Beacon Financial Corp (BBT) 2013 Q4 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp fourth-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 Ali O'Rourke, Investor Relations officer. Please go ahead.

Good morning and welcome to America's Most Exciting Bank. Thank you for joining us in this discussion of fourth-quarter results. Our news release is available on 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.

With that, I will turn the call over to Mike Daly, President and CEO. Mike?

Thank you, Ali. Good morning, everyone. Welcome to our fourth-quarter conference call.

With me this morning is Josephine Iannelli, along with other members of our management team. In addition to our earnings release last night, I hope you all saw the separate release about Josephine's promotion to Chief Financial Officer. I am delighted to welcome her to our executive team and I will have a little more to say about that in just a few minutes.

With respect to our earnings release, we did achieve our guidance and we turned in good results for net loan growth and expense reduction. Our earnings per share came in at $1.87 for the year and $0.40 for the quarter, and Josephine will speak to the GAAP results a little later.

Our results in the quarter and the second half of the year were driven mainly by a continued strong loan growth, a continued cost-cutting, and a focus on driving fee income. And I am going to touch on each of these. And I will start with loan growth.

Total loans were up 16% annualized for the quarter. That follows 16% annualized growth in the third quarter, so results here continue to be good. In fact we are seeing strong results out of not just our commercial teams at this point, but also the consumer side. Total consumer loans were up 10% annualized for the quarter and a big piece of this growth was driven by auto loans and this was the direct result of some of the investment we made in the first half of the year.

On the commercial front, it has been a particularly good year for our C&I business. We posted double-digit growth quarter after quarter and we are up another 12% annualized in the fourth quarter. Commercial real estate loans turned around in the back half of the year as well and we are up 7% annualized for the quarter there.

So I am pleased where George Bacigalupo's leadership has taken us, and the fact that we are seeing strong performance in all our regions has been particularly satisfied because that is at the heart of the strategy of the franchise, to become a strong organic player in the five regions where we have made investments.

We saw a good growth out of our Albany area, our new Burlington, Massachusetts area in Eastern Massachusetts. Our leasing teams are starting to show some traction. We had a good year in Connecticut and ABL, again, was a strong contributor.

We have also got a strong and solid pipeline ending the year, so I would anticipate that net loan growth should remain strong. And of course adherence to sound and consistent credit structuring and emphasis on relationship building will continue as important themes for us, always.

Now I will turn to expenses. We reduced our core operating expense by an additional 3% in the quarter. That brought our total to 7% in the last six months. We completed the consolidation of two branches in December, bringing the total for the year to five. And we discussed this on the third quarter call. We also got some benefit from the Six Sigma projects we were working on earlier in the year.

And as I've said in the past, the direct costs is from these process improvement projects. They are not always easy to predict, but you can see the results in slightly lower expenses across many of the categories in the bank. And as I have said before, as growth occurs, you realize better scalability through these process improvements.

Now as we move further into the year, expenses will remain a focus for us. But we are going to make some investments where we need to. I think it is widely agreed that the regulatory environment and compliance are becoming more demanding and we intend to keep the credit flowing to support our markets. And with CFPB becoming more active, we are going to be increasing our compliance resources to stay prepared and to get ahead where we can.

Now we communicate pretty closely with our regulators and we intend to maintain a strong relationship there and good standing with them, and I think staffing appropriately is always going to be part of that. I can also say that there are some opportunities right now for us to bring in some additional talent and to strengthen our teams and our regions.

As you know we have had a pipeline of people looking to bring their skills and relationships to us, and I think to miss out on those hires at this point and the potential revenue generation that they bring for a couple of cents just isn't worth it.

Now we are closely managing our total salaries, but there are some important players on the sideline right now that we want and, I think, are important to our growth strategy. So we are going to have to continue to create efficiencies where we can so we can absorb these costs, and I would say to stay tuned on that front.

Now turning to fee income, we showed an increase quarter over quarter in almost every category, and total fee income was up at a 6% annualized rate in the fourth quarter. This reverses the downward trend in fee income we were seeing earlier in the year primarily driven by the drop-off in the mortgage market. We saw a double-digit annualized growth from our Wealth Management and our deposit fee categories and our slot fees also made a solid contribution.

