Beacon Financial Corp. (BBT) Q4 2014 Earnings Report, Transcript and Summary

Good morning and welcome to the Berkshire Hills Q4 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 Ally O'Rourke, Investor Relations. Please go ahead.

Good morning and thank you for joining us for this discussion of fourth quarter results. I would like to begin by introducing the members of the executive team participating today. We have President and CEO, Mike Daly; Executive Vice President and Chief Financial Officer, Josephine Iannelli; Executive Vice President and Chief Risk and Administrative Officer, Richard Marotta; Executive Vice President, Retail Banking, Sean Gray; and Executive Vice President, Commercial Banking, George Bacigalupo. 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, President and CEO. Mike?

Thank you, Ally. Good morning everyone, and thanks for joining us this morning for our fourth quarter call. I will provide an overview of the quarter and the year, and then I will turn it over to Josephine Iannelli, our Chief Financial Officer, she will take you through some of the details in our financials and then I will wrap it up. I will start with our performance in 2014 where we finished the year on pace, growing core EPS by 4% over the prior quarter and by 20% year-over-year, and the results are based on a healthy combination of revenue growth, expense management, a good credit quality, and improving profitability. Our core revenue was up 7% for the year and 10% annualized over the linked quarter driven by good loan growth and a mostly stable net interest margin. We continue to produce strong loan growth across the franchise, as total loans were up 11% annualized for the quarter, and 12% for the year. We saw double-digit growth last year in both commercial and consumer books, and while mortgage continues to be a little lumpy, we did finish the year with strong production in that category as well. Things came together to produce a particularly strong C&I quarter for us. Growth was diversified, but among our teams we continue to see particularly good performance out of our Eastern Massachusetts and Albany New York regions. So when I look at this franchise and our reach across New England and Central New York, I am encouraged by the opportunities in front of us. We continue to target double-digit annualized commercial loan growth with emphasis on C&I and given the combination of improving economies, our competitive positioning, and the strong relationships we're developing across to our varied markets, I do believe it's sustainable. Now, let me make a couple of comments about our small business group. We've got a lot of momentum here. With the talent we brought in, in 2014, our pipeline heading into this year has more than doubled from our level only a year ago. We got a list of strong recruits and through focused efforts we see some meaningful opportunity in SBA loans having now risen into the top three in several of our markets. And one of the most attractive things about growing small business is the healthy relationship business it does bring to the bank. These are customers that more than fund their loans through their own deposits and they often have many products and services with us. And we still think we have plenty of opportunity across our footprint to grow this part of the business. So we are working to do just that. Now turning to deposits, we had an 8% annualized increase in deposits again this quarter, and demand deposits grew at 12% annualized rate. We continued to benefit from our growing small business banking and middle market relationships, as well as better brand recognition across the footprint. Looking ahead, we are targeting a low-single-digit annualized growth rate with a continued focused course on DDAs. For both deposits and loans, growth can be lumpy from quarter-to-quarter, and often our first quarter is seasonally a little softer due to weather impact, so we will be mindful of that as we look at the full year. I’d note that optimizing our branch network and accommodating the needs of our consumers will continue to be a priority for us. Now this means balancing our branch network with online and mobile channels and call centers and other developing channels. In 2014, we consolidated another four branches, which now makes nine over the past two years. We also opened two this year including the Westborough hub in the fourth quarter, while introducing new security and account futures for our mobile customers. So, while we've made progress optimizing our network, I still believe we have opportunities, and to that end, we are currently looking at several of our branches for consolidation again in 2015. Now, I think we've done a pretty good job in the past of consolidating locations while maintaining our customers and our deposits, so I am confident that Sean and his team can continue to do that while serving our communities. Turning to fee income, we posted 17% growth year-over-year with gains in every category. For the full year 2014, total fee income was up 6%, as we benefited from the acquired branches in Central New York and solid growth in deposit insurance and wealth management fees. Now we do believe that we need a laser focus on building fee income and that's one of the keys towards getting to our profitability goals. We're targeting more significant growth going forward, and we've selected several pieces of our fee generating business for further development. This includes wealth management, and over the next two years, we will be pursuing more market share opportunities and recruitment will certainly be part of that. Our teams from across regions and across product lines began working much more closely together in 2014, and I am encouraged by the cross-selling success we're seeing from those efforts. We still have a lot of opportunity here, and we're going to be chasing those. Now turning to profitability, we posted sequential improvements in core ROA, core ROE, and our efficiency ratio. And we've been pretty clear about our goals here, everybody knows what they are, but I do believe we're making progress. We grew our tangible book value by 6% in 2014, and we've maintained our dividend yield near the 3% level. Most of our employees are shareholders and providing a good return for them and the rest of our investors is important to every one of us. Now with that, I'm going to turn it over to Josephine, she'll walk you through some of the more detailed financials and then I'll sum up. Joe?

