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SUSQ > SEC Filings for SUSQ > Form 10-Q on 7-Aug-2014All Recent SEC Filings




Quarterly Report

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

Unless the context otherwise requires, the terms "Susquehanna," "we," "us," and "our" refer to Susquehanna Bancshares, Inc. and its subsidiaries.

Forward-Looking Statements.

We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Quarterly Report on Form 10-Q, contain "forward-looking statements," for which we claim the protection of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These include statements pertaining to our future business plans; regulatory capital and capital management, and capital resources generally; management; general economic conditions; the impact of new regulations on our business; accounting policies and estimates; 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 appropriate to meet probable loan and lease losses; our ability to evaluate loan collateral and guarantors; our ability to achieve loan and deposit growth; our ability to maintain sufficient liquidity; our ability to manage credit quality; and our ability to achieve our 2014 operating and financial goals. Forward-looking statements are often accompanied by, and identified with, terms such as "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective" and similar expressions or variations on such expressions. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors 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 estimates. 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:

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

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

decreases in our loan and lease origination volume;

our ability to make accurate assumptions and judgments about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers, guarantors, and lessees, and the value of the assets securing the loans;

adverse changes in regional real estate values;

adverse international, national, and regional economic and business conditions;

changes in consumer confidence, spending and savings habits impacting our bank and non-bank financial products and services;

impairment of our goodwill or other assets;

our ability to recruit and retain executive officers and other key employees;

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

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

capital and liquidity strategies, including the expected impact of capital and liquidity requirements under the Basel III capital and liquidity framework;

our ability to effectively fund our growth in earning assets with a managed blend of funding sources that provide an appropriate level of liquidity;

our ability to hedge certain market risks effectively and economically;

our ability to effectively implement technology-driven products and services;

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

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

cyber-security risks impacting us or our vendors, including "denial of service," "hacking" and "identity theft," that could adversely affect our business and financial performance, or our reputation;

operational risks, such as the risk of loss resulting from human error, inadequate or failed internal processes and systems, outsourcing arrangements, compliance and legal risk, and external events;

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 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. A more detailed description of the factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this filing is included in Item 1A of Annual Report on Form 10-K for the year ended December 31, 2013, available at

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 report.

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 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.

Critical Accounting Policies

Susquehanna's significant accounting policies are defined in Note 1 to the Consolidated Financial Statements included in its 2013 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) measurement and assessment of goodwill and intangible assets; 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 FDIC approved final rules to implement the Basel III capital framework. The rules were effective on January 1, 2014 and will be 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 1 ("CET1") capital to risk-weighted assets of 4.5 percent. The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0 percent to 6.0 percent, establish a minimum leverage ratio of 4.0 percent, and a minimum total capital (Tier 1 plus Tier 2) to risk-weighted assets ratio of 8.0 percent. The rules also revise the definition of capital by expanding the conditions for the inclusion of equity capital instruments and minority interests in Tier 1 capital. In addition, the rules implement a new "capital conservation buffer" of 2.5 percent (when fully phased-in), composed entirely of CET1, on top of the minimum risk-weighted ratios, and will impose limitations on capital distributions and certain discretionary bonus payments if any of the minimum risk-weighted capital ratios plus the new capital conservation buffer are not met. Management has evaluated these new rules and believes that Susquehanna, and Susquehanna Bank would have had sufficient capital at June 30, 2014 to meet the fully phased in increased requirements had they been in effect on that date.

Recent Developments

During the fourth quarter of 2013, Susquehanna completed a branch consolidation plan in which 14 branch locations were consolidated with other Susquehanna branches. The total expense incurred, and recognized in the fourth quarter, in connection with the consolidation process was $6.6 million, with $2.7 million as a result of a shorter useful life of premises and equipment, and $3.9 million incurred for contract termination and other related costs.

