DBRS Comments on Susquehanna Bancshares 3Q13 Results – Senior at BBB (high), Stable Trend

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $44.3 million, down from $45.6 million in 2Q13 and up from $36.7 million in 3Q12. Earnings equated to a 0.96% return on average assets and a 6.65% return on average equity.

As compared to the linked quarter, the decrease in earnings was mostly attributable to lower noninterest income and net interest income partially offset by a lower loan loss provision and operating expenses. Higher levels of average earnings assets were offset by a narrowing net interest margin (NIM), leading to the $2.1 million or 1.45% decline in net interest income. A 16 basis point narrowing of the Company’s NIM, to 3.72%, was largely driven by a 14 basis point decrease in purchase accounting benefit. Additionally, lower non-interest income, down $7.8 million QoQ, reflected higher interest rates which led to a drop in mortgage banking and capital markets revenue. Additionally, the prior quarter had $2.3 million of claim proceeds from bank-owned life insurance. The decrease in expenses was primarily related to an adjustment of incentive and benefits accrual which lowered salaries and benefits expense. The decline in revenues led to a 205 bp uptick in the efficiency ratio to a 61.62%. The company closed 13 branches early in 4Q13 and expects an additional closure by YE13. Charges associated with the branch closure were originally estimated at approximately $9 to $12 million and are expected to be incurred predominately in 4Q13.

During 3Q13, the Company exhibited sound balance sheet fundamentals. Period-end loans reflected sustained growth, and were up 1.7%, sequentially. Higher loans were driven mostly by an increase in CRE, consumer loans and leases partially offset by a decrease in commercial loans and real estate construction loans. The Company is slightly behind their targeted loan growth of 5% for the year and currently expects that it will come in slightly below that target given the highly competitive market for quality loans.

Deposits (period-end) decreased a modest 0.3% QoQ. DBRS views the Company’s funding profile as adequate, as core deposits fund most of the loan portfolio. 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 were slightly lower and net charge-offs increased while staying in acceptable range to 50 basis points from 30 basis points in the linked quarter. The loan loss reserve remains adequate at 164% of non-accrual loans and leases, and 1.25% of loans.

Susquehanna’s capital position remains sound and provides solid loss absorption capacity. Capital ratios were roughly in line with the linked quarter. As of September 30, 2013, the Company’s tangible common equity ratio was 8.22% and its estimated Tier 1 common ratio was 10.41%. Management believes they are already fully compliant with fully-phased in Basel III capital requirements, today.

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

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