Beacon Financial Corp (BBT) 2014 Q1 法說會逐字稿

Good day and welcome to the Berkshire Hills Bancorp first-quarter earnings release conference call and webcast. (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 first-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 the 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 first-quarter conference call. With me this morning is Josephine Iannelli, our Chief Financial Officer, and of course other members of our management team.

We released our earnings last night and I am happy to report that we achieved our core earnings guidance along with strong balance sheet growth. During the quarter we produced good growth in loans and fee income. We maintained discipline with our expense management and we produced an improved margin.

So good underlying trends. This resulted in core earnings per share of $0.42 for the quarter. That is a 5% increase over the fourth quarter.

We had a number of one-time charges primarily associated with the branch acquisition and the reset of some borrowings. That led to a GAAP loss of $0.04 a share but over half of those charges were capital neutral. And I will ask Josephine to walk you through the non-core charges in a little more detail a little later.

But total core revenue grew by 10% over the fourth quarter to $57.3 million. This was good solid performance accompanied by continued strong loan growth on both the commercial and consumer side along with good progress on building fee income across the footprint.

On the loan side, we grew total loans 6% annualized. That included 9% annualized commercial loan growth and 11% annualized consumer loan growth.

Now we only acquired about $4 million worth of loans for the branch acquisitions so this was all organic, in-region loan production based on relationship strategies. So we are pleased with the results.

Our commercial loan pipeline looks a lot like it did going into the first quarter. And we did have good production end marks so we expect that momentum to carry into second quarter as well. And of course adherence to sound and a consistent credit structuring and pricing duration and emphasis on relationship building will continue as important themes for us so this becomes a long-term benefit as well as the short-term benefit.

On the consumer side, we continue to see the benefits of investments we made in the first half of last year as total consumer loan growth was 11% annualized for the quarter. And once again, this was led in large part by the success that we are seeing in the auto loan market and the efforts of our Syracuse-based consumer teams.

Turning to deposits we did have 10% growth in the first quarter inclusive of the acquisition of our 20 branches in New York. That brought in an additional $440 million in primarily low-cost, non-maturity deposits.

Now the retention of these acquired deposits has been very good and the integration of the teams has been terrific. We also continue to focus on developing consumer relationships through a personal DDA growth. We grew these deposits by 5% organically quarter-over-quarter, again concentrating on higher-margin products.

In conjunction with the acquisition, we made the decision to manage out certain municipal deposit sources and other high-cost deposits. And these efforts helped to improve our average funding costs significantly in the first quarter dropping our cost of deposits 7 basis points to 46 basis points.

We also restructured some of our borrowings. So total costs to funds improved by 17 basis points from 73 to 56 and Josephine will walk you through those balance sheet actions shortly. But, I can tell you that we expect to sustain and maybe even improve on this a little.

Turning to fee income, we saw a 14% increase over the prior quarter. As you know this has been and continues to be a key focus for us. And while year-over-year comparisons do remain difficult due to the drop off in our mortgage banking activity, we continue to build on the momentum of the second half of last year.

Deposit-related fees included the impact of our acquired branches where there is a solid experience in fee penetration and good utilization of our service capability. So that is working out nicely.

Seasonal insurance fees were up 2% over the first quarter of 2013. And we are continuing to roll out a licensing initiatives that we have talked about and that we launched late last year.

Wealth management fees increased by 15% quarter-over-quarter and 13% year-over-year led by of course a strong market and more importantly organic account growth. Total assets under management are now $1.3 billion and that is up from around $1 billion a year ago.

As we have discussed in the past, this has been a Western New England focused team with dominant market share in that area including Vermont where we recently added a seasoned trust officer. But what is important and encouraging is that we are making progress at this point with results coming from our New York and Connecticut markets as we now widen referrals for this business across our geography.

In particular, we've launched targeted efforts in central New York to grow our wealth presence there with the help both of our commercial team in that area and the newly acquired branches. Looking forward, we are expecting a pickup in deposit fees, loan fees and mortgage fees in the second quarter.

Now I want to turn to expenses for a minute. After all the work we did in the second half of last year, disciplined expense management is crucial and I am pleased with where we ended the first quarter.

First-quarter core noninterest expense was in line with our guidance and includes the 20 acquired branches along with seasonally higher benefits and maintenance expenses. As discussed on the fourth-quarter call, we also targeted investment in our commercial and our retail teams this quarter.

