Beacon Financial Corp (BBT) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Berkshire Hills Bancorp Fourth Quarter 2017 Earnings Release Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Gordon Prescott, Senior Vice President, General Counsel. Please go ahead.

Good morning, everyone. I'm pinch-hitting for Ali O’Rourke today. But not to worry, Ali will be back to lead off our next call. So thanks for joining us for this discussion of year-end results. Our news release is available on the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC. Our remarks this morning will include forward-looking statements and actual results could differ materially from these statements. For detail on related factors, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding Berkshire's results and performance trends and should not be relied upon as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release.

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

Thank you, Gordon. Good morning, everyone. Thanks for joining us for our fourth quarter call. With me this morning are Richard Marotta, Sean Gray and Jamie Moses. I'll provide an overview of the quarter and the year, then I'll turn it over to Jamie. He'll walk you through some of the financials. We'll discuss our outlook and guidance, and then I'll wrap it up.

So let me start with 2017. It was a big year for us. The bank grew significantly. We integrated the First Choice deal. We crossed the $10 billion in asset threshold with the Commerce deal. That allowed us to absorb the costs and keep profitability trends positive. And we moved our corporate headquarters to Boston. And despite the high level of activity, we maintained our focus on improving profitability. We grew overall revenues. We managed our expenses. And we drove solid organic growth across the footprint.

Commerce integration has started smoothly for us. We're pleased with the high level of talent, their attention to customer service and their enthusiasm for continued growth in the region. And the full system integration will be completed near the end of March. And we look forward to capitalizing on the benefits of our partnership throughout the year.

Commerce added $1.8 billion in assets to our balance sheet, and importantly, improved our loan-to-deposit ratio to 95%. With the teams we've added in the market, we're already seeing new business opportunities, and we anticipate achieving the projected cost savings and earnings accretion on schedule.

We're in the process of opening the doors to our Boston headquarters, officially making us the largest regional bank with corporate headquarters in Boston. Our new regional commercial and private banking leaders are locating there. And so we anticipate selectively building our team in the city over the course of the year. We grew revenues by over 40% in 2017 and this included the benefit of the First Choice and Commerce acquisitions, along with solid organic growth. Our annualized revenues are now moving towards $500 million.

Company delivered 21% in C&I growth and 8% total organic commercial loan growth for the year. Margins expanded and fee income increased to close to 30% in net revenue. Core return on assets improved significantly, and we kept our efficiency ratio below 60% despite the impact of the mortgage business. We also bolstered our capital during the year, ending the fourth quarter with a tangible equity to asset ratio of 8.5%. So all in all, it was a good year and we closed it out with a solid quarter.

And we start 2018 with the benefit of tax reform. And Jamie will comment on the fourth quarter accounting impact and on the expected impact for 2018. But the reform is generally positive for corporate taxes. As you know, we felt strongly about passing a portion of the benefit on to our employees and communities. We announced earlier this month an increase in our minimum wage to $15 an hour. And this impact, along with further adjustments to our pay scale, benefited over 25% of our employees, and quite frankly, we believe this was the right thing to do. We provided onetime bonuses to over 1,000 of our employees as a thank you for their hard work and dedication. We've also earmarked a portion of the tax benefit to build out and enhance our employee development and our training programs.

As many of you know, culture has always been important to us and that our employees are really the soul of our efforts. And this means supporting and encouraging and rewarding our front line because we believe motivated employees deliver satisfied customers, communities and, of course, shareholders.

We also took the opportunity to contribute an additional $2 million to the bank's foundation, which supports charitable organizations, scholarships and volunteerism across Berkshire's local community. In addition to donations, we, of course, encourage all of our employees to volunteer in their local communities, and actually provide paid time off for them to do that. Because giving back is another of the core values our culture is built on.

At this point, I'm going to turn it over to Jamie. He'll provide you a review of the quarter, and then I'll wrap it up. Jamie?

