Beacon Financial Corp (BBT) 2011 Q1 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp first-quarter earnings conference call and webcast. 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.

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.

Our discussion will include references to our pending merger with Legacy Bancorp. This discussion will include forward-looking statements. Certain factors could cause actual results to differ materially from expected results. Legacy shareholders are urged to read the proxy statement prospectus documents as they become available at the SEC for additional important information about Berkshire and Legacy and the proposed transaction.

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

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

As you saw in our earnings release last night, we got the year off to a good start in the first quarter. We had 25% growth in core earnings per share and our core EPS came in at $0.30 which is consistent with our prior guidance. The increase again resulted from organic revenue growth and positive operating leverage, which demonstrates the ongoing strong fundamentals in the Company, both in driving top-line and market-share growth and more importantly, of course, in bringing the results to the bottom line.

Now, we've been operating at or above this level of core earnings growth for several quarters now. The profit trend is strong and, as you know, we expect the growth curve to get even steeper with the benefits of our Rome and Legacy bank acquisitions. And I'll have more to say about that later in my remarks.

As a result of noncore merger costs, our GAAP EPS came in at $0.20, as expected. And Kevin will provide more detail on that in his remarks.

Our operating strength is built on a solid balance sheet and our key balance sheet metrics continue to get stronger. Our capital ratio has improved, with tangible equity to assets at a little over 8% and our tangible book value per share grew to $15.44. Our liquidity improved as a result of strong deposit growth. And our asset quality remains very solid, with further improvement in our already favorable metrics for nonperforming assets and net loan charge-offs.

Our revenues were up 7% in the first quarter, which was driven by double-digit annualized growth in average loans and deposits. In the first quarter we posted strong growth in our key commercial lending areas. And at quarter end our $100 million pipeline of committed commercial loans is up even over last year, so once again we expect to post double-digit commercial loan growth in the second quarter and for this year.

Our deposit growth continues to be strong and demonstrates that we are gaining market share. And of course part of this results from our New York expansion. We recently opened our 13th branch in this region and our office count is expanding further as a result of our mergers. Our investment in this region has resulted in a $400 million balance sheet from de novo growth in just five years. And this is now over $700 million with the Rome merger.

Meanwhile, we're seeing ongoing growth in our Springfield region and into eastern Massachusetts. In our traditional markets we've been able to manage our funding costs to maintain our net interest margin while remaining asset sensitive. And we're leveraging our customer relationships for higher fee income and cross sales. In the first quarter this was particularly evident in our insurance revenues which, I'm pleased to report, were up 7% year over year. Our noninterest income was 30% of total revenue in the first quarter and, as I've said, we're determined to increase this metric over time and to create similar synergies in the new companies that we're acquiring.

I'm now going to ask Kevin to provide some further color on the first quarter and guidance for the second quarter. Kevin?

Thanks, Mike, and good morning, everybody.

As Mike has stated, we got off to a great start for 2011 by reporting $0.30 in core earnings per share for the first quarter and holding our net interest margin at the 3.30% level. These results were in line with the guidance that we provided you last quarter.

Our GAAP earnings came in at $0.20 per share due to merger-related charges. The expenses amounted to approximately $1.7 million, or $0.10 per share after tax. And they related primarily to investment banking, legal, and severance expenses. Since the Rome acquisition closed on April 1st, there were no other financial impacts due to the pending mergers. Of note, the tax deductibility of the merger-related expenses is generally less than other expenses. And that was reflected in the reconciliation we provided to you in our earnings release.

My remarks this morning will first cover the usual review of trends and expectations as it relates to the Company pre-acquisitions. Then I will briefly cover what Rome's impact will have on our earnings guidance for the second quarter.

Our earnings results for the first quarter were largely due to the 10% growth we achieved in our net interest income over the prior year. In our guidance we expected this increase, but it hinged on our ability to maintain our net interest margin at the 3.30% level despite the pressures on eroding earning asset yields caused by the prolonged low-rate environment. As Mike mentioned, we are maintaining our asset sensitivity so that we will benefit when rates begin to move up.

Our average loans and deposits showed a 12% and 22% annualized growth rate for the first quarter, respectively, when compared to the prior quarter. As we look forward, we continue to target our loan growth at high-single digits and our deposits in the mid-single digits.

