Beacon Financial Corp (BBT) 2010 Q4 法說會逐字稿

Good morning, and welcome to the Berkshire Hills Bancorp fourth-quarter earnings conference call. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to David Gonci. Please go ahead.

Thank you. Good morning, and thank you all for joining this discussion of our fourth-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.

Our discussion will also include references to our pending mergers with Rome Bancorp and Legacy Bancorp. This discussion will include forward-looking statements. Certain factors could cause actual results to differ materially from expected results.

Berkshire will be filing Registration Statements with the SEC containing a proxy statement prospectus and other documents regarding each of the proposed transactions. Rome and Legacy shareholders are encouraged to read the proxy statement prospectus documents when they become available, because they will contain important information about the Company and Rome and Legacy and the proposed transactions.

Now I will turn the call over to Mike Daly, President and CEO.

Thank you, Dave. Good morning, everyone. Welcome to our fourth-quarter conference call. With me this morning is Kevin Riley, our CFO, along with others from our management team.

Now, this morning, we will discuss our fourth-quarter results, we will comment on our performance for the year, and we will provide some guidance for the first quarter and for the year ahead. At the end of our comments, of course, we will be glad to take questions from our callers.

So, let's get started. We announced core EPS of $0.28 a share in the final quarter of 2010. This was ahead of our expectation and a 12% increase over the prior quarter.

Our seasonally adjusted core revenue growth was strongest in the fourth quarter, demonstrating strong momentum heading into the new year. We had significant growth near the end of the quarter, which of course bodes well for higher average balances in the next quarter.

For the year, we produced core EPS of $1.01, while our GAAP earnings were reduced by $0.02 a share in the fourth quarter due to merger-related charges that of course we had previously forecasted.

So we had a good year. We produced solid organic growth. We did control our expenses. We maintained and improved on solid asset quality metrics. We expanded with our new asset-based lending and private banking teams. We opened two new branches in New York. And we finished the year with two merger agreements that produced solid investment metrics and are strong strategic fits for our business.

And while these were good results, I want to be clear that we are not and we will not be satisfied until we double our core EPS run rate from this 2010 level.

Our pretax, preprovision core income increased by 32% in 2010, and at this pace, we can achieve a $2 or more core EPS run rate by the end of 2012. Now, including the benefit of our planned mergers, we expect to achieve around a 40% to 50% increase in core EPS in 2011.

So I am confident that, with our internal and external growth, we are well positioned to achieve our objectives. Now let's look at the growth that we posted in the fourth quarter.

We had 17% annualized loan growth, and we had 26% annualized deposit growth. This included significant new commercial account acquisition. Our commercial banking teams continue to have good results in capturing business from national bank competitors in all our markets.

All of our business is in-market. It conforms to disciplined underwriting policies. And we are not stretching on credit, structure or pricing to attract it. Our lenders are well known in their markets, and increasingly, they are the first call when borrowers are reaching out for their commercial banking needs.

Of course, our lending also included the contribution of our new asset-based lending team, which ended the year with nearly $100 million in outstandings, which actually was a little better than we expected.

Now, because of this business, the majority of our commercial loan growth in 2010 was in C&I loans. And that fits in with our plans to reduce the concentration of CRE loans.

Our consumer lending area also put up good numbers this year, with 6% growth in residential mortgages and 7% growth in home equity borrowings.

On the deposit side, we had very good performance with commercial accounts, which drove our deposit outstandings higher than we originally forecasted. We expect that much of this money will be staying with us, and we are not overpaying for it. Our growth includes some institutional accounts, and of course, we feel that the 100% deposit insurance that we have continues to give us a competitive advantage in our marketplace.

I think our approach has been disciplined, and that helped us to maintain our net interest margin at 3.30% in the fourth quarter. Our transaction account balances were up 7% for the year. And we continue to promote low-cost relationship-based accounts as a key focus of our business development.

Our deposit growth also included almost $50 million in outstandings from our new private banking team in Springfield, and this was a strong start for a really terrific group of well-known professionals.

Towards the end of the year, we opened branches in Albany and Latham, New York, and we have another new branch in Rotterdam coming online for an opening in the first part of 2011.