We brought on Scott Houghtaling from Citizens to lead our commercial efforts in New York. Scott has hit the ground running and with his long-standing relationships in Albany and central New York regions, we are delighted to have him aboard.

Combined with our newly enhanced retail presence from Albany to Syracuse, we are expecting solid growth from Scott and his team this year and we let him know that. And he is ready.

Through the hiring, the integrations and of course a long New England winter, I think our people have done a good job of maintaining our expenses. And our efficiency ratio ticked up only slightly in the quarter to 64%. And believe me, we are acutely aware of where that needs to go in the future, down.

We are continuing to closely manage our expenses while balancing growth needs and Josephine will have more on that in her comments. And I can issue you that she manages these expenses aggressively.

You know for many years now we have been focused on changing the customer experience in our branches. Back in 2008, we began reducing the size and the cost of many of our branches, removing the teller lines and installing cash counters to create a friendlier, more efficient environment. And this allows our tellers to focus on building relationships and cross-selling products and services rather than on counting cash.

These enhanced branches cost less to build, they cost less to operate and they bring in more fee income than traditional models. So we will continue to retrofit where reasonable and we will build to these specs on new branches.

Now with that, I would like to turn it over to Josephine Iannelli. She will walk you through some of the more detailed financials which are detailed. Josephine?

Thanks Mike, and good morning to everyone on the line. We had a strong start to the year, growing our core EPS by 5% over the prior quarter and getting good traction with our business strategies.

As Mike noted, our loan growth came late in the quarter which gives us solid momentum coming into the second quarter. We completed and integrated our branch purchase during the quarter and expect to have more earnings power there that we will focus on developing.

We also had a number of non-core charges primarily stemming from that acquisition. I will have a little more color on our non-core activity and GAAP results towards the end of my discussion.

You have heard from Mike about our organic balance sheet growth. I would like to address our active balance sheet management which we think will provide real payoff going forward.

We announced during the quarter that we brought on Rick Thevenet as our SVP and Treasurer. Rick has a strong background in Fortune 500 treasury management and he certainly jumped right in taking a fresh look at our balance sheet.

So it starts with the branch acquisition where we brought on $440 million in low-cost deposits with strong fee penetration in stable markets. We expect them to provide reliable, economical, long-term funding which will become increasingly attractive when interest rates rise.

With these stable funds, we were able to pay down borrowings. We elected to terminate existing interest rate swaps related to those borrowings and this reduced our ongoing borrowings expense.

We also adjusted some of our other deposit funding costs and deemphasized select municipal deposit sources and other higher cost deposits. We think we can sustain and maybe improve on these funding costs going forward.

We took advantage of more favorable interest rates earlier in the quarter to invest in mostly medium-term investment securities and we put in place forward-starting hedge protection for our interest income. With the benefit of these balance sheet improvements, we held our earning asset yield steady before purchase loan accretion while reducing our funding cost by 17 basis points.

Our net interest margin improved to 335 from 326 during the quarter and we posted a 7% increase in total interest income. Excluding purchase loan accretion, the margin improved by 17 basis points to 324 from 307.

In the first quarter we had $2.8 million in current period purchase loan accretion which included $2.1 million of impaired loan recoveries. Our loan yield before accretion decreased by 3 basis points and we estimate it at just under 4% for the quarter.

As Mike has commented, we continue to pursue variable-rate relationship-based commercial loan process. Nearly half of our new commercial loan volume for the quarter was variable rate and we look forward to the income benefit when rates start to increase.

During the quarter, we completed the last leg of our core systems conversion. We have implemented a top-of-the-line loan analytics platform which interfaces to our core. We realize the need for the system in the second half of last year when we initially posted an accounting adjustment.

We have spent the last two quarters on this conversion and the $1.4 million out-of-period adjustment was the culmination of this process based on the better data analytics in the new system. This is a significant investment for us. And we will provide advanced data analytics for tactical and strategic loan management in addition to the accounting benefits and this will support the active balance sheet management that we are pursuing.

In addition to the 7% increase in our net interest income, we had a 14% increase in our fee income as Mike has commented. Our total core revenue reached $57.3 million increasing by $5.2 million or 10% compared to the prior quarter.

Looking ahead to the second quarter, we expect to maintain our current loan growth momentum and to see a pickup in organic deposit growth. We plan to see total revenue climb a little higher with ongoing organic growth resulting in both higher spread income and higher fee income.

