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Susquehanna Bancshares, Inc (NASDAQ:SUSQ)

Q3 2010 Earnings Call

October 28, 2010 11:00 a.m. ET

Executives

Abram Koser - VP, IR

William Reuter - CEO

Drew Hostetter - EVP & CFO

Mike Quick - EVP & CCO

Analysts

Matthew Clark - KBW

Steven Alexopoulos - JPMorgan

Matt Schultheis - Boenning & Scattergood

Collyn Gilbert - Stifel Nicolaus

Andy Stapp - B. Riley & Company

Steve Moss - Janney Montgomery Scott

Mac Hodgson - Suntrust Robinson Humphrey

Frank Schiraldi - Sandler O'Neill

[TECHINCAL DIFFICULT]

Operator

Good morning and welcome to the Susquehanna Bancshares Third Quarter 2010 Earnings Conference Call. Today's call is being recorded. At this time, participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). Thank you.

Mr. Koser, you may begin your conference.

Abram Koser

Thank you. Good morning and welcome. I'm Abe Koser, Vice President, Investor Relations at Susquehanna Bancshares. By now, you should all have received a copy of the press release about our financial results for the third quarter of 2010, which we made available yesterday. You can find this and our other financial releases in the Investor Relations section of our Web site at www.susquehanna.net.

Certain statements made during this conference call may be considered to be forward-looking statements. In particular, certain statements made on this call may include forward-looking statements relating to our repayment of TARP and impact on our capital ratios and 100% crack quality, impact of recently inactive (inaudible) legislation and accompanying regulations.

(inaudible) that may affect these statements and our financial performance might include but are not limited to continued levels of our loan and lease quality and origination volume, changes in consumer confidence, spending and savings habits, compliance with applicable laws and regulations, competition from other financial institutions in originating loans and attracting deposits, adverse changes in the economy generally, and in particular, adverse changes relating to the risks set forth in our SEC filings, including our most recent Annual Report on Form 10-K, as well as our 10-Q report for the second quarter of 2010, and our success in managing the risks involved in the foregoing.

Forward-looking statements speak only as of the date they are made. We do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events, except as required by law.

I'll now turn the meeting over to your host, William J. Reuter, Chairman and Chief Executive Officer.

William Reuter

Thank you Abe and good morning everyone. Thank you joining us as we review Susquehanna's financial results for the third quarter of 2010. Those are participating in this morning's call will be Drew K Hostetter, Executive Vice President and Chief Financial Officer; and Michael M Quick, Executive Vice President and Chief Credit Officer.

(inaudible) an overview of the financial results we announced yesterday. For the third quarter we reported (inaudible) common shareholders of (inaudible) $0.04 per diluted share to compared to $2.7 million or $0.03 per share during the third quarter of 2009.

(inaudible) first nine months of the year were $6.5 million or $0.06 per share compared to a net loss of (inaudible) to the period last year. As we mentioned is previous calls, remember that the second quarter earnings this year were reduced by $4.8 million due to the acceleration of the accretion of the remaining discounts (inaudible) $200 million preferred stock issued under the capital purchase program which were redeemed in April.

(inaudible) continues to hold (inaudible) for which we paid $1.1 million dividend. They wonder about our timetable for regaining the remaining preferred shares. We are seeing positive trends in (inaudible) which I'll discuss later in the call. We will be closely watching (inaudible) during the fourth quarter this year with a nice award to retain the balance. As you know (inaudible) in the capital purchase program we have acted out of (inaudible) caution and we will continue to follow that same philosophy

I believe the current economic environment can best be characterized as a slow moving recovery. The slight occasional optimistic signs, businesses and consumer alike lack the confidence necessary to select stronger improvement.

With the national unemployment rate continuing at about 9.5% people are understandably unsure about job security and are therefore cautious with spending or taking on additional debt. This has an impact on business spending, depressing demand for loans. We have found that loan demand is particularly soft for small businesses but has remained somewhat more stable in middle market companies.

Our net loans and leases decreased 2% from the third quarter 2009. Commercial real estate loans were flat while construction, commercial loans and leases all declined on a year-over-year basis. The primary reason for this decrease was the fact that we intentionally reduced the construction loan portfolio by almost $300 million. Our goal is for construction loans to be 10% of our total portfolio which we now have accomplished. In a year-over-year result we see increase in consumer loans and residential real estate loans.