On December 23, 2013, Susquehanna sold a portfolio of 30 of its owned branch bank properties, and simultaneously entered into lease agreements of either 15 years or 26 years, for each property sold with the buyer of the properties. The sale of the properties resulted in an aggregate pretax gain of approximately $38.2 million, net of transaction expenses of $2.8 million. Of the total gain, approximately $33.3 million was recorded as deferred revenue and will be recognized over the terms of the leases. The remaining pretax gain of $4.9 million was recognized in Susquehanna's consolidated financial statements for the period ended December 31, 2013. The monthly base rents in the lease agreements will be recognized as expense evenly over the lease terms at an annual average rate of $1.8 million for the 15 year leases and $2.5 million for the 26 year leases. Susquehanna anticipates that these monthly base rents, as noted, will be substantially offset by the deferred gain on the sale of the properties and the elimination of depreciation on the properties. Additionally, the transaction allowed Susquehanna to realize $4.0 million of deferred tax assets, which were previously subject to a valuation allowance. The proceeds from the transaction will be used for general corporate purposes, which may include supporting lending, investing activities, or repayment of short-term borrowings.

At June 30, 2014, Susquehanna reclassified approximately $265 million of indirect auto loans from held for investment to held for sale. For additional information, refer to "Note 3. Loans and Leases" to the financial statements appearing in Part I, Item 1, of this report.

On July 16, 2014, Susquehanna's Board of Directors authorized the repurchase of up to 3.5% of its outstanding shares of common stock through December 31, 2014. As of June 30, 2014 approximately 187.7 million shares of Susquehanna common stock were outstanding. The timing and amount of any share repurchases under Susquehanna's share repurchase authorization will be determined by management based on market conditions and other considerations, and such repurchases may be effected in the open market, through negotiated transactions, or through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. The repurchase program may be discontinued at any time. Susquehanna does not expect any share repurchases to have a material effect on its liquidity or capital resources.

Executive Overview

Consolidated net income available to common shareholders for the second quarter of 2014 was $43.5 million, down 4.7% compared to $45.6 million earned during the same period in 2013. On a diluted per common share basis, earnings for the second quarter of 2014 were $0.23, down 4.2% compared to $0.24 for the same period in 2013. Susquehanna's results of operations for the second quarter of 2014 produced an annualized return on average assets of 0.95% and an annualized return on average tangible

shareholders' equity, a non-GAAP ratio, of 12.34% compared to the prior year ratios of 1.01% and 14.30%, respectively. For additional information on non-GAAP ratios, refer to "Table 3, Reconciliation of Non-GAAP Measures".

The following tables present a summary of our results of operations and key financial measures for the periods ended June 30, 2014 and 2013.

                                                 Table 1
    Summary of Second Quarter 2014 Compared to Second Quarter 2013, and Six Months Ended June 30, 2014
                                Compared to Six Months Ended June 30, 2013

                            Three Months Ended                               Six Months Ended
                                 June 30,                                        June 30,
                  2014             2013           % Change         2014             2013          % Change
                                                   (Dollars in thousands)
Net income      $   43,494       $   45,648       (4.7) %        $   80,656       $   88,047       (8.4) %
Net interest
income             141,694          148,097       (4.3)             281,758          297,303       (5.2)
Provision for
loan and lease
losses               3,000           12,000      (75.0)               9,000           24,000      (62.5)
income              45,349           49,076       (7.6)              87,438           91,720       (4.7)
expense            125,225          119,738        4.6              248,257          237,467        4.5

                                                          Table 2
                                            Key Susquehanna Financial Measures

                                                  Three Months Ended                         Six Months Ended
                                                       June 30,                                  June 30,
                                              2014                  2013                  2014                2013
    Diluted Earnings per Common Share  $         0.23         $         0.24        $         0.43        $    0.47
    Return on Average Assets                     0.95  %                1.01  %               0.88  %          0.98  %
    Return on Average Shareholders'
    Equity                                       6.30  %                6.91  %               5.91  %          6.75  %
    Return on Average Tangible
    Shareholders' Equity (1)                    12.34  %               14.30  %              11.68  %         14.09  %
    Efficiency Ratio (1)                        65.63  %               59.57  %              65.90  %         59.86  %
    Net Interest Margin                          3.63  %                3.88  %               3.62  %          3.92  %

(1) For information regarding Supplemental Reporting of Non-GAAP-based Financial Measurements, refer to "Table 3 - Reconciliation of Non-GAAP Measures".

