Jul 25, 2013
Executives
Allison O’Rourke – Vice President - Investor Relations Michael P. Daly – Chief Executive Officer Josephine Iannelli – Chief Accounting Officer Richard M.
Marotta – Executive Vice President and Chief Risk Officer Sean A. Gray – Executive Vice President of Retail Banking David H.
Gonci – Corporate Finance Officer
Analysts
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P. Matthew Kelley – Sterne, Agee & Leach, Inc.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Operator
Good morning, and welcome to the Berkshire Hills Bancorp Q2 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 Officer. Please go ahead.
Allison O’Rourke
Good morning. Welcome to America’s most exciting bank and thank you for joining this discussion of second quarter results.
Our new release is available in 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 Form 10-K and 10-Q. Now, I’ll turn the call over to Mike Daly, President and CEO.
Mike?
Michael P. Daly
Ally, thank you. Good morning everyone.
Welcome to our second quarter conference call. With me this morning are Josephine Iannelli, our Principal Accounting Officer and other members of our management team.
We released our second quarter earnings last night and as most of you know we pre announced our EPS on Monday morning. Yesterday morning we issued a news release about our agreement to purchase 20 branches in New York and then last night our earnings release included of the news about our organization.
So I’ve got a lot of ground covering this call and I will get right into it. We had $0.48 in EPS, both in a core and GAAP basis and our ROA was 93 basis points.
I want to state clearly, that I am obviously disappointed with these results. They are below our guidance of $0.55 to $0.56, and they are below the $0.54 that we posted for the prior two quarters.
For the first two months of the quarter, we felt that we had the prospects of achieving our targets based on our business expectations in pipelines at that time. June’s unusual rate swing changed that, the spike in long-term rates that began in the second half May, and really bend the yield curve in June took some expected revenues away, sooner than we had anticipated.
This caused us about $0.05 of our guidance and this including $0.04 due to mortgage banking income, and $0.01 due to other revenues including swap fees and interest income. We attribute the other $0.02 of mix to higher run rate operating expenses and we also had some higher project related expenses, which were offset by a tax valuation adjustment.
So we are here and we have to reset to the environment in front of us. So we are.
As we arrived at mid-year, we observe that four things that come together in a way that requires a course correction. First of all, we’ve been dealing with commercial loan outflows as we have discussed over the last several quarters.
Acquired impaired loans have been resolving faster than anticipated as many subprime financing sources emerged in recent quarters to attract these assets. Additionally, commercial real estate financing from conduits and non-bank sources has pulled away conforming commercial real estate loans with structures that aren’t suitable for bank loans.
Now this run off happening at the rate of around a $100 million a quarter and has not yet fully abated. Second our C&I originations are growing strongly, but even at a 15% to 20% growth rate, it’s not enough in and of itself to get ahead of the impaired loan run off.
As we noted in our release our total commercial loans are up 4% annualized for the first half of the year before the run off, but on a net basis our commercial portfolio of one gain traction under these circumstances. And our assessment of too many deals in the market are uneconomic.
I have stated in the past that we will not do uneconomic deals to meet growth targets and we resolve the whole tight disciplines. We are not going to fill up on shared national credits or out of area real estate deals, or even local deals or assets sensitivity or asset quality issues could occur when short rates rise and they will.
My third point is that we have been successful using our fee income in other leverage to maintain our revenue and earnings momentum until conditions improved in the commercial loan markets, but the spike in June costs the sharp contraction in mortgage banking earnings, and also derail some commercial loan swaps and the origination opportunities. We’re keeping our balance sheet asset sensitive, but we’re not going to benefit from this until there is a parallel shift in the yield curve rather than a steepening and I’ll see this happening right away.
Lastly, we recorded additional expenses while conduction a number of Six Sigma another efficiency and infrastructure projects this year following our acquisitions in recent core systems conversion. And these costs were higher than planned in the most recent quarter.
But they have set us up to be scalable and they position us to lower our expenses going forward while improving our service. Having said that, the operation we've build is geared toward higher growth expectation, and we've gone three quarters where the market economics have not supported that growth.
So we clearly need to adjust our operation conform to this current situation. Those are the events that impacted our results during the quarter and are going to impact our near-term earnings expectations.
We plan to stick to our strategy of disciplined loan growth, and we recognize that we'll also likely see future reductions in loan yield as purchase loan accretion becomes fully utilized. Much easier to stick to these principles when the fee income is closing that gap.
It's harder when you have to take earnings out. But I do remain confident in the fundamentals of our long-term strategy, and they're based on the following factors.
We’ve retained the size and a competitive positioning that will support continued market share acquisition from national competitors. Now this is evident from the 15% to 20% growth of our C&I business.
Our markets have sufficient depth and momentum to support our high-performance banking operation, and as interest rates normalize, excessive competition for assets will abate and we expect to invest in economically attractive assets to return to our targeted growth rates. And lastly, I think we have demonstrated that we can drive a high-level of constructive change here, having acquired and integrated four banks and accomplished a core systems conversion in the last two years.
We have the horsepower to do the necessary work, to get our earnings back on track and we will. Having gone through several process improvement projects, we believe we are positioned to reduce our expenses with minimal disruption to our business activities.
Let me comment first on a couple of executive changes announced in earnings release. Richard Marotta, our Chief Risk Officer has taken on the additional title and duties of Chief Administrative Officer.
In this role he is responsible for operations across the Company. Richard has been heading all of the Six Sigma process improvement initiatives here.
Though this is a natural fit for this role. By breaking out operations from sales we free up our retail and commercial teams to focus on servicing customers and ensure efficiency and quality and the delivery of products in services.
Also, Pat Sullivan has resigned as EVP Commercial Banking to pursue other opportunities. Pat helped build out some of our Commercial Banking groups since joining us a couple of years ago and the Legacy acquisition and of course we wish him the best.
I’m confident in our commercial leadership. These are seasoned executives and I’m confident in the ability of our teams to garner market share and grow our business profitably as they have for sometime.
Along with these changes we have implemented a broader restructuring plan that will allow us to execute with greater speed and efficiency and meet our cost save objectives. And we’ve already begun this process.
Beginning in the third quarter we are implementing cost saves with the run rate in the range of 4% to 5% of total costs including the like amount of compensation expenses. We’re not going to realize the full amount of these savings in the third quarter, since we are initiating the changes in mid quarter, but we fully intend to achieve this result as an adjustment to our ongoing base run rates.
So to start, but we intend to press on with further development of these restructuring program in the coming weeks. In particular, we'll be reviewing our branches and our facilities to identify situations where we can move in embedded cost.
We'll also be reviewing contractual arrangement with that same objective. In some cases, there will be one-time non-core costs related to our initiatives, and we will incur those costs that are reasonable to provide a proper accretive benefit to core EPS.
Now it’s a work in progress and Josephine will address our plans as they stand in her update. We will keep our focus on a path to restore our efficiency ratio to our targeted levels.
While we go through our expense management process, we will maintain our customer facing resources to support our organic franchise growth. Our new commercial teams are delivering solidly for us and building business acquisition in our new markets.
As we noted in our release, we expanded our commercial originations and pipelines during the quarter. Before the resolution of impaired loans, again our commercial loans were up at a 4% annualized rate during the first half of the year.
We've been expecting that this pace of originations would begin to exceed the run-off rate and this has been slower to emerge than we anticipated. As I'd explained, we do expect to see this happen by the end of the year and maybe as early as the third quarter, but we're not going to force it and we'll adjust our operations appropriately until we get the kind of next growth that we're targeting.
And we've been asked about the profitability of new loan bookings after the rate spike, and we haven't seen that much change in competitive pricing yet and since we are limiting our loan durations, the increase in long-term rates is not expected to have any significant effect on our interest income at this time. I want to move on to deposits.
We adjusted our funding strategies during the second quarter as we felt it was time to replace some commercial money market deposits with lower cost borrowings. Additionally some of our larger commercial deposits were utilized in capacity in our DIF, Deposit Insurance Fund which supplements our FDIC insurance.
Our participation in this fund is affected by the amount of our balances, which are not FDIC insure and this quarters adjustment maintained our targeted cushion for participation. Additionally during the quarter we decided to replace certain non-relationship Beacon deposit funding sources including broker deposits, which have been a regular part of their funding program.
These combined actions led to a 7% reduction in deposits during the quarter. And I’ll be addressing our New York branch acquisition later on my remarks but clearly that will provide a significant new source of core funding, which will be superior to the funds that we let go in the second quarter.
As we noted in the release we further reduced our funding costs in the second quarter helping us bringing our net interest margin at 363, which was within the range of our guidance. Of note, our loan to deposit ratio was 101% at mid year and we retain ample liquidity at this time and of course that will improve with the branch acquisition.
Turning to our fee businesses, we have described how the rate increase impacted our mortgage banking income late in the quarter. Following a pretty strong performance in April and May in line with our seasonal expectations.
Now we didn’t expect this mortgage market to last forever. But we did expect it to last at certain levels through the remainder of the year.
Results in June were a disappointment, with the significant drop off in volume and margins which were affected by the pronounced volatility in the market near the end of the quarter. Our mortgage banking operations provided exceptional benefits in the second half of last year.
But it is noted in the release, those revenues were down 65% from where they were just two quarters ago. We have a strong mortgage team and during this last quarter we’ve finished integrating our mortgage production operations across the Company, including our newest additions in (inaudible).
We have a solid market position and well regarded capabilities and our purchase business is growing significantly due to the strong Eastern Massachusetts residential market. Still we’re conservatively expecting at this point that our revenue run rate will remain at the lower levels experienced in June, although we will continue to explore opportunities bad originators in revenues.
Most of our mortgage banking business is sold in the secondary markets and represents fee income. Regarding our own mortgage portfolio was flat in the second quarter following the strategically positioning that we made in the first quarter and of course, that proved to be timely based on the recent rate increases.
We are not expect any major changes in the mortgage portfolio balance for the remainder of the year. Turning to other fee businesses, while there has been some firming in the insurance market.
There has also been higher account turn overs clients react to higher premiums by changing coverage or carriers. Additionally, we generally have a seasonal decline in revenue in the second half of the year, due to annual contingency payouts in the first half, so I don’t see any additional material growth this year.
In contrast, our wealth management business has done better than planned. Including the benefit of improved stock market conditions.
We are executing solidly in this business, our revenues are also somewhat seasonal, higher in the first half of the year including tax prep revenues. But for the second half of the year we do expect good year-over-year revenue growth, but revenues are expected to be stable sequentially compared to the first half of the year.
I’m going to pause for a moment and ask Josephine Iannelli to provide further detail about the numbers for the quarter, and some color on our outlook. We announced a couple of weeks ago that Kevin Riley have resigned from his position as CFO to take similar position in an another area of the country.
We’ve initiated the CFO search, we’re off to a very good start with that, I’m excited that we’ve already received some exceptional candidates with really the kind of numbers orientation and the technician type people that we are looking for. In our news release, we announced that Josephine has been working with our team here to keep our financial processes function smoothly, and she has already brought our financial data to a new level.
She joined us in March as Chief Accounting Officer. She brings prior senior management experience with high level of accounting responsibilities at top 10 banks.
And I’m pleased to have her on board. And with that I’ll turn the call over to her, Josephine.
Josephine Iannelli
Thanks Mike and good morning everyone. I’m pleased to be on the team here at Berkshire, and be able to give you more insight into our recent results and current expectations.
We’ve had a lot of news, so I’ll keep my remarks brief and just touch on some highlights. Our net interest income and net interest margin were in line with our guidance.
The net interest margin was 363 basis points and included a $3.4 million in purchase accounting accretion. Of which, $2.4 million related to impaired loan recovery.
Net of these recovery, the margin was in the low 3.40. This reflects the downward pressure on earning asset yields partially mitigated by a 4 basis point reduction achieved in our funding costs during the quarter.
While we expect modest growth and earning assets during the upcoming quarter, we anticipate a slight decline in net interest income due to lower purchase accounting accretion and the continued pressure on yields. We expect the third quarter net interest margin to be in the mid-340s including about $1 million in accretion from recoveries, and to be in the mid-330s excluding these recoveries.
We expect about 7 basis points of compression due to the ongoing impact of declining asset yields and changes in asset mix. We remain asset sensitive and we'll benefit when short-term rates rise.
As we've said before, the amount of net interest income can be variable from quarter-to-quarter due to changes in loan prepayment fees and recoveries of purchase impaired loans. Turning to non-interest income, our core non-interest income came in around $1.5 million below expectation, which was primarily due to the spike in interest rates affecting mortgage banking income and to a lesser extent interest rate swap income and other commercial fee.
In mortgage banking, our total rate of volume was around $230 million, up from about $210 million in the prior quarter, but well below the 300 plus million we anticipated for the second quarter. Our growth gain on sales declined by about 25 basis points to about 190 basis points during the quarter.
We saw most of the variance in volume and margin occurring in June. We anticipate a slight decrease in core non-interest income in the third quarter due to loan related revenue including a continuation of the reduced mortgage banking revenue that we've been experiencing since May.
In total, we expect about a 3% to 4% reduction in core revenue in the third quarter compared to the second quarter. Within non-core income in the second quarter we recorded $1 million from equity gains on our portfolio due to recent performance and price appreciation.
This portfolio has provided good return for us and we’ll continue to evaluate these returns and potential gains as we go along. On the credit front, it’s been another solid quarter for us and our credit metrics have been steady.
We anticipate a modest increase in the provision over the second half of the year within the context of continuing favorable overall credit metrics and performance. Turning to expenses, our core non-interest expenses were around $37 million for the quarter and we are also little more than $2.5 million from the first quarter.
They were increases in several operating categories due to the additions of new commercial teams and cost related to expansion imitatives as well as process and efficiency projects that position us for future cost sales. Mike commented on the current restructuring initiatives, which is intended to reduce core non-interest expense.
In the third quarter, we expect to reduce core non-interest expense by approximately 4% to 5% compared to our second quarter results. I’ll conclude my comments about expenses by turning to income taxes.
Our effective rate was about 25% in the second quarter as we benefited by about 900,000 from an adjustment to our capital gains valuation allowance following the appreciation and realization of equity security gains. Excluding this adjustment our effective tax rate was about 31% and we expect the tax rate to be around 32% for the remainder of the year.
So and putting it all together we anticipate core EPS of around $0.42 in the third quarter. Based on the cost base we have already put in motion we expect about $0.07 in net non-core charges in the third quarter primarily related to severance and the restructuring program.
We expect to pay back within about three quarters from these items. As Mike mentioned, we are continuing further work on restructuring initiatives.
And we anticipate that we’ll be achieving additional accretive core EPS benefits with some associated non-core charges. Additionally in our investor data for our New York branch purchase, we identified non-core transaction costs.
Most of which will be recorded in the first quarter of 2014, so we anticipate there will be a $0.01 or $0.02 non-core impact in the third quarter from these items. Our core ROA was 92 basis points in the second quarter.
We will be going through an adjustment process in the second half of the year. Our overall objective is to drive down our expense rate over the next couple of quarters and to begin moving the needle north on revenues in the fourth quarter, as you’ve seen from our announcements, we’re pushing forward with this work aggressively.
We also has the balanced cost initiative against the additional work that we’ll undertake when we integrate our new branches early in 2014, which represents about 25% increase in our retail distribution network. Mike will summarize our outlook in a moment, but I can say that we are targeting an ROA north of 80 basis points while we go through these changes and then our goal would be to begin moving the needle back north further targeted level of 100 basis points and ultimately better than that.
Lastly, having said all this I comment that during my career in banking I’ve seen challenging and changing environments like we are seeing now, what I haven’t seen before is a team so committed to shareholders and so quick to respond to making the changes required to improve shareholder value. I believe strongly in the potential of this franchise and I am needed to do my part, and I can assure you that the rest of the finance team is focused and motivated towards achieving our objectives.
With that, I would like to turn the call back over to Mike.
Michael P. Daly
Josephine, thank you. Well done.
As Josephine outlined, we have re-calibrated to anticipate lower near-term revenues and we are reducing expenses to help offset those impacts. Our guidance is $0.42 core earnings per share in the third quarter along with additional non-core restructuring charges.
As I noted earlier, we are continuing to develop additional restructuring initiatives, which will be intended to further improve core EPS. We will be targeting to improve our run rate to $0.45 in the fourth quarter, which will include a return to revenue growth based on our overall loan growth.
We then be setting our sights on returning to a $2 core EPS run rate or more as quickly as we can in 2014. And of course this will benefit from our New York branch purchase, when we complete that aquisition in 2014.
As you know, our long-term planned targets high single-digit annual organic revenue growth. I continued to have confidence in this long-term expectation, and I am willing to wait through the current period of excess competition for earning assets to resume our long-term growth path.
High quality, double-digit return on equity is still the priority for our management team along with an ROA north of 1. We also intend to be capital efficient as part of this process.
We reduced our shares outstanding by 160,000 during the quarter, under the stock buyback program we announced a few months ago. We continue to have capacity under this program and we’ll consider further repurchases depending on our circumstances and our market conditions.
Our tangible book value per share continue to grow at a 2% annualized pace in the second quarter, while our dividend yields remain near 3%. We absorbed the impact of higher rates in our securities market, we also continue to closely monitor the interest rate sensitivity of our balance sheet, we maintain the asset sensitive bias that is our long standing discipline, the capital is in good shape.
I’ll turn now to the news about our branch purchase from Bank of America, an excellent opportunity and investments for the franchise. $640 million in deposits, 20 branches that integrate well in our footprint, and 2.25% deposit premium.
Metrics of this acquisition are good and so is the payback. We’ll immediately put about half of the money to work replacing short term borrowings, and we’ve modeled our payback assuming that the other half stays invested in securities but in fact, I’m sure that we’ll be using those balances to fund loan growth in 2014 and 2015, as well as to further blend in with our existing fund sources.
But we view this as a low risk and immediately accretive transaction when it closes early in 2014. People have asked if we’re ready for another acquisition and we have been.
We completed the Beacon Systems integration at the end of the first quarter. We expect to execute this branch acquisition without a hitch and we think these branches hold promise for us, since we can deliver the products that they are used to, and also take advantage of our market position and local focus to offer these new customers a meaningful relationship over time.
Now how close by assuring you, that as Chairman and CEO, the second quarter set back is something that we are reacting to, and we are determined to move beyond and we can do better and we will do better. And it’ll take a couple of quarters to implement the necessary changes, and we've already undertaken that work.
We will be disciplined in managing our revenue growth and we will scale our operations appropriately for the revenues that we're achieving. I have no doubt that our franchise is well-positioned to achieve our long-term goals, and that our team has the attitude and the capability and the energy to get the necessary work done.
It's going to take a few quarters to get back to where we want to be, but the run rate will be pure and momentum will accelerate. This is a sidestep.
This is a marathon, not a sprint. We have to do this the right way and we will.
With that, I'm going to end my prepared remarks and we're ready to entertain questions.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) And our first question will come from Mark Fitzgibbon of Sandler O’Neill & Partners. Please go ahead.
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P.
Good morning.
Michael P. Daly
Hi, Mark. How are you?
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P.
Great. First question I have for you, Mike, is that I wondered if you could share with us the size of the loan pipelines right now?
Michael P. Daly
Yeah. Richard, you’ve got some specifics on that.
Richard M. Marotta
How are you doing, Mark? It's Richard.
From a commercial perceptive, I would call a strong pipeline about $175 million, which is a up a bit quarter-over-quarter, we're seeing good traction in ABL and in Eastern Mass and across the footprint into the capital area, and in Albany and out west. So we're starting to see strength in every market and the pipeline is strong.
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P.
Okay. And then secondly, as it relates to this restructuring that you're talking about, two questions related to that.
First, are there any particular parts of the organization that you're targeting with the restructuring? And then secondly, I think there were a couple of different comments about when the cost sales would be recognized.
Could you just share with us when that 4% to 5% cost savings reduction will be fully recognized?
Michael P. Daly
Sure. I'll take some of this and then either Sean or you Richard can take some of this.
I'd say that first of all, we're looking at the entire organization for any areas where we believe that we may have some redundancy. Obviously we've got some business lines that have taken a hit on the revenue they're producing.
So we've got to focus in that area as well, but I don't think there is any specific area that will jump out at us. I think we have to take a look at the entire core bank.
We do a great job when we do our acquisitions and our integrations and we hit our cost saves right on the nut every time. And we've gone through a lot in the last three or four years, and I think one of the things we now have to do to finish the job is we have to take a look at our own core operating and make sure that it's being integrated across the board as it should be to get the efficiencies we need.
Any...
Richard M. Marotta
Yeah. This is again Richard, Mark.
I guess the only thing I would add to that is as you kind of look through the organization, we just need to refocus in on the operations vis-a-vis our revenue streams. And so we just want to make sure that as we're walking down this path of building this franchise that's a good and it's a proper match, and this relieves the sales side from the operations perspective.
So they can go out and sell. We can look at efficiencies and set the right bar at the right level.
Michael P. Daly
And I would add this, Mark. It's not like we haven't been looking at this, but we have had the benefit of having some significant fee income on the mortgage operation, and that gave us the opportunity to do this over a longer period of time.
With that not available we got to step it up a little bit and I think we'll have to be a little bit more efficient in the process.
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P.
And the cost base will be fully recognized, do you think by the end of the fourth quarter in the 4% to 5% that you detailed?
Michael P. Daly
Yeah.
Richard M. Marotta
Yeah.
Michael P. Daly
We're going to continue to look and see if we can expand that process, but definitely that will be done by, and fully realized for the fourth quarter.
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P.
Okay. And then lastly, with the CFO role in transition and having just announced the Bank of America branch purchase, and having a pretty full play, does that necessarily mean that few other acquisitions would be on hold for a while?
Michael P. Daly
No, absolutely not. Our integration team is fully equipped.
There has been a change. Richard, you look like you want to jump in.
Richard M. Marotta
Yeah. I would also say, Mark that probably little over a year ago we really started to take the integration, the acquisition, due diligence from A to Z, and we can move within our corporate initiatives group.
So there is a, it's a team effort on the executive side, and more importantly, it's a team effort at the worker B level and it's all driven through the corporate initiative group that has been reporting to me for over a year. So there is no change there.
So as far as we're concerned it's truly a business as usual.
Michael P. Daly
And I'd also add, the conversion we did last year or the year before two FIS, I mean we did that for a reason. That's a big and powerful system, we’ve un-boarded I think three or four of the acquisitions onto that system.
So we have capacity to grow the institution, and as I said earlier, we got to grow into for the infrastructure.
Mark Fitzgibbon – Sandler O’Neill & Partners, L.P.
Thank you.
Michael P. Daly
Thank you Mark
Richard M. Marotta
Thanks Mark
Operator
And the next question is from Matthew Kelley of Sterne Agee. Please go ahead?
Matthew Kelley – Sterne, Agee & Leach, Inc.
Yeah, hi guys.
Richard M. Marotta
Hey Matt.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Michael P. Daly
Sean?
Sean A. Gray
Sure. From the volume perspective and we’re realizing income at rate lock, so from a volume perspective, we had a $100 million in locks in April.
We had $78 million in locks in May and we had $48 million in locks in June.
Matthew Kelley – Sterne, Agee & Leach, Inc.
And what were the gain on sale margins?
Sean A. Gray
Gain on sale margins for the quarters just been noted was 1.90. Your April was in the range of 2.20 to 2.30.
Your May within the similar range and June fell, I want to say 70 bps to 80 bps.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay, got you. And then for the Bank of America branches, what’s the dollar amount of operating expenses that’s going to be layered into the model once that deal is completed.
What are you baking in your assumptions?
Sean A. Gray
We’ve got a 2.2% baked into the model.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay, got you Okay. And I missed the Mark’s question on the pipeline what the yield was on the pipeline?
Richard M. Marotta
From a commercial perspective?
Matthew Kelley – Sterne, Agee & Leach, Inc.
Yeah.
Richard M. Marotta
Yeah, we’re seeing spreads in the all-in spreads in the C&I piece of it 2.75 and we’re seeing real estate spreads in the 2.50, and that what we saw in the second quarter, our current pipeline reflects that the market obviously is putting pressure on those margins.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay. And then on the commercial real estate side, that's a 250 spread over [SHLB] and then five-year and seven-year treasuries.
Is that kind of what you're seeing there?
Michael P. Daly
Yes.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay. Gotcha.
And then just a question on the expense initiatives here. So you're going to take expenses down 4% to 5%, but is there a larger expense management initiative, branch consolation plan for 2014 and 2015 that you're also contemplating.
Is it two phases or is that a...?
Michael P. Daly
I'd say there is a larger effort underway to review everything and if we have embedded costs in real estate that we've acquired in acquisitions over a period of time that's going to be looked at as carefully as anything else we do. So, the expansion of this entire process will continue over the next couple of weeks.
Sean, do you have anything to add to that?
Sean A. Gray
No.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Now let me get back to the insurance business. It was down sequentially, but more importantly it was down quite a bit year-over-year, which is a better comparison to account for seasonality.
Is that going to continue when you look at the year-over-year trends in the back half of 2013?
Sean A. Gray
No. Mike, you want to go or...?
Michael P. Daly
Go ahead, Sean.
Sean A. Gray
We don't continue to believe that you're going to see year-over-year declines. I think what you are seeing right now is a pretty normalized rate for the insurance revenues.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay, gotcha. Actually one more, just on the securities portfolio with loan growth coming in below expectations and rates up, could we see you add some securities to the balance sheet and take that number up?
Michael P. Daly
Yes you could, and, yes, we will.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay. Any degree of magnitude, I mean, you're at 14% of running your assets right now.
What's the comfortable range that might increase to over the next year or so?
Michael P. Daly
Let's do this in terms of, let's say the next couple of quarters and then next year. Dave you might.
David H. Gonci
Yeah, Dave Gonci here, we are looking at $50 million to $100 million of similar kinds of securities that we have at this time. We're not trying to give guidance on what we're going to do out over a full year, but we do think we've got room at this time to supplement that portfolio and of course as we noted in our branch acquisition announcement we expect that there will be growth in that portfolio when the new funds come in.
Matthew Kelley – Sterne, Agee & Leach, Inc.
What do you think the average yield will be on the new purchases?
Sean A. Gray
Mike?
Michael P. Daly
About $260 million.
Sean A. Gray
About $260 million.
Michael P. Daly
For the opening...
Sean A. Gray
That's what we modeled.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Sorry, I couldn't quite hear you. The $260 million to what?
Michael P. Daly
About $260 million is what we modeled for the Bank of America branch securities.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Got you. All right.
Thank you.
Sean A. Gray
All right, Mike. Thank you.
Operator
Our next question is from Collyn Gilbert of KBW. Please go ahead.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Thanks. Good morning, guys.
Sean A. Gray
Good morning, Collyn.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Could you just break out for us from the loan fee lines what mortgage banking was for the first half of the year?
Sean A. Gray
Sure.
David H. Gonci
This is Dave Gonci. Mortgage banking revenue was $2.1 million in the second quarter, down a little from the $2.2 million in the first quarter, but our guidance previously was that it was going to go seasonally in the second quarter by about $1.5 million and that's the event that was significant to our guidance.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. So the first half of the year was $4.5 million and what were your projections assuming for the second half of the year in mortgage banking?
David H. Gonci
At this time our guidance is that there is not going to be significant...
Sean A. Gray
No, but she is asking is if we...
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
What it had been, yeah.
Sean A. Gray
Where we were? You had $2.5 million, $3 million a quarter end?
Michael P. Daly
Yeah. I mean, we saw a decline of about 30% in volumes from where we targeted.
So backing into that…
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
What do you think we’re going to do in the third and fourth quarter when we put the budget together and mortgage to history $2.5 million, $3 million a quarter third and fourth.
Michael P. Daly
We had about 3.5 million in the half (inaudible), okay.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. That’s helpful, thanks.
And then I just wanted to confirm. So Joseph, the NIM comment, so we are going to see the NIM, is this 363 this quarter with accretion in there and you’re seeing that move to the mid three forties in the third quarter correct?
Michael P. Daly
Correct.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. And then just the point on a higher provision, if have that correctly in the back half of the year.
Why is that? I guess some curious because loan growth seems like it will be minimal in your credit profile is good.
What is going to drive our higher provision in the back half of the year?
Michael P. Daly
Hello, this is Richard, I think higher provision, we’re talking in the 2.8 to 2.9 range and at this point I think that’s kind of a normalized as we are continuously cleaning up the portfolio.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay.
