Beacon Financial Corp (BBT) 2014 Q3 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp third quarter earnings release conference call and webcast. All participants will be in listen only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ally 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 third 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. And with that, I will turn the call over to Mike Daly, President and CEO. Mike?

Thank you, Ally. Good morning, everyone. Welcome to our third quarter conference call. With me this morning are Josephine Iannelli, our Chief Financial Officer and of course other members of our management team.

We released earnings last night and I'm happy to report that we once again grew core EPS by 5% over the prior quarter and by 7% year over year. We continue to benefit from strong balance sheet growth while tightly managing expenses.

Core EPS came in at $0.46 a share. That's a 15% improvement from the fourth quarter of 2013 and we reported GAAP EPS of $0.48 due to the benefit of a lower tax rate, which Josephine will comment on in just a few minutes.

On previous calls we've discussed the volatility and accretion benefit and as we've said, we expect to continue to wind that down. Now it is worth noting that if you back out purchase loan accretion, we've moved core EPS by 24% so far this year.

Loan growth continues to be strong for us and in the third quarter we grew loans at a 9% annualized pace with organic growth in, well, every category. Our commercial loan growth on a net basis was less than the big second quarter we had. But I will point out that our originations were robust as we balanced the need for net interest margin gains against loan growth, we've begun to move out some low margin accounts, therefore having an effect on net growth. This will, however, bring stability and eventual margin expansion in 2015, even if rates remain unchanged.

Meanwhile, new production continues to be healthy and we've maintained double digit annualized commercial loan growth year to date. And this is a trend I expect will hold through the remainder of the year.

We continue to see good growth from Eastern and Central Massachusetts, along with our ABL team there and I was especially pleased with the performance of our New York team where we're capitalizing on our expanded branch network between Albany and Syracuse.

In our Connecticut market we recruited another seasoned commercial real estate lender at the end of the quarter and we continue to see good momentum in that region. We've also been actively building out our small business platform across the footprint. We added a new experience team in the Albany area, with strong ties to the community and small business leaders in Central New York, Connecticut and Central Massachusetts.

We're not only seeing good growth out of this loan book, but we were recently named the top SBA lender in Western Massachusetts and frankly that's an event that I've been expecting based on the quality of the teams that we put in place.

We also had good loan growth this quarter on the consumer and residential side. Year to date mortgage is growing in the mid single digits, which is what we expect over the long haul. And as you know, it can be variable and it depends a lot on seasonality and market conditions, a business mix and also asset liability considerations.

I think we've got a solid mortgage operation at this time and a good product set and we continue to tinker with operational efficiency. So I think that's going to set us up to take advantage of future activity in the housing market.

Looking to the fourth quarter, I'd expect total loan growth in the high single digits, led by a return to double digit commercial loan growth. And given recent market volatility and rate changes, we're not projecting significant growth in our mortgage and consumer portfolios in the fourth quarter, specifically with indirect auto loans where we achieved our objectives with strong year to date results already and the recent compression will likely impact our growth appetite for the remainder of the year.

We funded our loan growth this quarter with 8% annualized growth in deposits, including 25% annualized DDA growth. Our DDA penetration continues to climb and we had a good quarter for commercial DDAs following the strong loan production that we've seen. These commercial deposits have a tendency to fluctuate and we do expect to return to a more normalized mid single digit growth rate in the fourth quarter. Altogether, we expect to grow deposits at a low to mid single digit annualized rate in the fourth quarter with a continued focus of course on DDAs.

Of note, we just opened a new regional hub in Westborough covering much of our Central Massachusetts market. We have commercial and retail under one roof there, including full branch services, mortgage lenders, small business and commercial lenders. So we expect to be able to build on the commercial and retail balances we already have in that region while using the added brand presence in turn to continue our momentum on the loan side. And needless to say, we're looking forward to that branch's grand opening celebration in November and yes, Jim Curran, I'll be there.

Now turning to fee income, we posted 27% growth year over year with gains in, well, every category. Quarter over quarter total fee income was unchanged as solid growth in mortgage, insurance and wealth management was offset by lower swap income.

Looking at the wealth management business, our assets under management grew at a 12% annualized rate in the third quarter, led by a pretty strong referral pipeline. Income was up 6% annualized this quarter and has grown 11% year to date. We added a senior portfolio manager in our Eastern Massachusetts headquarters and a wealth advisor in our Central Massachusetts market. These folks will work hand in hand with our commercial teams to drive growth from their respective regions. And I think it's important to point out that we've kept expenses in check at the same time as we've added some serious talent over the last several months.