                                                Table 3
                                  Reconciliation of Non-GAAP Measures
                                (Dollars in thousands, except per share)

                             Three Months Ended                         Six Months Ended
                                  June 30,                                  June 30,
                           2014              2013              2014                        2013
Tangible Book Value
per Common Share
End of period balance
sheet data
   equity              $  2,796,392      $  2,644,940      $  2,796,392              $      2,644,940
   Goodwill and other
   intangible assets     (1,304,018)       (1,311,176)       (1,304,018)                   (1,311,176)
       Tangible common
       (numerator)     $  1,492,374      $  1,333,764      $  1,492,374              $      1,333,764

Common shares
(denominator)               187,706           187,023           187,706                       187,023
   Tangible book value
   per common share    $       7.95      $       7.13      $       7.95              $           7.13

Tangible book value per share is a non-GAAP based financial measure calculated using non-GAAP based amounts. The most
directly comparable GAAP based measure is book value per share. In order to calculate tangible book value per share, we divide tangible common equity, which is a non-GAAP based measure calculated as common shareholders' equity less intangible assets, by the number of shares of common stock outstanding. In contrast, book value per share is calculated by dividing total common shareholders' equity by the number of shares of common stock outstanding. Management uses tangible book value per share to assess our capital position and ratios.

Return on Average
Tangible Shareholders'
Return on average
shareholders' equity
(GAAP basis)                   6.30  %           6.91  %           5.91  %                       6.75  %
Effect of excluding
average intangible
assets and related
   amortization                6.04  %           7.39  %           5.77  %                       7.34  %
   Return on average
   equity                     12.34  %          14.30  %          11.68  %                      14.09  %

Return on average tangible equity is a non-GAAP based financial measure calculated using non-GAAP based amounts. The
most directly comparable GAAP-based measure is return on average equity. We calculate return on average tangible equity by excluding the balance of intangible assets and their related amortization expense from our calculation of return on average equity. Management uses the return on average tangible equity in order to review our core operating results. 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.

Efficiency Ratio
Noninterest operating
expense (numerator)    $    125,225      $    119,738      $    248,257              $        237,467

Taxable-equivalent net
interest income             145,447           151,916           289,258                       304,995
Other income                 45,349            49,076            87,438                        91,720
   Denominator              190,796           200,992           376,696                       396,715
   Efficiency ratio           65.63  %          59.57  %          65.90  %                      59.86  %

The efficiency ratio is a non-GAAP based financial measure. Management excludes merger-related expenses and certain other
selected items when calculating this ratio, which is used to measure the relationship of operating expenses to revenues.

                                            Three Months Ended            Six Months Ended
                                                 June 30,                     June 30,
                                           2014           2013           2014          2013
Net Interest Margin (excluding
purchase accounting)
Reported net interest margin (GAAP
basis)                                       3.63  %        3.88  %       3.62  %       3.92  %
Adjustments for purchase accounting:
        Loans and leases                    (0.12) %       (0.27) %      (0.14) %      (0.27) %
        Deposits                            (0.03) %       (0.06) %      (0.03) %      (0.06) %
        Borrowings                          (0.10) %       (0.01) %      (0.06) %      (0.01) %
        Net Interest Margin (excluding
        purchase accounting)                 3.38  %        3.54  %       3.39  %       3.58  %

Net interest margin (excluding purchase accounting) is a non-GAAP based financial measure using non-GAAP based amounts.

The most directly comparable GAAP based measure is net interest margin. In order to calculate net interest margin (excluding purchase accounting) we subtract the effects of amortizing/accreting purchase accounting valuation amounts from net interest income, and divide the remainder by average earning assets. Our management uses net interest margin (excluding purchase accounting) to measure and monitor the impact of the current economic environment on our net interest income and believes that this measure is more representative of our ongoing earnings power because it excludes the effect of valuation variables used to arrive at the acquisition fair value recorded on the acquisition date. We believe this non-GAAP measure, when taken together with the corresponding GAAP measure, provides meaningful supplemental information to investors regarding our performance. However, this non-GAAP measure should be considered in addition to, and not as a substitute for or preferable to, net interest margin prepared in accordance with GAAP.

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