10-Q 1 q22014edgarfiles.htm FORM 10-Q  

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2014

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 001-33872

 

Susquehanna Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Pennsylvania

23-2201716

(State or Other Jurisdiction

of Incorporation or Organization)

(I.R.S. Employer

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

 

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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes  x    No  ¨   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

Large Accelerated Filer

x

Accelerated Filer

¨

Non-Accelerated Filer

¨  (Do not check if a smaller reporting company)

Smaller Reporting Company

¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No    

As of July 28, 2014, there were 187,705,957 shares of the registrant’s common stock outstanding, par value $2.00 per share.

 

 


 

 

 

 

SUSQUEHANNA BANCSHARES, INC.

TABLE OF CONTENTS

  

  

  

Page

PART I. FINANCIAL INFORMATION

  

  

  

  

  

Item 1 Financial Statements (Unaudited)

  

  

  

  

  

  

Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

  

  

  

  

  

  

Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013

  

  

  

  

  

  

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013

  

  

  

  

  

  

Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

  

  

  

  

  

  

Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2014 and 2013

  

  

  

  

  

  

Notes to Consolidated Financial Statements

  

  

  

  

  

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

54 

  

  

  

  

  

Item 3 Quantitative and Qualitative Disclosures About Market Risk

77 

  

  

  

  

  

Item 4 Controls and Procedures

80 

  

  

  

  

PART II. OTHER INFORMATION

81 

  

  

  

  

  

Item 1 Legal Proceedings

81 

  

  

  

  

  

Item 1A Risk Factors

81 

  

  

  

  

  

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

82 

  

  

  

  

  

Item 3 Defaults Upon Senior Securities

82 

  

  

  

  

  

Item 4 Mine Safety Disclosures

82 

  

  

  

  

  

Item 5 Other Information

82 

  

  

  

  

  

Item 6 Exhibits

83 

  

  

  

  

SIGNATURES

84 

  

  

  

  

EXHIBIT INDEX

85 

2

 


 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

  

  

  

  

  

  

  

  

  

  

  

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

  

  

  

  

  

  

June 30,

  

December 31,

  

  

  

  

  

  

2014 

  

2013 

  

  

  

  

  

  

(in thousands, except share data)

Assets

  

  

  

  

  

  

  

Cash and due from banks

  

$

456,917 

  

$

305,357 

  

Unrestricted short-term investments

  

  

33,369 

  

  

37,967 

  

  

  

Cash and cash equivalents

  

  

490,286 

  

  

343,324 

  

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

  

  

  

  

  

  

  

  

settle obligations of the consolidated variable interest entities

  

  

1,554 

  

  

2,347 

  

Restricted short-term investments

  

  

43,926 

  

  

42,913 

  

Securities available for sale

  

  

2,183,093 

  

  

2,375,224 

  

Restricted investment in bank stocks

  

  

141,689 

  

  

158,232 

  

Loans and leases, net of deferred costs and fees

  

  

13,600,254 

  

  

13,503,392 

  

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

  

  

  

  

  

  

  

  

the consolidated variable interest entities

  

  

66,899 

  

  

72,694 

  

  

  

Less: Allowance for loan and lease losses

  

  

144,483 

  

  

157,608 

  

  

  

  

Net loans and leases

  

  

13,522,670 

  

  

13,418,478 

  

Premises and equipment, net

  

  

169,975 

  

  

173,542 

  

Other real estate and foreclosed assets

  

  

11,102 

  

  

17,573 

  

Accrued interest receivable

  

  

38,878 

  

  

41,690 

  

Bank-owned life insurance

  

  

450,318 

  

  

449,320 

  

Goodwill

  

  

1,275,439 

  

  

1,275,439 

  

Intangible assets with finite lives

  

  

28,579 

  

  

32,262 

  

Deferred income tax assets

  

  

7,357 

  

  

6,472 

  

Other assets

  

  

141,760 

  

  

136,673 

  

  

  

  

Total Assets

  

$

18,506,626 

  

$

18,473,489 

Liabilities and Shareholders’ Equity

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

Noninterest-bearing

  

$

1,935,635 

  

$

1,913,526 

  

  

Interest-bearing

  

  

11,379,359 

  

  

10,955,846 

  

  

  

  

Total deposits

  

  

13,314,994 

  

  

12,869,372 

  

Federal Home Loan Bank short-term borrowings

  

  

1,050,000 

  

  

1,450,000 

  

Other short-term borrowings

  

  

527,079 

  

  

555,740 

  

Federal Home Loan Bank long-term borrowings

  

  

77,302 

  

  

81,282 

  

Other long-term debt

  

  

175,222 

  

  

250,227 

  

Junior subordinated debentures

  

  

146,002 

  

  

155,002 

  

Long-term debt of consolidated variable interest entities for which creditors do not have recourse to

  

  

  

  

  

  

  

  

Susquehanna’s general credit

  

  

38,809 

  

  

48,031 

  

Accrued interest, taxes, and expenses payable

  

  

72,664 

  

  

82,150 

  

Deferred income tax liabilities

  

  

114,119 

  

  

70,308 

  

Other liabilities

  

  

194,043 

  

  

193,790 

  

  

  

  

Total Liabilities

  

  

15,710,234 

  

  

15,755,902 

  

Shareholders’ equity:

  

  

  

  

  

  

  

  

Common stock, $2.00 par value, 400,000,000 shares authorized; Issued: 188,072,946 at

  

  

  

  

  

  

  

  

  

June 30, 2014, and 187,676,711 at December 31, 2013

  

  

376,146 

  

  

375,353 

  

  

Treasury stock, at cost, 366,587 at June 30, 2014, and 313,568 at December 31, 2013

  

  

(3,075)

  

  

(2,531)

  

  

Additional paid-in capital

  

  

1,657,699 

  

  

1,652,116 

  

  

Retained earnings

  

  

794,864 

  

  

744,215 

  

  

Accumulated other comprehensive loss, net of taxes of $16,427  and $25,039, respectively

  

  

(29,242)

  

  

(51,566)

  

  

  

  

Total Shareholders’ Equity

  

  

2,796,392 

  

  

2,717,587 

  

  

  

  

Total Liabilities and Shareholders’ Equity

  

$

18,506,626 

  

$

18,473,489 

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these consolidated financial statements.

3

 


 

 

 

 

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

  

  

  

  

Three Months Ended

  

Six Months Ended

  

  

  

  

June 30,

  

June 30,

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

  

  

  

(in thousands, except per share data)

Interest Income:

  

  

  

  

  

  

  

  

  

  

  

  

  

Loans and leases, including fees

  

$

148,002 

  

$

159,986 

  

$

297,540 

  

$

320,330 

  

Securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

  

9,104 

  

  

9,683 

  

  

18,752 

  

  

19,943 

  

  

Tax-exempt

  

  

3,439 

  

  

3,561 

  

  

6,940 

  

  

7,155 

  

  

Dividends

  

  

2,134 

  

  

1,146 

  

  

3,899 

  

  

2,312 

  

Short-term investments

  

  

23 

  

  

35 

  

  

42 

  

  

71 

  

  

Total interest income

  

  

162,702 

  

  

174,411 

  

  

327,173 

  

  

349,811 

Interest Expense:

  

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing demand and savings

  

  

4,031 

  

  

4,513 

  

  

7,993 

  

  

9,414 

  

  

Time

  

  

10,246 

  

  

11,654 

  

  

19,874 

  

  

22,886 

  

Federal Home Loan Bank short-term borrowings

  

  

4,597 

  

  

3,452 

  

  

9,218 

  

  

6,823 

  

Other short-term borrowings

  

  

2,031 

  

  

2,153 

  

  

4,131 

  

  

4,306 

  

Federal Home Loan Bank long-term borrowings

  

  

243 

  

  

303 

  

  

488 

  

  

604 

  

Other long-term debt

  

  

(140)

  

  

4,239 

  

  

3,711 

  

  

8,475 

  

  

Total interest expense

  

  

21,008 

  

  

26,314 

  

  

45,415 

  

  

52,508 

Net interest income

  

  

141,694 

  

  

148,097 

  

  

281,758 

  

  

297,303 

Provision for loan and lease losses

  

  

3,000 

  

  

12,000 

  

  

9,000 

  

  

24,000 

Net interest income, after provision for loan and lease losses

  

  

138,694 

  

  

136,097 

  

  

272,758 

  

  

273,303 

Noninterest Income:

  

  

  

  

  

  

  

  

  

  

  

  

  

Service charges on deposit accounts

  

  

9,294 

  

  

9,347 

  

  

18,294 

  

  

18,019 

  

Vehicle origination and servicing fees

  

  

2,915 

  

  

2,407 

  

  

5,883 

  

  

5,761 

  

Wealth management commissions and fees

  

  

12,669 

  

  

13,289 

  

  

25,388 

  

  

25,679 

  

Commissions on property and casualty insurance sales

  

  

4,214 

  

  

4,360 

  

  

9,880 

  

  

8,902 

  

Other commissions and fees

  

  

5,401 

  

  

4,727 

  

  

10,436 

  

  

9,055 

  

Income from bank-owned life insurance

  

  

1,672 

  

  

1,520 

  

  

3,309 

  

  

3,028 

  

Mortgage banking revenue

  

  

3,004 

  

  

3,998 

  

  

5,414 

  

  

8,108 

  

Capital markets revenue

  

  

877 

  

  

3,256 

  

  

2,117 

  

  

4,158 

  

Net realized gain (loss) on sales of securities

  

  

3,293 

  

  

(71)

  

  

3,285 

  

  

(53)

  

Other

  

  

2,010 

  

  

6,243 

  

  

3,432 

  

  

9,063 

  

  

Total noninterest income

  

  

45,349 

  

  

49,076 

  

  

87,438 

  

  

91,720 

Noninterest Expenses:

  

  

  

  

  

  

  

  

  

  

  

  

  

Salaries and employee benefits

  

  

68,325 

  

  

66,888 

  

  

133,906 

  

  

129,502 

  

Occupancy

  

  

11,914 

  

  

11,154 

  

  

25,761 

  

  

22,369 

  

Furniture and equipment

  

  

4,058 

  

  

3,747 

  

  

8,002 

  

  

7,325 

  

Professional and technology services

  

  

7,189 

  

  

5,831 

  

  

13,259 

  

  

11,560 

  

Advertising and marketing

  

  

3,567 

  

  

2,465 

  

  

7,143 

  

  

5,765 

  

FDIC insurance

  

  

4,925 

  

  

4,541 

  

  

10,046 

  

  

8,339 

  

Legal fees

  

  

1,656 

  

  

1,810 

  

  

3,183 

  

  

3,680 

  

Amortization of intangible assets

  

  

2,367 

  

  

3,053 

  

  

4,906 

  

  

6,321 

  

Vehicle lease disposal

  

  

2,215 

  

  

1,313 

  

  

4,466 

  

  

2,603 

  

Other

  

  

19,009 

  

  

18,936 

  

  

37,585 

  

  

40,003 

  

  

Total noninterest expenses

  

  

125,225 

  

  

119,738 

  

  

248,257 

  

  

237,467 

Income before income taxes

  

  

58,818 

  

  

65,435 

  

  

111,939 

  

  

127,556 

Provision for income taxes

  

  

15,324 

  

  

19,787 

  

  

31,283 

  

  

39,509 

Net Income  

  

$

43,494 

  

$

45,648 

  

$

80,656 

  

$

88,047 

Earnings per common share:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Basic

  

$

0.23 

  

$

0.24 

  

$

0.43 

  

$

0.47 

  

  

Diluted

  

$

0.23 

  

$

0.24 

  

$

0.43 

  

$

0.47 

Cash dividends per common share

  

$

0.08 

  

$

0.08 

  

$

0.16 

  

$

0.08 

Average common shares outstanding:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Basic

  

  

187,637 

  

  

186,812 

  

  

187,547 

  

  

186,710 

  

  

Diluted

  

  

188,295 

  

  

187,723 

  

  

188,296 

  

  

187,612 

The accompanying notes are an integral part of these consolidated financial statements.

4

 


 

 

 

 

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

Six Months Ended

  

  

  

  

June 30,

  

June 30,

  

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

  

  

  

  

(in thousands)

  

  

(in thousands)

Net Income

  

$

43,494 

  

$

45,648 

  

$

80,656 

  

$

88,047 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other comprehensive income (loss):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Change in unrealized gain (loss) on securities available for sale

  

  

11,241 

  

  

(53,120)

  

  

27,362 

  

  

(59,291)

  

  

  

Tax effect and reclassification adjustment

  

  

(4,040)

  

  

19,177 

  

  

(9,847)

  

  

21,356 

  

  

  

  

  

  

7,201 

  

  

(33,943)

  

  

17,515 

  

  

(37,935)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Non-credit related unrealized gain on other-than-temporarily

  

  

  

  

  

  

  

  

  

  

  

  

  

  

impaired debt securities

  

  

  

  

433 

  

  

  

  

141 

  

  

  

Tax effect

  

  

  

  

(159)

  

  

  

  

(52)

  

  

  

  

  

  

  

  

274 

  

  

  

  

89 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Change in unrealized gain on cash flow hedges

  

  

3,473 

  

  

10,081 

  

  

7,573 

  

  

14,486 

  

  

  

Tax effect

  

  

(1,267)

  

  

(3,679)

  

  

(2,764)

  

  

(5,287)

  

  

  

  

  

  

2,206 

  

  

6,402 

  

  

4,809 

  

  

9,199 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Changes in postretirement benefit obligations

  

  

  

  

  

  

  

  

(26)

  

  

  

Tax effect

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(17)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total other comprehensive income (loss)

  

  

9,407 

  

  

(27,267)

  

  

22,324 

  

  

(28,664)

Total comprehensive income

  

$

52,901 

  

$

18,381 

  

$

102,980 

  

$

59,383 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these consolidated financial statements.

5

 


 

 

 

 

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

  

  

  

  

  

Six Months Ended

  

  

  

  

  

June 30,

  

  

  

  

  

2014 

  

2013 

  

  

  

  

  

  

(in thousands)

Cash Flows from Operating Activities:

  

  

  

  

  

  

  

Net income

  

$

80,656 

  

$

88,047 

  

Adjustments to reconcile net income to net cash provided by operating activities:

  

  

  

  

  

  

  

  

Depreciation, amortization, and accretion

  

  

31,184 

  

  

30,051 

  

  

Provision for loan and lease losses

  

  

9,000 

  

  

24,000 

  

  

Stock compensation expense

  

  

2,821 

  

  

1,473 

  

  

Realized (gain) loss on available-for-sale securities, net

  

  

(3,285)

  

  

53 

  

  

Deferred income tax expense

  

  

30,315 

  

  

30,552 

  

  

Gain on sale of loans and leases

  

  

(4,728)

  

  

(9,256)

  

  

Gain on sale of foreclosed assets

  

  

(95)

  

  

(470)

  

  

(Gain) loss on sale of fixed assets

  

  

(69)

  

  

285 

  

  

Mortgage loans originated for sale

  

  

(215,753)

  

  

(272,513)

  

  

Proceeds from sale of mortgage loans originated for sale

  

  

196,500 

  

  

287,009 

  

  

Increase in cash surrender value of bank-owned life insurance

  

  

(3,690)

  

  

(2,843)

  

  

Decrease (increase) in accrued interest receivable

  

  

2,812 

  

  

(2,361)

  

  

Increase in accrued interest payable

  

  

1,549 

  

  

1,627 

  

  

Decrease in accrued expenses and taxes payable

  

  

(11,035)

  

  

(5,224)

  

  

Other, net

  

  

(1,659)

  

  

8,301 

  

Net cash provided by operating activities  

  

  

114,523 

  

  

178,731 

Cash Flows from Investing Activities:

  

  

  

  

  

  

  

Net (increase) decrease in restricted short-term investments

  

  

(220)

  

  

28,929 

  

Activity in available-for-sale securities:

  

  

  

  

  

  

  

  

Sales

  

  

42 

  

  

33,763 

  

  

Maturities, repayments, and calls

  

  

216,865 

  

  

354,445 

  

  

Purchases

  

  

  

  

(224,074)

  

Net decrease in restricted investment in bank stock

  

  

16,543 

  

  

1,685 

  

Net increase in loans and leases

  

  

(108,859)

  

  

(301,026)

  

Purchase of bank-owned life insurance

  

  

  

  

(4,843)

  

Proceeds from bank-owned life insurance

  

  

2,692 

  

  

6,678 

  

Proceeds from sale of foreclosed assets

  

  

10,724 

  

  

12,661 

  

Additions to premises and equipment, net

  

  

(4,919)

  

  

(6,761)

  

Net cash provided by (used in) investing activities  

  

  

132,868 

  

  

(98,543)

Cash Flows from Financing Activities:

  

  

  

  

  

  

  

Net increase in deposits

  

  

447,842 

  

  

184,186 

  

Net increase (decrease) in other short-term borrowings

  

  

(28,661)

  

  

(111,512)

  

Net decrease in short-term FHLB borrowings

  

  

(400,000)

  

  

(28,000)

  

Repayment of long-term FHLB borrowings

  

  

(3,057)

  

  

(8,005)

  

Repayment of long-term debt

  

  

(89,557)

  

  

(24,436)

  

Proceeds from issuance of common stock

  

  

3,555 

  

  

4,621 

  

Purchase of treasury stock

  

  

(544)

  

  

(25)

  

Cash dividends paid

  

  

(30,007)

  

  

(14,948)

  

Net cash (used in) provided by financing activities  

  

  

(100,429)

  

  

1,881 

Net change in cash and cash equivalents  

  

  

146,962 

  

  

82,069 

Cash and cash equivalents at January 1  

  

  

343,324 

  

  

316,592 

Cash and cash equivalents at June 30  

  

$

490,286 

  

$

398,661 

Supplemental Disclosure of Cash Flow Information

  

  

  

  

  

  

  

Cash paid for interest on deposits and borrowings

  

$

43,866 

  

$

50,880 

  

Income tax payments (refunds)

  

  

(1,958)

  

  

(21,006)

Supplemental Schedule of Noncash Activities

  

  

  

  

  

  

  

Real estate acquired in settlement of loans

  

$

6,687 

  

$

6,987 

  

Securities purchased not settled

  

  

2,729 

  

  

The accompanying notes are an integral part of these consolidated financial statements.

6

 


 

 

 

 

SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements Of Changes In Shareholders’ Equity (Unaudited)

(In thousands, except share data)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Accumulated

  

  

  

  

  

  

  

Shares of

  

  

  

  

  

  

  

Additional

  

  

  

  

Other

  

  

  

  

  

  

  

Common

  

Common

  

Treasury

  

Paid-in

  

Retained

  

Comprehensive

  

  

  

  

  

  

  

Stock

  

Stock

  

Stock

  

Capital

  

Earnings

  

Loss

  

Total

Balance at January 1, 2013

186,811,642 

  

$

373,623 

  

$

(1,850)

  

$

1,645,958 

  

$

615,436 

  

$

(37,258)

  

$

2,595,909 

  

Total comprehensive income

  

  

  

  

  

  

  

  

  

  

  

  

88,047 

  

  

(28,664)

  

  

59,383 

  

Issuance of common stock and share-based awards under employee

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

benefit plans

471,555 

  

  

943 

  

  

  

  

  

3,678 

  

  

  

  

  

  

  

  

4,621 

  

Treasury stock purchased

  

  

  

  

  

  

(25)

  

  

  

  

  

  

  

  

  

  

  

(25)

  

Cash dividends paid on common stock ($0.08 per share)

  

  

  

  

  

  

  

  

  

  

  

  

(14,948)

  

  

  

  

  

(14,948)

Balance at June 30, 2013

187,283,197 

  

$

374,566 

  

$

(1,875)

  

$

1,649,636 

  

$

688,535 

  

$

(65,922)

  

$

2,644,940 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at January 1, 2014

187,676,711 

  

$

375,353 

  

$

(2,531)

  

$

1,652,116 

  

$

744,215 

  

$

(51,566)

  

$

2,717,587 

  

Total comprehensive income

  

  

  

  

  

  

  

  

  

  

  

  

80,656 

  

  

22,324 

  

  

102,980 

  

Issuance of common stock and share-based awards under employee

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

benefit plans

396,235 

  

  

793 

  

  

  

  

  

5,583 

  

  

  

  

  

  

  

  

6,376 

  

Treasury stock purchased

  

  

  

  

  

  

(544)

  

  

  

  

  

  

  

  

  

  

  

(544)

  

Cash dividends paid on common stock ($0.16 per share)

  

  

  

  

  

  

  

  

  

  

  

  

(30,007)

  

  

  

  

  

(30,007)

Balance at June 30, 2014

188,072,946 

  

$

376,146 

  

$

(3,075)

  

$

1,657,699 

  

$

794,864 

  

$

(29,242)

  

$

2,796,392 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The accompanying notes are an integral part of these consolidated financial statements.        

 

7

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

NOTE 1. Summary of Significant Accounting Policies

 

The information contained in this report is unaudited.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information.  Certain prior-year amounts have been reclassified to conform to current period.  In the opinion of management, the information reflects all normal recurring adjustments necessary for a fair statement of results for the three and six months ended June 30, 2014 and 2013. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the three-month and six-month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

The accounting policies of Susquehanna Bancshares, Inc. and Subsidiaries ("Susquehanna"), as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 78 through 85 of Susquehanna’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported and contingent amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting periods.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses; the fair value of financial instruments, such as loans, investment securities, and derivatives; measurement and assessment of goodwill and intangible assets: and, income tax assets, liabilities and expenses.

 

Recently Adopted Accounting Guidance

 

In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  This ASU requires entities to disclose information regarding reclassification adjustments from accumulated other comprehensive income in their financial statements in a single note or on the face of the financial statements.  ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012.  The adoption of this guidance, in the first quarter of 2013, did not have a material impact on results of operations or financial condition, however did result in additional disclosures.  For more information about these disclosures, refer to Note 8.  Accumulated Other Comprehensive Income.

 

In July 2013, FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.  This ASU permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to U.S. Treasury interest rates and the London Interbank Offered Rate.  The amendment also removes the restriction on using different benchmark rates for similar hedges.  The adoption of this guidance, in the third quarter of 2013, did not have a material impact on results of operations, financial condition, or disclosures.  For more information, refer to Note 13.  Fair Value Disclosures.

 

In July 2013, FASB issued ASU 2013-11, Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  This ASU provides clarifying guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist.  ASU 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013.  The adoption of this amendment, in the first quarter of 2014, did not have a material impact on results of operations or financial condition.  

8

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Recently Issued Accounting Guidance

 

In January 2014, FASB issued ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323) – Accounting for Investments in Qualified Affordable Housing Projects.  This ASU provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  ASU 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014.  The adoption of this amendment is not expected to have a material impact on the financial condition or results of operations.

 

In January 2014, FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  This ASU clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  ASU 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014.  The adoption of this amendment is not expected to have a material impact on the financial condition or results of operations.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016.  Susquehanna is currently evaluating this amendment to determine the impact on financial condition and results of operations

9

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

NOTE 2.  Investment Securities

The amortized cost and fair values of investment securities at June 30, 2014 and December 31, 2013 were as follows:

 

  

  

  

  

  

  

  

Gross

  

Gross

  

  

  

  

  

  

  

Amortized

  

Unrealized

  

Unrealized

  

Fair

At June 30, 2014

  

Cost

  

Gains

  

Losses

  

Value

Available-for-Sale:

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Government agencies

  

$

95,701 

  

$

276 

  

$

100 

  

$

95,877 

  

Obligations of states and political subdivisions

  

  

379,616 

  

  

20,922 

  

  

1,275 

  

  

399,263 

  

Agency residential mortgage-backed securities

  

  

1,612,979 

  

  

18,363 

  

  

10,567 

  

  

1,620,775 

  

Non-agency residential mortgage-backed securities

  

  

385 

  

  

  

  

  

  

381 

  

Commercial mortgage-backed securities

  

  

5,758 

  

  

124 

  

  

  

  

5,882 

  

Other structured financial products

  

  

24,741 

  

  

  

  

12,746 

  

  

11,995 

  

Other debt securities

  

  

24,064 

  

  

847 

  

  

273 

  

  

24,638 

  

  

  

  

  

2,143,244 

  

  

40,533 

  

  

24,966 

  

  

2,158,811 

  

Other equity securities

  

  

24,472 

  

  

699 

  

  

889 

  

  

24,282 

Total available-for-sale securities

  

$

2,167,716 

  

$

41,232 

  

$

25,855 

  

$

2,183,093 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Gross

  

Gross

  

  

  

  

  

  

  

Amortized

  

Unrealized

  

Unrealized

  

Fair

At December 31, 2013

  

Cost

  

Gains

  

Losses

  

Value

Available-for-Sale:

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Government agencies

  

$

110,227 

  

$

343 

  

$

422 

  

$

110,148 

  

Obligations of states and political subdivisions

  

  

389,199 

  

  

13,386 

  

  

4,075 

  

  

398,510 

  

Agency residential mortgage-backed securities

  

  

1,786,133 

  

  

12,163 

  

  

20,104 

  

  

1,778,192 

  

Non-agency residential mortgage-backed securities

  

  

572 

  

  

  

  

  

  

565 

  

Commercial mortgage-backed securities

  

  

8,568 

  

  

166 

  

  

  

  

8,734 

  

Other structured financial products

  

  

25,038 

  

  

  

  

13,741 

  

  

11,297 

  

Other debt securities

  

  

43,156 

  

  

1,487 

  

  

557 

  

  

44,086 

  

  

  

  

  

2,362,893 

  

  

27,546 

  

  

38,907 

  

  

2,351,532 

  

Other equity securities

  

  

24,318 

  

  

557 

  

  

1,183 

  

  

23,692 

Total available-for-sale securities

  

$

2,387,211 

  

$

28,103 

  

$

40,090 

  

$

2,375,224 

 

At June 30, 2014 and December 31, 2013, investment securities with carrying values of $1,340,493 and $1,512,824, respectively, were pledged to secure public funds and for other purposes as required by law.

The amortized cost and fair value of U.S. Government agencies, obligations of states and political subdivisions, agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities, other structured financial products, other debt securities, and residential and commercial mortgage-backed securities, at June 30, 2014 and December 31, 2013, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

  

  

  

  

June 30, 2014

  

December 31, 2013

  

  

  

  

  

  

Amortized

  

Fair

  

Amortized

  

Fair

  

  

  

  

  

  

Cost

  

Value

  

Cost

  

Value

  

  

Securities available for sale:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Within one year

  

$

24,902 

  

$

25,188 

  

$

8,870 

  

$

9,005 

  

  

  

After one year but within five years

  

  

99,490 

  

  

100,391 

  

  

129,176 

  

  

130,091 

  

  

  

After five years but within ten years

  

  

875,681 

  

  

887,302 

  

  

945,637 

  

  

946,754 

  

  

  

After ten years

  

  

1,143,171 

  

  

1,145,930 

  

  

1,279,210 

  

  

1,265,682 

  

  

  

  

Total

  

$

2,143,244 

  

$

2,158,811 

  

$

2,362,893 

  

$

2,351,532 

  

10

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Gross realized gains and gross realized losses on investment securities transactions are summarized below. These gains and losses were recognized using the specific identification method and were included in noninterest income.

 

  

  

  

Available-for-sale Securities

  

  

  

  

Three Months Ended June 30,

  

Six Months Ended June 30,

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

Gross gains

  

$

3,339 

  

$

26 

  

$

3,364 

  

$

433 

  

  

Gross losses

  

  

(46)

  

  

  

  

(79)

  

  

(1)

  

  

Other-than-temporary impairment

  

  

  

  

(97)

  

  

  

  

(485)

  

  

Net gains

  

$

3,293 

  

$

(71)

  

$

3,285 

  

$

(53)

  

 

The following table presents Susquehanna’s investments’ gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013.

