Q3 2019 Earnings Call
Good morning, and welcome to the Berkshire Hills Bank Corp. Q3 earnings release Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Sarkouhi followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then to.
Please note. This event is being recorded I would now like to turn the conference over to David going see capital markets Director. Please go ahead.
Good morning, and thank you for joining this discussion of third quarter results.
Our news release is available on the Investor Relations section of our website, Berkshire Bank Dot com.
And we'll be furnished to the FCC.
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 FCC reports on forms 10-K in 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 our results and performance trends.
And should not be relied on his financial measures of actual results or future projections.
Hey comparison and reconciliation to GAAP measures is included in our news release.
And with that I'll turn the call already CEO Richard Marotta. Thank you. Good morning, everyone and thank you for joining us today for our third quarter earnings call with me. This morning, our Jamie mode is our CFO , Sean Gray, our president George email as our Chief Credit Officer, and George Bacigalupo, Our commercial leader I'll begin the call today with a high.
Level overview, the quarter, and then turn it over to Jamie who will dive deeper into our numbers. The third quarter was eventful on several fronts. Our teams have moved forward together on bringing to fruition the financial cultural initiatives that we've had in the works since last year.
Most ways our financial performance was in line with our plans in previous guidance before I discuss our performance I'll take a few moments now to address the loan charge off that we announced last week.
As you know in September we announced that we identified a 16 million dollar problem loan, which resulted from potential borrower fraud I need to mentioned upfront that there have been various articles in the media about this but our policy is that we don't discuss the names of borrowers that provide specifics about customer relationships given that.
We have no comment on any news reports, but I will address out our assessment of the situation, which resulted in lost charging off the $16 million loan balance and that reduced third quarter EPS by approximately 23 cents after tax.
This credit is the loan participation is secured by business assets.
It's situations with potential fraud, the realize ability a loan collateral can be significantly impaired and it was our judgment that we should charge off the balance based on the information available to US we've reviewed our overall portfolio exposures and our loan participations and we remain confident of our overall credit quality well borrower fraud is.
Business risks that we can never fully eliminate we have strong underwriting and administrative disciplined and we feel we reviewed our practices to make sure we're prudently controlling risk.
Before this charge, we would have both achieved our earnings expectations as well as leading unchanged our outlook for the year.
Our strategies have produced solid results our initiative to reduce wholesale funding lowered our funding costs and supported our NIM.
We bought back stock below book value and return capital freed up my or loan strategies.
We made further progress whether efficiency projects.
We completed the integration of the ESI financial operations earlier this month and are on track with our objectives for this acquisition our team had solid progress in building our relationship oriented 21st century community Bank I, let Jamie take you through some of the numbers for the quarter game.
Thanks, Richard we had 46 cents in core income in the third quarter and that would've been 69 cents before the 23 cents impacted the loan charge, which was on pace towards our full year objective.
GAAP EPS came in at 44 cents in the third quarter and included merger related charges as we prepared for the systems conversion, which we completed earlier this month.
Total loans declined in the quarter, including targeted run off of indirect auto loans and accelerated mortgage prepays. This interest rates declined.
We moved about $50 million of commercial Outstandings off the balance sheet based on our selective criteria for relationship benefit in return.
We've got good experience with our acquired savings Institute deposits and were up a little across the franchise.
Total deposits decreased due to daily fluctuations in our payroll deposits and also due to a targeted reduction in broker deposit balances.
We continue to focus on our strategy of reducing our use of wholesale funds, which decreased by about 100 million during the quarter and are down by nearly half a billion since it started the year.
The ratio of loans to deposits decreased to 93% from 101% so far this year.
The net interest margin increased quarter over quarter by three basis points to 322.
We benefited from higher accretion and our teams brought in higher than expected recoveries in resolving purchased credit impaired loans.
Measured before accretion the margin decreased slightly by two basis points to three or six as we anticipated.
