Beacon Financial Corp (BBT) 2012 Q1 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp first-quarter 2012 earnings release conference call.

All participants will be in listen-only mode. (Operator instructions)

I would like now to turn the conference over to David Gonci, Investor Relations Officer. Please go ahead.

Good morning. Welcome to America's Most Exciting Bank, and thank you all for joining this discussion of 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'll turn the call over to Mike Daly, President and CEO.

Thank you, Dave. Good morning, everyone. Welcome to our first-quarter conference call. A special welcome to our new shareholders from the Connecticut Bank and Trust Company and, of course, all others who have invested in us in recent months.

With me this morning are Kevin Riley, our Chief Financial officer, and other members of our management team.

We had a good start to the year, producing $0.45 in core EPS, which was in line with our target and with Street consensus. This is a 50% increase from the first quarter of 2011 and a 9% annualized increase over prior-quarter results. We achieved this result with 10% annualized revenue growth over the prior quarter and we had strong balance sheet growth and we had growth in fee income. This revenue growth allowed us to continue to drive a positive operating leverage and our core return on assets improved to 94 basis points.

As we noted in our guidance at the start of the year, we had some non-core items related to our merger and branch divestitures. Of course, Kevin will provide some more detail on those and also on our GAAP earnings in just a few minutes.

As you know, we focus primarily on organic growth to achieve EPS targets, and we met those objectives in the first quarter with 11% annualized growth for both loans and deposits. We continue to have strong results with our commercial business lending. This was up at an 18% annualized rate during the quarter. Now, this is an ongoing focus for us and results during the quarter included the contribution of our new Westborough commercial lending office which, frankly, has gotten off to a very strong start.

We continue to build a pipeline of new commercial business and expect commercial loan balances to constitute a higher percentage of total loan growth through the balance of the year. Our commercial balances are also expected to benefit from our enhanced small-business lending program which has extended our reach to this market segment in now all of our regions.

We had a pickup in our residential mortgage balances, as we noted in our prior guidance. During the quarter, we entered into an agreement to acquire the assets and operations of Greenpark Mortgage. This is a well regarded mortgage company, headquartered in Needham, Massachusetts, with several offices in eastern and central Massachusetts. So we view this initiative as similar to the team recruitments we've accomplished in other business lines, basically bringing on a best-of-breed team that significantly expands the footprint and scale of our consumer lending operations.

Turning to deposits, our 11% growth was spread across all major account types. Deposit growth continues to be strongest in our New York region and it includes the contribution of both our retail and commercial teams. We opened a new branch in Colonie in the first quarter and we're opening a new branch in North Greenbush, New York this quarter.

We continue to pursue strong and broad-based deposit growth across the franchise, while also managing down our funding costs in the ongoing low rate environment. By keeping a strong focus on our loan and our deposit pricing disciplines, we did produce an increase in our net interest margin to 3.62% during the quarter. We also continue to maintain an asset sensitive interest rate risk profile so that our interest income will benefit when rates do finally rise.

In addition to the 11% loan and deposit growth, we reported a 12% increase in fee income compared to the prior quarter, with increases in most lines except for, I think, the seasonal reduction in our deposit fees. As we previously noted, much of the seasonality has been eliminated from insurance income beginning in 2012 and insurance revenues included the benefit of higher volumes and firmer prices.

Wealth Management fees were up 15% over the prior quarter and total Wealth and investment Assets Under Management increased by 7% to now over $1 billion during the quarter. Our growth in these areas was a little ahead of plan in the first quarter and, with the expansion of our footprint and our other business lines, I think the prospects are good for continued strong growth in our fee businesses as we move forward through the year.

Our non-interest income has declined to about 24% of our revenue from about a 30% level due to the Rome and Legacy acquisitions. I'd say, however, with our current momentum and the addition of the Greenpark operations, we do expect to be moving back toward a higher contribution from fee businesses. Of course, that will provide the benefit of increased diversification and the durability of our total revenue stream.

As you can see from our earnings release, our asset performance continues to be favorable with our annualized loan charge-off rate dipping further to 24 basis points in the first quarter.