 

  

  

  

Less than 12 Months

  

12 Months or More

  

Total

  

  

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

June 30, 2014

  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

U.S. Government agencies

  

$

24,953 

  

$

47 

  

$

1,947 

  

$

53 

  

$

26,900 

  

$

100 

Obligations of states and political subdivisions

  

  

  

  

  

  

59,429 

  

  

1,275 

  

  

59,429 

  

  

1,275 

Agency residential mortgage-backed securities

  

  

258,383 

  

  

1,763 

  

  

331,792 

  

  

8,804 

  

  

590,175 

  

  

10,567 

Non-agency residential mortgage-backed securities

  

  

  

  

  

  

352 

  

  

  

  

352 

  

  

Other structured financial products

  

  

  

  

  

  

11,995 

  

  

12,746 

  

  

11,995 

  

  

12,746 

Other debt securities

  

  

  

  

  

  

6,786 

  

  

273 

  

  

6,786 

  

  

273 

Other equity securities

  

  

  

  

  

  

1,577 

  

  

889 

  

  

1,577 

  

  

889 

  

  

  

$

283,336 

  

$

1,810 

  

$

413,878 

  

$

24,045 

  

$

697,214 

  

$

25,855 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Less than 12 Months

  

12 Months or More

  

Total

  

  

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

December 31, 2013

  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

U.S. Government agencies

  

$

68,111 

  

$

422 

  

$

  

$

  

$

68,111 

  

$

422 

Obligations of states and political subdivisions

  

  

73,895 

  

  

3,910 

  

  

7,025 

  

  

165 

  

  

80,920 

  

  

4,075 

Agency residential mortgage-backed securities

  

  

1,030,987 

  

  

20,104 

  

  

  

  

  

  

1,030,987 

  

  

20,104 

Non-agency residential mortgage-backed securities

  

  

530 

  

  

  

  

  

  

  

  

530 

  

  

Other structured financial products

  

  

  

  

  

  

11,297 

  

  

13,741 

  

  

11,297 

  

  

13,741 

Other debt securities

  

  

  

  

  

  

6,476 

  

  

557 

  

  

6,476 

  

  

557 

Other equity securities

  

  

19,111 

  

  

286 

  

  

1,619 

  

  

897 

  

  

20,730 

  

  

1,183 

  

  

  

$

1,192,634 

  

$

24,730 

  

$

26,417 

  

$

15,360 

  

$

1,219,051 

  

$

40,090 

11

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Non-agency residential mortgage-backed securities. At June 30, 2014, Susquehanna held one security that had unrealized losses, but was not rated below investment grade. None of Susquehanna’s non-agency residential mortgage-backed securities were backed by loans identified by the issuer as subprime or Alt-A collateral. Management has analyzed the collateral underlying these securities with respect to defaults, loan to collateral value ratios, current levels of subordination, and geographic concentrations and concluded that none of these securities are other-than-temporarily impaired.

Susquehanna recorded other-than-temporary impairment losses as presented in the following table:

 

Credit Losses on Non-agency Residential Mortgage-backed and Other Equity Securities for which a Portion of an

Other-than-temporary Impairment was Recognized in Other Comprehensive Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

  

  

  

June 30,

  

  

  

  

2014 

  

2013 

  

  

  

  

  

  

Equity

  

  

  

Equity

  

  

  

  

RMBS

  

Securities

  

RMBS

  

Securities

Balance - beginning of period

  

$

  

$

609 

  

$

1,122 

  

$

512 

Additions:

  

  

  

  

  

  

  

  

  

  

  

  

  

Amount related to credit losses for which an other-than-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

temporary impairment was not previously recognized

  

  

  

  

  

  

  

  

  

Additional amount related to credit losses for which an other-than-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

temporary impairment was previously recognized

  

  

  

  

  

  

  

  

97 

Deductions:

  

  

  

  

  

  

  

  

  

  

  

  

  

Realized losses

  

  

  

  

  

  

96 

  

  

Balance - end of period

  

$

  

$

609 

  

$

1,026 

  

$

609 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six Months Ended

  

  

  

  

June 30,

  

  

  

  

2014 

  

2013 

  

  

  

  

  

  

Equity

  

  

  

Equity

  

  

  

  

RMBS

  

Securities

  

RMBS

  

Securities

Balance - beginning of period

  

$

  

$

609 

  

$

768 

  

$

512 

Additions:

  

  

  

  

  

  

  

  

  

  

  

  

  

Amount related to credit losses for which an other-than-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

temporary impairment was not previously recognized

  

  

  

  

  

  

325 

  

  

  

Additional amount related to credit losses for which an other-than-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

temporary impairment was previously recognized

  

  

  

  

  

  

63 

  

  

97 

Deductions:

  

  

  

  

  

  

  

  

  

  

  

  

  

Realized losses

  

  

  

  

  

  

130 

  

  

Balance - end of period

  

$

  

$

609 

  

$

1,026 

  

$

609 

 

Susquehanna estimated the portion of loss attributable to credit using a discounted cash flow model. Susquehanna, in conjunction with a third-party financial advisory firm, assisted with the development of critical assumptions including the expected cash flows of the underlying collateral of the non-agency residential mortgage-backed securities using internal credit risk, interest rate risk, and prepayment risk models that incorporated management’s best estimate of current key assumptions, such as default rates, loss severity, and prepayment rates.  Assumptions used can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics, and collateral type. The distribution of underlying cash flows is determined in accordance with the security’s terms. Expected principal and interest cash flows on an other-than-temporarily impaired debt security are discounted using the effective yield of that debt security.

12

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Based on the expected cash flows derived from the model, Susquehanna expects to recover the unrealized loss in accumulated other comprehensive income ($0 and $471 at June 30, 2014 and 2013, respectively). Significant assumptions used in the valuation of these other-than-temporarily impaired securities were as follows:

 

  

  

  

Weighted-average (%)

  

  

  

  

June 30,

  

  

  

  

2014 (1)

  

2013 

  

  

  

Conditional repayment rate (2)

N/A

  

10.4%

  

  

  

Loss severity (3)

N/A

  

42.0%

  

  

  

Conditional default rate (4)

N/A

  

3.6%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Not applicable as the related securities were sold during 2013.

(2)

Conditional repayment rate represents a rate equal to the proportion of principal balance paid off voluntarily over a certain period of time on an annualized basis.

  

(3)

Loss severity rates are projected by considering collateral characteristics such as current loan-to-value, original creditworthiness of borrowers (FICO score) and geographic concentration.

  

(4)

Conditional default rate is an annualized rate of default on a group of mortgages, and represents the percentage of outstanding principal balances in the pool that are in default, which typically equates to the borrower being past due 60 days, 90 days, or possibly already in the foreclosure process.

  

  

  

 

Management provides input and monitors the third party valuation process of the non-agency residential mortgage-backed securities. A detailed review of the critical assumptions and inputs is performed by Susquehanna’s Corporate Investment Committee (“CIC”). Key assumptions reviewed by the CIC include prepayment assumptions, default rates, loss severity, bond waterfall payments, and the discount rate. Additionally, available market indications of similar securities are provided by Susquehanna to the third party and are given a significant weighting by the third party.

Other structured financial products. Susquehanna’s structured financial product investments are comprised of four pooled trust preferred securities which have an aggregate unrealized loss of $12,746 and $14,543 at June 30, 2014 and 2013, respectively. All of these securities are below investment grade but are of a more senior tranche of the specific issue. Susquehanna has contracted with a third party financial advisory firm (“third party firm”) to assist in its valuation and other-than-temporary impairment analysis of its structured financial product investments. In addition to the valuation work performed by a third party firm which Susquehanna utilizes to support its valuation and other-than-temporary-impairment analysis, management of Susquehanna considered Section 619 of the Dodd-Frank Act (commonly referred to as the “Volcker Rule”). Specifically, Susquehanna considered the interim final rule published by federal regulatory agencies on January 14, 2014, which indicated Susquehanna’s trust preferred securities will remain permissible holdings under the Volcker Rule.

Management has assisted with the development of, and performed a detailed review of the critical assumptions. The review of the inputs for the valuation of the pooled trust preferred securities is performed by the CIC. Key aspects reviewed by CIC include the detail on non-performing financial institutions within the pools of trust preferred securities, the probability of default of the underlying institutions within the pools, the discount rate, trades of similar securities and indexes, and the weighting given to market indications. Susquehanna management believes that the valuation analysis and methodology reasonably supports the value and projected performance of the specific trust preferred securities. Management believes this valuation methodology presents an appropriate approach in the determination of other-than-temporary impairment charges in accordance with GAAP.

Using publicly available financial information, the third party firm’s valuation analysis compares the present value of the expected base cash flows with the amortized cost basis of the trust preferred securities to determine whether Susquehanna expects to receive the entire amortized cost basis of such securities. To make this comparison, the third party firm evaluates two scenarios consisting of three phases each. The two scenarios are: (1) the first dollar loss scenario, and, (2) the expected or forecasted scenario. The three phases associated with each scenario are production of cash flows, application of the cash flows to the percent owned, and assessment of any other-than-temporary impairment.

To determine expected cash flows, the valuation analysis considers credit default rates, call options and deferrals, waterfall structure, and covenants relating to the trust preferred securities. The trust indenture documentation and the trustee reports for each specific trust preferred security issuance provides information regarding deferral rights, call options, various triggers, (including over-

13

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

collateralization triggers), and waterfall structure, which management believes is essential in determining projected base cash flows. The third party firm determines short-term default risk using ratios, including the Texas ratio, that relate to the issuers, capitalization, asset quality, profitability, and liquidity. To determine longer term default probabilities, the third party firm uses an internal scoring approach that relies on key historical financial performance ratios. Management believes that future cash flows for these securities are reasonably developed and supported.

If a collateral security is in default at the assessment date, a recovery rate specific to the issuer of the collateral security is incorporated into the expected cash flows with a twenty-four month lag in timing of receipt of those expected cash flows. The third party firm calculates a terminal default rate based upon certain key financial ratios of the active issuers in the security to all FDIC insured bank institutions. The active issuers of the collateral securities are summarized as a weighted average based on issue size according to status of deferral and default assumption. To enhance the analysis, the third party firm calculates the standard deviation across the issuers for each ratio and removes any issuer that falls more than three standard deviations above or below the average for that ratio. No recovery is incorporated into the expected cash flows for any issuers that exceed the terminal default rate. For issuers currently making interest payments and for those currently deferring interest payments, Susquehanna makes an estimate using publicly available financial information as to the likelihood and timing of any default, after which the estimated cash flow reflects a recovery rate specific to the issuer. Issuers of collateral securities that are currently deferring interest payments and not expected to default are assumed to continue to defer interest payments for twenty quarters, the full contractually permitted deferral, from the period of initial deferral.

In considering the amount and timing of expected cash flows on the pooled trust preferred securities, management considers the right of the issuers of the securities underlying the pooled trust preferred securities to call those collateral securities. Management assesses any projected exercise of the call option, incorporating changes in economic and market conditions and the impact of any change in timing of expected cash flows in the measurement of fair value and other-than-temporary impairment.

The discount rate applied to the projected cash flows for the specific class is calculated using a spread to the current swap curve. The swap curve gives a market participant perspective of the term structure of interest rates and on credit spreads. The determination of the discount rate used in Susquehanna’s valuation is based upon the referenced swap curve plus an additional credit spread based upon the credit rating of the class. Lower rated classes would have a wider implied credit spread. These multiple discount rates are then applied to the estimated cash flows in determining the estimated present value.

14

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

The present value of the expected cash flows for Susquehanna’s specific class and subordinate classes, as well as additional

information about the pooled trust preferred securities, are included in the following tables.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

As of June 30, 2014

  

Pooled Trust #1

  

Pooled Trust #2

  

Pooled Trust #3

  

Pooled Trust #4

Recorded investment

  

$

3,000 

  

$

7,160 

  

$

7,831 

  

$

6,750 

Fair value

  

  

1,222 

  

  

3,988 

  

  

4,372 

  

  

2,413 

Unrealized loss

  

  

(1,778)

  

  

(3,172)

  

  

(3,459)

  

  

(4,337)

Class

  

  

  

  

A2L 

Class face value

  

$

35,000 

  

$

59,724 

  

$

89,651 

  

$

45,500 

Present value of expected cash flows

  

  

  

  

  

  

  

  

  

  

  

  

  

for class noted above and all

  

  

  

  

  

  

  

  

  

  

  

  

  

subordinated classes (1)

  

$

170,046 

  

$

199,081 

  

$

326,512 

  

$

159,410 

Lowest credit rating assigned

  

  

Ca 

  

Caa2 

  

Ca 

Original collateral

  

$

623,984 

  

$

501,470 

  

$

700,535 

  

$

487,680 

Performing collateral

  

  

377,342 

  

  

318,814 

  

  

486,061 

  

  

273,100 

Actual defaults

  

  

47,400 

  

  

55,580 

  

  

49,000 

  

  

83,500 

Actual deferrals

  

  

28,500 

  

  

75,430 

  

  

67,650 

  

  

65,580 

Projected future defaults

  

  

38,438 

  

  

42,129 

  

  

44,490 

  

  

27,172 

Actual defaults as a % of original

  

  

  

  

  

  

  

  

  

  

  

  

  

collateral

  

  

7.6%

  

  

11.1%

  

  

7.0%

  

  

17.1%

Actual deferrals as a % of original

  

  

  

  

  

  

  

  

  

  

  

  

  

collateral (2)

  

  

4.6%

  

  

15.0%

  

  

9.7%

  

  

13.5%

Actual defaults and deferrals as a % of

  

  

  

  

  

  

  

  

  

  

  

  

  

original collateral

  

  

12.2%

  

  

26.1%

  

  

16.7%

  

  

30.6%

Projected future defaults as a % of

  

  

  

  

  

  

  

  

  

  

  

  

  

original collateral (3)

  

  

6.2%

  

  

8.4%

  

  

6.4%

  

  

5.6%

Actual institutions deferring and

  

  

  

  

  

  

  

  

  

  

  

  

  

defaulted as a % of total institutions

  

  

17.2%

  

  

31.5%

  

  

20.6%

  

  

36.5%

Projected future defaults as a % of

  

  

  

  

  

  

  

  

  

  

  

  

  

performing collateral plus

  

  

  

  

  

  

  

  

  

  

  

  

  

deferrals

  

  

9.5%

  

  

10.7%

  

  

8.0%

  

  

8.0%

15

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

As of June 30, 2013

  

Pooled Trust #1

  

Pooled Trust #2

  

Pooled Trust #3

  

Pooled Trust #4

Recorded investment

  

$

3,000 

  

$

7,183 

  

$

8,115 

  

$

6,750 

Fair value

  

  

1,272 

  

  

3,231 

  

  

3,798 

  

  

2,204 

Unrealized loss

  

  

(1,728)

  

  

(3,952)

  

  

(4,317)

  

  

(4,546)

Class

  

  

  

  

A2L 

Class face value

  

$

35,000 

  

$

59,248 

  

$

89,071 

  

$

45,500 

Present value of expected cash flows

  

  

  

  

  

  

  

  

  

  

  

  

  

for class noted above and all

  

  

  

  

  

  

  

  

  

  

  

  

  

subordinated classes (1)

  

$

162,483 

  

$

190,163 

  

$

305,257 

  

$

150,521 

Lowest credit rating assigned

  

  

Ca 

  

Ca 

  

Ca 

Original collateral

  

$

623,984 

  

$

501,470 

  

$

700,535 

  

$

487,680 

Performing collateral

  

  

358,342 

  

  

279,934 

  

  

470,731 

  

  

281,488 

Actual defaults

  

  

30,000 

  

  

51,580 

  

  

44,000 

  

  

77,212 

Actual deferrals

  

  

80,900 

  

  

125,810 

  

  

96,150 

  

  

93,080 

Projected future defaults

  

  

54,168 

  

  

45,809 

  

  

49,876 

  

  

39,479 

Actual defaults as a % of original

  

  

  

  

  

  

  

  

  

  

  

  

  

collateral

  

  

4.8%

  

  

10.3%

  

  

6.3%

  

  

15.8%

Actual deferrals as a % of original

  

  

  

  

  

  

  

  

  

  

  

  

  

collateral (2)

  

  

13.0%

  

  

25.1%

  

  

13.7%

  

  

19.1%

Actual defaults and deferrals as a % of

  

  

  

  

  

  

  

  

  

  

  

  

  

original collateral

  

  

17.8%

  

  

35.4%

  

  

20.0%

  

  

34.9%

Projected future defaults as a % of

  

  

  

  

  

  

  

  

  

  

  

  

  

original collateral (3)

  

  

8.7%

  

  

9.1%

  

  

7.1%

  

  

8.1%

Actual institutions deferring and

  

  

  

  

  

  

  

  

  

  

  

  

  

defaulted as a % of total institutions

  

  

20.0%

  

  

38.2%

  

  

26.2%

  

  

40.9%

Projected future defaults as a % of

  

  

  

  

  

  

  

  

  

  

  

  

  

performing collateral plus

  

  

  

  

  

  

  

  

  

  

  

  

  

deferrals

  

  

12.3%

  

  

11.3%

  

  

8.8%

  

  

10.5%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Susquehanna determines whether it expects to recover the entire amortized cost basis by comparing the present value of the expected cash flows to be collected with the amortized cost basis. As of June 30, 2014 and 2013, the present value of the current estimated cash flows is equal to or greater than the book value of the trust preferred securities held. Consequently, there is no credit-related other-than-temporary impairment required to be recognized.

  

  

  

  

(2)

Includes current interest deferrals for the quarter for those institutions deferring as of the date of the assessment of the other-than-temporary impairment. Current deferrals are assumed to continue for twenty quarters, the full contractually permitted deferral period, if the institutions are not projected to default prior to that time.

  

  

  

(3)

Includes those institutions that are performing but are not projected to continue to perform and includes those institutions that are currently deferring interest that are projected to default, based upon third-party proprietary valuation methodology used to determine future defaults. Creditworthiness of each underlying issue in the collateralized debt obligation is determined using publicly available data.

  

  

  

  

16

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

NOTE 3. Loans and Leases

Originated loans and leases is defined to exclude loans purchased in business combinations since September 30, 2011, and purchased loans and leases is defined to include those loans and leases excluded from the definition of originated loans.

 

At June 30, 2014, Susquehanna reclassified approximately $265 million of indirect auto loans from held for investment to held for sale (“HFS loans”).  The loans were transferred to held for sale at their amortized cost basis on the date of transfer and will be measured at the lower of their amortized cost or fair value on an ongoing basis.  Amortized cost was lower than fair value as of June 30, 2014. 

 

In conjunction with transferring the loans to held for sale, Susquehanna reclassified $1,236 from the allowance for loan loss and reflected this as a reduction in the cost basis of the reclassified loans, which is evident in the allowance roll-forward in Note 4. Allowance for Loan and Lease Losses.  Additionally, all held for sale loans are included in the consumer category in the loan note tables and were current and accruing at June 30, 2014.

 

Loans and Leases, Net of Deferred Costs and Fees

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

  

  

  

  

  

  

2014 

  

2013 

  

  

Commercial, financial, and agricultural

  

$

2,422,931 

  

$

2,394,847 

  

  

Real estate - construction

  

  

748,181 

  

  

735,877 

  

  

Real estate secured - residential

  

  

4,178,842 

  

  

4,204,430 

  

  

Real estate secured - commercial

  

  

4,053,990 

  

  

4,068,816 

  

  

Consumer

  

  

962,618 

  

  

953,000 

  

  

Leases

  

  

1,300,591 

  

  

1,219,116 

  

  

  

  

Total loans and leases

  

$

13,667,153 

  

$

13,576,086 

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

$

12,159,274 

  

$

11,930,946 

  

  

Purchased loans and leases

  

  

1,507,879 

  

  

1,645,140 

  

  

  

  

Total loans and leases

  

$

13,667,153 

  

$

13,576,086 

  

  

  

  

  

  

  

  

  

  

  

  

  

Nonaccrual loans and leases

  

$

105,609 

  

$

100,815 

  

  

Loans and leases contractually past due 90 days

  

  

  

  

  

  

  

  

  

and still accruing

  

  

9,190 

  

  

9,757 

  

  

Troubled debt restructurings

  

  

40,938 

  

  

72,133 

  

  

Deferred origination costs, net of fees

  

  

24,441 

  

  

21,216 

  

  

All overdrawn deposit accounts, reclassified

  

  

  

  

  

  

  

  

  

as loans and evaluated for collectability

  

  

6,477 

  

  

2,918 

  

 

  

A summary of our net investment in direct lease financing is presented below.

  

  

  

  

  

  

  

  

  

  

  

  

Net Investment in Direct Financing Leases

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

  

  

  

  

  

  

  

2014 

  

2013 

  

  

  

Minimum lease payments receivable

  

$

671,443 

  

$

667,365 

  

  

  

Estimated residual value of leases

  

  

712,442 

  

  

634,875 

  

  

  

Unearned income under lease contracts

  

  

(83,294)

  

  

(83,124)

  

  

  

  

  

Total leases

  

$

1,300,591 

  

$

1,219,116 

  

 

Susquehanna monitors the credit quality of its commercial loan portfolio using internal risk ratings. These risk ratings are consistent with established regulatory guidance. Loans with a Pass rating represent those not considered a problem credit. Special mention loans are those that have a potential weakness deserving management’s careful attention. Substandard loans are those where a well-defined weakness has been identified that may put the complete receipt of contractual cash flows at risk. Substandard loans are placed in nonaccrual status when Susquehanna believes it is no longer probable it will collect all contractual cash flows.

17

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Susquehanna reviews the loan gradings on an annual basis or at any time management becomes aware of the potential for not collecting all contractual cash flows. Significant credits with ratings of special mention or substandard, and associated with a relationship greater than $5.0 million, are reviewed quarterly by management.

Susquehanna monitors the credit quality of its retail loan portfolio based primarily on delinquency status, which is the primary factor considered in determining whether a retail loan should be classified as nonaccrual.

 

  

The following tables present Susquehanna's credit quality indicators by internally assigned grading and by payment activity at

June 30, 2014 and December 31, 2013.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Credit Quality Indicators, at June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial Credit Exposure

  

  

Credit-risk Profile by Internally Assigned Grade

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate -

  

Total

  

  

  

  

  

  

  

Real Estate -

  

Secured -

  

Commercial

  

  

  

  

Commercial

  

Construction (1)

  

Commercial (2)

  

Credit Exposure

Originated loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Grade:

  

  

  

  

  

  

  

  

  

  

  

  

  

Pass (3)

$

2,168,434 

  

$

517,720 

  

$

3,669,176 

  

$

6,355,330 

  

  

Special mention (4)

  

62,990 

  

  

20,374 

  

  

164,431 

  

  

247,795 

  

  

Substandard (5)

  

71,531 

  

  

31,753 

  

  

193,258 

  

  

296,542 

  

  

  

Total

$

2,302,955 

  

$

569,847 

  

$

4,026,865 

  

$

6,899,667 

Purchased loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Grade:

  

  

  

  

  

  

  

  

  

  

  

  

  

Pass (3)

$

107,421 

  

$

24,172 

  

$

693,000 

  

$

824,593 

  

  

Special mention (4)

  

5,325 

  

  

19,312 

  

  

64,620 

  

  

89,257 

  

  

Substandard (5)

  

7,230 

  

  

14,295 

  

  

104,933 

  

  

126,458 

  

  

  

Total

$

119,976 

  

$

57,779 

  

$

862,553 

  

$

1,040,308 

Total loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Grade:

  

  

  

  

  

  

  

  

  

  

  

  

  

Pass (3)

$

2,275,855 

  

$

541,892 

  

$

4,362,176 

  

$

7,179,923 

  

  

Special mention (4)

  

68,315 

  

  

39,686 

  

  

229,051 

  

  

337,052 

  

  

Substandard (5)

  

78,761 

  

  

46,048 

  

  

298,191 

  

  

423,000 

  

  

  

Total

$

2,422,931 

  

$

627,626 

  

$

4,889,418 

  

$

7,939,975 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other Credit Exposure

  

  

Credit-risk Profile based on Payment Activity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate - 

  

  

  

  

  

  

  

  

  

  

  

  

  

Secured - 

  

  

  

  

  

  

  

Total Other 

  

  

  

  

Residential 

  

Consumer 

  

Leases 

  

Credit Exposure 

Originated loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Performing

$

2,985,504 

  

$

956,065 

  

$

1,299,403 

  

$

5,240,972 

  

Nonperforming (6)

  

17,113 

  

  

334 

  

  

1,188 

  

  

18,635 

  

  

Total

$

3,002,617 

  

$

956,399 

  

$

1,300,591 

  

$

5,259,607 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Purchased loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Performing

$

452,350 

  

$

6,219 

  

$

  

$

458,569 

  

Nonperforming (6)

  

9,002 

  

  

  

  

  

  

9,002 

  

  

Total

$

461,352 

  

$

6,219 

  

$

  

$

467,571 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Performing

$

3,437,854 

  

$

962,284 

  

$

1,299,403 

  

$

5,699,541 

  

Nonperforming (6)

  

26,115 

  

  

334 

  

  

1,188 

  

  

27,637 

  

  

Total

$

3,463,969 

  

$

962,618 

  

$

1,300,591 

  

$

5,727,178 

18

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Credit Quality Indicators, at December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial Credit Exposure

  

  

Credit-risk Profile by Internally Assigned Grade

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate -

  

Total

  

  

  

  

  

  

  

Real Estate -

  

Secured -

  

Commercial

  

  

  

  

Commercial

  

Construction (1)

  

Commercial (2)

  

Credit Exposure

Originated loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Grade:

  

  

  

  

  

  

  

  

  

  

  

  

  

Pass (3)

$

2,133,884 

  

$

478,097 

  

$

3,658,875 

  

$

6,270,856 

  

  

Special mention (4)

  

75,162 

  

  

33,907 

  

  

168,464 

  

  

277,533 

  

  

Substandard (5)

  

60,168 

  

  

30,583 

  

  

194,799 

  

  

285,550 

  

  

  

Total

$

2,269,214 

  

$

542,587 

  

$

4,022,138 

  

$

6,833,939 

Purchased loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Grade:

  

  

  

  

  

  

  

  

  

  

  

  

  

Pass (3)

$

108,898 

  

$

25,070 

  

$

750,241 

  

$

884,209 

  

  

Special mention (4)

  

4,220 

  

  

19,811 

  

  

62,208 

  

  

86,239 

  

  

Substandard (5)

  

12,515 

  

  

22,247 

  

  

130,408 

  

  

165,170 

  

  

  

Total

$

125,633 

  

$

67,128 

  

$

942,857 

  

$

1,135,618 

Total loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Grade:

  

  

  

  

  

  

  

  

  

  

  

  

  

Pass (3)

$

2,242,782 

  

$

503,167 

  

$

4,409,116 

  

$

7,155,065 

  

  

Special mention (4)

  

79,382 

  

  

53,718 

  

  

230,672 

  

  

363,772 

  

  

Substandard (5)

  

72,683 

  

  

52,830 

  

  

325,207 

  

  

450,720 

  

  

  

Total

$

2,394,847 

  

$

609,715 

  

$

4,964,995 

  

$

7,969,557 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other Credit Exposure

  

  

Credit-risk Profile based on Payment Activity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate - 

  

  

  

  

  

  

  

  

  

  

  

  

  

Secured - 

  

  

  

  

  

  

  

Total Other 

  

  

  

  

Residential 

  

Consumer 

  

Leases 

  

Credit Exposure 

Originated loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Performing

$

2,914,547 

  

$

945,379 

  

$

1,217,629 

  

$

5,077,555 

  

Nonperforming (6)

  

16,937 

  

  

1,028 

  

  

1,487 

  

  

19,452 

  

  

Total

$

2,931,484 

  

$

946,407 

  

$

1,219,116 

  

$

5,097,007 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Purchased loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Performing

$

491,922 

  

$

6,591 

  

$

  

$

498,513 

  

Nonperforming (6)

  

11,007 

  

  

  

  

  

  

11,009 

  

  

Total

$

502,929 

  

$

6,593 

  

$

  

$

509,522 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

Performing

$

3,406,469 

  

$

951,970 

  

$

1,217,629 

  

$

5,576,068 

  

Nonperforming (6)

  

27,944 

  

  

1,030 

  

  

1,487 

  

  

30,461 

  

  

Total

$

3,434,413 

  

$

953,000 

  

$

1,219,116 

  

$

5,606,529 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Includes only construction loans granted to commercial customers. Construction loans for individuals are included in Real Estate – Secured – Residential, below.

(2)

Includes loans obtained for commercial purposes that are also secured by residential real estate.

(3)

Includes loans identified as having acceptable risk, which are loans for which the possibility of loss is considered unlikely.

(4)

Includes loans considered potentially weak; however, no loss of principal or interest is anticipated.

(5)

Includes loans that are inadequately protected by the current net-worth and paying capacity of the borrower or by the collateral pledged, if any. Loss of principal or interest is considered reasonably possible or likely.

  

(6)

Includes loans that are on non-accrual status or past due ninety days or more.