Even after considering accretion runoff, we expect earning asset growth will drive positive net interest income growth. Our goal is that fee income will grow at a higher rate than interest income. This reflects our emphasis on commercial relationships where fee income is a part of the overall profitability analysis as well as our strategy to diversify revenue and increase wallet share in our footprint.

Turning to the loan loss provision, we saw a modest increase that was in line with our guidance based on the growth of our portfolio. We believe that the charge-off rate will stay around the current level.

We expect the allowance to grow but at a slower rate than the portfolio. We have ongoing improvements in the quality and the mix of loans based on our credit disciplines and market strategy.

Looking at expenses, our total core expenses came in around $39 million which was in-line with our guidance. This included the expenses of the acquired branches along with seasonal increases in benefits in maintenance cost and targeted investments and revenue producers.

We are looking to hold the line on total noninterest expense in Q2. And we expect to balance cost-saved initiatives and seasonal cost reductions with investments in people as we look to deepen our business line penetration across our footprint. We do not anticipate any non-core expenses in the second quarter and we expect our tax rate to stay around the 30% range.

As Mike noted, we completed the branch acquisition and integration in the first quarter. We are now 90 branches including the benefit of the 20 branches that we acquired.

We consolidated two of these branches as of the acquisition date. And we have consolidated two others existing branches so far this year. So that is a total of four branches consolidated in the first three months of the year.

We continue to use Six Sigma to focus on efficiencies and synergies that we can mine based on our expanded footprint and investment in our infrastructure. We had guided that our branch acquisition was expected to be neutral to core earnings in the first quarter. We are still pretty early on with this acquisition with only two full months of reporting in hand at this time.

We were patient in making decisions on utilizing and investing these new funds. Based on our recent investments and further growth plans in front of us, we expect to be able to identify accretive benefit as we move forward this year.

Looking at the whole picture, we feel that our organic growth momentum is good and that we can offset the impacts of competitive market pricing conditions and run off of purchase loan accretion. As I said, we expect to hold the line of expenses and taxes.

This will allow us to repeat or improve on our core EPS from Q1 producing $0.42 or better for the second quarter. We expect this to be a clean quarter with no non-core activity.

Turning to our GAAP result, we had guided to the fact that we would have non-core charges for the acquisition and restructuring in the first quarter as we worked through these processes. Additionally, we identified the swap termination as an appropriate strategy during the quarter and previously disclosed this event which gave rise to additional non-core charges that importantly had no impact on equity since our swaps are already mark-to-market in equity.

Our non-core charges came to $0.46 resulting in a $0.04 GAAP loss. This included $0.25 for the swap terminations which as we said before were capital neutral. And $0.10 for branch deal cost and $0.11 for all other items including the accounting adjustment, system conversion and restructuring initiatives.

At this time, we do not foresee future non-core activity and we are giving our full attention to profiting from the actions we have taken. The branch acquisition has been completed and we have recognized the accounting impacts from the restructuring projects that were underway.

Many of these involved real estate marketing and negotiations with landlords which was a process that spanned a number of months. While we expect to continue to fine-tune our operations we feel that we have achieved our restructuring objective to right size our expenses and to set the foundation for core EPS growth. Also the loan analytics system conversion that I described is the last major project related to our original core systems conversion.

We did guide to tangible book value per share on our last call and noted that it would dip below $16 due to the branch purchase dilution. We calculated this dilution of $0.55 per share and we ended the quarter at $15.84 of tangible book value per share which is in line with our expectations.

As I mentioned last quarter, our goal beginning in the second quarter is to move tangible book value per share north at an annualized rate of 5% or more. I believe that we well positioned to accomplish that goal based on our double-digit run rate for core return on tangible equity.

With our new system analytics capability, the new initiatives in our Treasury Department and our active balance sheet management I am very excited about the opportunities in front of us. We look forward to putting these benefits together along with our organic growth and market share gains to move us towards our goal for 1% ROA and double-digit ROE.

This completes my comments. And I will turn the call back over to Mike.

Josephine, thanks. You had a lot to do today and you did a nice job.

