10-K405 1 d10k405.txt FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- 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, 2000 ------------------------------------------------------ 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 Susquehanna Bancshares, Inc. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Pennsylvania 23-2201716 ---------------------------------------------- -------------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 26 North Cedar St., Lititz, Pennsylvania 17543 ---------------------------------------------- -------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (717) 626-4721 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: common stock, par value $2.00 per share -------------------------------------------------------------------------------- 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. [X] The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $631,675,400 as of February 28, 2001, 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, 2001, was 39,223,112. 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 25, 2001, are incorporated by reference into Part III. 1 PART I ------ Item 1. Business ------- -------- General Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state financial holding company headquartered in Lititz, Pennsylvania. As of December 31, 2000, Susquehanna operated as a super-community financial holding company with eight commercial banks, one federal savings bank and four non-bank subsidiaries. As of December 31, 2000, Susquehanna had consolidated assets of $4.8 billion, loans receivable of $3.4 billion, deposits of $3.2 billion and shareholders' equity of $453 million. The relative sizes and profitability of Susquehanna's operating subsidiaries as of and for the year ended December 31, 2000, are depicted in the following table: (Dollars in Millions)
--------------------------------------------------------------------------------------------------------------------------------- Subsidiary* Assets Percent of Total Net Income Percent of Total ----------- ------ ---------------- ---------- ---------------- --------------------------------------------------------------------------------------------------------------------------------- Farmers First Bank $1,260 26% $20 36% Farmers & Merchants Bank and Trust 623 13 8 15 First National Trust Bank 297 6 4 7 Williamsport National Bank 260 5 5 9 Citizens National Bank of Southern Pennsylvania 202 4 3 5 First American National Bank of Pennsylvania 152 3 2 4 Susquehanna Bank** 1,080 23 6 11 Equity Bank, National Association*** 348 7 4 7 Founders' Bank*** 164 3 2 4 Susque-Bancshares Leasing Co., Inc. (leasing) 50 1 - - Valley Forge Asset Management Corp. 14 - 1 2 Boston Service Company, Inc. (t/a Hann Financial Service Corporation (auto leasing)) 507 11 4 7 Susque-Bancshares Life Insurance Co. (life insurance) 4 - - - Consolidation adjustments, including Susquehanna, Susquehanna South and Susquehanna East) (168) (2) (4) (7) --------------------------------------------------------------------------------------------------------------------------------- Total $4,793 100% $55 100% ---------------------------------------------------------------------------------------------------------------------------------
* Includes operations of wholly-owned subsidiaries. ** Subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares South, Inc. ("Susquehanna South"), a non-operating holding company. *** Subsidiaries of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares East, Inc. ("Susquehanna East"), a non-operating holding company. Susquehanna's depository institution subsidiaries are located in Pennsylvania, Maryland and New Jersey, and provide commercial and retail banking services in central and south central Pennsylvania, principally in Franklin, Lancaster, Northumberland, Snyder, Union, Columbia, York and Lycoming Counties; in southeastern Pennsylvania principally in Montgomery, Chester and Delaware Counties; in southwestern Pennsylvania principally in Bedford and Blair Counties; in western Maryland, principally in Allegany, Garrett and Washington Counties; in northwestern, central and southeastern Maryland, including Baltimore County, Baltimore City, Carroll County, Harford County, Worcester County, Wicomico County and Anne Arundel County; and in southern New Jersey, principally in Camden, Burlington and Gloucester Counties. Susquehanna's non-depository institution subsidiaries provide commercial leasing services in Pennsylvania, New Jersey, Maryland and Delaware and credit life insurance services in central and southeastern Pennsylvania. On February 1, 2000, Susquehanna acquired an additional non-depository institution subsidiary, Boston Service Company, Inc. (t/a Hann Financial Service Corporation), which provides consumer automobile financing services principally in New Jersey, eastern Pennsylvania, New York and Connecticut. On March 3, 2000, Susquehanna also acquired an additional non-depository institution subsidiary, Valley Forge Asset Management Corp., an asset management company which provides services principally in southeastern Pennsylvania (Philadelphia, Bucks, Montgomery, Delaware and Chester Counties), New Jersey and Delaware. 2 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. Consistent with this philosophy, in 2000 Susquehanna completed its program initiated in 1997 to convert all of its depository institution subsidiaries to a uniform computer system. Additionally, the trust departments of three of Susquehanna's subsidiary depository institutions were consolidated into Susquehanna Trust & Investment Company, a subsidiary of Farmers First Bank, in 2000, and a fourth trust department was consolidated into the trust company in the beginning of 2001. Susquehanna also provides its banking subsidiaries guidance in the areas of credit policy and administration, strategic planning, investment portfolio management and other financial and administrative services. In October of 1999, Susquehanna determined to undertake a detailed consolidation project. Specifically, it determined to consolidate, outsource and restructure certain back-office operations. The project was established to provide a strong, centralized support platform in order to provide consistent levels of service, re-engineer and standardize procedures to more effectively evaluate work flows and results, and to focus and extend customer service initiatives throughout the company. In connection with this project, during 2000, Susquehanna re-engineered processes, wrote new procedures, re-engineered facilities and trained and implemented a centralized design for the areas of Accounting and Finance, Deposit Operations, Loan Operations, Branch Administration and Bank Administration. Susquehanna also outsourced non-core support functions in the areas of Facilities, Courier Services, Loan Payment Processing and collateral insurance tracking. Additionally, the customer service call center was re-engineered so that it can support customer service calls from customers at any affiliate bank. Susquehanna is now in the assessment and clean-up portion of this project. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Results of Operations - Summary of 2000 Compared to 1999" for further discussion. As of December 31, 2000, Susquehanna had 395 full-time and 45 part-time employees, and Susquehanna and its subsidiaries, on a consolidated basis, had 1,601 full-time and 284 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 75% 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, 2000, there were over 99,000 active debit cards (over 123,000 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 the purchaser to continue to provide credit card products and services to Susquehanna's customers. 3 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 (11% of the total loan portfolio at December 31, 2000), real estate construction lending (8%), and commercial mortgage lending (20%). Loans originated by each subsidiary are subject to central review and uniform Susquehanna credit standards. Nearly all of Susquehanna's loans are concentrated in the markets served by its subsidiary commercial and savings banks. 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. In 2000, the trust departments of Citizens National Bank of Southern Pennsylvania, First National Trust Bank, and Williamsport National Bank were consolidated into Susquehanna Trust & Investment Company, and the trust company also opened an office in New Jersey. In January of 2001, the trust department of Farmers & Merchants Bank and Trust was also consolidated into Susquehanna Trust & Investment Company. Through its subsidiary, Susque-Bancshares Life Insurance Co., Susquehanna offers certain credit related insurance products. Susquehanna also offers certain leasing services through its subsidiary Susque-Bancshares Leasing Co., Inc., and its wholly owned subsidiary, Susquebanc Lease Co. Susquehanna expanded its leasing service capabilities through its acquisition in February of 2000 of Hann Financial Service Corporation, which provides comprehensive consumer automobile financing services. 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 broader 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 February 4, 2000, Farmers First Bank and First Capitol Bank, both wholly-owned subsidiaries of Susquehanna, signed an Agreement and Plan of Merger. On May 5, 2000, First Capitol Bank was merged with and into Farmers First Bank. Farmers First Bank was the surviving institution in the merger and continues its existence as a bank and trust company under Pennsylvania law with its present name. 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. 4 Supervision and Regulation General. Susquehanna is a financial holding company registered with the ------- 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 commercial and federal savings bank subsidiaries are also subject to regulation and supervision. Farmers First Bank, a state bank, is subject to regulation and periodic examination by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (the "FDIC"). Founders' Bank is a state member bank subject to regulation and periodic examination by the Board and the Pennsylvania Department of Banking. Citizens National Bank of Southern Pennsylvania, First National Trust Bank, Williamsport National Bank, First American National Bank of Pennsylvania and Equity Bank, National Association, are national banks and are subject to regulation and periodic examination by the Office of the Comptroller of the Currency (the "OCC"). Farmers & Merchants Bank and Trust, a state bank, is subject to regulation and periodic examination by the Maryland Banking Commission and the FDIC. Susquehanna Bank, a federal savings bank, is subject to regulation and periodic examination by the Office of Thrift Supervision (the "OTS"). Susquehanna South is also subject to supervision and regulation by the OTS as a savings and loan holding company. Because Susquehanna is a 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 2000 consisted of providing to its customers commercial banking, thrift and other banking-related services and products. These included commercial banking through its eight subsidiary banks, thrift activities through its federal savings bank subsidiary, credit life insurance through another subsidiary, leasing operations through two subsidiaries and investment advisory services through an additional subsidiary. Of these activities, commercial banking and savings activities accounted for 92% of Susquehanna's gross revenues in 1999 and 87% of Susquehanna's gross revenues in 2000. 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 commercial and savings bank subsidiaries are subject to comprehensive federal and state regulations dealing with a wide variety of subjects, including reserve requirements, loan limitations, restrictions as to interest rates on loans and deposits, restrictions as to dividend payments, requirements governing the establishment of branches and numerous other aspects of their operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders. Financial Modernization Legislation. In late 1999, Congress enacted the ----------------------------------- Gramm-Leach-Bliley Act (the "GLB Act") to modernize the legal structure of the U.S. financial services industry. The GLB Act permits a bank holding company, all of whose depository institution subsidiaries meet certain tests (discussed below), to elect to become a "financial holding company" (an "FHC"). Since Susquehanna's depository institutions met (and continue to meet) these tests, Susquehanna elected to become an FHC in 2000. 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. Susquehanna may still engage in all of the activities previously allowed to it, whether or not presently conducted. The new activities additionally permitted to Susquehanna as an FHC (if it so determines to conduct them) include, among others, insurance and securities underwriting, merchant banking activities, issuing and selling 5 annuities and securitized interests in financial assets and engaging domestically in activities that bank holding companies previously have been permitted to engage in only overseas. It is expected that in the future other activities will be added to the permitted list. All of these listed activities can be conducted, through an acquisition or on a start-up basis, without prior Board approval and with only notice to the Board after the fact. The GLB Act also generally permits well-capitalized national banks with proper regulatory approval (and, if state law permits, state chartered banks as well), to form or acquire financial subsidiaries to engage in most of these same activities, with the exception of certain specified activities (insurance underwriting, for example) which must be conducted only at the level of the holding company or a nonbank subsidiary. 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. On the other hand, as an FHC, Susquehanna, unlike traditional bank holding companies, is permitted to embark on several new types of activities and several additional types of acquisitions without Board approval and with only notice afterward. To qualify as an FHC, Susquehanna had to certify that all of its commercial and savings bank subsidiaries were well-capitalized and well-managed and were rated "satisfactory" or better in their most recent Community Reinvestment Act ("CRA") examinations. An FHC ceasing to meet these standards will be subject to a variety of restrictions, depending on the nature of the problem. If the Board determines that any of the FHC's subsidiary depository institutions are either not well-capitalized or not well-managed, it must notify the FHC. Until compliance is restored, the Board has broad discretion to impose appropriate limitations on the FHC's activities. If compliance is not restored within 180 days, the Board may ultimately require the FHC to divest its depository institutions. The potential restrictions are different if the lapse pertains to the CRA requirement. In that case, until all the subsidiary institutions are restored to at least "satisfactory" CRA rating status, the FHC may not engage, directly or through a subsidiary, in any of the new activities permissible under the GLB Act nor make additional acquisitions of companies engaged in the new activities. However, completed acquisitions and new activities and affiliations previously begun are left undisturbed, as the GLB Act does not require divestiture for this type of problem. Capital Adequacy. Under the risk-based capital requirements applicable ---------------- to them, bank holding companies must maintain a ratio of total capital to risk-weighted assets (including the asset equivalent of certain off-balance sheet activities such as acceptances and letters of credit) of not less than 8% (10% to be "well-capitalized"). At least 4% out of the total capital (6% to be well capitalized) must be composed of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, after deducting goodwill and certain other intangibles ("tier 1 capital"). The remainder of total capital ("tier 2 capital") may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance. At December 31, 2000, Susquehanna's tier 1 capital and total capital (i.e., tier 1 plus tier 2) ratios were 11.2% and 13.3%, respectively. The Board has also established minimum leverage ratio guidelines for bank holding companies. These guidelines mandate a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets less certain amounts ("leverage amounts") equal to 3% for bank holding companies meeting certain criteria (including those having the highest regulatory rating). All other banking organizations are generally required to maintain a leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The Board's guidelines also provide that bank holding companies experiencing internal growth or making acquisitions are expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Board will continue to consider a "tangible tier 1 leverage ratio" (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. The Board has not advised Susquehanna of any specific minimum leverage ratio applicable to it. At December 31, 2000, Susquehanna's leverage ratio was 8.8%. 6 Susquehanna's subsidiary depository institutions are all subject to similar capital standards promulgated by their respective federal regulatory agencies. No such agency has advised any of Susquehanna's subsidiary institutions of any specific minimum leverage ratios applicable to it. FDICIA Capital Categories. The Federal Deposit Insurance Corporation ------------------------- Improvement Act of 1991 ("FDICIA") requires the federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each capital measure (currently, risk-based and leverage). Adequately capitalized institutions include depository institutions that meet the required minimum level for each capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements. Currently, all of Susquehanna's depository institution subsidiaries qualify as well-capitalized. Cross Guarantees. Susquehanna's subsidiary commercial and federal ---------------- savings bank subsidiaries are also subject to cross-guaranty liability under federal law. This means that if one FDIC-insured depository institution subsidiary of a multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess "commonly controlled" depository institutions for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed subsidiary institution and on Susquehanna as the common parent. While the FDIC's cross-guaranty claim is junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is superior to the claims of shareholders and affiliates. Source of Strength Doctrine. Under Board policy, a bank holding company --------------------------- is expected to serve as a source of financial strength to each of its subsidiary banks and to stand prepared to commit resources to support each of them. Consistent with this policy, the Board has stated that, as a matter of prudent banking, a bank holding company should generally not maintain a given rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. Interstate Banking and Branching. Under the Pennsylvania Banking Code -------------------------------- of 1965, there is no limit on the number of banks that may be owned or controlled by a Pennsylvania-based bank holding company and the Pennsylvania bank subsidiaries may branch freely throughout the Commonwealth and, with Department of Banking approval, abroad. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 eliminated substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies. The same Act generally permits the federal banking agencies to approve merger transactions resulting in the creation of branches by banks outside their home states and permits the OCC to authorize the creation by national banks of branches outside their home states if the host state into which they propose to branch has enacted authorizing legislation. Of the middle-Atlantic states, Pennsylvania, New Jersey, Ohio and West Virginia have enacted legislation authorizing such "de novo" branching by banks located in states offering reciprocal treatment to their institutions. Maryland has as well, but without the requirement of reciprocity. Delaware and New York do not allow de novo branching by sister-state banks and require that they enter the state through mergers of established institutions. Qualifying federal savings associations are also generally permitted to establish interstate branches. Liberalizing the branching laws in recent years has had the effect of increasing competition within the markets in which Susquehanna now operates. Regulation of Nonbank Subsidiaries. Susquehanna has four direct ---------------------------------- non-bank subsidiaries, all wholly-owned: Susque-Bancshares Life Insurance Company, a reinsurance company, Susque-Bancshares Leasing Co., Inc., a leasing company, Hann Financial Service Corporation, 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 Co., Inc. is organized under the laws of the Commonwealth of Pennsylvania and owns a single leasing company subsidiary with commercial finance powers. 