BHLB (2025 - Q1)

Good morning, ladies and gentlemen, and welcome to the Berkshire Hills Bancorp First Quarter 2025 Earnings Conference Call. This call is being recorded on April 24, 2025. I would now like to turn the conference over to Kevin Conn, Investor Relations Officer. Please go ahead. Good morning, and thank you for joining Berkshire Hills Bancorp, Inc. first quarter earnings call. Kevin Co

My name is Kevin Conn, Investor Relations and Corporate Development Officer. With me today are Nitin Mhatre, Chief Executive Officer, Sean Gray, Chief Operating Officer, Brett Brbovic, Chief Financial Officer, and Greg Lindenmuth, Chief Risk Officer. Our remarks will include forward-looking statements and refer to non-GAAP financial measures. Actual results could differ materially from those statements. Please see our legal disclosures on pages two and three of the earnings presentation referencing forward-looking statements and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in our need for this. At this time, I'll turn the call over to Nitin. Nitin?

Thank you, Kevin. Good morning, everyone, and thank you all for joining us today. I'll begin my comments on Slide four. Where you can see the highlights for the first quarter. We had a very strong quarter with operating net income of $27.6 million, up 6% linked quarter and up 32% year over year. Earnings per share of $0.60 was flat to the fourth quarter including the full quarter impact of higher share count from our December equity raise and up 22% year over year. Our rigorous expense optimization initiatives continue to drive expenses lower with quarterly operating expense of about $68 million, down 4% linked quarter and down 6% year over year. Ongoing momentum of improving revenues and declining expenses led to a positive operating leverage of 5% linked quarter and 11% year over year. Operating ROTCE of 9.66% was down 27 basis points linked quarter and up 93 basis points year over year. Overall strong financial performance was primarily driven by improved net interest income, lower expenses, and disciplined credit management. Brett will provide more details in a few moments. Asset quality and balance sheet metrics remain strong. Net charge-offs were 15 basis points of loans and our reserve to loans was up two basis points to 1.24%. Total loss reserves of 1.24% are now at about 500% of our total nonperforming loans. Total delinquencies and nonperforming loans were 42 basis points of loans, the lowest level in about twenty years. A solid testament to the strength of our collaborative risk culture across frontline bankers and risk teams. Liquidity remains solid with our loan to deposit ratio at 5%, that is down 1% linked quarter. On the strategy front, we made steady progress on our strategic initiatives in the first quarter. Our focus on the deposits relationships across business lines continued and a relatively new digital deposit initiative has gained momentum and delivered approximately $75 million of new deposits. We sold the remaining $7 million upstart book and further our balance sheet with total nonstrategic runoff portfolios down by 76% year over year to just $34 million. Brett will share more details on the portfolio sale in a moment. As you know, in December, we announced the merger of equals with Brookline Bancorp, to create a preeminent Northeast franchise. This transaction improves scale and meaningfully improves profitability as reflected in the estimated 23% accretion to Berkshire's 2026 consensus estimate on GAAP and cash basis, respectively. Our team continues to work proactively on requisite integration planning for a seamless transition. With that, I'll turn over the call to Brett to cover our financials in more detail. Brett?

