------------------------------------------------------
Total investment securities $1,019,313 $1,778 $882,285 $16,319 $878,958 $33,090
===================================================================================================
ity, but does engage in active portfolio management, which requires the majority
of its security portfolios 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, 2001, Susquehanna held no securities of
one issuer, other than U.S. Government obligations, where the aggregate book
value exceeded ten percent of stockholders' equity.
Susquehanna adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), as of January 1, 2001. Concurrent with
adoption of this standard, and as permitted by its provisions, approximately
$14.3 million of securities held-to-maturity were reclassified as securities
available-for-sale. This reclassification resulted in an after-tax gain of
approximately $0.3 million, which was recorded in other comprehensive income.
Loans and Leases
Table 8 presents the loans outstanding, by type of loan, in Susquehanna's
portfolio for the past five years. In 2001, mortgage loans increased $29
million, commercial loans increased $63 million, and construction loans grew by
$95 million compared to 2000. Consumer loans declined $26 million in 2001 from
2000. 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 $103 million at December 31, 2001, and an additional $162
million was lent against junior liens on residential properties during 2001.
During 2001, senior liens on 1-4 family residential properties totaled $817
million, and much of the $784 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 $38 million, while loans secured by multi-family residential
properties totaled $59 million at December 31, 2001.
Leases declined by $77 million in 2001 compared to 2000, as most of Hann's
new lease production in 2001 was either sold or originated for other
institutions.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 2002 consist of $170 million with fixed-rate pricing and $240 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 8% of
total deposits. Table 13 presents a breakdown by maturity of time deposits of
$100,000 or more as of December 31, 2001.
Market Risks
The types of market risk exposures generally faced by banking entities include
interest rate risk, liquidity risk, equity market price risk, foreign currency
risk, and commodity price risk. Due to the nature of its operations, only
interest rate risk and liquidity risk are significant to Susquehanna.
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity--the ability to meet the cash
requirements of its customers and other financial commitments--is a fundamental
aspect of Susquehanna's asset/liability management strategy. Susquehan-na'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, 2001, Susquehanna's subsidiary banks and
savings bank have unused lines of credit available to them from various FHLBs of
$559 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 $34 million at December 31, 2001. These maturing
investments represented 3% of total investment securities. Cash and due from
banks amounted to $149 million and unrestricted short-term investments amounted
to $47 million for the year ended December 31, 2001, both of which represent
additional sources of liquidity.
23
TABLE 7 - Investment Securities
- --------------------------------------------------------------------------------------------------------
Dollars in thousands Within After 1 Year but After 5 Years but After
1 Year Within 5 Years Within 10 Years 10 Years Total
- --------------------------------------------------------------------------------------------------------
Available-for-Sale
U.S. Treasury
Fair value $ 1,302 $ 1,302
Amortized cost 1,201 1,201
Yield 7.01% 7.01%
U.S. Government agencies
Fair value $ 2,904 $ 67,962 $ 16,209 $ 1,214 $ 88,289
Amortized cost 2,900 66,261 15,943 1,225 86,329
Yield 3.41% 6.18% 5.84% 5.52% 6.01%
Corporate debt securities
Fair value $ 2,017 $ 17,833 $ 4 $ 990 $ 20,844
Amortized cost 2,004 17,082 5 982 20,073
Yield 5.97% 6.54% 2.63% 3.83% 6.35%
Mortgage-backed securities
Fair value $17,775 $ 994 $ 75,325 $714,887 $ 808,981
Amortized cost 18,040 984 74,543 705,699 799,266
Yield 5.28% 6.42% 5.47% 6.01% 5.94%
State and municipal securities
Fair value $11,169 $ 40,734 $ 6,991 $ 5,818 $ 64,712
Amortized cost 11,097 39,830 6,765 5,642 63,334
Yield 6.84% 6.54% 8.83% 8.46% 7.01%
Equity securities
Fair value $ 35,185
Amortized cost 33,373
Yield 5.61%
Held-to-Maturity
Mortgage-backed securities
Fair value $ 310 $ 1,468 $ 1,778
Amortized cost 310 1,468 1,778
Yield 4.46% 4.90% 4.82%
Total Securities
Fair value $33,865 $129,135 $ 98,529 $724,377 $1,021,091
Amortized cost 34,041 125,668 97,256 715,016 1,005,354
Yield 5.67% 6.35% 5.76% 6.02% 6.01%
========================================================================================================
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 occurs 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 sen sitivity and
periodic and cumulative gap positions as calculated at December 31, 2001 and
2000. These estimates include anticipated paydowns on commercial and residential
loans, mortgage-backed securities, and certain assumptions regarding core
deposits. Traditionally, 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 considered liability sensitive. An
asset sensitive institution will generally benefit from rising rates, and a
liability sensitive institution will generally benefit from declining rates.
However, imbedded options, such as a call feature on a bond or a prepayment
option on a loan, may impact the magnitude and direction of interest rate
sensitivity.
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 an in-house simulation model that measures
Susquehanna's exposure to interest rate risk. This model calculates the income
effect and the economic value of assets, liabilities, and equity at current and
forecasted interest rates, and at hypothetical higher and lower
24
Table 8 - Loan and Lease Portfolio
- ---------------------------------------------------------------------------------------------
At December 31 2001 2000
- ---------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 434,780 12.4% $ 371,320 10.8%
Real estate--construction 359,445 10.2 264,182 7.7
Real estate--mortgage 1,963,094 55.8 1,933,772 56.3
Consumer 325,170 9.2 350,707 10.2
Leases 437,009 12.4 513,629 15.0
- ---------------------------------------------------------------------------------------------
Total $3,519,498 100.0% $3,433,610 100.0%
=============================================================================================
Table 9 - Loan Maturity and Interest Sensitivity
- ---------------------------------------------------------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------
At December 31
- ---------------------------------------------------------------------------------------------------------------
Under One One to Five Over Five
Maturity Year Years Years Total
- ---------------------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 199,932 $129,282 $105,566 $434,780
Real estate--construction 183,832 145,545 30,068 359,445
- ---------------------------------------------------------------------------------------------------------------
$ 383,764 $274,827 $135,634 $794,225
===============================================================================================================
Rate sensitivity of loans with maturities greater than 1 year:
Variable rate $240,063
Fixed rate 170,398
- ---------------------------------------------------------------------------------------------------------------
$410,461
===============================================================================================================
Table 10 - Allocation of Allowance for Loan and Lease Losses
- -----------------------------------------------------------------------------------------
Dollars in thousands
- -----------------------------------------------------------------------------------------
At December 31 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 8,783 $ 7,518 $ 5,773 $ 5,212 $ 5,184
Real estate--construction 10,388 7,632 6,018 5,937 5,994
Real estate--mortgage 8,545 8,064 8,000 8,014 7,698
Consumer 6,423 6,187 6,981 5,500 5,225
Leases 1,923 2,276 9,113 4,657 3,960
Unused commitments 1,110 2,211 2,937 2,366 2,558
Unallocated 526 3,299 5,643 7,754 8,697
- -----------------------------------------------------------------------------------------
Total $37,698 $37,187 $44,465 $39,440 $39,316
=========================================================================================
interest rates at one percent intervals. The income effect and economic value of
defined categories of financial instruments is calculated by the model using
estimated cash flows based on imbedded options, prepayments, early withdrawals,
and weighted average contractual rates and terms. For economic value
calculations, the model also considers discount rates for similar financial
instruments. The economic value of longer-term fixed-rate financial instruments
are generally more sensitive to changes in interest rates. Adjustable-rate and
variable-rate financial instruments largely reflect only a change in economic
value representing the difference between the contractual and discounted rates
until the next contractual interest rate repricing date, unless subject to rate
caps and floors.
A substantial portion of Susquehanna's loans consists of commercial and
residential mortgage loans containing significant imbedded options which permit
the borrower to repay the principal balance of the loan prior to maturity
("prepayments") without penalty. A loan's susceptibility for prepayment is
dependent upon a number of factors, including the current interest rate versus
the contractual interest rate of the loan, the financial ability of the borrower
to refinance, and the economic benefit and availability of refinancing at
attractive terms. Also, refinancing may depend upon economic and other factors
in specific geographic areas that affect the sales and price levels of
residential property. In a changing interest rate environment, prepayments may
increase or decrease depending on the current relative levels and expectations
of future short- and long-term interest rates. Since a significant portion of
Susquehanna's loan portfolio has adjustable or variable rates, prepayments on
such loans generally increase when long-term interest rates fall or are at
historically low levels relative to short-term interest rates and fixed rate
loans are economically more desirable.
25
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------
$ 327,670 9.4% $ 301,385 9.3% $ 327,598 10.7%
255,054 7.4 256,451 7.9 231,120 7.5
1,850,375 53.3 1,821,485 56.0 1,761,763 57.4
395,566 11.4 346,180 10.7 329,876 10.7
640,996 18.5 523,317 16.1 422,328 13.7
- ------------------------------------------------------------------------------
$3,469,661 100.0% $3,248,818 100.0% $3,072,685 100.0%
==============================================================================
Table 11 - Loan Concentrations
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, Maryland, New Jersey, and New York. At December 31,
2001, 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 $ 99,821 $ 173,560 $ 1,238 $ 274,619 7.8 0.7
Office buildings and warehouses 137,285 5,559 57,873 200,717 5.7 1.7
Retailing 113,695 36,875 1,574 152,144 4.3 0.0
Manufacturing 46,023 3,114 66,882 116,020 3.3 1.8
Hotels/motels 61,905 4,443 4,237 70,585 2.0 0.1
Agriculture 36,598 130 19,150 55,879 1.6 0.6
Wholesalers 14,406 200 30,379 44,985 1.3 0.6
===================================================================================================================
Investment securities, other than those with early call provisions and
mortgage-backed securities, 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 future deposits
and withdrawals is generally predictable, resulting in a dependable 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 are primarily indexed to national interest indices.
When such loans 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, such 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 economic value of
assets, liabilities, and equity calculated using certain assumptions determined
by Susquehanna as of Decem-ber 31, 2001 and 2000, at current interest rates and
at hypothetical higher and lower interest rates in one- and two-percent
increments. As noted in Table 15, the economic value of equity at risk as of
December 31, 2001, is four percent at an interest rate change of plus two
percent, while Table 16 discloses that net interest income at risk as of
December 31, 2001, is eight percent at an interest rate change of minus two
percent.
At December 31, 2001, Susquehanna was an asset-sensitive institution and
should benefit from a rise in interest rates in 2002, if that should occur.
