Bryn Mawr Bank Corporation
Q4 2014 Earnings Call Transcript

Published: 23 Jan 2015

[Operator:]

Good morning, ladies and gentlemen. My name is Keith and I will be your conference operator today. At this time, I would like to welcome everyone to Bryn Mawr Bank Corporation’s quarterly conference call. All lines have them placed on mute to prevent and background noise. After the speakers’ remarks, there will be question-and-answer period. (Operator Instructions) Thank you. Please note this event is being recorded. It is now my pleasure to turn the floor over to your host, Duncan Smith, Chief Financial Officer. Sir, you may begin your conference.

[Duncan Smith:]

Thank you, Keith and thanks everyone for joining us today. I hope you had a chance to review our most recent press release. If you've not received the press release, it is available on our Web site at bmtc.com or by calling 610-581-4925. Frank Leto, President and CEO of Bryn Mawr Bank Corp. has some comments on the quarter and our strategic initiatives. After that, we will take your questions. The archives of this call will be available at Bryn Mawr Bank Corp.’s Web site or by calling 877-344-7529 referring to conference number 10057169. A replay will be available approximately two hours after this call concludes and will be accessible until 09

[Frank Leto:]

Thanks Duncan, and thank you all for joining our conference call today. I hope you had a chance to review our fourth quarter earnings press release which was issued yesterday after the market closed. We were pleased to have another year of record earnings. Our continued strong financial results are very encouraging and an endorsement of our sound business strategies. Before I get into the numbers for the quarter, I’d like to update you on our recent merger with Continental Bank Holdings. On January 1st the merger was completed successfully adding approximately $427 million in loans and $525 million in deposits. In addition, with 10 new branches and a well experienced staff, we’ve extended our presence within Montgomery County. And now have our first full service branch location in the City of Philadelphia. We’re very excited to be able to take advantage of growth opportunities that our expanded footprint has created. Also with one full quarter having elapsed since our acquisition of Powers Craft Parker & Beard, the transaction has already begun to produce positive results in our bottom-line. Bryn Mawr Trust is well positioned to offer an extensive array of banking and top-notch wealth management solutions and compressive insurance services, for both individuals, as well as commercial and institutional clients. And finally I’d like to take this opportunity to thank our outgoing Chief Executive Ted Peters for his 14 years of leadership. I couldn’t have asked for a better mentor or for a smoother transition and intend to continue to lead the organization with the same level of determination that has brought us to this point. I think you all know that Ted will be staying on as a Director and we will certainly rely on his sage advice as we move into the future. Now on to the numbers, we reported net income of $7 million and diluted earnings per share of $0.51 for the fourth quarter of 2014 as compared to net income of $6.5 million and diluted earnings per share of $0.47 for the same period in '13. Net income for the fourth quarter included pre-tax due diligence and merger-related expenses of $957,000 as compared to $155,000 for the same period in 2013. On a non-GAAP basis, net income excluding tax-affected due diligence and merger-related expenses was $7.7 million or $0.55 per diluted share for the fourth quarter of '14 as compared to $6.5 million or $0.48 per diluted share for the same period in '13. Some significant factors contributing to the results for the fourth quarter of 2014 included an increase in net interest income of 362,000 or 1.9% to $19.5 million as compared to $19.1 million for the same period in 2013. The increase was related to $131.6 million increase in average loans for the three months ending December 31, 2014 as compared to the same period in '13. This solid loan growth was partially offset by a decrease in average available sale investment securities of $57.8 million and a $33.1 million increase in long-term FHLB advances for the fourth quarter of 2014 as compared to the same period in '13. The income effect of this loan growth was partially offset by a 23 basis point decline in tax equivalent yield on portfolio loans for the fourth quarter of 2014 as compared to the same period in '13. This yield decrease was partially related to the effect of fair value accounting on acquired loans. When an acquired loan pays off early, any unamortized fair value mark is recognized in the interest income at once. During the three months ending December 31, 2014, the Corporation recognized in its loan yield 10 basis points relating to acquired loan payoffs as compared to 18 basis points for the same period in 2013. The provision for loan and lease losses decreased by $1.1 million for the fourth quarter of 2014 as compared to the same period in '13. The Corporation recorded a release from the allowance for loan and lease losses of $316,000 as compared to a provision of $812,000 for the same period in '13. As of December 31, 2014 the combination of improving credit quality metrics and positive economic indicators reduced the estimated losses inherent in the Corporation's loan and lease portfolio allowing for a release from the allowance. Non-interest income increased to $648,000 for the three months ending December 31, 2014 as compared to the same period in '13. A significant portion of this increase was a $400,000 increase in the net gain on sale of available for sale investment securities. During the fourth quarter of 2014 a net gain of $390,000 was recorded as compared to a net loss of $10,000 for the same period in 2013. Certain