BMTC: Strong Loan and Deposit Growth, Low Anticipated Expense Growth Drive Increased EPS Estimates; Higher Target Price; Reaffirm Neutral Rating.
Bryn Mawr Bank Corporation (BMTC – NASDAQ – Recent Price: $39.86)
Rating: Neutral / Buy Price: $37.00 / Target (Sell) Price: $42.00
4Q19 Results: Bryn Mawr reported 4Q19 net income of $16.4 million, little changed from the $16.4 million recorded in 3Q19. On a per share basis, 4Q19 EPS was $0.81, unchanged from the $0.81 recorded in the prior quarter. Reported 4Q19 EPS fell a penny short of our $0.82 estimate but bested the $0.78 median Street estimate by $0.03. Lower-than projected net interest income, a higher loan loss provision, and higher noninterest expenses were offset partially by higher-than expected noninterest income and a lower effective tax rate.
Highlights of the quarter include:
· Gross loans held for investment grew $148.6 million or 4.2% sequentially, substantially exceeding the 0.4% growth we anticipated. Originated loans grew $183.0 million or 5.8%, while acquired loans declined $34.5 million or 8.6%. In terms of loan types, declines of 1.8% in home equity loans, 3.0% in residential mortgage loans, and 0.1% in C&I loans were a drag on growth in 4Q19. However, these drops were more than offset by increases of 8.6% in commercial mortgages, 5.5% in construction loans, 13.2% in consumer loans, and 1.2% in leases.
· Total deposits rose $143.8 million or 3.9% linked-quarter. Noninterest bearing demand deposits declined $6.2 million or 0.7%, and savings accounts dropped $28.1 million or 11.3%. Meanwhile, other core deposit categories grew noticeably in 4Q19, as interest bearing checking accounts climbed 21.3% and money market accounts advanced 12.5%. This led to a $255.1 million or 8.8% rise in core deposits. Total wholesale deposits and CDs declined $111.3 million or 13.3% linked-quarter. Core (non-CD) deposits advanced to 82.5% of deposits compared to 78.8% at September 30, 2019 while wholesale deposits and CDs decreased to 17.5% from 21.2%. BMTC’s loans-to-deposits ratio stood at 96.1% at December 31, 2019, up from 95.9% as of September 30, 2019.
· Net interest income declined $1.4 million or 3.8% sequentially as a 1.3% increase in average earning assets was offset by 18 bps of NIM compression to 3.36% (on a tax equivalent basis). We had projected 7 bps of NIM compression. Part of the reason for the NIM compression was a significant drop in purchase accounting accretion, which contributed 15 bps to the NIM in 3Q19, but just 10 bps in 4Q19. Absent accretion, the NIM contracted 13 bps in 4Q19 compared to 3Q19, as average loan yields (excluding accretion) declined approximately 30 bps and AFS securities yields declined 18 bps, resulting in a 25 bps decline in average earning asset yields (excluding accretion). Meanwhile, the cost of interest bearing deposits fell 13 bps LQ, leading to a 14 bps drop in the average cost of interest bearing liabilities.
· Noninterest income increased $3.8 million or 19.5% linked-quarter. The main drivers of the increase were an $846k or 7.8% advance in wealth management revenues, aided by 6.0% sequential growth in assets under management, and a $3.3 million jump in capital markets revenue driven by higher interest rate swap transaction revenues. These advances were partially offset by a $176k drop in insurance commissions, and a $121k decline in “other” noninterest revenues.
· Noninterest expense grew $1.3 million or 3.6% compared to 3Q19. The primary drivers were a $902k or 5.1% rise in salaries and wages, and a $710k or 68.0% increase in professional fees. occupancy, data processing, and “other” noninterest expenses also contributed to the overall rise in noninterest expenses. Partially offsetting these increases were declines of $603k or 18.3% in employee benefits and $472k or 91.8% in Pennsylvania bank shares tax expenses.
· Bryn Mawr recorded a loan loss provision of $2.2 million in 4Q19, compared to the $0.9 million posted in 3Q19, despite a 69.8% decline in net charge-offs from $1.3 million in the prior quarter to $0.4 million in 4Q19. The lower charge-offs were mainly the result of a $1.1 million recovery posted in 4Q19. The higher provision was mainly related to the increased level of loan production in the quarter.