Our team was energized by our brand initiatives for America's Most Exciting Bank in 2010, and I would expect that we will continue to see success building commercial and retail and insurance and wealth-management business in our traditional markets as a result of this.

Turning to fee income, our fourth-quarter fees were up 18% year to year, with strong results in our banking fees for deposit, loan and interest rate swap services. This included strong contributions from the commercial side, and that's consistent with the balance sheet growth.

Our fourth-quarter insurance fee income was up 8% over prior-year results. Now, there is no seasonal contingency income in the fourth quarter, so this improvement does give me some confidence that we are starting to see an improved outlook for our noncontingency income as a result of account growth and improved pricing, in some cases.

As I discussed in our last call, we did reorganize our wealth management division in the fourth quarter, and we did bring in new management for account acquisition. So I look forward to seeing a resumption of double-digit revenue growth in this business line as we move forward.

For the year, our fee income was 28% of our total revenues, and I would expect we would get back to the 30% level, where we were, and then to improve from there as we pursue opportunities to expand our other fee services.

Turning to asset quality, our numbers continued to be favorable and improving through year-end. We've maintained our allowance at the same amount during the year, and we ended the year with more than 2 times coverage of our nonperforming assets. And I would add there is no core earnings benefit from reserve releases in our reported earnings.

Our delinquencies continue to be well below peer averages, measuring less than 1% of total loans, and our mortgage foreclosures remain nominal. Our foreclosed real estate has also remained nominal throughout the year. And based on the current economic outlook, we expect that despite these favorable metrics that we are enjoying, our trends will continue to improve during the upcoming year.

Now, at this time, I'm going to ask Kevin to provide some additional color on earnings and some guidance for the current quarter and 2011. Then I will return with some closing comments, and we will open up the lines for questions. Kevin?

Thanks, Mike, and good morning, everyone.

Well, we ended 2010 with a core that showed improving strength in all areas of our institution. As Mike has commented on and our press release has highlighted, the fourth-quarter result gives us great encouragement that the Company is moving forward to delivering the level of high performance that our shareholders and we expect.

We produced $0.28 in core earnings per share in the fourth quarter, which was up from $0.25 which we earned in the third, and was $0.02 more than we forecasted. We had stronger-than-expected fee revenue, coupled with a true-up of our annual tax rate, which caused this variance.

As we forecasted, we had $0.02 of noncore charges in the fourth quarter relating to the pending mergers, so our GAAP earnings per share for the quarter was $0.26. And for the year, we had $1.01 and $0.99 in core EPS and GAAP EPS, respectively.

Since Mike covered the fourth-quarter results, I will cover what we expect for the first quarter and the coming year.

Our expectations will focus on core earning results. As you know, we have pending acquisitions with Rome and Legacy. Rome should come -- should close near the end of the first quarter, and with it, it will bring a number of noncore charges. We have previously provided estimates of these transactional costs totaling about $7.5 million when we announced the acquisition. Under current accounting standards, some of these noncore charges will be recorded against GAAP earnings, as they were in the fourth quarter.

The actual impact of these costs on the first quarter will depend on timing and other factors, which are uncertain at this time. So, therefore, we are not going to try to provide guidance on the magnitude of these noncore charges against our expected core earnings for the first quarter.

As Mike has already commented on, our strong balance sheet growth in the fourth quarter brought us a full year of loan growth to 9% and our deposit growth to 11%. We are pleased that our liquidity remains strong, with deposit growth more than covering our strong loan growth.

As we look forward, we are planning our loan growth run rate to be in the high single digits and our deposit growth rate to be in the mid-single digits. And as you know, we have been very focused on maintaining our net interest margin, and we are pleased that even with the strong balance sheet growth, we were able to maintain the margin at 3.3% for the fourth quarter.

We remained disciplined not to extend asset duration, reduce our asset sensitivity, or take on riskier assets to generate additional yields.

For the first quarter, we are planning to hold the margin near its current levels. We expect our net interest income for the first quarter to be slightly more than $20 million. This result would produce growth of close to 10% over the first quarter of 2010.

Our fee income for the fourth quarter shows continued strength by increasing 8% compared to third quarter. This strength was apparent in all of our regular banking fee categories.