On the insurance front, I would like us to do a little better. We have launched several new programs designed to drive growth, including quick life in the branches and some niche programs on the commercial sites. So I am excited to see where that takes us.

But fee income continues to be a very important revenue source for us, and we are going to remain vigilant here as we go forward.

Now I will turn to deposits. As we discussed last quarter, much of the runoff this year was related to expensive time deposits that we let go ahead of the branch acquisition. And while total deposits were down for the fourth quarter, most importantly, non-maturity deposits were up, and we did post a 2% annualized growth for total deposits in the second half of the year, again anticipating the branch acquisition.

We completed the acquisition of the 20 branches from Bank of America in central New York last weekend. These locations nicely fill in our footprint along I-90, bridging our markets from Albany to Syracuse. And while numbers are still subject to some adjustment, we acquired approximately $450 million in deposits and $4 million in loans.

There was some deposit run off between the announcement and the closing, not unlike other transactions recently. But as you know, we only pay for the deposits we receive.

So overall, it was a smooth transaction. Our new customers seemed happy and, frankly, Bank of America was helpful in making that happen. We closed two of the 20 branches as they were within eyesight of branches we currently operate, and at the same time we opened an additional previously planned de novo branch in Loudonville, New York, and that is just outside of Albany.

This brings our total branch count up to 92 with over half of those now in Central and Eastern New York. As you know we originally planned to use about half of the new deposits to pay off borrowings while investing the rest. But I have got to tell you with market consensus that loan rates could move higher in the near term, I think we have to be cautious about when and where we put that money.

I really think we are better off being disciplined and cautious with rate volatility, rather than being aggressive and risk moving too far into liability-sensitive territory at this stage of the game. I mean the easy thing to do would be to invest in new deposits quickly and make a few cents early, but that could hurt us going forward. I don't want us looking back wishing we had been more patient.

Now Josephine will add some more thoughts on this transaction, but it seems to me as though this is a good time to bring her into the conversation.

As most of you know Josephine has been with us as Chief Accounting Officer for the last year, and she has been filling the role of Interim Chief Financial Officer since July. Myself, the executive team and the Board have been impressed with the leadership Jo has shown over the last six months and she has been instrumental in our restructuring and our cost initiatives. Her knowledge of accounting is superb and her ability to cut through and understand the complicated aspects of purchase accounting and other financial dynamics has been impressive and not just to management, but to our audit committee, our regulators and our outside auditors.

So, she has been vetted and tested over the last six months, both internally and externally, and I think everyone is impressed with her. Importantly, she also demonstrates the best of AMEB's culture and her willingness to stretch and grow and bring in thoroughbreds to support her. And she also shows humility and she is a strong team player and that is exactly what we were looking for.

So, for me personally, it has been nice to be able to promote two executives from within this year, starting with George Bacigalupo in commercial and now Josephine as CFO. We had a lot of outside interest in these executive positions and I am proud of the fact that our internal talent showed the best promise to drive market share and earnings. I think it is a testament to the bench strength that we have built and are building here at America's Most Exciting Bank.

Now with that, I am going to turn it over to Josephine. She will walk us through the numbers and then she will give us some guidance for next quarter. Jo?

Thanks, Mike, and good morning to everyone on the line. I have been a part of the Berkshire family for nearly a year now and I am pleased to join the executive team to do my part in delivering on the earnings and investment potential we all see in front of us in this Company.

That said, I will turn to the first quarter and provide some color here in a minute on the key drivers to earnings and also some guidance on our outlook. I will also refer to our operations as they stood at the end of the year and then separately address the impact of the branch purchase.

We produced $0.40 in core EPS in the fourth quarter which was in line with our prior guidance. Taking into account some adjustments that I will comment on, we produced positive operating leverage with growth in core revenue and a decrease in core expense.

Mike mentioned our strong loan growth. We also invested further in medium-term collateralized mortgage obligations in our securities portfolio. This contributed 5% growth in our average earning assets compared to the prior quarter.

