-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FxnbNdkMJ+NMedUgpOHpJ3ZIhuzHkMLRPqMncMacWcNnybwk9fZpggKdEn+um59L uCcTv84GuKrm0F+SvSQpog== 0000950109-02-001528.txt : 20020415 0000950109-02-001528.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950109-02-001528 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSQUEHANNA BANCSHARES INC CENTRAL INDEX KEY: 0000700863 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232201716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10674 FILM NUMBER: 02582810 BUSINESS ADDRESS: STREET 1: 26 N CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 BUSINESS PHONE: 7176264721 MAIL ADDRESS: STREET 2: 26 NORTH CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 10-K 1 d10k.txt FORM 10-K 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, 2001 ----------------- 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. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $820,440,400 as of February 28, 2002, based upon the closing price on the Nadsaq National Market reported for such date. Shares of common stock held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of shares issued and outstanding of the registrant's common stock as of February 28, 2002, was 39,346,049. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 29, 2002, are incorporated by reference into Part III. PART I ------ Item 1. Business - ------ -------- General Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state financial holding company headquartered in Lititz, Pennsylvania. As of December 31, 2001, Susquehanna operated as a super-community financial holding company with nine commercial banks and four non-bank subsidiaries. As of December 31, 2001, Susquehanna had consolidated assets of $5.1 billion, loans receivable of $3.5 billion, deposits of $3.5 billion and shareholders' equity of $494 million. The relative sizes and profitability of Susquehanna's operating subsidiaries as of and for the year ended December 31, 2001, are depicted in the following table: (Dollars in Millions)
- --------------------------------------------------------------------------------------------------------------- Subsidiary* Assets Percent of Total Net Income Percent of Total ----------- ------ ---------------- ---------- ---------------- - --------------------------------------------------------------------------------------------------------------- Farmers First Bank $1,358.9 26.8% $ 20.3 36.4% Farmers & Merchants Bank and Trust 752.8 14.9 8.2 14.7 First Susquehanna Bank & Trust 326.1 6.5 3.9 7.0 WNB Bank 286.0 5.7 4.5 8.1 Citizens Bank of Southern Pennsylvania 227.3 4.5 2.0 3.6 First American Bank of Pennsylvania 190.4 3.8 1.6 2.9 Susquehanna Bank** 1,080.8 21.3 7.0 12.6 Equity Bank*** 407.7 8.1 4.3 7.7 Founders' Bank*** 169.8 3.4 2.8 5.0 Susque-Bancshares Leasing Company, Inc. (leasing) 14.7 0.3 (0.5) (0.9) Valley Forge Asset Management Corp. 19.4 0.4 0.8 1.4 Boston Service Company, Inc. (t/a Hann Financial 475.2 9.4 5.6 10.1 Service Corporation (auto leasing)) Susque-Bancshares Life Insurance Company 4.6 0.1 0.2 0.4 (life insurance) Consolidation adjustments, including (262.6) (5.2) (5.0) (9.0) Susquehanna, Susquehanna South and Susquehanna East) - --------------------------------------------------------------------------------------------------------------- Total $5,051.1 100.0% $ 55.7 100.0% - ---------------------------------------------------------------------------------------------------------------
* Includes operations of wholly-owned subsidiaries. ** Subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares South, Inc. ("Susquehanna South"), a non-operating holding company. *** Subsidiaries of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares East, Inc. ("Susquehanna East"), a non-operating holding company. Susquehanna's depository institution subsidiaries are located in Pennsylvania, Maryland, New Jersey and West Virginia, and provide commercial and retail banking services in central and south central Pennsylvania, principally in Franklin, Lancaster, Northumberland, Snyder, Union, Columbia, York and Lycoming Counties; in southeastern Pennsylvania principally in Montgomery, Chester and Delaware Counties; in southwestern Pennsylvania principally in Bedford and Blair Counties; in western Maryland, principally in Allegany, Garrett and Washington Counties; in northwestern, central and southeastern Maryland, including Baltimore County, Baltimore City, Carroll County, Harford County, Worcester County, Wicomico County and Anne Arundel County; in southern New Jersey, principally in Camden, Burlington and Gloucester Counties; and in eastern West Virginia, principally in Berkeley County, West Virginia. Susquehanna's non-depository institution subsidiaries provide commercial leasing services in Pennsylvania, New Jersey, Maryland, Delaware, West Virginia and northern Virginia; credit life insurance services in central and southeastern Pennsylvania; consumer automobile financing services principally in New Jersey, eastern Pennsylvania, New York and Connecticut; and asset management services principally in southeastern Pennsylvania (Philadelphia, Bucks, Montgomery, Delaware and Chester Counties), New Jersey and Delaware. 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. Susquehanna also provides its banking subsidiaries guidance in the areas of credit policy and administration, strategic planning, investment portfolio management and other financial and administrative services. As of December 31, 2001, Susquehanna had 420 full-time and 55 part-time employees, and Susquehanna and its subsidiaries, on a consolidated basis, had 1,635 full-time and 308 part-time employees. Susquehanna was incorporated in Pennsylvania in 1982. Its executive offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and its telephone number is (717) 626-4721. Business Susquehanna, through its subsidiaries, provides a wide range of retail and commercial banking and financial services. Its retail banking business strategy is to expand its deposit and other product market share through a high level of customer service, new product offerings, application of new technologies and delivery systems, and selective acquisitions. Susquehanna operates an extensive branch network and has a strong market presence in its primary markets in Pennsylvania, Maryland and New Jersey. As a result of the development of broad banking relations with its customers, core deposits fund 77% of Susquehanna's lending and investing activities. Susquehanna's retail banking services include checking and savings accounts, money market accounts, certificates of deposit, individual retirement accounts, Christmas clubs, mutual funds and annuities (see discussion below), home equity lines of credit, residential mortgage loans, home improvement loans, student loans, automobile loans and personal loans. In 1996, Susquehanna introduced a check card in Pennsylvania and Maryland. In 1998, the check card was introduced in New Jersey. As of December 31, 2001, there were over 190,845 active debit cards (over 249,361 issued). In 2000, Susquehanna also sold its credit card portfolio to a third party purchaser. Simultaneously with this sale, Susquehanna entered into a separate agreement with the purchaser for it to continue to provide credit card products and services to Susquehanna's customers. Susquehanna conducts its mortgage origination and mortgage banking operations in its Pennsylvania and Maryland markets through Susquehanna Mortgage Company, a wholly-owned subsidiary of Susquehanna Bank. Susquehanna's consolidated commercial lending operations include commercial, financial and agricultural lending (12% of the total loan portfolio at December 31, 2001), real estate construction lending (10%), and commercial mortgage lending (25%). Loans originated by each subsidiary are subject to central review and uniform Susquehanna credit standards. Nearly all of Susquehanna's loans are concentrated in the markets served by its insured depository institution subsidiaries. Susquehanna Trust & Investment Company, a subsidiary of Farmers First Bank, renders services as trustee, executor, administrator, guardian, managing agent, custodian and investment advisor and performs other fiduciary activities authorized by law. It operates in Pennsylvania, New Jersey and Maryland. Through its subsidiary, Susque-Bancshares Life Insurance Company, Susquehanna offers certain credit related insurance products. Susquehanna also offers certain leasing services through its subsidiary Susque-Bancshares Leasing Company, Inc., and its wholly owned subsidiary, Susquebanc Lease Co. Susquehanna expanded its leasing service capabilities through its acquisition in February of 2000 of Boston Service Company, Inc. (t/a Hann Financial Service Corp.), which provides comprehensive consumer automobile financing services. 3 Through Susquehanna's acquisition of Valley Forge Asset Management Corp. in March of 2000, which represented Susquehanna's first acquisition of an investment advisory services corporation, Susquehanna and its subsidiaries offer a broad range of investment advisory, asset management and brokerage services to its customers. Susquehanna's subsidiaries also have referral fee arrangements with other investment advisors/broker-dealers. On October 12, 2001, Susquehanna's national bank subsidiaries, Citizens National Bank of Southern Pennsylvania, First American National Bank of Pennsylvania and First National Trust Bank converted into Pennsylvania state-chartered banks under the names Citizens Bank of Southern Pennsylvania, First American Bank of Pennsylvania and First Susquehanna Bank & Trust, respectively, and Equity Bank, National Association, converted into a New Jersey state-chartered bank under the name Equity Bank. On that same date, Susquehanna Bank converted from a federally-chartered savings bank into a Maryland state-chartered bank. On November 2, 2001, Williamsport National Bank converted into a Pennsylvania state-chartered bank under the name WNB Bank. Susquehanna and its subsidiaries do not have any portion of their business dependent upon a single or limited number of customers, the loss of which would have a material adverse effect on their business; no substantial portion of their loans or investments are concentrated within a single industry or group of related industries. The businesses of Susquehanna and its subsidiaries are not seasonal in nature. Susquehanna contemplates that in the future it will evaluate and may acquire, or may cause its subsidiaries to acquire, other banks or savings associations or other entities permitted by applicable law. Susquehanna may acquire state and national banks whose principal business activities are in Pennsylvania and in states which have not opted out of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (as described below). Susquehanna may also seek to enter businesses closely related to banking or that are financial in nature, or to acquire existing companies already engaged in such activities, which includes savings associations. Any acquisition by Susquehanna may require notice to or approval of the Board of Governors of the Federal Reserve System, the Pennsylvania Department of Banking, other regulatory agencies and, in some instances, its shareholders. Susquehanna currently has no formal commitments with respect to the acquisition of any entities, although discussions with prospects occur on a regular and continuing basis. Supervision and Regulation General. Susquehanna is a financial holding company registered with the ------- Board of Governors of the Federal Reserve System ("Board") and is subject to regulation under the Bank Holding Company Act of 1956, as amended. This law (the "BHC Act") requires prior approval of an acquisition of assets or of ownership or control of voting shares of any bank if the acquisition would give Susquehanna more than 5% of the voting shares of any bank or bank holding company. It also imposes restrictions, summarized below, on the assets or voting shares of non-banking companies which Susquehanna may acquire. Susquehanna's insured depository institution subsidiaries are also subject to regulation and supervision. Farmers First Bank, Citizens Bank of Southern Pennsylvania, First Susquehanna Bank & Trust, First American Bank of Pennsylvania and WNB Bank are all Pennsylvania state banks subject to regulation and periodic examination by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (the "FDIC"). Founders' Bank is a Pennsylvania state member bank subject to regulation and periodic examination by the Board and the Pennsylvania Department of Banking. Equity Bank is a New Jersey state member bank subject to regulation and periodic examination by the New Jersey Department of Banking and Insurance and the Board. Farmers & Merchants Bank and Trust and Susquehanna Bank are both Maryland state banks subject to regulation and periodic examination by the Division of Financial Regulation of the Maryland Department of Labor, Licensing and Regulation and the FDIC. Susquehanna Trust & Investment Company is a Pennsylvania non-depository trust company subject to regulation and periodic examination by the Pennsylvania Department of Banking. Because Susquehanna is a financial holding company, all of its subsidiaries are subject to examination by the Board even if not otherwise regulated by the Board. Consistent with the requirements of the BHC Act, Susquehanna's only lines of business in 2001 consisted of providing to its customers commercial banking, trust and other banking-related services and products. These 4 included commercial banking through its nine subsidiary banks, trust services through Susquehanna Trust & Investment Company, credit life insurance through another subsidiary, leasing operations through two subsidiaries and investment advisory services through an additional subsidiary. Of these activities, commercial banking activities accounted for 87% of Susquehanna's gross revenues in 2000 and 85% of Susquehanna's gross revenues in 2001. Regulations governing Susquehanna and its subsidiary depository institutions restrict extensions of credit by such institutions to Susquehanna and, with some exceptions, the other Susquehanna affiliates. For these purposes, extensions of credit include loans and advances to and guarantees and letters of credit on behalf of Susquehanna and such affiliates. These regulations also restrict investments by Susquehanna's depository institution subsidiaries in the stock or other securities of Susquehanna and the covered affiliates as well as the acceptance of such stock or other securities as collateral for loans to any borrower, whether or not related to Susquehanna. Susquehanna's insured depository institution subsidiaries are subject to comprehensive federal and state regulations dealing with a wide variety of subjects, including reserve requirements, loan limitations, restrictions as to interest rates on loans and deposits, restrictions as to dividend payments, requirements governing the establishment of branches and numerous other aspects of their operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders. Financial Modernization Legislation. In 2000, Susquehanna elected to become ----------------------------------- a "financial holding company" (an "FHC") under the Gramm-Leach-Bliley Act (the "GLB Act"). As an FHC, Susquehanna is permitted to engage, directly or through subsidiaries, in a wide variety of activities not previously allowed to it which are financial in nature or are incidental or complimentary to a financial activity, in addition to engaging in all of the activities previously allowed to it, whether or not presently conducted. The new activities additionally permitted to Susquehanna as an FHC (if it so determines to conduct them) include, among others, insurance and securities underwriting, merchant banking activities, issuing and selling annuities and securitized interests in financial assets and engaging domestically in activities that bank holding companies previously have been permitted to engage in only overseas. It is expected that in the future other activities will be added to the permitted list. All of these listed activities can be conducted, through an acquisition or on a start-up basis, without prior Board approval and with only notice to the Board afterward. The GLB Act also generally permits well-capitalized national banks and, if state law permits, well-capitalized state chartered banks as well, to form or acquire financial subsidiaries to engage in most of these same activities, with the exception of certain specified activities (insurance underwriting, for example) which must be conducted only at the level of the holding company or a nonbank subsidiary. State chartered banks in Pennsylvania, New Jersey and Maryland are generally allowed to engage (with proper regulatory authority) in activities that are permitted to national banks. As an FHC, Susquehanna is generally subject to the same regulation as other bank holding companies, including the reporting, examination, supervision and consolidated capital requirements of the Board. However, in some respects the regulation is modified as a result of FHC status. For example, Susquehanna must continue to satisfy certain conditions (discussed below) to preserve its full flexibility as an FHC. However, as an FHC, Susquehanna (unlike traditional bank holding companies) is permitted to undertake several new types of activities, and to acquire companies engaged in several additional kinds of activities, without prior Board approval and with only notice afterward. To preserve its FHC status, Susquehanna must ensure that all of its insured depository institution subsidiaries remain well-capitalized and well-managed for regulatory purposes and earn "satisfactory" or better ratings on their periodic Community Reinvestment Act ("CRA") examinations. An FHC ceasing to meet these standards is subject to a variety of restrictions, depending on the nature of the problem. If the Board determines that any of the FHC's subsidiary depository institutions are either not well-capitalized or not well-managed, it must notify the FHC. Until compliance is restored, the Board has broad discretion to impose appropriate limitations on the FHC's activities. If compliance is not restored within 180 days, the Board may ultimately require the FHC to divest its depository institutions or in the alternative, to discontinue or divest any activities that are permitted only to FHC bank holding companies. 5 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% in order to be considered "well-capitalized"). At least 4% out of the total capital (6% to be well capitalized) must be composed of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, after deducting goodwill and certain other intangibles ("tier 1 capital"). The remainder of total capital ("tier 2 capital") may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance. At December 31, 2001, Susquehanna's tier 1 capital and total capital (i.e., tier 1 plus tier 2) ratios were 10.82% and 12.53%, respectively. The Board has also established minimum leverage ratio guidelines for bank holding companies. These guidelines mandate a minimum leverage ratio of tier 1 capital to adjusted quarterly average total assets less certain amounts ("leverage amounts") equal to 3% for bank holding companies meeting certain criteria (including those having the highest regulatory rating). All other banking organizations are generally required to maintain a leverage ratio of at least 3% plus an additional cushion of at least 100 basis points and in some cases more. The Board's guidelines also provide that bank holding companies experiencing internal growth or making acquisitions are expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Board will continue to consider a "tangible tier 1 leverage ratio" (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. The Board has not advised Susquehanna of any specific minimum leverage ratio applicable to it. At December 31, 2001, Susquehanna's leverage ratio was 8.69%. Susquehanna's subsidiary depository institutions are all subject to similar capital standards promulgated by their respective federal regulatory agencies. No such agency has advised any of Susquehanna's subsidiary institutions of any specific minimum leverage ratios applicable to it. FDICIA Capital Categories. The Federal Deposit Insurance Corporation ------------------------- Improvement Act of 1991 ("FDICIA") requires the federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each capital measure (currently, risk-based and leverage). Adequately capitalized institutions include depository institutions that meet the required minimum level for each capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements. Currently, all of Susquehanna's depository institution subsidiaries qualify as well-capitalized. Cross Guarantees. Susquehanna's insured depository institution subsidiaries ---------------- are also subject to cross-guaranty liability under federal law. This means that if one FDIC-insured depository institution subsidiary of a multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess "commonly controlled" depository institutions for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed subsidiary institution and on Susquehanna as the common parent. While the FDIC's cross-guaranty claim is generally junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is generally superior to the claims of shareholders and affiliates. Source of Strength Doctrine. Under Board policy, a bank holding company is --------------------------- 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 6 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, elsewhere in the United States and abroad. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 eliminated substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies. The same Act generally permits the federal banking agencies to approve merger transactions resulting in the creation of branches by banks outside their home states if the host state into which they propose to branch has enacted authorizing legislation. Of the middle-Atlantic states, Pennsylvania, Ohio and West Virginia have enacted legislation authorizing such "de novo" branching by banks located in states offering reciprocal treatment to their institutions. Maryland has as well, but without the requirement of reciprocity. Delaware, New Jersey and New York do not allow de novo branching by sister-state banks and require that they enter the state through mergers of established institutions. Liberalizing the branching laws in recent years has had the effect of increasing competition within the markets in which Susquehanna now operates. Regulation of Nonbank Subsidiaries. Susquehanna has four direct non-bank ---------------------------------- subsidiaries, all wholly-owned: Susque-Bancshares Life Insurance Company, a reinsurance company, Susque-Bancshares Leasing Company, Inc., a leasing company, Hann Financial Service Corp., a consumer automobile financing and leasing company, and Valley Forge Asset Management Corp., an investment advisory firm. Susque-Bancshares Life Insurance Company is organized under Arizona law to operate as a credit life, health and accident reinsurer to the extent permitted by Pennsylvania law. It is regulated by the Arizona Department of Insurance and is subject to periodic review by that Department. Susque-Bancshares Leasing Company, Inc. is organized under the laws of the Commonwealth of Pennsylvania and owns a single leasing company subsidiary with commercial finance powers. Hann Financial Service Corp. is organized under New Jersey law and is also authorized to do business in Pennsylvania, New York and Connecticut. It is regulated by Connecticut as a motor vehicle leasing company, by Delaware as a finance or small loan agency, and by New Jersey and Pennsylvania as a sales finance company. Valley Forge Asset Management Corp. is organized under the laws of Pennsylvania. It is registered with the Securities and Exchange Commission (the "SEC") as an investment advisor under the Investment Advisers Act of 1940. It is also a registered broker-dealer and is a member of the National Association of Securities Dealers (the "NASD"). It is also licensed with the securities commissions of various states. Privacy. Title V of the GLB Act is intended to increase the level of ------- privacy protection afforded to customers of financial institutions, including the securities and insurance affiliates of such institutions, partly in recognition of the increased cross-marketing opportunities created by the Act's elimination of many of the boundaries previously separating various segments of the financial services industry. Among other things, these provisions require institutions to have in place administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information, to protect against anticipated threats or hazards to the security or integrity of such records and to protect against unauthorized access to or use of such records that could result in substantial harm or inconvenience to a customer. The Act also requires institutions to furnish consumers at the outset of the relationship and annually thereafter written disclosures concerning the institution's privacy policies. Environmental Impact Statement. Compliance by Susquehanna and its ------------------------------ subsidiaries with federal, state and local environmental protection laws during 2001 had no material effect upon capital expenditures or earnings or upon the competitive position of Susquehanna and its subsidiaries and is also not expected to materially affect such expenditures, earnings or competition during 2002. Pending Legislation. From time to time, legislation is proposed for ------------------- 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 7 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 Board, the FDIC, the SEC, the NASD and state agencies. An important function of the Board is to regulate the money supply and credit conditions. Among the instruments used by the Board to implement these objectives are open market operations in U.S. Government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of Susquehanna and its subsidiaries cannot be predicted. Competition Financial holding companies and their subsidiaries compete with many institutions for deposits, loans, trust services and other banking-related and financial services. Susquehanna and its subsidiaries are subject to competition from less heavily regulated entities such as brokerage firms, money market funds, consumer finance and credit card companies and other financial services companies. The GLB Act has liberalized many of the regulatory restrictions previously imposed on Susquehanna and its subsidiaries. Further legislative proposals are pending or may be introduced which could further effect the financial services industry. It is not possible to assess whether any of such proposals will be enacted, and if enacted, what effect such a proposal would have on the competitive positions of Susquehanna in its market place. As a result of state and federal legislation enacted over the past 20 years, consolidation in the industry has continued at a rapid pace. Further, as a result of relaxation of laws and regulations pertaining to branch banking in the state, and the opportunity to engage in interstate banking, the consolidation within the banking industry has had a significant competitive effect on Susquehanna and its markets. At present, Susquehanna and its subsidiary depository institutions compete with numerous super-regional institutions with significantly greater resources and assets which conduct banking business throughout the region. Business Trends Current business trends include a stable interest rate environment, a relatively strong and diverse local economy and fluctuating consumer confidence. While conditions are presently stable, a variety of factors (e.g., any substantial rise in the inflation or unemployment rates), may effect such stability, both in Susquehanna's markets as well as national markets. Susquehanna will continue its emphasis on control of funding costs and lending rates to effectively maintain profitability. In addition, Susquehanna will seek relationships which can generate fee income which is not directly tied to lending relationships. Susquehanna anticipates that this approach will help dampen its earnings fluctuations which are driven by movement in interest rates, business and consumer loan cycles, and local economic factors. Executive Officers The executive officers of Susquehanna, their ages and their positions with Susquehanna, are set forth in the following table: 8
Name Age Title - ---- --- ----- William J. Reuter(1) 52 President and Chief Executive Officer Gregory A. Duncan(2) 46 Executive Vice President and Chief Operating Officer Drew K. Hostetter(3) 47 Executive Vice President, Treasurer and Chief Financial Officer Edward Balderston, Jr.(4) 54 Senior Vice President and Group Executive David D. Keim (5) 53 Senior Vice President and Group Executive Michael M. Quick (6) 53 Vice President and Group Executive James G. Pierne (7) 50 Vice President and Group Executive Peter J. Sahd (8) 42 Vice President and Group Executive William T. Belden(9) 52 Vice President and Group Executive Rodney A. Lefever (10) 35 Chief Technology Officer Charles W. Luppert (11) 60 Vice President
(1) William J. Reuter was appointed Senior Vice President of Susquehanna on January 21, 1998 and promoted to President of Susquehanna on January 19, 2000. He was appointed as Chief Executive Officer on May 25, 2001. He was appointed as Chairman of the Board of Farmers & Merchants Bank and Trust on March 21, 2000. He was also the principal executive officer of Farmers & Merchants Bank and Trust until March 21, 2000, and had been employed by that subsidiary bank in a substantially equivalent position for more than the past five years. In 1996 Mr. Reuter was named an executive officer of Susquehanna South, and from 1997 until April 19, 2000, its wholly-owned subsidiary, Susquehanna Bank. Mr. Reuter was appointed Chairman of the Board of Susquehanna Bank on April 19, 2000. (2) Gregory A. Duncan was also the principal executive officer of Citizens National Bank of Southern Pennsylvania until September 1, 1999, and had been employed by that subsidiary bank in a substantially equivalent position since 1992. He was appointed Senior Vice President - Administration, of Susquehanna on January 21, 1998, was promoted to Executive Vice President on January 19, 2000, and was promoted to Chief Operating Officer on May 25, 2001. He was also appointed President of Susque-Bancshares Life Insurance Company on June 14, 1999 and Secretary of Susque-Bancshares Leasing Company, Inc. on July 15, 1998. (3) Drew K. Hostetter was appointed Assistant Treasurer of Susquehanna in 1995, was promoted to Treasurer in 1996 and promoted to Vice President, Treasurer and Chief Financial Officer in 1998. He was promoted to Senior Vice President on January 19, 2000 and was promoted to Executive Vice President on May 25, 2001. Mr. Hostetter was also appointed Treasurer and Assistant Secretary of Susquebanc Lease Co. on September 17, 1998 and Assistant Treasurer of Susquehanna East on April 18, 1997. Prior to joining Susquehanna, Mr. Hostetter served as Senior Vice President and Corporate Controller of MNC Financial, Baltimore, Maryland, from 1992 to 1994. (4) Edward Balderston, Jr. was appointed Senior Vice President and Group Executive of Susquehanna on May 25, 2001. Prior to that, he served as Vice President of Susquehanna in charge of Marketing and Human Resources from May of 1998 to May of 2001, Susquehanna's Director of Marketing and Human Resources from May 1997 to May of 1998, and as Senior Vice President, Administrative Services, of Farmers First Bank from December 1988 to May 1997. (5) David D. Keim was appointed Senior Vice President and Group Executive of Susquehanna on May 25, 2001. He was appointed as President of Susque-Bancshares Leasing Company, Inc. on July 19, 2000. Prior to that, he served as Vice President of Susquehanna from April 15, 1998 to May 24, 2001, and as Senior Vice President of Susque-Bancshares Leasing Company, Inc. from April 17, 1991 to July 18, 2000. (6) Michael M. Quick was appointed Vice President and Group Executive of Susquehanna on May 25, 2001. He also serves as President and Chief Executive Officer of Equity Bank and has served in that capacity since March 3, 1998 and as President and Chief Executive Officer of Susquehanna East since April 15, 2000. Prior to joining Susquehanna, Mr. Quick served as President and Chief Operating Officer of Equity National Bank from March 17, 1995 to March 3, 1998. (7) James G. Pierne was appointed as Vice President and Group Executive of Susquehanna on May 25, 2001. Since March of 2000, he has also served as President and Chief Executive Officer of Farmers & Merchants Bank 9 and Trust. Prior to that, he served as Executive Vice President of Farmers & Merchants Bank and Trust from March of 1999 until February of 2000, and as that bank's Senior Vice President from March of 1993 until February of 1999. (8) Peter J. Sahd was appointed as Vice President and Group Executive of Susquehanna on May 25, 2001. Prior to that, he served as Director, Alternative Delivery Services of Susquehanna from April 12, 1999 until May 25, 2001. Prior to joining Susquehanna, Mr. Sahd served as Senior Vice President, Operations, of Fulton Bank from August 23, 1994 until April 9, 1999. (9) William T. Belden is also a principal executive officer of Farmers First Bank, having been appointed as President and Chief Operating Officer in 1995 and promoted to President and Chief Executive Officer on March 22, 1999. He was promoted to a Group Executive on December 31, 2001. (10) Rodney A. Lefever joined Susquehanna as its Chief Technology Officer on April 30, 2001. Prior to joining Susquehanna, he served as Director, Earthlink Everywhere, Earthlink, Inc. from September of 2000 until April of 2001, as the President of New Business Development, OneMain.com Inc. from December of 1999 until September of 2000 and the President of D&E Supernet (and its predecessors) from March of 1995 until December of 1999. (11) Charles W. Luppert is also the principal executive officer of WNB Bank and has been employed by that subsidiary bank in a substantially equivalent position for more than the past five years. There are no family relationships among the executive officers of Susquehanna nor are there any arrangements or understandings between any of them and any other person pursuant to which any of them was selected an officer of Susquehanna. Item 2. Properties - ------ ---------- Susquehanna reimburses its subsidiaries for space and services utilized. It also leases office space located at Topflight Airpark, Showalter Road, Hagerstown, Maryland for its loan servicing center, and office space located at 701 South Broad Street, Lititz, Pennsylvania, for its Audit, Human Resources, Loan Review, Marketing and Sales Support departments. Susquehanna's subsidiary depository institutions operate 146 branches and 31 free-standing automated teller machines. The depository institutions own 82 of the branches and lease the remaining 64. Nine additional locations are owned or leased by subsidiary banks to facilitate operations and expansion. Management of Susquehanna believes that the properties currently owned and leased by its subsidiaries are adequate for present levels of operation. As of December 31, 2001, the offices (including executive offices) of Susquehanna's depository institution subsidiaries, were as follows:
Executive Office Location of Offices Subsidiary Location of Executive Office Owned/Leased (including executive office) - ---------- ---------------------------- ---------------- ---------------------------- Farmers First Bank 9 East Main Street Owned 43 banking offices in Lancaster Lititz, Pennsylvania and York Counties, Pennsylvania Citizens Bank of 35 North Carlisle Street Owned 8 banking offices in Franklin Southern Pennsylvania Greencastle, Pennsylvania County, Pennsylvania First Susquehanna Bank & Trust 400 Market Street Owned 12 banking offices in Sunbury, Pennsylvania Northumberland, Snyder, Columbia and Union Counties, Pennsylvania
10
Executive Office Location of Offices Subsidiary Location of Executive Office Owned/Leased (including executive office) - ---------- ---------------------------- ---------------- ---------------------------- WNB Bank 329 Pine Street Owned 7 banking offices in Lycoming Williamsport, Pennsylvania County, Pennsylvania Farmers & Merchants Bank and 59 West Washington Street Owned 32 banking offices in Trust Hagerstown, Maryland Washington, Allegany and Garrett Counties, Maryland and Berkeley County, West Virginia Susquehanna Bank 100 West Road Leased 22 banking offices located in Towson, Maryland Baltimore City and Baltimore, Harford, Anne Arundel, Carroll, Worcester and Wicomico Counties, Maryland First American Bank of 140 East Main Street Owned 6 banking offices in Bedford Pennsylvania Everett, Pennsylvania and Blair Counties, Pennsylvania Equity Bank 8000 Sagemore Drive Leased 13 banking offices in Camden, Suite 8101 Gloucester and Burlington Marlton, New Jersey Counties, New Jersey Founders' Bank 101 Bryn Mawr Avenue Leased 3 banking offices in Bryn Mawr, Pennsylvania Montgomery, Chester and Delaware Counties, Pennsylvania
The executive offices of Susquehanna Trust & Investment Company are located at 24 North Cedar Street, Lititz, Pennsylvania. The trust company leases this facility, as well as the facilities for each of its 5 branch offices. The executive offices of Hann Financial Service Corp. are located at One Centre Drive, Jamesburg, New Jersey. It leases both this facility and a second facility located at 1051 North Black Horse Pike, Williamstown, New Jersey. The executive offices of Valley Forge Asset Management Corp. are located at 120 South Warner Road, King of Prussia, Pennsylvania. Valley Forge Asset Management Corp. leases this facility. Item 3. Legal Proceedings. - ------ ----------------- There are no material proceedings to which Susquehanna or any of its subsidiaries are a party or by which they, or any of them, are threatened. All legal proceedings presently pending or threatened against Susquehanna and its subsidiaries involve routine litigation incidental to the business of Susquehanna or the subsidiary involved and are not material in respect to the amount in controversy. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 2001. 11 PART II ------- Item 5. Market for Susquehanna Capital Stock and Related Shareholder Matters. - ------ -------------------------------------------------------------------- Susquehanna common stock is listed for quotation on the National Association of Securities Dealers National Market System. Set forth below are the quarterly high and low sales prices of Susquehanna's common stock as reported on the Nasdaq National Market System for the years 2000 and 2001, and cash dividends paid. The table represents prices between dealers and does not include retail markups, markdowns or commissions and does not necessarily represent actual transactions. - -------------------------------------------------------- Price Range Per Share* ---------------------- - -------------------------------------------------------- Cash ---- Dividends --------- Year Period Paid Low High - ---- ------ ---- ------ ------- 2000 1st Quarter $.17 $11.25 $ 15.88 Common 2nd Quarter .17 12.38 15.00 Common 3rd Quarter .17 12.00 15.44 Common 4th Quarter .19 12.88 17.98 Common 2001 1st Quarter $.19 $15.00 $18.875 Common 2nd Quarter .19 16.25 20.81 Common 3rd Quarter .19 18.15 22.83 Common 4th Quarter .20 19.95 22.24 Common - -------------------------------------------------------- As of February 28, 2002, there were 6,298 record holders of Susquehanna common stock. Dividends paid by Susquehanna are provided from dividends paid to it by its subsidiaries. Susquehanna's ability to pay dividends is largely dependent upon the receipt of dividends from its bank subsidiaries. Both federal and state laws impose restrictions on the ability of these subsidiaries to pay dividends. These include the Pennsylvania Banking Code in the case of Farmers First Bank, Citizens Bank of Southern Pennsylvania, First American Bank of Pennsylvania, First Susquehanna Bank & Trust and WNB Bank, the Financial Institutions Article of the Annotated Code of Maryland in the case of Farmers & Merchants Bank and Trust and Susquehanna Bank, the Federal Reserve Act in the case of Founders' Bank and Equity Bank, and the applicable regulations under such laws. The net capital rules of the SEC under the Securities Exchange Act of 1934 also limit the ability of Valley Forge Asset Management Corp. to pay dividends to Susquehanna. In addition to the specific restrictions, summarized below, the banking and securities regulatory agencies also have broad authority to prohibit otherwise permitted dividends proposed to be made by an institution regulated by them if the agency determines that their distribution would constitute an unsafe or unsound practice. The Board and the FDIC have issued policy statements which provide that, as a general matter, insured banks and bank holding companies may pay dividends only out of current operating earnings. For state-chartered banks which are members of the Federal Reserve System (like Founders' Bank and Equity Bank), the approval of the applicable federal regulatory agency is required for the payment of dividends by the bank subsidiary in any calendar year if the total of all dividends declared by the bank in that calendar year exceeds the current year's retained net income combined with the retained net income for the two preceding years. "Retained net income" for any period means the net income for that period less any common or preferred stock 12 dividends declared in that period. Moreover, no dividends may be paid by such bank in excess of its undivided profits account. Dividends payable by a Pennsylvania state-chartered bank are restricted by the requirement that the bank set aside to a surplus fund each year at least 10% of its net earnings until the bank's surplus equals the amount of its capital (a requirement presently satisfied in the case of all of the Pennsylvania state bank subsidiaries of Susquehanna). Furthermore, a Pennsylvania bank may not pay a dividend if the payment would result in a reduction of the surplus available to the bank. A Maryland state-chartered bank may pay dividends out of undivided profits or, with the approval of the Maryland Bank Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. Within the regulatory restrictions described above, each of the insured depository institution subsidiaries of Susquehanna presently has the ability to pay dividends and at December 31, 2001, $13,340,000 in the aggregate was available for dividend distributions during calendar 2002 to Susquehanna from its insured depository institution subsidiaries without regulatory approval. Susquehanna presently expects that cash dividends will continue to be paid by its subsidiaries in the future at levels comparable with those of prior years. 13 Item 6. Selected Financial Data. - ------ ----------------------- See Page 15. 14 Selected Financial Data
- -------------------------------------------------------------------------------------------------------------------- Dollars in thousands, except per share - -------------------------------------------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Interest income $ 341,295 $ 353,416 $ 335,086 $ 335,614 $ 305,789 Interest expense 169,051 188,464 173,526 176,265 149,907 Net interest income 172,244 164,952 161,560 159,349 155,882 Provision for loan and lease losses 7,310 3,726 11,203 5,780 4,806 Other income 84,166 74,010 53,459 39,106 31,126 Other expenses 167,763 155,581 141,788 124,014 116,485 Income before taxes 81,337 79,655 62,028 68,661 65,717 Net income 55,716 54,962 43,523 46,804 44,770 Cash dividends declared on common stock 30,228 27,092 22,918 20,132 18,371 Dividend payout ratio 54.3% 49.3% 52.7% 43.0% 41.0% Per Common Share Amounts* - -------------------------------------------------------------------------------------------------------------------- Net income--Basic $ 1.42 $ 1.40 $ 1.11 $ 1.19 $ 1.16 Net income--Diluted 1.41 1.40 1.10 1.18 1.15 Cash dividends declared on common stock 0.77 0.70 0.62 0.57 0.55 Financial Ratios - -------------------------------------------------------------------------------------------------------------------- Return on average total assets 1.14% 1.15% 0.94% 1.06% 1.14% Return on average stockholders' equity 11.78 13.01 10.45 11.75 12.43 Net interest margin 3.91 3.83 3.82 3.98 4.34 Average stockholders' equity to average assets 8.85 8.85 8.95 9.05 9.17 Tangible Operating Results - -------------------------------------------------------------------------------------------------------------------- Tangible net income $ 59,095 $ 58,075 $ 46,498 $ 49,056 $ 47,745 Tangible earnings per share 1.51 1.48 1.18 1.25 1.24 Return on tangible average shareholders' equity 13.81% 15.08% 12.13% 13.51% 14.79% Return on tangible average assets 1.23 1.23 1.01 1.12 1.23 Year-End Balances - -------------------------------------------------------------------------------------------------------------------- Total assets $5,051,092 $4,792,856 $4,804,997 $4,589,287 $4,130,138 Investment securities 1,021,091 898,604 912,048 951,744 723,745 Loans and leases, net of unearned income 3,519,498 3,433,610 3,469,661 3,248,818 3,072,685 Deposits 3,484,331 3,249,013 3,180,520 3,216,879 3,041,466 Total borrowings 1,016,845 1,030,812 1,157,025 915,676 652,926 Stockholders' equity 493,536 453,437 415,022 412,587 382,772 Selected Share Data* - -------------------------------------------------------------------------------------------------------------------- Common shares outstanding (period end) 39,344 39,221 39,382 39,262 39,275 Average common shares outstanding--Basic 39,263 39,262 39,320 39,228 38,656 Average common shares outstanding--Diluted 39,593 39,365 39,497 39,548 38,911 At December 31: Book value per share $ 12.54 $ 11.56 $ 10.54 $ 10.51 $ 9.75 Market price per common share 20.85 16.50 15.88 20.47 25.50 Common stockholders 6,340 6,543 6,720 6,662 6,238
