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Executives

Carl D. Lundblad – Senior Vice President

William J. Reuter – Chairman and Chief Executive Officer

Michael M. Quick – Executive Vice President and Chief Corporate Credit Officer

Analysts

Robert Hutcheson Ramsey – FBR Capital Markets & Co.

Matthew Clark – Credit Suisse

Casey Haire – Jefferies & Company, Inc.

Chris McGratty – KBW

Preeti Dixit – JPMorgan

David W. Darst – FTN Midwest Securities Corp.

Frank Schiraldi – Sandler O'Neill

Blair Brantley – BB&T Capital Markets

Susquehanna Bancshares Inc (SUSQ) Q2 2013 Earnings Conference Call July 25, 2013 11:00 AM ET

Operator

Good morning and welcome to the Susquehanna Bancshares Second Quarter 2013 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time.

(Operator Instructions) Mr. Lundblad please begin.

Carl D. Lundblad

Thanks [Derick]. Good morning, and welcome everyone. I’m Carl Lundblad and I serve as Senior Vice President at Susquehanna Bancshares. Our press release containing financial results for the second quarter of 2013 was made available yesterday after 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 2013 financial targets, loan volume and growth, our mortgage business and revenue, the impact of branch consolidations and purchase accounting benefits on our financial results and the application of regulatory capital requirements.

Such statements are not guarantees of future performance and are subject to certain risks and uncertainties. The factors that may cause actual results to differ materially from expectations are detailed in the press release and in our SEC filings. We encourage you to refer to such filings including the 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 that forward-looking statements are made or to reflect the occurrence of unanticipated events, except as required by law.

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

William J. Reuter

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

Our second quarter results demonstrate how our team is successfully implementing the key elements of our strategic plan. Over the past year, we achieved strong growth in commercial and consumer loans, core deposits and non-interest income. This success is also evident in our profitability metrics as our return on average tangible equity, return on average assets and efficiency ratio have all experienced significant improvement.

In the second quarter, we earned net income of $45.6 million, or $0.24 per share, compared to $37.8 million, or $0.20 per share, in the second quarter of 2012. For the first half of the year net income was $88 million, or $0.47 per share, compared to $61.3 million, or $0.34 per share, during the first two quarters last year. Loans and leases were $13.2 billion at the end of the quarter. As we discussed in last quarter’s call, the market for quality loan relationships is very competitive. In spite of this, we achieved loan growth of 1.2% from prior quarter and 4.5% from second quarter 2012.

Given our growth rate for the quarter and year-to-date we believe we’re on track to meet our 5% loan growth projection for the year. In addition to looking at overall loan growth, I’d also like to focus on the makeup of our portfolio. Our strategic plan calls for increasing relationship based commercial and consumer loans and our second quarter results show making good progress.

Commercial loans were $2.3 billion at the end of the second quarter, although this was down slightly from the prior quarter was an increase of 8.9% over second quarter 2012. We continue to make commercial loan growth of priorities by adding new commercial lending talent in key markets and pursuing opportunities in target market segments.

We’ve also achieved solid loan growth in the consumer portfolio and leases. Consumer loans ended the quarter $908.3 million, an increase of 5.7% from the previous quarter and 12.8% from the prior year, leaves us we’re $1.1 billion, up 6.3% from first quarter 2013 and 44% year-over-year. As noted in our last conference call, the growth of leases has been driven largely by market expansion of our auto leasing subsidiary in the mid-Atlantic region. Credit quality remains strong with net charge offs declining to 30 basis points compared to 62 basis points in the first quarter and 65 basis points in last year second quarter. Non-performing assets to total assets in OREO were 94 basis points compared to 97 basis points on a linked quarter basis and 1.26% a year ago.

As we discussed deposits, I again like to highlight the objective of our strategic plan, which is to reduce the amount of high cost deposits within our portfolio, while increasing relationship based checking accounts and core deposits. Total deposits at the end of the second quarter were $12.8 billion, up slightly over the prior quarter and the second quarter 2012.

In keeping with our objective, time deposits decreased 10.2% year-over-year, while our core deposits increased 6.2% during the same period. We continue to see strong customer interest in some of our key retail product initiatives that were introduced in the first quarter including our stellar checking account and mobile deposit services.

Net interest margin was 3.88% for the second quarter by comparison margin in the first quarter was 3.97% and net interest margin for second quarter of 2012 was 4.1%. As we said in our call last quarter, we expect that there could be additional compression in the margin, due to the highly competitive loan environment. Given the compression in margin, net interest income was a $148.1 million, essentially flat compared to prior quarter and down 3% from second quarter 2012.

Non-interest income was $49.1 million, up 15.1% on a linked quarter basis and 23.3% year-over-year. Although some of this increase is attributable to non-recurring items, a substantial portion of it reflects an increase in deposit fees, as well as results of our efforts to enhance products and cross-sell mobile financial services to customers. We’re seeing solid performance from our business lines including wealth management, our commercial finance group, auto leasing and our insurance and risk management companies.

In regards to mortgage banking, this quarter was flat relative to the first quarter. However, this is an area where we are expanding our market presence not shrinking, and we expect revenue to expand in the future as we build our capacity and began to retain servicing.

We continue to be encouraged that 68% of our mortgage volume during the quarter is purchased and new construction, which we expect will be a more stable source of business then refinancings as rates begin to rise. We continue to effect – to our efforts to effectively manage expenses, non-interest expense was $119.7 million up 1.7% from prior quarter, but down 1.4% from a year ago.

Looking at six months of the year expenses were 1.8% lower than during the same period 2012 inclusive of merger related expenses. Our efficiency ratio dropped below our target of 60% range in the second quarter coming in at 59.57%. This shows improvement from 60.17% in the first quarter and 60.21% year-over-year.

For the first six months of the year the efficiency ratio was 59.86% and improvement from 60.77% during the same period in 2012. Return on average tangible equity was 14.3% compared to 13.87% in the first quarter, and 13.23% in second quarter of 2012.

For the first six months of the year, return on average tangible equity was 14.09% compared to 10.77% for the same period last year. Despite the economic and competitive environment and margin compression we’re pleased to see that our overall average to build revenue and manage expenses are yielding enhanced profitability. At this point, I would like to introduce Mike Harrington for a review of key aspects of our financial results.

Michael W. Harrington

Thank you, Bill, and good morning everyone. My comments very well focus primarily on providing additional color related to the results Bill reviewed with you, and our 2013 financial targets. Net interest income decreased $1.1 million or less than 1% from the first quarter of 2013, due to a decrease in loan yields, which dropped 14 basis points during the quarter. The purchase accounting benefits in the quarter were slightly lower as well as contributing 19 basis points to the margin versus 20 basis points in the first quarter.

We expect the purchase accounting benefits to continue well into 2014 or caution that the benefit could extend. This means we would realize less in current periods should commercial loan refinancing of the acquired portfolios slow. We have not seen signs of this happening yet although it’s too early to tell at the pickup and interest rates will affect this activity.

Non-interest income increased $6.4 million or 15.1% from the first quarter of 2013, due primarily to a solid pickup in deposit fees increased revenue from our wealth business and a strong increase in swap revenue. The improvements in these areas are a direct result of our efforts to improve the income generation, by enhancing our products, and service delivery.

We also benefited from the sale of OREO, which went from a loss of approximately $500,000 to a gain of approximately $1.5 million in the second quarter, as well as $2.3 million involving proceeds, which was recorded in the other income category. Non-interest expense increased $2 million or 1.7% from the first quarter of 2013, due primarily to an increase in salary cost related to annual merit increases and an increase in the bonus approval related to the performance in the quarter. We also experienced a reduction in OREO expenses and other operating losses in the second quarter, which drove other expenses lower.

Next, I want to review our updated financial targets for 2013. Starting with the margin, FTE margin 3.88%, this is a slight decrease from our previous guidance of 3.90% and reflects the activity we expect to see in new long volume inclusive of a higher mix of consumer loans over the remainder of the year.

Loan growth 5%, deposit growth 5%, we have lowered our deposit growth projection slightly to reflect the more aggressive approach we are taking to managing our higher cost deposits. Non-interest income growth 11%, we are increasing our projected growth and fee income given the performance year-to-date and our confidence in the growing momentum we have in a number of areas, including deposit services, capital markets and mortgage banking as noted earlier.

Non-interest expense growth minus 1%, we are increasing our projected non-interest expense growth from negative 2% to reflect a continuing need and desire to build our regulatory compliance and risk management infrastructure. This expense projection does not include the run rate benefits we expect to realize from the branch consolidation activity.

Although the branch consolidations are expected to occur in the fourth quarter, we'll not see the full benefit of this initiative for the second quarter of 2014, and lastly, tax rate 31%. Please note that the growth percentages included in these financial targets are based upon 2012 reported numbers, and not core numbers. Before, I turn it back to Bill, just a few comments on capital and Basel III.

We have not finalized calculating the impact of the new rules in our risk weighted assets. However, we do not expect the changes to having a material impact on our risk weighted assets. With regards to regulatory capital [our trust] were not grandfathered under the rules. So, that we’ll face out beginning in 2015 something the face out was effective today, we believe we would be fully complaint with the revised capital requirements including the conservation buffers.

On the good news front, the ability to continue excluding AOCI from capital is a positive, and we would expect at this time to opt out from including AOCI and regulatory capital. As for capital management we expect things to be statis quail into after the stress test results are submitted and we received feedback on our submission from the regulators, which we don’t expect until the second quarter of 2014.

With that, I’ll turn the conference call back to Bill for his closing remarks.

William J. Reuter

Thank you, Michael. During the first two quarters of this year, we’ve built a solid momentum in our objective to increase core deposits, commercial and consumer loans and non-interest income. As we face an economic environment they continue to struggle to achieve a sustainable growth, regulatory burns that continue to increase at a very competitive market will focused on the areas that are within our control to build a profitable franchise for the long term.

In addition to ongoing expense management and process improvements, initiatives on their way to further enhance our customer experience as well as employee engagement and leadership development. With the efforts of our 3,500 team members, our focus on our core objectives, I’ll look forward to expanding on our progress during the second half of the year.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take the first question from Bob Ramsey with FBR.

Robert Hutcheson Ramsey – FBR Capital Markets & Co.

Hey, good morning.

William J. Reuter

Hi, Bob

Robert Hutcheson Ramsey – FBR Capital Markets & Co.

I was curious you have built reserves this quarter and I didn’t know whether that was just a reflection of extraordinarily low net charge-offs or if your expectation would be to continue to build allowance in future periods?

Michael M. Quick

Hi, this is Mike Quick. We did have no charge-offs and that was generated by an extraordinary good quarter and recoveries on debt. We will look at it on a quarter-by-quarter basis, but we expect that we will continue to provide at the present level and the provision going forward for the next two quarters.

William J. Reuter

Yeah. Bob, this is Bill Reuter. I guess to put it another way. Well we’re pleased with 30 basis points in charge-offs, 30 basis points is not a trend make. We’d like to see that we have to save another couple of quarters for making that kind of decision.

Robert Hutcheson Ramsey – FBR Capital Markets & Co.

Okay, that’s helpful. And then quickly on margin, I know the new guidance suggest it will be a little bit narrower based on loan mix and growth. I’m just curious you know about putting two final points on it. How you’re thinking about next year given the slightly steeper curve, if that helps your balance sheet and if so in what places?

Michael M. Quick

Hi, Bob, this is Mike. The early impact of the change in the yield curve is very minimal on us. So, for the near-term, we don’t expect to really see any benefit, we’ve waited to that up. Next year we certainly don’t expect to see that kind of compression we saw this year and actually expect given the guidance we provided, expect the compression that start to slow. So, depending on what our mix is next year, when certainly, when expect to see anything close to the type of compression we've seen, but it’s probably too early to give anything more than that.

William J. Reuter

Yeah. So, I mean, this is Bill Reuter, so from a, we have to see a general rise in rates that have full benefit, if short end moves up about a 100 basis points we would expect about a 2.5% benefit in net interest income, if that were have to occur.