Comparing the third quarter of 2010 to second quarter, net loans and leases were down 1% and results -- and each category track much like did year-over-year. Construction and commercial loans and leases decreased while consumer and residential real estate grew.

Total deposits increased 3%, when compared to September 30th 2009. Time deposits were down, which is consistent with our strategy to reduce this portfolio while demand, money market and savings deposits increased. Excluding CD's core deposits were up 15% showing significant growth from third quarter of last year.

On a link quarter basis total deposits remained flat with both time deposits and savings increasing while demand and money market deposits increased. Excluding CDs core deposits grew by 1% from second quarter to third quarter 2010. Net interest margin for the quarter was 3.58%, compared to 3.69% in the previous quarter and 3.64% in third quarter 2009.

As I mentioned earlier we are seeing continued signs of stability in our credit quality. Net charge-offs as a percent of average loans and leases were 1.42%, compared to 1.48% in the third quarter 2009. Non performing assets as a percent of loans, leases and other real estate owned were 2.52%, up only slightly from September 30th 2009.

However looking at linked quarter numbers we can see continued improvement. Net charge-offs decreased 4 basis points from 1.46% in the second quarter to 1.42% in the third quarter. Non performing assets decreased 7 basis points from 2.6% to 2.53%. Our provision for loan and leases losses also declined from $43 million in the second quarter to $40 million in the third quarter. This is also down significantly from the $48 million provision in last year's third quarter.

This is the second consecutive quarter of improvement in charge-offs, non performers and a provision and we're cautiously optimistic that this is a signal of some renewed economic stability for our customer end markets we serve.

I'd like to take a moment to address a number of issues that have received wide spread attention, both in the industry and in the broader media. First is the concern about foreclosure processes which is primarily focused on larger mortgage services.

Our own foreclosure proceedings are sound and entail individual validation on a case-by-case basis. Our mortgage servicing is generally limited loans that we originate for our portfolio. Our foreclosure activity has been limited, especially compared to what is being reported by larger mortgage services across the country. So far this year we average about a dozen foreclosure actions per month. When its necessary implement foreclosure proceedings, a bank employee verifies the details and the documentation and that employee signature is properly notarized and we're confident that our procedures actively follow industry guidelines.

The second issue is the change to consumer overdraft regulations which require customers to give their consent before we pay and charge fees for overdrafts on debit card transactions and ATM withdrawals.

Despite this change we actually saw a slight increase in income and service charge on deposit accounts for the second to third quarter 2010. Now keep in mind that the regulation was only -- is in effect for about half of the quarter. So it's hard to gauge what impact it ultimately is going to have. To date we've had strong response to our customer outreach and education plan which gives consumers the opportunity to opt in for the standard overdraft practice. We expect additional customers may opt in as more time goes by and they experience the inconvenience of transactions being declined due to insufficient funds.

Third, the preliminary Basel III requirements that have been released and our own capital ratios are well in excess of these new more stringent requirements. At September 30th, Susquehanna's tier one common ratio was 9.52%, above the new requirement of 7%. Our tier one capital ratio was 13.54%, an excess of 8.5% stipulated in the new requirements and our total risk based capital ratio was 15.76%, also well above the 10.5% benchmark.

The new ratio requirements are still considered preliminary and we will monitor any proposed clarifications in these benchmarks. Even after TARP repayment, capital ratios and liquidity holding company will remain strong.

Finally we are closely watching the new regulatory changes that will be implemented in the coming months and years as a result of financial regulatory reform legislation. We will be setting up a committee of senior officers to review the new rules as they are published and our management team will be prepared to update our procedures as necessary.

Now in addition I've been asked to co-chair my new American Banker's Association Committee that will study the impact that regulations will have on this sized banks with assets between $5 billion and $20 billion. We look forward to providing our insight and expect to gain a lot from our participation in this process.

Now I'll turn the call over to our CFO, Drew Hostetter, who will give an update on our financial results.

Drew Hostetter

Thank you Bill. In my presentation, I want to focus on third quarter results for 2010 and our 2010 financial targets. Net interest income decreased $800,000 or 1% from the second quarter of 2010, due primarily to reduction in the net interest margin of 11 basis points from 3.69% to 3.58%. This reduction was primarily caused by soft loan demand and a lengthening of our borrowings. Non interest income decreased $2.9 million or 7% from the second quarter of 2010, due primarily to a reduction in net security gains of $2 million and a reduction in asset management fees of $900,000.

Next I want to present our updated financial targets for 2010. FTE margins, 3.65%; loan growth, negative 2%; deposit growth, 1%; non interest income growth, negative 11%; non interest expense growth, 0%; tax rate, not meaningful and the conferred dividend, $13.7 million. The financial target's growth percentages are based upon 2009 reported numbers and not core numbers.

I will now turn the conference call back to Bill for his closing remarks.

William Reuter

Thank you Drew. As I mentioned earlier in our call, the economic recovery has been caught in a state of paralysis for much of the year. We are fortunate that in markets served by Susquehanna, unemployment has tended to be at or below the natural average.

In some places such as our Central Pennsylvania markets as well as Maryland unemployment has been a percentage point or more below the U.S. rate. This certainly does not mean that we have been immune from the pain or the economic downturn. Our customers, our communities and our companies have felt the impact. It will take time for confidence to build so that consumers feel more comfortable about job security and to begin to spend and spur economic growth.

However, there are a few positive signs that help to fuel the recovery in the long term such as families refinancing debt and business building stockpiles of cash. When consumers and commercial customers begin to look for new growth opportunities we want to be in a position to help them with their financing.

One way we're preparing for this is to strategically build our presence in markets where we see potential such our expansion with new branches in Philadelphia. In addition we are investing in other local communities we serve by opening new branches or relocating existing options with better facilities.

In the coming months we'll be conducting branch openings and Lancaster, the Baltimore area and Southern New Jersey. We think there is potential for organic growth both from market disruptions as some competitors are impacted by mergers as well as a renewed interest in dynamic market areas.

In addition the headwinds and regulatory change and the current economic challenges have many industry analysts predicting an resurgence in M&A activity. This could create opportunities for us to deploy excess capital. Now even as we focus on economic stability we must be ready to seize opportunities for growth when the recovery once again regains momentum.

That concludes my comments and we'll now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Mathew Clark with KBW.

Matthew Clark - KBW

Good morning guys. You mentioned, I think during your opening comments that your goal in the construction portfolio was to get to 10%. I would assume though, given the duration of that asset and your limited appetite to originate in that space, we would continue to see that portfolio shrink. Is that fair? And I guess, can you give us a sense for how much more shrinkage we could see?

William Reuter

Well as we speak its down about 9% right now.

Drew Hostetter

9.4%.

William Reuter

9.4% to be precise. It's down about 9.4% right now. And a lot of it has to do with absorption rates. We're not saying we're out of the construction loan business. We are approving some limited transactions from some customers. A lot has to do with demand. So I can't properly predict that how low that portfolio will go but we are out actively engaged to bank -- obviously the right companies who are in the construction business.

Matthew Clark - KBW

Okay. And then on the securities portfolio, we saw that grow this quarter. Can you give us a sense for where that portfolio will go, what your strategy is, what you are buying and maybe what the duration of that overall portfolio is today?

Drew Hostetter

Yeah. The average life of the portfolio is 4 years. We've been buying recently pretty much 10 year mortgage backed securities with an average life of about -- somewhere from 4 to 6 years. And we've also been buying some agency ventures that are in the 3 year range. So then this thing very short in the portfolio but obviously when you do that you're looking at yields around 2% or so. And the level of investment should stay about the same rate. It probably won't go much higher than were we are today.

Matthew Clark - KBW

Okay. Great. And then in quarters past I think, Bill, you've talked about wanting to see net new problems get towards breakeven or zero and can you update us there -- your thoughts. Given that they've bounced back a little bit, what your sense is for provisioning and the outlook for that metric?

William Reuter

Maybe I'll have Mike address that, Mike Quick.

Mike Quick

We did have a slight decrease in non accruals this quarter. Our TDRs did go up this quarter and was the planned strategy. We're kind of counting off playing that thing first. We are projected that, over the next several quarters to begin to our non accruals decrease during that timeframe as we work through of the problems and we see that our provision will probably stay in the same -- in the same range over the next several quarters pending how we work out the problem.