19

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

The following tables detail the age analysis of Susquehanna's past due financing receivables as of June 30, 2014 and December 31, 2013.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Age Analysis of Past Due Financing Receivables, as of June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financing Receivables that are Accruing

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

30-59 Days

  

60-89 Days

  

90 Days

  

Total

  

  

  

  

 Financing 

  

  

Past Due

  

Past Due

  

and Greater

  

Past Due

  

Current

  

Receivables

Commercial

$

1,297 

  

$

468 

  

$

20 

  

$

1,785 

  

$

2,402,354 

  

$

2,404,139 

Real estate - construction

  

183 

  

  

745 

  

  

692 

  

  

1,620 

  

  

739,133 

  

  

740,753 

Real estate secured - residential

  

8,296 

  

  

3,709 

  

  

6,018 

  

  

18,023 

  

  

4,136,079 

  

  

4,154,102 

Real estate secured - commercial

  

2,544 

  

  

12,850 

  

  

1,903 

  

  

17,297 

  

  

3,983,006 

  

  

4,000,303 

Consumer

  

5,245 

  

  

1,015 

  

  

291 

  

  

6,551 

  

  

956,024 

  

  

962,575 

Leases

  

771 

  

  

316 

  

  

266 

  

  

1,353 

  

  

1,298,319 

  

  

1,299,672 

  

Total

$

18,336 

  

$

19,103 

  

$

9,190 

  

$

46,629 

  

$

13,514,915 

  

$

13,561,544 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

16,051 

  

$

17,055 

  

$

4,518 

  

$

37,624 

  

$

12,035,233 

  

$

12,072,857 

Purchased loans and leases

  

2,285 

  

  

2,048 

  

  

4,672 

  

  

9,005 

  

  

1,479,682 

  

  

1,488,687 

  

Total

$

18,336 

  

$

19,103 

  

$

9,190 

  

$

46,629 

  

$

13,514,915 

  

$

13,561,544 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financing Receivables that are Nonaccruing

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

30-59 Days

  

60-89 Days

  

90 Days

  

Total

  

  

  

  

 Financing 

  

  

Past Due

  

Past Due

  

and Greater

  

Past Due

  

Current

  

Receivables

Commercial

$

95 

  

$

1,436 

  

$

9,246 

  

$

10,777 

  

$

8,015 

  

$

18,792 

Real estate - construction

  

  

  

  

  

3,604 

  

  

3,604 

  

  

3,824 

  

  

7,428 

Real estate secured - residential

  

79 

  

  

544 

  

  

16,819 

  

  

17,442 

  

  

7,298 

  

  

24,740 

Real estate secured - commercial

  

1,865 

  

  

98 

  

  

30,527 

  

  

32,490 

  

  

21,197 

  

  

53,687 

Consumer

  

  

  

  

  

10 

  

  

10 

  

  

33 

  

  

43 

Leases

  

  

  

182 

  

  

24 

  

  

206 

  

  

713 

  

  

919 

  

Total

$

2,039 

  

$

2,260 

  

$

60,230 

  

$

64,529 

  

$

41,080 

  

$

105,609 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

1,550 

  

$

2,152 

  

$

49,750 

  

$

53,452 

  

$

32,965 

  

$

86,417 

Purchased loans and leases

  

489 

  

  

108 

  

  

10,480 

  

  

11,077 

  

  

8,115 

  

  

19,192 

  

Total

$

2,039 

  

$

2,260 

  

$

60,230 

  

$

64,529 

  

$

41,080 

  

$

105,609 

20

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Age Analysis of Past Due Financing Receivables, as of December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financing Receivables that are Accruing

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

30-59 Days

  

60-89 Days

  

90 Days

  

Total

  

  

  

  

 Financing 

  

  

Past Due

  

Past Due

  

and Greater

  

Past Due

  

Current

  

Receivables

Commercial

$

3,640 

  

$

518 

  

$

127 

  

$

4,285 

  

$

2,373,735 

  

$

2,378,020 

Real estate - construction

  

1,631 

  

  

903 

  

  

418 

  

  

2,952 

  

  

719,695 

  

  

722,647 

Real estate secured - residential

  

27,441 

  

  

6,223 

  

  

7,274 

  

  

40,938 

  

  

4,140,127 

  

  

4,181,065 

Real estate secured - commercial

  

11,583 

  

  

1,840 

  

  

667 

  

  

14,090 

  

  

4,008,579 

  

  

4,022,669 

Consumer

  

8,664 

  

  

1,537 

  

  

983 

  

  

11,184 

  

  

941,769 

  

  

952,953 

Leases

  

4,275 

  

  

368 

  

  

288 

  

  

4,931 

  

  

1,212,986 

  

  

1,217,917 

  

Total

$

57,234 

  

$

11,389 

  

$

9,757 

  

$

78,380 

  

$

13,396,891 

  

$

13,475,271 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

46,031 

  

$

9,381 

  

$

7,302 

  

$

62,714 

  

$

11,787,333 

  

$

11,850,047 

Purchased loans and leases

  

11,203 

  

  

2,008 

  

  

2,455 

  

  

15,666 

  

  

1,609,558 

  

  

1,625,224 

  

Total

$

57,234 

  

$

11,389 

  

$

9,757 

  

$

78,380 

  

$

13,396,891 

  

$

13,475,271 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financing Receivables that are Nonaccruing

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

  

  

30-59 Days

  

60-89 Days

  

90 Days

  

Total

  

  

  

  

 Financing 

  

  

Past Due

  

Past Due

  

and Greater

  

Past Due

  

Current

  

Receivables

Commercial

$

4,832 

  

$

855 

  

$

4,850 

  

$

10,537 

  

$

6,290 

  

$

16,827 

Real estate - construction

  

2,176 

  

  

788 

  

  

5,320 

  

  

8,284 

  

  

4,946 

  

  

13,230 

Real estate secured - residential

  

609 

  

  

497 

  

  

16,518 

  

  

17,624 

  

  

5,741 

  

  

23,365 

Real estate secured - commercial

  

1,320 

  

  

3,551 

  

  

19,952 

  

  

24,823 

  

  

21,324 

  

  

46,147 

Consumer

  

  

  

  

  

  

  

  

  

47 

  

  

47 

Leases

  

  

  

199 

  

  

148 

  

  

347 

  

  

852 

  

  

1,199 

  

Total

$

8,937 

  

$

5,890 

  

$

46,788 

  

$

61,615 

  

$

39,200 

  

$

100,815 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

8,205 

  

$

3,806 

  

$

39,553 

  

$

51,564 

  

$

29,335 

  

$

80,899 

Purchased loans and leases

  

732 

  

  

2,084 

  

  

7,235 

  

  

10,051 

  

  

9,865 

  

  

19,916 

  

Total

$

8,937 

  

$

5,890 

  

$

46,788 

  

$

61,615 

  

$

39,200 

  

$

100,815 

21

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

The following tables provide information about Susquehanna’s impaired loans, including principal balance, recorded investment, and related specific allowance amounts at the dates indicated. Loans with no specific allowance for loan losses have adequate collateral securing their carrying value and in some circumstances have been charged down to their current carrying value based on the fair value of the collateral less selling costs.

 

Impaired Loans at June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Average

  

  

  

  

  

  

  

  

  

  

Recorded

  

  

  

  

  

  

  

Recorded

  

  

  

  

  

  

  

Unpaid

  

Investment

  

  

  

  

Related

  

Investment

  

Interest

  

  

  

  

Principal

  

in Impaired

  

Related

  

Specific

  

in Impaired

  

Income

  

  

  

  

Balance

  

Loans

  

Charge-offs

  

Allowance

  

Loans (2)

  

Recognized

Impaired loans without a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

$

21,203 

  

$

18,289 

  

$

2,914 

  

  

  

  

$

18,410 

  

$

238 

  

Real estate - construction

  

11,286 

  

  

10,687 

  

  

599 

  

  

  

  

  

10,826 

  

  

97 

  

Real estate secured - residential

  

23,047 

  

  

22,414 

  

  

633 

  

  

  

  

  

22,953 

  

  

278 

  

Real estate secured - commercial

  

127,356 

  

  

104,750 

  

  

22,606 

  

  

  

  

  

103,245 

  

  

1,435 

  

Consumer

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total impaired loans without a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

182,892 

  

  

156,140 

(1) 

  

26,752 

  

  

  

  

  

155,434 

  

  

2,048 

Impaired loans with a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

7,941 

  

  

7,941 

  

  

  

$

4,307 

  

  

8,385 

  

  

56 

  

Real estate - construction

  

7,823 

  

  

3,090 

  

  

4,733 

  

  

705 

  

  

3,139 

  

  

27 

  

Real estate secured - residential

  

23,836 

  

  

22,218 

  

  

1,618 

  

  

2,634 

  

  

24,350 

  

  

259 

  

Real estate secured - commercial

  

16,543 

  

  

14,634 

  

  

1,909 

  

  

5,197 

  

  

13,792 

  

  

305 

  

Consumer

  

1,049 

  

  

1,049 

  

  

  

  

114 

  

  

1,095 

  

  

21 

  

  

Total impaired loans with a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

57,192 

  

  

48,932 

  

  

8,260 

  

  

12,957 

  

  

50,761 

  

  

668 

Total impaired loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

29,144 

  

  

26,230 

  

  

2,914 

  

  

4,307 

  

  

26,795 

  

  

294 

  

Real estate - construction

  

19,109 

  

  

13,777 

  

  

5,332 

  

  

705 

  

  

13,965 

  

  

124 

  

Real estate secured - residential

  

46,883 

  

  

44,632 

  

  

2,251 

  

  

2,634 

  

  

47,303 

  

  

537 

  

Real estate secured - commercial

  

143,899 

  

  

119,384 

  

  

24,515 

  

  

5,197 

  

  

117,037 

  

  

1,740 

  

Consumer

  

1,049 

  

  

1,049 

  

  

  

  

114 

  

  

1,095 

  

  

21 

  

  

  

Total impaired loans

$

240,084 

  

$

205,072 

  

$

35,012 

  

$

12,957 

  

$

206,195 

  

$

2,716 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Impaired loans without a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

73,346 

  

$

49,039 

  

$

24,307 

  

  

  

  

$

47,805 

  

$

583 

  

Purchased loans and leases

  

109,546 

  

  

107,101 

  

  

2,445 

  

  

  

  

  

107,629 

  

  

1,465 

  

  

Total impaired loans without a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

182,892 

  

  

156,140 

  

  

26,752 

  

  

  

  

  

155,434 

  

  

2,048 

Impaired loans with a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

51,046 

  

  

43,036 

  

  

8,010 

  

$

11,556 

  

  

44,763 

  

  

561 

  

Purchased loans and leases

  

6,146 

  

  

5,896 

  

  

250 

  

  

1,401 

  

  

5,998 

  

  

107 

  

  

Total impaired loans with a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

57,192 

  

  

48,932 

  

  

8,260 

  

  

12,957 

  

  

50,761 

  

  

668 

Total impaired loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

124,392 

  

  

92,075 

  

  

32,317 

  

  

11,556 

  

  

92,568 

  

  

1,144 

  

Purchased loans and leases (3)

  

115,692 

  

  

112,997 

  

  

2,695 

  

  

1,401 

  

  

113,627 

  

  

1,572 

  

  

  

Total impaired loans

$

240,084 

  

$

205,072 

  

$

35,012 

  

$

12,957 

  

$

206,195 

  

$

2,716 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

$34,511 of the $156,140 total impaired loans without a related reserve represents loans that had been written down to the fair value of the underlying collateral adjusted for selling costs through direct charge-offs of $26,752.

  

(2)

Average recorded investment in impaired loans is calculated on a quarterly basis using daily balances.

(3)

$5,896 of the $112,997 purchased impaired loans were subsequently impaired after being acquired.

22

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Impaired Loans at December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Average

  

  

  

  

  

  

  

  

  

  

Recorded

  

  

  

  

  

  

  

Recorded

  

  

  

  

  

  

  

Unpaid

  

Investment

  

  

  

  

Related

  

Investment

  

Interest

  

  

  

  

Principal

  

in Impaired

  

Related

  

Specific

  

in Impaired

  

Income

  

  

  

  

Balance

  

Loans

  

Charge-offs

  

Allowance

  

Loans (2)

  

Recognized

Impaired loans without a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

$

31,196 

  

$

28,034 

  

$

3,162 

  

  

  

  

$

29,316 

  

$

390 

  

Real estate - construction

  

17,851 

  

  

14,215 

  

  

3,636 

  

  

  

  

  

14,715 

  

  

140 

  

Real estate secured - residential

  

28,308 

  

  

27,645 

  

  

663 

  

  

  

  

  

27,800 

  

  

297 

  

Real estate secured - commercial

  

143,664 

  

  

125,139 

  

  

18,525 

  

  

  

  

  

125,003 

  

  

2,076 

  

Consumer

  

  

  

  

  

  

  

  

  

  

14 

  

  

  

  

Total impaired loans without a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

221,019 

  

  

195,033 

(1)

  

25,986 

  

  

  

  

  

196,848 

  

  

2,903 

Impaired loans with a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

6,864 

  

  

5,879 

  

  

985 

  

$

3,008 

  

  

5,893 

  

  

154 

  

Real estate - construction

  

15,202 

  

  

7,288 

  

  

7,914 

  

  

1,819 

  

  

5,831 

  

  

228 

  

Real estate secured - residential

  

37,499 

  

  

35,153 

  

  

2,346 

  

  

4,753 

  

  

35,273 

  

  

554 

  

Real estate secured - commercial

  

27,238 

  

  

17,529 

  

  

9,709 

  

  

3,827 

  

  

16,546 

  

  

325 

  

Consumer

  

1,992 

  

  

1,992 

  

  

  

  

218 

  

  

2,042 

  

  

56 

  

  

Total impaired loans with a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

88,795 

  

  

67,841 

  

  

20,954 

  

  

13,625 

  

  

65,585 

  

  

1,317 

Total impaired loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

38,060 

  

  

33,913 

  

  

4,147 

  

  

3,008 

  

  

35,209 

  

  

544 

  

Real estate - construction

  

33,053 

  

  

21,503 

  

  

11,550 

  

  

1,819 

  

  

20,546 

  

  

368 

  

Real estate secured - residential

  

65,807 

  

  

62,798 

  

  

3,009 

  

  

4,753 

  

  

63,073 

  

  

851 

  

Real estate secured - commercial

  

170,902 

  

  

142,668 

  

  

28,234 

  

  

3,827 

  

  

141,549 

  

  

2,401 

  

Consumer

  

1,992 

  

  

1,992 

  

  

  

  

218 

  

  

2,056 

  

  

56 

  

  

  

Total impaired loans

$

309,814 

  

$

262,874 

  

$

46,940 

  

$

13,625 

  

$

262,433 

  

$

4,220 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Impaired loans without a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

88,900 

  

$

66,086 

  

$

22,814 

  

  

  

  

$

65,341 

  

$

749 

  

Purchased loans and leases

  

132,119 

  

  

128,947 

  

  

3,172 

  

  

  

  

  

131,507 

  

  

2,154 

  

  

Total impaired loans without a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

221,019 

  

  

195,033 

  

  

25,986 

  

  

  

  

  

196,848 

  

  

2,903 

Impaired loans with a related reserve:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

78,015 

  

  

58,343 

  

  

19,672 

  

$

11,612 

  

  

55,881 

  

  

1,172 

  

Purchased loans and leases

  

10,780 

  

  

9,498 

  

  

1,282 

  

  

2,013 

  

  

9,704 

  

  

145 

  

  

Total impaired loans with a

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

related reserve

  

88,795 

  

  

67,841 

  

  

20,954 

  

  

13,625 

  

  

65,585 

  

  

1,317 

Total impaired loans:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

166,915 

  

  

124,429 

  

  

42,486 

  

  

11,612 

  

  

121,222 

  

  

1,921 

  

Purchased loans and leases (3)

  

142,899 

  

  

138,445 

  

  

4,454 

  

  

2,013 

  

  

141,211 

  

  

2,299 

  

  

  

Total impaired loans

$

309,814 

  

$

262,874 

  

$

46,940 

  

$

13,625 

  

$

262,433 

  

$

4,220 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

$43,363 of the $195,033 total impaired loans without a related reserve represents loans that had been written down to the fair value of the underlying collateral adjusted for selling costs through direct charge-offs of $25,986.

         

(2)

Average recorded investment in impaired loans is calculated on a quarterly basis using daily balances.

(3)

$9,498 of the $138,445 purchased impaired loans were subsequently impaired after being acquired.

23

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

The following table presents Troubled Debt Restructurings (TDR's), by class segment:

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

  

  

  

  

2014 

  

2013 

  

  

Commercial, financial, and agricultural

$

 4,228 

  

$

 6,885 

  

  

Real estate - construction

  

322 

  

  

615 

  

  

Real estate secured - residential

  

18,414 

  

  

31,623 

  

  

Real estate secured - commercial

  

16,903 

  

  

31,295 

  

  

Consumer

  

1,071 

  

  

1,715 

  

  

  

Total performing TDRs

  

 40,938 

  

  

 72,133 

  

  

Non-performing TDRs (1)

  

20,465 

  

  

22,676 

  

  

  

Total TDRs

$

 61,403 

  

$

 94,809 

  

  

  

  

  

  

  

  

  

  

  

Performing TDRs

  

67%

  

  

76%

  

  

Non-performing TDRs

  

33%

  

  

24%

  

  

  

  

  

  

  

  

  

(1)

These loans are included in the 90 day past due and non-accrual categories.

 

  

The following table provides detail of TDR balance and activity for the periods presented:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three months ended

  

Six months ended

  

  

  

  

  

June 30,

  

June 30,

  

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

Performing TDRs, beginning of period

$

39,555 

  

$

65,773 

  

$

72,133 

  

$

67,775 

  

New restructurings as TDRs

  

3,213 

  

  

7,187 

  

  

4,083 

  

  

25,069 

  

Repayments and payoffs

  

(566)

  

  

(1,013)

  

  

(1,005)

  

  

(3,250)

  

Charge-offs after restructuring

  

(14)

  

  

(6,604)

  

  

(429)

  

  

(6,725)

  

Transfer to nonaccrual, past due 90 days or greater, non-performing TDRs

  

(1,248)

  

  

(1,212)

  

  

(5,688)

  

  

(6,042)

  

Transfer out of TDR status (1)

  

  

  

(272)

  

  

(28,155)

  

  

(12,613)

  

Other, net (2)

  

(2)

  

  

(37)

  

  

(1)

  

  

(392)

Performing TDRs, end of period

$

40,938 

  

$

63,822 

  

$

40,938 

  

$

63,822 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Non-performing TDRs (3), end of period

$

20,465 

  

$

20,500 

  

$

20,465 

  

$

20,500 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Performing TDRs

  

67%

  

  

76%

  

  

67%

  

  

76%

Non-performing TDRs

  

33%

  

  

24%

  

  

33%

  

  

24%

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Loans that have performed in accordance with the renegotiated terms for a minimum of six consecutive months with payments and at the time of renegotiation the loan's interest rate represented a then current market interest rate for a loan of similar risk.

  

(2)

Includes $203 transferred to OREO in 2013.

(3)

Included in Age Analysis of Past Due Financing Receivables.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

24

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

The following tables present Susquehanna’s loan modification activities that were considered troubled debt restructurings for the three and six month periods ended June 30, 2014 and 2013.

 

  

  

  

  

  

Recorded Investment

  

  

  

  

  

  

  

  

  

  

Post-

  

Financial Effect of

  

  

  

  

  

  

  

Pre-Modification

  

Modification

  

Modification

  

  

  

  

  

Number of

  

Recorded

  

Recorded

  

Recorded

  

  

  

Three months ended June 30, 2014

  

Loans

  

Investment

  

Investment

  

Investment(1)

  

Interest (2)

Troubled Debt Restructurings

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

$

  

$

  

$

  

$

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

  

  

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

1,401 

  

  

1,401 

  

  

  

  

  

  

Combination of modification types

  

  

  

793 

  

  

793 

  

  

  

  

  

Real estate secured - commercial

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

  

  

  

  

  

  

  

  

Combination of modification types

  

  

  

375 

  

  

375 

  

  

  

  

  

Consumer

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

12 

  

  

81 

  

  

81 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

  

Total

  

24 

  

$

2,650 

  

$

2,650 

  

$

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

21 

  

$

2,129 

  

$

2,129 

  

$

  

$

53 

Purchased loans and leases

  

  

  

521 

  

  

521 

  

  

  

  

(45)

  

Total

  

24 

  

$

2,650 

  

$

2,650 

  

$

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Financial effects impacting the recorded investment include principal payments, advances, charge-offs, and capitalized past-due amounts.

(2)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Number of

  

Recorded

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Loans

  

Investment

  

  

  

  

  

  

Troubled Debt Restructurings that Subsequently

  

  

  

  

  

  

  

  

  

  

  

  

  

Defaulted during the current period

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

  

$

998 

  

  

  

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

179 

  

  

  

  

  

  

  

  

Real estate secured - commercial

  

  

  

  

  

  

  

  

  

  

  

  

Consumer

  

  

  

  

36 

  

  

  

  

  

  

  

  

Total

  

  

11 

  

$

1,213 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

  

10 

  

$

1,093 

  

  

  

  

  

  

Purchased loans and leases

  

  

  

  

120 

  

  

  

  

  

  

  

  

Total

  

  

11 

  

$

1,213 

  

  

  

  

  

  

25

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

  

  

  

Recorded Investment

  

  

  

  

  

  

  

  

  

  

Post-

  

Financial Effect of

  

  

  

  

  

  

  

Pre-Modification

  

Modification

  

Modification

  

  

  

  

  

Number of

  

Recorded

  

Recorded

  

Recorded

  

  

  

Three months ended June 30, 2013

  

Loans

  

Investment

  

Investment

  

Investment(1)

  

Interest (2)

Troubled Debt Restructurings

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

11 

  

$

1,041 

  

$

1,041 

  

$

  

$

  

  

Combination of modification types

  

  

  

241 

  

  

241 

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

117 

  

  

117 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

40 

  

  

2,912 

  

  

2,912 

  

  

  

  

  

  

Combination of modification types

  

10 

  

  

1,186 

  

  

1,186 

  

  

  

  

56 

  

Real estate secured - commercial

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

949 

  

  

949 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

  

Consumer

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

63 

  

  

741 

  

  

741 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

  

Total

  

131 

  

$

7,187 

  

$

7,187 

  

$

  

$

56 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

121 

  

$

6,458 

  

$

6,458 

  

$

  

$

56 

Purchased loans and leases

  

10 

  

  

729 

  

  

729 

  

  

  

  

  

Total

  

131 

  

$

7,187 

  

$

7,187 

  

$

  

$

56 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Financial effects impacting the recorded investment include principal payments, advances, charge-offs, and capitalized past-due amounts.

(2)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Number of

  

Recorded

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Loans

  

Investment

  

  

  

  

  

  

Troubled Debt Restructurings that Subsequently

  

  

  

  

  

  

  

  

  

  

  

  

  

Defaulted during the current period

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

  

$

6,621 

  

  

  

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

509 

  

  

  

  

  

  

  

  

Real estate secured - commercial

  

  

  

  

  

  

  

  

  

  

  

  

Consumer

  

  

14 

  

  

66 

  

  

  

  

  

  

  

  

Total

  

  

24 

  

$

7,196 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

  

22 

  

$

6,859 

  

  

  

  

  

  

Purchased loans and leases

  

  

  

  

337 

  

  

  

  

  

  

  

  

Total

  

  

24 

  

$

7,196 

  

  

  

  

  

  

26

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

  

  

Recorded Investment

  

  

  

  

  

  

  

  

  

  

  

  

Financial Effect of

  

  

  

  

  

  

Pre-Modification

  

Post-Modification

  

Modification

  

  

  

  

Number of

  

Recorded

  

Recorded

  

Recorded

  

  

  

Six months ended June 30, 2014

Loans

  

Investment

  

Investment

  

Investment(1)

  

Interest (2)

Troubled Debt Restructurings

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

$

102 

  

$

102 

  

$

  

$

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

  

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

13 

  

  

1,851 

  

  

1,851 

  

  

  

  

  

  

Combination of modification types

  

  

1,100 

  

  

1,100 

  

  

  

  

(8)

  

Real estate secured - commercial

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

  

  

  

  

  

  

  

  

Combination of modification types

  

  

375 

  

  

375 

  

  

  

  

  

Consumer

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

14 

  

  

92 

  

  

92 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

Total

41 

  

$

3,520 

  

$

3,520 

  

$

  

$

(8)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

37 

  

$

2,933 

  

$

2,933 

  

$

  

$

37 

Purchased loans and leases

  

  

587 

  

  

587 

  

  

  

  

(45)

  

Total

41 

  

$

3,520 

  

$

3,520 

  

$

  

$

(8)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Financial effects impacting the recorded investment include principal payments, advances, charge-offs, and capitalized past-due amounts.

(2)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Number of

  

Recorded

  

  

  

  

  

  

  

  

  

  

  

  

  

Loans

  

Investment

  

  

  

  

  

  

Troubled Debt Restructurings that Subsequently

  

  

  

  

  

  

  

  

  

  

  

  

  

Defaulted during the current period

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

11 

  

$

2,027 

  

  

  

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

397 

  

  

  

  

  

  

  

  

Real estate secured - commercial

  

  

  

  

2,599 

  

  

  

  

  

  

  

  

Consumer

  

  

21 

  

  

159 

  

  

  

  

  

  

  

  

Total

  

  

44 

  

$

5,182 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

  

40 

  

$

2,536 

  

  

  

  

  

  

Purchased loans and leases

  

  

  

  

2,646 

  

  

  

  

  

  

  

  

Total

  

  

44 

  

$

5,182 

  

  

  

  

  

  

27

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

  

  

Recorded Investment

  

  

  

  

  

  

  

  

  

  

  

  

Financial Effect of

  

  

  

  

  

  

Pre-Modification

  

Post-Modification

  

Modification

  

  

  

  

Number of

  

Recorded

  

Recorded

  

Recorded

  

  

  

Six months ended June 30, 2013

Loans

  

Investment

  

Investment

  

Investment(1)

  

Interest (2)

Troubled Debt Restructurings

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

23 

  

$

8,534 

  

$

8,534 

  

$

  

$

  

  

Combination of modification types

  

  

241 

  

  

241 

  

  

  

  

  

Real estate - construction

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

  

  

137 

  

  

137 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

99 

  

  

8,323 

  

  

8,323 

  

  

  

  

  

  

Combination of modification types

17 

  

  

2,502 

  

  

2,502 

  

  

  

  

(72)

  

Real estate secured - commercial

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

12 

  

  

2,499 

  

  

2,499 

  

  

  

  

  

  

Combination of modification types

  

  

1,436 

  

  

1,436 

  

  

  

  

(196)

  

Consumer

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Bankruptcies and maturity date extensions

150 

  

  

1,397 

  

  

1,397 

  

  

  

  

  

  

Combination of modification types

  

  

  

  

  

  

  

  

  

Total

305 

  

$

25,069 

  

$

25,069 

  

$

  

$

(268)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

287 

  

$

22,607 

  

$

22,607 

  

$

  

$

(225)

Purchased loans and leases

18 

  

  

2,462 

  

  

2,462 

  

  

  

  

(43)

  

Total

305 

  

$

25,069 

  

$

25,069 

  

$

  

$

(268)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Financial effects impacting the recorded investment include principal payments, advances, charge-offs, and capitalized past-due amounts.

(2)

Represents the present value of interest rate concessions discounted at the effective rate of the original loan.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Number of

  

Recorded

  

  

  

  

  

  

  

  

  

  

  

  

  

Loans

  

Investment

  

  

  

  

  

  

Troubled Debt Restructurings that Subsequently

  

  

  

  

  

  

  

  

  

  

  

  

  

Defaulted during the current period

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

  

12 

  

$

7,301 

  

  

  

  

  

  

  

  

Real estate - construction

  

  

  

  

137 

  

  

  

  

  

  

  

  

Real estate secured - residential

  

  

13 

  

  

1,290 

  

  

  

  

  

  

  

  

Real estate secured - commercial

  

  

  

  

447 

  

  

  

  

  

  

  

  

Consumer

  

  

33 

  

  

205 

  

  

  

  

  

  

  

  

Total

  

  

63 

  

$

9,380 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

  

  

58 

  

$

8,843 

  

  

  

  

  

  

Purchased loans and leases

  

  

  

  

537 

  

  

  

  

  

  

  

  

Total

  

  

63 

  

$

9,380 

  

  

  

  

  

  

28

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

The unpaid principal balance and the related carrying amount of acquired loans are as follows:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 

  

December 31, 

  

  

  

  

  

  

  

2014 

  

2013 

  

  

  

Credit impaired purchased loans evaluated individually for

  

  

  

  

  

  

  

  

  

  

incurred credit losses

  

  

  

  

  

  

  

  

  

  

  

Unpaid principal balance

  

$

139,097 

  

$

176,351 

  

  

  

  

  

Carrying amount

  

  

112,997 

  

  

138,445 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other purchased loans evaluated collectively for incurred credit

  

  

  

  

  

  

  

  

  

  

losses

  

  

  

  

  

  

  

  

  

  

  

Unpaid principal balance

  

  

1,393,362 

  

  

1,509,870 

  

  

  

  

  

Carrying amount

  

  

1,394,882 

  

  

1,506,695 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total purchased loans

  

  

  

  

  

  

  

  

  

  

  

Unpaid principal balance

  

  

1,532,459 

  

  

1,686,221 

  

  

  

  

  

Carrying amount

  

  

1,507,879 

  

  

1,645,140 

  

 

  

The changes in the accretable discount related to the purchased credit impaired loans are as follows:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

Six Months Ended

  

  

  

  

June 30,

  

June 30,

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

Balance - beginning of period

$

43,058 

  

$

58,817 

  

$

46,219 

  

$

62,868 

  

  

  

Accretion recognized during the period

  

(2,572)

  

  

(5,723)

  

  

(5,733)

  

  

(12,293)

  

  

  

Net reclassification from non-accretable to accretable

  

2,833 

  

  

(3,907)

  

  

2,833 

  

  

(1,388)

  

  

Balance - end of period

$

43,319 

  

$

49,187 

  

$

43,319 

  

$

49,187 

  

 

NOTE 4. Allowance for Loan and Lease Losses

 

In establishing the allowance for credit losses, Susquehanna estimates losses attributable to specific impaired credits identified through the credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, Susquehanna evaluates its loan and lease portfolio by loan type. The losses provisioned for in Susquehanna’s allowance for loan loss is determined through a loan by loan analysis of larger balance commercial and commercial real estate loans that show signs of credit deterioration and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Susquehanna’s loan grading system, adjusted for qualitative considerations.  In determining the allowance for credit losses, Susquehanna utilizes an internal loan grading system for its commercial portfolio.  The internal loan gradings are monitored by Susquehanna’s loan review department.  Additionally, loans that are part of a relationship of over $1.0 million and have a rating of substandard, special mention, and pass that are on the company’s watch list, are reviewed on a quarterly basis at Susquehanna’s Loan Quality Review Committee.  Factors considered at the Loan Quality Review meetings include the financial statements of the borrower, the borrower’s global cash flow, guarantees, and underlying collateral valuations.