Thanks, Mike, and good morning, everyone. We delivered $0.58 in core EPS in the fourth quarter, a 4% increase year-over-year, including the impact of the share issuances. We reported a GAAP EPS loss of $0.06, which includes onetime charges related to writing down the DTA due to tax reform and the close of the Commerce acquisition. Core EPS for the year was $2.29 and GAAP EPS was $1.39.

Starting with the balance sheet, we grew loans organically 6% annualized in the fourth quarter, which includes 5% annualized organic commercial growth. The pipelines remain healthy, and we expect to see mid-single-digit annualized commercial growth in the first quarter and mid- to high single-digit annualized total loan growth.

Now on the deposit side, we ended the year with strong organic growth. In the first quarter, we anticipate low single-digit annualized growth in average balances. Period-end balances will continue to depend on daily activity in commercial payroll balances. Average earning assets grew 14% this quarter, including the impact of the Commerce acquisition. Margins have continued to hold up well, driven by the rate hikes and low deposit betas. Our NIM in the fourth quarter advanced to 3.50%, and purchased loan accretion grew to $5.5 million, including the benefit of the Commerce acquisition.

For the first quarter, we expect the margin to decline slightly due to lower purchased loan accretion and the new tax rate impact on FTE. Purchased loan accretion is expected to gradually come back down and be in the $4.5 million range in the first quarter.

The provision was $6.1 million in the fourth quarter, exceeding net charge-offs. We don't expect any significant changes to our overall credit or charge-off levels in the first quarter, and we anticipate our provision will be slightly lower next quarter. Overall, fee income was mostly flat quarter-over-quarter as the increased deposit fees from Commerce offset seasonally lower mortgage and SBA fees. We originated $600 million in held-for-sale mortgages, with new production coming on about 65% purchase. Margins held steady quarter-over-quarter.

In the first quarter, we expect fee income to be stable as seasonally lower loan fee revenue is offset by seasonally higher wealth management and insurance revenues, and we expect mortgage revenues to remain steady. On the expense side, the increase in operating expense quarter-over-quarter was tied to the Commerce acquisition. Our efficiency ratio for the quarter dropped to 57%. We anticipate a mid-single-digit increase in core operating expenses in the first quarter, primarily reflecting seasonal employee benefit costs, a full quarter of Commerce expenses and an increase in FDIC charges tied to crossing the $10 billion mark.

The expense impacts tied to tax reform from the minimum wage hike and employee development is expected to be about $4 million for the year. The noncore charges in the fourth quarter included $16 million in Commerce acquisition costs, $3 million in onetime employee and community investment and $18 million tied to the DTA write-down as a result of tax reform. We estimate about $12 million in remaining Commerce acquisition costs at this point. Most of that should flow through in the first quarter.

Our core tax rate in the fourth quarter was 32%, which includes the benefit of some historic tax credits. Going forward, historic tax credits will have significantly less impact for us due both to our growth and tax reform legislation. We anticipate our core tax rate will be in the 22% to 24% range for the full year and at the high end of that range in the first quarter. Altogether, we expect core earnings per share in the first quarter to be 10% to 12% higher than the fourth quarter. And we estimate that the diluted common share count will average about 46.2 million shares.

It was a good year and quarter. We're pleased with the overall performance and look forward to delivering solid results in 2018.

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

Okay. Thank you, Jamie. So as Jamie said, we expect to deliver a double-digit increase in core EPS quarter-over-quarter, which would be a 16% to 18% improvement over the first quarter of last year, and this would also mean a core ROA over 1%. So a good start to the year.

