Beacon Financial Corp (BBT) 2010 Q2 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp second-quarter 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 conference over to David Gonci. Please go ahead, sir.

Thank you. Good morning and thank you all for joining this discussion of our second-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 Mike Daly, President and CEO.

Thank you, Dave. Good morning, everyone. Welcome to our second-quarter conference call. With me this morning is Kevin Riley, our CFO, along with other members of our management team.

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

Let me start by saying I am pleased with the solid second-quarter results. I am also encouraged by the strong signs of momentum within the Company. We had strong top-line and bottom-line growth in the quarter.

We had further improvement in the net interest margin. Our credit metrics are good and getting better, and we were able to lower expenses. So positive operating leverage and good fundamental improvements, and I think this will help to strengthen our currency.

Now let's take a look at some of the numbers. As you saw from our release, we posted earnings per share of $0.25 which exceeded our previous guidance of $0.21. Our results were up substantially from the second quarter of last year when we were battling the downward impacts of the recession and when we had a number of non-core items.

Compared to core earnings per share of $0.15 last year our second-quarter earnings per share was up 67% this year. Maybe more significantly our second-quarter results were up strongly on an annualized basis compared to the first quarter. We posted double-digit annualized growth in our largest revenue sources, net interest income and banking fee income. Meanwhile, our non-interest expense and loan loss provision both declined modestly.

Strong revenue growth, therefore, generated highly positive operating leverage for us. So when you adjust for the seasonal component of our insurance revenues our earnings per share increased at about a 55% annual rate compared to the first quarter and of course Kevin will provide some more details on that in just a few minutes.

As you know, aggressive asset management has been a top priority for us, including our loan initiative last year and our resolution strategies this year which have been ably orchestrated by our new Chief Risk Officer, Richard Marotta. Richard joined us at the start of the year. He has made a strong contribution right from the start in moving us forward on a resolution plans that we laid out at the start of the year and enhancing our overall risk management company wide.

The benefits of these plans are plainly evident in our earnings release here at midyear. Our non-performing assets are down to 71 basis points of total assets and our annualized charge-off rate continued to decline to 44 basis points during the second quarter. Our accruing delinquent loans were very low. At 21 basis points they were at the lowest quarter end level since 2005.

So all of these measures are at quite favorable levels compared to industry averages.

Now, of course, we are mindful of continuing economic uncertainty and we are continuing to monitor credit conditions very closely. With our actions last year we had hoped to get ahead of the curve and so far that has been our experience. We have deepened our talent in risk management and I expect that with careful and deliberate credit oversight we will stay ahead of the curve.

Our loan loss allowance currently stands at nearly two times the level of our non-performing loans and it remains at a healthy 1.58% of total loans.

At a time when loan growth is hard to come by we continue to book strong growth in our commercial loan portfolio. Part of this is the contribution of our new asset-based lending team which got staffed up in the first quarter and has $23 million in balances at midyear. Additionally, we continue to book organic growth by taking market share, particularly in our Albany and Springfield markets where we have invested in expansion.

The larger credits that we booked in the first half of the year included loans related to healthcare and social services which are areas where investment is ongoing in our markets. Our lending also benefited from the ongoing growth in New York's tech valley. And just yesterday the Albany newspaper reported on a $2 billion increase to $6.5 billion in the global foundry semiconductor plant investment that is currently under construction. So continued positive news on that front.

We booked about $44 million in net commercial loan growth in the first half of the year. And while I would say that market conditions have become more competitive in the last couple of months, we continue to target double-digit annualized growth here which will be the primary driver of our balance sheet.

On the deposit side we had very strong growth in the first quarter and we did take our foot off the accelerator a little in the second quarter as we let loan growth catch up. We continue to benefit from the new private banking team that we recruited in Springfield at the start of the year and I expect continued strong contributions from them helping to fund our loan growth.

Additionally, we plan to open two new branches in our New York region in the second half of this year bringing our total to 12. And we hope to double our branch presence in Albany over the next several years.

Now these new branches will provide deposit growth on top of the strong 17% annualized organic growth that we reported from our existing New York branches in the first half of this year. As you know, we added to our leadership there last year and we feel that we are making strong gains in this market with $311 million in deposits at mid-year.

