Beacon Financial Corp (BBT) 2010 Q1 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp Q1 earnings release conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the call over to David Gonci. Please go ahead, sir.

Good morning. Thank you all for joining this discussion of our first-quarter results. Our news release is available in the investor relations section of our website, Berkshirebank.com, and will be furnished to the SEC.

Our discussion will include forward-looking statements and actual results could differ materially from those statements. For a discussion of related factors, please see our earnings release and our most recent SEC reports on Forms 10-K and 10-Q. Now I will turn the call over to to Mike Daly, President and CEO.

Thank you, Dave. Good morning, everyone. Welcome to our first-quarter conference call. With me this morning is our Chief Financial Officer, Kevin Riley, and other members of the management team.

We released our quarter results last night and today I will discuss our progress during the quarter and Kevin will provide some color on our operating activities in the quarter as well as our second quarter guidance and then I will have some concluding remarks. Of course at the conclusion of our remarks, we will be glad to take questions from our callers.

So we earned $0.24 a share, which was a penny higher than our previous guidance, and income available to common shareholders was up 3% over the first quarter of last year. We achieved these results while we were digesting the cost of our investments in new business lines and an expanded infrastructure.

So I'm pleased with the results and I do believe it is a good sign that we're headed back to stronger earnings. And I will have more to say about that in just a few minutes.

But first, let me make some comments on one of our top priorities for the quarter which was to execute on the strategies that we outlined at the end of last year with our loan charge. Progress here was very good.

We reduced our non-performing assets by $14 million which was a 36% reduction. This brought our non-performers back under 1% to 92 basis points compared to total assets. We reduced our performing restructured loans from $18 million to about $3 million.

We also ended the quarter with accruing delinquent loans at only 31 basis points compared to total lines and this was the lowest level for this ratio since 2006. In the process, our net charge-offs were where we expected them and were less than 50 basis points compared to average loans for the quarter.

While these numbers are very good relative to peers, I actually believe they could improve further as we go through the year. Now there is always the potential for quarterly variability in this statistic, but I'm encouraged by our low delinquencies at March 31 and loan performance has been comparatively strong across all of our major lending categories.

Our residential mortgage and home equity portfolios have performed well to date and we are not currently seeing signs that this is going to change. As I stated in the press release, we're cautiously optimistic about the economic outlook.

But as I've also stated before, New England is typically slow to enter into a recession and it's slow to exit. So I believe our strategies last year put us in a good position to move forward positively if the expansion continues to take hold or even if it takes a little longer regionally.

Moving onto our business development, our outlook is encouraging here. Our commercial loan pipeline grew during the first quarter mainly in our New York and Springfield regions where we expanded our regional offices in 2009.

We continue to get active interest from area borrowers to replace credit facilities previously provided by the big banks and national sources and we added to our new asset base lending team. We now have five experienced lenders who have previously worked together in serving the New England commercial middle-market.

This team just moved into their new quarters in [Wilburn] last month and we had $13 million in outstanding asset base loans at quarter end and we continue to expect to build this portfolio towards $100 million by the end of the year. Now based on these developments, we're comfortable with our expectation for double-digit commercial loan growth this year.

We originated $45 million of residential mortgages in the first quarter. Fixed rates remained generally low and much of this volume was sold, but we were also aggressive and opportunistic in locating a Massachusetts institution that was seeking to improve its liquidity and we purchased $32 million of prime season Massachusetts mortgages for our portfolio.

We also grew our home equity balances at a 5% annualized rate during the quarter. And of course, we continue to have planned run-off of our indirect auto portfolio, so if you include this impact, our total loan growth is expected to be in the mid-single digits for the year.

With respect to deposits, we got off to a strong double-digit annual growth rate in the deposit portfolio, bringing down the cost of deposits by nearly 10 basis points at the same time. We grew deposits in all regions and we continued to emphasize relationship oriented accounts.

Results for the quarter benefited strongly from our new private banking unit that joined us in our Springfield region and Kevin will give you a little more color on our deposit growth shortly. We also had very good results in banking fees for loans, deposits and interest rate swaps.

Growth here was 30% compared to the prior year. Now as we previously indicated, we did expect insurance contingency income to be soft again this year. Nonetheless with our contingency income, we continue to rank high in terms of total compensation from a number of the larger carriers that we work with.

