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Susquehanna Bancshares, Inc. Announces Third Quarter 2014 Results

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Susquehanna Bancshares, Inc. (Susquehanna) (NASDAQ:SUSQ) today announced that it earned net income for the third quarter ended September 30, 2014 of $33.5 million, or $0.18 per diluted share, compared to $43.5 million, or $0.23 per diluted share, for the second quarter of 2014 and $44.3 million, or $0.24 per diluted share, for the third quarter of 2013.

“Despite a challenging economic and financial environment, we were able to achieve solid core deposit growth, improve our balance sheet positioning, and return capital to shareholders,” said William J. Reuter, Susquehanna’s Chairman and Chief Executive Officer. “In addition, we launched an initiative that will realign our bank to improve efficiency and create a more consistent management structure for our teams focused on sales and the customer experience in the retail, small business and commercial banking segments.”

Linked Quarter Results (Third Quarter 2014 vs. Second Quarter 2014)

  • Loans and leases decreased $241.4 million or 1.8% from June 30, 2014 to $13.4 billion at September 30, 2014. During the third quarter of 2014, Susquehanna and its wholly-owned subsidiary Susquehanna Bank sold approximately $255.8 million of retail loans from the Consumer loans category. Changes for the quarter in each major loan category were as follows:
    • Commercial loans decreased 2.5%.
    • Real estate – construction loans increased 9.3%.
    • Real estate secured – residential loans decreased 0.1%.
    • Real estate secured – commercial loans decreased 0.9%.
    • Consumer loans decreased 24.1%.
    • Leases increased 1.9%.
  • Total deposits increased $273.5 million or 2.1% from June 30, 2014 to $13.6 billion at September 30, 2014. Changes for the quarter in each major deposit category were as follows:
    • Non-interest bearing checking increased 1.2%.
    • Interest-bearing checking increased 7.1%.
    • Money market deposits increased 9.0%.
    • Savings deposits decreased 1.2%.
    • Time deposits decreased 4.9%.
  • Primarily as a result of the loan sale and growth in the deposit portfolio, the loan to deposit ratio decreased to 98.8% for the third quarter of 2014 compared to 102.6% for the second quarter of 2014.
  • Net interest margin decreased 13 basis points to 3.50% for the third quarter of 2014 compared to 3.63% for the second quarter of 2014. The second quarter of 2014 included a 9 basis point gain from the redemption of a trust preferred security. Net interest margin (excluding purchase accounting) (1) declined 1 basis points to 3.37% for the third quarter of 2014 compared to 3.38% for the second quarter of 2014.

    In the fourth quarter of 2014, management expects the net interest margin (excluding purchase accounting) (1) to decline 3 to 5 basis points.

  • Non-interest income decreased to $44.6 million for the third quarter of 2014 compared to $45.3 million for the second quarter of 2014. The third quarter of 2014 included a $2.6 million gain related to the loan sale while the second quarter of 2014 included a net realized gain on sale of investment securities of $3.3 million.

    Excluding the gain related to the loan sale in the third quarter of 2014, management expects noninterest income to increase modestly in the fourth quarter of 2014.

  • Non-interest expense decreased to $124.4 million for the third quarter of 2014 compared to $125.2 million in the second quarter of 2014. The third quarter of 2014 included a $1.6 million expense related to employee severance for the organizational realignment within our small business and retail operations.

    Management expects non-interest expenses to increase modestly in the fourth quarter of 2014.

  • The efficiency ratio (1) increased to 67.32% for the third quarter of 2014 compared to 65.63% in the second quarter of 2014.
  • Non-performing assets as a percentage of loans, leases and foreclosed real estate owned increased to 0.88% at September 30, 2014 compared to 0.85% at June 30, 2014.
  • The provision for loan and lease losses in the third quarter increased to $9.0 million compared to $3.0 million in the second quarter of 2014. Net charge-offs for the third quarter increased to $16.6 million, or 0.49% of average loans and leases, compared to $11.4 million, or 0.34% of average loans and leases, for the second quarter of 2014. As a result, the allowance for loan and lease losses was $136.9 million at September 30, 2014, representing 1.02% of total loans and leases and 125% of nonaccrual loans and leases compared to $144.5 million at June 30, 2014, representing 1.06% of total loans and leases and 137% of nonaccrual loans and leases.

Third Quarter Results (Third Quarter 2014 vs. Third Quarter 2013)

