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
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
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.
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