Meanwhile, we are building our policy book in the more profitable business lines. And we are hopeful that we are seeing the bottom of this pricing cycle with some firming now starting to show up in premium quotes in both retail and commercial segments.

Now there is a lot of upside potential as this market begins to improve. In addition, we're adding new product offerings including financial products and health products that make us stronger and more full service provider.

We've also reorganized this business line through an extensive Six Sigma project to lower our cost structure by more than $1 million and to improve the scalability of our service model. We opened our new centralized insurance center in Pittsfield during the first quarter and we're already seeing the benefits of this change.

Now this reorganization also gives us a platform to buy agencies and to integrate them easier and more effectively. With the consolidations that we've done, our insurance managers are working closely together with commercial and retail management to build a best-of-breed cross sales environment that will drive profitability going forward.

We brought Dave Farrell on as an executive last year to lead our Six Sigma process in insurance and to manage through this organization. We are actually -- we're ahead of plan in this regard and this is one of those situations where an executive actually works himself out of a job.

And so Dave has decided to move on to pursue other opportunities, including independent consulting, to apply his significant business experience. So we're in great shape here and of course we wish Dave all the best.

Let me summarize. Excluding seasonal insurance revenues, total core revenues were actually up 10% annualized over the prior quarter. So this is good momentum for us to have at the start of the year and it does give us confidence that further growth is ahead.

Now at this time, I'm going to ask Kevin to provide a little more color on the numbers for the quarter. He will give second quarter guidance and then I will conclude with some closing comments. Kevin?

Good morning, everyone. As Mike has commented, the first-quarter results were the first step toward building the momentum for future strong earnings performance. I would like to take a moment and comment on the first quarter results and give you some guidance on what we expect to see in the second quarter.

Our revenue for the first quarter grew by 2% when compared to the first quarter of 2009. Growth was achieved in both net interest income and banking fees which more than offset the decrease in insurance contingency revenue received this year. Our net interest income grew at an annualized rate of 7% when compared to the prior quarter. This was mainly accomplished by expansion of our net interest margin from 3.05% in the prior quarter to 3.24%.

This was the third consecutive quarter in which the margin improved. We have continually explored ways to push down our funding costs while striving to capture the highest yield on our earnings assets.

The margin also benefited from our fourth-quarter initiative which we prepaid some of our high-cost borrowings. Our previous guidance called for a margin in the low 320s which we achieved.

But looking at the second quarter's net interest income, one should expect the momentum to continue. As Mike noted, deposits grew at a strong annualized rate of 10% in the first quarter with a significant contribution coming from our new private banking unit in Springfield, which added more than $30 million for the quarter.

We expect deposit growth to slow a bit to the mid-single digits in the second quarter. Our average earning assets are expected to increase at an 8% annualized rate in the second quarter due to loan growth as Mike has commented on.

Our guidance for the second quarter is to keep the margin at or above the 320 mark and to have our net interest income increase over the first quarter by more than 5% annualized to $18.5 million. We continue to keep the Company asset sensitive to interest rate movement and are prepared to benefit if rates move higher.

Non-interest income for the quarter exceeded our expectation and came in at $8.5 million. Our first-quarter banking fees for deposits, loans and interest rate swaps were up strong at 30% or approximately $800,000 compared to last year.

Banking fee income was up in all major categories, reflecting higher volumes; and in some cases, selective price increases. First quarter wealth management fees were up 12% annualized compared to the prior quarter.

We expect this growth to continue at an annualized rate of 10% through year end as assets under management continue to grow. As Mike has commented and we have given guidance, we expect insurance revenue to be down due to market pricing conditions.

Consistent with prior year, insurance income is seasonal. We continue to see revenue being received in the first half of the year. We expect a second-quarter insurance income to be around $3.1 million.

With that said, we expect non-interest income in the second quarter to be around $8 million which would be a 12% increase over the prior year's core results. The first quarter's loan loss provision was $2.3 million.

This was in line with our guidance. We expect the quarter with an allowance of -- we ended the quarter with an allowance of 1.61% of total loans and a coverage ratio of non-performing loans of 147%. Our net charge-offs for the quarter were 47 basis points on an annualized -- average outstanding loans.

