Bryn Mawr Bank Corporation
Q3 2013 Earnings Call Transcript

Published: 26 Oct 2013

[Operator:]

Good morning, ladies and gentlemen. My name is Amy and I will by our conference call operator for today. At this time I would like to welcome everyone to the Bryn Mawr Bank Corporation’s quarterly conference call. (Operator instructions.) It is now my pleasure to turn the call over to your host, Duncan Smith, Chief Financial Officer. Sir, you may begin your conference.

[J. Duncan Smith:]

Thank you, Amy. Thanks everyone for joining us today. I hope you had a chance to review our most recent press release. If you have not received our press release it is available on our website at www.bmtc.com. Ted Peters, Chairman and CEO of Bryn Mawr Bank Corp has some comments on Q3 and our strategic initiatives. After that we’ll take your questions. The archive of this call will be available at Bryn Mawr Bank’s website or by calling 877-344-7529 and replay passcode 10030506. A replay will be available for approximately two hours after the call concludes. Before we begin please be advised that during the course of this conference call management may make forward-looking statements which are not historical facts. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include but are not limited to the words “may,” “will,” “would,” “could,” “should,” “likely,” “possibly,” “probably,” “potentially,” “predict,” “contemplate,” “continue,” “believe,” “expect,” “anticipate,” “outlook,” “project,” “forecast,” “are optimistic,” “are looking,” “intend,” “plan,” “target,” “estimate,” or words or phrases of similar meaning. Forward-looking statements by their nature are subject to risks and uncertainties. A number of factors, many of which are beyond the corporation’s control, could cause actual conditions, events, or results to differ significantly from those described in these forward-looking statements. All forward-looking statements discussed during this call are based on management’s current beliefs and assumptions and speak only as of the date and time they are made. The corporation does not undertake to update forward-looking statements. For a complete discussion of the assumptions, risks, and uncertainties related to our business you’re encouraged to review our filings with the SEC located on our website. Thanks. Now I’d like to turn the call over to Ted.

[Ted Peters:]

Thank you, Duncan, and thank you everyone for joining us today. I’d like to also mention that joining us as usual are Frank Leto, who is Head of our Wealth Management business; and Joe Keefer, our Chief Lending Officer. I hope you all have had a chance to review our Q3 earnings press release that we issued yesterday after the market closed. We are pleased with our continued strong quarterly results and we are optimistic that we will produce a strong finish to 2013. Reported net income of $6.4 million and diluted earnings per share of $0.47 for Q3 2013; net income for the Q3 2013 increased $978,000 or 18% from $5.4 million for the same period in 2012. It should be noted that net income for Q3 2013 included pre-tax due diligence and merger-related expenses of $328,000. Increases in net interest income and Wealth Management revenues were significant factors contributing to our solid performance in Q3 2013. However, partially offsetting these increases were decreases in the gain on sale of residential mortgage loans and investment securities available for sale. The overall results for Q3 2013 as compared to the same period in 2012 were affected by the November 12 acquisition of deposits, loans, and a branch location from The First Bank of Delaware. Noninterest expense for the three months ended September 30, 2013, increased $434,000 to $19.3 million as compared to $18.9 million for the same period in 2012. Salaries and benefits increased $302,000 primarily as a result of adding the branch and lending staff from The First Bank of Delaware and the new personnel for the Bala Cynwyd branch that opened in December, 2012. Partially offsetting these new personnel costs was the decrease in incentives paid to the residential mortgage originators and other factors. Net interest income for Q3 2013 was $18.5 million, an increase of $2.6 million or 16.2% compared to Q3 2012. The primary contributors to the net interest income increase between the periods were

[Operator:]

Certainly. (Operator instructions.) And our first question comes from Chris McGratty at KBW.

[Chris McGratty:]

Hi, good morning, guys.

[Ted Peters:]

Chris, good morning.

[Chris McGratty:]

Duncan, on the margin, can you help us with the near-term outlook? Obviously you got a little bit of a bump in the securities yields but your yield at 1.40% is still pretty darn low. Can you talk about what you’re buying and whether the recent uptick in rates suggests that the floor in the security (inaudible)? Thanks.

[J. Duncan Smith:]

Could you repeat your question about the floor? I didn’t hear that.

[Chris McGratty:]

The 1.40% security yield in the quarter, is that a good level, is that a stable level or will that level continue to go up as you kind of turn over the book; and how it relates to overall the margin outlook for the company.

[J. Duncan Smith:]

Well with the portfolio the dollars have been steady. We have not been buying any securities the last 60 days as our loan funding has been stronger. So we may let that run down to the $300 million level. But the reason the yield went up is due primarily to the mortgage backed securities in the portfolio where the prepayment speeds have dropped, and that was a result of rates increasing. So I don’t have an exact number but I think those prepayment speeds should continue the way they are so we should continue at that number. There’s no anomalies in there. And we are getting good cash flow so we will reinvest but we’re going to keep the duration around the three-year mark and keep it short as we need the cash for fund loans.

