Susquehanna Bancshares, Inc. (NASDAQ:SUSQ)
Credit Suisse Financial Services Forum Conference Call
February 13, 2013 01:45 p.m. ET
William Reuter – Chairman & CEO
Drew Hostetter – EVP & CFO
Next step we have Susquehanna Bancshares with us today. This is an $18 billion in asset, Mid-Atlantic franchise based in Lititz, Pennsylvania. They have got number one deposit market share in Pennsylvania, New Jersey, and the Maryland footprint. They’ve been very active coming out of the financial crisis. They have done two bank acquisitions in the affluent Philadelphia suburbs, which has helped them to strengthen the balance sheet, improve profitability and their growth, -- their organic growth outlook. They have done a number of things in recent -- again kind of coming out of the crisis, they have repaid TARP, they did the Abington acquisition, the Tower acquisition, and have also been able to remix the funding as well. So, with that, let me -- very happy to have Bill Reuter here with us, CEO; and CFO Drew Hostetter. Let me turn it over to Bill. Thanks.
Okay, thanks. Thank you, Matt, and good afternoon everybody. Again, my name is Bill Reuter, I’m Chairman and Chief Executive Officer of Susquehanna. Joining me over to my right is Drew Hostetter, our Chief Financial Officer. Thank you for joining us this afternoon and thank you for your interest in our company. We’re grateful for the opportunity to share the Susquehanna story with you.
As a reminder to the presentation, they include forward-looking statements that reflect our current expectations and projections. A variety of factors can affect the results causing them to differ materially from our expectations. A description of these factors is included in our filings with the SEC.
So, let’s start talking a little bit about who we are at Susquehanna, just a high level overview of our company for those who might not be familiar with us. We are a regional super community bank with about $18 billion in assets, headquartered in Lancaster County-, Pennsylvania; , 260 offices in Pennsylvania, New Jersey, Maryland, and West Virginia. We are now the 31st largest bank in the United States.
Our management team brings a wealth of experience to our organization. We lived and worked in all of these markets for many years, have a deep knowledge and understanding of the areas where we do business as well as customers and their needs. In addition to commercial and retail banking, we have a high quality wealth management business worth about $7.6 billion in assets under management and administration. This business is located in Valley Forge, Pennsylvania and operates as Valley Forge Asset Management and Stratton Management Company.
Additionally, we operate a risk management and insurance agency, a commercial finance, and a vehicle leasing business. One of our strengths of our franchise is the scale we’ve achieved in the Mid-Atlantic region. In markets where we do business, we are the largest locally-owned community bank. We are able to provide the personalized service of a community bank backed by the scale and diverse resources of a large financial service company. We believe that this distinction makes us a key player for future growth in the region where customers warrant new business with people they know and who have the ability to make decisions locally.
Our branch network, diverged product offerings, and strong presence, this all positions us to take market share from competitors. And we’ve been successful in doing just that as we have increased our market share in 14 out of 22 MSAs from 2011 to 2012.
Before discussing our future prospects, I’d like to briefly highlight some recent performance. 2012 for Susquehanna, it was a year of strategic growth and transition that yielded strong performance at the same time. Early in 2012, we disclosed 4 strategic goals as our main focus for that year, namely continuing improvement in credit quality, completing the acquisition and integration of Tower Bancorp, growing loans, deposits, and revenues, and increasing profitability and shareholder dividends.
And as you can see from some of the highlights on this slide, this focus yielded just terrific results. Our credit team has worked diligently through this recent cycle, non-performing assets are now less than 1% of total loans, leases, and foreclosed real estate down from a 188 basis points a year earlier.
Net charge-offs were just 55 basis points for 2012 compared to 116 basis points in 2011. The second of our major objectives for 2012 was integration of Tower Bancorp. The Tower merger occurred in February of 2012, just about a year ago now. It followed quickly on the heels of our acquisition of Abington Bancorp in October 2011. These two acquisitions added about $2.6 billion in loans and $2.9 billion in deposits as well as about $440 million in assets under management.