Securitizations and Off-Balance Sheet Financings
Assets securitizations and other off-balance sheet financings can further impact
liquidity and interest rate risk. Hann's automobile lease originations are
financed primarily in four ways: agency arrangements with other financial
institutions; securitization
Table 12 - Average Deposit Balances
- ---------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------
Year ended December 31 2001 2000 1999
- ---------------------------------------------------------------
Demand deposits $ 468,319 $ 441,894 $ 421,055
Interest-bearing
demand deposits 834,950 773,552 785,175
Savings deposits 420,818 420,512 444,938
Time deposits 1,568,646 1,552,939 1,519,267
- ---------------------------------------------------------------
Total $3,292,733 $3,188,897 $3,170,435
===============================================================
Table 13 - Deposit Maturity
- ---------------------------------------------------------------
Maturity of time deposits of $100 or more at
December 31, 2001
- ---------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------
Three months or less $ 84,592
Over three months through six months 50,011
Over six months through twelve months 58,646
Over twelve months 88,387
- ---------------------------------------------------------------
Total $281,636
===============================================================
26
Table 14 - Balance Sheet Gap Analysis
- -----------------------------------------------------------------------------------------------------------------
Dollars in thousands 1-3 3-12 1-3 Over 3
At December 31, 2001 months months years years Total
- -----------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 88,565 $ 0 $ 0 $ 0 $ 88,565
Investments 151,439 226,343 337,733 305,576 1,021,091
Loans and leases, net of unearned income 1,063,376 611,940 942,470 901,712 3,519,498
- -----------------------------------------------------------------------------------------------------------------
Total $1,303,380 $ 838,283 $1,280,203 $1,207,288 $4,629,154
- -----------------------------------------------------------------------------------------------------------------
Liabilities
Interest-bearing demand $ 131,747 $ 216,516 $ 425,113 $ 141,704 $ 915,080
Savings 26,832 80,496 246,473 82,158 435,959
Time 313,317 545,543 374,956 88,678 1,322,494
Time in denominations of $100 or more 84,592 108,657 69,035 19,352 281,636
Total borrowings 176,424 44,314 568,226 227,882 1,016,846
- -----------------------------------------------------------------------------------------------------------------
Total $ 732,912 $ 995,526 $1,683,803 $ 559,774 $3,972,015
=================================================================================================================
Interest Sensitivity Gap:
Periodic $ 570,468 $ (157,243) $ (403,600) $ 647,514
Cumulative 413,225 9,625 657,139
Cumulative gap as a percentage of earning assets 12% 9% 0% 14%
- -----------------------------------------------------------------------------------------------------------------
1-3 3-12 1-3 Over 3
At December 31, 2000 months months years years Total
- -----------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 59,035 $ 0 $ 0 $ 0 $ 59,035
Investments 88,763 109,253 311,141 389,447 898,604
Loans and leases, net of unearned income 1,123,486 702,439 1,010,264 597,421 3,433,610
- -----------------------------------------------------------------------------------------------------------------
Total $1,271,284 $ 811,692 $1,321,405 $986,868 $4,391,249
=================================================================================================================
Liabilities
Interest-bearing demand $ 105,639 $ 283,614 $ 139,208 $289,405 $ 817,866
Savings 47,068 137,135 85,505 144,170 413,878
Time 257,419 588,876 403,902 53,100 1,303,297
Time in denominations of $100 or more 80,757 107,577 50,256 13,085 251,675
Total borrowings 447,448 110,710 312,875 159,779 1,030,812
- -----------------------------------------------------------------------------------------------------------------
Total $ 938,331 $1,227,912 $ 991,746 $659,539 $3,817,528
=================================================================================================================
Interest Sensitivity Gap:
Periodic $ 332,953 $ (416,220) $ 329,659 $327,329
Cumulative (83,267) 246,392 573,721
Cumulative gap as a percentage of earning assets 8% -2% 6% 13%
=================================================================================================================
transactions; sale-leaseback transactions; and other sources of funds, including
internally generated sources. Assets financed in the first three of these
manners generally are not reflected on Susquehanna's consolidated balance sheet.
As of December 31, 2001, Hann's off-balance sheet, managed portfolio was funded
in the following manners: agency arrangements, $555 million; asset
securitization transactions, $111 million; and sale-leaseback transactions, $168
million.
Agency arrangements generally occur on similar economic terms and generally
result in no accounting gains or losses to Hann and no retention of credit,
residual value, or interest rate risk with respect to the sold assets. Agency
arrangements involve the origination and servicing by Hann of automobile leases
for other financial institutions. Hann generally is entitled to receive all of
the administrative fees collected from obligors, a servicing fee, and an
origination fee per lease. Lease sales are generally accounted for as sales
under SFAS 140.
In asset securitization transactions, Hann generally sells or contributes the
beneficial interest in fixed-rate automobile leases and related vehicles to a
wholly-owned, special purpose entity, or SPE. The SPE finances the purchase by
borrowing funds from a non-related, asset-backed commercial paper issuer. Hann
continues to act as servicer for the sold portfolio and Hann is entitled to
receive all of the administrative fees collected from obligors. In addition,
Hann also receives a servicing fee based upon a percentage of the dollar amount
of assets serviced. These transactions are generally accounted for as sales
under the guidelines of SFAS 140. Neither Hann nor Susquehanna provides recourse
for credit losses. The debt issued bears a floating rate of interest, and
Susquehanna either obtains interest rate protec-
27
Table 15 - Balance Sheet Shock Analysis
- ---------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 2001 -2% -1% Value 1% 2%
- ---------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 149,233 $ 149,233 $ 149,233 $ 149,233 $ 149,233
Short-term investments 88,565 88,565 88,565 88,565 88,565
Investment securities:
Held-to-maturity 1,967 1,878 1,794 1,716 1,642
Available-for-sale 1,040,905 1,031,544 1,019,313 998,072 973,117
Loans and leases, net of unearned income 3,703,282 3,641,837 3,581,492 3,522,580 3,465,534
Other assets 310,403 310,403 310,403 310,403 310,403
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 5,294,355 $ 5,223,460 $ 5,150,800 $ 5,070,569 $ 4,988,494
===============================================================================================================
Liabilities
Deposits:
Non-interest bearing $ 533,436 $ 518,195 $ 503,398 $ 488,601 $ 474,248
Interest-bearing 3,034,639 2,994,820 2,955,774 2,917,138 2,879,842
Total borrowings 1,062,516 1,045,342 1,028,653 1,012,494 998,316
Other liabilities 56,380 56,380 56,380 56,380 56,380
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 4,686,971 4,614,737 4,544,205 4,474,613 4,408,786
Total economic equity 607,384 608,723 606,595 595,956 579,708
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 5,294,355 $ 5,223,460 $ 5,150,800 $ 5,070,569 $ 4,988,494
===============================================================================================================
Economic equity ratio 11% 12% 12% 12% 12%
Value at risk 789 2,128 0 (10,639) (26,887)
%Value at risk 0% 0% 0% -2% -4%
- ---------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 2000 -2% -1% Value 1% 2%
- ---------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 129,101 $ 129,101 $ 129,101 $ 129,101 $ 129,101
Short-term investments 59,042 59,039 59,035 59,032 59,029
Investment securities:
Held-to-maturity 17,132 16,786 16,658 16,239 15,851
Available-for-sale 896,185 882,902 882,285 860,489 837,309
Loans and leases, net of unearned income 3,519,374 3,471,013 3,423,848 3,377,646 3,331,302
Other assets 309,693 309,693 309,693 309,693 309,693
- ---------------------------------------------------------------------------------------------------------------
Total assets 4,930,527 4,868,534 4,820,620 4,752,200 4,682,285
===============================================================================================================
Liabilities
Deposits:
Non-interest bearing 469,153 455,854 442,943 430,032 417,507
Interest-bearing 2,889,481 2,854,384 2,820,494 2,786,565 2,753,565
Total borrowings 1,058,580 1,040,424 1,022,746 1,005,507 988,673
Other liabilities 59,594 59,594 59,594 59,594 59,594
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 4,476,808 4,410,256 4,345,777 4,281,698 4,219,339
Total economic equity 453,719 458,278 474,843 470,502 462,946
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 4,930,527 $ 4,868,534 $ 4,820,620 $ 4,752,200 $ 4,682,285
===============================================================================================================
Economic equity ratio 9% 9% 10% 10% 10%
Value at risk (21,124) (16,565) 0 (4,341) (11,897)
% Value at risk -4% -3% 0% -1% -3%
===============================================================================================================
28
Table 16 - Net Interest Income Shock Analysis
- ---------------------------------------------------------------------------------------------------------------
Base
Dollars in thousands Present
At December 31, 2001 -2% -1% Value 1% 2%
- ---------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 1,883 $ 3,290 $ 4,790 $ 6,318 $ 7,881
Investments 52,758 55,777 58,844 60,969 62,842
Loans and leases 238,593 250,661 262,647 274,458 286,301
- ---------------------------------------------------------------------------------------------------------------
Total interest income 293,234 309,728 326,281 341,745 357,024
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 15,162 15,890 17,252 20,953 24,653
Time 51,429 57,444 63,659 69,931 76,268
Total borrowings 49,017 50,406 52,449 54,562 57,269
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 115,608 123,740 133,360 145,446 158,190
- ---------------------------------------------------------------------------------------------------------------
Net interest income $ 177,626 $ 185,988 $ 192,921 $ 196,299 $ 198,834
===============================================================================================================
Net interest income at risk $ (15,295) $ (6,933) 0 $ 3,378 $ 5,913
% Net interest income at risk -8% -4% 0% 2% 3%
===============================================================================================================
Base
Dollars in thousands Present
At December 31, 2000 -2% -1% Value 1% 2%
- ---------------------------------------------------------------------------------------------------------------
Interest income:
Short-term investments $ 3,287 $ 4,111 $ 4,934 $ 5,757 $ 6,518
Investments 44,494 47,978 55,608 56,700 57,850
Loans and leases 268,590 280,778 292,895 307,709 323,988
- ---------------------------------------------------------------------------------------------------------------
Total interest income 316,371 332,867 353,437 370,166 388,356
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand and savings 27,372 29,243 33,407 36,502 39,665
Time 73,063 79,009 84,958 90,906 96,855
Total borrowings 56,901 61,423 65,945 70,467 74,989
- ---------------------------------------------------------------------------------------------------------------
Total interest expense $ 157,336 $ 169,675 $ 184,310 $ 197,875 $ 211,509
- ---------------------------------------------------------------------------------------------------------------
Net interest income $ 159,035 $ 163,192 $ 169,127 $ 172,291 $ 176,847
===============================================================================================================
Net interest income at risk $ (10,092) $ (5,935) 0 $ 3,164 $ 7,720
% Net interest income at risk -6% -4% 0% 2% 5%
Table 17 - Capital Adequacy
- -----------------------------------------------------------------------------------
At December 31, 2001
- -----------------------------------------------------------------------------------
Tier I Capital Total Capital Leverage
Ratio (A) Ratio (B) Ratio (C)
- -----------------------------------------------------------------------------------
Required Ratio 4.00% 8.00% 4.00%
Citizens Bank of Southern Pennsylvania 10.78 11.75 6.82
Equity Bank 9.41 10.53 7.24
Farmers First Bank 10.44 11.69 8.32
Farmers & Merchants Bank and Trust 8.54 11.09 6.44
First American Bank of Pennsylvania 14.74 15.51 9.95
First Susquehanna Bank & Trust 10.65 11.90 7.38
Founders' Bank 9.17 10.41 7.50
Susquehanna Bank 8.91 11.45 7.13
WNB Bank 14.24 15.48 9.71
Total Susquehanna 10.81% 12.53% 8.68%
===================================================================================
(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.