Thank you, Nitin. I'll begin on slide five, which shows an overview of the first quarter metrics. As Nitin mentioned, our operating earnings were $27.6 million or $0.60 per share. Our net interest margin was 3.24%, up 10 basis points linked quarter and our net interest income was up $2.9 million or 3% linked quarter. Operating expenses were down $3.1 million or 4% linked quarter and our efficiency ratio was 59.5%. Slide six shows our average loan balances. Average loans were up $118 million or 1% linked quarter and up $348 million or 4% year over year. We've updated a page in the appendix which shows data on the Upstart and Firestone runoff portfolios. The combined runoff portfolios, including the Upstart loan sales, are down $110 million or 76% year over year to $34 million or just 40 basis points of loans. Slide seven shows average deposit balances. Average deposits increased $188 million or 2% linked quarter and were flat year over year. Excluding payroll deposits and brokered CD balances, average deposits were flat linked quarter and flat year over year. If you recall, our year over year deposits were impacted by the sale of 10 branches in Upstate New York in the third quarter of 2024. Average noninterest bearing deposits as a percentage of total deposits was 23%, down 1% linked quarter. Turning to Slide eight. Net interest income was up 3% linked quarter and up 2% year over year. Net interest margin was up 10 basis points linked quarter to 3.24% and our March spot NIM was 3.31%. Slide nine shows operating noninterest income which was down $2.5 million or 11% linked quarter and up $3.4 million or 19% year over year. Other noninterest income was down compared to the prior quarter. During the fourth quarter, we had strong SBA gains and unusually high BOLI income. In the near term, we expect SBA gains to be in line with our prior August average of $2.9 million due to uncertainty from the impact of tariffs. Slide 10 shows expenses. Operating expenses were down $3.1 million or 4% linked quarter, to $68 million and down $4.5 million or 6% year over year. Year over year expense reductions were broad-based, including our other expenses, which are an assortment of smaller items. Nonoperating expenses of $2.5 million were primarily related to the merger announced in December. Slide 11 shows our expense outperformance versus proxy peers over the last four years. This slide highlights the disciplined approach to expense management we've undertaken over that time. Slide 12 shows a summary of asset quality metrics. Nonperforming loans as a percentage of total loans was 25 basis points. Total delinquencies and nonperforming loans were 42 basis points of total loans. Net charge-offs of $3.5 million were up $200,000 linked quarter and down $500,000 year over year. We added $2 million to our loss reserve increasing our coverage ratio to 24 basis points. Our loss reserves to nonperforming loans are now about 500%. Our $5.5 million provision reflects the most recent Moody's baseline economic outlook in our ACL assumptions. During the quarter, we sold the remaining $7 million of upstart loans for net proceeds of $5.3 million or 76¢ on the dollar. With the sale of the Upstart book, we have significantly derisked our balance sheet. Our other loan books are below normal net charge-off levels. And we do expect those to normalize over time based on the macroeconomic environment and outlook. Slide 13 shows that our CRE book remains well diversified in terms of geography and collateral. Our CRE concentration ratio was approximately 290% of based capital, and credit quality of the CRE portfolio remained solid with nonaccrual loans at 19 basis points of period-end loans. Slide 14 shows details on our office portfolio. As noted last quarter, the weighted average loan to value ratios are about 60% and a large majority of the portfolio is in suburban and class A space. We have very limited exposure to Boston's financial district, and no exposure to high-rise office buildings. Turning to capital. We have strong capital levels. Tangible book value per share was $25.50, our CET1 ratio was 13.3%, and our TCE ratio was 9.9%. Our AOCI bond mark improved modestly a negative $106 million to a negative $95 million. Given the pending MOE transaction in the half of 2025, we did not provide line item income statement and balance sheet guidance for the upcoming year. That said, we are encouraged by the momentum in our financial metrics and confirm comfort with consensus net income cited in the December 16 merger presentation for 2025. And with that, I'll turn it back over to Nitin for further comments. Nitin?

Thank you, Brett. Overall, we had a very strong first quarter, driving a solid start to the year. Many of our multiyear initiatives are clearly bearing fruit. While the economic environment is given the volatility driven by tariffs and other policy initiatives, we continue to monitor the situation and communicate with clients to better understand potential impacts to their businesses. It's still very early, and the fluidity of the news from Washington makes it difficult to predict the potential outcomes at this point, but our teams remain prepared to pivot as needed to maintain our momentum. We're excited about the potential for the combined Berkshire Hills Bancorp, Inc. and Brookline franchises. The combined entity will provide growth opportunities for our employees, continued commitment to our communities, enhanced products for our customers, and significantly higher profitability and returns for our shareholders. I want to thank all of my Berkshire Hills Bancorp, Inc. colleagues for their continued hard work and commitment to the bank and our clients. And look forward to their continued support and commitment through this transition. On slide 15, we summarize our progress on the merger integration and next steps. In short, everything is on or slightly ahead of plan. We filed regulatory applications in March, and a shareholder proxy with the SEC in early April. We anticipate stockholder approvals at the annual meeting on May 21 and our regulatory approvals sometime in the third quarter. So a lot of progress so far, but there's more work to do. In closing, I'm proud of what the team has accomplished over the last four years in terms of financial performance improvement while delivering exceptional client experience and positive impact on the communities that we operate in. It is their hard work that continues to be recognized across various forums including the most recent recognition by Newsweek magazine, that listed Berkshire Hills Bancorp, Inc. amongst the most trustworthy banks in America for the fourth consecutive year. Thank you, team Berkshire Hills Bancorp, Inc., for everything you do to serve our clients and earn their trust. With that, I'll turn it over to the operator for questions. Operator?

Thank you. We are now opening the floor for the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Your first question comes from the line of Chris O'Connell of KBW. Your line is now open.

Hey. Good morning. Morning, Chris. And then so just where I started off, you know, with the balance sheet side, you know, I appreciate you know, no guidance from here, and, you know, it's you know, become a a little bit more shaky economic environment. So you know, I was hoping to get an update on loan demand. Has that changed as you guys have come into the year and over the past couple of months? And how you guys are thinking about you know, stand alone growth you know, going forward?

