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Susquehanna Bancshares, Inc. (NASDAQ:SUSQ)

Q4 2012 Earnings Conference Call

January 24, 2013 11:00 a.m. ET

Executives

Carl Lundblad – SVP & Director of Strategic Planning & IR

Bill Reuter – Chairman & CEO

Drew Hostetter – EVP & CFO

Mike Quick – EVP and CCO

Analysts

Bob Ramsey – FBR

Casey Haire – Jefferies

Chris McGratty – Keefe, Bruyette & Woods

Matthew Schultheis – Boenning & Scattergood

Preeti Dixit – JPMorgan

Matthew Clark – Credit Suisse

Collyn Gilbert – Stifel Nicolaus

Russell Gunther – Bank of America Merrill Lynch

Mac Hodgson – SunTrust Robinson Humphrey

John Moran – Macquarie Capital

Frank Schiraldi – Sandler O’Neill

Matthew Kelly – Sterne Agee

Blair Brantley – BB&T Capital Markets

Daniel Martian – Raymond James

Operator

Please stand by. Good morning and welcome to the Susquehanna Bancshares’ Fourth Quarter 2012 Earnings Conference Call. Today’s call is being recorded. At this time, participants are in a listen-only mode. Later, we’ll conduct an electronic question-and-answer session and instructions will follow at that time. (Operator Instructions)

Thank you. Mr. Lundblad, you may begin.

Carl Lundblad

Thank you, Beth. Good morning, and welcome everyone. I’m Carl Lundblad and I serve as Senior Vice President and Director of Strategic Planning and Investor Relations at Susquehanna Bancshares.

Our press release containing financial results for the fourth quarter and full-year of 2012 was made available yesterday after the market close. You can find this and our other financial releases in the Investor Relations section of our website at www.susquehanna.net.

Certain statements made during this conference call may be considered to be forward-looking statements. In particular, certain statements made on this call may include forward-looking statements relating to our strategic objectives and financial targets for 2013. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in the press release and our SEC filings. We encourage you to refer to such filings including a Form 8-K filed yesterday containing our earnings release and our most recent Forms 10-K and 10-Q for a complete discussion of forward-looking statements.

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.

I’m now pleased to introduce the host for our call, Bill Reuter, Chairman and Chief Executive Officer.

Bill Reuter

Thank you, Carl. Good morning everyone and thank you for joining us. Also participating in this morning’s call will be Drew Hostetter, Executive Vice President and Chief Financial Officer and Mike Quick, Executive Vice President and our Chief Credit Officer.

The results we announced yesterday illustrate the success we achieved with respect to each other strategic objectives we outlined for 2012. We continued to drive improvements in credit quality, successfully completed the integration of Tower bank order, generated solid organic loan and core deposit growth as well as overall revenue growth and significantly improved profitability and shareholder dividends.

For the fourth quarter, we earned net income of $43 million or $0.23 per share compared to $19 million or $0.12 per share during the same period 2011. For the fourth quarter 2012, this represents a very strong return on tangible equity of 14%. Net income for 2012 was $141 million or $0.77 per share compared to $55 million or $0.40 per share in 2011, an increased EPS of 93%.

During this morning’s call, I’d like review the achievements of each of our strategic objectives for 2012. And then Drew will focus on highlights of our fourth quarter financial results and 2013 targets. I’ll conclude our prepared remarks by outlining our strategic objectives for 2013.

I’ll begin with the review of our progress on credit quality. The stead improvement we saw throughout the year is a testament to the work of our credit and lending teams. Non-accruing loans were $98 million at year-end, down from $156 million in the fourth quarter 2011. At year-end 2012, the ratio of non-performing assets as percent of loans, leases and foreclosed real estates was 96 basis points compared to 188 basis points a year earlier.

Net charge-offs as a percent of average loans and leases was 55 basis points for 2012 compared to 116 basis points for 2011. We continued to maintain a strong reserve with our allowance of $184 million at year-end 2012 representing 1.43% of total loans and leases and 180% of non-accruals. Our teams will continue their focus on credit quality as we work to accelerate growth in our loan portfolio in 2013 and going forward.

The second of our major objectives for 2012 was the integration of Tower Bancorp. However, to truly put this into perspective, it’s important to consider that the Tower merger in February 2012 followed quickly after our acquisition of Abington Bancorp in October 2011. With these two integrations, we converted more than 200,000 accounts including $2.6 billion in loans and $2.9 billion in deposits as well as $443 million in assets under management associated with wealth management operation.