As you know from the past, we always receive insurance contingency revenue in the first and second quarters of the year. Even though we have been restructuring our revenue stream in this line of business to reduce our dependency on contingency income and to level out our earnings, we are expecting to record about $1 million in the first quarter of this seasonal insurance revenue. But for the quarter, we expect our fee revenue to be around $8 million. For the year, we expect our fee revenue to grow steadily due to the great work done with Regulation E solicitations and our restructuring of all our fee alliance businesses.

Our $2 million fourth-quarter loan loss provision more than covered our net charge-offs for the quarter. Our net charge-off rate continues to improve and declined below 40 basis points for the final quarter of the year. We ended the year with an allowance for loan losses to total loans of 1.49%.

When looking forward to 2011, we continue to expect further improvement in our asset quality, even from these already-favorable levels. But for the first quarter, we are anticipating our loan loss provision to be around $1.5 million to $1.8 million in reflection of this continuing strength.

Our fourth-quarter core noninterest expense was around $21 million. This reflects a 1% decrease from the prior year's fourth quarter. This quarter included the cost of two de novo branches that were opened in the latter part of the year in our attractive New York region.

Expense control continues to be a key focus of our management team as we try to achieve efficiencies in all areas of our operation. However, gaining efficiency does not preclude us from making strategic investments in our business in an effort to set the stage for a larger and a more profitable company going forward. For 2011, we are planning for several branch openings, including another de novo branch in New York in the first part of the year.

So for the first quarter of 2011, we are expecting our noninterest expense to be around $21 million. This would be about a 4% increase over our core expense level recorded in the first quarter of 2010. With our strong earnings growth rate, we feel comfortable with this increase as we build our Company for the future.

As we currently estimate, our tax rate for 2011 should be in the range of 29% to 30%, as we project higher levels of pretax income for the year.

In total, we expect to produce core earnings per share of around $0.30 in the first quarter. This would represent a 25% increase over the first-quarter results of 2010. We expect to continue this momentum throughout the integration of our pending mergers of Rome and Legacy. Our team is quite excited about executing our plans, and we are confident we have the horsepower to do so.

Our news release provides some general color regarding our expectations for 2011. We expect our core earnings per share to grow around 40% to 50% for the year. This will come from both organic growth and our two pending acquisitions.

We expect our organic revenue growth to be in the high single digits and our expense growth to be in the mid-single digits. This will continue to achieve the positive operating leverage we saw in 2010. All of this supports our goal of achieving a core earnings per share run rate of $2 by the end of 2012, if not before.

I am very excited about the results we posted for 2010, and I am convinced that we have a solid momentum for achieving our goals for 2011 and beyond.

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

Thank you, Kevin. Nice job as always. As Kevin described, we plan to carry strong organic earnings growth momentum through the first quarter. We expect to bring on the contribution from Rome by the end of the quarter and from Legacy by the midyear point. And we see this combination of internal and external growth producing a 40% to 50% increase in core EPS for the year 2011.

And this places us well along towards achieving our $2 per share core run rate by our target of the end of 2012. Now, we were there before, in 2007 and 2008, and we just won't be satisfied until we've regained and then surpassed these levels.

We closed in on nearly $3 billion in assets by the end of 2010, and we plan to be around $4 billion in another six months or so. We continue to be the largest locally headquartered regional bank in our markets. And all these moves strengthen the quality of our franchise and the profit potential that we have in these markets.

We plan to have more than 60 branch offices, including about a couple dozen in our important and growing New York region, which will actually be our largest region in terms of total branches.

Now, competition has intensified some in 2010, but we remain well positioned to gain market share, primarily from the national banks. And we feel we've got very solid banking teams in the markets and that this is increasing our recognition in these markets.

We expect to be able to gradually improve our margins as a result of our disciplines and our market positioning. And of course, with our mergers, we expect our margins in most of our financial metrics to improve even further.

As we are moving closer towards shareholder approval processes -- and I don't plan to get into detail on those mergers in this call -- I will say this, though -- we feel very good about our integration planning and our communications with our partners at Rome and Legacy.

