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SUSQ > SEC Filings for SUSQ > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for SUSQUEHANNA BANCSHARES INC

Form 10-Q for SUSQUEHANNA BANCSHARES INC


5-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of the significant changes in the consolidated results of operations, financial condition, and cash flows of Susquehanna Bancshares, Inc. and its subsidiaries is set forth below for the periods indicated. Unless the context requires otherwise, the terms "Susquehanna", "we", "us", and "our" refer to Susquehanna Bancshares, Inc. and its subsidiaries.

Certain statements in this report 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, general economic conditions; the impact of new regulations on our business; our potential exposures to various types of market risks, such as interest rate risk and credit risk; expectations regarding future acquisitions; whether our allowance for loan and lease losses is adequate to meet probable loan and lease losses; the expected values of assets and liabilities acquired in connection with the Tower merger; the improvement in the credit quality of our loan portfolio; our ability to maintain market share and monitor and manage our portfolios; our ability to evaluate loan guarantors; our ability to offset loan prepayment penalties through decreased interest expense on FHLB borrowings; our ability to achieve loan growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; and our ability to achieve our 2013 financial goals. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market-risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to:

adverse changes in our loan and lease portfolios and the resulting credit-risk-related losses and expenses;

adverse changes in regional real estate values;

interest rate fluctuations which could increase our cost of funds or decrease our yield on earning assets and therefore reduce our net interest income;

decreases in our loan and lease quality and origination volume;

the adequacy of loss reserves;

impairment of goodwill or other assets;

the loss of certain key officers, which could adversely impact our business;

continued relationships with major customers;

the ability to continue to grow our business internally and through acquisition and successful integration of bank and non-bank entities while controlling our costs;

adverse international, national and regional economic and business conditions;

compliance with laws and regulatory requirements of federal and state agencies;

competition from other financial institutions in originating loans, attracting deposits, and providing various financial services that may affect our profitability;

the ability to hedge certain risks effectively and economically;

our ability to effectively implement technology driven products and services;

changes in consumer confidence, spending and savings habits relative to the bank and non-bank financial services we provide;


changes in legal or regulatory requirements or the results of regulatory examinations that could adversely impact our business and financial condition and restrict growth;

the impact of federal laws and related rules and regulations on our business operations and competitiveness;

the effects of and changes in trade, monetary and fiscal policies, and laws, including interest rate policies of the Federal Reserve Board;

the effects of and changes in the rate of Federal Deposit Insurance Corporation ("FDIC") premiums; and

our success in managing the risks involved in the foregoing.

We encourage 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. We do not intend to update publicly any 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 except as required by law.

The following discussion and analysis, the purpose of which is to provide investors and others with information that we believe to be necessary for an understanding of our 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.

The following information refers to Susquehanna Bancshares, Inc. and its wholly owned subsidiaries: Boston Service Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), Susquehanna Bank and subsidiaries, Valley Forge Asset Management Corp. ("VFAM"), Stratton Management Company and subsidiary ("Stratton"), and The Addis Group, LLC ("Addis").

Availability of Information

Our web-site address is www.susquehanna.net. We make available free of charge, through the Investor Relations section of our web site, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We include our web-site address in this report as an inactive textual reference only. Information contained on our website is not incorporated into and does not constitute part of this report.

Executive Overview

Critical Accounting Policies

Susquehanna's significant accounting policies are defined in Note 1 to the Consolidated Financial Statements included in its 2012 Form 10-K, and in Note 1 to the Consolidated Financial Statements included in this report. The preparation of the Consolidated Financial Statements is in accordance with accounting principles generally accepted in the United States ("GAAP"). Management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for: (i) the allowance for loan and lease losses; (ii) fair value measurements for valuation of financial instruments; (iii) valuation of goodwill; and, (iv) income taxes, as Susquehanna's most critical accounting policies and estimates in that they are important to the portrayal of Susquehanna's financial condition and results. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout the Consolidated Financial Statements, accompanying footnotes, and Management's Discussion and Analysis of Financial Condition and Results of Operations.