We combined Tower and Abington 69 offices with our own branch network consolidating branches in close proximity for improved efficiency. Result is a network of more than 260 Susquehanna bank offices in Mid-Atlantic region. We strengthened our core market in Central Pennsylvania and also added critical mass in the Philadelphia metro market where we now operate more than 60 branches with over $3 billion in deposits. These acquisitions roughly doubled our presence, our company’s presence in the greater Philadelphia region.

In addition, we achieved our cost savings goal of $58 million from the two acquisitions and reductions in expenses in our core Susquehanna operation. I think it’s also important to note that since our most recent merger, we have achieved a very effective integration of people and best practices from both companies. It’s now been almost years since the acquisition of Tower and our team’s collaboration is evident both in our results from last year and then the strategic direction we’ve outlined for the new few years.

I’m pleased to see the focus that we have all on the collective goals on the company to advance the best interest of customers, shareholders and communities we serve. In connection with the Tower acquisition, we complete strategic reorganization of the company even as we’ve grown to more than $18 billion in assets. We remain committed to our heritage as a main street bank. So we organized the company to 12 regions each with its own President and leadership structure to keep as much decision making as local as possible and to maintain strong connections in the community.

A key differentiator for Susquehanna is our ability to provide the personalized service of the community bank backed by the scale and diverse resources of a large financial service company. Our regional structure was key to the success we achieved in next of our 2012 strategic goals namely, generating growth in loans, deposits and revenues.

Looking at year-over-year results, we would expect to see a significant increase in loans and deposits due to the Tower acquisition. So I’d like focus on our results excluding the loans and deposits acquired as part of the merger. This is where we see the reflection of our teams to build relationship with customers and win additional market share.

On the loan side, we achieved net organic loan growth of $471 million during 2012 or 4.5%. We are especially pleased with our growth in commercial loans a key focus for us, which solve progress particularly in the second half of the year. Commercial loans increased 3.2% in the third quarter 2012 and 4.8% in the fourth quarter.

Taking a look at deposits, we generated organic deposit growth of $215 million or 2.1% over last year. With our focus on increasing core deposits, we’re pleased to have achieved organic core deposit growth of $675 million or 9.8% for the year. Core deposits now make up 70% of our total deposits, up from 66.8% at year-end 2011. This continuing a shift in our deposit portfolio helped to drive down deposit costs throughout the year.

Net interest margin for the year was 4.01% compared to 3.6% for 2011. This improvement driven primarily by balance sheet restructuring in the fourth quarter 2011, redemption of trust-preferred securities in the third quarter of 2012 and the benefits of Tower acquisition.

Core revenue was up about 30% for the year to $758 million as net interest income increased 36% to $591 million and core non-interest income increased 16% to $167 million. Our final strategic objective for 2012 was an increased profitability and dividends to shareholders. To that end, we saw results of our cost management initiatives reflected in our efficiency ratio which improved from 66.83% in 2011 to 60.37% in 2012.

Return on average assets for 2012 was 81 basis points compared to 38 basis points 2011 and return on average tangible equity was 12.03% compared to 6.01% in 2011.

As our performance has shown a strong improvement, we’ve also increased return to our shareholders raising a dividend three times during 2012. We also accelerated the first quarter 2013 dividend paying in the fourth quarter of 2012. Excluding this accelerated quarterly payment, total dividends paid in 2012 were $0.21 per share compared to $0.08 per share in 2011.

At this point, I’d like to turn the call over to Drew.

Drew Hostetter

Thank you, Bill. In my presentation I want to focus on fourth quarter results for 2012 and our 2013 financial targets.

Net interest income increased $6.2 million or 4% from the third quarter of 2012, due primarily to an increase in the margin of 14 basis points from 3.92% to 4.06%. This improvement was due to an increase in purchase accounting, 9 basis points, a reduction in high cost funds, 11 basis points, offset by core margin compression, 6 basis points.

Salaries and benefits expense increased $4.6 million or 7% from the third quarter of 2012, as our short-term incentive accrual increased $4 million due to Susquehanna reaching its 2012 upper tier financial goals. Other expense increased $2.9 million or 12% from the third quarter of 2012 as we settled three litigation claims for a net pretax cost of $2.2 billion.

Next I want to present our financial targets for 2013. FTE margin, 3.90%, loan growth 5%, deposit growth, 6%, non-interest income growth 8%, non-interest expense growth negative 2%, tax rate 32%.

The growth percentages included in these financial targets are based upon 2012 reported numbers and not core numbers.

I will now turn the conference call back to Bill for his closing remarks.

Bill Reuter

Thank you Drew. We’re pleased with the strong performance we achieved in 2012 and are now pursuing initiatives to continue that momentum this year and going forward. Over the last few months, management and leadership throughout the company developed a three-year strategic plan which were reviewed and were proved by our Board of Directors.