Our system and branch conversions occurred immediately upon the effective date of each merger. The acquisitions strengthened our core markets in Central Pennsylvania and also added critical mass in the Philadelphia Metro market, where we are now operate more than 60 branches with over a $3 billion in deposits nearly doubling our company’s presence in the Philadelphia region.
In addition, we exceeded our targeted $30 million in cost savings from Tower acquisition, which combined with cost savings from Abington and efficiency projects what I call core Susquehanna, helped us achieve about $15 million in cost saves in less than a year.
In conjunction with entire acquisition, we adopted a regional leadership structure to keep much of the decision making as local as possible and maintain strong connections to the community. This structure was the key to success. We achieved in growing loans, deposits, and revenues. Excluding the loans acquired in the merger, we grew with the loan portfolio of about $471 million in 2012 or about 4.5% organically.
We are especially pleased with our growth in the commercial loans, a major focus for us, which saw a good progress particularly in the second half of 2012. Also excluding deposits assumed in the Tower acquisition, our total deposits grew $215 million or 2.1%, but more importantly our core deposits grew $675 million or about 9.8%. Our peer-leading net interest margin plus strong revenue from our mortgage banking and vehicle leasing business helped drive core revenues up about 31% year-over-year.
Finally, the strong co-performance led to improved profitability with significant improvement in the efficiency along the way, return on assets now approaching 1%, which is our current target. As result of this return and the strength of our capital, we were able to increase our return to shareholders raising a dividend three times during 2012 as we maintain a payout ratio at about the 30% range.
If you look at fourth quarter 2012 highlights, our most recent quarter demonstrates momentum that we continue to have as we carry over into 2013. GAAP earnings per share were $0.23, up from $0.20 per share in the third quarter and $0.12 per share in the fourth quarter 2011.
Loan growth was strong, particularly in commercial loans, which grew4.8% in the fourth quarter alone. Core deposits were also very strong increasing 2.1% for the quarter. Net interest margin was 4.06% as compression in loan yields was offset by reduction in funding costs, and credit quality continued to be a highlight. With MTAs and net charge-offs, they’re just 50 basis points of average loans.
If you look at our momentum that I mentioned earlier at a time when our industry was facing continuing headwinds and slow growth in the economic environment and increasing regulatory burden, we believe Susquehanna has real momentum that provides the foundation for future success.
First, we have the right scale, structure, and strategy to take market share from the regional, national, and foreign competitors and drive continued loan growth at a rate succeeding economic growth. Our regional structure, which empowers local leaders as the face of Susquehanna in the communities is uniquely able to support the strategy to aggressively build our portfolio among middle market and small businesses who desire the breadth of services, we are able to provide who want to deal directly with decision makers who are also leaders in their community.
Additionally, the actions we took to actually manage our balance sheet as well as our recent acquisitions have led to peer leading net interest margin, which will continue to come under pressure, but we believe can be [distended] (ph) by continued deliberate focus on managing our funding costs.
One of the clearest opportunities to further improve our performance, both in the short and long term, is to decrease our dependence on margin by increasing our fee revenue. As indicated previously, we have a diverse portfolio of fee businesses, and while they each have experienced success independently, we believe the opportunities to cross sell both to and from these business lines across our entire footprint, which recently expanded and built full client relationships through our community banking structure will help to drive fee income to comprise a greater portion of our total revenues.
After successfully reducing our efficiency ratio to new lows this past year, we continue to seek ways to improve efficiency of our model, including enhanced use of technology and opportunity to streamline both operational and sales processes bank wide.
And finally, our capital position continues to strengthen as our earnings performance has improved providing us with more options and greater flexibility to allocate capital in a manner that improves total return to our shareholders.