We continue to feel that we can generate good quality assets and deposit funding in our markets, based not only on our position as the only locally-headquartered regional bank but also on the brand and the cross-sell strategies that we have implemented. While our integrated service revenues from insurance and wealth management continue to be affected by market and pricing conditions, we do expect these revenue sources to improve as market conditions improve and as we continue to improve wallet share in these markets.

These initiatives, by the way, are being driven by a couple of key members of our team -- Sean Gray, Head of our Retail Banking, and Linda Johnston, our HR Chief. This month we announced their promotion to Executive Vice President and I am delighted to be able to provide this recognition of their contributions.

I would add that one area they have made a strong contribution is AMEBU, America's Most Exciting Bank University. We have expanded this program to support our branding culture and the response has been pretty overwhelming. Our style of customer engagement, it appeals to our team members and to our markets, and I think it's a key factor in our strong organic growth.

Now an example of the strength of this branding culture is our implementation of the new Regulation E. As many of you know, Reg E becomes effective August 15 for existing customers. This new regulation requires that customers opt-in to be eligible for ATM and debit card overdraft transactions.

At this time almost 70% of our eligible accounts have responded to our outreach and we have achieved over an 85% opt-in rate among the customers that have responded. We have been targeting an 80% opt-in on our whole customer base by the end of the year and that includes higher results among the heavy users of these services.

We have been very focused on reaching out to customers personally in order to explain the new opt-in procedure and we have made some other adjustments to our fee schedule. As a result, we don't really expect any material impact as a result of this new regulation. Our team has been very effective in engaging our customers to explain the service and I think this is the kind of customer engagement that is going to be critical as we go forward through these times of market and regulatory changes.

Now I am going to take a short break. I am going to ask Kevin to provide some more color on the numbers and then I will conclude with some closing comments. Kevin?

Thanks, Mike, and good morning, everyone. As Mike has mentioned, we earned $0.25 per share in the second quarter. This represents a 67% increase over the core earnings per share reported last year.

My comments this morning will be in regards to core earnings. As you know, we had several non-core items in the second quarter of 2009 including a merger termination fee and a charge related to the prepayment of our government preferred stock. These unusual items are more fully discussed in our earnings release.

As compared to last year, our core revenue increased by 12%. We continued to achieve growth in both net interest income and banking fees. Net interest income, when compared to the prior quarter, grew at an annualized rate of 13%. We reported net interest income of $18.9 million. This exceeded our forecast of $18.5 million.

We achieved this with a 7% annualized growth in average earning assets which included a 13% annualized growth in average commercial loans. The net interest margin also improved from 3.24% in the first quarter to 3.25%. Our margin improved with the yield on earning assets remaining stable at 4.75% and our deposit costs being reduced by six basis points for the quarter to 1.33%.

We continue to focus on keeping our funding costs down while maintaining our earning asset yields. This was the first quarter since 2007 that earning asset yields did not decline due to the falling rates. The 3.25% margin in the second quarter slightly exceeded our forecast of a margin in the low 3.20%s. For the remainder of the year we expect our margin to remain in the range between 3.20% to 3.25%.

We do anticipate some additional erosion in our earning asset yields as we move through the year, but we feel we can offset this with lower funding costs. We look to generate about $19.4 million in net interest income for the third quarter. And we expect earning assets to continue to grow at an annualized rate of 7% and deposits to grow with a rate in the mid-single digits.

This growth is aided by our new private banking and asset lending teams and the continued strong organic growth from our New York and Springfield regions. We continue to maintain our balance sheet asset sensitivity; however, we have not forecasted any rate increases this year.

Our net interest income came in at a forecast level of $8 million for the quarter. Included in the quarter results was a charge of about $400,000 resulting from market valuation declines in our interest rate swaps due to the low rate environment and our counterparty risk differences. This was a non-cash charge and it should be recovered as rates increase. A strong fee income growth this quarter helped offset this charge.

Banking fees for the quarter and over the prior quarter increased at an annualized rate of 19%. This growth is the result of increased secondary market income relating to residential mortgage originations and high checking fees. Income from integrated services, insurance, and wealth management came in near expectations and continues to reflect challenging market conditions.

When looking at the third quarter we are forecasting our non-interest income to be about $7.1 million. The reason for the drop from the second quarter is due to the seasonal insurance contingency revenue of about $1 million received in the second quarter and no contingency revenue in the third quarter. Excluding this component, we expect fee income to be slightly up in the third quarter even when you include the effects of Reg E.