Our total net interest income decreased compared to the prior quarter. However, our net interest income includes purchase loan accretion and we produced exceptionally high recoveries on purchase impaired loans in the third quarter. This helped to boost our total purchase loan accretion to an unusually high $8.5 million at that time, including an out of period accounting adjustment.

In the fourth quarter, total accretion declined to $2.4 million, which was in line with our guidance. Excluding the accretion, our net interest income actually picked up slightly in the fourth quarter after having declined in previous quarters. The growth in average earning assets was mostly offset by compression of the underlying margins due to changes in the asset mix and lower yields on the replacement of runoff.

Looking ahead, we continue to target near double-digit annualized loan growth and low single-digit deposit growth. We believe that our runoff and replacement interest rates on the asset side are coming into close surveillance and we expect that we can continue to gradually move down our funding costs as we have done so for the last four quarters.

We therefore expect asset yields and funding costs to do more in parallel and that our margin compression is mostly behind us. As we have discussed before, we expect that purchase loan accretion will gradually go to zero by the end of the year while strong earnings asset growth is expected to keep total net interest income moving north.

Moving to non-interest income. Mike commented on our 6% annualized fee income growth. We also had some year-end adjustments primarily in Bank-owned life insurance that contributed to an increase in other non-interest income.

Looking at core revenues, taken all together, we expect to see mid-single-digit annualized growth even while we are absorbing the expected decreases in our loan accretion.

We also posted noncore revenue in the fourth quarter from additional gains on sales of bank equity securities due to favorable market conditions for certain securities. Our loan loss provision and allowance remain very steady, our charge-off is down slightly in the fourth quarter and measured 29 basis points for the year.

Looking forward we expect the provision to increase modestly, based on our strong loan growth, but we expect to continue to have favorable charge-off numbers. And the ratio of the allowance to total loans may continue to modestly decline as overall portfolio quality continues to improve.

On the expense side, Mike talked about the 3% reduction in core expenses for the quarter. We do expect an uptick in expenses in the fourth quarter, in the first quarter -- excuse me -- due to the normal seasonal items as well as the recruiting and initiatives that Mike referenced.

Looking at taxes, results came in better than we expected. We benefited from the recapture of capital gains reserves as a result of our securities gains and the additional noncore items, including restructuring which I've contributed to a lower overall rate. The core tax rate for the quarter and the year was 31% and we presently don't anticipate major changes to this rate in 2014.

So, taking a step back as we put it all together, we see core EPS on baseline operations running flat to slightly up in the first quarter.

Let me now turn to the $450 million deposit purchase that Mike described earlier. We are being careful in how we utilize the proceeds and are using the acquired funds to repay borrowings and purchased investment securities at a blended rate. Decisions are being made on the exact mix at this time and our current expectation is that investments will increase by around $300 million with the rest of the funds being used to reduce borrowings. Investments will be similar instruments to what we have currently in the portfolio. Roughly 40% of the acquired deposits are in DDAs and the overall cost of the total deposits has been running in the mid-teens in terms of basis points.

We expect that the transaction will be asset-sensitive to our interest income at risk and we have some capacity for longer duration on the investment side. So we will be balancing EPS, return on assets and the potential benefit of higher rates down the road.

We expect the branch purchase will be accretive to our net interest margin and that our overall net interest margin, including existing operations, will be steady or expand in the first quarter, both in total as well as the margin measured net of a loan accretion. We do expect to benefit from the related termination of some higher rate swaps on borrowings that are repaid.

Also, in addition to nicely filling in our Central New York footprint, these new funds improve our liquidity and we expect that our initial pro forma loans to deposits will be around 97% with these acquired deposits.

We expect to pick up around $1 million in fee income per quarter and around $3.5 million in non-interest expense per quarter initially and we anticipate that we can improve on these numbers as we go along and build synergies in our Central New York region. We will likely have some initial dilution to our total return on assets and anticipate initially running in the 60s in terms of basis points on a total core basis and then moving north from there.

