What Susquehanna Bancshares' Four 'Clean' Quarters Tell Us


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By Harvard Winters :

I've written three articles on Lititz, PA-based bank Susquehanna Bancshares, Inc. ( SUSQ ), on May 16 , August 2 and October 26 , 2012. I initially chose to write about SUSQ because it was a serial acquirer, and this behavior had caused its tangible book value per share ("TBV-PS") to decline and stagnate over time. That's a disturbing trend if you owned SUSQ shares and wanted the share price to go up, because it meant that SUSQ's price/TBV-PS multiple needed to keep growing for your wish to come true.

On May 15, 2012, the night before my first article ran, SUSQ closed at $9.97. After the market close on Wednesday, SUSQ announced its Q1 2013 results. SUSQ closed at $11.60 on Thursday, 16% above its mid-May 2012 price. With the Q1 2013 results, SUSQ has now posted four consecutive quarters without any pending or closed acquisitions. Investors can now examine four "clean" quarters for operating performance trends.

How do things look?

Since Q1 2012, SUSQ's total assets have grown by 0.9% (that's an annual growth rate, not quarterly - all figures are provided by SNL Financial LC, unless otherwise noted). Since shares outstanding have decreased slightly over this period, assets per share ("A-PS") growth, the more relevant asset growth measure, was 1.47%. TBV-PS has grown by $0.74, or 11.6%, from $6.36 to $7.10. Return on average tangible common equity ("RoATCE") has averaged 13.4% over the last four quarters, and has trended up slightly even as tangible common equity/tangible assets ("TCE/TA") has increased from 7.24% to 7.96%. Return on average assets ("RoAA") was 0.94% in Q1 2013, considerably above the 0.81% and 0.38% for full-year 2012 and 2011, respectively.

In May 2012, the mean sell-side EPS estimate for 2013 was $0.95. By August 2013, the 2013 estimate had fallen to $0.93, where it had remained through October. The current 2013 estimate is $0.94, and 2014 is $0.98. It's unclear how many of the 15 sell-side analysts covering SUSQ have revised their estimates to reflect Q1 2013 results. SUSQ's Q1 2013 "core" EPS (excluding goodwill amortization and non-recurring items) was $0.24, so if SUSQ can repeat this for the next three quarters, it will earn $0.96 in 2013 and beat the $0.94 by a healthy $0.02 margin. But there are two problems. First, SUSQ management expects net interest margin ("NIM"), which the bank reported as 3.97% in Q1, to decline to 3.89%, 3.88% and 3.87%, respectively in the remaining quarters of 2013. A decline to 3.89% would have cost SUSQ $3.1 million of pre-tax income this quarter, or $0.01 per share after tax. Three quarters of that would cause SUSQ to miss. Second, SUSQ's provision for loan losses have declined steadily, from $19 million in Q1 2012 to $12 million in Q1 2013. But net charge-offs of loans haven't been falling. They were about $20 million in three of the last four quarters, higher than recent provisions. SUSQ is hardly under-reserved, but it has been reducing reserves. Could a bump in the road lead to a higher provision and an earnings miss? That's definitely a possibility.

So the 2013 EPS target has some risk associated with it. And SUSQ has to find another $0.05 of EPS in 2014 to hit that target, while facing lackluster asset growth.

SUSQ currently trades at 11.8x the mean 2014 EPS estimate and 1.63x TBV-PS. It offers a 2.8% dividend yield. The TBV-PS multiple doesn't seem crazy given SUSQ's 13-14% RoATCE; the multiple implies that SUSQ owners are valuing it using an 8%-ish equity discount rate, not crazy given the current low interest rate environment. Short interest in SUSQ stock has on three separate occasions spiked above 16%, but it began falling steadily from this level in mid-September 2011, and hasn't been higher than 5% since March 2012. More recently, it's been in the 2-3% range. Still a tad high, but clearly an improvement.

The shorts had a logical reason to cover. SUSQ has ratcheted up RoATCE and begun rebuilding TBV-PS. Both are good things for shareholders. And with an estimated 2013 dividend payout ratio of 34%, TBV-PS should continue to grow (although it will be years before SUSQ surpasses the Q1 2004 TBV-PS peak of $12.45). That is, unless SUSQ starts to feel pressure to "grow" assets, and that pressure leads management to pursue acquisitions. Let me point out that SUSQ delivered its peak "core" EPS of $1.66 in 2006, before it had completed three whole bank acquisitions with $1.47 billion of aggregate value. SUSQ's 2014 mean EPS estimate of $0.98 is 41% below this peak. Now SUSQ did complete a large, EPS-dilutive common equity offering in March 2010, but would this have been necessary had SUSQ not done the $852 million Community Banks acquisition in 2007?

Here's a suggestion for SUSQ management. If SUSQ can't grow assets organically, don't pursue acquisitions, and don't buy back shares, unless you can repurchase them at an unambiguously cheap price, at or around TBV-PS. Just increase dividends. That will increase SUSQ's yield and decrease its riskiness. And both will be unambiguous positives for SUSQ's share price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

See also Is Pepsi's Valuation Getting Stretched? on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy

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