Our noninterest income was slightly up in the first quarter and came in at our expected levels. Insurance revenue was up 7%, with improved sales and commission income and the seasonal contingency income which arrives in the first and second quarters. Our loan fee income was down in the quarter due to us not repeating the strong fourth-quarter swap income and mortgage loan production being off due to the tick-up in rates.

We continue to expect our noninterest income to increase slightly throughout 2011 with robust organic growth coming from our existing operations already in place.

We recorded for the quarter a provision for loan loss of $1.6 million, which covered what we had in net charge-offs. This level of net charge-offs fell right into our expected range. With asset quality improving we expect our allowance for loan loss to expect at this level or slightly lower. Loan growth and credit experience should support our expectations.

Our noninterest expense was slightly higher than we expected for the first quarter. This was due to $600,000 writedowns we took on our [older REIT] properties to facilitate expected sales. Excluding these writedowns our core noninterest expense was up 4%. With the new branches in New York and our continued growth, we generally expect our noninterest expense to grow at this level. We continue to prudently invest in our franchise for future growth by staying disciplined on our expenses.

Our effective tax rate for the first quarter was 27% including the impacts of the noncore expenses.

Based on these revenue and expense trends we expect our operations will deliver organic core earnings growth of around 25% throughout the rest of the year.

We included in our earnings release an additional exhibit of selected financial information on Rome Bancorp. The results at the time of the merger were within the range of our previous expectations. At this time we feel confident that we will achieve all of our financial performance targets for this merger. As we stated at the deal announcement, we expect cost saves of 25% for 2011 and 35% for 2012. While the integration is going well of Rome into our culture of cross selling all of our products into their markets, we have not included any revenue synergies or organic revenue growth in our near-term earnings targets for the Rome operations.

So for the second quarter, after the consolidation of Rome, we are expecting net interest income to be in the range of $23.5 million to $24 million. This should improve our net interest margin to the range of 3.40% to 3.45% as we mark the portfolio to market and take advantage of Rome's higher-margin business mix. We expect further improvements in the margin following the Legacy acquisition.

[With] Rome included our core noninterest income for the second quarter is expected to be in the range of $8.5 million to $9.0 million, bringing our total core revenue targets for the second quarter in the range of $31 million to $32 million, for about a 20% increase in our levels reported in 2010.

Our combined loan loss provision is targeted at $1.4 million to $1.6 million for the second quarter. As you know, under current accounting guidance we book Rome's loans at an estimated fair market value, with a credit discount and no allowance for loan losses. In the future our disclosures will distinguish between loans that are covered by the allowance and acquired loans that are not.

In looking at our combined core noninterest expense, we expect these expense levels for the second quarter to be around $23 million to $23.5 million. Our expected tax rate for the quarter is targeted in the range of 27% to 28%, but this may fluctuate based on the amount of noncore merger-related expenses and tax preference items.

In total we expect to produce a combined core net income for the quarter of around $5.5 million, which will equate to a core earnings per share of 33% to 34% including a little more than 2.6 million of shares issued in the Rome acquisition. These results would represent a growth of about 30% or better when compared to the prior year.

As we stated when we announced the acquisition of Rome, we expected it to be $0.09 accretive on core earnings in 2011, $0.03 of which we included in the second quarter earnings guidance. We also expect this merger will have a positive impact on all of our core financial performance metrics.

As we saw in the first quarter, our second-quarter GAAP earnings will also include some noncore-related charges for the Rome and the pending acquisition of Legacy. The amount and the timing of these charges is uncertain so, accordingly, we are not providing guidance on our GAAP earnings per share for the second quarter.

With the Rome acquisition behind us and our planned acquisition of Legacy to be completed early in the third quarter, we remain encouraged about the expected financial strength to emerge from these combinations. Our work with our merger partners this year has affirmed the cost save goals that we previously set forth. Our teams remain energized to deliver superior business results through organic growth and positive operating leverage, while successfully integrating our new partner banks.

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

Kevin, nice job. Good detail, good clarity on some of the noise caused by the acquisition. So thank you.

So we're right on pace with what we targeted coming into the year. And I think we're well positioned to deliver the full-year core earnings per share growth of 40% or more that we set as a goal this year, EPS in the $1.40 to $1.50 range. Now, this was highlighted, by the way, in a recent article called, "Great Expectations," at thestreet.com. And this article noted that we're among a handful of banks in the country with existing solid, profitable operations and strong prospects for earnings improvement on top of that.

