Susquehanna Bancshares, Inc. Announces Second Quarter Results

Susquehanna Bancshares, Inc., (Susquehanna) (Nasdaq:SUSQ) today announced net income for the second quarter of 2007 was $9.8 million, or $0.19 per diluted share, compared to $19.3 million, or $0.38 per diluted share, for the second quarter 2006. Net income for the first six months of 2007 was $30.5 million, or $0.59 per share, compared to $37.0 million, or $0.76 per share for the first half of 2006. Excluding the $11.8 million pre-tax charge related to Susquehanna’s investment restructuring program, net income for the second quarter of 2007 and the first six months of 2007 were $17.5 million and $38.2 million, respectively. Additionally, diluted earnings per share for the same periods were $0.34 and $0.73, respectively. Second Quarter Financial Highlights: -- As announced earlier this month, Susquehanna completed a restructuring of its bank investment portfolio, which was meant to reduce administrative costs, improve the yield on the portfolio, and enhance related net interest margin and net interest income. The restructuring involved the sale of $233 million in available-for-sale securities, or approximately 16% of Susquehanna's total investment portfolio. The sold securities had a weighted average yield of 3.76%, and the proceeds were reinvested in securities with an expected yield of 5.75%. The restructuring resulted in a pre-tax charge of $11.8 million in June 2007.   -- Net loans and leases, excluding securitizations, grew 5% from June 30, 2006. -- Commercial loans increased 15% to $1.1 billion at June 30, 2007.   -- Total deposits increased 1% to $6.0 billion from June 30, 2006.   -- Net interest margin for the second quarter decreased 22 basis points to 3.67% compared to 3.89% for the second quarter of 2006.   -- Net charge-offs as a percentage of average loans and leases for the quarter ended June 30, 2007 were 0.14% compared to 0.05% for the second quarter of 2006.   -- Wealth management fee income increased 11% to $8.1 million from $7.3 million in the second quarter of 2006. Commission income from property and casualty insurance sales increased 6% to $2.9 million from $2.8 million for the same period. Equity capital was $945 million at June 30, 2007 or $18.11 per share, compared to $905 million, or $17.47 per share at June 30, 2006. Return on average assets and average tangible equity(1) for the second quarter of 2007 finished at 0.48% and 6.96%, respectively. This compared to results of 0.97% and 14.43%, for the same measurements, respectively for the second quarter of 2006. (1)A non-GAAP-based financial measure. The most comparable GAAP-based measurement for return on average tangible equity is return on average equity. A reconciliation of the differences between non-GAAP-based and GAAP-based measurements can be found at the end of this release under the heading "Supplemental Reporting of Non-GAAP-Based Financial Measures." Linked Quarter Highlights (Second Quarter 2007 vs. First Quarter 2007) -- Net loans and leases, excluding securitizations, grew 3% from March 31, 2007. -- Commercial loans increased 6% to $1.1 billion from March 31, 2007.   -- Total deposits decreased 1% to $6.0 billion from March 31, 2007. -- Noninterest-bearing deposits grew 1% to $911 million from March 31, 2007.   -- Net interest margin remained unchanged at 3.67% compared to the first quarter of 2007. Additional Activity: -- On May 1, Susquehanna announced the signing of an agreement to acquire Community Banks, Inc., and the acquisition process is proceeding on schedule. Susquehanna projects that the acquisition will be completed on or about November 16, 2007. A Transition Team is overseeing the work of more than 60 sub-committees that are addressing specific initiatives. Major projects include filing necessary applications, outlining the planned management structure of the combined banks, and reviewing the branch network, operations and product lineup of both banks. "In spite of the challenging interest rate environment that the banking industry has been facing recently, I am pleased to report that we maintained our net interest margin from the first to the second quarter of 2007. In addition, we completed an investment restructuring that is expected to improve the yield on our portfolio going forward,” said William