DBRS: Susquehanna’s 2Q14 Earnings Increase QoQ on Securities Gain, Lower Loan Loss Provision

Summary:
• Susquehanna reported higher 2Q14 earnings of $43.5 million, up from $37.2 million for 1Q14, reflecting a securities gain and a decreased provision for loan and lease losses, which was partially offset by higher expenses.
• DBRS views Susquehanna’s 2Q14 results as sound and evidencing some additional progress remixing its loan and funding mix.
• DBRS rates Susquehanna Bancshares’ Issuer & Senior Debt at BBB (high) with a Stable Trend.

DBRS, Inc. (DBRS) considers Susquehanna’s (Susquehanna or the Company) 2Q14 earnings as reflecting continued steady progress towards the Company’s goals of transitioning both its loan and funding mix more towards commercial loans and relationship based deposit funding. Indeed, the Company is gradually getting closer to achieving its goal of achieving a loan to deposit ratio below 100% by YE14 which may be helped by the planned sale or securitization of a portion of the indirect auto portfolio.

Overall, revenues were relatively flat quarter-on-quarter (QoQ). A net realized gain on sale of securities boosted noninterest income this quarter as improved results from mortgage banking were not sufficient to offset seasonally lower insurance commissions. For 2Q14, results equated to a 0.95% return on average assets and a 12.34% return on average tangible common equity, improved from the linked quarter.

A QoQ decrease in the provision for loan and lease losses includes a reserve release amid continued positive asset quality trends including declining nonperforming assets and manageable net charge-off levels. The Company’s loan loss reserve remains adequate at 1.06% of total loans.

At June 30, 2014, Susquehanna reported sound and improved capital ratios, which included a Tier 1 common equity ratio of 10.99%. The Company recently announced that its Board had approved an increase in its common stock dividend as well as a common stock repurchase program of up to 3.5% of its outstanding common shares through YE14. These capital actions would return approximately 78% of the previous four quarters’ net income to shareholders and capital levels have continued to build given modest balance sheet growth. Given current capital levels, DBRS views this increased return of capital as reasonable.

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.

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