Beacon Financial Corp (BBT) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Berkshire Hills Bancorp Q1 earnings release conference call. (Operator Instructions) Please note, this event is being recorded.

I'll now turn the conference over to Allison O'Rourke. Ms. O’Rourke, please go ahead.

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 remarks will include forward-looking statements and actual results could differ materially from those 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.

And with that, I'll turn the call over to CEO, Mike Daly. Mike?

Thank you, Ali. Good morning, everyone. Thanks for joining us this morning for our first quarter call. I'll provide an overview of the quarter, and then I'll turn it over to Jamie Moses, our CFO. He will walk you through some of the specifics in our financials, will discuss our outlook and our guidance, and then I'll wrap it up.

So a good start to the year. We delivered $0.65 in core EPS, a $1.04 core ROA, kept our efficiency ratio below 60%, and our core return on tangible equity moved to 13.5%. Importantly, we completed the conversion and system integration of Commerce, and we're pleased with how that process went and our reception in that market. We grew our teams in both Boston and New Jersey this quarter and delivered solid fee income, and we also managed our expenses tightly.

Total loan growth was 4% annualized in the first quarter, with C&I loans up 3% annualized. We saw good growth from our ABL team, and originations were strong in the Boston, Connecticut and New Jersey markets. We added lenders to our ABL team in the Mid-Atlantic this quarter, and we've been building out our Greater Boston middle market team, which has a pretty robust pipeline at this point. So we expect, as we begin to close these deals, to see at least high single-digit annualized commercial and overall loan growth as early as next quarter.

Average deposits were up 3% over the fourth quarter, including the impact of Commerce and organic business, targeting average deposit growth in the mid-single digits annualized in the second quarter. We opened a new branch in Simsbury, Connecticut this quarter, and we relocated our downtown Albany branch. Both new locations are equipped with the new virtual teller technology, allowing customers to interact with our teller center in Pittsfield. We'll now have 10 locations utilizing this technology by year-end, and early results have been pretty positive from a customer experience standpoint and also an efficiency perspective.

And we've also officially opened our Boston headquarters. We've got executives, lenders, My Bankers and private bankers working out of the office at 60 State Street at this point. I expect we'll continue to add to that team there over the course of the year as we build up our customer base and further establish ourselves as a go-to bank in that market.

As I mentioned, we completed the Commerce systems integration at the end of March. By all accounts, it was another good conversion. Customer reception has been positive, and we're retaining more deposits actually than we anticipated. It's a great market, it's a great team and we're feeling pretty good about what we're building there.

Now at this point, I'm going to turn it over to Jamie and he'll provide some more detail and review the quarter, and then I'll wrap it up. Jamie?

Thanks, Mike, and good morning, everyone. We delivered $0.65 in core EPS in the first quarter, a 12% increase over the fourth quarter and an 18% increase year-over-year. We reported GAAP EPS of $0.55, which includes onetime charges tied to the system conversion of Commerce and the mark-to-market of our equity portfolio.

Overall, average earning assets were up 3% over the fourth quarter. Our net interest margin was 3.36% in the first quarter and 3.23% excluding purchased loan accretion. Outside of accretion and the FTE adjustment, we gave up 1 basis point on the overall margin.

In the second quarter, we expected NIM to be up a few basis points. And in the back half of the year, it should stabilize as anticipated benefits from rate hikes offset the rundown of scheduled accretion. Purchased loan accretion came in at $3.4 million in Q1, which included fewer recoveries than we expected. For the second quarter, we anticipate the accretion number to be closer to $4 million.

The loan loss provision was $5.6 million in the first quarter, exceeding net charge-offs. We anticipate that number to be about $1 million higher in the second quarter, in line with loan growth and mix expectations. Overall, noninterest income was flat quarter-over-quarter, as insurance, wealth management and deposit fee income offset lower mortgage banking fees.

We originated $400 million -- $480 million in held-for-sale mortgages in the first quarter, with new production coming on 65% purchase. The mortgage team did a nice job managing expenses through a slow quarter and offset most of the revenue decline with matching expense saves.

The second quarter should be seasonally stronger for our fee income businesses, including mortgage and SBA loan sales, and we expect to see noninterest income up about 10% over the first quarter results.

We tightly controlled expenses in the first quarter, and our efficiency ratio remained below 60%. In addition to the lower mortgage-related expenses, we benefited from the Commerce integration and achieved some of the projected cost saves early. We expect to see a low single-digit increase in operating expenses in the second quarter tied to higher loan production and investments in people and training.