7 Hann Financial Service Corporation 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, and is licensed under the state securities laws of 17 states. Valley Forge Asset Management Corp. is also a registered broker-dealer, is a member of the National Association of Securities Dealers (the "NASD") and is registered in Canada as an International Advisor. Privacy. The new GLB Act has provisions intended to increase the level ------- of privacy protection afforded to customers of financial institutions, including the securities and insurance affiliates of such institutions, partly in recognition of the increased cross-marketing opportunities created by the Act's elimination of many of the boundaries previously separating various segments of the financial services industry. Among other things, these provisions will require institutions to have in place administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information, to protect against anticipated threats or hazards to the security or integrity of such records and to protect against unauthorized access to or use of such records that could result in substantial harm or inconvenience to a customer. The Act will also require institutions to furnish consumers at the outset of the relationship and annually thereafter written disclosures concerning the institution's privacy policies. Although these provisions of the GLB Act will result in important operational modifications within all affected financial institutions, Susquehanna included, they are not expected to have a material effect on the operating results of Susquehanna and its subsidiaries. Environmental Impact Statement. Compliance by Susquehanna and its ------------------------------ subsidiaries with federal, state and local environmental protection laws during 2000 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 2001. Pending Legislation. From time to time, legislation is proposed for ------------------- enactment before the United States Congress and before the Pennsylvania General Assembly which could result in various changes in the laws and regulations applicable to Susquehanna and its subsidiaries. It is not possible at this time to predict if or when any such legislation might become law or the extent to which it might affect the business or competitive status of Susquehanna and its subsidiaries. National Monetary Policy. In addition to being affected by general ------------------------ economic conditions, the earnings and growth of Susquehanna and its subsidiaries are affected by the policies of regulatory authorities, including the OCC, the Board, the FDIC, the OTS, the SEC, the NASD and state agencies. An important function of the Board is to regulate the money supply and credit conditions. Among the instruments used by the Board to implement these objectives are open market operations in U.S. Government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of Susquehanna and its subsidiaries cannot be predicted. Competition 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 8 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 decreasing interest rate environment, a relatively strong and diverse local economy and declining 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:
Name Age Title ---- -- ----- Robert S. Bolinger (1) 64 Chairman of the Board and Chief Executive Officer William J. Reuter(2) 51 President Gregory A. Duncan(3) 45 Executive Vice President Drew K. Hostetter(4) 46 Senior Vice President, Treasurer and Chief Financial Officer William T. Belden(5) 51 Vice President Charles L. Luppert(6) 59 Vice President Peter C. Zimmerman(7) 54 Vice President
(1) Robert S. Bolinger is also a principal executive officer of Farmers First Bank and has been employed by that subsidiary bank in a substantially equivalent position for more than the past five years. Mr. Bolinger has also served as a principal executive officer of Susquehanna South since its inception in 1994, and was a principal executive officer of Susquehanna East from its inception in 1997 to 1999. (2) 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 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. (3) Gregory A. Duncan was also the principal executive officer of Citizens National Bank of Southern Pennsylvania until September 1, 1999, and had been employed by that subsidiary bank in a substantially equivalent position since 1992. He was appointed Senior Vice President - Administration, of Susquehanna on January 21, 1998 and promoted to his current position on January 19, 2000. He was also appointed President of SBLIC on June 14, 1999 and Secretary of SBLC on July 15, 1998. 9 (4) Drew K. Hostetter was appointed Assistant Treasurer of Susquehanna in 1995, was promoted to Treasurer in 1996 and promoted to Vice President, Treasurer and Chief Financial Officer in 1998. He was promoted to his current position on January 19, 2000. Mr. Hostetter was also appointed Treasurer and Assistant Secretary of Susquebanc Lease Co. on September 17, 1998 and Assistant Treasurer of Susquehanna East on April 18, 1997. Prior to joining Susquehanna, Mr. Hostetter served as Senior Vice President and Corporate Controller of MNC Financial, Baltimore, Maryland, from 1992 to 1994. (5) 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. (6) Charles W. Luppert is also the principal executive officer of Williamsport National Bank and has been employed by that subsidiary bank in a substantially equivalent position for more than the past five years. (7) Mr. Zimmerman was appointed President and Chief Executive Officer of Susquehanna Trust & Investment Company, a Susquehanna subsidiary, in May of 1999. He was also an Executive Vice President of Susquehanna East, a Susquehanna subsidiary, from April 1, 1998 to April 26, 2000 and the Vice Chairman of Equity Bank, National Association, a Susquehanna subsidiary, from April 22, 1998 to November 15, 2000. Prior to joining Susquehanna, Mr. Zimmerman was the President and Chief Operating Officer of Financial Trust Corp. from 1995 to 1997 and the President and Chief Executive Officer of Financial Trust Company in 1997. There are no family relationships among the executive officers of Susquehanna nor are there any arrangements or understandings between any of them and any other person pursuant to which any of them was selected an officer of Susquehanna. Item 2. Properties ------- ---------- Susquehanna reimburses its subsidiaries for space and services utilized. It also leases office space located at Topflight Airpark, Showalter Road, Hagerstown, Maryland for its 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 122 full-service branches, 18 limited-service branches and 34 free-standing automated teller machines. The depository institutions own 78 of the branches and lease the remaining 62. Ten additional locations are owned or leased by subsidiary banks to facilitate operations and expansion. Management of Susquehanna believes that the properties currently owned and leased by its subsidiaries are adequate for present levels of operation. As of December 31, 2000, 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 34 full-service and 10 Lititz, Pennsylvania limited-service banking offices in Lancaster and York Counties, Pennsylvania Citizens National Bank of 35 North Carlisle Street Owned 7 full-service banking offices Southern Pennsylvania Greencastle, Pennsylvania in Franklin County, Pennsylvania First National Trust Bank 400 Market Street Owned 11 full-service and 1 Sunbury, Pennsylvania limited-service banking offices in Northumberland, Snyder, Columbia and Union Counties, Pennsylvania
10 Williamsport National Bank 329 Pine Street Owned 6 full-service and 1 limited Williamsport, Pennsylvania service banking offices in Lycoming County, Pennsylvania Farmers & Merchants Bank and 59 West Washington Street Owned 22 full-service and 5 limited Trust Hagerstown, Maryland service banking offices in Washington, Allegany and Garrett Counties, Maryland Susquehanna Bank 100 West Road Leased 21 full-service banking offices Towson, Maryland located in Baltimore City and Baltimore, Harford, Anne Arundel, Carroll, Worcester and Wicomico Counties, Maryland First American National Bank 140 East Main Street Owned 6 full-service banking offices of Pennsylvania Everett, Pennsylvania in Bedford and Blair Counties, Pennsylvania Equity Bank, National 8000 Sagemore Drive Leased 12 full-service and 1 Association Suite 8101 limited-service banking offices Marlton, New Jersey in Camden, Gloucester and Burlington Counties, New Jersey Founders' Bank 101 Bryn Mawr Avenue Leased 3 full-service banking offices Bryn Mawr, Pennsylvania in Montgomery, Chester and Delaware Counties, Pennsylvania
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 Corporation 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 2000. 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 1999 and 2000, 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 ---- ------ ---- --- ---- 1999 1st Quarter $.15 $16.50 $21.25 Common 2nd Quarter .15 17.00 19.38 Common 3rd Quarter .15 15.75 18.50 Common 4th Quarter .17 14.88 18.25 Common 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 -------------------------------------------------------------------------------- As of February 28, 2001, there were 6,476 record holders of Susquehanna common stock. Dividends paid by Susquehanna are provided from dividends paid to it by its subsidiaries. Susquehanna's ability to pay dividends is largely dependent upon the receipt of dividends from its bank and savings bank subsidiaries. Both federal and state laws impose restrictions on the ability of these subsidiaries to pay dividends. These include the Pennsylvania Banking Code in the case of Farmers First Bank, the Financial Institutions Article of the Annotated Code of Maryland in the case of Farmers & Merchants Bank and Trust, the National Bank Act in the case of First National Trust Bank, Williamsport National Bank, Citizens National Bank of Southern Pennsylvania, Equity Bank, National Association and First American National Bank of Pennsylvania, the Federal Reserve Act in the case of Founders' Bank, and the Home Owners Loan Act in the case of Susquehanna Bank and the applicable regulations under such laws. The net capital rules of the SEC under the Securities Exchange Act of 1934 also limit the ability of Valley Forge Asset Management Corp. to pay dividends to Susquehanna. In addition to the specific restrictions, summarized below, the banking, thrift and securities regulatory agencies also have broad authority to prohibit otherwise permitted dividends proposed to be made by an institution regulated by them if the agency determines that their distribution would constitute an unsafe or unsound practice. The Board and the FDIC have issued policy statements which provide that, as a general matter, insured banks and bank holding companies may pay dividends only out of current operating earnings. For national banks and state-chartered banks which are members of the Federal Reserve System (like Founders' Bank), 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. 12 "Retained net income" for any period means the net income for that period less any common or preferred stock dividends declared in that period. Moreover, no dividends may be paid by such bank in excess of its undivided profits account. Dividends payable by a Pennsylvania state-chartered bank are restricted by the requirement that the bank set aside to a surplus fund each year at least 10% of its net earnings until the bank's surplus equals the amount of its capital (a requirement presently satisfied in the case of all of the Pennsylvania state bank subsidiaries of Susquehanna). Furthermore, a Pennsylvania bank may not pay a dividend if the payment would result in a reduction of the surplus available to the bank. A Maryland state-chartered bank may pay dividends out of undivided profits or, with the approval of the Maryland Bank Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. As indicated above, Susquehanna looks to distributions from Susquehanna Bank (along with the other Susquehanna operating subsidiaries) as the source of funds to distribute as dividends. However, federal regulations impose restrictions on dividend payments by savings institutions which converted from the mutual to stock form of ownership and were federally insured at the time of the conversion, as was the case with the two predecessors of Susquehanna Bank, the former Atlantic Federal Savings Bank ("Atlantic Federal") and Reisterstown Federal Savings Bank ("Reisterstown Federal"). Upon their conversion to stock form, mutual savings institutions are required by regulation to establish a "liquidation account" by restricting a portion of their net capital for the benefit of eligible savings account holders who continue to maintain their savings accounts with the institution after the conversion. In the event of a subsequent complete liquidation of the institution (and only in such event), each savings account holder who continues to maintain a savings account would be entitled to receive a distribution from the liquidation account after payment to all creditors, but before any liquidation distribution with respect to the institution's capital stock. This account is proportionally reduced for any decreases in the eligible holder's savings accounts. Susquehanna Bank has succeeded to the liquidation account obligations of Atlantic Federal and Reisterstown Federal. Under federal regulations, savings institutions such as Atlantic Federal and Reisterstown Federal which have converted from mutual form may not declare or pay a cash dividend on common stock if the dividend would cause the institution's capital to be reduced below the amount required for the maintenance of the liquidation account or for regulatory capital requirements generally. Savings associations such as Susquehanna Bank are subject to federal regulatory limitations on the amount of cash dividends they may pay, depending on the level of their regulatory capital in relation to regulatory capital requirements. At present, Susquehanna Bank may, after notice to but without approval of the OTS, make capital distributions during a calendar year of up to 100% of its year to date net income plus such additional amounts as would not reduce by more than one-half its surplus capital at the beginning of the calendar year, or, if greater, 75% of its net income for the most recent four-quarter period. However, the OTS has overriding authority to prohibit an otherwise permissible cash dividend proposed to be made by a federal savings bank if the OTS determines that the distribution would result in an unsafe or unsound practice. The capital requirements applicable to federal savings banks require them to maintain tangible capital of at least 1.5% of adjusted total assets, a leverage ratio or core capital of at least 3% of adjusted total assets, and overall risk-based capital of at least 8% of total risk-weighted assets. For these purposes, tangible capital consists of common stockholder's equity net of certain intangible assets phased out over several years, and core capital consists of tangible capital augmented by "supervisory" goodwill and certain other items. The risk-based capital requirement involves the risk weighting of various classes of assets (including the asset equivalent of certain commitments and obligations) and is comparable to the risk-based capital regimen applicable to banks. The capital rules applicable to federal savings banks include provisions intended to measure the sensitivity of the institution's portfolio market values to hypothetical shifts in market interest rates. If interest rate risk is found to exist at levels above certain thresholds prescribed by these rules, an additional level of capital is required. 13 Susquehanna Bank has not to date been required to maintain additional capital as a result of the interest rate risk component of the risk-based capital rule. Within the regulatory restrictions described above, each of the commercial and federal savings bank subsidiaries of Susquehanna presently has the ability to pay dividends and at December 31, 2000, $45.1 million in the aggregate was available for dividend distributions during calendar 2001 to Susquehanna from its commercial and savings bank subsidiaries without regulatory approval. Susquehanna presently expects that cash dividends will continue to be paid by its subsidiaries in the future at levels comparable with those of prior years. 14 Item 6. Selected Financial Data. ------ ----------------------- See Page 16. 15 Selected Financial Data
------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands, except per share ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 353,416 $ 335,086 $ 335,614 $ 305,789 $ 285,522 Interest expense 188,464 173,526 176,265 149,907 136,767 Net interest income 164,952 161,560 159,349 155,882 148,755 Provision for loan and lease losses 3,726 11,203 5,780 4,806 5,285 Other income 74,010 53,459 39,106 31,126 29,031 Other expenses 155,581 141,788 124,014 116,485 120,229 Income before taxes 79,655 62,028 68,661 65,717 52,272 Net income 54,962 43,523 46,804 44,770 35,475 Cash dividends declared on common stock 27,092 22,918 20,132 18,371 16,226 Dividend payout ratio 49.3% 52.7% 43.0% 41.0% 45.7% Per Common Share Amounts* ------------------------------------------------------------------------------------------------------------------------------------ Net income--Basic $ 1.40 $ 1.11 $ 1.19 $ 1.16 $ 0.93 Net income--Diluted 1.40 1.10 1.18 1.15 0.92 Cash dividends declared on common stock 0.70 0.62 0.57 0.55 0.52 Financial Ratios ------------------------------------------------------------------------------------------------------------------------------------ Return on average total assets 1.15% 0.94% 1.06% 1.14% 0.96% Return on average stockholders' equity 13.01 10.45 11.75 12.43 10.59 Net interest margin 3.83 3.82 3.98 4.34 4.39 Average stockholders' equity to average assets 8.85 8.95 9.05 9.17 9.02 Tangible Operating Results ------------------------------------------------------------------------------------------------------------------------------------ Tangible net income $ 58,075 $ 46,498 $ 49,056 $ 47,745 $ 38,292 Tangible earnings per share 1.48 1.18 1.25 1.24 1.00 Return on tangible average shareholders' equity 15.08% 12.13% 13.51% 14.79% 12.81% Return on tangible average assets 1.23 1.01 1.12 1.23 1.04 Year-End Balances ------------------------------------------------------------------------------------------------------------------------------------ Total assets $4,792,856 $ 4,804,997 $4,589,287 $4,130,138 $ 3,804,450 Investment securities 898,604 912,048 951,744 723,745 729,234 Loans and leases, net of unearned income 3,433,610 3,469,661 3,248,818 3,072,685 2,722,280 Deposits 3,249,013 3,180,520 3,216,879 3,041,466 2,933,301 Total borrowings 1,030,812 1,157,025 915,676 652,926 468,478 Stockholders' equity 453,437 415,022 412,587 382,772 343,870 Selected Share Data* ------------------------------------------------------------------------------------------------------------------------------------ Common shares outstanding (period end) 39,221 39,382 39,262 39,275 38,395 Average common shares outstanding--Basic 39,262 39,320 39,228 38,656 38,349 Average common shares outstanding--Diluted 39,365 39,497 39,548 38,911 38,427 At December 31: Book value per share $ 11.56 $ 10.54 $ 10.51 $ 9.75 $ 8.96 Market price per common share 16.50 15.88 20.47 25.50 15.39 Common stockholders 6,543 6,720 6,662 6,238 5,694
