Beacon Financial Corp. (BBT) Q4 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Berkshire Hills Bancorp Fourth Quarter 2017 Earnings Release Conference Call. All participants will be in listen-only mode. [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 am pinch hitting for Ali O'Rourke today, but not to worry, Ali will be back to lead off for our next call. So thanks for joining us for this discussion of year end results. Our news release is available on the Investor Relations sections 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 and then I'll turn it over to Jamie who will 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 cost 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 our overall revenues. We managed our expenses and we drove solid organic growth across the footprint. Commerce integration has started smoothly for us. We are 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 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 are already seeing the business opportunities and we anticipate achieving the projected cost savings and earnings accretion on schedule. We are in the process of opening the doors to our Boston Headquarter, 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 benefits of the First Choice and Commerce acquisitions along with solid organic growth. Our annualized revenues are now moving towards $500 million. Company delivered 21% 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 the tangible equity to asset ratio of 8.5%. So all-in-all, it was a good year. And we closed it out with the solid quarter. Now we start 2018 with the benefit of tax reform. And Jamie will comment on the fourth quarter accounting impact and on the expected 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 one time bonuses to over a 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 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 volunteers from 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 pay time off for them to do that. Because giving back is another of core values our cultures build at. Now at this point I'm going to turn it over to Jamie, he will provide you 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 one-time 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 pipeline 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 and 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 350 and purchase 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 purchase loan accretion and the new tax rate impact on FTE. Purchase 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 $660 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 cost, 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 non-core charges in the fourth quarter included $16 million in Commerce acquisition cost, $3 million in one-time 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 cost at this point, most of that should flow through in the first quarter. Our core tax rate in fourth quarter was 32% which includes the benefit of some historic 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. All together, 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 account will average about 46.2 million shares. It was a good year end quarter. We are 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 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 and 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 are not forecasting any significant growth in 2018. And combined with the lower tax rate, we are 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 will continue to pursue the right balance between efficiency and investing in our franchise and opportunistically building our fee revenue streams. We are pleased with our performance over the last year and optimistic about our continued growth. The Board is to raise the dividend by another 5% this year evidencing their confidence heading into 2018. And we are 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 are 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 am going to open it up to any questions.

[Operator Instructions] The first question comes from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

Good morning. This is Nick Cucharale filling in for Mark. Doing very well, thank you. Good, just wanted to start on some really nice organic trend on the C&I front this quarter and this year as you alluded to. Are there particular market 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 and C&I and we look for C&I growth to continue on pace with overall loan growth approximately 10%.

Okay, great. And then speaking on the concept of Boston I was hoping you could update us in 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 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?

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

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

Thanks. Good morning, guys. Just on the loan just following up on Sean on a loan discussion and can you just talk a little bit about what you are seeing in terms of loan pricing and just a competitive landscape as it relates to just yes structures and pricing?

I think we are going to see loan yield stay consistent with the stable core margin. We are seeing a mid to high 4s as a roll on rate right now.

Okay, okay. And then just the mix that you are seeing so when you guys - you are 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 will 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 we are thinking about it, Collyn, is that we are going to have a smaller 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 is maybe a basis point or two there tied to the FTE adjustments going forward in 2018. And then after that we expected to be pretty stable. And I guess that's based off of the forward curve that we are 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 are just still expecting continued funding pressure right because of the - because you would get a benefit I would assume obviously on the asset side.

Yes. That's right. I mean if you it's - that's one of those things right. It's going to be depended on what happens out there in the market. And that's going to be one of the things that drives you the NIM up or down, right. That's just something we are going to have deal with when it happens.

Okay. And then just on - I just want to make sure we are 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 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 when that happens. There are surprises. Last quarter, we had a surprise when a loan prepays. There 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 last question. If I heard you correctly and Mike your comment at the end on mortgage, you 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 are opportunities in the market we'll double down a little bit with investment, with marketing and maybe with some new hires. When we are seeing margins stable as we see them now, we look to hold the business.

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 are forecasting our budget next year on that significant growth in that area.

Yes, Collyn, I think if you 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 are 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 - the opportunity you maybe thought is not materializing, okay. It's just macro call. Okay. That's helpful. I'll leave it there. Thanks guys.

The next question comes from Dave Bishop of FIG Partners. Please go ahead.

Good morning, gentlemen. I was curious if you could walk us through maybe as we talked about the NIM side but on the expense outlook in term of first quarter, I know there is a lot noise in the fourth quarter and probably some in the first quarter but stripping out the merger charges you talk about maybe what you are 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 digit 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 efficiency ratio below 60%. So I think if you can take a look at that, that should help and then again we are going to have the impact of the Commerce cost saves should fully roll through in Q2 and then in the rest of the year.

Okay. So fully in 2Q from the Commerce side of the house in terms of cost savings.

Yes. I should say they will be fully through in Q2 and then Q3, Q4 going to be - would be the run rate.

Got it. And then just in terms deposit pricing across your market and any sort of - you talked about loan yields, any sort of variation on the deposit cost side across your core market there, just what you are seeing, is there been any sort of outside movement, one geographic region over the other.

No. We've seen discipline in the market. And we don't run any non-relationship special so the demand deposit really helps us minimize upward rate pressure, but we've seen disciplined and stability.

The next question comes from Brody Preston of Piper Jaffray. Please go ahead.

Good morning, guys. Sorry if I miss this Jamie. Did you provide an outlook for - what you are 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, thank you. And I know you said you expect credit to remain relatively stable given the trends you are 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 it will depend on loan growth after that. So that's kind of how we are looking at them.

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

We are meeting our expectations. We've got a lot experience on boarding and modeling as it pertains to acquisition. And everything we've seen so far is right where we would expect. This concludes our question-and-answer session. I'd 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. We certainly look forward to speaking with everyone again in April when we discuss our first quarter results.

The conference is now concluded. Thank you for attending today's presentation. You may not disconnect.