Our strategy to reduce higher cost wholesale funds lowered our funding cost by nine basis points, which mostly offset the impact of asset sensitivity in the falling interest rate environment.
Including a full quarter of acquired ESI financial balances net interest income grew by 6% quarter over quarter.
Looking forward, we expect fourth quarter and I do decrease as a result of both margin and balance sheet changes, while advancing strongly year over year due to the ESI financial contribution.
Turning to noninterest income.
Total fee income increased by 17% over the prior quarter.
Let's be a team had a strong quarter and achieved record quarterly revenue.
For the fiscal year, ending September Thirtyth, Berkshire with the 18th largest lender in the country based on SP approvals are seven eight loans. This was up from the 28 spot in the prior year.
Commercial loan swap fees also improved in the third quarter due to volume gains and our ESI financial team has experienced in delivering swaps solutions to their markets.
As it related fee income increased including a full quarter benefit from our acquired ESI financial operations.
We're targeting to achieve further fee income gains in the fourth quarter based again on a higher contribution from loan related fees.
Including the 16 million dollar loan charge offs total net charge offs were 22 and a half million in the quarter.
This also included a write down of a commercial real estate balance that we have commented on in previous quarters and that write down was based on an updated appraisals.
All other net charge offs were within the range of recent quarters, we expect our provision in the fourth quarter to be within the range of those recent previous quarters.
Looking forward to 2020, we're well along with validating our methodologies for the new Cecil reserving process, which will be effective at the turn of the year, but we won't be providing estimates of the impact of this accounting change at this time.
I would note.
As we've previously disclosed the balance of non Accretable credit discount on purchased credit impaired loans will be transferred to the loan loss allowance when we implement Cecil at the start of 2020.
The balance of that discount was 91 million at September Thirtyth.
Also any future accretion on recoveries of these loans will be credited to the allowance rather than to interest income as we presently do.
I'll turn now to noninterest expense.
GAAP expense decreased from the prior quarter due to lower merger charges core expense increased by 2%, including a full quarter of acquired ESI financial operations.
We recorded a 1.9 million dollar FDIC insurance premium rebate and anticipate another 1.4 million in the fourth quarter.
Our efficiency ratio improved to 53% from 56% in the prior quarter.
We brought down our head count and expect to bring it down again in the fourth quarter as we complete our merger integration.
We expect to achieve our merger related cost saves as planned and to keep total merger cost within our original estimate.
We're targeting to achieve an efficiency ratio in the area, 55% for the fourth quarter.
Putting it altogether, we expect to bring in our core EPS at the target of 260 or more for the year before the impact of the 23 cents loan charge off that we have discussed.
Outlook anticipates that we will maintain our pace of share repurchases, which will of course depend on market conditions.
We cannot provide GAAP EPS guidance for the quarter, we plan to record our final ESI financial merger costs and our GAAP results will also be affected by F. CLS mortgage results, including any potential sale impacts.
This concludes my comments and I'll turn the call back over to Richard Thanks, Jim strategies, we put together at the started the year or keeping us on pace for target of core earnings at 260 or more before the 23 cents impact of the loan charge offs.
In addition to our earnings release yesterday, we also announced that our chair Bill Ryan stepping aside from the chairman responsibility.
Grateful for his vision and leadership that he has contributed since taking the position of board chair five years ago.
Well he is reducing his role for health reasons. We're pleased that you'll continue to remain active and the board of directors and a personal level I'd like to thank bill for the guidance in Wisdom, you provided me since I assume the CEO position Bill. Thank you.
The board has elected build dunlaevy to take the position of chair effective December 1st.
There's also a career bank executive that served on our board. Since 2011, you fully supports our vision of building a 21st century community bank with a cultural belong you'll know their markets and is well positioned to lead the board oversight of our enterprise.
I'd also like to thank former director Rick Murphy for his service Rick has moved down due to increased professional opportunities he will be miss.