Now at this point, I want to turn it over to Josephine. She'll walk you through some more details on the financials. And then I will come back and wrap it up. Jo?

Thanks, Mike, and good morning, everyone. I'm pleased to say that we recorded sequential core EPS growth of 5% for each of the last three quarters. And our core EPS is up 7% year over year. We continue to post increased revenues while controlling expenses and importantly, we haven't had any consequential non-core charges since our first quarter branch acquisition.

Our third quarter revenue was up 5% annualized over the prior quarter with lift coming from both spread income and non interest income. Spread income was driven by the 9% annualized increase in total loans that Mike discussed. This more than offset the NIM compression that we experienced during the quarter.

The net interest margin dipped by 6 basis points to 320, due to the lower earning assets yields and the ongoing low rate environment. Excluding purchase loan accretion, our margin was 312. Before accretion, our net loan yield was 381 compared to 386 in the prior quarter and also reflected the shift in loan mix. We only saw 2 basis points of compression in the commercial yields to 387 before accretion.

Our securities yield normalized after a timing related spike in the second quarter. There was a slight change in our deposit mix resulting in a 1 basis point increase in deposit costs. We continue to focus strongly on growth in DDAs, which help both in managing our current margin and in providing long term interest rate protection.

We added $53 million in broker deposits and were able to bring down time deposit costs by 7 basis points. Overall, we held our total cost of funds flat.

Looking forward, Mike has commented on our fourth quarter outlook for loan growth in the high single digits. I expect the mix to improve with more medium term commercial loans and fewer lower rate auto loans. We expect the loan growth to be funded by a mix of deposits and borrowings. Additionally, we continue to actively manage our balance sheet to find the best opportunities, both on investments and on the funding side to achieve our objectives both on markets and our asset liability management goals.

Before accretion, we expect to keep earning asset yield compression at a minimum due to the more favorable loan mix and we expect similar results on the net interest margin.

NIMM before accretion is projected to come in around 310, which is in line with what we guided to at the start of the year. While we're not giving forward guidance for 2015 at this time, I do expect to see margin expansion next year as we further refine our business mix. And of course, we'll look forward to addressing that more completely during our next call.

Based on strong loan growth and more stable asset yields, we expect our fourth quarter net interest income before accretion to be at more than 5% annualized, in line with what we saw this quarter.

Purchase loan accretion will likely come down somewhat in Q4 and actual results will depend on recoveries and prepayment activity. Our volume growth should offset any decreases in accretion with the result that our overall net interest income is expected to increase slightly in the fourth quarter.

Moving on to non interest income, our third quarter gain was primarily due to mortgage banking revenue, which was stronger than expected. Mortgage originations increased, the volume sold was higher and the gain on sale margins improved. We expect mortgage revenues to decrease in the fourth quarter while other fee revenue sources should more than offset this.

Total core non interest income is projected to be up a little in the fourth quarter from the third quarter. On a year over year basis, fee income is expected to be up more than 20% including the benefit of the New York branch purchase.

Our loan loss provision decreased to $3.7 million in the third quarter. We had projected a drop from the second quarter, which was elevated due to the higher loan growth in that period.

As stated in our earnings release, our credit metrics remain favorable and they strengthened during the quarter. Our commercial risk ratings continue to improve and we expect that the provision will remain around the current level in the fourth quarter.

Turning now to expenses, operating expenses were up 1% over the prior quarter with no material non core charges. The modest increase in expense showed up in compensation and also in the other expense category, which includes lending costs related to growth and mortgage and consumer loan volumes.

We slightly improved the efficiency ratio, which measured 62.89% for the quarter. We expect to see non interest expense up a little in the fourth quarter while we absorb the build out of our Westborough regional office.

On the tax side, we held our core tax rate around 30%, which is the rate we expect to carry through the remainder of the year. As we discussed last quarter, the GAAP tax rate of 26% includes the full year impact of the branch acquisition charges recorded in the first quarter. This brought our GAAP EPS to $0.48 for the third quarter.

Our GAAP results also included some small non core securities gains, offset by non core expenses related to the bank's change to a commercial charter. We expect that this tax rate difference again will appear on the fourth quarter and then it will disappear as we roll into the new tax year.

Moving to the bottom line, we expect to do at least as well as we did in the third quarter and hopefully better. Looking at it year over year, this would represent a 30% EPS increase before accretion over last year's fourth quarter core results. That's a significant list as a result of our strategies.

As we noted in our release, our profitability measures have improved over the last several quarters due to our revenue growth on a controlled expense base. Our core return on tangible equity has improved to 11.8% and our capital ratios improved modestly based on this internal capital generation.

Our tangible equity also improved and moved north towards 7% of tangible assets at quarter end. And our tangible book value moved up at a 7% annualized rate to $16.67 in the third quarter while our dividend yielded 3%.

I'd like to comment now on our interest rate risk management. As you know, we have a goal of maintaining modest asset sensitivity. Our expectations are in line with market sentiment that short term rates will begin to increase in the second half of next year. We have been managing our interest rate sensitivity to take advantage of this projected outcome. For both 100 and 200 basis point upward ramp scenarios, we see our net interest income as being asset sensitive in the low to mid single digit range for 2015 and into 2016. This improves as we look further out in 2016 when our interest rate slots become effective.

Lastly, I'm pleased to report that we continue to make progress in enhancing our financial division. During the most recent quarter, we strengthened our management and profitability analysis and in tax accounting. We continue to be closely engaged with our business lines on pricing, product management and analysis of growth initiatives.

We are deeply into our budgeting process and while we are not providing 2015 guidance at this time, I can speak for all of our team about our excitement and anticipation of further progress towards our objectives going forward.

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

Josephine, thanks. That was a great job. So as Jo said, we're expecting fourth quarter earnings to be as good as they were this quarter and we hope to do a little better as we consolidate the strong gains we've accumulated to this point. As you've heard, this represents 30% growth year over year before runoff of accretion.

The volatility in the markets of late seems to have everyone second guessing rate expectations. As Jo has commented, we're managing our business in line with current market expectations while hedging against future rate spikes. We're focused on growing revenues, maintaining expenses and improving our profitability and ultimately our returns for shareholders. We're actively managing our net interest margin and we expect to see expansion in 2015.

Our core return on tangible equity climbed to 11.8% this quarter and we saw sequential improvements in ROA, ROE and our efficiency ratio. Now we know we still have work to do here as we develop our 2015 business plan and we're on it.

Year over year our growth is strong and we expect to continue to build on that base. Our New England and New York footprint, our team strategy and America's most exciting bank culture continue to be differentiators for us. Our footprint gives us the advantage of multiple geographies for driving growth and our people are dedicated and they're motivated to achieve our goals. So I'm confident in the opportunities in front of us and our ability to capitalize on them.

And with that, we'll open it up to any questions.

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

It's actually Anna Bard calling in for Mark. I was just wondering if you could comment a little bit on the M&A environment in your markets, if you're seeing any changes or just any commentary you might have.

I'm not see any changes and the commentary would be really similar to what I've said in past quarters. We're concentrating right now on our organic growth and our market penetration and we'll be opportunistic in the event that there's something to take a look at. But I don't see much change, if any, over the past several quarters.

And then my other question, and you sort of touched on it in the prepared remarks, but I mean your loan and deposit growth looks great. Is there anywhere in your footprint that's been particularly strong or that you're looking forward to going forward?

I think the Eastern Massachusetts and the New York market and the Connecticut market, my guys would all say that we're seeing good deliverables from all of those regions. And frankly, that's one of the benefits that we've been talking about by having a diversified footprint.

Collyn Gilbert, KBW.

Mike, I just want to go back to your comment about what you guys are continuing to do on the loan portfolio side in terms of pushing out kind of lower margin credits and adding better yielding ones. Can you talk just a little bit more about that? And I presume that from your comments again that this is sufficient enough with kind of -- the trend that's going on there is sufficient enough to offset the more yield compression that you're seeing in other loan categories.

Yes, I mean we haven't always been able to do this because loan growth always hasn't been this strong. But right now I think our originations, both on the commercial side and on the retail side have been strong enough for us to be pretty selective. And we've run into at times loans that either renew or HUD loans that come up and it's to the benefit of us at this point that we can go forward and not renew those situations, because the rates are just incredibly low, and replace those with new origination opportunities.

Sean or Josephine or George, if you have anything to add to that, I'd be happy to have you do that at this point.

Yes, Mike, I agree with your comments. As we look to Q4 we would expect to bring out more of the commercial fixed rate paper and possibly less of some of the consumer paper. And I think some of that change in the mix will overall keep the yield compression low.

And then just curious, what was the composition of the resi mortgages that you guys put on the balance sheet this quarter? Like the structure.

Collyn, it was about 70% fixed, 30% variable. Our variable concentration was probably more in that 7/1 and 10/1 ARM product. And also we work closely with finance in our ALCO committee to really make sure that our future hedges that Josephine talked about take into consideration any product that we're putting on the balance sheet.