The primary objectives of plan include continuing to grow our core deposits especially check and accounts, grow a more diverse loan portfolio with a continuing emphasis on commercial and non-residential consumer lines. Increasing non-interest income as a percent of total revenue and delivering a consistent and differentiating customer experience to support the Susquehanna brand of building and enduring relationships. And then achieving sustainable employ engagement and deliver our differentiating employee experience.

We believe that by focusing on these objectives, we will achieve our mission to help customers achieve their financial goals deliver superior return for our shareholders and build the economic strength of our communities. Managers throughout the company were engaged in developing the strategic plan and have aligned their own department and business unit goals to support these objectives.

Various initiatives are underway to support the plan including new retail and commercial products, technology and mobile service enhancements, expansion of our C&I lending talent and capacity and enhance capital markets group and sales effort, increase cross-selling with our wealth management group and other fee generating business lines, process review and improvements and enhancing our talent and leadership development activities.

These are just a few examples initiatives we already have started and with the court assuring more about these plans and our progress in future calls. Lay assure represented a year of transition as well as a year of strong performance for Susquehanna with a strategic roadmap, new products and services set to be launched and the commitment of our 3,400 team members I’m excited about what we can achieve in 2013.

Thank you for your attention this morning. We’ll now open the call for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Bob Ramsey with FBR.

Bob Ramsey – FBR

Hey, good morning guys.

Bill Reuter

Good morning Bob.

Bob Ramsey – FBR

Just a question, I know you said that you all looking for 5% loan growth in 2013, is that a good way to think about earning asset growth as well and I think previously you all had said earning assets in 2013 should be something shy of $60.5 billion, just curios if you had a number now that are a little bit closer.

Bill Reuter

Yes, we’ll be less than that. We did give the 5% loan growth. The investment portfolio when you consider short-term investments we think we’ll be about$2.7 billion. So that’ll be less. Now if rates would come up sometime in the latter half of this year or whatever, we would start to reinvest in the investment portfolio once again and that number could grow substantially. But if rates stay where they are today, our best estimate is that common issue short-term investment, the investment portfolio average for 2013 will be about $2.7 billion.

Bob Ramsey – FBR

Okay. And then with the loan growth of 5%, I think is a little bit shy of your annualized growth in the fourth quarter here. Just curious, is that reflecting just caution and economic outlook or did you all have some loan volume that was fold forward in the fourth quarter maybe related to year-end tax issues. Just curious what you’re seeing in terms of demand on the ground to then?

Drew Hostetter

Now I think you’re statements are correct. I think we’ll be in cautious with respect to the economy, with respect to unemployment rates and everything in between all the talk about spending costs in fiscal cliffs, I think we’ll just be basically conservative but we think 5% is very achievable.

Bill Reuter

Yeah, and some of the loan growth in the leasing had to do with hurricane Sandy because our auto leasing is in New Jersey.

Bob Ramsey – FBR

Okay. Great, thank you.

Operator

Moving on now to, Casey Haire with Jefferies.

Casey Haire – Jefferies

Hey good morning guys.

Drew Hostetter

Good morning Casey.

Casey Haire – Jefferies

So just question on, I’m just running through the guide for ‘13, it looks like you’re assuming, it spits out a revenue run rate that’s a little bit light of the fourth quarter run rate. Obviously purchase accounting helped as you pointed out, but just curious is there anything more you can do on the expense front to help preserve margins and keep that efficiency ratio below 60%?

Drew Hostetter

Yeah I think the guidance we just gave is up with the efficiency ratio just likely under 60%. But there are several things we are looking at in 2013 to continue to try to reduce expenses. We always continue to look at branches specifically, so we will continue to look at areas where we have an opportunity to reduce costs if we can.

Bill Reuter

And I think, this is Bill Reuter speaking, and I think as our mobile products get up and running and we start to seeing what kind of transaction volume they build when in fact it has on the branches, we’ll make the proper adjustments at that point in time staffing level is up as well.

Casey Haire – Jefferies

Okay, great. And then just I guess switching to capital and sort of the M&A environment, it does feel like things are loosening up a little bit, a target bank in Virginal announce that its exploring its strategic options last month. I’m just curious what’s your appetite is on the M&A front and what’s your sense of how the disconnect between buyers and sellers sort of closing on pricing within your footprint.

Bill Reuter

Yeah, I’m not sure I have to make any conclusions yet about the disconnect between seller expectations and buyer expectations, but until we see a couple more deals done. But I will say this to you about appetite to M&A, if you look at our strategic objectives that outlined early in my comments; our primary focus right now is on enhancing the core performance of the company and growing market share in our existing markets for organic growth. We would consider on a very selective basis, acquisition opportunities to build long-term shareholder value but it’s not a primary strategy for us at this time.