portions of the Corporation's mortgage backed securities portfolio were sold during the fourth quarter of 2014 in order to shorten its duration. This was a strategic decision in anticipation of the addition of a longer duration portfolio from Continental Bank. Fees for wealth management services increased by $157,000 for the fourth quarter of 2014, as compared to the same period in '13. The wealth management division’s assets under management, administration, supervision and brokerage increased by $432 million from December of 2013 to December 31, 2014 a new record level of $7.7 billion. The success of the division's strategic initiatives, new business and some market appreciation contributed to the growth. Also included in other non-interest income for the three months ending December 31, 2014 was $619,000 in insurance commissions related to the Powers Craft acquisition. Non-interest expense for the three months ended December 31, 2014 increased by $1.3 million as compared to the same period in '13. Largely contributing to this increase in non-interest expense was $802,000 increase in due diligence and merger-related expense for the fourth quarter of '14 as compared to the same period in '13. The expenses were related to the Powers Craft and Continental Bank transactions. In addition, furniture, fixtures and equipment expense increased by $341,000 as certain infrastructure improvement projects largely related to systems upgrades were finalized in the third quarter and began amortizing in the fourth quarter. Total portfolio loans and leases of $1.65 billion as of December 31, 2014 increased by $105.1 million or 6.8% from '13. Commercial mortgages, residential mortgages, and construction loans accounted for the majority of the increase. Non-performing loans and leases as of December 31, 2014 were $10.1 million or 0.61% of total portfolio loans and leases as compared to 10.5 million or $0.68% of loans and leases as of December 31, 2013. For the three months ended December 31, 2014 net loan and lease charge-offs were $697,000 as compared to $324,000 for the same period in '13. Total assets as of December 31, 2014 were $2.25 billion, an increase of $184.8 million from December 31, 2013. Mainly accounting for this increase were loan originations and increase in interest bearing deposits with other banks, partially offset by a decrease in available for sale investment securities. Deposits of $1.69 billion as of December 31, 2014 increased $96.7 million from '13. The increase was comprised of increases in wholesale deposits, non-interest bearing deposits and other core deposits partially offset by decreases in retail time deposits between the dates. As of December 31, 2014 the capital ratios for the Bank and the Corporation indicate levels well above the regulatory minimum to be considered well capitalized. However, the tangible equity ratios for both the Bank and the Corporation as of December 31, 2014 have declined from their third quarter levels. These decreases were partially caused by increases unrealized losses on the Corporation's pension plans as a result of decreases in the discount rate used to value the pension liability along with revised mortality tables. In addition, the $9 million of goodwill and intangible assets recorded in connection with the Powers Craft acquisition and the $151.7 million increase in cash and interest bearing deposits with other banks as of December 31, 2014 also contributed to the decline in the tangible equity ratio. The effects of these decreases were partially offset by increases in retained earnings and unrealized gains on available for sale investment securities between the dates. In closing, I’d like to talk a bit about our future plans for the organization. Over the past eight months, we've been busy developing a five year strategic plan which is designed to build upon the many things that we currently do by expanding their scope. For example, two of the initiatives entail hiring seasoned lenders in both our residential mortgage and lending area, as well as in our Hershey area. As a result, we expect a short lag before we are able to realize the increased loan volumes and new client relationships resulting from these new initiatives. In addition, the merger with Continental Bank should allow us to take advantage of certain restructurings and cost savings. However, much like the restructurings that occurred after acquisitions of the Private Wealth Management Group of the Hershey Trust Company and the Davidson Trust Company there will be some upfront cost that will have to be absorbed. In particular, these upfront costs will include various upgrades to our back office systems designed to increase our scale, as well as provide process improvement and increase efficiency and to better integrate future acquisitions. As a result, we do not expect the anticipated cost savings related to the Continental Bank merger to begin to be realized until the end of -- till beginning of 2016. For the past 87 consecutive quarters we paid dividends to our shareholders. We are very proud of this record and feel very fortunate to have the continued loyalty and support of our shareholders. Therefore I am pleased to announce that on January 22, 2015 the Board of Directors of the Corporation declared a quarterly dividend of $0.19 per share payable on March 01, 2015 to shareholders of record as of February 03, 2015. In summary, we believe our business model is sound, with an improving economy locally and nationally. We are in an excellent position to take advantage of opportunities for continued profitable growth and strong performance. We continually evaluate acquisition opportunities as they arise with a focus on quality and compatibility and we believe we are poised for continued profitability and growth. With that we will open the lines for questions. Operator, would you please compile the Q&A roster? Question-and-Answer Session