If you look at our focus on 2013, to build on this momentum and drive performance, we recently completed an extensive process that resulted in a three-year strategic plan for the company. Our primary objectives on the plan are to continue to grow our core deposits, especially checking accounts; grow a more diverse loan portfolio with a continuing emphasis on commercial and non-residential consumer lending; increasing non-interest income as a percent of total revenues; deliver a consistent and differentiating customer experience that supports the Susquehanna brand of building enduring relationships; and to elevate employ engagement and deliver a differentiating employee experience.
Various initiatives are underway to support the plan including new and improved retail and commercial products, technology and mobile service enhancements, expansion of our C&I lending talent and capacity, increase cross-sell with our wealth management group and other fee generating businesses, process review and improvements, and enhancing our talent and leadership development activities.
Now, I’d like to walk you through Susquehanna’s opportunities with a little more detail on the loan growth side. We have demonstrated our ability to grow high quality loans even during challenging times. And as you could see on this slide, through the financial crisis recession aftermath, we achieved organic loan growth at a rate over 5% even as we significantly reduced our exposure to construction loans resulting in a more diverse portfolio.
Our recent performance demonstrates building momentum in both originations and loan growth, particularly in commercial loans where originations were up more than 50% over the fourth quarter of 2011. Continuing this trend is critical to our strategy of building full-client relationships. We are committed to significant growth of our C&I portfolio, which we are targeting to comprise about 25% of total loans.
We also believe there are some good opportunities to grow with the consumer portfolio. As we seek to increase these portfolios, we would expect to see a reduction in relative size of our commercial and residential real estate portfolios with a target of about 25% each.
Now, turning to asset quality, we are pleased with how our credit quality has improved particularly over the last 18 months. This can be attributed partly to the fact that our relationship-based security bank strategy. We seek to lend money in markets to customers we know with nearly 90% of our portfolio in our core Pennsylvania, Maryland, and New Jersey markets.
In addition to this most recent cycle, we were continuing to be very active and deliberate in our approach to identifying and resolving credit problems very early. As a result, our credit metrics are rebounding more quickly than many of peers, and achievement our teams reached without resulting [bulk] (ph) at sale of problem assets.
MTAs are now 96 basis points of loans, leases, and foreclosed real estate, and the coverage ratio is over 185%. I would also highlight that about 20% of the total portfolio has been market fair value through purchase accounting in the recent acquisitions. Excluding the marked acquired loans, our allowance is about 1.77% of legacy Susquehanna loans.
With growth and quality, we believe Susquehanna is in position with strength and with momentum in desirable markets. As you can see from the map on this slide, we have very attractive Mid-Atlantic footprint with offices located in Central and Eastern Pennsylvania, Southern New Jersey, across Maryland, and the Panhandle West Virginia. Our territory includes the metropolitan areas of Baltimore and Philadelphia as well as fluent suburb areas and strong stable communities like Lancaster and York. The economies of these areas are characterized by diverse businesses and stability provided by government, education, and health care.
As I previously indicated, we pursue our strategy through a regional bank model. The model includes 12 regions each with its own President and leadership team that serves as the face of Susquehanna in that market. Our regional Presidents report to their market CEOs for Pennsylvania, Maryland, and Delaware, who internally report to our President and Chief Revenue Officer, Andrew Samuel.
Our regional Presidents are leaders in their local markets with strong community ties. Customers will see them at their grocery store, the (indiscernible), at church, school, and major social functions. Their leadership and strength in building relationship with our customers will drive the success we are anticipating in these markets.
Looking at the market opportunities, we are excited by the opportunities within our adjusting markets. These markets have a higher [meeting] (ph) household income than the US generally, and include some of the wealthiest markets in the United States including Montgomery and Chester Counties outside of Philadelphia.
The Central Pennsylvania market is the core of the franchise and provides strong and steady growth. The opportunity for additional growth by increasing our market share is presented primarily in the metropolitan areas of Philadelphia and Baltimore. In these areas, industry disruption, consolidation in recent years left an empty space for sizeable institutions with local ties that offer both personal service and responsiveness of a community bank, and the capacity and expertise of a larger financial service company.
