Beacon Financial Corp (BBT) 2016 Q1 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp Q1 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.

Thank you. Good morning and thank you for joining 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 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, Chief Executive Officer. Mike?

Thank you, Ali. Good morning everyone. Thanks for joining us this morning for our first-quarter call. I will provide an overview of the quarter and then I will turn it over to Josephine Iannelli, our Chief Financial Officer. She will take you through some of the details and our financials, she will comment on our guidance and then I will wrap it up.

It was a good quarter for us. We executed on our planned initiatives, we delivered $0.54 and we managed through the volatility in the marketplace as well as absorbing a tax rate higher than we saw last year. We grew core revenue 3% sequentially led by gains in most major categories of fee income. We also benefited from disciplined expense management, the mild winter in New England and the identification of additional cost synergies. This helped to drive our core expense base lower and to improve our efficiency ratio.

Commercial loan growth came in at a healthy 6% annualized pace. Our Syracuse team had their best quarter yet and the Albany and Boston markets continue to perform well. As I have said before, one of the key benefits of having a footprint like ours is the ability to capitalize on the strengths of different regions. This allows us to focus on relationships and be disciplined when it comes to extending credit.

Our teams work hard at getting the right relationships through the door and the pipeline for new business continues to be very good. We added an established SBA leader this quarter with a strong reputation for finding and executing on larger SBA deals. Now this aligns with our originate and sales strategy and we are happy with the early results we are seeing. This also complements the acquisition of the 44 Business Capital team with their focus on driving SBA business in the mid-Atlantic region and we expect to have that team on-boarded very soon.

In addition to the success we are seeing in commercial, we did have good growth in consumer loans this quarter and on the mortgage side we took advantage of favorable market conditions to prune some seasoned loans. As a result of this strategy, total loan balances were flat quarter over quarter.

We will continue to evaluate market opportunities as we see them as well as further develop our secondary market strategy across several product lines.

In the second quarter, I would expect to see overall loan growth in the mid-single digits led by mid to high single-digit commercial growth. On the deposit side, we realized 2% annualized organic growth in the first quarter and we also entered into an agreement to sell two smaller outlying branches in New York. The branches have about $30 million in deposits between them and they are located in lower growth areas and the sale will occur later this year.

Net of moving the deposits associated with these branches, the held for sale total deposits were flat at quarter end. We would expect to see overall deposit growth close to a mid single-digit rate in the second quarter and we continue to emphasize of course demand deposits.

As you know, we actively evaluate our branch network and we will look for more opportunities to streamline and reposition when and where we can.

We are also developing new technology and service options for our customers and one of these new technologies is Text AMEB. We rolled out the program in the first quarter and the early feedback has been just great. So rather than dialing the call center, customers can simply send a text message to AMEB1 and they receive a quick call back from one of our customer service team members. So more on that and some other exciting initiatives will be forthcoming in the next few months.

Turning to fee income, we posted 7% growth over the fourth quarter and 12% growth year-over-year. Driving fee income to 30% of overall revenue is a key strategic initiative for us and we expect to continue to make strides here. We are building on the successes we have had in wealth management and insurance while further developing the secondary market channels for loan sales. So combined with a focus on customer penetration through cash management and other cross sells, this strategy should and I believe it will lead to improved ratios and less dependence on the margin in the coming quarters and frankly the coming years.

Now with that I am going to turn it over to Josephine. She will walk you through more of the financial details. Jo?

Thanks, Mike. Good morning, folks. I will begin by saying we feel good about this start to the year. We continue to be focused on profitability and we are demonstrating solid growth and disciplined expense management in what remains a challenging environment.

Core EPS came in at $0.54 for the first quarter which was in line with our guidance. We reported $0.50 per share for the same period in 2015. Our GAAP EPS was $0.52 reflecting the non-core charges related with the recent acquisitions and restructuring. As Mike noted due to opportunistic loan and deposit sales, balances netted flat this quarter. Excluding accretion impacts, loan yields have been holding up and improving in some cases. That being said, with the outlook of additional rate hikes retreating, we do expect loan pricing to remain under pressure in 2016.