29
tion agreements or retains the related interest rate risk. Although neither Hann
nor Susquehanna has retained residual risk in the vehicle leases and related
vehicles, in the event of a breach by Auto Lenders of its obligation under the
Servicing Agreement, described earlier in the discussion titled "Related Party
Transaction and Residual Value Risk," Susquehanna would be required to reimburse
up to $20.5 million under a letter of credit facility for losses suffered by the
investors to the extent of amounts not paid by Auto Lenders. As of December 31,
2001, Hann had one outstanding asset securitization transaction. The transaction
documents contain several requirements, obligations, liabilities, provisions,
and consequences, including events of default, which become applicable upon,
among other conditions, the failure of the sold and pledged portfolios to meet
certain performance tests. The SPE generally retains the right to receive excess
cash flows from the sold portfolio and, under SFAS 140, Hann is required to
recognize a receivable representing the present value of these excess cash
flows, which is subordinate to the investors' interests. The value of this
recorded interest is subject to credit, prepayment, and interest rate risks. At
Decem-ber 31, 2001, this recorded interest was $4.5 million of which $1.3
million represents the remaining interest-only asset and $3.2 million is a
valuation adjustment which is recognized as other comprehensive income, net of
taxes.
In December 2000, Hann sold and leased back the beneficial interest in $190
million of automobiles subject to operating leases under a Master Lease
Agreement that has an eight-year term with an early buyout option on January 14,
2007. For accounting purposes, the transaction is treated as a sale and an
operating lease. To support its obligations under the Master Lease Agreement,
Hann pledges the beneficial interest in an additional $31.6 million of
automobile leases and related vehicles. Hann is expected to earn approximately
$11.7 million in other income over the term of the Master Lease Agreement, which
includes $27.1 million of estimated net rental income, or the difference between
the operating lease payments received by Hann and the payments made by Hann
under the Master Lease Agreement. The estimated net rental income will be
partially offset by the amortization of transaction costs of approximately $15.4
million, which includes a $14.0 million deferred loss on an interest rate swap.
Susquehanna entered into an interest rate swap in order to fix the return on the
transaction, while leases originated for the sale-leaseback were being held in a
warehouse facility during the ten-month production period. The transaction
documents contain several requirements, obligations, liabilities, provisions,
and consequences which become applicable upon the occurrence of an "Early
Amortization Event." An Early Amortization Event includes the failure of the
sold and pledged portfolios to meet certain performance tests or the failure of
Susquehanna to continue to maintain its investment-grade senior unsecured
long-term debt ratings. This rating provision can be cured by Susque-hanna by
obtaining a $32.7 million letter of credit from an eligible financial
institution for the benefit of the equity participants in the transaction. This
is referred to in Table 18 as Contingent Cash Collateral. For example, after an
Early Amortization Event, substitutions are no longer permitted, which means
that the sales proceeds from the sold vehicles following termination of the
related auto leases may not be used to purchase replacement vehicles and leases.
Instead, these proceeds are required to make termination and other payments
under the Master Lease Agreement. As of December 31, 2001, the obligation to
make these termination and other payments is collateralized by a cash deposit of
$6.4 million.
Table 18 presents certain contractual obligations and commercial
commitments, including the guarantees of Susquehanna on behalf of its
subsidiaries, and their expected year of payment or expiration.
Capital Adequacy
Risk-based capital ratios, based upon guidelines adopted by bank regulators in
1989, 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
stockholders' equity reduced by excludable intangibles, while Tier 2 capital
represents certain allowable long-term debt, the portion of the allowance for
loan and lease losses equal to 1.25% of risk-adjusted assets, and 45% of the
unrealized gain on equity securities. The sum of Tier 1 capital and Tier 2
capital is "total risk-based capital."
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.
Recent Accounting Pronouncements
On July 20, 2001, the FASB issued SFAS No. 141, ("SFAS 141") "Business
Combinations," and SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." SFAS 141 supercedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations." The most significant changes made by SFAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001; (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill; and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain. Management has reviewed SFAS 141 and has determined that the
statement has no effect on its current financial position or results of
operations.
SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. The most significant changes made by SFAS 142 are: (1) goodwill and
indefinite-lived intangible assets will no longer be amortized; (2) goodwill
will be tested for impairment at least annually at the reporting unit level; (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually; and (4) the amortization period of intangible
assets with finite
30
TABLE 18--Contractual Obligations and Commercial Commitments
- --------------------------------------------------------------------------------------
Payments Due by Period
- --------------------------------------------------------------------------------------
Less than 1-3 4-5 Over 5
Contractual Obligations Total 1 Year Years Years Years
- --------------------------------------------------------------------------------------
Long-term debt $ 105,000 $ 0 $ 55,000 $ 50,000 $ 0
Operating leases 211,544 27,147 53,425 61,567 69,405
Contingent cash collateral 32,739 0 0 0 32,739
- --------------------------------------------------------------------------------------
Commitment Expiration
- --------------------------------------------------------------------------------------
Less than 1-3 4-5 Over 5
Other Commercial Commitments Total 1 Year Years Years Years
- --------------------------------------------------------------------------------------
Stand-by letters of credit $ 86,161 $ 54,180 $ 31,981 $ 0 $ 0
Guarantees 20,000 0 20,000 0 0
Other commercial commitments,
principally lines of credit 424,945 328,588 96,357 0 0
======================================================================================
lives will no longer be limited to forty years. The provision of SFAS 142 will
be effective for fiscal years beginning after De-cember 15, 2001. Management
estimates that amortization expense for 2002 will be reduced by approximately
$3.3 million. Management has not yet performed an impairment test of goodwill.
Critical Accounting Policies
Susquehanna has established various accounting policies that govern the
application of accounting principles generally accepted in the United States in
the preparation of its financial statements. The significant accounting policies
of Susquehanna are described in the footnotes to the consolidated financial
statements. Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experiences and other factors which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates, which could have a material impact on the
carrying values of assets and liabilities and the results of operations of
Susquehanna. Susquehanna believes that the allowance for loan and lease losses,
which is discussed in the section titled "Provision and Allowance for Loan and
Lease Losses," and the treatment of securitizations and off-balance sheet
financing, which is discussed in the section titled "Securitizations and
Off-Balance Sheet Financing," both require the most significant judgments and
estimates used in the preparation of its consolidated financial statements. See
"Footnote 1. Summary of Significant Accounting Policies" for a detailed
description of Suquehanna's estimation process and methodology related to the
allowance for loan and lease losses and treatment of recorded interests in
securitized assets, and "Footnote 10. Financial Instruments with Off-Balance
Sheet Risk."
Summary of 2000 Compared to 1999
Several significant transactions occurred which affected the comparability of
Susquehanna's financial performance for theyears ended December 31, 2001 and
2000. These transactions are described in the following paragraphs.
On March 3, 2000, Susquehanna completed the acquisition of Valley Forge
Asset Management Corp., a Pennsylvania asset management corporation registered
both as a broker/dealer and as an investment advisor, and Valley Forge
Investment Company, Inc., its parent corporation, in cash transactions. The
acquisition was accounted for under the purchase method of accounting for
business combinations. Goodwill of $9.4 million was recognized in the
acquisition and was being amortized to other operating expense on a
straight-line basis over 25 years. In this transaction, there was a contingent
earn-out paid, totaling $6.0 million in 2001.
On February 1, 2000, Susquehanna completed the acquisition of Hann, a
closely held consumer automobile financing company that services more than $1.0
billion in lease receivables. Susquehanna issued 2,360,000 shares of common
stock to the stockholders of Hann for the outstanding common shares of Hann. The
acquisition was accounted for under the pooling-of-interest method of accounting
for business combinations; accordingly, the consolidated financial statements
have been restated to include the consolidated accounts of Hann for all periods
presented.
Susquehanna's net income for the year ended December 31, 2000, increased
$11.5 million, or 26%, from the 1999 net income of $43.5 million. Net income for
1999 included $10.8 million of special charges relating to the consolidation of
Susquehanna's back office operations and a special bonus. The restructuring
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 work force reduction should result in an estimated net annual
savings of approximately $6.0 million, of which $1.0 million was realized in the
year 2000, with an anticipated 100% realization in 2001 and each succeeding
year. A special bonus of $3.4 million was awarded to Susquehanna employees
(excluding executive and senior management) for extraordinary efforts in 1999.
Susquehanna's earnings performance in 2000 was also affected by significant
growth in non-interest income resulting primarily from increases in vehicle
origination and servicing fees and merchant credit card fees. Non-interest
income increased
31
$20.6 million, or 38%, in 2000 over 1999.
Diluted EPS increased 27% from $1.10 per share for the year ended 1999 to
$1.40 per share for the year ended 2000. Excluding the special charges noted
above, annual 2000 diluted EPS increased 9% over 1999. ROA and ROE finished at
1.15% and 13.01% for the year 2000, compared with 0.94% and 10.45% for 1999.
Excluding the special charges noted above, Susque-hanna's ROA and ROE for 1999
would have been 1.09% and 12.13%, respectively.
For 2000, tangible net income, earnings per share, ROA, and ROE were $58.1
million, $1.48, 1.23%, and 15.08%, respectively, compared to actual net income,
basic earnings per share, ROA, and ROE of $55.0 million, $1.40, 1.15%, and
13.01%, respectively. Tangible net income, earnings per share, ROA, and ROE for
1999 were $46.5 million, $1.18, 1.01%, and 12.13%, respectively. Excluding
special charges, tangible net income, EPS, ROA, and ROE were $53.5 million,
$1.36, 1.16%, and 13.96%, respectively.