We don't see any systemic changes occurring in the current environment. In fact, the Massachusetts unemployment rate declined to 6.5% in March compared to the 8.2% national average. Both Massachusetts and New York, actually, were two of five states with significant employment gains from February to March. So while the national economic recovery remains uneven, the economic conditions in our markets support our expectation that credit conditions will remain firm. We expect that these market conditions will support our continued progress in taking market share from national competitors on reasonable terms based on our focus and our responsiveness in our local markets.

Moving beyond our first-quarter results, our major news last Friday was the completion of our acquisition of the Connecticut Bank and Trust Company. Now, that makes us three for three for bank acquisitions completed on time and on the plan in the last year. I'd note that two of these transactions involved complicating factors. The Legacy merger involved multiple branch divestitures and the CBT merger involved dealing with the U.S. Treasury and five regulatory agencies. So, I continue to believe that a strong execution and the capacity to get things done is an attractive attribute to developing partnerships and creating shareholder value in the process.

Now, I'll comment further about our acquisitions shortly, but at this time, I'd like to turn the call over to Kevin. He'll provide some further color of our financials. He'll discuss our guidance for the second quarter and I think he'll also include the impact of the CBT and Greenpark initiatives. Kevin?

Thanks, Mike. Good morning, everyone. As Mike has mentioned, we had a solid first quarter. Core earnings per share continued to grow, posting $0.45 for the quarter, up 50% over the prior year and up 9% over the fourth-quarter results at an annualized rate. Our $0.45 core earnings per share was in line with our previous guidance and continues to be based on positive operating leverage, which is our primary objective.

GAAP earnings per share for the quarter were $0.28, which included some additional merger and non-core expenses, and a net loss from discontinued operations. I will discuss this in more detail later in my remarks.

As Mike has also mentioned, we had a strong balance sheet growth. Both loans and deposits for the first quarter grew at an annualized rate of 11%. Our outlook for growth for the full year continues to be high single digits for loan and mid-single digits for deposits.

C&I and mortgage loan growth for the quarter more than offset the planned runoff we had for Commercial Real Estate loans. We expect loan growth to be fairly balanced for the full year across all lines with continued emphasis on C&I originations.

Now let's get into the earnings detail. In the first quarter, our net interest margin came in at 3.62%, a slight increase over the previous quarter. As I have mentioned before, prepayment activity on purchased loans can cause the margin to fluctuate slightly. Absent this activity, the margin for the quarter would have been slightly higher.

For the second quarter, we expect the margin to remain in the range of 360 to 365 and that the acquisition of CBT will have little to no impact. As I have stated previously, we do expect the margin to come under some pressure later in the year if we continue to stay in this low rate environment. This could cause the margin to decline to the mid-350s by year-end.

Net interest income for the first quarter as compared to the prior quarter was flat. This was the result of fewer days in the quarter, offset by some balance sheet growth. Average earning asset growth for the quarter was less than we expected, due to most growth coming in at the end of the quarter. This growth and strong commercial loan pipeline, we expect net interest income to come in stronger in the second quarter and to be in the range of $30.5 million to $34 million. This range would include the impact of CBT.

Moving to non-interest income, we reported an 11% increase in first quarter over the results of the prior quarter. This result was better than expected and most business areas contributed to this increase. The small remaining amount of seasonal insurance revenue recorded in the first quarter was offset by normal seasonal decline in deposit fees.

For the second quarter, we expect non-interest income to be around $12 million to $12.5 million. This would include the impact of CBT and Greenpark. This projected result would represent more than a 20% increase over what was reported in the first quarter. Our organic growth and strategic initiatives continue to add strength here, along with acquisitions.

As Mike mentioned, our credit performance was and is solid, resulting in better than expected first-quarter loan loss provisions. We see the second-quarter loan loss provision being around $2 million to $2.3 million, which is in the same range we have been in over the past several quarters.

Our core non-interest expense for the first quarter came in a little better than our guidance. We continue to remain focused on controlling expense growth during these times of expansion.