Our net interest margin for the quarter was 3.33%. The margin before loan accretion contracted 1 basis point to 3.21%. Funding cost increased including shifts in our deposit mix and the roll-on of our forward starting balance sheet swaps. The swaps will continue to add incremental costs over the next couple of quarters. Outside of that, we may see an additional 1 to 2 basis points of compression in the margin excluding accretion in Q2.

Purchase loan accretion for the first quarter decreased to $2.1 million. We expect recoveries to continue to be bouncy and scheduled accretion to continue to track at a little under $0.5 million. Total purchase loan accretion including recoveries should come down further next quarter. Our fee income continues to improve and we expect further progress here in Q2. This includes the expected gain on sale benefit from our SBA program as well as seasonal improvements in deposit and mortgage banking fees. Overall, revenue is expected to be up in Q2.

Moving to expenses, I am pleased with the discipline we continue to demonstrate here. Core noninterest expenses were down 2% quarter over quarter as we managed our headcount, successfully negotiated decreases in some facility-related costs and continued to promote Six Sigma disciplined within the organization. Naturally expenses will be up in Q2 as we absorb the new SBA business.

We also expect to continue to reinvest in revenue producers throughout our expanding footprint.

Our core tax rate for the first quarter was 28% including the benefit of some small existing tax credit investments. We still anticipate the full-year core tax rate will be in the 20% range and that the tax credits will be more back loaded in the second half of the year.

Now for the second quarter, we see the core tax rate in the area of 25% with a corresponding offset charge to noninterest income for the book amortization. So we won't see a further boost to EPS from the tax credits until the second half of the year.

Stepping back, we expect to deliver $0.54 in core EPS in the second quarter. This would result in a 6% increase year-over-year with stronger revenues offsetting a higher tax rate. Non-core charges for the first quarter were tied to the branch sales and Firestone conversion.

Core return on tangible equity came in at 12.2% and at quarter end our tangible equity was 7.7% of tangible assets, up from 7% a year ago. Tangible book value grew 3% quarter over quarter to $18.44 per share. Credit remains very strong and we intend to remain selective taking advantage of our diverse footprint and emphasizing relationships, margin and profitability. We do expect a small increase in provision expense related to our targeted portfolio growth in the second quarter but no significant changes to our overall credit or charge-off levels.

So as I said, we are happy with our start to the year and our prospects for delivering solid results in Q2. While there are headwinds, we see opportunity for growth and we are making strides and diversifying our income stream. Our financial condition is good and we expect to make further progress towards our profitability goals throughout the balance of the year.

With that, I will turn it back over to Mike.

Thank you, Josephine. Nice job as always. So as Jo said, we are looking for second quarter core EPS that is in line with what we reported this quarter and of course we will work hard and look to do better if we can.

Despite concerns over a slowing US economy, the local region does feel like it is continuing to make progress and we remain cautiously optimistic. Growth remained solid in the Boston market and the New York markets are slowly but surely benefiting from the broad technology investments going on there. So I would say the opportunities are good but we will continue to be disciplined from a credit and a pricing standpoint as we move forward. We have built a strong franchise at Berkshire and a culture that thrives on meeting the market challenges of today's market.

We remain focused on developing our revenue channels and closely monitoring expenses leading to improved profitability and ultimately increasing shareholder returns. As I've said in the past, M&A opportunities will continue to come up from time to time but our focus remains on leveraging our existing business and taking advantage of the synergies we can develop here.

Our footprint, our teams and our Americas most exciting bank culture I believe will continue to be differentiators for us. I am confident about the opportunities in front of us and our team's ability to capitalize on them.

With that, we will open it up too many questions.

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

Good morning and thank you for taking my question. Mike, I heard what you said on the loan growth numbers but I wondered if you could share with us what the pipelines look like, maybe the mix in the pipelines as well?

Mark, it is Sean here. The pipeline remains robust. From a commercial perspective, we are talking in the $150 million to $160 million range with a good balance between CRE and C&I. On the consumer and mortgage pipelines, we are talking about $100 million to $120 million with also a good mix of product.