* Amounts adjusted for the three-for-two stock splits in July 1997 and 1998. 16 Item 7. Management's Discussion and Analysis of Results of Operations and ------ ----------------------------------------------------------------- Financial Condition ------------------- See Pages 18-31. 17 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 National Bank of Pennsylvania; First National Trust Bank; Williamsport National Bank; Citizens National Bank of Southern Pennsylvania; Susquehanna Bancshares East, Inc. and its commercial bank subsidiaries Equity Bank, N.A., and Founders' Bank; Susquehanna Bancshares South, Inc. and its savings bank subsidiary Susquehanna Bank; Boston Service Company, Inc.; Susque-Bancshares Leasing Co., Inc.; Susque-Bancshares Life Insurance Company; and 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 expres- sions. 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 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. RESULTS OF OPERATIONS Summary of 2000 Compared to 1999 Several significant transactions occurred which affected the comparability of Susquehanna's financial performance for the years ended December 31, 2000 and 1999. These transactions are described in the following paragraphs. On March 3, 2000, Susquehanna completed the acquisition of Valley Forge Asset Management Corp. ("VFAM"), 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 $9.3 million was realized in the acquisition and will be amortized to other operating expense on a straight-line basis over 25 years. In this transaction, there are contingent cash payments totaling $6.0 million. These contingent cash payments are based upon certain earnings targets and will be recorded as goodwill if earned. No pro forma data are disclosed because the acquisition is not material to Susquehanna. On February 1, 2000, Susquehanna completed the acquisition of Boston Service Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), a closely-held consumer automobile financing company 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. On January 24, 2000, Susquehanna announced that it recognized, in December 1999, $10.8 million of pre-tax special charges relating to the consolidation of Susquehanna's back office operations and a special bonus. The restructure charge of $7.4 million represents severance, employee and employment assistance services, consulting and asset write-offs related to a reduction in the work force. This reduction in the work force should result in an estimated net annual savings of $6.0 million of which approximately $1.0 million was realized in the year 2000, with an anticipated 100% realization in 2001 and each succeeding year. The special bonus was awarded to Susquehanna employees (excluding executive and senior management) for extraordinary efforts in 1999. On January 4, 1999, Susquehanna acquired First Capitol Bank ("First Capitol"), a Pennsylvania commercial bank with $111 million in assets and $93 million in deposits at the acquisition date. Susquehanna issued 1,055,247 shares of its common stock to the shareholders of First Capitol based upon an exchange ratio of 2.028 shares of Susquehanna common stock for each outstanding share of First Capitol. The transaction was accounted for under the pooling-of-interests method of accounting for business combinations; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of First Capitol for all periods presented. Subsequently, on May 5, 2000, Susquehanna merged First Capitol into Farmers First Bank, with Farmers First Bank being the surviving entity. Susquehanna's net income for the year ended December 31, 2000, increased $11.5 million, or 26% over 1999 net income of $43.5 million. Excluding the special charges noted above, Susquehanna's net income for 2000 increased 9% over annual 1999 earnings. Susquehanna's earnings performance was enhanced by significant improvements in fee income, which during the year 2000 exceeded 31% of total revenues. 18 Diluted earnings per share ("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. Return on average assets ("ROA") and return on average equity ("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, Susquehanna's ROA and ROE for 1999 would have been 1.09% and 12.13%, respectively. Through various acquisitions utilizing the purchase method of accounting for business combinations, Susquehanna has created an intangible asset, goodwill, of $43 million, which significantly affects Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash charge to earnings. Tangible net income is actual net income increased by the tax-effected amortization of those intangible assets that are deducted from equity in determining Tier I capital. 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 the special charges, tangible net income, EPS, ROA, and ROE were $53.5 million, $ 1.36, 1.16%, and 13.96% respectively. Net Interest Income--Taxable Equivalent Basis The major source of operating revenues is net interest income, which rose to a level of $165.0 million in 2000, $3.4 million, or 2% above the $161.6 million attained in 1999. The net interest mar- TABLE 1--Distribution of Assets, Liabilities, and Stockholders' Equity Interest Rates and Interest Differential--Tax Equivalent Basis
------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Average Rate Average Rate Average Rate Assets Balance Interest % Balance Interest % Balance Interest % ------------------------------------------------------------------------------------------------------------------------------------ Short-term investments $ 50,715 $ 2,937 5.79 $ 67,021 $ 3,089 4.61 $ 92,971 $ 6,962 7.49 Investment securities: Taxable 824,902 53,238 6.45 811,255 50,394 6.21 766,342 48,578 6.34 Tax-advantaged 90,898 6,455 7.10 116,037 8,189 7.06 122,691 8,731 7.12 ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 915,800 59,693 6.52 927,292 58,583 6.32 889,033 57,309 6.45 ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases (net): Taxable 3,393,175 289,827 8.54 3,298,442 273,387 8.29 3,085,727 271,045 8.78 Tax-advantaged 55,970 4,952 8.85 49,380 4,451 9.01 54,612 5,077 9.30 ------------------------------------------------------------------------------------------------------------------------------------ Total loans and leases 3,449,145 294,779 8.55 3,347,822 277,838 8.30 3,140,339 276,122 8.79 ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 4,415,660 $357,409 8.09 4,342,135 $339,510 7.82 4,122,343 $340,393 8.26 ==================================================================================================================================== Allowance for loan and lease losses (41,340) (41,011) (39,264) Other non-earning assets 401,395 351,187 318,579 ------------------------------------------------------------------------------------------------------------------------------------ Total assets $4,775,715 $4,652,311 $ 4,401,658 ==================================================================================================================================== Liabilities & Stockholders' Equity Deposits: Interest-bearing demand $ 773,552 $ 22,080 2.85 $ 785,175 $ 20,359 2.59 $ 723,669 $ 20,651 2.85 Savings 420,512 7,709 1.83 444,938 8,166 1.84 449,022 10,102 2.25 Time 1,552,939 85,216 5.49 1,519,267 77,488 5.10 1,538,475 83,951 5.46 Short-term borrowings 199,001 11,597 5.83 122,406 5,754 4.70 92,159 4,515 4.90 FHLB borrowings 388,078 23,139 5.96 354,644 19,600 5.53 285,128 16,192 5.68 Long-term debt 99,105 7,762 7.83 95,000 7,481 7.87 61,078 5,217 8.54 Vehicle financing 416,295 30,961 7.44 451,841 34,679 7.68 417,247 35,637 8.54 ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 3,849,482 $188,464 4.90 3,773,271 $173,527 4.60 3,566,778 $176,265 4.94 ------------------------------------------------------------------------------------------------------------------------------------ Demand deposits 441,894 421,055 390,231 Other liabilities 61,725 41,614 46,335 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 4,353,101 4,235,940 4,003,344 ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity 422,614 416,371 398,314 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities & stockholders' equity $4,775,715 $4,652,311 $ 4,401,658 ==================================================================================================================================== Net interest income/yield on average earning assets $ 168,945 3.83 $165,983 3.82 $164,128 3.98 ====================================================================================================================================
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 tam-advantaged interest on the same basis as taxable interest. The marginal tax rate is 35%. 19 gin, on a tax equivalent basis, increased from 3.82% in 1999 to 3.83% in 2000. Net interest income is the income which remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans, 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 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 a percentage of net interest income and other income was 69%, 75%, and 80% for the twelve months ended December 31, 2000, 1999, and 1998, respectively. Table 2 illustrates that the increase in interest income in 2000 compared with 1999 was primarily attributable to interest rates. The average growth in interest-earning assets of $74 million in 2000 over 1999 was due to a $101 million increase in loans, partially offset by a $28 million decrease in the investment portfolio. As illustrated in Table 1, the tax equivalent yield on earning assets for 2000 increased to 8.09% from 7.82% in 1999. This increase was primarily due to higher reinvestment rates on loans and investments and market forces impacting product pricing. Table 2 also illustrates that the increase in interest expense in 2000 compared with 1999 was primarily attributed to interest rates. Increases in rates paid for interest-bearing deposits, short-term borrowings, and FHLB borrowings were the primary reasons for the $14.9 million increase in interest expense. The average funding costs increased from 4.60% in 1999 to 4.90% in 2000, as increased levels of short-term borrowings and FHLB borrowings (higher cost funds) outpaced the declines in interest-bearing demand, savings, and vehicle financing balances. As a result of the preceding comments, Susquehanna's net interest margin, on a taxable equivalent basis, increased from 3.82% in 1999 to 3.83% in 2000. Variances do occur in the net interest margin as an exact repricing of assets and liabilities is not possible. A further explanation of the impact of asset and liability repricing is found in the Market Risks section of this discussion. Provision and Allowance for Loan and Lease Losses Susquehanna's provision for loan and lease losses is based upon TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis
--------------------------------------------------------------------------------------------------------------------------------- 2000 Versus 1999 1999 Versus 1998 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 $ (846) $ 694 $ (152) $(1,629) $ (2,244) $(3,873) Investment securities: Taxable 858 1,986 2,844 2,805 (989) 1,816 Tax-advantaged (1,785) 51 (1,734) (471) (71) (542) --------------------------------------------------------------------------------------------------------------------------------- Total investment securities (927) 2,037 1,110 2,334 (1,060) 1,274 Loans (net of unearned income): Taxable 7,968 8,472 16,440 18,105 (15,763) 2,342 Tax-advantaged 584 (83) 501 (475) (151) (626) --------------------------------------------------------------------------------------------------------------------------------- Total loans 8,552 8,389 16,941 17,630 (15,914) 1,716 --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 6,779 $ 11,120 $17,899 $18,335 $(19,218) $ (883) ================================================================================================================================= Interest Expense Deposits: Interest-bearing demand $ (305) $ 2,026 $ 1,721 $ 1,678 $ (1,970) $ (292) Savings (448) (9) (457) (91) (1,845) (1,936) Time 1,747 5,981 7,728 (1,037) (5,426) (6,463) Short-term borrowings 4,225 1,618 5,843 1,429 (190) 1,239 FHLB borrowings 1,927 1,612 3,539 3,852 (444) 3,408 Long-termdebt 322 (41) 281 2,699 (435) 2,264 Vehicle financing (2,668) (1,050) (3,718) 2,820 (3,778) (958) ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 4,800 10,137 14,937 11,350 (14,088) (2,738) ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 1,979 $ 983 $ 2,962 $ 6,985 $ (5,130) $ 1,855 ====================================================================================================================================
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. 20 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 rated by loan officers and, periodically, by loan review personnel. Consumer, residential real estate loans, and leases are generally reviewed in the aggregate as they are of relative small dollar size and homogeneous in nature. In addition to economic conditions, loan portfolio diversification, delinquency, and historic loss experience, consideration is also given to examinations performed by the regulatory authorities. To determine the allowance and corresponding provision, the amount required for specific allocation is first determined. For all types of commercial and construction loans, this amount is based upon specific borrower data determined by reviewing individual non-performing, delinquent, or potentially troubled credits. In addition, a general allocation is also determined using the same criteria applied to the total commercial portfolio. Consumer, residential real estate, and lease allowances, which may include specific allocations, generally are based upon recent charge-off and delinquency history, other known trends, and expected losses over the remaining lives of these loans, as well as the condition of local, regional and national economies. The unallocated portion of the allowance is the amount which, when added to these allocated amounts, brings the total to the amount deemed adequate by management at that time. This unallocated portion is available to absorb losses sustained anywhere within the loan 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, New Jersey, and to a lesser extent, southwestern Pennsylvania, Connecticut, 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, 2000. As illustrated in Table 3, the provision for loan and lease losses was $3.7 million for 2000 compared to $11.2 million in 1999. Net charge-offs, as seen in Table 3, were $7.9 million in 2000 compared with $6.2 million in 1999. This decline was due to Hann as most year 2000 auto lease production was sold to third parties with Hann retaining no credit or residual value risk. In the third quarter of 2000, Hann entered into an agreement with a third party to guarantee the residual values on Hann's balance sheet. As part of this agreement, Hann transferred (cash payment) $3.1 million of its allowance for loan and lease losses to the third party. As a result, the allowance for loan and lease losses at December 31, 2000, was 1.08% of period-end loans and leases, or $37.2 million, compared with 1.28%, or $44.5 million, at December 31, 1999. Excluding Hann, the allowance for loan and lease losses as a percentage of period-end loans and leases was 1.17%. The allowance for loan and lease losses as a percentage of non-performing loans increased from 195% at December 31, 1999, to 225% at December 31, 2000. Should the economic climate no longer continue to improve or begin to deteriorate, borrowers may experience difficulty, and the level of non-performing loans and assets, charge-offs and delinquencies could rise and require further increases in the provision. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan and lease losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination. It is the policy of Susquehanna not to renegotiate the terms of a loan simply because of a delinquency status. Rather, a loan is transferred to non-accrual status if it is not well secured and in the process of collection, and is delinquent in payment of either principal or interest beyond 90 days. Interest income received on non-performing loans in 2000 and 1999 was $0.9 million and $0.5 million, respectively. Interest income which would have been recorded on these loans under the original terms was $1.5 million and $1.9 million for 2000 and 1999, respectively. At December 31, 2000, Susquehanna had no outstanding commitments to advance additional funds with respect to these non-performing loans. Table 3 is an analysis of the provision levels as well as the activity in the allowance for loan and lease losses for the past five years. Table 4 reflects the five-year history of non-performing assets and loans and leases contractually past due 90 days and still accruing. Total non-performing assets at December 31, 2000 and 1999, were $20.6 million and $27.5 million, respectively, including $4.0 million and $4.7 million 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 0.60% at December 31, 2000, a decline from 0.79% at December 31, 1999. Real estate acquired through foreclosure is carried at the lower of the recorded amount of the loan for which the foreclosed property served as collateral or the fair market value of the property as determined by a current appraisal less estimated costs to sell (fair value). Prior to foreclosure, the recorded amount of the loan is written-down, if necessary, to fair value by charging the allowance for loan losses. Subsequent to foreclosure, gains or losses on the sale of real estate acquired through foreclosure are recorded in operating income and any losses determined as a result of periodic valuations are charged to other operating expense. Loans with principal and/or interest delinquent 90 days or more which are still accruing interest were $13.8 million at December 31, 2000, an increase from the $10.4 million at December 31, 1999. Although the economy is stable, softness in certain areas of the economy may adversely affect certain borrowers and may cause additional loans to become past due beyond 89 days or be placed on non-accrual status because of uncertainty of receiving full payment of either principal or interest on these loans. Potential problem loans consist of loans which are performing but for which potential credit problems have caused Susquehanna to place them on its internally monitored loan list. At December 31, 2000, such loans, not included in Table 4, amounted to $25.8 million. Depending upon the state of the economy and the impact thereon to these borrowers, as well as future events such as regulatory examination assessment, these loans and others not currently so identified could be classified as non-performing assets in the future. 21 Other Income Non-interest income, recorded as other income, consists of: service charges on deposit accounts; commissions; fees received for credit cards, travelers' check sales, and money orders; fees for trust services; vehicle origination and servicing fees; income generated from bank-owned life insurance and reinsurance activities; gains and losses on security transactions; net gains on sales of loans; net gains on sales of other real estate owned; and other miscellaneous income, such as safe deposit box rents and gains on the sale of branch offices. Other income as a percentage of net interest income and other income was 31%, 25%, and 20% for 2000, 1999, and 1998, respectively. Non-interest income increased $20.6 million, or 38%, in 2000 over 1999. Other service charges, commissions, and fees increased $13.0 million, primarily attributable to VFAM investment advisory fees ($6.6 million) and merchant credit card fees ($7.0 million). Vehicle origination and servicing fees increased $8.6 million, as Hann's servicing portfolio increased from $0.8 billion to $1.0 bil- TABLE 3--Provision and Allowance for Loan and Lease Losses