Our people are working hard to deliver our targeted results. We had a great fall session of America's Most Exciting Bank University for the whole Company. And it is showing up in the quality of our customer engagement and overall recognition in our communities.

Now, as Kevin noted in his comments, we are absorbing the costs of infrastructure growth in our operating earnings, and we expect to continue to do this. Between our expansion initiatives and our merger agreements, I think we accomplished as much in 2010 to support future earnings growth as we did in terms of delivering improved bottom-line numbers in 2010.

We've also made it clear we do not intend to take on long-term interest rate risk. And I have the fullest confidence that our risk management disciplines will continue to deliver strong asset quality and other solid metrics of safety and soundness.

As we see other consolidation at the regional and community levels in our New England and New York markets, we believe that this gives us more opportunity to deepen the identity that we are building. I also believe strongly that we are a good provider for those institutions that may wish to entertain partnerships going forward. The increasing demands of regulatory compliance, product diversity and infrastructure investment make such partnerships a win-win in our view.

Among the deals announced in Massachusetts and upstate New York markets in 2010, we had the opportunity to be in discussions on several of them, and we were very pleased that we negotiated merger agreements on two of them, agreements that I think are very good deals for both sides.

I've been pleased to see our stock strengthen in recent months. And like those who cover our stock as analysts, I believe there continues to be strong upside price potential as we move closer towards delivering on our earnings objectives.

As our proxy materials will demonstrate, a significant part of our compensation is based on the results that we produce. And we are also investors in our Company, with the same expectations for superior results that we know our investors expect.

We think we did a good job in 2010, but I can assure you that we will have our total focus on building on that performance in 2011 and beyond.

Now, that completes my prepared remarks, and we will now invite the operator to open the lines for any questions you might have.

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

A couple questions. First, you mentioned something about the insurance revenue projection for the first quarter. Did I hear incorrectly, it was a $1 million revenue number at the insurance subsidiary in 1Q?

It was contingency.

That was just the contingency revenue, Mark.

Oh, got you, okay. And then secondly, could you give us a sense on the timing of the closing for Legacy?

Well, we are hopeful that we can close on that right at the end of the second quarter.

Okay. And then, could you talk maybe a little bit about the mix and the size of your current loan pipeline?

Yes, sure. Richard, you can give us a little color on that?

I think what we are seeing is, and I think Michael's comments up front hit it best, I think in the markets we are in, we've got a well-seasoned staff. We are not seeing a lot of slippage yet on structure or pricing. And what we're seeing is we're seeing a good mix of C&I, ABL and then real estate.

So we're starting to see some of the real estate markets come back. We're starting to see some companies starting to build inventory, starting to make sales, receivables. So we are starting to see a really good mix from the commercial perspective. And on the consumer side, we continue to see strong demand in our product line, and everything seems to be moving according to plan.

Would you say that the majority of the commercial business will continue to be C&I, based on the ABL production, Richard?

Yes. I mean, we are -- again, to Michael's comments earlier, the ABL and the C&I is really a focus because we want to pull down the level of real estate on the balance sheet.

And how big is the pipeline?

We probably have overall $200 million of deals in the pipeline, and then there's varying levels of where they are in the process.

Okay. And then I'm curious -- do you feel like, Mike, at this point you have sufficient capital, or do you feel like you might need some additional capital this year?

No, I don't have any reason to believe we would need additional capital this year at all, Mark. And that was really one of the benefits of the two deals we did.

Okay. And then lastly, when do you feel like you would be in a position to do more acquisitions? You mentioned in your opening comments about hopefully there would be other merger partners down the road. Is it likely that you'll wait until you close Rome and Legacy before you contemplate other things?

Well, I think pipeline is important. I think we will end up closing the Rome deal and we will close the Legacy deal, and I think we will do it flawlessly. I hope that -- we've got pipelines going and discussions going so that if there is an opportunity to close another deal or two before the end of the year, we will do it.

Okay, thank you.

Damon DelMonte, KBW.

Could you remind us with the asset-based lending, kind of the geography of those loans?

Yes, they're all in New England, so Eastern Massachusetts, our New York market. We've actually done a couple of nice ABL deals in Vermont. So they are all in-market.