So still the majority are identified for potential sales at future dates or season loan sales or through locking through our secondary desk.

And Sean, you had mentioned to me either earlier today or yesterday, one, our margins were good, which you might want to talk about.

Sure.

Secondly, the fact that a much larger percentage of our work right now is purchase money.

Yes, we're seeing about 70% purchased, which we've worked really hard to identify the appropriate type of originators in our marketplace. And just have the right markets and right strategy to go after that purchase business.

So that bodes well for us because we do feel that that's a more consistent type of growth that we'll see going into the future regardless of the rate environment. And we did see our gross gain on sale go up to about 225 basis points, which as we look out against our competitors we're comfortable in that range and happy with what we're seeing.

Sean, just on that point, the purchase mortgages that you're seeing, are these new customers to the bank or are they current BHLB customers?

Majority are new customers. We do most of this business in Eastern Massachusetts where we don't have a huge footprint largely because we had such a penetration in Western Massachusetts. So most of these customers we are seeing in Eastern Massachusetts. They offer us up also insurance opportunities and other bank products as we introduce them to Berkshire Bank via the mortgage.

And then just one final question, I guess sort of big picture for you, Mike or Josephine. Can you just sort of update us on your efficiency goals targets? I mean you guys have been bringing that down a little bit. Just maybe a little bit more color how you see that shaking out over the next year or two.

Jo, you can get specific, but we know where we have to be and we want to be looking up at 60%, not down at it. And so I don't think anybody on my team believes that we're going to be happy until we're somewhere between 55% and 60% on the efficiency ratio. And I think we can get there. Does anybody want to scream on that?

Not at all. I would just comment, Collyn, that our goal is to get, as Mike said, below 60% and we have operated there previously and we can do that through our revenue growth and positive operating leverage as we utilize the infrastructure that we've built and the revenue streams throughout our expanded footprint.

Do you think that could be achievable by 2016 or are we out further years than that?

I don't think -- let's get through our 2015 budgeting and we'll address that timing question I think on the next call, if that's all right, Collyn.

Okay, sure thing. Very good.

Matthew Kelley, Sterne, Agee.

I was wondering, was there any change in C&I utilization rates? What are you seeing from your customers in terms of draw downs and needs for additional borrowing?

George?

No, actually our utilization was unchanged over Q3 at just about 60% for both the ADL and the commercial loans.

And question for Sean. Any change just over the last couple of days and weeks here in application volume in the mortgage business at all with rates down a little bit over the last couple of weeks?

You know what? We typically start to see a seasonal wind down as we move into the fourth quarter. I can say though with the recent rate changes, October has remained a very strong month. But we are, as Josephine mentioned in her comments, as we move post Thanksgiving and into December, typically this business does have a seasonal wind down.

I think it would be unreasonable to assume that you're going to have a big December in the mortgage business. You never know what's going to happen, but that would be an unlikely event just based on history.

Correct.

And then Sean, what was the average yield on the residential mortgages put onto the balance sheet in the quarter?

I think it was right about 4, in that 3.95 to 4 range. Jo can pull it up.

Yes, one second and I'm looking it up for you. Yes, it was about 3.75.

Then, Mike, how are you feeling on capital? You have a pretty good outlook for commercial loan growth, TCE is sitting at 6.9%. Maybe just talk about the common ratios, total risk based ratios, how you're feeling on that front and any needs for capital over the next year?

No, I mean I think we're right where we have been and that is we're returning -- our returns are good enough to support our dividend and it's, I think, certainly clearly enough to support the growth that we have and what we've projected. So I'm comfortable with our capital levels and they continue to inch north. And I think we're in a pretty good place. I don't think there's any reason for us to be concerned about our capital levels.

What was the rate on the brokered money and what's the total amount of brokered money that you have now in the deposit business?

Hey, Matt, I'll take that one. Give me one second while I get your numbers. Okay, so the Q3 net increase was $53 million. Our gross bookings were probably closer to about $100 million and they generally had an average cost of 38 basis points and we saw somewhere around the five month average maturity.

And Josephine, the tax rate, it sounded like it's going to be somewhere between the 26% and the 30%. So is 28% a good number to use for the fourth quarter as we transition to that 30%?

Yes, I would say that we expect it to carry through the remainder of the year at around 30%.

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

Well, thank you very much for joining us today. We look forward to getting back together with you for our fourth quarter conference call and I can assure you that our entire crew here will be working to (inaudible) to your benefit. Thank you.

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