Robert Hutcheson Ramsey – FBR Capital Markets & Co.

Okay. Great. Thank you, guys.

Operator

And next we will hear from Matthew Clark with Credit Suisse.

Matthew Clark – Credit Suisse

Hi, guys.

Unidentified Company Representative

Hi, Matt.

Matthew Clark – Credit Suisse

Can you talk a little bit more I guess in detail about pricing, obviously it sounds like its more competitive, but have you seen uncertain product types or industry verticals any kind of lead just curious, how the competitive landscape has change with a curve a little bit.

Unidentified Company Representative

I can just Matt, just tell you on the from a funds transfer price perspective and what we are seeing fixed rate does, spreads have actually state fairly consistent from quarter-to-quarter, what we are seeing to get a little more aggressive is on the variable rate side and that’s not surprising, given keep or trying to position themselves for rising rate environment. So that’s where we have seen spreads decrease the most.

William J. Reuter

Yeah, Matt, this is Bill Reuter. I am going to, I maybe add to that little bit one of our strategic objectives is to increase the commercial loan portfolio. C&I bulk of business, so, year-over-year, it’s up 8.9% you saw it was pretty flat from quarter-to-quarter. Our commercial loan originations have been consistently strong over the past several quarters. In the second quarter, we were impacted by a decision we made to exit a couple credits or what I call mind relationships single product credits, including couple participations where we weren’t [lead bank] had no other relationship with the customers so, and one bank term original promise of being a customer driven and having full banking relationships. We decided to exit a couple of those credits where we were just running money for lack of better work.

The pipeline on commercial is pretty consistent with prior quarters, and it suggests potential really good strength and – for instance a greater Baltimore region and in our core Central Pennsylvania market, our small business products in terms of loan products, we continue to see steady increases up about 15% over the first quarter and about 33% over second quarter 2012 that’s a small business portfolio.

So that small business portfolio now has outstandings of about $1.3 billion in size. So pricing Mike answered, but volume we expect to see volumes sort of pick up on the C&I side.

Matthew Clark – Credit Suisse

Okay. And then in terms of returns and in goals, I mean you guys are basically there on an operating basis from an efficiency standpoint and on the ROI, I mean is it fair to assume that you guys are going to reassess those targets in January or is it, whether not we raise the bar I guess.

Unidentified Company Representative

Yeah. I think that’s a fair question. We’ve already had a couple off side strategic planning sessions with our top management team, and we’re taking a look at where their targets need to be. We are well ahead of the planning process for next year on be off for the next three years. We will be a perfecting that plan and presenting it to the board in December. So, I would expect you wouldn’t see us stay stagnant with respect to some of those benchmarks.

Matthew Clark – Credit Suisse

Great, thanks.

Operator

And now we’re moving to the next question and that comes from Casey Haire with Jefferies.

Casey Haire – Jefferies & Company, Inc.

Hey, good morning guys.

Michael M. Quick

Hi, Casey.

Casey Haire – Jefferies & Company, Inc.

Mike, a couple more questions on net interest margin, just I guess if you could quantify loan pricing competition in terms of you know what is I guess the blended yield on new production versus that 4.95 level?

Michael M. Quick

Well, I have spread income is more focused on where spreads are tracking versus the absolute yields, but otherwise I’d have to segment this probably more than I’d like to do on the call. But just from a quarter-to-quarter standpoint spreads were down maybe 10 basis points to 15 basis points on the new volume on the variable rate side and again like I said on the fixed rate side you’re fairly flat. Mix was fairly consistent although the C&I portion of our new loan originations was down somewhat from quarter-over-quarter. We didn’t see a big decrease in overall yields that were being booked just other than what I’m referencing relative to the spreads dropping.

Casey Haire – Jefferies & Company, Inc.

Okay.

Michael M. Quick

And the loans are originated before any change happened in the rate environment.

Casey Haire – Jefferies & Company, Inc.

Yeah.