------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan and lease losses, January 1 $ 44,465 $ 39,440 $ 39,316 $ 38,464 $ 34,028 Allowance acquired in business combination 0 0 0 1,460 4,229 Allowance transferred to third-party guarantor 3,057 0 0 0 0 Additions to provision for loan and lease losses charged to operations 3,726 11,203 5,780 4,806 5,285 Loans and leases charged-off during the year: Commercial, financial, agricultural, and leases 3,880 3,181 2,039 1,612 1,944 Real estate--mortgage 1,634 2,050 1,657 1,355 2,124 Consumer 4,186 3,188 3,413 3,820 2,686 ------------------------------------------------------------------------------------------------------------------------------------ Total charge-offs 9,700 8,419 7,109 6,787 6,754 ------------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans and leases previously charged-off: Commercial, financial, agricultural, and leases 275 550 428 413 601 Real estate--mortgage 369 812 182 71 100 Consumer 1,109 879 843 889 975 ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 1,753 2,241 1,453 1,373 1,676 ------------------------------------------------------------------------------------------------------------------------------------ Net charge-offs 7,947 6,178 5,656 5,414 5,078 ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan and lease losses, December 31 $ 37,187 $ 44,465 $ 39,440 $ 39,316 $ 38,464 ==================================================================================================================================== Average loans and leases outstanding $3,449,145 $3,347,822 $3,140,339 $2,891,979 $2,634,280 Period-end loans and leases 3,433,610 3,469,661 3,248,818 3,072,685 2,722,280 Net charge-offs as a percentage of average loans and leases 0.23% 0.18% 0.18% 0.19% 0.19% Allowance as a percentage of period-end loans and leases 1.08% 1.28% 1.21% 1.28% 1.41% ==================================================================================================================================== TABLE 4--Non-Performing Assets ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands ------------------------------------------------------------------------------------------------------------------------------------ At December 31 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ Loans contractually past due 90 days and still accruing $ 13,798 $ 10,360 $ 10,645 $ 7,248 $ 9,087 ==================================================================================================================================== Non-performing assets: Nonaccrual loans: Commercial, financial, agricultural, and leases 3,856 1,510 1,659 934 2,299 Real estate--mortgage 12,568 20,989 18,409 21,995 17,665 Consumer 117 271 343 622 477 Restructured loans 0 0 1,258 93 6,429 Other real estate owned 4,039 4,703 4,745 4,547 7,849 ------------------------------------------------------------------------------------------------------------------------------------ Total non-performing assets $ 20,580 $ 27,473 $ 26,414 $ 28,191 $ 34,719 ==================================================================================================================================== Total non-performing assets as a percentage of period-end loans and leases and other real estate owned 0.60% 0.79% 0.81% 0.92% 1.27% ==================================================================================================================================== Allowance for loan and lease losses as a percentage of non-performing loans 225% 195% 182% 166% 143% ====================================================================================================================================
22 lion. Also contributing to the overall year-to-year increase was income from bank-owned life insurance, $1.4 million; service charges on deposit accounts, $0.8 million; and trust activities, $0.7 million. Partially offsetting these increases were decreases in investment securities gains, $1.0 million, and gain on sale of mortgages, which declined by $1.6 million. Mortgages sold in the secondary market in 2000 declined by $88.6 million, or 44%, from 1999. In the third quarter of 2000, Susquehanna sold its credit card portfolio, and the transaction resulted in a gain of $1.8 million recorded as other operating income. However, this category shows a decline from 1999, as Susquehanna Bank, a wholly-owned subsidiary of Susquehanna, sold two branch offices in the third quarter of 1999 which resulted in a gain of $3.3 million. Other Expenses Non-interest expenses are categorized into seven main groupings: employee-related expenses, which include salaries, fringe benefits, and employment taxes; occupancy expenses, which include depreciation, rents, maintenance, utilities, and insurance; equipment expenses, which include depreciation, rents, and maintenance; amortization of intangible assets; vehicle expense (primarily residual value losses); restructuring charges; and other expenses (detailed in Table 5) incurred in operating Susquehanna's business. TABLE 5--Analysis of Other Expenses -------------------------------------------------------------------------------- Dollars in thousands -------------------------------------------------------------------------------- Year ended December 31 2000 1999 1998 -------------------------------------------------------------------------------- Advertising, marketing, and public relations $ 4,051 $ 3,938 $ 3,864 Audits and examinations 1,353 723 933 Communications 3,149 2,827 2,675 Directors' fees 1,255 1,212 1,337 Legal and professional 5,702 4,880 5,927 Life Insurance Company related expenses 1,178 924 679 Other real estate 1,071 1,089 1,083 Outside services 4,711 3,735 3,336 PA shares/capital stock tax 2,284 2,407 2,295 Postage and delivery 3,631 3,438 3,097 Stationery and supplies 3,204 3,359 3,126 FDIC insurance 642 769 729 Credit card related expenses 9,514 3,122 984 All other 18,818 14,720 11,960 -------------------------------------------------------------------------------- Total $60,563 $47,143 $42,025 ================================================================================ Non-interest expense increased $13.8 million, or 10%, in 2000 over 1999. Salaries and employee benefits, excluding bonuses, increased $7.3 million, or 12%, from 1999 to 2000. The increase in salaries and benefits was primarily due to the acquisition of VFAM, normal annual salary increases, and the staffing of central sites for loans, deposits, administration, and finance regarding the back office consolidation project. Anticipated savings from the reduction in the work force associated with the back office consolidation project are anticipated to be $6.0 million in the year 2001 and each succeeding year. Charges for occupancy and equipment increased $0.8 million, or 5%, in 2000 from 1999, the result of the VFAM acquisition, additional branches, and the opening of the new centralized loan servicing center in Hagerstown, Md. Amortization of intangible assets declined $0.2 million in 2000 from 1999, as certain intangibles have reached the end of their amortization period. Vehicle expense in 2000 increased $4.2 million from 1999. The increase in vehicle expense is due to residual value losses on vehicles coming off lease. These losses related primarily to large class sport utility vehicles. In the third quarter of 2000, Hann entered into an agreement with a third party to guarantee the remaining residual values on Hann's balance sheet. This agreement eliminates the residual value risk for Hann with regard to those leased vehicles. During 2000, Susquehanna was able to recognize a credit of $0.9 million to the restructure charge. This credit represents a reduction in the severance accrual recorded in December 1999 as more employees than anticipated, who were eligible for severance, have left the employ of Susquehanna prior to their severance date. The current status of the $7.4 million restructure charge is as follows: -------------------------------------------------------------------------------- Incurred Remaining Original and Paid Accrual Accrual Item Accrual to-Date Reversal at 12/31/00 -------------------------------------------------------------------------------- Employee severance benefits $3,170 $2,270 $900 $ 0 Professional fees 2,850 2,850 0 0 Employment services 660 660 0 0 Asset disposals 732 732 0 0 -------------------------------------------------------------------------------- Total $7,412 $6,512 $900 $ 0 ================================================================================ All other expenses increased $13.4 million (see Table 5), with increases in credit card assessments of $6.4 million; data processing expense and amortization of capitalized software costs of $1.6 million; consulting fees of $1.2 million; and audits and exams of $0.6 million. Income Taxes Susquehanna's effective tax rate for 2000 was 31.00% compared to 29.83% in 1999. The effective rate for 2000 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. Susquehanna recognizes deferred tax liabilities for taxable temporary differences (the difference between financial and tax bases) and deferred tax assets for deductible temporary differences. Management believes the deferred tax assets recognized at December 31, 2000, will be realized in future tax returns. While the ultimate realization of deferred tax assets is dependent on future taxable income, taxable income in prior carry-back years and future reversals of existing taxable temporary differences are sufficient to offset the future reversals of deductible temporary differences without implementing any tax strategies or assuming future taxable income. FINANCIAL CONDITION Investment Securities Susquehanna follows SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This accounting pronounce- 23 TABLE 6--Carrying Value of Investment Securities
---------------------------------------------------------------------------------------------------------------------------- Year ended December 31 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- Available- Held-to- Available- Held-to- Available- Held-to- Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury $ 3,307 $ -- $ 16,683 $ -- $ 67,955 $ 500 U.S. Government agencies 359,773 0 338,990 0 215,966 55,810 State and municipal 63,922 15,833 69,599 32,070 71,990 0 Other securities 16,641 0 17,682 0 35,392 25 Mortgage-backed securities 403,094 486 399,428 1,020 466,534 3,502 Equity securities 35,548 0 36,576 0 34,070 0 ---------------------------------------------------------------------------------------------------------------------------- Total investment securities $882,285 $ 16,319 $878,958 $33,090 $891,907 $59,837 ============================================================================================================================
ment requires the segregation of investment securities into three categories, each having a distinct accounting treatment. Securities identified as "held-to-maturity" continue to be carried at their amortized cost and, except for limited circumstances, may not be sold prior to maturity. Securities identified as "available-for-sale" must be reported at their market or "fair" value and the difference between that value and their amortized cost recorded in the equity section, net of taxes. As a result, total equity of Susquehanna was positively impacted by $12.8 million, as the "unrealized gains or losses for available-for-sale securities" changed from a negative $13.6 million at December 31, 1999, to a negative $0.8 million at December 31, 2000. Securities identified as "trading account securities" are marked-to-market with the change recorded in the income statement. Presently, Susquehanna does not engage in trading activity, but does engage in active portfolio management which requires the majority of its security portfolios be to 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, 2000, Susquehanna held no securities of one issuer, other than U.S. Government obligations, where the aggregate book value exceeded ten percent of stockholders' equity. Loans and Leases Table 8 presents the loans outstanding, by type of loan, for the past five years. Mortgage loans increased $83 million, commercial loans increased $44 million, and construction loans grew by $9 million. Consumer loans declined $45 million, partially as the result of the sale of its credit card portfolio. Susquehanna's banking subsidiaries historically have 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 $94 million at year end, and an additional $188 million was lent against junior liens on residential properties. Senior liens on 1-4 family residential properties totaled $922 million, and much of the $638 million in loans secured by non-farm, non-residential properties represented collateralization of operating lines, or term loans that finance equipment, inventory, or receivables. Loans secured by farmland totaled $39 million, while loans secured by multi-family residential properties totaled $53 million at December 31, 2000. Leases declined by $127 million in 2000, as Hann new lease production in 2000 was either sold as described in Note 5 or originated for other institutions. Under a sale-leaseback transaction, Hann sold $190 million of operating leases and retained $19 million in lease financing receivables (held as collateral in the transaction) and leases them back from the original purchaser in a "Master Lease Agreement." The Master Lease Agreement has a eight-year term with an early buy-out option on January 14, 2007. Management expects Hann to earn approximately $11.0 million in other income over the term of the Master Lease Agreement. The components of the other income include $27 million of 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 net rental income will be partially offset by the amortization of transaction costs of approximately $16 million which include a $14 million deferred loss on an interest rate swap. Susquehanna entered into an interest 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. Table 9 represents the maturity of commercial, financial, and agricultural loans as well as real estate construction loans. These loans with maturities after 2001 consist of $149 million with fixed-rate pricing and $187 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 thousand 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 thousand or more as of December 31, 2000. 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 24 TABLE 7--Investment Securities
-------------------------------------------------------------------------------------------------------------------------- Within After 1 Year but After 5 Years but After Dollars in thousands 1 Year Within 5 Years Within 10 Years 10 Years Total -------------------------------------------------------------------------------------------------------------------------- Available-for-Sale U.S. Treasury Fair value $ 2,038 $ 1,269 $ 3,307 Amortized cost 2,049 1,200 3,249 Yield 5.26% 7.03% 5.91% U.S. Government agencies Fair value $22,465 $332,148 $ 3,532 $ 1,628 $359,773 Amortized cost 22,493 332,595 3,545 1,643 360,276 Yield 6.09% 6.37% 8.52% 8.57% 6.38% Corporate debt securities Fair value $ 100 $ 15,537 $ 4 $ 1,000 $ 16,641 Amortized cost 100 15,410 5 984 16,499 Yield 9.40% 6.78% 2.63% 6.39% Mortgage-backed securities Fair value $ 3,543 $ 2,591 $28,182 $368,778 $403,094 Amortized cost 3,480 2,598 27,983 371,617 405,678 Yield 7.54% 6.52% 6.71% 6.57% 6.59% State and municipal securities Fair value $ 5,550 $ 47,386 $ 6,424 $ 4,562 $ 63,922 Amortized cost 5,537 47,361 6,351 4,425 63,674 Yield 7.08% 6.51% 7.75% 8.36% 6.81% Equity securities Fair value $ 35,548 Amortized cost 34,074 Yield 7.36% Held-to-Maturity Mortgage-backed securities Fair value $ 482 $ 482 Amortized cost 486 486 Yield 6.49% 6.49% State and municipal securities Fair value $ 2,837 $ 7,827 $ 2,496 $ 3,016 $ 16,176 Amortized cost 2,832 7,721 2,341 2,939 15,833 Yield 7.09% 7.48% 10.65% 4.61% 7.35% Total Securities Fair value $37,015 $406,758 $40,638 $378,984 $898,943 Amortized cost 36,977 406,885 40,225 381,608 899,769 Yield 6.42% 6.43% 7.26% 6.57% 6.56% ==========================================================================================================================
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 con- centration in any single financial market and also to avoid heavy funding requirements within short periods of time. At December 31, 2000, Susquehanna's subsidiary banks and savings bank have unused lines of credit available to them from the Federal Home Loan Bank for more than $566 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 $37 million at December 31, 2000. These maturing investments represent 4% of total investment securities. Cash and due from banks amounted to $129 million and unrestricted short-term investments amounted to $26 million, which represent additional sources of liquidity. Closely related to the management of liquidity is the management of interest rate risk. Interest rate risk focuses on maintaining stability in the net interest margin, an important factor in earnings growth. Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest-bearing assets and liabilities. It is the objective of management to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors to maximize earnings in an environment of changing interest rates. However, there is a lag in maintaining the desired matching because the repricing of products does occur at varying time intervals. Susquehanna employs a variety of methods to monitor interest rate risk. By dividing assets and liabilities into three groups--fixed rate, floating rate, and those which reprice only at management's 25 TABLE 8--Loan and Lease Portfolio
------------------------------------------------------------------------------------------------------------------------ At December 31 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Percentage Percentage of Loans to of Loans to Dollars in thousands Amount Total Loans Amount Total Loans ------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 371,320 10.8% $ 327,670 9.4% Real estate--construction 264,182 7.7 255,054 7.4 Real estate--mortgage 1,933,772 56.3 1,850,375 53.3 Consumer 350,707 10.2 395,566 11.4 Leases 513,629 15.0 640,996 18.5 ------------------------------------------------------------------------------------------------------------------------ Total $3,433,610 100.0% $3,469,661 100.0% ========================================================================================================================
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 $169,043 $129,929 $ 72,348 $371,320 Real estate--construction 130,159 100,892 33,131 264,182 ---------------------------------------------------------------------------------------------------------------------------------- $299,202 $230,821 $105,479 $635,502 ================================================================================================================================== Rate sensitivity of loans with maturities greater than 1 year: Variable rate $186,918 Fixed rate 149,382 ---------------------------------------------------------------------------------------------------------------------------------- $336,300 ==================================================================================================================================
TABLE 10--Allocation of Allowance for Loan and Lease Losses
--------------------------------------------------------------------------------------------------------------------------------- Dollars in thousands --------------------------------------------------------------------------------------------------------------------------------- At December 31 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 7,518 $ 5,773 $ 5,212 $ 5,184 $ 4,700 Real estate--construction 7,632 6,018 5,937 5,994 5,810 Real estate--mortgage 8,064 8,000 8,014 7,698 7,632 Consumer 6,187 6,981 5,500 5,225 5,020 Leases 2,276 9,113 4,657 3,960 3,857 Unused commitments 2,211 2,937 2,366 2,558 1,656 Unallocated 3,299 5,643 7,754 8,697 9,789 -------------------------------------------------------------------------------------------------------------------------------- Total $37,187 $44,465 $39,440 $39,316 $38,464 ================================================================================================================================