  • Loans and leases increased $49.3 million or 0.4% from September 30, 2013 to $13.4 billion at September 30, 2014. During the third quarter of 2014, Susquehanna and its wholly-owned subsidiary Susquehanna Bank sold approximately $255.8 million of retail loans from the Consumer loans category. Changes for the twelve month period in each major loan category were as follows:
    • Commercial loans increased 3.9%.
    • Real estate – construction loans increased 6.8%.
    • Real estate secured – residential loans increased 0.7%.
    • Real estate secured – commercial loans decreased 2.3%.
    • Consumer loans decreased 21.9%.
    • Leases increased 15.5%.
  • Total deposits increased $866.8 million or 6.8% from September 30, 2013 to $13.6 billion as of September 30, 2014. Changes for the twelve month period in each major deposit category were as follows:
    • Non-interest-bearing checking increased 4.6%.
    • Interest-bearing checking increased 6.6%.
    • Money market deposits increased 7.7%.
    • Savings deposits increased 5.3%.
    • Time deposits increased 7.8%.
  • Primarily as a result of the loan sale and growth in the deposit portfolio, the loan to deposit ratio decreased to 98.8% for the third quarter of 2014 compared to 105.1% for the third quarter of 2013.
  • Net interest margin decreased 22 basis points to 3.50% compared to 3.72% for the third quarter of 2013. Net interest margin (excluding purchase accounting) (1) declined 17 basis points to 3.37% compared to 3.54% for the third quarter of 2013.
  • Non-interest income increased to $44.6 million compared to $41.3 million in the third quarter of 2013. The third quarter of 2014 included a $2.6 million gain related to the loan sale.
  • Non-interest expense increased to $124.4 million compared to $117.7 million in the third quarter of 2013. The third quarter of 2014 included a $1.6 million expense related to employee severance for the organizational realignment within our small business and retail operations while the third quarter of 2013 included a reduction in salaries and benefits by $5.0 million due to the adjustment of incentive and benefit accruals.
  • The efficiency ratio (1) increased to 67.32% compared to 61.62% in the third quarter of 2013.
  • Non-performing assets as a percentage of loans, leases and foreclosed real estate decreased to 0.88% compared to 0.89% at September 30, 2013.
  • The provision for loan and lease losses increased to $9.0 million compared to $5.0 million for the third quarter of 2013. Net charge-offs as a percentage of average loans and leases decreased to 0.49% compared to 0.50% for the third quarter of 2013. The allowance for loan and lease losses was $136.9 million, representing 1.02% of total loans and leases and 125% of nonaccrual loans and leases, compared to $166.7 million at September 30, 2013, representing 1.25% of total loans and leases and 164% of nonaccrual loans and leases.
  • Return on average assets and average tangible equity (1) decreased to 0.72% and 9.41%, respectively compared to 0.96% and 13.67%, respectively for the third quarter of 2013.
  • Susquehanna’s capital ratios continue to exceed internal capital targets and those required to be considered “well-capitalized” under the current regulatory requirements, with a Tier 1 common ratio of 10.86%, Tier 1 capital ratio of 11.92%, Total risk-based capital ratio of 13.08% and a Leverage ratio of 9.61%, each as of September 30, 2014. Based on a preliminary analysis of the new capital rules approved in July 2013, management believes that Susquehanna would be fully compliant with the revised capital ratio standards as of September 30, 2014 if they had been effective on that date.

    (1) Non-GAAP based financial measure. Please refer to the calculations and management’s reasons for using this measure in the accompanying financial schedules

Additional Events

  • On August 14, 2014, Susquehanna and its wholly-owned subsidiary Susquehanna Bank completed an off-balance sheet securitization of approximately $255.8 million of indirect retail installment contracts secured by new and used automobiles, light-duty trucks and vans.
  • On August 21, 2014, Moody’s Investor Service upgraded the long-term ratings of Susquehanna, including its senior debt rating from Baa3 to Baa2.
  • On October 15, 2014, Susquehanna’s Board of Directors declared a third quarter dividend of $0.09 per common share, payable on November 20, 2014 to shareholders of record on October 30, 2014.
  • During the third quarter of 2014, Susquehanna repurchased approximately 6.5 million shares of common stock, completing its outstanding share repurchase program on October 1, 2014.

Susquehanna will broadcast its third quarter 2014 conference call over the Internet on October 23, 2014, at 11:00 a.m. Eastern time. The conference call will include management’s discussion of third quarter 2014 financial results and may also include forward-looking information and financial goals. Investors will have the opportunity to listen to the conference call through a live broadcast on Susquehanna’s website. The event may be accessed by selecting “Investor Relations” near the bottom of the home page or go directly to http://ir.susquehanna.net. At the site, please click on the third quarter webcast link. To listen to the live call, please go to the website at least 15 minutes prior to the scheduled start time to download and install any necessary audio software. For those who are unable to listen to the live broadcast, an archived replay and podcast will be available on the website shortly after the call concludes.

Susquehanna is a financial services holding company with total assets of approximately $18.6 billion. Headquartered in Lititz, Pa., Susquehanna provides banking and financial services at 245 branch locations in the mid-Atlantic region. Through Susquehanna Wealth Management, Susquehanna offers investment, fiduciary, brokerage, insurance, retirement planning, and private banking services, with approximately $7.6 billion in assets under management and administration. Susquehanna also operates an insurance brokerage and employee benefits company, a commercial finance company, a vehicle leasing company, a mortgage division, and a settlement services company. Investor information may be requested through Susquehanna’s Website at www.susquehanna.net.

This press release contains certain financial information determined by methods other than in accordance with GAAP. Susquehanna’s management uses these non-GAAP measures in its analysis of the company’s performance. These non-GAAP financial measures require management to make judgments about the exclusion of certain items, and if different judgments were made, the amounts reported would be different. These measures typically exclude the effects of intangibles and related amortization and include the tax benefit associated with revenue items that are tax-exempt. Disclosures regarding these non-GAAP financial measures are included in the accompanying financial information.