Looking at the bottom line of the branch purchase, we expect modest core EPS accretion in 2014, although we are not expecting any significant EPS benefit in the first quarter while we are completing the transaction. With the moving parts we have going on right now, we are still working out the timing and magnitude of expected core EPS growth after the first quarter and we expect to be able to clarify our outlook as we move forward through the year.

Moving to noncore items for a moment, we had $0.02 noncore contribution in the fourth quarter bringing us to $0.42 GAAP EPS. This included a securities gain as I mentioned earlier and was net of restructuring, M&A, and conversion charges shown in our release.

For the year, noncore items totaled $0.22 in net charges and GAAP EPS totaled $1.65. We expect further net noncore charges in the first quarter as we complete the acquisition along with a small amount of restructuring and conversion charges. We anticipate the tangible book value per share dilution will decline slightly to a little under $16 by the end of the quarter, as we record these costs and goodwill arising primarily from the deposit premiums of around $10.5 million.

We currently don't anticipate any significant differences between GAAP and core results beyond the first quarter. We expect that the accretive benefit of the deposit purchase will provide a payback within five years to the modest transaction solution. After the first quarter, we expect tangible book value per share to resume growing in a mid-single-digit annualized rate or possibly higher. Our goal is to produce reliable, tangible, shareholder returns and, as CFO, I am ready and enthusiastic about the contribution I intend to make in order to realize those results.

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

Thank you, Josephine. It was a nice job. So as Jo said, we expect next quarter to do at least what we did this past quarter and we are working to do a little better. And when we sort out our plans with our expanded operations, I will provide more guidance about expected growth beyond that.

I think you have to be some cautious of potential market volatility right now. I mean, you have got a lot of variables in the economy, both domestic and global. Of course, and then there is the political side. You have got the State of the Union tonight, a new head of the Fed, another debt ceiling deadline.

I would say this, I do take comfort, however, in the fact that a fair amount of our growth is based on market share gains and we are uniquely positioned in New England to take advantage of market vulnerabilities based on our geography. We are not necessarily dependent on a 3% GDP growth and we have already done much of the hard work to put this franchise in place and we can concentrate on the revenue opportunities in front of us.

Now, we are not taking our eye off our goals of positive operating leverage, 1% ROA, double-digit ROE, and a strong return on tangible book value.

As we discussed in the third quarter, we are still going to be in a transitional state for the next quarter or two as we bring on the new branches, pursue further net loan growth, and we continue to architect this infrastructure. Loan accretion continues to wind down but, excluding these effects, we did post positive operating leverage in the most recent quarter and we plan to keep that our prospect.

With the Central New York branch deal recently closed, we are spending a lot of time and effort making sure those customers and new employees have a smooth transition. And as I said last quarter, our focus right now is on developing the synergies in our business, increasing our market share in the regions where we have made investments, and pursuing our long-term profitability run rates while moving the core EPS needle north consistently from here.

I mentioned earlier there was some talent out there we were looking to hire and some teams we thought that would be good additions. We are also going to continue to vet out potential teams or acquisitions in the fee business space, again with the intent of fully taking advantage of the footprint and overall franchise that we have built while delivering to our shareholders.

For the year we paid out 4% more in dividends while maintaining the yield near 3%. We also bought back about 0.5 million shares of our stock and we produced 5% growth in book value per share and 9% growth in tangible including dividends.

Now this is good, but we know we can do better. I know where we need to be and I am confident we are going to get there. And we will find and pull as many core levers as we can along the way.

I do think it is important, however, to be disciplined and thoughtful about the value of the franchise that we are creating, which will result in strong market positions across a pretty impressive footprint. 2014 will be about executing on our strategy and taking advantage of the opportunities that exist in our markets. I am confident that we have got the right vision, the right culture and people, and the right footprint to get that done.

Now with that, I will open it up to questions.

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

Good morning. First question is for Josephine. Josephine, could you just clarify for us the reported margin in the first quarter? Do you expect to see some additional compression?

No. I think we are hoping that it will stabilize here in Q1 and hopefully move north from there.

It stabilizes in Q4 and moves north in Q1.

Got you. And then as it relates to the purchase accounting adjustments, I know you said they burn off by the end of the year. Do you have a sense on how much will burn off in each quarter over the next couple of quarters?