Our success in achieving this goal will be based in part on our acquisitions of Rome and Legacy. We completed the Rome acquisition right on schedule and we're progressing well with the integration. We're pressing forward to complete the Legacy acquisition and, as you know, we built a half-year benefit from the Legacy operations into our plans this year. So we're working hard to capture most of this benefit in accordance with those plans.

I'm very pleased with the teamwork that we developed with both the Rome staff and the Legacy staff. Those who have invested in our company know the strong emphasis that we place on people and energy and teamwork and the right values that we believe in so passionately as America's Most Exciting Bank. I believe we are demonstrating the benefits of this investment in people and culture with success in our markets and in our financials.

I also feel strongly that this emphasis on people is critical to our attractiveness as a partner in other bank consolidations that may arise in and around our market. Now, we have a deliberate and a disciplined approach towards structuring deals that we believe results in appreciation of our stock price and higher value for partnering shareholders which, of course, was highlighted after these two merger announcements. We continue to explore other such opportunities and we will avoid situations where we feel the economics will not be favorable for the existing shareholders of both institutions.

I was very pleased that the stock component of the Rome merger was oversubscribed in their recent cash and stock election and we're pleased to welcome the Rome shareholders who have received the Berkshire stock. Berkshire stock will also comprise 90% of the consideration for Legacy.

So with the completion of both of these deals, our outstanding shares will have increased from 14 million to 21 million and our market cap will exceed $450 million based on our recent stock price and it will exceed $500 million based on the consensus price estimate. This should open our stock to a wider range of investors and should also improve the daily trading liquidity for our stock.

I'd like to add that our stock does have strong elements of both growth and value at today's valuations. This is reflected in the unanimous buy ratings among the analysts who cover us. We have a solid market position in our existing markets and strong growth resulting from our strategies for organic, de novo, and product expansion. Growth through acquisitions will come when it comes, as long as the economics and the value make sense. Meanwhile, we are strongly focused on our profitability targets of an ROA of 1% or higher and a double-digit ROE which will provide sustainable long-term value.

Now, a recent Wall Street Journal article commented on the profitability challenges in our industry and the need to develop solutions of scale. Well, we are committed to doing just that, while also keeping a local focus and responsiveness that our markets want to have with their banking partner. And we ensure this by attracting the right people with the right energy from those markets. Now, these are the ingredients behind the $2.00 EPS run rate that we've targeted for the end of next year. And we are committed to the work before us to deliver this result.

Now, that completes my prepared remarks. And I know now that our operator will open the lines and we invite any questions that you may have.

(Operator instructions.) Damon DelMonte; KBW.

You mentioned that your commercial loan pipeline is about $100 million right now. Could you give us a little color on how the breakout of that is between C&I, CRE, and your asset-based lending operations?

Yes, sure. Mike Oleksak's right here. You can give us a breakdown, can't you?

Yes. Of the ABL -- we're probably 40% ABL, 20% C&I, and 40% CRE.

Okay. What was the ABL balance at the end of the quarter?

$110 million, approximately.

Okay. So is that tracking where you expected it to be?

A little behind in the first quarter, but the committed loans are good. But we've got the loans that they're working on that we have term sheets on that we feel confident that we're going to get should bring us right up to budget by the end of the second quarter.

Okay, great. And then, could you just give us an update on the divestiture of the branches associated with the Legacy transaction?

Right now it's in the hands of the DOJ, Damon, and so it would really be premature for me to get into any discussions we're having with regulators. We believe, based on the schedule we've put forward, that we're right on schedule. But that's probably all I'm allowed to say about that.

Okay, fair enough. And I guess just my last question is probably for Kevin. Regarding the FDIC assessment change that took place on April 1st, can you quantify what the benefit would be for you guys?

We've gone around and around about the benefit of that. We do see some benefit, Damon. But we're not counting it as a material change of our numbers.

Okay. That's good. That's all I have for now. Thank you.

Mike Shafir; Sterne, Agee.

This quarter we saw a pretty big uptick sequentially in occupancy and equipment expense. I'm assuming obviously that has to do some with the branches. Are we going to see that number start to come in a little bit as you guys start to see some of the cost saves from both of these transactions?