Q2 should be the last quarter with non-core charges associated with Commerce. We anticipate a final $2 million to $3 million in deal charges now that we're through integration, which brings our total deal cost in below the original projection. That means a fairly clean second quarter and a very clean third and fourth quarter for us.

Our core tax rate in the first quarter was 23% and our GAAP tax rate was 22%. We continue to expect our full year '18 core tax rate to be in the 22% to 24% range, with the second quarter coming in at the low end of that. Altogether, we expect core earnings in the second quarter to be around $0.70 per share, with GAAP EPS around $0.65 per share. And we estimate that the diluted share count will average about 46.3 million shares.

At quarter end, tangible equity was 8.6% of tangible assets. Our core return on assets was 104 basis points and GAAP ROA was 88 basis points. Core return on tangible equity moved up to 13.4% and GAAP ROE improved to 6.7%. Our financial condition is good and we're set up to deliver solid results this year.

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

Okay. Thank you, Jamie. So as Jamie said, we're expecting to deliver around $0.70 in core EPS in the second quarter, with strong improvements to our profitability metrics, including a core ROA north of 1.10%, and we remain on target for full year a core EPS growth of 17% to 20%, with our core ROA above 1% and our efficiency ratio below 60% for the year.

Our immediate goal is to get the most out of our recent acquisitions, fully integrating our operations and our culture. We feel good about how the Mid-Atlantic operations are performing, and we're really pleased with how well our Boston build out is going. We expect to see strong results in the next several quarters as our initiatives come together to drive value. And we've worked hard to get here with your support, and you have our promise to give all we have towards delivering the high performance that you expect.

Now with that, I'm going to open it up for any questions.

(Operator Instructions) And the first question comes from Mark Fitzgibbon with Sandler O'Neill.

I wondered -- maybe for Jamie, how much remains in Commerce cost saves to be extracted and what would you guesstimate the rough timing on that would be?

Yes. So thanks, Mark. I think that we have about another $1 million or so in Commerce cost saves that we can extract, so that's about half of where we thought we were going to be. That should fully show up in Q3, and then will sort of -- Q2 is going to be a little light with that, but Q3 is going to show up fully in the back end. And again, that's just people -- people saves in terms of Commerce.

Okay. And then, secondly, I wondered if -- with the expansion you've had into Boston, if you could kind of update us on loan and deposit growth there in the Boston market maybe this quarter?

Sean?

Sure. We're up to 4 branches in the Boston market, now with deposits are over $400 million with the Commerce integration. As you know, we opened our first de novo branch on Congress Street. That branch is up over $50 million, so we're very pleased with the progress. From a loan perspective, we're now -- we're probably pushing $2 billion in the greater Boston as you move out towards Worcester. That's not including Worcester, but that's including Greater Boston and the ABL markets.

Okay. And then, Sean, I wonder if you could share with us what the pipelines look like, both on the commercial side as well as in the mortgage business right now?

Sure. Commercial pipelines are over $200 million. We're pleased the Commerce integration is ahead of schedule. We're coming off strong recruitment, like Mike talked about, so we've got really good running room. The other part was mortgage. Mortgage is at $344 million.

Okay. Great. And then lastly, Mike, being that you guys are America's most exciting bank, what are you most excited about in your business today?

That's a great question and I appreciate the way you asked it, Mark. That's good branding and advertising for us. I'd say this, I think we're all pretty excited that we're at a point now where we can concentrate almost exclusively on integrating all of the different products we have across the 3 strong footprints. So we're past $10 billion, we've done it in a way that we expected to do it, the numbers are coming our way and we've got a lot of the people on the ground that get that there has to be cross-sell across each of the regions in order for us to realize our full potential. So there's a lot of excitement in the company right now about filling the customer base with additional products and then picking up additional profitability across a pretty strong regional franchise.

And the next question comes from David Bishop with FIG Partners.

I know with the acquisition of Commerce, there could be some seasonality in terms of some of the deposit flows. I don't know if it's possible to sort of walk through in terms of what's sort of their normal seasonality and how do you see deposit trends moving as we go through 2018?

Sure. The big seasonality is really with their payroll deposits. So your payroll deposits, depending on the end-of-quarter balances, is where you'll see the fluctuation. So we -- going forward, we see average balances staying in that growth of mid-single digits where you could see payroll fluctuation at an end of quarter, depending on that date, fluctuate as high as $200 million within the payroll business itself. Although the average balances within that payroll business will remain healthy through that quarter.