Susquehanna’s size, stature, and reputation continues to grow in both Philadelphia and Baltimore, and we believe, we’ve begun to feel a need for that go-to bank for business leaders in these communities. So, now I would like to invite Drew to share with you our Chief Financial Officer’s comments. He has about balance sheet, capital, and financial performance. Drew?
Thank you, Bill. Net interest margin is a significant recent highlight for us. In addition to the growth we achieved in core deposits, we recently took advantage of several opportunities to restructure our long-term debt, which has had significant impact on our funding cost.
In the fourth quarter of 2011, we used the bargain purchase gain from the Abington acquisition to offset the prepayment penalty to pay down approximately $679 million of Federal home loan bank debt at an average interest cost of 4.25%. And during the third quarter of 2012, we raised $150 million in senior debt and used the proceeds together with available cash at the holding company to redeem over $200 million in high cost trust preferred securities and subordinated debt.
As a result, we significantly reduced our funding costs, which combined with the benefits of our recent acquisitions has resulted in a peer-leading net interest margin. Although, we expect to experience some compression in the margin going forward, as core margin is impacted by the yield curve, we believe that through our strategies to increase our core deposits and the scheduled maturity of a significant amount of higher rate time deposits, we can continue to reduce our funding costs. We are targeting a margin of 3.90% for 2013.
A key strategic initiative as Susquehanna has been and will continue to be reducing high cost time deposits, especially single-service CDs and increasing core deposits. This change in deposit composition provides lower cost funding as well as higher customer retention rates.
As you can see, we have made good progress on this objective. At the end of 2007, time deposits accounted for 46% of our deposits, shrinking to just 30% at December 31, 2012, so that 70% of our deposit base is now core deposits.
As a result, our average cost to deposits has decreased significantly over the past two years. Nonetheless, we recognized that our cost to deposit still remains higher than many of our peers, and we believe that we have some opportunities to continue shifting our deposit composition and lowering our deposit costs.
Our efforts to leverage our large customer base and enhance market presence are yielding results in core banking fees, and we have also realized significant increases in 2012 fees from mortgage, vehicle leasing, and interest rates swaps.
For 2013 as Bill indicated, we are very focused on cross-selling all of our business lines to drive additional growth in fee revenues. Our initiatives to expand commercial lending and core deposit growth will naturally support this focus.
We believe the greatest opportunities for further increases are in our mortgage, wealth management, and insurance services, as well as increased service fees from a growing core deposit base. We’ve been very focused on increasing our efficiency and recently completed $58 million in cost saving initiatives in connection with the Abington and Tower mergers and within legacy Susquehanna operations.
As a result, we are now operating near our target efficiency ratio of 60%. Nonetheless, given the revenue pressures on the industry, we continue to manage expenses closely and look for opportunities to increase our operating efficiency. We see potential opportunities in this regard through the expanded use of technology, both to streamline internal operations and processes, and to enhance our delivery model with increased Internet and mobile capabilities.
Our capital position is strong with all ratios exceeding our management minimum targets, which are generally maintained at a 100 basis points over the proposed basal three minimums, including the conservation buffers. These capital levels are strengthened further by sustained earnings performance and our 30% dividend payout ratio. This strength provides us with additional opportunities to pursue our priorities for capital allocation to the ultimate benefit of our shareholders supporting continued organic growth, positioning for the changing regulatory landscape, continuing to increase cash dividends to shareholders, and considering on a very selective basis strategic M&A opportunities.
I will now invite Bill back to offer some final remarks.
Okay, thanks Drew. So, ultimately we are focused on improving profitability and overall return on equity. Our earnings per share have been steadily climbing which has put us in a position to increase our dividends to shareholders as we did three times in 2012.