Thanks, Mike and good morning folks. Core EPS came in at $1.80 for the year and $0.48 for the fourth quarter. We reported $1.87 and $0.40 per share for the same periods in 2013 due to the benefit of increased purchase loan accretion and mortgage fee income in the first half of that year. Our GAAP EPS in 2014 was $1.36 for the year and $0.46 for the fourth quarter. Looking at the fourth quarter, Mike commented on our 20% core EPS growth, and I think it's worth noting that before loan accretion, we grew our core results by 29% year-over-year. Our fourth quarter core revenue was up 10% annualized over the prior quarter driven by strong loan growth and margin expansion. The net interest margin expanded 3 basis points to 3.23%, including a shift in the loan mix and a higher than expected level of accretion and impaired loan recovery. Excluding purchase loan accretion, our margin was 3.12%, which is unchanged from the prior quarter. We continue to target mid-single-digit overall loan growth, but expect the first quarter to be in the low-single-digits as we take on seasonality for mortgage and continue to work on our balance sheet mix. As discussed last quarter, we have been managing indirect auto lending to meet our balance sheet and margin objectives, and I expect us to continue to actively manage this category going forward. Average loan yield rose 5 basis points to 3.96% with expansion in most categories and significant improvement in C&I tied to the strong growth we saw there. As we said last quarter, in addition to managing our indirect exposure we have been transitioning out of some lower margin account, a strategy that is proving successful for us as we saw in the margin this quarter. Deposit cost rose 1 basis point as a result of some relationship targeted money market promotion. For the year, we lowered our cost of deposits by 9 basis points and our overall cost of funds is reduced by 21 basis points. We're not anticipating any significant changes to our yields on securities and borrowing costs as we move into 2015. Net interest margin before accretion is expected to come in around the same level in Q1 as we saw in Q4. As I said on the last call, I do expect to see some margin expansion in 2015 based on our balance sheet strategies. But this will depend on movements in the yield curve. We do expect that the Hampden acquisition will be positive for our net interest margin. Mike commented on the 17% year-over-year fourth quarter fee income growth and our focus on further developing these revenues. We expect to see good first quarter growth including a seasonal component related to annual commission revenue in our insurance agency. The positive revenue drivers in the first quarter, including fee income and loan growth, will be modestly offset by a decline in purchase loan accretion. Total revenues are expected to be up modestly for the quarter. Our loan loss provision increased to $3.9 million in the fourth quarter due to the higher loan growth. Our credit metrics remain favorable and looking forward we're not expecting major changes in our provision. Our profitability measures improved in the fourth quarter due to our revenue growth on a controlled expense base. Our core return on tangible equity has improved to 12% and our capital ratio has improved modestly based on this internal capital generation even with strong loan growth. Our tangible equity to tangible assets stood at around 7% at year-end. Our efficiency ratio improved for the third straight quarter and measured 62.5 at the end of the year, marching us towards our goal of better than 60. Core operating expenses were up 1% over the prior quarter driven by higher cost linked to business expansion. Non-core charges for the quarter totaled $1.8 million related mostly to Hampden acquisition. Core operating expense is expected to increase modestly in the first quarter due to the seasonality. And on the tax side, we held our core tax rate around 29%. Our GAAP tax rate for the quarter was 25% including the full year impact of the branch acquisition charges. The benefit of the lower tax rate and GAAP EPS was more than offset by the merger charges in this quarter. As we head into 2015, we are actively looking at ways to improve on our effective tax rate, including potential tax credit investment opportunities and I expect to have some success here. Looking at the first quarter our hope is that even with the seasonal headwinds, the additional levers we are working on including tax strategies will be enough to provide the same kind of core EPS as we did this quarter. As we get further into the year, we will be working on growing this number through ongoing organic growth and merger benefits but we are also mindful of the uncertain rate environment which may impact market demand. I would also note that GAAP results for 2015 will be impacted by merger charges as expected. Before turning it back over to Mike, I'd like to touch on our expectations for Hampden Bank. We are moving on along with the acquisition and integration plans and feel good about our ability to reach a 35% cost save target. After examining the footprint, we have selected three branches in the Springfield area to consolidate with this merger. This will leave us with combined 18 branches in the Greater Springfield market and a solid platform from which to serve our increased customer base. We look forward to modest core EPS accretion in the second half of this year with full benefits next year on completing all the cost saves. With that, I'd like to turn it back over to Mike.