The presentation of these non-GAAP financial measures is intended to supplement investors’ understanding of Susquehanna’s core business activities. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

This release includes forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. Forward-looking statements can be identified by words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may,” “plans,” “estimates,” and similar words or expressions. The risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: ineffectiveness of Susquehanna’s business strategy due to internal or external factors, including changes in current or future market conditions; the effects of competition, including industry consolidation and development of competing financial products and services; the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; interest rate movements; changes in credit quality; deteriorating economic conditions; market or other events adversely affecting our ability to conduct off-balance transactions; inability to successfully execute Susquehanna’s initiatives and planned and proposed organizational, process and technology improvements; other risks and uncertainties; our success at managing the risks involved in the foregoing items; and the other factors detailed in Susquehanna’s filings with the Securities and Exchange Commission. Susquehanna encourages readers of this release 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 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.

Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
Nine Months YTD
3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013
Balance Sheet (EOP)
Investments $ 2,325,734 $ 2,324,782 $ 2,445,322 $ 2,533,456 $ 2,644,162 $ 2,325,734 $ 2,644,162
Loans and leases 13,425,721 13,667,153 13,575,295 13,576,086 13,376,454 13,425,721 13,376,454
Allowance for loan and lease losses (ALLL) 136,870 144,483 154,150 157,608 166,740 136,870 166,740
Total assets 18,583,327 18,506,626 18,439,682 18,473,489 18,481,150 18,583,327 18,481,150
Deposits 13,588,524 13,314,994 13,079,523 12,869,372 12,721,685 13,588,524 12,721,685
Other short-term borrowings 532,675 527,079 584,664 555,740 688,456 532,675 688,456
Federal Home Loan Bank borrowings 915,362 1,127,302 1,229,296 1,531,282 1,593,272 915,362 1,593,272
Other long-term debt 356,117 360,033 448,521 453,260 457,804 356,117 457,804
Shareholders’ equity 2,751,260 2,796,392 2,755,199 2,717,587 2,679,348 2,751,260 2,679,348
Average Balance Sheet
Investments $ 2,293,302 $ 2,395,690 $ 2,505,937 $ 2,616,807 $ 2,584,212 $ 2,397,531 $ 2,563,862
Loans and leases 13,499,686 13,589,533 13,574,526 13,421,474 13,290,513 13,554,307 13,111,325
Total earning assets 15,872,628 16,066,177 16,162,210 16,124,369 15,960,228 16,032,982 15,775,630
Total assets 18,411,529 18,378,127 18,411,873 18,437,954 18,258,982 18,417,499 18,121,360
Deposits 13,395,247 13,131,617 12,874,040 12,806,503 12,794,022 13,135,544 12,768,046
Other short-term borrowings 541,363 552,367 671,653 671,923 758,079 589,462 767,911
Federal Home Loan Bank borrowings 961,483 1,174,611 1,387,124 1,502,120 1,285,276 1,172,846 1,161,305
Other long-term debt 358,502 396,367 451,267 455,787 475,655 401,706 493,358
Shareholders’ equity 2,775,786 2,768,665 2,726,465 2,679,242 2,642,806 2,760,888 2,635,251
Income Statement
Net interest income $ 136,465 $ 141,694 $ 140,064 $ 142,688 $ 145,949 $ 418,223 $ 443,252
Provision for loan and lease losses 9,000 3,000 6,000 2,000 5,000 18,000 29,000
Noninterest income 44,617 45,349 42,089 50,666 41,343 132,055 133,063
Noninterest expense 124,411 125,225 123,032 135,672 117,701 372,668 355,168
Income before taxes 47,671 58,818 53,121 55,682 64,591 159,610 192,147
Provision for income taxes 14,203 15,324 15,959 14,341 20,300 45,486 59,809
Net income 33,468 43,494 37,162 41,341 44,291 114,124 132,338
Basic earnings per common share 0.18 0.23 0.20 0.22 0.24 0.61 0.71
Diluted earnings per common share 0.18 0.23 0.20 0.22 0.24 0.61 0.70
Cash dividends paid per common share 0.09 0.08 0.08 0.08 0.08 0.25 0.16
Asset Quality
Net charge-offs (NCOs) $ 16,613 $ 11,431 $ 9,458 $ 11,132 $ 16,854 $ 37,502 $ 46,280
Nonaccrual loans and leases $ 109,506 $ 105,609 $ 108,408 $ 100,815 $ 101,976 $ 109,506 $ 101,976
Foreclosed real estate 9,133 10,302 11,980 16,555 17,760 9,133 17,760
Total nonperforming assets (NPAs) $ 118,639 $ 115,911 $ 120,388 $ 117,370 $ 119,736 $ 118,639 $ 119,736
Restructured loans $ 42,418 $ 40,938 $ 39,555 $ 72,133 $ 69,975 $ 42,418 $ 69,975
Loans and leases 90 days past due 10,303 9,190 9,328 9,757 8,655 10,303 8,655
Credit Quality
NCOs / Average loans and leases 0.49% 0.34% 0.28% 0.33% 0.50% 0.37% 0.47%
NPAs / Loans and leases + foreclosed real estate 0.88% 0.85% 0.89% 0.86% 0.89% 0.88% 0.89%
ALLL / Nonaccrual loans and leases 124.99% 136.81% 142.19% 156.33% 163.51% 124.99% 163.51%
ALLL / Total loans and leases 1.02% 1.06% 1.14% 1.16% 1.25% 1.02% 1.25%
Profitability
Return on average assets 0.72% 0.95% 0.82% 0.89% 0.96% 0.83% 0.98%
Return on average equity 4.78% 6.30% 5.53% 6.12% 6.65% 5.53% 6.71%
Return on average tangible equity (1) 9.41% 12.34% 11.08% 12.49% 13.67% 10.90% 13.95%
Net interest margin 3.50% 3.63% 3.61% 3.60% 3.72% 3.58% 3.85%
Efficiency ratio (1) 67.32% 65.63% 66.18% 68.84% 61.62% 66.37% 60.43%
Per Share Data (EOP)
Closing share price $ 10.00 $ 10.56 $ 11.37 $ 12.84 $ 12.53 $ 10.00 $ 12.53
Stated book value per common share 15.17 14.90 14.69 14.50 14.31 15.17 14.31
Tangible book value per common share (1) 7.99 7.95 7.73 7.52 7.32 7.99 7.32
Price/Book Value 65.90% 70.88% 77.41% 88.52% 87.56% 65.90% 87.56%
Price/Tangible Book Value 125.16% 132.83% 147.09% 170.74% 171.17% 125.16% 171.17%
Number of outstanding shares (‘000) 181,310