discretion--strategies are developed and designed to minimize exposure to interest rate fluctuations. Management also utilizes gap analysis to evaluate rate sensitivity at a given point in time. Table 14 illustrates Susquehanna's estimated interest rate sensitivity and periodic and cumulative gap positions as calculated at December 31, 2000 and 1999. 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 which 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 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 26 -------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------------------------- Percentage Percentage Percentage of Loans to of Loans to of Loans to Amount Total Loans Amount Total Loans Amount Total Loans -------------------------------------------------------------------------------- $ 301,385 9.3% $ 327,598 10.7% $ 272,442 10.0% 256,451 7.9 231,120 7.5 230,212 8.5 1,821,485 56.0 1,761,763 57.4 1,629,559 59.8 346,180 10.7 329,876 10.7 296,613 10.9 523,317 16.1 422,328 13.7 293,454 10.8 -------------------------------------------------------------------------------- $3,248,818 100.0% $ 3,072,685 100.0% $ 2,722,280 100.0% ================================================================================ 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, 2000, 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 $ 53,063 $186,787 $20,305 $260,155 7.6 0.1 Office buildings and warehouses 142,155 11,366 11,404 164,925 4.8 0.0 Retailing 83,726 1,412 35,719 120,857 3.5 0.6 Manufacturing 25,779 0 44,965 70,744 2.1 1.9 Hotels/motels 43,162 1,500 9,683 54,345 1.6 0.0 Agriculture 39,775 1,728 22,398 63,901 1.9 0.9 ===========================================================================================================================
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 is collateralized 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 interest rate of the instrument, the financial ability of the borrower to refinance, 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 instruments 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. TABLE 12--Average Deposit Balances -------------------------------------------------------------------------------- Dollars in thousands -------------------------------------------------------------------------------- Year ended December 31 2000 1999 1998 -------------------------------------------------------------------------------- Demand deposits $ 441,894 $ 421,055 $ 390,231 Interest-bearing demand deposits 773,552 785,175 723,669 Savings deposits 420,512 444,938 449,022 Time deposits 1,552,939 1,519,267 1,538,475 -------------------------------------------------------------------------------- Total $3,188,897 $3,170,435 $3,101,397 ================================================================================ 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, thus, the historical relationships in various indices may not be indicative of the actual change which may result in a changing interest rate environment. TABLE 13--Deposit Maturity -------------------------------------------------------------------------------- Maturity of time deposits of $100 or more at December 31, 2000 -------------------------------------------------------------------------------- Dollars in thousands -------------------------------------------------------------------------------- Three months or less $ 80,757 Over three months through six months 54,974 Over six months through twelve months 52,603 Over twelve months 27,341 -------------------------------------------------------------------------------- Total $ 215,675 ================================================================================ 27 TABLE 14--Balance Sheet Gap Analysis ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1-3 3-12 1-3 Over 3 At December 31, 2000 months months years years Total ------------------------------------------------------------------------------------------------------------------------------------ Assets Short-term investments $ 59,035 $ -- $ -- $ -- $ 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% ------------------------------------------------------------------------------------------------------------------------------------ 1-3 3-12 1-3 Over 3 At December 31, 1999 months months years years Total ------------------------------------------------------------------------------------------------------------------------------------ Assets Short-term investments $ 36,653 $ -- $ -- $ -- $ 36,653 Investments 41,067 96,746 273,186 501,049 912,048 Loans and leases, net of unearned income 1,851,726 556,222 712,731 348,982 3,469,661 ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,929,446 $ 652,968 $ 985,917 $ 850,031 $ 4,418,362 ==================================================================================================================================== Liabilities Interest-bearing demand $ 453,710 $ 178,411 $ 82,455 $ 78,584 $ 793,160 Savings 315,759 42,101 31,871 31,281 421,012 Time 444,829 480,556 214,629 206,254 1,346,268 Time in denominations of $100 or more 72,317 83,847 17,268 16,594 190,026 Total borrowings 339,910 108,664 477,787 230,664 1,157,025 ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,626,525 $ 893,579 $ 824,010 $ 563,377 $ 3,907,491 ==================================================================================================================================== Interest Sensitivity Gap: Periodic $ 302,921 $(240,611) $ 161,907 $ 286,654 Cumulative 62,310 224,217 510,871 Cumulative gap as a percentage of earning assets 7% 1% 5% 12% ====================================================================================================================================
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 December 31, 2000, and 1999, 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, 2000 is four percent at an interest rate change of minus two percent, while Table 16 discloses that net interest income at risk as of December 31, 2000 is six percent at an interest rate change of minus two percent. 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 I capital as a percentage of average assets less excludable intangibles). Capital elements are segmented into two tiers. Tier I capital represents shareholders' equity reduced by excludable intangibles, while total capital represents Tier I capital plus certain allowable long-term debt, the portion of the allowance for loan losses equal to 1.25% of risk-adjusted assets, and 45% of the unrealized gain on equity securities. The maintenance of a strong capital base at both the parent company level as well as at each bank affiliate is an important aspect of Susquehanna's philosophy. Table 17 illustrates these capital ratios for each bank and savings bank subsidiary and Susquehanna 28 TABLE 15--Balance Sheet Shock Analysis
------------------------------------------------------------------------------------------------------------------------------------ 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) -- (4,341) (11,897) % Value at risk -4% -3% -- -1% -3% ------------------------------------------------------------------------------------------------------------------------------------ Base Present At December 31, 1999 -2% -1% Value 1% 2% ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 146,576 $ 146,576 $ 146,576 $ 146,576 $ 146,576 Short-term investments 36,657 36,653 36,653 36,653 36,649 Investment securities: Held-to-maturity 36,598 34,984 33,461 32,027 30,674 Available-for-sale 932,544 906,389 878,958 852,306 824,614 Loans and leases, net of unearned income 3,443,442 3,419,563 3,398,109 3,381,101 3,377,192 Other assets 284,524 284,524 284,524 284,524 284,524 ------------------------------------------------------------------------------------------------------------------------------------ Total assets $4,880,341 $4,828,689 $4,778,281 $4,733,172 $4,700,229 ==================================================================================================================================== Liabilities Deposits: Non-interest bearing $ 415,513 $ 411,840 $ 408,410 $ 405,114 $ 403,865 Interest-bearing 2,787,660 2,761,592 2,736,328 2,712,028 2,693,073 Total borrowings 1,198,663 1,175,997 1,154,890 1,135,214 1,116,844 Other liabilities 52,430 52,430 52,430 52,430 52,430 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 4,454,266 4,401,859 4,352,058 4,304,786 4,266,212 Total economic equity 426,075 426,830 426,223 428,401 434,017 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and equity $4,880,341 $4,828,689 $4,778,281 $4,733,187 $4,700,229 ==================================================================================================================================== Economic equity ratio 9% 9% 9% 9% 9% Value at risk (148) 607 -- 2,178 7,794 % Value at risk 0% 0% -- 1% 2% ====================================================================================================================================
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 The Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards ("SFAS") 138, "Accounting for Derivative Instruments and Hedging Activities--Amendment of 29 TABLE 16--Net Interest Income Shock Analysis
------------------------------------------------------------------------------------------------------------------------------------ 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) -- $ 3,164 $ 7,720 % Net interest income at risk -6% -4% -- 2% 5% ------------------------------------------------------------------------------------------------------------------------------------ Base Dollars in thousands Present At December 31, 1999 -2% -1% Value 1% 2% ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Short-term investments $ 1,482 $ 1,890 $ 2,297 $ 2,704 $ 3,112 Investments 56,098 57,054 57,786 58,482 59,045 Loans and leases 235,405 265,753 296,544 325,292 355,929 ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 292,985 324,697 356,627 386,478 418,086 ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest-bearing demand and savings 16,470 27,269 37,910 48,398 58,735 Time 64,589 69,607 74,599 79,584 85,059 Total borrowings 63,383 74,011 84,719 95,502 106,372 ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 144,442 170,887 197,228 223,484 250,166 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 148,543 $ 153,810 $159,399 $ 162,994 $ 167,920 ==================================================================================================================================== Net interest income at risk $(10,856) $ (5,589) -- $ 3,595 $ 8,521 % Net interest income at risk -7% -4% -- 2% 5%
TABLE 17--Capital Adequacy
------------------------------------------------------------------------------------------------------------------------------------ At December 31, 2000 ------------------------------------------------------------------------------------------------------------------------------------ Tier I Capital Total Capital Leverage Ratio (A) Ratio (B) Ratio (C) ------------------------------------------------------------------------------------------------------------------------------------ Required Ratio 4.00% 8.00% 4.00% Citizens National Bank of Southern Pennsylvania 12.51 13.38 8.54 Equity Bank, N.A. 9.23 10.44 7.19 Farmers First Bank 13.12 14.37 10.28 Farmers & Merchants Bank and Trust 10.33 10.94 7.17 First American National Bank of Pennsylvania 16.31 17.23 11.22 First National Trust Bank 13.07 14.32 8.96 Founders' Bank 8.84 10.08 7.08 Susquehanna Bank 9.86 13.47 6.95 Williamsport National Bank 17.40 18.65 12.58 Total Susquehanna 11.18% 13.28% 8.82% ====================================================================================================================================
(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. 30 SFAS No. 133," in June of 2000. SFAS established a new model for accounting for derivatives and hedging activities and superseded and amended a number of existing standards. Susquehanna has implemented SFAS 133 and 138 as of January 1, 2001, with no material impact on Susquehanna's financial condition or results of operations. Summary of 1999 Compared to 1998 Susquehanna's net income for the year ended December 31, 1999, declined to $43.5 million, or 7%, below 1998 net income of $46.8 million. Excluding the special charges noted earlier, Susquehanna's net income for 1999 would have increased 8% over annual 1998. Susquehanna's earnings performance was affected by significant growth in non-interest income resulting primarily from increases in vehicle origination and servicing fees, income from bank-owned life insurance, and a one-time $3.3 million pre-tax gain on the sale of two branch offices. Non-interest income increased $14.3 million, or 37%, in 1999 over 1998. Diluted earnings per common share were $1.10 in 1999 compared to $1.18 in 1998. ROA and ROE decreased from 1.06% and 11.75%, respectively, in 1998 to 0.94% and 10.45%, respectively, in 1999. Excluding the special charges noted above, annual 1999 diluted EPS, ROA, and ROE were $1.28, 1.09%, and 12.13%, respectively. During 1995 and 1996, Susquehanna acquired two Maryland savings banks under the purchase method of accounting for business combinations. These purchase transactions created an intangible asset, goodwill, of $34 million, which significantly affects Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash charge to earnings. For 1999, tangible net income, earnings per share, ROA, and ROE were $46.5 million, $1.18, 1.01%, and 12.13%, respectively, compared to actual net income, basic earnings per share, ROA and ROE of $43.5 million, $1.11, 0.94%, and 10.45%, respectively. Excluding the special charges, tangible net income, EPS, ROA, and ROE were $ 53.5 million, $1.36, 1.16%, and 13.96%, respectively. Tangible net income, earnings per share, ROA, and ROE for 1998 were $49.1 million, $1.25, 1.12%, and 13.51%, respectively. Tangible net income is actual net income increased by the tax- effected amortization of those intangible assets which are deducted from equity in determining Tier I capital. 31 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, 2000 and 1999............................. 33 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998............................................ 34 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998............................................ 35 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998........................ 36 Notes to Consolidated Financial Statements............................................ 37 Report of Independent Accountants..................................................... 52 Summary of Quarterly Financial Data................................................... 53
32 Consolidated Balance Sheets SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 129,101 $ 146,576 Short-term investments: Restricted 32,731 7,304 Unrestricted 26,304 29,349 ------------------------------------------------------------------------------------------------------------------------------------ Total short-term investments 59,035 36,653 ------------------------------------------------------------------------------------------------------------------------------------ Investment securities available for sale 882,285 878,958 Investment securities held to maturity (Fair values of $16,658 and $33,461) 16,319 33,090 Loans and leases, net of unearned income 3,433,610 3,469,661 Less: Allowance for loan and lease losses 37,187 44,465 ------------------------------------------------------------------------------------------------------------------------------------ Net loans and leases 3,396,423 3,425,196 ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment (net) 58,303 55,429 Accrued income receivable 26,775 23,763 Bank-owned life insurance 113,865 108,105 Other assets 110,750 97,227 ------------------------------------------------------------------------------------------------------------------------------------ Total assets $4,792,856 $4,804,997 ==================================================================================================================================== Liabilities Deposits: Noninterest-bearing $ 462,297 $ 430,054 Interest-bearing 2,786,716 2,750,466 ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 3,249,013 3,180,520 ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings 205,336 207,507 FHLB borrowings 367,954 372,414 Vehicle financing 357,522 482,104 Long-term debt 100,000 95,000 Accrued interest, taxes, and expenses payable 42,382 34,746 Other liabilities 17,212 17,684 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 4,339,419 4,389,975 ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' Equity Common stock Authorized: 100,000,000 ($2.00 par value) Issued: 39,398,190 and 39,394,094, at December 31, 2000 and 1999, respectively 78,796 78,788 Surplus 57,872 57,873 Retained earnings 320,020 292,150 Accumulated other comprehensive income, net of taxes of ($408) and ($6,961) at December 31, 2000 and 1999, respectively (757) (13,616) Less: Treasury stock, (176,798 and 11,641 common shares at cost at December 31, 2000 and 1999, respectively) 2,494 173 ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 453,437 415,022 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $4,792,856 $4,804,997 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. 33 Consolidated Statements of Income SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands, except per share ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Interest Income Interest and fees on loans and leases $293,046 $276,280 $274,399 Interest on investment securities: Taxable 53,238 50,485 48,578 Interest on investment securities: Tax-exempt 4,195 5,232 5,675 Interest on short-term investments 2,937 3,089 6,962 ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 353,416 335,086 335,614 ------------------------------------------------------------------------------------------------------------------------------------ Interest Expense Interest on deposits: Interest-bearing demand 22,080 20,359 20,651 Savings 7,709 8,166 10,102 Time 85,216 77,487 83,951 Interest on short-term borrowings 11,597 4,336 4,517 Interest on FHLB borrowings 23,139 19,600 16,190 Interest on vehicle financing 30,961 34,679 33,552 Interest on long-term debt 7,762 8,899 7,302 ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 188,464 173,526 176,265 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 164,952 161,560 159,349 Provision for loan and lease losses 3,726 11,203 5,780 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan and lease losses 161,226 150,357 153,569 ------------------------------------------------------------------------------------------------------------------------------------ Other Income Service charges on deposit accounts 10,867 10,054 8,570 Vehicle origination and servicing fees 22,053 13,480 7,918 Other service charges, commissions, fees 19,846 6,836 4,184 Income from fiduciary-related activities 4,734 4,028 3,958 Gain on sale of mortgages 1,846 3,427 4,923 Income from bank-owned life insurance 5,909 4,528 3,374 Other operating income 8,768 10,128 6,104 Investment security gains/(losses) (13) 978 75 ------------------------------------------------------------------------------------------------------------------------------------ Total other income 74,010 53,459 39,106 ------------------------------------------------------------------------------------------------------------------------------------ Other Expenses Salaries and employee benefits 68,110 64,218 60,599 Net occupancy expense 9,933 9,349 9,160 Furniture and equipment expense 8,308 8,088 7,698 Amortization of intangible assets 3,294 3,476 4,532 Vehicle expense 6,273 2,102 0 Restructuring charge (900) 7,412 0 Other operating expenses 60,563 47,143 42,025 ------------------------------------------------------------------------------------------------------------------------------------ Total other expenses 155,581 141,788 124,014 ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 79,655 62,028 68,661 Provision for income taxes 24,693 18,505 21,857 ------------------------------------------------------------------------------------------------------------------------------------ Net Income $ 54,962 $ 43,523 $ 46,804 ==================================================================================================================================== Per share information: Basic earnings $ 1.40 $ 1.11 $ 1.19 Diluted earnings 1.40 1.10 1.18 Cash dividends 0.70 0.62 0.57 Average shares outstanding: Basic 39,262 39,320 39,228 Diluted 39,365 39,497 39,548 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. 