Susquehanna Bancshares Inc.'s auto-leasing subsidiary is headed for a $14 million net loss this year, and analysts are clamoring for the company to shut it down. But chairman and chief executive William J. Reuter said he is not about to rush into a decision.
Mr. Reuter said the Lititz, Pa., company is considering a range of strategic alternatives for Hann Financial Services Corp., including closing it. But he seemed committed to hanging tough until a change in market conditions returns the business to health.
"We take a longer-term perspective on our franchise, and that includes Hann," Mr. Reuter said Monday. "If a bank cut and ran every time it got tough out there, it wouldn't look very good."
The $7.3 billion-asset banking company acquired Hann in November 1999. In the next four years the unit finished solidly in the black, generating total profits of $16 million.
But toward the end of 2003, Hann began to feel the effects of incentive financing offered by the big Japanese manufacturers. Origination volume shrank throughout 2004 and plummeted to $52 million in the first quarter, 61% less than a year earlier.
Susquehanna said Hann lost $3.1 million last year.
Despite Hann's problems, Susquehanna insists that its own 2005 earnings will come in at the forecast $1.70 to $1.80 a share. In a conference call with analysts last month, chief financial officer Drew K. Hostetter said the company would post record earnings in the third and fourth quarters as a result of a robust loan pipeline and an expanding net interest margin.
Susquehanna reported first-quarter earnings per share of 33 cents, missing its target by 6 cents. Analysts are openly skeptical about its prospects for the rest of the year.
"The assumptions that Susquehanna has laid out in order to achieve EPS of $1.70 to $1.80 are, quite frankly, unachievable," wrote Collyn B. Gilbert of BankAtlantic Bancorp's Ryan Beck & Co. in a report published after the conference call.
Most of the analysts following Susquehanna project earnings well below $1.70 and say its only hope of hitting its forecast lies in quickly disposing of Hann.
Lana Chan, with Bank of Montreal's Harris Nesbitt Corp., said Friday that she was "disappointed" that Susquehanna had stuck with auto leasing so long.
"A lot of banks have exited this business, particularly the community banks," Ms. Chan said. "Its unusual for a bank Susquehanna's size to have such a meaningful position." The company "would benefit by taking a more aggressive approach" to Hann, she said. "Clearly, it's dragging down the good things that are happening."
Andrew W. Stapp of Cohen Brothers & Co. said he believes Susquehanna will wind Hann down gradually rather than close it abruptly. But "anything would be better than what they're doing now," he said.
Though Mr. Stapp called it "armchair quarterbacking," he echoed Ms. Chan in saying that Susquehanna would have been better off getting out of auto leasing some time ago.
"It's a shame, because it looks like they've been making headway" in the core banking business, he said.
Susquehanna executives blame Hann's problems on the major Japanese automakers.
"We're dealing mostly with foreign manufacturers - Nissan, Honda, and Toyota - and pretty much all down the line they're giving special offers on the leases on all their cars," Mr. Hostetter said during the conference call. "They're going straight across the board with 1% financing. We're at 6%, so we're not competitive."
Mr. Reuter said that the manufacturers' low rates could not have been predicted, and that Hann is working hard to regain its competitive balance.
"Historically, Hann has been very innovative" in marketing, he said. "The quality of their management is very good. They know this business backwards and forwards. … We're still projecting that they're going to have a difficult year, but I anticipate their activity is going to start picking up in the second quarter."
Mr. Reuter and Mr. Hostetter are bullish about Susquehanna's other businesses. During the conference call they predicted stronger-than-expected growth in wealth management, insurance, and especially the core banking franchise, where they said the expansion of the net interest margin alone would add $2.6 million of net interest income.
Susquehanna's margin grew 4 basis points in the first quarter, to 3.71%, and the company said it is expected to reach 3.74% by yearend.
On the expense side, the executives said recent moves to consolidate its eight bank subsidiaries to three would help trim $2.5 million of expenses.
Over all, Mrs. Hostetter said, Susquehanna's earnings per share would total about 40 cents in the second quarter, then jump to about 50 cents in both the third and fourth quarters.
That forecast is way too aggressive for most analysts. Ms. Gilbert projected full-year earnings of $1.61, and Ms. Chan of $1.68.
"I think we're all in agreement that these assumptions for you to get back to that $1.70 and $1.80 are extremely aggressive," Ms. Gilbert said during the conference call - "especially given what many would argue is a more difficult operating environment for the banking industry in general as we look out for the rest of the year."
Susquehanna's stock dropped after the first-quarter earnings were released April 26. It bottomed at $20.50 on April 29 - 14% below the pre-release level - and despite a rebound has not regained all the lost ground. It closed Tuesday at $22.94.