I'm pleased to report that during the third quarter, we were proud to partner with the what runway project to create the friends and family fun CD aimed at helping entrepreneurs of color access the seed capital they need in order to launch the businesses of their dreams together, we're doing our part to help close the racial wealth gap by investing communities of color.
We also move forward with our storefront initiative as you pursue our plans to open these collaborative work spaces to expand our support of under bank communities engage with community Influencers.
Well have more news on this in the coming months.
Looking ahead to next year, we'll be moving forward with the benefit of our strategic initiatives and our fully integrated eastern Connecticut, and Rhode Island operations, while we won't be providing 2020 guidance in this call I can share that will be targeting to approve our profitability, while investing in our 21st century community bank and providing leadership and meeting that.
Diverse and evolving needs of all of our community at this time I'll ask the operator to open the call the question.
We will now begin the question and answer session. You asked a question sarsen one on your Touchtone phone.
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Our first question comes from Mark given Sandler O'neill.
Hey, guys good morning.
Mark I know Mark.
Jay terrific, Jamie I'm wondering if you could help us think about sort of the size of the balance sheet at the end of the year given the planned run off in some of those selected portfolios you discussed previously.
Yes, I mean, I think I think the balance sheet will be slightly smaller than it is at the end of the third quarter by by the end of the year, Yeah, we're going to continue to run down the indirect auto portfolio.
We're going to continue to look look for sales on the aircraft portfolio as well so.
While we look at.
The commercial pipeline is strong for us.
At this moment, we're going to be very selective in the loans that we bring onto the balance sheet, making sure that the the other relationships are there as well as the profitability. So yeah. I think you can you still see the the overall balance sheet to be slightly down mark.
And does that kind of continue for another couple of quarters do you think or.
Yeah, I think so mark you know when we look at it. We had you know we had almost close to $3 billion in wholesale funding on the balance sheet that the at the beginning of the year.
We're going to try to drive that down to much more manageable levels. As we go forward ideally we'd have no wholesale funding on the balance sheet right, but that's going to depend on our ability to drive core organic deposit growth.
We're going to you know, we're going to actively and prudently manage that.
You know in consideration of earnings and profitability.
Okay.
And then I heard your comments about Eni, but I'm curious as to your thoughts on the margin.
So yeah, right. So we are or organically or ex accretion I guess I'll say, we were down two basis points from third quarter to second quarter.
You know in fourth quarter. There's you know we're anticipating another rate cut here at the end of October .
We had a into September there was a rate cut and sew when when those two cuts sort of flow through the balance sheet.
We expect probably five or six basis point decline in the in the NIM in fourth quarter.
The reported NIM not the core NIM correct, yes, that's right and so so if you assume that the the accretion the recovery and workouts that we do in the fourth quarter the same.
In it and as they were in the third quarter, you would expect that to decline also by five basis points or so.
And should we assume the effective tax rate will be around 20% going forward, Yes, I think I think thats right, maybe you know could be 19%, 20% somewhere in that range, if you're if you're flat I think during the red spot.
Okay, and then also I noticed that you took a commercial real estate charge off in the quarter I assume it was related to that.
You know ski place up in Vermont.
Well, we sorted through most of that do you think at this point do or are there additional charges that are coming because I thought I noticed that they filed for chapter seven.
We don't like to comment on our customers and the borrowers in this regard.
We have previously mentioned this loan on other calls I you know if it's still kind of up in here, but we feel comfortable where we are charged off on that loan that at the moment and Mark as you know as these situations go to their personality. The bank continues to update the value or.
Of the underlying collateral.
Okay.
And then lastly, I wonder if you could just help us think about this this be first program and what the implications will be from a cost standpoint.
So great question, Mark I mean, we continue to manage be first as part of our overall cost expense.
The first is a is a cultural initiative that we're very proud of very excited about.
Right and so from from that perspective, I don't think you're going to see any additional expense gained.