It's lumpy. A lot of it, Mark, has to do with the when we get recoveries on loans. So we could have a little bit more in the first quarter, or a little bit less in the first quarter, a little bit more in the second quarter. It really all depends on the aggressiveness by which people either get moved out or loans move. Because that is the biggest portion of that loan accretion. Is that right, Jo?

Yes.

And then you had said the pipeline was strong. I wondered if you could share with us the size of the pipeline and what the complexion of that looks like.

Mr. Bacigalupo, can you help us with that?

I sure can, Mike. Pipeline is holding steady at about [$160 million]and this is all high-quality items that we expect to close in our first quarter. So this is pretty much in line with where were last quarter. Despite growing pretty well in the fourth quarter and closing a number of deals, it is good to see entering beginning of the year, which sometimes a slow period, that our pipeline has not withdrawn and actually we are seeing a pickup of activity.

So we are quite positive about where the pipeline is today and our probability of closing the majority of them in the first quarter.

And the mix of that?

The mix is continuing to be similar to last quarter, where we have growth in both real estate and commercial including ABL. The good news here is that we are seeing stronger pipelines out of all of our different areas are contributing. Hartford has a strong pipeline, Central Mass has a very strong pipeline. And so areas that may have been slower in the previous quarters are picking up. Albany, which had a very strong fourth quarter is having a little bit of a slower quarter this quarter.

We understood that. There was some planned payouts, but overall we are seeing a situation where all of the regions are continuing to positive growth.

And then lastly, Mike, I wondered if you could share with us what you are seeing out there in the M&A market, and is Berkshire in a good position to do additional acquisitions now.

I think that the M&A market is probably not materially different than it has been over the last few quarters. Although I think people are talking a little bit more about it today maybe than they did last year. I think there is going to be some opportunities over the course of the year, and we will take every opportunity that comes our way the way we have in the past and that is, if it makes sense from not only a strategic standpoint, but from a financial standpoint, it helps to move our profitability metrics forward and north from where they are and increases our EPS. If it is a good investment, we are going to be looking at them as we have in the past.

We have done a lot of work over the past several months, I think, to get our infrastructure really in a good sound place. There's a lot of scalability with the Company. We are not done yet, but we are on our way to having an infrastructure that I think puts us in an enviable place when it comes to being able to integrate and partner with people who have like-minded options.

Thank you.

Matthew Kelley, Sterne, Agee.

Just a quick one. Did you say there was a [BOLI] gain that we need to be aware of in the fourth quarter or any items there in the BOLI income?

Yes. It is about $700,000 that was taken in, and Q4 relates to one of our past acquisitions, a BOLI portfolio that we retired.

Okay, got you. Then maybe you could talk a little bit more about what is going on in the insurance business. Year-over-year revenue is down 17% and what is profitability like there and what is the outlook for the insurance business?

Well, I always feel like the outlook is good, so I will give you to Sean Gray, who is probably a little more balanced in that respect, and he is running insurance. But I do think that you have put a lot of things in place over the past two or three quarters that should help move that. Sean?

Sure. Speaking first to the fourth quarter, saw a little bit of a change in our business mix which created some seasonality in the fourth quarter. Our outlook going forward, though, is very positive. I think it is going to be a balance between earnings and revenue gains as well as fee re- -- in cost reductions. So we anticipate positive operating leverage moving into 2014 for the interest business as a whole. So we are optimistic.

What about the mix, Sean, the Quick Lifes that seem to be doing well?

With the larger branch footprint we are able to leverage certain products. One of those is a mass-market life insurance product called Quick Life for the branches. We have just recently rolled that out. So on the product development side, we are seeing more scale in our overall products which should positively improve revenues going forward.

One of the things we have talked about in the past several quarters is that in the first half of this year we actually made some significant investments in all of our regions and we look at, say, the Berkshire County area and areas in that corridor. We have been able to squeeze that orange significantly more than we have in some of the other areas and sometimes the reason for that is we need to put some boots on the ground in some of these other regions. And so in the first half of last year, and in some cases in the second half of this past year, we geared up to be able to garner a lot more wallet share in the other four regions outside of our primary headquarters here.