29

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

An analysis of the allowance for loan and lease losses for the three and six months ended June 30, 2014 and 2013 are presented in the following tables:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

Real Estate

  

Real Estate

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate -

  

Secured -

  

Secured -

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

  

Construction

  

Residential

  

Commercial

  

Consumer

  

Leases

  

Unallocated

  

Total

Allowance for credit losses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at April 1, 2014

$

48,016 

  

$

21,718 

  

$

22,078 

  

$

44,486 

  

$

2,097 

  

$

14,788 

  

$

967 

  

$

154,150 

  

Charge-offs

  

(9,094)

  

  

(339)

  

  

(3,290)

  

  

(1,077)

  

  

(1,341)

  

  

(801)

  

  

  

  

(15,942)

  

Recoveries

  

1,820 

  

  

796 

  

  

837 

  

  

347 

  

  

328 

  

  

383 

  

  

  

  

4,511 

  

Transfer for loans designated as held for sale

  

  

  

  

  

  

  

  

  

(1,236)

  

  

  

  

  

  

(1,236)

  

Provision

  

659 

  

  

(3,995)

  

  

1,751 

  

  

3,196 

  

  

1,428 

  

  

(495)

  

  

456 

  

  

3,000 

Balance at June 30, 2014

$

41,401 

  

$

18,180 

  

$

21,376 

  

$

46,952 

  

$

1,276 

  

$

13,875 

  

$

1,423 

  

$

144,483 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six Months Ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

Real Estate

  

Real Estate

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate -

  

Secured -

  

Secured -

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

  

Construction

  

Residential

  

Commercial

  

Consumer

  

Leases

  

Unallocated

  

Total

Allowance for credit losses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at January 1, 2014

$

40,590 

  

$

26,189 

  

$

24,076 

  

$

48,261 

  

$

2,266 

  

$

15,259 

  

$

967 

  

$

157,608 

  

Charge-offs

  

(13,608)

  

  

(630)

  

  

(7,120)

  

  

(3,684)

  

  

(2,579)

  

  

(1,721)

  

  

  

  

(29,342)

  

Recoveries

  

3,152 

  

  

1,178 

  

  

1,871 

  

  

820 

  

  

711 

  

  

721 

  

  

  

  

8,453 

  

Transfer for loans designated as held for sale

  

  

  

  

  

  

  

  

  

(1,236)

  

  

  

  

  

  

(1,236)

  

Provision

  

11,267 

  

  

(8,557)

  

  

2,549 

  

  

1,555 

  

  

2,114 

  

  

(384)

  

  

456 

  

  

9,000 

Balance at June 30, 2014

$

41,401 

  

$

18,180 

  

$

21,376 

  

$

46,952 

  

$

1,276 

  

$

13,875 

  

$

1,423 

  

$

144,483 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Individually evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

4,281 

  

$

704 

  

$

2,181 

  

$

4,276 

  

$

114 

  

$

  

  

  

  

$

11,556 

  

  

  

Purchased loans and leases

  

26 

  

  

  

  

453 

  

  

922 

  

  

  

  

  

  

  

  

  

1,401 

  

  

  

  

Total

$

4,307 

  

$

704 

  

$

2,634 

  

$

5,198 

  

$

114 

  

$

  

  

  

  

$

12,957 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Collectively evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

37,094 

  

$

17,476 

  

$

18,742 

  

$

41,754 

  

$

1,162 

  

$

13,875 

  

$

1,423 

  

$

131,526 

  

  

  

Purchased loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

$

37,094 

  

$

17,476 

  

$

18,742 

  

$

41,754 

  

$

1,162 

  

$

13,875 

  

$

1,423 

  

$

131,526 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financing receivables:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at June 30, 2014

$

2,422,931 

  

$

748,181 

  

$

4,178,842 

  

$

4,053,990 

  

$

962,618 

  

$

1,300,591 

  

  

  

  

$

13,667,153 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Individually evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

16,378 

  

$

3,283 

  

$

24,201 

  

$

47,167 

  

$

1,046 

  

$

  

  

  

  

$

92,075 

  

  

  

Purchased loans and leases

  

9,851 

  

  

10,495 

  

  

20,431 

  

  

72,217 

  

  

  

  

  

  

  

  

  

112,997 

  

  

  

  

Total

$

26,229 

  

$

13,778 

  

$

44,632 

  

$

119,384 

  

$

1,049 

  

$

  

  

  

  

$

205,072 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Collectively evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

2,262,865 

  

$

686,743 

  

$

3,560,563 

  

$

3,301,084 

  

$

955,353 

  

$

1,300,591 

  

  

  

  

$

12,067,199 

  

  

  

Purchased loans and leases

  

133,837 

  

  

47,660 

  

  

573,647 

  

  

633,522 

  

  

6,216 

  

  

  

  

  

  

  

1,394,882 

  

  

  

  

Total

$

2,396,702 

  

$

734,403 

  

$

4,134,210 

  

$

3,934,606 

  

$

961,569 

  

$

1,300,591 

  

  

  

  

$

13,462,081 

30

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

  

  

  

Three Months Ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

  

Real Estate

  

Real Estate

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate -

  

Secured -

  

Secured -

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

  

Construction

  

Residential

  

Commercial

  

Consumer

  

Leases

  

Unallocated

  

Total

Allowance for credit losses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at April 1, 2013

$

30,462 

  

$

25,549 

  

$

36,542 

  

$

66,977 

  

$

2,997 

  

$

13,714 

  

$

136 

  

$

176,377 

  

Charge-offs

  

(10,829)

  

  

(1,170)

  

  

(2,607)

  

  

(842)

  

  

(788)

  

  

(1,202)

  

  

  

  

(17,438)

  

Recoveries

  

2,040 

  

  

1,725 

  

  

601 

  

  

2,083 

  

  

239 

  

  

967 

  

  

  

  

7,655 

  

Provision

  

8,564 

  

  

(2,536)

  

  

3,180 

  

  

609 

  

  

707 

  

  

1,271 

  

  

205 

  

  

12,000 

Balance at June 30, 2013

$

30,237 

  

$

23,568 

  

$

37,716 

  

$

68,827 

  

$

3,155 

  

$

14,750 

  

$

341 

  

$

178,594 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six Months Ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

  

Real Estate

  

Real Estate

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Real Estate -

  

Secured -

  

Secured -

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial

  

Construction

  

Residential

  

Commercial

  

Consumer

  

Leases

  

Unallocated

  

Total

Allowance for credit losses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at January 1, 2013

$

30,207 

  

$

25,171 

  

$

41,276 

  

$

70,053 

  

$

3,722 

  

$

13,341 

  

$

250 

  

$

184,020 

  

Charge-offs

  

(20,866)

  

  

(5,933)

  

  

(5,620)

  

  

(5,445)

  

  

(1,346)

  

  

(2,321)

  

  

  

  

(41,531)

  

Recoveries

  

4,036 

  

  

2,187 

  

  

1,252 

  

  

2,805 

  

  

561 

  

  

1,264 

  

  

  

  

12,105 

  

Provision

  

16,860 

  

  

2,143 

  

  

808 

  

  

1,414 

  

  

218 

  

  

2,466 

  

  

91 

  

  

24,000 

Balance at June 30, 2013

$

30,237 

  

$

23,568 

  

$

37,716 

  

$

68,827 

  

$

3,155 

  

$

14,750 

  

$

341 

  

$

178,594 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at June 30, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Individually evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

3,007 

  

$

1,145 

  

$

3,629 

  

$

5,155 

  

$

145 

  

$

  

  

  

  

$

13,081 

  

  

  

Purchased loans and leases

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Total

$

3,007 

  

$

1,145 

  

$

3,629 

  

$

5,155 

  

$

145 

  

$

  

  

  

  

$

13,081 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Collectively evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

27,104 

  

$

22,013 

  

$

26,965 

  

$

61,997 

  

$

3,010 

  

$

14,750 

  

$

341 

  

$

156,180 

  

  

  

Purchased loans and leases

  

126 

  

  

410 

  

  

7,122 

  

  

1,675 

  

  

  

  

  

  

  

  

9,333 

  

  

  

  

Total

$

27,230 

  

$

22,423 

  

$

34,087 

  

$

63,672 

  

$

3,010 

  

$

14,750 

  

$

341 

  

$

165,513 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financing receivables:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at June 30, 2013

$

2,289,159 

  

$

769,722 

  

$

4,098,938 

  

$

4,029,454 

  

$

908,328 

  

$

1,062,161 

  

  

  

  

$

13,157,762 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at June 30, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Individually evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

10,905 

  

$

10,948 

  

$

31,226 

  

$

63,615 

  

$

1,334 

  

$

  

  

  

  

$

118,028 

  

  

  

Purchased loans and leases

  

13,899 

  

  

13,355 

  

  

39,713 

  

  

74,402 

  

  

117 

  

  

  

  

  

  

  

141,486 

  

  

  

  

Total

$

24,804 

  

$

24,303 

  

$

70,939 

  

$

138,017 

  

$

1,451 

  

$

  

  

  

  

$

259,514 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Collectively evaluated for impairment:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Originated loans and leases

$

2,142,345 

  

$

649,535 

  

$

3,211,466 

  

$

3,218,759 

  

$

898,527 

  

$

1,062,161 

  

  

  

  

$

11,182,793 

  

  

  

Purchased loans and leases

  

122,010 

  

  

95,884 

  

  

816,533 

  

  

672,678 

  

  

8,350 

  

  

  

  

  

  

  

1,715,455 

  

  

  

  

Total

$

2,264,355 

  

$

745,419 

  

$

4,027,999 

  

$

3,891,437 

  

$

906,877 

  

$

1,062,161 

  

  

  

  

$

12,898,248 

31

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

NOTE 5. Goodwill

Goodwill is allocated to Susquehanna’s reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identified with the reporting unit as a whole. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit. Goodwill impairment testing is performed at the reporting unit level, one level below the business segment.

The goodwill impairment analysis is done in two steps. The first step requires a comparison of the fair value of the individual reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit exceeds the fair value, there is an indication of potential impairment and a second step of testing is performed to measure the amount of impairment, if any, for the reporting unit.

Susquehanna assesses goodwill for impairment on an annual basis, or more often if events or circumstances indicate that goodwill may be impaired. This assessment requires significant judgment and analysis.

Susquehanna performed its annual goodwill impairment assessments in the second quarter of 2014 and determined that the fair value of each of its reporting units exceeded its book value, and that there was no goodwill impairment.

Bank Reporting Unit

 

Goodwill assigned to the bank reporting unit at the annual assessment dates of May 31, 2014 and 2013 was $1,165,200. Fair value of the bank reporting unit was determined using a market approach, which uses prices and other relevant information reported for market transactions involving recent non-distressed sales of comparable financial institutions in the United States, with particular consideration given to transactions within Susquehanna’s market, to value the bank reporting unit. The following table shows the ratios used at May 31, 2014 and 2013.

 

  

  

  

Annual

  

Annual

  

  

Ratio

May 31, 2014

  

May 31, 2013

  

  

Price to book

1.48x

  

1.57x

  

  

Price to tangible book

1.70x

  

1.80x

  

  

Price to earnings(1)

20.5x

  

22.1x

  

  

  

  

  

  

  

  

  

(1)

Last twelve months earnings.

  

  

  

  

 

Fair value of the bank reporting unit exceeded carrying value by 25.4% at May 31, 2014, and by 44.6% at May 31, 2013. Since the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and the second step in the analysis is unnecessary.

Wealth Management Reporting Unit

 

Goodwill assigned to the wealth management reporting unit at the annual assessment dates of May 31, 2014 and 2013 was $82,746. Fair value of the wealth management reporting unit was determined utilizing the market approach and the income approach. The market approach measures the fair value of the reporting unit using transaction multiples reported for market transactions involving comparable wealth management business. The income approach measures the fair value of the reporting unit by converting the reporting unit’s future earnings over ten years, assuming a weighted increase in the reporting unit’s revenues and a weighted increase in the reporting unit’s expenses, to a single present (discounted) amount, based on a discount rate. The following table shows the factors used in the income approach at May 31, 2014 and 2013.

32

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

Annual

  

Annual

  

  

Factors

May 31, 2014

  

May 31, 2013

  

  

Discount rate

19.5%

  

18.4%

  

  

Weighted-average increase in revenues

4.2%

  

5.0%

  

  

Weighted-average increase in expenses

4.7%

  

3.3%

  

 

Fair value of the wealth management reporting unit exceeded carrying value by 51.5% at May 31, 2014 and by 45.9% at May 31, 2013. Since the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and the second step in the analysis is unnecessary.

Property and Casualty Insurance Reporting Unit

 

Goodwill assigned to the property and casualty insurance reporting unit at the annual assessment dates of May 31, 2014 and 2013 was $17,177. Fair value of the property and casualty insurance reporting unit was determined using the market approach, which measures the fair value of the reporting unit using recent sales of comparable property and casualty insurance companies in Susquehanna’s market. Susquehanna uses two key ratios to measure the fair value of the property and casualty insurance reporting unit: average price to book and median price to earnings. The following table shows the ratios used at May 31, 2014 and 2013.

 

  

  

Annual

  

Annual

  

  

Ratio

May 31, 2014

  

May 31, 2013

  

  

Average price to book

1.34X

  

1.15X

  

  

Median price to earnings

21.1X

  

18.1X

  

 

Fair value of the property and casualty insurance reporting unit exceeded carrying value by 25.6% at May 31, 2014 and by 21.7% at May 31, 2013. Since the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and the second step in the analysis is not required.

33

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

NOTE 6. Deposits

  

  

  

  

  

  

  

  

Deposits consisted of the following at June 30, 2014 and December 31, 2013:

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

  

  

2014 

  

2013 

Noninterest-bearing:

  

  

  

  

  

  

Demand

$

1,935,635 

  

$

1,913,526 

Interest-bearing:

  

  

  

  

  

  

Interest-bearing demand

  

2,883,679 

  

  

2,909,376 

  

Money market

  

3,025,430 

  

  

3,144,106 

  

Savings

  

1,136,044 

  

  

1,077,923 

  

Time

  

2,266,815 

  

  

2,113,209 

  

Time of $100 or more

  

2,067,391 

  

  

1,711,232 

Total deposits

$

13,314,994 

  

$

12,869,372 

 

NOTE 7.  Income Taxes

 

Our effective income tax rate for the three months ended June 30, 2014 and 2013 was 26.1% and 30.2%, respectively.  Our effective income tax rate for the six months ended June 30, 2014 and 2013 was 27.9% and 31.0%, respectively.   The estimated annual effective income tax rates used in calculating the income tax expense for the reporting periods ended June 30, 2014 and 2013 were impacted by the level of permanent differences, including tax-advantaged income, and by Low Income Housing and other tax credits, resulting in effective income tax rates below statutory rates for the interim reporting periods.  The change in the estimated annual effective income tax rates used to calculate income tax expense was influenced by the amount of tax-advantaged income relative to total income for the second quarter of 2014, as compared to the amount of tax-advantaged income relative to total income for the second quarter of 2013.  Additionally, adjustments for income tax expense/(benefit) from discrete items recorded for the three months ended June 30, 2014 and 2013 impacted the effective income tax rate by (4.2%) and (0.5%), respectively.  The net deferred discrete income tax benefit recorded during the period for the effect of recent enactment of state tax legislation caused a reduction in the effective income tax rate for the three months ended June 30, 2014 of (4.2%).

34

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

NOTE 8. Accumulated Other Comprehensive Loss

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The balances and changes in balances by component of accumulated other comprehensive income (loss) are shown in the following tables:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Unrealized 

  

  

  

  

Accumulated 

  

  

  

  

  

  

Unrealized Gains (Losses) on 

  

Gains (Losses) 

  

Post- 

  

Other 

  

  

  

  

  

  

Investment securities 

  

on Cash Flow 

  

retirement 

  

Comprehensive 

  

  

  

  

  

  

With OTTI 

  

All other 

  

Hedges 

  

Benefits 

  

Loss 

Balance, April 1, 2014

 (279) 

  

 3,119 

  

 (19,080) 

  

 (22,409) 

  

 (38,649) 

  

AOCI before reclassifications, net of tax

  

  

  

 9,341 

  

  

 (1,362) 

  

  

  

  

 7,979 

  

Amounts reclassified from AOCI:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest expense

  

  

  

  

  

5,489 

  

  

  

  

5,489 

  

  

Net realized loss (gain) on sales of securities

  

  

  

(3,293)

  

  

  

  

  

  

(3,293)

  

  

  

  

Total before income taxes

  

  

  

(3,293)

  

  

5,489 

  

  

  

  

2,196 

  

  

  

  

Less: Income taxes

  

  

  

1,153 

  

  

(1,921)

  

  

  

  

(768)

  

  

  

  

  

Net of income taxes

  

  

  

(2,140)

  

  

3,568 

  

  

  

  

1,428 

  

Net change in AOCI

  

  

  

 7,201 

  

  

 2,206 

  

  

  

  

9,407 

Balance, June 30, 2014

 (279) 

  

 10,320 

  

 (16,874) 

  

 (22,409) 

  

(29,242)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance, April 1, 2013

 (1,024) 

  

 33,529 

  

 (31,839) 

  

 (39,321) 

  

 (38,655) 

  

AOCI before reclassifications, net of tax

  

 211 

  

  

 (33,926) 

  

  

 3,368 

  

  

  

  

 (30,347) 

  

Amounts reclassified from AOCI:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest expense

  

  

  

  

  

4,668 

  

  

  

  

4,668 

  

  

Net realized loss (gain) on sales of securities

  

97 

  

  

(26)

  

  

  

  

  

  

71 

  

  

  

  

Total before income taxes

  

97 

  

  

(26)

  

  

4,668 

  

  

  

  

4,739 

  

  

  

  

Less: Income taxes

  

(34)

  

  

  

  

(1,634)

  

  

  

  

(1,659)

  

  

  

  

  

Net of income taxes

  

63 

  

  

(17)

  

  

3,034 

  

  

  

  

3,080 

  

Net change in AOCI

  

 274 

  

  

 (33,943) 

  

  

 6,402 

  

  

  

  

(27,267)

Balance, June 30, 2013

 (750) 

  

 (414) 

  

 (25,437) 

  

 (39,321) 

  

(65,922)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance, January 1, 2014

 (279) 

  

 (7,195) 

  

 (21,683) 

  

 (22,409) 

  

 (51,566) 

  

AOCI before reclassifications, net of tax

  

  

  

 19,650 

  

  

 (2,265) 

  

  

  

  

 17,385 

  

Amounts reclassified from AOCI:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest expense

  

  

  

  

  

10,883 

  

  

  

  

10,883 

  

  

Net realized loss (gain) on sales of securities

  

  

  

(3,285)

  

  

  

  

  

  

(3,285)

  

  

  

  

Total before income taxes

  

  

  

(3,285)

  

  

10,883 

  

  

  

  

7,598 

  

  

  

  

Less: Income taxes

  

  

  

1,150 

  

  

(3,809)

  

  

  

  

(2,659)

  

  

  

  

  

Net of income taxes

  

  

  

(2,135)

  

  

7,074 

  

  

  

  

4,939 

  

Net change in AOCI

  

  

  

 17,515 

  

  

 4,809 

  

  

  

  

22,324 

Balance, June 30, 2014

 (279) 

  

 10,320 

  

 (16,874) 

  

 (22,409) 

  

(29,242)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance, January 1, 2013

 (839) 

  

 37,521 

  

 (34,636) 

  

 (39,304) 

  

 (37,258) 

  

AOCI before reclassifications, net of tax

  

 (226) 

  

  

 (37,654) 

  

  

 3,218 

  

  

(17)

  

  

 (34,679) 

  

Amounts reclassified from AOCI:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest expense

  

  

  

  

  

9,202 

  

  

  

  

9,202 

  

  

Net realized loss (gain) on sales of securities

  

485 

  

  

(432)

  

  

  

  

  

  

53 

  

  

  

  

Total before income taxes

  

485 

  

  

(432)

  

  

9,202 

  

  

  

  

9,255 

  

  

  

  

Less: Income taxes

  

(170)

  

  

151 

  

  

(3,221)

  

  

  

  

(3,240)

  

  

  

  

  

Net of income taxes

  

315 

  

  

(281)

  

  

5,981 

  

  

  

  

6,015 

  

Net change in AOCI

  

 89 

  

  

 (37,935) 

  

  

 9,199 

  

  

(17)

  

  

(28,664)

Balance, June 30, 2013

 (750) 

  

 (414) 

  

 (25,437) 

  

 (39,321) 

  

(65,922)

35

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

NOTE 9. Pension and Other Postretirement Benefits

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Components of Net Periodic Benefit Cost

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other Postretirement

  

  

Pension Benefits

  

SERP

  

Benefits

  

  

2014 

  

2013 

  

2014 

  

2013 

  

2014 

  

2013 

Service cost

$

  

$

1,333 

  

$

71 

  

$

313 

  

$

 316 

  

$

 337 

Interest cost

  

1,922 

  

  

1,794 

  

  

122 

  

  

102 

  

  

 247 

  

  

 217 

Expected return on plan assets

  

(2,337)

  

  

(2,412)

  

  

  

  

  

  

  

  

Amortization of prior service cost

  

  

  

  

  

37 

  

  

54 

  

  

 28 

  

  

 29 

Amortization of transition obligation

  

  

  

  

  

  

  

  

  

  

  

 2 

Amortization of net actuarial loss

  

121 

  

  

757 

  

  

29 

  

  

57 

  

  

  

  

42 

  

Net periodic postretirement benefit cost

$

(294)

  

$

1,478 

  

$

259 

  

$

526 

  

$

 591 

  

$

 627 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six Months Ended June 30,

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other Postretirement

  

  

Pension Benefits

  

SERP

  

Benefits

  

  

2014 

  

2013 

  

2014 

  

2013 

  

2014 

  

2013 

Service cost

$

  

$

2,666 

  

$

143 

  

$

626 

  

$

633 

  

$

674 

Interest cost

  

3,845 

  

  

3,588 

  

  

245 

  

  

204 

  

  

493 

  

  

434 

Expected return on plan assets

  

(4,673)

  

  

(4,823)

  

  

  

  

  

  

  

  

Amortization of prior service cost

  

  

  

12 

  

  

73 

  

  

109 

  

  

57 

  

  

58 

Amortization of transition obligation

  

  

  

  

  

  

  

  

  

  

  

Amortization of net actuarial loss

  

241 

  

  

1,514 

  

  

57 

  

  

113 

  

  

  

  

84 

  

Net periodic postretirement benefit cost

$

(587)

  

$

2,957 

  

$

518 

  

$

1,052 

  

$

1,183 

  

$

1,254 

 

Employer Contributions

Susquehanna previously disclosed in its financial statements for the year ended December 31, 2013, that it expected to contribute $559 to its pension plans and $782 to its other postretirement benefit plan in 2014. As of June 30, 2014, $280 of contributions had been made to its pension plans, and $391 of contributions had been made to its other postretirement benefit plan. Susquehanna anticipates contributing an additional $279 to fund its pension plans in 2014, for a total of $559, and an additional $391 to it other postretirement benefit plan, for a total of $782.

36

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

NOTE 10. Earnings per Share ("EPS")

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following tables set forth the calculation of basic and diluted EPS for the three-month and six-month periods ended

June 30, 2014 and 2013.

  

  

  

  

  

  

  

  

  

  

  

  

  

Basic earnings per common share

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended June 30,

  

Six Months Ended June 30,

  

  

2014 

  

2013 

  

2014 

  

2013 

Net income applicable to common shareholders

$

43,494 

  

$

45,648 

  

$

80,656 

  

$

88,047 

Average common shares outstanding

  

187,637 

  

  

186,812 

  

  

187,547 

  

  

186,710 

Basic earnings per common share

$

0.23 

  

$

0.24 

  

$

0.43 

  

$

0.47 

  

  

  

  

  

  

  

  

  

  

  

  

  

Diluted earnings per common share

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended June 30,

  

Six Months Ended June 30,

  

  

2014 

  

2013 

  

2014 

  

2013 

Net income available to common shareholders

$

43,494 

  

$

45,648 

  

$

80,656 

  

$

88,047 

Average common shares outstanding

  

187,637 

  

  

186,812 

  

  

187,547 

  

  

186,710 

Dilutive potential common shares

  

658 

  

  

911 

  

  

749 

  

  

902 

Total diluted average common shares outstanding

  

188,295 

  

  

187,723 

  

  

188,296 

  

  

187,612 

Diluted earnings per common share

$

0.23 

  

$

0.24 

  

$

0.43 

  

$

0.47 

 

For the three months ended June 30, 2014 and 2013, average options to purchase 1,226 and 1,490 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents were antidilutive. For the six months ended June 30, 2014 and 2013, average options to purchase 1,219 and 1,530 shares, respectively, were outstanding but were not included in the computation of diluted EPS because the options’ common stock equivalents were antidilutive.

 

NOTE 11. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Susquehanna is exposed to certain risks arising from both its business operations and economic conditions. Susquehanna manages economic risk exposures, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Susquehanna enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are impacted by changes in interest rates. Susquehanna’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally those related to certain variable-rate liabilities. Susquehanna also has derivatives that are a result of a service it provides to certain qualifying customers. Susquehanna manages a matched book with respect to its derivative instruments offered as a part of this service to its customers in order to minimize its interest rate risk resulting from such transactions. All derivatives are recorded at fair value.

Derivatives may expose Susquehanna to market, credit or liquidity risks in excess of the amounts recorded on the consolidated balance sheets. Market risk of a derivative is the exposure created by potential fluctuations in interest rates and other factors and is a function of the type of derivative, the tenor and terms of the agreement, and the underlying volatility. Credit risk is the exposure to loss in the event of nonperformance by the other party to the transaction where the value of any collateral held is not adequate to cover such losses. Liquidity risk is the potential exposure that arises when the size of the derivative position may not be able to be rapidly adjusted in periods of high volatility and financial stress at a reasonable cost.

All freestanding derivatives are recorded on the balance sheet at fair value.

Cash Flow Hedges of Interest Rate Risk

Susquehanna uses interest rate derivatives to manage its exposure to interest rate movements and add stability to interest income and expense. Susquehanna primarily uses interest rate swaps as part of its interest rate risk management strategy. For example, Susquehanna may issue variable-rate debt and then enter into a receive-variable pay-fixed-rate interest rate swap with the same

37

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

payment timing and notional amount to convert the interest payments to a net fixed-rate basis for all or a portion of the term of the long-term debt. As of June 30, 2014, December 31, 2013, and June 30, 2013, Susquehanna had 13, 14, and 14 interest rate swaps, respectively for each period, with an aggregate notional amount of $1,117,859, $1,146,437, and $1,150,284, respectively that were designated as cash flow hedges of interest-rate risk.

Susquehanna applies hedge accounting to certain interest rate derivatives entered into for risk management purposes. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, key aspects of achieving hedge accounting are documentation of hedging strategy and hedge effectiveness at the hedge inception and substantiating hedge effectiveness on an ongoing basis. A derivative must be highly effective in accomplishing the hedge objective of offsetting either changes in the fair value or cash flows of the hedged item for the risk being hedged. Any ineffectiveness in the hedge relationship is recognized in current earnings. The assessment of effectiveness excludes changes in the value of the hedged item that are unrelated to the risks being hedged. The effective portion of changes in the fair value of derivatives designated in a hedge relationship and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

Amounts recorded in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on Susquehanna’s variable-rate liabilities. During the next 12 months, Susquehanna estimates that $20,243 will be reclassified as an expense to net interest income.