With our strategic focus, the opportunities before us, and disciplined execution, we believe Susquehanna is well positioned for many years of high performance. So, I hope we provided you with some highlights and to why we believe Susquehanna is well positioned to achieve a continued success in both the short and long term. And at this point, we will be please to answer any questions you might have.
Okay. The first question here, do you think Susquehanna will announce the bank acquisition in 2013? This is for the audience.
Bill, hold up, well, you can if you want, yes, no, or maybe. All right, 40% say yes, 30% say no, 30% say maybe.
Okay, the next question. Would you like to see management to do strategically, one organic growth only; two, organic growth and a wealth management acquisition; or three, organic growth and a well priced bank acquisition?
Okay, most, at least half of the audience; organic growth and a wealth management deal.
Do you view Susquehanna’s financial guidance -- their financial guidance for 2013 has been conservative, inline, or aggressive for those of you that know it, again conservative, realistic and inline, or aggressive?
All right, everybody thinks it’s realistic and inline, okay.
And which performance metric should receive the greatest weight in determining managements instead of compensation; total shareholder return, earnings per share growth, ROA, or return on tangibles?
Return on tangibles, 60%.
What is your main concern if any with owning Susquehanna shares, is it growth, deal risk, margin outlook, or asset quality?
56% say deal risk, 33% say growth, okay.
So, it’s open to Q&A, feel free to -- please raise your hand and ask questions if you would like to.
Maybe why don’t we start with, Bill, since you seemed like you wanted to answer that question.
Can we just talk a little bit about M&A, and you know, whether or not it’s realistic to think that you guys might do a bank deal or not in this --?
Well, you know, realistically, you know, the company is 30 years old last year. In 30 years, we did 35 acquisitions, so for me to tell you we are not acquiring any stake, you probably wouldn’t believe me anyway, but I wouldn’t tell you that anyway. So, I will tell you that our top priority inside the company is organic growth. At $18 billion in assets, if we grow the franchise 5% to 8% a year, we are growing a billion and half dollars a year, so I view it as a free bank without the merger integration risk without the tangible book value dilution.
So, our top priority is organic growth. We know where we want to be and where we don’t want to be. We love the footprint we are in, so there aren’t that many deals in our footprint that moves the needle enough for us of size, it’s just a handful, and on that handful, none of them for sale. There could be a couple of small infills that we would do, that we may fill out at county that wouldn’t be of consequence and size that might fill out the mainline in Philadelphia Baltimore county, whatever the case might be.
But, in terms of large deals and opportunities, we are really focused internally at this point in time. We did a lot in 2012. In a 15-month timeframe, we bought two banks. We got $58 million in cost saves out of the operation. At the same time, we grew loans, we grew deposits, we increased profitability, we increased margin, and we increased dividend to shareholders.
So, we did a lot and lot; very, very successful last year. Now, it’s the question of being focused on sustainability of what we already have in place with some tweaks. So, top priority is internal growth about $1 billion to $1.5 billion a year. The only exception to that would be, we were so interested in acquiring some asset management companies basically in our footprint where we have a wonderful group of asset management companies headed up at Valley Forge Asset Management in King of Prussia who are managing $7.5 billion to $8 billion in assets right now. It is about 40% margin business. So, we would have a higher degree of interest and continue to build that both organically as well as through acquisition and also increase fee income as a result of that.
Matt, let me mention one more thing. Even when we look at acquisitions, you know we have to be disciplined; we’ve gotten calls from a lot of people. I would tell you that I’m not entirely (indiscernible) expectations are still realistic in many respects. When we do look at acquisition, assuming that meets our criteria of where we want to be in the market, we are looking at criteria that includes a 15% ROR at a minimum, a transaction where in the first full year of operation it has to be at least breakeven from EPS standpoint, dilution standpoint and hopefully accretive, tangible book value, with [diluted] (ph) payback period of less than five years or probably less than three years, and then we run that model against as to better off just buying back our stock, and if the answer is better off buying back our stock, we just won’t do the deal.
