DBRS Comments on the Q1 Earnings of Susquehanna Bancshares, Inc. – Senior at BBB (high)

DBRS has today commented on the Q1 2009 earnings of Susquehanna Bancshares, Inc. (Susquehanna or the Company). DBRS rates Susquehanna’s Issuer & Senior Debt at BBB (high) with a Stable trend. Susquehanna reported net income available to shareholders of $1.9 million for the quarter, down from $18.2 million in the previous quarter and from $28.0 million in Q1 2008. On a sequential quarter basis, margin compression, higher FDIC expenses, lower service charges on deposit accounts, a full quarter’s worth of preferred dividends and incremental loan loss provisioning of $12.5 million more than offset the sale of Susquehanna’s merchant processing business and strong mortgage lending results. The quarterly earnings equated to a return on assets of only 0.18%. Positively, the Company was able to grow core deposits, which replaced more expensive jumbo and brokered certificates of deposit.

Asset quality remains under pressure, but DBRS notes that real estate values have held up better within the Company’s mid-Atlantic footprint relative to other parts of the country. Nonperforming assets (NPAs) increased to 1.73% of loans and leases and OREO in the first quarter from 1.22% in the previous quarter and from 1.03 % in Q1 2008. Almost half of the increase to non-accruals was attributable to land acquisition and development loans, while other commercial real estate and commercial and industrial non-accrual loans increased as well. Within the footprint, credit quality remains the softest along the I-95 corridor from Delaware to Washington D.C. Meanwhile, net charge-offs (NCOs) increased to 0.70% of loans and leases for the first quarter from 0.60% in the prior quarter and 0.25% a year earlier. Most of the first quarter NCOs were related to real estate and commercial lending. With housing prices yet to stabilize and higher unemployment, DBRS expects asset quality to continue to deteriorate, which will keep earnings muted over the intermediate term.

Like many banks, the Company’s net interest margin (NIM) contracted 12 basis points to 3.40% as a result of increased non-accruals and a slightly asset-sensitive balance sheet. Management reduced its NIM outlook for 2009 to 3.50% from 3.70% targeted last quarter, but expects NIM to rebound the remainder of the year as the Company reduces funding costs and implements floors in all renewed variable rate loans.

After already achieving $20 million in annual cost savings, Susquehanna will announce more expense reduction initiatives that will include staff reductions as well as branch rationalization in the second quarter.

Positively, the Company reduced its dividend to five cents per share to further protect capital in the difficult operating environment. The dividend reduction will save $18 million a quarter going forward. Susquehanna noted it would not repay TARP money until management was sure the worst of the downturn was over.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.