Non-designated Derivatives

Derivatives not designated as hedges are used to manage Susquehanna’s exposure to interest rate movements and other identified risks but do not meet the strict requirements of hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recognized directly in earnings.

Susquehanna does not seek to apply hedge accounting to all of the derivatives involved in Susquehanna’s risk management activities, such as the interest rate derivatives entered into to offset the derivatives offered to qualifying borrowers. Susquehanna offers qualifying commercial banking customers derivatives to enable such customers to transfer, modify or reduce their interest rate risks. The credit risk associated with derivatives entered into with these customers is essentially the same as that involved in extending loans and is subject to our normal credit policies. Susquehanna obtains collateral based upon its assessment of the customers’ credit quality. Susquehanna actively manages the market risks from its exposure to these derivatives by entering into offsetting derivative transactions, controls focused on pricing, and reporting of positions to senior managers to minimize its exposure resulting from such transactions. 

At June 30, 2014 and 2013, Susquehanna had 285 and 263 derivative transactions, respectively, related to these risk management activities with an aggregate notional amount of $1,806,139 and $1,605,531, respectively. For the three-month and six-month periods ended June 30, 2014, Susquehanna recognized a net loss of $902 and $1,612, respectively, and for the three-month and six-month periods ended June 30, 2013, Susquehanna recognized a net gain of $1,848 and $1,615, respectively, related to changes in fair value of the derivatives in this program.

Credit-risk-related Contingent Features

Susquehanna has agreements with certain of its derivative counterparties that contain the following provisions:

·         if Susquehanna defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Susquehanna could also be declared in default on its derivative obligations;

·         if Susquehanna fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions, and Susquehanna would be required to settle its obligations under the agreements;

·         if Susquehanna fails to maintain a specified minimum leverage ratio, then Susquehanna could be declared in default on its derivative obligations;

At June 30, 2014 and December 31, 2013, the fair value of derivatives in a net liability position, which includes accrued interest and any credit valuation adjustments related to these agreements, was $43,164 and $50,247, respectively. At June 30, 2014 and December 31, 2013, Susquehanna had minimum collateral posting thresholds with certain of its derivative counterparties and had posted cash collateral of $43,826 and $42,813, respectively. If Susquehanna had breached any of the above provisions at June 30, 2014, it would have been required to settle its obligations under the agreements at termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

 

38

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Fair Value of Derivative Instruments

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Values of Derivative Instruments

  

  

June 30, 2014

  

  

Asset Derivatives

  

Liability Derivatives

  

  

Balance Sheet

  

  

  

  

Balance Sheet

  

  

  

  

  

Location

  

Fair Value

  

Location

  

Fair Value

  

  

  

  

  

  

  

  

  

  

  

Derivatives designated as hedging instruments

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

Other assets

  

$

 641 

  

Other liabilities

  

$

 23,570 

Derivatives not designated as hedging instruments

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

Other assets

  

  

 23,945 

  

Other liabilities

  

  

 19,594 

Total derivatives

  

  

$

 24,586 

  

  

  

$

 43,164 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Values of Derivative Instruments

  

  

December 31, 2013

  

  

Asset Derivatives

  

Liability Derivatives

  

  

Balance Sheet

  

  

  

  

Balance Sheet

  

  

  

  

  

Location

  

Fair Value

  

Location

  

Fair Value

  

  

  

  

  

  

  

  

  

  

  

Derivatives designated as hedging instruments

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

Other assets

  

$

 1,419 

  

Other liabilities

  

$

 31,662 

Derivatives not designated as hedging instruments

  

  

  

  

  

  

  

  

  

  

Interest rate contracts

Other assets

  

  

 22,897 

  

Other liabilities

  

  

 18,585 

Total derivatives

  

  

$

 24,316 

  

  

  

$

 50,247 

 

39

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

The Effect of Derivative Instruments on Comprehensive Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Loss

  

Amount of Loss

  

  

  

  

Location of Loss

  

Amount of Loss

  

Recognized in

  

Recognized in

  

Amount of Gain

  

Reclassified from

  

Reclassified from

  

Income

  

Income

Derivatives in Cash Flow

 Recognized 

  

Accumulated OCI

  

Accumulated OCI

  

(Ineffective

  

(Ineffective

Hedging Relationships

in OCI

  

into Income

  

into Income

  

Portion)

  

Portion)

Interest rate contracts:

$

 2,200 

  

  

Interest expense

  

$

 (5,489) 

  

Other expense

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Loss

  

Amount of Loss

  

  

  

  

  

  

  

  

  

  

Recognized

  

Recognized

  

  

  

  

  

  

  

  

Derivatives Not Designated

  

in Income

  

in Income

  

  

  

  

  

  

  

  

as Hedging Instruments

  

on Derivatives

  

on Derivatives

  

  

  

  

  

  

  

  

Interest rate contracts:

  

Other income

  

$

 (902) 

  

  

  

  

  

  

  

  

  

  

Other expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Loss

  

Amount of Loss

  

  

  

  

Location of Loss

  

Amount of Loss

  

Recognized in

  

Recognized in

  

Amount of Gain

  

Reclassified from

  

Reclassified from

  

Income

  

Income

Derivatives in Cash Flow

 Recognized 

  

Accumulated OCI

  

Accumulated OCI

  

(Ineffective

  

(Ineffective

Hedging Relationships

in OCI

  

into Income

  

into Income

  

Portion)

  

Portion)

Interest rate contracts:

$

 6,401 

  

  

Interest expense

  

$

 (4,668) 

  

Other expense

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Gain

  

Amount of Gain

  

  

  

  

  

  

  

  

  

  

Recognized

  

Recognized

  

  

  

  

  

  

  

  

Derivatives Not Designated

  

in Income

  

in Income

  

  

  

  

  

  

  

  

as Hedging Instruments

  

on Derivatives

  

on Derivatives

  

  

  

  

  

  

  

  

Interest rate contracts:

  

Other income

  

$

 1,848 

  

  

  

  

  

  

  

  

  

  

Other expense

  

  

  

  

  

  

  

  

  

  

 

40

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Six Months Ended June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Loss

  

Amount of Loss

  

  

  

  

Location of Loss

  

Amount of Loss

  

Recognized in

  

Recognized in

  

Amount of Gain

  

Reclassified from

  

Reclassified from

  

Income

  

Income

Derivatives in Cash Flow

 Recognized 

  

Accumulated OCI

  

Accumulated OCI

  

(Ineffective

  

(Ineffective

Hedging Relationships

in OCI

  

into Income

  

into Income

  

Portion)

  

Portion)

Interest rate contracts:

$

 4,809 

  

  

Interest expense

  

$

 (10,883) 

  

Other expense

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Loss

  

Amount of Loss

  

  

  

  

  

  

  

  

  

  

Recognized

  

Recognized

  

  

  

  

  

  

  

  

Derivatives Not Designated

  

in Income on

  

in Income on

  

  

  

  

  

  

  

  

as Hedging Instruments

  

Derivatives

  

Derivatives

  

  

  

  

  

  

  

  

Interest rate contracts:

  

Other income

  

$

 (1,612) 

  

  

  

  

  

  

  

  

  

  

Other expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Six Months Ended June 30, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Loss

  

Amount of Loss

  

  

  

  

Location of Loss

  

Amount of Loss

  

Recognized in

  

Recognized in

  

Amount of Gain

  

Reclassified from

  

Reclassified from

  

Income

  

Income

Derivatives in Cash Flow

 Recognized 

  

Accumulated OCI

  

Accumulated OCI

  

(Ineffective

  

(Ineffective

Hedging Relationships

in OCI

  

into Income

  

into Income

  

Portion)

  

Portion)

Interest rate contracts:

$

 9,199 

  

  

Interest expense

  

$

 (9,202) 

  

Other expense

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Location of Gain

  

Amount of Gain

  

  

  

  

  

  

  

  

  

  

(Loss) Recognized

  

(Loss) Recognized

  

  

  

  

  

  

  

  

Derivatives Not Designated

  

in Income

  

in Income

  

  

  

  

  

  

  

  

as Hedging Instruments

  

on Derivatives

  

on Derivatives

  

  

  

  

  

  

  

  

Interest rate contracts:

  

Other income

  

$

 1,616 

  

  

  

  

  

  

  

  

  

  

Other expense

  

  

 (1) 

  

  

  

  

  

  

  

  

41

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

NOTE 12.  Balance Sheet Offsetting

Assets and liabilities relating to certain financial instruments, including derivatives and securities sold under agreements to repurchase, may be eligible for offset in the consolidated balance sheet as permitted under accounting guidance.  Susquehanna is party to transactions involving derivative instruments that are subject to master netting arrangements or similar agreements.  Under these agreements, Susquehanna may have the right to net settle multiple contracts with the same counterparty.  Certain derivative transactions may require Susquehanna to receive or pledge cash collateral based on the contract provisions.

Susquehanna also enters into agreements in which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these agreements, Susquehanna may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates Susquehanna to repurchase the assets.  The obligation to repurchase the securities is reflected as a liability in Susquehanna’s consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities account, therefore there is no offsetting or netting of the investment securities assets with the repurchase agreement liability.

Susquehanna also offers derivative products to qualifying customers and enters into offsetting derivative transactions in due course.  Susquehanna manages a matched book with respect to its derivative instruments offered as part of this service to its customers in order to minimize its interest rate risk resulting from such transactions.  These instruments are free-standing derivatives and are recorded at fair value on the consolidated balance sheet.  Collateral is posted by the counterparty with net liability positions in accordance with the contract provisions.

Susquehanna is subject to the regulations of the Commodity Futures Trading Commission that require financial institutions to clear all eligible contracts beginning June 2013.  Susquehanna fulfills this obligation by clearing its eligible contracts through a clearing member that faces a designated clearing house on Susquehanna’s behalf. Susquehanna reports amounts for interest rate contracts in a single clearing member account as of period end on a net basis in the Consolidated Balance Sheet, including the related unrealized contract gains and losses, accrued interest receivable/payable, and cash collateral posted as initial and variation margin. Derivatives originated prior to June 2013 continue to be presented on a gross basis in the Consolidated Balance Sheet.

42

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

The following table provides information about financial instruments that are eligible for offset at June 30, 2014 and December

31, 2013.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance Sheet Netting Disclosure about Offsetting Assets and Liabilities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net Amounts

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Presented in

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

the

  

Gross Amounts Not Offset in the

  

  

  

  

  

  

Gross

  

  

  

  

Consolidated

  

Consolidated Balance Sheet

  

  

  

  

  

  

Amounts

  

Gross Amounts

  

Balance

  

Financial

  

Cash

  

  

  

  

  

  

Recognized

  

Offset

  

Sheet

  

Instruments

  

Collateral

  

Net Amount

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financial assets:

  

Derivatives

$

24,586 

  

$

  

$

24,586 

  

$

  

$

(1,250)

  

$

23,336 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financial liabilities:

  

Derivatives

$

 43,164 

  

$

  

$

43,164 

  

$

  

$

 (43,826) 

  

$

(662)

  

Repurchase agreements

  

 275,830 

  

  

  

  

275,830 

  

  

 (275,830) 

  

  

  

  

  

  

Total

$

 318,994 

  

$

  

$

318,994 

  

$

 (275,830) 

  

$

 (43,826) 

  

$

(662)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financial assets:

  

Derivatives

$

24,316 

  

$

  

$

24,316 

  

$

  

$

(3,940)

  

$

20,376 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Financial liabilities:

  

Derivatives

$

 50,247 

  

$

  

$

50,247 

  

$

  

$

 (42,813) 

  

$

7,434 

  

Repurchase agreements

  

 295,800 

  

  

  

  

295,800 

  

  

 (295,800) 

  

  

  

  

  

  

Total

$

 346,047 

  

$

  

$

346,047 

  

$

 (295,800) 

  

$

 (42,813) 

  

$

7,434 

43

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

The table below presents the offsetting of derivative assets and derivative liabilities as of June 30, 2014 and December 31,

2013.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Derivative Assets and Collateral

  

Derivative Liabilities and Collateral

  

  

  

  

Held by Counterparty

  

Pledged by Counterparty

  

  

  

  

Amounts

  

Gross Amounts

  

  

  

  

Amounts

  

Gross Amounts

  

  

  

  

  

  

  

Presented in

  

Not Offset

  

  

  

  

Presented in

  

Not Offset

  

  

  

  

  

  

  

the

  

in the Consolidated

  

  

  

  

the

  

in the Consolidated

  

  

  

  

  

  

  

Consolidated

  

Balance Sheet

  

  

  

  

Consolidated

  

Balance Sheet

  

  

  

  

  

  

  

Balance

  

Financial

  

Cash

  

Net

  

Balance

  

Financial

  

Cash

  

Net

June 30, 2014

Sheet

  

Instruments

  

Collateral

  

Amount

  

Sheet

  

Instruments

  

Collateral

  

Amount

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cleared Agreements:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Clearing member A

$

  

$

  

$

  

$

  

$

 6,641 

  

$

  

$

(9,992)

  

$

(3,351)

  

  

  

  

  

  

  

  

  

  

  

  

  

 6,641 

  

  

  

  

(9,992)

  

  

(3,351)

Bilateral Agreements:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Counterparty:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Dealer A

  

774 

  

  

  

  

  

  

774 

  

  

3,869 

  

  

  

  

(3,120)

  

  

749 

  

  

Dealer B

  

965 

  

  

  

  

  

  

965 

  

  

3,305 

  

  

  

  

(2,040)

  

  

1,265 

  

  

Dealer C

  

54 

  

  

  

  

  

  

54 

  

  

1,181 

  

  

  

  

(1,150)

  

  

31 

  

  

Dealer D

  

2,345 

  

  

  

  

(1,250)

  

  

1,095 

  

  

1,265 

  

  

  

  

  

  

1,265 

  

  

Dealer E

  

  

  

  

  

  

  

  

  

16,261 

  

  

  

  

(18,600)

  

  

(2,339)

  

  

Dealer F

  

  

  

  

  

  

  

  

  

3,080 

  

  

  

  

(4,200)

  

  

(1,120)

  

  

Dealer G

  

  

  

  

  

  

  

  

  

2,664 

  

  

  

  

(3,130)

  

  

(466)

  

  

Dealer H

  

  

  

  

  

  

  

  

  

876 

  

  

  

  

(1,060)

  

  

(184)

  

  

Dealer I

  

  

  

  

  

  

  

  

  

400 

  

  

  

  

(280)

  

  

120 

  

  

Dealer J

  

  

  

  

  

  

  

  

  

18 

  

  

  

  

  

  

18 

  

  

End User

  

20,448 

  

  

  

  

  

  

20,448 

  

  

3,604 

  

  

  

  

(254)

  

  

3,350 

  

  

  

  

  

24,586 

  

  

  

  

(1,250)

  

  

23,336 

  

  

36,523 

  

  

  

  

(33,834)

  

  

2,689 

  

  

  

Total

$

24,586 

  

$

  

$

(1,250)

  

$

23,336 

  

$

43,164 

  

$

  

$

(43,826)

  

$

(662)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cleared Agreements:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Clearing member A

$

19 

  

$

  

$

  

$

19 

  

$

1,077 

  

$

  

$

(3,993)

  

$

(2,916)

  

  

  

  

  

19 

  

  

  

  

  

  

19 

  

  

1,077 

  

  

  

  

(3,993)

  

  

(2,916)

Bilateral Agreements:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Counterparty:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Dealer A

  

2,836 

  

  

  

  

  

  

2,836 

  

  

3,840 

  

  

  

  

(1,290)

  

  

2,550 

  

  

Dealer B

  

2,412 

  

  

  

  

  

  

2,412 

  

  

3,306 

  

  

  

  

(1,400)

  

  

1,906 

  

  

Dealer C

  

359 

  

  

  

  

  

  

359 

  

  

684 

  

  

  

  

(550)

  

  

134 

  

  

Dealer D

  

5,571 

  

  

  

  

(3,940)

  

  

1,631 

  

  

688 

  

  

  

  

  

  

688 

  

  

Dealer E

  

  

  

  

  

  

  

  

  

21,251 

  

  

  

  

(24,100)

  

  

(2,849)

  

  

Dealer F

  

  

  

  

  

  

  

  

  

5,081 

  

  

  

  

(6,100)

  

  

(1,019)

  

  

Dealer G

  

  

  

  

  

  

  

  

  

3,966 

  

  

  

  

(4,260)

  

  

(294)

  

  

Dealer H

  

  

  

  

  

  

  

  

  

770 

  

  

  

  

(1,120)

  

  

(350)

  

  

Dealer I

  

  

  

  

  

  

  

  

  

121 

  

  

  

  

  

  

121 

  

  

Dealer J

  

  

  

  

  

  

  

  

  

18 

  

  

  

  

  

  

18 

  

  

End User

  

13,119 

  

  

  

  

  

  

13,119 

  

  

9,445 

  

  

  

  

  

  

9,445 

  

  

  

  

  

24,297 

  

  

  

  

(3,940)

  

  

20,357 

  

  

49,170 

  

  

  

  

(38,820)

  

  

10,350 

  

  

  

Total

$

24,316 

  

$

  

$

(3,940)

  

$

20,376 

  

$

50,247 

  

$

  

$

(42,813)

  

$

7,434 

44

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

NOTE 13. Fair Value Disclosures

The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.

Susquehanna uses fair value measurements for the initial recording of certain assets and liabilities and periodic subsequent measurement of certain assets and liabilities on a recurring or non-recurring basis.

Fair Value Hierarchy

The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on quoted prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements based on observable inputs other than quoted prices in active markets for identical assets and liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

The accounting guidance requires the measurement of fair value to maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect Susquehanna’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Valuation Processes and Controls over Fair Value Measurement

As part of Susquehanna’s overall valuation process, management employs processes to evaluate and validate the methodologies, techniques and inputs, including review and approval of valuation judgments, methods, models, process controls, and results. These processes are designed to help ensure that the fair value measurements and disclosures are appropriate, consistently applied, and reliable.

Valuation Methodologies and Inputs

The following is a description of Susquehanna’s valuation methodologies and more significant inputs for assets and liabilities measured at fair value. These methods may produce a fair value measurement that may not be indicative of future fair values. Furthermore, while Susquehanna believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Susquehanna uses a third-party pricing service and third-party financial advisory firms in determining the fair value of its securities. Certain fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. For certain other fair value measurements, when market observable data is not available due to the lack of an active market for a given security, the valuation of the security involves assistance of a third-party financial advisory firm and substantial judgment by management.

Specific valuation methodologies and inputs used in determining the fair value of each significant class of assets and liabilities follows:

Cash and due from banks and short-term investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities

U.S. Government agencies: These are debt securities issued by U.S. government-sponsored entities (“GSE”). These securities are valued using market-based pricing matrices that are based on observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. The investor base is broad, resulting in moderate trading volumes and are classified as Level 2 in the fair value hierarchy. These valuations are sensitive to interest rates. As interest rates increase (decrease), the fair value of the securities will generally decrease (increase).

45

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Obligations of states and political subdivisions: These securities are valued using market-based pricing matrices that are based on observable inputs including the structure of the bond, including call terms, cross-collateralization features, and tax-exempt features, together with MSRB reported trades, issuer spreads, material event notices and benchmark yield curves. The investor base for most issues of municipal securities is fairly broad, resulting in moderate trading volumes and are classified as Level 2 in the fair value hierarchy. These valuations are sensitive to trends in the broader municipal securities market, which includes credit risk. As market concerns associated with credit risk increase (decrease), the fair value of the securities will generally decrease (increase).

Agency residential mortgage-backed securities: These securities are valued using market-based pricing matrices that are based on observable inputs, including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE collateralized mortgage obligations (“CMOs”) are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above. Because agency residential mortgage-backed securities are generally liquid and are valued using observable pricing in the market, they generally are classified as Level 2. As interest rates increase (decrease), the fair value of the securities will generally decrease (increase).

Non-agency mortgage-backed securities: Refer to the description in “Note 2-Investment Securities”

Commercial mortgage-backed securities: Commercial mortgage-backed securities are valued primarily based on the median prices from multiple pricing services. Some of the important valuation assumptions used by the pricing services include the collateral type, collateral performance, capital structure, issuer, credit enhancement, coupon, weighted average life, and interest rates, coupled with the observed spread levels on trades of similar securities. Many of these securities have significant prepayment lockout periods or penalty periods that limit the window of potential prepayment to a relatively narrow band. These securities are primarily classified as Level 2.

These valuations are sensitive to market changes, specifically changes in interest rates and credit spreads. As interest rates increase (decrease) and/or credit spreads widens (tightens), fair values will typically decrease (increase).

Other structured financial products: The significant unobservable inputs used in the fair value measurement of Susquehanna’s other structured financial products are conditional repayment rate, loss severity, and conditional default rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and directionally opposite change in the assumption used for repayment rate. In addition, refer to the description in “Note 2-Investment Securities.”  

Other debt securities: These securities consist primarily of government and corporate bonds. These securities are valued using market-based pricing matrices that are based on observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. The investor base is broad, resulting in moderate trading volumes and are classified as Level 2 in the fair value hierarchy. These valuations are sensitive to interest rates. As interest rates increase (decrease), the fair value of the securities will generally decrease (increase).

Other equity securities; These securities include liquid, exchange-traded equity securities as well as thinly-traded bank stocks and trust preferred securities. The exchange-traded equities are classified in Level 1 because they are valued using quoted market prices. The thinly traded and trust preferred securities are classified in Level 2 or 3 based on the significance of market observable inputs to the overall measurement.

Restricted investments in bank stocks

Restricted investments in bank stocks consists of FRB stock, FHLB stock, and Atlantic Central Bankers Bank stock. Federal law requires a member institution of the district FRB and FHLB to hold stock according to predetermined formulas. Atlantic Central Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership.

Loans and leases

The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are indicative of orderly transactions in the current market. For commercial loans and leases, internal risk grades are used to adjust discount rates for risk migration and expected losses. For residential mortgage and other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using benchmark-based rates. The carrying amounts of accrued interest receivable approximate fair values.

46

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Deposits

The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date; recognition of the inherent funding value of these instruments is not permitted. The carrying value of variable-rate time deposits approximates 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, using the U.S. Treasury yield curve.

Short-term borrowings

For those short-term instruments, the carrying amount approximates fair value.

FHLB borrowings and long-term debt

Fair values were based upon quoted rates of similar instruments issued by banking institutions with similar credit ratings. The carrying amounts of accrued interest payable approximate fair values.

Derivatives

The fair values of interest rate swaps are determined using models that use readily observable market inputs and a market standard methodology applied to the contractual terms of the derivatives, including the period to maturity and interest rate indices.

 

The methodology nets the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Susquehanna incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Susquehanna has considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds, mutual settlements, and guarantees.

In the first quarter of 2013 Susquehanna changed its valuation methodology for over-the-counter (“OTC”) derivatives to discount cash flows based on Overnight Index Swap (“OIS”) rates.  Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value.  Uncollateralized or partially-collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs, such as a spread between LIBOR and OIS to approximate an uncollateralized cost of funds, and credit risk.  Susquehanna made the changes to reflect inputs, assumptions, and pricing methodologies that are used in its principal market by market participants.

Although Susquehanna has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2014 and 2013, Susquehanna has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Susquehanna has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The fair values of commitments to originate mortgage loans to be held for sale and their corresponding forward-sales agreements are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The valuation of fixed-rate loan commitments also considers the difference between current levels of interest rates and the committed rates. These respective fair value measurements would be categorized within Level 3 of the fair value hierarchy.

For additional information regarding derivatives, refer to “Note 11 – Derivative Financial Instruments” above.

Off-balance-sheet items

The fair values of unused commitments to lend and standby letters of credit are considered to be the same as their contractual amounts.

 

47

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following tables present the financial instruments carried at fair value at June 30, 2014 and December 31, 2013, on the

consolidated balance sheets and by levels within the valuation hierarchy.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Value Measurements at Reporting Date Using

  

  

  

  

  

  

  

  

Quoted Prices in

  

Significant

  

  

  

  

  

  

  

  

  

  

  

Active Markets for

  

Other

  

Significant

  

  

  

  

  

  

  

  

Identical

  

Observable

  

Unobservable

  

  

  

  

  

  

  

  

Instruments

  

Inputs

  

Inputs

Description

  

June 30, 2014

  

(Level 1)

  

(Level 2)

  

(Level 3)

Assets

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Government Agencies

  

$

 95,877 

  

$

  

$

 95,877 

  

$

  

Obligations of states and political

  

  

  

  

  

  

  

  

  

  

  

  

  

  

subdivisions

  

  

 399,263 

  

  

  

  

 399,263 

  

  

  

Agency residential mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

  

 1,620,775 

  

  

  

  

 1,620,775 

  

  

  

Non-agency residential mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

  

  

 381 

  

  

  

  

 381 

  

  

  

Commercial mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

  

 5,882 

  

  

  

  

 5,882 

  

  

  

Other structured financial products

  

  

 11,995 

  

  

  

  

  

  

 11,995 

  

Other debt securities

  

  

 24,638 

  

  

  

  

 24,638 

  

  

  

Other equity securities

  

  

 24,282 

  

  

 21,479 

  

  

  

  

 2,803 

Derivatives: (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

Designated as hedging instruments

  

  

 641 

  

  

  

  

 641 

  

  

  

Not designated as hedging

  

  

  

  

  

  

  

  

  

  

  

  

  

  

instruments

  

  

 23,945 

  

  

  

  

 23,945 

  

  

  

  

  

Total

  

$

 2,207,679 

  

$

 21,479 

  

$

 2,171,402 

  

$

 14,798 

Liabilities

  

  

  

  

  

  

  

  

  

  

  

  

Derivatives: (2)

  

  

  

  

  

  

  

  

  

  

  

  

  

Designated as hedging instruments

  

$

 23,570 

  

$

  

$

 23,570 

  

$

  

Not designated as hedging

  

  

  

  

  

  

  

  

  

  

  

  

  

  

instruments

  

  

 19,594 

  

  

  

  

 19,594 

  

  

  

  

  

Total

  

$

 43,164 

  

$

  

$

 43,164 

  

$

 

48

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

  

  

  

  

  

  

Fair Value Measurements at Reporting Date Using

  

  

  

  

  

  

  

  

Quoted Prices in

  

Significant

  

  

  

  

  

  

  

  

  

  

  

Active Markets for

  

Other

  

Significant

  

  

  

  

  

  

  

  

Identical

  

Observable

  

Unobservable

  

  

  

  

  

  

  

  

Instruments

  

Inputs

  

Inputs

Description

  

December 31, 2013

  

(Level 1)

  

(Level 2)

  

(Level 3)

Assets

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

U.S. Government Agencies

  

$

 110,148 

  

$

  

$

 110,148 

  

$

  

Obligations of states and political

  

  

  

  

  

  

  

  

  

  

  

  

  

  

subdivisions

  

  

 398,510 

  

  

  

  

 398,510 

  

  

  

Agency residential mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

  

  

 1,778,192 

  

  

  

  

 1,778,192 

  

  

  

Non-agency residential mortgage-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

backed securities

  

  

 565 

  

  

  

  

 565 

  

  

  

Commercial mortgage-backed

  

  

  

  

  

  

  

  

  

  

  

  

  

  

securities

  

  

 8,734 

  

  

  

  

 8,734 

  

  

  

Other structured financial products

  

  

 11,297 

  

  

  

  

  

  

 11,297 

  

Other debt securities

  

  

 44,086 

  

  

  

  

 44,086 

  

  

  

Other equity securities

  

  

 23,692 

  

  

 20,895 

  

  

  

  

 2,797 

Derivatives: (1)

  

  

  

  

  

  

  

  

  

  

  

  

  

Designated as hedging instruments

  

  

 1,419 

  

  

  

  

 1,419 

  

  

  

Not designated as hedging

  

  

  

  

  

  

  

  

  

  

  

  

  

  

instruments

  

  

 22,897 

  

  

  

  

 22,897 

  

  

  

  

  

Total

  

$

 2,399,540 

  

$

 20,895 

  

$

 2,364,551 

  

$

 14,094 

Liabilities

  

  

  

  

  

  

  

  

  

  

  

  

Derivatives: (2)

  

  

  

  

  

  

  

  

  

  

  

  

  

Designated as hedging instruments

  

$

 31,662 

  

$

  

$

 31,662 

  

$

  

Not designated as hedging

  

  

  

  

  

  

  

  

  

  

  

  

  

  

instruments

  

  

 18,585 

  

  

  

  

 18,585 

  

  

  

  

  

Total

  

$

 50,247 

  

$

  

$

 50,247 

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Included in Other assets

(2)

Included in Other liabilities

 

49

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following tables present roll-forwards of the balance sheet amounts for the three and six month periods ended June 30, 2014

and 2013, for financial instruments classified by Susquehanna within Level 3 of the valuation hierarchy.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Available-for-sale Securities

  

  

  

  

  

  

  

  

  

  

  

Non-

  

  

  

  

  

  

  

  

  

  

  

  

  

  

agency

  

  

  

  

  

  

  

  

  

  

  

Other

  

Residential

  

  

  

  

  

  

  

  

  

  

  

Structured

  

Mortgage-

  

  

  

  

  

  

  

  

Equity

  

Financial

  

backed

  

  

  

  

  

  

  

  

Securities

  

Products

  

Securities

  

Total

Balance at April 1, 2014

$

 2,816 

  

$

 11,419 

  

$

  

$

 14,235 

  

Total gains or losses (realized/unrealized):

  

  

  

  

  

  

  

  

  

  

  

  

  

Included in other comprehensive income (before taxes)

  

(13)

  

  

576 

  

  

  

  

 563 

Balance at June 30, 2014

$

 2,803 

  

$

 11,995 

  

$

  

$

 14,798 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at April 1, 2013

$

 3,157 

  

$

 9,977 

  

$

25,592 

  

$

 38,726 

  

Total gains or losses (realized/unrealized):

  

  

  

  

  

  

  

  

  

  

  

  

  

Included in earnings:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other-than-temporary impairment (1)

  

(97)

  

  

  

  

  

  

(97)

  

  

Included in other comprehensive income (before taxes)

  

(240)

  

  

 529 

  

  

(1,043)

  

  

 (754) 

Balance at June 30, 2013

$

 2,820 

  

$

 10,506 

  

$

24,549 

  

$

 37,875 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at January 1, 2014

$

 2,797 

  

$

 11,297 

  

$

  

$

 14,094 

  

Total gains or losses (realized/unrealized):

  

  

  

  

  

  

  

  

  

  

  

  

  

Included in other comprehensive income (before taxes)

  

  

  

698 

  

  

  

  

 704 

Balance at June 30, 2014

$

 2,803 

  

$

 11,995 

  

$

  

$

 14,798 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at January 1, 2013

$

 3,156 

  

$

 9,550 

  

$

26,800 

  

$

 39,506 

  

Total gains or losses (realized/unrealized):

  

  

  

  

  

  

  

  

  

  

  

  

  

Included in earnings:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other-than-temporary impairment (1)

  

(97)

  

  

  

  

(388)

  

  

(485)

  

  

Included in other comprehensive income (before taxes)

  

(239)

  

  

 956 

  

  

(1,863)

  

  

 (1,146) 

Balance at June 30, 2013

$

 2,820 

  

$

 10,506 

  

$

24,549 

  

$

 37,875 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Included in noninterest income, net impairment losses recognized in earnings.

