DBRS Comments on Susquehanna Bancshares 2Q13 Results – Senior at BBB (high), Stable Trend

DBRS, Inc. (DBRS) has today commented on the 2Q13 results for Susquehanna Bancshares, Inc. (Susquehanna or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB (high) with a Stable trend. For the quarter, Susquehanna reported net income of $45.6 million, up from $42.4 million and $37.8 million for 1Q13 and 2Q12, respectively. Earnings equated to a 1.01% return on average assets and a 6.91% return on average equity, higher then both previous periods.

As compared to the linked quarter, the increase in earnings was mostly attributable to higher noninterest income partially offset by a slight decline in net interest income and modestly higher expenses. The loan loss provision was flat QoQ. Higher levels of average earnings assets were offset by a narrowing net interest margin (NIM), leading to the $1.1 million or 0.74% decline in net interest income. A 9 basis point (bps) narrowing of the Company’s NIM, to a still solid 3.88%, was driven by competitive pressure on loan pricing. Additionally, higher non-interest income, up $6.4 million QoQ, was reflected in increases in a number of categories including deposit fees, wealth management, and swap revenue. Additionally, about $2.3 million of the increase was related to claim proceeds from bank-owned life insurance. The increase in expenses was driven primarily by annual merit increases, offset by a decline in OREO expenses. The positive operating leverage led to a modest improvement in the efficiency ratio to 59.6%

During 2Q13, the Company exhibited sound balance sheet fundamentals. Period-end loans reflected sustained growth, and were up 1.2%, sequentially. Higher loans were driven mostly by an increase in commercial, CRE and consumer loans and leases partially offset by a decrease in real estate construction loans. The Company is still slightly behind their targeted loan growth of 5% for the year but still remains comfortable with achieving that goal given the current strong loan pipeline and the addition of new commercial lending officers in key markets.

Deposits (period-end) increased 0.6% QoQ. DBRS views the Company’s funding profile as adequate, as deposits fund most of the loan portfolio, although the Company is reliant on wholesale borrowings to fund the rest of the balance sheet. 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 asset quality remained relatively stable as non-performing assets (NPAs) were slightly lower and net charge-offs (NCOs) declined to 30 bps from 62 bps in the linked quarter. The loan loss reserve remains adequate at 170% of non-accrual loans and leases, and 1.36% of loans.

Susquehanna’s capital position remains sound and provides solid loss absorption capacity. Most capital ratios were up QoQ reflecting a stable balance sheet and positive earnings generation. At June 30, 2013, the Company’s tangible common equity ratio was 8.21%, relatively flat from the linked quarter and its estimated Tier 1 common ratio was 10.41%, up from 10.20%. Management believes, that as of today, they are already fully compliant with fully-phased in Basel III capital requirements.

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

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