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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to ____________________________
Commission file number 0-10674
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Susquehanna Bancshares, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2201716
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
26 North Cedar St., Lititz, Pennsylvania 17543
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (717) 626-4721
-----------------------------
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of July 31, 2002, the Registrant had 39,608,918 shares of common
stock outstanding.
SUSQUEHANNA BANCSHARES, INC.
INDEX
SEQUENTIAL
PAGE
REFERENCE
PART I. FINANCIAL INFORMATION 3
Item 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets - as of June 30, 2002 and 2001 3
Consolidated Statements of Income - for the three and six months
ended June 31, 2002 and 2001 4
Consolidated Statements of Cash Flow - for the three and six month
periods ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 11-18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 19 - 21
PART II. OTHER INFORMATION 22
Item 2. CHANGES OF SECURITIES AND USE OF PROCEEDS 22
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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June 30 December 31 June 30
(Dollars in thousands) 2002 2001 2001
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ASSETS
Cash and due from banks $ 113,414 $ 149,233 $ 119,013
Short-term investments:
Restricted 31,149 41,584 35,823
Unrestricted 19,720 46,981 39,282
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Total short-term investments 50,869 88,565 75,105
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Investment securities available for sale, at fair value 1,038,522 1,019,313 954,562
Investment securities held to maturity, at amortized cost 1,689 1,778 1,865
(Fair values of $1,689, $1,778 and $1,865)
Loans and leases, net of unearned income 3,737,178 3,519,498 3,481,729
Less: Allowance for loan and lease losses 39,148 37,698 38,407
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Net loans and leases 3,698,030 3,481,800 3,443,322
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Premises and equipment (net) 59,361 60,063 57,459
Accrued income receivable 21,521 21,268 22,688
Bank-owned life insurance 123,269 120,174 116,946
Goodwill 54,396 43,496 41,052
Intangible assets with finite lives 5,294 5,622 2,397
Other assets 110,892 97,642 101,298
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Total assets $5,277,257 $5,088,954 $4,935,707
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LIABILITIES
Deposits:
Demand $ 545,375 $ 529,162 $ 482,101
Interest-bearing demand 976,486 915,080 807,497
Savings 468,774 435,959 422,863
Time 1,317,126 1,322,494 1,304,432
Time of $100 or more 323,204 281,636 248,559
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Total deposits 3,698,030 3,484,331 3,265,452
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Short-term borrowings 219,003 169,803 210,968
FHLB borrowings 565,121 570,580 508,074
Vehicle financing 106,403 171,462 284,723
Long-term debt 105,000 105,000 100,000
Accrued interest, taxes, and expenses payable 51,474 36,652 48,327
Other liabilities 82,160 57,590 44,499
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Total liabilities 4,760,126 4,595,418 4,462,043
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STOCKHOLDERS' EQUITY
Common stock
Authorized: 100,000,000 ($2.00 par value)
Issued: 39,433,663, 39,398,190, and 39,398,190, respectively 78,867 78,796 78,796
Surplus 58,434 57,986 57,766
Retained earnings 360,204 345,508 331,820
Accumulated other comprehensive income,
net of taxes of $10,568, $6,928 and $4,216, respectively 19,626 12,009 7,462
Less: Treasury stock, (0, 54,115 and 133,112
common shares at cost, respectively) 0 763 2,180
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Total stockholders' equity 517,131 493,536 473,664
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Total liabilities and stockholders' equity $5,277,257 $5,088,954 $4,935,707
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The accompanying notes are an integral part of these financial statements.
3
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------- ------------------------
Three Months Ended Six Months Ended
June 30 June 30
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(Dollars in thousands, except per share) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------- ------------------------
INTEREST INCOME
Interest and fees on loans and leases $65,736 $71,526 $130,024 $143,687
Interest on investment securities: Taxable 13,833 11,403 27,116 23,596
Tax-exempt 618 848 1,322 1,749
Interest on short-term investments 263 1,056 700 2,194
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Total interest income 80,450 84,833 159,162 171,226
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INTEREST EXPENSE
Interest on deposits:
Interest-bearing demand 3,002 4,830 5,908 10,647
Savings 1,103 1,703 2,180 3,593
Time 16,386 21,537 34,152 43,753
Interest on short-term borrowings 797 2,175 1,472 5,062
Interest on FHLB borrowings 7,418 4,692 14,679 9,357
Interest on vehicle financing 1,988 5,425 4,594 11,482
Interest on long-term debt 2,000 1,934 3,993 3,884
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Total interest expense 32,694 42,296 66,978 87,778
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Net interest income 47,756 42,537 92,184 83,448
Provision for loan and lease losses 2,434 1,833 4,707 3,679
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Net interest income after provision for loan and lease losses 45,322 40,704 87,477 79,769
- -------------------------------------------------------------------------------------------------- ------------------------
OTHER INCOME
Service charges on deposit accounts 4,207 3,269 8,050 6,271
Vehicle origination and servicing fees 6,864 6,277 13,896 12,052
Merchant credit card fees 2,740 2,353 6,467 6,119
Asset management fees 2,521 1,503 4,973 3,602
Income from fiduciary-related activities 1,247 1,313 2,498 2,531
Gain on sale of loans and leases 727 2,374 2,139 2,957
Income from bank-owned life insurance 1,630 1,574 3,348 3,080
Other operating income 2,474 2,528 5,309 5,098
Investment security gains/(losses) 4 0 145 0
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Total other income 22,414 21,191 46,825 41,710
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OTHER EXPENSES
Salaries and employee benefits 19,772 18,551 39,411 36,188
Net occupancy expense 3,077 2,734 6,175 5,760
Furniture and equipment expense 2,144 1,925 4,219 4,014
Amortization of intangible assets 158 861 326 1,759
Vehicle residual value expense 1,605 1,243 3,270 2,544
Vehicle delivery and preparation expense 2,046 1,394 3,608 2,328
Merchant credit card servicing expense 2,603 2,275 6,250 5,824
Other operating expenses 13,695 12,304 26,928 24,077
- -------------------------------------------------------------------------------------------------- ------------------------
Total other expenses 45,100 41,287 90,187 82,494
- -------------------------------------------------------------------------------------------------- ------------------------
Income before income taxes 22,636 20,608 44,115 38,985
Provision for income taxes 7,017 6,400 13,676 12,281
- -------------------------------------------------------------------------------------------------- ------------------------
NET INCOME $15,619 $14,208 $ 30,439 $ 26,704
================================================================================================== ========================
Per share information:
Basic earnings $ 0.40 $ 0.36 $ 0.77 $ 0.68
Diluted earnings $ 0.39 $ 0.36 $ 0.76 $ 0.68
Cash dividends $ 0.20 $ 0.19 $ 0.40 $ 0.38
Average shares outstanding: Basic 39,398 39,224 39,373 39,223
Diluted 39,891 39,494 39,854 39,475
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The accompanying notes are an integral part of these financial statements.