So I think that is where everybody's concentration has been and there's a certain amount of optimism that we can drive additional fee income and additional loans now across the board in a way like we have here in Berkshire County area.

Okay, got you. Then wanted to be clear on expenses. So your pace is running about $35 million in the fourth quarter of core expenses for Berkshire. You add on $3 million for the Bank of America transaction. That gets us to an annualized run rate of [152]. What type of change do you expect to see off of that 152 growth rate for the full year of 2014?

I would say none.

Flat.

Yes.

Yes. I think at this time we are going to hold off on giving any further guidance and we are still vetting through that as we look to the full 2014 year.

Yes. I think that's appropriate.

Okay. Thank you very much.

Collyn Gilbert, KBW.

Good morning. What is your --? On your double-digit loan growth targets, what are you expecting for the composition of that growth throughout the year? I know you gave some color in the first quarter, but just throughout the balance of the year.

I don't think it is going to change dramatically. It could change depending on where rates go. If we end up in a situation where we are selling more of our residential rather than keeping some of the variable rate, that could have an impact in the commercial. Could take a bigger position. I think, also, Sean, the -- certainly the auto loans and some of the consumer loans could pick up a little bit. But I think as a range, Collyn, that is not a bad range from where we were in the fourth quarter with maybe some small percentage changes, but nothing material.

Is there a cap that you would want to put on your resi mortgage portfolio as a percent of the total loans?

Well, again, it's volatile. So we could put a cap on it today and if we found that we started to see more fixed rate mortgage production coming in, that could change that percentage pretty dramatically. Anybody today that we are doing three- , five- , six-year variable-rate mortgages on, that's good business and we are going to want to continue to do that. There's probably not a cap, but there's probably an informal cap that will incur just through general business practice.

So what you are retaining are the adjustables at this point.

Yes.

Okay. And on the NIM, I just want to make sure I understood and it is following up to Mark's question. So, did you say total NIM has stabilized in the fourth quarter and now should increase from here or that was core NIM?

Well, core NIM. I mean, the total NIM will still be subject to the fluctuation (multiple speakers).

Right, the accretion. Okay. Then if we look at the core NIM, what is going to really drive that increase? Is it -- because I don't -- I wouldn't -- I guess it doesn't sound like it is necessarily going to be mix shift. So is it just find a drop in the funding cost or are you finally seeing stabilization in loan yields?

Well, we have got all three, but, Jo, you could comment on those specifically. We --

Yes. I think with the BofA deposits, there's a lower cost of funds there and we are seeing there will be more of a parallel shift there with our loan rates. So we expect it to neutralize as we go.

If we look at our -- the loan rates that are coming on today, there's probably stabilization there. We certainly -- I know we have got some higher priced CDs that Sean has taken a look at. I know he would love to continue to be able to offer the specials, but we have a little room on the deposit side still and I think we'll probably use a little of that and I think the BofA transaction has an impact as well.

Okay. That's helpful. Josephine, what is the dollar amount? And if you said it, I apologize, that you guys have left on the accretable income that you said you'll recognize by year end?

It is in the range of about $1 million to $2 million if you are looking to 2014. And as Mike said, it is relatively lumpy so it is hard to predict exactly the timing of that.

$1 million to $2 million for the full year, or a quarter?

For the full year.

Full year. Okay. Then, going back to -- I guess earlier in the year you guys were guiding to what you thought a core NIM would be in the [320] range and now it has sort of settled out this quarter at [307]. What was -- what changed relative to expectations earlier in the year? Was it rates? Was it mix? Just curious to sort of bridge that gap.

I think it is probably both of those things. Jo, would you agree?

Yes. We had a couple of one-time unusual events, but for the most part we are seeing for the compression and I think it is a function of the environment we are in.

Okay. That was all I had. Thanks, guys.

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

Okay, thank you everyone for joining us. We obviously look forward to speaking with you again in April and, at that point, we will discuss the first-quarter results and anything else that we think would be germane to the Company moving forward. Thank you.

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