DBRS Comments on Susquehanna Bancshares, Inc. 3Q12 Results – Senior at BBB (high), Negative Trend

DBRS, Inc. (DBRS) today has commented on the 3Q12 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 $36.7 million for 3Q12, down from $37.8 million for 2Q12, yet up from $15.0 million for 3Q11. Lower sequential earnings mostly reflected non-core items, including a $5.4 million (pre-tax) loss on extinguishment of debt, related to the redemption of $175 million of certain trust preferred securities, a $1.5 million (pre-tax) merger related expense associated with the Company’s Tower Bancorp, Inc. acquisition (Tower; acquired on February 17, 2012) and $1.3 million decrease in securities gains. Specifically, moderately lower QoQ earnings were driven by a 1.2% increase in noninterest expense. Meanwhile, total revenues and provisions for loan loss reserves were flat, QoQ.

During 3Q12, the Company exhibited solid balance sheet fundamentals. Period-end loans reflected sustained growth, and were up 0.7%, sequentially. Higher loans were driven by increased levels of residential mortgages (up 2.0%) commercial & industrial loans (up 3.2%) and consumer loans (up 3.0%). Supporting loan growth, deposits (period-end) grew 0.3% QoQ, mostly attributable to higher interest bearing demand deposits (up 5.4%). Finally, Susquehanna’s asset quality continues to trend positively, reflecting both lower levels of nonperforming assets (NPAs) and net charge-offs (NCOs).

Core expenses, which exclude one-time merger and debt extinguishment costs, declined $2.2 million QoQ, and fully reflect the Company’s recently completed expense initiatives. The bulk of the decline in core costs was attributable to lower salaries & employee benefits, which were down $2.3 million, or 3.5%, sequentially. Although the Company has met its expected $116 million quarterly expense run-rate, management anticipates that additional regulatory costs, driven by Dodd-Frank, will pressure future expenses.

Excluding securities gains, total revenues increased 0.9%, QoQ, to $192.8 million, driven by a 13.5% increase in fee income to $43.6 million, partially offset by a 2.3% decline in net interest income to $149.1 million. Higher fee income was driven by gains from the sale of SBA loans and OREO, higher deposit service charges, and an improved level of mortgage banking revenue. Meanwhile, lower spread income reflected an 18 bps narrowing of net interest margin to still high 3.92%, partially offset by a solid 1.3% increase in average earning assets. The narrower margin was attributable to reduction in purchase accounting, the trust preferred redemption cost and some narrowing of core margin.

Notwithstanding the macroeconomic headwinds, Susquehanna’s asset quality metrics improved QoQ. Specifically, NCOs decreased to 0.62% of average loans, from 0.65% for 2Q12. Meanwhile, the Company’s NPAs contracted to 1.16% of loans and leases at September 30, 2012, from 1.26% at June 30, 2012. Except for modestly elevated levels of commercial real estate, lower nonperforming loans (NPLs) reflected broad-based declines across all other reported categories. Finally, loan loss reserves remain adequate at 158% of nonaccrual loans and leases, and 1.47% of loans.

DBRS views the Company’s funding profile as adequate, as deposits mostly fund loans. The Company’s generally good quality securities portfolio, which represents approximately 16% of total assets and access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

Susquehanna’s capital position remains sound and provides solid loss absorption capacity, especially at current loss rates. At September 30, 2012, the Company’s tangible common equity ratio was 7.84%, up from 7.61%, at June 30, 2012 and its estimated Tier 1 common to risk-weighted average metric was 10.07%, up from 9.97%, respectively.

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: Alan G. Reid
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.