 

Susquehanna’s policy is to recognize transfers in and transfers out of Levels 1, 2, and 3 as of the end of a reporting period.

 

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans

Impaired collateral dependent loans and other loans where the carrying value is based on the fair value of the underlying collateral minus selling costs, such as residential mortgage loans charged off in accordance with regulatory guidance, are measured at fair value on a nonrecurring basis. The fair value of the underlying collateral is incorporated into the estimate of the impairment of a loan. Most of Susquehanna’s impaired collateral dependent loans are secured by real estate. The value of the real estate collateral is determined through appraisals performed by third-party, licensed appraisers. As part of Susquehanna’s overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna’s principal markets. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs. When the value of the real estate, less estimated selling costs, is less than the principal balance of the loan, a specific reserve is established. Impaired loans are reviewed at least quarterly for additional impairment, and reserves are adjusted accordingly.

50

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

Foreclosed Assets

Other real estate property acquired through foreclosure is recorded at the lower of its carrying value or the fair value of the related real estate collateral at the transfer date, less estimated selling costs. The value of the real estate collateral is determined through appraisals performed by third party licensed appraisers. As part of Susquehanna’s overall valuation process, management evaluates these third-party appraisals to ensure that they are representative of the exit prices in Susquehanna’s principal markets. Susquehanna considers the appraisals used in its impairment analysis to be Level 3 inputs.

 

  

The following tables present assets measured at fair value on a nonrecurring basis at June 30, 2014 and December 31, 2013,

on the consolidated balance sheets and by the valuation hierarchy.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quoted

  

  

  

  

  

  

  

  

  

  

  

  

  

Prices

  

  

  

  

  

  

  

  

  

  

  

  

  

in Active

  

Significant

  

  

  

  

  

  

  

  

  

  

Markets for

  

Other

  

Significant

  

  

  

  

  

  

  

Identical

  

Observable

  

Unobservable

  

  

  

  

  

  

  

Instruments

  

Inputs

  

Inputs

  

  

Description

  

June 30, 2014

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

  

Impaired loans

  

$

 35,975 

  

$

  

$

  

$

 35,975 

  

  

Foreclosed assets

  

  

 10,302 

  

  

  

  

  

  

10,302 

  

  

  

  

$

 46,277 

  

$

  

$

  

$

46,277 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Quoted

  

  

  

  

  

  

  

  

  

  

  

  

  

Prices

  

  

  

  

  

  

  

  

  

  

  

  

  

in Active

  

Significant

  

  

  

  

  

  

  

  

  

  

Markets for

  

Other

  

Significant

  

  

  

  

  

  

  

Identical

  

Observable

  

Unobservable

  

  

  

  

  

  

  

Instruments

  

Inputs

  

Inputs

  

  

Description

  

December 31, 2013

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

  

Impaired loans

  

$

 54,216 

  

$

  

$

  

$

 54,216 

  

  

Foreclosed assets

  

  

 16,555 

  

  

  

  

  

  

16,555 

  

  

  

  

$

 70,771 

  

$

  

$

  

$

 70,771 

  

 

  

The following table details the quantitative information about Level 3 fair value measurements:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Fair Value at

Valuation

  

Range

Asset

June 30, 2014

Technique(s)

Unobservable Input

(Weighted Average)

  

  

  

  

  

  

  

Other structured financial products (1)

$

11,995 

Discounted Cash Flow

Credit default rates, call options and deferrals, waterfall structure, and covenants. 

Varies by individual security, refer to Note 2

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other equity securities

  

2,803 

Discounted Cash Flow

Cash flows from dividends and terminal value

0.2x - 1.4x

  

  

  

  

(0.8x)

  

  

  

  

  

  

  

Impaired loans

  

35,975 

Discounted Cash Flow

Cash flows based upon current discount rates and terminal value

0.6% - 14.1%

  

  

  

  

(3.6%)

  

  

  

  

  

  

  

  

  

  

  

  

  

Foreclosed assets

  

10,302 

Discounted Cash Flow

Third party appraisals less estimated selling costs

0.0% - 100.0%

  

  

  

  

(32.7%)

 

51

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

  

  

Fair Value at

Valuation

  

Range

Asset

December 31, 2013

Technique(s)

Unobservable Input

(Weighted Average)

  

  

  

  

  

  

  

Other structured financial products (1)

$

11,297 

Discounted Cash Flow

Credit default rates, call options and deferrals, waterfall structure, and covenants. 

Varies by individual security, refer to Note 2

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other equity securities

  

2,797 

Discounted Cash Flow

Cash flows from dividends and terminal value

0.2x - 1.5x

  

  

  

  

(0.8x)

  

  

  

  

  

  

  

Impaired loans

  

54,216 

Discounted Cash Flow

Cash flows based upon current discount rates and terminal value

0.8% - 8.0%

  

  

  

  

(3.9%)

  

  

  

  

  

  

  

  

  

  

  

  

  

Foreclosed assets

  

16,555 

Discounted Cash Flow

Third party appraisals less estimated selling costs

0.0% - 100.0%

  

  

  

  

(29.6%)

  

  

  

  

  

  

  

(1)

The significant unobservable inputs used in the fair value measurement of Susquehanna's other structured financial products are conditional repayment rate, loss severity, and conditional default rate. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and directionally opposite change in the assumption used for repayment rate.

  

  

  

  

  

 

52

 


 

Susquehanna Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except as noted and per share)

 

 

 

Additional Disclosures about Fair Value of Financial Instruments

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following table represents the carrying amounts and estimated fair values of Susquehanna's financial instruments.  The

  

methods and assumptions used to estimate the fair value of each class of financial instruments are described above.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30, 2014

  

  

  

  

Carrying

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 Amount 

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

  

  

Financial assets:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks

$

456,917 

  

$

456,917 

  

$

456,917 

  

$

  

$

  

  

  

Short-term investments

  

78,849 

  

  

78,849 

  

  

  

  

78,849 

  

  

  

  

  

Investment securities

  

2,183,093 

  

  

2,183,093 

  

  

21,479 

  

  

2,146,816 

  

  

14,798 

  

  

  

Restricted investment in bank stocks

  

141,689 

  

  

141,689 

  

  

  

  

141,689 

  

  

  

  

  

Loans and leases

  

13,667,153 

  

  

13,678,712 

  

  

  

  

  

  

13,678,712 

  

  

  

Derivatives

  

24,586 

  

  

24,586 

  

  

  

  

24,586 

  

  

  

  

Financial liabilities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

  

13,314,994 

  

  

12,472,338 

  

  

  

  

12,472,338 

  

  

  

  

  

Short-term borrowings

  

527,079 

  

  

527,079 

  

  

  

  

527,079 

  

  

  

  

  

FHLB borrowings

  

1,127,302 

  

  

1,131,404 

  

  

  

  

1,131,404 

  

  

  

  

  

Long-term debt

  

360,033 

  

  

361,178 

  

  

  

  

361,178 

  

  

  

  

  

Derivatives

  

43,164 

  

  

43,164 

  

  

  

  

43,164 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

December 31, 2013

  

  

  

  

Carrying

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 Amount 

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

  

  

Financial assets:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Cash and due from banks

$

305,357 

  

$

305,357 

  

$

305,357 

  

$

  

$

  

  

  

Short-term investments

  

83,227 

  

  

83,227 

  

  

  

  

83,227 

  

  

  

  

  

Investment securities

  

2,375,224 

  

  

2,375,224 

  

  

20,895 

  

  

2,340,235 

  

  

14,094 

  

  

  

Restricted investment in bank stocks

  

158,232 

  

  

158,232 

  

  

  

  

158,232 

  

  

  

  

  

Loans and leases

  

13,576,086 

  

  

13,463,676 

  

  

  

  

  

  

13,463,676 

  

  

  

Derivatives

  

24,316 

  

  

24,316 

  

  

  

  

24,316 

  

  

  

  

Financial liabilities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

  

12,869,372 

  

  

11,901,099 

  

  

  

  

11,901,099 

  

  

  

  

  

Short-term borrowings

  

555,740 

  

  

555,740 

  

  

  

  

555,740 

  

  

  

  

  

FHLB borrowings

  

1,531,282 

  

  

1,531,606 

  

  

  

  

1,531,606 

  

  

  

  

  

Long-term debt

  

453,260 

  

  

461,247 

  

  

  

  

461,247 

  

  

  

  

  

Derivatives

  

50,247 

  

  

50,247 

  

  

  

  

50,247 

  

  

  

53

 


 

  

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;

 

54

 


 

  

·         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 www.sec.gov.

 

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 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.

 

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

55

 


 

  

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

56

 


 

  

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)

  

 

Non-interest income

  

45,349 

  

  

49,076 

  

(7.6)

  

  

  

87,438 

  

  

91,720 

  

(4.7)

  

 

Non-interest 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"

 

57

 


 

  

 

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

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

  

Shareholders' 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 equity (numerator)

$

1,492,374 

  

  

$

1,333,764 

  

  

$

1,492,374 

  

  

$

1,333,764 

  

 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

Common shares outstanding (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' Equity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

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 tangible shareholders' 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.

 

58

 


 

  

 

  

  

  

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.

 
 
 
 
 
 
 
 

 

59

 


 

  

 

Table 4

Distribution of Assets, Liabilities and Shareholders' Equity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest Rates and Interest Differential - Tax Equivalent Basis

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

For the Three Month Period Ended

  

  

For the Three Month Period Ended

  

  

  

June 30, 2014

  

  

June 30, 2013

  

  

  

Average

  

  

  

  

  

  

Average

  

  

  

  

  

  

  

  

Balance

  

Interest

  

Rate (%)

  

Balance

  

Interest

  

Rate (%)

  

  

  

(Dollars in thousands)

Assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Short-term investments

$

 80,954 

  

 23 

  

0.11 

  

$

 106,740 

  

 34 

  

0.13 

Investment securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

 2,013,166 

  

  

 11,238 

  

2.24 

  

  

 2,107,031 

  

  

 10,830 

  

2.06 

  

  

Tax-advantaged

  

 382,524 

  

  

 5,291 

  

5.55 

  

  

 396,960 

  

  

 5,478 

  

5.54 

  

Total investment securities

  

 2,395,690 

  

  

 16,529 

  

2.77 

  

  

 2,503,991 

  

  

 16,308 

  

2.61 

Loans and leases, (net):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

 13,154,917 

  

  

 144,471 

  

4.40 

  

  

 12,690,334 

  

  

 156,561 

  

4.95 

  

  

Tax-advantaged

  

 434,616 

  

  

 5,432 

  

5.01 

  

  

 419,794 

  

  

 5,326 

  

5.09 

  

Total loans and leases

  

 13,589,533 

  

  

 149,903 

  

4.42 

  

  

 13,110,128 

  

  

 161,887 

  

4.95 

Total interest-earning assets

  

 16,066,177 

  

  

 166,455 

  

4.16 

  

  

 15,720,859 

  

  

 178,229 

  

4.55 

Allowance for loan and lease losses

  

 (154,710) 

  

  

  

  

  

  

  

 (179,273) 

  

  

  

  

  

Other noninterest-earning assets

  

 2,466,660 

  

  

  

  

  

  

  

 2,529,880 

  

  

  

  

  

Total assets

$

 18,378,127 

  

  

  

  

  

  

$

 18,071,466 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Liabilities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing demand

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing demand

$

 5,998,086 

  

 3,726 

  

0.25 

  

$

 5,983,543 

  

 4,219 

  

0.28 

  

  

Savings

  

 1,134,421 

  

  

 305 

  

0.11 

  

  

 1,080,427 

  

  

 294 

  

0.11 

  

  

Time

  

 4,129,738 

  

  

 10,245 

  

1.00 

  

  

 3,892,237 

  

  

 11,653 

  

1.20 

Short-term borrowings

  

 552,367 

  

  

 2,030 

  

1.47 

  

  

 728,497 

  

  

 2,154 

  

1.19 

FHLB borrowings

  

 1,174,611 

  

  

 4,840 

  

1.65 

  

  

 1,041,577 

  

  

 3,754 

  

1.45 

Long-term debt

  

 396,367 

  

  

 (138) 

  

(0.14) 

  

  

 496,240 

  

  

 4,239 

  

3.43 

Total interest-bearing liabilities

  

 13,385,590 

  

  

 21,008 

  

0.63 

  

  

 13,222,521 

  

  

 26,313 

  

0.80 

Demand deposits

  

 1,869,372 

  

  

  

  

  

  

  

 1,911,667 

  

  

  

  

  

Other liabilities

  

 354,500 

  

  

  

  

  

  

  

 288,964 

  

  

  

  

  

Total liabilities

  

 15,609,462 

  

  

  

  

  

  

  

 15,423,152 

  

  

  

  

  

Equity

  

 2,768,665 

  

  

  

  

  

  

  

 2,648,314 

  

  

  

  

  

Total liabilities & shareholders' equity

$

 18,378,127 

  

  

  

  

  

  

$

 18,071,466 

  

  

  

  

  

Net interest income / yield on

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

average earning assets

  

  

  

  

 145,447 

  

3.63 

  

  

  

  

  

 151,916 

  

3.88 

Taxable equivalent adjustment

  

  

  

  

 (3,753) 

  

  

  

  

  

  

  

(3,819)

  

  

Net interest income - as reported

  

  

  

$

 141,694 

  

  

  

  

  

  

$

 148,097 

  

  

 

60

 


 

  

 

Table 4

Distribution of Assets, Liabilities and Shareholders' Equity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest Rates and Interest Differential - Tax Equivalent Basis

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

For the Six Month Period Ended

  

For the Six Month Period Ended

  

  

  

June 30, 2014

  

June 30, 2013

  

  

  

Average

  

  

  

  

  

  

Average

  

  

  

  

  

  

  

  

Balance

  

Interest

  

Rate (%)

  

Balance

  

Interest

  

Rate (%)

  

  

  

(Dollars in thousands)

Assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Short-term investments

$

 81,909 

  

$

 41 

  

0.10 

  

$

 108,037 

  

$

 71 

  

0.13 

Investment securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

 2,065,278 

  

  

 22,651 

  

2.21 

  

  

 2,154,321 

  

  

 22,256 

  

2.08 

  

  

Tax-advantaged

  

 385,231 

  

  

 10,677 

  

5.59 

  

  

 399,197 

  

  

 11,008 

  

5.56 

  

Total investment securities

  

 2,450,509 

  

  

 33,328 

  

2.74 

  

  

 2,553,518 

  

  

 33,264 

  

2.63 

Loans and leases, (net):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

 13,145,644 

  

  

 290,552 

  

4.46 

  

  

 12,596,683 

  

  

 313,413 

  

5.02 

  

  

Tax-advantaged

  

 436,427 

  

  

 10,752 

  

4.97 

  

  

 423,563 

  

  

 10,697 

  

5.09 

  

Total loans and leases

  

 13,582,071 

  

  

 301,304 

  

4.47 

  

  

 13,020,246 

  

  

 324,110 

  

5.02 

Total interest-earning assets

  

 16,114,489 

  

  

 334,673 

  

4.19 

  

  

 15,681,801 

  

  

 357,445 

  

4.60 

Allowance for loan and lease losses

  

 (156,070) 

  

  

  

  

  

  

  

 (182,075) 

  

  

  

  

  

Other noninterest-earning assets

  

 2,460,609 

  

  

  

  

  

  

  

 2,551,682 

  

  

  

  

  

Total assets

$

 18,419,028 

  

  

  

  

  

  

$

 18,051,408 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Liabilities

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing demand

$

 6,015,217 

  

$

 7,400 

  

0.25 

  

$

 5,939,576 

  

$

 8,842 

  

0.30 

  

  

Savings

  

 1,117,278 

  

  

 592 

  

0.11 

  

  

 1,064,741 

  

  

 572 

  

0.11 

  

  

Time

  

 4,020,822 

  

  

 19,874 

  

1.00 

  

  

 3,835,477 

  

  

 22,886 

  

1.20 

Short-term borrowings

  

 611,681 

  

  

 4,131 

  

1.36 

  

  

 772,910 

  

  

 4,306 

  

1.12 

FHLB borrowings

  

 1,280,280 

  

  

 9,706 

  

1.53 

  

  

 1,098,292 

  

  

 7,427 

  

1.36 

Long-term debt

  

 423,666 

  

  

 3,712 

  

1.77 

  

  

 502,356 

  

  

 8,475 

  

3.40 

Total interest-bearing liabilities

  

 13,468,944 

  

  

 45,415 

  

0.68 

  

  

 13,213,352 

  

  

 52,508 

  

0.80 

Demand deposits

  

 1,850,223 

  

  

  

  

  

  

  

 1,915,046 

  

  

  

  

  

Other liabilities

  

 346,546 

  

  

  

  

  

  

  

 291,599 

  

  

  

  

  

Total liabilities

  

 15,665,713 

  

  

  

  

  

  

  

 15,419,997 

  

  

  

  

  

Equity

  

 2,753,315 

  

  

  

  

  

  

  

 2,631,411 

  

  

  

  

  

Total liabilities & shareholders' equity

$

 18,419,028 

  

  

  

  

  

  

$

 18,051,408 

  

  

  

  

  

Net interest income / yield on

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

average earning assets

  

  

  

  

 289,258 

  

3.62 

  

  

  

  

  

 304,937 

  

3.92 

Taxable equivalent adjustment

  

  

  

  

 (7,500) 

  

  

  

  

  

  

  

 (7,634) 

  

  

Net interest income - as reported

  

  

  

$

 281,758 

  

  

  

  

  

  

$

 297,303 

  

  

61

 


 

  

 

Table 5

Changes in Net Interest Income - Tax Equivalent Basis

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three months ended June 30, 2014

  

Six months ended June 30, 2014

  

  

versus June 30, 2013

  

versus June 30, 2013

  

  

Increase (Decrease)

  

Increase (Decrease)

  

  

Due to Change in (1)

  

Due to Change in (1)

  

  

Average

  

Average

  

  

  

  

Average

  

Average

  

  

  

  

  

Volume

  

Rate

  

Total

  

Volume

  

Rate

  

Total

  

  

(Dollars in thousands)

Interest Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other short-term investments

$

 (7) 

  

$

 (4) 

  

$

 (11) 

  

$

 (16) 

  

$

 (14) 

  

$

 (30) 

Investment securities:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

 (490) 

  

  

 898 

  

  

 408 

  

  

 (389) 

  

  

 784 

  

  

 395 

  

Tax-advantaged

  

 (200) 

  

  

 13 

  

  

 (187) 

  

  

 (338) 

  

  

 7 

  

  

 (331) 

Total investment securities

  

 (690) 

  

  

 911 

  

  

 221 

  

  

 (727) 

  

  

 791 

  

  

 64 

Loans (net of unearned income):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Taxable

  

 5,480 

  

  

 (17,570) 

  

  

 (12,090) 

  

  

 3,352 

  

  

 (26,213) 

  

  

 (22,861) 

  

Tax-advantaged

  

 185 

  

  

 (79) 

  

  

 106 

  

  

 175 

  

  

 (120) 

  

  

 55 

Total loans

  

 5,665 

  

  

 (17,649) 

  

  

 (11,984) 

  

  

 3,527 

  

  

 (26,333) 

  

  

 (22,806) 

Total interest-earning assets

$

 4,968 

  

$

 (16,742) 

  

$

 (11,774) 

  

$

 2,784 

  

$

 (25,556) 

  

$

 (22,772) 

Interest Expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Deposits:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest-bearing demand

$

 10 

  

$

 (503) 

  

$

 (493) 

  

$

 6 

  

$

 (1,448) 

  

$

 (1,442) 

  

Savings

  

 14 

  

  

 (3) 

  

  

 11 

  

  

 22 

  

  

 (2) 

  

  

 20 

  

Time

  

 667 

  

  

 (2,075) 

  

  

 (1,408) 

  

  

 196 

  

  

 (3,208) 

  

  

 (3,012) 

Short-term borrowings

  

 (578) 

  

  

 454 

  

  

 (124) 

  

  

 (537) 

  

  

 362 

  

  

 (175) 

FHLB borrowings

  

 512 

  

  

 574 

  

  

 1,086 

  

  

 1,317 

  

  

 962 

  

  

 2,279 

Long-term debt

  

 (709) 

  

  

 (3,668) 

  

  

 (4,377) 

  

  

 (1,170) 

  

  

 (3,593) 

  

  

 (4,763) 

Total interest-bearing liabilities

  

 (84) 

  

  

 (5,221) 

  

  

 (5,305) 

  

  

 (166) 

  

  

 (6,927) 

  

  

 (7,093) 

Net Interest Income

$

 5,052 

  

$

 (11,521) 

  

$

 (6,469) 

  

$

 2,950 

  

$

 (18,629) 

  

$

 (15,679) 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Changes that are due in part to volume and in part to rate are allocated in proportion to their relationship to the amounts of changes directly to volume and rate.

  

 

Net Interest Income-Taxable Equivalent Basis

       

Our major source of operating revenues is net interest income, which is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the cost of the funds required to support earning assets. Income from earning assets includes income from loans, investment securities, and 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, the levels of non-performing loans, and accretion of fair value adjustments on purchased loans. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, the rates paid on borrowed funds, amortization of core deposit intangibles, accretion of fair value adjustments on acquired deposits, and the levels of noninterest-bearing demand deposits, and equity capital.

 

Table 4 presents average balances, taxable equivalent interest income and expense, and yields earned or paid on these assets and liabilities. 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.

  

62

 


 

  

Net interest income on a fully taxable-equivalent basis totaled $145.4 million for the second quarter of 2014 compared to $151.9 million for the same period in 2013.  The decrease of $6.5 million in our taxable equivalent net interest income was the result of the decline in interest earned on earning assets exceeding the decline in interest paid on rate related liabilities. 

 

The net interest margin for the second quarter of 2014 was 3.63%, a 25 basis point decline from 3.88% for the same period in 2013.  The decline in the net interest margin results primarily from the runoff of higher yielding earning assets, existing loans repricing at lower rates, lower spreads to base indices on our variable rate loans, and partially offset by lower funding costs of deposits and borrowings.  The net interest margin is positively affected by the recognition of purchase accounting benefit from the loan portfolio.  The purchase accounting benefit recorded in the second quarter of 2014 was 12 basis points, a decrease of 15 basis points from the 27 basis points recorded during the same period in 2013.  Net interest margin, excluding purchase accounting, declined 16 basis points from 3.54% in the second quarter of 2013 to 3.38% for the same period in 2014. 

 

Net interest margin for the six month periods ended June 30, 2014 and 2013 was 3.62% and 3.92%, respectively. The 30 basis point decline in the net interest margin results primarily from originating lower yielding loans due to competition, and existing loans repricing to lower rates, partially offset by lower funding costs of deposits and borrowings.  The purchase accounting benefit from the loan portfolio for the six month periods ended June 30, 2014 and 2013 was 14 and 27 basis points, respectively. Net interest margin, excluding purchase accounting, declined 19 basis points from 3.58% in 2013 to 3.39% in 2014.  For additional information related to our net interest margin, excluding purchase accounting, refer to “Table 3, Reconciliation of Non-GAAP Measures”

  

We expect the purchase accounting benefit from the loan portfolio to continue into the future, but would note that the timing of this benefit is not certain.  While the purchase accounting marks on the purchased credit impaired loans (“PCI loans”) are accreted at a pool level the non-PCI fair value marks are accreted at the individual loan level.  While the credit mark on the non-PCI loans was always established at a discount, the interest mark on the non-PCI loans were individually established at either premiums or discounts depending upon the terms of the loan compared to market at acquisition date.  Accordingly when non-PCI loans prepay or refinance any remaining purchase accounting mark is accreted into interest income, the impact of which would vary depending upon whether the remaining marks were premiums or discounts.  Accordingly, the impact upon the net interest margin is difficult to predict.

 

When evaluating the net interest margin after the effects of purchase accounting, variances do occur, 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 Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

 

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 as of the balance sheet date at a level appropriate to absorb management’s estimate of probable incurred losses in the loan and lease portfolio. A quarterly review of the allowance for loan and lease losses is performed for the purpose of assessing loan quality, identifying impaired loans and leases, analyzing delinquencies, ascertaining loan and lease growth, evaluating potential charge-offs and recoveries, and assessing general economic conditions in the markets we serve.

Net charge-offs for the second quarter of 2014 increased to $11.4 million, or 0.34% of average loans and leases, when compared to net charge-offs for the second quarter of 2013 of $9.8 million, or 0.30% of average loans and leases. Net charge-offs for the six months ended June 30, 2014 decreased to $20.9 million, or 0.31% of average loans and leases, when compared to net charge-offs for the six months ended June 30, 2013 of $29.4 million, or 0.46% of average loans and leases. Nonaccrual loans increased slightly during this period, from $105.1 million at June 30, 2013 to $105.6 million at June 30, 2014. However, non-performing assets comprised of non-accrual loans plus foreclosed real estate, declined from $123.5 million, or 0.94% of total loans and leases at June 30, 2013, to $115.9 million, or 0.85% of total loans and leases at June 30, 2014. “Table 6 – Provision and Allowance for Loan and Lease Losses” provides detail of charge-offs and recoveries by loan category.

The allowance for loan and lease losses was 1.06% of period-end loans and leases, or $144.5 million, at June 30, 2014; 1.16% of period-end loans and leases, or $157.6 million, at December 31, 2013; and 1.36% of period-end loans and leases, or $178.6 million, at June 30, 2013.

Significant drivers of the allowance for loan and lease losses include charge-off history, with the most recent periods receiving a more significant weighting, loan portfolio composition, ratio of legacy loans to total loans, loan growth, and internal risk weightings.  Our charge-offs have declined during recent quarters which results in the need for a lower allowance for loan loss.  Also contributing to the need for a lower allowance for loan loss in the second quarter of 2014 was the majority of the loan growth was in categories with historically lower loss factors.  Additionally, during the recent quarter we experienced positive credit migration in our internal risk ratings, which influence the loss factors applied to pools of loans.  The need for a smaller allowance for loan loss resulted in a lower provision expense compared to the second quarter of 2013.

63

 


 

  

Determining the level of the allowance for probable loan and lease losses at any given point in time is difficult, particularly during uncertain economic periods. We must make estimates using assumptions and information that is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing process in light of a changing economy and the dynamics of the banking and regulatory environment. In our opinion, the allowance for loan and lease losses is appropriate to meet probable incurred loan and lease losses at June 30, 2014. There can be no assurance, however, that we will not sustain loan and lease losses in future periods greater than the size of the allowance at June 30, 2014.