[Chris McGratty:]

And then as it relates to the overall margin outlook given your, it sounds like a more optimistic growth outlook – and maybe Joe could add a comment there. How should we think about absolute margin present the next few quarters?

[Ted Peters:]

This is Ted. I think we’re going to see a slippage, a slow slippage in the margin over the next year until we start getting some rate relief. We’ve done a number of things which we’ve mentioned to improve our margin including subordinated debt, paying that off. We actually paid off the trust preferred a year or so before that. We prepaid a Federal Home Loan Bank advance. Our loan demand fortunately has been very nice and we’ve had a very strong Q3 in loans which has certainly helped us as well, but we, as I said a couple times we don’t have any more rabbits to pull out of the hat on the liability pricing. Our cost of funds on deposits is one of the lowest in Pennsylvania if not the lowest, so we’re looking for… It’s a rate volume issue as you know, Chris, and as everyone knows on the call, so we’re looking for increased volume and probably the rate to be down a little teeny bit.

[Chris McGratty:]

Great. And Joe, maybe a comment on Q4 loan growth expectations?

[Joe Keefer:]

Yeah, we had a very strong pipeline going into Q3 and as it turned out we closed the majority of it. So that usually doesn’t happen. But if I look going into Q4 the pipeline still remains very strong. So I don’t think we’re going to show an annualized run rate of 20% but I think it’ll probably look more like the Q2 to Q3 loan growth. So for the year we’ll probably show year-over-year loan growth north of 9% which is better than what I expected. So I feel pretty good about it and I think we’ll go into ’14 with a strong pipeline as well. A lot of the new hires that we have done in the last three or four years and continue to do have really paid dividends, so we feel good about that.

[Chris McGratty:]

Just one last one, then I’ll jump out of the queue. Ted, you’ve got a year till the retirement – can you update us on the search at this point?

[Ted Peters:]

Yes. The Board has formed a committee of independent directors, three of them who have formed a search committee. The whole Board obviously is involved but they’re heading it up, and they have retained a search firm. In addition we’re looking at internal and external candidates. The plan is to have someone probably onboard by sometime in Q2, mid- or maybe late-Q2, and then there would be an overlap period with me until the end of 2014.

[Chris McGratty:]

Great, thank you.

[Operator:]

(Operator instructions.) And our next question comes from Jason O’Donnell at Merion Capital.

[Jason O’Donnell:]

Good morning.

[Ted Peters:]

Good morning, Jason.

[Jason O’Donnell:]

It looks like deposit growth has stalled a little bit over the last few quarters and you’re funding a little bit more with borrowings and excess liquidity. How do you think about the funding strategy going forward just given kind of the environment we’re in? At some point do you feel like you may have to ratchet deposit costs up a little bit? Or how do you think about the funding strategy as you look out over the next few quarters?

[Ted Peters:]

Good question. First of all as we mentioned we have had a planned run off in certificates of deposit really for two or three years. When we acquired First Bank of Delaware they had a very large CD portfolio – we’ve just let that run off as well. And as a result that’s really helped our cost of funds. We have had a strategy, once again, this is a longer-term strategy of three or four or five years, to build core deposit accounts – and I’m talking about business and personal checking, money market and savings which are relationship-core accounts, and to fund ourselves through those. It’s a zero sum game in the Philadelphia area, so for every account that we get someone loses one. And I’m happy to say, proud to say that we have been the winner in this for the last five years and every year our core account growth is going up 6.5%, 7.0% of good core accounts. Those aren’t the dollars. It’s not the dollars but it’s the actual accounts. And so our strategy was to win the war of accounts and it’s been a good strategy. We are very, very well positioned when rates go up. First of all these core accounts which we’ve been really working hard to open, they’re not overly price sensitive. So we know when rates go up they’re going to lag and whatever, so if rates go up 50 bps our deposit increases will certainly be a lot less than that. So they’re good relationship core deposits. Our non-interest bearing deposits I believe that at the end of this quarter… Last quarter they were 26%; I can’t remember what they were this one. They’re probably 24%, 25%, 26%. I mean that’s as you know terrific – I mean anything in the mid-teens is considered okay or pretty decent. We will use as needed wholesale funding, whether it be a Federal Home Loan Bank advance or something else if needed. But our loan growth was particularly strong. Our loan growth as you know in Q1 was not as strong, in Q2 it was a little better, and Q3 was very strong and we’ll see if it increases. We always have the ability to do a CD program and still bring in deposits and not really do it on a wholesale funding basis. We’ve opened a number of new branches, we opened up a branch in Bala Cynwyd recently – actually we did it about a year ago – and that is in a very, very deposit-rich, not only a deposit-rich but it’s also in a CD-rich market as well. So we feel comfortable, Jason, where we are on deposits. We’re not as concerned about the levels as we are about the quality of the deposits and the pricing of them, and the strategy seems to have been paying off for us. Duncan, do you want to add anything on that?