Business plans are adhered to and planned savings and acquisitions are achieved. As I have mentioned before, the expense culture here is part of the fabric of the Company and division leaders are diligent in their results.

For the second quarter, we are projecting non-interest expense of around $30 million. Again, this would include CBT and Greenpark.

Our first quarter's core efficiency ratio was 59% and we see this ratio coming in around 60% for the second quarter as we integrate our new teams and operations. We project our core tax rate to be around 28% for the second quarter, which is up a little from the previous estimates and includes the impact of additional income from these strategic initiatives.

To summarize our second-quarter outlook, we expect our core net income to be around $10 million. When you take into account the additional shares issued in the CBT transaction, which are around $965,000, we are expecting core earnings per share of about $0.47. This projected earnings level will represent an annualized growth rate of about 13% when you compare it to the run rate of $0.44 we had coming into the year.

Our first-quarter results also include a charge of $637,000 relating to discontinued operations. This charge was associated with the final divestiture of New York branches from our Legacy acquisition. We also recorded $3 million in after-tax, non-core merger related expenses for the quarter. Both of these reduced GAAP earnings per share down to $0.28. For the second quarter, we are anticipating non-core, after-tax charges for the CBT acquisition and system conversion to be about $4 million to $5 million.

As Mike mentioned, we closely assess our asset sensitivity position. Our investment portfolio consists of high-quality securities, primarily agencies and munis, with a portfolio duration of under four years. Future growth in the portfolio will be weighed against growth in our loan portfolio. This quarter, we added some forward-starting swaps which locked in some lower fixed funding costs and we continued to use a balanced approach with regards to our loans and deposit mix, all protecting us against the eventual rise in rates.

We continue this balance between investing in expansion, generating current period earnings and accelerating future earnings and we are carefully and diligently moving forward with the best people, culture and execution standards which generates the right energy and optimism in our Company.

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

Kevin, thank you. Nice job.

So our core EPS guidance of $0.47 for the second quarter does keep us on track with the growth momentum that we're targeting to reach our annual goals. Now, this is a 34% increase over our second-quarter core EPS last year and it represents more than a 13% annualized increase from our run rate at the end of 2011. Now, this, again, reflects a continued positive core operating leverage from revenue gains exceeding expense increases.

Now, I'd add this. We give all kinds of granular guidance. I think you have the best thinking on what we're aiming to accomplish during the quarter. And, as with the first quarter, I hope that this would be accepted as the bottom line for what we are expecting to deliver.

On our last call, I noted the leverage per growth and improvement that we're working on to achieve our financial goals this year. We've made progress toward many of these objectives which include completing the CBT acquisition successfully and on time, which we have now accomplished; accelerating the pace of our organic growth across our business lines, and this is evident from our first-quarter results; enhancing our mortgage and consumer loan originations.

We're taking a major step forward here with our Greenpark team recruitment. Enhancing our small-business banking program. We completed this process in the first quarter and business volume is expanding every month.

Continued retail development. This is evidenced by the new offices we've opened in Colonie and North Greenbush, New York. We have two branch relocations planned for this year and another new branch planned for Niskayuna, New York around the end of the year. We're also moving forward with increased distribution of our mortgage, our insurance, and our small business services through our retail platform. Finally, a further improvement in our already favorable credit metrics. Again, this was evident in our first-quarter results as well.

Now, turning back to our acquisition, we've worked closely with the CBT team in completing the merger process. We're on track with our integration plans in our new Connecticut region. As I've stated before, we view this acquisition as a beachhead, giving us eight well-positioned branches in the Greater Hartford area and a total of 20 branches in the Hartford/Springfield economic area. We look forward to increasing our presence in this market and to growing the CBT branches as a result of the brand and the product benefits that we're now introducing to these new customers.

Including the CBT merger consideration, will have nearly 22.2 million shares outstanding. So based on our recent stock price, our market cap is over $0.5 billion. So the visibility and the liquidity of our stock continue to increase as we gain new interest from institutional investors based on our growth and based on our prospects.

We had a change in our analyst lineup in the most recent quarter, but we continue to enjoy a 100% buy ratings from all our analysts. I personally want to say that we appreciate this very much.

Our stock price has improved since the start of the year and I'm pleased that all three of our bank acquisitions have resulted in price appreciation for existing and new shareholders because that's what they were structured to do. We've been careful to assess any tangible book value dilution and to have a sensible plan to recoup any such dilution ) within a reasonable time frame while also targeting double-digit returns on the new equity utilized.

Our ongoing success with our mergers and the further gains in our stock price I think does position us to continue to be an attractive partner for consolidation opportunities that may arise in our market. We are positioned to be responsive to any such opportunities that may avail themselves, subject to the deal disciplines we've previously set up. Meanwhile, we're very focused on the top line and bottom line gains.

So let me conclude with this. Each year at this time, I meet with all of our employees to review our successes in the Company and in each region. Additionally, in my presentations, I tie together the importance of our brand and culture and connection to the high levels of financial performance.

Moments. Moments that we create with our form of customer engagement, moments that generate fulfillment and results and loyalty, all translating into personal and team success. I'm confident that this culture will help us in delivering results from organic and partnership activities that are producing above-average earning gains, improved profitability, a larger footprint, and a stronger franchise.

Now, this is a time when those who have and are investing in us are seeing the tangible benefits of their investment. We remain absolutely focused on continuing to deliver that growth, to provide the upside our analysts and many others expect from us.

This completes my prepared remarks, and I now invite the operator to open the line for questions.

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

Good morning, gentlemen. It's actually Alex Twerdahl here. I certainly do appreciate all the forward guidance that you guys have given to the second quarter but, Kevin, I just missed the net interest income number that you gave. You said something to $34 million?

Yes. I think I misspoke. It's $33.5 million to $34 million.

Great. Thanks. And then maybe you can give a little bit of color on the commercial loan growth that you're seeing. Is that attributable to any specific geographies in your footprint?

I think that it's centered in the Central-Eastern Massachusetts, Albany, New York, area. You need color. Is that where you say most of our growth comes from?

Yes, Mike. I would say, Alex, yes. Our growth has been heavily driven by core growth in New York because we've expanded our footprint through our branch system and the new team that we brought on December 1 has really paid great dividends.

And ABL.

And ABL.

Right. I think you alluded to this a little bit in your prepared comments, but do you think that this growth is indicative of an expanding economy in these areas, or is it all just stealing business from competitors that are less focused?

Well, I think that, at this time, it's still predominantly taking market share.

Great. Then, with the completion of the CBT deal, do you think that you are ready to go forward and announce another acquisition? Any hints on to what geographies might be the most attractive to you right now?

Well, let's start with the second question. Probably not going to give you any hints, and go back to the first question. Any acquisitions or partnerships we do, Alex, are really just the result of discussions with someone who believes in what we're doing and the partnership works. So that is not our primary objective right now. Our primary objective is to hunker in, do all the blocking and tackling that we need to do, execute flawlessly, continue to drive organic growth and if partnership opportunities arise in the footprints that we've delineated, then we're going to be responsive and we're going to be eager to have those discussions.

Great. And the final question is just on the residential mortgage product you're putting on. Is that mostly a 10 to 15 year product or is there some 30-year fixed in there? How do you structure your pricing to make what you want more attractive to the customers?

It's mostly a 15- to 30-year fixed. What's most important, with the Greenpark acquisition, we've opened up a new corridor of customers for us. I think that's the way we look at it. So we priced it appropriately in conjunction with finance. Kevin talked a little bit about those forward swaps.

The big thing that we're excited about is these -- mortgage has proven to be a gateway product to us for checking, for mortgage insurance, and we've just opened up a whole new batch of customers for us to cross-sell to.

Great. Thanks. That's all my questions for now.

Thanks, Alex.

The next question is from Damon DelMonte, KBW.

Good morning, guys. How are you?

Good, Damon. How are you?

Good, Mike. Thanks. Just to kind of follow-up of the Greenpark commentary, could you talk a little bit about what your expected volumes are going to be from that business? I know Kevin gave us a broader guidance towards the non-interest income, but what kind of revenue component can we expect from these guys?

Sean, you can get to the answer of that question, but I just want to kind of -- this Greenpark group, these guys are terrific entrepreneurial individuals. They're wide-open to not only doing a mortgage business but, as you said, these are entrepreneurial people that are really excited about selling a lot of other products in the Company. So I'm pretty excited about this team.

With respect to volumes, do you want to --?

Sure. We can originate between $600 million and $800 million with this group. This group is the endorsed lender to the Mass. Teachers Association, which we have been successfully able to transfer over now to the Bank. That's a great opportunity for us.

From a revenue perspective, we had estimated a break even at about nine to ten months, so as we're able to integrate our operations and how they sell on the secondary market, we will be able to realize improved enhancement. So, for instance, we sell best efforts to Fannie Mae in current state. With Greenpark, we will be able to guarantee that basis and then improve that operation by 25 to 50 bps going forward. So from a break-even perspective, nine to ten months and then additional revenue enhancements as we integrate.

Okay. Great. The transaction is complete, so they are fully integrated with you guys now?

No. We've got a May -- a Monday date for finalizing that transaction and then, like any integration, systems and other things will convert over time. We anticipate full conversion -- full integration of systems and processes toward the end of the year.

Okay. All right. That's helpful. And then, this is probably for Kevin, with respect to insurance commissions and fees, I know you guys have made efforts to get rid of some of the seasonality and lumpiness in the way that hits the income statement. So is the first-quarter number, then, a good run rate going forward for us?

The first quarter included some seasonality, about $300,000, approximately, of contingency but that is down dramatically from the -- if you look at our prior year where we had contingency revenue, so we had a little bit, but not much.

Okay. Then I guess my last question in regards to commercial lending -- sorry if I missed this part, but could you talk a little bit about your pipelines, kind of what you are seeing in which areas of the footprint?

Do you want to go, talk to --

I'd be happy to, Mike. Yes, Damon, the heavy part of our footprint continues to be central and eastern Massachusetts. I think we've talked a little bit about the fact that we are taking market share from bigger institutions. Central Massachusetts, which we talked about the fact that we would be able to book about $75 million in new commitments, we're well ahead of track record of where we thought we'd be. ABL continues to do very, very well and will continue to do very, very well in New York, especially with a number of really small businesses, because our small business program is expanding in New York with our new branch system.

Okay. That's helpful. That's all I have for now. Thank you very much.

Thanks, Damon.

Theodore Kovaleff, Horwitz and Associates.

Yes, essentially my question had been answered, but I do want to congratulate you and look forward to ongoing growth.

Theodore, we'll take calls like that all day long. Appreciate it.

Okay. Take care.

Mike Shafir, Stern Agee.

Good morning, guys.

Michael, how are you doing?

Doing well. Thank you. I'm sorry, I missed the provision guidance for the quarter.

Provision guidance is somewhere between $2 million to $2.3 million.

Then, if we could just, a little bit more on the mortgage acquisition. I don't know any of the details of the transaction, but it looks like a portion of that will be paid in stock as the deal finalizes?

The stock component is more or less on incentive comp going forward in years to come, so it's no different, really, than executive comp here, but they wanted some of their performance comp to be put into stock. So the transaction is not stock into beginning.

Okay. And then the cash value of whatever you guys paid for the transaction is -- are we going to see that recognized somewhere in the near term or in this quarter?

We really don't disclose that.

Okay. Fair enough.

This is -- it's small amounts.

Small amounts (multiple speakers)

Then just as you guys were talking about the potential origination volume is $600 million to $800 million annually, so we're going to see this coming onto the income statement as a gain on sale of loans component?

Yes.

Moving forward?

Yes.

Okay. So if you guys were at about -- it looks like around $10 million last quarter and you go into $12 million to $12.5 million, so you are expecting somewhere around $2 million in contribution from this gain on sale piece, moving forward? I'm sorry -- quarterly.

That's correct, Mike.

Well done.