32
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, 2001 and 2000.................... 34
Consolidated Statements of Income for the years ended
December 31, 2001, 2000, and 1999................................... 35
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999................................... 36
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000, and 1999............... 37
Notes to Consolidated Financial Statements................................... 38
Report of Independent Accountants............................................ 52
Summary of Quarterly Financial Data.......................................... 53
33
Consolidated Balance Sheets
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------
Year ended December 31 2001 2000
- ---------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 149,233 $ 129,101
Short-term investments:
Restricted 41,584 32,731
Unrestricted 46,981 26,304
- ---------------------------------------------------------------------------------------------------------
Total short-term investments 88,565 59,035
- ---------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value 1,019,313 882,285
Investment securities held to maturity, at amortized cost
(Fair values of $1,778 and $16,658) 1,778 16,319
Loans and leases, net of unearned income 3,519,498 3,433,610
Less: Allowance for loan and lease losses 37,698 37,187
- ---------------------------------------------------------------------------------------------------------
Net loans and leases 3,481,800 3,396,423
- ---------------------------------------------------------------------------------------------------------
Premises and equipment (net) 60,063 58,303
Accrued income receivable 21,268 26,775
Bank-owned life insurance 120,174 113,865
Other assets 108,898 110,750
- ---------------------------------------------------------------------------------------------------------
Total assets $ 5,051,092 $ 4,792,856
=========================================================================================================
Liabilities
Deposits:
Noninterest-bearing $ 529,162 $ 462,297
Interest-bearing 2,955,169 2,786,716
- ---------------------------------------------------------------------------------------------------------
Total deposits 3,484,331 3,249,013
- ---------------------------------------------------------------------------------------------------------
Short-term borrowings 169,803 205,336
FHLB borrowings 570,580 367,954
Vehicle financing 171,462 357,522
Long-term debt 105,000 100,000
Accrued interest, taxes, and expenses payable 36,652 42,382
Other liabilities 19,728 17,212
- ---------------------------------------------------------------------------------------------------------
Total liabilities 4,557,556 4,339,419
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 16)
Stockholders' Equity
Common stock
Authorized: 100,000,000 ($2.00 par value)
Issued: 39,398,190 78,796 78,796
Surplus 57,986 57,872
Retained earnings 345,508 320,020
Accumulated other comprehensive income, net of taxes of $6,928 and 12,009 (757)
($408), respectively
Less: Treasury stock (54,115 and 176,798 common shares at cost,respectively) 763 2,494
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 493,536 453,437
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 5,051,092 $ 4,792,856
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
34
Consolidated Statements of Income
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------
Dollars in thousands, except per share
- -----------------------------------------------------------------------------------------------
Year ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans and leases $283,212 $293,046 $276,280
Interest on investment securities: Taxable 51,247 53,238 50,485
Tax-exempt 3,297 4,195 5,232
Interest on short-term investments 3,539 2,937 3,089
- -----------------------------------------------------------------------------------------------
Total interest income 341,295 353,416 335,086
- -----------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits: Interest-bearing demand 18,144 22,080 20,359
Savings 6,324 7,709 8,166
Time 84,222 85,216 77,487
Interest on short-term borrowings 7,976 11,597 4,336
Interest on FHLB borrowings 23,656 23,139 19,600
Interest on vehicle financing 20,886 30,961 34,679
Interest on long-term debt 7,843 7,762 8,899
- -----------------------------------------------------------------------------------------------
Total interest expense 169,051 188,464 173,526
- -----------------------------------------------------------------------------------------------
Net interest income 172,244 164,952 161,560
Provision for loan and lease losses 7,310 3,726 11,203
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 164,934 161,226 150,357
- -----------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 13,735 10,867 10,054
Vehicle origination and servicing fees 22,435 22,053 13,480
Merchant credit card fees 10,489 10,130 3,086
Asset management fees 9,072 6,610 0
Income from fiduciary-related activities 5,084 4,734 4,028
Gain on sale of loans and leases 4,198 3,936 3,427
Income from bank-owned life insurance 6,509 5,909 4,528
Other operating income 11,995 9,784 13,878
Investment security gains/(losses) 649 (13) 978
- -----------------------------------------------------------------------------------------------
Total other income 84,166 74,010 53,459
- -----------------------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 73,850 68,110 64,218
Net occupancy expense 11,498 9,933 9,349
Furniture and equipment expense 8,185 8,308 8,088
Amortization of intangible assets 3,645 3,294 3,476
Vehicle residual value expense 4,850 8,068 2,102
Vehicle delivery and preparation expense 6,168 2,166 1,181
Merchant credit card servicing expense 9,820 9,514 3,122
Restructuring charge 0 (900) 7,412
Other operating expenses 49,747 47,088 42,840
- -----------------------------------------------------------------------------------------------
Total other expenses 167,763 155,581 141,788
- -----------------------------------------------------------------------------------------------
Income before income taxes 81,337 79,655 62,028
Provision for income taxes 25,621 24,693 18,505
- -----------------------------------------------------------------------------------------------
Net Income $ 55,716 $ 54,962 $ 43,523
===============================================================================================
Per share information: Basic earnings $ 1.42 $ 1.40 $ 1.11
Diluted earnings 1.41 1.40 1.10
Cash dividends 0.77 0.70 0.62
Average shares outstanding: Basic 39,263 39,262 39,320
Diluted 39,593 39,365 39,497
===============================================================================================
The accompanying notes are an integral part of these financial statements.
35
Consolidated Statements of Cash Flows
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------------------------------------------------------------
Year ended December 31 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 55,716 $ 54,962 $ 43,523
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization, and accretion 12,814 14,248 11,857
Provision for loan and lease losses 7,310 3,726 11,203
Gain on sale of branch offices 0 0 (3,352)
(Gain)/loss on securities transactions (649) 13 (978)
Gain on sale of loans (4,198) (3,936) (3,427)
Loss on sale of other real estate owned 16 15 6
Mortgage loans originated for resale (118,652) (117,328) (187,017)
Sale of mortgage loans originated for resale 118,177 114,530 203,158
Leases acquired/originated for resale (116,643) (222,376) 0
Sale of leases acquired/originated for resale 118,392 200,709 0
(Increase)/decrease in accrued interest receivable 5,757 (3,012) (989)
(Decrease)/increase in accrued interest payable (5,782) 3,471 734
(Decrease)/increase in accrued expenses and taxes payable (146) 4,165 2,635
Other, net (3,718) 3,900 1,832
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 68,394 53,087 79,185
- -------------------------------------------------------------------------------------------------------------
Investing Activities
Net increase in restricted short-term investments (8,853) (25,427) (3,713)
Proceeds from the sale of available-for-sale securities 21,889 4,482 47,719
Proceeds from the maturity of investment securities 457,528 120,204 264,783
Purchase of available-for-sale securities (584,286) (84,412) (302,763)
Purchase of held-to-maturity securities 0 (7,887) 0
Proceeds from sale of credit card portfolio 0 12,373 0
Net (increase)/decrease in loans and leases (39,730) 19,670 (192,610)
Transfer of allowance for loan and lease losses to third-party guarantor 0 (3,057) 0
Capital expenditures (4,207) (9,709) (5,400)
Net cash and cash equivalents received/(paid) in acquisitions 6,224 (12,707) (22,381)
Purchase of insurance products 0 0 (50,000)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by/(used for) investing activities (151,435) 13,530 (264,365)
- -------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase/(decrease) in deposits 166,200 68,493 (13,978)
Net increase/(decrease) in short-term borrowings (35,533) (2,171) 102,976
Net increase/(decrease) in FHLB borrowings 202,626 (4,460) 58,778
Net increase/(decrease) in vehicle financing (186,060) (124,582) 25,191
Proceeds from issuance of long-term debt 5,000 5,000 0
Repayment of long-term debt 0 0 (10)
Proceeds from issuance of common stock 1,845 772 1,372
Cash paid for treasury stock 0 (3,097) (287)
Dividends paid (30,228) (27,092) (22,918)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by/(used for) financing activities 123,850 (87,137) 151,124
- -------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 40,809 (20,520) (34,056)
Cash and cash equivalents at January 1 155,405 175,925 209,981
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 196,214 $ 155,405 $ 175,925
=============================================================================================================
Cash and cash equivalents:
Cash and due from banks $ 149,233 $ 129,101 $ 146,576
Unrestricted short-term investments 46,981 26,304 29,349
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 196,214 $ 155,405 $ 175,925
=============================================================================================================
The accompanying notes are an integral part of these financial statements.
36
Consolidated Statements of Changes in Stockholders' Equity
SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2001, 2000, and 1999
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Dollars in thousands, Common Retained Comprehensive Treasury Total
except per share data Stock Surplus Earnings Income Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 $ 78,655 $ 57,166 $271,545 $ 6,004 $ (783) $412,587
Comprehensive income:
Net income 43,523 43,523
Change in unrealized gain/(loss) on
securities, net of taxes of ($10,186)
and reclassification
adjustment of $978 (19,620) (19,620)
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 43,523 (19,620) 23,903
Common stock issued under employee benefit
plans (including related tax benefits of $365) 133 707 897 1,737
Purchase/conversion of treasury stock (287) (287)
Cash dividends paid:
Per common share of $0.62 (22,918) (22,918)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 78,788 57,873 292,150 (13,616) (173) 415,022
Comprehensive income:
Net income 54,962 54,962
Change in unrealized gain/(loss) on
securities, net of taxes of ($6,553) and
reclassification
adjustment of ($13) 12,859 12,859
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 54,962 12,859 67,821
Common stock issued under employee benefit
plans (including related tax benefit of $11) 8 (1) 776 783
Purchase/conversion of treasury stock (3,097) (3,097)
Cash dividends paid:
Per common share of $0.70 (27,092) (27,092)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 78,796 57,872 320,020 (757) (2,494) 453,437
Comprehensive income:
Net income 55,716 55,716
Change in unrealized gain/(loss) on securities,
net of taxes of $5,578 and reclassification
adjustment of $649 10,862 10,862
Unrealized gain on recorded interest in securitized
assets, net of taxes of $1,296 1,904 1,904
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 55,716 12,766 68,482
Common stock issued under employee benefit
plans (includes related tax benefit of $278) 114 1,731 1,845
Cash dividends paid:
Per common share of $0.77 (30,228) (30,228)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 78,796 $ 57,986 $345,508 $ 12,009 $ (763) $493,536
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
37
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except as noted and per share data)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Susquehanna Banc-shares, Inc. and
subsidiaries ("Susquehanna") conform to accounting principles generally accepted
in the United States of America 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: Boston
Service Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"),
Conestoga Management Company, Farmers First Bank and subsidiaries ("Farmers"),
Farmers & Merchants Bank and Trust and subsidiaries ("F&M"), First American Bank
of Pennsylvania ("FAB"), First Susquehanna Bank & Trust ("First Susquehanna"),
WNB Bank ("WNB"), Citizens Bank of Southern Pennsylvania ("Citizens"),
Susquehanna Bancshares East, Inc. and subsidiaries ("East"), Susquehanna
Bancshares South, Inc. and subsidiaries ("South"), Susque-Bancshares Life
Insurance Co. ("SBLIC"), Susque-Bancshares Leasing Company, Inc. and subsidiary
("SBLC"), and Valley Forge Asset Management Corporation ("VFAM"), as of and for
the years ended December 31, 2001, 2000, and 1999. All significant inter-company
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 Susque-hanna.