 

Table 6

Provision and Allowance for Loan and Lease Losses

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

Six Months Ended

  

  

  

  

  

June 30

  

June 30

  

  

  

  

  

2014 

  

2013 

  

2014 

  

2013 

  

  

  

  

  

(Dollars in thousands)

  

  

Balance - beginning of period

$

154,150 

  

$

176,377 

  

$

157,608 

  

$

184,020 

  

  

  

Additions

  

3,000 

  

  

12,000 

  

  

9,000 

  

  

24,000 

  

  

  

Transfer for loans designated as held for sale

  

(1,236)

  

  

  

  

(1,236)

  

  

  

  

  

Charge-offs:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

(9,094)

  

  

(10,829)

  

  

(13,608)

  

  

(20,866)

  

  

  

  

Real estate - construction

  

(339)

  

  

(1,170)

  

  

(630)

  

  

(5,933)

  

  

  

  

Real estate secured - residential

  

(3,290)

  

  

(2,607)

  

  

(7,120)

  

  

(5,620)

  

  

  

  

Real estate secured - commercial

  

(1,077)

  

  

(842)

  

  

(3,684)

  

  

(5,445)

  

  

  

  

Consumer

  

(1,341)

  

  

(788)

  

  

(2,579)

  

  

(1,346)

  

  

  

  

Leases

  

(801)

  

  

(1,202)

  

  

(1,721)

  

  

(2,321)

  

  

  

Total charge-offs

  

(15,942)

  

  

(17,438)

  

  

(29,342)

  

  

(41,531)

  

  

  

Recoveries:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

  

1,820 

  

  

2,040 

  

  

3,152 

  

  

4,036 

  

  

  

  

Real estate - construction

  

796 

  

  

1,725 

  

  

1,178 

  

  

2,187 

  

  

  

  

Real estate secured - residential

  

837 

  

  

601 

  

  

1,871 

  

  

1,252 

  

  

  

  

Real estate secured - commercial

  

347 

  

  

2,083 

  

  

820 

  

  

2,805 

  

  

  

  

Consumer

  

328 

  

  

239 

  

  

711 

  

  

561 

  

  

  

  

Leases

  

383 

  

  

967 

  

  

721 

  

  

1,264 

  

  

  

Total recoveries

  

4,511 

  

  

7,655 

  

  

8,453 

  

  

12,105 

  

  

  

Net charge-offs

  

(11,431)

  

  

(9,783)

  

  

(20,889)

  

  

(29,426)

  

  

Balance - end of period

$

144,483 

  

$

178,594 

  

$

144,483 

  

$

178,594 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Average loans and leases outstanding

$

13,589,533 

  

$

13,110,128 

  

$

13,582,071 

  

$

13,020,246 

  

  

Period-end loans and leases

  

13,667,153 

  

  

13,157,762 

  

  

13,667,153 

  

  

13,157,762 

  

  

Net charge-offs as a percentage of average loans

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and leases (annualized)

  

0.34%

  

  

0.30%

  

  

0.31%

  

  

0.46%

  

  

Allowance as a percentage of period-end loans

  

  

  

  

  

  

  

  

  

  

  

  

  

  

and leases

  

1.06%

  

  

1.36%

  

  

1.06%

  

  

1.36%

  

64

 


 

  

Noninterest Income

 

Noninterest income represents a significant portion of our revenue.  Noninterest income includes service charges on deposit accounts, vehicle origination and servicing fees, wealth management commissions and fees, insurance income, mortgage banking income, capital markets income, gains and losses on securities transactions, and commissions and fees from other business activities.  The following table presents a breakdown of our noninterest income.

 

Noninterest Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following table presents a breakdown of Susquehanna's noninterest income.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 7

Noninterest Income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% Change

  

  

  

  

  

  

  

% Change

  

  

Three Months

  

2014 

  

Six Months

  

2014 

  

  

Ended June 30,

  

vs.

  

Ended June 30,

  

vs.

  

  

2014 

  

2013 

  

2013 

  

2014 

  

2013 

  

2013 

  

  

Dollars in thousands

Service charges on deposit accounts

$

 9,294 

  

$

 9,347 

  

(0.6)

  

$

 18,294 

  

$

 18,019 

  

1.5 

Vehicle origination and servicing fees

  

 2,915 

  

  

 2,407 

  

21.1 

  

  

  

 5,883 

  

  

 5,761 

  

2.1 

  

Wealth management commissions and fees

  

 12,669 

  

  

 13,289 

  

(4.7)

  

  

  

 25,388 

  

  

 25,679 

  

(1.1)

  

Commissions on property and casualty

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

insurance sales

  

 4,214 

  

  

 4,360 

  

(3.3)

  

  

  

 9,880 

  

  

 8,902 

  

11.0 

  

Other commissions and fees

  

 5,401 

  

  

 4,727 

  

14.3 

  

  

  

 10,436 

  

  

 9,055 

  

15.3 

  

Income from bank-owned life insurance

  

 1,672 

  

  

 1,520 

  

10.0 

  

  

  

 3,309 

  

  

 3,028 

  

9.3 

  

Mortgage banking revenue

  

 3,004 

  

  

 3,998 

  

(24.9)

  

  

  

 5,414 

  

  

 8,108 

  

(33.2)

  

Capital markets revenue

  

877 

  

  

3,256 

  

(73.1)

  

  

  

2,117 

  

  

4,158 

  

(49.1)

  

Net realized gain (loss) on sales of securities

  

 3,293 

  

  

 (71) 

  

4,538.0 

  

  

  

 3,285 

  

  

 (53) 

  

6,098.1 

  

Other

  

 2,010 

  

  

 6,243 

  

(67.8)

  

  

  

 3,432 

  

  

 9,063 

  

(62.1)

  

  

Total noninterest income

$

 45,349 

  

$

 49,076 

  

(7.6)

  

  

$

 87,438 

  

$

 91,720 

  

(4.7)

  

 

Second Quarter 2014 Compared to Second Quarter 2013

 

Noninterest income totaled $45.3 million for the three month period ended June 30, 2014 compared to $49.1 million for the same period in 2013.  Noninterest income as a percentage of total revenue (net interest income plus noninterest income) was 24.2% in 2014 compared to 24.9% in 2013.

 

Vehicle origination and servicing fees totaled $2.9 million, an increase of $0.5 million, or 21.1% compared to 2013. The increase is primarily due to higher vehicle leasing originations at our Hann subsidiary as a result of postponed demand due to the inclement winter weather experienced by the Mid-Atlantic region during the first quarter of 2014.

  

Wealth management commissions and fees decreased $0.6 million, or 4.7% from 2013.  The decline is primarily due to lower trading activity due to reduced market volatility.

  

Other commissions and fees totaled $5.4 million, an increase of $0.7 million, or 14.3%, compared to $4.7 million in 2013.  The increase is primarily due to increased commissions and fees associated with debit/credit card activity, and letters of credit.

 

Mortgage banking revenue declined $1.0 million, or 24.9%, to $3.0 million for the second quarter of 2014, compared to $4.0 million during the same period in 2013.  The volume of mortgages sold declined 28.3% from the second quarter of 2013 due to lower originations during the latter half of the first quarter resulting from the inclement weather the Mid-Atlantic region experienced in the first quarter of 2014.

  

Capital markets revenue totaled $0.9 million, a decrease of $2.4 million, or 73.1%, compared to 2013.  Our commercial lending originations during the quarter did not generate the number of potential customers for our interest rate swap product as did the commercial loan originations during the same quarter in 2013.

 

65

 


 

  

Net realized gain (loss) on securities increased $3.4 million over 2013 due to redemption calls of several securities in 2014, as compared to fewer calls in 2013.

 

Other income decreased $4.2 million, or 67.8%, to $2.0 million in 2014, compared to $6.2 million in 2013.  Primary contributors to the 2014 decrease were: $2.5 million decline in insurance death benefits; $1.0 million decline in gains on OREO and fixed asset sales; $0.2 million decrease in rents received; and, $0.5 million decrease in other miscellaneous income.

 

The remaining noninterest income decreased $47 thousand, or 0.3%, compared to 2013.  Refer to “Table 7 – Noninterest Income” for detail of fluctuations in other categories of noninterest income.

 

Six months ended June 30, 2014 compared to Six months ended June 30, 2013

 

Noninterest income totaled $87.4 million for the six month period ended June 30, 2014 compared to $91.7 million for the same period in 2013.  Noninterest income as a percentage of total revenue (net interest income plus noninterest income) was 23.7% in 2014 compared to 23.6% in 2013.

 

Commissions on property and casualty insurance sales increased $1.0 million, or 11.0%, to $9.9 million in 2014, compared to $8.9 million in 2013.  The main contributor to this increase is an additional $0.9 million of insurance carrier incentives paid in the first quarter of 2014.

 

Other commissions and fees totaled $10.4 million, an increase of $1.4 million, or 15.3%, compared to $9.1 million in 2013.  The increase is primarily due to increased commissions and fees associated with debit/credit card activity of $0.9 million, and letter of credit fees of $0.7 million, offset by decreases in other miscellaneous fees of $0.2 million.

 

Mortgage banking revenue declined $2.7 million, or 33.2%, to $5.4 million for the first six months of 2014, compared to $8.1 million during the same period in 2013.  The volume of mortgages sold declined 38.5% from the first six months of 2013 due to lower originations during the latter half of the first quarter resulting from the inclement weather the Mid-Atlantic region experienced in the first quarter of 2014.

 

Capital markets revenue totaled $2.1 million, a decrease of $2.0 million, or 49.1%, compared to 2013.  Our commercial lending originations during 2014 did not generate the number of potential customers for our interest rate swap product as did the commercial loan originations during 2013.

 

 

Net realized gain (loss) on securities increased $3.3 million over 2013 due to redemption calls of several securities in 2014, as compared to fewer calls in 2013.

 

Other income decreased $5.6 million, or 62.1%, to $3.4 million in 2014, compared to $9.1 million in 2013.  Primary contributors to the 2014 decrease were: $3.2 million decline in insurance death benefits; $0.9 million decline in gain on sale of OREO and fixed assets; $0.7 million decline in gain on sale of SBA loans; $0.5 million decline of one-time signing bonus related to merchant services; $0.4 million decline in credit card provider royalties (now classified in Other commissions and fees); $0.3 million decline in rents received; and, $0.4 million increase in other miscellaneous income.

 

The remaining noninterest income increased $0.4 million, or 0.7%, compared to 2013.  Refer to “Table 7 – Noninterest Income” for detail of fluctuations in other categories of noninterest income.

66

 


 

  

 

Noninterest Expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

The following table presents a breakdown of Susquehanna's noninterest expense.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Table 8

Noninterest Expense

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

% Change

  

  

  

  

  

  

  

% Change

  

  

Three Months

  

2014 

  

Six Months

  

2014 

  

  

Ended June 30,

  

vs.

  

Ended June 30,

  

vs.

  

  

2014 

  

2013 

  

2013 

  

2014 

  

2013 

  

2013 

  

  

Dollars in thousands

Salaries and employee benefits

$

 68,325 

  

$

 66,888 

  

2.1 

  

$

 133,906 

  

$

 129,502 

  

3.4 

Occupancy

  

 11,914 

  

  

 11,154 

  

6.8 

  

  

  

 25,761 

  

  

 22,369 

  

15.2 

  

Furniture and equipment

  

 4,058 

  

  

 3,747 

  

8.3 

  

  

  

 8,002 

  

  

 7,325 

  

9.2 

  

Professional and technology services

  

 7,189 

  

  

5,831 

  

23.3 

  

  

  

 13,259 

  

  

11,560 

  

14.7 

  

Advertising and marketing

  

 3,567 

  

  

 2,465 

  

44.7 

  

  

  

 7,143 

  

  

 5,765 

  

23.9 

  

FDIC insurance

  

 4,925 

  

  

 4,541 

  

8.5 

  

  

  

 10,046 

  

  

 8,339 

  

20.5 

  

Legal fees

  

 1,656 

  

  

 1,810 

  

(8.5)

  

  

  

 3,183 

  

  

 3,680 

  

(13.5)

  

Amortization of intangible assets

  

 2,367 

  

  

 3,053 

  

(22.5)

  

  

  

 4,906 

  

  

 6,321 

  

(22.4)

  

Vehicle lease disposal

  

 2,215 

  

  

 1,313 

  

68.7 

  

  

  

 4,466 

  

  

 2,603 

  

71.6 

  

Other

  

 19,009 

  

  

 18,936 

  

0.4 

  

  

  

 37,585 

  

  

 40,003 

  

(6.0)

  

  

Total noninterest expenses

  

 125,225 

  

  

 119,738 

  

4.6 

  

  

  

 248,257 

  

  

 237,467 

  

4.5 

  

 

Second Quarter 2014 Compared to Second Quarter 2013

Noninterest expenses totaled $125.2 million for the three month period ended June 30, 2014 compared to $119.7 million for the same period in 2013.

Salaries and benefits are our largest single noninterest expense and include salaries, wages, commissions, stock-based compensation, incentives, pension, and other employee benefit costs.  Total salaries and benefits expenses increased $1.4 million, or 2.1%, in 2014 compared to 2013.  This increase is due to normal salary increases, and additional personnel to ensure our compliance with the increased governmental regulations issued as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act and strategic corporate initiatives. Partially offsetting these increases are decreases in sales commissions and other performance incentives.

 

Professional and technology expenses increased 23.3%, or $1.4 million, to $7.2 million in 2014 compared to $5.8 million in 2013.  The primary driver was increased consulting fees related to investments in risk management, stress testing, and technology to comply with changing regulations.

 

Advertising and marketing costs increased $1.1 million, or 44.7%, to $3.6 million in 2014, due to increased costs related to deposit gathering campaigns, and a $0.8 million reclassification of postage from Other expenses.

 

Vehicle lease disposal expenses increased $0.9 million, or 68.7%, as a result of a 98% increase in the value of terminated leases, and a new quarterly contract amount with Auto Lenders Liquidation Center, Inc. to effectively transfer substantially all residual value risk.

 

The remaining noninterest expenses decreased $0.7 million, or 1.6% compared to 2013.  Refer to “Table 8 – Noninterest Expense” for detail of fluctuations in other categories of noninterest expense.

 

Six months ended June 30, 2014 Compared to Six months ended June30, 2013

Noninterest expenses totaled $248.3 million for the six month period ended June 30, 2014 compared to $237.5 million for the same period in 2013.

Salaries and benefits are our largest single noninterest expense and include salaries, wages, commissions, stock-based compensation, incentives, pension, and other employee benefit costs.  Total salaries and benefits expenses increased $4.4 million, or 3.4%, in 2014 compared to 2013.  This increase is due to normal salary increases, and additional personnel to ensure our compliance

67

 


 

  

with the increased governmental regulations and strategic corporate initiatives.  Partially offsetting these increases are decreases in sales commissions and other performance incentives.

 

Occupancy expense increased 15.2%, or $3.4 million, to $25.8 million in 2014 compared to $22.4 million in 2013.  The primary drivers were increased grounds maintenance of $1.1 million due to winter weather, and additional rent expense of $2.3 million, resulting from the sale / leaseback transaction executed in the fourth quarter of 2013.

 

Professional and technology expenses increased 14.7%, or $1.7 million, to $13.3 million in 2014 compared to $11.6 million in 2013.  The primary drivers were increased consulting fees related to investments in risk management, stress testing, and technology to comply with changing regulations of $1.0 million, and outside vendor services of $0.7 million.

 

Advertising and marketing costs increased $1.4 million, or 23.9%, to $7.1 million in 2014, due to increased costs related to our deposit gathering campaigns, and a $0.8 million reclassification of postage from Other expenses.

 

FDIC insurance costs increased $1.7 million, or 20.5%, to $10.0 million in 2014, due to the FDIC’s change in methodology for reporting various quantitative factors included in the assessment calculation.

 

Vehicle lease disposal expenses increased $1.9 million, or 71.6%, as a result of a 75% increase in the value of terminated leases, and a new quarterly contract amount with Auto Lenders Liquidation Center, Inc. to effectively transfer substantially all residual value risk.

 

Other expenses in 2014 totaled $37.6 million, a decrease of $2.4 million, or 6.0% from 2013’s amount of $40.0 million.  This decrease is the result of lower operating risk losses of $2.6 million and OREO and foreclosure expense of $1.6 million, partially offset by increased insurance expenses of $0.9 million and Pennsylvania shares tax of $0.9 million.

 

The remaining noninterest expenses decreased $1.2 million, or 7.1% compared to 2013.  Refer to “Table 8 – Noninterest Expense” for detail of fluctuations in other categories of noninterest expense.

 

Income Taxes

 

For information about our income taxes, refer to “Note 7. Income Taxes” to the financial statements appearing in Part I, Item 1, of this report.

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Financial Condition

Table 9

Summary of June 30, 2014 Compared to December 31, 2013

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

  

  

  

  

  

  

2014 

  

2013 

  

% Change

  

  

  

(Dollars in thousands, except per share)

  

  

Total assets

$

18,506,626 

  

$

18,473,489 

  

0.2 

%

  

  

Investment securities available for sale

  

2,183,093 

  

  

2,375,224 

  

(8.1)

  

  

  

Loans and leases

  

13,667,153 

  

  

13,576,086 

  

0.7 

  

  

  

Deposits

  

13,314,994 

  

  

12,869,372 

  

3.5 

  

  

  

Shareholders' equity

  

2,796,392 

  

  

2,717,587 

  

2.9 

  

  

  

Book value per common share

  

14.90 

  

  

14.50 

  

2.8 

  

  

  

Tangible book value per common share

  

7.95 

  

  

7.52 

  

5.7 

  

  

 

Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities

 

At June 30, 2014, we had made no elections to use fair value as an alternative measurement for selected financial assets and financial liabilities not previously carried at fair value. In addition, non-financial assets and non-financial liabilities have not been measured at fair value because we have made the determination that the impact on our financial statements would be minimal.  For additional information about our financial assets and financial liabilities carried at fair value, refer to “Note 13. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this report.

 

Securities Available for Sale

 

Securities available for sale decreased 8.1%, or $192.1 million from December 31, 2013 resulting from a strategic decision, in early 2014, not to purchase securities due to the current low interest rate environment.  As interest rates increase, Susquehanna anticipates increasing the volume of securities purchases.  For additional information about our investment securities portfolio, refer to “Note 2. Investment Securities” and  “Note 13. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this report.

 

Loans and Leases

 

Loans and leases totaled $13.7 billion at June 30, 2014 and $13.6 billion at December 31, 2013.  For additional information about our loan portfolio, refer to “Note 3. Loans and Leases” to the financial statements appearing in Part I, Item 1, of this report.

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Risk Assets

  

  

  

  

  

  

  

  

  

  

  

Table 10

Risk Assets

  

  

  

  

  

  

  

  

  

  

  

  

  

  

June 30,

  

December 31,

  

  

  

  

  

  

2014 

  

2013 

  

% Change

  

  

  

(Dollars in thousands)

Non-performing assets:

  

  

  

  

  

  

  

  

  

Nonaccrual loans and leases:

  

  

  

  

  

  

  

  

  

  

Commercial, financial, and agricultural

$

 18,792 

  

$

 16,827 

  

 11.7 

%

  

  

Real estate - construction

  

 7,428 

  

  

 13,230 

  

 (43.9) 

  

  

  

Real estate secured - residential

  

 24,740 

  

  

 23,365 

  

 5.9 

  

  

  

Real estate secured - commercial

  

 53,687 

  

  

 46,147 

  

 16.3 

  

  

  

Consumer

  

43 

  

  

47 

  

 (8.5) 

  

  

  

Leases

  

 919 

  

  

 1,199 

  

 (23.4) 

  

  

Total nonaccrual loans and leases

  

 105,609 

  

  

 100,815 

  

 4.8 

  

  

Foreclosed real estate

  

 10,302 

  

  

 16,555 

  

 (37.8) 

  

Total non-performing assets

$

 115,911 

  

$

 117,370 

  

 (1.2) 

  

  

  

  

  

  

  

  

  

  

  

  

Total non-performing assets as a percentage of period-end

  

  

  

  

  

  

  

  

  

loans and leases and foreclosed real estate

  

0.85%

  

  

0.86%

  

 (1.2) 

  

Allowance for loan and lease losses as a percentage of

  

  

  

  

  

  

  

  

  

nonaccrual loans and leases

  

137%

  

  

156%

  

 (12.2) 

  

  

  

  

  

  

  

  

  

  

  

  

Loans contractually past due 90 days and still accruing

$

 9,190 

  

$

 9,757 

  

 (5.8) 

  

Performing troubled debt restructurings

  

 40,938 

  

  

 72,133 

  

 (43.2) 

  

 

Nonperforming assets decreased from $117.4 million at December 31, 2013, to $115.9 million at June 30, 2014. Consequently, total nonperforming assets as a percentage of period-end loans and leases plus foreclosed real estate decreased from 0.86% at December 31, 2013 to 0.85% at June 30, 2014.  Troubled debt restructurings decreased $31.2 million, from $72.1 million at December 31, 2013 to $40.9 million at June 30, 2014, resulting from our curing evaluation process.

 

Of the $205.1 million of impaired loans (nonaccrual, non-consumer loan relationships greater than $1.0 million plus accruing restructured loans) at June 30, 2014 $156.1 million, or 76.1%, had no related reserve (refer to “Note 3. Loans and Leases – Impaired Loans” to the financial statements appearing in Part I, Item 1, of this report.) The determination that no related reserve for collateral-dependent loans was required was based on the net realizable value of the underlying collateral less costs to sell.

 

At June 30, 2014, real estate – construction loans comprised only 5.5% of our total loan and lease portfolio, but accounted for 7.0% of nonaccrual loans and leases and 12.6% of our allowance for loan and lease losses.  As a result, we consider real estate - construction loans to be higher-risk loans. Additional information about our real estate – construction loan portfolio is presented in Tables 11, 12, and 13. Categories within these tables are defined as follows:

 

·         Construction loans – loans used to fund vertical construction for residential and non-residential structures;

 

·         Land development loans – loans secured by land for which the approvals for site improvements have been obtained, the site improvements are in progress, or the site improvements have been completed; and

 

·         Raw land – loans secured by land for which there are neither approvals nor site improvements.

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Table 11

Construction, Land Development, and Other Land Loans - Portfolio Status

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at

  

  

  

Past Due

  

 Past Due

  

  

  

Other

  

Net

  

  

  

  

  

  

June 30,

  

% of Total

  

30-89

  

90 Days and

  

Non

  

Internally

  

Charge-

  

  

  

Category

2014

  

Construction

  

Days

  

Still Accruing

  

Accrual

  

Monitored

(1)

Offs

(2)

Reserve

(3)

  

  

  

(Dollars in thousands)

1-4 Family:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Construction

$

146,972 

  

19.6 

%

0.1

%

0.0

%

0.5

%

4.7

%

(1.1)

%

2.6

%

  

Land development

  

172,541 

  

23.1 

  

0.0

  

0.2

  

0.4

  

10.9

  

(1.0)

  

2.5

  

  

Raw land

  

1,242 

  

0.2 

  

0.0

  

0.0

  

0.0

  

2.5

  

22.2

  

3.0

  

  

  

  

  

320,755 

  

42.9 

  

0.1

  

0.1

  

0.4

  

8.0

  

(0.9)

  

2.5

  

All Other:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Construction:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investor

  

276,101 

  

36.9 

  

0.0

  

0.0

  

1.4

  

5.0

  

0.6

  

2.3

  

  

  

Owner-occupied

  

31,924 

  

4.3 

  

0.0

  

0.0

  

0.5

  

0.0

  

0.0

  

1.9

  

  

Land development:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investor

  

94,934 

  

12.7 

  

0.8

  

0.0

  

1.4

  

26.5

  

4.0

  

2.8

  

  

  

Owner-occupied

  

4,653 

  

0.6 

  

0.0

  

0.0

  

16.9

  

7.3

  

5.2

  

1.8

  

  

Raw land:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investor

  

19,353 

  

2.6 

  

0.0

  

1.8

  

0.0

  

4.7

  

(2.0)

  

1.9

  

  

  

Owner-occupied

  

461 

  

0.1 

  

0.0

  

0.0

  

0.0

  

77.7

  

0.0

  

3.3

  

  

  

  

  

427,426 

  

57.1 

  

0.2

  

0.1

  

1.4

  

9.5

  

1.3

  

2.3

  

Total

$

748,181 

  

100.0 

  

0.1

  

0.1

  

1.0

  

8.9

  

0.4

  

2.4

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Represents loans with initial signs of some financial weakness and potential problem loans that are on our internally monitored loan list, excluding non-accrual and past-due loans reflected in the prior three columns.

  

(2)

Represents the amount of net charge-offs in each category for the last twelve months divided by the category loan balance at June 30, 2014 plus the net charge-offs.

  

(3)

Represents the amount of the allowance for loan and lease losses allocated to this category divided by the category loan balance at June 30, 2014.

71

 


 

  

 

Table 12

Construction, Land Development, and Other Land Loans - Collateral Locations

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balance at

  

Geographical Location by %

  

Category

June 30, 2014

  

Maryland

  

  

New Jersey

  

  

Pennsylvania

  

  

Other

  

  

  

  

  

(Dollars in thousands)

  

1-4 Family:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Construction

$

 146,972 

  

59.2

%

  

3.3

%

  

30.7

%

  

6.8

%

  

Land development

  

 172,541 

  

42.9

  

  

5.2

  

  

38.6

  

  

13.3

  

  

Raw land

  

 1,242 

  

0.0

  

  

18.2

  

  

81.8

  

  

0.0

  

  

  

  

  

  

 320,755 

  

50.2

  

  

4.4

  

  

35.1

  

  

10.3

  

All Other:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Construction:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investor

  

 276,101 

  

50.8

  

  

14.3

  

  

32.0

  

  

2.9

  

  

  

Owner-occupied

  

 31,924 

  

1.7

  

  

34.4

  

  

63.9

  

  

0.0

  

  

Land development:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investor

  

 94,934 

  

32.6

  

  

6.0

  

  

42.8

  

  

18.6

  

  

  

Owner-occupied

  

 4,653 

  

67.2

  

  

0.0

  

  

32.8

  

  

0.0

  

  

Raw land:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Investor

  

 19,353 

  

24.6

  

  

1.9

  

  

70.1

  

  

3.4

  

  

  

Owner-occupied

  

 461 

  

100.0

  

  

0.0

  

  

0.0

  

  

0.0

  

  

  

  

  

  

 427,426 

  

42.1

  

  

13.2

  

  

38.5

  

  

6.2

  

Total

$

 748,181 

  

45.6

  

  

9.4

  

  

37.0

  

  

8.0

  

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Table 13

Construction, Land Development, and Other Land Loans - Portfolio Characteristics

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Global Debt

  

  

  

  

  

  

  

  

Balance at

  

Coverage Ratio

  

Average Loan to

  

  

  

Category

June 30, 2014

  

Less than 1.1 Times (1)

  

Value (current)

  

  

  

  

  

  

  (Dollars in thousands)

  

  

  

1-4 Family:

  

  

  

  

  

  

  

  

  

  

Construction

$

 146,972 

  

6.0

103.5

  

  

  

Land development

  

 172,541 

  

10.3

  

79.3

  

  

  

  

Raw land

  

 1,242 

  

0.0

  

68.6

  

  

  

  

  

  

  

 320,755 

  

8.6

  

94.5

  

  

  

All Other:

  

  

  

  

  

  

  

  

  

  

Construction:

  

  

  

  

  

  

  

  

  

  

  

Investor

  

 276,101 

  

19.9

  

87.1

  

  

  

  

  

Owner-occupied

  

 31,924 

  

0.0

  

66.5

  

  

  

  

Land development:

  

  

  

  

  

  

  

  

  

  

  

Investor

  

 94,934 

  

9.8

  

69.8

  

  

  

  

  

Owner-occupied

  

 4,653 

  

31.1

  

47.4

  

  

  

  

Raw land:

  

  

  

  

  

  

  

  

  

  

  

Investor

  

 19,353 

  

21.1

  

76.7

  

  

  

  

  

Owner-occupied

  

 461 

  

77.7

  

73.3

  

  

  

  

  

  

  

 427,426 

  

17.4

  

75.9

  

  

  

  

  

  

$

 748,181 

  

13.0

  

85.3

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Global debt coverage ratio is calculated by analyzing the combined cash flows of the borrower, its related entities, and the guarantors (if any).  The final global cash flow is divided by the global debt service for the same entities to determine the coverage ratio.

  

  

 

We conduct continuous portfolio reviews of real estate – construction loan relationships in excess of $0.75 million in order to identify potential problem loans. For those loan relationships under $0.75 million, the evaluation of risk is based upon delinquency. The review of loans in excess of $0.75 million consists of:

·         Determining whether the project’s economics are achievable within a time frame such that the available cash flow of this and all of the projects of the borrower/guarantor (whether financed or not financed by Susquehanna) is sufficient to pay the required payments of interest plus principal during a rolling fifteen-month projection.

