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Susquehanna Bancshares, Inc.’s (SUSQ - Snapshot Report) third-quarter 2013 operating earnings came in at 24 cents per share, beating the Zacks Consensus Estimate by a penny. Further, this compares favorably with the year-ago earnings of 20 cents.

Results were driven by a substantial fall in operating expenses, improved profitability and capital ratios, and a better asset quality. However, decline in net interest income and non interest income were the headwinds for the quarter.

Tax equivalent net income stood at $44.3 million compared with $36.7 million in the prior-year quarter.

Performance in Detail

Susquehanna Bancshares’ total revenue came in at $187.3 million, down 2.9% from the prior-year quarter. Further, it missed the Zacks Consensus Estimate of $197.0 million.

Net interest income declined 2.1% year over year to $145.9 million. Moreover, net interest margin declined 20 basis points from the prior-year quarter to 3.72%.

Non-interest income decreased 5.3% from the prior-year quarter to $41.3 million. The dip reflects a fall in life insurance and mortgage banking revenues.

Non-interest expense declined 4.2% year over year to $117.7 million. The fall was primarily attributable to a decline in personnel expenses, amortization costs, legal fees and FDIC insurance costs.

The efficiency ratio rose to 61.62% from 58.98% recorded in the prior-year quarter. The rise indicates deterioration in profitability.

Asset Quality

Asset quality exhibited a marked improvement during the quarter with total nonperforming assets decreasing 18.6% on a year-over-year basis to $119.7 million.

Annualized net charge offs as a percentage of average loans and leases came in at 0.50%, decreasing from 0.62% in the year-ago period.

Likewise, provision for credit losses declined 68.8% from the prior-year quarter to $5 million. Moreover, allowance for loan and lease losses decreased 10.8% year over year to $166.7 million.

Loans and Deposits

As of Sep 30, 2013, Susquehanna’s total loans were $13.4 billion, up 5.5% from the previous-year quarter. Apart from real estate construction loans, all other loan portfolios performed well in the quarter.

As of Sep 30, 2013, total deposits were $12.7 billion, in line with the prior-year quarter.

Capital Ratios

The company’s capital ratios remained strong in the quarter. As of Sep 30, 2013, Tier 1 common ratio rose to 10.41% from 10.07% in the year-ago quarter. Tier 1 capital ratio was 11.52% up from 11.37% at the end of the prior-year quarter.     

Profitability Ratios

Susquehanna’s profitability ratios improved during the third quarter. The return on average assets was 0.96%, compared with 0.81% as of Sep 30, 2012.

As of Sep 30, 2013, return on average equity came in at 6.65%, up from 5.70% as of Sep 30, 2012. Book value per common share on a non-GAAP basis was $7.32, up from $6.82 at the end of the year-ago period.

Dividend Declaration

On Oct 16, Susquehanna announced a fourth-quarter dividend of 8 cents per share to be paid on Nov 20 to shareholders of record as of Oct 30.

Our Viewpoint

Susquehanna’s consistent organic growth, improving credit quality and a strong balance sheet are impressive. However, mounting expenses, the prevailing low interest rate environment and a stringent regulatory landscape remain major near-term concerns.

The company currently carries a Zacks Rank #4 (Sell).  

Some better performing North-East banks include Hudson Valley Holding Corp. (HVB - Snapshot Report), Malvern Bancorp, Inc. (MLVF) and VantageSouth Bancshares, Inc. . While Hudson Valley Holding Corp carries a Zacks Rank #1 (Strong Buy), both Malvern Bancorp and VantageSouth Bancshares carry a Zacks Rank #2 (Buy).

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