I'd also like to touch on some high-level 2018 guidance. We expect to grow loans at a mid- to high single-digit pace this year, with deposit growth to match. Our new teams in expanded markets, including Greater Boston and New Jersey, should contribute to this growth. Our margins are expected to be steady, barring any significant change in deposit betas. Credit shows no sign of deteriorating and we anticipate that it will remain stable throughout the year. And lastly, the mortgage business should remain healthy, but we're not forecasting any significant growth in 2018. And combined with the lower tax rate, we're targeting core EPS growth in the 17% to 20% range for 2018, with our core ROA above 1% and our efficiency ratio below 60% for the full year. And we'll continue to pursue the right balance between efficiency and investing in our franchise, and opportunistically building our fee revenue streams. We're pleased with our performance over the last year and optimistic about our continued growth. The board voted to raise the dividend by another 5% this year, evidencing their confidence heading into 2018. And we're seeing a lot of optimism from our local businesses and communities as well. Tax reform should have a positive impact on the region and growth in the economy looks poised to continue. And with our recent commercial and private banking hires in Boston, we're in a strong position to capitalize on those opportunities.

It's a strong culture and it's the right people that have allowed us to come this far, and we believe it will allow us to keep delivering on our promises. This momentum should produce strong results over the next several years and that will benefit all our constituents.

With that, I'm going to open it up to any questions.

(Operator Instructions) The first question comes from Mark Fitzgibbon of Sandler O'Neill.

This is Nick Cucharale filling in for Mark. Just wanted to start out, some really nice organic trends on the C&I front this quarter and this year as you alluded to. Are there particular markets that are showing strength? And are you seeing increasing optimism across your footprint?

Sean?

Sure. We really like the Northern New Jersey and the Greater Philadelphia market. It's proving to be a good ABL hub for us. That, coupled with the Greater Boston market. So we continue to see good ABL opportunities in C&I. And we look for C&I growth to continue on pace with overall loan growth, approximately 10%.

Okay, great. And then sticking on the concept of Boston, I was hoping you could update us on your presence there. What are your loan and deposit figures?

Loan and deposit figures, Sean, for Boston?

Deposits are approaching about $0.5 billion right now. Loans are approaching and heading towards $3 billion for the Greater Boston market.

Terrific. And then lastly, would you mind sharing with us your commercial loan pipeline and how that compares to last quarter?

The pipeline is higher than it's been for a while. We're seeing a good business mix. We're continuing to see more C&I opportunities. So that pipeline is moving north of about $200 million.

The next question comes from Collyn Gilbert of KBW.

Just on the loan -- just following up, Sean, on the loan discussion. Can you just talk a little bit about what you're seeing in terms of loan pricing and just the competitive landscape as it relates to just, yes, loan structures and pricing?

I think we're going to see loan yields stay consistent with a stable core margin. From a -- we're seeing mid- to high-4s as a roll-on rate right now.

Okay, okay. And then just the mix that you're seeing, so when you guys are -- you're thinking about mid- to high single-digit loan growth for the year, do you anticipate much variation from the current composition of the portfolio?

No, I think we'll be pretty stable.

Okay, okay. And then for you, Jamie, on the NIM, just curious what's going into your assumptions there, like in terms of deposit pricing pressure and then rate -- what -- your rate outlook.

Yes. So the way that we're thinking about it, Collyn, is that we're going to have a small decline in Q1, maybe 3 to 5 basis points. And that's going to be tied to the lower accretion number that we talked about in the script. And then there's maybe 1 basis point or 2 there tied to the FTE adjustments going forward in 2018. And then after that, we expect it to be pretty stable. And I guess that's based off of the forward curve that we're looking at here, so based on a couple of rate hikes in 2018. So we think the NIM is going to be stable.

Okay. And I presume then you're still expecting continued funding pressure, right, because of the -- because you would get a benefit, I would assume, obviously, on the asset side?

Yes, yes, that's right. I mean, it's -- that's one of those things, right? It's going to be dependent on what happens out there in the markets. And that's going to be one of the things that drives you to the NIM up or down, right? And that's -- so that's just something we're going to have to deal with when it happens.