* Amounts adjusted for the three-for-two stock splits in July 1997 and 1998. 15 Item 7. Management's Discussion and Analysis of Results of Operations and - ------ ----------------------------------------------------------------- Financial Condition ------------------- See Pages 17 to 32. 16 Management's Discussion and Analysis of Results of Operations and Financial Condition The following pages of this report present management's discussion and analysis of the consolidated financial condition and results of operations of Susquehanna Bancshares, Inc., including its subsidiaries (collectively, "Susquehanna"): Farmers First Bank; Farmers & Merchants Bank and Trust; First American Bank of Pennsylvania; First Susquehanna Bank & Trust; WNB Bank; Citizens Bank of Southern Pennsylvania; Susquehanna Bancshares East, Inc. and its commercial bank subsidiaries Equity Bank and Founders' Bank; Susquehanna Bancshares South, Inc. and its commercial bank subsidiary Susquehanna Bank; Boston Service Company, Inc., t/a Hann Financial Service Corp. ("Hann"); Susque-Bancshares Leasing Co., Inc.; Susque-Banc-shares Life Insurance Company; Valley Forge Asset Management Corp.; and Conestoga Management Company, a non-operating, passive investment subsidiary. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective," and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, Susquehanna's potential exposures to various types of market risks, such as interest rate risk and credit risk. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in market areas in which Susquehanna has significant business activities or investments; the monetary and interest rate policies of the Board of Governors of the Federal Reserve System; inflation; deflation; unanticipated turbulence in interest rates; changes in laws, regulations, and taxes; changes in competition and pricing environments; natural disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructuring; technological changes; changes in consumer spending and saving habits; and the success of Susquehanna in managing the risks involved in the foregoing. The management of Susquehanna encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements speak only as of the date they are made. Susquehanna does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. The following discussion and analysis, the purpose of which is to provide investors and others with information that Susque-hanna's management believes to be necessary for an understanding of its financial condition, changes in financial condition, and results of operations should be read in conjunction with the financial statements, notes, and other information contained in this document. Results of Operations Summary of 2001 Compared to 2000 Susquehanna's net income for the year ended December 31, 2001, increased $0.7 million, or 1%, over 2000 net income of $55.0 million. Susquehanna's earnings performance was enhanced by significant improvements in non-interest income, which during the year 2001 exceeded 33% of total revenues. The $10.2 million improvement in non-interest income over the year ended December 31, 2000, was split almost equally between banking activities and non-bank affiliate operations. Diluted earnings per share ("EPS") increased 1% from $1.40 per share for the year ended 2000 to $1.41 per share for the year ended 2001. Return on average assets ("ROA") and return on average equity ("ROE") finished at 1.14% and 11.78 %, respectively, for the year 2001, compared with 1.15% and 13.01%, respectively, for 2000. Through various acquisitions utilizing the purchase method of accounting for business combinations, Susquehanna has created intangible assets. Amortization of such intangible assets is a non-cash charge that significantly affects Susquehanna's earnings and financial ratios. Tangible net income is actual net income increased by the tax-effected amortization of those intangible assets that are deducted from stockholders' equity in determining Tier I capital. For 2001, tangible net income, basic earnings per share, ROA, and ROE were $59.1 million, $1.51, 1.23%, and 13.81%, respectively, compared to 2001 actual net income, basic earnings per share, ROA, and ROE of $55.7 million, $1.42, 1.14%, and 11.78%, respectively. Tangible net income, basic earnings per share, ROA, and ROE for 2000 were $58.1 million, $1.48, 1.23%, and 15.08%, respectively. Net Interest Income - Taxable Equivalent Basis The major source of operating revenues for Susquehanna is net interest income, which rose to a level of $172.2 million in 2001, $7.3 million, or 4%, above the $164.9 million attained in 2000. Net interest income increased in 2001 despite the substantial decline in the levels of total interest income, which was more than offset by a decline in total interest expense. These declines are the direct result of the Federal Reserve Bank's lowering of interest rates eleven times during 2001. Net interest income is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans, income from investment securities and in- 17 come from short-term investments. The amount of interest income is dependent upon many factors including the volume of earning assets, the general level of interest rates, the dynamics of the change in interest rates, and levels of nonperforming loans. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds, and the levels of non-interest-bearing demand deposits and equity capital. Table 1 presents average balances, taxable equivalent interest income and expenses, and yields earned or paid on these assets and liabilities of Susquehanna. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates. Net interest income as apercentage of net interest income and other income was 67%, 69%, and 75% for the twelve months ended December 31, 2001, 2000 and 1999, respectively. Table 2 illustrates that the increase in net interest income in 2001 compared with 2000 was primarily attributable to volumes. The average growth in interest-earning assets of $67 million in 2001 over 2000 was due to a $39 million increase in loans and a $28 million increase in Susquehanna's investment portfolio. As illustrated in Table 1, the tax equivalent yield on earning assets for 2001 decreased to 7.68% from 8.09% in 2000. This decrease was due to the steady drop in interest rates throughout 2001, which was the primary cause for the $13.0 million decrease in taxable equivalent interest income. Table 2 also illustrates that the decrease in interest expense in 2001 compared TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity Interest Rates and Interest Differential--Tax Equivalent Basis
- --------------------------------------------------------------------------------------------------------------------------------- Dollars in thousands 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Average Rate Average Rate Average Rate Assets Balance Interest % Balance Interest % Balance Interest % - --------------------------------------------------------------------------------------------------------------------------------- Short-term investments $ 88,379 $ 3,539 4.00 $ 50,715 $ 2,937 5.79 $ 67,021 $ 3,089 4.61 Investment securities: Taxable 834,066 51,219 6.14 824,902 53,238 6.45 811,255 50,394 6.21 Tax-advantaged 72,090 5,115 7.10 90,898 6,455 7.10 116,037 8,189 7.06 - --------------------------------------------------------------------------------------------------------------------------------- Total investment securities 906,156 56,334 6.22 915,800 59,693 6.52 927,292 58,583 6.32 - --------------------------------------------------------------------------------------------------------------------------------- Loans and leases (net): Taxable 3,444,049 280,730 8.15 3,393,175 289,827 8.54 3,298,442 273,387 8.29 Tax-advantaged 43,945 3,820 8.69 55,970 4,952 8.85 49,380 4,451 9.01 - --------------------------------------------------------------------------------------------------------------------------------- Total loans and leases 3,487,994 284,550 8.16 3,449,145 294,779 8.55 3,347,822 277,838 8.30 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 4,482,529 344,423 7.68 4,415,660 $357,409 8.09 4,342,135 $339,510 7.82 ================================================================================================================================= Allowance for loan and lease losses (38,409) (41,340) (41,011) Other non-earning assets 423,029 401,395 351,187 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $4,867,149 $4,775,715 $4,652,311 ================================================================================================================================= Liabilities & Stockholders' Equity Deposits: Interest-bearing demand $ 834,950 $ 18,145 2.20 $ 773,552 $ 22,080 2.85 $ 785,175 $ 20,359 2.59 Savings 420,818 6,324 1.50 420,512 7,709 1.83 444,938 8,166 1.84 Time 1,568,646 84,222 5.37 1,552,939 85,216 5.49 1,519,267 77,488 5.10 Short-term borrowings 211,033 7,976 3.78 199,001 11,597 5.83 122,406 5,754 4.70 FHLB borrowings 446,835 23,656 5.29 388,078 23,139 5.96 354,644 19,600 5.53 Long-term debt 101,329 7,843 7.74 99,105 7,762 7.83 95,000 7,481 7.87 Vehicle financing 293,885 20,886 7.11 416,295 30,961 7.44 451,841 34,679 7.68 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,867,496 169,052 4.37 3,849,482 $188,464 4.90 3,773,271 $173,527 4.60 - --------------------------------------------------------------------------------------------------------------------------------- Demand deposits 468,319 441,894 421,055 Other liabilities 58,362 61,725 41,614 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 4,394,177 4,353,101 4,235,940 - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 472,972 422,614 416,371 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $4,867,149 $4,775,715 $4,652,311 ================================================================================================================================= Net interest income/yield on average earning assets $175,371 3.91 $168,945 3.83 $165,983 3.82 =================================================================================================================================
For purposes of calculating loan yields, the average loan volume includes nonaccrual loans. For purposes of calculating yields on tax-advantaged interest income, the taxable equivalent is made to equate tax-advantaged interest on the same basis as taxable interest. The marginal tax rate is 35%. 18 with 2000 was also attributed to lower interest rates. Decreases in rates paid for interest-bearing deposits, short-term borrowings, and Federal Home Loan Bank ("FHLB") borrowings were the primary reasons for the $19.4 million decrease in interest expense. Consequently, the average cost of funds decreased from 4.90% in 2000 to 4.37% in 2001. Also contributing to the lower cost of funds was an increase in lower cost deposits offsetting a decrease in higher cost borrowings. As a result of the preceding comments, Susquehanna's net interest margin, on a taxable equivalent basis, increased from 3.83% in 2000 to 3.91% in 2001. Variances do occur in the net interest margin, as an exact repricing of assets and liabilities is not possible. A further explanation of the impact of asset and liability repricing is found in the section titled "Market Risks." Provision and Allowance for Loan and Lease Losses The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb management's estimate of inherent losses in the loan and lease portfolio. Susquehanna's provision for loan and lease losses is based upon management's quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries,and assess general economic conditions in the markets its affiliates serve. Commercial and real estate loans are internally risk rated by Susquehanna's loan officers and periodically reviewed by loan quality personnel. Consumer, residential real estate loans, and leases are generally analyzed in the aggregate as they are of relative small dollar size and homogeneous in nature. In addition to economic conditions, consideration of loan portfolio diversification, delinquency, and historic loss experience, consideration is also given in examinations performed by the regulatory authorities. To determine the allowance and corresponding loan and lease loss provision, the amount required for specific loans is first determined. For certain commercial and construction loans, this amount is based upon specific borrower data determined by reviewing individual non-performing, delinquent, or potentially troubled credits. The remaining commercial loans as well as consumer, residential real estate, and lease allowances, which may include specific reserves, generally are based upon recent charge-off and delinquency history, other known trends and expected losses over the remaining lives of these loans, as well as the condition of local, regional, and national economies. In addition, a reserve for unused commitments is determined using the same criteria applied to the remaining commercial portfolio by risk-rating type. Table 2 - Changes in Net Interest Income - Tax Equivalent Basis
- ------------------------------------------------------------------------------------------------ 2001 Versus 2000 2000 Versus 1999 Increase /(Decrease) Increase/ (Decrease) Due to Change in Due to Change in - ------------------------------------------------------------------------------------------------ Average Average Average Average Dollars in thousands Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------ Interest Income Other short-term investments $ 1,706 $ (1,104) $ 602 $ (846) $ 694 $ (152) Investment securities: Taxable 586 (2,605) (2,019) 858 1,986 2,844 Tax-advantaged (1,335) (5) (1,340) (1,785) 51 (1,734) - ------------------------------------------------------------------------------------------------ Total investment securities (749) (2,610) (3,359) (927) 2,037 1,110 Loans (net of unearned income): Taxable 4,296 (13,393) (9,097) 7,968 8,472 16,440 Tax-advantaged (1,046) (86) (1,132) 584 (83) 501 - ------------------------------------------------------------------------------------------------ Total loans 3,250 (13,479) (10,229) 8,553 8,388 16,941 - ------------------------------------------------------------------------------------------------ Total interest-earning assets $ 4,207 $(17,193) $(12,986) $ 6,780 $11,119 $17,899 ================================================================================================ Interest Expense Deposits: Interest-bearing demand $ 1,392 $ (5,327) $ (3,935) $ (305) $ 2,026 $ 1,721 Savings 6 (1,391) (1,385) (448) (9) (457) Time 856 (1,850) (994) 1,747 5,981 7,728 Short-term borrowings 665 (4,286) (3,621) 4,225 1,618 5,843 FHLB borrowings 3,278 (2,761) 517 1,927 1,612 3,539 Long-term debt 173 (92) 81 322 (41) 281 Vehicle financing (8,753) (1,322) (10,075) (2,668) (1,050) (3,718) - ------------------------------------------------------------------------------------------------ Total interest-bearing liabilities (2,383) (17,029) (19,412) 4,800 10,137 14,937 - ------------------------------------------------------------------------------------------------ Net interest income $ 6,590 $ (164) $ 6,426 $ 1,979 $ 983 $ 2,962 ================================================================================================
Changes which are due in part to volume and in part to rate are allocated in proportion to their relationship to the amounts of changes attributed directly to volume and rate. 19 To ensure adequacy to a higher degree of confidence, a portion of the allowance for loan and lease losses is considered unallocated. The unallocated portion of the allowance is the amount which, when added to these allocated amounts, brings the total to the amount deemed adequate by management at that time. This unallocated portion is available to absorb losses sustained anywhere within the loan and lease portfolios. Table 10 presents this allocation. The loan portfolio represents loans and leases made primarily within Susquehanna's market area, which includes principally central and southeastern Pennsylvania, Maryland, and New Jersey, and to a lesser extent, southwestern Pennsylvania, Con-necticut, Delaware, West Virginia, northern Virginia, and the southern tier of New York state. Determining the level of the allowance for possible loan and lease losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. Management must make estimates using assumptions and information which is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. In management's opinion, the allowance for loan and lease losses is adequate at December 31, 2001. There can be no assurance, however, that Susquehanna will not sustain losses in future periods, which could be greater than the size of the allowance at December 31, 2001. As illustrated in Table 3, the provision for loan and lease losses was $7.3 million for 2001 compared to $3.7 million in 2000. Net charge-offs, as presented in Table 3, were $7.3 million in 2001 compared with $7.9 million in 2000. The allowance for loan and lease losses at December 31, 2001, was 1.07% of period-end loans and leases, or $37.7 million, compared with 1.08% or $37.2 million at December 31, 2000. Should the economic climate deteriorate further, borrowers may experience difficulty, and the level of non-performing loans and assets, charge-offs, and delinquencies could rise and require further increases in the provision. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan and lease losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination. It is the policy of Susquehanna not to renegotiate the terms of a loan simply because of a delinquency status. Rather, a loan is typically transferred to non-accrual status if it is not well secured and in the process of collection, and is considered delinquent in payment if either principal or interest is past due beyond 90 days. Interest income received on non-performing loans in 2001 and 2000 was $1.0 million and $0.9 million, respectively. Interest income which would have been recorded on these loans under the original terms was $1.3 million and $1.5 million for 2001 and 2000, respectively. At December 31, 2001, Sus-quehanna had no outstanding commitments to advance additional funds with respect to these non-performing loans. Table 3 is an analysis of the provision levels as well as the activity in the allowance for loan and lease losses for the past five years. Table 4 reflects the five-year history of non-performing assets and loans and leases contractually past due 90 days and still accruing. Total non-performing assets at December 31, 2001 and 2000, were $19.3 and $20.6 million, respectively, including $3.8 million and $4.0 million, respectively, in other real estate acquired through foreclosure. Non-performing assets as a percentage of period-end loans and leases and other real estate owned was 0.55% at December 31, 2001, a decline from 0.60% at December 31, 2000. Real estate acquired through foreclosure is carried at its fair value, which is calculated as the lower of the recorded amount of the loan for which the foreclosed property served as collateral, or the fair market value of the property as determined by a current appraisal less estimated costs to sell. Prior to foreclosure, the recorded amount of the loan is written-down, if necessary, to fair value by charging the allowance for loan and lease losses. Subsequent to foreclosure, gains or losses on the sale of real estate acquired through foreclosure are recorded in operating income, and any losses determined as a result of periodic valuations are charged to other operating expense. Loans with principal and/or interest delinquent 90 days or more and still accruing interest were $11.5 million at December 31, 2001, a decrease from $13.8 million at December 31, 2000. A softening of certain segments of the economy may adversely affect certain borrowers and may cause additional loans to become past due beyond 89 days or be placed on non-accrual status because of uncertainty of receiving full payment of either principal or interest on these loans. Potential problem loans consist of loans that are performing under contract but for which potential credit problems have caused Susquehanna to place them on its internally monitored loan list. At December 31, 2001, such loans, which are not included in Table 4, amounted to $12.9 million. Depending upon the state of the economy and the impact thereon to these borrowers, as well as future events such as regulatory examination assessments, these loans and others not currently so identified could be classified as non-performing assets in the future. Related Party Transaction and Residual Value Risk In the third quarter of 2000, Hann entered into a Servicing Agreement with Auto Lenders Liquidation Center, Inc. ("Auto Lenders"), pursuant to which Hann effectively transferred to Auto Lenders all residual risk of the managed auto lease portfolio originated by Hann and all residual risk on any new leases originated over the term of the agreement. Michael J. Wimmer, who is a member of Susquehanna's Board of Directors and the chief executive officer of Hann, along with his immediate family, owns 100% of the outstanding equity interest of Auto Lenders. Auto Lenders, which was formed in 1990, is a used vehicle remarketer with three retail locations in New Jersey. Under this Servicing Agreement, Auto Lenders agreed to purchase the beneficial interest in all vehicles returned by the obligors at the scheduled expiration of the related leases for a purchase price equal to the stated residual value of such vehicles. Further, Hann agreed to set its stated residual values in accordance with the standards approved in advance by Auto Lenders, and Hann agreed to pay to Auto Lenders an upfront fee of $3.1 million, as shown in Table 3, to cover all the auto leases serviced by Hann which had been originated by Hann prior to the agreement. Hann also agreed to make monthly guaranty payments to Auto Lenders based upon a fixed schedule covering a three-year period. At the end of each year, the Servicing Agreement may be renewed by the mutual agreement of the parties for an additional one-year term beyond the current three-year term, subject to renegotiation of the pay- 20 ments. During the renewal process, competitive quotes are obtained by Hann from third parties to determine the best remarketing alternative for Hann. The aggregate fees paid by Hann to Auto Lenders under the Servicing Agreement in 2001 were $9.2 million. Under the Servicing Agreement, Auto Lenders retains all residual gains and bears all residual losses with respect to the vehicles. The obligations of Auto Lenders under the Servicing Agreement are secured by a Guaranty dated December 31, 2001, executed by Mr. Wimmer in favor of Hann. Other Income Non-interest income, recorded as other income, consists of: service charges on deposit accounts; commissions and fees received for credit cards (merchant processing), travelers' checks sales, money orders, and investment advisory services; fees for trust services; vehicle origination and servicing fees; income generated from bank-owned life insurance and reinsurance activities; net gains and losses on security transactions; net gains on sales of loans; and other miscellaneous income, such as safe deposit box rents and net gains on the sale of other real estate and branch offices. Other income as a percentage of net interest income and other income was 33%, 31%, and 25% for 2001, 2000, and 1999, respectively. Non-interest income increased $10.2 million, or 14%, in 2001 over 2000. Asset management fees increased $2.5 million from 2000 to 2001 as a result of an increase in assets under manage- TABLE 3 - Provision and Allowance for Loan and Lease Losses
- ----------------------------------------------------------------------------------------------------------------------- Dollars in thousands 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Allowance for loan and lease losses, January 1 $ 37,187 $ 44,465 $ 39,440 $ 39,316 $ 38,464 Allowance acquired in business combination 539 0 0 0 1,460 Allowance transferred to third-party guarantor 0 3,057 0 0 0 Additions to provision for loan and lease losses charged to operations 7,310 3,726 11,203 5,780 4,806 Loans and leases charged-off during the year: Commercial, financial, agricultural, and leases 4,976 3,880 3,181 2,039 1,612 Real estate--mortgage 1,270 1,634 2,050 1,657 1,355 Consumer 3,178 4,186 3,188 3,413 3,820 - ----------------------------------------------------------------------------------------------------------------------- Total charge-offs 9,424 9,700 8,419 7,109 6,787 - ----------------------------------------------------------------------------------------------------------------------- Recoveries of loans and leases previously charged-off: Commercial, financial, agricultural, and leases 397 275 550 428 413 Real estate--mortgage 363 369 812 182 71 Consumer 1,326 1,109 879 843 889 - ----------------------------------------------------------------------------------------------------------------------- Total recoveries 2,086 1,753 2,241 1,453 1,373 - ----------------------------------------------------------------------------------------------------------------------- Net charge-offs 7,338 7,947 6,178 5,656 5,414 - ----------------------------------------------------------------------------------------------------------------------- Allowance for loan and lease losses, December 31 $ 37,698 $ 37,187 $ 44,465 $ 39,440 $ 39,316 ======================================================================================================================= Average loans and leases outstanding $3,537,316 $3,449,145 $3,347,822 $3,140,339 $2,891,979 Period-end loans and leases 3,519,498 3,433,610 3,469,661 3,248,818 3,072,685 Net charge-offs as a percentage of average loans and leases 0.21% 0.23% 0.18% 0.18% 0.19% Allowance as a percentage of period-end loans and leases 1.07% 1.08% 1.28% 1.21% 1.28% =======================================================================================================================
TABLE 4--Non-Performing Assets
- ---------------------------------------------------------------------------------------------------------------------- Dollars in thousands - ---------------------------------------------------------------------------------------------------------------------- At December 31 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Loans contractually past due 90 days and still accruing $ 11,498 $ 13,798 $ 10,360 $ 10,645 $ 7,248 ====================================================================================================================== Non-performing assets: Nonaccrual loans: Commercial, financial, agricultural, and leases 4,680 3,856 1,510 1,659 934 Real estate--mortgage 10,795 12,568 20,989 18,409 21,995 Consumer 41 117 271 343 622 Restructured loans 0 0 0 1,258 93 Other real estate owned 3,761 4,039 4,703 4,745 4,547 - ---------------------------------------------------------------------------------------------------------------------- Total non-performing assets $ 19,277 $ 20,580 $ 27,473 $ 26,414 $ 28,191 ====================================================================================================================== Total non-performing assets as a percentage of period-end loans and leases and other real estate owned 0.55% 0.60% 0.79% 0.81% 0.92% ====================================================================================================================== Allowance for loan and lease losses as a percentage of non-performing loans 243% 225% 195% 182% 166% ======================================================================================================================
21 ment. Service charges on deposit accounts increased $2.9 million in 2001 over 2000 as the introduction of a new overdraft program improved fee collection significantly. Contributing to the $2.2 million increase in other operating income was improved debit card volume resulting from new marketing efforts. Gain on sale of loans and leases was $4.2 million in 2001 compared with $3.9 million in 2000. During the second quarter of 2001, Hann sold approximately $117 million in automobile leases. In conjunction with this transaction, Hann realized a $1.7 million gain on the sale. During 2001, Susquehanna affiliate banks sold approximately $118 million of mortgage loans that were originated for resale. In conjunction with the sale of mortgage loans, Susquehanna realized approximately $2.5 million in gains. In the third quarter of 2000, Susquehanna sold its credit card portfolio, which resulted in a gain of $1.8 million. During 2000, Susquehanna affiliate banks sold approximately $114 million of mortgage loans which resulted in a gain of $2.1 million. All other categories experienced modest gains over the prior year, as well. Other Expenses Non-interest expenses are categorized into the following nine groupings: employee-related expenses, which include salaries, fringe benefits, and employment taxes; occupancy expenses, which include depreciation, rents, maintenance, utilities, and insurance; furniture and equipment expenses, which include depreciation, rents, and maintenance; amortization of intangible assets; vehicle residual value expense; vehicle delivery and preparation expense; merchant credit card servicing expense; restructuring charges; and other expenses (detailed in Table 5) incurred in operating Susquehanna's business. Non-interest expense increased $12.2 million, or 8%, in 2001 over 2000. Salaries and employee benefits increased $5.7 million, or 8%, from 2000 to 2001. The increase in salaries and benefits was primarily due to normal annual salary increases, recent branch openings, new revenue producing positions, and higher health benefit costs. Table 5 - Analysis of Other Expenses Dollars in thousands - ------------------------------------------------------------------ Year ended December 31 2001 2000 1999 - ------------------------------------------------------------------ Advertising, marketing, and public relations $ 4,865 $ 4,051 $ 3,938 Audits and examinations 1,214 1,353 723 Communications 3,938 3,149 2,827 Directors' fees 1,291 1,255 1,212 Legal and professional 3,768 5,702 4,880 Life Insurance Company related expenses 967 1,058 924 Other real estate 2,568 1,071 1,089 Outside services 3,989 4,711 3,735 PA shares/capital stock tax 2,571 2,284 2,407 Postage and delivery 4,806 3,631 3,438 Stationery and supplies 3,123 3,204 3,359 FDIC insurance 596 642 769 All other 16,051 14,977 13,539 - ------------------------------------------------------------------ Total $49,747 $47,088 $42,840 ================================================================== Charges for occupancy and equipment increased $1.6 million, or 16%, in 2001 from 2000, the result of recent branch openings, and the full-year impact of central processing established throughout the second half of 2000. Amortization of intangible assets increased $0.4 million in 2001 from 2000. Vehicle residual value expense in 2001 decreased $3.2 million from 2000. In the third quarter of 2000, Hann entered into a Servicing Agreement, described earlier in the section "Related Party Transaction and Residual Value Risk," to guarantee all residual values of vehicle leases serviced by Hann. Consequently, year 2000 vehicle residual value expense included both actual residual value losses and residual value guarantee fees, whereas year 2001 included only residual value guarantee fees. Vehicle delivery and preparation expense for 2001 increased $4.0 million over the prior year's expense due to costs associated with an increased number of vehicles being prepared for retail sale during 2001. All other expenses increased $2.7 million (see Table 5), with notable increases in postage and delivery costs of $1.2 million, and other real estate expenses of $1.5 million. While modest increases were realized in most of the other categories, a decrease of $1.9 million was recorded in legal and professional, primarily due to less acquisition-related activity. Income Taxes Susquehanna's effective tax rate for 2001 was 31.5% compared to 31.0% in 2000. The effective rate for 2001 was increased because of reduced levels of tax-advantaged income. As tax-advantaged loans and securities continue to mature, and the opportunities for investment in additional tax-advantaged enterprises become less attractive due to certain provisions of the Tax Reform Act of 1986, effective tax rates may increase in the years ahead. However, beginning in 2002, as required by the FASB that issued SFAS 142, Susquehanna will no longer amortize goodwill created in previous business combinations. The reduction in pre-tax amortization expense of $3.3 million will have a favorable impact on Susquehanna's effective tax rate, as most of the amortization expense was not deductible from taxable income. FINANCIAL CONDITION Investment Securities Susquehanna follows SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This accounting pronouncement requires the segregation of investment securities into three categories, each having a distinct accounting treatment: held-to-maturity, trading, or available-for-sale. Securities identified as "held-to-maturity" continue to be carried at their amortized cost and, except for limited circumstances, may not be sold prior to maturity. Securities identified as "available-for-sale" must be reported at their market or "fair" value, and the difference between that value and their amortized cost recorded in the equity section, net of taxes. As a result, total equity of Susquehanna was positively impacted by $10.9 million as the "unrealized gains or losses for available-for-sale securities," changed from a negative $0.8 million at December 31, 2000, to a positive $10.1 million at December 31, 2001. Securities identified as "trading account securities" are marked-to-market, with the change recorded in the income statement. Presently, Susquehanna does not engage in trading activ- 22 TABLE 6 - Carrying Value of Investment Securities
- --------------------------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 - --------------------------------------------------------------------------------------------------- Available- Held-to- Available- Held-to- Available- Held-to- Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity - --------------------------------------------------------------------------------------------------- U.S. Treasury $ 1,302 $ 0 $ 3,307 $ 0 $ 16,683 $ 0 U.S. Government agencies 88,289 0 359,773 0 338,990 0 State and municipal 64,712 1,778 63,922 15,833 69,599 32,070 Other securities 20,844 0 16,641 0 17,682 0 Mortgage-backed securities 808,981 0 403,094 486 399,428 1,020 Equity securities 35,185 0 35,548 0 36,576 0 - --------------------------------------------------------------------------------------------------- Total investment securities $1,019,313 $1,778 $882,285 $16,319 $878,958 $33,090 ===================================================================================================
ity, but does engage in active portfolio management, which requires the majority of its security portfolios be identified as "available-for-sale." While SFAS 115 requires segregation into "held-to-maturity" and "available-for-sale" categories (see Table 6), it does not change Susquehanna's policy concerning the purchase of only high-quality securities. Strategies employed address liquidity, capital adequacy, and net interest margin considerations which then determine the assignment of purchases into these two categories. Table 7 illustrates the maturities of these security portfolios and the weighted average yields based upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35% federal income tax rate. At December 31, 2001, Susquehanna held no securities of one issuer, other than U.S. Government obligations, where the aggregate book value exceeded ten percent of stockholders' equity. Susquehanna adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as of January 1, 2001. Concurrent with adoption of this standard, and as permitted by its provisions, approximately $14.3 million of securities held-to-maturity were reclassified as securities available-for-sale. This reclassification resulted in an after-tax gain of approximately $0.3 million, which was recorded in other comprehensive income. Loans and Leases Table 8 presents the loans outstanding, by type of loan, in Susquehanna's portfolio for the past five years. In 2001, mortgage loans increased $29 million, commercial loans increased $63 million, and construction loans grew by $95 million compared to 2000. Consumer loans declined $26 million in 2001 from 2000. Susquehanna's banking subsidiaries have historically reported a significant amount of loans secured by real estate, as depicted in Table 8. Many of these loans have real estate collateral taken as additional security not related to the acquisition of the real estate pledged. Open-end home equity loans amounted to $103 million at December 31, 2001, and an additional $162 million was lent against junior liens on residential properties during 2001. During 2001, senior liens on 1-4 family residential properties totaled $817 million, and much of the $784 million in loans secured by non-farm, non-residential properties represented collateralization of operating lines, or term loans that finance equipment, inventory, or receivables. Loans secured by farmland totaled $38 million, while loans secured by multi-family residential properties totaled $59 million at December 31, 2001. Leases declined by $77 million in 2001 compared to 2000, as most of Hann's new lease production in 2001 was either sold or originated for other institutions. Table 9 represents the maturity of commercial, financial, and agricultural loans as well as real estate construction loans. These loans with maturities after 2002 consist of $170 million with fixed-rate pricing and $240 million with variable-rate pricing. Deposits Susquehanna's deposit base is consumer-oriented, consisting of time deposits, primarily certificates of deposit of various terms, interest-bearing demand accounts, savings accounts, and demand deposits. The average amounts of deposits by type are summarized in Table 12. Susquehanna does not rely upon time deposits of $100,000 or more as a principal source of funds, as they represent 8% of total deposits. Table 13 presents a breakdown by maturity of time deposits of $100,000 or more as of December 31, 2001. Market Risks The types of market risk exposures generally faced by banking entities include interest rate risk, liquidity risk, equity market price risk, foreign currency risk, and commodity price risk. Due to the nature of its operations, only interest rate risk and liquidity risk are significant to Susquehanna. Liquidity and interest rate risk are related but distinctly different from one another. The maintenance of adequate liquidity--the ability to meet the cash requirements of its customers and other financial commitments--is a fundamental aspect of Susquehanna's asset/liability management strategy. Susquehan-na's policy of diversifying its funding sources--purchased funds, repurchase agreements, and deposit accounts--allows it to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At December 31, 2001, Susquehanna's subsidiary banks and savings bank have unused lines of credit available to them from various FHLBs of $559 million. However, liquidity is not entirely dependent on increasing Susquehanna's liability balances. Liquidity can also be generated from maturing or readily marketable assets. The carrying value of investment securities maturing within one year amounted to $34 million at December 31, 2001. These maturing investments represented 3% of total investment securities. Cash and due from banks amounted to $149 million and unrestricted short-term investments amounted to $47 million for the year ended December 31, 2001, both of which represent additional sources of liquidity. 23 TABLE 7 - Investment Securities
- -------------------------------------------------------------------------------------------------------- Dollars in thousands Within After 1 Year but After 5 Years but After 1 Year Within 5 Years Within 10 Years 10 Years Total - -------------------------------------------------------------------------------------------------------- Available-for-Sale U.S. Treasury Fair value $ 1,302 $ 1,302 Amortized cost 1,201 1,201 Yield 7.01% 7.01% U.S. Government agencies Fair value $ 2,904 $ 67,962 $ 16,209 $ 1,214 $ 88,289 Amortized cost 2,900 66,261 15,943 1,225 86,329 Yield 3.41% 6.18% 5.84% 5.52% 6.01% Corporate debt securities Fair value $ 2,017 $ 17,833 $ 4 $ 990 $ 20,844 Amortized cost 2,004 17,082 5 982 20,073 Yield 5.97% 6.54% 2.63% 3.83% 6.35% Mortgage-backed securities Fair value $17,775 $ 994 $ 75,325 $714,887 $ 808,981 Amortized cost 18,040 984 74,543 705,699 799,266 Yield 5.28% 6.42% 5.47% 6.01% 5.94% State and municipal securities Fair value $11,169 $ 40,734 $ 6,991 $ 5,818 $ 64,712 Amortized cost 11,097 39,830 6,765 5,642 63,334 Yield 6.84% 6.54% 8.83% 8.46% 7.01% Equity securities Fair value $ 35,185 Amortized cost 33,373 Yield 5.61% Held-to-Maturity Mortgage-backed securities Fair value $ 310 $ 1,468 $ 1,778 Amortized cost 310 1,468 1,778 Yield 4.46% 4.90% 4.82% Total Securities Fair value $33,865 $129,135 $ 98,529 $724,377 $1,021,091 Amortized cost 34,041 125,668 97,256 715,016 1,005,354 Yield 5.67% 6.35% 5.76% 6.02% 6.01% ========================================================================================================
Closely related to the management of liquidity is the management of interest rate risk. Interest rate risk focuses on maintaining stability in the net interest margin, an important factor in earnings growth. Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest-bearing assets and liabilities. It is the objective of management to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors to maximize earnings in an environment of changing interest rates. However, there is a lag in maintaining the desired matching because the repricing of products occurs at varying time intervals. Susquehanna employs a variety of methods to monitor interest rate risk. By dividing the assets and liabilities into three groups--fixed rate, floating rate, and those which reprice only at management's discretion--strategies are developed which are designed to minimize exposure to interest rate fluctuations. Management also utilizes gap analysis to evaluate rate sensitivity at a given point in time. Table 14 illustrates Susquehanna's estimated interest rate sen sitivity and periodic and cumulative gap positions as calculated at December 31, 2001 and 2000. These estimates include anticipated paydowns on commercial and residential loans, mortgage-backed securities, and certain assumptions regarding core deposits. Traditionally, an institution with more assets repricing than liabilities over a given time frame is considered asset sensitive, and one with more liabilities repricing than assets is considered liability sensitive. An asset sensitive institution will generally benefit from rising rates, and a liability sensitive institution will generally benefit from declining rates. However, imbedded options, such as a call feature on a bond or a prepayment option on a loan, may impact the magnitude and direction of interest rate sensitivity. In addition to periodic gap reports comparing the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates, management also utilizes an in-house simulation model that measures Susquehanna's exposure to interest rate risk. This model calculates the income effect and the economic value of assets, liabilities, and equity at current and forecasted interest rates, and at hypothetical higher and lower 24 Table 8 - Loan and Lease Portfolio
- --------------------------------------------------------------------------------------------- At December 31 2001 2000 - --------------------------------------------------------------------------------------------- Percentage Percentage of Loans to of Loans to Dollars in thousands Amount Total Loans Amount Total Loans - --------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 434,780 12.4% $ 371,320 10.8% Real estate--construction 359,445 10.2 264,182 7.7 Real estate--mortgage 1,963,094 55.8 1,933,772 56.3 Consumer 325,170 9.2 350,707 10.2 Leases 437,009 12.4 513,629 15.0 - --------------------------------------------------------------------------------------------- Total $3,519,498 100.0% $3,433,610 100.0% =============================================================================================
Table 9 - Loan Maturity and Interest Sensitivity
- --------------------------------------------------------------------------------------------------------------- Dollars in thousands - --------------------------------------------------------------------------------------------------------------- At December 31 - --------------------------------------------------------------------------------------------------------------- Under One One to Five Over Five Maturity Year Years Years Total - --------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 199,932 $129,282 $105,566 $434,780 Real estate--construction 183,832 145,545 30,068 359,445 - --------------------------------------------------------------------------------------------------------------- $ 383,764 $274,827 $135,634 $794,225 =============================================================================================================== Rate sensitivity of loans with maturities greater than 1 year: Variable rate $240,063 Fixed rate 170,398 - --------------------------------------------------------------------------------------------------------------- $410,461 ===============================================================================================================
Table 10 - Allocation of Allowance for Loan and Lease Losses
- ----------------------------------------------------------------------------------------- Dollars in thousands - ----------------------------------------------------------------------------------------- At December 31 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 8,783 $ 7,518 $ 5,773 $ 5,212 $ 5,184 Real estate--construction 10,388 7,632 6,018 5,937 5,994 Real estate--mortgage 8,545 8,064 8,000 8,014 7,698 Consumer 6,423 6,187 6,981 5,500 5,225 Leases 1,923 2,276 9,113 4,657 3,960 Unused commitments 1,110 2,211 2,937 2,366 2,558 Unallocated 526 3,299 5,643 7,754 8,697 - ----------------------------------------------------------------------------------------- Total $37,698 $37,187 $44,465 $39,440 $39,316 =========================================================================================
