On May 16th, I published an article on the future earnings prospects of Susquehanna Bancshares, Inc. (SUSQ). I mentioned SUSQ's frequent acquisitions, which made it difficult for investors to evaluate operating performance over time. Its most recent acquisition, of Tower Bancorp (announced deal value $342 million), closed on February 17, 2012, and as a result, SUSQ's Q1 2012 income statement contained only half a quarter's worth of Tower's revenues and expenses. A prior acquisition, Abington Bancorp (announced deal value $274 million) was announced in January 2011 and closed in October 2011. So Q2 2012 is the first "clean" quarter (pending acquisition free, except for a tiny deposit assumption, and with a full helping of target earnings) in over a year.

SUSQ announced earnings last Wednesday. What did we learn?

First, SUSQ's Q2 2012 assets were 1.3% higher than Q1 2012, translating into an attractive annualized asset growth rate of 5.3%. Gross loan growth was 0.9%, 3.4% annualized. Lower than overall asset growth, but still good. Second, SUSQ's Q2 2012 net interest margin ("NIM") was 4.10%, versus 3.94% in Q1 2012. This is not a surprise; Tower's NIM had been meaningfully higher than SUSQ's. 4.10% is a solid NIM. However, on the most recent earnings conference call, SUSQ Chief Financial Officer Drew Hostetter voiced his expectation that NIM would contract in the second half of 2012, to 3.90%, and to 3.85% in 2013. That's 25 basis points of eventual compression. More on this below.

Leaving out non-recurring merger-related expenses, SUSQ's overhead expense/average assets (OH/AA) ratio was 2.66% in Q2 2012, versus 2.68% in Q1 2012. Surprisingly, on the aforementioned earnings conference call, Chairman and Chief Executive Officer William Reuter stated that SUSQ had substantially achieved its merger-related cost savings. SUSQ's Q2 2012 recurring non-interest expense was $118 million. In Q2 2011 (the last quarter for which stand-alone data was available both for Abington and Tower), the aggregate non-interest expense for the three institutions was $128 million. Comparing the two figures implies that SUSQ realized quarterly savings of about $10 million, or $40 million annualized. In an investor presentation last October, SUSQ had promised annual savings of $58 million. On the earnings conference call, SUSQ said it had already realized $56 million of the $58 million it promised, with $2 million more to come. I recognize that my calculation is crude, but I still find the discrepancy between their arithmetic and mine puzzling. SUSQ's reported Q2 2012 EPS was $0.20, $0.21 if adjusted for non-recurring items. These figures won't grow meaningfully because of future cost savings.

Q1 2012 non-interest income/average assets was 0.86%, versus 0.97% in the prior quarter. Realized securities gains were $1.4 million, not that important relative to net income.

SUSQ's mean sell-side EPS estimates for 2012 and 2013 on May 16th were $0.82 and $0.95, respectively. Now, they are $0.81 and $0.93. Both new estimates are slightly lower than the old ones, but the expected 2013 EPS growth is still 15%, which is pretty high.

Where will the $0.12 of EPS growth come from?

Potentially from three places. First, from cost savings. According to SUSQ management, $2 million worth, or $0.007 per share after tax, are still to come.

Second, from a reduced loan loss provision. SUSQ's Q2 2012 loan loss provision was $16 million, below the $19 million of Q1 2012 (and this $19 million would presumably been even higher if it contained three months of provisioning at Tower). SUSQ's non-accrual loans have fallen 42% from their peak in Q4 2009, but at 1.01% of gross loans, versus 0.39% at the end of 2004, they still need to fall by another $80 million or so. More charge-offs will be needed. Annualized provision/average gross loans was 0.51% in Q2 2012. It averaged 0.20% from 2004 to 2006; a return to this level would generate an additional $25 million of after-tax earnings, or $0.14 per share.

If you believe SUSQ will earn $0.93 of EPS in 2013, this is why you believe it. But that means the provision needs to fall very far, very fast, with the start of 2013 only two quarters away.

Third, asset growth might contribute to EPS growth, but it can help only modestly. The economy is still on the mend. And keep in mind that SUSQ is expecting NIM contraction. I estimate that 25 basis points of NIM compression would lower SUSQ's annual EPS by $0.13 at its current size.

NIM compression puts the $0.93 2013 EPS target at risk even if you're certain that loan loss provisions will quickly fall to the lower historical levels.

I'll conclude with a few words on valuation. SUSQ's Q2 2012 tangible book value per share (TBV-PS) was $6.59. Based upon SUSQ's July 30th closing price of $10.54, SUSQ trades at a 1.60x price/TBV-PS multiple. If you assume that SUSQ earns $0.48 for the balance of 2012 (and by the way, the mean Q3 and Q4 2012 EPS estimates are $0.21 and $0.22, respectively; the sum is way short of $0.48), and $0.93 in 2013, and SUSQ pays its recently raised quarterly dividend of $0.06 per share through 2013, SUSQ's return on average tangible common equity (RoATCE) will decline from 15.1% next quarter to 12.8% in Q4 2013. If you use a 10% discount rate, "fair value" for SUSQ would be $9.87 at the end of 2013, or 6% below where it is currently trading.

A lot of optimism seems to be priced into SUSQ right now.

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.