Our total allowance for loans and leases will go up because of our formula which is weighted to the recent history and charge-offs and migration. So the factories are increasing that. So we will continue to have a higher reserve in that particular situation but the economy turns back.

William Reuter

Well on the upside again -- this is Bill Reuter speaker before Mike comes back in that we -- based on what we know today we believe that non performers peaked several quarters ago and will continue to go down. Depending upon what happens with economy and how we work out certain transactions with the customers, you could see those non performers -- the acceleration with non performers decreased fairly rapidly in the fourth quarter and the first quarter of next year.

Matthew Clark - KBW

Okay, and then on the use of TDRs there, Mike.

Mike Quick

Okay, first of all we feel that the TDR strategy is a friendly strategy to both our customers and to our shareholders. What we have continued to do is to take a look accounts and determine whether this is a long term hold or it should be exited out of the bank. We're using the strategy for those particular situations where we feel there is a potential down the road that we will get compared to a recovery.

The TDR strategy is based on the fact that it must be the -- a note must be able to obtain a 1.15 coverage ratio and then be tested each quarter to maintain at least one tenth debt service coverage ratio during the quarter and if it does not maintain that, then it will be subject to impairment. We've been doing this for thee quarters and we just recently completed it and we do not test.

In the last quarter we did not have any of our TDRs that fell below that. We have begun to take a look at selective TDRs that we feel may be marketable in the market price and we have a strategy in place to do that and we've tested that and we feel that our A notes based upon how we tested was with several people in the marketplace. We will hold up with its value that we would not see any decrease on those particular ones we're testing. Now just to talk a little bit about the increase in this quarter, the TDR strategy does take time. We started -- the TDRs that hit this quarter were really started in the second quarter and progressed over -- through negotiating with the customer to create a TDR and you're negotiating with certain caveats and a formal agreement between the customers.

Other ones that could on this quarter, one which is a residential construction loan for $4 million is already paid off. We have several loans which we expect in the month of November to pay off and that number is roughly around 6 million and then we had several more that we expect, everything being correct, about $8 million we pay off in December. So this is an ongoing strategy and we're moving these loans through. And again a selective strategy to ensure that we are picking the right ones and we're not delaying a problem down the road.

William Reuter

Mike, why don't you comment for Matt's benefit and those listening to what we're projecting TDRs to do after the first of the year?

Mike Quick

We believe after year, because many of these have met the requirements of the TDR that is --they've had sixth consecutive payment and they've crossed over a calendar year end. We're expecting a percentage of what we have will go into the grilling stage out of the TDR.

Matthew Clark - KBW

So how much was that? What did you…?

Mike Quick

It would probably be somewhere in the area of about 40% of what we have right now. But that could change. That's what we're projecting.

Matthew Clark - KBW

Okay, and the new rates that you are putting on these, they are not considered really market rates. Can you give us a sense for what that rate is, on average, for your TDR customers?

Mike Quick

Generally it is a market rate. Generally it's between 5.5 to 6 in the quarter.

Matthew Clark - KBW

On the TDRs?

Mike Quick

On the TDRs, yes. That's on the A note

Matthew Clark - KBW

Right. Okay, thank you.

Operator

We will now take our next question from Steven Alexopoulos with JPMorgan.

Steven Alexopoulos - JPMorgan

Hey, good morning everyone. I wanted to start with a question on the securities yields. Looking just at the taxable securities, what is it in that portfolio that is causing this drop in yields? We're down 100 basis points in two quarters. And then how do we think about near-term pressure and where that should bottom?

Drew Hostetter

What's causing it is we have some security sales in the second quarter, that guides and right nearly under the second quarter. So, we sell securities that were yielding 5 – 6%. And that is reinvested at 2%. Okay, that yields obviously will continue to decrease as securities mature, like I said the average license is about 40 years and it effects our maturities are pretty even on that light. So, obviously as 4, 5 or 6% yield and securities mature but we have done right now at around 2%.

Steven Alexopoulos - JPMorgan

So, we shouldn't expect this level of pressure to continue here? It should moderate in the coming quarters.