With respect to market extension deals, I think there are more problematic for us at this point in time. Although we like the demographics in some of these market extension deals, our market extension transaction for us is simply less likely to meet financial criteria that we consider as we look at things like accretive to earnings in the first year, tangible book value dilution less than five years, IRR is at 15% or greater and then we’ve been find back our stock as opposed doing the deal. So I think when you look at that in the context of some of these market extension deals, bureaucracy and type of synergies involved in those deals that’s all are end market deals, doesn’t mean we would never do want, but again our primary focus is basically on the organic growth of the company, our core performance and selectively if the like then came along we looked, but again it’s not a primary strategy for us this time.

Casey Haire – Jefferies

Okay. And just last one on credit, the credit metrics continue to show nice recovery here, but if memory serves at $13 million were about 40 bps of average loans in terms of credit costs. Is there a sense that given the underlying improvement in credit metrics that you guys can go below this normalized level of credit costs?

Drew Hostetter

Yeah, this is my quick. That’s going to depend on the economy. We still have weaknesses in some of our markets and we still see the small to mid sized business struggling. We looked at our new nonaccrual generation during the quarter, most of it was under $1 million and they set it in small businesses that are just having difficult times. We still see in certain areas depression of values of property. So it’s going to depend on the economy into a great extent.

Bill Reuter

Yeah, I see there are credit costs really would cut or mere the third and fourth quarter until we start to see signs that G&P is picking off and the job creation are at higher levels, somewhere before as we saw before the recession.

Drew Hostetter

Well we had always, we sub-earn at 35 to 40 basis point range. So the credit quality continues to improve or probably to lower end of that range if it’s not, we might be to higher into that range.

Casey Haire – Jefferies

Great, thanks guys.

Operator

And moving on now to, Chris McGratty with KBW.

Chris McGratty – Keefe, Bruyette & Woods

Good morning guys. Just asking the credit question a little bit differently, can you remind us, I think it’s probably buried in other non-interest expense. What the ongoing workout costs aside from the provision are today and kind of where you think those can go near-term?

Drew Hostetter

That’s an area where we have a reasonable chance for some improvement. It’s a couple million dollars, $2 million, $3 million a quarter and we think we can hopefully bring that down in 2013.

Chris McGratty – Keefe, Bruyette & Woods

Now is that, is there an assumption that comes down in the guidance you provide us or is that kind of room for upside?

Drew Hostetter

There is some room for upside there.

Chris McGratty – Keefe, Bruyette & Woods

Okay. On the balance sheet, loan to deposit ratio, the CD books continues to drop. Maybe you could talk about what the change in guidance whether what’s contemplated on the CD repricing in both where we see the CD portfolio kind of falling out with the loan deposit ratio north of 100?

Drew Hostetter

Yeah, to kind of go through guidance for you on the non-interest margin by quarter, let’s start with the fourth quarter and kind of get where we are on a core basis. In the fourth quarter, we had three events that occurred, in the middle of October we paid off or called $21 million of 9% sub-debt. In the beginning of November, we had $75 million of subordinated debt mature at 6.05%. Both of those were taken to overnight funds and then also we called in the middle of December $15.5 million of trust-preferred at 9.5%, which again we took to overnight funds. Okay.

And as a result of the calling of the trust-preferred in the sub-debt, there was purchase accounting associated with that. So that was 7 basis points and 9 basis points I described in the call earlier in my presentation. So we’re 4.06% in the fourth quarter, if you take out the 7 basis points of purchase accounting benefit from the debt calls, and also assume a 6 basis point compression in the first quarter that 13 basis point reduction in the first quarter which is partially offset by the fact of those three items I just gave you, having a full effect in the first quarter, the positive effect of that is 2 basis points. So that gives you a net 11 basis points down to 3.95%.

Then in the second quarter of 2013, we will have 6 basis points in margin compression again, which would take us down to 3.89%. Then in the third quarter we have another 6 basis points margin compression, but now we have $200 million of our high cost 4.3% on average CDs, $200 million coming due in June. And as a result of that that would pickup 5 basis points in our margin, so the net of the compression and we off that of the high CD cost is 1 basis point reduction, down to 3.88%.

Then in the fourth quarter, we have the exact same phenomenon, 6 basis points of margin compression. We have another $200 million in September of high cost CDs about 4.34% coming due which gives us a positive 5 basis point effect. So the net again is 1 basis point down that gets you to 3.87%. So your 3.95%, 3.89%, 3.88%, 3.87% divide that by four that’s your 3.90% guidance for 2013. And that assumes the interest rate environment stays where it is today.