187,706

187,590 187,363 187,225 181,310 187,225
Capital Ratios
Tangible common ratio (1) 8.58% 8.88% 8.67% 8.44% 8.22% 8.58% 8.22%
Tier 1 common ratio 10.86% 11.03% 10.84% 10.60% 10.41% 10.86% 10.41%
Leverage ratio 9.61% 9.90% 9.72% 9.55% 9.47% 9.61% 9.47%
Tier 1 capital ratio 11.92% 12.07% 11.95% 11.71% 11.52% 11.92% 11.52%
Total risk-based capital ratio 13.08% 13.27% 13.23% 13.04% 12.92% 13.08% 12.92%
(1) Non-GAAP based financial measures. Please refer to the calculations and management’s reasons for using these measures in Appendix A – GAAP to Non-GAAP Reconciliation

Susquehanna Bancshares, Inc.

26 North Cedar Street

Lititz, PA 17543

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
September 30, June 30, March 31, December 31, September 30,
2014 2014 2014 2013 2013
Assets
Cash and due from banks $ 772,677 $ 456,917 $ 389,793 $ 305,357 $ 377,730
Unrestricted short-term investments 40,508 33,369 24,768 37,967 30,663
Cash and cash equivalents 813,185 490,286 414,561 343,324 408,393

Interest-bearing deposits held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities

2,211 1,554 1,689 2,347 2,138
Restricted short-term investments 36,943 43,926 42,993 42,913 44,928
Securities available for sale 2,192,615 2,183,093 2,299,235 2,375,224 2,483,375
Restricted investment in bank stocks 133,119 141,689 146,087 158,232 160,787
Loans and leases, net of deferred costs and fees 13,361,516 13,600,254 13,505,746 13,503,392 13,300,309

Loans held by consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities

64,205 66,899 69,549 72,694 76,145
Less: Allowance for loan and lease losses 136,870 144,483 154,150 157,608 166,740
Net loans and leases 13,288,851 13,522,670 13,421,145 13,418,478 13,209,714
Premises and equipment, net 168,466 169,975 170,349 173,542 189,096
Other real estate and foreclosed assets 9,898 11,102 12,943 17,573 18,729
Accrued interest receivable 39,899 38,878 41,594 41,690 41,715
Bank-owned life insurance 449,199 450,318 449,778 449,320 449,419
Goodwill 1,275,439 1,275,439 1,275,439 1,275,439 1,275,439
Intangible assets with finite lives 27,163 28,579 30,303 32,262 33,666
Deferred income tax assets 6,903 7,357 5,216 6,472 7,921
Other assets 139,436 141,760 128,350 136,673 155,830
Total assets $ 18,583,327 $ 18,506,626 $ 18,439,682 $ 18,473,489 $ 18,481,150
Liabilities and Shareholders’ Equity
Deposits $ 13,588,524 $ 13,314,994 $ 13,079,523 $ 12,869,372 $ 12,721,685
Federal Home Loan Bank short-term borrowings 850,000 1,050,000 1,150,000 1,450,000 1,510,000
Other short-term borrowings 532,675 527,079 584,664 555,740 688,456
Federal Home Loan Bank long-term borrowings 65,362 77,302 79,296 81,282 83,272
Other long-term debt 175,219 175,222 250,224 250,227 250,229
Junior subordinated debentures 146,059 146,002 155,022 155,002 154,983

Long-term debt of consolidated variable interest entities for which creditors do not have recourse to Susquehanna’s general credit