Thanks, Josephine really well done. So, as Joe said, we're moving along nicely with the Hampden merger. We expect to close that in the second quarter. As you know we do have experience at evaluating and integrating acquisitions and we expect this one to go as smoothly as our others have. I am also pleased with the response and the partnership offered by the Hampden team and we are excited about the opportunities of our expanded presence in Springfield. Combination moves us into the top five for deposit market share and the middle market and small business teams we're bring on have strong relationships in that market. Now, in addition to the anticipated cost saves, we'll also be in pursuit of the revenue synergies, we expect to plan combining our product suites with their customer base. So looking at the year ahead, while the economy does feel better in New England so it doesn't seem to an end in sight for the volatility and the markets, and the rate environment remains uncertain. We do however see continued running room for taking profitable market share from the national players and we intend to take advantage of that. With this earnings release, we also announced a 6% increase in our dividend making the payout ratio 40% and the dividend yield just over 3% at current stock price levels. Maintaining a competitive dividend and returning capital to shareholders remains a priority for us. And of course we're building capital through operations, and we will boost it further with the Hampden merger. As Josephine said, we think we will do is well next quarter as we did this quarter despite the expectation of lowered purchase loan accretion and seasonal headwinds. We will work in on a number of levers including tax strategies and balance sheet management and fee income options to get us there. So I'm pleased with our momentum coming into the year and with our prospects for earnings growth in 2015. We're focused on growing revenues and maintaining expenses and improving on our profitability and our shareholder returns. We saw sequential improvements in core profitability measures once again this quarter, and while we're moving in the right direction, we know we still have a lot of work to do here as we further develop and execute on our 2015 business plan. So as I look back over 2014, I do feel like we've matured as a company. We have the right people in place and the right priorities and we've been demonstrating our ability to grow this business organically. And while M&A opportunities will continue to come up from time-to-time, our focus is on getting the most out of the franchise that we've built. Look ahead, our footprint, our teams, and our Americas most exciting bank culture, I think will continue to be differentiators for us, and I'm confident about the opportunities in front of us and our ability to capitalize on them and frankly, I'm excited about the year ahead. With that, I'll open it up to any questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

Good morning.

Hi, Mark.

First question, Josephine, you had mentioned about the net interest margin. You've thought that it could move a little bit higher during the course of the year. But with the purchase loan accretion sort of running down, am I thinking about it the right way if I were to assume that the margin sort of comes down a little bit in the early part of the year and then bounces later in the year as you get potentially the benefit from Hampden and some higher short rates?

Well, I think we're talking about the core margin, Mark. I mean the overall margin obviously is lumpy from quarter-to-quarter, because we never know when we're going to get paid off on a loan that's got a mark on it. But we've been concentrating as you know on where our core margin is, and I think Josephine, correct me if I'm wrong, your anticipation is that our core margin will start to move upward over the course of 2015 and that's the one we’ve got to pay attention to.

Correct. Right.

Okay. And then, secondly, it looked like C&I loan yields went up like 43 basis points from a linked quarter. Was there something unusual in there that caused that?

Yes. Mark, a good part is that increase in the yield was due to the impaired loan recoveries. And as you know, some of that can be pretty lumpy. And then, certainly we benefited from some of the roll on, roll off in the good growth we saw in commercial this year -- this quarter.