interest rates at one percent intervals. The income effect and economic value of defined categories of financial instruments is calculated by the model using estimated cash flows based on imbedded options, prepayments, early withdrawals, and weighted average contractual rates and terms. For economic value calculations, the model also considers discount rates for similar financial instruments. The economic value of longer-term fixed-rate financial instruments are generally more sensitive to changes in interest rates. Adjustable-rate and variable-rate financial instruments largely reflect only a change in economic value representing the difference between the contractual and discounted rates until the next contractual interest rate repricing date, unless subject to rate caps and floors. A substantial portion of Susquehanna's loans consists of commercial and residential mortgage loans containing significant imbedded options which permit the borrower to repay the principal balance of the loan prior to maturity ("prepayments") without penalty. A loan's susceptibility for prepayment is dependent upon a number of factors, including the current interest rate versus the contractual interest rate of the loan, the financial ability of the borrower to refinance, and the economic benefit and availability of refinancing at attractive terms. Also, refinancing may depend upon economic and other factors in specific geographic areas that affect the sales and price levels of residential property. In a changing interest rate environment, prepayments may increase or decrease depending on the current relative levels and expectations of future short- and long-term interest rates. Since a significant portion of Susquehanna's loan portfolio has adjustable or variable rates, prepayments on such loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates and fixed rate loans are economically more desirable. 25 - ------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------ Percentage Percentage Percentage of Loans to of Loans to of Loans to Amount Total Loans Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------ $ 327,670 9.4% $ 301,385 9.3% $ 327,598 10.7% 255,054 7.4 256,451 7.9 231,120 7.5 1,850,375 53.3 1,821,485 56.0 1,761,763 57.4 395,566 11.4 346,180 10.7 329,876 10.7 640,996 18.5 523,317 16.1 422,328 13.7 - ------------------------------------------------------------------------------ $3,469,661 100.0% $3,248,818 100.0% $3,072,685 100.0% ============================================================================== Table 11 - Loan Concentrations Substantially all of Susquehanna's loans and leases are to enterprises and individuals in Pennsylvania, Maryland, New Jersey, and New York. At December 31, 2001, Susquehanna's portfolio included the following concentrations:
- ------------------------------------------------------------------------------------------------------------------- Total As a % of % Nonperforming Dollars in thousands Permanent Construction All Other Amount Total Loans in each category - ------------------------------------------------------------------------------------------------------------------- Housing developments $ 99,821 $ 173,560 $ 1,238 $ 274,619 7.8 0.7 Office buildings and warehouses 137,285 5,559 57,873 200,717 5.7 1.7 Retailing 113,695 36,875 1,574 152,144 4.3 0.0 Manufacturing 46,023 3,114 66,882 116,020 3.3 1.8 Hotels/motels 61,905 4,443 4,237 70,585 2.0 0.1 Agriculture 36,598 130 19,150 55,879 1.6 0.6 Wholesalers 14,406 200 30,379 44,985 1.3 0.6 ===================================================================================================================
Investment securities, other than those with early call provisions and mortgage-backed securities, generally do not have significant imbedded options and repay pursuant to specific terms until maturity. While savings and checking deposits generally may be withdrawn upon the customer's request without prior notice, a continuing relationship with customers resulting in future deposits and withdrawals is generally predictable, resulting in a dependable source of funds. Time deposits generally have early withdrawal penalties, while term FHLB borrowings and subordinated notes have prepayment penalties which discourage customer withdrawal of time deposits and prepayment of FHLB borrowings and subordinated notes prior to maturity. Susquehanna's loans are primarily indexed to national interest indices. When such loans are funded by interest-bearing liabilities which are determined by other indices, primarily deposits and FHLB borrowings, a changing interest rate environment may result in different levels of changes in the different indices, resulting in disproportionate changes in the value of, and the net earnings generated from, such financial instruments. Each index is unique and is influenced by different external factors; therefore, the historical relationships in various indices may not be indicative of the actual change which may result in a changing interest rate environment. Tables 15 and 16 reflect the estimated income effect and economic value of assets, liabilities, and equity calculated using certain assumptions determined by Susquehanna as of Decem-ber 31, 2001 and 2000, at current interest rates and at hypothetical higher and lower interest rates in one- and two-percent increments. As noted in Table 15, the economic value of equity at risk as of December 31, 2001, is four percent at an interest rate change of plus two percent, while Table 16 discloses that net interest income at risk as of December 31, 2001, is eight percent at an interest rate change of minus two percent. At December 31, 2001, Susquehanna was an asset-sensitive institution and should benefit from a rise in interest rates in 2002, if that should occur. Securitizations and Off-Balance Sheet Financings Assets securitizations and other off-balance sheet financings can further impact liquidity and interest rate risk. Hann's automobile lease originations are financed primarily in four ways: agency arrangements with other financial institutions; securitization Table 12 - Average Deposit Balances - --------------------------------------------------------------- Dollars in thousands - --------------------------------------------------------------- Year ended December 31 2001 2000 1999 - --------------------------------------------------------------- Demand deposits $ 468,319 $ 441,894 $ 421,055 Interest-bearing demand deposits 834,950 773,552 785,175 Savings deposits 420,818 420,512 444,938 Time deposits 1,568,646 1,552,939 1,519,267 - --------------------------------------------------------------- Total $3,292,733 $3,188,897 $3,170,435 =============================================================== Table 13 - Deposit Maturity - --------------------------------------------------------------- Maturity of time deposits of $100 or more at December 31, 2001 - --------------------------------------------------------------- Dollars in thousands - --------------------------------------------------------------- Three months or less $ 84,592 Over three months through six months 50,011 Over six months through twelve months 58,646 Over twelve months 88,387 - --------------------------------------------------------------- Total $281,636 =============================================================== 26 Table 14 - Balance Sheet Gap Analysis
- ----------------------------------------------------------------------------------------------------------------- Dollars in thousands 1-3 3-12 1-3 Over 3 At December 31, 2001 months months years years Total - ----------------------------------------------------------------------------------------------------------------- Assets Short-term investments $ 88,565 $ 0 $ 0 $ 0 $ 88,565 Investments 151,439 226,343 337,733 305,576 1,021,091 Loans and leases, net of unearned income 1,063,376 611,940 942,470 901,712 3,519,498 - ----------------------------------------------------------------------------------------------------------------- Total $1,303,380 $ 838,283 $1,280,203 $1,207,288 $4,629,154 - ----------------------------------------------------------------------------------------------------------------- Liabilities Interest-bearing demand $ 131,747 $ 216,516 $ 425,113 $ 141,704 $ 915,080 Savings 26,832 80,496 246,473 82,158 435,959 Time 313,317 545,543 374,956 88,678 1,322,494 Time in denominations of $100 or more 84,592 108,657 69,035 19,352 281,636 Total borrowings 176,424 44,314 568,226 227,882 1,016,846 - ----------------------------------------------------------------------------------------------------------------- Total $ 732,912 $ 995,526 $1,683,803 $ 559,774 $3,972,015 ================================================================================================================= Interest Sensitivity Gap: Periodic $ 570,468 $ (157,243) $ (403,600) $ 647,514 Cumulative 413,225 9,625 657,139 Cumulative gap as a percentage of earning assets 12% 9% 0% 14%
- ----------------------------------------------------------------------------------------------------------------- 1-3 3-12 1-3 Over 3 At December 31, 2000 months months years years Total - ----------------------------------------------------------------------------------------------------------------- Assets Short-term investments $ 59,035 $ 0 $ 0 $ 0 $ 59,035 Investments 88,763 109,253 311,141 389,447 898,604 Loans and leases, net of unearned income 1,123,486 702,439 1,010,264 597,421 3,433,610 - ----------------------------------------------------------------------------------------------------------------- Total $1,271,284 $ 811,692 $1,321,405 $986,868 $4,391,249 ================================================================================================================= Liabilities Interest-bearing demand $ 105,639 $ 283,614 $ 139,208 $289,405 $ 817,866 Savings 47,068 137,135 85,505 144,170 413,878 Time 257,419 588,876 403,902 53,100 1,303,297 Time in denominations of $100 or more 80,757 107,577 50,256 13,085 251,675 Total borrowings 447,448 110,710 312,875 159,779 1,030,812 - ----------------------------------------------------------------------------------------------------------------- Total $ 938,331 $1,227,912 $ 991,746 $659,539 $3,817,528 ================================================================================================================= Interest Sensitivity Gap: Periodic $ 332,953 $ (416,220) $ 329,659 $327,329 Cumulative (83,267) 246,392 573,721 Cumulative gap as a percentage of earning assets 8% -2% 6% 13% =================================================================================================================
transactions; sale-leaseback transactions; and other sources of funds, including internally generated sources. Assets financed in the first three of these manners generally are not reflected on Susquehanna's consolidated balance sheet. As of December 31, 2001, Hann's off-balance sheet, managed portfolio was funded in the following manners: agency arrangements, $555 million; asset securitization transactions, $111 million; and sale-leaseback transactions, $168 million. Agency arrangements generally occur on similar economic terms and generally result in no accounting gains or losses to Hann and no retention of credit, residual value, or interest rate risk with respect to the sold assets. Agency arrangements involve the origination and servicing by Hann of automobile leases for other financial institutions. Hann generally is entitled to receive all of the administrative fees collected from obligors, a servicing fee, and an origination fee per lease. Lease sales are generally accounted for as sales under SFAS 140. In asset securitization transactions, Hann generally sells or contributes the beneficial interest in fixed-rate automobile leases and related vehicles to a wholly-owned, special purpose entity, or SPE. The SPE finances the purchase by borrowing funds from a non-related, asset-backed commercial paper issuer. Hann continues to act as servicer for the sold portfolio and Hann is entitled to receive all of the administrative fees collected from obligors. In addition, Hann also receives a servicing fee based upon a percentage of the dollar amount of assets serviced. These transactions are generally accounted for as sales under the guidelines of SFAS 140. Neither Hann nor Susquehanna provides recourse for credit losses. The debt issued bears a floating rate of interest, and Susquehanna either obtains interest rate protec- 27 Table 15 - Balance Sheet Shock Analysis
- --------------------------------------------------------------------------------------------------------------- Base Dollars in thousands Present At December 31, 2001 -2% -1% Value 1% 2% - --------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 149,233 $ 149,233 $ 149,233 $ 149,233 $ 149,233 Short-term investments 88,565 88,565 88,565 88,565 88,565 Investment securities: Held-to-maturity 1,967 1,878 1,794 1,716 1,642 Available-for-sale 1,040,905 1,031,544 1,019,313 998,072 973,117 Loans and leases, net of unearned income 3,703,282 3,641,837 3,581,492 3,522,580 3,465,534 Other assets 310,403 310,403 310,403 310,403 310,403 - --------------------------------------------------------------------------------------------------------------- Total assets $ 5,294,355 $ 5,223,460 $ 5,150,800 $ 5,070,569 $ 4,988,494 =============================================================================================================== Liabilities Deposits: Non-interest bearing $ 533,436 $ 518,195 $ 503,398 $ 488,601 $ 474,248 Interest-bearing 3,034,639 2,994,820 2,955,774 2,917,138 2,879,842 Total borrowings 1,062,516 1,045,342 1,028,653 1,012,494 998,316 Other liabilities 56,380 56,380 56,380 56,380 56,380 - --------------------------------------------------------------------------------------------------------------- Total liabilities 4,686,971 4,614,737 4,544,205 4,474,613 4,408,786 Total economic equity 607,384 608,723 606,595 595,956 579,708 - --------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 5,294,355 $ 5,223,460 $ 5,150,800 $ 5,070,569 $ 4,988,494 =============================================================================================================== Economic equity ratio 11% 12% 12% 12% 12% Value at risk 789 2,128 0 (10,639) (26,887) %Value at risk 0% 0% 0% -2% -4%
- --------------------------------------------------------------------------------------------------------------- Base Dollars in thousands Present At December 31, 2000 -2% -1% Value 1% 2% - --------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 129,101 $ 129,101 $ 129,101 $ 129,101 $ 129,101 Short-term investments 59,042 59,039 59,035 59,032 59,029 Investment securities: Held-to-maturity 17,132 16,786 16,658 16,239 15,851 Available-for-sale 896,185 882,902 882,285 860,489 837,309 Loans and leases, net of unearned income 3,519,374 3,471,013 3,423,848 3,377,646 3,331,302 Other assets 309,693 309,693 309,693 309,693 309,693 - --------------------------------------------------------------------------------------------------------------- Total assets 4,930,527 4,868,534 4,820,620 4,752,200 4,682,285 =============================================================================================================== Liabilities Deposits: Non-interest bearing 469,153 455,854 442,943 430,032 417,507 Interest-bearing 2,889,481 2,854,384 2,820,494 2,786,565 2,753,565 Total borrowings 1,058,580 1,040,424 1,022,746 1,005,507 988,673 Other liabilities 59,594 59,594 59,594 59,594 59,594 - --------------------------------------------------------------------------------------------------------------- Total liabilities 4,476,808 4,410,256 4,345,777 4,281,698 4,219,339 Total economic equity 453,719 458,278 474,843 470,502 462,946 - --------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 4,930,527 $ 4,868,534 $ 4,820,620 $ 4,752,200 $ 4,682,285 =============================================================================================================== Economic equity ratio 9% 9% 10% 10% 10% Value at risk (21,124) (16,565) 0 (4,341) (11,897) % Value at risk -4% -3% 0% -1% -3% ===============================================================================================================
28 Table 16 - Net Interest Income Shock Analysis
- --------------------------------------------------------------------------------------------------------------- Base Dollars in thousands Present At December 31, 2001 -2% -1% Value 1% 2% - --------------------------------------------------------------------------------------------------------------- Interest income: Short-term investments $ 1,883 $ 3,290 $ 4,790 $ 6,318 $ 7,881 Investments 52,758 55,777 58,844 60,969 62,842 Loans and leases 238,593 250,661 262,647 274,458 286,301 - --------------------------------------------------------------------------------------------------------------- Total interest income 293,234 309,728 326,281 341,745 357,024 - --------------------------------------------------------------------------------------------------------------- Interest expense: Interest-bearing demand and savings 15,162 15,890 17,252 20,953 24,653 Time 51,429 57,444 63,659 69,931 76,268 Total borrowings 49,017 50,406 52,449 54,562 57,269 - --------------------------------------------------------------------------------------------------------------- Total interest expense 115,608 123,740 133,360 145,446 158,190 - --------------------------------------------------------------------------------------------------------------- Net interest income $ 177,626 $ 185,988 $ 192,921 $ 196,299 $ 198,834 =============================================================================================================== Net interest income at risk $ (15,295) $ (6,933) 0 $ 3,378 $ 5,913 % Net interest income at risk -8% -4% 0% 2% 3% ===============================================================================================================
Base Dollars in thousands Present At December 31, 2000 -2% -1% Value 1% 2% - --------------------------------------------------------------------------------------------------------------- Interest income: Short-term investments $ 3,287 $ 4,111 $ 4,934 $ 5,757 $ 6,518 Investments 44,494 47,978 55,608 56,700 57,850 Loans and leases 268,590 280,778 292,895 307,709 323,988 - --------------------------------------------------------------------------------------------------------------- Total interest income 316,371 332,867 353,437 370,166 388,356 - --------------------------------------------------------------------------------------------------------------- Interest expense: Interest-bearing demand and savings 27,372 29,243 33,407 36,502 39,665 Time 73,063 79,009 84,958 90,906 96,855 Total borrowings 56,901 61,423 65,945 70,467 74,989 - --------------------------------------------------------------------------------------------------------------- Total interest expense $ 157,336 $ 169,675 $ 184,310 $ 197,875 $ 211,509 - --------------------------------------------------------------------------------------------------------------- Net interest income $ 159,035 $ 163,192 $ 169,127 $ 172,291 $ 176,847 =============================================================================================================== Net interest income at risk $ (10,092) $ (5,935) 0 $ 3,164 $ 7,720 % Net interest income at risk -6% -4% 0% 2% 5%
Table 17 - Capital Adequacy
- ----------------------------------------------------------------------------------- At December 31, 2001 - ----------------------------------------------------------------------------------- Tier I Capital Total Capital Leverage Ratio (A) Ratio (B) Ratio (C) - ----------------------------------------------------------------------------------- Required Ratio 4.00% 8.00% 4.00% Citizens Bank of Southern Pennsylvania 10.78 11.75 6.82 Equity Bank 9.41 10.53 7.24 Farmers First Bank 10.44 11.69 8.32 Farmers & Merchants Bank and Trust 8.54 11.09 6.44 First American Bank of Pennsylvania 14.74 15.51 9.95 First Susquehanna Bank & Trust 10.65 11.90 7.38 Founders' Bank 9.17 10.41 7.50 Susquehanna Bank 8.91 11.45 7.13 WNB Bank 14.24 15.48 9.71 Total Susquehanna 10.81% 12.53% 8.68% ===================================================================================
(A) Tier I capital divided by year-end risk-adjusted assets, as defined by the risk-based capital guidelines. (B) Total capital divided by year-end risk-adjusted assets. (C) Tier I capital divided by average total assets less disallowed intangible assets. 29 tion agreements or retains the related interest rate risk. Although neither Hann nor Susquehanna has retained residual risk in the vehicle leases and related vehicles, in the event of a breach by Auto Lenders of its obligation under the Servicing Agreement, described earlier in the discussion titled "Related Party Transaction and Residual Value Risk," Susquehanna would be required to reimburse up to $20.5 million under a letter of credit facility for losses suffered by the investors to the extent of amounts not paid by Auto Lenders. As of December 31, 2001, Hann had one outstanding asset securitization transaction. The transaction documents contain several requirements, obligations, liabilities, provisions, and consequences, including events of default, which become applicable upon, among other conditions, the failure of the sold and pledged portfolios to meet certain performance tests. The SPE generally retains the right to receive excess cash flows from the sold portfolio and, under SFAS 140, Hann is required to recognize a receivable representing the present value of these excess cash flows, which is subordinate to the investors' interests. The value of this recorded interest is subject to credit, prepayment, and interest rate risks. At Decem-ber 31, 2001, this recorded interest was $4.5 million of which $1.3 million represents the remaining interest-only asset and $3.2 million is a valuation adjustment which is recognized as other comprehensive income, net of taxes. In December 2000, Hann sold and leased back the beneficial interest in $190 million of automobiles subject to operating leases under a Master Lease Agreement that has an eight-year term with an early buyout option on January 14, 2007. For accounting purposes, the transaction is treated as a sale and an operating lease. To support its obligations under the Master Lease Agreement, Hann pledges the beneficial interest in an additional $31.6 million of automobile leases and related vehicles. Hann is expected to earn approximately $11.7 million in other income over the term of the Master Lease Agreement, which includes $27.1 million of estimated net rental income, or the difference between the operating lease payments received by Hann and the payments made by Hann under the Master Lease Agreement. The estimated net rental income will be partially offset by the amortization of transaction costs of approximately $15.4 million, which includes a $14.0 million deferred loss on an interest rate swap. Susquehanna entered into an interest rate swap in order to fix the return on the transaction, while leases originated for the sale-leaseback were being held in a warehouse facility during the ten-month production period. The transaction documents contain several requirements, obligations, liabilities, provisions, and consequences which become applicable upon the occurrence of an "Early Amortization Event." An Early Amortization Event includes the failure of the sold and pledged portfolios to meet certain performance tests or the failure of Susquehanna to continue to maintain its investment-grade senior unsecured long-term debt ratings. This rating provision can be cured by Susque-hanna by obtaining a $32.7 million letter of credit from an eligible financial institution for the benefit of the equity participants in the transaction. This is referred to in Table 18 as Contingent Cash Collateral. For example, after an Early Amortization Event, substitutions are no longer permitted, which means that the sales proceeds from the sold vehicles following termination of the related auto leases may not be used to purchase replacement vehicles and leases. Instead, these proceeds are required to make termination and other payments under the Master Lease Agreement. As of December 31, 2001, the obligation to make these termination and other payments is collateralized by a cash deposit of $6.4 million. Table 18 presents certain contractual obligations and commercial commitments, including the guarantees of Susquehanna on behalf of its subsidiaries, and their expected year of payment or expiration. Capital Adequacy Risk-based capital ratios, based upon guidelines adopted by bank regulators in 1989, focus upon credit risk. Assets and certain off-balance sheet items are segmented into one of four broad-risk categories and weighted according to the relative percentage of credit risk assigned by the regulatory authorities. Off-balance sheet instruments are converted into a balance sheet credit equivalent before being assigned to one of the four risk-weighted categories. To supplement the risk-based capital ratios, the regulators issued a minimum leverage ratio guideline (Tier 1 capital as a percentage of average assets less excludable intangibles). Capital elements are segmented into two tiers. Tier 1 capital represents stockholders' equity reduced by excludable intangibles, while Tier 2 capital represents certain allowable long-term debt, the portion of the allowance for loan and lease losses equal to 1.25% of risk-adjusted assets, and 45% of the unrealized gain on equity securities. The sum of Tier 1 capital and Tier 2 capital is "total risk-based capital." The maintenance of a strong capital base at both the parent company level as well as at each bank affiliate is an important aspect of Susquehanna's philosophy. Table 17 illustrates these capital ratios for each bank and savings bank subsidiary and Susquehanna on a consolidated basis. Susquehanna and each of its banking and savings bank subsidiaries have leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity is considered "well capitalized" under regulatory guidelines. Recent Accounting Pronouncements On July 20, 2001, the FASB issued SFAS No. 141, ("SFAS 141") "Business Combinations," and SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 supercedes Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations." The most significant changes made by SFAS 141 are: (1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; (2) establishing specific criteria for the recognition of intangible assets separately from goodwill; and (3) requiring unallocated negative goodwill to be written off immediately as an extraordinary gain. Management has reviewed SFAS 141 and has determined that the statement has no effect on its current financial position or results of operations. SFAS 142 supercedes APB 17, "Intangible Assets." SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The most significant changes made by SFAS 142 are: (1) goodwill and indefinite-lived intangible assets will no longer be amortized; (2) goodwill will be tested for impairment at least annually at the reporting unit level; (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually; and (4) the amortization period of intangible assets with finite 30 TABLE 18--Contractual Obligations and Commercial Commitments
- -------------------------------------------------------------------------------------- Payments Due by Period - -------------------------------------------------------------------------------------- Less than 1-3 4-5 Over 5 Contractual Obligations Total 1 Year Years Years Years - -------------------------------------------------------------------------------------- Long-term debt $ 105,000 $ 0 $ 55,000 $ 50,000 $ 0 Operating leases 211,544 27,147 53,425 61,567 69,405 Contingent cash collateral 32,739 0 0 0 32,739 - --------------------------------------------------------------------------------------
Commitment Expiration - -------------------------------------------------------------------------------------- Less than 1-3 4-5 Over 5 Other Commercial Commitments Total 1 Year Years Years Years - -------------------------------------------------------------------------------------- Stand-by letters of credit $ 86,161 $ 54,180 $ 31,981 $ 0 $ 0 Guarantees 20,000 0 20,000 0 0 Other commercial commitments, principally lines of credit 424,945 328,588 96,357 0 0 ======================================================================================
lives will no longer be limited to forty years. The provision of SFAS 142 will be effective for fiscal years beginning after De-cember 15, 2001. Management estimates that amortization expense for 2002 will be reduced by approximately $3.3 million. Management has not yet performed an impairment test of goodwill. Critical Accounting Policies Susquehanna has established various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of Susquehanna are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experiences and other factors which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of Susquehanna. Susquehanna believes that the allowance for loan and lease losses, which is discussed in the section titled "Provision and Allowance for Loan and Lease Losses," and the treatment of securitizations and off-balance sheet financing, which is discussed in the section titled "Securitizations and Off-Balance Sheet Financing," both require the most significant judgments and estimates used in the preparation of its consolidated financial statements. See "Footnote 1. Summary of Significant Accounting Policies" for a detailed description of Suquehanna's estimation process and methodology related to the allowance for loan and lease losses and treatment of recorded interests in securitized assets, and "Footnote 10. Financial Instruments with Off-Balance Sheet Risk." Summary of 2000 Compared to 1999 Several significant transactions occurred which affected the comparability of Susquehanna's financial performance for theyears ended December 31, 2001 and 2000. These transactions are described in the following paragraphs. On March 3, 2000, Susquehanna completed the acquisition of Valley Forge Asset Management Corp., a Pennsylvania asset management corporation registered both as a broker/dealer and as an investment advisor, and Valley Forge Investment Company, Inc., its parent corporation, in cash transactions. The acquisition was accounted for under the purchase method of accounting for business combinations. Goodwill of $9.4 million was recognized in the acquisition and was being amortized to other operating expense on a straight-line basis over 25 years. In this transaction, there was a contingent earn-out paid, totaling $6.0 million in 2001. On February 1, 2000, Susquehanna completed the acquisition of Hann, a closely held consumer automobile financing company that services more than $1.0 billion in lease receivables. Susquehanna issued 2,360,000 shares of common stock to the stockholders of Hann for the outstanding common shares of Hann. The acquisition was accounted for under the pooling-of-interest method of accounting for business combinations; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of Hann for all periods presented. Susquehanna's net income for the year ended December 31, 2000, increased $11.5 million, or 26%, from the 1999 net income of $43.5 million. Net income for 1999 included $10.8 million of special charges relating to the consolidation of Susquehanna's back office operations and a special bonus. The restructuring charge of $7.4 million represents severance, employee and employment assistance services, consulting, and asset write-offs related to a reduction in the work force. This work force reduction should result in an estimated net annual savings of approximately $6.0 million, of which $1.0 million was realized in the year 2000, with an anticipated 100% realization in 2001 and each succeeding year. A special bonus of $3.4 million was awarded to Susquehanna employees (excluding executive and senior management) for extraordinary efforts in 1999. Susquehanna's earnings performance in 2000 was also affected by significant growth in non-interest income resulting primarily from increases in vehicle origination and servicing fees and merchant credit card fees. Non-interest income increased 31 $20.6 million, or 38%, in 2000 over 1999. Diluted EPS increased 27% from $1.10 per share for the year ended 1999 to $1.40 per share for the year ended 2000. Excluding the special charges noted above, annual 2000 diluted EPS increased 9% over 1999. ROA and ROE finished at 1.15% and 13.01% for the year 2000, compared with 0.94% and 10.45% for 1999. Excluding the special charges noted above, Susque-hanna's ROA and ROE for 1999 would have been 1.09% and 12.13%, respectively. For 2000, tangible net income, earnings per share, ROA, and ROE were $58.1 million, $1.48, 1.23%, and 15.08%, respectively, compared to actual net income, basic earnings per share, ROA, and ROE of $55.0 million, $1.40, 1.15%, and 13.01%, respectively. Tangible net income, earnings per share, ROA, and ROE for 1999 were $46.5 million, $1.18, 1.01%, and 12.13%, respectively. Excluding special charges, tangible net income, EPS, ROA, and ROE were $53.5 million, $1.36, 1.16%, and 13.96%, respectively. 32 Item 8. Financial Statements and Supplementary Data - ------ ------------------------------------------- The following consolidated financial statements of Susquehanna are submitted herewith:
Page Reference -------------- Consolidated Balance Sheets at December 31, 2001 and 2000.................... 34 Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999................................... 35 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999................................... 36 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999............... 37 Notes to Consolidated Financial Statements................................... 38 Report of Independent Accountants............................................ 52 Summary of Quarterly Financial Data.......................................... 53
33 Consolidated Balance Sheets SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------- Dollars in thousands - --------------------------------------------------------------------------------------------------------- Year ended December 31 2001 2000 - --------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 149,233 $ 129,101 Short-term investments: Restricted 41,584 32,731 Unrestricted 46,981 26,304 - --------------------------------------------------------------------------------------------------------- Total short-term investments 88,565 59,035 - --------------------------------------------------------------------------------------------------------- Investment securities available for sale, at fair value 1,019,313 882,285 Investment securities held to maturity, at amortized cost (Fair values of $1,778 and $16,658) 1,778 16,319 Loans and leases, net of unearned income 3,519,498 3,433,610 Less: Allowance for loan and lease losses 37,698 37,187 - --------------------------------------------------------------------------------------------------------- Net loans and leases 3,481,800 3,396,423 - --------------------------------------------------------------------------------------------------------- Premises and equipment (net) 60,063 58,303 Accrued income receivable 21,268 26,775 Bank-owned life insurance 120,174 113,865 Other assets 108,898 110,750 - --------------------------------------------------------------------------------------------------------- Total assets $ 5,051,092 $ 4,792,856 ========================================================================================================= Liabilities Deposits: Noninterest-bearing $ 529,162 $ 462,297 Interest-bearing 2,955,169 2,786,716 - --------------------------------------------------------------------------------------------------------- Total deposits 3,484,331 3,249,013 - --------------------------------------------------------------------------------------------------------- Short-term borrowings 169,803 205,336 FHLB borrowings 570,580 367,954 Vehicle financing 171,462 357,522 Long-term debt 105,000 100,000 Accrued interest, taxes, and expenses payable 36,652 42,382 Other liabilities 19,728 17,212 - --------------------------------------------------------------------------------------------------------- Total liabilities 4,557,556 4,339,419 - --------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 16) Stockholders' Equity Common stock Authorized: 100,000,000 ($2.00 par value) Issued: 39,398,190 78,796 78,796 Surplus 57,986 57,872 Retained earnings 345,508 320,020 Accumulated other comprehensive income, net of taxes of $6,928 and 12,009 (757) ($408), respectively Less: Treasury stock (54,115 and 176,798 common shares at cost,respectively) 763 2,494 - --------------------------------------------------------------------------------------------------------- Total stockholders' equity 493,536 453,437 - --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 5,051,092 $ 4,792,856 =========================================================================================================
The accompanying notes are an integral part of these financial statements. 34 Consolidated Statements of Income SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------- Dollars in thousands, except per share - ----------------------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------- Interest Income Interest and fees on loans and leases $283,212 $293,046 $276,280 Interest on investment securities: Taxable 51,247 53,238 50,485 Tax-exempt 3,297 4,195 5,232 Interest on short-term investments 3,539 2,937 3,089 - ----------------------------------------------------------------------------------------------- Total interest income 341,295 353,416 335,086 - ----------------------------------------------------------------------------------------------- Interest Expense Interest on deposits: Interest-bearing demand 18,144 22,080 20,359 Savings 6,324 7,709 8,166 Time 84,222 85,216 77,487 Interest on short-term borrowings 7,976 11,597 4,336 Interest on FHLB borrowings 23,656 23,139 19,600 Interest on vehicle financing 20,886 30,961 34,679 Interest on long-term debt 7,843 7,762 8,899 - ----------------------------------------------------------------------------------------------- Total interest expense 169,051 188,464 173,526 - ----------------------------------------------------------------------------------------------- Net interest income 172,244 164,952 161,560 Provision for loan and lease losses 7,310 3,726 11,203 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan and lease losses 164,934 161,226 150,357 - ----------------------------------------------------------------------------------------------- Other Income Service charges on deposit accounts 13,735 10,867 10,054 Vehicle origination and servicing fees 22,435 22,053 13,480 Merchant credit card fees 10,489 10,130 3,086 Asset management fees 9,072 6,610 0 Income from fiduciary-related activities 5,084 4,734 4,028 Gain on sale of loans and leases 4,198 3,936 3,427 Income from bank-owned life insurance 6,509 5,909 4,528 Other operating income 11,995 9,784 13,878 Investment security gains/(losses) 649 (13) 978 - ----------------------------------------------------------------------------------------------- Total other income 84,166 74,010 53,459 - ----------------------------------------------------------------------------------------------- Other Expenses Salaries and employee benefits 73,850 68,110 64,218 Net occupancy expense 11,498 9,933 9,349 Furniture and equipment expense 8,185 8,308 8,088 Amortization of intangible assets 3,645 3,294 3,476 Vehicle residual value expense 4,850 8,068 2,102 Vehicle delivery and preparation expense 6,168 2,166 1,181 Merchant credit card servicing expense 9,820 9,514 3,122 Restructuring charge 0 (900) 7,412 Other operating expenses 49,747 47,088 42,840 - ----------------------------------------------------------------------------------------------- Total other expenses 167,763 155,581 141,788 - ----------------------------------------------------------------------------------------------- Income before income taxes 81,337 79,655 62,028 Provision for income taxes 25,621 24,693 18,505 - ----------------------------------------------------------------------------------------------- Net Income $ 55,716 $ 54,962 $ 43,523 =============================================================================================== Per share information: Basic earnings $ 1.42 $ 1.40 $ 1.11 Diluted earnings 1.41 1.40 1.10 Cash dividends 0.77 0.70 0.62 Average shares outstanding: Basic 39,263 39,262 39,320 Diluted 39,593 39,365 39,497 ===============================================================================================
The accompanying notes are an integral part of these financial statements. 35 Consolidated Statements of Cash Flows SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------- Dollars in thousands - ------------------------------------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 55,716 $ 54,962 $ 43,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion 12,814 14,248 11,857 Provision for loan and lease losses 7,310 3,726 11,203 Gain on sale of branch offices 0 0 (3,352) (Gain)/loss on securities transactions (649) 13 (978) Gain on sale of loans (4,198) (3,936) (3,427) Loss on sale of other real estate owned 16 15 6 Mortgage loans originated for resale (118,652) (117,328) (187,017) Sale of mortgage loans originated for resale 118,177 114,530 203,158 Leases acquired/originated for resale (116,643) (222,376) 0 Sale of leases acquired/originated for resale 118,392 200,709 0 (Increase)/decrease in accrued interest receivable 5,757 (3,012) (989) (Decrease)/increase in accrued interest payable (5,782) 3,471 734 (Decrease)/increase in accrued expenses and taxes payable (146) 4,165 2,635 Other, net (3,718) 3,900 1,832 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 68,394 53,087 79,185 - ------------------------------------------------------------------------------------------------------------- Investing Activities Net increase in restricted short-term investments (8,853) (25,427) (3,713) Proceeds from the sale of available-for-sale securities 21,889 4,482 47,719 Proceeds from the maturity of investment securities 457,528 120,204 264,783 Purchase of available-for-sale securities (584,286) (84,412) (302,763) Purchase of held-to-maturity securities 0 (7,887) 0 Proceeds from sale of credit card portfolio 0 12,373 0 Net (increase)/decrease in loans and leases (39,730) 19,670 (192,610) Transfer of allowance for loan and lease losses to third-party guarantor 0 (3,057) 0 Capital expenditures (4,207) (9,709) (5,400) Net cash and cash equivalents received/(paid) in acquisitions 6,224 (12,707) (22,381) Purchase of insurance products 0 0 (50,000) - ------------------------------------------------------------------------------------------------------------- Net cash provided by/(used for) investing activities (151,435) 13,530 (264,365) - ------------------------------------------------------------------------------------------------------------- Financing Activities Net increase/(decrease) in deposits 166,200 68,493 (13,978) Net increase/(decrease) in short-term borrowings (35,533) (2,171) 102,976 Net increase/(decrease) in FHLB borrowings 202,626 (4,460) 58,778 Net increase/(decrease) in vehicle financing (186,060) (124,582) 25,191 Proceeds from issuance of long-term debt 5,000 5,000 0 Repayment of long-term debt 0 0 (10) Proceeds from issuance of common stock 1,845 772 1,372 Cash paid for treasury stock 0 (3,097) (287) Dividends paid (30,228) (27,092) (22,918) - ------------------------------------------------------------------------------------------------------------- Net cash provided by/(used for) financing activities 123,850 (87,137) 151,124 - ------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents 40,809 (20,520) (34,056) Cash and cash equivalents at January 1 155,405 175,925 209,981 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 196,214 $ 155,405 $ 175,925 ============================================================================================================= Cash and cash equivalents: Cash and due from banks $ 149,233 $ 129,101 $ 146,576 Unrestricted short-term investments 46,981 26,304 29,349 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 196,214 $ 155,405 $ 175,925 =============================================================================================================
The accompanying notes are an integral part of these financial statements. 36 Consolidated Statements of Changes in Stockholders' Equity SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 2001, 2000, and 1999 - ----------------------------------------------------------------------------------------------------------------------------- Accumulated Other Dollars in thousands, Common Retained Comprehensive Treasury Total except per share data Stock Surplus Earnings Income Stock Equity - ----------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1999 $ 78,655 $ 57,166 $271,545 $ 6,004 $ (783) $412,587 Comprehensive income: Net income 43,523 43,523 Change in unrealized gain/(loss) on securities, net of taxes of ($10,186) and reclassification adjustment of $978 (19,620) (19,620) - ----------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 43,523 (19,620) 23,903 Common stock issued under employee benefit plans (including related tax benefits of $365) 133 707 897 1,737 Purchase/conversion of treasury stock (287) (287) Cash dividends paid: Per common share of $0.62 (22,918) (22,918) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 78,788 57,873 292,150 (13,616) (173) 415,022 Comprehensive income: Net income 54,962 54,962 Change in unrealized gain/(loss) on securities, net of taxes of ($6,553) and reclassification adjustment of ($13) 12,859 12,859 - ----------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 54,962 12,859 67,821 Common stock issued under employee benefit plans (including related tax benefit of $11) 8 (1) 776 783 Purchase/conversion of treasury stock (3,097) (3,097) Cash dividends paid: Per common share of $0.70 (27,092) (27,092) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 78,796 57,872 320,020 (757) (2,494) 453,437 Comprehensive income: Net income 55,716 55,716 Change in unrealized gain/(loss) on securities, net of taxes of $5,578 and reclassification adjustment of $649 10,862 10,862 Unrealized gain on recorded interest in securitized assets, net of taxes of $1,296 1,904 1,904 - ----------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 55,716 12,766 68,482 Common stock issued under employee benefit plans (includes related tax benefit of $278) 114 1,731 1,845 Cash dividends paid: Per common share of $0.77 (30,228) (30,228) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ 78,796 $ 57,986 $345,508 $ 12,009 $ (763) $493,536 =============================================================================================================================