Drew Hostetter

That was illustrated by the sales and it was just maturities.

Steven Alexopoulos - JPMorgan

Okay. And then on the other side, looking at the CDs, how quickly can you ramp that down? The rates still seem pretty high, that blended rate. And given where the loan to deposit ratio, what percent of the maturing CDs do you guys need to hold onto to fund the loan growth?

Drew Hostetter

We could still run off a far amount we will be okay with the loan portfolio. Next year the 2012 we had a couple of years ago we had a CD promotion at a fairly four years ago, obviously, it was a higher rate. In the first six months of 2011 we have about 230 million of CDs coming off that 375 which will obviously rephrase down to 1% range or so or will leave the bank depending on what the customer wants to do. So, that would be the big effect on our dropping of CD in 2011.

Steven Alexopoulos - JPMorgan

Okay, I mean just one final question. Did I hear you correctly that you said you are targeting to repay TARP by the end of this year?

William Reuter

No, what I said was that we will, we are obviously one month and through the fourth quarter and but if we continue to see our credit metrics progressing the way they are, we are taking a look at that repaying TARP sooner than later.

Steven Alexopoulos - JPMorgan

Do you have any sense at this point if the capital levels are sufficient to exit TARP, or is there a chance you may have to raise some additional capital to if you get?

Drew Hostetter

Let me just go back by kind of couple of comments I made in the script. If you look at our capital ratios even with – even if we target a 100 basis points more as a cushion above the new Basel III standards. We still have more sufficient capital and liquidity to repay the $100 million in TARP and still be in great shape from a capital standpoint.

Steven Alexopoulos - JPMorgan

Okay. Maybe just one more. What portion of the restructured loans are in non-accrual today?

Drew Hostetter

None. The rest we restructured and we are currently at the beginning of it none of them have moved to non-accrual.

Steven Alexopoulos - JPMorgan

Okay thanks guys.

Operator

Our next question comes from Matt Schultheis with Boenning & Scattergood.

Matt Schultheis - Boenning & Scattergood

Thank you. Good morning. Quick question back to the TDRs, and I think that you pretty much answered this. But the B tranche, is that showing up in your TDR, or is that showing up in your non-accrual bucket?

Drew Hostetter

TDR rates have been charged off.

Matt Schultheis - Boenning & Scattergood

Okay.

Drew Hostetter

We got it off, there is no doubt there but it's the charged off and it will be dealt within the future.

William Reuter

It's not forgotten its course.

Matt Schultheis - Boenning & Scattergood

What is the size of that that is -- that you've charged off so far, the aggregate amount?

Drew Hostetter

It's about $0.35 on the dollar.

Matt Schultheis - Boenning & Scattergood

Would you look to sell those?

Drew Hostetter

Anything for sales.

Matt Schultheis - Boenning & Scattergood

Okay. Can you provide some geographic color as to where you are still experiencing problems or the breakdown, basically geographically, of your problemed assets versus where you just don't have that many problems?

Drew Hostetter

Well I think we have said this before and in the conference call the initial problem guarded on the I-95 quarter Denver to Washington. That has rebounded nicely primarily because of the black program for the based realignment. The Western Suburb of Philadelphia have been problemed and while we take Chester and Montgomery and Berks County have been problems and they are still, they are not problems as far long as the Maryland areas but we are starting to see some light at the end of the tunnel with some of the those problem issues. Our Central Pennsylvania has helped up very well and continues to hold it up and I guess that real lagger in recovery with the I-81 corridor from Carlisle down to Hagerstown. The real estate market there is still stressed and will be sometime before we see a recovery in that particular area.

Our Northern Tier wins was going to cause problems there than connected to really the small business who have been really hurt but the number is maybe larger but the dollar amount is not as great. But the good thing is that we are seeing a lot of interest in residential land in the Western Suburbs of Philadelphia as well as in Maryland area.

And we are starting to see some very attractive prices, we continually to go out and price. Our problem loans is even what it will bring in the market and we have seen an increase in those numbers and we look at a lot of different strategies in those particular areas and much of which will come to more clear view during this quarter into next quarter, that two what the options are, some of the loans there.