Okay. And also on the loan fees, those look like they grew really nicely. What's sort of driving that? Is it just origination volume or is there some unusual items there as well?

Yes. I think we saw some good production here in the fourth quarter.

Okay. Great. Thank you very much.

Thanks Mark.

Our next question comes from Matthew Kelley of Sterne Agee. Please go ahead.

Yes. Just a follow-up on the question about C&I. Can you give us a little more detail on where those loans were coming from, the types of loans you're putting on in terms of yields? And then, a little bit of detail on the single-family book as well, what's going into the balance sheet in terms of structure and yield?

Sure. I'll kind of give you a general overview and then, George if you want to add a few more comments. Essentially that came from all diversified sources. They were tied in some way to our footprint through relationships with banks and customers. The average rate on the new production this quarter was an average of 3.75%.

One of the things I think we said a quarter or two ago that we were really going to concentrate on because of the margin was to actually let some of the loans that while they're grade A loans run down a little bit on their balances and replace those with loans that have higher yield. And I’ve got to say George that's been painful for you. But you've done a nice job with it . And it does affect the margin over time.

Yes, Mike the roll off while in previous quarters was higher rate loans, higher price loans, and the past quarter was really lower priced loans, which we were able to replace with better credit quality. We've been focusing on C&I, becoming disciplined and doing those deals that give us a good opportunity to make a decent margin plus some cross-sell opportunities, and the business did come throughout the region, Eastern Mass was a strong contributor in the fourth quarter, but again our entire footprint really did contribute to the improvement that we saw.

And then what about the single family, what's going into the balance sheet there in terms of structure and yield?

Sure, from Q3 to Q4, we actually reduced our fixed exposure within the balance sheet, so we're putting in more variable. It is a mix we do have; we do have a good amount of jumbo loans within the Massachusetts and the Boston and Albany franchise. So we do see a mix, we're looking in the high threes, I mean and it's important to note that every individual loan we put on the balance sheet, we run through a return on equity calculation using match funding with our finance partners, so very in-tune with the impacts that will have even through our ALCO model. So did that help Matt?

Yes, and that’s just 30-year fixed rate jumbo?

Some 30 year fixed rate jumbo, some also 10.1, 7.1 arm jumbo as well.

Okay. And then, Sean -- yes go ahead.

No, it's also important to note that we do -- our question earlier was loan fee income. We do look for opportunities to sell seasoned loans, and a lot of times those are jumbo loans, and we feel it creates good opportunities for us when we can arbitrage certain opportunities within the marketplace, and you saw a little of that in Q4 as well.

Got you. And then how would you feel about -- how do you feel about the mortgage banking business, gain on sale opportunities as we are in the early part of the quarter here and what's that looking like for Q1?

Gross gain on sale, we really target anywhere in the 225 basis point range. We pay a close attention to some of the national players to make sure we're getting a competitive gross gain on sale. I will say towards the end of the year, really our production was purchase driven. However, I am seeing a little bit of a refinance boom here in January. So, I think we're bullish that there are some opportunities within the market right now.

Got you. And just a last question Mike, how does the overall commercial loan pipeline stack up at year-end 2014 versus when we were talking back in October?

It hasn't really changed much, has it George, it is --.

No, it's been virtually steady at about $150 million.

And that's been, again easy, you don't -- for us stabilizing this margin and looking at increasing our core margin isn't something that we could just turn around on a dime. And so you had to work a little bit harder because again some of the large loans that we might have either participated in or done prior to that had rates that were generally detrimental to our margin we had either passed on, which means you had to replace those with other loans that had rates that were more economical. So pipeline is the same may be a little bit of complexion is different.

Okay. Thank you very much.

Thank you.

The next question comes from Laurie Hunsicker of Compass Point. Please go ahead.

Yes, hi good morning.

Hi, Laurie.

Just if you could just take me through a couple of line items on the income statement that would be great. So starting with other, other the non-interest income was to jump next quarter from 520 to $1.2 million?

Yes, Laurie typically we do see some seasonality in the fourth quarter and we did get some distribution from some of our investments here in the fourth quarter but other than that there wasn't any particularly large item.