Okay, great. And do you have a targeted level of outstandings for the end of 2011?

For ABL?

For the ABLs specifically, yes.

I would like to see us do the same production in 2011 that we did in 2010, so $200 million.

Okay. And then, if you look at the yields on the commercial business loans this quarter, it looks like they dropped to 4.83% from 5.86%. Could you kind of talk us through a little bit what the quarterly decline was?

Sure. I'm going to ask Richard or Kevin to give you an answer on that.

And I think Mike Oleksak is also on the line. I think the decline was just, again, there has been some pressure in the market from a pricing perspective. The flipside is we started to delever the balance sheet from a risk and it's starting to fall in line with what the market is.

Okay, great. And then, I guess lastly, Kevin, when you were giving your guidance for expenses, is that including both the Rome and the Legacy franchises in the expense base?

For the first quarter?

Well, I think in the release, you guys mentioned 3% to 5% growth for the year --

Right.

-- on your core base. Does that include the addition of the other two franchises, or is that just based off of your fourth-quarter --

That's just based off our core bank before the acquisitions are included.

Okay. All right, that's all I had for now. Thank you.

Mike Shafir, Sterne, Agee.

I'm just wondering, the actual -- the guidance for the expense line for the first quarter, I believe I missed that. I was just wondering if you could reiterate that.

4%, wasn't it, Kevin?

It was 4%; I think it's $21 million.

And then, as we think about the margin moving forward, I think when you guys had the call for the Legacy acquisition, you gave some annual guidance on 2011. And I was just wondering if the guidance still kind of holds relative to a flattish-type margin in the first quarter.

Yes.

Yes, I mean, the answer is yes.

Okay. So we should start to see that margin really increase as we integrate the deals?

No question.

Towards the back end of the year?

Yes, no question. I mean, we can hold it where it is for the first quarter. We will expect a bump in the second quarter. We will expect a bump in the third and fourth quarter.

Okay. And then, just as we kind of think about M&A moving forward, obviously you guys want to continue to be on the hunt for things to expand the franchise. Is there specific geographies that you continue to look at, specific size of transactions?

You know, I think the geography has been consistent. We like the New England and New York markets.

I think size has an awful lot to do with good partnership metrics, both from a pricing standpoint and a cultural standpoint. $500 million to $1.5 billion I think has been kind of the sweet spot. But, again, a lot of that depends on when something becomes available, when somebody feels as though a partnership with us is beneficial to their shareholders and our shareholders.

So those are probably generally acceptable parameters, Mike. But, you know, they can change based on the specifics of any individual deal.

Okay. And then just finally, just going back to the capital question, I mean, the growth here has been very robust. And I'm just wondering, I mean, is there going to be enough capital to support the organic growth outside the potential acquisitions? And if so, what is the comfort level on a TCE to tangible asset ratio basis?

Well, I think we've said before, based on our forecasting, we can continue to grow organically at the numbers that are in front of us for a couple years without the need for additional capital. And as we look to do deals, some will be capital-accretive, some will be a little capital-dilutive. And those will have an impact on when and if we would have to raise additional capital.

But I think we continue to say that if we are in the 7%, 7.5% range in our capital ratio that we feel comfortable.

Thanks a lot for all that detail, guys.

Laurie Hunsicker, Stifel Nicolaus.

Yes, just to follow up, actually, on two of Mike's questions, just going back to the margin, I guess you had given us guidance it would be around the 3.60% level as we sort of fast-forward midway into the year. Is that still a good number?

Yes. I mean, I don't know if it was midyear. Kevin, you can double-check me on that. But I think we were, mid- to latter part of the year, we would certainly be between 3.50% and 3.60% in the margin, based on the metrics of the two acquisitions.

Okay. And then, also just to follow up on Mike's question, as you look at acquisition, and I guess to your point that you're looking for deals, continuing to look for deals -- you would like to do two more -- what sort of floor do you put in terms of how much dilution you take to tangible book?

Or I guess even asked another way, pro forma, your tangible book is currently $14.60 with charges, with earnings and everything. You had suggested you would be up at around $15 by the end of the year, which seems reasonable. So if we were to look at that $15 pro forma tangible book number at end of 2011, where could we expect to see that if you do two more deals?