34 Consolidated Statements of Cash Flows SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 54,962 $ 43,523 $ 46,804 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion 14,248 11,857 9,652 Provision for loan and lease losses 3,726 11,203 5,780 Gain on sale of branch offices 0 (3,352) 0 (Gain)/loss on securities transactions 13 (978) (75) (Gain)/loss on sale of loans (3,936) (3,427) (4,923) (Gain)/loss on sale of other real estate owned 15 6 (274) Mortgage loans originated for resale (117,328) (187,017) (282,073) Sale of mortgage loans originated for resale 114,530 203,158 273,707 Leases originated for resale (222,376) 0 0 Sale of leases originated for resale 200,709 0 0 (Increase)/decrease in accrued interest receivable (3,012) (989) 691 Increase/(decrease) in accrued interest payable 3,471 734 1,255 (Increase)/decrease in accrued expenses and taxes payable 4,165 2,635 (2,018) Other, net 3,900 1,832 11,013 ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 53,087 79,185 59,539 ------------------------------------------------------------------------------------------------------------------------------------ Investing Activities Net increase in restricted short-term investments (25,427) (3,713) (409) Proceeds from the sale of available-for-sale securities 4,482 47,719 37,933 Proceeds from the maturity of investment securities 120,204 264,783 360,343 Purchase of available-for-sale securities (84,412) (302,763) (625,038) Purchase of held-to-maturity securities (7,887) 0 0 Proceeds from sale of credit card portfolio 12,373 0 0 Net (increase)/decrease in loans and leases 19,670 (192,610) (258,296) Transfer of allowance for loan and lease losses to third-party guarantor (3,057) 0 0 Capital expenditures (9,709) (5,400) (8,123) Net cash and cash equivalents paid in acquisition (12,707) (22,381) 0 Purchase of insurance products 0 (50,000) (9,438) ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by/(used for) investing activities 13,530 (264,365) (503,028) ------------------------------------------------------------------------------------------------------------------------------------ Financing Activities Net increase/(decrease) in deposits 68,493 (13,978) 175,413 Net increase/(decrease) in short-term borrowings (2,171) 102,976 205,014 Net increase/(decrease) in FHLB borrowings (4,460) 58,778 0 Net increase/(decrease) in vehicle financing (124,582) 25,191 118,158 Proceeds from issuance of long-term debt 5,000 0 10,000 Repayment of long-term debt 0 (10) (5,018) Proceeds from issuance of common stock 772 1,372 1,675 Cash paid for treasury stock (3,097) (287) (742) Dividends paid (27,092) (22,918) (20,132) ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided from/(used for) financing activities (87,137) 151,124 484,368 ------------------------------------------------------------------------------------------------------------------------------------ Net increase/(decrease) in cash and cash equivalents (20,520) (34,056) 40,879 Cash and cash equivalents at January 1 175,925 209,981 169,102 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at December 31 $ 155,405 $ 175,925 $ 209,981 ==================================================================================================================================== Cash and cash equivalents: Cash and due from banks $ 129,101 $ 146,576 $ 116,801 Unrestricted short-term investments 26,304 29,349 93,180 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at December 31 $ 155,405 $ 175,925 $ 209,981 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. 35 Consolidated Statements of Changes in Stockholders' Equity SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, 2000, 1999, and 1998 ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Dollars in thousands, Common Retained Comprehensive Treasury Total except per share data Stock Surplus Earnings Income Stock Equity ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1998 $55,136 $79,192 $244,873 $3,825 $ (255) $382,771 Comprehensive income: Net income 46,804 46,804 Change in unrealized gain/(loss) on securities, net of taxes of $954 and reclassification adjustment of $75 2,179 2,179 ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income 46,804 2,179 48,983 Common stock issued under employee benefit plans 12 325 214 551 Effect of three-for-two stock split 23,507 (22,346) 1,161 Purchase/conversion of treasury stock (742) (742) Cash paid for fractional shares of acquired entities (5) (5) Cash dividends paid: By pooled entities (847) (847) Per common share of $0.57 (19,285) (19,285) ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 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 (includes 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 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. 36 Notes to Consolidated Financial Statements YEARS ENDED DECEMBER 31, 2000, 1999, 1998 (Dollars in thousands, except as noted and per share data) -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Susquehanna Bancshares, Inc. and subsidiaries ("Susquehanna") conform to 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 National Bank of Pennsylvania ("FANB"), First National Trust Bank ("First National"), Williamsport National Bank ("Williamsport"), Citizens National Bank of Southern Pennsylvania ("Citizens"), Susquehanna Bancshares East, Inc. and subsidiaries ("Susquehanna East"), Susquehanna Bancshares South, Inc. and subsidiaries ("Susquehanna South"), Susque-Bancshares Life Insurance Co. ("SBLIC") and Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC"), Valley Forge Asset Management Corp. ("VFAM"), as of and for the years ended December 31, 2000, 1999, and 1998. All significant intercompany transactions have been eliminated. Income and expenses are recorded on the accrual basis of accounting except for trust and certain other fees, which are recorded principally on the cash basis. This does not materially affect the results of operations or financial position of Susquehanna. Nature of Operations. Susquehanna is a financial holding company, which operates eight commercial banks and one savings bank based upon the sound principles of super-community banking. These subsidiaries provide financial services from 140 branches located in central and southeastern Pennsylvania, Maryland, and southern New Jersey. In addition, Susquehanna operates 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 over 10 years. The excess of purchase price over the fair value of net assets acquired (goodwill) is amortized on a straight-line basis generally over 15 years. The unamortized amount of goodwill was $38,934 and $31,106 at December 31, 2000 and 1999, 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 $184,993 in 2000, $178,734 in 1999, and $172,387 in 1998. Income taxes paid were $422 in 2000, $16,409 in 1999, and $19,805 in 1998. Amounts transferred to other real estate owned were $2,795 in 2000, $7,342 in 1999, and $8,408 in 1998. On February 1, 2000, Susquehanna acquired Boston Service Company, Inc., Jamestown, N.J., 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 acquired Valley Forge Asset Management Corp., King of Prussia, Pa., 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. 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, 2000 or 1999. 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 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, and estimated value of any underlying collateral and prevailing 37 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 Susquehanna will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Larger groups of small-balance loans, such as residential mortgage and installment loans are collectively evaluated for impairment. Only commercial loans exceeding $100 are individually evaluated for impairment. An insignificant delay or shortfall in the amounts of payments, when considered independent of other factors, would not cause a loan to be rendered impaired. Insignificant delays or shortfalls may include, depending on specific facts and circumstances, those that are associated with temporary operational downturns or seasonal delays. Management performs periodic reviews of Susquehanna's loan portfolio to identify impaired loans. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When an impaired loan or portion of an impaired loan is determined to be uncollectible, the portion deemed uncollectible is charged against the related valuation allowance and subsequent recoveries, if any, are credited to the valuation allowance. Depreciable Assets. Buildings, leasehold improvements, and furniture and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related property as follows: Buildings, 40 years, and furniture and equipment, 3 to 20 years. Leasehold improvements are amortized over the shorter of the lease term or 10 to 20 years. Maintenance and normal repairs are charged to operations as incurred, while additions and improvements to buildings and furniture and equipment are capitalized. Gain or loss on disposition is reflected in operations. Long-lived assets 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 non-accrual status when principal or interest is past due 90 days or more and the loan is not well collateralized and in the process of collection or immediately, if, in the opinion of management, full collection is doubtful. Interest accrued but not collected as of the date of placement on nonaccrual status is reversed and charged against current income. Susquehanna does not accrue interest on impaired loans. While a loan is considered impaired or on nonaccrual status, subsequent cash payments received either are applied to the outstanding principal balance or recorded as inter- est 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") became effective in 1998. This statement 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. Susquehanna's non-banking activities are insignificant and do not require separate information. 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 ($13), $978, and $75 for the years ended December 31, 2000, 1999, and 1998, respectively. 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. Consolidated Statements of Changes in Stockholders' Equity -------------------------------------------------------------------------------- Common Shares Outstanding -------------------------------------------------------------------------------- Balance, January 1, 1998 26,886,631 Stock issued under employee benefit plans 27,167 Exercise of stock-warrants of pooled entity 76,814 Effect of three-for-two stock split 12,304,910 Purchase of treasury stock (33,000) -------------------------------------------------------------------------------- Balance, December 31, 1998 39,262,522 Stock issued under employee benefit plans 134,931 Purchase of treasury stock (15,000) -------------------------------------------------------------------------------- Balance, December 31, 1999 39,382,453 Stock issued under employee benefit plans 59,156 Purchase of treasury stock (220,217) -------------------------------------------------------------------------------- Balance, December 31, 2000 39,221,392 ================================================================================ 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 38 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 the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method. All share, per share, and option data in these financial statements have been adjusted to give effect to the three-for-two stock split of 1998. Recent Accounting Pronouncements. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125," in September of 2000. This Statement replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. This Statement is not effective for transfers until after March 31, 2001; however, the disclosure requirements relating to securitization transactions and collateral are effective for fiscal years ending after December 31, 2000. Management has reviewed the Statement and has determined that the Statement will have no impact on Susquehanna's financial condition or results of operations and that no additional disclosure is required. In March 2000, the FASB issued FASB Interpretation Number ("FIN") 44, "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB 25." The FIN clarifies the application of Accounting Practice Bulletin ("APB") 25 for only certain issues, and does not address any issues related to the application of the fair value method in SFAS 123. The Interpretation clarifies (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This FIN was effective for the third quarter of 2000 and had no material effect on Susquehanna's financial condition or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which, as amended, is effective for calendar year-end registrants for their December 31, 2000, financial statements. This SAB summarizes certain of the staff's views in applying accounting principles generally accepted in the United States of American to revenue recognition in financial statements. Susquehanna has implemented SAB 101 for their December 31, 2000 financial statements, with no material impact on Susquehanna's revenue recognition policies and procedures. 39 -------------------------------------------------------------------------------- 2. COMPLETED ACQUISITIONS On February 1, 2000, Susquehanna completed the acquisition of Boston Service Company, Inc. (t/a Hann Financial Service Corporation)("Hann"), a closely-held consumer automobile financing company that serviced more than $800 million in lease receivables. Susquehanna issued 2,360,000 shares of common stock to stockholders of Hann for the outstanding common shares of Hann. The acquisition was accounted for under the pooling-of-interests 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. On March 3, 2000, Susquehanna completed the acquisition of Valley Forge Asset Management Corp. ("VFAM"), 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 $9.3 million was realized in the acquisition and will be amortized to other operating expense on a straight-line basis over 25 years. In this transaction, there are also contingent cash payments totalling $6.0 million. These contingent cash payments are based upon certain earnings targets and will be recorded as goodwill if earned. No pro forma data is disclosed because the acquisition is not material to Susquehanna. Previously reported information has been restated as follows:
-------------------------------------------------------------------------------------------------- 1999 -------------------------------------------------------------------------------------------------- As Reported Hann SBI Restated -------------------------------------------------------------------------------------------------- Net interest income $ 160,923 $ 637 $161,560 Provision for loan and lease losses 7,200 4,003 11,203 Other income 39,979 13,480 53,459 Other expense 131,882 9,906 141,788 -------------------------------------------------------------------------------------------------- Income before taxes 61,820 208 62,028 Taxes 18,422 83 18,505 -------------------------------------------------------------------------------------------------- Net income $ 43,398 $ 125 $ 43,523 ================================================================================================== Earnings per share: Basic $ 1.17 $ 1.11 Diluted $ 1.17 $ 1.10 Average shares outstanding: Basic 36,960 2,360 39,320 Diluted 37,137 2,360 39,497 -------------------------------------------------------------------------------------------------- 1998 -------------------------------------------------------------------------------------------------- As Reported Hann SBI Restated -------------------------------------------------------------------------------------------------- Net interest income $ 158,129 $ 1,220 $159,349 Provision for loan and lease losses 5,333 447 5,780 Other income 31,188 7,918 39,106 Other expense 118,064 5,950 124,014 -------------------------------------------------------------------------------------------------- Income before taxes 65,920 2,741 68,661 Taxes 20,757 1,100 21,857 -------------------------------------------------------------------------------------------------- Net income $ 45,163 $ 1,641 $ 46,804 ================================================================================================== Earnings per share: Basic $ 1.22 $ 1.19 Diluted $ 1.21 $ 1.18 Average shares outstanding: Basic 36,868 2,360 39,228 Diluted 37,188 2,360 39,548
-------------------------------------------------------------------------------- 3. SHORT-TERM INVESTMENTS The book value of short-term investments and weighted average interest rates on December 31, 2000 and 1999, were as follows: ----------------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------------- Book Book Value Rates Value Rates ----------------------------------------------------------------------- Interest-bearing deposits in other banks $40,463 5.42% $23,781 3.80% Federal funds sold 291 6.50 3,418 4.52 Money market funds 18,281 5.84 9,454 5.30 ----------------------------------------------------------------------- Total $59,035 $36,653 ======================================================================= 40 -------------------------------------------------------------------------------- 4. INVESTMENT SECURITIES The amortized cost and fair values of investment securities at December 31, 2000 and 1999, are as follows:
------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair At December 31, 2000 Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------------ 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, 1999 Available-for-Sale: U.S. Treasury $ 16,658 $ 49 $ 24 $ 16,683 U.S. Government agencies 346,041 36 7,087 338,990 Obligations of states and political subdivisions 70,136 201 738 69,599 Corporate debt securities 17,795 52 165 17,682 Mortgage-backed securities 414,317 47 14,936 399,428 Equity securities 34,588 1,988 0 36,576 ------------------------------------------------------------------------------------------------------------------------------------ $ 899,535 $ 2,373 $ 22,950 $ 878,958 ------------------------------------------------------------------------------------------------------------------------------------ Held-to-Maturity: State and municipal $ 32,070 $ 388 $ 8 $ 32,450 Mortgage-backed securities 1,020 0 9 1,011 ------------------------------------------------------------------------------------------------------------------------------------ 33,090 $ 388 $ 17 $ 33,461 ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities $ 932,625 $ 2,761 $ 22,967 $ 912,419 ====================================================================================================================================
At December 31, 2000 and 1999, investment securities with a carrying value of $475,725 and $463,071 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, 2000 and 1999. The amortized cost and fair value of U.S. Treasury, U.S. Government agencies, obligations of states and political subdivisions, corporate debt securities, and mortgage-backed securities, at December 31, 2000, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 41 -------------------------------------------------------------------------------- Amortized Fair Cost Value -------------------------------------------------------------------------------- Securities Available-for-Sale: Within one year $ 33,659 $ 33,696 After one year but within five years 399,164 398,931 After five years but within ten years 37,884 38,142 After ten years 378,669 375,968 -------------------------------------------------------------------------------- $ 849,376 $ 846,737 -------------------------------------------------------------------------------- Securities Held-to-Maturity: Within one year $ 3,318 $ 3,319 After one year but within five years 7,721 7,827 After five years but with in ten years 2,341 2,496 After ten years 2,939 3,016 -------------------------------------------------------------------------------- 16,319 16,658 -------------------------------------------------------------------------------- Total debt securities $ 865,695 $ 863,395 ================================================================================ The gross realized gains and gross realized losses on investment securities transactions are summarized in the next column. During 2000, 1999, and 1998, 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, 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) ================================================================================ -------------------------------------------------------------------------------- For the year ended December 31, 1998 -------------------------------------------------------------------------------- Gross gains $ 210 $ 0 Gross losses 133 2 -------------------------------------------------------------------------------- Net gains (losses) $ 77 $ (2) ================================================================================ Interest earned on investment securities for the years ended December 31 was as follows: -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Taxable $53,238 $50,485 $48,578 Tax-advantaged 4,195 5,232 5,675 -------------------------------------------------------------------------------- Total $57,433 $55,717 $54,253 ================================================================================ 42 5. LOANS AND LEASES At December 31, loans and leases, net of unearned income ($53,239 at December 31, 2000, and $105,040 at December 31, 1999), were as follows:
------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 371,320 $ 327,670 Real estate--construction 264,182 255,054 Real estate--mortgage 1,933,772 1,850,375 Consumer 350,707 395,566 Leases 513,629 640,996 ------------------------------------------------------------------------------------ Total $3,433,610 $3,469,661 ==================================================================================== Net investment in direct financing leases is as follows: ------------------------------------------------------------------------------------ Minimum lease payments receivable $172,775 $226,352 Estimated residual value of leases 391,625 495,309 Unearned income under lease contracts (50,771) (80,665) ------------------------------------------------------------------------------------ Total leases $513,629 $640,996 ====================================================================================
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 buy-out 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. Following are Hann's minimum future lease payments under the arrangement. --------------------------------------------------- 2001 $19,786 2002 23,713 2003 23,713 2004 23,713 2005 27,665 Subsequent years 93,940 --------------------------------------------------- $212,530 =================================================== Certain directors and executive officers of Susquehanna and its affiliates, including their immediate families and companies in which they are principal owners (more than 10%), were indebted to banking subsidiaries. In the opinion of management, such loans are consistent with sound banking practices and are within applicable regulatory bank lending limitations. Susquehanna relies on the directors and executive officers for the identification of their associates. The activity of loans to such persons whose balance exceeded $60 during 2000, 1999, and 1998 follows: ----------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------- Balance--January 1 $35,975 $27,225 $27,740 Additions 48,735 28,273 20,379 Deductions: Amounts collected 46,599 24,657 20,894 Other changes (2,865) 5,134 0 ----------------------------------------------------------------------- Balance--December 31 $35,246 $35,975 $27,225 ======================================================================= Substantially all of Susquehanna's loans and leases are to enterprises and individuals in Pennsylvania, New Jersey, New York, and Maryland. 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, 2000 and 1999, is presented as follows: -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Impaired loans without a related reserve $4,379 $11,491 Impaired loans with a reserve 2,970 1,460 -------------------------------------------------------------------------------- Total impaired loans $7,349 $12,951 ================================================================================ Reserve for impaired loans $ 866 $ 532 ================================================================================ An analysis of impaired loans for the years ended December 31, 2000 and 1999, is presented as follows: -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Average balance of impaired loans $10,645 $10,560 Interest income on impaired loans (cash basis) $ 76 $ 134 ================================================================================ 43 ------------------------------------------------------------------------------- 6. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses were as follows: ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- Balance--January 1 $44,465 $39,440 $39,316 Reserve transferred to third-party guarantor 3,057 0 0 Provision charged to operating expenses 3,726 11,203 5,780 ------------------------------------------------------------------------------- 45,134 50,643 45,096 ------------------------------------------------------------------------------- Charge-offs 9,700 8,419 7,109 Recoveries 1,753 2,241 1,453 ------------------------------------------------------------------------------- Net charge-offs 7,947 6,178 5,656 ------------------------------------------------------------------------------- Balance--December 31 $37,187 $44,465 $39,440 =============================================================================== ------------------------------------------------------------------------------- 7. PREMISES AND EQUIPMENT Property, buildings, and equipment, at December 31, were as follows: ------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------- Land $ 9,706 $ 8,393 Buildings 48,222 45,346 Furniture and equipment 60,462 53,185 Leasehold improvements 6,027 6,348 Land improvements 738 1,136 ------------------------------------------------------------------------------- 125,155 114,408 ------------------------------------------------------------------------------- Less: accumulated depreciation and amortization 66,852 58,979 ------------------------------------------------------------------------------- $ 58,303 $ 55,429 =============================================================================== Depreciation and amortization expense charged to operations amounted to $7,594 in 2000, $6,881 in 1999, and $5,968 in 1998. 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 ------------------------------------------------------------------------------- 2001 $ 3,814 2002 3,302 2003 3,017 2004 2,784 2005 2,203 Subsequent years 8,530 ------------------------------------------------------------------------------- $ 23,650 =============================================================================== Total rent expense charged to operations amounted to $3,887 in 2000, $3,475 in 1999, and $3,233 in 1998. ------------------------------------------------------------------------------- 8. DEPOSITS Deposits at December 31 were as follows: ------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------- Noninterest-bearing: Demand $ 462,297 $ 430,054 Interest-bearing: Interest-bearing demand 817,866 793,160 Savings 413,878 421,012 Time 1,303,297 1,346,268 Time of $100 or more 251,675 190,026 ------------------------------------------------------------------------------- Total deposits $ 3,249,013 $ 3,180,520 =============================================================================== 44 -------------------------------------------------------------------------------- 9. BORROWINGS Short-Term Borrowings Short-term borrowings and weighted average interest rates, at December 31, were as follows: --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------------------------------------- Amount Rate Amount Rate ------------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements $198,573 5.72% $179,278 5.02% Treasury tax and loan notes 6,763 6.25 14,010 4.54 Federal funds purchased 0 14,219 5.07 ------------------------------------------------------------------------------------------------------------- $205,336 $207,507 =============================================================================================================
Federal Home Loan Bank Borrowings ----------------------------------------------------------------------- December 31 2000 1999 ----------------------------------------------------------------------- Due 2000, 4.50% to 6.16% $ 0 $107,325 Due 2001, 5.27% to 6.76% 111,250 13,750 Due 2002, 0.00% to 5.60% 1,500 10,000 Due 2003, 5.69% to 5.98% 114,700 115,500 Due 2004, 4.65% 15,000 15,000 Due 2006, 6.65% 691 788 Due 2008, 5.43% to 5.50% 75,000 75,000 Due 2009, 5.30% to 5.34% 3,000 33,000 Due 2010, 6.01% to 6.17% 42,750 0 Due 2011, 3.25% 83 85 Due 2012, 3.25% 150 155 Due 2013, 5.94% 199 210 Due 2014, 5.00% to 6.51% 1,041 1,057 Due 2018, 6.00% 343 347 Due 2019, 4.50% 194 197 Due 2020, 4.50% to 5.40% 2,053 0 ----------------------------------------------------------------------- $367,954 $372,414 ======================================================================== 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 $146,275 in 2001, $94,155 in 2002, $110,756 in 2003, ad $6,336 in 2004 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 $934 million and $1.0 billion, of which $368 million and $372 million were outstanding at December 31, 2000 and 1999, respectively. At December 31, 2000, Susquehanna subsidiaries could borrow an additional $566 million based on qualifying collateral. Such additional borrowings would require the subsidiaries to increase their investment in FHLB stock by approximately $15 million. Long-Term Debt -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Amount Rate Amount Rate -------------------------------------------------------------------------------- Term note due July 19, 2003 $ 10,000 6.09% $10,000 6.09% Term note due July 19, 2003 5,000 7.35 0 0.00 Subordinate notes due February 1, 2005 50,000 9.00 50,000 9.00 Senior notes due February 1, 2003 35,000 6.30 35,000 6.30 -------------------------------------------------------------------------------- $100,000 $95,000 ================================================================================ The term notes are payable with interest only payments being made until maturity. 45 -------------------------------------------------------------------------------- 10. INCOME TAXES The components of the provision for income taxes are as follows: -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Current $ 464 $19,009 $17,250 Deferred 24,229 (504) 4,607 -------------------------------------------------------------------------------- Total $24,693 $18,505 $21,857 ================================================================================ The provision for income taxes differs from the amount derived from applying the statutory income tax rate to income before income taxes as follows: -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Provision for statutory rates $27,879 $21,710 $24,031 Tax-advantaged income (2,595) (2,857) (3,144) Other, net (591) (348) 970 -------------------------------------------------------------------------------- Total $24,693 $18,505 $21,857 ================================================================================ 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: -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Deferred tax assets: Reserve for loan losses $13,991 $16,539 $13,521 Accrued pension expense 904 1,180 1,314 Deferred directors' fees 564 564 811 Deferred compensation 1,103 775 451 Nonaccrual loan interest 996 1,398 1,078 Core deposit intangible 0 101 25 Purchase accounting 537 493 449 Suspended losses 18,665 38,311 24,462 Unrealized investment securities (gains) and losses 408 6,961 (3,225) Other assets 2,696 4,835 1,248 Deferred tax liabilities: Deferred loan costs (2,328) (1,310) (10) FHLB stock dividends (395) (395) (395) Premises and equipment (2,359) (2,208) (2,160) Operating lease income, net (54,993) (56,116) (37,259) Recapture of savings banks' bad debt reserve (90) (344) (598) Other liabilities (2,248) (2,551) (2,169) -------------------------------------------------------------------------------- Net deferred income tax asset/(liability) $(22,549) $8,233 $(2,457) ================================================================================ 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Susquehanna is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statement of condition. The contract or notional amount of those instruments reflects the extent of involvement Susquehanna has in particular classes of financial instruments. Susquehanna's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the contractual amount of these instruments. Susquehanna uses the same credit policies for these instruments as it does for on-balance sheet instruments. Standby letters of credit are conditional commitments issued by Susquehanna to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Susquehanna evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Susquehanna upon extension of credit, is based on management's credit evaluation of the borrower. Financial instruments with off-balance sheet risk at December 31, 2000 and 1999, are as follows: -------------------------------------------------------------------------------- Contractual 2000 1999 -------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Standby letters of credit $ 37,313 $ 36,426 Commitments to originate loans 175,929 136,257 Unused portion of home equity and credit card lines 171,836 188,043 Other unused commitments, principally commercial lines of credit 517,463 418,387 46 -------------------------------------------------------------------------------- 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Susquehanna's estimated fair value information about financial instruments is presented below. Some of this information is presented whether it is recognized in the Consolidated Balance Sheet or not, and if it is practicable to estimate that value. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques. As a result, Susquehanna's ability to actually realize these derived values cannot be assured. The estimated fair values disclosed herewith may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The disclosure requirements exclude disclosure of nonfinancial assets such as buildings as well as certain financial instruments such as leases. Susquehanna also has several intangible assets which are not included in the fair value disclosures such as mortgage servicing rights, customer lists, and core deposit intangibles. Accordingly, the aggregate estimated fair values presented do not represent the underlying value of Susquehanna. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Cash and Due from Banks and Short-Term Investments. The fair value of cash and due from banks and short-term investments is deemed to be the same as their carrying value. Investment Securities. The fair value of investment securities is estimated based on quoted market prices, where available. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans. Variable rate loans which do not expose Susquehanna to interest rate risk have a fair value that equals their carrying value, discounted for estimated future credit losses. The fair value of fixed rate loans was based upon the present value of projected cash flows. The discount rate was based upon the U.S. Treasury yield curve, adjusted for credit risk. Deposits. The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date. The carrying value of variable rate time deposits represents a reasonable estimate of fair value. The fair value of fixed rate time deposits is based upon the discounted value of future cash flows expected to be paid at maturity. Discount rates are calculated off the U.S. Treasury yield curve. Short-term Borrowings. The carrying amounts reported in the balance sheet represent a reasonable estimate of fair value since these liabilities mature in less than one year. FHLB Borrowings, Vehicle Financing, and Long-Term Debt. Fair values were based upon quoted rates of similar instruments, issued by banking companies with similar credit ratings. Off-Balance Sheet Items. The fair value of unused commitments to lend and standby letters is deemed to be the same as their carrying value. The following table represents the carrying amount and estimated fair value of Susquehanna's financial instruments at December 31:
------------------------------------------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------------------------------------------------------ Assets: Cash and due from banks $ 129,101 $ 129,101 $ 146,576 $ 146,576 Short-term investments 59,035 59,035 36,653 36,653 Investment securities 898,604 898,604 912,048 912,419 Loans, net of unearned income and allowance 3,433,610 3,423,848 3,469,661 3,398,109 Liabilities: Deposits 3,249,013 3,263,437 3,180,520 3,144,738 Short-term borrowings 205,336 205,336 207,507 207,507 FHLB borrowings 367,954 364,851 372,414 372,559 Vehicle financing 357,522 352,891 482,104 479,445 Long-term debt 100,000 99,668 95,000 95,379
47 -------------------------------------------------------------------------------- 13. BENEFIT PLANS Susquehanna maintains a single non-contributory pension plan that covers substantially all full-time employees. In addition, Susquehanna offers life insurance and other benefits to its retirees. A summary of the plans at December 31 is as follows:
-------------------------------------------------------------------------------------------------------------------- Pension Benefits Other Benefits -------------------------------------------------------------------------------------------------------------------- 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $35,151 $ 39,605 $ 3,099 $ 3,251 Service cost 1,790 1,916 141 146 Interest cost 2,737 2,505 250 212 Plan participants' contributions 0 0 0 66 Amendments 96 21 70 32 Actuarial (gain) / loss 614 (7,709) 131 (437) Benefits paid (1,952) (1,187) (87) (171) -------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $38,436 $ 35,151 $ 3,604 $ 3,099 -------------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $47,352 $ 44,600 $ 0 $ 0 Actual return on plan assets (534) 3,939 0 0 Employer contributions 4 0 87 105 Plan participants' contributions 0 0 0 66 Benefits paid (1,952) (1,187) (87) (171) -------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $44,870 $ 47,352 $ 0 $ 0 -------------------------------------------------------------------------------------------------------------------- Funded status $6,434 $ 12,202 $(3,604) $(3,099) Unrecognized net actuarial gain (7,163) (13,306) (954) (1,131) Unrecognized prior service cost (2,197) (2,562) 410 386 Unrecognized transition asset (413) (481) 1,364 1,477 -------------------------------------------------------------------------------------------------------------------- Accrued benefit cost $(3,339) $ (4,147) $(2,784) $(2,367) ==================================================================================================================== -------------------------------------------------------------------------------------------------------------------- Pension Benefits Other Benefits -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Expense/(Income) Service cost $ 1,790 $ 1,916 $ 1,529 $ 141 $ 146 $ 116 Interest cost 2,737 2,505 2,238 250 212 197 Expected return on plan assets (4,202) (3,962) (3,332) 0 0 0 Amortization of prior service cost (269) (277) (279) 46 41 27 Amortization of transition asset (68) (68) (67) 113 113 113 Amortization of net actuarial gain (796) (305) (322) (46) (28) (36) -------------------------------------------------------------------------------------------------------------------- Net periodic benefit expense/(income) $ (808) $ (191) $ (233) $ 504 $ 484 $ 417 ==================================================================================================================== Weighted-Average Assumptions at Year-End Discount rate 8.00% 8.00% 6.75% 7.50% 8.00% 6.75% 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 54,078 and 31,751 shares of Susquehanna common stock at December 31, 2000 and 1999, 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 $1,169 in 2000, $1,192 in 1999, and $1,213 in 1998. Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows employees to purchase Susquehanna common stock up to 5% of their salary at discount to the market price, through payroll deductions. 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 1,462,500 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 maxi- 48 mum 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. Option data noted below has been adjusted for the three-for-two stock split of 1998. The pro forma effects on net income include both the Compensation Plan and the ESPP.