Nature of Operations. Susquehanna is a financial holding company which operates
nine commercial banks based upon the sound principles of super-community
banking. These subsidiaries provide financial services from 146 branches located
in central and southeastern Pennsylvania, Maryland, northeastern West Virginia,
and southern New Jersey. In addition, Susque-hanna operates four non-bank
subsidiaries that provide leasing, credit insurance, and asset management
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 accounting principles generally accepted
in the United States of America 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 significantly 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
generally over 10 years. The excess of purchase price over the fair value of net
assets acquired, or goodwill, is amortized on a straight-line basis generally
over 15 to 40 years. The unamortized amount of goodwill was $43,496 and $38,934
at December 31, 2001 and 2000, respectively. Periodically, management
reevaluates goodwill and other intangibles based on undiscounted operating cash
flows whenever significant events or changes occur which might impair recovery
of recorded asset costs.
Consolidated Statement of Cash Flows. Interest paid on deposits, short-term
borrowings, and long-term debt was $174,635 in 2001, $184,993 in 2000, and
$178,734 in 1999. Income taxes paid were $8,784 in 2001, $422 in 2000, and
$16,409 in 1999. Amounts transferred to other real estate owned were $3,836 in
2001, $2,795 in 2000, and $7,342 in 1999.
On February 1, 2000, Susquehanna acquired Hann, using the
pooling-of-interests method of accounting for business combinations;
accordingly, consolidated results for all periods have been restated.
On March 3, 2000, Susquehanna completed its acquisition of VFAM, using the
purchase method of accounting for business combinations.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash
equivalents includes cash, due from banks, and unrestricted short-term
investments. Unrestricted 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, 2001, or 2000. 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 accretion 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
stockholders' 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 allowance for loan and lease losses is
established, as losses are estimated to have occurred, through a provision for
loan and lease losses charged to earnings. Loan and lease losses are charged
against the allowance when management believes the uncollectibility of a loan
balance is confirmed, and recoveries on previously charged-off loans and leases
are credited to the allowance.
The allowance for loan and lease losses is evaluated on a regular basis by
management and is based upon management's
38
periodic review of the collectibility of the loans and leases in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and prevailing economic conditions. This evaluation
is inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available.
Susquehanna considers a loan to be impaired, based upon current information
and events, if it is probable that Susque-hanna 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. Measurement of impaired loans is based on 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 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 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 and leases is recorded on the interest method and the
actuarial method. 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 but not collected 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 interest 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.
Segment Reporting. Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), requires that public business enterprises report financial and
descriptive information about its reportable operating segments. Based on the
guidance provided by the statement, Susquehanna has determined its only
reportable segment is Community Banking.
Comprehensive Income. Susquehanna reports comprehensive income in accordance
with Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Components of comprehensive income, as detailed in the
Consolidated Statements of Changes in Stockholders' Equity, are net of tax.
Comprehensive income includes a reclassification adjustment for net realized
gains/(losses) included in net income of $649, $(13), and $978 for the years
ended December 31, 2001, 2000, and 1999, respectively.
Recorded Interests in Securitized Assets. In accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (a replacement of FASB
Statement No. 125)," recorded interests in securitized assets, including debt
securities and interest-only strips, are initially recorded at their allocated
carrying amounts based on the relative fair value of assets sold and retained.
Recorded interests are subsequently carried at fair value, which is generally
estimated based on the present value of expected cash flows, calculated using
management's best estimates of key assumptions, including credit losses, loan
repayment speeds, and discount rates commensurate with the risks involved. Gains
on sale and servicing fees are recorded in non-interest income.
During 2001, Susquehanna repurchased and sold approximately $117 million of
auto leases, and realized $1.7 million of pre-tax gain on the sale. Susquehanna
receives annual servicing fees as compensation for servicing the outstanding
balances on the auto leases. Susquehanna's recorded interests are subordinate to
purchasers' interests. The value of these recorded interests is subject to
credit, prepayment, and interest rate risks re-
39
lated to the transferred assets. At December 31, 2001, Susque-hanna's recorded
interests were $4.5 million. Key economic assumptions used in measuring the
initial recorded interests resulting from the securitization completed in 2001
were weighted average life of 30 months, expected credit losses of 1.72%, and
discount rate of 4%.
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. Basic earnings per share represents income available to
common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by
Susquehanna relate solely to outstanding stock options, and are determined using
the treasury stock method.
Consolidated Statements of Changes in Stockholders' Equity
- -----------------------------------------------------------------------
Common Shares Outstanding
- -----------------------------------------------------------------------
Balance, January 1, 1999 29,262,522
Stock issued under employee benefit plans 134,931
Purchase of treasury stock (15,000)
- -----------------------------------------------------------------------
Balance, December 31, 1999 39,262,522
Stock issued under employee benefit plans 59,156
Purchase of treasury stock (220,217)
- -----------------------------------------------------------------------
Balance, December 31, 2000 39,221,392
Stock issued under employee benefit plans 122,683
- -----------------------------------------------------------------------
Balance, December 31, 2001 39,344,075
=======================================================================
Recent Accounting Pronouncements. On July 20, 2001, the FASB issued Statements
of Accounting Standards No. 141 ("SFAS 141"), Business Combinations, and No. 142
("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 141 supercedes
Accounting Principles Board Opinion No. 16, Business Combinations. The most
significant changes made by SFAS 141 are: (1) requiring that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001; (2) establishing specific criteria for the recognition of intangible
assets separately from goodwill; and (3) requiring unallocated negative goodwill
to be written off immediately as an extraordinary gain. Management has reviewed
SFAS 141 and has determined that the statement has no effect on its current
financial position or results of operations.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17, Intangible
Assets. SFAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The most significant changes made by
SFAS 142 are: (1) goodwill and indefinite-lived intangible assets will no longer
be amortized; (2) goodwill will be tested for impairment at least annually at
the reporting unit level; (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually; and (4) the amortization
period of intangible assets with finite lives will no longer be limited to forty
years. As required, Susquehanna adopted this new standard on Janu-ary 1, 2002.
The $43 million in goodwill outstanding at Decem-ber 31, 2001, will no longer be
amortized going forward pursuant to the new pronouncement. Management estimates
that amortization expense for 2002 will be reduced by approximately $3.3
million. Management has not yet performed an impairment test of goodwill.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS 143"), Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible, long-lived assets
and the associated asset retirement costs. This Statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred by capitalizing it as part of the carrying amount
of the long-lived assets. As required by SFAS 143, Susquehanna will adopt this
new accounting standard on January 1, 2003. Management believes the adoption of
SFAS 143 will not have a material impact on our financial statements.
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, was issued by FASB on October 3,
2001, and is effective for fiscal years beginning after December 15, 2001. This
statement establishes a single accounting model for impairment related to
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121), and APB Opinion No. 30, Reporting the results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001, with early adoption permitted, and in general are to be applied
prospectively. This statement is not expected to have a material impact on
Susque-hanna's financial position or results of operations.
- --------------------------------------------------------------------------------
2. SHORT-TERM INVESTMENTS
The book value of short-term investments and weighted average interest rates on
December 31, 2001 and 2000, were as follows:
- ---------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------
Book Book
Value Rates Value Rates
- ---------------------------------------------------------------------------
Interest-bearingdeposits
in other banks $ 45,455 1.22% $40,463 5.42%
Federal funds sold 8,500 1.63 291 6.50
Money market funds 34,610 1.79 18,281 5.84
- ---------------------------------------------------------------------------
Total $ 88,565 $59,035
===========================================================================
40
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31, 2001
and 2000, are as follows:
- ------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
At December 31, 2001 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $ 1,201 $ 101 $ 0 $ 1,302
U.S. Government agencies 86,329 1,960 0 88,289
Obligations of states and political subdivisions 63,334 1,400 22 64,712
Corporate debt securities 20,073 772 1 20,844
Mortgage-backed securities 799,266 10,718 1,003 808,981
Equity securities 33,373 1,812 0 35,185
- ------------------------------------------------------------------------------------------------------------
$ 1,003,576 $ 16,763 $ 1,026 $1,019,313
- ------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
State and municipal $ 1,778 $ 0 $ 0 $ 1,778
- ------------------------------------------------------------------------------------------------------------
$ 1,778 $ 0 $ 0 $ 1,778
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 1,005,354 $ 16,763 $ 1,026 $1,021,091
============================================================================================================
At December 31, 2000
- ------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury $ 3,249 $ 68 $ 10 $ 3,307
U.S. Government agencies 360,276 870 1,373 359,773
Obligations of states and political subdivisions 63,674 381 133 63,922
Corporate debt securities 16,499 169 27 16,641
Mortgage-backed securities 405,678 884 3,468 403,094
Equity securities 34,074 1,474 0 35,548
- ------------------------------------------------------------------------------------------------------------
$ 883,450 $ 3,846 $ 5,011 $ 882,285
- ------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
State and municipal $ 15,833 $ 343 $ 0 $ 16,176
Mortgage-backed securities 486 0 4 482
- ------------------------------------------------------------------------------------------------------------
$ 16,319 $ 343 $ 4 $ 16,658
- ------------------------------------------------------------------------------------------------------------
Total investment securities $ 899,769 $ 4,189 $ 5,015 $ 898,943
============================================================================================================
At December 31, 2001 and 2000, investment securities with a carrying value
of $611,065 and $475,725, respectively, were pledged to secure public funds and
for other purposes as required by law.
There were no invesment securities whose ratings were less than investment
grade at December 31, 2001 and 2000.
The amortized cost and fair value of U.S. Treasury, U.S. Gov- ernment
agencies, obligations of states and political subdivisions, corporate debt
securities, and mortgage-backed securities, at December 31, 2001, by contractual
maturity, are shown following. 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.