4
Susquehanna Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
Six months ended June 30, 2002 2001
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OPERATING ACTIVITIES:
Net income $ 30,439 $ 26,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 4,642 6,629
Provision for loan and lease losses 4,707 2,909
(Gain)/loss on securities transactions (145) (18)
Gain on sale of loans (1,899) (2,957)
(Gain)/loss on sale of other real estate owned (63) (43)
Mortgage loans originated for resale (52,294) (52,416)
Sale of mortgage loans originated for resale 58,189 56,308
Leases acquired/originated for resale (79,415) (116,643)
Sale of leases acquired/originated for resale 80,215 118,392
(Increase)/decrease in accrued interest receivable (253) 4,087
Increase in accrued interest payable (1,824) (1,893)
(Increase)/decrease in accrued expenses and taxes payable 16,646 7,838
Other, net (7,537) (16,376)
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Net cash provided by operating activities 51,408 32,521
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INVESTING ACTIVITIES:
Net increase in restricted short-term investments 10,435 (3,092)
Proceeds from the sale of available-for-sale securities 6,003 0
Proceeds from the maturity of investment securities 132,637 354,259
Purchase of available-for-sale securities (147,868) (399,834)
Net (increase)/decrease in loans and leases (226,260) (53,996)
Capital expenditures (290) (1,664)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used for) investing activities (225,343) (104,327)
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FINANCING ACTIVITIES:
Net increase/(decrease) in deposits 146,634 16,439
Net increase/(decrease) in short-term borrowings 49,200 5,632
Net increase/(decrease) in FHLB borrowings (5,459) 140,120
Net increase/(decrease) in vehicle financing (65,059) (72,799)
Proceeds from issuance of common stock 1,282 208
Dividends paid (15,743) (14,904)
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Net cash provided by/(used for) financing activities 110,855 74,696
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (63,080) 2,890
Cash and cash equivalents at January 1 196,214 155,405
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Cash and cash equivalents at June 30 $ 133,134 $ 158,295
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Cash and cash equivalents:
Cash and due from banks $ 113,414 $ 119,013
Unrestricted short-term investments 19,720 39,282
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Cash and cash equivalents at June 30 $ 133,134 $ 158,295
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Interest paid on deposits, short-term borrowings, and long-term debt was
$68,703 and $89,670 in 2002 and 2001, respectively. An income tax refund of
$9,200 was received in 2002 and income taxes of $636 were paid in 2001. Amounts
transferred to other real estate owned were $1,327 in 2002 and $2,498 in 2001.
5
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
Six months ended June 30 STOCK SURPLUS EARNINGS INCOME
- -----------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 2001 $78,796 $57,872 $320,020 ($757)
Comprehensive income:
Net income 26,704
Change in unrealized gain/(loss) on securities, net of
taxes of $4,216 and reclassification adjustment of $0 8,219
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 26,704 8,219
Common stock issued under employee benefit plans (106)
Cash dividends paid:
Per common share of $0.38 (14,904)
- -----------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2001 $78,796 $57,766 $331,820 $ 7,462
- -----------------------------------------------------------------------------------------------------------------------------
Balance - January 1, 2002 $78,796 $57,986 $345,508 $12,009
Comprehensive income:
Net income 30,439
Change in unrealized gain/(loss) on securities, net of
taxes of $3,844 and reclassification adjustment of $145 7,254
Unrealized gain on recorded interest in securitized assets,
net of taxes of $237 363
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 30,439 7,617
Common stock issued under employee benefit plans 71 448
Cash dividends paid:
Per common share of $0.40 (15,743)
- -----------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2002 $78,867 $58,434 $360,204 $19,626
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TREASURY TOTAL
Six months ended June 30 STOCK EQUITY
- -----------------------------------------------------------------------------------------------------
Balance - January 1, 2001 ($2,494) $453,437
Comprehensive income:
Net income 26,704
Change in unrealized gain/(loss) on securities, net of
taxes of $4,216 and reclassification adjustment of $0 8,219
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Total comprehensive income 34,923
Common stock issued under employee benefit plans 314 208
Cash dividends paid:
Per common share of $0.38 (14,904)
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Balance - June 30, 2001 ($2,180) $473,664
- -----------------------------------------------------------------------------------------------------
Balance - January 1, 2002 $ (763) $493,536
Comprehensive income:
Net income 30,439
Change in unrealized gain/(loss) on securities, net of
taxes of $3,844 and reclassification adjustment of $145 7,254
Unrealized gain on recorded interest in securitized assets,
net of taxes of $237 363
- -----------------------------------------------------------------------------------------------------
Total comprehensive income 38,056
Common stock issued under employee benefit plans 763 1,282
Cash dividends paid:
Per common share of $0.40 (15,743)
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Balance - June 30, 2002 $ - $517,131
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ACCOUNTING POLICIES
The information contained in this report is unaudited and is subject to
year-end adjustments. Certain prior year amounts have been reclassified to
conform with current period classifications. The adjustments had no effect on
gross revenues, gross expenses or net income. In the opinion of management, the
information reflects all adjustments necessary for a fair statement of results
for the periods ended June 30, 2002 and 2001.
