DBRS Confirms Susquehanna Bancshares at BBB (high); Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Susquehanna Bancshares, Inc. (Susquehanna or the Company) and its related entities, including its Issuer & Senior Debt rating of BBB (high). The Trend for all ratings remains Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

Overall, the ratings confirmation is underpinned by Susquehanna’s solid mid–Atlantic banking franchise, sufficiently diversified revenue streams, and sound capital position. The ratings also consider the Company’s still slightly below-peer profitability, elevated concentrations in commercial real estate/construction lending, and higher than peer reliance on wholesale funding.

DBRS continues to see Susquehanna as being well placed in its rating category over the near to medium term. While recent acquisitions are integrated and have expanded the franchise into larger markets, Susquehanna must continue to execute on its strategy to garner business in these markets as the Company focuses more on organic growth. Additionally, DBRS would favorably view a sustained improvement as well as a further diversification of earnings, a reduction in reliance on wholesale funding, and maintenance of sound capital levels.

Like most banking companies, Susquehanna’s earnings have been pressured in the current low rate environment. The resulting decline in net interest margin has created headwinds for generating revenue growth. The Company has countered this by working to lower funding costs and reducing operating expenses. Positively, DBRS notes that Susquehanna is less reliant on mortgage banking income than many of its peers and, as such, has been less impacted by the overall slowdown in mortgage banking. Still, and despite an increase in average interest earning assets, the DBRS-adjusted income before provision and taxes has declined in recent quarters.

Additionally, Susquehanna’s asset quality continues to trend positively, reflecting lower levels of nonperforming assets (NPAs) and manageable net charge-off (NCO) levels. Specifically, NPAs (excluding restructured loans) contracted to a moderate 0.89% of loans and leases at September 30, 2013, from 0.96% at December 31, 2012. Meanwhile, NCOs decreased to a manageable 0.47% of average loans 9M13. Finally, the Company’s loan loss reserves remain adequate at 1.25% of total loans.

DBRS views the Company’s funding profile as adequate although the Company is more reliant on wholesale funding than many of its peers. Nonetheless, Susquehanna’s deposits mostly fund the entire loan book. Susquehanna’s relatively good quality securities portfolio and secured access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

Capital remains sound and has improved in recent quarters largely due to earnings retention. Specifically, the Company’s tangible common equity ratio (DBRS-calculated) was a solid 7.99% at September 30, 2013, up from 7.57% a year earlier. Likewise, its Tier 1 common to risk-weighted asset metric was 10.41%, up from 10.07%, one year earlier. All capital metrics are above management’s minimum target levels. Additionally, the Company does not expect Basel III implementation to have a material impact on risk-weighted assets.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found at http://www.dbrs.com/about/methodologies.

The primary sources of information for this rating include company documents 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.

[Amended on August 7, 2014, to reflect actual applicable methodologies used and sources of information]

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: 7 March 2005
Most Recent Rating Update: 14 December 2012

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