41
- ----------------------------------------------------------------------
Amortized Fair
Cost Value
- ----------------------------------------------------------------------
Securities Available-for-Sale:
Within one year $ 34,041 $ 33,865
After one year but within five years 125,358 128,825
After five years but within ten years 97,256 98,529
After ten years 713,548 722,909
- ----------------------------------------------------------------------
$ 970,203 $ 984,128
- ----------------------------------------------------------------------
Securities Held-to-Maturity:
Within one year $ 0 $ 0
After one year but within five years 310 310
After five years but within ten years 0 0
After ten years 1,468 1,468
- ----------------------------------------------------------------------
$ 1,778 $ 1,778
- ----------------------------------------------------------------------
Total debt securities $ 971,981 $ 985,906
======================================================================
The gross realized gains and gross realized losses on investment securities
transactions are summarized following. During 2001, 2000, and 1999, 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, 2001
- -----------------------------------------------------------------------------
Gross gains $ 652 $ 0
Gross losses 3 0
- -----------------------------------------------------------------------------
Net gains/(losses) $ 649 $ 0
=============================================================================
- -----------------------------------------------------------------------------
For the year ended December 31, 2000
- -----------------------------------------------------------------------------
Gross gains $ 4 $ 0
Gross losses 17 0
- -----------------------------------------------------------------------------
Net gains/(losses) $ (13) $ 0
=============================================================================
- -----------------------------------------------------------------------------
For the year ended December 31, 1999
- -----------------------------------------------------------------------------
Gross gains $ 998 $ 1
Gross losses 18 3
- -----------------------------------------------------------------------------
Net gains/(losses) $ 980 $(2)
=============================================================================
Interest earned on investment securities for the years ended December 31 was as
follows:
- --------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------
Taxable $ 51,247 $ 53,238 $ 50,485
Tax-advantaged 3,297 4,195 5,232
- --------------------------------------------------------------------
Total $ 54,544 $ 57,433 $ 55,717
====================================================================
42
- --------------------------------------------------------------------------------
4. LOANS AND LEASES
At December 31, loans and leases, net of unearned income ($20,381 at December
31, 2001, and $53,239 at December 31, 2000), were as follows:
- ------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------
Commercial, financial,
and agricultural $ 434,780 $ 371,320
Real estate--construction 359,445 264,182
Real estate--mortgage 1,963,094 1,933,772
Consumer 325,170 350,707
Leases 437,009 513,629
- ------------------------------------------------------------------
Total $ 3,519,498 $ 3,433,610
==================================================================
- ------------------------------------------------------------------
Net investment in direct financing leases is as follows:
- ------------------------------------------------------------------
Minimum lease payments
receivable $ 175,893 $ 172,775
Estimated residual value of leases 299,433 391,625
Unearned income under lease
contracts (38,317) (50,771)
- ------------------------------------------------------------------
Total leases $ 437,009 $ 513,629
==================================================================
During 2000, Hann originated $209 million in leases for resale. On December
29, 2000, Hann sold $190 million of operating leases in a sale-leaseback
transaction. The remaining $19 million are held by Hann as collateral in the
transaction and are recorded as lease financing receivables. Under the structure
of the sale of the automobile leases, Hann sells the ownership of the
automobiles and leases the vehicles back from the investors in a sale-leaseback
transaction.
The original term of the leaseback transaction is approximately eight
years, with an early buyout option on January 14, 2007. The difference in lease
payments received from the consumer and paid to the investor, net of amortized
costs, is recognized in vehicle origination and servicing fees on the statements
of income.
In conjunction with the transaction, Susquehanna entered into an interest
rate swap agreement to fix the return to Susquehanna and Hann. A deferred loss
of $14 million was recognized on the swap and will be amortized over the
estimated life of the transaction.
Listed below are Hann's minimum future lease payments under this
arrangement.
- ---------------------------------------
2002 $ 23,713
2003 23,713
2004 23,713
2005 27,665
2006 30,035
Subsequent years 63,905
- ---------------------------------------
$ 192,744
=======================================
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. Susque-hanna 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
2001, 2000, and 1999 follows:
- --------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------
Balance--January 1 $ 35,246 $ 35,975 $ 27,225
- --------------------------------------------------------
Additions 22,587 48,735 28,273
Deductions:
Amounts collected 19,258 46,599 24, 657
Other changes (10,075) (2,865) 5,134
- --------------------------------------------------------
Balance--December 31 $ 28,500 $ 35,246 $ 35,975
========================================================
Substantially all of Susquehanna's loans and leases are to enterprises and
individuals in Pennsylvania, New Jersey, New York, Maryland, and West Virginia.
Susquehanna, as shown in Table 11, has no concentration of loans to borrowers in
any one industry, or related industry, which exceeds 10% of total loans.
An analysis of impaired loans at December 31, 2001 and 2000, is presented
as follows:
- ---------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------
Impaired loans without a related reserve $ 7,252 $ 4,379
Impaired loans with a reserve 2,111 2,970
- ---------------------------------------------------------------
Total impaired loans $ 9,363 $ 7,349
===============================================================
Reserve for impaired loans $ 560 $ 866
===============================================================
An analysis of impaired loans for the years ended December 31, 2001 and 2000, is
presented as follows:
- ---------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------
Average balance of impaired loans $11,865 $10,645
Interest income on impaired loans
(cash basis) $ 420 $ 76
===============================================================
43
- --------------------------------------------------------------------------------
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses were as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Balance--January 1 $37,187 $44,465 $39,440
Reserve acquired or
(transferred) 539 (3,057) 0
Provision charged to
operating expenses 7,310 3,726 11,203
- -------------------------------------------------------------------------------
45,036 45,134 50,643
- -------------------------------------------------------------------------------
Charge-offs 9,424 9,700 8,419
Recoveries 2,086 1,753 2,241
- -------------------------------------------------------------------------------
Net charge-offs 7,338 7,947 6,178
- -------------------------------------------------------------------------------
Balance--December 31 $37,698 $37,187 $44,465
===============================================================================
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
Property, buildings, and equipment, at December 31, were as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Land $ 10,377 $ 9,706
Buildings 50,871 48,222
Furniture and equipment 61,282 60,462
Leasehold improvements 7,447 6,027
Land improvements 925 738
- --------------------------------------------------------------------------------
$130,902 $125,155
- --------------------------------------------------------------------------------
Less: accumulated depreciation
and amortization 70,839 66,852
- --------------------------------------------------------------------------------
$ 60,063 $ 58,303
================================================================================
Depreciation and amortization expense charged to operations amounted to
$8,357 in 2001, $7,594 in 2000, and $6,881 in 1999.
All subsidiaries lease certain banking branches and equipment under
operating leases which expire on various dates through 2015. Renewal options are
available for periods up to 20 years. Minimum future rental commitments under
non-cancellable leases, as of December 31, 2000, are as follows:
- --------------------------------------------------------------------------------
Operating Leases
- --------------------------------------------------------------------------------
2002 $ 3,434
2003 3,142
2004 2,857
2005 2,278
2006 1,589
Subsequent years 5,500
- --------------------------------------------------------------------------------
$ 18,800
================================================================================
Total rent expense charged to operations amounted to $4,468 in 2001, $3,887
in 2000, and $3,475 in 1999.
- --------------------------------------------------------------------------------
7. DEPOSITS
Deposits at December 31 were as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Noninterest-bearing:
Demand $ 529,162 $ 462,297
Interest-bearing:
Interest-bearing demand 915,080 817,866
Savings 435,959 413,878
Time 1,322,494 1,303,297
Time of $100 or more 281,636 251,675
- --------------------------------------------------------------------------------
Total deposits $3,484,331 $3,249,013
================================================================================
44
- --------------------------------------------------------------------------------
8. BORROWINGS
Short-Term Borrowings
Short-term borrowings and weighted average interest rates, at December 31, were
as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------
Securities sold under repurchase agreements $158,140 3.28% $198,573 5.72%
Treasury tax and loan notes 11,663 1.50 6,763 6.25
- --------------------------------------------------------------------------------
$169,803 $205,336
================================================================================
Federal Home Loan Bank Borrowings
- --------------------------------------------------------------------------------
December 31 2001 2000
- --------------------------------------------------------------------------------
Due 2001, 5.27% to 6.76% $ 0 $ 111,250
Due 2002, 0.00% to 4.12% 28,800 1,500
Due 2003, 2.99% to 5.98% 145,800 114,700
Due 2004, 3.56% to 4.95% 180,200 15,000
Due 2006, 4.73% to 6.65% 30,580 691
Due 2008, 5.43% to 5.50% 75,000 75,000
Due 2009, 5.34% 3,000 3,000
Due 2010, 6.01% to 6.17% 42,750 42,750
Due 2011, 3.25% to 5.33% 60,080 83
Due 2012, 3.25% 144 150
Due 2013, 5.94% 188 199
Due 2014, 5.00% to 6.51% 1,021 1,041
Due 2018, 6.00% 339 343
Due 2019, 4.50% to 5.40% 245 194
Due 2020, 4.50% to 6.00% 2,433 2,053
- --------------------------------------------------------------------------------
$ 570,580 $ 367,954
================================================================================
Vehicle Financing
Prior to 2000, Hann originated leases for other investors and financial
institutions that contained Hann's guarantee for the residual values and any
credit losses. Accounting principles generally accepted in the United States of
America require Hann to reflect the entire amount of the lease obligation, on
the balance sheet. Accordingly, an obligation under the lease contract with the
same terms as the lease assets is recorded as vehicle financing in the
borrowings section of the balance sheet. The contractual runoff of these
obligations is projected to be $47,058 in 2002, $50,811 in 2003, $54,844 in
2004, and $18,709 in 2005 and beyond.
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 $1.130 billion and $934 million, of which $571 million and
$368 million were outstanding at December 31, 2001 and 2000, respectively. At
December 31, 2001, Susquehanna subsidiaries could borrow an additional $559
million based on qualifying collateral. Such additional borrowings would require
the subsidiaries to increase their investment in FHLB stock by approximately $25
million.
Long-Term Debt
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------
Senior notes due February 1, 2003 $ 35,000 6.30% $ 35,000 6.30%
Term note due July 19, 2003 10,000 6.09 10,000 6.09
Term note due July 19, 2003 5,000 7.35 5,000 7.35
Term note due July 19, 2004 5,000 4.48 -- --
Subordinate notes due February 1, 2005 50,000 9.00 50,000 9.00
- --------------------------------------------------------------------------------
$105,000 $100,000
================================================================================
The notes require interest-only payments throughout their term with the entire
principal balance paid at maturity. Susquehanna guarantees the $20 million in
term notes for the holder of these instruments.