Got it. And maybe you could comment overall just in terms of deposit pricing across your footprint? Any sort of just some of your rationale you've seen out there in terms of some of the larger competitors?

The larger competitors have been pretty disciplined and they really leverage their franchise value, leverage their convenience factors. We have seen competitive pressure tick up. It's typically been some of the folks struggling with liquidity and some of the smaller competitors with some very aggressive specials.

And the next question comes from Laurie Hunsicker with Compass Point.

Just wondered if we could go back to net interest income here. Do you have a layout of accretion for the rest of the year? I got your 2Q guide at $4 million. How are we thinking about that?

Yes. I think, Laurie, you can think about that, that's going to come down over the rest of the year. I think in round numbers, maybe you should think about it as about $500,000 a quarter.

That it comes down, okay. Great. Okay. And then, again, just as we think about your loan growth, your recent commercial and private banking hires, how do we think about those teams playing out?

Meaning, as far as pipelines and whether we expect there to be additional growth in volume, and Sean, you can probably get specific with it. But right now, it looks as though the teams we've put in place in both the Mid-Atlantic and specifically the Boston area, they're hitting on all cylinders. So we would expect real good strong commercial growth from here forward with the addition of those teams. Is that...

Yes. I mean, in your opening comments you mentioned the recruitment. We usually -- it takes about 3 to 6 months to see them truly ramp-up, and that started in Q4 and Q1. So we feel very bullish about that high single-digit commercial loan growth and loan growth in general.

Okay. And I'm sorry, I missed, your total loan growth expectations for the remainder of this year are what?

Yes. I think the same thing. I will say mid to high single digits.

Okay. And then just on CRE, can help us think about that specifically. I mean, that's 40% of your loan mix and we saw 0 growth there. How should we be thinking about that?

Well, I think that one of the things you saw, we were busy, obviously, with the integration of Commerce in the first quarter. And when we went took a look at the portfolio, there were some commercial real estate loans that we moved off the balance sheet. So that had some effect on the overall commercial real estate growth. But I would say as we go from here towards the rest of the year, the commercial real estate growth would mirror the growth of any other product that we have in commercial. Is that...

Yes. I think it will trail slightly to C&I growth, but you'll see healthy growth in that line.

Okay. Great. And on mortgage banking, what was the contribution if we looked at the net number? In other words, your -- just your net income of $25 million, how much did mortgage banking contribute to that?

Yes. So the way that we think about this and talk about it, Laurie, is we look at it about 30 basis points pretax margins in that business.

Okay. And that's including expenses?

Yes.

Okay. Okay. And then in terms of 2019, are you projecting about the same?

We would expect -- yes, we would expect the margins to be the same on that business. And that's a long way out to predict mortgage banking fees and revenues and things like that, but assuming there's no wild changes in the interest rates, then, yes, we would expect it to be about there.

Okay. Great. And then can you just -- can you give us an update on where we stand with respect to Firestone and Taxi just in terms of balances, originations, nonperformers, charge-offs?

Richard?

Yes. Laurie, this is Richard. Again, as a way of a perspective, Firestone is less than 5% of the total commercial loan book, so the balances were about $250 million, about 11% up quarter-over-quarter. Credit metrics remain very, very strong in that portfolio and everything is going according to plan. As far as the Medallion portfolio...

I'm sorry. Richard, I'm sorry, just to interrupt you. So you had -- last quarter, you had $1.8 million nonperforming. Do you have a number for me, a number on that?

$1.5 million.

$1.5 million. Okay. And what were your actual originations?

$38 million, approximately.

$38 million. Okay. And no charge-offs?

No. I'm sorry. I'm sorry. About $170,000 -- $180,000 with the charge-offs.

Great. Okay. And then, I'm sorry, didn't mean to interrupt you. And then Taxi?

Yes. Taxi, everything there is going according to plan. Our cash in quarter-over-quarter was actually higher. So the first quarter cash in was higher than the fourth quarter. No loss, no charge off in that portfolio. No deterioration in any credit metrics, and over 50% of the portfolio still remains that it was never -- has never been delinquent.

Okay. And so what is your actual period-end balance?

Gross?

It's below $40 million.

Mark?

Mark, net.

Well, okay. So basically, I'm grossing back to $60 million -- $67 million in reserve, is that right?

That would be about right.

Okay. So you're at $107 million. So then it increased slightly from the $103 million?

No, it's down.

Laurie, when you do the math, it's down probably $4 million quarter-over-quarter.