The accompanying notes are an integral part of these financial statements. 37 Notes to Consolidated Financial Statements YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (Dollars in thousands, except as noted and per share data) - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Susquehanna Banc-shares, Inc. and subsidiaries ("Susquehanna") conform to accounting principles generally accepted in the United States of America and to general practices in the banking industry. The more significant policies follow: Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Susquehanna and its wholly-owned subsidiaries: Boston Service Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), Conestoga Management Company, Farmers First Bank and subsidiaries ("Farmers"), Farmers & Merchants Bank and Trust and subsidiaries ("F&M"), First American Bank of Pennsylvania ("FAB"), First Susquehanna Bank & Trust ("First Susquehanna"), WNB Bank ("WNB"), Citizens Bank of Southern Pennsylvania ("Citizens"), Susquehanna Bancshares East, Inc. and subsidiaries ("East"), Susquehanna Bancshares South, Inc. and subsidiaries ("South"), Susque-Bancshares Life Insurance Co. ("SBLIC"), Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC"), and Valley Forge Asset Management Corporation ("VFAM"), as of and for the years ended December 31, 2001, 2000, and 1999. All significant inter-company transactions have been eliminated. Income and expenses are recorded on the accrual basis of accounting except for trust and certain other fees, which are recorded principally on the cash basis. This does not materially affect the results of operations or financial position of Susque-hanna. Nature of Operations. Susquehanna is a financial holding company which operates nine commercial banks based upon the sound principles of super-community banking. These subsidiaries provide financial services from 146 branches located in central and southeastern Pennsylvania, Maryland, northeastern West Virginia, and southern New Jersey. In addition, Susque-hanna operates four non-bank subsidiaries that provide leasing, credit insurance, and asset management services. Susquehanna's primary source of revenue is derived from loans to customers, who are predominately small- and middle-market businesses and middle-income individuals. Use of Estimates in the Preparation of Financial Statements.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Purchase Method of Accounting. Net assets of companies acquired in purchase transactions are recorded at the fair value at the date of acquisition. Core deposit and other intangible assets are amortized on a straight-line basis generally over 10 years. The excess of purchase price over the fair value of net assets acquired, or goodwill, is amortized on a straight-line basis generally over 15 to 40 years. The unamortized amount of goodwill was $43,496 and $38,934 at December 31, 2001 and 2000, respectively. Periodically, management reevaluates goodwill and other intangibles based on undiscounted operating cash flows whenever significant events or changes occur which might impair recovery of recorded asset costs. Consolidated Statement of Cash Flows. Interest paid on deposits, short-term borrowings, and long-term debt was $174,635 in 2001, $184,993 in 2000, and $178,734 in 1999. Income taxes paid were $8,784 in 2001, $422 in 2000, and $16,409 in 1999. Amounts transferred to other real estate owned were $3,836 in 2001, $2,795 in 2000, and $7,342 in 1999. On February 1, 2000, Susquehanna acquired Hann, using the pooling-of-interests method of accounting for business combinations; accordingly, consolidated results for all periods have been restated. On March 3, 2000, Susquehanna completed its acquisition of VFAM, using the purchase method of accounting for business combinations. Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from banks, and unrestricted short-term investments. Unrestricted short-term investments consist of interest-bearing deposits in other banks, federal funds sold, and money market funds with an original maturity of three months or less. Investment Securities. Susquehanna classifies debt and equity securities as either "held-to-maturity" or "available-for-sale." Susquehanna does not have any securities classified as "trading" at December 31, 2001, or 2000. Investments for which management has the intent and Susquehanna has the ability to hold to maturity are carried at the lower of cost or market adjusted for amortization of premium and accretion of discount. Amortization and accretion are calculated principally on the interest method. All other securities are classified as "available-for-sale" and reported at fair value. Changes in unrealized gains and losses for "available-for-sale" securities are recorded as a component of stockholders' equity. Securities classified as "available-for-sale" include investments management intends to use as part of its asset/liability management strategy, and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors. Realized gains and losses on the sale of securities are recognized using the specific identification method and are included in Other Income in the Consolidated Statements of Income. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established, as losses are estimated to have occurred, through a provision for loan and lease losses charged to earnings. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed, and recoveries on previously charged-off loans and leases are credited to the allowance. The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon management's 38 periodic review of the collectibility of the loans and leases in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Susquehanna considers a loan to be impaired, based upon current information and events, if it is probable that Susque-hanna will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Larger groups of small-balance loans, such as residential mortgage and installment loans, are collectively evaluated for impairment. Only commercial loans exceeding $100 are individually evaluated for impairment. An insignificant delay or shortfall in the amounts of payments, when considered independent of other factors, would not cause a loan to be rendered impaired. Insignificant delays or shortfalls may include, depending on specific facts and circumstances, those that are associated with temporary operational downturns or seasonal delays. Management performs periodic reviews of Susquehanna's loan portfolio to identify impaired loans. Measurement of impaired loans is based on present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on fair value of the collateral. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When an impaired loan or portion of an impaired loan is determined to be uncollectible, the portion deemed uncollectible is charged against the related valuation allowance and subsequent recoveries, if any, are credited to the valuation allowance. Depreciable Assets. Buildings, leasehold improvements, and furniture and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related property as follows: Buildings, 40 years, and furniture and equipment, 3 to 20 years. Leasehold improvements are amortized over the shorter of the lease term, or 10 to 20 years. Maintenance and normal repairs are charged to operations as incurred, while additions and improvements to buildings and furniture and equipment are capitalized. Gain or loss on disposition is reflected in operations. Long-lived assets are evaluated for impairment by management on an ongoing basis. An impairment may occur whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Other Real Estate. Other real estate property acquired through foreclosure or other means is recorded at the lower of its carrying value or fair value of the property at the transfer date less estimated selling costs. Costs to maintain other real estate are expensed as incurred. Interest Income on Loans and Leases. Interest income on commercial, consumer, and mortgage loans is recorded on the interest method. Interest income on installment loans and leases is recorded on the interest method and the actuarial method. Loan fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment to the related loan yield on the interest method, generally over the contractual life of the related loans. Nonaccrual loans are those on which the accrual of interest has ceased and where all previously accrued but not collected interest is reversed. Loans, other than consumer loans, are placed on nonaccrual status when principal or interest is past due 90 days or more and the loan is not well collateralized and in the process of collection or immediately, if, in the opinion of management, full collection is doubtful. Interest accrued but not collected as of the date of placement on nonaccrual status is reversed and charged against current income. Susquehanna does not accrue interest on impaired loans. While a loan is considered impaired or on nonaccrual status, subsequent cash interest payments received either are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of the ultimate collectibility of principal and interest. In any case, the deferral or non-recognition of interest does not constitute forgiveness of the borrower's obligation. Consumer loans are recorded in accordance with the Uniform Retail Classification regulation. Generally, the regulation requires that consumer loans are charged off to the allowance for loan losses when they become 120 days or more past due. Segment Reporting. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), requires that public business enterprises report financial and descriptive information about its reportable operating segments. Based on the guidance provided by the statement, Susquehanna has determined its only reportable segment is Community Banking. Comprehensive Income. Susquehanna reports comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Components of comprehensive income, as detailed in the Consolidated Statements of Changes in Stockholders' Equity, are net of tax. Comprehensive income includes a reclassification adjustment for net realized gains/(losses) included in net income of $649, $(13), and $978 for the years ended December 31, 2001, 2000, and 1999, respectively. Recorded Interests in Securitized Assets. In accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of FASB Statement No. 125)," recorded interests in securitized assets, including debt securities and interest-only strips, are initially recorded at their allocated carrying amounts based on the relative fair value of assets sold and retained. Recorded interests are subsequently carried at fair value, which is generally estimated based on the present value of expected cash flows, calculated using management's best estimates of key assumptions, including credit losses, loan repayment speeds, and discount rates commensurate with the risks involved. Gains on sale and servicing fees are recorded in non-interest income. During 2001, Susquehanna repurchased and sold approximately $117 million of auto leases, and realized $1.7 million of pre-tax gain on the sale. Susquehanna receives annual servicing fees as compensation for servicing the outstanding balances on the auto leases. Susquehanna's recorded interests are subordinate to purchasers' interests. The value of these recorded interests is subject to credit, prepayment, and interest rate risks re- 39 lated to the transferred assets. At December 31, 2001, Susque-hanna's recorded interests were $4.5 million. Key economic assumptions used in measuring the initial recorded interests resulting from the securitization completed in 2001 were weighted average life of 30 months, expected credit losses of 1.72%, and discount rate of 4%. Federal Income Taxes. Deferred income taxes reflect the temporary tax consequences on future years of differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Earnings Per Share. Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by Susquehanna relate solely to outstanding stock options, and are determined using the treasury stock method. Consolidated Statements of Changes in Stockholders' Equity - ----------------------------------------------------------------------- Common Shares Outstanding - ----------------------------------------------------------------------- Balance, January 1, 1999 29,262,522 Stock issued under employee benefit plans 134,931 Purchase of treasury stock (15,000) - ----------------------------------------------------------------------- Balance, December 31, 1999 39,262,522 Stock issued under employee benefit plans 59,156 Purchase of treasury stock (220,217) - ----------------------------------------------------------------------- Balance, December 31, 2000 39,221,392 Stock issued under employee benefit plans 122,683 - ----------------------------------------------------------------------- Balance, December 31, 2001 39,344,075 ======================================================================= Recent Accounting Pronouncements. On July 20, 2001, the FASB issued Statements of Accounting Standards No. 141 ("SFAS 141"), Business Combinations, and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 141 supercedes Accounting Principles Board Opinion No. 16, Business Combinations. The most significant changes made by SFAS 141 are: (1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; (2) establishing specific criteria for the recognition of intangible assets separately from goodwill; and (3) requiring unallocated negative goodwill to be written off immediately as an extraordinary gain. Management has reviewed SFAS 141 and has determined that the statement has no effect on its current financial position or results of operations. SFAS 142 supercedes Accounting Principles Board Opinion No. 17, Intangible Assets. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. The most significant changes made by SFAS 142 are: (1) goodwill and indefinite-lived intangible assets will no longer be amortized; (2) goodwill will be tested for impairment at least annually at the reporting unit level; (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually; and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. As required, Susquehanna adopted this new standard on Janu-ary 1, 2002. The $43 million in goodwill outstanding at Decem-ber 31, 2001, will no longer be amortized going forward pursuant to the new pronouncement. Management estimates that amortization expense for 2002 will be reduced by approximately $3.3 million. Management has not yet performed an impairment test of goodwill. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred by capitalizing it as part of the carrying amount of the long-lived assets. As required by SFAS 143, Susquehanna will adopt this new accounting standard on January 1, 2003. Management believes the adoption of SFAS 143 will not have a material impact on our financial statements. SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued by FASB on October 3, 2001, and is effective for fiscal years beginning after December 15, 2001. This statement establishes a single accounting model for impairment related to disposal of long-lived assets, including discontinued operations. SFAS 144 superseded Statement of Financial Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121), and APB Opinion No. 30, Reporting the results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. This statement is not expected to have a material impact on Susque-hanna's financial position or results of operations. - -------------------------------------------------------------------------------- 2. SHORT-TERM INVESTMENTS The book value of short-term investments and weighted average interest rates on December 31, 2001 and 2000, were as follows: - --------------------------------------------------------------------------- 2001 2000 - --------------------------------------------------------------------------- Book Book Value Rates Value Rates - --------------------------------------------------------------------------- Interest-bearingdeposits in other banks $ 45,455 1.22% $40,463 5.42% Federal funds sold 8,500 1.63 291 6.50 Money market funds 34,610 1.79 18,281 5.84 - --------------------------------------------------------------------------- Total $ 88,565 $59,035 =========================================================================== 40 - -------------------------------------------------------------------------------- 3. INVESTMENT SECURITIES The amortized cost and fair values of investment securities at December 31, 2001 and 2000, are as follows:
- ------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair At December 31, 2001 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------ Available-for-Sale: U.S. Treasury $ 1,201 $ 101 $ 0 $ 1,302 U.S. Government agencies 86,329 1,960 0 88,289 Obligations of states and political subdivisions 63,334 1,400 22 64,712 Corporate debt securities 20,073 772 1 20,844 Mortgage-backed securities 799,266 10,718 1,003 808,981 Equity securities 33,373 1,812 0 35,185 - ------------------------------------------------------------------------------------------------------------ $ 1,003,576 $ 16,763 $ 1,026 $1,019,313 - ------------------------------------------------------------------------------------------------------------ Held-to-Maturity: State and municipal $ 1,778 $ 0 $ 0 $ 1,778 - ------------------------------------------------------------------------------------------------------------ $ 1,778 $ 0 $ 0 $ 1,778 - ------------------------------------------------------------------------------------------------------------ Total investment securities $ 1,005,354 $ 16,763 $ 1,026 $1,021,091 ============================================================================================================ At December 31, 2000 - ------------------------------------------------------------------------------------------------------------ Available-for-Sale: U.S. Treasury $ 3,249 $ 68 $ 10 $ 3,307 U.S. Government agencies 360,276 870 1,373 359,773 Obligations of states and political subdivisions 63,674 381 133 63,922 Corporate debt securities 16,499 169 27 16,641 Mortgage-backed securities 405,678 884 3,468 403,094 Equity securities 34,074 1,474 0 35,548 - ------------------------------------------------------------------------------------------------------------ $ 883,450 $ 3,846 $ 5,011 $ 882,285 - ------------------------------------------------------------------------------------------------------------ Held-to-Maturity: State and municipal $ 15,833 $ 343 $ 0 $ 16,176 Mortgage-backed securities 486 0 4 482 - ------------------------------------------------------------------------------------------------------------ $ 16,319 $ 343 $ 4 $ 16,658 - ------------------------------------------------------------------------------------------------------------ Total investment securities $ 899,769 $ 4,189 $ 5,015 $ 898,943 ============================================================================================================
At December 31, 2001 and 2000, investment securities with a carrying value of $611,065 and $475,725, respectively, were pledged to secure public funds and for other purposes as required by law. There were no invesment securities whose ratings were less than investment grade at December 31, 2001 and 2000. The amortized cost and fair value of U.S. Treasury, U.S. Gov- ernment agencies, obligations of states and political subdivisions, corporate debt securities, and mortgage-backed securities, at December 31, 2001, by contractual maturity, are shown following. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 41 - ---------------------------------------------------------------------- Amortized Fair Cost Value - ---------------------------------------------------------------------- Securities Available-for-Sale: Within one year $ 34,041 $ 33,865 After one year but within five years 125,358 128,825 After five years but within ten years 97,256 98,529 After ten years 713,548 722,909 - ---------------------------------------------------------------------- $ 970,203 $ 984,128 - ---------------------------------------------------------------------- Securities Held-to-Maturity: Within one year $ 0 $ 0 After one year but within five years 310 310 After five years but within ten years 0 0 After ten years 1,468 1,468 - ---------------------------------------------------------------------- $ 1,778 $ 1,778 - ---------------------------------------------------------------------- Total debt securities $ 971,981 $ 985,906 ====================================================================== The gross realized gains and gross realized losses on investment securities transactions are summarized following. During 2001, 2000, and 1999, certain securities classified as held-to-maturity were called for early redemption by the issuer. The results of those transactions are recorded in the corresponding category. - ----------------------------------------------------------------------------- Available-for-Sale Held-to-Maturity - ----------------------------------------------------------------------------- For the year ended December 31, 2001 - ----------------------------------------------------------------------------- Gross gains $ 652 $ 0 Gross losses 3 0 - ----------------------------------------------------------------------------- Net gains/(losses) $ 649 $ 0 ============================================================================= - ----------------------------------------------------------------------------- For the year ended December 31, 2000 - ----------------------------------------------------------------------------- Gross gains $ 4 $ 0 Gross losses 17 0 - ----------------------------------------------------------------------------- Net gains/(losses) $ (13) $ 0 ============================================================================= - ----------------------------------------------------------------------------- For the year ended December 31, 1999 - ----------------------------------------------------------------------------- Gross gains $ 998 $ 1 Gross losses 18 3 - ----------------------------------------------------------------------------- Net gains/(losses) $ 980 $(2) ============================================================================= Interest earned on investment securities for the years ended December 31 was as follows: - -------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------- Taxable $ 51,247 $ 53,238 $ 50,485 Tax-advantaged 3,297 4,195 5,232 - -------------------------------------------------------------------- Total $ 54,544 $ 57,433 $ 55,717 ==================================================================== 42 - -------------------------------------------------------------------------------- 4. LOANS AND LEASES At December 31, loans and leases, net of unearned income ($20,381 at December 31, 2001, and $53,239 at December 31, 2000), were as follows: - ------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------ Commercial, financial, and agricultural $ 434,780 $ 371,320 Real estate--construction 359,445 264,182 Real estate--mortgage 1,963,094 1,933,772 Consumer 325,170 350,707 Leases 437,009 513,629 - ------------------------------------------------------------------ Total $ 3,519,498 $ 3,433,610 ================================================================== - ------------------------------------------------------------------ Net investment in direct financing leases is as follows: - ------------------------------------------------------------------ Minimum lease payments receivable $ 175,893 $ 172,775 Estimated residual value of leases 299,433 391,625 Unearned income under lease contracts (38,317) (50,771) - ------------------------------------------------------------------ Total leases $ 437,009 $ 513,629 ================================================================== During 2000, Hann originated $209 million in leases for resale. On December 29, 2000, Hann sold $190 million of operating leases in a sale-leaseback transaction. The remaining $19 million are held by Hann as collateral in the transaction and are recorded as lease financing receivables. Under the structure of the sale of the automobile leases, Hann sells the ownership of the automobiles and leases the vehicles back from the investors in a sale-leaseback transaction. The original term of the leaseback transaction is approximately eight years, with an early buyout option on January 14, 2007. The difference in lease payments received from the consumer and paid to the investor, net of amortized costs, is recognized in vehicle origination and servicing fees on the statements of income. In conjunction with the transaction, Susquehanna entered into an interest rate swap agreement to fix the return to Susquehanna and Hann. A deferred loss of $14 million was recognized on the swap and will be amortized over the estimated life of the transaction. Listed below are Hann's minimum future lease payments under this arrangement. - --------------------------------------- 2002 $ 23,713 2003 23,713 2004 23,713 2005 27,665 2006 30,035 Subsequent years 63,905 - --------------------------------------- $ 192,744 ======================================= Certain directors and executive officers of Susquehanna and its affiliates, including their immediate families and companies in which they are principal owners (more than 10%), were indebted to banking subsidiaries. In the opinion of management, such loans are consistent with sound banking practices and are within applicable regulatory bank lending limitations. Susque-hanna relies on the directors and executive officers for the identification of their associates. The activity of loans to such persons whose balance exceeded $60 during 2001, 2000, and 1999 follows: - -------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------- Balance--January 1 $ 35,246 $ 35,975 $ 27,225 - -------------------------------------------------------- Additions 22,587 48,735 28,273 Deductions: Amounts collected 19,258 46,599 24, 657 Other changes (10,075) (2,865) 5,134 - -------------------------------------------------------- Balance--December 31 $ 28,500 $ 35,246 $ 35,975 ======================================================== Substantially all of Susquehanna's loans and leases are to enterprises and individuals in Pennsylvania, New Jersey, New York, Maryland, and West Virginia. Susquehanna, as shown in Table 11, has no concentration of loans to borrowers in any one industry, or related industry, which exceeds 10% of total loans. An analysis of impaired loans at December 31, 2001 and 2000, is presented as follows: - --------------------------------------------------------------- 2001 2000 - --------------------------------------------------------------- Impaired loans without a related reserve $ 7,252 $ 4,379 Impaired loans with a reserve 2,111 2,970 - --------------------------------------------------------------- Total impaired loans $ 9,363 $ 7,349 =============================================================== Reserve for impaired loans $ 560 $ 866 =============================================================== An analysis of impaired loans for the years ended December 31, 2001 and 2000, is presented as follows: - --------------------------------------------------------------- 2001 2000 - --------------------------------------------------------------- Average balance of impaired loans $11,865 $10,645 Interest income on impaired loans (cash basis) $ 420 $ 76 =============================================================== 43 - -------------------------------------------------------------------------------- 5. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses were as follows: - ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- Balance--January 1 $37,187 $44,465 $39,440 Reserve acquired or (transferred) 539 (3,057) 0 Provision charged to operating expenses 7,310 3,726 11,203 - ------------------------------------------------------------------------------- 45,036 45,134 50,643 - ------------------------------------------------------------------------------- Charge-offs 9,424 9,700 8,419 Recoveries 2,086 1,753 2,241 - ------------------------------------------------------------------------------- Net charge-offs 7,338 7,947 6,178 - ------------------------------------------------------------------------------- Balance--December 31 $37,698 $37,187 $44,465 =============================================================================== - -------------------------------------------------------------------------------- 6. PREMISES AND EQUIPMENT Property, buildings, and equipment, at December 31, were as follows: - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Land $ 10,377 $ 9,706 Buildings 50,871 48,222 Furniture and equipment 61,282 60,462 Leasehold improvements 7,447 6,027 Land improvements 925 738 - -------------------------------------------------------------------------------- $130,902 $125,155 - -------------------------------------------------------------------------------- Less: accumulated depreciation and amortization 70,839 66,852 - -------------------------------------------------------------------------------- $ 60,063 $ 58,303 ================================================================================ Depreciation and amortization expense charged to operations amounted to $8,357 in 2001, $7,594 in 2000, and $6,881 in 1999. All subsidiaries lease certain banking branches and equipment under operating leases which expire on various dates through 2015. Renewal options are available for periods up to 20 years. Minimum future rental commitments under non-cancellable leases, as of December 31, 2000, are as follows: - -------------------------------------------------------------------------------- Operating Leases - -------------------------------------------------------------------------------- 2002 $ 3,434 2003 3,142 2004 2,857 2005 2,278 2006 1,589 Subsequent years 5,500 - -------------------------------------------------------------------------------- $ 18,800 ================================================================================ Total rent expense charged to operations amounted to $4,468 in 2001, $3,887 in 2000, and $3,475 in 1999. - -------------------------------------------------------------------------------- 7. DEPOSITS Deposits at December 31 were as follows: - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Noninterest-bearing: Demand $ 529,162 $ 462,297 Interest-bearing: Interest-bearing demand 915,080 817,866 Savings 435,959 413,878 Time 1,322,494 1,303,297 Time of $100 or more 281,636 251,675 - -------------------------------------------------------------------------------- Total deposits $3,484,331 $3,249,013 ================================================================================ 44 - -------------------------------------------------------------------------------- 8. BORROWINGS Short-Term Borrowings Short-term borrowings and weighted average interest rates, at December 31, were as follows: - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Amount Rate Amount Rate - -------------------------------------------------------------------------------- Securities sold under repurchase agreements $158,140 3.28% $198,573 5.72% Treasury tax and loan notes 11,663 1.50 6,763 6.25 - -------------------------------------------------------------------------------- $169,803 $205,336 ================================================================================ Federal Home Loan Bank Borrowings - -------------------------------------------------------------------------------- December 31 2001 2000 - -------------------------------------------------------------------------------- Due 2001, 5.27% to 6.76% $ 0 $ 111,250 Due 2002, 0.00% to 4.12% 28,800 1,500 Due 2003, 2.99% to 5.98% 145,800 114,700 Due 2004, 3.56% to 4.95% 180,200 15,000 Due 2006, 4.73% to 6.65% 30,580 691 Due 2008, 5.43% to 5.50% 75,000 75,000 Due 2009, 5.34% 3,000 3,000 Due 2010, 6.01% to 6.17% 42,750 42,750 Due 2011, 3.25% to 5.33% 60,080 83 Due 2012, 3.25% 144 150 Due 2013, 5.94% 188 199 Due 2014, 5.00% to 6.51% 1,021 1,041 Due 2018, 6.00% 339 343 Due 2019, 4.50% to 5.40% 245 194 Due 2020, 4.50% to 6.00% 2,433 2,053 - -------------------------------------------------------------------------------- $ 570,580 $ 367,954 ================================================================================ Vehicle Financing Prior to 2000, Hann originated leases for other investors and financial institutions that contained Hann's guarantee for the residual values and any credit losses. Accounting principles generally accepted in the United States of America require Hann to reflect the entire amount of the lease obligation, on the balance sheet. Accordingly, an obligation under the lease contract with the same terms as the lease assets is recorded as vehicle financing in the borrowings section of the balance sheet. The contractual runoff of these obligations is projected to be $47,058 in 2002, $50,811 in 2003, $54,844 in 2004, and $18,709 in 2005 and beyond. Susquehanna subsidiary banks are members of the Federal Home Loan Banks ("FHLB") of Atlanta, New York, and Pittsburgh, and, as such, can take advantage of the FHLB program for overnight and term advances at published daily rates. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying first mortgages. In addition, all of the subsidiaries' stock in the FHLB is pledged as collateral for such debt. Advances available under this agreement are limited by available and qualifying collateral and the amount of FHLB stock held by the borrower. Under this program Susquehanna subsidiaries have lines of credit available to them totalling $1.130 billion and $934 million, of which $571 million and $368 million were outstanding at December 31, 2001 and 2000, respectively. At December 31, 2001, Susquehanna subsidiaries could borrow an additional $559 million based on qualifying collateral. Such additional borrowings would require the subsidiaries to increase their investment in FHLB stock by approximately $25 million. Long-Term Debt - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Amount Rate Amount Rate - -------------------------------------------------------------------------------- Senior notes due February 1, 2003 $ 35,000 6.30% $ 35,000 6.30% Term note due July 19, 2003 10,000 6.09 10,000 6.09 Term note due July 19, 2003 5,000 7.35 5,000 7.35 Term note due July 19, 2004 5,000 4.48 -- -- Subordinate notes due February 1, 2005 50,000 9.00 50,000 9.00 - -------------------------------------------------------------------------------- $105,000 $100,000 ================================================================================ The notes require interest-only payments throughout their term with the entire principal balance paid at maturity. Susquehanna guarantees the $20 million in term notes for the holder of these instruments. 45 - -------------------------------------------------------------------------------- 9. INCOME TAXES The components of the provision for income taxes are as follows: - ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- Current $ 11,197 $ 464 $ 19,009 Deferred 14,424 24,229 (504) - ------------------------------------------------------------------------------- Total $ 25,621 $ 24,693 $ 18,505 =============================================================================== The provision for income taxes differs from the amount derived from applying the statutory income tax rate to income before income taxes as follows: - ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- Provision for statutory rates $ 28,468 $ 27,879 $ 21,710 Tax-advantaged income (2,033) (2,595) (2,857) Other, net (814) (591) (348) - ------------------------------------------------------------------------------- Total $ 25,621 $ 24,693 $ 18,505 =============================================================================== Accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the net deferred tax asset/(liability) as of December 31 were as follows: - ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- Deferred tax assets: Reserve for loan losses $ 13,690 $ 13,991 $ 16,539 Accrued pension expense 872 904 1,180 Deferred directors' fees 570 564 564 Deferred compensation 1,005 1,103 775 Nonaccrual loan interest 1,096 996 1,398 Core deposit intangible 0 0 101 Purchase accounting 442 537 493 Suspended losses 4,085 18,665 38,311 Alternative minimum tax credit carryover 1,091 0 0 Other assets 1,436 2,696 4,835 Deferred tax liabilities: Deferred loan costs (1,474) (2,328) (1,310) FHLB stock dividends (372) (395) (395) Premises and equipment (2,532) (2,359) (2,208) Operating lease income, net (50,975) (54,993) (56,116) Recapture of savings banks' bad debt reserve 0 (90) (344) Unrealized investment securities (gains)/losses (5,632) 408 6,961 Unrealized gain on recorded interest in securitized assets (1,296) 0 0 Deferred intercompany gain (4,798) 0 0 Other liabilities (1,517) (2,248) (2,551) - ------------------------------------------------------------------------------- Net deferred income tax asset/(liability) $(44,309) $(22,549) $ 8,233 =============================================================================== - -------------------------------------------------------------------------------- 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Susquehanna is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to orginate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statement of condition. The contract or notional amount of those instruments reflects the extent of involvement Susque-hanna has in particular classes of financial instruments. Susquehanna's exposure to credit loss in the event of nonper-formance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the contractual amount of these instruments. Susquehanna uses the same credit policies for these instruments as it does for on-balance sheet instruments. Standby letters of credit are conditional commitments issued by Susquehanna to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Susquehanna evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Susquehanna upon extension of credit, is based on management's credit evaluation of the borrower. Financial instruments with off-balance sheet risk at December 31, 2001 and 2000, are as follows: - -------------------------------------------------------------------------------- Contractual 2001 2000 - -------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Standby letters of credit $ 86,161 $ 37,313 Commitments to originate loans 360,690 175,929 Unused portion of home equity and credit card lines 164,714 171,836 Other unused commitments, principally commercial lines of credit 424,945 517,463 46 - -------------------------------------------------------------------------------- 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Susquehanna's estimated fair value information about financial instruments is presented below. Some of this information is presented whether it is recognized in the Consolidated Balance Sheets or not, and if it is practicable to estimate that value. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques. As a result, Susquehanna's ability to actually realize these derived values cannot be assured. The estimated fair values disclosed herewith may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The disclosure requirements exclude disclosure of nonfinancial assets such as buildings as well as certain financial instruments such as leases. Susquehanna also has several intangible assets which are not included in the fair value disclosures such as mortgage servicing rights, customer lists, and core deposit intangibles. Accordingly, the aggregate estimated fair values presented do not represent the underlying value of Susquehanna. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Cash and Due from Banks and Short-Term Investments. The fair value of cash and due from banks and short-term investments is deemed to be the same as their carrying value. Investment Securities. The fair value of investment securities is estimated based on quoted market prices, where available. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans and Leases. Variable rate loans which do not expose Susquehanna to interest rate risk have a fair value that equals their carrying value, discounted for estimated future credit losses. The fair value of fixed rate loans was based upon the present value of projected cash flows. The discount rate was based upon the U.S. Treasury yield curve, adjusted for credit risk. Deposits. The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date. The carrying value of variable rate time deposits represents a reasonable estimate of fair value. The fair value of fixed rate time deposits is based upon the discounted value of future cash flows expected to be paid at maturity. Discount rates are calculated off the U.S. Treasury yield curve. Short-term Borrowings. The carrying amounts reported in the balance sheet represent a reasonable estimate of fair value since these liabilities mature in less than one year. FHLB Borrowings, Vehicle Financing, and Long-Term Debt. Fairvalues were based upon quoted rates of similar instruments, issued by banking companies with similar credit ratings. Off-Balance Sheet Items. The fair value of unused commitments to lend and standby letters is deemed to be the same as their carrying value. The following table represents the carrying amount and estimated fair value of Susquehanna's financial instruments at December 31:
- ----------------------------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value - ----------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 149,233 $ 149,233 $ 129,101 $ 129,101 Short-term investments 88,565 88,565 59,035 59,035 Investment securities 1,021,091 1,021,091 898,604 898,943 Loans and leases, net of unearned income 3,519,498 3,581,495 3,433,610 3,423,848 Liabilities: Deposits 3,484,331 3,520,173 3,249,013 3,263,437 Short-term borrowings 169,803 169,803 205,336 205,336 FHLB borrowings 570,580 578,333 367,954 364,851 Vehicle financing 171,462 170,587 357,522 352,891 Long-term debt 105,000 109,919 100,000 99,668
47 - -------------------------------------------------------------------------------- 12. BENEFIT PLANS Susquehanna maintains a single non-contributory pension plan that covers substantially all full-time employees. In addition, Susquehanna offers life insurance and other benefits to its retirees. A summary of the plans at December 31 is as follows:
- -------------------------------------------------------------------------------------- Pension Benefits Other Benefits - -------------------------------------------------------------------------------------- 2001 2000 2001 2000 - -------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $ 38,436 $ 35,151 $ 3,604 $ 3,099 Service cost 2,015 1,790 137 141 Interest cost 2,788 2,737 273 250 Plan participants' contributions 0 0 147 0 Amendments 402 96 0 70 Actuarial (gain)/loss (501) 614 (64) 131 Benefits paid (2,392) (1,952) (220) (87) - -------------------------------------------------------------------------------------- Benefit obligation at end of year $ 40,748 $ 38,436 $ 3,877 $ 3,604 - -------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $ 44,870 $ 47,352 $ 0 $ 0 Actual return on plan assets (2,043) (534) 0 0 Employer contributions 71 4 73 87 Plan participants' contributions 0 0 147 0 Benefits paid (2,392) (1,952) (220) (87) - -------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 40,506 $ 44,870 $ 0 $ 0 - -------------------------------------------------------------------------------------- Funded status $ (241) $ 6,434 $(3,877) $(3,604) Unrecognized net actuarial gain (1,329) (7,163) (1,009) (954) Unrecognized prior service cost (1,561) (2,197) 364 410 Unrecognized transition asset (345) (413) 1,251 1,364 - -------------------------------------------------------------------------------------- Accrued benefit cost $ (3,476) $ (3,339) $(3,271) $(2,784) ======================================================================================
- ---------------------------------------------------------------------------------------------- Pension Benefits Other Benefits - ---------------------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 - ---------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Expense/(Income) Service cost $ 2,015 $ 1,790 $ 1,916 $ 137 $ 141 $ 146 Interest cost 2,788 2,737 2,505 273 250 212 Expected return on plan assets (3,967) (4,202) (3,962) 0 0 0 Amortization of prior service cost (235) (269) (277) 46 46 41 Amortization of transition asset (68) (68) (68) 113 113 113 Amortization of net actuarial gain (324) (796) (305) (9) (46) (28) - ---------------------------------------------------------------------------------------------- Net periodic benefit expense/(income) $ 209 $ (808) $ (191) $ 560 $ 504 $ 484 ============================================================================================== Weighted-Average Assumptions at Year-End Discount rate 7.25% 8.00% 8.00% 7.25% 7.50% 8.00% Expected return on plan assets 9.00% 9.00% 9.00% 0.00% 0.00% 0.00% Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
The plan assets were invested principally in U.S. Government securities and listed stocks and bonds including 56,231 and 54,078 shares of Susquehanna common stock at December 31, 2001 and 2000, respectively. Susquehanna maintains a 401(k) savings plan which allows employees to invest a percentage of their earnings, matched up to a certain amount specified by Susquehanna. Contributions to the savings plan which are included in salaries and benefits expense amounted to $1,253 in 2001, $1,169 in 2000, and $1,192 in 1999. Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows employees to purchase Susquehanna common stock up to 5% of their salary at a discount to the market price, through payroll deductions. On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc. ("Cardinal"), a Pennsylvania bank holding company. Cardinal, prior to the merger with Susquehanna, had issued 135,099 Stock Purchase Options to the members of Cardinal's Board of Directors. Susquehanna succeeded Cardinal as a party to the options as a result of the merger. The option prices range from a low of $6.44 to a high of $10.25. Susquehanna implemented an Equity Compensation Plan ("Compensation Plan") in 1997 under which Susquehanna may grant options to its employees and directors for up to 2,462,500 48 shares of common stock. Under the Compensation Plan, the exercise price of each nonqualified option equals the market price of the company's stock on the date of grant, and an option's maximum term is 10 years. Options are granted upon approval of the Board of Directors and typically vest one-third at the end of years three, four, and five. The option prices range from a low of $13.00 to a high of $24.75. On January 1, 1996, Susquehanna adopted SFAS 123 and as permitted by SFAS 123, Susquehanna has chosen to apply APB Opinion No.25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for the Compensation Plan. Accordingly, no compensation cost has been recognized for options granted under the Compensation Plan. For purposes of disclosure, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-valuation model based upon the assumptions noted below. The pro forma effects on net income include both the Compensation Plan and the ESPP.
