Earnings of Bridge Bancorp (BDGE) plunged to $0.47 per share in the first quarter, down 34% from the last quarter of 2019. Earnings will likely recover in the remainder of the year due to a strong surge in loan balances on the back of the Paycheck Protection Program. Further, a sequential decline in provision expense will help earnings recover in the year ahead from the first quarter’s dip. On the other hand, a decline in swap income will pressurize earnings. Meanwhile, the net interest margin will likely remain stable in the remainder of the year due to yield stickiness. Overall, I’m expecting earnings of $2.58 per share in 2020, almost unchanged from 2019. The December 2020 target price suggests a 54% upside from the current market price; hence, I’m adopting a bullish rating on BDGE.
Paycheck Protection Program to Boost Loan Balances
BDGE’s loan balance in the second quarter will likely receive a substantial boost from the Paycheck Protection Program, PPP. As mentioned in the first quarter’s conference call, BDGE funded around $700 million of loans under PPP in the first round and did more than $200 million in the second round. As a result, PPP will increase loan balances by more than $900 million, or 24%, in the second quarter, which is a substantial amount given BDGE’s asset size. I’m expecting a majority of the PPP loans to get forgiven in the third quarter; hence, BDGE will likely recognize most of the fees under PPP in the third quarter. Assuming a fee of 3%, I’m expecting PPP to increase net interest income by around $27 million.
As a majority of the PPP loans will likely get forgiven before year-end, the December 2020 loan balance will most probably not reflect the full loan growth during the year. I’m expecting loans to stand at $3.9 billion at the end of 2020, up 7.8% from the end of 2019. The following table shows my balance sheet estimates.
Earnings to Rebound Upon a Decline in Credit Costs
BDGE’s provision expense surged to $5 million in the first quarter from $0.6 million in the fourth quarter of 2019. I’m expecting provision expense to decline in the remainder of the year from the first quarter’s peak. As mentioned in the conference call, the management assumed that the economy would experience a severe downturn in 2020 and a recovery in 2021 to determine its loan loss reserves. I believe that the assumption of a recovery in 2021 is reasonable because a sustainable recovery is unlikely until after a vaccine is developed, which will most probably happen in 2021. The director of the National Institute of Allergy and Infectious Diseases said last week that the U.S. could have approved vaccines by 2021, according to news sources. As the assumption of the economic recovery trend appears reasonable, I’m not expecting another sizable adjustment to loan loss reserves that would drive credit costs.
Moreover, BDGE has limited exposure to COVID-19-sensitive industries. As mentioned in the first quarter’s investor presentation, high-risk industries, including hotels, restaurants, and passenger transportation, made up 5.5% of total loans as of March 31, 2020. Additionally, the consumer segment made up just 0.7% of total loans, as mentioned in the first quarter’s 10-Q filing. Considering these factors, I’m expecting provision expense to decline to $2 million in the second quarter, from $5 million in the first quarter. For the full year, I’m expecting BDGE to book a provision expense of $10 million, up from $5.7 million in 2019.
Net Interest Margin to Remain Mostly Stable in the Year Ahead
I’m expecting net interest margin to remain almost unchanged in the year ahead because the average yield will likely remain sticky. BDGE focuses on real estate loans, which lock in rates for a long time. As mentioned in the 10-Q filing, real estate loans made up 79% of total loans as of March 31, 2020. The results of a simulation conducted by the management show that BDGE’s NIM is not very rate-sensitive. According to the results, a 100 bps decline in interest rates can increase net interest income by 0.13% in the next twelve months. However, the rate decline can reduce net interest income by 4.54% in the second year of the rate cuts. The following table from the 10-Q filing shows the results of the simulation.
Considering the rate-sensitivity and the assumption that interest rates will remain unchanged in the remainder of the year, I’m expecting NIM to contract by just 2 bps in 2020. The following table shows my estimates for yield, cost, and NIM.
BDGE Likely to Post Earnings of $2.58 per Share in 2020
The loan growth and decline in provision expense will likely help earnings recover in the remainder of the year from the earnings plunge in the first quarter. For the full year, I’m expecting high provision expense and normalization of swap income to counter the loan growth. BDGE’s non-interest income plunged by 38% quarter over quarter in the first quarter as swap income returned to normal post elevated levels in the last quarter of 2019. I’m expecting swap income to remain at first quarter’s level in the remaining three quarters, which will likely lead to a 13% year-over-year decline in non-interest income in 2020. Overall, I’m expecting BDGE to book earnings of $2.58 per share in 2020, almost unchanged from $2.59 in 2019. The following table shows my income statement estimates.
The risks of a negative earnings surprise are high this year due to the uncertainty surrounding the COVID-19 pandemic. Fears of a second dip in economic activity will likely remain until a COVID-19 vaccine becomes widely available. Consequently, I believe risks are currently high for the entire banking sector. However, BDGE has relatively low risk compared to peers because the company’s loan mix is tilted towards real estate loans, which are safer than consumer loans and commercial and industrial loans. Further, BDGE has limited exposure (only 5.5% of total loans) to COVID-19-sensitive industries.
Year-End Target Price Shows Potential for High Upside
I’m using the average price to book ratio, P/TB, to value BDGE. The stock has traded at an average P/TB multiple of 1.72 in the past, as shown below.
Multiplying this average P/TB ratio with the forecast tangible book value per share of $20.4 gives a target price of $35.1 for December 2020. This price target implies a significant price upside of 54.4% from BDGE’s June 10 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
In addition to the capital appreciation opportunity, BDGE is also offering a modest dividend yield of 4.2%. The dividend yield estimate is based on the expectation that the company will maintain its quarterly dividend at the current level of $0.24 per share in the remainder of 2020. Based on the high upside, modest dividend yield, and a relatively low level of risk, I’m adopting a bullish rating on BDGE.
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.