Our guidance for the second quarter is for a provision of $2.7 million which is in line with our annual projection of $11 million which at this point may look a little high. This will cover anticipated net loan growth for the quarter and our net charge-offs.

Our first quarter non-interest expense came in at $20.2 million which was a little better than our guidance. Our expense base has increased due to the adding of new business lines and strengthening our teams in Albany and the Springfield region.

The Company is absorbing these costs as we build the related revenue streams throughout the year. We expect these new business lines to break even by year end.

For the second quarter, we're expecting non-interest expense to decrease slightly to about $20 million even. The tax rate for the quarter was 22%. This was a little higher than our guidance and was due to higher pre-tax income. We expect the second quarter to be at the same rate of about 22%.

In summary, we expect the second quarter's net interest income to be about $3 million or $0.21 per share. The drop in EPS from the first quarter is mainly due to the seasonality of our insurance revenue.

This compares favorable to the $0.15 in core earnings per share recorded in the second quarter of 2009 and that would produce a first-half result of $0.45 per share, up 7% over the $0.42 of core EPS in 2009. We're encouraged by our current results and our future projection of earnings growth. We are constantly looking for opportunities to enhance earnings and are expected -- our latest investments in new product lines to reward us as we move throughout the year.

Earnings growth will be backed by solid balance sheet management and during the quarter, the Company paid down borrowings with funds from deposit growth. Our loan deposit ratio stands currently at 97%.

Our ratio of tangible equity to tangible assets remain strong at 8.3%. We're solidly positioned to take advantage of organic and acquisition growth opportunities that we anticipate in our market. With that, I will turn the call back over to Mike.

Thanks, Kevin. Nice job. So our $0.21 EPS guidance for the second quarter is in fact a 40% increase over core results for the same quarter last year. And as Kevin mentioned, it would bring our and six-month EPS numbers up 7% over first-half core results last year.

For the year, our guidance continues to be in the $0.85 to $0.95 range as we work carefully and liberally to produce consistent EPS gains through the rest of this year and to move EPS back toward the $2.00 level that we achieved in 2008 before the onset of the recession. Meanwhile, we're maintaining our cash dividend which provides a current yield in excess of 3%.

The executive team here is dedicated to strong, growing, reliable earnings as the basis for an attractive return to shareholders. I also believe that as we continue to deliver these results, they will be reflected in ongoing improvement in our stock price and that should enhance our ability to participate in any M&A opportunities in our markets.

We've been a disciplined and successful acquirer and the strength of the team and our franchise and our currency I believe will be attractive to those institutions who reach out for partnerships. As many of you know, there are recent regulatory proposals to increase bank capital requirements.

Now, some of the (inaudible) proposals strike us as excessive and counterproductive to a healthy financial system. We don't know what regulatory changes may be made, but we are keenly aware that return on capital will be critical and we're managing our business activities on the margin with an objective to maintain strong return on capital disciplines. Return on assets and return on equity are at the forefront of our management and board discussion and I'm confident that we will see marked improvement as we move forward.

I've recently met with all of our employees in all our regions. They understand the importance of earnings to our long-run success and they're enthusiastic about our franchise and our brand position and the culture of performance that we're building in this Company.

We define America's Most Exciting Bank as the right mix of people, attitude and energy. The benefits of this mix I believe are showing in our current results and we plan to build steadily on this momentum from here.

And we've talked with many of our shareholders in recent months and will be spending more time on the road in the second quarter. I must say, we do appreciate the support that so many have shown and we appreciate the participation by existing and new investors who have invested in our stock in recent months.

We will not let you down. We're bullish about our prospects, we're bullish about the outlook for an improved stock valuation going forward.

We've got a clean balance sheet and improving asset metrics. We've got strong capital and liquidity. We're positioned to take advantage of the stronger economy and higher rates that we do think are coming our way.

We've got a talented and focused management team. We have new strong business lines that should quickly start adding to EPS and we have a strong market position in attractive markets where we're generating solid growth in revenue and earnings. This Company is on the move and we look forward to delivering a solid return on your investment.

Now that concludes my remarks and we'll ask the operator to open the lines for questions.