34,839 38,809 43,275 48,031 52,592
Accrued interest, taxes, and expenses payable 72,044 72,664 69,404 82,150 101,040
Deferred income tax liabilities 128,389 114,119 75,911 70,308 52,214
Other liabilities 238,956 194,043 197,164 193,790 187,331
Total liabilities 15,832,067 15,710,234 15,684,483 15,755,902 15,801,802
Shareholders’ equity:
Common stock 363,358 376,146 375,845 375,353 374,982
Treasury stock (3,100 ) (3,075 ) (2,735 ) (2,531 ) (1,918 )
Additional paid-in capital 1,605,671 1,657,699 1,654,357 1,652,116 1,651,382
Retained earnings 811,462 794,864 766,381 744,215 717,850
Accumulated other comprehensive loss (26,131 ) (29,242 ) (38,649 ) (51,566 ) (62,948 )
Total shareholders’ equity 2,751,260 2,796,392 2,755,199 2,717,587 2,679,348
Total liabilities and shareholders’ equity $ 18,583,327 $ 18,506,626 $ 18,439,682 $ 18,473,489 $ 18,481,150

Susquehanna Bancshares, Inc.

26 North Cedar Street

Lititz, PA 17543

Loans and Leases and Deposits
(in thousands)
Loans and Leases
09/30/14 06/30/14 03/31/14 12/31/13 09/30/13
Commercial, financial, and agricultural $ 2,362,201 $ 2,422,931 $ 2,411,851 $ 2,394,847 $ 2,273,735
Real estate – construction 817,492 748,181 714,291 735,877 765,246
Real estate secured – residential 4,172,943 4,178,842 4,178,505 4,204,430 4,145,522
Real estate secured – commercial 4,016,635 4,053,990 4,041,989 4,068,816 4,109,329
Consumer 730,687 962,618 955,577 953,000 935,117
Leases 1,325,763 1,300,591 1,273,082 1,219,116 1,147,505
Total loans and leases $ 13,425,721 $ 13,667,153 $ 13,575,295 $ 13,576,086 $ 13,376,454
Deposits
09/30/14 06/30/14 03/31/14 12/31/13 09/30/13
Noninterest-bearing checking $ 1,958,308 $ 1,935,635 $ 1,880,284 $ 1,913,526 $ 1,871,461
Interest-bearing checking 3,087,166 2,883,679 2,908,507 2,909,376 2,895,027
Money market 3,297,699 3,025,430 3,184,719 3,144,106 3,062,955
Savings 1,122,232 1,136,044 1,132,850 1,077,923 1,065,699
Core deposits 9,465,405 8,980,788 9,106,360 9,044,931 8,895,142
Time less than $100 2,265,787 2,266,815 2,166,207 2,113,209 2,103,650
Time of $100 or more 1,857,332 2,067,391 1,806,956 1,711,232 1,722,893
Total deposits $ 13,588,524 $ 13,314,994 $ 13,079,523 $ 12,869,372 $ 12,721,685
Supplemental Loan and Lease Data
(in thousands)
Nonaccrual Loans and Leases
09/30/14 06/30/14 03/31/14 12/31/13 09/30/13
Commercial, financial, and agricultural $ 23,121 $ 18,792 $ 24,529 $ 16,827 $ 10,048
Real estate – construction 7,225 7,428 11,695 13,230 16,497
Real estate secured – residential 23,653 24,740 23,189 23,365 27,878
Real estate secured – commercial 54,484 53,687 47,950 46,147 45,906
Consumer 40 43 46 47 177
Leases 983 919 999 1,199 1,470
Total nonaccrual loans and leases $ 109,506 $ 105,609 $ 108,408 $ 100,815 $ 101,976
Restructured Loans
09/30/14 06/30/14 03/31/14 12/31/13 09/30/13
Commercial, financial, and agricultural $ 4,044 $ 4,228 $ 5,264 $ 6,885 $ 9,609
Real estate – construction 319 322 325 615 331
Real estate secured – residential 20,231 18,414 16,168 31,623 26,848
Real estate secured – commercial 16,780 16,903 16,681 31,295 31,766
Consumer 1,044 1,071 1,117 1,715 1,421
Total restructured loans $ 42,418 $ 40,938 $ 39,555 $ 72,133 $ 69,975
Net Charge-offs (Recoveries)
3Q 2014 2Q 2014 1Q 2014 4Q 2013 3Q 2013
Commercial, financial, and agricultural $ 8,069 $ 7,274 $ 3,182 $ (480 ) $ 3,731
Real estate – construction 776 (457 ) (91 ) (3,312 ) 6,504
Real estate secured – residential 2,549 2,453 2,796 2,724 3,524
Real estate secured – commercial 3,827 730 2,134 11,060 2,007
Consumer 614 1,013 855 330 726
Leases 778 418 582 810 362
Total net charge-offs $ 16,613 $ 11,431 $ 9,458 $ 11,132 $ 16,854

Susquehanna Bancshares, Inc.

