DBRS: Susquehanna’s 4Q13 Earnings decrease QoQ on Higher Expenses

Summary

• Susquehanna reported lower 4Q13 earnings of $41.3 million down from $44.3 mn for 3Q13 as gains from a branch sale leaseback transaction were offset by higher expenses some of which are viewed as temporary.
• DBRS views Susquehanna’s 4Q13 results as reflecting improving business volumes tempered by additional investments in the franchise and heightened regulatory requirements.
• DBRS rates Susquehanna Bancshares’ Issuer & Senior Debt at BBB (high) with a Stable Trend.

DBRS, Inc. (DBRS) considers Susquehanna’s (Susquehanna or the Company) 4Q13 earnings as reflecting continued steady progress towards the Company’s goals of building its business; particularly in increased transaction deposit accounts and C&I lending, both of which were up QoQ. For 4Q13, results equated to a 0.89% ROAA and a 12.49% return on average TCE, slightly lower than recent periods. A margin driven decline in net interest income and higher expenses were partially offset by growth in noninterest income and a decrease in the provision for income taxes. Later in the fourth quarter, the Company completed a sale and leaseback of 30 branches which impacted revenues ($5.0 million gain) and income tax expenses as the transaction enabled it to realize approximately $4.1 million of deferred tax assets, which were previously subject to a valuation allowance.
The gain was offset by $6.6 million in branch consolidation expense as well as higher incentive compensation expense. Additionally, the linked quarter had adjustment to benefits accrual which lowered expenses in 3Q13.

A QoQ decline in the provision for loan and lease losses reflects continued positive asset quality trends. Specifically, NPAs (excluding restructured loans) contracted to a moderate 0.86% of loans and leases at December 30, 2013, from 0.96% at December 31, 2012. Meanwhile, NCOs decreased to a manageable 0.33% of average loans for 4Q13 versus 0.50% in 3Q13. The Company’s loan loss reserves remain adequate at 1.16% of total loans.
At December 31, 2013, Susquehanna reported sound capital ratios which included a Tier 1 common equity ratio of 10.58%. Based on current proposed rules, the Company estimates that it is already in compliance with fully phased in Basel III requirements. Susquehanna will be completing stress testing and capital management activity may increase following the regulatory evaluation of the Company’s stress test results.
Overall, Susquehanna’s ratings are underpinned by its 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 rates Susquehanna’s Issuer & Senior Debt at BBB (high) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]