DBRS Comments on Susquehanna Bancshares, Inc. 4Q12 Results – Senior at BBB (high), Stable Trend

DBRS, Inc. (DBRS) has today commented on Susquehanna Bancshares, Inc.’s (Susquehanna or the Company) 4Q12 results. DBRS rates the Company’s Issuer & Senior Debt rating at BBB (high) with a Stable trend. For the quarter, Susquehanna reported net income of $43.2 million, up from $36.7 million for 3Q12 and from $19.1 million for 4Q11. Higher sequential earnings mostly reflected a wider net interest margin (NIM), solid loan growth and a significant decrease in debt redemption expense. Specifically, higher QoQ earnings were driven by a 3.2% increase in total revenues and an 18.8% decrease in provisions for loan loss reserves, partially offset by a 1.9% increase in noninterest expense.

During 4Q12, the Company exhibited solid balance sheet fundamentals. Period-end loans reflected sustained growth, and were up 1.7%, sequentially. Higher loans were driven mostly by a 4.8% increase in commercial & industrial loans, and to lesser extent in residential mortgages (up 0.4%), commercial real estate (excluding construction: up 0.4%) and consumer loans (up 1.5%). Although deposits (period-end) decreased 1.1% QoQ, the mix improved, as non-time deposits increased by 2.1%, while time deposits decreased by 8.0%. Finally, Susquehanna’s asset quality continues to trend positively, reflecting both lower levels of non-performing assets (NPAs) and net charge-offs (NCOs).

Higher linked-quarter total revenues were driven by a 4.1% increase in net interest income and a 0.25% increase in non-interest income. A substantial 14 bp widening of the Company’s NIM to a high 4.06% and a 0.4% increase in average earning assets drove higher spread income. The wider NIM mostly reflected lower funding costs, primarily due to recent redemptions of trust preferred securities and subordinated debt, which led to a 22 bps decrease in total interest bearing liabilities cost.

Meanwhile, the modest QoQ increase in fee income was driven by improvements in most fee line items, led by a $1.3 million, or 52.0%, increase in vehicle originations and servicing fees. Mostly offsetting these tailwinds was a $3 million swing in OREO related gains. Specifically, Susquehanna reported $1 million of OREO related losses in 4Q12 as compared to a $2 million OREO gain in 3Q12.

Core expenses, excluding merger related and debt extinguishment costs, increased $7.9 million, or 6.8%, QoQ, to $123.8 million, mostly driven by a 7.4% increase in salaries/employee benefits and a 12.5% increase in other expense. DBRS notes that higher salaries included $4.0 million (pre-tax) of additional bonus accruals. Meanwhile the increase in other expense was attributable to a $2.2 million (pre-tax) litigation settlement expense.

Despite the difficult business environment, Susquehanna’s asset quality remains sound and improved. Specifically, NCOs decreased to 0.50% of average loans for 4Q12, from 0.62% for 3Q12. Meanwhile, the Company’s NPAs contracted to a moderate 0.96% of loans and leases at December 31, 2012, from 1.16% at September 30, 2012. DBRS notes that lower QoQ non-performing loans reflected declines across all reported loan segments. Finally, loan loss reserves remain adequate at 188% of non-accrual loans and leases, and 1.43% 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 14% 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 December 31, 2012, the Company’s tangible common equity ratio was 7.94%, up from 7.84%, at September 30, 2012 and its estimated Tier 1 common ratio was 9.94%, down from 10.07%, respectively.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]