J. Reuter, Chairman, President and Chief Executive Officer. "We are making good progress on our plans to acquire Community Banks, Inc. With the completion of this acquisition, Susquehanna will have assets of more than $12 billion and a significantly expanded branch network in the Mid-Atlantic region. The combination of financial strength, market share leadership and broad business lines created by this merger should benefit both our customers and our shareholders.” Susquehanna will broadcast its second quarter 2007 results conference call over the Internet on July 25, 2007 at 11:00 a.m. Eastern time. The conference call will include management’s discussion of second quarter 2007 results. The discussion may also include forward-looking information and financial goals. Investors will have the opportunity to listen to the conference call through a live broadcast on Susquehanna’s Web site. The event may be accessed by selecting "Investor Relations" at the bottom right of the home page and clicking on the second quarter webcast link. To listen to the live call, please go to the Web site at least fifteen minutes prior to the scheduled start time to download and install any necessary audio software. For those who are unable to listen to the live broadcast, an archived replay and podcast will be available on the Web site shortly after the call concludes. Susquehanna Bancshares, Inc., is a financial services holding company with assets of $8.3 billion. It includes three commercial banks that provide financial services at 164 branch locations and 170 ATM locations in the mid-Atlantic region. Through Susquehanna Wealth Management, the company offers investment, fiduciary, brokerage, insurance, retirement planning, and private banking services. Susquehanna also operates an insurance and employee benefits company, a commercial finance company, and a vehicle leasing company. For more information, please visit www.susquehanna.net. This press release contains certain financial information determined by methods other than in accordance with GAAP. Susquehanna’s management uses these non-GAAP measures in its analysis of the company’s performance. These non-GAAP financial measures require management to make judgments about the exclusion of certain items, and if different judgments were made, the amounts reported would be different. These measures typically exclude the effects of intangibles and related amortization and include the tax benefit associated with revenue items that are tax-exempt. Disclosures regarding these non-GAAP financial measures are included in the accompanying financial information. The presentation of these non-GAAP financial measures is intended to supplement investors’ understanding of Susquehanna’s core business activities. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. This press release contains "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995 that are based on Susquehanna’s current expectations, estimates and projections about future events and financial trends affecting the financial condition of its business. These statements are not historical facts or guarantees of future performance, events or results. Such statements involve potential risks and uncertainties. Accordingly, actual results may differ materially. Susquehanna undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543   SUMMARY FINANCIAL INFORMATION (Dollars in thousands, except per share data) Six Months 2Q07 2Q06 2007 2006 Balance Sheet (EOP) Investments $1,411,229 $1,257,209 $1,411,229 $1,257,209 Loans and leases 5,574,858 5,743,859 5,574,858 5,743,859 Allowance for loan & lease losses (ALLL) 61,871 60,138 61,871 60,138 Total assets 8,313,609 8,256,165 8,313,609 8,256,165 Deposits 5,979,281 5,917,311 5,979,281 5,917,311 Short-term borrowings 440,672 360,430 440,672 360,430 FHLB borrowings 460,034 621,949 460,034 621,949 Long-term debt 222,035 222,556 222,035 222,556 Shareholders' equity 945,140 904,929 945,140 904,929   Stated Book Value per Share 18.11 17.47 18.11 17.47 Tangible Book Value per Share 11.28 10.66 11.28 10.66   Average Balance Sheet Investments 1,456,918 1,291,604 1,461,708 1,241,983 Loans and leases 5,470,859 5,513,312 5,484,373 5,375,932 Total earning assets 7,028,522 6,880,914 7,037,801 6,692,150 Total assets 8,202,823 7,964,471 8,198,518 7,705,330 Deposits 