DBRS Comments on the Q3 Earnings of Susquehanna Bancshares, Inc. – Senior at BBB (high)

DBRS has today commented on the Q3 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 $2.7 million for the quarter, up from a loss of $11.9 million in the previous quarter, but down from $6.4 million in Q3 2008. On a sequential quarter basis, margin expansion of 12 basis points (bps), $4.7 million in securities gains, lower incremental loan loss provisioning of $2 million and no one-time expenses ($9.1 million in Q2 2009) drove the improved results.

Despite the improvement, Susquehanna’s performance remains weak and Q3 2009 earnings would have resulted in a net loss without the securities gains. Positively, DBRS notes that the margin improvement and expense initiatives have resulted in strengthening income before provisions and taxes (IBPT), which enhances the Company’s ability to earn its way through asset quality issues. DBRS notes that if IBPT comes under pressure or asset quality deteriorates more than we currently expect, the ratings would likely be under pressure.

Asset quality remains challenging with both nonperforming assets (NPAs) and net charge-offs (NCOs) increasing in the quarter. Specifically, NPAs increased to 2.83% of loans and leases and OREO in the third quarter from 2.57% in the previous quarter. Meanwhile, NCOs reached $36.9 million, or 1.48% (annualized) of average loans from 1.01% in Q2 2009. Construction remains the most problematic and represented almost half of all nonaccrual loans and over half of NCOs in the third quarter. While the Company has done a good job reducing construction exposure with a $73.5 million decline in the quarter, the construction portfolio still represents a sizeable $1.2 billion, or 12.3%, of the total portfolio. Positively, the generation of new NPAs slowed considerably in the quarter and economic activity has picked up within Susquehanna’s footprint.

Given the still uncertain economic environment, Susquehanna reduced its dividend to one cent from 5 cents per share. This move should save the Company approximately $14 million per year in capital. With the tangible common equity ratio still below 5%, DBRS views this move as prudent, but an action that should have been made earlier. As a TARP recipient, regulatory capital metrics remain strong. Under a stressed scenario where losses are 2.5x estimated 2009 losses, Susquehanna would still have over a 200 bps cushion above regulatory “well-capitalized” standards. DBRS notes that the Company does not plan to repay TARP until NPAs decline for two consecutive quarters and the economic recovery becomes more certain. Management noted that repayment would most likely coincide with an equity raise.

With the margin expanding 12 bps to 3.64% during the quarter, Susquehanna was able to increase net interest income despite modest loan contraction. The improvement was driven by more expensive CDs maturing and repricing into lower cost funding sources. This dynamic should continue in Q4 2009, as the Company has another $1.1 billion in higher rate CDs maturing.

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.