Okay. And then just on the -- I just want to make sure we're talking like apples-to-apples. So on the NIM, your sort of accretion assumption for 2018, when you talk about your NIM outlook. I know you mentioned first quarter, but just, yes, a little bit more broadly.

Yes, no problem. So you should think about that as gradually coming down over the course of the year. Of course, it's hard to know exactly what that happens. There are surprises. Last quarter, we had a surprise -- when a loan prepays that has accretion tied to it, it can make things a little bumpy. But I think if you sort of look at 2017's number, you can expect something like that for 2018 as well.

Okay, that's helpful. And then the last question, if I heard you correctly, Mike, your comments at the end on mortgage, suggesting that it was healthy but not seeing significant growth. What -- can you talk a little bit about your outlook there and why not more growth?

Sean?

Sure. We see it as healthy, and we really look at the business to really drive 30 to 35 bps of pretax profit. So when there's opportunities in the market, we'll double down a little bit with investment, with marketing and maybe with some new hires. When we're seeing margins stable, as we see them now, we look to hold the business.

And that's not to say that we won't see an increase in mortgage business. I think we just -- I think from our standpoint, we're forecasting our budget next year on no significant growth in that area.

Correct.

Yes. Collyn, I think if you were to go over to look at the, like, the overall landscape, I think most companies are sort of predicting a lower origination of mortgages in 2018 versus 2017. So we're just kind of holding steady there.

Okay. So that's more of a macro issue than anything specific with First Choice or just how that's integrating, or the opportunity that you maybe thought that is not materializing. Okay, it's just a macro call.

Yes.

The next question comes from Dave Bishop of FIG Partners.

Was curious if you could walk us through maybe as we've talked about the NIM side. But on the expense outlook, in terms of first quarter, I know there's a lot of noise in the fourth quarter and probably some in the first quarter. But stripping out the merger charges you talked about, maybe what's your thinking in terms of what's a good quarter run rate looking into the first quarter for operating expenses?

Right. So we said mid-single digits in Q1 update in terms of expenses. That's a little bit high for the whole year because we have some seasonal payroll factors and things like that, that happen in Q1. So -- expect that to come down a little bit. And again, we guided to an EPS growth of 17% to 20% and an efficiency ratio below 60%. So I think if you can take a look at that, that should help. And then again, we're going to have the impact of the Commerce cost saves, should fully roll through into Q2 and then in the rest of the year.

Okay. So fully in 2Q from the Commerce side of the house because of cost saves?

Yes, they will be fully through in Q2. And then Q3, Q4 are going to be -- would be the run rate.

Got it. And then just in terms of deposit pricing across your market. Any sort of -- you talked about loan yields. Any sort of variation on the deposit cost side across your core markets there? I'm just curious what you're seeing, if there's been any sort of outside movements, one geographical region over the other.

No. We've seen discipline in the market. And we don't run any non-relationship specials. So the demand deposit really helps us minimize upward rate pressure. But we've seen discipline and stability.

The next question comes from Brody Preston of Piper Jaffray.

Sorry if I missed this, Jamie. But did you provide an outlook for what you're expecting for accretion moving forward?

Yes. So the accretion number we gave for Q1 is $4.5 million. And then, again, we expect that to gradually come down throughout the rest of the year.

All right, great. And I know you said you expect credit to remain relatively stable, given the trends you're seeing here. But just wanted to touch on the provision and what might be a good run rate moving forward.

Yes. So we expect the provision to be slightly lower in Q1, and then that will depend on loan growth after that. So that's kind of how we're looking at them.

Okay, great. And then with the Commerce transaction, how are you guys doing on customer retention on both the deposit and the loan side?

We're meeting our expectation. We've got a lot of experience on-boarding and modeling as it pertains to acquisition. And everything we've seen so far is right where we would expect it.

Yes, No, it's good.

Yes.

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

Okay. Well, I want to thank everybody for joining us, and we certainly look forward to speaking with everyone again in April when we discuss our first quarter results.

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