So as Jo said, we expect to do next quarter at least what we did this past quarter and we are working hard to do a little better. And while recoveries may continue to be volatile, we are expecting significantly less purchase loan accretion in the second quarter and the rest of the year for that matter as the balances run off. Despite this runoff, we expect to deliver a solid clean second quarter as we have now gotten through the branch acquisition, the restructuring project we initiated last year and the last leg of our system conversion.

Now I want to take a minute and just revisit the net interest margin. I am certainly satisfied with the significant pop we got in the first quarter. The improved funding costs due to our swap termination and our lower cost of deposit.

Now that being said, we continue to see deal pressure in the market. Now, we will plan to offset some of this pressure with funding costs throughout the year. And as we have discussed in the past, we continue to develop the depth of our profitability reporting and we have done a lot a work over the last year on finding ways to deliver better profitability on the product level.

Looking ahead we will likely see some pressure from these levels. But we do expect to end the year with a better margin that we ended 2013 adjusted for accretion.

Now as Josephine said, we have been actively managing our balance sheet. With our focus in success on relationship-based C&I loans, as rates start to move up, we expect to see material benefits to our bottom line. And I continue to think discipline is extremely important here and we don't intend to lose sight of this sensitivity to higher rates for short-term gain.

As we discussed on our last call, we are being selective with the investment of our newly acquired funds from the branch purchase while we evaluated the rate environment and the opportunities in front of us. And I believe this patience and discipline will pay off and we will see some more accretive opportunities in front of us because of it.

Turning to capital, we consider our internal capital generation to be the first source of our capital strength and we continue to post double-digit core return on capital equity which did tick up in the first quarter. Now Josephine commented on the branch purchase dilution which caused our capital ratios to dip towards the lower end of our normal range.

We look forward to the repayment of that dilution as we build out our New York franchise. Our regulatory capital remains strong and we continue to have a strategic and disciplined focused on our capital management.

Now switching briefly to credit. Credit remains very solid and both the nonperforming assets and net charge off ratios have moved lower off of already pretty favorable levels.

And as you know, over the last several quarters, we have replaced over $400 million of acquired loans with new higher quality relationship-based loans which better fit our conservative approach. As you would expect, we are not going to take our eye off our goals of a positive operating leverage a 1% ROA, double-digit ROE and a strong return on tangible book value and we are making good progress towards these objectives.

Building shareholder value is and always will be the underlying call this Company. While we remain a focus on organic growth right now, we will also continue to vet out potential teams or acquisitions in the fee business space in order to fully take advantage of the footprint and the overall franchise we've built.

So I am proud of all the work our employees have done over the last several quarters. And I believe this franchise is considerably stronger for it.

Now, we are certainly not done yet and I am confident that the work we are doing to take America's most exciting bank to the next level is well underway. We will find and we'll pull as many levers as we can while remaining disciplined and thoughtful about the value of the franchise we are creating.

The result will continue to be robust market positions across a solid footprint, tight customer relationships and increased value for our shareholders. And with that, I will open it up to questions.

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

Good morning. Mike, should we take it from your comments that you don't think there is any need to raise any additional capital at this time?

I think that capital management is always top of mind for us. And today I would say there is no need for us to raise any additional capital.

Okay. And then secondly, Josephine, I think in your comments you mentioned that you thought the income would be up in the second quarter but seasonal the insurance business is strongest in the first quarter.

What is going to make up the difference? Is it the benefit of additional deposit fees from the new branches or something else?

Yes Mark, I would tell you that we continue to pursue those opportunities within the new markets. And certainly on the mortgage site, we continue to position, should rates start to tick up slightly, we should to see the benefit of those as well. I also deposits -- we are aggressively managing those, and Sean did you want to comment?

Yes Mark, I think you're spot on. We should see both organic deposit fee income improve as well as the value of having the BofA branches now for a full quarter.

And typically post-winter in New England, the mortgage market is better in the spring. So in my world those two facets should be better in Q2.

Okay. And then Josephine, could you help us think about the margin over the next couple of quarters as the loan accretion runs off? You know what the actual reported margin will look like in say 2Q, 3Q, 4Q?

Sure, as I said excluding accretion, our NIM went up 17 basis points from 307 to 324. I do see that could potentially tick down a bit in Q2. I think the lows are behind us at this point.

But you know as we continue to see the yield compression, I think that we can probably do better in our funding costs. You know going forward in Q2.

So, I am still unclear. Are you sort of suggesting that the core margin will be bottoming out pretty close to this level?