(Operator Instructions) Mark Fitzgibbon, Sandler O'Neill.

Mike, in the press release you guys seem to be pretty upbeat about the economy and your markets. Aside from the trend in your an NPA's which is great, what gives you sort of the comfort that the economy in your regions is turning?

It's an interesting question. I would say this. Our outlook hasn't really changed much since the end of last year or the fourth quarter last year.

What we've said and what we continue to say is we see some light. For the first time in several quarters as I said last quarter, we're starting to -- the potential recovery is at least getting a little clearer.

I've also stated on a couple of occasions and I stated it again today that I think New England is a region that has historically been slow to enter a recession and historically slow to exit recession. So I don't think there's going to be a quick recovery.

We do see some borrowers hiring. We see some borrowers that are putting numbers up that we hadn't seen for some time. So I think there are signs of recovery.

The idea that we took the charge last quarter in anticipation of not having to either foreclose, sell, deal with issues on loans in the first half or the first three quarters of 2010 I think is still going to be a strategy that plays out. Because frankly it's going to take some time for all of this to work its way through.

Just wanted to add onto that. We noted in the release that the business confidence index came up to the highest level in 18 months in Massachusetts and that was a recent announcement. We just had an announcement yesterday that Berkshire County unemployment dipped for the first time in quite a while and we're just generally seeing a number of reports about improvement and certain retail sales indicators and home price and volume activity.

And then secondly as it relates acquisitions, do think it is likely that Berkshire will do some deals this year? And would you consider leapfrogging to new markets for FDIC transactions?

First, Mark, I hope we do a transaction this year. It takes two to put a good dance together and we think that there's a good possibility that we can find an attractive partner that wants to do some things with us.

I think the fact that there is a good sense at this point that the currency might continue to get stronger based on our earnings with our partners that may feel as though the currency is a good one to latch onto, so I think will do a deal or two. I hope we will.

With respect to leapfrogging for FDIC deals, we've looked at a lot of FDIC deals. We are notified whenever there is an FDIC deal. And I think if the numbers were significantly positive, if the complexion of the balance sheet fit completely with what we were doing, we would take a look at something that was potentially leapfrogged but I can assure you it would not be leapfrogged significantly.

So if there are FDIC deals to do in the contiguous markets, we will be all over looking at those. If there are FDIC deals to do and it requires leapfrogging, we would have to put a lot more attention into it and it would have to be a pretty good deal.

Okay, great. Thank you.

Laurie Hunsicker, Stifel Nicolaus.

Great quarter. Great to see your credit improvement. I wanted to tandem a little bit off of Mark's question as it pertains to M&A. How far will you leapfrog?

Not that far. So, our contiguous markets are pretty big. When you look at New York and Vermont and areas of Connecticut and the rest of Massachusetts, that's a pretty big market.

Maybe some other New England states, I think if there were contiguous New England states to those markets, we would take a look at it. But we're not going to go to Pennsylvania or Michigan or Alabama or Florida, I can assure you that.

So even for an FDIC deal, you would not go down to Pennsylvania?

It's very unlikely.

And then you mentioned capital in your comments as well. So with respect to M&A opportunities, if you were to sort of characterize your preference and obviously with nice results, your stock currency should continue to improve which is your acquisition currency. Theoretically if you could buy an overcapitalized bank versus one that wasn't, would that have more appeal or how do you look at that?

I don't think there's any more appeal based on overcapitalized versus a well performing company. The metrics we're going to use to do deals will be the same.

Strategically it has to be good fit. There has to be a quick return on our investment for our shareholders. REO and ROA are going to be at the forefront of every single deal we look at.

So, I think there are a lot of deals to look at. There are a lot of partners that potentially we could look at in and around our areas. And I would not discount or increase that number based on a company that was either overcapitalized or adequately capitalized.

Okay. What is the smallest asset sized bank you would consider looking at?

You know, again, I hate to put specific parameters. If there is an incredibly interesting deal for us and it is a couple hundred million, I think it would be incumbent upon us to look at it. If there is a billion-dollar bank, it's incumbent upon us to look at it. I think every deal is going to stand on its own and the merits of that deal will be borne out through our analysis.

Okay. And then asset management, is that something you would look to acquire.