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Chris McGratty with KBW.

[Chris McGratty:]

Duncan can you help me with the kind of how should we thinking about the balance sheet in the first quarter, obviously deal closing Jan 01, I am not sure if there is any restructurings you talked about the securities book can you kind of speak to that. How should we be thinking about kind of the earning asset levels for first quarter and maybe we can work from there? Thanks.

[Duncan Smith:]

Well, as Frank mentioned I think the loan pickup was about 427 million, the securities book pickup is going to be about 185 million. So, those two will contribute to earning assets. As far as restructurings, with the influx of cash we got at the end of the year from some year-end deposits coming in we have already paid off approximately 100 million in short-term borrowings that Continental had out that were overnight to 30 day bar. So we feel very comfortable paying that down and we are going to take a look to see if there is any other borrowings that we may be able to exit. So, while initially we picked up say 800 million we are going to drop back 100 million of that right away, and look to, the Continental investment portfolio probably has a five year duration whereas we are about a 2.5 duration. So we will probably prune that back a little bit and there will be some other opportunities during the quarter as we go through.

[Chris McGratty:]

Okay. And kind of with the commentary that the investments need to be made to kind of scale up to be a much bigger Bank. I think at the time of the announcement you said 5% accretion in '15 and 7% in '16. Should we now assume zero in '15 like I think I heard you say and should we get the whole 7% in '16 or is that going to be pushed into '17.

[Duncan Smith:]

Well, one of the things that we are going to do and consistent with prior quarters is a lot of the merger costs that will come out a lot of the redundant cost for example say redundant staff and/or say the redundant systems will be run through the merger expense line. So while they will come out as GAAP expense and will reduce our earnings they are segregated and so they will start to go away by the fourth quarter, they are just going to start to go away right away but they will gradually go away a lot of them will end at the end of the third quarter. And as Frank said by beginning of the fourth quarter we will have really all of that out.

[Chris McGratty:]

So if we are thinking about and I will step back after this, if we are thinking about kind of a starting point for kind of total expenses in the first quarter Duncan can you help us with that? And then within that what might be kind of you would guide us to take out in terms of one-time items?

[Duncan Smith:]

I had a feeling you would ask that question, or it would be asked. So just I actually prepared to give everybody a couple of the numbers. So, if we start with non-interest expenses we are running approximately 20 million give or take, 0.5 million every quarter. So I would anticipate the new number to be approximately 25 million excluding the merger costs per quarter, so a pick of about 5 million per quarter. On the net interest income number, if you take our '14 divided by 4 or about 19 million a quarter we expect that to be 25 million to 26 million a quarter. And then on the non-interest income they don’t have a wealth presence. So we’re not going to get a wealth pick-up initially we will from new business development. But we have done some things on the residential mortgage side where we hope to sell more mortgages into the secondary market and we have picked up some additional mortgage originators. So we are running in '14 about 12 million a quarter in non-interest income and we expect to be about 15 million a quarter in non-interest income next year and part of that is also the revenue from the insurance acquisition, which is incremental or at least an incremental 500 or 600 per quarter. So that should be a little bit of a color on what we think there.