Recent Legislation

In July 2013, the Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation approved final rules to implement the Basel III capital framework. The rules will be effective on January 1, 2014 and phased-in over a multiple year period becoming fully effective on January 1, 2019. The new capital rules call for higher quality capital with higher minimum capital level requirements. Consistent with the international Basel framework, the rules include a new minimum ratio of common equity tier I capital to risk-weighted assets of 4.5 percent, and a common equity tier I capital conservation buffer of 2.5 percent of risk-weighted assets. The rules also raise the minimum ratio of tier I capital to risk-weighted assets from 4.0 percent to 6.0 percent and includes a minimum leverage ratio of 4.0 percent. Management has evaluated these new rules and anticipates Susquehanna would have had sufficient capital to meet the increased requirements at September 30, 2013.


Recent Developments

On October 4, 2013, Susquehanna completed its previously announced branch consolidation plan. This involved the consolidation of 13 branch locations into other Susquehanna branches, with one additional branch to be closed on December 31, 2013. The total amount incurred in connection with the consolidation process approximated $7.2 million, net of liabilities currently recognized, and will be recognized in the fourth quarter of 2013. Approximately $2.7 million of the total charge will be incurred in connection with a shortened useful life of premises and equipment and approximately $4.5 million of the total charge will be incurred for contract termination costs. The gross cash payments that Susquehanna expects to make will be $7.0 to $9.0 million.

Summary of Performance

Susquehanna's net income available to common shareholders was $44.3 million, or $0.24 per diluted share, for the three months ended September 30, 2013, an increase of $7.6 million when compared to $36.7 million, or $0.20 per diluted share, for the three months ended September 30, 2012. The $7.6 million increase in net income for the three months ended September 30, 2013 is due to a $11.0 million decrease in provision for loan and lease losses, and a $5.2 million decrease in non-interest expense, partially offset by a decrease of $2.3 million in non-interest income, and a $3.1 million increase in income tax expense. Susquehanna's net income available to common shareholders was $132.3 million, or $0.70 per diluted share, for the nine months ended September 30, 2013, an increase of $34.3 million when compared to $98.0 million, or $0.54 per diluted share, for the nine months ended September 30, 2012. The $34.3 million increase in net income for the nine months ended September 30, 2013 is due to a $7.3 million increase in net interest income, a $22.0 million decrease in provision for loan and lease losses, a $10.1 million increase in non-interest income, and a decrease of $9.6 million in non-interest expense, partially offset by an increase of $14.6 millionin income tax expense.

Our 2013 financial goals are as follows:

                                Table 1
                   Key Susquehanna Financial Targets

                                 Updated as of      Original as of
                               September 30, 2013   January 1, 2013
    Net interest margin (FTE)        3.80%               3.90%
    Loan growth                       4.0%               5.0%
    Deposit growth                    2.0%               6.0%
    Noninterest income growth         5.0%               8.0%
    Noninterest expense growth       -2.5%               -2.0%
    Effective tax rate               31.0%               32.0%

Acquisitions

On February 17, 2012, we completed the acquisition of Tower Bancorp, Inc. ("Tower"), a Pennsylvania chartered bank holding company based in Harrisburg, Pennsylvania with approximately $2.5 billion of assets, through a merger of Tower with and into Susquehanna. In connection with the Tower merger, Tower's wholly-owned banking subsidiary, Graystone Tower Bank, was merged into Susquehanna's wholly-owned banking subsidiary Susquehanna Bank, with Susquehanna Bank being the surviving institution. The acquisition of Tower enhances Susquehanna's footprint in Pennsylvania and Maryland. The acquisition was accounted for under the acquisition method.