William Reuter

Hey Matt this is William Reuter let me also add I have said before but it's worth repeating. We have had very limited exposure on the Jersey Shore, Delmarva Shore and Maryland Eastern Shore and we have also had little or no exposure in the condo market that the Greater DC condo markets from for lack of better order.

Matt Schultheis - Boenning & Scattergood

Okay, thank you very much. That's it for me.

Operator

We will now take our next question from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Thanks. Good morning guys.

Drew Hostetter

Hey, Collyn.

Collyn Gilbert - Stifel Nicolaus

Just to follow on Matt's question. And Mike, you touched on a little bit of this. But I guess I was interested in hearing some of the more specific characteristics of the credits that are coming on to nonperforming status and then those that are rolling off, which I think ties in, Mike, to what you were saying about perhaps resolution of some of these land loans. And then also tagging onto that, what will drive the resolution of credits, perhaps, in 2011, as far as what you can see now?

Mike Quick

What's been rolling on has been what I would call in the CRE commercial real estate area, those properties that I would like to say the people who were investing in properties as the side like to their normal job to try to build their network. The professional managers is trained to manage pretty well on the CRE properties those that we have dealt with for the long time came into the recession with a lot of cash and have been able to get through it and have maintained pretty good occupancy. What routine is the individual to primary purpose would not, with a bit with adjusted investment, they are getting hurt on what I would say the 10th to 30 square foot it would retail or office. They have had a piece of it but they are the ones that are getting because they have don't have the connections and the expertise and that's what we see rolling on.

What we see going forward is, we are looking at all options again. We are testing the market, we have not used the terms that will sell notes because we have a lot of connections, we have a lot of interesting experienced people. And we've been working our connections and we are getting a lot of good interest and a lot of good discussions on and on and we have a lot of things over the next five to six quarters that if everything works out would be a benefit to our numbers.

So, we are looking at all possible options but we continue to work with those customers as we feel in the long run be good customers down the road it's just the problem they are getting through.

William Reuter

This is Bill Reuter. Let me just add to the additional information that if we can. The other area that we have seen historically where companies have had difficulties on good companies and have a solid records, they have decided to go outside their core-market and do something. Now we have finance them because where they are gone to do is still in our core markets but in other words you did a great job in the Metropolitan area but now you are chasing cheaper land prices out further and as this economic downturn occurred they are the properties that are moving the slowest.

So that's been identified and has been provided for and that's been, we have managed through that fairly nicely.

Collyn Gilbert - Stifel Nicolaus

Okay. That's helpful. Mike, just curious, in the point that you made about interest in residential land in some of the western burbs of Philly, I'm surprised by that. What is driving that interest?

Mike Quick

Prices are cheap, actually it's the pricing but more importantly in the suburbs of Philadelphia the time to get approved lot, approved improved lot are just approvals in that area. It takes so long that people are trying to pick up property where the improvements are in and the lots are ready to go and that's what we are seeing the interest in those type of properties and prices are better than what we saw a year ago.

Collyn Gilbert - Stifel Nicolaus

Interesting. Okay.

Mike Quick

I do want to emphasis again how I said earlier that is that based on our projections and based on what we know today showed some catastrophic from another big dip that we believe credit quality will continue downward in terms of decreases and non-approvals and as Mike said earlier sometime shortly for the first of the year based on our projections there will be a number TDRs that will come off because they weren't paid as agreed for six months and have gone over a year end.

Collyn Gilbert - Stifel Nicolaus

Okay. That's great. Just one quick final question. Was there anything in particular that drove -- because you guys have consistently shown pretty good growth in the asset management line, but obviously it reversed a bit this quarter, was there anything in particular that led to that? And are you -- maybe kind of give some outlook as to that business going forward?

Drew Hostetter

Yes Collyn actually the assets under management actually went up for the quarter even though the fees weren't down. What happened is in the second quarter both Stratton and Valley Forge kind of realigned those portfolios. So there was a lot of commission that occurred from the sales and buys with other securities in that second quarter that totaled 900,000 difference there was a reduction in commission and not with the people managing the assets.

Collyn Gilbert - Stifel Nicolaus

Oh, okay. So then this quarter is more -- I don't have my model open -- but is this quarter a more reasonable run rate then, we should assume going forward, if that was an unusual boost in commissions in the third -- I'm sorry -- in the second quarter?