Chris McGratty – Keefe, Bruyette & Woods

Very helpful. Thank you.

Operator

We’ll now hear from Matt Schultheis with Boenning & Scattergood.

Matthew Schultheis – Boenning & Scattergood

Good morning gentlemen.

Bill Reuter

Good morning Matt.

Matthew Schultheis – Boenning & Scattergood

Couple of quick questions. Do you have any interest in securitizing your auto leases like you used to, now that the market for that is rebounding considerable?

Bill Reuter

No we don’t Matt, because that’s collateral at the discount window for us, so we can borrow at the discount one and swap it at basically less cost that it does to do the securitization. The only way we consider securitization is if it most purely from a funding perspective but now we’re applying liquidity, so that’s not going to happen any time in the near.

Matthew Schultheis – Boenning & Scattergood

Okay. And direct me if I’m wrong, I seem to remember you saying that you’re going to take some of the expertise out of horn, we’re not out of horn, but use the expertise there to bulk of your indirect auto lending. How is that work out so far?

Bill Reuter

We’ve got some increase from it, but not a lot. It has had some extra production for us, but not significant.

Matthew Schultheis – Boenning & Scattergood

Okay. Thank you very much.

Operator

And we’ll now move to Steven Alexopoulos with JPMorgan.

Preeti Dixit – JPMorgan

Drew, this is actually Preeti Dixit on for Steve. Just a question on the construction portfolio, it still running off at a pretty decent click here, do you have a sense of when we could see that stabilize and be less the drive on the overall loan growth numbers?

Drew Hostetter

The construction portfolio is really driven by loans moving out of construction into permanent both into the CRE permanent and into the residential portfolio of fourth quarter. Those ones moving into the CRE with approximately $46 million and into resi was $27 million. We did create $58 million worth of new construction loans. We’ve got to get that back up to about $100 million to start moving the construction portfolio a lot.

We’re seeing some life in the construction area mostly on the commercial side down in the Baltimore area and a little bit we’re seeing in the western suburbs of Philadelphia and in Central Pennsylvania where it’s always been there. But we need to see that pickup again we need to originate over $100 million to really turn the tight audit.

Bill Reuter

And I think, this is Bill Reuter, I think we’re at 6.6%, 6.8% of outstanding construction portfolio right now. Our target is around 8% to 10%, so we’re not afraid of construction loans at all, but we’re working hard to see what’s out there that’s reasonable and some upturn economy which certainly help that also.

Preeti Dixit – JPMorgan

Okay, that’s very helpful. And then just a follow-up. On your commercial loans on the new loans coming in, could you give us a sense of what new yields are and how that compares to the portfolio rate?

Drew Hostetter

The yields, the larger loans are tied to LIBOR. They’re probably a gross yield in the 3.5% to 4% range day before in the quarter. The smaller loans are probably in 4% to 5.5% tied to either prime or whatever our LIBOR. Now in our new production this quarter, 49% were large loans over $5 million and 51% were loans under $5 million. So we have a nice balance there, so we’re not just trying to go after the large ones when we continuing to have a strong input into the smaller to mid size loans.

Bill Reuter

Yeah, as a matter of fact, again Bill Reuter is speaking, if you look at the average size of the small business loan portfolio in the fourth quarter it’s about $290,000 alone. If you looked at 12 largest C&I loans closed in the quarter, they averaged about $7.5 million.

Preeti Dixit – JPMorgan

Okay, great. And what’s the blended rate on the portfolio today, the commercial loans?

Drew Hostetter

In the fourth quarter, the fixed rate loans were about 4.5% on a blended basis and the variable rate was about 3.75%.

Preeti Dixit – JPMorgan

Great, thank you so much.

Operator

We’ll now hear from Matthew Clark with Credit Suisse.

Matthew Clark – Credit Suisse

Hey, good morning guys.

Drew Hostetter

Good morning Matt.

Matthew Clark – Credit Suisse

Can you maybe first discuss in your fee guidance whether or not that contemplates any new initiatives at all or whether or not that’s baked in there?

Drew Hostetter

Yeah let me just kind of go over with you the, where we are core in the fourth quarter and what our projection is estimating for 2013. Basically we had three large fluctuations in the fourth quarter and non-interest income. The first was the horn auto leasing fees were up $1.3 million. Horn’s production went from $65 million in the second quarter to $87 million in the third quarter to $148 million in the fourth quarter.

The increase in the third quarter was related to, we’re going back into the Southern Connecticut market, there are some technical regulatory rules that changed in Connecticut several years ago which required us to pull out. Those rules have been changed now and we’re back in Southern Connecticut which is a perfect market for us because as people moved into New York City, they’re low modeling to leases, which is kind of our business plan. So that increase and you saw in the third quarter was mostly related getting into the Southern Connecticut market.

