DBRS: Susquehanna’s 3Q14 Earnings Drop on Lower Revenues; Higher Loan Loss Provision

Summary:
• Susquehanna reported lower 3Q14 earnings of $33.5 million, down from $43.5 million for 2Q14, reflecting revenue headwinds and a higher loan loss provision.
• Deposit growth and the completion of an auto loan securitization improved the loan to deposit ratio.
• DBRS rates Susquehanna Bancshares’ Issuer & Senior Debt at BBB (high) with a Stable Trend.

DBRS, Inc. (DBRS) considers Susquehanna’s (Susquehanna or the Company) 3Q14 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 met its goal of achieving a loan to deposit ratio below 100% by YE14.

Overall, revenues were down quarter-on-quarter (QoQ). A decline in average earning assets, driven by a completed auto loan securitization, and a lower NIM drove the drop in net interest income. Noninterest income, however, while also lower, decreased just modestly QoQ (excluding securities gains in 2Q14 and the gain from the auto loan securitization in 3Q14). Additionally, expenses were down QoQ even including severance costs related to an organizational realignment. For 3Q14, results equated to a 0.72% return on average assets and a 9.41% return on average tangible common equity, lower than the linked quarter.

The QoQ increase in the provision for loan and lease losses included a reserve release amid continued generally positive asset quality trends. One loan drove the increase in nonperforming assets and net charge-offs this quarter, although both remain manageable.

At September 30, 2014, Susquehanna reported sound although lower capital ratios, which included a Tier 1 common ratio of 10.86%. The Company completed a common stock repurchase program of approximately 3.5% of its outstanding common shares on October 1, 2014 and increased its common stock dividend. These capital actions return approximately 78% of the previous four quarters’ net income to shareholders. Given current capital levels and expected modest balance sheet growth, DBRS views the 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 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.