On the financial goal front, I think you mentioned, you know, you knew your targeted efficiency ratio is 60%, you have actually just got under that, I think this quarter on an operating basis, you know, your ROA goal has been about -- your target I think has been 1%, you’re bumping up against that. You do suggest that, you know, you’re looking for other efficiencies in the bank. Can you just talk to, whether or not we can assume that you might reconsider those targets and whether or not you may be able to do something better than that?
Well, you know, we certainly hope that in 2013, we’ll actually hit those targets and then we’ll kind of reset the bar, we have a 13 to 15 strategic plan in place, as I mentioned, we’ll kind of reset the bar at that point in time. I would also mention that, you know, at the quarterly conference call, we gave the expense run rate -- we gave was -- we think it is right on and there obviously is lot of pressure on us and all banks our size to increase backroom staff in the form of more stress test people, more asset liability people, more risk management people, that’s a reality, we’ve done that, we are in the process of doing that, and that has some cost associated with it.
But we also have -- we are also constantly taking a look at efficiency, and the operational flow (indiscernible), you know, just something that’s simple as returning e-statement, the customers that approach the hard statement has a significant cost save for us.
As we are rolling out, we just rolled out our next generation mobile products as we speak, and we are certainly watching the impact that has on the volume and the branches. We actually closed or touched about 69 branches last year as part of Tower Abington acquisition of the 260 branches. So, we’ll continue to take a look at how the mobile transaction volume affects staffing levels at the branches, therefore we have to consolidate branches or close branches as a result of decreased volumes there. We are certainly going to do that. I think every bank in the United States will probably look at the same thing.
Bill, you know, you touched on M&A just a few minutes ago and suggested that maybe the [bid-out] (ph) spread is still too wide, can you give us a color on where that’s come from over the last couple of years and how close are you to the point where that bid-out spread is becoming closer to doing a deal?
We look all the time, there are people who come to us, and there are many cases in the last couple of years where we said no, obviously. You get like a Virginia commerce deal that goes at 1.8, and then expectations go up a little bit for a while.
But, really we don’t see that spread narrowing much right now. That’s why you don’t see many deals. We believe that once, you know, all the regulatory rules get finalized and Dodd-Frank and people start realizing the back office investment they’re going to have make with the flat yield curve putting pressure on the margin, we think in the next couple of years, I think that will change around some, and the expectations will start to come down and you will start to see more details bid for. In the near future, we don’t see much of a change in the environment.
Yeah, let me just add a couple of comments to that if I can, you know, I think that absolutely positively, this industry size does matter, about think at $18 billion we can right where we need to be in terms of where we need to be, to be effective and obviously if we can get larger than that. I think it’s very difficult for banks less than $10 billion in size and lesser really have a niche, and obviously they don’t gain access to capital markets that easily.
We talked to a lot of banks that there aren’t quite used to talking about the (indiscernible)on the pay, those banks are smaller, they have Boards that are getting older, and I can tell you a real life story, that is when we bought Abington or we bought Tower, there were some similarities there. The similarities were simply this, at Abington the next four, five people we hired needed to be backroom people and not frontline revenue generation people. So, they just saw at a $1.2 billion more and more headwinds from a cost and an efficiency standpoint being [thrusted] (ph) in by the regulators.
In the case of Tower, a lot of the same things, Tower thought that if they would double the size, they still are going to have a problem sustaining shareholder value on a long-term basis. Both those banks decided that they would go with somebody that would be able to not only integrate them properly, but also ride the price of their stock up, and I think some of the -- I’m hoping that there are some more banks like them out there that have that type of thought process, not necessarily somewhere across the United States, you know, this issue of holding on what you have when costs are going up, returns are going down, shareholder value is being driven down, and the regulatory burden that you always hear about for banks of greater than 10 billion is there for banks, so less than $10 billion, it’s not only the dribble down theory, it’s a major dribble down theory, they are going to subject to the same type of issues that we are the banks (indiscernible) $50 billion, we are on the same industry.