Okay, great. And then Josephine on the efficiency ratio, it looked like you guys made great progress this quarter, you had a below 60%. Can you hold it there? Is that the goal?

Mark, yes, obviously we have had a disciplined expense management. I do expect that to tick up in Q2 as we continue to expand our SBA platform so you might see a small uptick there.

Okay. And then Mike, I am just curious if you had a chance to look at the Chicopee deal before they announced their deal with Westfield and if that deal would have made some sense for you guys?

You know, we weren't involved in that one, Mark. I meet with all of these guys regularly and I think it is fair to say that both Jim and Bill wanted to do and in-market deal with two banks that are headquartered in that community and kudos to them. And I think they execute on their strategies, they will be fine and their shareholders will be happy and there is plenty of deals out there and there is plenty of business for everybody. So that is about all I can tell you at this point.

Thank you.

Casey Haire, Jefferies.

Good morning, guys. Just wanted to follow up on the expense front. Typically the balance FICA hits, you guys actually had comp lower. What was the payroll tax hit this quarter and what was it that came in lower to allow you to keep expenses, to keep the comp line down in this seasonally challenged quarter?

Generally as you say the FICA taxes hit, they are roughly about $1 million that we see coming through there. I tell you overall it is really just a managed pace. As we see the opportunities, we will layer in revenue producers and accelerate that in periods when we can.

Okay. And then just switching gears on the C&I yields if I look and obviously purchased accounting is in play here and it was over this quarter. But the C&I yields were down 50 basis points roughly after the Fed hike. As I said, purchase accounting was lower but how come we didn't see, why such a big downdraft in the wake of a Fed hike?

Casey, again, a lot of that degradation is the recoveries. We did see a bump in overall new originations. You have some of that -- relatively stayed flat once you strip out the accretion and you still have a little bit of the roll off effect in there. But overall they were relatively flat for the quarter.

Okay. And just lastly, on the loan growth front, consumer, you guys had a very nice growth period in consumer which you guys were kind of in the back half of 2015 anyway pulling away from due to overheating in auto. I missed the pipeline remarks but is consumer expected to be a growth driver for you going forward?

Casey, Sean here. We did see some growth in indirect. We've been strategically moving away from the super prime business not liking the economics. We are able to evaluate our portfolio and in that sweet spot of about a 720 FICO score, we actually saw expanding margins within the quarter so it gave us an opportunity to grow the business a little bit. Don't see it is a huge growth play because our overall strategy is to originate and sell in that business as well. But we did see some good healthy growth within the quarter with good expanding margins.

Okay, thank you.

Collyn Gilbert, KBW.

Thanks, good morning, everyone. Could you -- I don't know, Jo, if you want to run through it or Sean or whomever, just some of the detail on what you sold this quarter and maybe what the related yields were on what you sold within each bucket?

So predominantly we had a great quarter. As Mike mentioned, we were able to pare down and sell some seasoned portfolio loans and really took advantage of some really good economics there. We monitor our gain on sale margins, we monitor them against our competition and what I can tell you is very strong this quarter. So our gains were predominantly from selling mortgage in that respect.

As we mentioned I think in the last call as well as we 44 Capital closes and we continue to invest in SBA, we will start to see some additional gains there. From the commercial side, it was predominantly moving out commercial assets that didn't meet either a relationship hurdle for us or a margin hurdle for us. So no real gain on sales on that piece this quarter but we will look for that opportunity as we go forward.

Okay. So are you sort of managing to a balance sheet level or are you looking at more it on an individual sort of the profitability formula for each transaction?

So we will look at those opportunities as they come up. It is less about any strategic level and more just as the teams identify opportunities and making sure there is room for solid profitable relationship growth.

Okay. Just tying into the comment about 44 Capital closing, can you just kind of give us an update on how you are thinking about the SBA business and how much of a contributor you sort of expect that to be either this year or next?