5,998,428 5,741,424 5,957,425 5,509,621 Short-term borrowings 363,651 290,603 352,302 298,817 FHLB borrowings 432,975 625,979 487,468 659,285 Long-term debt 222,090 212,741 222,159 192,849 Shareholders' equity 945,974 873,274 942,473 827,465   Income Statement Net interest income 63,437 66,109 126,485 125,847 Provision for loan and lease losses 1,933 1,275 3,933 3,950 Noninterest income 19,151 32,078 53,431 61,929 Noninterest expense 67,342 68,394 132,190 129,354 Income before taxes 13,313 28,518 43,793 54,472 Income taxes 3,495 9,178 13,249 17,431 Net income 9,818 19,340 30,544 37,041 Basic earnings per share 0.19 0.38 0.59 0.76 Diluted earnings per share 0.19 0.38 0.59 0.76 Cash dividends paid per share 0.25 0.24 0.50 0.48   Asset Quality Net charge-offs (NCO) $1,851 $650 $4,705 $3,040 Nonaccrual loans & leases 30,309 16,816 30,309 16,816 Restructured loans 1,997 2,393 1,997 2,393 OREO 4,587 2,530 4,587 2,530 Total nonperforming assets (NPA) 36,893 21,739 36,893 21,739 Loans & leases 90 days past due 8,053 8,735 8,053 8,735     Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543     RATIO ANALYSIS 2Q07 2Q06 2007 2006   Credit Quality NCO / Average loans & leases 0.14 % 0.05 % 0.17 % 0.11 % NPA / Loans & leases & OREO 0.66 % 0.38 % 0.66 % 0.38 % ALLL / Nonperforming loans & leases 191.52 % 313.07 % 191.52 % 313.07 % ALLL / Total loans & leases 1.11 % 1.05 % 1.11 % 1.05 %   Capital Adequacy Equity / Assets 11.37 % 10.96 % 11.37 % 10.96 % Long-term debt / Equity 23.49 % 24.59 % 23.49 % 24.59 %   Profitability Return on average assets 0.48 % 0.97 % 0.75 % 0.97 % Return on average equity 4.16 % 8.88 % 6.54 % 9.03 % Return on average tangible equity (1) 6.96 % 14.43 % 10.79 % 14.14 % Net interest margin 3.67 % 3.89 % 3.67 % 3.83 % Efficiency ratio 80.75 % 69.19 % 72.83 % 68.47 % Efficiency ratio excluding Hann (1) 79.08 % 64.09 % 70.70 % 63.03 %   (1)Supplemental Reporting of Non-GAAP-based Financial Measures   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. A reconciliation of return on average equity to return on average tangible equity is set forth below.   Return on average equity (GAAP basis) 4.16 % 8.88 % 6.54 % 9.03 % Effect of excluding average intangible assets and related amortization 2.80 % 5.55 % 4.25 % 5.11 % Return on average tangible equity 6.96 % 14.43 % 10.79 % 14.14 %   Efficiency ratio excluding Hann is a non-GAAP-based financial measure calculated using non-GAAP-based amounts. The most directly comparable GAAP-based measure is the efficiency ratio. We measure our efficiency ratio by dividing noninterest expenses by the sum of net interest income, on a FTE basis, and noninterest income. The presentation of an efficiency ratio excluding Hann is computed as the efficiency ratio excluding the effect of our auto leasing subsidiary, Hann. Management believes this to be a preferred measure because it excludes the volatility of vehicle residual values and vehicle delivery and preparation expense of Hann and provides better visibility into our core business activities. A reconciliation of efficiency ratio to efficiency ratio excluding Hann is set forth below.   Efficiency ratio (GAAP basis) 80.75 % 69.19 % 72.83 % 68.47 % Effect of excluding Hann 1.67 % 5.10 % 2.13 % 5.44 % Efficiency ratio excluding Hann 79.08 % 64.09 % 70.70 % 63.03 % Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543   CONSOLIDATED BALANCE SHEETS     June 30, December 31, June 30, 2007 2006 2006 (unaudited)   (unaudited) (in thousands, except share data) Assets Cash and due from banks $198,899 $194,785 $203,151 Unrestricted short-term investments 99,634   70,996   48,551   Cash and cash equivalents 298,533 265,781 251,702 Restricted short-term investments 214 33,533 29,086 Securities available for sale 1,406,342 1,397,420 1,250,948 Securities held to maturity (fair values approximate $4,887, $6,146, and $6,261) 4,887 6,146 6,261 Loans and leases, net of unearned income 5,574,858 5,560,997 5,743,859 Less: Allowance for loan and lease losses 61,871   62,643   60,138   Net loans and leases 5,512,987   5,498,354   5,683,721   Premises and equipment, net 107,334 106,305 106,410 Foreclosed assets 4,587 1,544 2,530 Accrued income receivable 32,075 31,044 28,869 Bank-owned life insurance 267,788 264,398 259,502 Goodwill 338,284 335,005 332,095 Intangible assets with finite lives 17,846 