During the second quarter, managenment revised it's policy for evaluating
loans for impairment. Previously all commercial loans greater than $100 were
evaluated for impairment. Currently, only commercial loans greater than $250
will be evaluated for impairment.
Except as noted above, the accounting policies of Susquehanna Bancshares,
Inc. & Subsidiaries, as applied in the consolidated interim financial statements
presented herein, are substantially the same as those followed on an annual
basis as presented on pages 38 through 40 of the Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
6
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES
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The amortized costs and fair values of securities are as follows:
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June 30, 2002 December 31, 2001
--------------------------------- ------------------------------------------
Amortized cost Fair value Amortized cost Fair value
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Available-for-sale:
U.S. Treasury $ 11,199 $ 11,294 $ 1,201 $ 1,302
U.S. Government agencies 78,577 79,780 86,329 88,289
State & municipal 51,003 52,531 63,334 64,712
Mortgage-backed 823,845 844,996 799,266 808,981
Corporates 12,302 12,948 20,073 20,844
Equities 34,764 36,973 33,373 35,185
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1,011,690 1,038,522 1,003,576 1,019,313
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Held-to-maturity:
State & municipal 1,689 1,689 1,778 1,778
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1,689 1,689 1,778 1,778
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Total investment securities $1,013,379 $1,040,211 $1,005,354 $1,021,091
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LOANS AND LEASES
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Loans and leases, net of unearned income at June 30, 2002 and December 31, 2001, were as follows:
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June 30, December 31,
2002 2001
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Commercial, financial, and agricultural $ 451,385 $ 434,780
Real estate - construction 408,191 359,445
Real estate - mortgage 2,119,381 1,963,094
Consumer 339,317 325,170
Leases 418,904 437,009
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Total loans and leases $3,737,178 $3,519,498
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Net investment in direct financing leases is as follows:
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Minimum lease payments receivable $ 205,292 $ 175,893
Estimated residual value of leases 247,875 299,433
Unearned income under lease contracts (34,263) (38,317)
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Total leases $ 418,904 $ 437,009
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An analysis of impaired loans as of June 30, 2002 and December 31, 2001, is presented as follows:
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June 30, December 31,
2002 2001
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Impaired loans without a related reserve $ 5,475 $ 7,252
Impaired loans with a reserve 3,143 2,111
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Total impaired loans $ 8,618 $ 9,363
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Reserve for impaired loans $ 1,300 $ 560
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An analysis of impaired loans for the three and six month periods ended June 30, 2002 and 2001 is presented as follows:
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Three Months ended June 30, Six Months ended June 30,
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2002 2001 2002 2001
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Average balance of impaired loans $ 9,085 $ 10,047 $ 8,062 $ 10,773
Interest income on impaired loans (cash-basis) 18 98 58 118
7
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BORROWINGS
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June 30, December 31,
2002 2001
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Short-term borrowings at June 30, 2002 and December 31, 2001, were as follows:
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Securities sold under repurchase agreements $210,575 $158,140
Treasury tax and loan notes 8,428 11,663
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Total short-term borrowings $219,003 $169,803
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Long-term debt at June 30, 2002 and December 31, 2001, was as follows:
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Subsidiaries:
Term notes due July, 2003 $ 10,000 $ 10,000
Term notes due July, 2003 5,000 5,000
Term notes due July, 2004 5,000 5,000
Parent:
Senior notes due February, 2003 35,000 35,000
Subordinated notes due February, 2005 50,000 50,000
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Total long-term debt $105,000 $105,000
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EARNINGS-PER-SHARE
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The following tables sets forth the calculation of basic and diluted earnings per share for the three months ended and six months
ended June 30, 2002 and 2001:
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For the three months ended June 30,
------------------------------------------------------------------------------------------
2002 2001
------------------------------------------ -----------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
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Basic Earnings per Share:
Income available to common stockholders $15,619 39,398 $0.40 $14,208 39,224 $0.36
Effect of Diluted Securities:
Stock options outstanding 493 270
-------- --------
Diluted Earnings per Share:
Income available to common stockholders
and assuming conversion $15,619 39,891 $0.39 $14,208 39,494 $0.36
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For the six months ended June 30,
------------------------------------------------------------------------------------------
2002 2001
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Per Share Per Share
Income Shares Amount Income Shares Amount
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Basic Earnings per Share:
Income available to common stockholders $30,439 39,373 $0.77 $26,704 39,223 $0.68
Effect of Diluted Securities:
Stock options outstanding 481 252
-------- --------
Diluted Earnings per Share:
Income available to common stockholders
and assuming conversion $30,439 39,854 $0.76 $26,704 39,475 $0.68
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8
Susquehanna Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires companies to use the purchase method of accounting for all
business combinations initiated after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangibles acquired in a
business combination. SFAS No. 142, which Susquehanna adopted on January 1,
2002, addresses the initial recognition and measurement of intangible assets
acquired outside a business combination and the recognition and measurement of
goodwill and other intangible assets subsequent to acquisition. Under the new
standard, goodwill is no longer amortized. Instead, it is tested for impairment
at least annually. As of June 30, 2002, there was no impairment of goodwill.
Other intangible assets continue to be amortized over their useful lives.