We like the business. We have really spent the time to make the investments in our foundation. From a units perspective, we are number nine in the country now. So good relationship business, we think that business also helps our deposit base. So from a contribution perspective, I think we have guided in the past to between $400,000 and $500,000 and gain on sale that you will start to see in that business as we move toward the summer. And I think that is where we were last quarter as well. So we like the business, we think it will be a great strategic fit with what we have got going on.

Okay, that is helpful. And then just finally, Josephine, on your comments on the tax, so in the second quarter you said 25% core tax rate which would be offset by the negative adjustment on the fee side. I think I had like a $2 million negative adjustment for the second quarter. Is that about right or what are you anticipating that negative adjustment to be?

You know what, Collyn, I would back into it from a net perspective, I don't expect there to be any contribution to EPS bottom line. So $2 million is probably the right number, I will have to go back and do the math.

All right, I will leave it there. Thanks.

Laurie Hunsicker, Compass Point.

Good morning. Just wanted to follow on Collyn's question of tax. So as we look, Jo, at the back half of the year if we get to September, December, is that taxes advantage project line item in the noninterest income, that is going to be tracking around the $2.9 million, $3 million loss? Are you thinking about that the right way?

Yes, that should probably get you to the overall if you are looking at an effective tax rate for the year in that 20% range and knowing that we were at 28% guiding to 25%, that is probably the right run rate.

Okay, and so for the then again for the back two quarters we are going to be probably 17%, 18% in terms of a tax rate? Getting us to that?

I would expect us to be somewhere south of 20%, yes.

Okay, and then how should we think about that for 2017?

You know, we really don't give guidance out for 2017. I will tell you this has been a very successful effort here. Our commercial guys are sourcing these projects, they are coming from solid relationships. They've built a robust pipeline and I expect it to continue.

Okay. And then just jumping over to your comments on core margin, so the core margin excluding accretion was 3.21, if it is down a basis point call it to 3.20. But your reported margin if we see a drop in that accretion income, if that is going from 3.33 to somewhere in the high 3.20s, 3.27, 3.28, is that probably a good number? I realize accretion income jumps around but how should we think about that?

I would say you are in the ballpark, yes.

Okay. And then on your marketing expenses which had a nice drop linked quarter, is that a good run rate for this year or are we going to see that ramp back up?

Laurie, we don't generally break down line item expenses in terms of our guidance. I do expect there to be an uptick in overall operating expenses for Q2. Again, I think that it is probably going to stabilize where you see it, that will bounce around as we see our markets and our footprint opportunities.

Of course Sean has got his finger pointing up in the air. He would like to see that go a little higher.

That is alright, Sean and I partner up (multiple speakers)

We are a growing bank.

Okay, good. Just one more line item here on the expense side. The merger charges you guys took of $780,000 relating to Firestone, do we see any more merger charges related to Firestone or when do those stop?

Those are mostly behind us at this point. The remaining till is really around some of the conversions that happened here in the first quarter.

Okay, and then the two branches that are closing, do we see a charge associated with those two come through in June or was that rolled in?

Those two branches will close in Q3 so generally you will see the final economics getting trued up in the quarter. You move them to held for sale at your best estimate but until they settle you could see a refinement there.

Okay. And then Mike and Jo, this is both for you. So share buyback that you announced in December, it doesn't look like you repurchased any shares in the quarter. How, Mike, are you thinking about that here? And, Jo, any color on directionally what share count does going forward?

I don't think there is any change in strategy, Laurie, from our standpoint on buybacks. It is not at the top of the list but when and if it is appropriate, we will do some repurchase of our stock. And I don't think it gets a lot more strategic than that unless you have something to add to that, Jo?

No, we just reloaded. We got approval under our old program and so as Mike said opportunistically, it is there and ready to go.

Okay, great. Thanks. And then just lastly, can you just give us an update on the Firestone balances, where we stand total, what originations were in the quarter and where non-performers were? Thanks.

This is Richard Marotta. The balances went up about $17 million quarter over quarter. The nonperforming piece of this was approximately 1% of our total NPLS and every single metric from a credit perspective looks fantastic.

So 1% of $21 million?

Yes. Approximately.