Or you know expense costs right that that on a go forward basis, we're going to continue to manage the efficiency ratio in that 55 56, yet on efficiency right Mark I mean, it's a it's the core of who we are and so that basically as a core expense to watch and it's all built into all the things that you've seen.
Thank you.
Our next question comes from.
Yep.
Yeah good morning.
Good morning, Dave I know one day.
You mentioned.
The outlook for fee income and some confidence I guess in terms of.
Maintaining the the level that the comment related to that maybe some of the contribution from Mississippi, maybe just more modest in terms of where you're seeing some of their core competency sort of flow through the the fee income generation this quarter and that's maybe moving forward.
Yes. So there was some gains on the on swap income.
The ESI financial team as we said in the in the call is experienced in delivering swap to their market. So I'm very pleased with how they deliver that to their customers end markets. And then also obviously on the deposit side right you add in a billion or so deposit you're going to get higher.
Your fees based off of that as well. So that's that's generally how they're delivering in the on the fee income side of things.
And from an overall perspective.
We think theres a little bit of room in Q4 on the fee income side, we think we'll do a little bit better than we did here in Q3.
Okay got it and then.
You've talked about sort of focusing on.
Core loan deposit relationship generation here in the past several quarters.
Have you sort of success stories or early indication, but you're winning more on the on the core sort of commercial sought in any sort of a success stories on a core deposit generation thus far.
So I guess what else what I'll say David.
From an individual success stories, probably not overall, we're looking you know we're looking at what we would consider our organic deposit growth.
Throughout the year has been has been healthy right. So this we wouldn't count payroll or broker deposits in this number.
I think we're we're we're doing very well in that regard. So you know and I'll go ahead, yet one of the other successes is I think as the.
Hi Tech acquisition integration has happened they think the there has been minimal if any runoff there if anything has actually been some growth. Yes. That's a good point and so we've done that I think you know consistently historically as weve gone in gone into new markets I guess, the other thing that I would say is as we start to go into on the.
The under bank communities, and we start to tie it to some of the things that we talked about in here the family and friends CD Anamaria anticipation is that we're going to start to drive some core deposits through that whole process.
So we will have I'm, assuming very good.
You know a wind stories in the not too distant future.
Got it and then maybe just a any sort of update from the aircraft portfolio.
For that.
Any update you can Brian Yeah, we continue to market that portfolio in the meantime, we're letting it run off as an existing up operation Thats basically on the update I have for you on that Dave.
Got it thank you.
Our next question comes from Laurie Hunsicker.
Hi, good morning morning, or <unk>.
Just just wanted to go back to the aircraft per minute. So when would you expect that that book what would be completely run to zero, if you don't actually sell it.
We were looking at three and a half year, three and have to four year weighted average life.
Okay, and just remind me what does the coupon on that.
It's in a it's in the mid fives.
Okay and are there currently any delinquencies or not.
You know none none that are material I'm sure there must be a delinquent loan or two in there I can get back to you offline hour. Okay. And then just same question in terms of charge offs, because obviously, you're seeing eye chargeouts were elevated even excluding that 16 million was there anything from aircraft and that number.
No okay.
Okay.
Great and then what were your total that's standard.
Where did those come in at relative to last quarter, they were $150 million going to kick that over to Georgia.
Hi, Good morning laureates, Georgia, the total criticized it the total you're looking just for the substandard just standard okay. So the total there is a roughly 170 <unk> hundred 62 million.
Okay, and then how much of that is.
Hi.
He and I is roughly well [noise].
Seasonally 50.5 million, it's actually down a little bit from last quarter.
Okay, and then how and how much is Cree Cree is 112, and that's up roughly 25 million from last quarter and that's due primarily to the two a hand, well actually three accounts from savings Institute.
Okay and that includes the.
The Herman Hitchcock or I guess, you're not mention by name that includes <unk> that the ski resort is that yeah and that number. Yes. This is total commercial yeah, okay, and so you guys did update us on that loan.