The gross carrying amount and accumulated amortization of identifiable
intangible assets as of June 30, 2002 are as follows:
Gross
Carrying Accumulated
Amount Amortization
-------------- ------------------
Amortized intangible assets:
Core deposit intangibles $ 5,874 ($747)
Favorable lease adjustments 393 (226)
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Total $ 6,267 ($973)
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Unamortized intangible assets:
Goodwill $54,396 N/A
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The following is the activity of the goodwill account since December 31, 2001:
- ---------------------------------------------------------------------------------------------------------------------
Goodwill, December 31, 2001 $43,496
Purchase of The Addis Group 10,900
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Goodwill, June 30, 2002 $54,396
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The following table sets forth the actual and estimated pre-tax amortization expense of amortized intangible assets:
- ---------------------------------------------------------------------------------------------------------------------
Aggregate Amortization Expense:
For the quarter ended June 30, 2002 $ 158
Estimated Amortization Expense:
For the year ended December 31, 2002 $ 632
For the year ended December 31, 2003 632
For the year ended December 31, 2004 632
For the year ended December 31, 2005 632
For the year ended December 31, 2006 632
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9
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The following table sets forth the net income, basic EPS and fully diluted EPS as adjusted to exclude
goodwill amortization expense for the three months and six months ended June 30, 2002 and 2001:
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
Reported net income $ 15,619 $ 14,208 $ 30,439 $ 26,704
Add back: Goodwill amortization - 777 - 1,564
- ---------------------------------------------------------------------------------------------------------
Adjusted net income $ 15,619 $ 14,985 $ 30,439 $ 28,268
=========================================================================================================
Basic earnings per share:
Reported net income $ 0.40 $ 0.36 $ 0.77 $ 0.68
Goodwill amortization - $ 0.02 - 0.04
- ---------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.40 $ 0.38 $ 0.77 $ 0.72
=========================================================================================================
Diluted earnings per share:
Reported net income $ 0.39 $ 0.36 $ 0.76 $ 0.68
Goodwill amortization - $ 0.02 - 0.04
- ---------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.39 $ 0.38 $ 0.76 $ 0.72
=========================================================================================================
10
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Management's discussion and analysis of the significant changes in the
consolidated results of operations, financial condition, and cash flows of
Susquehanna Bancshares, Inc. ("Susquehanna") is set forth below for the periods
indicated.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, 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
essential 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 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 Susquehanna'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.
11
Results of Operations
Summary of 2002 Compared to 2001
Susquehanna's net income for the second quarter of 2002 was $15.6
million, a 9.9% increase from net income of $14.2 million in the second quarter
of 2001. For the first six months of 2002, net income increased 14.0% to $30.4
million from $26.7 million for the same period during 2001. During the second
quarter of 2002, Susquehanna's margin and fee income continued to improve as
they increased by 12.3% and 5.8%, respectively, from the second quarter of 2001
and fee income represented 31.9% of total revenues for the second quarter of
2002. The improvement in margin and fee income was offset by a 9.2% increase in
operating expenses from second quarter 2001 to second quarter 2002. During the
first six months of 2002, Susquehanna's margin and fee income increased by 10.5%
and 9.9%, respectively, from the comparable period of 2001 and fee income
represented 33.7% of total revenues for the first six months of 2002. This
improvement in margin and fee income was offset by a 9.3% increase in operating
expenses from the comparable period of 2001.
Diluted earnings per share ("EPS") increased 8.3% from $0.36 per share
for the second quarter of 2001 to $0.39 per share for the second quarter of
2002. Diluted EPS increased 11.8% for the six months ended June 30, 2002 to
$0.76 from $0.68 for the same period in 2001. Return on average assets ("ROA")
and return on average equity ("ROE") were 1.20% and 12.37%, respectively, in the
second quarter of 2002 compared with 1.20% and 12.15%, respectively, in the
second quarter of 2001. ROA and ROE were 1.19% and 12.24%, respectively, for the
six months ended June 30, 2002 as compared to 1.14% and 11.67%, respectively,
for the same period ended June 30, 2001.
In June 2001, the Financial Accounting Standards Board adopted SFAS
142, Goodwill and Other Intangible Assets. Because of the adoption of SFAS 142,
goodwill amortization ceased in 2002. Had the new rules been in effect last
year, fully diluted earnings per share would have been $ 0.72 and net income
would have been $28.3 million for the six months ended June 30, 2001, resulting
in a 5.6% increase in diluted earnings per share and a 7.7% increase in net
income for the first six months of 2002. Under the new rules, second quarter
2001 fully diluted earnings per share and net income would have been $0.38 and
$15.0 million, respectively, resulting in increases of 2.6% and 4.2%,
respectively, for the second quarter of 2002.
Total assets at June 30, 2002 were $5.3 billion, compared with $4.9
billion at June 30, 2001. Loans of $3.7 billion at June 30, 2002 increased from
$3.5 billion at June 30, 2001, while deposits increased from $3.3 billion at
June 30, 2001 to $3.6 billion at June 30, 2002. Equity capital was $517 million
at June 30, 2002, or $13.11 per share, compared to $474 million, or $12.06 per
share, at June 30, 2001.
The following discussion details the factors that contributed to these
results.
12
Net Interest Income - Taxable Equivalent Basis
Our major source of operating revenues is net interest income, which
rose to a level of $47.8 million in the second quarter of 2002, compared to
$42.5 million for the same period in 2001. For the six months ended June 30,
2002, net interest income was $92.2 million compared with $83.4 million for the
same period of 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 and leases, income from
investment securities and income from short-term investments. The amount of
interest income is dependent upon many factors, including the volume of earning
assets, the general level of interest rates, the dynamics of the change in
interest rates, and levels of non-performing assets. The cost of funds varies
with the amount of funds necessary to support earning assets, the rates paid to
attract and hold deposits, rates paid on borrowed funds, and the levels of
non-interest bearing demand deposits and equity capital.