19,092 20,641 Investment in and receivables from unconsolidated entities 161,445 121,663 147,317 Other assets 161,287   144,849   137,083   Total assets $8,313,609   $8,225,134   $8,256,165     Liabilities and Shareholders' Equity Deposits: Demand $911,383 $959,654 $1,019,976 Interest-bearing demand 2,126,459 2,004,596 1,839,089 Savings 445,333 477,447 540,011 Time 1,592,165 1,528,298 1,646,010 Time of $100 or more 903,941   907,594   872,225   Total deposits 5,979,281 5,877,589 5,917,311 Short-term borrowings 440,672 401,964 360,430 FHLB borrowings 460,034 528,688 621,949 Long-term debt 150,031 150,036 150,041 Junior subordinated debentures 72,004 72,244 72,515 Accrued interest, taxes, and expenses payable 36,394 54,800 61,919 Deferred taxes 146,485 145,825 122,132 Other liabilities 83,568   57,702   44,939   Total liabilities 7,368,469   7,288,848   7,351,236     Shareholders' equity: Common stock, $2.00 par value, 100,000,000 shares authorized; Issued: 52,202,046 at June 30, 2007; 52,080,419 at December 31, 2006; and 51,798,970 at June 30, 2006 104,343 104,161 103,598 Additional paid-in capital 348,897 345,840 339,796 Retained earnings 510,344 505,861 484,659 Accumulated other comprehensive loss, net of taxes of $(9,931); $(10,541); and $(12,451) (18,444 ) (19,576 ) (23,124 ) Total shareholders' equity 945,140   936,286   904,929   Total liabilities and shareholders' equity $8,313,609   $8,225,134   $8,256,165   Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543   CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)   Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share data) 2007 2006 2007 2006 Interest Income: Loans and leases, including fees $102,795 $100,796 $205,240 $192,160 Securities: Taxable 15,571 12,549 31,036 23,396 Tax-exempt 426 187 812 363 Dividends 985 914 2,092 1,751 Short-term investments 1,268   847   2,392   1,585   Total interest income 121,045   115,293   241,572   219,255     Interest Expense: Deposits: Interest-bearing demand 16,466 12,243 32,864 22,860 Savings 940 1,324 2,053 1,946 Time 28,947 23,975 56,686 44,314 Short-term borrowings 3,990 2,970 7,772 5,688 FHLB borrowings 3,960 5,559 9,129 13,012 Long-term debt 3,305   3,113   6,583   5,588   Total interest expense 57,608   49,184   115,087   93,408   Net interest income 63,437 66,109 126,485 125,847 Provision for loan and lease losses 1,933   1,275   3,933   3,950   Net interest income, after provision for loan and lease losses 61,504   64,834   122,552   121,897     Noninterest Income: Service charges on deposit accounts 7,181 6,592 13,656 11,648 Vehicle origination, servicing, and securitization fees 3,888 5,150 7,906 9,155 Asset management fees 4,792 4,633 9,403 9,401 Income from fiduciary-related activities 1,755 1,531 3,343 3,025 Commissions on brokerage, life insurance and annuity sales 1,567 1,147 2,678 2,247 Commissions on property and casualty insurance sales 2,941 2,762 7,033 7,109 Income from bank-owned life insurance 2,641 2,615 5,299 4,784 Net gain on sale of loans and leases 1,474 2,014 5,525 5,307 Net loss on securities (11,801 ) (20 ) (11,740 ) (84 ) Other 4,713   5,654   10,328   9,337   Total noninterest income 19,151   32,078   53,431   61,929     Noninterest Expenses: Salaries and employee benefits 34,840 32,531 69,116 62,505 Occupancy 5,703 5,135 11,774 10,284 Furniture and equipment 2,912 2,821 5,809 5,306 Advertising and marketing 2,808 3,764 4,633 5,822 Amortization of intangible assets 623 546 1,246 971 Vehicle lease disposal 2,834 3,478 6,179 6,869 Other 17,622   20,119   33,433   37,597   Total noninterest expenses 67,342   68,394   132,190   129,354   Income before income taxes 13,313 28,518 43,793 54,472 Provision for income taxes 3,495   9,178   13,249   17,431   Net Income $9,818   $19,340   $30,544   $37,041     Earnings per share: Basic $0.19 $0.38 $0.59 $0.76 Diluted $0.19 $0.38 $0.59 $0.76 Cash dividends $0.25 $0.24 $0.50 $0.48 Average shares outstanding: Basic 52,124 50,697 52,111 48,796 Diluted 52,197 50,820 52,198 48,938 Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543   DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY     Interest rates and interest differential-taxable equivalent basis   For the Three-month Period Ended For the Three-month Period Ended June 30, 2007   June 30, 2006 (Dollars in thousands) AverageBalance   