· The effective tax rate in 4Q19 was 20.4%, down from the 21.2% rate recorded in the prior quarter.
· Bryn Mawr experienced a noticeable decrease in nonaccrual loans in 4Q19. Nonaccrual loans retreated $3.5 million or 24.6% sequentially. As a result, NPLs/Loans held-for-investment ratio declined from 0.40% in 3Q19 to 0.29% in 4Q19. Meanwhile, NPAs/Assets dropped 9 bps to 0.20%. The NCO ratio was 0.04% in 4Q19, down 11 bps from the 0.15% registered in the prior quarter. Reserve coverage of loans HFI climbed slightly to 0.61% in 4Q19, up from 0.59% at the end of the prior quarter.
· Wealth assets under management, administration, supervision and brokerage grew $938 million or 6.0% sequentially to $16.5 billion.
· Bryn Mawr’s regulatory capital ratios rose modestly again in 4Q19. The leverage ratio climbed 26 basis points linked-quarter to 9.33%, while the tier 1 risk-based, and CET1 ratios rose 10 bps, and 12 bps, respectively. Meanwhile, the total capital ratio rose 110 bps compared to September 30, 2019 levels. The regulatory capital ratios all remain well in excess of the regulatory minimums. The TCE ratio, on the other hand, declined to 8.10% from 8.60% in 3Q19, while tangible book value (TBV) per share increased to $20.36 from $19.75.
· Bryn Mawr was apparently inactive once again in the 1 million share stock repurchase program announced in 1Q19. In fact, the period-end share count grew by approximately 2,000 shares in 4Q19. Management currently intends to try to keep the share count relatively flat in 2020, using buybacks to offset any modest growth in the share count from other means.
Earnings Estimates: We are making a few notable changes to our earnings model as a result of 4Q19 results. After a strong quarter of loan and deposit generation, we have slightly increased our balance sheet growth estimates. Management has long guided toward a range of 5%-7% loan growth, and our revised estimates take us closer to the top end of that range. Of course, following the growth exhibited in 4Q19, this growth now starts from a higher base. On the other hand, the NIM compression in 4Q19 was greater than we anticipated. Bryn Mawr has a significant portion of floating rate loans, many of which are tied to LIBOR. As interest rates have declined, this has resulted in quicker repricing of loans compared to deposit costs. We expect some additional NIM pressures in 1Q20, and a fairly stable NIM after that, but again, these assumptions now start from the lower base established in 4Q19. The last significant change reflects the higher expenses incurred in 4Q19. Management has made significant investments in technology and infrastructure in recent years, and they hope to realize the benefits of these investments in 2020 while keeping expense growth minimal in 2020. We are continuing to project growth of roughly 2% for the year, but this is from the higher-than-expected base established in 4Q19. One additional change we’ve made does not affect the income statement. Management suggests that the incremental increase to the loan loss allowance as a result of adopting the CECL accounting standard in 1Q20 will be no larger than $6.8 million. We had been using a $10.0 million increment, but we have reduced that to the $6.8 ceiling suggested by management. This change affects the balance sheet and book value but does not flow through the income statement.
After making the preceding adjustments, we are raising our 2020 EPS estimate from $3.05 to $3.14 and raising our 2021 EPS estimate from $3.13 to $3.28. The bulk of the increases stem from the larger balance sheet expectations.
Stock Price Implications: BMTC’s similar size peer institutions in the Pennsylvania, New Jersey and Delaware region are currently trading at median multiples of 12.7x TTM EPS, and 142.9% of TBV. BMTC is trading at a modest premium in terms of the EPS multiple, 13.6x TTM EPS, but a considerably larger TBV premium of 195.8% of TBV.
Reflecting the strong balance sheet performance in 4Q19 and our higher EPS projections, we still believe the outlook for BMTC in 2020 is very good. With valuations increasing industrywide, we are raising the multiple we use to value BMTC stock from 12.5x trailing EPS to 13.5x. Applied to our $3.14 EPS estimate for 2020, this results in a $42.00 price target, a $3.00 increase from our prior target. Our target price implies a gain of 5.4% from the current price and a total return, including the stock’s 2.61% dividend yield of 8.0%. Consequently, we are maintaining our Neutral rating on shares of BMTC.