Table 1 presents average balances, taxable equivalent interest income
and expenses, and yields earned or paid on the assets and liabilities of
Susquehanna. For purposes of calculating taxable equivalent interest income,
tax-exempt interest has been adjusted using a marginal tax rate of 35% in order
to equate the yield to that of taxable interest rates. Net interest income as a
percentage of net interest income and other income was 68.1% for the quarter
ended June 30, 2002, and was 66.7% for the quarter ended June 30, 2001,
respectively. For the six month period ended June 30, 2002 and 2001, net
interest income as a percentage of net interest income and other income was
66.3% and 66.7%, respectively.
Net interest income for the second quarter 2002 increased $5.2 million
compared to the second quarter of 2001. Average earning assets in the second
quarter of 2002 increased $389 million over the same period in 2001, with
average loans increasing $219 million, average investment securities increasing
$214million, and lower yield short-term investments decreasing $44 million.
Average interest-bearing liabilities increased $297 million with average
interest-bearing deposits increasing $237 million. Non-interest bearing demand
deposits increased $77 million in the second quarter of 2002 over the second
quarter of 2001. These factors, coupled with the overall decline in interest
rates, caused the net interest margin to improve to 4.08% in the second quarter
of 2002 from 3.97% in the second quarter of 2001. The margin improvement is
partially attributable to a 128 basis point decrease in the cost of funds,
coupled with a decrease of only 102 basis points in the yield on earning assets.
Net interest income for the six months ended June 30, 2002 increased
$8.7 million compared to the same period in 2001. Average earning assets for the
first six months of 2002 increased $345 million over the same period in 2001,
with average loans increasing $169 million and average investment securities
increasing $194 million. Average interest-bearing liabilities increased $264
million with average interest-bearing deposits increasing $216 million. Average
non-interest bearing demand deposits increased $80 million for the first six
months of 2002 compared with the first six months of 2001. This increased volume
helped the net interest margin improve to 4.01% in the first six months of 2002
from 3.94% during the same period of 2001.
13
Actions by the Board of Governors of the Federal Reserve System to decrease
interest rates primarily caused these basis point decreases.
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"
below.
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.
As illustrated in Table 3, the provision was $2.4 million in the second
quarter of 2002, an increase of $0.6 million from the same period in 2001. Net
charge-offs were $1.8 million for the three-month period ended June 30, 2002
versus $1.3 million in the corresponding three month period ended 2001. For the
six months ended June 30, 2002, the provision was $4.7 million, an increase of
$1.0 million from the $3.7 million provision for the first six months of 2001,
while net charge-offs increased from $2.5 million in 2001 to $3.3 million in
2002.
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. Despite the fact
that interest rates have been lowered, a slowdown of economic growth could
occur. Borrowers may experience difficulty and the level of non-performing loans
and assets, charge-offs and delinquencies could rise and require further
increases to the provision.
Other Income
Non-interest income increased $1.2 million, or 5.8%, from $21.2 million
in the second quarter of 2001, to $22.4 million in the second quarter of 2002.
This quarter's increase resulted primarily from an increase in asset management
fees at Valley Forge Asset Management Corp. (VFAM) and service charges on
deposit accounts at our banking subsidiaries. Non-interest income increased $5.1
million, or 12.3%, from $41.7 million to $46.8 million for the six months ended
June 30, 2002 and 2001, respectively. The six month improvement was primarily
attributed to an increase in deposit service charges of $1.8 million, an
increase in vehicle fees of $1.8 million at Boston Service Company, Inc., t/a
Hann Financial Service Corp. (Hann), and an increase in asset management fees of
$1.4 million at VFAM.
14
Other income as a percentage of net interest income and other income,
was 31.9% for the quarter ended June 30, 2002 compared with 33.3% for the
comparable period of 2001. For the six months ended June 30, 2002 and 2001,
other income as a percentage of net interest income and other income was 33.7%
and 33.3%, respectively.
Other Expenses
Total non-interest expenses increased $3.8 million from $41.2 million
in the second quarter of 2001 to $45.1 million in the second quarter of 2002.
For the six months ended June 30, 2002, total non-interest expenses increased
$7.7 million to $90.2 million from $82.5 million during the same period in 2001.
The quarter to quarter increase was primarily due to increases in salaries and
benefits of 6.6%, or $1.2 million, and other expenses of 11.3%, or $1.4 million,
with the increases consisting of professional fees, insurance, advertising,
communications and software expenses. The increase in salaries and benefits was
primarily due to normal annual salary increases, increased sales force and the
addition of seven banking branches. Four of these branches were acquired from
another institution, while three were newly developed branches. These additional
branches also contributed to the increase in other expense. The six month
increase was due to the same factors as noted above plus a $1.3 million increase
in vehicle delivery and preparation expense due to increased volumes at Hann.
Income Taxes
Susquehanna's effective tax rate decreased slightly to 31.0% for the
second quarter and first six months of 2002 due to the adoption of SFAS 142 and
the cessation of goodwill amortization.
Financial Condition
Risk Assets
Table 2 shows a decrease in non-accrual loans and leases from $18.7
million at June 30, 2001 to $16.8 million at June 30, 2002. Loans past due 90
days or more and still accruing increased from $8.5 million at June 30, 2001 to
$10.0 million at June 30, 2002. The percentage of non-performing assets to
period-end loans and other real estate owned (OREO) decreased from .67% at June
30, 2001 to .53% at June 30, 2002. The percentage of loan loss reserve to
non-performing loans at June 30, 2002 was 233% compared with 205% at June 30,
2001.
Capital Resources
Capital elements for Susquehanna are segmented into two tiers. Tier 1
capital represents shareholders' equity reduced by most intangible assets. Tier
2 capital represents certain allowable long-term debt, the portion of the
allowance for loan and lease losses limited 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."