·         Determining, based on a review of external sources, the viability/absorption of the projects and whether they align with the borrower/guarantor’s expectations.

·         Reviewing quarterly to assess whether the expectations of the borrower/guarantor and the externally supplied information on the market are aligned to determine if the previous assumptions are still valid or need to be adjusted to meet the expectations that Susquehanna be fully repaid.

During this process, we also review the liquidity of any guarantors (the secondary source for continuance of the project) to determine if their liquidity will support any extension of the project due to slower than expected absorption (units leased or sold).  If the result of any of the determinations set forth above is negative, we consider the loan to be impaired, and it is included in our evaluation of the allowance for loan and lease losses. If a loan is determined to be impaired, the net realizable value of the loan is calculated by using a current (less than one year old) appraisal, and the short fall is charged off. All partially charged-off loans become part of the calculation for the allowance for loan and lease losses.

  

Although our impairment and charge-off analyses take into consideration the guarantor’s demonstrated ability and willingness to service the debt, we do not carry any impaired loans at values in excess of the current appraisal due to the loan having a guarantor. Our evaluation of guarantors includes examining their financial wherewithal and their reputation and willingness to work with their lenders. Since the beginning of the global economic slowdown in 2007, we have consistently assessed the probability for completion of a project by determining the guarantor’s liquidity and the cash flow generated by the project based upon current absorption. 

 

Charge-offs are taken in the quarter that we determine that the loan is impaired and there is a probable incurred loss. We exercise our full legal rights to pursue all assets of the borrower and guarantors.

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Guarantors are required to provide us with copies of annual financial statements and tax returns, including all schedules. These financial statements and tax returns are analyzed using variables such as total debt obligation including contingent liabilities (an analysis of those contingent liabilities, the ability to service third-party debt, and whether the cash that is left will support our loan), and a review of financial statements to determine living expenses. These results are part of a fifteen-month rolling projection of the borrower’s and the guarantor’s cash flow.  With respect to a potential problem loan, the rolling fifteen-month cash flow projection requires verification of all cash or liquid investments each quarter.  In addition, we require that these statements are generally current to within one year.

 

We are well equipped to underwrite the credit worthiness of our sponsors.  Over half of our clients have been successfully operating their businesses within our markets for 15 or more years.  In addition, many of our sponsors have been either direct clients or have had successful banking relationships with our Credit Relationship managers at other financial institutions that exceed 10 years.  All of the Commercial Real Estate team’s leadership has 20 plus years of in market lending and portfolio management experience.  Therefore, we have a strong historical perspective as to how our sponsors performed during all stages of an economic cycle.

 

We continue to aggressively review our portfolio, contact customers to evaluate their financial situation and where necessary, to work with them to find proactive solutions to help limit the number of loans that become delinquent or go into default. We believe that the remainder of 2014 will be challenging, with the volatility of key commodity prices continuing to impact the commercial and industrial, commercial real estate, and consumer credit segments. However, we also believe that we have the proper monitoring systems in place to recognize issues in an appropriate time frame and to minimize the effect on our financial results.

 

Goodwill

 

For information about goodwill, refer to “Note 5. Goodwill” to the financial statements appearing in Part I, Item 1, of this report.

 

Deposits

 

Total deposits increased 3.5%, or $445.6 million, from December 31, 2013 to June 30, 2014. Within this category, core deposits such as demand, interest-bearing demand, and savings decreased 0.7%.

 

Time deposits less than $0.1 million increased 7.3%, or $153.6 million, from December 31, 2013 to June 30, 2014.  Time deposits greater than $0.1 million increased 20.8%, or $356.2 million, from December 31, 2013 to June 30, 2014.  For additional information about deposits, refer to “Note 6. Deposits” to the financial statements appearing in Part I, Item I, of this report.

 

Borrowings

 

Total short-term borrowings and long-term debt decreased $525.9 million, or 20.7%, from December 31, 2013 to June 30, 2014.  The decline is due to a $400.0 million decrease in Federal Home Loan Bank short-term borrowings made possible by the use of $445.6 million increase in deposits and not reinvesting the cash flows from the paydowns in the investment securities portfolio.

 

On May 31, 2014, a 4.75% Subordinated Note having an aggregate balance of $75.0 million matured.  The Note, plus all accrued and unpaid distributions thereon, was fully paid to the Note holder(s).

 

On June 30, 2014, we completed a redemption of an outstanding 12% Trust Preferred Security, having an aggregate liquidation amount of $5.33 million, that was issued by Tower Bancorp, Inc. which was acquired by Susquehanna Bancshares, Inc. on February 17, 2012.  The Trust Preferred Security, which by its terms had a final repayment date of April 28, 2019, was redeemed at the full amount of $5.33 million plus all accrued and unpaid distributions thereon to the redemption date.  The transaction resulted in the accretion of the remaining purchase accounting valuation of $3.7 million, which reduced interest expense for the period.

 

Susquehanna funded these repayments from available cash.

 

Shareholders’ Equity

 

Total shareholders’ equity increased $78.8 million, or 2.9%, during the first six months of 2014.  The primary components of the change were net income of $80.7 million, offset by dividends paid to shareholders of $30.0 million, or $.16 per share, and a $22.3 million positive adjustment to accumulated other comprehensive income resulting from increased fair values of available for sale securities.

 

Capital Adequacy

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Capital elements are segmented into two tiers.  Tier 1 capital represents shareholders’ equity plus junior subordinated debentures, reduced by excludable intangibles. Tier 2 capital represents certain allowable long-term debt, the portion of the allowance for loan and lease losses and the allowance for credit losses on off-balance-sheet credit exposures 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.” Tier 1 common and tangible common equity includes only common equity.

On July 2, 2013, the Federal Reserve Board, Office of the Comptroller of the Currency, and FDIC approved New Capital Rules that are applicable to bank holding companies and state member banks, relating to the implementation of revised capital standards to reflect the requirements of the Dodd-Frank Act as well as the Basel III international capital standards. The New Capital Rules were effective as of January 1, 2014 but will be phased in over a period of years beginning in 2015 for Susquehanna and ending on January 1, 2019.

Consistent with the international Basel III framework, the New Capital Rules include a new minimum ratio of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets of 4.5 percent. The New Capital 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.  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 capital ratios.  This capital conservation buffer is designed to absorb losses in times of economic stress.

The New Capital Rules emphasize Common Equity Tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The changes to the risk-weighted assets calculation will be effective beginning January 1, 2015.

The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital for institutions with over $15 billion in assets as of December 31, 2009.  An institution such as Susquehanna, which had less than $15 billion in assets as of December 31, 2009, but that exceeded this threshold before January 1, 2014, the effective date of the New Capital Rules, will be permitted to continue to include these securities in Tier 1 capital, until such a time as the institution acquires another depository institution.

Based on an analysis of the New Capital Rules, management believes that we would be fully compliant with the revised standards as of June 30, 2014 if they had been effective on that date.

We actively review our capital strategies in light of current and anticipated business risks, future growth opportunities, industry standards, and compliance with regulatory requirements.  The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings stability, competitive forces, economic conditions, and strength of management.  At June 30, 2014, the capital ratios of Susquehanna exceed the “well-capitalized” thresholds under current capital requirements as shown below.

 

Table 14

Susquehanna Capital Ratios

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Well-capitalized

  

  

  

  

  

At June 30, 2014

  

Threshold

  

  

  

Tier 1 Common Ratio

  

11.03%

  

N/A

  

  

  

Leverage Ratio

  

9.90%

  

5.0%

  

  

  

Tier 1 Capital Ratio

  

12.07%

  

6.0%

  

  

  

Total Risk-based Capital Ratio

  

13.27%

  

10.0%

  

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Recently Adopted or Issued Accounting Guidance

 

For information about the impact that recently adopted or issued accounting guidance will have on our financial statements, refer to “Note 1. Accounting Policies” to the financial statements appearing in Part I,   Item 1, of this report.

 

Risk Management

 

As a financial services company we assume or incur risk in conjunction with the execution of our day-to-day business activities.  The most significant risks we face fall into six main categories:  credit risk, market risk, operational risk, legal and regulatory compliance risk, reputation risk, and strategic risk.  While we recognize that legal and regulatory compliance risk is typically a component of operational risk, we believe the significance of this sub-category and impact on our operations warrants its own assessment and reporting category.  Our risk management activities are centered on the proper identification, measurement, monitoring, reporting, and management of these material risks. 

 

Our Board of Directors (“Board”) is ultimately accountable for the oversight of how management assumes and manages risks in pursuit of preserving shareholder value and driving financial returns.  The Board approves Susquehanna’s risk appetite, assesses the effectiveness of the enterprise risk management framework and governance processes, and oversees management’s handling of issues related to risk mitigation.

 

To this end, the Board has established a Risk Committee whose primary purpose is to exercise oversight of management’s identification of material risks facing the Company and the management and mitigation of these material risks by the management team.  The Board Risk Committee is responsible for the oversight over the enterprise risk management program.

 

Our risk management governance approach is designed to ensure clear lines of risk management accountability and a structured escalation process for key risk information.  We adhere to a concept of the “three lines of defense” whereby the lines of business represent the first line of defense owning risks impacting their businesses as well as the control activities to successfully manage those risks.  Risk management personnel comprise the second line of defense providing independent and centralized oversight over all risk categories by aggregating, analyzing and reporting upon risk information.  Internal Audit represents the third line of defense providing an independent assessment and testing of the effectiveness of policies, practices, and controls within the first and second lines of defense.

 

        Within our risk appetite framework, we have established specific qualitative and quantitative risk principles as well as risk ranges and limits to facilitate the monitoring of risk across our primary risk categories as such risks are incurred by the lines of business during the ordinary course of conducting their business.

 

The Risk Management Committee of the Board formally convenes no less than quarterly to discuss with management the status of our current and prospective risk profile as measured by risk attributes within each of our key risk categories (credit, market, operational, legal and regulatory compliance, reputation, strategic).  Matters of material risk identified by the first, second, or third line of defense would be escalated to the Board more frequently than the quarterly discussion.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risks

The types of market risk exposures generally faced by us include:

·         equity market price risk;

 

·         liquidity risk; and

 

·         interest rate risk.

Due to the nature of our operations, foreign currency and commodity price risk are not significant to us.

Equity Market Price Risk

Equity market price risk is the risk related to market fluctuations of equity prices in the securities markets. While we do not have significant equity market price risk in our investment portfolio, market price fluctuations may affect fee income generated through our asset management operations. Generally, our fee structure is based on the market value of assets being managed at specific time frames. If market values decline, our fee income may also decline.

Liquidity Risk

 

Company Liquidity

 

Our primary sources of liquidity at the parent holding company level are dividends from Susquehanna Bank, dividends from non-bank subsidiaries, investment income, proceeds from the sale of investments, and net proceeds from borrowings and capital offerings.  During the six month periods ended June 30, 2014 and 2013, our primary uses of liquidity at the parent holding company level were the payment of interest to holders of notes and capital securities, the payment of dividends to common shareholders, the repurchase of our common stock, and operating expenses of the parent holding company. During the six month periods ended June 30, 2014 and 2013, a total of 53,000 and 2,100 shares of common stock were repurchased at a cost of $544,000 and $25,000, respectively.  There are certain restrictions on the payment of dividends by Susquehanna Bank.  At June 30, 2014, $40.6 million was available for dividend distribution to the parent holding company from its banking subsidiary.  During the six month periods ended June 30, 2014 and 2013, Susquehanna Bank paid dividends to the parent holding company of $52.7 million per period, respectively.  Additional liquidity is available to us through equity or debt offerings.  The ability to execute these transactions could be affected by adverse credit ratings or market conditions.

 

Management is not aware of any events that are reasonably likely to have a material adverse effect on the parent holding company’s liquidity. 

 

Bank Liquidity

 

Management believes the sources of liquidity at the Bank are sufficient to support our banking operations.

 

Susquehanna Bank’s primary sources of liquidity are deposit accounts, purchased funds, repurchase agreements, borrowings, and the sale, maturity, or call of investment securities. Susquehanna’s primary use of liquidity is the origination and purchase of loans; extension of credit; purchase of investment securities; management of working capital; and funding debt and capital service.  Deposits represented 86.6% and 83.5% of total bank funding as of June 30, 2014 and December 31, 2013, respectively.  Brokered deposits at June 30, 2014 and December 31, 2013 were $650.7 million and $566.8 million representing 4.9% and 4.4% of total deposits, respectively.  At June 30, 2014 and December 31, 2013, Susquehanna Bank had approximately $4.1 billion at each period available under a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh; and $3.0 billion and $2.5 billion, respectively, of additional borrowing capacity subject to the pledge of additional collateral.  Susquehanna Bank pledged certain auto leases, certain auto loans, certain commercial finance leases, and certain investment securities to the Federal Reserve’s Discount Window to obtain collateralized borrowing availability.  At June 30, 2014 and December 31, 2013, Susquehanna Bank had unused collateralized borrowing availability at the Federal Reserve’s Discount Window of $1.6 and $1.5 billion, respectively.

 

Susquehanna Bank had unrestricted investment securities with a market value of $0.9 billion for the periods ended June 30, 2014 and December 31, 2013.

 

The Board has designated a management Asset and Liability Committee (“ALCO”) to develop strategies, policies, and procedures to identify, measure, monitor, and control liquidity risk pursuant to its liquidity management policy.  The liquidity management policy is commensurate with the complexity, risk profile, and scope of operations of the Bank and reflects its risk

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appetite, tolerances, key risk indicators, and reporting requirements that are deemed appropriate in order to operate in a safe and sound manner.  The liquidity management policy includes the Bank’s contingency funding plan that assesses liquidity needs that may arise from certain stress events that are bank-specific, as well as the result of external factors.

Interest Rate Risk

We define interest rate risk as the risk to earnings and equity arising from the behavior of interest rates.  These behaviors include increases and decreases in interest rates as well as continuation of the current interest rate environment.  The Asset Liability & Interest Rate Risk Management Policy (the “ALM Policy”) provides a comprehensive management process for identifying, measuring, monitoring, and managing interest rate risk.  The ALM Policy is commensurate with the complexity, risk profile, and scope of operations and reflects the risk appetite, interest rate risk tolerances, and key risk indicators of the Company.  The Board has designated ALCO, through the treasury group, to implement the ALM Policy and to develop strategies to manage interest rate risk.

 

Our interest rate risk principally consists of reprice, option, basis risk, and yield curve risk.   Reprice risk results from differences in the maturity or repricing characteristics of asset and liability portfolios. Option risk arises from embedded options in the investment and loan portfolios such as investment securities calls and loan prepay options.  Option risk also exists since deposit customers may withdraw funds at their discretion in response to general market conditions, competitive alternatives to existing accounts or other factors.  The exercise of such options may result in higher costs or lower revenue for the Company. Basis risk refers to the potential for changes in the underlying relationship between market rates or indices, which subsequently result in narrowing spreads on interest-earning assets and interest-bearing liabilities.  Basis risk also exists in administered rate liabilities, such as interest-bearing checking accounts, savings accounts and money market accounts where the price sensitivity of such products may vary relative to general markets rates.  Yield curve risk refers to the adverse consequences of nonparallel shifts in the yield curves of various market indices that impact our assets and liabilities.    

 

We use simulation analysis as a primary method to assess earnings at risk and equity at risk due to assumed changes in interest rates.  Management uses the results of its various simulation analyses in combination with other data and observations to formulate strategies designed to maintain interest rate risk within risk tolerances. 

 

Earnings at risk is defined as the change in net interest income (excluding provision for loan and lease losses and income tax expense) due to assumed changes in interest rates. Earnings at risk is generally used to assess interest rate risk over relatively short time horizons.  We compute earnings at risk on a monthly basis over one and two-year time horizons. 

  

Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. The discounted present value of all cash flows represents our economic value of equity.  Equity at risk is generally considered a measure of the long-term interest rate exposures of the balance sheet at a point in time.  We compute equity at risk on a monthly basis.

 

We conduct scenario analyses across a range of instantaneous, parallel, and sustained interest rate shocks and measures the percent of change in earnings and equity relative to a base case scenario assuming no movement in interest rates.  The range of interest rate shocks includes upward and downward movements of rates through 400 basis points in 100 basis point increments, subject to market conditions that may render certain rate shocks impracticable.  For example, during the current period of ultra-low interest rates, downward interest rate shocks have been suspended.  The ALM Policy defines this series of scenario analysis as Core Scenarios.  The size and composition of the balance sheet is held constant for the Core Scenarios.  Measures of earnings at risk computed over a one-year time horizon and equity at risk produced from the Core Scenarios are defined as key risk indicators and are compared to risk tolerances established by the ALCO and the Board. 

 

We conduct scenario analysis across a range of other changes in interest rates including ramped rate changes, non-parallel rate changes, and changes in key interest rates that do not move in tandem for upward and downward interest rate shocks.  The specific interest rate scenarios that are analyzed are developed by the treasury group in consultation with the ALCO.  We also conduct scenario analyses assuming changes in the size and composition of the balance sheet to support business planning, budgeting, and forecasting.  

 

Simulation analysis involves the use of several assumptions including, but not limited to, the timing of cash flows such as investment security calls, loan prepayment speeds, deposit attrition rates, the interest rate sensitivity of loans and deposits relative to general market rates, and the behavior of interest rates and spreads.  Furthermore, equity at risk simulation uses assumptions regarding discount rates that value cash flows.  Simulation analysis is highly dependent on model assumptions that may vary from actual outcomes.  For example, higher levels of interest rate sensitivity of deposits to upward movements in interest rates may adversely impact net interest income.  Additionally, slower prepayment speeds of loans may adversely impact the economic value of equity in a rising interest rate environment.  Key simulation assumptions are subject to stress testing to assess the impact of assumptions changes on earnings at risk and equity at risk.  We also use back-testing to assess the effectiveness of simulation analysis in identifying, measuring, monitoring, and managing interest rate risk. 

 

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From time to time, key model assumptions may be modified to improve the effectiveness of simulation analysis.  Management modified certain key assumptions during calendar year 2013 and in the assessment of our interest rate risk profile as of December 31, 2013.  The model assumptions modifications included changes to the prepayment speeds of residential mortgage loans (the assumption changes generally reflected slower loan prepayment speeds); increases in the price sensitivity of certain deposit products; increases in the present value discount rates applied to cash flows of the loan portfolio for upward interest rate shocks; and changes to the non-maturity deposit attrition rates (an acceleration of attrition rates resulting in shorter assumed average lives).  Model assumptions were also modified to discount deposit liabilities using a yield curve from the Federal Home Loan Bank of Pittsburgh cost of funds for bullet debt maturities rather than discount deposit liabilities using a single market rate applied to the respective deposit balances.  The use of the yield curve from the FHLB bullet debt results in applying higher discount rates to non-maturity deposit liabilities based on their assumed average lives that are derived from deposit attrition rates.

 

Table 15 summarizes the results of the Core Scenarios for equity at risk and earnings at risk assuming instantaneous, parallel, and sustained upward interest rate shocks of 100 and 200 basis points at June 30, 2014 and December 31, 2013.  The results for equity at risk assuming a 200 basis point increase in interest rates produces a negative 0.8% change in equity while the results for earnings at risk assuming a 200 basis point increase in interest rates produces a positive 5.9% change in net interest income over a one-year time horizon.  Equity at risk and earnings at risk may not produce highly correlated results due to the fundamental nature of the two simulation techniques.  Equity at risk measures cash flows over time horizons that capture the interest rate characteristics of assets and liabilities that may change within one year and beyond one year.  In contrast, the calculation of earnings at risk is focused on the interest rate characteristics of assets and liabilities that may alter earnings within a one-year time horizon.

 

Table 15

Susquehanna Rate Shock Analysis

  

  

  

  

  

  

  

  

  

  

Net Interest Income

  

Economic Value of Equity

  

  

  

+100bp

+200bp

  

+100bp

+200bp

  

  

June 30, 2014

2.4%

5.9%

  

0.0%

-0.8%

  

  

December 31, 2013

1.0%

3.7%

  

-1.5%

-2.7%

  

  

Risk-tolerance

-7.5%

-10.0%

  

-15.0%

-25.0%

  

 

Derivative Financial Instruments and Hedging Activities

 

Our interest rate risk management strategy involves hedging the repricing characteristics of certain assets and liabilities so as to mitigate adverse effects on our net interest margin and cash flows from changes in interest rates. While we do not participate in speculative derivatives trading, we consider it prudent to use certain derivative instruments to add stability to our interest income and expense, to modify the duration of specific assets and liabilities, and to manage our exposure to interest rate movements.

 

Additionally, we execute derivative instruments in the form of interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those derivatives are immediately hedged by offsetting derivative contracts, such that we minimize our net risk exposure resulting from such transactions. We do not use credit default swaps in our investment or hedging operations.

 

For additional information about our derivative financial instruments, refer to “Note 11. Derivative

Financial Instruments” and  “Note 13. Fair Value Disclosures” to the financial statements appearing in Part I, Item 1, of this report.  

 

Vehicle Leasing Residual Value  Risk   

 

In an effort to manage the vehicle residual value risk arising from the auto leasing business of Hann and our affiliate bank, Hann and the bank have entered into arrangements with Auto Lenders Liquidation Center, Inc. (“Auto Lenders”) pursuant to which Hann or the bank, as applicable, effectively transferred to Auto Lenders substantially all residual value risk of its respective auto lease portfolio, and all residual value risk on any new leases originated over the term of the applicable agreement. Auto Lenders, which was formed in 1990, is a used-vehicle remarketer with five retail locations in New Jersey and has access to various wholesale facilities throughout the country. Under these arrangements, Auto Lenders agrees 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. Stated residual values of new leases are set in accordance with the standards approved in advance by Auto Lenders. Under a servicing agreement with Auto Lenders, Hann agrees to make monthly guaranty payments to Auto Lenders based upon a negotiated 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 payments. During the renewal process, we periodically evaluate the best remarketing and/or residual guarantee alternatives for Hann and our bank subsidiary.

 

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Item 4. Controls and Procedures.

 

(a)       Evaluation of Disclosure Controls and Procedures

             

Susquehanna’s management, with the participation of Susquehanna’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Susquehanna’s disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Susquehanna believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

(b)       Change in Internal Control Over Financial Reporting

 

No change in Susquehanna’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Susquehanna’s internal control over financial reporting.

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PART II--OTHER INFORMATION

 

Item 1.  Legal Proceedings. 

 

Susquehanna and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions with numerous customers through offices in Pennsylvania, Maryland, New Jersey and West Virginia. Although we have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk. In the ordinary course of operations, Susquehanna and our subsidiaries are subject to routine litigation incidental to our business.

   Lehman Litigation

In September 2010, Lehman Brothers Special Financing, Inc. (“LBSF”) filed suit in the United States Bankruptcy court for the Southern District of New York against certain indenture trustees, certain special-purpose entities (issuers) and a class of noteholders and trust certificate holders who received distributions from the trustees, including Susquehanna, to recover funds that were allegedly improperly paid to the noteholders in forty-seven separate collateralized debt obligation transactions (“CDO”). In June 2007, two of our affiliates each purchased $5.0 million in AAA rated Class A Notes of a CDO offered by Lehman Brothers, Inc. Concurrently with the issuance of the notes, the issuer entered into a credit swap with LBSF. Lehman Brothers Holdings, Inc. (“LBHI”) guaranteed LBSF’s obligations to the issuer under the credit swap. When LBHI filed for bankruptcy in September 2008, an Event of Default under the indenture occurred, and the trustee declared the notes to be immediately due and payable. Susquehanna was repaid its principal on the notes in September 2008.

This legal proceeding is in its early stages of discovery; thus it is not yet possible for us to estimate potential loss, if any. Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of this proceeding will have a material adverse effect on our financial position, or cash flows; although, at the present time, management is not in a position to determine whether such proceeding will have a material effect on our results of operations in any future quarterly reporting period.

Other Legal Proceedings and Investigations

Susquehanna and certain of its subsidiaries have been named as defendants in various legal actions arising out of the normal course of business, including claims against entities to which Susquehanna is a successor as a result of business combinations. In the opinion of management, the ultimate resolution of these lawsuits should not have a material adverse effect on Susquehanna’s business, consolidated financial position or results of operations. It is possible, however, that future developments could result in an unfavorable ultimate outcome for or resolution of any one or more of the lawsuits in which Susquehanna or its subsidiaries are defendants, which may be material to Susquehanna’s results of operations for a particular quarterly reporting period. Litigation is inherently uncertain, and management cannot make assurances that Susquehanna will prevail in any of these actions, nor can management reasonably estimate the amount of damages that Susquehanna might incur.

 

In addition, from time to time, Susquehanna receives subpoenas and other requests for information from various federal and state governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings.  Susquehanna’s policy is to be fully cooperative with such inquiries.  Any of these matters may result in material adverse consequences to Susquehanna and/or its directors, officers and other personnel, including: adverse judgments, findings, settlements, fines, penalties, orders, injunctions or other actions; amendments and/or restatements of Susquehanna’s filings with the Securities and Exchange Commission and/or its financial statements, as applicable; and determinations of material weaknesses in our disclosure controls and procedures. Investigations by regulatory authorities may from time to time result in civil or criminal referrals to law enforcement authorities such as the Department of Justice or a United States Attorney.  Among other matters, Susquehanna has received a subpoena from the Department of Justice requiring the production of documents in connection with a civil investigation focused on, among other things, return deposit rates for payment processor and certain merchant customers of Susquehanna Bank.  Susquehanna has responded to the subpoena and continues to cooperate with the government’s investigation, which is ongoing. In the event that the Department of Justice were to bring any proceeding, demand or claim against Susquehanna as a result of the investigation, such action could include the Department of Justice seeking injunctive and monetary relief against Susquehanna under the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

 

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

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None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

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Item 6. Exhibits.†

  

  

  

  

  

  

  

  

  

  

  

  

The Exhibits filed as part of this report are as follows:

  

  

  

  

  

  

  

  

  

  

  

  

3.1 

Amended and Restated Articles of Incorporation, dated May 6, 2011, incorporated by reference to Exhibit 3.1 to Susquehanna’s Quarterly Report on Form 10-Q, filed August 8, 2011.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

3.2 

Amended and Restated By-Laws, dated December 10, 2013, incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed December 13, 2013.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

31.1 

Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.

  

  

  

  

  

  

  

  

  

  

  

  

31.2 

Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.

  

  

  

  

  

  

  

  

  

  

  

  

32 

Section 1350 Certifications are filed herewith as Exhibit 32.

  

  

  

  

  

  

  

  

  

  

  

  

101.INS

XBRL Instance Document

  

  

  

  

  

  

  

  

  

  

  

  

101.SCH

XBRL Taxonomy Extension Schema Document

  

  

  

  

  

  

  

  

  

  

  

  

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

  

  

  

  

  

  

  

  

  

  

  

  

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

  

  

  

  

  

  

  

  

  

  

  

  

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

  

  

  

  

  

  

  

  

  

  

  

  

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document

  

  

  

  

  

  

  

  

  

  

  

  

Upon request by the SEC, the registrant agrees to furnish to the SEC a copy of any instrument with respect to unregistered long-term debt of the registrant in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K promulgated under the Exchange Act.

  

  

  

  

  

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SIGNATURES

 

Pursuant to the requirements 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.

 

 

August 7, 2014                                                                 /s/ William J. Reuter                                                                                                                                                                                           William J. Reuter

                                                                                            Chairman and Chief Executive Officer

 

 

August 7, 2014                                                                 /s/ Michael W. Harrington                                                                                                                                                                                                 Michael W. Harrington

                                                                                    Executive Vice President and Chief

                                                                                            Financial Officer

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EXHIBIT INDEX

  

  

  

  

  

  

  

  

  

  

3.1 

Amended and Restated Articles of Incorporation, dated May 6, 2011, incorporated by reference to Exhibit 3.1 to Susquehanna’s Quarterly Report on Form 10-Q, filed August 8, 2011.

  

  

  

  

  

  

  

  

  

  

  

3.2 

Amended and Restated By-Laws, dated December 10, 2013, incorporated by reference to Exhibit 3.1 of Susquehanna’s Current Report on Form 8-K, filed December 13, 2013.

  

  

  

  

  

  

  

  

  

  

  

31.1 

Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer is filed herewith as Exhibit 31.1.

  

  

  

  

  

  

  

  

  

  

31.2 

Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer is filed herewith as Exhibit 31.2.

  

  

  

  

  

  

  

  

  

  

32 

Section 1350 Certifications are filed herewith as Exhibit 32.

  

  

  

  

  

  

  

  

  

  

101.INS

XBRL Instance Document

  

  

  

  

  

  

  

  

  

  

101.SCH

XBRL Taxonomy Extension Schema Document

  

  

  

  

  

  

  

  

  

  

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

  

  

  

  

  

  

  

  

  

  

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

  

  

  

  

  

  

  

  

  

  

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

  

  

  

  

  

  

  

  

  

  

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document

 

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