Okay. So for the March quarter that's probably been a more normalized background about $0.5 million?

Yes, that's probably right.

Okay. And then same thing professional services, there was a jump in that late quarter, was there anything unusual?

We do incur some additional legal costs associated with the recoveries that Richard and his folks bring in and we did see that spike here in the fourth quarter. And I think that's flown through there as well.

Okay great. And then lastly on the income statement, tax rate and you guys obviously mentioned on the call that you're looking at tax strategies. And obviously the GAAP rate of 25% is a big differential offer; I think where you were guiding us last quarter sort of a 30% outlook?

I think our core tax rate, Laurie, is in that 29%, 30% rate. The GAAP is generally going to be lower for 2014 just because of the significant charges that were posted in Q1.

Okay. But so absent that and then was absent the Hampden merger charges we're probably going to see a GAAP rate that's pretty close to a core tax rate?

Yes, I mean obviously the only difference there would be any of the acquisition related charges, noncore activity, and pretty consistent to what you saw in 2014.

And I know that right now you're working on some potential tax benefits for 2015, we won't have any full details on that yet but it would be a tax rate that would run through the entire year there won't be any up and down other than the difference between the GAAP and core based on any cost we take because of the acquisition, correct.

Correct.

Okay, good. And then to your point on dividend do you target or do you plan to target going forward staying at that 40% payout?

I'm sorry. What was the question Laurie? Can you just repeat that?

Yes, with respect to how is great you just raised your dividend in your, as you figure out a 40% payout. Is 40% can it be your targeted payout for dividend?

Well it's been historically if you look at where we've been. We've been in that 35% to 40% range over the past several years. I don't see us in any material way moving from that. We don't set out a specific payout ratio and stick to a specific number. But I think the range has been comparative to our peers and I've no doubt that we'll continue to stay there.

Okay great. And then Mike just one last question for you. With Hampden you had -- you already mentioned that you were closing three of the branches does that line up with when you first booked it that's what you thought roughly it would look like or has there been any of sort of difference in terms of when you first bought?

No we're pretty much right on plan.

Okay great. Thank you.

Thank you.

And the next question comes from Collyn Gilbert of KBW. Please go ahead.

Thanks. Good morning everybody.

Hi, Collyn.

Just a follow-up on Josephine on your NIM comments on the core side what are you assuming in terms of an interest rate environment to have that core NIM expense?

Yes, for purposes of Q1 pretty much consistent to where we are at today.

But how I'm interested in getting like kind of the trajectory for the full year?

We're following the forward yield curve, right.

Correct.

And that's what we're following.

Okay all right. And then on the -- sorry I apologize. If you could update us on Hampden just remind us again of what the EPS accretion assumption were and then the tangible book value dilution was?

Sure. For purpose of 2015 the EPS accretion there was minimal $0.01 to $0.02 with a full $0.08 coming in 2016. And then from a capital perspective we pick up over 30 bps in capital.

We'll have a lot more to be able to say about that once we get all of the legal documents filed.

Okay. And then I know you said second Q closing any tighter timeline within the second quarter, is that going to be end of second quarter or --?

I hope it's a little sooner than that but again I think we're a little tied legally in getting into too much detail on that. But it would be nice if there were closer to the early to mid part of the second quarter for everybody's benefit.

Okay. And then just a final question on your sort of efficiency targets kind of for the years. As you fold in Hampden and even if we're looking at 2015 or 2016, where do you think that efficiency ratio can go as you're starting into 2016?

Well, I don't think any of us are blind to the fact at least in this room that we have a efficiency ratio that needs to come down under 60%. Whether that will be the case and we'll get there in 2016, I think will depend on some factors. But Josephine, you look like you're about ready to say something so I don't want to interrupt you.

Yes. As I said, we close up the year at 62.5%. We certainly have made sequential quarter progress towards that. We do see improvements in 2015 both on the efficiency and our profitability measures and I think that's a significant target for us as we look out in the next four quarters.

Under 60 is in our sites.

Okay. Great. Okay. That's all I have. Thanks guys.

Thanks Collyn.

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

Okay. Thank you everyone for joining us. We look forward to speaking with you again in April. At that time we will discuss our first quarter results.

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