Based on our outlook for net interest income and non-interest income for the third quarter, our revenue is targeted at $26.5 million. This represents an 8% increase over the prior year's third quarter. Our position was $2.2 million for the second quarter and it covered our net charge-offs. This was also better than our forecast of $2.7 million.

We expect our net charge-offs to continue to decline and our third-quarter forecast for the provision to be around $2 million. As we look forward, we see the allowance as a percent of total loans decreasing slightly from the 1.58% as we continue to build a track record of lower net charge-offs. Our credit experience for the first half of the year supports these improved expectations.

Our second-quarter non-interest expense came in right on forecast at $20 million and shows a slight improvement as compared to the first quarter. Our employees continue to do a great job of holding the line on expense growth and in the second half of the year we do expect some expense increases as we absorb the cost of opening two new de novo branches in New York.

For the third quarter our forecast for non-interest expense is to be about $20.3 million. Due to our pretax earnings being ahead of our earlier forecast we had to increase our effective tax rate to 26% in the second quarter and we expect this tax rate to remain at this level throughout the rest of the year.

In summary, we expect the third-quarter net income to be about $3.2 million or about $0.23 per share. Adjusting for seasonality this would continue to produce a strong annualized growth rate of almost 40% compared to the prior quarter. Earnings for the first nine months would be $0.72 a share, which would be nearly a 30% increase over the $0.56 core earnings per share reported in the first nine months of 2009.

I continue to feel encouraged about our results and our prospects. We have solid liquidity, capital, and are positioned to benefit when conditions improve in our markets and when interest rates rise. Our goal is to aim for double-digit annualized revenue growth and to keep our expenses low. This should help to significantly improve our bottom-line growth.

With that I will turn the call back over to Mike.

Thank you, Kevin. Nice job. So as Kevin said, our $0.23 earnings per share guidance for the third quarter represents about 40% annualized sequential growth. As we noted in our earnings release, we have increased our guidance for full-year core earnings per share to the range of $0.95 to $1.00.

As I have said to many of you, we are keenly focused in the next couple of years on getting back to the $2.00 core earnings per share run rate that we produced back in 2007 and 2008. On getting there we also have to offset the impact of additional shares outstanding, higher FDIC premiums, as well as the margin contraction resulting from the current low rate environment.

In our investor presentations we have shown how we get there, based on strong organic revenue growth including our new business lines, along with some moderation in credit costs and some rate relief along the way. To achieve this goal we need to keep boosting our bottom line at around a 30% annual rate. Now we are currently growing earnings per share at a 40% annualized rate, but of course the opportunities for margin expansion will be more limited from here until rates rise.

Now there is a lot of questions in our industry about the impact of financial regulatory reform. Most of these questions have not yet been answered. We don't feel there will be any immediate impact to our operations and some of the impacts will be based on regulations that will be written in the next couple of years.

While we need a little more time to sort through the impacts of this reform, we do feel that it can provide opportunity. Whenever the environment is challenging or unstable companies who are nimble and proactive do have an opportunity to prosper and our team has the attitude and energy to find new ways to make money in these times.

Additionally, I do believe that the reforms will have more impact on larger entities which are more highly leveraged, which rely on derivatives and other trading income and have less connection with consumers in local markets. We are absolutely focused on our markets and we can provide the solutions that they need while larger institutions, frankly, will be distracted by reforms and economic issues in other areas of the country.

I also expect that the 2,000-plus page reform bill is going to increase the compliance costs in our industry and this will contribute to compliance fatigue in some smaller institutions. Now this is an unfortunate side effect of financial regulation and it's going to increase the scale necessary for efficient operations. I expect that there will be institutions who decide to partner in this environment and we are positioned to be a desirable partner for consolidation.

As our earnings continue to grow strongly, I believe we will see continued strength in our currency and that should enhance our ability to participate in M&A opportunities that we do encounter. Now we have been a disciplined and successful acquirer and we will continue to be disciplined in evaluating opportunities that arise in the current market.

Now there have been a few opportunities this year and there have been a few transactions done this year, and we have been at the table for most of them. Each situation is unique and we approach each one based on our analysis of the benefits. And we will continue to be active in evaluating potential opportunities in and around our markets.