45
- --------------------------------------------------------------------------------
9. INCOME TAXES
The components of the provision for income taxes are as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Current $ 11,197 $ 464 $ 19,009
Deferred 14,424 24,229 (504)
- -------------------------------------------------------------------------------
Total $ 25,621 $ 24,693 $ 18,505
===============================================================================
The provision for income taxes differs from the amount derived from applying the
statutory income tax rate to income before income taxes as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Provision for statutory
rates $ 28,468 $ 27,879 $ 21,710
Tax-advantaged income (2,033) (2,595) (2,857)
Other, net (814) (591) (348)
- -------------------------------------------------------------------------------
Total $ 25,621 $ 24,693 $ 18,505
===============================================================================
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/(liability) as of December 31
were as follows:
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $ 13,690 $ 13,991 $ 16,539
Accrued pension expense 872 904 1,180
Deferred directors' fees 570 564 564
Deferred compensation 1,005 1,103 775
Nonaccrual loan interest 1,096 996 1,398
Core deposit intangible 0 0 101
Purchase accounting 442 537 493
Suspended losses 4,085 18,665 38,311
Alternative minimum tax
credit carryover 1,091 0 0
Other assets 1,436 2,696 4,835
Deferred tax liabilities:
Deferred loan costs (1,474) (2,328) (1,310)
FHLB stock dividends (372) (395) (395)
Premises and equipment (2,532) (2,359) (2,208)
Operating lease income, net (50,975) (54,993) (56,116)
Recapture of savings banks'
bad debt reserve 0 (90) (344)
Unrealized investment
securities (gains)/losses (5,632) 408 6,961
Unrealized gain on recorded
interest in securitized assets (1,296) 0 0
Deferred intercompany gain (4,798) 0 0
Other liabilities (1,517) (2,248) (2,551)
- -------------------------------------------------------------------------------
Net deferred income tax
asset/(liability) $(44,309) $(22,549) $ 8,233
===============================================================================
- --------------------------------------------------------------------------------
10. 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 Susque-hanna has in particular classes of
financial instruments.
Susquehanna's exposure to credit loss in the event of nonper-formance 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, 2001 and
2000, are as follows:
- --------------------------------------------------------------------------------
Contractual 2001 2000
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Standby letters of credit $ 86,161 $ 37,313
Commitments to originate loans 360,690 175,929
Unused portion of home equity
and credit card lines 164,714 171,836
Other unused commitments,
principally commercial lines
of credit 424,945 517,463
46
- --------------------------------------------------------------------------------
11. 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 Sheets 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 and Leases. 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.
FHLB Borrowings, Vehicle Financing, and Long-Term Debt. Fairvalues 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:
- -----------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 149,233 $ 149,233 $ 129,101 $ 129,101
Short-term investments 88,565 88,565 59,035 59,035
Investment securities 1,021,091 1,021,091 898,604 898,943
Loans and leases, net of unearned income 3,519,498 3,581,495 3,433,610 3,423,848
Liabilities:
Deposits 3,484,331 3,520,173 3,249,013 3,263,437
Short-term borrowings 169,803 169,803 205,336 205,336
FHLB borrowings 570,580 578,333 367,954 364,851
Vehicle financing 171,462 170,587 357,522 352,891
Long-term debt 105,000 109,919 100,000 99,668
47
- --------------------------------------------------------------------------------
12. 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
- --------------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 38,436 $ 35,151 $ 3,604 $ 3,099
Service cost 2,015 1,790 137 141
Interest cost 2,788 2,737 273 250
Plan participants' contributions 0 0 147 0
Amendments 402 96 0 70
Actuarial (gain)/loss (501) 614 (64) 131
Benefits paid (2,392) (1,952) (220) (87)
- --------------------------------------------------------------------------------------
Benefit obligation at end of year $ 40,748 $ 38,436 $ 3,877 $ 3,604
- --------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of
year $ 44,870 $ 47,352 $ 0 $ 0
Actual return on plan assets (2,043) (534) 0 0
Employer contributions 71 4 73 87
Plan participants' contributions 0 0 147 0
Benefits paid (2,392) (1,952) (220) (87)
- --------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 40,506 $ 44,870 $ 0 $ 0
- --------------------------------------------------------------------------------------
Funded status $ (241) $ 6,434 $(3,877) $(3,604)
Unrecognized net actuarial gain (1,329) (7,163) (1,009) (954)
Unrecognized prior service cost (1,561) (2,197) 364 410
Unrecognized transition asset (345) (413) 1,251 1,364
- --------------------------------------------------------------------------------------
Accrued benefit cost $ (3,476) $ (3,339) $(3,271) $(2,784)
======================================================================================
- ----------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ----------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Components of Net Periodic Benefit
Expense/(Income)
Service cost $ 2,015 $ 1,790 $ 1,916 $ 137 $ 141 $ 146
Interest cost 2,788 2,737 2,505 273 250 212
Expected return on plan assets (3,967) (4,202) (3,962) 0 0 0
Amortization of prior service cost (235) (269) (277) 46 46 41
Amortization of transition asset (68) (68) (68) 113 113 113
Amortization of net actuarial gain (324) (796) (305) (9) (46) (28)
- ----------------------------------------------------------------------------------------------
Net periodic benefit expense/(income) $ 209 $ (808) $ (191) $ 560 $ 504 $ 484
==============================================================================================
Weighted-Average Assumptions at Year-End
Discount rate 7.25% 8.00% 8.00% 7.25% 7.50% 8.00%
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 56,231 and 54,078 shares of Susquehanna common
stock at December 31, 2001 and 2000, 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 $1,253 in 2001, $1,169 in 2000, and $1,192 in
1999.
Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows
employees to purchase Susquehanna common stock up to 5% of their salary at a
discount to the market price, through payroll deductions.
On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc.
("Cardinal"), a Pennsylvania bank holding company. Cardinal, prior to the merger
with Susquehanna, had issued 135,099 Stock Purchase Options to the members of
Cardinal's Board of Directors. Susquehanna succeeded Cardinal as a party to the
options as a result of the merger. The option prices range from a low of $6.44
to a high of $10.25.
Susquehanna implemented an Equity Compensation Plan ("Compensation Plan")
in 1997 under which Susquehanna may grant options to its employees and directors
for up to 2,462,500
48
shares of common stock. Under the Compensation Plan, the exercise price of each
nonqualified 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 $13.00 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 grant is
estimated on the date of grant using the Black-Scholes option-valuation model
based upon the assumptions noted below.
The pro forma effects on net income include both the Compensation Plan and
the ESPP.
- ----------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year: 1,470,529 $ 15.90 1,094,625 $ 16.76 892,870 $ 15.36
Granted 242,251 17.25 382,500 13.31 294,117 18.19
Forfeited 34,209 15.89 2,500 13.31 0 0
Exercised 75,824 11.08 4,096 6.90 92,362 7.81
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,602,747 $ 16.33 1,470,529 $ 15.90 1,094,625 $ 16.76
======================================================================================================================
Outstanding at end of year:
Granted prior to 1999 722,847 $ 16.83 572,193 $ 12.96 576,289 $ 12.92
Granted 1999 278,774 18.19 224,219 24.75 224,219 24.75
Granted 2000 363,750 13.31 294,117 18.19 294,117 18.19
Granted 2001 237,376 17.25 380,000 13.31 0 0
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,602,747 $ 16.33 1,470,529 $ 15.90 1,094,625 $ 16.76
======================================================================================================================
Options exercisable at year-end:
Granted prior to 1999 758,807 $ 15.64 427,599 $ 12.62 302,848 $ 12.16
Granted 1999 0 0 0 0 0 0
Granted 2000 0 0 0 0 0 0
Granted 2001 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 758,807 $ 15.64 427,599 $ 12.62 302,848 $ 12.16
======================================================================================================================
Weighted average remaining contractual maturity
of options outstanding at year-end:
Granted prior to 1999 5.1 years
Granted 1999 7.4 years
Granted 2000 8.4 years
Granted 2001 9.4 years
- ----------------------------------------------------------------------------------------------------------------------
Total 6.9 years
- ----------------------------------------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Dollars Per Share Dollars Per Share Dollars Per Share
- ----------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 1,096 $ 4.52 $ 1,290 $ 3.36 $ 1,321 $ 4.49
Fair value disclosures pro forma effect on:
Net income (746) (797) (328)
Basic earnings per share (0.02) (0.02) (0.01)
Diluted earnings per share N/A* N/A* 0.00
- ----------------------------------------------------------------------------------------------------------
Weighted-average fair value assumptions:
Dividend yield 3.5% 3.5% 3.0%
Expected volatility 23.5% 23.0% 22.0%
Risk-free interest rate 5.5% 6.6% 5.7%
Expected term 7 years 7 years 7 years
* For the years ended December 31, 2001 and 2000, the application of SFAS 123
would have an anti-dilutive effect.
49
- -------------------------------------------------------------------------------
13. SUSQUEHANNA BANCSHARES, INC. (Parent Only)
CONDENSED BALANCE SHEETS
- -------------------------------------------------------------------------------
December 31 2001 2000
- -------------------------------------------------------------------------------
Assets
Cash in subsidiary bank $ 2,117 $ 1,037
Investment in consolidated
subsidiaries at equity in net assets 567,277 526,150
Other investment securities 2,690 2,414
Premises and equipment (net) 2,703 2,649
Other assets 9,592 11,070
- -------------------------------------------------------------------------------
Total assets $584,379 $ 543,320
===============================================================================
Liabilities
Long-term debt $ 85,000 $ 85,000
Accrued taxes and expenses payable 5,843 4,883
- -------------------------------------------------------------------------------
Total liabilities 90,843 89,883
- -------------------------------------------------------------------------------
Equity
- -------------------------------------------------------------------------------
Common stock ($2 par value) 78,796 78,796
Surplus 57,986 57,872
Retained earnings 345,508 320,020
- -------------------------------------------------------------------------------
Accumulated other comprehensive
income, net of taxes 12,009 (757)
Less: Treasury stock at cost 763 2,494
- -------------------------------------------------------------------------------
Total stockholders' equity 493,536 453,437
- -------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $584,379 $ 543,320
===============================================================================
- --------------------------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. (Parent only)
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
Year ended December 31 2001 2000 1999
- -------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 68,821 $ 71,581 $ 35,814
Interest, dividends, and gains on
sales of investment securities 419 3,145 959
Interest and management fee
from subsidiaries 37,506 22,840 3,408
- -------------------------------------------------------------------------------
Total income 106,746 97,566 40,181
- -------------------------------------------------------------------------------
Expenses
Interest expense 6,864 6,863 6,864
Restructuring charges 0 0 3,410
Other expenses 36,786 31,872 7,145
- -------------------------------------------------------------------------------
Total expenses 43,650 38,735 17,419
- -------------------------------------------------------------------------------
Income before taxes, and equity
in undistributed income of
subsidiaries 63,096 58,831 22,762
Income tax provision/(benefit) 421 (125) (1,470)
Equity in undistributed income
of subsidiaries (6,959) (3,994) 19,291
- -------------------------------------------------------------------------------
Net Income $ 55,716 $ 54,962 $ 43,523
===============================================================================
- -------------------------------------------------------------------------------
SUSQUEHANNA BANCSHARES, INC. (Parent only)
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Year ended December 31 2001 2000 1999
- -------------------------------------------------------------------------------
Operating Activities
Net income $ 55,716 $ 54,962 $ 43,523
Adjustment to reconcile net
income to cash provided
by operating activities:
Depreciation and amortization 666 1,409 357
Equity in undistributed income
of subsidiaries and income
of subsidiaries accrued not
received 6,959 3,994 (19,291)
Decrease/(increase) in other
assets (282) (3,553) (651)
Increase/(decrease) in accrued
expenses payable 960 (2,604) (278)
Other, net (956) 4,585 (959)
- -------------------------------------------------------------------------------
Net cash provided from
operating activities 63,063 58,793 22,701
- -------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities 0 (8) (500)
Proceeds from the sale/maturities
of investment securities 72 0 1,089
Capital expenditures (547) (2,699) (204)
Net infusion of investment in
subsidiaries (33,125) (25,879) (1,814)
- -------------------------------------------------------------------------------
Net cash used for investing
activities (33,600) (28,586) (1,429)
- -------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of common
stock 1,845 772 1,372
Dividends paid (30,228) (27,092) (22,918)
Cash paid for treasury stock 0 (3,097) (287)
- -------------------------------------------------------------------------------
Net cash (used for)/provided
from financing activities (28,383) (29,417) (21,833)
- -------------------------------------------------------------------------------
Net (decrease)/increase in cash
and cash equivalents 1,080 790 (561)
Cash and cash equivalents at
January 1 1,037 247 808
- -------------------------------------------------------------------------------
Cash and cash equivalents at
December 31 $ 2,117 $ 1,037 $ 247
===============================================================================
Cash in subsidiary bank at
December 31 $ 2,117 $ 1,037 $ 247
===============================================================================
50
- --------------------------------------------------------------------------------
14. EARNING PER SHARE
The following table sets forth the calculation of basic and diluted earnings per
share for the years ended below:
- -----------------------------------------------------------------------------------------------------------------------------
December 31 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income available to common
stockholders $ 55,716 39,263 $ 1.42 $ 54,962 39,262 $ 1.40 $ 43,523 39,320 $ 1.11
Effect of Diluted Securities:
Stock options outstanding 330 103 177
- -----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share:
Income available to common
stockholders and assuming
conversion $ 55,716 39,593 $ 1.41 $ 54,962 39,365 $ 1.40 $ 43,523 39,497 $ 1.10
- --------------------------------------------------------------------------------
15. 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, 2001,
$13,340 is available for dividend distribution to Susquehanna in 2002 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 $3,075
and $1,427 at December 31, 2001 and 2000, respectively.