Okay. And then you also have another $4 million reserve against that, is that correct?

Approximately.

Okay. And then the last that I had in nonperformers there was about $29 million. Do you have a current number of nonperforming?

We are entertaining offers on this portfolio, and that's probably all we want to disclose at this point.

Got it. Okay. Okay, that makes sense. So Mike, generally, in terms of Boston and your growth prospects there, can you talk a little bit about how potential M&A could fit into that puzzle of how you're thinking about expanding?

Well, I mean, I think potential M&A in any one of the regions that we're in is something, as you know, we always look at as opportunistic. And if there was an opportunity to do something with a partner that made sense, we'd certainly take a look at it. But I've got to tell you, one of the things that I think Mark Fitzgibbon asked when we started was what we're most excited about. And the thing we're most excited about right now is getting the most juice that we can out of the company that we built. So it's not a priority of ours right now to be out seeking acquisitions or additional partners. Our priority right now is to continue to grow the company from a market share standpoint and improve the profitability metrics. And if there's an opportunity, whether it's in Eastern Massachusetts or any other region, we'll look at it. But I just want to be clear that that's something that we're looking at as part of the overall scope and plan strategically right now. That help at all?

Yes.

And the next question comes from Collyn Gilbert with KBW.

Jamie, if we could just go through some of the fee comments you made, what was -- what were the SBA fees this quarter?

They were right around $2 million, just slightly under that.

Okay. And then when you talk about expectation that SBA is going to be up and mortgage up next quarter, how -- I just -- kind of getting a little bit, I guess, more specific on the mortgage business in terms of how that fee line is going to flow through.

Right. So it's going to be up seasonally in Q2. So I think the way that you should think about it is maybe up $4 million or so on the mortgage revenue side of things, so that's kind of where that's going to land up. And then all the other expenses sort of land inside that range that we talked about.

Okay. Okay. So that's a nice increase, which is comparable, I guess, you guys kind of did maybe like a $4 million, maybe it's a little bit lighter than that last 1Q to 2Q. So even given what's going on from a macro perspective, I mean, it sounds like your outlook for mortgage is still pretty strong.

Yes. I would say it is pretty strong, Collyn. We feel good about what the mortgage business has delivered for us from the First Choice acquisition, and we continue to think that it's going to run around in that area.

Yes.

Okay. Okay. That's helpful. And then just when you would -- I think I heard you say fee income growth in the second quarter of 10%. Is that right?

Yes.

Okay. Just curious, off of what base? I just want to make sure that I'm comparing apples-to-apples. Is that just -- go ahead.

Yes. I mean, it's off of noninterest income, Collyn.

So the reported -- the reported number, just?

Yes. Yes.

So the securities loss...

If I'm understanding your question correctly, that's -- yes, that's where I think we'll see it.

Okay. So it includes that securities loss in there. Okay. All right. That's helpful. And then I know David asked a question about deposit runoff or deposit trends within Commerce. Is there a loan runoff too that we should be expecting coming off of the Commerce portfolio?

Going forward, no, I don't think so, Collyn. Mike talked a little bit about some of the commercial real estate that we sort of sold down.

And we managed some of that out. But on an ongoing basis, we feel pretty good about that market right now.

Okay. Okay. That's helpful. And then just finally, kind of broadly, Mike, as you think about business and driving profitability and all the initiatives that you have on your plate, do you have just a rough estimate of where you think the earnings growth trajectory is for the company as we look out, like in 2019, 2020? I guess, if we look at this -- so like '16 and '17, you guys generated about an operating EPS growth of 5%. Obviously, this year it's helped by the tax rate as well as other things. But just trying to get a sense of all the initiatives and investments you guys have made, where you think the potential for acceleration of EPS growth can come or what that (inaudible)?

Yes. I mean, it's probably a little early to be speculating on guidance for, let's say, 2019, Collyn. But I think, right now, we've got consensus when you take a look at where people have us across the board. And if you look at the consensus of those numbers, I think those are numbers that we feel we can meet. And that's about as specific as I think I'd be allowed to get at this point.

Okay. Okay. No problem. Okay. Good. And just anything on the credit side, any areas where you're somewhat concerned or taking a harder look at or anything at all on your outlook for credit?

Yes. Collyn, this is Richard.

Nothing systemic in...

Yes. There's nothing at all. There's no trends and we look at that constantly, and we don't see anything, at this point, across the footprint.

And the next question comes from Matthew Breese of Piper Jaffray.