I have met with a number of investors in recent months. At recent price levels we believe that our stock has compelling value based on the earnings targets and growth opportunities that are in front of us. We expect current investors to be rewarded for their investment. It's also a good time for new investors to come into our stock.

As always, Kevin and I are available to answer questions and provide perspectives about our strategies. Management has also been active as investors. The BHLB was recently discussed in an article by Seeking Alpha highlighting 15 stocks seeing insider buying.

And I would add this, the long-term incentives provided to management anticipate annualized earnings growth similar to the targets that we discussed. So our team is fully committed to these goals and we are working overtime to deliver strong results in future quarters.

So as I mentioned at the start of the call, it was a good quarter for us. We had top-line growth, we had bottom-line growth, we had strong asset performance, and we had good expense control. This is certainly the direction that we wanted to be headed in and I believe this is the result of a positive, energetic, and experienced team who will be working hard to continue growing this franchise and providing strong returns to those who are invested with us.

Now that concludes our remarks and I would ask the operator now to open the line for questions.

Damon DelMonte, KBW.

Good morning, guys. Mike, I was just wondering if you could elaborate a little bit more on your comments on M&A.

I think a couple of the deals that we have seen recently have been on the far end of Massachusetts. Are you guys willing to expand your footprint that far or are you trying to just keep it to the middle part of the state?

No, I think there is no question we would expand as far as Eastern Massachusetts. The two deals that we have seen recently -- Wainwright, we saw the RiverBank deal -- both I think good deals. Gerry Mulligan is a good friend and it's a franchise we would have been interested in. Jack Barnes is also a very confident and good friend, and I think they put together a good deal; probably a level at $21 cash that was a little rich for us.

But I think there will be additional opportunities and there is really no restrictions on us taking a look at Eastern Massachusetts.

Okay, great. That is helpful. Thank you. And then could you just give us a little perspective on why you guys have been so successful on commercial loan growth or just loan growth in general? It seems like other banks that have reported everybody is talking about weak demand and limited opportunity out there and you guys are knocking the cover off of the ball.

Let me say this, it's not easy for sure. We are certainly not getting it because we are pricing better and we are certainly not taking credits that are suspect. I think Richard would tell you we are turning down significantly more credits than we are making but we have recruited well.

We have recruited the right people from the right institutions that have been in those markets for a long time. I think that the culture that we have based and put in place here is one on energy and action and accountability. And so I think there are a lot of pieces that come to play and I think if we continue to work as hard as we are working, we will continue to see continued growth at the numbers we are putting up.

Okay, great. And then lastly, I guess, Kevin, for you, could you just repeat what you had said your expectation was for non-interest expense -- sorry, non-interest income for the quarter?

Hold on. $7.1 million.

Okay, great. Thanks a lot, guys.

Mark Fitzgibbon, Sandler O'Neill.

Good morning, guys. This is actually [Alex Twordahl]. My first question is are you guys noticing any difference in credit trends in your New York franchise versus the Western Massachusetts franchise versus other parts of your footprint?

You mean as far as finding more solid credit relationships?

Well, that and also just with respect to credit quality, asset deterioration, that sort of thing?

Richard, do you have any comments on that?

I think that in the markets we are in, and New York being one of them, I think we are seeing a consistency across the board where some companies have handled this recession I think in a good place. Part of the reason why we have been able to grow our commercial book is that some of the banks that they were banking with during this upheaval in the economy kind of treated customers in a bad light. And that opened the door for, as Michael indicated, an energetic, disciplined team to go in and move swiftly.

So if anything we have seen the ability to cherry pick off of other companies' books because they really haven't paid a lot of attention to their clients.

Okay. And then just secondly with respect to M&A and because you are doing some de novo work in the Albany area, would you say that you are saving your capital more towards something closer to Boston or is it really sort of just looking at everything?

I think that we are -- continue to be open to partnership opportunities and it's not really concentrated anywhere specific. We have got a currency at this point that by all measures looks like it's going to be a profoundly profitable currency over time, and we think that that is going to promote potential partnerships with other smaller banks that will benefit the shareholders on both sides.

So I would say it's more of a matter of when opportunities arise, not necessarily being specific and concentrating on a specific geography.

