Bryn Mawr Bank Corporation (BMTC) posted earnings of $2.93 per share in 2019, which were mostly in line with expectations. Going forward, earnings are expected to increase on the back of continued loan portfolio expansion. However, an increase in provisions charge and low growth in non-interest expenses are expected to somewhat curtail bottom-line growth. Overall, earnings are expected to increase by 8% in 2020 to $3.16 per share. The estimated one-year ahead target price is quite close to BMTC’s current market price; hence, I’m adopting a neutral rating on the stock.
Loan Growth Likely to Miss Management’s Target
As mentioned in the last investor presentation, the management is targeting to grow loans by 5-7% in 2020. They believe that an expansion of teams for commercial real estate, CRE, and commercial and industrial loans, C&I, segments can help BMTC achieve the target. However, I think the company might miss this target as it appears too ambitious to achieve when uncertainty is likely to remain high this year. The upcoming presidential elections and the resultant political uncertainty are likely to deter businesses from borrowing for capital expenditure purposes in 2020. Moreover, despite some developments in trade negotiations between China and the United States, uncertainty related to trade remains because progress can easily be reversed. The high level of uncertainty is likely to dampen demand for credit this year.
Another reason why the company is likely to miss management’s growth target and see a deceleration in loan expansion is that competition is likely to remain intense in BMTC’s main coverage region of the Boston-Washington corridor. Consequently, I’m expecting BMTC’s loan growth to slow to around 4% in 2020 compared to 7.6% in 2019. The following table shows my estimates for BMTC’s loan growth and other key balance sheet items. I am assuming that deposits will increase in line with loans because the management mentioned that they wish to maintain the loan to deposit ratio at around 100%.
The expected loan growth of 4% is likely to drive net interest income up this year, thereby contributing to the bottom-line growth. The impact of loan expansion on net interest income is expected to be partly offset by slight pressure on net interest margin, NIM, due to the rate environment. As inferred from guidance given in the investor presentation, the management expected NIM in 2020 to be 4-14 bps below the NIM for the third quarter of 2019. I’m expecting BMTC’s NIM to decline by 14bps in 2020 compared to 2019, as shown in the following table.
The combined effect of low loan growth and NIM compression is expected to lead to a net interest income increase of 5.6% year over year in 2020. I’m expecting net interest income to be the chief driver of earnings growth this year.
Provisions Charge to Rise Due to Loan Growth, CECL Adoption
BMTC reported provisions charge growth of 142% quarter over quarter in the last quarter of 2019, which surpassed my expectation. As mentioned in the earnings release, the growth was driven by new loan origination and not by a worsening of credit quality. Going forward, I’m expecting credit quality to remain strong; however, the provisions charge is expected to increase due to a rise in loans as well as the adoption of a new accounting standard for credit losses called CECL. I’m expecting provisions charge to be slightly higher initially under the CECL accounting method than under the old incurred loss model. As a result, I’m expecting BMTC’s provisions charge to increase by 3.4% in 2020 compared to 2019.
CECL will also have a large one-time initial impact on allowances for loan losses, which will directly reduce equity. I’m expecting CECL to decrease equity book value by $6.1 million in the first quarter of 2020. This expectation is based on guidance given in the earnings release that CECL can lead to an estimated addition of at most $6.8 million to the December 31, 2019, allowance level.
Earnings Expected to Increase by 8%
Apart from higher provisions charge, a modest increase in non-interest expense is also expected to constrain earnings growth this year. I’m expecting BMTC’s operating expenses to increase by a rate of 2% year over year in 2020. The estimated growth rate is low because, as mentioned in the earnings release, the management hopes to control future increases in expenses until the operating environment (particularly the interest rate scenario) improves. Despite management’s cost cutting efforts, non-interest expense growth is expected to be positive this year because of the balance sheet expansion and the resultant increase in administrative expenses.
On the other hand, earnings growth is expected to receive support from an increase in non-interest income. As mentioned in the investor presentation, the management is targeting 4.0-6.0% growth in 2020 on the back of continued momentum in wealth management and correspondent banking. I’m expecting non-interest income to grow by 2.6% this year. Together with the increase in net interest income (discussed above), the growth in non-interest income is expected to boost earnings in 2020. I’m expecting BMTC’s earnings to grow by 8% year over year in 2020 to $3.16 per share. The following table presents my estimates for key income statement items in 2020.
Due to the prospects of an increase in earnings, I’m expecting BMTC to raise its quarterly dividend to $0.28 per share in the second quarter of 2020 from the current level of $0.26 per share. This will lead to full-year dividend of $1.10 for 2020, up 7% from $1.03 in 2020, and implying a dividend yield of 2.76%.
Considering the earnings estimate, dividend forecast, and CECL impact, I’m expecting BMTC’s equity book value to increase by 5.8% to $32.05 per share by the end of 2020. Assuming goodwill and intangibles remain unchanged, tangible book value per share is expected to reach $22.0 per share by the end of the year.
Limited Price Upside Expected
BMTC’s average price to tangible book multiple, P/TB, in 2019 was 1.85. Multiplying this average P/TB ratio with the forecast tangible book value per share of $22.0 gives a target price of $40.7 for December 2020. This price target implies an upside of only 2.1% from BMTC’s January 17 closing price. The following table shows the sensitivity of the target price to P/TB ratio.
As the December 2020 price target is quite close to the current market price, I believe the stock is not attractive at the present level. As a result, I’m adopting a neutral rating on BMTC. The company has decent earnings growth prospects, therefore, it is advisable to watch for price dips. An entry point of $37.0, which is 10% below the target price, appears to be a feasible entry point.
Disclosure: I/we 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.
Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.