- ---------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year: 1,470,529 $ 15.90 1,094,625 $ 16.76 892,870 $ 15.36 Granted 242,251 17.25 382,500 13.31 294,117 18.19 Forfeited 34,209 15.89 2,500 13.31 0 0 Exercised 75,824 11.08 4,096 6.90 92,362 7.81 - ---------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,602,747 $ 16.33 1,470,529 $ 15.90 1,094,625 $ 16.76 ====================================================================================================================== Outstanding at end of year: Granted prior to 1999 722,847 $ 16.83 572,193 $ 12.96 576,289 $ 12.92 Granted 1999 278,774 18.19 224,219 24.75 224,219 24.75 Granted 2000 363,750 13.31 294,117 18.19 294,117 18.19 Granted 2001 237,376 17.25 380,000 13.31 0 0 - ---------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,602,747 $ 16.33 1,470,529 $ 15.90 1,094,625 $ 16.76 ====================================================================================================================== Options exercisable at year-end: Granted prior to 1999 758,807 $ 15.64 427,599 $ 12.62 302,848 $ 12.16 Granted 1999 0 0 0 0 0 0 Granted 2000 0 0 0 0 0 0 Granted 2001 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 758,807 $ 15.64 427,599 $ 12.62 302,848 $ 12.16 ====================================================================================================================== Weighted average remaining contractual maturity of options outstanding at year-end: Granted prior to 1999 5.1 years Granted 1999 7.4 years Granted 2000 8.4 years Granted 2001 9.4 years - ---------------------------------------------------------------------------------------------------------------------- Total 6.9 years
- ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Dollars Per Share Dollars Per Share Dollars Per Share - ---------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year $ 1,096 $ 4.52 $ 1,290 $ 3.36 $ 1,321 $ 4.49 Fair value disclosures pro forma effect on: Net income (746) (797) (328) Basic earnings per share (0.02) (0.02) (0.01) Diluted earnings per share N/A* N/A* 0.00 - ---------------------------------------------------------------------------------------------------------- Weighted-average fair value assumptions: Dividend yield 3.5% 3.5% 3.0% Expected volatility 23.5% 23.0% 22.0% Risk-free interest rate 5.5% 6.6% 5.7% Expected term 7 years 7 years 7 years
* For the years ended December 31, 2001 and 2000, the application of SFAS 123 would have an anti-dilutive effect. 49 - ------------------------------------------------------------------------------- 13. SUSQUEHANNA BANCSHARES, INC. (Parent Only) CONDENSED BALANCE SHEETS - ------------------------------------------------------------------------------- December 31 2001 2000 - ------------------------------------------------------------------------------- Assets Cash in subsidiary bank $ 2,117 $ 1,037 Investment in consolidated subsidiaries at equity in net assets 567,277 526,150 Other investment securities 2,690 2,414 Premises and equipment (net) 2,703 2,649 Other assets 9,592 11,070 - ------------------------------------------------------------------------------- Total assets $584,379 $ 543,320 =============================================================================== Liabilities Long-term debt $ 85,000 $ 85,000 Accrued taxes and expenses payable 5,843 4,883 - ------------------------------------------------------------------------------- Total liabilities 90,843 89,883 - ------------------------------------------------------------------------------- Equity - ------------------------------------------------------------------------------- Common stock ($2 par value) 78,796 78,796 Surplus 57,986 57,872 Retained earnings 345,508 320,020 - ------------------------------------------------------------------------------- Accumulated other comprehensive income, net of taxes 12,009 (757) Less: Treasury stock at cost 763 2,494 - ------------------------------------------------------------------------------- Total stockholders' equity 493,536 453,437 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $584,379 $ 543,320 =============================================================================== - -------------------------------------------------------------------------------- SUSQUEHANNA BANCSHARES, INC. (Parent only) CONDENSED STATEMENTS OF INCOME - ------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------- Income Dividends from subsidiaries $ 68,821 $ 71,581 $ 35,814 Interest, dividends, and gains on sales of investment securities 419 3,145 959 Interest and management fee from subsidiaries 37,506 22,840 3,408 - ------------------------------------------------------------------------------- Total income 106,746 97,566 40,181 - ------------------------------------------------------------------------------- Expenses Interest expense 6,864 6,863 6,864 Restructuring charges 0 0 3,410 Other expenses 36,786 31,872 7,145 - ------------------------------------------------------------------------------- Total expenses 43,650 38,735 17,419 - ------------------------------------------------------------------------------- Income before taxes, and equity in undistributed income of subsidiaries 63,096 58,831 22,762 Income tax provision/(benefit) 421 (125) (1,470) Equity in undistributed income of subsidiaries (6,959) (3,994) 19,291 - ------------------------------------------------------------------------------- Net Income $ 55,716 $ 54,962 $ 43,523 =============================================================================== - ------------------------------------------------------------------------------- SUSQUEHANNA BANCSHARES, INC. (Parent only) CONDENSED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- Year ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------- Operating Activities Net income $ 55,716 $ 54,962 $ 43,523 Adjustment to reconcile net income to cash provided by operating activities: Depreciation and amortization 666 1,409 357 Equity in undistributed income of subsidiaries and income of subsidiaries accrued not received 6,959 3,994 (19,291) Decrease/(increase) in other assets (282) (3,553) (651) Increase/(decrease) in accrued expenses payable 960 (2,604) (278) Other, net (956) 4,585 (959) - ------------------------------------------------------------------------------- Net cash provided from operating activities 63,063 58,793 22,701 - ------------------------------------------------------------------------------- Investing Activities Purchase of investment securities 0 (8) (500) Proceeds from the sale/maturities of investment securities 72 0 1,089 Capital expenditures (547) (2,699) (204) Net infusion of investment in subsidiaries (33,125) (25,879) (1,814) - ------------------------------------------------------------------------------- Net cash used for investing activities (33,600) (28,586) (1,429) - ------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of common stock 1,845 772 1,372 Dividends paid (30,228) (27,092) (22,918) Cash paid for treasury stock 0 (3,097) (287) - ------------------------------------------------------------------------------- Net cash (used for)/provided from financing activities (28,383) (29,417) (21,833) - ------------------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents 1,080 790 (561) Cash and cash equivalents at January 1 1,037 247 808 - ------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 2,117 $ 1,037 $ 247 =============================================================================== Cash in subsidiary bank at December 31 $ 2,117 $ 1,037 $ 247 =============================================================================== 50 - -------------------------------------------------------------------------------- 14. EARNING PER SHARE The following table sets forth the calculation of basic and diluted earnings per share for the years ended below:
- ----------------------------------------------------------------------------------------------------------------------------- December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Per Share Per Share Per Share Income Shares Amount Income Shares Amount Income Shares Amount - ----------------------------------------------------------------------------------------------------------------------------- Basic Earnings per Share: Income available to common stockholders $ 55,716 39,263 $ 1.42 $ 54,962 39,262 $ 1.40 $ 43,523 39,320 $ 1.11 Effect of Diluted Securities: Stock options outstanding 330 103 177 - ----------------------------------------------------------------------------------------------------------------------------- Diluted Earnings per Share: Income available to common stockholders and assuming conversion $ 55,716 39,593 $ 1.41 $ 54,962 39,365 $ 1.40 $ 43,523 39,497 $ 1.10
- -------------------------------------------------------------------------------- 15. REGULATORY RESTRICTIONS OF BANKING SUBSIDIARIES Susquehanna is limited by regulatory provisions in the amount it can receive in dividends from its banking subsidiaries. Accordingly, at December 31, 2001, $13,340 is available for dividend distribution to Susquehanna in 2002 from its banking subsidiaries. Included in cash and due from banks are balances required to be maintained by banking subsidiaries on deposit with the Federal Reserve. The amounts of such reserves are based on percentages of certain deposit types and totalled $3,075 and $1,427 at December 31, 2001 and 2000, respectively. In accordance with certain lease and retail loan financing arrangements, Hann maintains prescribed amounts of cash in accounts with the respective financial institutions. The total of such amounts represents restricted cash of $41,584 and $32,731 at December 31, 2001 and 2000, respectively. - -------------------------------------------------------------------------------- 16. CONTINGENT LIABILITIES Susquehanna is party to various legal proceedings incidental to its business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against Susquehanna. In the opinion of management, all such matters are adequately covered by insurance or, if not covered, are without merit or are of such kind, or involve such amounts, as would not have a material effect on the financial position, results of operations, and cash flows of Susquehanna, if disposed of unfavorably. 51 PricewaterhouseCoopers LLP One South Market Square Harrisburg, PA 17101-9916 Telephone (717) 231-5900 Facsimile (717) 232-5672 Report of Independent Accountants To the Board of Directors and Stockholders of Susquehanna Bancshares, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Susquehanna Bancshares, Inc. (Susquehanna) and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Susquehanna's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP January 22, 2002 52 Summary of Quarterly Financial Data The unaudited quarterly results of operations for the years ended December 31, 2001 and 2000, are as follows:
- ---------------------------------------------------------------------------------------------------------------------- Dollars in thousands, except per share 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Quarter Ended Dec31 Sep30 Jun30 Mar31 Dec31 Sep30 Jun30 Mar31 - ---------------------------------------------------------------------------------------------------------------------- Interest income $83,386 $86,683 $84,833 $86,393 $89,360 $89,263 $88,050 $86,743 - ---------------------------------------------------------------------------------------------------------------------- Interest expense 38,517 42,756 42,296 45,482 48,290 47,846 46,406 45,922 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 44,869 43,927 42,537 40,911 41,070 41,417 41,644 40,821 - ---------------------------------------------------------------------------------------------------------------------- Provision for loan and lease losses 1,891 1,740 1,833 1,846 1,453 766 643 864 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan and lease losses 42,978 42,187 40,704 39,065 39,617 40,651 41,001 39,957 - ---------------------------------------------------------------------------------------------------------------------- Other income 21,660 20,796 21,191 20,519 19,399 19,072 18,476 17,063 - ---------------------------------------------------------------------------------------------------------------------- Other expenses 43,215 42,054 41,287 41,207 39,141 39,159 39,693 37,588 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 21,423 20,929 20,608 18,377 19,875 20,564 19,784 19,432 - ---------------------------------------------------------------------------------------------------------------------- Applicable income taxes 6,748 6,592 6,400 5,881 6,161 6,375 6,133 6,024 - ---------------------------------------------------------------------------------------------------------------------- Net income $14,675 $14,337 $14,208 $12,496 $13,714 $14,189 $13,651 $13,408 ====================================================================================================================== Earnings per common share: Basic $ 0.37 $ 0.36 $ 0.36 $ 0.32 $ 0.35 $ 0.36 $ 0.35 $ 0.34 Diluted 0.37 0.36 0.36 0.32 0.35 0.36 0.35 0.34
Market for Susquehanna Bancshares, Inc., Capital Stock Since November 5, 1985, Susquehanna common stock has been listed for quotation on the National Association of Securities Dealers National Market System. Set forth below are the high and low sales prices of Susquehanna's common stock as reported on the Nasdaq National Market System for the years 2001 and 2000. - -------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------- Quarterly Quarterly Market Price Dividend Market Price Dividend - -------------------------------------------------------------------------- First Quarter $18.88-$15.00 $0.19 $15.88-$11.25 $0.17 Second Quarter $20.81-$16.25 $0.19 $15.00-$12.38 $0.17 Third Quarter $22.83-$18.15 $0.19 $15.44-$12.00 $0.17 Fourth Quarter $22.24-$19.95 $0.20 $17.98-$12.88 $0.19 53 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure. - ------ -------------------------------------------------------------------- There has been no change in Susquehanna's principal accountants in over two years. There have been no disagreements with such principal accountants on any matters of accounting principles, practices, financial statement disclosure, auditing scope or procedures. 54 PART III Item 10. Directors and Executive Officers of Susquehanna. - ------- ----------------------------------------------- The information required by this Item will be included in Susquehanna's Proxy Statement for its 2002 Annual Meeting of Shareholders (the "2002 Proxy Statement") in the Election of Directors section and the Director and Executive Officer Compensation section, each of which sections is incorporated herein by reference. Item 11. Executive Compensation - ------- ---------------------- The information required by this Item will be included in the 2002 Proxy Statement in the Director and Executive Officer Compensation section, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- The information required by this Item will be included in the 2002 Proxy Statement in the Principal Holders of Voting Securities and Holdings of Management section, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- The information required by this Item will be included in the 2002 Proxy Statement in the Certain Relationships and Related Transaction section, and is incorporated herein by reference. 55 PART IV ------- Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. - ------- --------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Financial Statements. See Item 8 of this report for the consolidated financial statements of Susquehanna and its subsidiaries (including the index to financial statements). (2) Financial Statement Schedules. Not Applicable. (3) Exhibits. A list of the Exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits. (b) Report on Form 8-K. None. (c) Exhibits. The exhibits required to be filed as part of this report pursuant to Item 601 of Regulation S-K are filed herewith or incorporated by reference. (d) Financial Statement Schedule. None Required. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SUSQUEHANNA BANCSHARES, INC. By: /s/ William J. Reuter -------------------------------- William J. Reuter, President and Chief Executive Officer Dated: March 18, 2002 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ William J. Reuter President, Chief Executive March 18, 2002 - --------------------------- Officer and Director (William J. Reuter) /s/ Drew K. Hostetter Executive Vice President, March 18, 2002 - --------------------------- Treasurer and Chief (Drew K. Hostetter) Financial Officer /s/ Robert S. Bolinger Director March 18, 2002 - --------------------------- (Robert S. Bolinger) /s/ Chloe R. Eichelberger Director March 21, 2002 - --------------------------- (Chloe R. Eichelberger) /s/ James G. Apple Director March 21, 2002 - --------------------------- (James G. Apple) /s/ Wayne E. Alter, Jr. Director March 20, 2002 - --------------------------- (Wayne E. Alter, Jr.) /s/ John M. Denlinger Director March 18, 2002 - --------------------------- (John M. Denlinger) /s/ Owen O. Freeman, Jr. Director March 18, 2002 - --------------------------- (Owen O. Freeman, Jr.) /s/ Henry H. Gibbel Director March 18, 2002 - --------------------------- (Henry H. Gibbel) /s/ William B. Zimmerman Director March 18, 2002 - --------------------------- (William B. Zimmerman) /s/ T. Max Hall Director March 19, 2002 - --------------------------- (T. Max Hall) 57 SECURITIES AND EXCHANGE COMMISSION SUSQUEHANNA BANCSHARES, INC. Form 10-K, December 31, 2001 [SIGNATURES CONTINUED] Signature Title Date - --------- ----- ---- /s/ Michael J. Wimmer Director March 20, 2002 - --------------------------- (Michael J. Wimmer) /s/ C. William Hetzer, Jr. Director March 18, 2002 - --------------------------- (C. William Hetzer, Jr.) /s/ Guy W. Miller, Jr. Director March 18, 2002 - --------------------------- (Guy W. Miller, Jr.) /s/ George J. Morgan Director March 18, 2002 - --------------------------- (George J. Morgan) /s/ Roger V. Wiest Director March 18, 2002 - --------------------------- (Roger V. Wiest) [END OF SIGNATURE PAGES] 58 EXHIBIT INDEX Exhibit Numbers Description and Method of Filing - --------------- -------------------------------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. Not Applicable. (3) (i) Articles of Incorporation. Incorporated by reference to Attachment E to Susquehanna's Joint Proxy Statement/Prospectus on Susquehanna's Registration Statement on Form S-4, Registration No. 33-13276 and to Exhibit 3.3 of Susquehanna's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (ii) By-laws. Incorporated by reference to Exhibit 3 of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (4) Instruments defining the rights of security holders including indentures. The rights of the holders of Susquehanna's Common Stock and the rights of Susquehanna's note holders are contained in the following documents or instruments, which are incorporated herein by reference. (i) Articles of Incorporation. Incorporated by reference to Attachment E to Susquehanna's Joint Proxy Statement/Prospectus on Susquehanna's Registration Statement on Form S-4, Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (iii) By-laws. Incorporated by reference to Exhibit 3 of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (iv) Form of Subordinated Note/Indenture incorporated by reference to Exhibit 4.1 to Susquehanna's Registration Statement on Form S-3, Registration No. 33-87624. (9) Voting trust agreement. Not Applicable (10) Material Contracts. (i) Susquehanna's Key Employee Severance Pay Plan, adopted in 1999 and amended on May 26, 2000 and on February 22, 2001, is incorporated by reference to Exhibit 10 of Susquehanna's Annual Report on Form 10-K for fiscal year ended December 31, 1999 and to Exhibit 10(i) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (ii) Susquehanna's Executive Deferred Income Plan, effective January 1, 1999, is incorporated by reference to Exhibit 10(a) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (iii) Susquehanna's Equity Compensation Plan, as amended on May 25, 2001, is filed herewith as Exhibit 10(iii). (iv) Susquehanna's Supplemental Executive Retirement Plan as amended and restated effective January 1, 1998 is filed herewith as Exhibit 10(iv). (v) Forms of The Insurance Trust for Susquehanna Bancshares Banks and Affiliates Split Dollar Agreement and Split Dollar Policy Endorsement are filed herewith as Exhibit 10(v). 59 (vi) 2002 Amended Servicing Agreement dated January 1, 2002 between Boston Service Company, Inc. t/a Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. is filed herewith as Exhibit 10(vi). (vii) Guaranty Agreement dated December 31, 2001 by Michael J. Wimmer in favor of Boston Service Company, Inc. is filed herewith as Exhibit 10(vii). (viii) Employment Agreement between Susquehanna and William J. Reuter, dated March 21, 2001, is incorporated by reference to Exhibit 10(vi) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Amendment dated February 28, 2002 is filed herewith as Exhibit 10(viii). (ix) Employment Agreement between Susquehanna and Gregory A. Duncan, dated March 14, 2001, is incorporated by reference to Exhibit 10(vii) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Amendment dated February 28, 2002, is filed herewith as Exhibit 10(ix). (x) Employment Agreement between Susquehanna and Drew K. Hostetter, dated March 12, 2001, is incorporated by reference to Exhibit 10(viii) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Amendment dated February 28, 2002, is filed herewith as Exhibit 10(x). (xi) Employment Agreement between Susquehanna and Williamsport National Bank and Charles W. Luppert, dated March 20, 2001, is incorporated by reference to Exhibit 10(ix) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Amendment dated February 28, 2002, is filed herewith as Exhibit 10(xi). (xii) Employment Agreement between Boston Service Company, Inc. t/a Hann Financial Service Corp. and Michael J. Wimmer, dated February 1, 2000, is incorporated by reference to Exhibit 10(x) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. (xiii) Consulting Agreement between Susquehanna and Robert S. Bolinger, dated June 4, 2001, is filed herewith as Exhibit 10(xiii). (xiv) Guaranty Agreement dated March 11, 2002 by Michael J. Wimmer in favor of Boston Service Company, Inc. is filed herewith as Exhibit 10(xiv). (11) Statement re: computation of per share earnings. Not Applicable. (12) Statements re: computation of ratios. Not Applicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders. Not applicable. (16) Letter re: change in certified accountant. Not applicable. (18) Letter re: change in accounting principles. Not Applicable. (19) Report furnished to security holders. Not Applicable. (21) Subsidiaries of the registrant. Filed herewith. (22) Published report regarding matters submitted to vote of security holders. Not Applicable. 60 (23) Consents of experts and counsel. Filed herewith. (24) Power of Attorney. Not Applicable. (99) Additional Exhibits. Not Applicable. 61 EX-10.III 3 dex10iii.txt AMENDED EQUITY COMPENSATION PLAN Exhibit 10(iii) --------------- Amended Equity Compensation Plan SUSQUEHANNA BANCSHARES, INC. EQUITY COMPENSATION PLAN ------------------------ (As Amended on May 25, 2001) The purpose of the Susquehanna Bancshares, Inc. Equity Compensation Plan (the "Plan") is to provide (i) designated officers (including officers who are also directors) and other employees of Susquehanna Bancshares, Inc. (the "Company") and its subsidiaries, and (ii) non-employee members of the board of directors of the Company (the "Board"), with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights or phantom stock appreciation rights and restricted stock. The Company believes that the Plan will cause the participants to contribute materially to the growth of the Company, thereby benefiting the Company's shareholders and will align the economic interests of the participants with those of the shareholders. 1. Administration -------------- The Plan shall be administered and interpreted by a committee (the "Committee"), which shall consist of two or more persons appointed by the Board, all of whom shall be "disinterested persons" as defined under Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and "outside directors" as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and related Treasury regulations. Except as provided in Section 6 hereof, the Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for vesting and the acceleration of vesting and (iv) deal with any other matters arising under the Plan. The Committee may, in its discretion or in accordance with a directive from the Board, waive or amend any provisions of any Grant, provided such waiver or amendment is not inconsistent with the terms of this Plan as then in effect. The Committee may, if it so desires, base any of the foregoing determinations upon the recommendations of management of the Company. A majority of the Committee shall constitute a quorum thereof, and the actions of a majority of the Committee at a meeting at which a quorum is present, or actions unanimously approved in writing by all members of the Committee, shall be actions of the Committee. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interests in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. Grants ------ Incentives under the Plan shall consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, phantom stock appreciation rights and restricted stock (hereinafter collectively referred to as "Grants"). All Grants shall be subject to the terms and conditions set forth herein and to those other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual (the "Grant Instrument"). The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular section of the Plan need not be uniform as among the grantees. 2 3. Shares Subject to the Plan -------------------------- (a) Subject to the adjustment specified below, the aggregate number of shares of the common stock of the Company, par value $2.00 per share (the "Company Stock") that may be issued or transferred under the Plan is 2,462,500 shares. Notwithstanding anything in the Plan to the contrary, the maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any one individual during any calendar year shall be 450,000. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent options granted under the Plan terminate, expire, or are cancelled, forfeited, exchanged or surrendered without having been exercised or if any shares of restricted stock are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) If there is any change in the number or kind of shares of Company Stock outstanding by reason of a stock dividend, a recapitalization, stock split, or combination or exchange of shares, or merger, reorganization or consolidation in which the Company is the surviving corporation, reclassification or change in par value or by reason of any other extraordinary or unusual events affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced due to the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that may be subject to Grants to any one individual under the Plan in any calendar year, the number of shares covered by outstanding Grants, and the price per share or the applicable market value of such Grants shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number or kind of issued shares of Company Stock to preclude the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated by rounding any portion of a share equal to .500 or greater up, and any portion of a share equal to less than .500 down, in each case to the nearest whole number. For purposes of this Section 3(b), "shares of Company Stock" and "shares" include referenced shares with respect to SARs. The adjustments determined by the Committee shall be final, binding and conclusive. Notwithstanding the foregoing, no adjustment shall be authorized or made pursuant to this Section to the extent that such authority or adjustment would cause any incentive stock option to fail to comply with section 422 of the Code. 4. Eligibility for Participation ----------------------------- All employees of the Company and its subsidiaries ("Employees"), including Employees who are officers or members of the Board, shall be eligible to participate in the Plan. Members of the Board who are not employees of the Company or any of its subsidiaries ("Non-Employee Directors") shall be eligible to participate in the Plan, but shall not be eligible to receive incentive stock options. The Board shall select the Employees and Non-Employee Directors to receive Grants and determine the number of shares of Company Stock subject to a particular Grant in such manner as the Board determines. Employees and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as "Grantees". Nothing contained in this Plan shall be construed to (i) limit the right of the Board to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including options granted to employees thereof who become Employees of the Company, or for other proper corporate purpose, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. 5. Granting of Options ------------------- (a) Number of Shares. The Committee, in its sole discretion, shall ---------------- determine the number of shares of Company Stock that will be subject to each Grant of stock options. -3- (b) Type of Option and Price. The Committee may grant options intended to ------------------------ qualify as "incentive stock options" within the meaning of section 422 of the Code ("Incentive Stock Options") or options which are not intended to so qualify ("Nonqualified Stock Options") or any combination of Incentive Stock Options and Nonqualified Stock Options (hereinafter collectively the "Stock Options"), all in accordance with the terms and conditions set forth herein. The purchase price of Company Stock subject to a Stock Option shall be determined by the Committee and may be equal to, greater than, or less than the Fair Market Value (as defined below) of a share of such Stock on the date such Stock Option is granted; provided, however, that (i) the purchase price of Company Stock subject to an Incentive Stock Option shall be equal to the Fair Market Value of a share of such Stock on the date such Stock Option is granted; and (ii) the purchase price of Company Stock subject to a Nonqualified Stock Option shall not be less than 100% of the Fair Market Value of a share of such stock on the date such Stock Option is Granted. If the Company Stock is traded in a public market, then the Fair Market Value per share shall be, if the principal trading market for the Company Stock is a national securities exchange or the National Market segment of The NASDAQ Stock Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or, if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices thereof on the relevant date, as reported on NASDAQ or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not traded in a public market or subject to reported transactions or "bid" or "ask" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) Option Term. The Committee shall determine the term of each Stock ----------- Option. The term of any Stock Option shall not exceed ten years from the date of grant. (d) Exercisability of Options. Stock Options shall become exercisable in ------------------------- accordance with the terms and conditions determined by the Committee, in its sole discretion, and specified in the Grant Instrument. The Committee, in its sole discretion, may accelerate the exercisability of any or all outstanding Stock Options at any time for any reason. In addition, all outstanding Stock Options automatically shall become fully and immediately exercisable upon a Change of Control (as defined herein) in accordance with the provisions of Section 11. (e) Vesting of Options and Restrictions on Shares. The vesting period for --------------------------------------------- stock Options shall commence on the date of grant and shall end on the date or dates, determined by the Committee, that shall be specified in the Grant Instrument. Notwithstanding any other provision of the Plan, except as otherwise provided by the Committee in the Grant Instrument, all outstanding Stock Options shall become immediately exercisable upon the earliest to occur of the following, if at such time the Grantee is an Employee of the Company or a parent or subsidiary of the Company, or a Non-Employee Director in the case of a Nonqualified Stock Option: (i) the Grantee's normal retirement date, (ii) five years from the date of the Grant, (iii) the Grantee's death or Disability (as defined herein), or (iv) the occurrence of a Change of Control (as defined herein) of the Company. (f) Manner of Exercise. A Grantee may exercise a Stock Option which has ------------------ become exercisable, in whole or in part, by delivering a duly completed notice of exercise to the Secretary of the Company with accompanying payment of the option price in accordance with Subsection (h) below. Such notice may instruct the Company to deliver shares of Company Stock due upon the exercise of the Stock Option to any registered broker or dealer designated by the Committee ("Designated Broker") in lieu of delivery to the Grantee. Such instructions must designate the account into which the shares are to be deposited. The Grantee may tender a notice of exercise, which has been properly executed by the Grantee and the aforementioned delivery instructions to any Designated Broker. (g) Termination of Employment, Disability or Death. ---------------------------------------------- (i) Except as provided below, a Stock Option may only be exercised while the Grantee is employed by the Company as an Employee or Non-Employee Director. In the event that a Grantee ceases to be -4- employed by the Company for any reason other than a "Disability" or death, any Stock Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days of the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified in the Grant Instrument), but in any event no later than the date of expiration of the option term. Any of the Grantee's Stock Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (ii) In the event the Grantee ceases to be employed by the Company because the Grantee is "disabled," any Stock Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year of the date on which the Grantee ceases to employed by the Company (or within such other period of time as may be specified in the Grant Instrument), but in any event no later than the date of expiration of the option term. Any of the Grantee's Stock Options which are not otherwise exercisable as of the date on which the Grantee ceases to be an Employee shall terminate as of such date. (iii) If (a) the Grantee dies while employed by the Company, or (b) in the case of disability, during the period provided at Section 5(g)(ii) above, or (c) within 90 days after the date on which the Grantee ceases to be employed by the Company on account of a termination of employment specified in Section 5(g)(i) above (or within such other period of time as may be specified in the Grant Instrument), any Stock Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year of the date of death (or within such other period of time as may be specified in the Grant Instrument), but in any event no later than the date of expiration of the option term. Any of the Grantee's Stock Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (iv) For purposes of this Section 5, the term "Company" shall include the Company's subsidiaries and the term "Disability" or "Disabled" shall mean a Grantee's becoming disabled within the meaning of section 22(e)(3) of the Code. (h) Satisfaction of Option Price. The Grantee shall pay the option price ---------------------------- specified in the Grant Instrument in (i) cash, (ii) with the approval of the Committee, by delivering shares of Company Stock owned by the Grantee (including Company Stock acquired in connection with the exercise of a Stock Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the option price or (iii) through any combination of (i) and (ii). The Grantee shall pay the option price and the amount of withholding tax due, if any, at the time of exercise. Shares of Company Stock shall not be issued or transferred upon exercise of a Stock Option until the option price is fully paid and any required withholding is made. (i) Election to Withhold Shares. To the extent permitted by the Committee, --------------------------- Grantees may make an election to satisfy the Company income tax withholding obligation with respect to a Stock Option by having shares withheld up to an amount that does not exceed the minimum applicable rate for federal (including FICA), state and local tax liabilities. Such election must be in the form and manner prescribed by the Committee. If the Grantee is a director or officer within the meaning of Rule 16a-1(f) promulgated under the Exchange Act, such election must be irrevocable and must be made six months prior to the date on which the Stock Option is exercised with respect to such shares. (j) Rule 16b-3 Restrictions. Unless a Grantee who is an "insider," as ---------------------- defined under Section 16 of the Exchange Act, could otherwise transfer Company Stock issued pursuant to a Stock Option without incurring liability under Section 16(b) of the Exchange Act, at least six months must elapse from the date of acquisition of a Stock Option by such a Grantee to the date of disposition of the Company Stock issued upon exercise of such option. (k) Limits on Incentive Stock Options. Each Incentive Stock Option shall --------------------------------- provide that, to the extent that the aggregate Fair Market Value of the Company Stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year under the Plan or any other stock option plan of the Company exceeds $100,000, then such option as to the excess shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any participant who is not an Employee of the Company or any "subsidiary" within the meaning of section 424(f) of the Code. An Incentive -5- Stock Option shall not be granted to any Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any "parent" or "subsidiary" of the Company within the meaning of section 424(e) and (f) of the Code, unless the option price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant and the option exercise period is not more than five years from the date of grant. 6. Formula Option Grants to Non-Employee Directors ----------------------------------------------- A Non-Employee Director shall be entitled to receive Nonqualified Stock Options in accordance with this Section 6. (a) Initial Grant. Each Non-Employee Director who is a member of the Board ------------- on the effective date of this Plan, as defined in Section 21 hereof, will receive a grant of a Nonqualified Stock Option to purchase 2,250 shares of Company Stock as of such date. Each Non-Employee Director who first becomes a member of the Board after the effective date of this Plan, will receive a grant of a Nonqualified Stock Option to purchase 2,250 shares immediately upon the date he or she becomes a member of the Board. (b) Annual Grants. During the term of this Plan, beginning from the date of ------------- the initial grant specified in Section 6(a) above (the "Initial Grant Date"), and, thereafter, on each anniversary date of the Initial Grant Date (the "Annual Automatic Grant Date"), each Non-Employee Director will receive a grant of a Nonqualified Stock Option to purchase 2,250 shares of Company Stock provided that the Non-Employee Director remains as such on the Annual Automatic Grant Date. (c) Option Price. The purchase price per share of Company Stock subject to ------------ a Stock Option granted under this Section 6 shall be equal to the Fair Market Value of a share of Company Stock on the date of grant. (d) Option Term. The term of each Stock Option granted pursuant to this ------------ Section 6 shall be ten years. (e) Exercisability. Options granted under this Section 6 shall be -------------- exercisable one-third on the third anniversary following the date of the grant, one-third on the fourth anniversary following the date of the grant, and one-third on the fifth anniversary following the date of the grant. (f) Administration. The provisions of this Section 6 are intended to -------------- operate automatically and not require administration. However, to the extent that administrative determinations are required, the provisions of this Section 6 shall be made by the members of the Board who are not eligible to receive grants under this Section 6, but in no event shall such determinations affect the eligibility of Grantees, the determination of the exercise price, the timing of the grants or the number of shares subject to Stock Options granted hereunder. (g) Applicability of Plan Provisions. Except as otherwise provided in, and -------------------------------- not inconsistent with, this Section 6, the Nonqualified Stock Options granted to Non-Employee Directors shall be subject to the provisions of this Plan applicable to Nonqualified Stock Options granted to other persons. (h) Amendment. Notwithstanding any other provision of the Plan, this --------- Section 6 may not be amended more than once every six months, except for amendments necessary to conform the Plan to changes in the provisions of or the regulations relating to applicable laws, including the Code or the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 7. Restricted Stock Grants ----------------------- The Committee may issue or transfer shares of Company Stock to an Employee under a Grant (a "Restricted Stock Grant"), upon such terms as the Committee deems appropriate. The following provisions are applicable to Restricted Stock Grants: -6- (a) General Requirements. Shares of Company Stock issued pursuant to -------------------- Restricted Stock Grants may be issued for cash consideration or for no cash consideration, at the sole discretion of the Committee. The Committee shall establish conditions under which restrictions on the transfer of shares of Company Stock shall lapse over a period of time or according to such other criteria as the Committee deems appropriate. The period of years during which the Restricted Stock Grant will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Committee shall grant to each Grantee a number of ---------------- shares of Company Stock pursuant to a Restricted Stock Grant in such manner as the Committee determines. (c) Termination of Employment or Services. If the Grantee ceases to be ------------------------------------- employed by the Company (as an Employee or Non-Employee Director) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Restricted Stock Grant shall terminate as to all shares covered by the Grant as to which restrictions on transfer have not lapsed and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems equitable. (d) Restrictions on Transfer and Legend on Stock Certificate. During the -------------------------------------------------------- Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Company Stock to which such Restriction Period applies except to a Successor Grantee under Section 10. Each certificate for a share issued or transferred under a Restricted Stock Grant shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate or certificates covering any of the shares subject to restrictions when all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Cash Dividends. During the Restriction ------------------------------------------- Period, unless the Committee determines otherwise, the Grantee shall have the right to vote shares subject to the Restricted Stock Grant and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed under the Restricted ---------------------- Stock Grant shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of any conditions imposed by the Committee. The Committee may determine, as to any or all Restricted Stock Grants, that all the restrictions shall lapse without regard to any Restriction Period. All restrictions under all outstanding Restricted Stock Grants shall automatically and immediately lapse upon a Change of Control. (g) Election to Withhold Shares. To the extent permitted by the Committee, --------------------------- Grantees may make an election to satisfy the Company income tax withholding obligation with respect to a Restricted Stock Grant by having shares withheld up to an amount that does not exceed the participant's minimum applicable tax rate for federal (including FICA), state and local tax liabilities. Such election must be in the form and manner prescribed by the Committee. If the Grantee is a director or officer within the meaning of Rule 16a-1(f) promulgated under the Exchange Act, such election must be irrevocable and must be made six months prior to the date on which all restrictions lapse with respect to such shares. 