Michael M. Quick

So and that that’s made everything closed. We’ll start to see the impact of the change in rates in this coming quarter and that’s where we have to see how things play out whether refinancing slows down on the commercial book or and almost it will or nor because it was a big backup, but rates are still very low relative to where they’ve been over the past couple of years. So I think we’re still going to continue to see some refinancing activities especially in the commercial area.

Casey Haire – Jefferies & Company, Inc.

Okay. And then in the securities book was premium amortization was better, did you guys get a benefit there this quarter or is that more on the comp? How much it impact us?

Michael M. Quick

I think it was a little bit better. our portfolio has a very stable cash flow characteristics, so as you know we never experienced a increase, a real increase in prepayments and amortization on that book. The last couple of years those rates were dropping, everyone expect to have a real – wouldn’t expect a rising rate environment to have a very material impact on that as well.

Casey Haire – Jefferies & Company, Inc.

Okay.

Unidentified Company Representative

This is true. Just a follow up on the investment portfolio too. We look to increase that by the end of the third quarter to $2.7 billion because now we can meet our targets with regards to a particular yield and the duration we’re looking for in the portfolio. So, we’re still comfortable with our [59] in average earning assets for the year. So, and that does effect our overall, it will help our earnings per share, but it will put a little more pressure on our margin.

Casey Haire – Jefferies & Company, Inc.

Okay, understood. And just lastly on the expense side, the efficiency ratio you guys dig it under 60, but obviously got a little bit of help on the – from the other line within fees. Just curious what kind of run rate are we contemplating and are you still looking to get to 60% for the year on the efficiency ratio?

Unidentified Company Representative

Yeah, I think that’s a fair target somewhere right around 60%, so you expect that to creep up in the next two quarters because as you noted, we had a very good quarter, but some of that was non-recurring revenue.

Casey Haire – Jefferies & Company, Inc.

Okay. Thanks for taking the questions.

Unidentified Company Representative

Thank you.

Operator

Chris McGratty with KBW has questions.

Chris McGratty – KBW

Hi good morning guys.

Unidentified Company Representative

Good morning.

Chris McGratty – KBW

Mike, just a quick one on the securities book, how shall we think about the sizes going forward?

Michael M. Quick

Well as Drew just mentioned, we are targeting the book being about 15% of assets, so we are going to take that back up to the $2.7 billion number over the remainder of the year, that’s where we are in now we’ll take that up a couple of $100 million over the next two quarters now that we can buy securities and their back to a level that we feel it make sense for us two months ago, three months ago, we just buying anything because rates were so low.

Chris McGratty – KBW

Okay. Just one on the credit, just to make sure heard you guys in the provision. Its sound like an – in the prepared remarks that the provision dollars is going to be flat is that, did I interpret that correctly by $12 million bucks?

Unidentified Management Representative

Yeah, that’s correct. We haven’t changed our thinking around the provision expense and just think of it mostly that provisional mirror in that net charge-offs on an annual basis. All subject to change.

Unidentified Management Representative

Yes.

Chris McGratty – KBW

Thanks.

Operator

And now moving onto the next question, Preeti Dixit, JPMorgan.

Preeti Dixit – JPMorgan

Hi, good morning everyone

Michael M. Quick

Good morning

Preeti Dixit – JPMorgan

Good morning. On the balance sheet growth [period] loans drop about $160 million in the quarter deposits about half. Given what you said about loan and securities growth. Can you gives us some color on how do you think about the funding side, the loan to deposit ratio here like a 103% will you plug the hole at more FHLB

Unidentified Management Representative

Well in the near-term well, we might have to do that, I mean, we have a couple initiatives out there to, really ramp up our deposit gathering activities just, and then we’re not sure how long it’s going to take for those to take hold. So, in the interim we have plenty of capacities to fund any type of growth we’ve got that’s above the amount of deposit growth we got. But long-term our target is to drive our loan to deposit ratio down in those mid 90s maximum, so that’s kind of things we’re focused on here internally from a business activity standpoint.

Unidentified Management Representative

We’ve continue to focus on our repositioning of our current deposit portfolio. I think you might recall that we had a fairly good chunk of CDs, which showed in the month of June, they where high cost CD’s and we actually retained about 80% of them as – as they came up from maturity.