In accordance with certain lease and retail loan financing arrangements,
Hann maintains prescribed amounts of cash in accounts with the respective
financial institutions. The total of such amounts represents restricted cash of
$41,584 and $32,731 at December 31, 2001 and 2000, respectively.
- --------------------------------------------------------------------------------
16. 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.
51
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,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
January 22, 2002
52
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31,
2001 and 2000, are as follows:
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Quarter Ended Dec31 Sep30 Jun30 Mar31 Dec31 Sep30 Jun30 Mar31
- ----------------------------------------------------------------------------------------------------------------------
Interest income $83,386 $86,683 $84,833 $86,393 $89,360 $89,263 $88,050 $86,743
- ----------------------------------------------------------------------------------------------------------------------
Interest expense 38,517 42,756 42,296 45,482 48,290 47,846 46,406 45,922
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 44,869 43,927 42,537 40,911 41,070 41,417 41,644 40,821
- ----------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 1,891 1,740 1,833 1,846 1,453 766 643 864
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan and lease losses 42,978 42,187 40,704 39,065 39,617 40,651 41,001 39,957
- ----------------------------------------------------------------------------------------------------------------------
Other income 21,660 20,796 21,191 20,519 19,399 19,072 18,476 17,063
- ----------------------------------------------------------------------------------------------------------------------
Other expenses 43,215 42,054 41,287 41,207 39,141 39,159 39,693 37,588
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,423 20,929 20,608 18,377 19,875 20,564 19,784 19,432
- ----------------------------------------------------------------------------------------------------------------------
Applicable income taxes 6,748 6,592 6,400 5,881 6,161 6,375 6,133 6,024
- ----------------------------------------------------------------------------------------------------------------------
Net income $14,675 $14,337 $14,208 $12,496 $13,714 $14,189 $13,651 $13,408
======================================================================================================================
Earnings per common share: Basic $ 0.37 $ 0.36 $ 0.36 $ 0.32 $ 0.35 $ 0.36 $ 0.35 $ 0.34
Diluted 0.37 0.36 0.36 0.32 0.35 0.36 0.35 0.34
Market for Susquehanna Bancshares, Inc., 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 2001 and 2000.
- --------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------
Quarterly Quarterly
Market Price Dividend Market Price Dividend
- --------------------------------------------------------------------------
First Quarter $18.88-$15.00 $0.19 $15.88-$11.25 $0.17
Second Quarter $20.81-$16.25 $0.19 $15.00-$12.38 $0.17
Third Quarter $22.83-$18.15 $0.19 $15.44-$12.00 $0.17
Fourth Quarter $22.24-$19.95 $0.20 $17.98-$12.88 $0.19
53
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.
54
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 2002 Annual Meeting of Shareholders (the "2002 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 2002 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 2002 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 2002 Proxy
Statement in the Certain Relationships and Related Transaction section, and is
incorporated herein by reference.
55
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. None.
(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.
56
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/ William J. Reuter
--------------------------------
William J. Reuter, President and Chief
Executive Officer
Dated: March 18, 2002
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/ William J. Reuter President, Chief Executive March 18, 2002
- --------------------------- Officer and Director
(William J. Reuter)
/s/ Drew K. Hostetter Executive Vice President, March 18, 2002
- --------------------------- Treasurer and Chief
(Drew K. Hostetter) Financial Officer
/s/ Robert S. Bolinger Director March 18, 2002
- ---------------------------
(Robert S. Bolinger)
/s/ Chloe R. Eichelberger Director March 21, 2002
- ---------------------------
(Chloe R. Eichelberger)
/s/ James G. Apple Director March 21, 2002
- ---------------------------
(James G. Apple)
/s/ Wayne E. Alter, Jr. Director March 20, 2002
- ---------------------------
(Wayne E. Alter, Jr.)
/s/ John M. Denlinger Director March 18, 2002
- ---------------------------
(John M. Denlinger)
/s/ Owen O. Freeman, Jr. Director March 18, 2002
- ---------------------------
(Owen O. Freeman, Jr.)
/s/ Henry H. Gibbel Director March 18, 2002
- ---------------------------
(Henry H. Gibbel)
/s/ William B. Zimmerman Director March 18, 2002
- ---------------------------
(William B. Zimmerman)
/s/ T. Max Hall Director March 19, 2002
- ---------------------------
(T. Max Hall)
57
SECURITIES AND EXCHANGE COMMISSION
SUSQUEHANNA BANCSHARES, INC.
Form 10-K, December 31, 2001
[SIGNATURES CONTINUED]
Signature Title Date
- --------- ----- ----
/s/ Michael J. Wimmer Director March 20, 2002
- ---------------------------
(Michael J. Wimmer)
/s/ C. William Hetzer, Jr. Director March 18, 2002
- ---------------------------
(C. William Hetzer, Jr.)
/s/ Guy W. Miller, Jr. Director March 18, 2002
- ---------------------------
(Guy W. Miller, Jr.)
/s/ George J. Morgan Director March 18, 2002
- ---------------------------
(George J. Morgan)
/s/ Roger V. Wiest Director March 18, 2002
- ---------------------------
(Roger V. Wiest)
[END OF SIGNATURE PAGES]
58
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
- --------------- --------------------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession. Not Applicable.
(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 of
Susquehanna's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of 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.
(iii) By-laws. Incorporated by reference to Exhibit 3 of
Susquehanna's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
(iv) 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.
(i) Susquehanna's Key Employee Severance Pay Plan,
adopted in 1999 and amended on May 26, 2000 and on
February 22, 2001, is incorporated by reference to
Exhibit 10 of Susquehanna's Annual Report on Form
10-K for fiscal year ended December 31, 1999 and to
Exhibit 10(i) of Susquehanna's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.
(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 Equity Compensation Plan, as amended on
May 25, 2001, is filed herewith as Exhibit 10(iii).
(iv) Susquehanna's Supplemental Executive Retirement Plan
as amended and restated effective January 1, 1998 is
filed herewith as Exhibit 10(iv).
(v) Forms of The Insurance Trust for Susquehanna
Bancshares Banks and Affiliates Split Dollar
Agreement and Split Dollar Policy Endorsement are
filed herewith as Exhibit 10(v).
59
(vi) 2002 Amended Servicing Agreement dated January 1,
2002 between Boston Service Company, Inc. t/a Hann
Financial Service Corp. and Auto Lenders Liquidation
Center, Inc. is filed herewith as Exhibit 10(vi).
(vii) Guaranty Agreement dated December 31, 2001 by Michael
J. Wimmer in favor of Boston Service Company, Inc. is
filed herewith as Exhibit 10(vii).
(viii) Employment Agreement between Susquehanna and William
J. Reuter, dated March 21, 2001, is incorporated by
reference to Exhibit 10(vi) of Susquehanna's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001. Amendment dated February 28, 2002
is filed herewith as Exhibit 10(viii).
(ix) Employment Agreement between Susquehanna and Gregory
A. Duncan, dated March 14, 2001, is incorporated by
reference to Exhibit 10(vii) of Susquehanna's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001. Amendment dated February 28, 2002,
is filed herewith as Exhibit 10(ix).
(x) Employment Agreement between Susquehanna and Drew K.
Hostetter, dated March 12, 2001, is incorporated by
reference to Exhibit 10(viii) of Susquehanna's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001. Amendment dated February 28, 2002,
is filed herewith as Exhibit 10(x).
(xi) Employment Agreement between Susquehanna and
Williamsport National Bank and Charles W. Luppert,
dated March 20, 2001, is incorporated by reference to
Exhibit 10(ix) of Susquehanna's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
Amendment dated February 28, 2002, is filed herewith
as Exhibit 10(xi).
(xii) Employment Agreement between Boston Service Company,
Inc. t/a Hann Financial Service Corp. and Michael J.
Wimmer, dated February 1, 2000, is incorporated by
reference to Exhibit 10(x) of Susquehanna's Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001.
(xiii) Consulting Agreement between Susquehanna and Robert
S. Bolinger, dated June 4, 2001, is filed herewith as
Exhibit 10(xiii).
(xiv) Guaranty Agreement dated March 11, 2002 by Michael J.
Wimmer in favor of Boston Service Company, Inc. is
filed herewith as Exhibit 10(xiv).
(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.
60
(23) Consents of experts and counsel. Filed herewith.
(24) Power of Attorney. Not Applicable.
(99) Additional Exhibits. Not Applicable.
61