In the fourth quarter, the increase you’re talking about is about 50% related to furthering our endeavor in the southern market Connecticut marking our southern part of Connecticut market and hurricane Sandy. So when you look at going forward on a core basis, I would say about half that increase is core because it’s got to remain in the Connecticut market, about half related to hurricane Sandy so will not reoccur in 2013.

Also other commissions and fees in the third – in the fourth quarter went up $1.3 million that was almost all related to swap fees went from $600,000 to $1.8 million, an improvement of $1.2 million. We expect that levels of $1.8 million to continue each quarter in 2013. So we believe that is core.

The other thing is, other dropped $3 million and that’s because our result of selling OREO was a $2 million gain in the third quarter, and $1 million loss in the fourth quarter. So if you take that $1 million loss and offset it gets about $650,000 related to hurricane Sandy, you’re up a couple of hundred thousand dollars core so you’ve gone for about $43.7 million to about $44 million core in the fourth quarter.

So if you take our guidance, the 8% that gives you about $180 million for 2013 which is $45 million a quarter. So we’re up $1 million a quarter or about 2%. Most of that 2% is coming from improvement in deposit fees, wealth management and insurance commissions.

Matthew Clark – Credit Suisse

Okay. Good stuff. And then I think your original guidance from a year ago assumed 1% ROA target. Is there any sense that you may raise those that goal whether it’d be this year or beyond now that you’re pumping up against it?

Drew Hostetter

Yeah the guidance that we’re giving this year pumps up again so we’re not, we’re little short of the 1% and our goal is to get to that 1% for 2013 and it improves from there.

Matthew Clark – Credit Suisse

Okay, thank you.

Operator

(Operator Instructions) We’ll now move on to Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert – Stifel Nicolaus

Thanks. Good morning guys.

Drew Hostetter

Hey Col.

Collyn Gilbert – Stifel Nicolaus

Drew that was great color on the margin that you offered. Just a question. You had mentioned that you’re assuming no change in interest rates, what about prepayment fees? They’re assuming those stay where they were in the fourth quarter.

Drew Hostetter

Yes.

Collyn Gilbert – Stifel Nicolaus

Okay.

Drew Hostetter

Our investment portfolio, Collyn, is mostly seasoned 10-year mortgage backs. So we have a little better prepayment history than if you have a portfolio has got 15, 20, 30 year mortgage backs in it.

Collyn Gilbert – Stifel Nicolaus

Okay. And is it assuming to the loan yields that new origination yields stay relatively flat throughout the year, or are you assuming some modest compression because of competition or?

Drew Hostetter

Relatively flat.

Collyn Gilbert – Stifel Nicolaus

Okay. That’s helpful. And then, do you have what the carrying amount is of your acquired loans and then also what the accretable yield is and the non-accretable difference?

Drew Hostetter

So I can tell you on the accretable it’s about 13 basis points affect on as a year, Collyn. So when I give you that 3.90% if you take out all the accretable yield, you’re really at about 3.77%.

Collyn Gilbert – Stifel Nicolaus

Okay. And the carrying amount of the acquired loans, do you happen to have that.

Drew Hostetter

No, I don’t offer, but it’ll be in our archive.

Collyn Gilbert – Stifel Nicolaus

Okay. And just the pace of pay downs within those loans. Has it been fairly consistent, is it if you’ve seen much of a change since you acquired them?

Drew Hostetter

It’s fairly consistent, Collyn.

Collyn Gilbert – Stifel Nicolaus

Okay. That was all I had, thanks.

Drew Hostetter

Collyn, well I can tell you that when we originally acquired Towers about $2 billion in loans and about $200 million in loans on Abington. So they have paid down a little bit, so its somewhat little bit less in that number, but the final number will be in archive.

Collyn Gilbert – Stifel Nicolaus

Okay. All right, thank you.

Operator

And moving on now to, Russell Gunther with Bank of America Merrill Lynch.

Russell Gunther – Bank of America Merrill Lynch

Hey, good morning guys.

Bill Reuter

Good morning Russell.

Russell Gunther – Bank of America Merrill Lynch

I appreciate the color you gave on fee income items in the quarter and expectations going forward. You also mentioned that you’re continuing to work on some core revenue initiatives and was just wondering if you could give us a sense of what those are and how that might impact fee income going forward.

Bill Reuter

Well I’m not sure I want to get into a lot of detail from a competitive standpoint about what they are. We’re obviously looking at, if you looked at what, if you heard what I said about strategic objectives where a lot of them would be centered around things like our check and account product offerings, our mobile offerings and so forth and so on.