Okay, thank you. Just lastly I was wondering if you could share with us when your last FDIC exam was.

Yes, you know, that is obviously confidential information. I would say this, we always have our examinations in the first half of the year and so there was no change in that this year.

I think I would say this about the examiners in general, if you have got a clean balance sheet and you are doing the things that you are supposed to be doing the relationship with regulators continues to get better and better. So that is about all I can tell you about that at this point.

Great, that is helpful. Thank you.

Mike Shafir, Sterne Agee.

Good morning, guys. I was just wondering if maybe kind of broadly speaking we could think about some of the growth aspirations and goals to achieve this $2 run rate. I think because, as mentioned before, the loan growth as a whole kind of in my universe has been hard to come by and it seems like that piece of the equation is going to have to be pretty robust along with obviously some help from the rate environment.

Well, I think there is two or three factors that we have talked about on some of our investor presentations. Certainly we believe that we can continue to generate good loan growth across the board. There will be a settling from credit issues. I think there will also be some movement in rate, but in the short run I don't see why we can't continue to deliver double-digit numbers for growth in loans.

I also would say this, we do a pretty extensive job in this company with our Six Sigma processes, and as we grow we expect to see exponential benefits to us in the scalability of many of our operations. We have got three Six Sigma projects going on internally right now and every one of those Six Sigma projects has the ability to generate a larger margin from the standpoint of growth versus expenses that are in place today.

So I don't think that we are necessarily counting on any immediate movement in rates and we are certainly not counting on anything out of the ordinary to get back to that $2 level.

So when you speak about the double-digit growth in loans are you speaking specifically to the commercial loans?

No.

In general?

In general.

On an annualized basis?

Correct.

And then just as far as the new branch openings in August and November, how much do you guys think that is going to add to the expense line?

How much is that going to add to what, Mike?

The operating expenses.

Do you have a number on that, Sean?

Yes, I would say about $600,000 total over the course of the next six months.

Okay. Thanks a lot, guys.

Laurie Hunsicker, Stifel Nicolaus.

Good morning. Just to follow-up on what Mike asked and also what Damon asked a little while ago, as we look at your $2 target does that assume an acquisition, your $2 target for 2012?

No, it doesn't.

It does not, okay. And then as you see it in terms of heading east toward Boston, and this is just more sort of for Massachusetts, would you be more inclined to de novo like you are doing in New York or would you be more inclined to acquisition?

We would like to do -- have a partnership in that area because it's certainly more advantageous from the standpoint of creating density with your branches. That is not to say that we wouldn't branch at all in Eastern Massachusetts, but I would say the priority for us would be to do an acquisition.

Okay. And I have heard from some of your competitors that are sort of in and around the Boston area that the team you picked out from TD Banknorth is very visible. That you are -- and I think that was a compliment in a good way. Can you talk a little bit about the projections that you expect from that group?

Yes, sure. It's a pretty extraordinary group of guys and of course they were running about $1 billion in asset-based loans for Bill Ryan back in the day and so they have a large portfolio of existing customers that they continue to call on.

They gave us some numbers early on; we are holding them to it and that is somewhere between $80 million and $100 million will be booked in ABL in the first 12 months that they are on board with us.

Okay. And remind me, when did they start?

They really started in the first quarter, so we are about $23 million as we turn mid-year and the pipeline is pretty robust.

Okay, great. And then just one last question, Mike. You had mentioned that the LSBX [hand over] deal looked interesting to you at $21. Did you guys bid on the deal?

No, that is not something I would tell you if we did or didn't, Lori, you know that. I would say this. I liked that franchise. I think Gerry Mulligan is a terrific guy and he did a great job. I think that Jack got a nice deal there.

When we look at the numbers, $21 cash, we couldn't make it work. We have to see payback in a period of time that is advantageous to us and our shareholders. Maybe with the Smithtown and RiverBank deals Jack can pull that off. So, yes, we had interest in that. I thought it was a great franchise.

Okay, great. Thanks a lot. Nice quarter.

This concludes today's question-and-answer session. I would like to turn the call back over to Mike Daly for any closing remarks.

Great, thank you very much. Thank you all for joining us. This does conclude the call.

I certainly want to extend our appreciation for you joining us today. We certainly do look forward to speaking with you again next quarter.

This concludes today's conference. Thank you for joining. You may now disconnect.