Not too long ago, Charlie Munger quipped that one of the best sources of value in the market can come from searching for opportunities among the smaller, responsible American banks that have created value opportunities for shareholders, because investors have become so disgusted by the practices at the largest banks that some of the animosity may have transferred to the smaller banks, even though they have higher-quality assets on their balance sheets.
One such example is the little-followed Bryn Mawr Bank (NASDAQ:BMTC), headquartered in Bryn Mawr, Pennsylvania.
Unlike its mega-cap peers, Bryn Mark managed to weather the storm financially and actually increase its dividend throughout the financial crisis. During the absolute worst part of the recession, profits at Bryn Mawr fell from $13.6 million to $9.3 million. It didn't have to issue shares to stay alive (Bryn Mawr had 8.56 million shares outstanding in 2006, and that figure barely budged to 8.59 million by the end of 2008).
The annual dividend payout actually increased from $0.50 per share in 2007 to $0.54 per share in 2008, before increasing yet again to $0.56 per share in 2009. The bank is able to do this by maintaining a sizable spread between its dividend and its earnings (even when profits per share declined from $1.58 to $1.08 in 2008 and the dividend simultaneously increased $0.54, the dividend payout ratio was only 50%). A lot of banks didn't have that kind of cushion heading into the financial crisis, and that is why Bryn Mawr was able to raise its dividend even while so many other banks couldn't.
As we fast-forward here to 2014, we can see strong signals that Bryn Mawr is improving its bank fundamentals and positioning itself for greater flexibility. The quarterly dividend has only grown by a penny since 2011 (the $0.15 quarterly dividend in 2011 became $0.16 in 2012 and then $0.17 in 2013, before improving to $0.18 this year), and that slow dividend growth in good times is the price paid for being able to maintain the dividend in bad times.
What is more intriguing, from the viewpoint of someone interested in the fundamentals of the company, is that the profits are growing at a rate exceeding the bank's dividend growth. Earnings grew from $1.60 in 2012 to $1.80 in 2013, and analysts are pegging $1.96 per share in profits for this year. That means the dividend payout ratio is only 36.7% of profits, giving the bank solid room to grow organically, while also providing the platform to maintain and even increase its dividend, should we find ourselves with another banking crisis on our hands.
Some who study this stock may note that the current valuation offers little-to-no margin of safety: With a book value of $16.84 and a stock price in the $29-$30, you are quickly approaching the territory at which the stock offers no margin of safety in terms of stock price, and you must rely on the actual growth of the company itself (rather than valuation expansion), as well as the dividend payout to support your growth.
When you study the bank's balance sheet, you will likely see that Bryn Mawr shares deserve a premium valuation when you take into account its lack of toxic debt, improving fundamentals, and general organic growth.
The bank has boosted its loan portfolio from $1.2 billion on 2011 to $1.5 billion as of last quarter, and its deposit base has increased from $1.3 billion to $1.6 billion over the past three years. The company has overhauled its balance sheet - it now has no pension liabilities, no preferred stock offerings, and only $3 million in annual leases. All of its debt has been refinanced at lower rates, so that none of it is due before 2019. The company's loan loss reserves have increased by 20% since 2011.
The appeal of Bryn Mawr Bank is that it is a company funding profit growth not through buybacks and cost-cutting, but rather, good old-fashioned growth. The loan portfolio is growing by 9% annually, the profits are growing by 13% annually, and the book value has recently been increasing by 10% each year. Studying this bank sort of gives you a 1950s feeling when you study the simplicity of the business model - it takes deposits, makes consumer and commercial loans, administers trusts and IRA funds, and provides property and casualty insurance. This isn't a bank trading highly leveraged derivatives that are about to explode, like you saw with many of its larger peers in 2006 and 2007. It sticks to old-fashioned banking practices, and because of its nimble size and only $400 valuation, it has been able to recently grow in the ballpark of 10%.
The major drawback of the bank is its price - if you buy today, you are not getting shares at a discount. However, this is offset by the quality of the bank: Bryn Mawr managed to grow its dividend throughout the financial crisis and is using current loan growth to fund double-digit profit growth, while keeping the dividend payout ratio low in the 37% range. All of the bank's core metrics are improving, and there is a sense of conservatism about the bank's field of operations that protects from the kind of banking blowups we saw during the most recent financial crisis.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.