Drew Hostetter

I think you will see because the assets under management have for an let's say 67 improvement from the third quarter.

Collyn Gilbert - Stifel Nicolaus

Okay, that's great. Thanks very much.

Operator

We'll take our next question from Andy Stapp with B. Riley & Company.

Andy Stapp - B. Riley & Company

Good morning.

Drew Hostetter

Good morning Andy.

Andy Stapp - B. Riley & Company

How did the early stage delinquencies and the watch list compare with Q2?

Drew Hostetter

The delinquency was a little bit elevated this quarter as compared with Q2 pretty much across the board some of that was caused by technical issues where we didn't have current statements and we choose to keep them in a delinquent side till we got the statements but in general this is quite the up cross board.

Mike Quick

Yeah the number's Andy, 30 to 89 days delinquent one from 60 million in the second quarter to 69 million in the third quarter but to give you some perspective that was a 127 million in the first quarter. So, the up and down is significantly, this has been a slight uptick in the third quarter.

Andy Stapp - B. Riley & Company

Okay. And do you have any other early-stage indicators such as watch lists that type of thing?

Mike Quick

Now the watch list deal with one second migration. We continue to have negative migration in this quarter not as great as we had in the second quarter but the wait a minute, the watch list actually went down from the previous quarter.

Andy Stapp - B. Riley & Company

Okay. That's helpful, and that's all I have.

Mike Quick

Thank you.

Operator

We will take our next question from Steve Moss with Janney Montgomery Scott.

Steve Moss - Janney Montgomery Scott

Good morning guys.

Drew Hostetter

Good morning.

Steve Moss - Janney Montgomery Scott

Most of my questions have been asked and answered here. Just one minor detail at this point, what was OREO expense for the quarter?

Drew Hostetter

For the quarter Steve was a 1.477 million.

Steve Moss - Janney Montgomery Scott

Okay. Thank you very much.

Operator

We'll take our next question from Mac Hodgson with Suntrust Robinson Humphrey.

Mac Hodgson - Suntrust Robinson Humphrey

Good morning.

Drew Hostetter

Hi Mac.

Mac Hodgson - Suntrust Robinson Humphrey

Drew, you mentioned lengthening of borrowings putting some pressure on the margin. I may have missed this, but I'm just -- could you elaborate a little bit on that?

Drew Hostetter

Sure in February 2009 we entered into a $500 million worth of forward interest rate swaps. Where we took an overnight rate and swap to a five year fix of 288, 250 million of that was effective of April 1st and the other 2050 million was effects of July 1st of this year.

Mac Hodgson - Suntrust Robinson Humphrey

Got you. Okay and then I guess as we look into 2011, related to the margin, you mentioned some of those high-cost CDs repricing down, 3.75 down to 1%. What other key drivers should we think about with the margin next year?

Drew Hostetter

The one of the keys will obviously be the loan growth, we had a 100 billion run off in the third quarter and we are projecting the fourth quarter based up on my estimates of 2% decrease in loans for the year that's about another 100 million run off in the fourth quarter. So, that we have got few basis points especially on the margin and in the fourth quarter as well.

We believe that in 2011 we are starting a budgeting process here that will start to reverse and start to improve in 2011. So, we expect the margin to have a little bit of pressure in the fourth quarter and then in 2011 starts from rising a little bit again.

William Reuter

And we are not expecting much up of the way of increased interest rates at least for the foreseeable future.

Drew Hostetter

Right.

Mac Hodgson - Suntrust Robinson Humphrey

Great. And Bill, on the M&A outlook and Susquehanna's interest to deploy excess capital, could you talk about what an ideal candidate would look like, from a size, geography, you know, that sort of standpoint?

William Reuter

The markets we currently operate in and markets that are growing equal to and better than our core market here in Central Pennsylvania in Lancaster, they don't expect us to see this jump way out of market place. I think there is going to be some limited opportunities inside our marketplace. The Maryland, Greater Philadelphia could be some Brandt sales, could be some whole bank sales. There is a lot of chatter right now, not a lot of is being getting done and it's final now. But our ideal bank right now would be something in the 1 to $2 million size doesn't mean the world go bigger, doesn't mean won't go smaller.