About a year ago about a year ago I had it at 17 million no specific reserve against that 50% LTV can you just help us think about that I mean, I guess that loan is.
Still about 17 million.
No we've written it down to the liquidation value we received an appraisal earlier in the third quarter with a lower liquidation value when we did write it down to that level.
Okay and so.
Well what is what it what is that number.
I mean, right actually you didn't have 3 million 2.7 million in and and so thats related to that.
That brings it down to what about 14 million Hey, Laurie This is Richard.
So we're not going to comment on specific.
Deals like that for a couple of reasons and one of the reason does is when we're in a situation that we are now which is I think someone mentioned the chapter seven. So we are secured creditor, we're not going to give out what we're carrying on our books for for many reasons in a lot of revolve around just the modality of it got it now that may.
Perfect. Okay. So sorry, just a few more questions here on credit so looking at your CNR charge offs. They were 19 million turned the corner, obviously 16 million related to the Cnine fraud.
What was the other 3 million because that's an outsized number relative to where you guys had been running.
Well actually there, but any color around that well the 3 million and charge offs for the quarter. When you take out the the fraud and the real estate transaction is right in line with what we've been running on a quarterly basis, we typically run between three and 4 million.
So it is right in line with where our charge offs have been.
And I and I think you're asking is there any thing else significant in there and there really isn't it's just the quarterly charge off number.
I mean, because you're seeing I try to I'm, just looking back over the last many many quarters they've been bouncing around between a lot of 200000, and I have a million and a half right. So I guess I'm, yeah, So said differently because you're on within not within the see an eye charge offs was there anything related to Firestone Ward County.
There was no charge offs and Firestone actually they had a small recovery and there was nothing in there for for the taxi medallion portfolio.
Okay, and then where where the taxis on that basis.
I'm right around 26 million, Oh, I'm, sorry balances I I apologize no balances are actually down to 24 million. What he had we had about a $2 million reduction this quarter southern just around 24 million.
Okay, Great and then can you just update us where you are on Firestone.
Balances for Firestone are about to 66.
Okay and then.
Rich nations corner.
Firestone 32 man.
Right.
Okay and are you guys. How are you thinking about Firestone as we head into C., so well they'll be any changes or you're still going to be running at around the same the same run right.
There will not be any business impact or decisioning based on based on new accounting change. So I think we will continue to run Firestone the same way.
Okay, Great very helpful. And then just one last sort of more macro question I'm as we head into fourth quarter. Obviously, we're gonna see some more merger charges round numbers, you've got about <unk> million or so left off as.
What you were initially stated or are you still on track for that and I guess more importantly, as we look forward to next year.
Than anything going on in the aircraft are are we done with merger and restructuring charges or how should we think about that yeah. That's it it's absolutely how you should think about at Laurie.
We were probably can do a little bit better than the 8 million left in terms of merger charges.
You know that so as we look forward goal will get to our clean quarters that we're all hoping for us and we all want I'm, so well get there the only the only other thing I mentioned here in the fourth quarter is there's a potential for after our mortgage group Spls. Those those are showing up in discontinued ops.
On our you know on our balance sheet, an income statement here and so just you know we're excluding anything that we're talking about.
With that would that team.
Okay, great and actually I'm, sorry, Jamie one last question here, Yeah, I'm going to the other either non interest income line yeah.
So the 609000 compared to a Boston, She's 16, and I know embedded at that number is the tax advantage commercial project investments that link quarter that was roughly unchanged write a loss of 1.9 in each one.
I had an $800000 swing there [laughter] think about what's in that whats nonrecurring or how that's going forward.
Yeah, you should know that was BOLI income Oh, Laura So there was we had a premium.
Capture in yeah, there in death benefit in Q3, so hopefully you won't you won't see I I change in that next quarter.