[Operator:]

Thank you. (Operator Instruction) Alright, we do have a question from Matthew Breese from Sterne Agee.

[Matthew Breese:]

Kind of related to the question about the integration of Continental, how would you expect the margin to shake out on a core basis in 2015?

[Duncan Smith:]

When you say core, can you clarify what you mean with core?

[Matthew Breese:]

Yes, so I guess what I’m thinking about is, the total margin including accretable yield and then excluding accretable yields, how would you expect the core margin to behave in 2015?

[Duncan Smith:]

Okay, we thought about that one also. And so if you see where we were in 2014 we were at 4% for the first two-three, two quarters and then we dipped down, thank you, we dip down to 3.87 and then we are coming in at 3.84. So that was the all-in number and you can see at the bottom our press release that we showed that the year -- accretable yields from the mergers in the last two quarters dropped down from say 20 basis points in the June quarter to 11 basis points in the September and December quarter. So the two factors I would say is we’re going to see that accretable yield go up due to the Continental acquisition. The mark is still being determined but it’s going to be somewhere north of $10 million all-in mark and that’s going to add at least probably 4 to 5 basis points per quarter for the foreseeable future. At the same time, as with all banks we’re continuing to see pressure with the continued lower rate environment on the loan and lease yields. So we are defending that as well as we can. But we will give a little bit on yield to get the quality loans. And where we wouldn’t sacrifice on the credit quality we might give a little bit on yield. So we’re going to see -- I would say over the year you are going to see a slight 1 to 2 basis points maybe per quarter degradation over the year.

[Matthew Breese:]

Okay that’s very help. Maybe switching a little bit to the provision line item this year was a little bit more difficult to model, just curious how -- if you have any insight as to how we should be thinking about that in 2015?

[Duncan Smith:]

Okay that’s another good question. As you know the calculation of the provision these days is a lot of it’s based on some of your external metrics along with your meaning external economics metrics along with your asset quality. So our asset quality continues to be very good and we don’t see anything on the horizon for '15 that looks bad. At the same time the metrics, external metrics have improved and we don’t really expect them to get too much better because there are actually some headwinds going the other way. So I think you will see some normal provisioning you could call normal provisioning anywhere from 250 to 750 potentially up to a 1 million. But I don’t think we’ll see too many reserve releases in 2015 in my take. So I would say we ended the year about 850,000 provision I think probably at least double that for '15 may be even you can even go up to a 1 million a quarter or more.

[Matthew Breese:]

Okay that’s really helpful as well. And maybe you could talk about the insurance acquisition the Powers Craft Parker & Beard acquisition obviously some goodwill created out of that. I was just curious what the overall impact from a revenue perspective will be and along those lines what the earn-back, the standalone earn-back from that acquisition was?

[Duncan Smith:]

Well a couple of things and Frank and we have Gary Madeira our Head of Wealth here he may jump in and Frank may jump in here, but just a couple of things to think about. This is a foundation agency and it really took our insurance revenue from almost an immaterial number about 120,000 a quarter to 650 a quarter and that's just getting started, so we expect to have some very good growth in that business as we go forward. But the earn-back is we paid all cash for this, so we didn't issue equity in this transition you could say theoretically there should be some equity but we had good capital numbers. But the earn back is probably going to be within our parameters that we set out for all mergers within the 3 to 5 year earn back period and that could accelerate depending on the earnings growth.

[Operator:]

Thank you. (Operator Instructions) Alright there is nothing more at the present time, so I would like to turn the call back over to management for any closing comments.

[Duncan Smith:]

Well thank you all for joining the call today and we look forward to a very good 2015, thanks.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a nice day.