Let me answer it and then, Kevin, you can correct me if I'm wrong. But the answer is unequivocally yes. I mean, we're seeing -- we have a couple of opportunities right now that we think will help us even before we get to the conclusion of the Legacy transaction. So the answer to that is yes. The degree that that would come down I think is probably a little squishy at the moment. But, Kevin, if you more detail on that?

No. I mean, it might have been up, but the fact that that's kind of what we budgeted. We live in the Northeast, so we have some little bit of additional expenses in the wintertime. But it was only slightly above what we anticipated for the quarter and then we are anticipating that to come down as we move out through the year. But there was nothing really surprising in that than what we expected.

All right. Thank you. And then, just on the net interest margin, could you just maybe reiterate the guidance you gave for the next quarter?

Yes. The guidance with Rome is going to be somewhere around 3.40% to 3.45%.

And then you said that you should see that continue to move upwards with Legacy?

That's our anticipation.

Okay. Thanks a lot, guys. And just one final one -- obviously you guys have been pretty prudent on the acquisition front. When you continue to think about where you'd preferably like to go, where is that? Are you willing to move kind of more into eastern Mass or do you really like kind of that Albany market and prefer to stay there?

You know, we've been pretty clear, Mike, with what the metrics are for us to get a deal done. And we'd love to do more deals in Massachusetts. We'd love to do some more deals in New York or Vermont or even northern Connecticut or, really, New England, in and around our markets. But a lot of that comes down to making sure that the value proposition is good for both sets of shareholders.

And so, if a deal were available today and it met those metrics, we'd love to do it. But eastern Mass right now seems to be a little expensive for us, but it's certainly on our radar screen.

All right, thanks a lot. I appreciate all that detail, guys.

Laurie Hunsicker; Stifel Nicolaus.

Can you give us an update on your new branches, how they're doing in terms of deposit and how they're doing in terms of what you thought they would -- the Albany, the Latham, and the Rotterdam. And just remind me, with the Rotterdam, when did that open?

Okay. I can give you that, Laurie. It's Sean Gray. Rotterdam opened approximately -- we haven't actually even had our grand opening. The soft opening was about a month ago.

They are on track. We target for about $20 million in the first two years and that gets us to breakeven. And they're very much show on their way to $10 million apiece. And all-in for the New York branches, as Mike mentioned in his script, that each of those branches average about $41.5 million. So in five years very much on track and we're very bullish on that Albany market.

So do you have a breakdown just of how, specifically, Albany and Latham are doing in deposits?

Albany and Latham -- we target $10 million for the first year. They've been open for about five months. They're on track. So they're in that $5 million to $7 million range.

Okay. And then -- and, Mike, this is more a question for you because you have been a disciplined acquirer. If we get through this year and don't see you do another acquisition, where would you stand bigger picture on de novo and much would you take on?

For us, as you know, Laurie, this is all about driving our earnings per share. So if acquisition opportunities aren't available to us and we feel as though we can put some branches in some areas, increase our earnings per share, not dilute it even in the short run, then New York would probably be the place that we would continue to branch. But it's all going to be a matter of math for us.

One thing I think we've done more this year than ever is we've gotten out and we've met with many, many, many of our shareholders. And we think we know what they want us to do and we promised them that we would deliver. So whether it's de novo branching or whether it's making an acquisition, driving the earnings of this company is really at the forefront.

Okay. And so just one more question to that. Is it safe to assume that if you did embark on a de novo strategy you wouldn't do more than X, like you wouldn't do more than probably three or four per year?

I think that's probably a fair assessment.

Okay, great. Thanks a lot.

Mark Fitzgibbon; Sandler O'Neill.

Hi, guys. This is actually Matt filling in for Mark. Just a quick question here -- can you give us some guidance when you may expect the system conversion for Rome?

Yes. Well, it's near the third week of May.

Great, helpful. Thank you. And then can you give us a sense of the monthly margins leading into the quarter end?

The monthly margins for the first quarter?

Yes, please.

It was kind of -- it was 3.26% for January, 3.43% for February, and then 3.24% for March.

February is always --

Because usually the February, because it's a short month, it's always going to be high. 30-day months are usually higher than 31-day months because of the mortgage books and also mortgage-backed securities.

That's great. That's all I had. Thank you.

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

Okay. Well, thank you all very much. This concludes the call. I want to thank everyone for joining us. And of course we look forward to speaking with all of you again next quarter.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your phone lines.