26 North Cedar Street

Lititz, PA 17543

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30,
2014 2014 2014 2013 2013 2014 2013
Interest Income:
Loans and leases, including deferred costs and fees $ 147,761 $ 148,002 $ 149,538 $ 151,907 $ 155,596 $ 445,301 $ 475,926
Securities:
Taxable 8,459 9,104 9,648 10,406 10,641 27,211 30,584
Tax-exempt 3,383 3,439 3,501 3,511 3,527 10,323 10,682
Dividends 2,108 2,134 1,765 1,649 1,297 6,007 3,609
Short-term investments 24 23 19 21 16 66 87
Total interest income 161,735 162,702 164,471 167,494 171,077 488,908 520,888
Interest Expense:
Deposits:
Interest-bearing demand and savings 4,256 4,031 3,962 4,202 4,190 12,249 13,604
Time 10,803 10,246 9,628 9,597 10,229 30,677 33,115
Federal Home Loan Bank short-term borrowings 4,554 4,597 4,621 4,449 3,915 13,772 10,738
Other short-term borrowings 2,091 2,031 2,100 2,146 2,242 6,222 6,548
Federal Home Loan Bank long-term borrowings 247 243 245 254 284 735 888
Other long-term debt 3,319 (140 ) 3,851 4,158 4,268 7,030 12,743
Total interest expense 25,270 21,008 24,407 24,806 25,128 70,685 77,636
Net interest income $ 136,465 $ 141,694 $ 140,064 $ 142,688 $ 145,949 $ 418,223 $ 443,252
Provision for loan and lease losses 9,000 3,000 6,000 2,000 5,000 18,000 29,000
Net interest income, after provision for loan and lease losses 127,465 138,694 134,064 140,688 140,949 400,223 414,252
Noninterest Income:
Service charges on deposit accounts 9,561 9,294 9,000 9,456 9,514 27,855 27,533
Vehicle origination and servicing fees 1,691 2,915 2,968 3,057 2,907 7,574 8,668
Wealth management commissions and fees 13,199 12,669 12,719 13,048 12,606 38,587 38,285
Commissions on property and casualty insurance sales 3,992 4,214 5,666 4,023 3,872 13,872 12,774
Other commissions and fees 5,689 5,401 5,035 5,077 4,885 16,125 13,940
Income from bank-owned life insurance 1,634 1,672 1,637 1,492 1,493 4,943 4,521
Mortgage banking revenue 2,432 3,004 2,410 2,483 2,237 7,846 10,345
Capital markets revenue 1,593 877 1,240 3,216 111 3,710 4,269
Net realized gain (loss) on sales of securities 0 3,293 (8 ) (1,343 ) 2 3,285 (51 )
Realized gain on sale of branch properties 0 0 0 4,945 0 0 0
Other 4,826 2,010 1,422 5,212 3,716 8,258 12,779
Total noninterest income 44,617 45,349 42,089 50,666 41,343 132,055 133,063
Noninterest Expenses:
Salaries and employee benefits 68,042 68,325 65,581 70,837 61,879 201,948 191,381
Occupancy 12,089 11,914 13,847 11,727 11,352 37,850 33,721
Furniture and equipment 4,043 4,058 3,944 3,865 3,661 12,045 10,986
Professional and technology services 6,168 7,189 6,070 6,404 7,173 19,427 18,733
Advertising and marketing 3,784 3,567 3,576 3,618 3,319 10,927 9,084
FDIC insurance 5,038 4,925 5,121 6,118 5,421 15,084 13,760
Legal fees 1,699 1,656 1,527 1,968 1,774 4,882 5,454
Amortization of intangible assets 2,220 2,367 2,539 2,803 2,502 7,126 8,823
Vehicle lease disposal 2,222 2,215 2,251 1,216 1,193 6,688 3,796
Branch consolidation costs 0 0 0 6,603 0 0 0
Other 19,106 19,009 18,576 20,513 19,427 56,691 59,430
Total noninterest expenses 124,411 125,225 123,032 135,672 117,701 372,668 355,168
Income before income taxes 47,671 58,818 53,121 55,682 64,591 159,610 192,147
Provision for income taxes 14,203 15,324 15,959 14,341 20,300 45,486 59,809
Net Income $ 33,468 $ 43,494 $ 37,162 $ 41,341 $ 44,291 $ 114,124 $ 132,338
Earnings per common share:
Basic $ 0.18 $ 0.23 $ 0.20 $ 0.22 $ 0.24 $ 0.61 $ 0.71
Diluted $ 0.18 $ 0.23 $ 0.20 $ 0.22 $ 0.24 $ 0.61 $ 0.70
Cash dividends per common share $ 0.09 $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.25 $ 0.16
Average common shares outstanding:
Basic 184,985 187,637 187,455 187,186 187,096 186,683 186,840
Diluted 185,724 188,295 188,378 188,078 188,109 187,445 187,816

Susquehanna Bancshares, Inc.