I think that I do see a potential for it to tick down a bit in Q2. But I do think as we go through the year I would expect the NIM to be, excluding accretion to be much higher at the end of the year to where we started the year, at the end of 2013.

Okay. And then lastly on the size and complexion of the loan pipeline, I wonder if you could share that data with us?

George, you can give us some update on that.

Thanks Mike. Thanks Mark, I will take that.

Our pipeline has been robust. We are running steady at $140 million, $150 million range which is very consistent with what I reported last quarter. We are really seeing activity throughout our regions and we are seeing some additional real estate growth, commercial real estate growth but our core C&I business and ABL is running very strong right now.

Thank you.

Thanks Mark.

Collyn Gilbert, KBW.

Thanks, good morning guys. Josephine, if I could just start with following up on the NIM question. So with your commentary suggesting that funding costs could go lower over the next couple of quarters, does that suggest that the swaps that you guys initiated this quarter do not come with an additional interest expense?

No, I think what I was alluding to there is when we look at our deposit costs across the board, we saw the 17 basis reduction in our overall funding and much of that was the swaps. But I do think that as we continue to manage deposits across individual markets we will opportunistically look for opportunities to continue to reduce those. A lot of are swaps that we put on, $300 million are forward-starting swaps and those begin in two years out from when we had put them on the balance sheet.

Okay, okay that is helpful. Okay so it is really going to be just being able to lower some of the categories. The costs associated with the deposit categories?

Correct.

Right.

Okay, okay. And then just on the [C] commentary, so I know you guys have been making some having some success on the insurance initiative. How should we think about sort of the run rate there in that business line?

I mean it had been running at it looks like the last couple years at about $10 million. Do you think that can migrate up to a $12 million? Or for the full year, how should we think about insurance contribution?

Hey Collyn, it is Sean here. You know migrating all the way up to the $12 million level I don't see that fully.

I do see that the growth rate that you saw this quarter as you compare linked quarters should continue. So I do think we will see low single-digit growth quarter-over-quarter as the year continues.

Okay, okay. That is helpful. And then just back on the accretion discussion Josephine.

Do you happen to have handy the dollar amount of accretion that you guys collected in 2013? And then what you are expecting that to be for 2014?

Collyn, I can get back to you but I can tell you that the amortized balance remaining on the accretion is $3.1 million and we can circle back up with you for 2013.

Okay. Okay, that is helpful. That is all I have for now, thanks guys.

Matthew Kelley, Sterne Agee.

Hi, I guess the first question would be what should be thinking about the securities portfolio, kind of remixing of average earning assets going forward. From $1.15 billion directionally, where should I be going on a securities book?

Yes, sure. So much of the Q1 investments that we made again were very similar to our existing portfolio. We did leverage the branch deposits and made some further investments in our agency CMOs.

Average life of 4.5 years there of duration. We also purchased some strong credit and muni bonds as well as some general blue-chip liquidity stock. I would tell you that from a Q2 perspective, there is potential there for some possible modest increase and those would probably be more in-line with a CMO focus.

Okay and then after that 2Q, I assume that in the back half of the year there is going to be an attempt to kind of remix the shift from securities into loans or use that cash flow to fund loan growth. Is that a fair assessment?

That is a fair assessment.

Yes.

Okay, got it. What was the average yield on the commercial real estate originations in the first quarter and also if you have the C&I and ABL yields on the originations?

We do.

Okay, so let's see. From a C&I perspective, 335 and our CRE was 436.

Got you. Okay. I think those are the big ones that we have.

What are we looking at for 2Q expenses? I know there has been some seasonal items in Q1 and for the fourth quarter of the Bank of America branches, what should be using for a 2Q number in expenses?

Yes, I would expect that expenses should hold close to the line consistent with what we posted for Q1.

On a core basis, 39? Is that right?

Yes.

Yes.

Okay, alright got you. And then last question on the margin.

What you're basically saying is compression from the 325 level on the core margin in Q1 and directionally going lower but holding above the 307 core margin in the fourth quarter. Is that accurate?

It is.

Actually, maybe we should have put it that way because that is pretty clear.

All right, thank you. Thank you.

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

Well, okay thank you everyone for joining us. We certainly look forward to speaking with you again in July to discuss the second-quarter results.

And we are hungry and we are working hard and we expect to be able to deliver some good results over the second quarter and the rest of the year. Thank you.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.