15
The minimum Tier I capital ratio is 4%; Susquehanna's ratio at June 30,
2002 was 10.3%. The minimum total capital (Tier I and II) ratio is 8%;
Susquehanna's ratio at June 30, 2002 was 11.6%. The minimum leverage ratio is
4%; Susquehanna's leverage ratio at June 30, 2002 was 8.5%. Susquehanna and each
of its banking subsidiaries have leverage and risk-weighted ratios well in
excess of regulatory minimums, and each entity is considered "well-capitalized"
under regulatory guidelines.
16
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest rates and interest differential - taxable equivalent basis
- -----------------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------ ------------------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Short - term investments $ 52,843 $ 263 2.00 $ 97,525 $ 1,056 4.34
Investment securities:
Taxable 958,583 13,833 5.79 724,971 11,403 6.31
Tax - advantaged 54,023 952 7.07 73,511 1,305 7.12
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,012,606 14,785 5.86 798,482 12,708 6.38
- --------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 3,645,093 65,110 7.16 3,430,843 70,953 8.30
Tax - advantaged 48,015 965 8.06 42,677 882 8.29
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,693,108 66,075 7.18 3,473,520 71,835 8.30
- --------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 4,758,557 $ 81,122 6.84 4,369,527 $ 85,599 7.86
------------------------- ---------------------
Allowance for loan and lease losses (39,155) (38,501)
Other non - earning assets 490,699 422,523
- ------------------------------------------------------ -------------
Total assets $5,210,101 $4,753,549
- ------------------------------------------------------ -------------
Liabilities
Deposits:
Interest - bearing demand $ 938,783 $ 3,003 1.28 $ 811,649 $ 4,830 2.39
Savings 467,067 1,103 0.95 421,301 1,703 1.62
Time 1,619,017 16,386 4.06 1,554,427 21,537 5.56
Short - term borrowings 195,226 796 1.64 213,688 2,175 4.08
FHLB borrowings 600,568 7,419 4.95 348,472 4,692 5.40
Vehicle financing 126,500 1,987 6.30 305,629 5,425 7.12
Long - term debt 105,000 2,000 7.64 100,000 1,934 7.76
------------- ------------ ---------- ------------- ---------- --------
Total interest - bearing liabilities 4,052,161 $ 32,694 3.24 3,755,166 $ 42,296 4.52
------------------------- ---------------------
Demand deposits 541,669 464,800
Other liabilities 109,916 64,716
- ------------------------------------------------------ -------------
Total liabilities 4,703,746 4,284,682
- ------------------------------------------------------ -------------
Equity 506,355 468,865
- ------------------------------------------------------ -------------
Total liabilities & stockholders' equity $5,210,101 $4,753,547
- ------------------------------------------------------ -------------
Net interest income / yield on
average earning assets $ 48,428 4.08 $ 43,303 3.97
------------------------- -----------------------
- ----------------------------------------------------------------------------------------------------------------------------------
For the Six Month Period Ended For the Six Month Period Ended
June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------ -----------------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%)
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Short - term investments $ 73,659 $ 700 1.92 $ 91,504 $ 2,194 4.84
Investment securities:
Taxable 954,078 27,116 5.73 742,047 23,596 6.41
Tax - advantaged 57,734 2,034 7.10 75,721 2,691 7.17
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,011,812 29,150 5.81 817,768 26,287 6.48
- --------------------------------------------------------------------------------------------------------------------------------
Loans and leases, (net):
Taxable 3,570,648 128,819 7.28 3,400,978 142,374 8.44
Tax - advantaged 45,985 1,854 8.13 46,969 2,020 8.67
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 3,616,633 130,673 7.29 3,447,947 144,394 8.45
- --------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 4,702,104 $160,523 6.88 4,357,219 $172,875 8.00
--------------------- -------------------
Allowance for loan and lease losses (38,701) (38,046)
Other non - earning assets 495,563 411,794
- ------------------------------------------------------ --------------
Total assets $5,158,966 $4,730,967
- ------------------------------------------------------ --------------
Liabilities
Deposits:
Interest - bearing demand $ 928,939 $ 5,909 1.28 $ 813,050 $ 10,647 2.64
Savings 456,198 2,180 0.96 417,306 3,593 1.74
Time 1,618,022 34,152 4.26 1,556,755 43,753 5.67
Short - term borrowings 185,283 1,471 1.60 214,823 5,062 4.75
FHLB borrowings 588,971 14,680 5.03 338,495 9,357 5.57
Vehicle financing 142,156 4,593 6.52 320,464 11,482 7.23
Long - term debt 105,000 3,993 7.67 100,000 3,884 7.83
------------ -------- -------- -------------- -------- ----
Total interest - bearing liabilities 4,024,569 $ 66,978 3.36 3,760,893 $ 87,778 4.71
--------------------- -------------------
Demand deposits 529,135 449,111
Other liabilities 103,827 59,363
- ------------------------------------------------------ ---------------
Total liabilities 4,657,531 4,269,367
- ------------------------------------------------------ ---------------
Equity 501,435 461,602
- ------------------------------------------------------ ---------------
Total liabilities & stockholders' equity $5,158,966 $4,730,969
- ------------------------------------------------------ ---------------
Net interest income / yield on
average earning assets $ 93,545 4.01 $ 85,097 3.94
--------------------- -------------------
For purposes of calculating loan yields, the average loan volume includes
non-accrual loans. For purposes of calculating yields on non-taxable interest
income, the taxable equivalent adjustment is made to equate non-taxable interest
on the same baisis as taxable interest. The marginal tax rate is 35%.
