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Case Study of Susquehanna Bank and Charge-Offs

 Susquehanna Bank – a bank which took $300M in TARP
money and lightly covered in the media

 Analysis based on comparing losses in court filings and charge-offs
documented in call reports
 Preliminary results shows under-estimation of charge-offs in
construction & development loans, at least YTD charge-offs on
 12/31/08 call reports showed nearly doubling in charge-offs
numbers, though amounts outstanding in default status only had a
slight change between Q308 and Q408
 Red flag could have been raised earlier by looking into the bank’s
exposures to bankrupt companies and estimated losses
Excerpt from Call Report for Susquehanna Bank (Hagerstown, MD)
ending 9/30/08

YTD charge-offs for construction & development loans totaled $2.4M
 …at least 4 separate exposures in Maryland to
construction & development loans with potential losses

Recipients of Construction Loan District Case No. Bankruptcy Date Exposure Amt
Caruso Virginia Homes BR, LLC) Maryland 08-18275 6/23/2008 $ 1,000,000.00
Caruso Maryland Homes CY, LLC) Maryland 08-18268 6/23/2008 $ 6,934,313.00
Caruso Homes Inc Maryland 08-18254 6/23/2008 $ 1,910,341.00
Island Developers Fruitland LLC Maryland 08-20557 9/15/2008 $ 1,009,000.00

 We can find more defaults, but given the low level of the
documented charge-offs and the aggregate of these 4
exposures is around $11M, let’s take a look at the losses
incurred in these cases
 Analyzing Island Developers Fruitland LLC:
 Construction loan of over $1million
 Though the bankruptcy occurred in Sep’08, the loan
should be in non-accrual status earlier
▪ Foreclosure proceedings first docketed on 7/3/08 (forestalled by filing)
▪ Developer was 7 payments past due at the time of bankruptcy filing

 9/11/08: Bank files motion for relief from stay, asserting
Apr’08 appraisal value of property to be $940,000
 12/4/08: Property sold at auction for $525,000
 Nominal loss estimated at 52.6%* and exceeds $3,000
 Possibility that bank might have charged off this loan in 2007

*At the time of sale, the amount outstanding (including fees and charges) was $1.108 million
 For 2 of the Caruso Homes construction loans, schedules of assets &
liabilities filed on 8/30/08 provided values* of collateral upon which
Susquehanna’s loans were secured
 See estimated losses which supported higher charge-offs by Sep’08

Recipients of Construction Loan Collateral Scheduled Value Exposure Amt Estimated Loss
Caruso Virginia Homes BR, LLC) 4 Lots in Breckenridge Estates 411,012.00 $ 1,000,000.00 59%
Caruso Maryland Homes CY, LLC) 33 Lots in Rivergate Estates 3,448,060.00 $ 6,934,313.00 50%

 Without counting estimated loss on the 4th exposure (to Caruso
Homes Inc – insufficient data):
 Losses on these 3 loans alone amount to $4.56 million
 Higher than $2.3 million in YTD charge-offs on 9/30/08
*Scheduled values in the current environment of declining real estate prices might mean even lower values at time of sale. Also,
the developer has no incentives to provide lower values, otherwise it quickly constitutes evidence that the developer has no
equity and the bank might obtain relief to foreclose
 Question: Could the bank have charged off these loans earlier in
 Probably not, the defaults occurred in 2008

 Even if they did, the charge-offs in 2007 totaled $1.3M, making
total charge-offs in 1/1/07-9/30/08 period $3.7M

 Still less than $4.56M estimated losses in 3 exposures alone
 The Bank finally reported a spike in charge-offs for 12/31/08
 Note that there are 3 Susquehanna Bank entities
 Analysis in earlier slides premised on Susquehanna Bank (the MD entity) making the
Maryland loans (MD office referenced in construction loan docs attached as exhibits in
 Why is this material? The bank consolidated its numbers for Dec’08 reporting,
instead of reporting by entity
 See excerpt below – showing the consolidated numbers (I have summed up the numbers
for the 3 separate Sep’08 call reports for comparison purposes)

Susquehanna Susquehanna
(merged) (summed)
12/31/2008 12/31/2008 9/30/2008 9/30/2008
Charge-offs Recoveries Charge-offs Recoveries
'000s (YTD) (YTD) (YTD) (YTD)
1. Loans secured by real estate
a. Construction, land development, and other land loans
1. 1-4 family residential construction loans 3,586 3 2,946 3
2. Other construction loans and all land development and
other land loans 5,299 2 268 2

 Note the spike of YTD charge-offs from $3.2M (9/30/08) to $8.9M (12/31/08)
 To round up the case, let’s take a look at the numbers for defaults
(90 days past due and non-accrual status)
 Excerpt below shows amounts outstanding on loans placed in default
 Observation: Little change between 9/30 and 12/31 numbers, i.e., the
spike in Dec’08 is unlikely due to defaults recorded in Q4
Susquehanna Susquehanna
000s (merged) (summed)
90 days past 90 days past
due + due + Change over
Nonaccrual Nonaccrual 2008Q4
12/31/2008 9/30/2008
1. Loans secured by real estate
a. Construction, land development, and other land loans
1. 1-4 family residential construction loans 29,103 30578 -4.82%
2. Other construction loans and all land development and
other land loans 23,259 22073 5.37%

 Conclusion: Questions could have been raised about the Sep’08 YTD
charge-offs with some research on potential losses based on bankruptcies
to which the bank was exposed
For more details on distressed construction loans, bankrupt home builders
and the banks exposed to this sector, visit: