Beacon Financial Corp. (BBT) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Berkshire Hills Bancorp Q1 earnings release conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now 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 sections 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 will turn the call over to CEO, Mike Daly. Mike?

Thank you, Ally. Good morning everyone. Thanks for joining us this morning for our first quarter call. I will provide an overview of the quarter and then I will turn it over to Jamie Moses, our CFO. He will walk you through some of the specifics in our financials. We will discuss our outlook and our guidance and then I will wrap it up. So a good start to the year. We delivered $0.65 in core EPS, 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 are 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 mid-Atlantic this quarter and we have 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 telecenter in Pittsfield. We will 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 have also officially opened our Boston headquarters. We have got executives, lenders, MyBankers and private bankers work out of the office at 60 State Street at this point. And I expect we will 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 are retaining more deposits than we anticipated. It's a great market, it's a great team and we are feeling pretty good about what we are building there. Now, at this point, I am going to turn it over to Jamie and he will provide some more detail and review the quarter and then I will 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 one-time 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 adjustments, we gave up one basis point on the overall margin. In the second quarter, we expect the 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 $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 are 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 2018 core tax rate to be in the 22% to 24% range with the second quarter coming in at the low end of that. All together, 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 are set up to deliver solid results this year. With that, I will turn it back over to Mike.

Okay. Thank you Jamie. So as Jamie said, we are expecting to deliver around $0.70 in core EPS in the second quarter with strong improvements to our profitability metrics, putting the core ROA north of 1.10%. And we remain on target for full-year 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 get the most out of our recent acquisitions, fully integrating our operations into our culture. We feel good about how the Mid-Atlantic operations are performing and we are really pleased with how well our Boston buildout is going. We expect to see strong results in the next several quarters as our initiatives come together to drive value. We have 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. With that, I am going to open it up to any questions.

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

Good morning.

Hi Mark. How are you?

Great. Thanks Mike. I wondered if, maybe for Jamie, how much remains in Commerce cost saves to be extracted? And what would you guestimate 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 we will sort of, Q2 is going to be a little light with that, but Q3 is going to show it fully in the back-end. And again, that's just people saves in terms of Commerce.

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

Sean?

Sure. We are up to four branches in the Boston market. Now 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 millions. So we are very pleased with the progress. From a loan perspective, we are now probably pushing to $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 wondered 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 are pleased the Commerce integration is ahead of schedule. We are coming off strong recruitment, like Mike talked about. So we have 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 would say this. I think we are all pretty excited that we are at a point now where we can concentrate almost exclusively on integrating all of the different products we have across a pretty strong footprint. So we are past $10 billion. We have done it in a way that we expected to do it. The numbers are coming our way. And we have got a lot of new people on the ground that there has to be cross-sell across each of the regions in order for us to realize our full potential. So there is 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.

Thank you.

Thank you.

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

Hi. Good morning guys. How are you doing?

Good, Dave. How are you doing?

Good. I know with the acquisition of Commerce, there could be some seasonality in terms of some of the deposit book. I don't know if you could sort of walk through in terms what's 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 will see the fluctuation. So 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 a comment overall, just in terms deposit pricing across your footprint? Any sort of, just a bit of rationality you have 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.

Got it. Thank you.

All right. Thanks a lot.

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

Yes. Hi. Good morning.

Hi Laurie. How are you?

Good. Thanks. Just wondered if we could go back to net interest income here. Do you have a layout accretion for the rest of the year? I have got your 2Q guide of $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.

Then 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 put in place in both the Mid-Atlantic and specifically the Boston area, they are hitting it 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. Well, usually it takes about three to six 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 am sorry, I missed. Your total loan growth expectations for the remainder of this year are what?

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

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

Well, I think that one of the things you saw, we were a busy obviously with the integration of Commerce in the first quarter and when we 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 will see healthy growth in that line.

Yes.

Okay. Great. Thanks. And then on mortgage banking, what was the contribution if we looked at the net number? In other words, 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 about it at 30basis points pretax margins in that business.

Okay. And that's including expenses?

Yes.

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

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 is no wild changes in the interest rates, then yes, we would expect it to be about there.

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

Richard?

Yes. Laurie, this is Richard. Again, as way of 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's going according to plan. As far as the Medallion portfolio --

Richard, I am sorry just to interrupt you. So last quarter you had $1.8 million nonperforming. Do you have a nonperforming 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.

Okay.

I am sorry. About $180,000 worth of charge-offs.

Great. Thank you. Okay. And then I am sorry. I 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 and it was never, has never been delinquent.

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

It's below $40 million, marked, net.

Okay. So basically I am grossing back to $60 million, $67 million in reserve, is that right?

That would be about right.

Okay. So you are $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 e 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 member of nonperforming?

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

Got it. 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 are thinking about expanding?

Well, I think potential M&A in any one of the regions that we are 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 would certainly take a look at it. But I have got to tell you, one of the things that I think Mark Fitzgibbon asked when we started was what we are most excited about. And the thing we are 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 is an opportunity, whether it's in Eastern Massachusetts or any other regions, we will look at it, but I just want to be clear that that's something that we are looking at as part of the overall scope and plan strategically right now. That help at all?

Yes. Thank you very much.

You are welcome.

Thank you. And the next question comes from Collyn Gilbert with KBW.

Thanks. Good morning everyone.

Hi Collyn.

Just Jamie, if we could just go through some of the fee comments you made. 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 next quarter, just kind of getting a little bit 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 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. So that's a nice increase which is comparable. I guess you guys did kind of maybe like a $4 million, maybe it was a little bit lighter than that last 1Q to 2Q. So even given what's going on from a macro perspective, 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.

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

Yes.

Okay. Just curious also what base? I just want to make sure that comparing apples to apples. Is that just -- go ahead.

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

So the reported number?

Yes.

So the securities loss --

Yes. If I understand your question correctly, that's where I think we will 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 run-off or deposit trends within Commerce? Is there a loan run-off 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 on an ongoing basis. We feel pretty good about that market right now.

Okay. That's helpful. And then just finally kind of broadly, Mike, as you think about business and driving profitability and all the initiative 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 in 2016 and 2017 you guys generated about and operating EPS growth of 5%. Obviously, this year is 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 do you think the potential for acceleration of EPS growth can come? Or what --

It's probably a little early to be speculating on guidance for, let's say, 2019, Collyn. But I think right now we have 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.

Okay.

That's about as specific as I think I would be allowed to guide at this point.

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

Yes. Collyn, this is Richard.

Nothing systemic.

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

Okay. That's helpful. I will leave it there. Thanks guys.

Thanks Collyn.

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

Good morning everybody.

Good morning.

I just want to hop back on the fee income outlook, the mortgage banking outlook. I think it 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 wanted 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 is going to be some offset in there. And I think those would be the main drivers that would offset some of that.

Okay. And then on the expense front, obviously some cost saves from Commerce were accelerated. There was 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 modeling on a growth trajectory there?

So again for the year, it's going to be seasonal, right. So I think you are going to see up five, it's going to be up single digits on the year or low single digits on the year. But then again, that's going to matter between 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 are going to have an efficiency ratio under 60%. So 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. As you to get to the back half the year, it sounds like accretive yields will 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 that, the core NIM trajectory here?

Yes. Matt, so you could see some expansion. 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 are going to be muted, sort of lower than our long-term run rate. But as we have 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 are guiding that at the moment.

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

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

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

Well, priority number one, of course, as I said, is to squeeze the orange in all of our regions. Priority number two is probably to ensure that the ongoing culture of the company continues across every region. We have got new companies. We have got new people to integrate. And that is particularly important aspect of this company because we are living in a very fast-paced environment and the people and 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's on the same page with respect to expectation. I always think that when we are looking at all of the regions of this company, we want to ensure that that we are 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 are getting better as a company the more data we produce. And then at some point, if there are additional partnerships for us to entertain, we will 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 up partnering easier.

Understood. Thank you. That's all I had.

Thank you.

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

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

They did have 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 of that decline?

$50 million-ish.

I am sorry.

About $50 million. And we can follow-up and get you the exact number.

Okay. And then Mike, just in terms of the outlook for new hires. 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? Are we talking single digits in terms of new bodies? Double-digits? Just curious as to what the outlook looks like?

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

Great. Thank you.

You are welcome. Thank you.

Thank you. 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.