Yeah. Chris, that's a good question. Like you said, there's a lot of uncertainty out there. And, broadly speaking, what we're hearing from the clients is, like, three different themes that are emerging. One is where there's some clients especially commercial clients that are loading up on the inventories. You know, in in in kind of anticipation of the prices going up. There's the other group that's kind of wait and watch approach and just kind of staying put where they are. And there is a third group that is actually looking at rationalizing and know, reducing expenses and so on and so forth. So it it's a mixed bag, but what we what we see in the pipeline is our pipeline has slowed down. Compared to the previous quarter just like the origination slowed down. So I think there's a net indication of slowing demand. I think we still I think this quarter was about 5% annualized loan growth. I think we still probably expect to be in that range, but time will tell how the economy turns out. Great. That's, that's helpful. And then you know, on on the expense side, you you said there's kind of a number of small items here. Just just hoping to see, you know, get your guys' thoughts about you know, the how the expense you know, base grows throughout the rest of the year on a stand alone basis or if it is able to remain pretty steady? Yeah. I think we're we're very pleased with with our expense momentum that we're we're seeing currently and that we've seen over the last few quarters. I am expecting it to remain know, relatively stable. You know, consistent with with generally consistent with this quarter, I would say. You know, we do hope to to continue that momentum as we move forward and and progress towards the towards the merger.

Okay. Got it. And then, you know, with the the, you know, final ops start sale, between, you know, this quarter or last quarter, and just today overall progress on on the runoff portfolios in general. You're talking about kind of normalized net charge offs. I mean, where do you think that range is now? Like, do you you know, now that you guys have kind of changed the balance sheet, you think that you know, that's a different level than it's been historically?

Yep. Chris, in a normalized environment, that would have been the case. So if you look at our last five quarters, our charge off rate has ranged between seven basis points and 24 basis points. This quarter was about fifteen. So I think on the last earnings call, we did say that we expect it to normalize to around 20 basis points level. And I think that's where we're staying at the moment because there's so much uncertainty out there, so it's tough to say. I think Brett mentioned in his remarks that we expect it to normalize, and we believe that's the normalized level.

Great. I appreciate the time. Thank you.

Thank you, Chris.

Your next question comes from the line of Gregory Zingone of Piper Sandler. Your line is now open.

Hey, guys. It's Greg stepping in for Mark. How are you?

Hey, Greg. Good. How are you?

Good. So a quick clarifying question. Did you say the spot NIM in March was 3.31%?

That's correct. Yes.

Okay. Awesome. And there any update you could give us on how you're managing employee retention ahead of the MOE closing, especially for some of your key producers?

Sure. Sean here. We've identified all of those key producers. We've had those conversations, and, both organizations have discussed you know, meaningful retention and retention grants. As they move towards the pro forma company. So we feel we've got a good handle, but a lot of work left to do.

Okay. Thank you. And then is there any plans to align your product offerings and your deposit related strategies ahead of the legal close?

So I think we we in my remarks, I talked about the digital deposit initiative that we launched that's programmed to date about $75 million in deposits. And I think even more exciting outside of the absolute numbers is roughly one out of five new client relationships are coming through digital channels now, which was our you know, original goal. So I think we're pleased with that. I don't think we're gonna launch new products per se, but I think the team continues to fine tune the functionalities. So just as an example, last quarter, we have launched what we call as the direct deposit API. Whereby if you open a deposit relationship with Berkshire Hills Bancorp, Inc., and wanna move your direct deposit from another bank, it's really a a couple of clicks of buttons on your phone. I think those kind of functionalities will continue to be added to create that, digital first type of experience.

Awesome. Thank you. And last question for me. Is there a TCE ratio or a CRE concentration level you guys are keeping in mind as you approach the MOE?

For CRE, our we've continued to stay below 300% mark. And I think this quarter, we ended at about two ninety. PC, Brett, I don't know if you have a comment on that.

Yeah. No. I I would expect TC to to remain relatively stable. From now, basically, to the merger. You know, just trying to make sure that that we put ourselves in in the best position possible for you know, once the merger occurs. You know, to continue going forward and grow.

Awesome. Thanks so much, guys.

Thank you.

I'd now like to hand the call back to Nitin Mhatre for final remarks.

Thank you, Ali, and thank you all for joining us today on our call and for your continued interest in Berkshire Hills Bancorp, Inc. Have a great day, and be well. Kelly, you can close the call now.

Thank you for attending today's call. You may now disconnect. Goodbye.