Laurie, this is Ali. That compares to the overall -- Firestone makes up about 3% of the assets but it is only 1% of the NPL. So to put that in perspective.

Got it. Okay, just one more question as I'm sitting here looking at it. So Firestone then is sitting at about $200 million total and your non-performers on that are a $210,000. So a nonevent, is that correct?

You got it.

Okay, thank you.

Matthew Kelley, Piper Jaffray.

A question for Josephine. Just on the guidance on the margin and the outlook there, if rates don't change, the $300 million in forward starting swaps I believe that is supposed to be -- it works out to like a 6 to 8 basis point drag on the margin. How much of that is already reflected or how much of that is to come again if rates don't change?

Sure, good morning. So I would tell you in Q1 you probably saw 2 slightly more basis points of compression with the first tranche kicking in. And the second quarter the second tranche, the second $100 million will kick in and you will probably see another 3 basis of compression related to the swaps and then the rest will flow through in the third quarter once they are fully phased in.

Okay, got you. So another basis point or two in 3Q just pressure there if rates don't increase?

Yes, 2 basis points give or take.

Okay. So it seems like the core margin will continue to drift down then throughout the course of year as a result of that if there is no change in the shape of the curve.

Yes, you are definitely going to have the impact of the swaps. Overall yields on loans I would say 1 to 2 basis points. We have been very diligent at what we will or won't do and I think that discipline is holding strong there. As we absorb the swaps you will see some further degradation.

Got it. Okay. And then on the loan related fees, I assume that is mostly new back-to-back swaps that are being booked. During the first-quarter, what percent of the commercial real estate loans included a back-to-back swap and how many customers were taking those?

The loan fees have swap incomes and service fees as well as some of the seasoned loan sales that we did in the quarter. From a percentage perspective, I don't know?

We can calculate it as a percentage of customers and get back to you.

Okay. How much of the $3 million then was the seasoned loan sales again?

We will get to you the detail there, Matt. It wasn't a significantly high quarter for us but there was some activity there this quarter.

Got you. Got you. And then just a big picture question on the tax planning program. Is that something that you believe the net bottom line EPS and capital growing benefits are worth it relative to some of the uncertainty that it introduces into the model? I mean are you okay with that kind of give and take between a clear net benefit to earnings and capital versus volatility to the quarter to quarter that makes it a little bit more challenging in the forward outlook?

Let me just say this, anytime you can put more money in the pockets of your shareholders you probably ought to do it. And so we have to balance that versus the value proposition because of the volatility but I find it hard to believe that most of our shareholders wouldn't want us to take advantage of those and add that kind of respective EPS into our retention of earnings. Jo?

One other comment I would say there, Matt. When we think about these tax projects, there's really kind of three basic risks around them and one has to do with the project development, the construction needs to be completed per the plan. Now these are again, the bank is providing construction generally on these projects and the underwriting is part of the banks normal construction and management process. So that is really mitigated.

The other one being more around the tax benefits and making sure that we are working with third-party tax and legal resources and we certainly go through that level of due diligence. And lastly, the bank would need to generate their operating capital gains in order on the income tax liability that we are going to offset those tax credits and we have done a lot of tax planning strategies here in the last two years and we are seeing that play out.

Got it. Okay.

Matt, it is Ali. I just to follow up on your question about swaps. So when you look at the swap fee, the loan fee income line it is less than half of that is what is made up of swap fees and of the deals we did this quarter it is around 20%, probably less than 20% had swaps attached to them.

Okay, got it. That makes sense. And one last quick one. Do you anticipate any additional uptick in just kind of the core deposit rates that we are seeing here? The money market was up 10 basis points year-over-year. And CDs, are new CD offering is coming in right around 100 basis points or what is the trajectory of the deposit cost?

Matt, it is Jo. We will probably see some additional repricing in some of those time deposits from the Fed rate hike. I don't expect any major changes but you could see a slight uptick.

Okay. Thank you.

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

Okay. We want to thank everyone as always for joining us. We look forward to speaking with you again in July to discuss our second-quarter results. Thank you.

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