DBRS: Susquehanna’s 1Q14 Earnings decrease QoQ; Remix of Loans and Funding Continues

Summary:
• Susquehanna reported lower 1Q14 earnings of $37.2 million, down from $41.3 million for 4Q13, reflecting a decline in revenues and an increased provision for loan and lease losses, which was partially offset by lower expenses.
• DBRS views Susquehanna’s 1Q14 results as sound and evidencing some additional progress remixing its loan and funding mix. However, headwinds, some of which were weather related slowed activity in the Company’s footprint during the quarter.
• DBRS rates Susquehanna Bancshares’ Issuer & Senior Debt at BBB (high) with a Stable Trend.

DBRS, Inc. (DBRS) considers Susquehanna’s (Susquehanna or the Company) 1Q14 earnings as reflecting continued steady, although slowing progress towards the Company’s goals of building its business and transitioning both its loan and funding mix more towards C&I loans and deposit funding. However, a slow economy, some of which is viewed as weather related, pressured the Company’s progress this quarter. For 1Q14, results equated to a 0.82% return on average assets and an 11.08% return on average tangible common equity, somewhat lower than recent periods. Lower expenses were offset by a decline in revenues, increased provision for loan losses and an increase in the provision for income taxes. Some of these quarter-on-quarter (QoQ) changes reflect a return to more normalized levels as 4Q13 continued a number of one-time items. A stable net interest margin and modest growth in average earning assets was not enough to offset the lower day count this quarter as net interest income declined modestly.

A QoQ increase in the provision for loan and lease losses still reflects a reserve release and continued positive asset quality trends. The Company’s loan loss reserve remains adequate at 1.14% of total loans.

At March 31, 2014, Susquehanna reported sound and improved capital ratios, which included a Tier 1 common equity ratio of 10.84%. Susquehanna will be completing stress testing. Following the regulatory evaluation of the Company’s stress test results in 2H14, it is DBRS’s view that capital management activity could increase.

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.

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