Interest   Rate (%) AverageBalance   Interest   Rate (%) Assets Short-term investments $100,745 $1,268 5.05 $75,998 $847 4.47 Investment securities: Taxable 1,415,256 16,556 4.69 1,272,836 13,462 4.24 Tax-advantaged 41,662   655 6.31 18,768   289 6.18   Total investment securities 1,456,918   17,211 4.74 1,291,604   13,751 4.27 Loans and leases, (net): Taxable 5,381,069 101,715 7.58 5,425,315 99,756 7.38 Tax-advantaged 89,790   1,662 7.42 87,997   1,601 7.30   Total loans and leases 5,470,859   103,377 7.58 5,513,312   101,357 7.37   Total interest-earning assets 7,028,522 $121,856 6.95 6,880,914 $115,955 6.76 Allowance for loan and lease losses (62,688 ) (59,150 ) Other non-earning assets 1,236,989   1,142,707     Total assets $8,202,823   $7,964,471     Liabilities Deposits: Interest-bearing demand $2,133,308 $16,466 3.10 $1,824,434 $12,243 2.69 Savings 457,442 940 0.82 527,067 1,324 1.01 Time 2,502,428 28,947 4.64 2,413,185 23,975 3.98 Short-term borrowings 363,651 3,990 4.40 290,603 2,970 4.10 FHLB borrowings 432,975 3,960 3.67 625,979 5,559 3.56 Long-term debt 222,090   3,305 5.97 212,741   3,113 5.87   Total interest-bearing liabilities 6,111,894 $57,608 3.78 5,894,009 $49,184 3.35 Demand deposits 905,250 976,738 Other liabilities 239,705   220,450     Total liabilities 7,256,849 7,091,197   Equity 945,974   873,274     Total liabilities & shareholders' equity $8,202,823   $7,964,471     Net interest income / yield on average earning assets $64,248 3.67 $66,771 3.89     1. Average loan balances include non accrual loans. 2. Tax-exempt income has been adjusted to a tax-equivalent basis using a marginal tax rate of 35%. 3. For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.   Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543   DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY (continued)     Interest rates and interest differential-taxable equivalent basis   For the Six-month Period Ended For the Six-month Period Ended June 30, 2007 June 30, 2006 (Dollars in thousands) AverageBalance   Interest   Rate (%) AverageBalance   Interest   Rate (%) Assets Short-term investments $91,720 $2,392 5.26 $74,235 $1,585 4.31 Investment securities: Taxable 1,421,976 33,128 4.70 1,223,724 25,147 4.14 Tax-advantaged 39,732   1,249 6.34 18,259   558 6.16   Total investment securities 1,461,708   34,377 4.74 1,241,983   25,705 4.17 Loans and leases, (net): Taxable 5,396,899 203,121 7.59 5,297,370 190,371 7.25 Tax-advantaged 87,474   3,260 7.52 78,562   2,752 7.06   Total loans and leases 5,484,373   206,381 7.59 5,375,932   193,123 7.24   Total interest-earning assets 7,037,801 $243,150 6.97 6,692,150 $220,413 6.64 Allowance for loan and lease losses (62,690 ) (56,782 ) Other non-earning assets 1,223,407   1,069,962     Total assets $8,198,518   $7,705,330     Liabilities Deposits: Interest-bearing demand $2,104,997 $32,864 3.15 $1,785,276 $22,860 2.58 Savings 464,889 2,053 0.89 488,820 1,946 0.80 Time 2,481,568 56,686 4.61 2,312,000 44,314 3.87 Short-term borrowings 352,302 7,772 4.45 298,817 5,688 3.84 FHLB borrowings 487,468 9,129 3.78 659,285 13,012 3.98 Long-term debt 222,159   6,583 5.98 192,849   5,588 5.84   Total interest-bearing liabilities 6,113,383 $115,087 3.80 5,737,047 $93,408 3.28 Demand deposits 905,971 923,525 Other liabilities 236,691   217,293     Total liabilities 7,256,045 6,877,865   Equity 942,473   827,465     Total liabilities & shareholders' equity $8,198,518   $7,705,330     Net interest income / yield on average earning assets $128,063 3.67 $127,005 3.83     1. Average loan balances include non accrual loans. 2. Tax-exempt income has been adjusted to a tax-equivalent basis using a marginal tax rate of 35%. 3. For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. Susquehanna Bancshares, Inc. P.O. Box 1000 Lititz, PA 17543   LOANS AND LEASES   Loans and leases, net of unearned income, were as follows:   June 30, December 31, June 30, 2007 2006 2006 (in thousands) Commercial, financial, and agricultural $1,090,241 $978,522 $948,068 Real estate - construction 1,069,309 1,064,452 1,075,954 Real estate secured - residential 1,206,891 1,147,741 1,476,250 Real estate secured - commercial 1,559,283 1,577,534 1,558,151 Consumer 297,429 313,848 317,115 Leases 351,705 478,900 368,321 Total loans and leases $5,574,858 $5,560,997 $5,743,859