8. Stock Appreciation Rights ------------------------- (a) General Requirements. The Committee may grant stock appreciation rights -------------------- ("SARs") to any Grantee in tandem with any Stock Option, for all or a portion of the applicable Stock Option, either at the time the Stock Option is granted or at any time thereafter while the Stock Option remains outstanding; provided, however, that in the case of an Incentive Stock Option, such rights may be granted only at the time of the Grant of such Stock Option. Unless the Committee determines otherwise, the base price of each SAR shall be equal to the greater of (i) the exercise price of the related Stock Option or (ii) the Fair Market Value of a share of Company Stock as of the date of Grant of such SAR. -7- (b) Number of SARs. The number of SARs granted to a Grantee which shall be -------------- exercisable during any given period of time shall not exceed the number of shares of Company Stock which the Grantee may purchase upon the exercise of the related Stock Option during such period of time. Upon the exercise of a Stock Option, the SARs relating to the Company Stock covered by such Stock Option shall terminate. Upon the exercise of SARs, the related Stock Option shall terminate to the extent of an equal number of shares of Company Stock. (c) Value of SARs. Upon a Grantee's exercise of some or all of the ------------- Grantee's SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in cash, Company Stock or a combination thereof. The stock appreciation for an SAR is the difference between the base price of the SAR as described in subsection (a) and the Fair Market Value of the underlying Company Stock on the date of exercise of such SAR. (d) Form of Payment. At the time of such exercise, the Grantee shall have --------------- the right to elect the portion of the amount to be received that shall consist of cash and the portion that shall consist of Common Stock, which for purposes of calculating the number of shares of Company Stock to be received, shall be valued at their Fair Market Value on the date of exercise of such SARs. The Committee shall have the right to disapprove a Grantee's election to receive cash in full or partial settlement of the SARs exercised and to require that shares of Company Stock be delivered in lieu of cash. If shares of Company Stock are to be received upon exercise of an SAR, cash shall be delivered in lieu of any fractional share. (e) Certain Restrictions. An SAR is exercisable only during the period when -------------------- the Stock Option to which it is related is also exercisable. No SAR may be exercised for cash by an officer or director of the Company subject to Section 16 of the Exchange Act, in whole or in part, except in accordance with Rule 16b-3 under the Exchange Act. 9. Phantom Stock Appreciation Rights --------------------------------- The Plan will include phantom stock appreciation rights under a program substantially similar to the Phantom Stock Appreciation Plan (the "PSAP") currently maintained by the Company. In connection with adoption of the Plan, at the time of shareholder approval of the Plan, the PSAP will be terminated as a separate plan but its provisions will be incorporated herein and become a part of the Plan. Any inconsistency between the terms of this Plan and the PSAP will be resolved in favor of the terms of this Plan. Interests previously awarded under the PSAP and outstanding at the time of adoption of the Plan will be subject to conversion to cash and Company Stock in an equitable manner but subject to the PSAP participant's acceptance. 10. Transferability of Grants ------------------------- Only the Grantee or his or her authorized representative may exercise rights under a Grant. Such persons may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted under Rule 16b-3 of the Exchange Act and if permitted in any specific case by the Committee in its sole discretion, pursuant to a qualified domestic relations order as defined under the Code or Title I of ERISA or the regulations thereunder . When a Grantee dies, the representative or other person entitled to succeed to the rights of the Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to his or her children, grandchildren or spouse or to one or more trusts for the benefit of such family members or to partnerships in which such family members are the only partners (a "Family Transfer"), provided that the Grantee receives no consideration for a Family Transfer and the Grant Instruments relating to Nonqualified Stock Options transferred in a Family Transfer continue to be subject to the same terms and conditions that were applicable to such Nonqualified Stock Options immediately prior to the Family Transfer. -8- 11. Change of Control of the Company -------------------------------- As used herein, a "Change of Control" shall be deemed to have occurred if: (a) A liquidation or dissolution of the Company (excluding transfers to subsidiaries) or the sale of all or substantially all of the Company's assets occurs; (b) As a result of a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split or sale or transfer of assets, any person or group (as such terms are used in and under Section 13(d)(3) or 14(d)(2) of the Exchange Act) becomes the beneficial owner (as defined in Rule 13-d under the Exchange Act), directly or indirectly, of securities of the Company representing more than 20% of the common stock of the Company or the combined voting power of the Company's then outstanding securities; provided, however, that for purposes of this subsection 11(b), a person or group shall not include the Company or any subsidiary or any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary; (c) If at least a majority of the Board at any time does not consist of individuals who were elected, or nominated for election, by directors in office at the time of such election or nomination; or (d) The Company merges or consolidates with any other corporation (other than a wholly owned subsidiary) and is not the surviving corporation (or survives only as a subsidiary of another corporation). 12. Consequences of a Change of Control ----------------------------------- (a) Notice. ------ (i) If a Change of Control described in Section 11(a), (b) or (d) will occur, then, not later than 10 days after the approval by the stockholders of the Company (or approval by the Board, if stockholder action is not required) of such Change of Control, the Company shall give each Grantee with any outstanding Stock Options, Phantom Stock Appreciation Rights or SARs written notice of such proposed Change of Control. (ii) If a Change of Control described in Section 11(b) may occur without approval by the shareholders (or approval by the Board) and does so occur, or if a Change of Control described in Section 11(c) occurs, then, not later than 10 days after such Change of Control, the Company shall give each Optionee with any outstanding Stock Options, Phantom Stock Appreciation Rights or SARs written notice of the Change of Control. (b) Election Period. In connection with the Change of Control and effective --------------- only upon such Change of Control, each Grantee shall thereupon have the right, within 10 days after such written notice is sent by the Company (the "Election Period"), to make an election as described in Subsection (c) with respect to all of his or her outstanding Stock Options, Phantom Stock Appreciation Rights or SARs (whether the right to exercise such Stock Options, Phantom Stock Appreciation Rights or SARs has then accrued or the right to exercise such Stock Options, Phantom Stock Appreciation Rights or SARs will occur or has occurred upon the Change of Control). (c) Election Right. During the Election Period, each Grantee shall have the -------------- right to elect to exercise in full any installments of such Stock Options, Phantom Stock Appreciation Rights or SARs not previously exercised; provided, however, that in the case of an SAR or Phantom Stock Appreciation Right held by a Grantee who is subject to Section 16(b) of the Exchange Act, any such surrender or payment shall be made on such date as the Committee shall determine consistent with Rule 16b-3 under the Exchange Act. (d) Termination of Stock Options. If a Grantee does not make a timely ---------------------------- election in accordance with Subsection (c) in connection with a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), the Grantee's Stock Options, Phantom Stock Appreciation Rights or SARs shall terminate as of the Change of Control. Notwithstanding the foregoing, a Stock Option, Phantom Stock Appreciation Right or SAR will not terminate if assumed by the surviving or acquiring corporation, -9- or its parent, upon a merger or consolidation and, with respect to an Incentive Stock Option, the assumption of the Stock Option occurs under circumstances which are not deemed a modification of the Stock Option within the meaning of sections 424(a) and 424(h)(3)(A) of the Code. (e) Accounting and Tax Limitations. Notwithstanding the foregoing, ------------------------------ (i) if the right described in Subsection (c) in connection with SARs or Phantom Stock Appreciation Rights would make the applicable Change of Control ineligible for pooling of interest accounting treatment under APB No. 16 or make such Change of Control ineligible for desired tax treatment with respect to such Change of Control and, but for those provisions, the Change of Control would otherwise qualify for such treatment, the Grantee shall receive shares of Company Stock with a Fair Market Value equal to the cash that would otherwise be payable pursuant to Subsection (c) in substitution for the cash, and (ii) if the termination of the Stock Options described in Subsection (d) would make the applicable Change of Control ineligible for pooling of interest accounting treatment under APB No. 16 and, but for such provision, the Change of Control would otherwise qualify for such treatment, each affected Grantee shall receive a replacement or substitute stock option issued by the surviving or acquiring corporation. 13. Amendment and Termination of the Plan ------------------------------------- (a) Amendment. The Board may amend or terminate the Plan at any time; --------- provided, however, that any amendment that increases the aggregate number (or individual limit for any single Grantee) of shares of Company Stock that may be issued or transferred under the Plan (other than by operation of Section 3(b)), or modifies the requirements as to eligibility for participation in the Plan, shall be subject to approval by the shareholders of the Company and provided, further, that the Board shall not amend the Plan without shareholder approval if such approval is required by Rule 16b-3 of the Exchange Act or Section 162(m) of the Code. (b) Termination of Plan. The Plan shall terminate on the day immediately ------------------- preceding the tenth anniversary of its effective date unless terminated earlier by the Board or unless extended by the Board with the approval of the shareholders. (c) Termination and Amendment of Outstanding Grants. A termination or ----------------------------------------------- amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Committee acts under Section 20(b) hereof. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 20(b) hereof or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No ------------------ other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 14. Funding of the Plan ------------------- This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 15. Rights of Participants ---------------------- Nothing in this Plan shall entitle any Employee or Non-Employee Director or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. -10- 16. No Fractional Shares -------------------- No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 17. Withholding of Taxes -------------------- The Company shall have the right to deduct from all Grants paid in cash, or from other wages paid to an employee of the Company, any federal, state or local taxes required by law to be withheld with respect to such cash awards and, in the case of Grants paid in Company Stock, the Grantee or other person receiving such shares shall be required to pay to the Company the amount of any such taxes which the Company is required to withhold with respect to such Grants or the Company shall have the right to deduct from other wages paid to the employee by the Company the amount of any withholding due with respect to such Grants. 18. Requirements for Issuance of Shares ----------------------------------- No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations and other obligations of the Company, including any requirement that a legend or legends be placed thereon. 19. Headings ------- Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 20. Miscellaneous ------------- (a) Substitute Grants. The Committee may make a Grant to an employee of ----------------- another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant made by such corporation ("Substituted Stock Incentives"). The terms and conditions of the substitute grant may vary from the terms and conditions required by the Plan and from those of the Substituted Stock Incentives. The Committee shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Stock Options and the ------------------- obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to Section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) Ownership of Stock. A Grantee or Successor Grantee shall have no rights ------------------ as a shareholder with respect to any shares of Company Stock covered by a Grant until the shares are issued or transferred to the Grantee or Successor Grantee on the stock transfer records of the Company. -11- (d) Governing Law. The validity, construction, interpretation and effect of ------------- the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the law of the Commonwealth of Pennsylvania. 21. Effective Date of the Plan. The Plan shall be effective as of the date of -------------------------- the approval by the Company's shareholders of the Plan. -12- EX-10.IV 4 dex10iv.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10(iv) -------------- Susquehanna's Supplemental Executive Retirement Plan as amended and restated effective January 1, 1998 SUSQUEHANNA BANCSHARES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated Effective January 1, 1998) Table of Contents
Page ---- Article I. Definitions...............................................................................2 Section 1.01 Accrued Benefit................................................................2 Section 1.02 Actuarial Equivalent...........................................................2 Section 1.03 Annuity Starting Date..........................................................2 Section 1.04 Beneficiary....................................................................2 Section 1.05 Board..........................................................................2 Section 1.06 Code...........................................................................2 Section 1.07 Committee......................................................................2 Section 1.08 Deferred Retirement Benefit....................................................2 Section 1.09 Early Retirement Date..........................................................3 Section 1.10 Effective Date.................................................................3 Section 1.11 Employee.......................................................................3 Section 1.12 Employer.......................................................................3 Section 1.13 ERISA..........................................................................3 Section 1.14 Normal Retirement Age..........................................................3 Section 1.15 Normal Retirement Date.........................................................3 Section 1.16 Participant....................................................................3 Section 1.17 Participating Employer.........................................................3 Section 1.18 Plan...........................................................................4 Section 1.19 Plan Year......................................................................4 Section 1.20 Qualified Plan.................................................................4 Section 1.21 Qualified Plan Accrued Benefit.................................................4 Section 1.22 Sponsor........................................................................4 Section 1.23 Year of Service................................................................4 Article II. Participation............................................................................5 Section 2.01 Participation..................................................................5 Article III. Benefits................................................................................6 Section 3.01 Normal Retirement Benefit......................................................6 Section 3.02 Deferred Retirement Benefit....................................................6 Section 3.03 Early Retirement Benefit.......................................................6 Section 3.04 Death Benefit..................................................................6 Section 3.05 Deferred Vested Benefit........................................................6 Article IV. Vesting..................................................................................8 Section 4.01 Vesting - Years of Service or Normal Retirement Age............................8 Section 4.02 Forfeiture.....................................................................8
Article V. Payment of Benefits.......................................................................9 Section 5.01 Retirement.....................................................................9 Section 5.02 Deferred Vested Benefit........................................................9 Section 5.03 Death Benefit..................................................................9 Section 5.04 Small Benefits.................................................................9 Article VI. Administration..........................................................................10 Section 6.01 Administration................................................................10 Section 6.02 Claims for Benefits...........................................................10 Section 6.03 Review of Claims..............................................................10 Article VII. Miscellaneous..........................................................................11 Section 7.01 No Contract of Employment.....................................................11 Section 7.02 Funding.......................................................................11 Section 7.03 Liability of Employer.........................................................11 Section 7.04 Termination of Participation by Participating Employer........................11 Section 7.05 Notices, Data.................................................................12 Section 7.06 Choice of Law.................................................................12 Section 7.07 Binding Effect................................................................12 Section 7.08 Non-alienation................................................................12 Section 7.09 Incapacity....................................................................12 Section 7.10 Amendment or Termination......................................................13 Section 7.11 Other Plans...................................................................13 Section 7.12 Integrated Agreement..........................................................13 Section 7.13 Severability..................................................................13 Section 7.14 Withholding...................................................................13 Section 7.15 Construction..................................................................13
PREAMBLE Susquehanna Bancshares, Inc. (the "Employer") amends and restates the Susquehanna Bancshares, Inc. Supplemental Executive Retirement Plan (the "Plan"), effective January 1, 1998, to provide retirement benefits to selected executives that these executives are not permitted to receive from the Susquehanna Bancshares, Inc. Cash Balance Pension Plan on account of the limitations of sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended (the "Code"), and to recognize their service with the Employer. This Plan is intended to constitute an unfunded plan for the benefit of a select group of management or highly compensated employees within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Article I. Definitions Section 1.01 Accrued Benefit. The benefit to which a Participant is entitled under Section 3.01, expressed in the form of a single life annuity beginning at the Participant's Normal Retirement Date. Section 1.02 Actuarial Equivalent. A benefit of equivalent value as determined using the actuarial assumptions set forth in the Qualified Plan. Section 1.03 Annuity Starting Date. For a benefit payable in the form of an annuity, the first day of the first period for which a benefit is payable, or, for any other form of benefit, the first day on which all events have occurred which entitle the Participant to such benefit. Section 1.04 Beneficiary. The person or persons who are the Participant's Beneficiary under the Qualified Plan in the same proportion as determined under the Qualified Plan. Section 1.05 Board. The Board of Directors of the Sponsor, or the committee of the Board of Directors of the Sponsor to which responsibility for this Plan has been delegated. Section 1.06 Code. The Internal Revenue Code of 1986, as amended. Section 1.07 Committee. The individual or committee appointed by the Board to administer the Plan. Section 1.08 Deferred Retirement Benefit. The benefit referred to in Section 3.02. 2 Section 1.09 Early Retirement Date. The first day of any month coincident with or following the Participant's attainment of age 55 and completion of 15 Years of Service, but before his Normal Retirement Date, provided the Participant terminates employment with the Employer. Section 1.10 Effective Date. This Plan was originally effective January 1, 1994. This amendment and restatement is effective January 1, 1998. Section 1.11 Employee. An individual employed by the Employer in an executive capacity. Section 1.12 Employer. The Sponsor, and (a) any other corporation that is a member of a controlled group of corporations, as defined in section 414(b) of the Code, that includes the Sponsor, (b) any other trade or business that is a member of a controlled group of trades or business, as defined in section 414(c) of the Code, that includes the Sponsor, and (c) any other entity that is required to be aggregated with the Sponsor under section 414(m) or 414(o) of the Code. Section 1.13 ERISA. The Employee Retirement Income Security Act of 1974, as amended. Section 1.14 Normal Retirement Age. The date a Participant reaches age 65 or, if later, the fifth anniversary of his participation in the Qualified Plan. Section 1.15 Normal Retirement Date. The first day of the month coincident with or following the date the Participant reaches Normal Retirement Age. Section 1.16 Participant. An Employee who satisfies the requirements for participation and becomes a Participant as described in Article II. 3 Section 1.17 Participating Employer. The Sponsor and each other Employer that has adopted the Plan with the approval of the Board. Section 1.18 Plan. The Susquehanna Bancshares, Inc. Supplemental Executive Retirement Plan, as amended from time to time. Section 1.19 Plan Year. The calendar year. The first Plan Year began on the Effective Date. Section 1.20 Qualified Plan. Effective January 1, 1998, "Qualified Plan" means the Susquehanna Bancshares, Inc. Cash Balance Pension Plan, as amended and restated effective January 1, 1998, as further amended from time to time. From January 1, 1994, through December 31, 1997, "Qualified Plan" meant the Susquehanna Bancshares, Inc. Retirement Income Plan. Section 1.21 Qualified Plan Accrued Benefit. The Participant's Accrued Benefit under the Qualified Plan, expressed in terms of a single life annuity beginning at the Participant's Normal Retirement Date. Section 1.22 Sponsor. Susquehanna Bancshares, Inc., a Pennsylvania corporation, and any successor. Section 1.23 Year of Service. A Year of Service as defined in the Qualified Plan. 4 Article II. Participation ------------------------- Section 2.01 Participation. An Employee shall become a Participant in the Plan upon his designation and approval by the Board. A list of Employees who have been designated as Participants is attached as Appendix A. An Employee shall remain a Participant until the earlier of the date he terminates employment or the date the Board determines that he shall no longer be a Participant. A former Participant shall nevertheless be entitled to receive any benefits in which he is vested as described in Section 4.01 in accordance with Article V. 5 Article III. Benefits --------------------- Section 3.01 Normal Retirement Benefit. On retirement at his Normal Retirement Date, a Participant shall be entitled to the Actuarial Equivalent of an Accrued Benefit equal to the difference between (a) his Qualified Plan Accrued Benefit as of his Normal Retirement Date, determined without reference to the limitations contained in sections 401(a)(17) and 415 of the Code, and (b) his Qualified Plan Accrued Benefit at his Normal Retirement Date. Notwithstanding the preceding sentence, the amount of a Participant's Accrued Benefit shall be adjusted as agreed to by the Participant and the Participating Employer. Section 3.02 Deferred Retirement Benefit. If a Participant continues in employment following his Normal Retirement Date, he shall be entitled to the Actuarial Equivalent of a Deferred Retirement Benefit as of his Annuity Starting Date calculated as of the date of his termination of employment. The Deferred Retirement Benefit shall be computed in the same manner as the Normal Retirement Benefit under Section 3.01. Section 3.03 Early Retirement Benefit. A Participant who retires on an Early Retirement Date shall be entitled to the Actuarial Equivalent of an Accrued Benefit payable at his Normal Retirement Date determined in accordance with Section 3.01 as of the date of his termination of employment. If the Participant so elects, his Annuity Starting Date may precede his Normal Retirement Date, in which case the amount of the payments shall be adjusted to the Actuarial Equivalent amount. Section 3.04 Death Benefit. If a married Participant who is vested in his Accrued Benefit dies before his Annuity Starting Date, his spouse shall be entitled to the Actuarial Equivalent of the Participant's vested Accrued Benefit under Section 3.01 determined as of the Participant's date of death. The death benefit payable to a Participant who dies after his Annuity Starting Date shall depend on the form of benefit selected. Section 3.05 Deferred Vested Benefit. A Participant who terminates employment after satisfying the requirements for vesting under Section 4.01 shall be entitled to the Actuarial Equivalent of an 6 Accrued Benefit beginning as of his Normal Retirement Date determined under Section 3.01 as of the date of his termination of employment. 7 Article IV. Vesting ------------------- Section 4.01 Vesting - Years of Service or Normal Retirement Age. Except as provided in Section 4.02, a Participant shall be fully vested in his Accrued Benefit upon the earlier of (a) his attainment of Normal Retirement Age while employed by the Employer, or (b) his completion of five Years of Service. Section 4.02 Forfeiture. The Accrued Benefit of a Participant who terminates employment before completing five Years of Service or attaining Normal Retirement Age shall be forfeited. In addition, the Accrued Benefit of a Participant who is unmarried and dies before his Annuity Starting Date shall be forfeited. 8 Article V. Payment of Benefits ------------------------------ Section 5.01 Retirement. Subject to Section 5.04, the Accrued Benefit of a Participant who retires at an Early Retirement Date, his Normal Retirement Date, or a Deferred Retirement Date shall be paid or shall begin to be paid at the same time and in the same form as payment of the Participant's Qualified Plan Accrued Benefit, to the extent administratively practicable. Section 5.02 Deferred Vested Benefit. Subject to Section 5.04, the vested Accrued Benefit of a Participant who terminates employment before his Early or Normal Retirement Date shall be paid or shall begin to be paid at the same time and in the same form as payment of the Participant's Qualified Plan Accrued Benefit, to the extent administratively practicable. Section 5.03 Death Benefit. Subject to Section 5.04, the vested Accrued Benefit of a Participant who dies before his Annuity Starting Date shall be distributed to his Beneficiary at the same time, and in the same form, as the Participant's Qualified Plan Accrued Benefit is distributed. Section 5.04 Small Benefits. Notwithstanding anything in this Article V to the contrary, if the Actuarial Equivalent lump sum present value of a Participant's vested Accrued Benefit is not greater than $5,000 as of the date of his termination of employment, that Actuarial Equivalent amount shall be distributed to him or his Beneficiary, as applicable, in the form of a single lump sum as soon as practicable after his termination of employment. 9 Article VI. Administration -------------------------- Section 6.01 Administration. The Plan shall be administered by the Committee. The Committee shall establish such rules and procedures as it deems appropriate for the administration of the Plan. The Committee shall have the full power, discretion and authority to interpret, construe and administer the terms of the Plan, and all decisions made by the Committee shall be final and binding. The Committee may employ legal counsel, consultants, actuaries and others as it deems desirable in the administration of the Plan. The Committee shall have such other powers as provided to the plan administrator under the Qualified Plan. Section 6.02 Claims for Benefits. A Participant or Beneficiary may bring a claim for benefits under this Plan by filing a written application for benefits with the Committee. The Committee shall review such claim and shall decide such claim within a reasonable time, but not more than 90 days from the date the claim was received, unless special circumstances beyond the control of the Committee require an extension of time to respond, in which case the Committee may delay response for up to an additional 90 days, provided that prior notice is given to the Participant or Beneficiary. If the claim is denied, the Committee shall provide the Participant with a written notice setting forth the reasons for the denial, references to the provisions of the Plan upon which the denial was based, a description of any additional information or material necessary for the claimant to perfect his claim, and information as to how the Participant or Beneficiary may submit his claim for review. Section 6.03 Review of Claims. A Participant or Beneficiary whose claim has been denied may file an appeal in writing with the Committee within 60 days of his receipt of the denial of his claim (which 60-day period may be extended by the Committee in its discretion). A Participant or Beneficiary shall be permitted to review pertinent documents and submit issues and comments in writing. The Committee shall review its determination and make a determination within a reasonable time, but not more than 60 days after the date that the appeal was filed, unless prior notification is given to the claimant, and in that case not more than 120 days after the appeal was filed. If the claim is denied upon review, the Committee shall provide the claimant with written notice specifying the reasons for the denial, including the Plan provisions on which the denial was based. 10 Article VII. Miscellaneous -------------------------- Section 7.01 No Contract of Employment. This Plan is not intended to constitute a contract of employment, and each Participating Employer retains the right to discharge or discipline any Employee for any reason. Section 7.02 Funding. This Plan is intended by the Employer and the Participants to constitute an unfunded plan for purposes of the Code and Title I of ERISA. To the extent that any Participant of Beneficiary acquires a right to any benefits under this Plan, such right shall not be greater than that of an unsecured general creditor of the Employer, and no Participant shall have any right to any specific assets of the Employer. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind between the Employer and any Participant, his or her Beneficiary, or any other person. Subject to the foregoing restrictions, a Participating Employer may establish a "rabbi trust" to provide a source of payments under the Plan in accordance with Rev. Proc. 92-64, or may purchase an insurance policy or other investment vehicle. A Participant shall comply with the Participating Employer's reasonable requests for information necessary to obtain such investment. Section 7.03 Liability of Employer. Subject to its obligation to pay Accrued Benefits pursuant to the terms of this Plan, neither the Employer nor anyone acting on behalf of the Employer shall be liable for any act performed or the failure to perform any act with regard to this Plan, except in the event that there has been a judicial determination of willful misconduct on the part of the Employer or such person. Section 7.04 Termination of Participation by Participating Employer. Any Participating Employer other than the Sponsor may withdraw from the Plan at any time with regard to its Employees without affecting any other Participating Employer by giving 30 days' prior written notice to the Board. In addition, the Sponsor may, in its absolute discretion, terminate any Participating Employer's participation in the Plan at any time when, in the Sponsor's judgment, such Participating Employer is failing or refusing to discharge its obligations under the Plan. 11 Section 7.05 Notices, Data. Each Participant or Beneficiary shall be responsible for furnishing the Committee with the current and proper address for the mailing of notices, reports and benefit payments. Any notice required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any check mailed to such address is returned as undeliverable to the addressee, mailing of checks will be suspended until the Participant or Beneficiary furnishes the proper address. The Employer, the Committee, and all other persons associated with the Plan's operation shall have the right to rely on the veracity and accuracy of any required written data provided by the Participant or the Beneficiary, including age, health and marital status. Section 7.06 Choice of Law. This Plan shall be governed by the laws of the Commonwealth of Pennsylvania, without regard to its conflict of laws provisions, to the extent such law is not preempted by federal law. Section 7.07 Binding Effect. The terms of this Plan shall be binding on Plan Participants, their Beneficiaries, and their legal representatives, and on the Employer and its successors, assigns and legal representatives. Section 7.08 Non-alienation. None of the payments, benefits or rights of any Participant or Beneficiary shall be subject to the claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachments, garnishment, trustee's process or any other legal or equitable process available to any credit of such Participant or Beneficiary. Section 7.09 Incapacity. If the Committee determines that a Participant or Beneficiary is incompetent by reason of legal minority or physical or mental disability, the Committee shall have the power to cause the payments becoming due to such person to be made to another for the benefit of the minor or incompetent, without responsibility of the Employer or the Committee to see to the application of such payment. Payments made in accordance with the application of such power shall operate as a complete discharge of all obligations of the Employer and the Committee to the extent of such payment. 12 Section 7.10 Amendment or Termination. This Plan may be amended, suspended or terminated, in whole or in part, at any time by action of the Board in writing. No amendment, suspension or termination shall deprive any Participant of any portion of his Accrued Benefit deemed to be vested under the Plan as of the date of the amendment, suspension or termination. Section 7.11 Other Plans. Nothing contained in this Plan shall preclude a Participant, to the extent he is otherwise eligible, from participation in any group insurance, pension, profit-sharing, savings, or other employee benefit plans or programs which the Employer in its discretion may make available to its employees, but the Employer shall not be required to establish, maintain or continue any such plan or program by reason of this Plan. Any amounts accrued or payable under this Plan shall not be deemed to be salary or other compensation paid to a Participant for purposes of computing contributions to or benefits under any other employee benefit plan or program, unless specifically required pursuant to such other plan or program. Section 7.12 Integrated Agreement. This Plan document represents the entire agreement between the Participating Employers and the Participants concerning the Participants' retirement benefits, except for the Qualified Plan, the Susquehanna Bancshares, Inc. 401(k) Plan, the Susquehanna Bancshares, Inc. 401(k) Excess/Mirror Plan, the Susquehanna Bancshares, Inc. Employee Stock Purchase Plan, and Social Security. Section 7.13 Severability. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, and this Plan shall be construed and enforced as if such provision had not been included. Section 7.14 Withholding. The Employer may withhold any federal, state or local taxes from any payment due any Participant as it or the Committee determines pursuant to applicable law. Section 7.15 Construction. The masculine gender includes the feminine, and the singular, the plural and vice versa, unless the context requires otherwise. The headings and captions contained herein are provided for convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 13 IN WITNESS WHEREOF, Susquehanna Bancshares, Inc. has caused its authorized officers to execute this document this 11th day of December, 2002. SUSQUEHANNA BANCSHARES, INC. By: /s/ Edward Balderston, Jr. --------------------------------------- Name: Edward Balderston, Jr. Title: Sr. V.P. & Group Executive Attest: /s/ Lisa M. Cavage ---------------------------------- Name: Lisa M. Cavage Title: Vice President, Secretary & Counsel 14 APPENDIX A LIST OF PARTICIPANTS Frederick Bisbee Robert Bolinger Richard Cloney Gregory Duncan Richard Funke Drew Hostetter Thomas Hogan Charles Luppert Stanley Mull William Reuter Donald Showers 15 EX-10.V 5 dex10v.txt FORMS OF THE INSURANCE TRUST Exhibit 10(v) ------------- Forms of The Insurance Trust for Susquehanna Bancshares Banks and Affiliates Split Dollar Agreement and Split Dollar Policy Endorsement THE INSURANCE TRUST FOR SUSQUEHANNA BANCSHARES BANKS AND AFFILIATES SPLIT DOLLAR AGREEMENT ("AGREEMENT") THIS AGREEMENT is made and entered into this 30 day of December, 1998, by and between [Name of Affiliate Bank] located in _________________________ (the "Company"), Farmers First Bank, located in Lititz, Pennsylvania (hereinafter the "Trustee" for The Insurance Trust for Susquehanna Bancshares Banks and Affiliates (the "Trust", dated December 18, 1998)) and ___________________, (the "Executive"). This Agreement shall append the Split Dollar Policy Endorsement entered into on December 30, 1998, by and between the aforementioned parties. INTRODUCTION To encourage the Executive to remain an employee of the Company, the Company is willing to divide the death proceeds of a life insurance policy on the Executive's life, which policy shall be owned on the Company's behalf by Farmers First Bank, Trustee of The Insurance Trust For Susquehanna Bancshares Banks and Affiliates. The Company will pay life insurance premiums from its general assets. Article 1 General Definitions The following terms shall have the meanings specified: 1.1. "Base Annual Salary" means the base annual compensation, excluding bonuses, commissions, overtime, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, paid to the Executive for employment services rendered to the Company, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 plans of the Company. The term "Base Annual Salary" shall be used for purposes of determining the portion of the Policy death proceeds which shall payable to the Executive's beneficiary pursuant to provisions of this Agreement. The Executive's Base Annual Salary for (i) the Executive's first Policy Year and (ii) every subsequent Policy Year up to and including the Policy Year in which the Executive Terminates Employment or becomes Disabled (as applicable), the Executive's Base Annual Salary shall be measured as of the June 1st preceding the first day of the applicable Policy Year. For any and all subsequent Policy Years (if any) covered by the Agreement, the Executive's Base Annual Salary shall continue to be measured as of the June 1st preceding the first day of the Policy Year in which the Executive Terminates Employment or becomes Disabled (as applicable). 1.2. "Change of Control" means and shall be deemed to have occurred upon the happening of any one or more of the following occurrences, if prior thereto, the happening of such occurrence has not received the approval of a majority of the disinterested member of the Company (excluding transfer to subsidiaries) or the sale of all or substantially all of the Company's assets; (ii) as a result of a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split or sale or transfer of assets, any person or group (as such terms are used in and under Section 13(d)(3) or 14(d)(2) of the Securities and Exchange Act of 1934 (the "Exchange Act")) becomes beneficial owner (as defined in 13-d under the Exchange Act), directly or indirectly, of securities of the Company representing 20% of the common stock of the Company then outstanding securities; provided, however, that for purposes of this Plan, a person or group shall not include the Company or any subsidiary or any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary; (iii) if at least a majority of the Board of Directors of the Company at any time does not consist of individuals who were elected or nominated for election, by directors in office at the time of such election or nomination; or (iv) Company merges or consolidates with any other corporation (other than an Affiliate of the Company) and is not the surviving corporation (or survives only as a subsidiary of another corporation). 1.3. "Disability" shall mean the following: (i) if the Executive is covered by a Company sponsored disability plan, the term shall mean a permanent disability as defined in such plans without regard to any waiting period or (ii) if the Executive suffers a sickness, accident or injury which, in the judgment of a physician satisfactory to the Company, prevents the Executive from performing substantially all of the Executive's normal duties for the Company. 1.4. "Grantor Trust" means The Insurance Trust For Susquehanna Bancshares Banks which shall hold and own the policy on the Company's behalf. 1.5. "Insured" means the Executive. 1.6. "Insurer" means General American Life Insurance Company. 1.7. "Policy" means insurance policy # __________________ issued by the Insurer. 1.8. "Policy Year" shall mean the calendar year. 1.9. "Retirement Age" means the date during active employment upon which (i) the Executive attains age sixty-five (65) or (ii) the Executive attains both age fifty-five and fifteen (15) years of service with the Company. 1.10. "Termination of Employment" means the date the Executive ceasing to be employed by the Company for any reason whatsoever, other than by reason of an approved leave of absence or Disability. 