Michael P. Daly
Not material, but material by even. I think that’s another piece of where we think we need to continue to be disappointed and be ready for 2014 and beyond.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. And then can you just reconcile the $0.85 intangible book value dilution that you are going to see on the branch acquisition, struggling with that one?
Michael P. Daly
This is Dave of (inaudible) whether is it 2.25% deposit premium, which is about $14.4 million, herewith also $5 million in the after tax transaction caused that we discussed a little in earlier discussion and then it was some other $2 million sell in additional balance sheet related adjustments that added up and gave the $0.85 tangible book value dilution.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. And you're expecting, what was it?
You said $0.10 accretion from the deal?
Michael P. Daly
Initially $0.06 to $0.08, I think our materials. Our investor deck talked about $0.13 in the following year as we get ramp up of earning asset deployment.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay, that's helpful.
And then, just, Mike you talked about higher revenues. You're expecting higher revenues in the fourth quarter.
Can you just sort of talk conceptually where you think those are going to come from?
Michael P. Daly
I mean to be honest with you, if you look at our asset generation at this point, it's been good. This has been clearly the reflection of the runoff that we expected.
If we could see anywhere from the small gain in earning assets in commercial, there would be some additional consumer balances and we'll probably see some increases in residential, but it will clearly come from our commercial balances and it's going to reflect the growth that we've had quarter after quarter after quarter without the runoff.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay, that's helpful.
Michael P. Daly
I think it will, we're still doing, again, 15% into 18%, 20% growth in our C&I. Our teams are really just knocking the cover off the ball.
So it's not their fault. They are putting on good loans.
It's just that we are not prepared to keep loans that we think are going to hurt us in the future and there has been some bleed off on some of the commercial real estate loans and deals that I just can't believe are being done. So I think that's going to subside and when that subsides our growth will come right from where it always has and that's from the commercial side.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay.
And then just one final question, just can you remind us of your asset sensitivity position and kind of what's going into those assumptions?
David H. Gonci
This is Dave Gonci. We retained an asset sensitive position for slight increase in net interest income in an upward ramp environment.
Do you have a particular question about the composition?
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Well, just I mean even more specifically what does that mean? So we assume 100 basis point parallel shift that assumes what in net interest income and what's driving your assumptions there?
Sean A. Gray
So we've got what a 2-bit model that shows $0.10.
David H. Gonci
We were looking typically at the models at 200 basis points and we were looking at I think 2% to 4% increase in ramped situation in net interest income that was as of our first quarter modeling. I think that will be coming in a little in mid-year here, but of course with the New York branch acquisition that will be increasing our interest-rate sensitivity although we don't have a specific model number that we can provide for you at this time.
It will be improving our asset sensitivity.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Do you run a scenario just on in terms of sort of a nonparallel shift of this deepening curve, what impact that's going to have?
Sean A. Gray
Mike, do you have a comment on it?
Michael P. Daly
Yeah, we do. We would still be asset sensitive in that scenario as well.
So, we benefit more from a parallel.
Sean A. Gray
No question.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay.
Thanks, guys.
Michael P. Daly
Thank you.
Sean A. Gray
Thank you.
Operator
And the next question is a follow-up from Matthew Kelley of Sterne Agee. Please go ahead.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Yeah, hi. Just, again a follow-up on the modeling of the Bank of America deal.
The core deposits are $531 million and then the 1% premium of $5 million. So, total intangibles is around $20 million, is that accurate?
Sean A. Gray
It's in that area. Yeah.
Michael P. Daly
Yeah.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay. Got you.
And then you take down the TC by the deal charge of $5 million. So your total TC – you had $25 million, and that’s what's going to drive the dilution [that you’re on].
Richard M. Marotta
That sounds a little high. Happy to get back to you off-line on that.
That’s a little high. We think that the tangible book value per share dilution number we gave you is a good number.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay. All right.
We’ll follow up. Thank you.
Michael P. Daly
Thanks, Matt.
Operator
And this concludes our question-and-answer session. I’d like to turn the conference back over to Mr.
Daly for any closing remarks.
Michael P. Daly
Okay. Thank you.
Thank you all for joining us. This concludes the call.
I want to thank everybody again and of course we look forward to speaking with you all again in October and hopefully we’ve got some really positive things to talk about at that point and conclude on some of our process improvements. Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.