Yes. Frankly we have done a couple of those. Our asset management group is seeing nice double-digit growth rates right now. We've hired several new asset managers in the Springfield area, the Berkshire area and New York area. So those are a little harder to do from time to time, but certainly will be on our radar screen.

I had at December your assets under management were $668 million. Do you have a current number for that?

It was up about 10% in the first quarter.

Okay, great. And then just last question. On your margin, do you have a month margin or period-end margin or any sort of current margin you can give us just beyond a quarter?

Yes, I think we've got a period-end margin. Mike?

324 for March.

Perfect. Great. Thank you all very much.

Damon DelMonte, KBW.

I jumped on a little but late, so I apologize if you had addressed this. But could you provide a little color around potential NSF fees and the pending legislation and what might be at risk for you guys after this year?

Actually, Sean Gray is here. He's our star retail guy. So we will put him on the spot and have him answer that question directly.

We've done a lot of research in looking at different organizations, are handling it from the large box, B of A positions that I'm sure you've all read to. Our plan probably most mirrors what US bank is looking at.

Really we've got a very detailed outreach to our customers and we're going to educate them on choices. We do anticipate a slight hit, but we anticipate customer fees to remain flat for the year.

We have the luxury that reaching out to our customer base, it's not too large where we can't have that personalized touch and that personalized touch should help us increase our percentage of [opt in] compared to our peers. So we do feel it will be pretty flat for the year with a slight tick down that will be more than made up with other fees.

That's helpful. Thank you. And then just with regards to period-end loans versus average loans, it looks like the period-end loans were much higher than the average. Did you have any -- a handful of loans that closed right towards the end of the quarter?

We did. And Mike (inaudible) is here and he takes pride in the fact that we closed all those loans at the end of the quarter and I hit him over the head a little bit and said, can we close them four or five weeks earlier. They close when they close and so we had a significant number close at the end of the quarter.

Just wanted to confirm that. That's all I have for now. Thank you.

Mike Shafir, Sterne, Agee.

I was just wondering if you could give us a little bit of detail. The $14 million in CRE in reduction in the non-performers, can you just kind of give us some idea of how those were resolved and the resolution process on those?

As a matter of fact, some or most of that as I said at the end of the year was in process and we just didn't get them closed. I think we had refinancing that occurred afterwards.

It took a deal out of the bank that was in process at the end of the year. We had a sale of a loan and I think after that, it was a payoff. I think there was also one that we recycled (multiple speakers) back in. Is that right, Richard?

Michael hit on all the aspects. There were everywhere from return to accrual to note sales to -- we got refinanced out of a position or just the liquidation and payoff.

So out of that $14 million, could you just -- the more sizable credits?

It's about a little bit less than half [will they] return to accrual and then the rest were just payoffs. So if you kind of bifurcate it in half, 50%, a little less than 50% will return to accrual and then the rest were just off the balance sheet all together.

The return to accrual, was that restructure?

Yes. The restructure began in the fourth quarter and then we finalized it and closed it in the first quarter.

And the other $7 million were payoffs, notes sales and one got refi'd away from you?

Yes, basically cash in the house.

And then just a quick question. A lot has been made about the potential for your acquisition strategy and so forth. And we discussed that a couple of times here now.

But ultimately, if you want to stay within your markets, what are you seeing or kind of what are you feeling about some your neighbors or a lot of the overcapital guys are going to hit their three-year anniversary soon. Are those dialogs continuously going on as you are reaching out?

I would say that I probably dialogue with as many CEOs in New England as almost anybody else. So the answer to that is of course. And the territory that we do business in from Pittsfield to Boston to Northern Connecticut to Vermont to New York, I think there are a significant number of potential partnership opportunities.

We're talking to all of them. Again, we want to do deals that work for both parties and we want to do deals that people come to the table motivated and I think those are out there and our hope is we get one or two done this year.

I might've missed this, but did you guys reiterate the guidance of $0.85 to $0.95 for 2010?

I did.

Thanks a lot, guys. Appreciate it.

This concludes our question-and-answer session today. I would like to turn the conference back over to Mr. Daly for any closing remarks.

Great. Thank you, Andrea, and thank you all for joining us. This concludes the call and we certainly look forward to speaking with all of you again next quarter.

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