Just want to hop back on the fee income outlook, the mortgage banking outlook. I think you noted there could be as high as a $4 million quarter-over-quarter increase. And when I think about the base of $29 million, the $4 million carries a little bit more than 10%. So I just want to get some color on what the offsetting items will be that will carry fee income down a little bit to get to 10%. Is there anything we should be thinking about there?

Yes. So insurance and wealth are seasonally up in Q1 as well, so there's going to be some offset in there. And I think that -- those are kind of would be the main drivers that would offset some of that.

Okay. Okay. And then on the expense front, obviously, some cost saves from Commerce were accelerated. There's also some moving parts on mortgage banking. But I did want to get a sense for the year as we think about expenses what we should be kind of modeling on a growth trajectory there.

So again, for the year, it's going to be seasonal, right? So I think you're going to see up 5 -- it's going to be up single digits on the year -- low single digits on the year. But then again, that's going to matter between when the -- how much mortgage comes in, how much SBA loan sales we do. I think it's tough for the year when we haven't seen how variable those businesses are going to be as well. And another way to think about it, Matt, is that, for the year, we're going to have an efficiency ratio under 60%, so that's -- I guess, that could be your governor on that.

Got it. Okay. And then, Jamie, one more for you. You did note the longer-term margin outlook.

Yes.

As we get to the back half of the year, it sounds like accretive yields would be coming down and you should see some margin stability. Does that imply that the core NIM, we should see some expansion there? Or just maybe you could give us a little bit more color on the core NIM trajectory from here?

Yes. Yes, Matt. Yes, so you could see some expansion. It's -- I guess, I would say it this way. We think it's going to be stable in the back half of the year and it could be a little higher or a little lower, depending on how deposit betas react. At the moment, we think they're going to be muted, sort of lower than our long-term run rate. But as we've talked about in the past and as other people have brought up, there is some competition out there that needs to be accounted for. So it could be a little bit higher; it could be a little bit lower. That's kind of where we're guiding now at the moment.

And then has the flatter yield curve impacted the bank's balance sheet sensitivity at all, one way or another?

I wouldn't -- I don't think so, Matt. We're still sort of neutral to asset sensitive, and right where we kind of where we want to be.

Okay. And then my last one, Mike, it sounds like priority #1 is integration and getting as much juice out of the bank as you possibly can. What are priorities #2 and 3? Just curious there.

Well, priority #1, of course, as I said, is to squeeze the orange in all of our regions. Priority #2 is probably to ensure that the ongoing culture of the company continues across every region. We've got new companies. We've got new people to integrate. And that is a particularly important aspect of this company because we're living in a very fast-paced environment and the people in the company have to be flexible and they have to be able to react, and so that's always going to be part of what we do as a company. And since we have new regions, we want to make sure that those -- everyone is on the same page with respect to expectation. I always think that when we're looking at all of the regions of this company, we want to ensure that we're driving the same performance metrics out of each one of those regions as well. So additional accounting, additional product and financial accounting is going on in the company. I think we get better as a company the more data we produce. And then at some point, if there are additional partnerships for us to entertain, we'll entertain them. But I think we have to get better as a company and we have to perform better as a company, and that makes a partnering easier.

And the next question is a follow-up from David Bishop with FIG Partners.

Just circling back to the loan portfolio. You noted exiting some of the CRE credits. Just curious, so a decline in consumer loans, anything specific there? Was that similar or related to maybe something that was picked up in the Commerce side you wanted to exit?

They did have a classic car, a book that we are strategically exiting. So there was some noise in that, that drove that.

Any sense of the dollar volume with that decline?

$50 million-ish.

I'm sorry?

About $50 million. We can follow up and get you the exact number.

Okay. And then, Mike, just in terms of the outlook for new hires, I mean, you noted the expansion or the addition in New Jersey and Boston. Just what are you thinking as you enter into the back half of the year, is it -- are we talking single digits in terms of new bodies, double digits? Just curious what the outlook looks like.

Well, a lot of that always depends on how we're doing in penetrating the market. It would not surprise me if we had another double-digit number with respect to additional employees and additional teams. I mean, we have a good brand and we've got a lot going on in the company, and there a lot of A players out there that contact us that we think would be helpful to us and we think we could provide them a good home. And so I think single digit is probably low. It's probably double digits.

And as there are no more questions at the present time, I would like to return the call to Mike Daly for any closing comments.

Terrific. Well, thanks for joining us. We look forward to speaking with everybody again on our second quarter call when the sunshine is a little warmer. Thanks again.

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