Preeti Dixit – JPMorgan

Okay, that’s really helpful, thanks. And then just a quick question on M&A. I heard you said, more recently the focus for capital be organic growth, given the focus on leasing do you see any kind of niche opportunities out there maybe on the leasing side?

Unidentified Company Representative

I think we’re pretty happy with where we are from a leasing standpoint. As I said horn continues to do well. We’ve increased horn’s geographic market penetrations include growing the mid-Atlantic states better. Our small tick of commercial leasing operation is also having a very solid year. I believe their volumes are about 40% or so over last year. So, if you look at our total lease portfolio, about $340 million is subsequent to commercial finance or a small tick of commercial leasing operation about $722 million is horn and excuse me our direct commercial leasing business is about 22% over last year with applications really at record levels on our commercial finance. We anticipate, our order lease portfolio growing to about $900 million from the current level or $722 million.

Preeti Dixit – JPMorgan

Is that by year-end?

Unidentified Company Representative

Yes.

Unidentified Company Representative

No, until next couple of years.

Preeti Dixit – JPMorgan

I appreciate it, thank you.

Operator

(Operator Instructions) David Darst, FTN Midwest Securities has the next question.

David W. Darst – FTN Midwest Securities Corp.

Hi, Good morning.

Unidentified Company Representative

Good morning.

David W. Darst – FTN Midwest Securities Corp.

Bill or Mike, may be could you run through the cost on expected savings from the (inaudible) consolidation, I know there was an 8-K with some details, but could you run through that?

Michael M. Quick

When we disclose this as we expect the cost to be $9 million to $12 million and most of that should all be reported in the fourth quarter of this year. And then the payback which we said was about two years is would have it to your payback, so to do the math it’s about a $6 million benefit per year. So that’s the reduction. And basically the reduction in the operating cost less than any revenue that we’re factoring into that that we would give up just because of some. We’re going to have some customer attrition. We’re not expecting that to be major, but so we made an assumption around some customer attrition and the loss revenue related to that.

David W. Darst – FTN Midwest Securities Corp.

Okay.

William J. Reuter

I think we said we expect a lot of the phase in cost to kick into the second quarter of next year.

Michael M. Quick

Right, the only reason there is a phasing is just because of how we’re handling the employees, there is to be a time lag between when we closed the branches and then we get back to a normal vacancy rate within the whole distribution network.

David W. Darst – FTN Midwest Securities Corp.

Okay. And would you expect at this time for that net savings to all hit the bottom line?

Michael M. Quick

Well a decent portion of it, yeah. I mean that will depend on how much that we decided to reinvest into the business. But I’d say a good portion of it will hit the bottom line, but we don’t want to be too specific about that because at this time, as Bill mentioned, we’re going through our strategic planning process and thinking about investments we need to make longer-term and we might decide it will some of those dollars into other areas.

William J. Reuter

But, David, in general we’re pretty happy with this distribution of a branch system. We don’t have anything substantially planned for next year, new branches. We do have a couple of branchs that will come online in later portion of this year, one Westminster, Maryland which is a new branch and another New York County in York, Pennsylvania. But we don’t have anything on the John board for new branches at this point in time. We’re going to just maximize the existing footprint, especially possibly can.

David W. Darst – FTN Midwest Securities Corp.

Okay. Are you making a pretty significant push into any mobile products or other direct making tools and so what type of adoption are you seeing and is it changing the branch flow.

Unidentified Company Representative

I think it’s too early to talk about the branch flow, but so far, remember we just launched it this year; we are exceeding our projections thus far this year for our mobile deposit services. We have nearly 10,000 customers and have already signed up for as mobile deposit users, 41,000 deposits has been made well over about $17 million, $18 million in deposits. So it’s in infant stages. Well we continue to see it grow nicely. I would mention to you David the strategy here has been to launch our mobile deposit services at the same time to launch our stellar checking account product, which we reward consumer behaviors for using their debit card more frequently, paying bills online more frequently that they’re all kind of linked with customers getting each statements more from us as supposed to hard copy, so it all kind of fits together kind of nicely, but we are monitoring the mobile deposit services fairly closely again exceeding our projections and it’s really too early to figure out, what impact they are going to have on our branch system.