[J. Duncan Smith:]

Yes, thank you Ted. We do have significant liquidity at the Home Loan Bank and through some of our other sources that we will tap on a near-term basis and then backfill with the deposits, with a program. Like I say, the CDs have been running down as planned and we have been adding some Home Loan Bank advances more for [ALCO] purposes. We’ve been extending some of the CDs, going three, four, five years out to take advantage of the lower funding costs. And we’re taking a look at some of our other wholesale sources but we are in the process of looking at some CD programs and other deposit programs as our loan-to-deposit ratio is creeping up. But they are still, if you compare back a couple of years ago we were 115% loan-to-deposit ratio and we’re still in the mid-90%s right now.

[Ted Peters:]

And we got as low as the high 80%s. So yeah, as you see that loan-to-deposit ratio creep up we think that’s a good problem to have. And we feel we have access to deposits, higher-priced deposits whenever we really want to get them. So hopefully, does that answer your question, Jason?

[Jason O’Donnell:]

It does, thanks for the color – that’s appreciated. So just moving on to the margin a little bit, I wanted to follow up on a question that was asked earlier. Just thinking about kind of the securities portfolio, really the yield and obviously there was a big move this quarter – how much did you have in the way of premium amortization expense in the quarter versus Q2? I’m assuming you saw a material reduction?

[J. Duncan Smith:]

I don’t have that number in front of me, Jason, but that yield should hold – the 1.40%. I mean there’s no anomalies in there, it’s just slowed down. So we should see… If the prepayment speeds stay as they were in the quarter that should hold.

[Jason O’Donnell:]

Okay, fair enough. And then my last question and I’ll hop out is in terms of the loan yield, how much did you have in accretable yield this quarter? Do you expect that adjustment to be a drag on the margin going forward?

[J. Duncan Smith:]

I don’t know whether we really disclosed those numbers before, but what I could tell you – I assume you’re talking about the accretable yield from the mergers, is that correct?

[Jason O’Donnell:]

That’s correct, yep.

[J. Duncan Smith:]

Yeah, well I would tell you that over the last four quarters we’ve probably been running north of I’d say about $700,000 average per quarter over the last four quarters of accretable yield – and that’s all in, excluding any large one-timers that might go through other income. And it’s accounted for anywhere from 15 basis points to 18 basis points in the margin. Now that will run for another year or two before it starts to run down, so barring any other acquisition that will gradually drop off.

[Jason O’Donnell:]

Okay, perfect. Thanks, guys.

[Ted Peters:]

Thank you, Jason.

[Operator:]

Our next question comes from Matthew Breese at Sterne Agee.

[Matthew Breese:]

Good morning, everybody.

[Ted Peters:]

Hey Matt, good morning.

[Matthew Breese:]

I just wanted to touch on the overall expenses, down quite a bit from last quarter. And I was looking for one, was there any seasonal or one-time items in there that might pop back Q4 or Q1 2014? And then two, what’s a good run rate? What are you guys expecting going forward on quarterly expenses?

[Ted Peters:]

Let me just make a general comment, Matt, and then I’ll turn it over to Duncan. In general we have really looked and worked hard on our expense structure. This is something we have not done a good job on over the last four or five years and we’re trying to do a better job at it. We need to drive our efficiency ratio down lower. We exclude of course from our expenses any merger-related expenses because they’re sort of one-time kinds of things, so we take them out and a think a lot of the analysts take them out as well. We have certain things that we’re facing here

[J. Duncan Smith:]

Yeah, it’s a good question and it’s certainly a question I ask myself when looking at the numbers. If you look back the last three quarters prior to this quarter we were at $21.1 million, $20.2 million, $20.5 million, and then this quarter we’re at $19.3 million. So the obvious question

[Ted Peters:]

August.

[J. Duncan Smith:]

August 1. So we had more individuals and employees go to this high deductible plan which is slightly less cost. There’s also the payroll taxes that the FICA limits get hit probably in Q3 so the payroll taxes are a little bit lower. So there’s a bunch of noise in there but I would say the ongoing run rate is probably more near the $20.0 million per quarter than the $19.3 million that’s showing in Q3 here. And obviously merger costs, you can neutralize for those.

[Matthew Breese:]

Right, I’m talking about core expenses, that’s great color. And then in regards to mergers and acquisitions, how has deal flow been? What kind of deals are coming across your desk over the last three months? Has it picked up or dropped off? And then if you comment on overall pricing of deals that would be great too.