17
Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
June 30 December 31, June 30,
(Dollars in thousands) 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans and leases $ 16,828 $ 15,516 $ 18,696
Restructured accrual loans 0 0 0
Other real estate owned 3,174 3,761 4,824
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 20,002 $ 19,277 $ 23,520
===============================================================================================================================
As a percent of period-end loans and leases and
other real estate owned 0.53% 0.55% 0.67%
Coverage ratio 232.64% 242.96% 205.43%
Loans and leases contractually
past due 90 days and still accruing $ 9,995 $ 11,498 $ 8,494
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Balance - Beginning of period $ 38,532 $ 37,848 $ 37,698 $ 37,187
Additions charged to operating expenses 2,434 1,833 4,707 3,679
- -------------------------------------------------------------------------------------------------------------------------------
40,966 39,681 42,405 40,866
- -------------------------------------------------------------------------------------------------------------------------------
Charge-offs (2,425) (1,960) (4,427) (3,545)
Recoveries 607 686 1,170 1,086
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,818) (1,274) (3,257) (2,459)
- -------------------------------------------------------------------------------------------------------------------------------
Balance - Period end $ 39,148 $ 38,407 $ 39,148 $ 38,407
===============================================================================================================================
Net charge-offs as a percent of average loans and leases(annualized) 0.20% 0.15% 0.18% 0.14%
Allowance as a percent of period-end loans and leases 1.05% 1.10% 1.05% 1.10%
Average loans and leases $3,693,108 $3,473,520 $3,616,633 $3,447,947
Period-end loans and leases 3,737,178 3,481,729 3,737,178 3,481,729
18
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk, and commodity price risk. Only interest rate and liquidity risks
are significant to Susquehanna.
Liquidity Risk
Liquidity and interest rate risk are related but distinctly different
from one another. The maintenance of adequate liquidity -- the ability to meet
the cash requirements of its customers and other financial commitments -- is a
fundamental aspect of Susquehanna's asset/liability management strategy.
Susquehanna's policy of diversifying its funding sources -- purchased funds,
repurchase agreements, and deposit accounts -- allows it to avoid undue
concentration in any single financial market and also to avoid heavy funding
requirements within short periods of time. At June 30, 2002, Susquehanna's
subsidiary banks had unused lines of credit available to them from the Federal
Home Loan Bank system totaling approximately $521 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 $51 million at June 30, 2002. These
maturing investments represented 5% of total investment securities. Unrestricted
short-term investments amounted to $19.7 million and represent additional
sources of liquidity. Consequently, Susquehanna's exposure to liquidity risk is
not considered significant.
Interest Rate Risk
Closely related to the management of liquidity is the management of
interest rate risk, which focuses on maintaining stability in the net interest
margin, an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the
interest-bearing assets and liabilities. Management's objective is to control
the difference 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 uses gap and interest rate shock analyses to evaluate interest
rate sensitivity at a given point in time.
19
Periodic gap reports compare 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 interest rates using one percent
intervals.
Susquehanna's policy, as approved by its Board of Directors, is for
Susquehanna to experience no more than a 15% decline in net interest income and
no more than a 30% decline in economic equity for a 300 basis point shock
(immediate change) in interest rates. The assumptions used for the interest rate
shock analysis are reviewed and updated at least quarterly. Based upon the most
recent interest rate shock analysis, Susquehanna was within the Board's policy
limits.
At June 30, 2002, Susquehanna continues to be an asset sensitive
institution and should benefit from a rise in interest rates in the future, if
that should occur.
Securitizations and Off-Balance Sheet Financings
Background. Asset securitizations and other off-balance sheet
financings can further affect liquidity and interest rate risk. Automobile
leases originated by Susquehanna's wholly-owned subsidiary, Boston Service
Company, Inc. doing business as Hann Financial Service Corporation ("Hann") are
financed primarily in four ways: securitization transactions; sale-leaseback
transactions; agency arrangements with other financial institutions; 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 June 30, 2002, Hann's off-balance sheet,
managed portfolio was funded in the following manners: asset securitization
transactions, $179 million; sale-leaseback transaction, $158 million; and agency
arrangements, $641 million.
In connection with the securitization transactions, Hann sells the
beneficial interests in automobile leases and related vehicles at par to a
wholly-owned, special purpose entity, or SPE. These transactions have been
accounted for as sales under the guidelines of SFAS 140. The SPE retains the
right to receive excess cash flows from the sold portfolio. Under SFAS 140, Hann
is required to recognize a receivable representing the present value of these
excess cash flows. As of June 30, 2002, the aggregate amount of all such
recorded receivables was $6.3 million.
Second Quarter 2002 Transaction. During the second quarter of 2002,
Hann completed a new agency arrangement. In connection with that arrangement,
Susquehanna entered into a Residual Interest Agreement which guarantees the
performance of Auto Lenders Liquidation Center, Inc. (Auto Lenders) in its
obligation to an agency client of Hann. Michael J. Wimmer, who was a member of
Susquehanna's Board of Directors on June 30, 2002, 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.
20
In the event the agency client incurs any losses, cost and expenses as
a result of any failure of Auto Lenders to perform in its obligation to remit to
the agency client an amount equal to the full residual value of any leased
vehicle within the agency client's portfolio, Susquehanna agrees to compensate
the agency client for any final liquidation loss with respect to such leased
vehicle. However, Susquehanna's liability is not to exceed 12% of the maximum
aggregate residual value of all leases purchased by the agency client. At June
30, 2002, the total residual value amount related to this transaction was $13.6
million and the maximum obligation under the residual interest agreement at June
30, 2002, was $1.6 million.
Summary of Susquehanna's Potential Exposure under All Off-Balance Sheet
Transactions. Under the asset securitization transactions, Susquehanna has
reimbursement obligations to lenders under letter of credit facilities if Auto
Lenders breaches its obligations to the lenders. At June 30, 2002, Susquehanna
would be obligated for up to $40.5 million under these facilities. Under the
sale-leaseback transaction, Susquehanna must continue to maintain its investment
grade senior unsecured long-term debt ratings. This rating provision can be
cured by Susquehanna by obtaining a $33.9 million letter of credit from an
eligible financial institution for the benefit of the equity participants in the
transaction. Under the agency arrangements, Susquehanna's maximum obligation at
June 30, 2002 was $1.6 million.