26 North Cedar Street

Lititz, PA 17543

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY
(in thousands)
Interest rates and interest differential-taxable equivalent basis
Three Months Ended Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2014 June 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013
Average Average Average Average Average
Balance Interest Rate (%) Balance Interest Rate (%) Balance Interest Rate (%) Balance Interest Rate (%) Balance Interest Rate (%)
Assets
Short-term investments $ 79,640 $ 24 0.12 $ 80,954 $ 23 0.11 $ 85,503 $ 16 0.07 $ 81,144 $ 65 0.11 $ 100,443 $ 87 0.12
Investment securities:
Taxable(1) 1,915,888 10,567 2.19 2,013,166 11,238 2.24 2,191,743 11,937 2.16 2,014,934 33,219 2.20 2,166,932 34,193 2.11
Tax-exempt(1)(2) 377,414 5,205 5.47 382,524 5,291 5.55 392,469 5,450 5.51 382,597 15,882 5.55 396,930 16,515 5.56
Total investment securities 2,293,302 15,772 2.73 2,395,690 16,529 2.77 2,584,212 17,387 2.67 2,397,531 49,101 2.74 2,563,862 50,708 2.64
Loans and leases, (net):
Taxable(3) 13,067,543 144,248 4.38 13,154,917 144,471 4.40 12,888,591 152,275 4.69 13,119,323 434,798 4.43 12,695,055 465,689 4.90
Tax-exempt(2)(3) 432,143 5,405 4.96 434,616 5,432 5.01 401,922 5,133 5.07 434,984 16,158 4.97 416,270 15,830 5.08
Total loans and leases 13,499,686 149,653 4.40 13,589,533 149,903 4.42 13,290,513 157,408 4.70 13,554,307 450,956 4.45 13,111,325 481,519 4.91
Total interest-earning assets 15,872,628 165,449 4.14 16,066,177 166,455 4.16 15,960,228 174,811 4.35 16,032,982 500,122 4.17 15,775,630 532,314 4.51
Allowance for loan and lease losses (144,674 ) (154,710 ) (177,853 ) (152,229 ) (180,652 )
Other non-earning assets 2,683,575 2,466,660 2,476,607 2,536,746 2,526,382
Total assets $ 18,411,529 $ 18,378,127 $ 18,258,982 $ 18,417,499 $ 18,121,360
Liabilities
Deposits:
Interest-bearing demand $ 6,165,175 3,970 0.26 $ 5,998,086 3,726 0.25 $ 5,936,693 3,904 0.26 $ 6,065,751 11,371 0.25 $ 5,938,605 12,746 0.29
Savings 1,131,551 286 0.10 1,134,421 305 0.11 1,075,734 286 0.11 1,122,088 878 0.10 1,068,446 858 0.11
Time 4,133,949 10,803 1.04 4,129,738 10,245 1.00 3,870,542 10,229 1.05 4,058,947 30,677 1.01 3,847,294 33,115 1.15
Other short-term borrowings 541,363 2,091 1.53 552,367 2,030 1.47 758,079 2,242 1.17 589,462 6,221 1.41 767,911 6,548 1.14
FHLB borrowings 961,483 4,801 1.98 1,174,611 4,840 1.65 1,285,276 4,199 1.30 1,172,846 14,508 1.65 1,161,305 11,626 1.34
Long-term debt(4) 358,502 3,319 3.67 396,367 (138 ) (0.14 ) 475,655 4,268 3.56 401,706 7,030 2.34 493,358 12,743 3.45
Total interest-bearing liabilities 13,292,023 25,270 0.75 13,385,590 21,008 0.63 13,401,979 25,128 0.74 13,410,800 70,685 0.70 13,276,919 77,636 0.78
Demand deposits 1,964,572 1,869,372 1,911,053 1,888,758 1,913,701
Other liabilities 379,148 354,500 303,144 357,053 295,489
Total liabilities 15,635,743 15,609,462 15,616,176 15,656,611 15,486,109
Equity 2,775,786 2,768,665 2,642,806 2,760,888 2,635,251
Total liabilities & shareholders’ equity $ 18,411,529 $ 18,378,127 $ 18,258,982 $ 18,417,499 $ 18,121,360

Net interest income / yield on average earning assets

$ 140,179 3.50 $ 145,447 3.63 $ 149,683 3.72 $ 429,437 3.58 $ 454,678 3.85
Taxable equivalent adjustment (3,714 ) (3,753 ) (3,734 ) (11,214 ) (11,426 )
Net interest income – as reported $ 136,465 $ 141,694 $ 145,949 $ 418,223 $ 443,252

(1)

For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(2)

Tax-exempt income has been adjusted to a tax-equivalent basis using a marginal tax rate of 35%.

(3)

Average loan balances include non-accrual loans.

(4)

Includes $3.7 million purchase accounting adjustment on redemption of junior subordinated debt in second quarter of 2014.
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543

Appendix A – GAAP to Non-GAAP Reconciliation

Nine Months Ended

(Dollars and share data in thousands)

September 30,

3Q14 2Q14 1Q14 4Q13 3Q13 2014 2013

Efficiency Ratio

Other expense $ 124,411 $ 125,225 $ 123,032 $ 135,672 $ 117,701 $ 372,668 $ 355,168
Noninterest operating expense (numerator) $ 124,411 $ 125,225 $ 123,032 $ 135,672 $ 117,701 $ 372,668 $ 355,168
Taxable-equivalent net interest income $ 140,179 $ 145,447 $ 143,813 $ 146,430 $ 149,683

$

429,437 $ 454,678
Other income 44,617 45,349 42,089 50,666 41,343 132,055 133,063
Noninterest operating income (denominator) $ 184,796 $ 190,796 $ 185,902 $ 197,096 $ 191,026

$

561,492 $ 587,741
Efficiency ratio 67.32 % 65.63 % 66.18 % 68.84 % 61.62 % 66.37 % 60.43 %
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.