Well, Laurie, I will tell you this -- I am not necessarily focused on what the floor would be at the time that a deal is announced. I am a lot more focused on how fast and how accretive a deal is when we do it.

And if you look at the last couple of deals that we've done, we are actually accreting our tangible book value per share in a very short period of time based on, number one, the minimal tangible book value dilution we accepted, but more so the earnings accretion that we got out of the deal.

So I think we just have to base what we are doing going forward on what we've done in the past, and that is to make sure that earnings accretion is at the forefront of any deal we look at and that any tangible book value dilution that we accept gets paid back in a very short period of time.

Okay. And what would be your benchmark for a short time? Do you define that as two years, or--?

You know, I really just don't want to get into defining what that is. You know, if you look at the last couple deals that we've done, I think we are at the three-year time period, three- to four-year time period, and those were, from a comparison standpoint, pretty good metrics.

So if it is two, that's great; if it is four, we will see how strategic the deal is. But I think generally speaking, the terms and conditions that we did the last two deals at are pretty good benchmarks for deals going forward.

And Laurie, that's on the accretiveness of the actual acquisition.

Right.

On the returning or getting back to the tangible book value dilution, it's under a year --

Under a year.

-- (multiple speakers) the total earnings of the Company.

Right, right. No, I mean, clearly you guys have done it right. But there have been others that have really hurt their tangible book, and their stock has suffered. I think -- I know I certainly like it; I like what you've done, and I think the market likes it.

I just -- you know, as you are more acquisitive -- and I guess to that point, too, to the extent -- I mean, we know, per your press release, you've got one more branch here that you are opening in Rotterdam in the first half of 2011. And I guess, Mike, you referred to -- there were several more branch openings planned. Are they in the New York marketplace? Are we going to see you start to de novo towards Boston?

Kevin, I think you made that comment.

There are several branches that -- we are actually relocating a couple of our branches, one out of Pittsfield and down to Lenox. So the actual cost structure will not increase, but it broadens our market a little bit.

Another one is we have a location in Delmar, which is not really a visible location, and we are moving it out to a real premier location. Again, the cost of moving that branch isn't going to be much, but the visibility in the Albany market is substantial. And then we also have one on one of the best roads in Albany going in, and that is Wolf Road in Albany, which will be open in the later part of the year. So that's kind of the structure of the branches that we're looking at next year.

Okay, and so no plans to sort of fill in with branches up where you're lending team is, closer to Boston?

Not at this juncture (multiple speakers).

Okay. And I guess to the extent that you guys can't find acquisitions, would then you be more aggressive on the de novo?

I think that has always been the case. You know, if we are interested in a specific area and there is no way to get in there through a partnership, then we have to resort to taking a look at putting some de novo branches up.

Okay. And then I have two more questions. You had referenced that you might expand into other fee services areas.

I think he was -- we were talking about broadening our fee revenue by maybe some acquisitions in that area. Again, (multiple speakers) --

No, and I would also add, though, I think -- I remember what Laurie was referring to. And there are some other retail-type products that we've looked at in the past to broaden some of our fee-based businesses. And some of them are ancillary to wealth management; some of them are ancillary to some of our mortgage products.

So I am not prepared to get into detail on those. But I think it's important for the Company to continue to look at broadening its product base. And every time we broaden our product base, it gives us an opportunity to enhance our fee income.

Okay, great. And then last question, on the tax rate, you had mentioned 29% to 30%, Kevin, in the first quarter of 2011. Is there -- I mean, I saw that your BOLI increased. You're up to $46 million. Is there anything that might be continuing to be put in place that we could see your tax rate go down, or is that also going to be a good tax rate into 2012?

There is really no -- you know, right now, the thinking is our tax rate is going to continue to increase. As we increase the normal taxable income, our tax (multiple speakers) will decrease. So we anticipate our tax rate will continue to go up slightly over the year. So I don't think there's anything in place, though, to actually bring it down below 30%.

Okay, great. Thank you all very much.

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

Thank you. I'd just say this concludes the call, and we want to thank everyone for joining us. And of course, we 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.