21
PART II. OTHER INFORMATION
Item 2. CHANGES OF SECURITIES AND USE OF PROCEEDS
On June 28, 2002, Susquehanna acquired all of the outstanding stock of
The Addis Group, Inc., a property and casualty insurance brokerage located in
King of Prussia, Pennsylvania. In connection with the acquisition, Susquehanna
agreed to issue and sell $4,000,000 worth of its common stock to the
shareholders of Addis, based on a per share price equal to the average closing
price of the ten trading days prior to the date immediately preceeding the
closing date, or $22.824 per share. Accordingly, on July 1, 2002, Susquehanna
issued a total of 175,254 shares of its common stock to F. Scott Addis, William
D. Rhodes, III and Peter Unger (the shareholders of Addis). The shares are
exempt from registration pursuant to Section 506 of the Securities Act of 1933,
as amended.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Susquehanna's Annual Meeting of Shareholders was held on May 29, 2002.
The following directors were elected to Susquehanna's board of directors Class
of 2005 by the holders of Susquehanna common stock (the following details the
voting results with respect to each director nominee, including the number of
shares not voted at all (Not Present) and the proxies that brokers did not vote
in full (Broker Non-Voted)):
Nominee Common Stock
------- ------------
C. William Hetzer, Jr.
For 33,005,433
Withhold/Abstain 399,128
Not Present 5,965,095
Broker Non-Voted 297,248
Owen O. Freeman, Jr.
For 32,984,322
Withhold/Abstain 420,239
Not Present 5,965,095
Broker Non-Voted 297,248
Guy W. Miller, Jr.
For 32,997,788
Withhold/Abstain 406,773
Not Present 5,965,095
Broker Non-Voted 297,248
William J. Reuter
For 30,689,314
Withhold/Abstain 2,715,247
Not Present 5,965,095
Broker Non-Voted 297,248
No other matters were submitted for shareholder action.
22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The Exhibits filed as part of this report are as follows:
2.1 Stock Purchase Agreement by and among Susquehanna Bancshares,
Inc., Susquehanna Acquisition, LLC, The Addis Group, Inc., F. Scott
Addis, William D. Rhodes, III and Peter R. Unger, dated April 30,
2002, including the First Amendment to Stock Purchase Agreement,
between the same parties, dated June 28, 2002. Schedules to this
agreement and amendment are omitted. Pursuant to paragraph (2) of
Item 601(b) of Regulation S-K, Susquehanna agrees to furnish a copy
of such schedules to the Commission upon request.
10.1 Residual Interest Agreement dated May 17, 2002 by and between
Sovereign Bank and Susquehanna Bancshares, Inc.
10.2 Purchase Agreement, dated as of June 29, 2001, between Boston
Service Company, Inc. d/b/a Hann Financial Service Corp. and Auto
Lenders Liquidation Center, Inc.
10.3 Irrevocable Standby Letter of Credit No. 1, dated June 29,
2001, of Susquehanna Bancshares, Inc. for the account of HAL
Warehouse Funding 2001 LLC, including Amendment No. 1 thereto.
10.4 Purchase Agreement, dated as of March 11, 2002, between
Boston Service Company, Inc. d/b/a/ Hann Financial Service Corp. and
Auto Lenders Liquidation Center, Inc.
10.5 Irrevocable Standby Letter of Credit No. 2, dated March 11,
2002, of Susquehanna Bancshares, Inc. in favor of Galleon Capital
Corporation for the account of HAL Warehouse Funding 2002-LLC.
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Report on Form 8-K. Susquehanna filed a Current Report on Form 8-K
on May 3, 2002 regarding the execution of a definitive agreement by Susquehanna
to purchase all of the outstanding stock of The Addis Group, Inc., a property
and casualty insurance brokerage located in King of Prussia, Pennsylvania.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUSQUEHANNA BANCSHARES, INC.
August 13, 2002 /s/ William J. Reuter
----------------------------------------
William J. Reuter
President and Chief Executive Officer
August 13, 2002 /s/ Drew K. Hostetter
----------------------------------------
Drew K. Hostetter
Executive Vice President, Treasurer and
Chief Financial Officer
24
EXHIBIT INDEX
Exhibit Numbers Description and Method of Filing
- --------------- --------------------------------
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession.
2.1 Stock Purchase Agreement by and among Susquehanna
Bancshares, Inc., Susquehanna Acquisition, LLC, The Addis
Group, Inc. and F. Scott Addis, William D. Rhodes, III and
Peter R. Unger, dated April 30, 2002, including the First
Amendment to Stock Purchase Agreement, between the same
parties, dated June 28, 2002. Schedules to this agreement
and amendment are omitted. Pursuant to paragraph (2) of Item
601(b) of Regulation S-K, Susquehanna agrees to furnish a
copy of such schedules to the Commission upon request.
(10) Material Contracts.
10.1 Residual Interest Agreement dated May 17, 2002 by and
between Sovereign Bank and Susquehanna Bancshares, Inc.
10.2 Purchase Agreement, dated as of June 29, 2001, between
Boston Service Company, Inc. d/b/a Hann Financial Service
Corp. and Auto Lenders Liquidation Center, Inc.
10.3 Irrevocable Standby Letter of Credit No. 1, dated June
29, 2001, of Susquehanna Bancshares, Inc. for the account of
HAL Warehouse Funding 2001 LLC, including Amendment No. 1
thereto.
10.4 Purchase Agreement, dated as of March 11, 2002, between
Boston Service Company, Inc. d/b/a/ Hann Financial Service
Corp. and Auto Lenders Liquidation Center, Inc.
10.5 Irrevocable Standby Letter of Credit No. 2, dated March
11, 2002, of Susquehanna Bancshares, Inc. in favor of
Galleon Capital Corporation for the account of HAL Warehouse
Funding 2002-LLC.
(99) Additional Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.