Cheap Bridge Bancorp Offering High Dividend Yield

Earnings are likely to slightly decline in 2020 due to lower NIM and higher non-interest expense.

Loan growth and normalization of provisions charge are expected to support earnings.

Dividends are expected to be maintained at the current level, implying a forward dividend yield of 3.16%.

Earnings of Bridge Bancorp. Inc (BDGE) declined in 2QFY19 due to a sharp surge in provisions charge for credit losses. Following the earnings release the stock price has trended downwards, but the market appears to have overreacted as my valuation analysis shows that there is room for double digit price upside.

BDGE's earnings took a hit in 2QFY19 from a charge-off on an owner-occupied commercial real estate loan to a non-profit worth $3.7 million. Non-performing loans increased from $3 million to $5.5 million due to two residential loans totalling $1.9 million and one investor commercial real estate loan of $500,000. From the 2QFY19 conference call it appears that the large charge was due to certain one-offs; however, as the management declined to give guidance on this item I think it's best to be conservative in this regard. To arrive at my earnings estimate I'm assuming that provisions charge will be high in the remainder of 2019 as well. I'm expecting BDGE to post provisions charge of $2000 in 3QFY19 and $1500 in 4QFY19. Provisions charge for loan losses is expected to normalize in 2020.

The management mentioned in the 2QFY19 investor conference call that they expect loan growth rate to be between 10-12% for 2019. According to the management, the pipeline does not indicate any weakness in pricing or volume.

I expect lower growth than the management guidance as the economic outlook has worsened since July, when the last investor conference call was held. I expect trade uncertainties and signs of their effect on the United States economy to dampen demand for credit products. Multi-family mortgages were already declining in the second quarter due to rent regulations in New York City. Two thirds of BDGE's book is in New York City, and of that 80% is exposed to the rent regulations, according to disclosures made in the 2QFY19 investor call. The table below shows my forecasts for key balance sheet items.

BDGE's loan to deposit ratio, LDR, is less than 100% (at June 2019 end it was only 89%) which gives the company flexibility to manage deposit pricing. Further, the low LDR gives the company the liberty to avoid borrowing to fund earning assets. In a falling interest rate environment it is better for a bank to not have borrowings as they are generally more expensive than deposits and usually carry fixed rates. As a result of the room available in funding cost, I expect BDGE's net interest margin, NIM, to remain mostly stable in the remainder of 2019. For 2020 I expect NIM to decline slightly by 3bps. My estimates for yields, costs, and margins are given in the table below.

As disclosed in the investor call, the management expects margins to improve in the short term due to rate decline, and NIM to be in the range of 3.27% to 3.32%.

I expect loan growth to drive up net interest income by 3% in 2020, which will help support net income. I also expect provisions charge to normalize in 2020, which will further help the bottom-line. However, the positive effect of movement in net interest income and provisions charge is likely to be countered by non-interest expense. I expect administrative expenses to grow at a normal rate of 8% in 2020, which will pressurize earnings next year. The earnings estimates are shown in the table below.

BDGE has paid out a quarterly dividend of $0.23 per share consistently since 2005, and it is very unlikely that the company will break this tradition now, even with the prospects of earnings decline in 2020. The company's expected payout ratio for next year is a comfortable 40%, and the Tier I ratio for June 2019 was 10.3%, above the regulatory requirement of 8.5%. As both payout ratio and capital ratio are at comfortable levels, there is very little need to cut dividends. Consequently, I expect the company to continue paying $0.23 per quarter, leading to full year 2020 dividends of $0.92, which implies a dividend yield of 3.16%.

I’m using the justified price to book ratio, P/B, to value BDGE. This method has been derived from the Gordon Growth Model and it determines justified P/B from the following formula:

Justified P/B = (sustainable ROE - growth rate)/(required return - growth rate)

I get a multiple of 1.28 using sustainable return on equity, ROE, of 8.4%, terminal growth rate of 3.0% and required return of 7.2%.

The sustainable ROE is based on the average of the historical and forecast ROE for the company, as shown below.

Multiplying the average price to book ratio with the forecast book value per share of $25.8 gives a target price of $33 for December 2020. This price target implies an upside of 13.3% from BDGE's September 3, 2019 closing price.

Combining the estimated dividend yield and potential price upside gives a total expected return of 16.4%. Consequently, I'm adopting a bullish stance on BDGE and advising investors to buy the stock.

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.