Okay, so that that death benefit with about 800, that's right. Okay perfect. Thanks, I'll leave it there.
Our next question comes from Collyn Gilbert.
Thanks, Good morning, everyone.
Good. Thanks, So just wanted to first start on the on the loan book.
What kind of just if you could offer us a little bit of color as to what the pipeline is looking like where you're seeing some good I'm kind of organic demand and then what some of the blended origination yields are running.
On that pipeline Buck.
Calling this is George I'm, a pipeline is doing pretty well, it's a north of $200 billion and Oh, we think we're continuing to be selective on terms of both pricing and credit. So we feel good about the totals.
Continuing with our relationship approach.
We've seen that Boston continues to be strong is good opportunity in the real estate side in the greater Boston area.
But we also have some strength.
In various folk places around the footprint.
Some good pipeline in operate BL.
But also in New Jersey markets. So we feel good about contributions from our various regions.
Okay. Okay, and then just tying into the broader balance sheet moves. So Jamie you know obviously, you're building a lot of cash and I would expect to continue with the portfolios are running off.
Do you have kind of near term and a long term plan for the cash.
Or how you're going to manage that part yeah. I mean, I think near term is we're going to continue to deploy that into the.
Stock buybacks.
When we when we get through the 2.4 million authorization share authorization that we have we will be will go back to the board a natural gas for more.
You know is a is our thinking at the at the time.
You know and I think you know what you do see is we are building we are building capital, even though we are buying back some shares.
So I think that's kind of how we're thinking about it right now as you know until and unless we see.
More and better opportunity to deploy that capital into.
Into asset generation. They do we'll we'll continue to return it in the form of buybacks.
Okay. Okay, and then just breaking into the NIM a little bit some of the drivers of that can you just kinda talk about I mean, I, obviously, you're you're shifting the mix significantly and getting a wholesale part of the funding off the balance sheet, but just in terms of your core customers and where your to pricing deposit pricing strategy is right now as we look into.
The fourth quarter and with the rate coming right coming tomorrow.
Yeah. So I I think we expect our deposit deposit costs will be reduced in the fourth quarter I don't think it's going to be a major reduction in deposit cost. The you know the where we'll see the benefit is on the in funding costs, where we are continue to reduce the real.
Lines on wholesale funding there you know the markets you know I guess I'll, let Sean comment in a minute here I'm just those things, but you know from my seat you know what I see is.
You did the competition right that same thing we experienced over the last couple of quarters, where there are less and less rates out there at the at the high end of things, we've been able to reduce our CD rates over the past a quarter and a half for so I think we're generally seeing people follow the market.
Yeah in that regard other other competitors follow the market in that regard Sean do you have anything else I agree where there was disciplined in markets the prices staying flat I'm from a competitive perspective.
Okay. Okay. That's helpful. And then just on the expense side. So should we assume that if if into similar FDIC credit is going to run through this fourth quarter that the expense will be zero on that line and then does it normalize in the first quarter of next year. So we're going to see about a 1.4 million dollar.
Rebate in in Q4 for the for the FDIC.
Right, so, but it's a 500000 dollar swing to the negative in Q4 on that and then you will see a normalized run rate after that starting in Q1.
Okay. Okay.
Okay. That's helpful. And then just on thoughts Richard on on M&A. I mean, you <unk> you guys area you had a line your place you're changing and you know restructuring and and and such but just curious if you could give us some thoughts as to how you're thinking about M&A as you look into 2020.
Yeah, calling it the short answer is I have absolutely no thoughts on it just because it's not in in on anybody's radar.
But certainly not on my radar.
Okay, Alright, that's good I'll leave it there thanks guys.
Thank you.
[noise]. This concludes our question and answers.
I would like to turn the conference back over to see.
For any closing remarks.
Thank you for joining us today, we look forward to speaking again in January to discuss our results for the fourth quarter and for the full year. Thank you.
The conference has now concluded thank you for attending [noise].
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