[Ted Peters:]

This is Ted. Yeah, we have seen definitely an uptick in sort of chatter and things that are out there, absolutely without a doubt. Everybody thought 2012 was going to be the year of the merger, it wasn’t. It picked up a little bit in ’13 and ‘14, I think it’s going to certainly pick up a little bit more. There seems to be a lot of pressure on banks that are less than $1 billion to comply with all these regulatory expenses and so forth; as well as banks that are dependent upon margin spread if that’s their core business are getting squeezed a little bit, too. There are now 6500 banks in the country, defining a bank as somebody who pays FDIC insurance. I think most people would agree there’s probably going to be 4000 or 4500 in six or seven years or so. So we’re active in the market. We are a buyer; we are not a seller. We are a buyer. We look at things all the time. We get calls from people who say “Do you have interest in looking at this situation or that situation?” As you know we had a merger that we were going to purchase a bank in Delaware and we were actually going to close on that October, this past October 1st and we decided to call that off in a joint thing with the other party. But that doesn’t in any way dampen our enthusiasm for doing acquisitions. Bank acquisitions we are seeing an increase in pricing. A deal that might have gone for 130% of tangible booked value two years ago, that same bank’s probably now 150% and maybe a year from now it’s 170%. We don’t look, while we look at tangible booked value we really look more closely at a couple things. One, we look at tangible earn down. So we take the loan mark and other marks into it, and so what are we paying based on what the marks will be. And the key thing for us is, is it accretive to earnings? We’ve done five deals; every one’s been accretive to earnings. Every one’s worked very well. Some have been singles, some have been home runs but they’ve all been accretive and they’ve all worked very well and been integrated. Pricing is going up and I think it’s going to continue to go up and I think you’re going to see more sellers. Certainly as pricing goes up you might see more sellers. We are agnostic as to whether we buy another bank or whether we buy a wealth business, and we’re looking at wealth businesses all the time as well. And so we’ll see whatever kind of percolates up will percolate up. We like to think we’re very disciplined. We passed on a lot of deals and we probably looked at twenty situations in the past number of years, and we’re going to continue to look at situations. But I’m leaving at the end of 2014 as you know and we’d like to do at least one more transaction if not two before then, but we may do zero. We’re not going to do a deal unless it kind of happens. We do have a lot of confidence in going forward. The Board, we normally look at the dividend in January but at our Board meeting yesterday the Board felt very confident in our future and where we’re going. So the Board, we decided to raise the dividend yesterday as opposed to waiting until January which hopefully is a good signal out there. But to answer the general question, Matt

[Matthew Breese:]

That’s great color, thanks Ted.

[Ted Peters:]

Thank you very much.

[Operator:]

We have another question from Chris McGratty, KBW.

[Chris McGratty:]

Just to follow up on the mortgage line item in the quarter can you speak to the outlook given the bump up in rates for this item? I know it was down about $1 million sequentially.

[Joe Keefer:]

Yeah, hi Chris. I think what you see in Q3 that we just had is probably a more normalized run rate. And you know, it could go up or down about $100,000 either way per quarter. So I think that we’re back to more normal times and we’re seeing more and more purchase business. So hopefully maybe it’ll be more on the upside but we’re now into a more normal mortgage banking-type income to go back a number of quarters.

[Chris McGratty:]

And on the wealth revenue obviously there was some seasonality in Q2. How should we think about the growth going forward in terms of Wealth Management revenues?

[Frank Leto:]

Hi Chris, it’s Frank. You know, I’ll tell you – we had a really busy Q3; Q4 looks even busier. We’ve booked a lot of business in this latter half of the year and I think looking at the pipeline it’s going to stay strong into next year. So I’m confident that we’re going to continue on the same path that we’ve been on.

[Chris McGratty:]

Okay, thanks.

[Ted Peters:]

Yeah, let me just add, Chris, that Wealth has been a huge success for us in the last four or five years, and we’ve grown the assets from around $2.0 billion to over $7.0 billion where $7.1 billion will set a new record for us. And about half that growth has been acquisition type growth, acquiring some businesses, but the other half has been all organic. We’ve really worked hard to establish ourselves as a preeminent or the preeminent services business in the Philadelphia area and it’s really starting to pay dividends. We’re starting to see larger things. We used to get excited if we had a $1 million or $2 million or $3 million piece of business moving to us now and now we’re getting a $15 million piece of business, a $20 million piece of business. So that’s been a real great spot for us and we think it’s going to continue to do very well.

[Chris McGratty:]

Great, thank you.

[Operator:]

At this time I show no further questions. Would you like to make any closing comments?

[Ted Peters:]

No. This is Ted Peters. I’d like to thank everybody for joining us today. We appreciate your support as shareholders or as friends of the bank, and we look forward to working hard and hopefully having a very good Q4 for everybody. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.