Russell Gunther – Bank of America Merrill Lynch

Okay, great. And then just moving to loan growth. Can you talk about your footprint in some of the markets where you’re seeing strength and then if you do expect any pickup from those that have been lagging?

Bill Reuter

Yeah, let’s talk about loan demand in general. I’ll kind of characterize some of the markets. If you look at Southern New Jersey, Western Maryland and cities of Baltimore and Philadelphia I’d say the activity in the market environment is competitive for existing credit, few new business opportunities, pipelines are okay I wouldn’t say really robust and have improved quite a bit grew slightly from previous years.

If you look at place like Lehigh Valley, Berks/Bucks/Montgomery County, Delaware County, Chester County the markets are active and the opportunities continue to be available across the running of spectrum for commercial real estate, but are called middle market, small to medium size business. Again competition in the markets are strong from banks and non-banks that’s frankly equates the pressure on pricing in terms, but we do see forward momentum in those markets.

If you look at the central part of the state of Pennsylvania that really has performed throughout the whole time spans in 2008 to the present, job creation, unemployment are all positive when you compare to national averages and pipelines are strong there. Government, education, I’d say distribution and health care are the driving forces in that market. And the competition is strong, but reasonable compared to some of the other markets.

If you look at I-95 Corridor from Delaware to Delaware border to above Washington was were we first saw the recovery and occasionally strong upturn for the company. Previously we mentioned I think in the other calls six of our top 10 relationships were in that area. We didn’t have those three years ago and their tenure with the companies has been two or three or four years or less. So that’s kind of a breakdown of the market.

I-95 pretty strong, strength for Pennsylvania what I call steady eddy throughout the whole downturn and continues to be good backlogs there. We’re seeing some real full momentums in counties surrounding Philadelphia, Southern New Jersey, Western Maryland pipelines are okay, some improvement last year but I wouldn’t call them robust. And so a lot of our new business opt to get the market share and attract new customer really lie on that I-95 Corridor, also lie to some degree in the counties surrounding Philadelphia as well as our core Central Pennsylvania markets.

Russell Gunther – Bank of America Merrill Lynch

It’s great color. Thanks so much. That’s it from me.

Operator

And we’ll now go to Mac Hodgson with SunTrust Robinson Humphrey.

Mac Hodgson – SunTrust Robinson Humphrey

Hey, good morning.

Bill Reuter

Good morning Mac.

Mac Hodgson – SunTrust Robinson Humphrey

All my questions have really been asked and answered. I just want to be sure I understand the big picture on the guidance of ‘13 relative to what you guys have given couple of quarters last year. It seems like that the fee income and the expense changes relative to what you’ve given offset each other and the NII is probably about the same, some still shaking out about $80 million pretax pre-provision per quarter. Is that about right basically no change on kind of the bottom line basis?

Drew Hostetter

Yeah, I mean, you can take all the estimates we gave here are the targets and I think you’re pretty close.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, great. Thanks.

Operator

And moving on now to, John Moran with Macquarie Capital.

John Moran – Macquarie Capital

Hey guys, how is going?

Drew Hostetter

Good John.

John Moran – Macquarie Capital

Likewise, most of mine have been asked and answered. So maybe just a big picture question. In the past you’ve talked about a bit about Tower how to add maybe a slightly better sales culture and a real nice practice in small business. Obviously I think you’d sort of alluded to this as part of the focus for ‘13 but any updated thoughts in terms of kind of taking some of those best practices from Tower and putting them across the footprint?

Bill Reuter

We’re already there. They’ve been fully integrated, now when you see the results.

John Moran – Macquarie Capital

Terrific.

Bill Reuter

A lot of our management peoples, a lot of our programs are all centered around that.

John Moran – Macquarie Capital

Sorry, sounds good. Thanks.

Operator

And, we’ll now go to, Frank Schiraldi with Sandler O’Neill.

Frank Schiraldi – Sandler O’Neill

Good morning. Just want to follow it, Drew, on the accretable yield question. Someone asked and you noted that there is 13 basis points baked in for 2013 guidance. And I just wondered how that roles off the NIM going forward, I mean beyond 2013. I mean is that sort of 2014 event or 2015 event? How do we think about when that begins to participate?

Drew Hostetter

2015.

Frank Schiraldi – Sandler O’Neill

2015, okay. And then I may have missed it, I think you talked about credit cost for 2013, but just wondering if you had given expectations for provisioning for the full year.

Drew Hostetter

We said basically between 35 and 40 basis points. If our credit quality continues the trends it has been it’ll be at the lower end of that. It’s more steady for 2013. It’ll be at the upper end of that.