So, I don’t think that the seller expectations have quite become totally realistic yet, conversely I would also you tell there aren’t as many buyers out there as it used to be. So, therein lies maybe some of the issues relative to why we don’t see the level of M&A activity everybody keeps projected.
The other thing just to follow up on the wealth management side, we’ve been looking at a few targets on the wealth management side, and the particular problem that comes up on the wealth management side is the tangible book value dilution payback period which has to be under five years, and under the new accounting rules, if you have an earn out, you have to present value that is part of your good will calculation immediately in the transaction today. So, what happens is to get your payback period under five years because all the goodwill you’re booking upfront including the earn out piece of it, really the calculation comes that bad, you’re going to afford to pay about 7 to 8 times EBITDA, and we found that a lot of the wealth management companies are still looking for like around 10 times EBITDA to want to move on and merge with somebody, so that’s been our biggest stumbling block there and that still hasn’t narrowed yet, I think most of the good wealth management companies are still looking for 10 times EBITDA.
Bill, you mentioned coming into 2013, you’re seeing some good momentum, can you clarify those comments, quantifying -- maybe not quantify them, but you saw from stronger loan growth in the fourth quarter, I think part of that came from C&I, part of that came from auto leasing, and maybe some increased activity from the Storm Sandy, but just curious as to when you make that comment, I assume that you’re talking about pipelines and activity, but…?
Yes, pipelines are strong moving into the first quarter and just as you mentioned C&I, we expect C&I to continue to do well, some of our consumer portfolios to continue to do well. We think construction has kind of bottomed out at about 6% or 7% of outstanding. So, we just see a lot of really good opportunities and some really, really solid pipelines there.
You know, as I did not mention CRE, we have always been a CRE [or E-bank] (ph) and always will be a CRE bank. If you think about what we are trying to accomplish in the next three years as we did in 2012, we are going to top out organic deposit growth, it just make sense that C&I is a major focus, because with every C&I relationship comes substantial deposits at the same time. There’s probably not a bank you talked to out there that isn’t chasing the C&I lending market like we are. Difference is we are doing it, 4.8% growth in the fourth quarter alone, 50% year-over-year. That portfolio is about $2 billion right now on a $12 billion, $13 billion portfolio. Again, we want to see that at about 25% of outstandings.
And that ironic part about that is a lot of growth -- a lot of good solid growth there is coming from the middle market side, small business still hasn’t quite participated. I think they are still worried about income taxable consequences and the cliffs and healthcare costs, it would be nice to see -- we are getting more than our share of the market, don’t get me wrong, but those organic growth numbers are 5%, next year it would be a lot easier for us if we get some more participation on the small business side.
Maybe on the margin, I know, you guys have given very specific quarterly guidance this year, so do not think there are really any surprises today, and I think you reiterated the 390 margin for the year. But can you give us a sense for, you know, whether there might be some flexibility in that margin, what you may or may not be incorporating or assuming in that guidance?
Yes, we believe the margin could be a little bit conservative, not a lot, and the two areas we are looking at are, first of all, we have $15 million in trust preferred -- high-cost trust preferred security still out there, they can’t be called until the basal three rules are finalized. If they are finalized sometime in the first half of this year, we will be able to call this. That would give us a little bit of boost to margin. And the second thing is, I think we’ve been fairly conservative with our purchase accounting assumptions in 2013, so there may be a little bit of upside there as well.
Anyway to quantify the impact of purchase accounting from the Tower deal?
Sure, on the impaired loans it’s on the accretable discount, it’s about 13 basis points a year, it was 13 basis points in 2012, and we are projecting it will be about the same 13 basis points in 2013.
Any questions in the audience? All right, you guys have a break out session, I think in Hong Kong B. And I’d like to thank Susquehanna for joining us.
Thank you very much.
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