Okay. Fair enough. And then, just the $30 million non-interest expense guidance, that's core ex the one-time items?

That's correct, Mike.

Okay. Well, thanks a lot, guys. I appreciate all that detail.

Mike, thank you.

Collyn Gilbert, Stifel Nicolaus.

Thanks. Good morning, guys.

Good morning, Collyn. Welcome.

Thanks. I just want to follow up on the loan pipeline comment in reconciling -- so it sounded like the Central Mass or what you're getting is ahead of that $75 million that you were targeting, but yet I think, Mike, in your opening comments, you had said that maybe the loan growth didn't materialize as much as you thought it would this quarter. So, just trying to reconcile maybe was it the timing issue that caused you to sort of fall short of your expectations then, but yet exceed them now?

Yes, I think that clearly is the case. We've got a new team there. We've got some guys that are doing some things in the Central New York area right now and it just took a little more time to get some closings done than I would have liked. I mean, we would have liked to have seen those close two weeks ago, three weeks ago. But they built a nice pipeline and there are certain covenants and certain things that need to get done in order to close them. So I think that's exactly right. Pipeline is pretty strong. I think second quarter we will see the results of that and it was a matter of timing.

Okay. That's helpful. That's great. Okay. Then just following also on the Greenpark discussion, I just want to make sure I'm understanding it. So the $1.3 million in loan fees that you guys saw this quarter, was there anything in there from Greenpark?

No. Hardly any, none.

Okay. So the big jump from the fourth quarter, what was that in that line? Was there something in particular?

No. We just had more production that we sold to the secondary market.

Okay. So that was just your own mortgage production?

Yes.

Yes.

Okay. Okay. Okay. That's helpful. Then, just kind of understand some of the components of your margin. It looks like the C&I yield moved around from the fourth quarter to the first quarter and then is there -- what causes that? Was there anything in particular that caused that? I think it dropped off and now it's kind of recovered, but just trying to understand maybe what's driving that C&I yield.

Could some of that be the movement of some of the loans that you moved into small business portfolio?

Part of it's purchase account, and we had a premium that --

Oh, I see, okay.

-- we had a loan payoff with a large premium that impacted that margin.

Okay. Then, how much -- do you guys have a number on how much of your margin is -- the component that is tied to the accretable yield from your acquisitions?

Yes. For the quarter, that was about $500,000.

Has that changed much over the last couple of quarters?

It's come down a lot since the fourth quarter where we had about $1.1 million.

Okay. Do you expect that to drop that much going forward?

No. Again, we had some large premiums that were recorded in this quarter, so we actually think that might go back up a little bit as we move into the second quarter and out.

Okay. Got it. Got it. That's helpful. Thanks. And then other opportunities -- and you know what, if you said this, Kevin, I apologize, but to lower the deposit costs -- I'm just trying to get a sense of what opportunities you might have on that side.

We believe we have some opportunities there and we're going to look at those opportunities because deposits are growing very robustly right now, so we will look at our deposit costs.

I think, Collyn, that is a point that we talk about from time to time when we're on the road when we're on the road. You know, there's always probably a little more room to lower deposits. I think if we continue to put the numbers on the board that we anticipate and we don't have to lower our deposit costs significantly, it's better long term for the franchise. So it's a balance.

Okay. Okay. But there's not like a tranche or buckets of maturations that are coming down the pike that could dramatically lower that?

No.

No.

On the CD side. Okay. And then just one final reconciliation point. So the $4.2 million that you guys saw in merger charges this quarter, how did that split between Legacy and CBT?

I'm trying to think here. It was probably a third, a third, a third -- a third Legacy, a third CBT, and a third core conversion.

Okay. So when you talk about, Kevin, the $4 million to $5 million in after-tax charges in the second quarter, is that all merger related to CBT or is there other stuff in there?

That's majority CBT.

Okay. That was all I had. Thanks.

Collyn, thank you.

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

Well, thank you very much. This does conclude our call. I want to thank everyone for joining us. Of course, we look forward to speaking with you all again in July to discuss our midyear results.

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