David W. Darst – FTN Midwest Securities Corp.

Okay, great. Thank you.

Operator

Now taking the next question from Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi – Sandler O'Neill

Hey, guys, most of my questions have been answered, just one on purchase accounting, flow into the margin, you talked a little bit about it, and sorry if I missed it. But can you talk about the dollar amount of purchase accounting flowing through the margin in the quarter and how I think Mike you mentioned there could be a potential for that quarterly number to decrease as you extend the purchase accounting treatment over more quarters, but how you’re budgeting for that to roll-off?

Michael M. Quick

So, all right. I’ll just stick with basis points, so the total margin is accounted, we’ll help the margin by 19% this quarter that was 20% last quarter, so that decreased by one basis point. Going forward, we’ve made an estimate for the next two quarters that we’ve baked into the guidance we’ve provided you and my commentary is really just to provide some caution that – that number can move around depending on which loan is refinanced. And to the extent they don’t, I mean eventually we’ll recognize that income, but it’s just a matter of timing. So I don’t want to get any more specific than that other than the guidance we have provided, relative to the margin for the next two quarters. But currently that’s responsive to your question.

Frank Schiraldi – Sandler O'Neill

Yeah, it is. I just wonder is there any sort of timeframe you can give for that sort of falling off in terms of down the line?

Michael M. Quick

Well, I think as I noted, I think it’s good through 2014, then after that starting November to almost three years into post acquisition, and the duration of these assets is three years call it or something in that sense. So after 2014 you are expected to drop off.

Frank Schiraldi – Sandler O'Neill

And is there any additional expectation of reduction in margin as that acquired portfolio matures or is it only the purchase accounting?

Michael M. Quick

Well, the purchasing accounting I said burns off, it means we’re getting the cash flows in. So either the assets are maturing, they’re getting replace, you can see what’s happening from a replacement yield standpoint, certainly in the current market, it’s lower if we get the benefit of the rise in rate environment that will certainly help from a replacement yield standpoint.

Frank Schiraldi – Sandler O'Neill

Got you, okay. Thank you.

Operator

And now we will here from Blair Brantley with BB&T Capital Markets.

Blair Brantley – BB&T Capital Markets

Hi, good morning, everyone. I just had a question about the loan portfolio from a geographic kind of where you are seeing strength and some new opportunities maybe?

Unidentified Company Representative

First part of your question was…

Blair Brantley – BB&T Capital Markets

Just from a geographic perspective with the loan pipeline and where the opportunities are and what markets are doing well and whether…?

Unidentified Company Representative

Yeah, I would say strong in Central Pennsylvania that greater Baltimore part area, the Berks Lehigh County areas, Harrisburg region would be the areas we see kind of the strongest momentum.

Blair Brantley – BB&T Capital Markets

Okay, anything that would change from last quarter to this quarter or...

Unidentified Company Representative

Yeah, Baltimore is getting stronger.

Blair Brantley – BB&T Capital Markets

Okay, and what products will benefit the most in Baltimore do you think?

Unidentified Company Representative

We have a great team down there.

Blair Brantley – BB&T Capital Markets

I mean, is more of this is commercial, are there any consumer.

Unidentified Company Representative

Our combination C&I, some commercial real estate, but mostly C&I.

Blair Brantley – BB&T Capital Markets

Okay, thanks very much.

Operator

At this time there is no additional questions in the queue. I will give a final reminder for any additional questions. [Operator Instructions] We will pause for another moment. With no additional questions, I will turn the conference over to Mr. Bill Reuter for closing remarks.

William J. Reuter

Okay, well thank you for your questions and discussions this morning. We hope you can join us for our next quarterly conference call on Thursday, October 24, 2013, 11:00 AM Eastern Time. It will be available via webcast on our website www.susquehanna.net. Thank you for your interest in Susquehanna Bancshares.

Operator

Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation.

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