But our thought process is takes much time and effort to do what $500 million bank as it does to do $1.5 million bank. So, we would there the areas that we would target, I could tell you we could also pass some interest as far up as mid-state New Jersey as far as south up here is as the Greater Northern Virginia area.

Mac Hodgson - Suntrust Robinson Humphrey

Okay, great. That's helpful. Thank you.

Operator

We'll now take our next question from Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi - Sandler O'Neill

Just a couple quick questions. I just wanted to follow up one more time on TDRs, but I think, Bill, you might have just answered this a couple of seconds ago. But in terms of them coming back onto accruing status, is it really basically just as simple as once they have been -- if they've been performing as agreed for six months and then you get over the hurdle of end of year, is that basically, they almost automatically come back on, or is there a little more decision-making into whether or not they come back onto accrual status?

Drew Hostetter

The only other decision in that process Frank is you have to believe that they are going to be able to continue to make to learning curve going forward.

Mike Quick

We have a prospects in place at every quarter. We view all the seven accruing and the TDRs to ensure that they are still in compliance with why they were pretty net categories, why they are still accruing and why their TDR and that's pre-level done at the divisional level, it's done at the credit risk and then it's done by loan review. So, if we would, when we come to January we will take a look at all of those accounts during the first quarter you see that they are still able to continue to make the payments over the long month and if they are we would then, that would be the final decision to move them off of the TDR into clearance.

We'll not do it unless we are absolute sure based on what we know at the time that they will continue to take, going into the future.

William Reuter

Remember with all these TDRs we are looking at 15 month forward projections and we continually update, so that also goes into our thought process. We are not going to ring alone off the TDR, we think it's marginal that's for sure, even if they were paid as agreed and we past quarter end.

Frank Schiraldi - Sandler O'Neill

Okay. So it sounds like you are, at this point though, confident that a decent amount will come back onto accrual status at January 1?

Mike Quick

Yeah we do test them periodically and if our projections are right there will be a slug of them come back.

Frank Schiraldi - Sandler O'Neill

Now, am I -- is it a quarterly process, so more can come back on accrual in 2Q, or is it an end of year process?

Drew Hostetter

If the accounting rules required and that's to cross over at year-end.

William Reuter

Six months and a year end.

Frank Schiraldi - Sandler O'Neill

Okay, got you and then just finally, just another question on TARP repayment. I don't know if you can answer it or not. But I am just kind of curious about the process here, if it is something where you've addressed it in conversations with the regulators and you feel like you've been green-lighted to do it when you are ready, or if it is something that once you are ready to pay it back, then you start talking with the regulators about it.

William Reuter

We do it when we are ready and we're constantly updating a base case and a worst case credit scenario. So we do – what we go do regulators when we are ready. Drew you want to elaborate on that at all?

Drew Hostetter

That's pretty much the case. When we are confident and we believe that this appropriate time will go to the regulators and our discussions lately with the regulators have been positive. So, there doesn't seem to be negativity there anyhow.

Frank Schiraldi - Sandler O'Neill

Okay. Great. Thank you.

Operator

At this time we have one question remaining in the queue. (Operator Instructions). We'll now take a follow-up question from Matthew Clark with KBW.

Matthew Clark - KBW

Hey Drew, how should we think above the tax rate next year? Is it also going to be not meaningful, or is there something that changes next year, where we should maybe reinstate a tax rate?

Drew Hostetter

What we used to do simply for next year for calculating the tax rate. Take your estimated pre-tax income, okay? for 2011 and whatever you have in your model subtract 28 million from that that will be our estimated permanent differences for 2011 and multiply that by 35%.

Matthew Clark - KBW

Great. Thank you.

Operator

And with no further questions on the queue, I would like to turn it back to Mr. William J Reuter for any closing remarks.

William Reuter

Okay well first of all thank you for your questions. Our next quarterly conference call will be held on Thursday, January 27, 2011 at 11.00 AM Eastern Time. It will be available via webcast on our website, www.susquehanna.net. Thank you for joining us this morning and for your continued interest in Susquehanna Bancshares.

Operator

Ladies and Gentlemen that does conclude today's conference. We thank you for your participation.

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