----------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year: 1,094,625 $16.76 892,870 $15.36 676,151 $ 12.22 Granted 382,500 13.31 294,117 18.19 224,219 24.75 Forfeited 2,500 13.31 0 0.00 0 0.00 Exercised 4,096 6.90 92,362 7.81 7,500 13.00 ----------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,470,529 $15.90 1,094,625 $16.76 892,870 $ 15.36 ============================================================================================================================= Outstanding at end of year: Granted prior to 1998 572,193 $12.96 576,289 $12.92 668,651 $ 12.22 Granted 1998 224,219 24.75 224,219 24.75 224,219 24.75 Granted 1999 294,117 18.19 294,117 18.19 0 0.00 Granted 2000 380,000 13.31 0 0.00 0 0.00 ----------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,470,529 $15.90 1,094,625 $16.76 892,870 $ 15.37 ============================================================================================================================= Options exercisable at year-end: Granted prior to 1998 427,599 $12.62 302,848 $12.16 282,114 $ 10.40 Granted 1998 0 0.00 0 0.00 0 0.00 Granted 1999 0 0.00 0 0.00 0 0.00 Granted 2000 0 0.00 0 0.00 0 0.00 ----------------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 427,599 $12.62 302,848 $12.16 282,114 $ 10.40 ============================================================================================================================= Weighted average remaining contractual maturity of options outstanding at year-end: Granted prior to 1998 5.3 years Granted 1998 7.4 years Granted 1999 8.3 years Granted 2000 9.4 years ----------------------------------------------------------------------------------------------------------------------------- Total 7.3 years ----------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------- Dollars Per Share Dollars Per Share Dollars Per Share ----------------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year $ 1,290 $ 3.36 $ 1,321 $ 4.49 $ 1,348 $ 6.01 Fair value disclosures pro forma effect on: Net income (797) (328) (484) Basic earnings per share (0.02) (0.01) (0.01) Diluted earnings per share N/A* 0.00 (0.01) ----------------------------------------------------------------------------------------------------------------------------- Weighted-average fair value assumptions: Dividend yield 3.5% 3.0% 3.0% Expected volatility 23.0% 22.0% 22.0% Risk-free interest rate 6.6% 5.7% 5.5% Expected term 7 years 7 years 7 years
*For the year ended December 31, 2000, the application of SFAS123 would have an anti-dilutive effect. 49 -------------------------------------------------------------------------------- 14. SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY) CONDENSED BALANCE SHEETS -------------------------------------------------------------------------------- December 31 2000 1999 -------------------------------------------------------------------------------- Assets Cash in subsidiary bank $ 1,037 $ 247 Investment in consolidated subsidiaries at equity in net assets 526,150 495,798 Other investment securities 2,414 2,920 Premises and equipment (net) 2,649 320 Other assets 11,070 7,588 -------------------------------------------------------------------------------- Total assets $ 543,320 $ 506,873 ================================================================================ Liabilities Long-term debt $ 85,000 $ 85,000 Accrued taxes and expenses payable 4,883 6,851 -------------------------------------------------------------------------------- Total liabilities 89,883 91,851 -------------------------------------------------------------------------------- Equity Common stock ($2 par value) 78,796 78,788 Surplus 57,872 57,873 Retained earnings 320,020 292,150 Accumulated other comprehensive income, net of taxes (757) (13,616) Less: Treasury stock at cost 2,494 173 -------------------------------------------------------------------------------- Total stockholders' equity 453,437 415,022 -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 543,320 $ 506,873 ================================================================================ -------------------------------------------------------------------------------- SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY) CONDENSED STATEMENTS OF INCOME -------------------------------------------------------------------------------- Year ended December 31 2000 1999 1998 -------------------------------------------------------------------------------- Income Dividends from subsidiaries $ 71,581 $ 35,814 $ 68,266 Interest, dividends and gains on sales of investment securities 3,145 959 231 Interest and management fee from subsidiaries 22,840 3,408 4,137 -------------------------------------------------------------------------------- Total income 97,566 40,181 72,634 -------------------------------------------------------------------------------- Expenses Interest expense 6,863 6,864 6,864 Restructuring charges 0 3,410 0 Other expenses 31,872 7,145 4,036 -------------------------------------------------------------------------------- Total expenses 38,735 17,419 10,900 -------------------------------------------------------------------------------- Income before taxes, and equity in undistributed income of subsidiaries 58,831 22,762 61,734 Income tax provision/(benefit) (125) (1,470) 241 Equity in undistributed income of subsidiaries (3,994) 19,291 (16,689) -------------------------------------------------------------------------------- Net Income $ 54,962 $ 43,523 $ 44,804 ================================================================================ -------------------------------------------------------------------------------- SUSQUEHANNA BANCSHARES, INC. (PARENT ONLY) CONDENSED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- Year ended December 31 2000 1999 1998 -------------------------------------------------------------------------------- Operating Activities Net income $ 54,962 $ 43,523 $44,804 Adjustment to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,409 357 313 Equity in undistributed income of subsidiaries and income of subsidiaries accrued not received 3,994 (19,291) 16,689 Decrease/(increase) in other assets (3,553) (651) (5,752) Increase/(decrease) in accrued expenses payable (2,604) (278) 1,271 Other, net 4,585 (959) 0 -------------------------------------------------------------------------------- Net cash provided from operating activities 58,793 22,701 57,325 -------------------------------------------------------------------------------- Investing Activities Purchase of investment securities (8) (500) 0 Proceeds from the sale/maturities of investment securities 0 1,089 8,500 Capital expenditures (2,699) (204) (179) Net infusion of investment in subsidiaries (25,879) (1,814) (46,006) -------------------------------------------------------------------------------- Net cash used for investing activities (28,586) (1,429) (37,685) -------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of common stock 772 1,372 551 Dividends paid (27,092) (22,918) (20,132) Cash paid for treasury stock (3,097) (287) (742) Other, net 0 0 32 -------------------------------------------------------------------------------- Net cash used for financing activities (29,417) (21,833) (20,291) -------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents 790 (561) (651) Cash and cash equivalents at January 1 247 808 1,459 -------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 1,037 $ 247 $ 808 ================================================================================ Cash and cash equivalents: Cash in subsidiary bank $ 1,037 $ 247 $ 746 Short-term investments 0 0 62 -------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 1,037 $ 247 $ 808 ================================================================================ 50 -------------------------------------------------------------------------------- 15. EARNING PER SHARE The following table sets forth the calculation of basic and diluted earnings per share for the years ended below:
------------------------------------------------------------------------------------------------------------------------------------ December 31 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Per Share Per Share Per Share Income Shares Amount Income Shares Amount Income Shares Amount ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings per Share: Income available to common stockholders $54,962 39,262 $1.40 $43,523 39,320 $ 1.11 $46,804 39,228 $1.19 Effect of Diluted Securities: Incentive stock options outstanding 103 177 320 ------------------------------------------------------------------------------------------------------------------------------------ Diluted Earnings per Share: Income available to common stockholders and assumed conversion $54,962 39,365 $1.40 $43,523 39,497 $ 1.10 $46,804 39,548 $1.18 ====================================================================================================================================
-------------------------------------------------------------------------------- 16. REGULATORY RESTRICTIONS OF BANKING SUBSIDIARIES Susquehanna is limited by regulatory provisions in the amount it can receive in dividends from its banking subsidiaries. Accordingly, at December 31, 2000, $45,127 is available for dividend distribution to Susquehanna in 2001 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 $1,427 and $2,231 at December 31, 2000 and 1999, 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 $32,731 and $7,304 at December 31, 2000 and 1999, respectively. -------------------------------------------------------------------------------- 17. CONTINGENT LIABILITIES Susquehanna is party to various legal proceedings incidental to its business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against Susquehanna. In the opinion of management, all such matters are adequately covered by insurance or, if not covered, are without merit or are of such kind, or involve such amounts, as would not have a material effect on the financial position, results of opera- tions, 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 Shareholders 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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 Harrisburg, PA January 23, 2001 52 Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31, 2000 and 1999, are as follows: ------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands, except per share 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ Quarter Ended Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 ------------------------------------------------------------------------------------------------------------------------------ Interest income $89,360 $89,263 $88,050 $86,743 $85,502 $84,264 $83,529 $81,791 Interest expense 48,290 47,846 46,406 45,922 44,655 43,815 42,732 42,324 ------------------------------------------------------------------------------------------------------------------------------ Net interest income 41,070 41,417 41,644 40,821 40,847 40,449 40,797 39,467 Provision for loan and lease losses 1,453 766 643 864 5,350 1,920 1,856 2,077 ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan and lease losses 39,617 40,651 41,001 39,957 35,497 38,529 38,941 37,390 ------------------------------------------------------------------------------------------------------------------------------ Other income 19,399 19,072 18,476 17,063 14,194 17,291 11,297 10,677 Other expenses 39,141 39,159 39,693 37,588 46,457 34,230 31,524 29,577 ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 19,875 20,564 19,784 19,432 3,234 21,590 18,714 18,490 Applicable income taxes 6,161 6,375 6,133 6,024 178 6,721 5,706 5,900 ------------------------------------------------------------------------------------------------------------------------------ Net income $13,714 $14,189 $13,651 $13,408 $ 3,056 $14,869 $13,008 $12,590 ============================================================================================================================== Earnings per common share: Basic $ 0.35 $ 0.36 $ 0.35 $ 0.34 $ 0.08 $ 0.38 $ 0.33 $ 0.32 Diluted 0.35 0.36 0.35 0.34 0.08 0.37 0.33 0.32
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 2000 and 1999.
---------------------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------------------- Quarterly Quarterly Market Price Dividend Market Price Dividend ---------------------------------------------------------------------------------------------- First Quarter $15.88-$11.25 $0.17 $21.25-$16.50 $ 0.15 Second Quarter $15.00-$12.38 $0.17 $19.38-$17.00 $ 0.15 Third Quarter $15.44-$12.00 $0.17 $18.50-$15.75 $ 0.15 Fourth Quarter $17.98-$12.88 $0.19 $18.25-$14.88 $ 0.17
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 2001 Annual Meeting of Shareholders (the "2001 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 2001 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 2001 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 2001 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. Susquehanna Auto Program 2000 LLC, a Delaware limited liability company and a wholly-owned subsidiary of Boston Service Company, Inc., t/a Hann Financial Service Corp. ("Hann"), a wholly-owned subsidiary of Susquehanna, is a party to (i) a Participation Agreement, dated as of December 29, 2000, with Susquehanna Auto Lease Trust 2000-1, as Lessor, Susquehanna Auto Leasing Investors LLC 2000-1, as Owner Participant, Wilmington Trust Company, as Lessor Trust Owner Trustee, the OP Members named therein and Wells Fargo Bank Minnesota, National Association, as Lessor Trust Indenture Trustee and ABS Trustee, and (ii) certain other Basic Documents (as defined in the Participation Agreement) related thereto. These documents pertain to the securitization and financing of auto leases generated by Hann. Susquehanna agrees to furnish a copy of the Participation Agreement and other Basic Documents to the Commission upon its request pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. (b) Report on Form 8-K. (1) Susquehanna filed a Current Report on form 8-K, dated March 5, 2001, to report the announcement on March 1, 2001 of management succession and executive appointments, filed pursuant to Item 5. (c) Exhibits. The exhibits required to be filed as part of this report pursuant to Item 601 of Regulation S-K are filed herewith or incorporated by reference. (d) Financial Statement Schedule. None Required. 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/ Robert S. Bolinger ---------------------------------- Robert S. Bolinger, Chairman of the Board and Chief Executive Officer Dated: March 19, 2001 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert S. Bolinger Chairman of the Board, Chief Executive March 19, 2001 ------------------------------------ Officer and Director (Robert S. Bolinger) /s/ Drew K. Hostetter Sr. Vice President, Treasurer March 19, 2001 ------------------------------------ and Chief Financial Officer (Drew K. Hostetter) /s/ William J. Reuter President and Director March 19, 2001 ------------------------------------ (William J. Reuter) Director March __, 2001 ------------------------------------ (Richard M. Cloney) Director March __, 2001 ------------------------------------ (James G. Apple) /s/ Trudy B. Cunningham Director March 21, 2001 ------------------------------------ (Trudy B. Cunningham) /s/ John M. Denlinger Director March 20, 2001 ------------------------------------- (John M. Denlinger) /s/ Owen O. Freeman, Jr. Director March 20, 2001 ------------------------------------- (Owen O. Freeman, Jr.) /s/ Henry H. Gibbel Director March 20, 2001 ------------------------------------ (Henry H. Gibbel) /s/ Marley R. Gross Director March 21, 2001 ------------------------------------ (Marley R. Gross) /s/ T. Max Hall Director March 21, 2001 ------------------------------------ (T. Max Hall)
57 SECURITIES AND EXCHANGE COMMISSION SUSQUEHANNA BANCSHARES, INC. Form 10-K, December 31, 2000 [SIGNATURES CONTINUED]
Signature Title Date --------- ----- ---- /s/ Michael J. Wimmer Director March 20, 2001 ------------------------------------- (Michael J. Wimmer) /s/ C. William Hetzer, Jr. Director March 21, 2001 ------------------------------------ (C. William Hetzer, Jr.) /s/ Guy W. Miller, Jr. Director March 21, 2001 ------------------------------------ (Guy W. Miller, Jr.) /s/ George J. Morgan Director March 21, 2001 ------------------------------------ (George J. Morgan) /s/ Clyde R. Morris Director March 20, 2001 ------------------------------------- (Clyde R. Morris) /s/ Roger V. Wiest Director March 21, 2001 ------------------------------------ (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. Filed herewith as Exhibit 3. (4) Instruments defining the rights of security holders including indentures. The rights of the holders of Susquehanna's Common Stock and the rights of Susquehanna's note holders are contained in the following documents or instruments, which are incorporated herein by reference. (i) Articles of Incorporation. Incorporated by reference to Attachment E to Susquehanna's Joint Proxy Statement/Prospectus on Susquehanna's Registration Statement on Form S-4, Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (ii) By-laws. Filed herewith as Exhibit 3. (iii) Form of Subordinated Note/Indenture incorporated by reference to Exhibit 4.1 to Susquehanna's Registration Statement on Form S-3, Registration No. 33-87624. (9) Voting trust agreement. Not Applicable (10) Material Contracts. (i) Susquehanna's Key Employee Severance Pay Plan, adopted in 1999, is incorporated by reference to Exhibit 10 of Susquehanna's Annual Report on Form 10-K for fiscal year ended December 31, 1999. Amendments dated May 26, 2000 and February 22, 2001 are filed herewith as Exhibit 10(i). (ii) Susquehanna's Executive Deferred Income Plan, effective January 1, 1999, is incorporated by reference to Exhibit 10(a) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (iii) Susquehanna's Performance Award Plan as amended in 1995, is incorporated by reference to Exhibit (a)(10) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (iv) Susquehanna's Equity Compensation Plan, as adopted in 1996, is incorporated by reference to Exhibit (a)(10) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. Amendment dated February 22, 2001 is filed herewith as Exhibit 10(iv). (v) Amended Servicing Agreement dated September 1, 2000 between Boston Service Company, Inc. t/a Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. is filed herewith as Exhibit 10(v). 59 (vi) Employment Agreement between Susquehanna and William J. Reuter, dated March 21, 2001, is filed herewith as Exhibit 10(vi). (vii) Employment Agreement between Susquehanna and Gregory A. Duncan, dated March 14, 2001, is filed herewith as Exhibit 10(vii). (viii) Employment Agreement between Susquehanna and Drew K. Hostetter, dated March 12, 2001, is filed herewith as Exhibit 10(viii). (ix) Employment Agreement between Susquehanna and Williamsport National Bank and Charles W. Luppert, dated March 20, 2001, is filed herewith as Exhibit 10(ix). (x) Employment Agreement between Boston Service Company, Inc. t/a Hann Financial Service Corp. and Michael J. Wimmer, dated February 1, 2000 is filed herewith as Exhibit 10(x). (11) Statement re: computation of per share earnings. Not Applicable. (12) Statements re: computation of ratios. Not Applicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders. Not applicable. (16) Letter re: change in certified accountant. Not applicable. (18) Letter re: change in accounting principles. Not Applicable. (19) Report furnished to security holders. Not Applicable. (21) Subsidiaries of the registrant. Filed herewith. (22) Published report regarding matters submitted to vote of security holders. Not Applicable. (23) Consents of experts and counsel. Filed herewith. (24) Power of Attorney. Not Applicable. (99) Additional Exhibits. Not Applicable. 60