DBRS Comments on Susquehanna Bancshares, Inc. 2Q12 Results – Senior at BBB (high), Negative Trend

DBRS, Inc. (DBRS) has today commented on the 2Q12 results for Susquehanna Bancshares, Inc. (Susquehanna or the Company). Susquehanna has an Issuer & Senior Debt rating of BBB (high). All ratings have a Negative trend. Susquehanna reported net income of $37.8 million for 2Q12, up from $23.5 million for 1Q12 and $11.0 million for 2Q11. Higher sequential earnings reflected the first full quarter of revenue/expense contributions from the Tower Bancorp, Inc. acquisition (Tower; acquired on February 17, 2012), as well as some noise from non-core items.

Several non-core items impacted earnings during 1H12. In 2Q12, the Company reported a $3.3 million pre-tax merger related expense and a $1.4 million pre-tax net gain on securities sales. In 1Q12, Susquehanna reported $11.5 million in pre-tax merger related expenses, a $385,000 pre-tax net gain on the sale of securities and a pre-tax $144,000 net impairment loss. Excluding these items, total revenues increased 10.2% to $191.1 million and operating expenses increased 8.5% to $118.2 million sequentially.

The full quarter impact of the Tower transaction, led to improved top-line results. Specifically, higher core revenues quarter-over-quarter (QoQ) reflected a 13.8%, or $18.5 million, increase in net interest income, and a 2.1%, or $0.8 million, decrease in noninterest income. Higher net interest income was driven by a solid 16 basis point (bps) widening of NIM to a strong 4.10% and a significant 9.0% increase in average earning assets. The wider NIM mostly reflected the impact of purchase accounting associated with the Tower acquisition, as well as the impact of a full quarter of Tower on the balance sheet. Furthermore, the full quarter of Tower boosted average earning assets for 2Q12.

In DBRS‘s view, the Tower acquisition provides solid cross sell opportunities for Susquehanna, which should help bolster future noninterest income. Nonetheless, core noninterest income modestly declined QoQ, driven by a 22% decrease in property & casualty insurance sales and an 81% decrease in other income. Mostly offsetting these headwinds, the remainder of the Company’s fee income components increased sequentially.

DBRS notes that the bulk of Susquehanna’s recently implemented expense initiatives are reflected in 2Q12 results. With an additional $2 million in savings expected in 3Q12, the Company’s expense run-rate should decline to $116 million. Reflecting the full quarter impact of Tower, higher QoQ core expenses were mostly attributable to an 11.3% increase in salaries and employee expenses, an 8.5% increase in occupancy costs and a 19% increase in furniture & equipment expense. DBRS notes that most other expense items were well managed during the quarter.

Although 2Q12 net charge-offs (NCOs) increased to 0.65% of average loans, up from 0.44% for 1Q12, Susquehanna’s nonperforming assets (NPAs) continued to trend positively, despite the difficult business environment. Specifically, NPAs moderated to 1.26% of loans and leases at June 30, 2012, from 1.35% at March 31, 2012. Except for higher commercial real estate nonperforming loans (NPLs), the overall decline in NPLs was broad-based. DBRS notes that the Company’s allowance for loan loss reserves remains adequate at 150% of nonaccrual loans and leases, and 1.5% of loans.

DBRS views the Company’s funding profile as adequate. Susquehanna’s deposits were bolstered by the Tower acquisition, which increased levels of demand, savings and time deposits. Finally, the Company’s good quality securities portfolio, which represents 15% of total assets and access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

Despite the impact of its last two acquisitions, including Tower, Susquehanna’s capital position remains sound and provides solid loss absorption capacity, especially at current loss rates. At June 30, 2012, the Company’s tangible common equity (TCE) ratio was 7.64% and Tier 1 common metric was 9.97%. In addition, Susquehanna’s estimated Tier 1 capital ratio was 12.63% and Total risk based capital ratio was 14.38%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 7 March 2005
Most Recent Rating Update: 21 June 2011

For additional information on this rating, please refer to the linking document under Related Research.