                                          Results of Operations

                                                 Table 2
 Summary of Third Quarter 2013 Compared to Third Quarter 2012, and Nine Months Ended September 30, 2013
                            Compared to Nine Months Ended September 30, 2012

                               Three Months Ended                            Nine Months Ended
                                 September 30,                                 September 30,
                     2013           2012           % Change          2013           2012        % Change
Net income        $   44,291     $   36,732           20.6  %     $  132,338     $   97,998       35.0  %
Net interest
income               145,949        149,142           (2.1)          443,252        435,934        1.7
Provision for
loan and lease
losses                 5,000         16,000          (68.8)           29,000         51,000      (43.1)
Non-interest
income                41,343         43,661           (5.3)          133,063        122,987        8.2
Non-interest
expense              117,701        122,910           (4.2)          355,168        364,740       (2.6)
Non-interest
expense excluding
   merger-related
   expenses and
   loss
   on
   extinguishment
   of debt           117,701        115,959            1.5           355,168        342,992        3.5

                                                Table 3
                                  Key Susquehanna Financial Measures

                                             Three Months Ended              Nine Months Ended
                                               September 30,                   September 30,
                                           2013             2012           2013           2012
    Diluted Earnings per Common Share  $    0.24         $   0.20       $   0.70       $   0.54
    Return on Average Assets                0.96  %          0.81  %        0.98  %        0.75  %
    Return on Average Shareholders'
    Equity                                  6.65  %          5.70  %        6.71  %        5.27  %
    Return on Average Tangible
    Shareholders' Equity (1)               13.67  %         12.41  %       13.95  %       11.33  %
    Efficiency Ratio (1)(2)                61.62  %         58.98  %       60.43  %       60.15  %
    Net Interest Margin                     3.72  %          3.92  %        3.85  %        3.99  %

(1) Supplemental Reporting of Non-GAAP-based Financial Measurements.
(2) Adjusted for merger-related expenses.

Return on average tangible equity is a non-GAAP-based financial measure calculated using non-GAAP amounts. The most directly related comparable measure is return on average shareholders' equity, which is calculated using GAAP-based amounts. We calculate return on average tangible shareholders' equity by excluding the balance of intangible assets and their related amortization expense from our calculation of return on average shareholders' equity. Management uses the return on average tangible shareholders' equity in order to evaluate its business performance relative to the tangible capital supporting the ongoing business. Management believes that this is a better measure of our performance. In addition, this is consistent with the treatment by bank regulatory agencies, which excludes goodwill and other intangible assets from the calculation of risk-based capital ratios. A reconciliation of return on average shareholders' equity to return on average tangible shareholders' equity is set forth as part of Table 4 below.


                                                   Table 4
                                     Reconciliation of Non-GAAP Measures

                                               Three Months Ended                    Nine Months Ended
                                                 September 30,                         September 30,
                                            2013               2012               2013               2012
Tangible Book Value per Common Share
End of period balance sheet data
         Shareholders' equity           $  2,679,348       $  2,584,682       $  2,679,348       $  2,584,682
         Goodwill and other intangible
         assets                           (1,309,105)        (1,313,310)        (1,309,105)        (1,313,310)
               Tangible common equity
               (numerator)              $  1,370,243       $  1,271,372       $  1,370,243       $  1,271,372

Common shares outstanding (denominator)      187,225            186,465            187,225            186,465
         Tangible book value per common
         share                          $       7.32       $       6.82       $       7.32       $       6.82

Return on Average Tangible
Shareholders' Equity
Return on average shareholders' equity
(GAAP basis)                                    6.65  %            5.70  %            6.71  %            5.27  %
Effect of excluding average intangible
assets and related
         amortization                           7.02  %            6.71  %            7.24  %            6.06  %
         Return on average tangible
         shareholders' equity                  13.67  %           12.41  %           13.95  %           11.33  %

Efficiency Ratio
Other expense                           $    117,701       $    122,910       $    355,168       $    364,740
Less:    Merger related expenses                   0             (1,500)                 0            (16,297)
         Loss on extinguishment of debt            0             (5,451)                 0             (5,451)
Noninterest operating expense
(numerator)                             $    117,701       $    115,959       $    355,168       $    342,992

Taxable-equivalent net interest income  $    149,683       $    152,948       $    454,678       $    447,200
Other income                                  41,343             43,661            133,063            122,987
         Denominator                    $    191,026       $    196,609       $    587,741       $    570,187
         Efficiency ratio                      61.62  %           58.98  %           60.43  %           60.15  %


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