Tangible Common Ratio

End of period balance sheet data
Shareholders’ equity $ 2,751,260 $ 2,796,392 $ 2,755,199 $ 2,717,587 $ 2,679,348 $ 2,751,260 $ 2,679,348
Goodwill and other intangible assets (1) (1,265,598 ) (1,265,846 ) (1,266,403 ) (1,264,839 ) (1,263,928 ) (1,265,598 ) (1,263,928 )
Tangible common equity (numerator) $ 1,485,662 $ 1,530,546 $ 1,488,796 $ 1,452,748 $ 1,415,420 $ 1,485,662 $ 1,415,420
Assets $ 18,583,327 $ 18,506,626 $ 18,439,682 $ 18,473,489 $ 18,481,150 $ 18,583,327 $ 18,481,150
Goodwill and other intangible assets (1) (1,265,598 ) (1,265,846 ) (1,266,403 ) (1,264,839 ) (1,263,928 ) (1,265,598 ) (1,263,928 )
Tangible assets (denominator) $ 17,317,729 $ 17,240,780 $ 17,173,279 $ 17,208,650 $ 17,217,222 $ 17,317,729 $ 17,217,222
Tangible common ratio 8.58 % 8.88 % 8.67 % 8.44 % 8.22 % 8.58 % 8.22 %
The tangible common ratio is a non-GAAP based financial measure using non-GAAP based amounts. The most directly comparable GAAP-based measure is the ratio of common shareholders’ equity to total assets. In order to calculate tangible common shareholders equity and assets, our management subtracts the intangible assets from both the common shareholders’ equity and total assets. Tangible common equity is then divided by the tangible assets to arrive at the ratio. Management uses the ratio to assess the strength of our capital position.
(1) Net of applicable deferred income taxes

Return on Average Tangible Equity

Income statement data
Net income $ 33,468 $ 43,494 $ 37,162 $ 41,341 $ 44,291 $ 114,124 $ 132,338
Amortization of intangibles, net of taxes at 35% 1,443 1,539 1,650 1,822 1,626 4,632 5,735
Net tangible income (numerator) $ 34,911 $ 45,033 $ 38,812 $ 43,163 $ 45,917 $ 118,756 $ 138,073
Average balance sheet data
Shareholders’ equity $ 2,775,786 $ 2,768,665 $ 2,726,465 $ 2,679,242 $ 2,642,806 $ 2,760,888 $ 2,635,251
Goodwill and other intangible assets (1,303,275 ) (1,304,736 ) (1,306,298 ) (1,308,690 ) (1,310,155 ) (1,304,759 ) (1,311,682 )
Tangible common equity (denominator) $ 1,472,511 $ 1,463,929 $ 1,420,167 $ 1,370,552 $ 1,332,651 $ 1,456,129 $ 1,323,569
Return on equity (GAAP basis) 4.78 % 6.30 % 5.53 % 6.12 % 6.65 % 5.53 % 6.71 %
Effect of goodwill and other intangibles 4.63 % 6.04 % 5.55 % 6.37 % 7.02 % 5.37 % 7.24 %
Return on average tangible equity 9.41 % 12.34 % 11.08 % 12.49 % 13.67 % 10.90 % 13.95 %
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.

Tangible Book Value per Common Share

End of period balance sheet data
Shareholders’ equity $ 2,751,260 $ 2,796,392 $ 2,755,199 $ 2,717,587 $ 2,679,348 $ 2,751,260 $ 2,679,348
Goodwill and other intangible assets (1,302,602 ) (1,304,018 ) (1,305,742 ) (1,307,701 ) (1,309,105 ) (1,302,602 ) (1,309,105 )
Tangible common equity (numerator) $ 1,448,658 $ 1,492,374 $ 1,449,457 $ 1,409,886 $ 1,370,243 $ 1,448,658 $ 1,370,243
Common shares outstanding (denominator) 181,310 187,706 187,590 187,363 187,225 181,310 187,225
Tangible book value per common share $ 7.99 $ 7.95 $ 7.73 $ 7.52 $ 7.32 $ 7.99 $ 7.32
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.
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Appendix A – GAAP to Non-GAAP Reconciliation
3Q14 2Q14 1Q14 4Q13 3Q13

Net Interest Margin (excluding purchase accounting)

Reported net interest margin (GAAP basis) 3.50 % 3.63 % 3.61 % 3.60 % 3.72 %
Adjustments for purchase accounting:
Loans and leases -0.10 % -0.12 % -0.17 % -0.11 % -0.13 %
Deposits -0.02 % -0.03 % -0.03 % -0.03 % -0.04 %
Borrowings -0.01 % -0.10 % -0.01 % -0.01 % -0.01 %
Net Interest Margin (excluding purchase accounting) 3.37 % 3.38 % 3.40 % 3.45 % 3.54 %
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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