Frank Schiraldi – Sandler O’Neill

Okay, 35 to 40 basis points of loan book, okay. And then I guess just a quick question for Mike. Over the last couple of years, it seems like Southern New Jersey has been a bit of laagered in the Mid-Atlantic footprint in terms of credit and I just wondered if, it seems like, Southern New Jersey has improved as well and began to recover and wondering if that’s still the case if Southern New Jersey is still sort of the laagered of the footprint.

Mike Quick

It’s starting to improve but if you look at their unemployment it’s higher than the other areas of our footprint. And that economy in Southern New Jersey was driven by the housing market residential and it was driven by the casinos and the coast area the vacation. And that’s been hurt by the recession, but it’s starting to come back. They had a pretty good year down there last year at the shore. So we think it will come back. We do have very strong pockets in Southern New Jersey where we’re doing very, very well and the businesses are doing well, but generally speaking, the unemployment levels there are significantly higher than what the national average is.

Frank Schiraldi – Sandler O’Neill

Okay, great. Thank you.

Operator

And, moving on now to, Matthew Kelly with Sterne Agee.

Matthew Kelly – Sterne Agee

Yeah, in your commercial loan growth, maybe just give us a little update on utilization rates you saw during the quarter. Any change there and kind of characterizes the nature of growth, larger type credits versus small? It sounded like earlier you mentioned mostly larger type credits, but is it…

Drew Hostetter

No, larger was about 49% and smaller was 51%. So the smaller credits were slightly higher. We like that balance. We do see in our lines of credit in commercial to deleveraging and if that’s starts to turn around that’s going to drive the outstandings in that particular area.

Matthew Kelly – Sterne Agee

What was the fourth quarter usage rate compared to the third quarter, utilization rate?

Drew Hostetter

I can tell you what, the third quarter, we deleveraged about $161 million, in the fourth quarter we deleveraged about $202 million.

Matthew Kelly – Sterne Agee

Okay. And then just a question on the marks on Abington and Tower, any thought, how those tracking relative to where you booked on that, on the non-accretable piece and any potential for shifting from non-accretable to accretable as you kind of monitor those portfolios and the performance?

Drew Hostetter

Yeah, we’ve had some shifts from non-accretable to accretable, but that’s in my estimate as a 13 basis point. And our marks on the non-SOP 03-3 have been what I would call relatively conservative. While most of the pay downs and stuff that we see in that are pretty close to the marks we put on.

Matthew Kelly – Sterne Agee

Okay. All right, thank you.

Operator

We’ll now go to Blair Brantley with BB&T Capital Markets.

Blair Brantley – BB&T Capital Markets

Good morning everyone. Just a quick question, how does talent left out set into your kind of your growth picture going forward?

Bill Reuter

Say it again.

Blair Brantley – BB&T Capital Markets

How do talent left out from other peer’s kind of fit in? is that something that you’re kind of been focusing on or something that’s kind of built into your estimates or is it just more of just the organic structure that you have in place today?

Drew Hostetter

Okay. The budget that was done was based upon what we had at the end of the year, but we are continuing to look at potential hires. We have become in dated with applications and people who want to work with us because they’ve seen what our numbers are doing and they’ve seen our strength in the market much greater than it has been. So we do feel that we’ll pickup some talent during the year, some very good talent, because we’re a known quantity now.

Blair Brantley – BB&T Capital Markets

All right, thank you very much.

Operator

(Operator Instructions) We’ll now go to Daniel Martian with Raymond James.

Daniel Martian – Raymond James

Hey, good morning guys.

Drew Hostetter

Good morning.

Daniel Martian – Raymond James

I think, I guess just about everything was covered in terms of credit quality and everything works really good. The only question I had is, can you provide a little bit more color on the uptick we saw in restructured loans?

Drew Hostetter

Yes, that uptick was one loan. We said repeatedly that we’ve used to trouble debt restructure as a way to stabilize an asset or to help a company that’s been heard by the economy we cover and that particular case the main business of that particular customer has slowed down. We signs that is picking up, but we had to go to TDR based upon the definition with this particular situation. We do think it’s highly likely that in the fourth quarter of this year or early next year that may come off TDR status.

Daniel Martian – Raymond James

Okay, great. Thanks. That’s it from me.

Operator

And at this time, there are no additional questions. I would like to turn the call over to Bill Reuter for additional and closing remarks.

Bill Reuter

Okay. Well thank you for all your questions and we got a lot of good questions. We hope you can join us for our next quarter conference call that’ll be on Thursday April 25, 2013 11:00 A.M. Eastern Time. It’ll be available by our webcast on our website, www.susquehanna.net. And we want to thank you for your continued interest in Susquehanna Bancshares.

Operator

That does conclude today’s program. We thank you all for joining today.

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