2 Article 2 Policy Ownership/Interests 2.1. Executive's Interest. Provided this Agreement has not terminated pursuant to Article 7, the Executive shall have the right to designate the beneficiary of an amount of the Policy's death proceeds as follows: (a) If the Executive dies on or before attaining age 70, the Executive's beneficiary shall receive an amount equal to two times the Executive's Base Annual Salary, less the amount (if any) provided by the Company's group term life insurance plan; or (b) If the Executive dies after attaining age 70, the Executive's beneficiary shall receive an amount equal to one times the Executive's Base Annual Salary, less the amount (if any) provided by the Company's group term life insurance plan. (c) The Executive shall also have the right to elect and change settlement options that may be permitted. Provided, however, the Executive, the Executive's transferee or the Executive's beneficiary shall have no rights or interests in the Policy with respect to that portion of the death proceeds designated in this Section 2.1 (i) upon the Executive's Termination of Employment prior to Retirement Age or Disability or (ii) upon termination of this Agreement pursuant to Section 7. 2.2. Company Ownership. The Grantor Trust on behalf of the Company is the sole owner of the Policy and shall have the right to exercise all incidents of ownership, other than the right granted to the Executive in Section 2.1. The Grantor Trust shall be the direct beneficiary of any death proceeds remaining after the Executive's interest is determined according to section 2.1. 2.3. Option to Purchase. The Grantor Trust shall not sell, surrender or transfer ownership of the Policy while this Agreement is in effect without first giving the Executive or the Executive's transferee the option to purchase the Policy for a period of sixty (60) days from written notice of such intention. The purchase price shall be an amount equal to the cash surrender value of the Policy. This provision shall not impair the right of the Company to terminate this Agreement. Article 3 Premiums 3.1. Premium Payment. The Company shall pay any premiums due on the Policy. 3.2. Imputed Income. The Company shall furnish the Executive, on a timely basis, a statement of income reportable by the Executive for Federal Income Tax purposes as a result of the insurance protection provided the Executive. Such amount shall be computed in accordance with Revenue Rulings 64-328, 1964-2 C.B 11, and 66-110 1966-1 C.B. 12. 3 Article 4 Assignment The Executive may assign without consideration all interests in the Policy and in this Agreement to any person, entity or trust. In the event the Executive transfers all of the Executive's interest in the Policy, then all of the Executive's interest in the Policy and in the Agreement shall be vested in the Executive's transferee, who shall be substituted as a party hereunder and the Executive shall have no further interest in the Policy or in this Agreement. Article 5 Insurer The Insurer shall be bound only by the terms of the Policy. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits and demands of all entities or persons. The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement. Article 6 Claims Procedure 6.1. Claims Procedure. The Company shall notify the Executive, the Executive's transferee or beneficiary, or any other party who claims a right to an interest under the Agreement (the "Claimant") in writing, within ninety (90) days of his or her written application for benefits, of his or her eligibility or ineligibility for benefits under this Agreement. If the Company determines that the Claimant is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of this Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of this Agreement's claims review procedure and other appropriate information as to the steps to be taken if the Claimant wishes to have the claim reviewed. If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the Claimant of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety day period. 6.2. Review Procedure. If the Claimant is determined by the Company not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. The Company shall notify 4 the Claimant of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the Claimant and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the Claimant. Article 7 Amendments and Termination This Agreement may be amended or terminated only by a written agreement signed by the Company, the trustee of The Insurance Trust For Susquehanna Bancshares Banks and Affiliates and the Executive. Notwithstanding the prior sentence, this Agreement will automatically terminate upon the Executive's Termination of Employment prior to Normal Retirement Age. However, the Agreement shall not automatically terminate if the termination of employment (prior to Normal Retirement Age) occurs within twelve (12) months following a change in control. Article 8 Miscellaneous 8.1. Binding Effect. This Agreement shall bind the Executive, the THE INSURANCE TRUST FOR SUSQUEHANNA BANCSHARES AND AFFILIATES and the Company, their beneficiaries, survivors, executors, administrators and transferees, and any Policy beneficiary. 8.2. No Guarantee of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 8.3. Applicable Law. The Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of Pennsylvania, except to the extent preempted by the laws of the United States of America. 8.4. Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company. 8.5. Notice. Any notice, consent or demand required or permitted to be given under the provisions of this Split Dollar Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by, delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the 5 Company. The date of such mailing shall be deemed the date of such mailed notice, consent or demand. 8.6. Entire Agreement. This Agreement, together with the Split Dollar Policy Endorsement, constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 8.7. Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Interpreting the provisions of the Agreement; (b) Establishing and revising the method of accounting for the Agreement; (c) Maintaining a record of benefit payments; and (d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement. 8.8. Named Fiduciary. For purposes of the Employees Retirement Income Security Act of 1974, if applicable, the Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. 6 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. [NAME OF AFFILIATE BANK] By_________________________________ Title______________________________ EXECUTIVE: ___________________________________ [Name of Executive] FARMERS FIRST, TRUSTEE FOR THE INSURANCE TRUST FOR SUSQUEHANNA BANCSHARES BANKS AND AFFILIATES, DATED DECEMBER 18, 1998: By_________________________________ Title______________________________ 7 SPLIT DOLLAR POLICY ENDORSEMENT ("ENDORSEMENT") FOR THE SPLIT DOLLAR AGREEMENT OF THE INSURANCE TRUST FOR SUSQUEHANNA BANCSHARES BANKS AND AFFILIATES Policy No._______________ Insured: [Name of Executive] Supplementing and amending the application to General American Life Insurance Company ("Insurer"), the applicant requests and directs that: BENEFICIARIES ------------- 1. The beneficiary designated by the Insured, or his or her transferee, shall be the beneficiary of an amount of the Policy's death proceeds as follows, subject to the provisions of paragraph (5) below: (a) If the Insured dies (i) before the Split Dollar Agreement has terminated pursuant to its terms and (ii) on or before attaining age 70, the Insured's beneficiary shall receive an amount equal to two times the Insured's "Base Annual Salary" (as such terms have been defined in his Split Dollar Agreement), less the amount (if any) provided by the Company's group term life insurance plan; or (b) If the Insured dies (i) before the Split Dollar Agreement has terminated pursuant to its terms, or (ii) after attaining age 70, the Insured's beneficiary shall receive an amount equal to one times the Insured's "Base Annual Salary" (as such terms have been defined in his Split Dollar Agreement), less the amount (if any) provided by the Company's group term life insurance plan. 2. The beneficiary of any remaining death proceeds shall be Farmers First Bank, Trustee of The Insurance Trust For Susquehanna Bancshares Banks and Affiliates. OWNERSHIP --------- 3. The Owner of the policy shall be Farmers First Bank, Trustee for The Insurance Trust For Susquehanna Bancshares Banks and Affiliates, on behalf of the Company. The Owner shall have all ownership rights in the Policy except as may be specifically granted to the Insured or the Insured's transferee in paragraph (4) of this endorsement. 4. The Insured or the Insured's transferee shall have the right to assign all rights and interests in the Policy with respect to that portion of the death proceeds designated in paragraph (1) of this endorsement, and to exercise all settlement options with respect to such death proceeds. 5. Notwithstanding the provisions of paragraph (4) above, the Insured or the Insured's transferee shall have no rights or interests in the Policy with respect to that portion of the death proceeds designated in paragraph (1) of this endorsement if the Insured, prior to either his Retirement Age or Disability, ceases to be employed by the Company for any reason whatsoever (excluding than (i) termination by reason of a leave of absence which is approved by the Company, or (ii) a termination within twelve (12) months of a "Change in Control," as such term has been defined in the Split Dollar Agreement), unless otherwise agreed to by the parties to The Insurance Trust For Susquehanna Bancshares Banks and Affiliates Split Dollar Agreement. MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY --------------------------------------------------- 6. Upon the death of the Insured, the interest of any collateral assignee of the Owner of the Policy designated in (3) above shall be limited to the portion of the proceeds described in paragraph (2) above. OWNER'S AUTHORITY ----------------- 7. The Insurer is hereby authorized to recognize the Owner's claim to rights hereunder without investigating the reason for any action taken by the Owner, including its statement of the amount of premiums it has paid on the Policy. The signature of the Owner shall be sufficient for the exercise of any rights under this Endorsement and the receipt of the Owner for any sums received by it shall be a full discharge and release therefore to the Insurer. 8. Any transferee's rights shall be subject to this Endorsement. 2 Signed at __________________, Pennsylvania, this 30 day of December, 1998. [NAME OF AFFILIATE BANK] By_______________________________ Title____________________________ FARMERS FIRST BANK, TRUSTEE FOR THE INSURANCE TRUST FOR SUSQUEHANNA BANCSHARES BANKS AND AFFILIATES, DATED DECEMBER 18, 1998 By_______________________________ Title____________________________ The Insured accepts and agrees to the foregoing and, subject to the rights of the Owner as stated above, designates as primary of the portion of the proceeds describe in (1) above - ------------------------------------ ---------------------------------- [Name] [Relationship] - ------------------------------------ ---------------------------------- [Name] [Relationship] and as contingent beneficiary of the portions of proceeds described in (1) above - ------------------------------------ ---------------------------------- [Name] [Relationship] - ------------------------------------ ---------------------------------- [Name] [Relationship] Signed at ______________, Pennsylvania, this ______ day of ______________, 199_. THE INSURED: - --------------------------------- [Name of Executive] THE INSURER: General American Life Insurance Company Accepted By:_________________________ Its:_________________________________ 3 EX-10.VI 6 dex10vi.txt 2002 AMENDED SERVICING AGREEMENT Exhibit 10(vi) -------------- 2002 Amended Servicing Agreement dated January 1, 2002 Between Boston Service Company, Inc. t/a Hann Financial Service Corp. and Auto Lenders Liquidation Centre, Inc. 2002 AMENDED SERVICING AGREEMENT THIS 2002 AMENDED SERVICING AGREEMENT (the "Amended Agreement"), signed by the parties on the dates indicated by their signatures below but effective as of January 1, 2002, is by and between AUTO LENDERS LIQUIDATION CENTER, INC. (hereinafter referred to as "Auto Lenders"), a New Jersey corporation having its principal office at 1051 North Black Horse Pike, Williamstown, New Jersey 08094, and BOSTON SERVICE COMPANY, INC. trading as HANN FINANCIAL SERVICE CORP. (hereinafter referred to as "BSC"), a New Jersey corporation, having its principal office at One Centre Drive, Jamesburg, New Jersey 08831. BACKGROUND Auto Lenders is in the business of providing services to lenders who acquire motor vehicles upon termination of lease contracts or upon repossession under installment sales contracts (the "Vehicles"). Auto Lenders reconditions vehicles and sells and leases them at retail to the general public or sells them at wholesale at public or private auctions (the "Service"). The Service enables lenders to maximize remarketing and resale gains, minimize remarketing and resale losses and do so while reducing the costs normally incurred by lenders in the disposition of Vehicles. Auto Lenders initially agreed to provide the Service to BSC on an exclusive basis pursuant to the terms and conditions of a Servicing Agreement between the parties dated February 1, 2000 and the Amended Servicing Agreement dated September 1, 2000. Pursuant to this Amended Agreement, BSC desires to engage Auto Lenders to continue to provide the Service to BSC on an exclusive basis. BSC also offers a retail automobile leasing program (the "Program"). Under the Program BSC purchases leases from automobile dealers, assigns the leases to participating lenders (the "Lenders"), services the leases, and, utilizing the Service, arranges for disposal of the leased Vehicles by Auto Lenders on termination of the leases. Pursuant to the terms and provisions of the above-referenced agreements, Auto Lenders agrees to guaranty the residual value of all program Vehicles originated and serviced by BSC as of December 31, 2001 (the "Guaranty"). Pursuant to this Amended Agreement, BSC desires to continue to include with the sale and assignment of such leases to Lenders the Guaranty of Auto Lenders. AGREEMENT Auto Lenders and BSC, in consideration of the above premises, of the mutual promises and covenants herein contained, and intending to be legally bound hereby, agree as follows: 1. Authorization. Auto Lenders and BSC each represent and warrant to ------------- the other that it is (i) a corporation, duly organized and validly existing under the laws of the State of New Jersey, (ii) duly licensed and/or qualified in all jurisdictions where such licensing and/or qualifications is required pursuant to this Agreement, and (iii) authorized to enter into and perform its obligations under this Amended Agreement. Auto Lenders further represents and 1 warrants to BSC that it is currently providing the Service and the Guaranty only to BSC and its participating Lenders and agrees that, during the term and any extended terms of this Amended Agreement, as provided in Paragraph 11 below, Auto Lenders will continue to provide the Service and the Guaranty only to BSC and its participating Lenders and will not provide any similar service or guarantee to any other person unless mutually agreed to by the parties. 2. Published Residual Values of Leased Motor Vehicles. BSC publishes, -------------------------------------------------- approximately six (6) times per year, an Automobile Lease Residual Guide (the "Residual Guide") and periodic bulletins which it distributes to its automobile dealer network. The residual values of all Vehicles contained in each Residual Guide and the bulletins to be published by BSC during the term or any extended terms of this Amended Agreement shall be mutually approved by BSC and Auto Lenders. In the event that the parties cannot agree upon the residual value of any particular Vehicle, then Auto Lenders shall not provide the Guaranty to Lenders or BSC as to such Vehicle, even if covered by a lease sold by BSC to a Lender, unless Auto Lenders agrees to do so in a separate writing. 3. Guaranty of Residual Value. Except as provided in Paragraph 2, Auto -------------------------- Lenders agrees to provide the Guaranty of the residual value of the Vehicle as contained in a lease to any participating Lender that purchases the lease from BSC during the term or any extended term of this Amended Agreement or to BSC. Auto Lenders shall pay to any such participating Lender or BSC the guaranteed amount on any Vehicle at the times and in the manner provided in the second subparagraph of Paragraph 5. Upon the Lenders or BSC's receipt of payment of the residual value of a Vehicle from Auto Lenders, Auto Lenders shall become the owner of the Vehicle and shall receive from the Lender or BSC, without recourse, such documents as may be necessary to transfer marketable title to the Vehicle to Auto Lenders, free and clear of all liens and encumbrances. 4. Delivery and Reconditioning of Vehicles. BSC will deliver all --------------------------------------- Vehicles which are subject to the Guaranty to an Auto Lenders designated place of business at BSC's sole cost and expense. In providing the Service, Auto Lenders will determine the reasonable costs (which shall be equivalent to market conditions) necessary to recondition the Vehicle for sale or lease and shall promptly advise BSC of such costs. Such costs shall be reimbursed to Auto Lenders by BSC on a monthly basis within thirty (30) days of receipt of an invoice for such costs from Auto Lenders. The provisions of this paragraph 4 shall survive termination of this Amended Agreement. 5. Remarketing of Vehicles. As an incident to the Service, Auto ----------------------- Lenders will use its best efforts to sell or lease those Vehicles which are reconditioned by it, as well as those Vehicles which did not require reconditioning, on such terms as are acceptable to BSC. Upon any such sale, BSC shall transfer the title to the Vehicles to Auto Lenders, which shall then transfer title to the purchaser. BSC warrants to Auto Lenders that it has marketable title to all Vehicles delivered to Auto Lenders pursuant to this Amended Agreement, free and clear of all liens and encumbrances. 2 All proceeds from the sale of any Vehicle on termination of a lease, including termination fees (i.e., purchase option fees), shall be paid to BSC and credited to Auto Lenders to an account on the books of BSC designated the "Termination Account." Any deficiency between the sale proceeds received and the residual amounts guaranteed on the Vehicles sold or leased by Auto Lenders shall be reconciled at the end of each month and paid by Auto Lenders to BSC and credited to the Termination Account on or before the 10th day of the following month. Likewise, any surplus between the sale proceeds received and the residual amounts guaranteed shall be reconciled at the end of each month and paid by BSC from the Termination Account to Auto Lenders on or before the 10th day of the following month. 6. Right of First Refusal. Auto Lenders will offer to BSC in writing ---------------------- the right of first refusal to purchase, without recourse, all leases and installment sale contracts which meet BSC's credit requirements (together the "Contracts") negotiated by Auto Lenders pursuant to the Service and signed by retail purchasers or lessees who purchase or lease Vehicles delivered by BSC to Auto Lenders pursuant to this Amended Agreement. BSC shall exercise its right of first refusal as to such Contracts, if its elects to do so, within two (2) business days of its receipt of the offer from Auto Lenders accompanied by the credit file with respect to the retail purchaser or lessee. Otherwise, Auto Lenders' offer shall expire. All Contracts on which BSC exercises its right of first refusal shall be sold and assigned by Auto Lenders to BSC without recourse to Auto Lenders. Auto Lenders need not offer to BSC any retail lease or installment sale contract which does not meet BSC's credit requirements. All Vehicles other than those subject to Contracts purchased by BSC upon the exercise of its right of first refusal under this Paragraph 6 shall be disposed of, and the proceeds of such dispositions shall be applied, in accordance with Paragraph 5 hereof. 7. Employees. Auto Lenders agrees to employ servicing personnel, at no --------- costs to BSC, in a number and quality sufficient to provide the Service to BSC required by this Amended Agreement. Such personnel shall function under the sole guidance, supervision and direction of Auto Lenders and at all times remain solely the employees of Auto Lenders. Auto Lenders shall solely be responsible for the salaries, employment taxes, and any and all employee benefits of such personnel. It is the intention of BSC and Auto Lenders that this Amended Agreement shall not be construed to create in any manner whatsoever an employer-employee relationship between BSC and the employees of Auto Lenders, it being within the contemplation of the parties that all acts performed by Auto Lenders in carrying out the provisions of this Amended Agreement shall be those of an independent contractor and all acts performed by employees of Auto Lenders shall be those strictly of employees of Auto Lenders. 8. Contract Payments. All lease and installment sale payments on ----------------- Contracts sold and assigned by Auto Lenders to BSC hereunder will be made directly payable to BSC. BSC personnel will promptly process all Contract payments received on a daily basis. BSC will keep accurate, current and complete records of all payments posted in accordance with normal business practices and procedures. Auto Lenders will promptly pay to BSC all monies received from the sale or lease of all vehicles disposed of pursuant to this Amended Agreement. 3 9. Consideration. ------------- A. Retail Service Fee. In consideration of the Service performed by ------------------ Auto Lenders under this Amended Agreement, Auto Lenders shall retain from the proceeds received from retail customers a fee for each vehicle sold or leased. Except in special cases (in which case the parties' mutual agreement in writing shall first be obtained), the fee shall be $300.00 per retail sale or lease. However, no fee shall be paid to Auto Lenders for any Vehicle which is sold at wholesale or at public or private auction pursuant to this Amended Agreement, although BSC shall reimburse Auto Lenders for its actual out-of-pocket expenses (in each case not to exceed $1,000 without BSC's prior consent) in disposing of the Vehicle, within thirty (30) days of receipt of an itemized invoice for such expenses from Auto Lenders. The provisions of this paragraph 9.A shall survive termination of this Amended Agreement. B. Guaranty Fees. In consideration of its agreement to provide the ------------- Guaranty to BSC and Lenders, Auto Lenders shall receive from BSC (which BSC may cause to be paid by the participating Lenders) the following Guaranty Fees, which shall pertain only to leases subject to the Guaranty of Auto Lenders: i. A one-time Lease Guaranty Fee of $150.00 per lease on which Auto Lenders has provided the Guaranty. A minimum of $100.00 of the Lease Guaranty Fee shall be reserved by BSC or the Lender participating in the Program and credited to a Residual Value Loss Reserve Account maintained by BSC or the Lenders, as applicable, in the name of Auto Lenders. (In some instances, the Guaranty may be provided to a Lender pursuant to a separate written agreement among Auto Lenders, BSC and the Lender. In such event, the amount of the Lease Guaranty Fee reserved and the rights of the parties with regard to the Residual Value Loss Reserve Account may be subject to that agreement and not this Amended Agreement.) The amount of the Lease Guaranty Fee reserved shall be placed by BSC or the Lender in an interest-bearing account under the dominion and control of BSC or the Lender, as applicable, with interest to accrue at a rate not less than the money market account rate offered by the Lender. Interest shall accrue to the benefit of Auto Lenders. The unreserved balance of the Lease Guaranty Fee shall be paid on or before the tenth (10th) day of the month following the month in which the Guarantee is provided by Auto Lenders. BSC or the Lender, as applicable, shall be, and hereby is, granted a first perfected security interest in such account to secure the obligations of Auto Lenders to BSC or the Lender, as applicable, with respect to the Vehicle covered by such lease. This Lease Guaranty Fee and/or the reserved amount of the Lease Guaranty Fee shall be subject to amendment by written agreement among BSC, Auto Lenders and each Lender who participates in the Program. 1. The sum on deposit in the Residual Value Loss Reserve Account shall be applied to defray residual value losses on leases subject to the Auto Lenders Guaranty pursuant to the Program; provided that, so long as it is not in default under any guaranty furnished by it, Auto Lenders has the right to dispose of the Vehicles covered by such leases in any manner Auto Lenders deems appropriate to minimize such losses. Auto Lenders agrees to maintain the Residual Value Loss Reserve Account so long as Auto Lenders has any obligation to a participating Lender or BSC on one or more leases subject to the Guaranty. So 4 long as Auto Lenders is not in default under any guaranty furnished by it, the balance of the Residual Value Loss Reserve Account and accrued interest shall be paid to Auto Lenders under the Guaranty provided pursuant to this Amended Agreement. Such sum shall be paid to Auto Lenders within ten (10) business days of written request. The provisions of this subparagraph 9.B.(i).1 shall survive termination of this Amended Agreement. ii. A Monthly Guaranty Fee of $5.00 per lease subject to the Auto Lenders Guaranty to be charged to Lenders other than BSC. The Monthly Guaranty Fees shall be based on the number of leases which are part of the Program and which are outstanding at the end of each month. The Monthly Guaranty Fees shall be paid by participating Lenders and credited to Auto Lenders by BSC on or before the tenth (10th) day of the following month. It is understood by the parties that the Monthly Guaranty Fee shall apply to the leases subject to the Auto Lenders Guaranty and shall be applied to reduce the Monthly Guaranty Payment due from BSC to Auto Lenders as required pursuant to subparagraph 9.B. (iv) below. The provisions of this Paragraph 9.B. (ii) shall survive termination of this Amended Agreement. iii. All full-term lease assessments (for example, excess mileage, assessed wear and tear, Vehicle damage, termination-disposition fees, and the like) which relate to a lease subject to the Auto Lenders Guaranty and which are collected from a lessee at the expiration of a lease shall be paid, so long as Auto Lenders is not in default under any guaranty furnished by it, to Auto Lenders on or before the tenth (10th) day of the month following the month of collection. It is understood and agreed, however, that in the event any such full-term lease assessment is not collected by BSC from the lessee within one hundred fifty (150) days of the date of the invoice to the lessee, such assessment shall be paid by BSC to Auto Lenders promptly after the expiration of the one hundred fifty (150) day period. From time to time, Auto Lenders may accept the amount of a settlement between BSC and a lessee as payment in full for a Vehicle damage or wear and tear assessment provided that the reduced amount is reasonable and is previously approved by Auto Lenders. The provisions of this paragraph 9.B.iii. shall survive termination of this Amended Agreement. iv. BSC shall pay to Auto Lenders a Monthly Guaranty Payment of $600,000 per month during calendar year 2002, a Monthly Guaranty Payment of $400,000 per month during calendar year 2003, and a Monthly Guaranty Payment of $300,000 per month during calendar year 2004. The Monthly Guaranty Payment due for the month of January, 2002 shall be paid on or before February 10, 2002. The remaining payments shall be made by BSC on or before the tenth day of each following month. The Monthly Guaranty Payments for any extended term or terms shall be as determined by BSC and Auto Lenders pursuant to Paragraph 11 below. 10. Indemnification. Except as otherwise provided herein or caused by --------------- the gross negligence or willful misconduct of BSC, Auto Lenders agrees to indemnify, defend and save BSC and the applicable Lenders and their respective directors, officers, agents and employees harmless from all losses, damages, claims and expenses (including court costs and attorney's fees, provided Auto Lenders is offered the opportunity (except in situations involving exposure to potential criminal liability) to select BSC's attorneys, subject to BSC's reasonable approval) arising out of the conduct of Auto Lenders, its officers, agents, servants and 5 employees, in providing the Service and the Guaranty pursuant to this Amended Agreement. This indemnification shall survive the termination of this Amended Agreement. Likewise, except as otherwise provided herein or caused by the gross negligence or willful misconduct of Auto Lenders, BSC agrees to indemnify, defend and save Auto Lenders and its directors, officers, agents and employees harmless from all losses, damages, claims and expenses (including court costs and attorney's fees, provided BSC is offered the opportunity (except in situations involving exposure to potential criminal liability) to select Auto Lenders' attorneys, subject to Auto Lenders' reasonable approval) arising out of the conduct of BSC, its officers, agents, servants and employees, in performing its obligations under this Amended Agreement and in servicing Contracts assigned to it pursuant to this Amended Agreement. This indemnification shall survive the termination of this Amended Agreement. 11. Term of Agreement. The term of this Amended Agreement is three (3) ----------------- years, commencing on the effective date of January 1, 2002 and ending on December 31, 2004. Should neither party terminate this Amended Agreement by written notice to the other received on or before November 15, 2002, then the term of this Agreement shall automatically be extended for an extended term of one year lasting from January 1, 2005 to December 31, 2005. Similarly, if neither party terminates this Agreement by written notice to the other on or before November 15 of the following year (or years), then this Agreement shall automatically be extended for an additional period (or periods) of one year. This Amended Agreement may be terminated by either party upon the expiration of the then current term (i.e. December 31st of the second following year), by providing written notice to the other party of termination that is received by the other party on or before November 15th of any year. (For example, a notice of termination must be received by one party on or before November 15, 2002 in order for the other party to terminate this Amended Agreement on December 31, 2004.) Each year the parties shall use their best efforts to agree upon a reasonable and appropriate change (by way of an increase or decrease) to the Guaranty Fees as provided in subparagraphs 9.B. (i), (ii), and (iv) above. If the parties are unable to agree upon such a change on or before November 15th of any year, then this Amended Agreement shall automatically be extended (unless otherwise terminated by either party) and the Retail Service Fee and Guaranty Fees for the extended term shall be the same as those of the immediately prior calendar year. (For example, if the parties do not agree by November 15, 2002, on the fees for calendar year 2005, the fees for calendar year 2004 shall apply during calendar year 2005.) The Retail Servicing Fee and Guaranty Fees applicable to any extended term shall be calculated to provide Auto Lenders with (a) a reasonable net financial return as determined by industry standards, and (b) the same protection against risk as the fees and portfolio payments paid to Auto Lenders during the initial three-year term. Auto Lenders agrees to provide BSC with full access to its financial books and records and its financial statements during the term and each extended term of this Amended Agreement. Either party may terminate this Amended Agreement at any time upon the failure of the other party to comply with any of the terms and provisions of this Amended Agreement, which failure to comply extends thirty (30) days or more after written notice of the non-compliance to the other party and that party (i) fails to cure such non-compliance within that time 6 or (ii) fails to commence efforts in good faith to cure a failure to comply which cannot reasonably be cured within such time and to pursue such cure with diligence to completion. Either party may terminate this Amended Agreement, immediately and without penalty, if the other party applies for or consents to the appointment of a receiver, trustee or liquidator of itself or its property, admits in writing its inability to pay its debts as they mature, makes a general assignment for the benefit of creditors, is adjudicated a bankrupt or insolvent or files a voluntary petition in bankruptcy or a petition or an answer seeking reorganization or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or if any order, judgement or decree is entered by any court of competent jurisdiction approving a bankruptcy petition or appointing a receiver, sequestrator, trustee or liquidator of the other party. BSC's obligations under this Amended Agreement as to Contracts purchased prior to the effective termination date, and Auto Lenders' obligations as to the Vehicles received for sale and lease and as to the Guaranty provided for all Vehicles made prior to the effective termination date, shall survive the termination of this Agreement. Notwithstanding anything herein to the contrary, this Amended Agreement may be terminated immediately, without penalty, upon the direction or instruction of any federal or state regulatory authority having jurisdiction over BSC, Hann or Susquehanna Bancshares, Inc. 12. Change of Control. ----------------- A. BSC is a subsidiary of Susquehanna Bancshares, Inc. ("SBI"), a multi-state, financial holding company located in Lititz, Pennsylvania. Should a "change of control" occur at SBI, then Auto Lenders may, in its sole discretion and at any time up to 12 months after the date of such change in control, provide a notice of termination of this Amended Agreement effective as of the then next scheduled termination date and require BSC to pay immediately and in one sum all remaining Guaranty Fees, as stated in Paragraph 9.B.(iv), for the period extending from the date of the notice of termination to the then next scheduled termination date of this Amended Agreement. (That is, should a change of control occur on March 1, 2002 and Auto Lenders send a notice of termination on May 1, 2002, this Amended Agreement will terminate as of December 31, 2004 and BSC must pay to Auto Lenders, promptly after receiving the notice of termination, the Guaranty Fees for the period from May 1, 2002 to December 31, 2004.) Thereupon, this Amended Agreement shall be deemed to be terminated as of such scheduled termination date. Notwithstanding such termination, upon payment to Auto Lenders of such fees Auto Lenders will remain obligated to perform the Service and to provide the Guaranty as provided in this Amended Agreement. For purposes of this Paragraph 12.A., a "change in control" with respect to SBI shall mean the acquisition by any other person (other than Auto Lenders or a principal or significant shareholder of Auto Lenders and other than a purchaser from Auto Lenders or a principal or significant shareholder thereof in any transaction not involving common shareholders generally) of twenty-five percent (25%) or more of the shares of SBI, whether directly or indirectly or acting through one or more other persons, including the power to cast twenty-five percent (25%) or more of the votes for the election of directors which may be cast in the aggregate by the holders of all of the voting securities of SBI, or any person, 7 whether directly or indirectly or acting through one or more other persons, obtains control in any manner over the election of a majority of the directors of SBI. B. Should a "change of control" occur at Auto Lenders, then BSC may, in its sole discretion and at any time up to 12 months after the date of such change of control, provide notice of termination of this Amended Agreement effective as of the date of such notice. For purposes of this Paragraph 12.B., a "change in control" with respect to Auto Lenders shall mean the acquisition by any other person (other than SBI or BSC) of twenty-five percent (25%) or more of the shares of Auto Lenders, whether directly or indirectly or acting through one or more other persons, including the power to cast twenty-five percent (25%) or more of the votes for the election of directors which may be cast in the aggregate by the holders of all of the voting securities of Auto Lenders, or any person, whether directly or indirectly or acting through one or more other persons, obtains control in any manner over the election of a majority of the directors of Auto Lenders. 13. Assignment of Agreement. Neither Auto Lenders nor BSC may assign ----------------------- or delegate its rights or obligations under this Amended Agreement without the written consent of the other party. This Amended Agreement, however, shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. 14. Notices. All notices hereunder to a party shall be in writing and ------- shall be deemed to have been duly received when delivered by hand or sent by confirmed facsimile, or two (2) days after being mailed by certified mail, return receipt requested, to such party at its address set forth above or such other address as such party may specify by notice to the other party hereto. If sent to Auto Lenders, such notice shall be forwarded to: AUTO LENDERS LIQUIDATION CENTER, INC. 1051 North Black Horse Pike Williamstown, NJ 08094 Attn: Chief Executive Officer with a copy to: CAPEHART & SCATCHARD, P.A. A Professional Corporation Laurel Corporate Center, Suite 300 8000 Midlantic Drive- C.S. 5016 Mt. Laurel, NJ 08054 Attn: Charles A. Rizzi, Jr., Esquire If sent to BSC, such notice shall be forwarded to: 8 BOSTON SERVICE COMPANY INC. t/a HANN FINANCIAL SERVICE CORP. One Centre Drive Jamesburg, NJ 08831 Attn: President with a copy to: Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, PA 17543 Attn: Chief Executive Officer 15. Entire Agreement; Amendments. This Amended Agreement represents ---------------------------- the entire understanding between the parties any may not be modified unless such modifications is in writing and signed by each party to this Amended Agreement. 16. Governing Law. The terms of this Amended Agreement shall be ------------- construed and governed in accordance with the laws of the State of New Jersey. Each party agrees that any suit, action or other proceeding arising out of or in connection with this Amended Agreement or the transactions contemplated hereby shall be brought in the Superior Court of New Jersey, Gloucester County or the United States District Court for the District of New Jersey. 17. Severability. If any provision of this Amended Agreement is held ------------ invalid or unenforceable in any jurisdiction, the remainder of this Amended Agreement shall not be affected thereby. 18. Enforcement of Agreement. BSC and Auto Lenders agree that ------------------------ irreparable damage would occur in the event that any provision of this Amended Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Amended Agreement and to enforce specifically the terms and provisions of this Amended Agreement, this being in addition to any other remedy to which they are otherwise entitled at law or in equity. 19. Counterparts. This Amended Agreement may be executed in\ ------------ counterparts each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same Amended Agreement. 20. Superseding Agreement. This Amended Agreement amends and --------------------- supersedes the provisions of the Servicing Agreement, the Amended Servicing Agreement, and all other prior agreements relating to the subject matter hereof. However, the parties rights and obligations under those agreements shall continue in full force and effect under the terms of this Amended Agreement except and to the extent they have been amended by this Amended Agreement. 9 IN WITNESS WHEREOF, BSC and Auto Lenders have caused this Amended Agreement to be executed by their duly authorized corporate officers and their corporate seals to be affixed hereto the day and year written beneath their signatures below; each intending that this Amended Agreement shall become effective on the date first written above. AUTO LENDERS LIQUIDATION CENTER, INC. Attest: /s/ Terry L Wimmer By:/s/ Michael Wimmer ------------------- ----------------------------------- [Assistant] Secretary Title: (Corp. Seal) Dated: 12/31/01 ---------------------------- BOSTON SERVICE COMPANY, INC. t/a HANN FINANCIAL SERVICE CORP. Attest: /s/ Jeri Dooley By: /s/ Charles Dovico ------------------- ------------------------------- [Assistant] Secretary Title: President (Corp. Seal) Dated: 12/31/01 ---------------------------- 10 EX-10.VII 7 dex10vii.txt GUARANTY AGREEMENT BY MICHAEL J. WIMMER Exhibit 10(vii) --------------- Guaranty Agreement dated December 31, 2001 by Michael J. Wimmer in favour of Boston Service Company, Inc. GUARANTY THIS GUARANTY, dated as of December 31, 2001, is made by Michael J. Wimmer, an adult individual residing at 34 Southwood Drive, Cherry Hill, New Jersey (hereinafter referred to as the "Guarantor") in favor of Boston Service Company, Inc., trading as Hann Financial Service Corp., a New Jersey corporation (hereinafter referred to as "BSC"), with respect to certain obligations, present and future, of Auto Lenders Liquidation Center, Inc., a New Jersey corporation (hereinafter referred to as "Auto Lenders"), to BSC. BACKGROUND A. BSC and Auto Lenders are parties to a certain 2002 Amended Servicing Agreement, of even date herewith (the "New Servicing Agreement"), between them, pursuant to which Auto Lenders has, inter alia, undertaken, for the fees and other considerations therein expressed, to perform certain services and to guarantee the residual values on certain leases of motor vehicles and other property, all as more fully set forth therein. Terms defined in the New Servicing Agreement and not otherwise defined herein are used herein with the meanings ascribed to them in the New Servicing Agreement. B. The Guarantor is the owner of a majority of the outstanding shares of the capital stock of Auto Lenders and, as an inducement to BSC to enter into the New Servicing Agreement, is willing to provide hereby his guarantee of all of the obligations of Auto Lenders under the New Servicing Agreement and under the prior agreements relating to the same subject matter which are referred to in paragraph 20 of the New Servicing Agreement (collectively, the "Superseded Agreements"). COVENANTS NOW, THEREFORE, in consideration of the foregoing and the undertakings of Auto Lenders and BSC contained in the New Servicing Agreement, and intending to be legally bound hereby, the Guarantor hereby undertakes and agrees as follows: 1. Guaranty. So long as BSC is not in material default of the New Servicing -------- Agreement and the Superseded Agreements, Guarantor guarantees, as a guarantor and not as a surety, the payment of all indebtedness and the performance of all obligations of Auto Lenders to BSC under the New Servicing Agreement and each of the Superseded Agreements (collectively, the "Agreements"), including without limitation all guarantees of residual values and service undertakings of Auto Lenders under the Agreements or any of them (all of the above-described indebtedness, obligations and liabilities collectively, the "Obligations"), but only if and to the extent that Auto Lenders is in material default under the New Servicing Agreements or any of the Superseded Agreements. Upon the occurrence of any material default under any of the Agreements, the non-defaulting party shall give written notice to the other party of such default, and the defaulting party shall have thirty (30) days from receipt of such notice to cure such default as determined by the non-defaulting party in its reasonable discretion. For purposes of this Guaranty, a material default shall mean any failure to pay, when due, any amount(s) due under any of the Agreements. Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent by him, and that he will remain bound upon his guaranty notwithstanding any such extension or renewal. 2. Subordination. Upon payment by Guarantor of any of the Obligations, all ------------- rights of Guarantor against Auto Lenders arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full and performance of all of the Obligations. This Guaranty is a continuing one and shall remain in full and effect until all of the Obligations have been indefeasibly paid and discharged and all of the Agreements are terminated. 3. Confidentiality. Neither the Guarantor nor, so long as the Guarantor is not --------------- in default hereunder, BSC, will disclose any information about the existence or substance of this Guaranty to any third persons (other than their attorneys and like persons with whom they have a confidential relationship) unless 1 required to do so by applicable law, regulation or legal process, including securities law disclosure requirements, or at the request or direction of any state or federal regulatory agency. 4. Corporate Existence of Auto Lenders. The Guarantor hereby engages that Auto ----------------------------------- Lenders will remain in existence until all of the Obligations have been indefeasibly paid and performed in full and this Guaranty shall have been fully satisfied. 5. Financial Statements of Guarantor. Until all of the Obligations have been --------------------------------- indefeasibly paid and performed in full and this Guaranty shall have been fully satisfied, the Guarantor will furnish to BSC, on an annual basis, personal financial statements consisting of a balance sheet of the Guarantor and a statement of his income as of the last day of each calendar year and for the calendar year then ended. The Guarantor shall furnish such financial statements not later than April 15 of the succeeding calendar year, commencing April 15, 2002. 6. Governing Law. This Guarantee shall be construed in accordance with the laws ------------- of the state of New Jersey (without giving effect to the conflict of laws provisions thereof). If any provisions hereof shall be determined to be invalid or unenforceable in any respect, such determination shall not affect such provision in any other respect or any other provision of this Guaranty, each of which shall remain in full force and effect. 7. Delay and Waiver. No failure or delay by BSC in exercising any of its rights ---------------- hereunder in any instance shall constitute a waiver thereof in that or any other instance. BSC will not in any instance be deemed to have waived any of its rights except by an instrument in writing signed by it. 8. Notices. All notices to a party shall be in writing and shall be deemed to ------- have been duly received when delivered by hand or sent by confirmed facsimile, or two (2) days after being mailed by certified mail, return receipt requested, to such party at its address set forth below or such other address as such party may specify by notice to the other party hereto. If to Guarantor: Michael J. Wimmer 34 Southwood Drive Cherry Hill, NJ 18003 Facsimile: (856) 262-3121 If to Auto Lenders: Auto Lenders Liquidation Center, Inc. 1051 North Black Horse Pike Williamstown, NJ 08094 Attention: Chief Executive Officer Facsimile: (856) 262-3121 If to BSC: Boston Service Company, Inc. t/a Hann Financial Service Corp. One Centre Drive Jamesburg, NJ 08831 Attention: President Facsimile: (608) 860-9526 2 IN WITNESS WHEREOF, the Guarantor has signed and delivered this Guaranty as of the date first above written. Witness: /s/ Charles Dovico /s/ Michael J. Wimmer - ------------------------------------ --------------------------------------- Michael J. Wimmer 3 EX-10.VIII 8 dex10viii.txt AMEND. TO EMPLOYMENT AGREEMENT, WILLIAM J. REUTER Exhibit 10(viii) ---------------- Amendment to Employment Agreement between Susquehanna and William J. Reuter, dated February 28, 2002 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement effective as of February 28, 2001, by and between SUSQUEHANNA BANCSHARES, INC., a Pennsylvania corporation organized as a financial holding company under the Bank Holding Company Act of 1956, as amended (the "Company"), and WILLIAM J. REUTER, an adult individual whose principal residence is at 6 Apple Hill Drive, Lititz, Pennsylvania 17543 (the "Employee"), is hereby amended as follows: 1. Paragraph 10.4 is amended by adding the following sentence to the end thereof: "The qualifying event under COBRA shall be the date on which the Employee terminates employment or suffers a reduction of hours that would otherwise cause him to lose coverage under the applicable group health plan but for the extension of benefits hereunder." 2. Paragraph 10.5 is amended by adding the following sentence to the end thereof: "In the event of and in consideration for all amounts and benefits payable hereunder by reason of a Change in Control, the Employee acknowledges that the provisions of paragraph 14 hereof shall extend to any offices or facilities of any business that becomes an affiliate of or successor to the Company on account of such Change in Control." 3. Paragraph 10.6 is amended by deleting said Section in its entirety and by substituting therefor: 10.6 (i) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each such payment, a "Parachute Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") (whether or not under an existing plan, arrangement or other agreement) and would result in the imposition on the Employee of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Employee is entitled under this Agreement or otherwise, the Employee shall be paid an amount in cash equal to the sum of the excise taxes payable by the Employee by reason of receiving Parachute Payments plus the amount necessary to place the Employee in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under this subparagraph 10.6(i)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this subparagraph 10.6(i) shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax (to the extent such determination has been made prior to such time), even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this subparagraph 10.6(i) shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under this Agreement, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Employee's employment with the Employer shall have been terminated. (ii) All determinations to be made under this subparagraph 10.6 shall be made by the Company's independent public accountant (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and the Employee within 10 days of his termination of employment. (iii) In the event the Internal Revenue Service notifies the Employee of an inquiry with respect to the applicability of Code ss.280G or Code ss.4999 to any payment by the Company, or assessment of tax under Code ss.4999 with respect to any payment by the Company, the Employee shall provide notice to the Company of such inquiry or assessment within 10 days, and shall take no action with respect to such inquiry or assessment until the Company has responded thereto (provided such response is timely with respect to the inquiry or assessment). The Company shall have the right to appoint an attorney or accountant to represent the Employee with respect to such inquiry or assessment, and the Employee shall fully cooperate with such representative as a condition of receiving a Parachute Gross-up with respect to such inquiry or assessment. (iv) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (i) and (ii) above, or of the representative appointed pursuant to subsection (iii) above, shall be borne solely by the Company. As so amended, said Employment Agreement is hereby confirmed, this 18th day of January, 2002. SUSQUEHANNA BANCSHARES, INC. Attest:/s/ Lisa M. Cavage By:/s/ Gregory A. Duncan ------------------------- -------------------------------------- Secretary Name: Gregory A. Duncan Title: Executive Vice President and COO EMPLOYEE Witness: /s/ Edward Balderston, Jr. /s/ William J. Reuter - --------------------------- ----------------------------------------- Name: Edward Balderston, Jr. William J. Reuter EX-10.IX 9 dex10ix.txt AMEND. TO EMPLOYMENT AGREEMENT, GREGORY A. DUNCAN Exhibit 10(ix) -------------- Ammendment to Employment Agreement between Susquehanna and Gregory A. Duncan, dated February 28, 2002 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement effective as of February 28, 2001, by and between SUSQUEHANNA BANCSHARES, INC., a Pennsylvania corporation organized as a financial holding company under the Bank Holding Company Act of 1956, as amended (the "Company"), and GREGORY A. DUNCAN, an adult individual whose principal residence is at 1046 Hunters Path, Lancaster, Pennsylvania 17601 (the "Employee"), is hereby amended as follows: 1. Paragraph 10.4 is amended by adding the following sentence to the end thereof: "The qualifying event under COBRA shall be the date on which the Employee terminates employment or suffers a reduction of hours that would otherwise cause him to lose coverage under the applicable group health plan but for the extension of benefits hereunder." 2. Paragraph 10.5 is amended by adding the following sentence to the end thereof: "In the event of and in consideration for all amounts and benefits payable hereunder by reason of a Change in Control, the Employee acknowledges that the provisions of paragraph 14 hereof shall extend to any offices or facilities of any business that becomes an affiliate of or successor to the Company on account of such Change in Control." 3. Paragraph 10.6 is amended by deleting said Section in its entirety and by substituting therefor: 10.6 (i) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each such payment, a "Parachute Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") (whether or not under an existing plan, arrangement or other agreement) and would result in the imposition on the Employee of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Employee is entitled under this Agreement or otherwise, the Employee shall be paid an amount in cash equal to the sum of the excise taxes payable by the Employee by reason of receiving Parachute Payments plus the amount necessary to place the Employee in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under this subparagraph 10.6(i)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this subparagraph 10.6(i) shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax (to the extent such determination has been made prior to such time), even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this subparagraph 10.6(i) shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under this Agreement, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Employee's employment with the Employer shall have been terminated. (ii) All determinations to be made under this subparagraph 10.6 shall be made by the Company's independent public accountant (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and the Employee within 10 days of his termination of employment. (iii) In the event the Internal Revenue Service notifies the Employee of an inquiry with respect to the applicability of Code ss.280G or Code ss.4999 to any payment by the Company, or assessment of tax under Code ss.4999 with respect to any payment by the Company, the Employee shall provide notice to the Company of such inquiry or assessment within 10 days, and shall take no action with respect to such inquiry or assessment until the Company has responded thereto (provided such response is timely with respect to the inquiry or assessment). The Company shall have the right to appoint an attorney or accountant to represent the Employee with respect to such inquiry or assessment, and the Employee shall fully cooperate with such representative as a condition of receiving a Parachute Gross-up with respect to such inquiry or assessment. (iv) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (i) and (ii) above, or of the representative appointed pursuant to subsection (iii) above, shall be borne solely by the Company. As so amended, said Employment Agreement is hereby confirmed, this 18th day of January, 2002. SUSQUEHANNA BANCSHARES, INC. Attest:/s/ Lisa M. Cavage By:/s/ William J. Reuter ------------------------- ------------------------- Secretary Name: William J. Reuter Title: President and CEO EMPLOYEE Witness: /s/ Edward Balderston, Jr. /s/ Gregory A. Duncan - -------------------------------- ---------------------------- Name: Edward Balderston, Jr. Gregory A. Duncan EX-10.X 10 dex10x.txt AMEND. TO EMPLOYMENT AGREEMENT, DREW K. HOSTETTER Exhibit 10(x) ------------- Amemdment to Employment Agreement between Susquehanna and Drew K.Hostetter, dated February 28,2002 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement effective as of February 28, 2001, by and between SUSQUEHANNA BANCSHARES, INC., a Pennsylvania corporation organized as a financial holding company under the Bank Holding Company Act of 1956, as amended (the "Company"), and DREW K. HOSTETTER, an adult individual whose principal residence is at 812 Westminster Drive, Lancaster, Pennsylvania 17601 (the "Employee"), is hereby amended as follows: 1. Paragraph 10.4 is amended by adding the following sentence to the end thereof: "The qualifying event under COBRA shall be the date on which the Employee terminates employment or suffers a reduction of hours that would otherwise cause him to lose coverage under the applicable group health plan but for the extension of benefits hereunder." 2. Paragraph 10.5 is amended by adding the following sentence to the end thereof: "In the event of and in consideration for all amounts and benefits payable hereunder by reason of a Change in Control, the Employee acknowledges that the provisions of paragraph 14 hereof shall extend to any offices or facilities of any business that becomes an affiliate of or successor to the Company on account of such Change in Control." 3. Paragraph 10.6 is amended by deleting said Section in its entirety and by substituting therefor: 10.6 (i) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each such payment, a "Parachute Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") (whether or not under an existing plan, arrangement or other agreement) and would result in the imposition on the Employee of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Employee is entitled under this Agreement or otherwise, the Employee shall be paid an amount in cash equal to the sum of the excise taxes payable by the Employee by reason of receiving Parachute Payments plus the amount necessary to place the Employee in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under this subparagraph 10.6(i)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this subparagraph 10.6(i) shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax (to the extent such determination has been made prior to such time), even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this subparagraph 10.6(i) shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under this Agreement, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Employee's employment with the Employer shall have been terminated. (ii) All determinations to be made under this subparagraph 10.6 shall be made by the Company's independent public accountant (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and the Employee within 10 days of his termination of employment. (iii) In the event the Internal Revenue Service notifies the Employee of an inquiry with respect to the applicability of Code ss.280G or Code ss.4999 to any payment by the Company, or assessment of tax under Code ss.4999 with respect to any payment by the Company, the Employee shall provide notice to the Company of such inquiry or assessment within 10 days, and shall take no action with respect to such inquiry or assessment until the Company has responded thereto (provided such response is timely with respect to the inquiry or assessment). The Company shall have the right to appoint an attorney or accountant to represent the Employee with respect to such inquiry or assessment, and the Employee shall fully cooperate with such representative as a condition of receiving a Parachute Gross-up with respect to such inquiry or assessment. (iv) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (i) and (ii) above, or of the representative appointed pursuant to subsection (iii) above, shall be borne solely by the Company. As so amended, said Employment Agreement is hereby confirmed, this 18th day of January, 2002. SUSQUEHANNA BANCSHARES, INC. Attest:/s/ Lisa M. Cavage By:/s/ William J. Reuter ----------------------------- -------------------------------- Secretary Name: William J. Reuter Title: President and CEO Witness: EMPLOYEE /s/ Edward Balderston, Jr. /s/ Drew K. Hostetter - --------------------------- ----------------------------------- Name: Edward Balderston, Jr. Drew K. Hostetter EX-10.XI 11 dex10xi.txt AMEND. TO EMPLOYMENT AGREEMENT, CHARLES W. LUPPERT Exhibit 10(xi) -------------- Amendment to Employment Agreement between Susquehanna, Williamsport National Bank and Charles W. Luppert, dated February 28, 2002 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT The Employment Agreement effective as of February 28, 2001, by and between SUSQUEHANNA BANCSHARES, INC., a Pennsylvania corporation organized as a financial holding company under the Bank Holding Company Act of 1956, as amended (the "Company"), WNB BANK, a Pennsylvania state-chartered bank and the successor in interest to Williamsport National Bank (the "Bank"), on the one side, and CHARLES W. LUPPERT, an adult individual whose principal residence is at 1618 Heather Lane, Williamsport, Pennsylvania 17701 (the "Employee"), is hereby amended as follows: 1. Paragraph 10.4 is amended by adding the following sentence to the end thereof: "The qualifying event under COBRA shall be the date on which the Employee terminates employment or suffers a reduction of hours that would otherwise cause him to lose coverage under the applicable group health plan but for the extension of benefits hereunder." 2. Paragraph 10.5 is amended by adding the following sentence to the end thereof: "In the event of and in consideration for all amounts and benefits payable hereunder by reason of a Change in Control, the Employee acknowledges that the provisions of paragraph 14 hereof shall extend to any offices or facilities of any business that becomes an affiliate of or successor to the Company on account of such Change in Control." 3. Paragraph 10.6 is amended by deleting said Section in its entirety and by substituting therefor: 10.6 (i) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (each such payment, a "Parachute Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") (whether or not under an existing plan, arrangement or other agreement) and would result in the imposition on the Employee of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Employee is entitled under this Agreement or otherwise, the Employee shall be paid an amount in cash equal to the sum of the excise taxes payable by the Employee by reason of receiving Parachute Payments plus the amount necessary to place the Employee in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under this subparagraph 10.6(i)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this subparagraph 10.6(i) shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax (to the extent such determination has been made prior to such time), even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this subparagraph 10.6(i) shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under this Agreement, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Employee's employment with the Employer shall have been terminated. (ii) All determinations to be made under this subparagraph 10.6 shall be made by the Company's independent public accountant (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and the Employee within 10 days of his termination of employment. (iii) In the event the Internal Revenue Service notifies the Employee of an inquiry with respect to the applicability of Code ss.280G or Code ss.4999 to any payment by the Company, or assessment of tax under Code ss.4999 with respect to any payment by the Company, the Employee shall provide notice to the Company of such inquiry or assessment within 10 days, and shall take no action with respect to such inquiry or assessment until the Company has responded thereto (provided such response is timely with respect to the inquiry or assessment). The Company shall have the right to appoint an attorney or accountant to represent the Employee with respect to such inquiry or assessment, and the Employee shall fully cooperate with such representative as a condition of receiving a Parachute Gross-up with respect to such inquiry or assessment. (iv) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (i) and (ii) above, or of the representative appointed pursuant to subsection (iii) above, shall be borne solely by the Company. [THIS SPACE INTENTIONALLY LEFT BLANK] As so amended, said Employment Agreement is hereby confirmed, this 28th day of January, 2002. SUSQUEHANNA BANCSHARES, INC. Attest:/s/ Lisa M. Cavage By:/s/ William J. Reuter ---------------------- --------------------------------- Secretary Name: William J. Reuter Title: President and CEO WNB BANK Witness:/s/ Rexford B. Hilton By:/s/ Chris W. Rager --------------------- --------------------------------- Name: Chris W. Rager Title: Vice President and Secretary EMPLOYEE Witness: /s/ Hallie Luppert /s/ Charles W. Luppert - ----------------------------- ------------------------------------ Name: Hallie Luppert Charles W. Luppert EX-10.XIII 12 dex10xiii.txt CONSULTING AGREEMENT, ROBERT S. BOLINGER Exhibit 10(xiii) ---------------- Consulting Agreement between Susquehanna and Robert S. Bolinger, dated June 4, 2002. CONSULTING AGREEMENT -------------------- This Consulting Agreement ("Agreement") is made this 4th day of June, 2001, between SUSQUEHANNA BANCSHARES, INC. (herein referred to as "Corporation") and ROBERT S. BOLINGER, (herein referred to as "Consultant"). Consultant has served faithfully as an employee and officer of the Corporation for many years. As an officer and director of the Corporation, Consultant has contributed materially to the development of policies and practices of the Corporation that have led to the Corporation's success. The officers and board of directors of the Corporation are unanimous in agreeing that Consultant's services will be of great value to the Corporation in its future success. Consultant wishes to withdraw from active executive responsibility in the Corporation, but is willing to devote part of his time to acting as advisor and consultant for the Corporation. The Corporation desires to retain Consultant's services as a part-time advisor and consultant subject to Consultant's agreement not to compete with the Corporation. IT IS THEREFORE AGREED; 1. Terms and Duties. The Corporation hereby retains Consultant to perform ---------------- and Consultant shall perform, during the period hereinafter called the "Consultative Period", beginning on July 1, 2001 and continuing until the earlier of June 30, 2002, or Consultant's death, such advisory and consultative services on a part-time basis as may, from time to time, be 1 requested by the President or the Board of Directors of the Corporation, subject, however, to the following conditions: (a) Such services shall be performed in such place or places as the President or Board of Directors of the Corporation may from time to time designate but shall essentially be performed in the Commonwealths of Pennsylvania and Virginia and the States of Maryland and New Jersey. (b) Consultant shall not be required to devote a major part of his time to such services. (c) Consultant shall not be required to render services during reasonable vacation periods or during periods of illness or other incapacity. (d) Consultant shall be deemed to be an independent contractor and shall have no authority to bind Corporation to any contract. 2. Compensation. ------------ (a) The Corporation shall pay to Consultant (or to his estate in the event of his death) and Consultant (or his estate in the event of his death) shall accept from the Corporation for Consultant's services under this Agreement during the Consultative Period and for Consultant's Agreement Not To Compete during that period Two Hundred Fifty Thousand ($250,000.00) Dollars payable on Consultant's request subsequent to September 15, 2001. (b) The Corporation shall pay Consultant's Bent Creek Country Club dues so long as he is able to perform his advisory and consultative services under this Consultation Agreement. (c) The Corporation will title the car currently being used by the Consultant into Consultant's name on or before June 30, 2001. 2 3. Expenses and Office Space. During the Consultative Period, Consultant ------------------------- shall be allowed, on submission of vouchers, reasonable out-of-pocket expenses for entertainment, travel, meals, hotel accommodations, and the like incurred by Consultant in the interest of the Corporation's business, if requested to incur such expenses on behalf of the Corporation, and Consultant shall be furnished office space and facilities suitable to Consultant's position and adequate to the performance of Consultant's duties. However Consultant may perform services in any other place. 4. Restrictive Covenant. From July 1, 2001, until June 30, 2002, -------------------- ("Non-Compete Period"), Consultant shall not, either directly or indirectly, as owner, principal, shareholder, director, partner, officer, agent, employee, consultant, or otherwise engage in or become financially interested in any business conducted by Corporation, or similar or related business, within the Commonwealth of Pennsylvania and the States of Maryland and New Jersey. 5. Benefit. If the Corporation shall at any time be merged or consolidated ------- into or with any other corporation or if substantially all the assets of the Corporation are transferred to another corporation, or if Corporation's majority control is transferred, the Consultive Period and Non-Compete Period shall terminate and all remaining compensation provided herein shall be accelerated and become due and payable to Consultant immediately. 6. Non-Assignability. In view of the personal nature of the services to be ----------------- performed by Consultant under this agreement, Consultant shall not have the right to assign or transfer any of the rights or benefits of this Agreement except in the event of Consultant's death, nor shall they be subject to voluntary or involuntary alienation. 7. Death or Disability. In the event of the death or disability of ------------------- Consultant during the Consultative Period, the Corporation, unless Consultant is then in violation of the restrictive 3 covenant, shall continue to make the payments described in paragraph 2 (a) to Consultant if disabled or to Consultant's spouse if she survives Consultant, or to Consultant's estate of Consultant's spouse does not survive Consultant. 8. Ordinary Income. Consultant agrees that the payments described in --------------- paragraph 2(a) hereof are ordinary income and shall be reported as such to taxing authorities. 9. Remedies. Consultant acknowledges that the restrictions contained in -------- paragraph 4, in view of the nature of the business in which the Corporation is engaged, are reasonable and necessary to protect the legitimate interests of the Corporation. Consultant acknowledges that the restrictions contained in paragraph 4 will not prevent Consultant from earning a living. Consultant understands and agrees that the remedies at law for violation of any of the covenants or provisions of paragraph 4 will be inadequate, that such violations will cause irreparable injury within a short period of time, and that the Corporation shall be entitled to preliminary injunctive relief and other injunctive relief against any such violation. Such injunctive relief shall be in addition to, and in no way in limitation of, any and all other remedies the Corporation shall have in law and equity for the enforcement of those covenants and provisions. If Consultant breaches or violates the provisions of paragraph 4 herein, the obligation of Corporation for the payments under paragraph 2 herein shall be suspended during such breach or violation and the Non-Compete Period shall be deemed to extend for an additional period equal to the period of such breach or violation. 10. Modification. This Agreement contains the full agreement of the parties ------------ and shall not be modified, altered, changed, or terminated except pursuant to a writing signed by the parties hereto. 4 11. Construction. This Agreement shall be governed by and construed in ------------ accordance with the laws of the Commonwealth of Pennsylvania. 12. Invalidity. If any of the provisions of this Agreement are determined ---------- to be invalid, such invalidity shall not affect or impair the validity of the other provisions that shall be deemed severable to this extent and shall remain in full force and effect. The provisions of this Agreement are intended to be and shall be deemed severable. 13. Waiver. Waiver by any party of any breach of or exercise of any right ------ under this Agreement shall not be deemed a waiver of a breach of similar rights. The failure of any party to take any action by reason of any such breach or to exercise any such right, shall not be deemed a waiver of such breach nor deprive such party of the right to take action at any time while such breach; or condition giving rise to such right, continues. 14. Miscellaneous. ------------- (a) No rights are intended to be created in favor of any third party creditor, donee, or incidental beneficiary. (b) Notices hereunder shall be in writing and shall be deemed given if delivered in person or if sent by certified or registered mail, return receipt requested, as follows: If to Corporation: 26 North Cedar Street, Lititz, Pennsylvania, 17543 If to Consultant: 1314 Stillwater Road, Lancaster, Pennsylvania, 17601 or to such other address as the Corporation or Consultant, as the case may be, shall designate by notice to the other. 5 Dated the day and year first above written. WITNESSES PRESENT SUSQUEHANNA BANCSHARES, INC. /s/ Edward Balderston By: /s/ William J. Reuter - ------------------------------------ -------------------------------- Title: President - ------------------------------------ ---------------------------- CONSULTANT: /s/ Robert S. Bolinger (SEAL) ------------------------------ ROBERT S. BOLINGER 6 EX-10.XIV 13 dex10xiv.txt GUARANTY AGREEMENT BY MICHAEL J. WIMMER Exhibit 10(xiv) --------------- Guaranty Agreement dated March 11, 2002 by Michael J. Wimmer in favour of Boston Service Company, Inc. GUARANTY THIS GUARANTY, dated as of March 11, 2002, ("this Guaranty") is made by Michael -------- J. Wimmer, an adult individual residing at 34 Southwood Drive, Cherry Hill, New Jersey (hereinafter referred to as the "Guarantor") in favor of Boston Service Company, Inc., doing business as Hann Financial Service Corp., a New Jersey corporation (hereinafter referred to as "Hann"), with respect to certain obligations, present and future, of Auto Lenders Liquidation Center, Inc., a New Jersey corporation (hereinafter referred to as "Auto Lenders"), to Hann. BACKGROUND A. Hann and Auto Lenders are parties to a certain Purchase Agreement, dated as of even date herewith (the "Purchase Agreement"), pursuant to which Auto Lenders has, inter alia, undertaken, for the fees and other considerations therein expressed, to pay the Residual Vehicle Purchase Price for each Residual Vehicles, all as more fully set forth therein. Terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement. B. The Guarantor is the owner of a majority of the outstanding shares of the capital stock of Auto Lenders and, as an inducement to Hann to enter into the Purchase Agreement, is willing to provide hereby his guarantee of all of the obligations of Auto Lenders under the Purchase Agreement. C. All capitalized terms used in this Guaranty which are not expressly defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. COVENANTS NOW, THEREFORE, in consideration of the foregoing and the undertakings of Auto Lenders and Hann contained in the Purchase Agreement, and intending to be legally bound hereby, the Guarantor hereby undertakes and agrees as follows: 1. Guaranty. (a) So long as the Guaranty Conditions (as defined below) have -------- been met, Guarantor guarantees, as a guarantor and not as a surety, Auto Lenders' obligation to purchase each Residual Vehicle for the Residual Value Purchase Price, upon delivery of a Residual Allocation Notice by Hann to Auto Lenders, pursuant to the terms of the Purchase Agreement (such obligations, the "Obligations"), without demand, presentment, protest or notice. The Collateral ----------- Agent shall have the right to enforce the Guaranty on behalf of Hann. As used herein, the term "Guaranty Conditions" means (i) Hann is not in material default of the Purchase Agreement, (ii) Auto Lenders is in material default under the Purchase Agreement and (iii) delivery by Hann of the related Residual Vehicle to an Auto Lenders designated place of business at Hann's sole expense. (b) Without limiting the generality of the foregoing Section 1(a) above, the occurrence of one or more of the following shall not preclude the enforcement of the Guaranty by Hann or the Collateral Agent or alter or impair the liability of the Guarantor under this Guaranty: (i) the commencement of any bankruptcy, insolvency or similar proceeding with respect to Auto Lenders, (ii) the waiver or consent by the Collateral Agent with respect to the Obligations, any delay or lack of diligence in enforcement of the Obligations, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect the Obligations, (iii) any assignment, pledge or other transfer of Hann's rights or Auto Lenders' obligations under the Purchase Agreement, (iv) any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all of the Obligations, (v) any consolidation or amalgamation of Auto Lenders with, any merger of Auto Lenders with or into, or any transfer by Auto Lenders of all or substantially all of its assets to another Person, any change in the legal or beneficial ownership of ownership interests issued by Auto Lenders, or any other change whatsoever in the objects, capital structure, constitution or business of Auto Lenders, (vi) any delay, failure or inability of Hann to perform, willful or otherwise, any provision of any of the Transaction Documents or any agreement or instrument referred to therein other than Hann's obligations to Auto Lenders under the Purchase Agreement, (vii) any suit or other action brought by, or any judgment in favor of, any beneficiaries or creditors of, Auto Lenders or any other Person for any reason whatsoever, including any suit or action in any way disaffirming, repudiating, rejecting or otherwise calling into question any issue, matter or thing in respect of any of the Obligations or the Transaction Documents, (viii) any lack or limitation of status or of power, incapacity or disability of Auto Lenders or any other guarantor or obligor in respect of any of the Obligations, (ix) the occurrence of any Event of Default under the Loan Agreement or Servicer Termination Event under the Galleon SUBI Servicing Supplement or the occurrence of any similar event (howsoever described) under any other Transaction Document, or (x) any change in the time, manner or place of payment or performance or compliance of, or in any other term in respect of, or any subordination of, all or any of the Obligations, or any other amendment, extension, renewal or waiver of or consent to any departure from the Transaction Documents or any other document or instrument executed in connection with or related to the Obligations. (c) For purposes of this Guaranty, a material default shall mean any failure to pay, when due, any amount(s) due under the Purchase Agreement. (d) This Guaranty is a continuing guaranty, and the Guarantor agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent by him, and that he will remain bound upon his guaranty notwithstanding any such extension or renewal until the payment in full and performance of all the Obligations. In the event Auto Lenders shall consolidate or amalgamate with, or merge into, or transfer all or substantially all of its assets to, another Person, the Guarantor shall continue to be obligated hereunder in respect of the Obligations, whether or not the Obligations are assumed by such Person, and each reference herein to Auto Lenders shall thereafter instead be a reference to such Person. This Guaranty shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment, or any part hereof, of any of the Obligations is rescinded or must otherwise be returned by the Collateral Agent upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Auto Lenders or otherwise, all as though such payment had not been made. 2. Subordination. Upon payment by Guarantor of any of the Obligations, all ------------- rights of Guarantor against Auto Lenders arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full and performance of all of the Obligations. This Guaranty is a continuing one and shall remain in full and effect until all of the Obligations have been indefeasibly paid and discharged and the Purchase Agreement is terminated. 3. Set-Off. Each amount that the Guarantor is obligated to pay under this ------- Guaranty shall be paid without set-off, deduction or counterclaim. 4. Instrument for Payment of Money. The Guarantor hereby acknowledges that, ------------------------------- with respect to the Obligations that are payment obligations, this Guaranty constitutes an instrument for the payment of money and consents and agrees that the Collateral Agent, at its sole option, in the event of a dispute by the Guarantor in relation to the payment of any moneys due hereunder, shall have the right to bring motion-action under New York CPLR Section 3213. 5. Confidentiality. Neither the Guarantor nor, so long as the Guarantor is --------------- not in default hereunder, Hann, will disclose any information about the existence or substance of this Guaranty to any third persons (other than attorneys and like persons with whom the Guarantor or Hann have a confidential relationship) unless required to do so by the Transaction Documents, applicable law, regulation or legal process, including securities law disclosure requirements, or at the request or direction of any state or federal regulatory agency. 6. Corporate Existence of Auto Lenders. The Guarantor hereby covenants that ----------------------------------- he will cause Auto Lenders to remain in existence until all of the Obligations have been indefeasibly paid and performed in full and this Guaranty shall have been fully satisfied. 7. Financial Statements of Guarantor. Until all of the Obligations have --------------------------------- been indefeasibly paid and performed in full and this Guaranty shall have been fully satisfied, the Guarantor will furnish to Hann, on an annual basis, personal financial statements consisting of a balance sheet of the Guarantor and a statement of his income as of the last day of each calendar year and for the calendar year then ended. The Guarantor shall furnish such financial statements not later than April 15 of the succeeding calendar year, commencing April 15, 2002. 8. CHOICE OF LAW; SUBMISSION TO JURISDICTION. (a) THIS GUARANTY AND ALL ----------------------------------------- MATTERS ARISING OUT OF OR RELATING IN ANY WAY THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAW, OTHER THAN SECTION 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW. (b) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. 9. Delay and Waiver. No failure or delay by Hann in exercising any of its ---------------- rights hereunder in any instance shall constitute a waiver thereof in that or any other instance. Hann will not in any instance be deemed to have waived any of its rights except by an instrument in writing signed by it. 10. Notices. All notices to a party shall be in writing and shall be deemed ------- to have been duly received when delivered by hand or sent by confirmed facsimile, or two (2) days after being mailed by certified mail, return receipt requested, to such party at its address set forth below or such other address as such party may specify by notice to the other party hereto. If to Guarantor: Michael J. Wimmer 34 Southwood Drive Cherry Hill, NJ 08003 Facsimile: (856) 262-3121 If to Auto Lenders: Auto Lenders Liquidation Center, Inc. 1051 North Black Horse Pike Williamstown, NJ 08094 Attention: Chief Executive Officer Facsimile: (856) 262-3121 If to Hann: Boston Service Company, Inc. d/b/a Hann Financial Service Corp. One Centre Drive Jamesburg, NJ 08831 Attention: President Facsimile: (608) 860-9526 11. Severability of Provisions. If any one or more of the covenants, -------------------------- agreements, provisions or terms of this Guaranty shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Guaranty and shall in no way affect the validity or enforceability of the other provisions of this Guaranty. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Guarantor has signed and delivered this Guaranty as of the date first above written. /s/ Michael J. Wimmer ------------------------------------------ Michael J. Wimmer EX-21 14 dex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 ---------- SUBSIDIARIES OF THE REGISTRANT 1. Farmers First Bank, 9 East Main Street, Lititz, Pennsylvania; a bank and trust company organized under the Pennsylvania Banking Code of 1965. 2. Citizens Bank of Southern Pennsylvania, 35 North Carlisle Street, Greencastle, Pennsylvania; a bank and trust company organized under the Pennsylvania Banking Code of 1965. 3. First Susquehanna Bank & Trust, 400 Market Street, Sunbury, Pennsylvania; a bank and trust company organized under the Pennsylvania Banking Code of 1965. 4. WNB Bank, 329 Pine Street, Williamsport, Pennsylvania; a bank and trust company organized under the Pennsylvania Banking Code of 1965. 5. Farmers & Merchants Bank and Trust, 59 West Washington Street, Hagerstown, Maryland; a bank and trust company organized under the Maryland Banking Code. 6. Susque-Bancshares Life Insurance Company, Phoenix, Arizona; an insurance company organized under the laws of the State of Arizona. 7. Susque-Bancshares Leasing Company, Inc., 9 East Main Street, Lititz, Pennsylvania; a company organized under the laws of the Commonwealth of Pennsylvania. 8. Susquehanna Bancshares South, Inc., 100 West Road, Baltimore, Maryland; a financial holding company organized under the laws of the State of Delaware. 9. Susquehanna Bank, 100 West Road, Towson, Maryland; a bank and trust company organized under the Maryland Banking Code and a wholly-owned subsidiary of Susquehanna Bancshares South, Inc. 10. Susquehanna Bancshares East, Inc., 114 North Main Street, Mullica Hill, New Jersey; a financial holding company organized under the laws of the State of Delaware. 11. Equity Bank, 8000 Sagemore Drive, Suite 8101, Marlton, New Jersey; a bank and trust company organized under the New Jersey Banking Code and a wholly-owned subsidiary of Susquehanna Bancshares East, Inc. 12. Founders' Bank, 101 Bryn Mawr Avenue, Bryn Mawr, Pennsylvania; a bank and trust company organized under the Pennsylvania Banking Code of 1965 and a wholly-owned subsidiary of Susquehanna Bancshares East, Inc. 13. First American Bank of Pennsylvania, 140 East Main Street, Everett, Pennsylvania, a bank and trust company organized under the Pennsylvania Banking Code of 1965. 14. Boston Service Company, Inc. (t/a Hann Financial Service Corp.), One Centre Drive, Jamesburg, New Jersey, a consumer automobile finance company. 15. Valley Forge Asset Management Corp., 120 South Warner Road, King of Prussia, Pennsylvania, an asset management company. 16. Conestoga Management Company, 103 Foulk Road, Suite 205-18, Wilmington, Delaware, a non-operating, passive investment company. EX-23 15 dex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit23 --------- PriceWaterhouseCoopers LLP One South Market Square Harrisburg, PA 17101-9916 Telephone (717) 231-5900 Facsimile (717) 232-5672 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-92512, No. 333-85655 and No. 333-61794)) and Form S-3 (No. 333-38032) of Susquehanna Bancshares, Inc. of our report dated January 22, 2002, relating to the consolidated financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP March 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----